Operational Management Issues in the Context of a Supermarket Chain - Case Study Example

Objective Discussing the strategies and tactics adopted by managers in the application of the following five operational management issues in thecontext of a Supermarket Chain and 2. Comparing and contrasting the application of these issues in their application in a manufacturing organization: 1. Service or Product Design 2. Demand forecasting 3. Inventory management 4. Resource Scheduling 5. Quality Management Introduction: The phrase 'Operations Management' is often applied to manufacturing activities. 'Operation' is defined as a 'planned activity involving many people performing various actions.' Collins English Dictionary defines 'Operation' as a 'process, method or series of acts especially of a practical nature.' These definitions broaden the scope of 'Operations Management' to include all management functions. Galloway defines 'Operations Management' as 'all activities concerned with the deliberate transformation of materials, information or customers' Elaborating his definition he states that 'Operations Management' is "concerned with both the effective and efficient management of any operation." (1998 1-2) Johnston et al define 'Operations Management' as "concerned with the design, planning, control and improvement of an organization's resources and processes to produce goods or services for customers." Thus key management tasks in operations management are designing, planning, controlling, improvement of activities; transforming input resources into goods or services (input-transformation-output); understanding the organisation's strategic intentions and translating them into operations and performance objectives which in turn guide operations decisions about design, planning, control and improvement of operations resources and processes. (1997 15-25) Supermarkets are self-service food stores stocking and selling a variety of goods including groceries, foods, medicines, clothes, alcohol (where permitted) and other household goods. Supermarkets may offer some goods produced by them but more generally they retail products of many manufacturers. They are often chains of stores supplied by the distribution centres of large businesses. Today they offer home deliveries, online transactions, extend their services to credit cards and other financial products (e.g. Tesco in the UK). They operate on the principles of 'economies of scale' because of which they are able to offer products cheap and convenience because they offer a variety of goods and services in one location. While these features are common to all supermarkets, the creativity with which a supermarket market markets its products (or services), establishes its brand equity and ultimately the quality of services it offers lend it the winning edge. 1. Product Design: As we have seen earlier the brand differentiator in the case of supermarkets is their quality of service to customers. In the case of manufactured goods the customer is not involved in the transformation process and the finished product is stocked prior to supply. On the other hand, American Marketing Association defines a "service" as "Activities, benefits or satisfactions, which are offered for sale or provided in connection with sale of goods." (Galloway 1998 1-2) Customer satisfaction in the context of supermarkets is obtained by locating them in their vicinity or offering free home delivery, offering large varieties to suit customer tastes and delight, the ease with which a customer can find or is helped to find his/her requirements, the efficiency with which the customer is serviced, pricing vis--vis competitors and of course underwriting quality of the products sold. It is difficult to define which of these issues appeals to individual customers but to be in business a supermarket has to strike a balance among them. A customer who is not able to find (for e.g.) sugar in a supermarket, a customer who can not find his favourite brand of coffee because the supermarket does not stock it, a customer who does not find a ready attendant to guide him/her through the shelves or has to wait too long to take his/her turn to be billed or a customer who is supplied with (for e.g.) stale bread is not likely to be satisfied let alone delighted by the supermarket. Unlike in the case of manufactured goods customer satisfaction (as in the case of supermarkets) depends on intangibles, which defy clear specification. For e.g. does a customer like immediate attention or does he/she perceive this as an unpleasant intrusion (However waiting times are generally considered as performance indicators.) Similarly some customers may welcome a friendly greeting from the service personnel while others may consider this artificial and obsequious and even a ploy to saddle them with unwanted goods. As the customer is a part of the process, the design of the service operation and design of the service are indistinguishable. The two critical factors in the design process, utilization and cost depend on widely ranging variables, thus making an assessment of its efficiency difficult. Many organizations have been resorting to the interactive model instead of the earlier sequential approach in order to shorten the 'time-to-market', reducing the number of operations problems and development costs and obtain early return on investment. The other criterion in the product design viz. quality (in the context of supermarkets) pertains to services is also an intangible and shall be dealt with separately under quality management. Industrialization in service design has led to several approaches: removing the customer from the process (front office, back shop), using the customer as labour (self-service), labour flexibility (part time staff), automation (extension of self-service), centralization and demand management. 