Now in the last session, we discussed how the performance of an operation can be evaluated along four dimensions, cluster efficiency, the quality, ability to provide choice to the customer, and responsiveness. Now as the owner of a business, of course, I would love my operations to excel at all four of these dimensions. I would love to provide customers with products at low prices, provide them with infinite choice, high quality service, and all of that immediately, provide them the products or services when they want them. Obviously, that is often not possible. As the owner of the business, as the manager, as a consultant, I have to make trade-offs among these four dimensions, which is really what we're going to be discussing in this session today. Let's look at a specific example. Imagine you're consulting for a call center, the call center currently has problems with response times. Customers are waiting a long time, and only 30% of the incoming calls get served in 20 seconds or less. Say, for sake of argument, that your goal is to improve this and get 80% of the calls serviced in 20 seconds or less. This is called a service level. Now there's a tension between the forces of responsiveness and productivity, in the sense that you could easily imagine a call center that would have an amazing responsiveness. It would have thousands and thousands of employees staffed. It would be very inefficient, but it would very responsible. Vice versa, you could imagine downsizing the workforce so that you have very few workers answering calls, which would be great for your productivity but very poor for your responsiveness. So there is clearly a tradeoff between those two dimensions. But one of the things that we'll discuss in this course is how you can use your operations and the tools in this course to really position yourself on this graph, because every business needs a different position in terms of the service level. And the managerial decision is how many employees would you want to hire on a given shift. Next, imagine that you are going out, you are working for this call center. The call center is performing about here in terms of the responsiveness and the productivity. You engaged in some benchmarking and you're looking at a number of other industry players along the lines of responsiveness and productivity. First company that you run into is company A. Company A, you notice, is a lot more responsive then you have. So in other words their customers have to wait less. But at the same time, you notice that they are a lot less efficient. Then you run into company B. Now these guys here are having a much better productivity, but they do so at the cost of some responsiveness. So they are cheaper than we are, but they are a lot slower. Both of these make good sense because they are really reflecting the trade-off that we just discussed on the previous slide. Now the very next company you run in to is Competitor C. And Competitor is a puzzle for you really because these guys are both faster than we are, and they are cheaper. We refer to this difference here as the inefficiency in our operation. And the line that goes, let me say this casually, the line that includes all the industry players to its lower left, we refer to this as the efficient frontier. Obviously, the goal of an operation is to move out here to the upper right of this graph. Now an operation that is currently on the frontier, in order to move to the upper right here, it has to innovate and shift the frontier. Everybody else who is off the frontier has the potential to simultaneously improve, allowing multiple of the four dimensions of operational performance without having to make necessarily a serious sacrifice. These are guys that are just doing work smarter. Now one of the things we will talk about in this course, is we'll help you evaluate such changes, be it on the frontier to a new frontier, or off the frontier towards more productivity and more responsiveness. We'll help you evaluate these changes before you actually make them. Making these changes is expensive. And so, to the extent that you can evaluate the financial impact before embarking on them, you'll have saved yourself a lot of headache. Now it's time to look at a specific example. What I've shown on this graph is data from the US airline industry. And I plot here on the x axis the efficiency of the carriers as measured by the ratio between the travel miles that they provide relative to the operating expenses. I also measure on the y axis the number that is called the yield of the airline which takes the ratio between the miles of travel service provided by the airline relative to the revenue. Now, take a look here at this concept of the efficient frontier. We see a line that roughly looks like this, and that captures, basically, all of the big airlines along a pretty linear line. The interesting outlier on this graph is Southwest Airlines. Southwest has been able to achieve a much higher productivity compared to the big legacy carriers. And thereby has been able to shift the frontier, largely done because of their clever labour productivity, something that we will analyze later on in this course. We also notice how Hawaiian Airline has been able to achieve a similar productivity, largely because of their small route network, but has not been able to command the high prices relative to Southwest. Now this is data from 1996. It is interesting to contrast this data with the year 2011. In 2011, you'll notice that the frontier has changed very dramatically. In fact, Southwest, it has been playing a cost game relying on low pricing has emerged us actually an airline that has been able to charge the highest prices in the industry, yet they had to sacrifice on the productivity side. They have been overtaken on the productivity side by companies such as JetBlue and Virgin America. So you notice how the frontier in the industry has shifted. New business models have arrived, companies have played different strategies. And because of their operations, the industry landscape now is a very different one. All right, what have we learned today? First of all, we notice that you cannot have it all. Just like in normal life, where you have to set priorities, a business has to prioritize some of the four dimensions of operational performance, cost, quality, variety, and responsiveness. You have to decided on which of these four dimensions you want to compete. Second, we talked about the concept of the efficient frontier. I have casually defined the efficient frontier as a line that includes all firms to its lower left. It was, arguably, a quite casual definition. More formally, in academic terms, we talk about the line of firms that has no other firm that per rate or dominates the firm. That is, for example, cheaper and faster at the same time. The efficient frontier is important as our gap as a company to the frontier measures the inefficiency, the waste that we have in our operation. One thing that we will talk about in this course is through clever operations, through clever process design, we will help your firm to move up towards the frontier. And then once you're on the frontier, we'll have to continually innovate to keep on pushing the frontier to the upper right of the graph.
