Operational Review Workbook: Case Studies, Forms, and Exercises / Edition 1 available in Paperback
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Operational Review WorkbookCase Studies, Forms, and Exercises
By Rob Reider
John Wiley & SonsISBN: 0-471-22811-7
Chapter OneOverview of Operational Reviews
The operational review process is most helpful and beneficial in the following instances:
Identifying operational areas in need of positive improvement-looking for best practices as part of a program for continuous improvements
Pinpointing the cause (not the symptom) of the problem-avoiding quick-fix, short-term solutions in favor of longer-term, elegant solutions
Quantifying the effect of the present situation on operations- identifying the cost of present practices and the benefits to be derived through implementation of best practices
Developing recommendations as to alternative courses of action to correct the situation-identifying best practices in a program of continuous improvements
This chapter will:
Introduce operational review concepts and principles.
Provide an update of the current status of operational reviews.
Familiarize the reader with commonly used operational review definitions and terms.
Identify the purposes and components of operational reviews.
Increase understanding of the benefits of operational reviews.
Introduce the phases in which a typical operational review is conducted.
Pinpoint the Cause, Not the Symptom, of the Problem to Identify the Best Practice
Operational reviewprocesses are directed toward the continuous pursuit of positive improvements, excellence in all activities, and the effective use of best practices. The focal point in achieving these goals is the customer or stakeholder-both internal and external-who establishes performance expectations and is the ultimate judge of resultant quality. A company customer is defined as anyone who has a stake or interest in the ongoing operations of the organization, anyone who is affected by its results (type, quality, and timeliness). Stakeholders include all those who are dependent on the survival of the organization, such as:
Customers/end users: external
Stakeholder Expectations Are the Key to Evaluating the Company's Performance
Reader: Identify the stakeholders in your organization and what you believe each one desires from the organization. List the major players in each stakeholder category (e.g., 20 percent of vendors and customers who provide approximately 80 percent of total volume). How do these various stakeholders affect the focus of the organization?
WHY BUSINESSES ARE IN EXISTENCE
Before one even thinks about performing an operational review of an organization, it is necessary to determine why the organization is in existence. When clients are asked this question, invariably the answer is to make money. Although this is partly true, there are really only two reasons for a business entity to exist:
1. The customer service business. To provide goods and services to satisfy desired customers, so that they will continue to use the business's goods and services and refer it to others. An organizational philosophy that correlates with this goal that has been found to be successful is "To provide the highest quality products and service at the least possible cost."
2. The cash conversion business. To create desired goods and services so that the investment in the business is as quickly converted to cash as possible, with the resultant cash-in exceeding the cash-out (net profits or positive return on investment). The correlating philosophy to this goal can be stated as follows: "To achieve desired business results using the most efficient methods so that the organization can optimize the use of limited resources."
This means that we are in business to stay for the long term-to serve our customers and grow and prosper. A starting point for establishing operational review measurement criteria is to decide which businesses the organization is really in (such as the two listed) so that operational efficiencies and effectiveness can be compared to such overall organizational criteria.
Being in the Customer Service and Cash Conversion Businesses Enables the Company to Make Money and to Survive
Reader: Document the practices that your organization uses with regard to the customer service and cash conversion businesses. Identify any effective best practices and practices that appear to be counter to effectiveness. Identify any performance gaps that need to be addressed in an operational review.
BUSINESSES A COMPANY IS NOT IN
Once short-term thinking is eliminated, managers realize they are not in the following businesses and decision making becomes simpler:
Sales business. Making sales that cannot be collected profitably (sales are not profits until the cash is received and all the costs of the sale are less than the amount collected) creates only numerical growth.
Customer order backlog business. Logging customer orders is a paperwork process to impress internal management and outside shareholders. Unless this backlog can be converted into a timely sale and collection, there is only a future promise, which may never materialize.
Accounts receivable business. Get the cash as quickly as possible, not the promise to pay. But remember, customers are the company's business; keeping them in business is keeping the company in business. Normally, the company has already put out its cash to vendors and/or into inventory. It may even be desirable to get out of the accounts receivable business all together. This is particularly true for small sales where the amount of the sale is less than the cost of billing and collections or where major customers (e.g., 20 percent of all customers equal 80 percent of total sales) are willing to pay at the time of shipping or receipt as part of price negotiations.