2. Demand Forecasting: The objective of any operations manager is to meet customer requirements as efficiently as a possible by stocking up the right quantity keeping in view seasonal fluctuations of demand. In the case of under stocking, in addition to immediate loss of business its adverse impact on the image of the organization is to be considered. On the other hand overstocking not only leads to unnecessary inventory (unsold stocks may have to be written off if the goods are perishable) but also strains scarce financial resources and adversely affects bottom lines. Forecasting of demand in the case of manufacturing goods - with the raw materials undergoing conversion into finished goods in various stages and lead times - allows a certain leeway for the organization to regulate the pace of production. But in the case of a supermarket it is only the goods on the shelves that can be sold and requires greater degree of accuracy in forecasting demand. By far the best method used to forecast demand is the 'time series' method as it affords the manager a number of alternative techniques. These techniques attempt to distinguish between trends in the data and random variations. However distinguishing between random variations and changes in trends is the most difficult part of the exercise. The simplest method of forecasting demand is the moving average method in which past trends are extrapolated into the future, by taking the last three/six months sales into consideration and dropping the oldest month and adding the latest, every month. Weighting the figures for the months under condition could further refine this, thus the nearest (or the last) month being the closest to the next getting higher weighting and the oldest getting the least weighting. For e.g. multiply the figure for the nearest month by 3, the earlier one by 2 and the oldest by 1 and divide the sum of the three figures by 6. This might smoothen out the trend but unlikely to take seasonal variations into account. Alternatively, a subjective method is sometimes employed in which the demand is assumed to correspond to last year's demand taking into account the opinions of the sales team, marketing strategies and estimates based on sales promotion schemes and the seasonality of consumption (e.g. shopping during festive season) etc. Organizations resort to a combination of methods, as it is difficult to forecast demand with any degree of accuracy based on a single method. 3. Inventory Management: Inventory management is a complements forecasting demand and is a major factor that affects bottom lines. In the case of a manufacturing organization inventory includes raw materials and materials in various stages of conversion into finished goods, the processing of which can be regulated to meet rising or falling demand. In the case of a supermarket only the goods on the shelf are to be considered as inventory. Inventory management therefore necessitates accuracy in forecasting demand in order to avoid stock-outs or overstocking but also take lead times in ordering and transportation from manufacturer's distribution points into consideration. It may at times be necessary to keep 'safety' or 'buffer' stocks to ensure delayed replenishments do not end in loss of business if there is a sudden rise in demand. Two methods of ordering for supplies are generally followed: ordering a fixed quantity at variable times or ordering variable quantities at fixed times. The 'economic order quantity' method sometimes called the 'economic batch quantity' adopted by organizations means ordering large quantities occasionally or small quantities at frequent intervals. There are obvious limitations to the method, one of them being its insensitivity to error. The simplest procedure is to estimate demand for the coming year and order it to be supplied in pre-determined quantities at pre-determined periodicity. This method is suitable for low value low bulk items. There are two parameters to measure the efficiency of inventory management. One of them is measuring stock-out which is calculated based on the proportion of demand actually satisfied compared to a specified service level. The second is stock holding on an average (of twelve months or 52 weeks) divided by annual usage of the product. This analysis should be carried out for individual products and the reasons for sluggish movement of some products investigated. 4. Resource Scheduling: Resource scheduling is a part of the business planning process dealing with allocation of resources, the 'when', 'where' and 'by whom' of them. In the case of manufacturing operations various processes are scheduled in sequence or in tandem so that there is a smooth flow in the conversion of raw materials into finished goods based on demand estimates, lead times required at various stages and finally for transportation and distribution. In the case of supermarket operations scheduling of resources pertains to allocation of financial resources (which of course is common to all businesses), space, human resources and real-time control of stocking, inventory and delivery systems. Logistics is at the core of managing supermarket operations. According to Fernie, as the customers gain more power in the marketing channel, the supply chain should be 'demand-driven' (shift from push to pull) information systems should be given due importance to have better control in stocking and elimination of unnecessary inventory, should focus on core capabilities and increased outsourcing of non-core activities to specialists. (2004 9) However focus on core capabilities and outsourcing non-core activities may apply more to manufacturing industries. Efficient Consumer Response (ECR) an initiative first launched by Wal-Mart and Procter & Gamble in the United States in the 1990s in response to recession