BizOps: Making Operational Trade-Offs
In the previous post, we spoke of the four axes of operational performance: cost, variety, quality and timeliness. And while a company may want to perform well along each axis, it's not quite that simple.
Let's take an example. At Polydojo, we receive a number of support tickets each day. Now, of course, we want to answer each ticket quickly and correctly. Ideally, within a minute. But at the same time, we want our spend on support agents to be efficiently utilized.
- If we hire too many agents, they'll just be sitting around, burning the company's cash.
- If we hire too few, the ticket-queue will get long and tickets will take days to get answered.
It's also easy for us to imagine how quality and cost can act as opposing forces. If you want to manufacture a high quality (made in USA) product, you'll have high material (and labor) costs.
If you want to increase product variety by introducing more SKUs, that'll increase your costs; and may also cause manufacturing delays. That'll negatively impact your performance on price & timeliness.
Now that we see how performing well along each axis is not quite feasible, it begs question: how do you decide how to operate? Do you focus on timeliness? Or, do you focus on cost efficiency?
Making these trade-offs can be though. It's a managerial decision that must be carefully made. However, you can make the decision easier by first deciding on a service level. Here's how:
At Polydojo, instead of saying let's hire N support agents, we said:
- For 'Free' plan users, let's try to respond to support tickets withing 24 working hours.
- For 'Professional' plan users, let's strive to fully resolve queries within 8 working hours.
Your service level should be easy to think of; and should measurable. It's easier for us to say, "We resolved all Professional tickets within 8 hours today", rather than saying, "We delivered timely and responsive customer service today."
Monitoring The Competition:
Once you've picked the performance axis you'd like to focus on, you should continually monitor the market for competitors that outperform you. Let's say you have 3 prominent competitors: X, Y & Z.
- Competitor X's product is of higher quality; but is far more expensive.
- Competitor Y's product is far more affordable; but it really lacks in quality.
- Competitor Z's product is both better and cheaper than your product.
The fact that Z is able to outperform your company on opposing axes indicates that your company has room for improvement. You should rethink your production process until you can do better than Z.
The Efficient Frontier (Supplementary Reading):If you are doing better than each competitor on at least on performance axis, then you're likely doing an amazing job. Kudos to you! Technically speaking, you are on the Efficient Frontier (EF).
Consider a market with exactly four competitors P, Q, R and T:
- P's product is the cheapest. As no other product is cheaper, P is on the EF.
- Q's product has the best quality. As no other product is of better quality, Q is also on the EF.
- R's product is better quality than P's product and is also cheaper than Q's product.
- T's product is of better quality and is also cheaper than R's product. T is also on the EF.
P, Q & T are on the EF, while R is not. If you work for P, Q or T, you must focus on pushing the EF by doing better than you previously did. And if you work for R, you must figure out how T's product can be both better and cheaper than yours.
The EF is not static. It changes with time as competitors figure out ways to improve performance along the various axes. Thus, if your company is on the EF, it's important that you don't become complacent. It's important that you keep finding new and innovative ways to improve your operational efficiency.
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