7.3 Operations decisions  (Page 5/5)

Exhibit

Technology decisions

There are many benefits that technology can bring to an operations environment. Automated machinery, programmable equipment, and management information systems can provide speed, low unit processing costs, labor cost savings, increased accuracy and consistency, and sophisticated tracking and decision support systems to increase operations efficiency and effectiveness for both manufacturing and service environments. The main drawback in many technology decisions is the high fixed cost of purchasing and implementing the new systems. If mistakes are made in technology purchases, it can severely impact the fortunes of the company.

Managers are often biased in favor of adopting leading edge technology, especially if they see their competitors adopting it. Financial justifications for purchasing new technology are often overly optimistic in estimations of payback periods, the costs of implementation, and the actual gains in overall productivity the firm will enjoy.

The challenge for managers in technology is selecting the right technology for the right application. For example, if a manufacturing company believes that automation will increase the firm’s flexibility to adapt to a changing competitive environment, questions should be asked, such as:

• What type of flexibility does the company need to thrive?
• Does it need to quickly switch production across a wide variety of products (product mix flexibility)?
• Does it need to quickly produce new products for a rapidly changing marketplace (product development flexibility)?
• Does it need to be able to quickly ramp up production during times of high demand, and quickly scale down production when cyclical or seasonal demand hits downturns (volume flexibility)?

Deere&Co manufactures machinery for the highly cyclical agricultural and construction industries. One of the reasons for Deere’s success over the many decades is its ability to keep its technology expenditures under control so it can weather the inevitable declines in demand for its products. Deere managers use a mix of low technology/labor intensive production methods and automated/programmable technologies in its manufacturing plants. Careful technology decision making is a major reason why Deere&Co continues to thrive in spite of its highly volatile markets.

Location decisions

There are many factors that can determine where an organization will locate its facilities. For any given situation, some factors become more important than others in how facility location affects an organization’s efficiency and effectiveness.

• Proximity to sources of supply : Firms that process bulk raw materials usually locate close to the source of supply to reduce transportation costs. Paper mills locate close to forests, canneries are built close to farming areas, and fish processing plants are located close to the harbors where the fishing vessels dock.
• Proximity to customers : There are several reasons why an organization would locate close to end customers. Service firms need to be close to customers to be convenient, as is the case for grocery stores, gas stations, fast food restaurants, and hospitals. Transportation costs can also require proximity to customers, as in the case of concrete manufacturing. Perishable products often require that they be produced close to the final market, as is the case for bakeries and fresh flowers.
• Community factors : Communities may offer a number of incentives to entice companies, including waiving or reducing taxes, and providing access roads, water and sewer connections, and utilities. Community attitudes can also play a role in an organization’s location decision. Some communities may actively discourage companies that might bring more pollution, noise, and traffic to the area. Some communities may not want a prison to be located in their community. Other communities may welcome such firms because of the jobs, tax revenues, and economic diversity they promise.
• Labor factors : Research shows that the majority of location decisions are largely based on labor factors, since labor is a critical variable for many firms. Labor factors include the prevailing wage rate in a community for similar jobs, the supply of qualified workers, and the average education level of the local population (percentage of high school graduates, etc.). Other labor factors can include the degree of union organizing and the general work ethic of a community, as well as other measures of absenteeism and worker longevity in a job can play strong roles when a firm makes a location decision.
• Other factors : Many other factors can play a role in the location decision, including quality of life (crime rates, good schools, climate, and recreation options), access to major transportation arteries, construction costs, proximity of the competition, and opportunities for future expansion. As mentioned earlier, the importance of any location factor can vary greatly, depending on the circumstances of the decision.

In the 1990s, MCI, a major US telecommunications company, decided to relocate its engineering services division from MCI’s headquarters in Washington DC to Colorado Springs, Colorado to reduce labor and facility costs. The decision was largely unsuccessful due to the high costs of employee relocation and the fact that much of the ethnically diverse engineering workforce did not want to live in Colorado Springs. Unlike Washington DC, Colorado Springs did not have cultural diversity to match with its diverse and highly educated workforce, it lacked employment options for spouses, and the work ethic was more relaxed due to the beautiful natural setting that provided unlimited options for outdoor recreation. In short, if MCI had put more effort into researching how well the Colorado Springs location matched its strategic requirements, it probably could have saved itself millions of dollars and a great deal of internal disruption to the organization.