and increased competition resulted pruning excessive inventories and estimated potential of savings up to 10.8% of sales turnover. This was followed in Europe in 1993 and the European Executive Board created in 1994 to analyze similar trends. Efficient Consumer Response (ECR) focuses on category management, product replenishment and enabling technologies. (Fernie 2004 35) Allocation of space and financial scheduling for different kinds of products, investments in climate control equipment and delivery vans depend on the nature and size of the operation of individual supermarkets. Similarly supermarkets may engage temporary additional staff during peak demand periods. Information technology tools will not only help track sales and inventory controls but also to monitor customer choices, preferences and tastes. This is one of the factors that helped Tesco, the biggest of UK's supermarkets to reach the summit. "Tesco today has enough capacity to take the information from every shopping basket processed through its checkouts and use it to drive marketing and management decisions." (Humby 2004 96) 5. Quality Management: We have mentioned in the section on product design that the main differentiator in the case of supermarkets is the quality of service it offers. Everyone agrees that 'quality' is good or desirable but perhaps difficult to define. Quality may be defined as transcendent (innate excellence recognized rather than measured), meeting the customer requirements, conformance to specifications, being free from errors, offering value for money or exceeding customer expectations. (Galloway 1998 164-176) Meeting or exceeding customer expectations is very important in the case of supermarket services while the other attributes are applicable to the products it supplies. The onslaught of Japanese manufacturing companies on American and European markets resulted in the development of a number of analyses the most important of them being the Total Quality Management or TQM: "TQM is an all pervasive philosophy that aims to improve every part of system on a continual basis using teamwork as the main vehicle of progress. Van der Wiele, Dale, and Williams (1997) support this notion when they state 'TQM aims to improve all activities and eliminate wastage on a continuous basis, reorient all activities and employees to focus on the customer (external and internal) by understanding and meeting the requirements, and to involve and develop the members of the organization'. " (Jiju 2001 30-31) The objective of TQM according to Galloway is "to achieve perfection in all aspects of customer service, not just in the conformance of the product to specification but also in all other aspects of the relationship; thus late delivery, incorrect quantities, or incorrect paperwork, or even just a failure to understand the customer would also be considered quality failures. While perfection is probably unattainable, and certainly cannot be sustained, TQM aims at continuous and unremitting vigilance and improvement." Galloway defines TQM as representing an "an unequivocal commitment to quality by the whole organization and involves every member of the organization, there is no separate quality department to which responsibility can be transferred." (1998 176) Thus the salesman attending to a customer in a supermarket, the deliveryman or van driver, the cashier at the till, the packer and the administrator are as responsible for quality of service in a supermarket as the quality control managers of the manufacturers of the products supplied by it. There are a number of difficulties in measuring quality in the context of delivery of services rather than products as they are intangibles, which can only be experienced rather than physically felt. It is not possible to define specifications against which the services can be measured. However elusive 'quality' may be to define, an attempt must be made to find out how customers perceive and judge it if the organization is to survive the onslaught of competition. Some of these methods may yield extreme results but they certainly are indicative of trends: 1. Monitoring customer complaints / Satisfaction surveys / Attitude surveys: Customers may rarely write in to praise services but they certainly do if they are not satisfied with them. 2. Focus groups / Mystery shoppers: In both these cases the size of the group / sample has to be small to be implemented; subjectivity may creep in as the group is already sensitized. Total Quality Management, to be successful, warrants total commitment from the organization at all levels. It can only be achieved if every employee is sensitized to offer total customer satisfaction within the framework of the organization's mission, vision, goals and objectives. Fernie, John. Logistics and Retail Management: Insights into Current Practice and Trends from Leading Experts. London, GBR: Kogan Page, Limited, 2004. p 9. http://site.ebrary.com/lib/britishcouncilonline/Docid=10074933&ppg=27 Copyright 2004. Kogan Page, Limited. All rights reserved. Galloway, Les. Principles of Operations Management. (Second Edition). 1998. International Thomson Business Press. London. Humby, Clive. Scoring Points : How Tesco Is Winning Customer Loyalty. London, GBR: Kogan Page, Limited, 2004. p 96. http://site.ebrary.com/lib/britishcouncilonline/Docid=10074929&ppg=111 Copyright 2004. Kogan Page, Limited. All rights reserved. Jiju, Anthony. Understanding & Implementing Quality: Frameworks, Techniques & Cases. Florence, KY, USA: Routledge, 2001. p 30-31. http://site.ebrary.com/lib/britishcouncilonline/Docid=5004285&ppg=53 Copyright 2001. Routledge. All rights reserved. Johnston, Robert., Chambers, Stuart., Harland Christine., Harrison, Alan., and Slack, Nigel. Cases in Operations Management. (Second Edition). 1997. Pitman Publishing. London. Read More