Inventory business. Inventory does not equal sales. Keep inventories to a minimum-zero if possible. Procure raw materials from vendors only as needed, produce for real customer orders based on agreed upon delivery dates, maximize work-in-process throughput, and ship directly from production when the customer needs the product. To accomplish these inventory goals, it is necessary to develop an effective organizational life stream that includes the company's vendors, employees, and customers.
Property, plant, and equipment business. Maintain at a minimum: be efficient. Idle plant/equipment causes anxiety and results in inefficient use. If it is there, it will be used. Plan for the normal (or small valleys) not for the maximum (or large peaks); network to out-source for additional capacity and in-source for times of excess capacity.
Employment business. Get by with the least number of employees as possible. Never hire an additional employee unless absolutely necessary; learn how to cross train and transfer good employees. Not only do people cost ongoing salaries and fringe benefits, but they also need to be paid attention, which results in organization building.
Management and administration business. The more an organization has, the more difficult it becomes to manage its business. It is easier to work with less and be able to control operations than to spend time managing the managers. So much of management becomes getting in the way of those it is supposed to manage and meeting with other managers to discuss how to do this. Management becomes the promotion for doing.
Knowing the Business Not to Be in Keeps the Company in the Business It Should Be in-and Makes it Grow and Prosper
Reader: Document the extent that your organization is in the aforementioned businesses. Identify related critical areas in each of these areas that should be addressed in an operational review. Document any immediate recommendations that can effectively reduce or eliminate the extent of being in these business. What are the organization's goals for each of these areas?
SOME BASIC BUSINESS PRINCIPLES
Each company must determine the basic principles that guide its operations. These principles become the foundation on which the company bases its desirable operational practices. Examples of such business principles include:
Produce the best quality product at the least possible cost.
Set selling prices realistically, so as to sell all the product that can be produced within the constraints of the production facilities.
Build trusting relationships with critical vendors; keeping them in business is keeping the company in business.
The company is in the customer service and cash conversion businesses.
Do not spend a dollar that doesn't need to be spent; a dollar not spent is a dollar to the bottom line. Control costs effectively; there is more to be made here than increased sales.
Manage the company; do not let it manage the managers. Provide guidance and direction, not crises.
Identify the company's customers and develop marketing and sales plans with the customers in mind. Produce for the company's customers, not for inventory. Serve the customers by providing what they need, not by selling them what the company produces.
Do not hire employees unless they are absolutely needed; and only when they multiple the company's effectiveness so that the company makes more from them than if they did it themselves without them.
Keep property, plant, and equipment to the minimum necessary to maintain customer demand.
Plan for the realistic, but develop contingency plans for the positive unexpected.
Basic Business Principles Guide the Company's Operations
Reader: Which of these basic business principles does your organization embrace-not just philosophically-but in reality? Document other basic business principles that you believe your organization operates under. Which ones increase the organization's effectiveness and which ones are detrimental?
CRITERIA FOR ORGANIZATIONAL GROWTH
There are numerous criteria that the organization may choose to implement in its program of continuous improvements leading toward organizational growth. As part of conducting an operational review, the reviewer must be aware of these criteria to be successful in addressing the company's desired direction-in total or by business segment or function. Some of these criteria include:
Sales volume increases
New market expansion
New distribution channels
Market share increase in existing markets
Selling or closing a losing operation or location
Acquire another company, division, operation, or product
Developing a new product or service
Efficiency or productivity improvements
Non-value-added activities eliminated
Making employees responsible
Organizational structure revisions
Reader: Document your organization's criteria for organizational growth in each of the listed areas. How do they affect your organization's present and future effectiveness? Are there are other areas for organizational growth in your organization? What are they?
MENTAL MODELS AND BELIEF SYSTEMS
Many organizations operate on the basis of prevalent mental models or belief systems-usually emanating from past and present top management-which have an overriding effect on the conditions with which operations within the company are carried out. They can help to produce a helpful working environment or atmosphere or a hindering one. In effect, such mental models become performance drivers-those elements within the organization that shape the direction of how employees will perform their functions. Examples of such mental models and belief systems include:
Hard work and doing what you are told are the keys to success for the individual and the company.
The obedient child in the company survives and is promoted, while the rebellious child is let go or leaves the company.
Only managers can make decisions.
Power rises to the top-and stays there.
Employees need to be watched to do their jobs.
Power and control over employees is necessary to get results.
Managers are responsible; employees are basically irresponsible.
Those at the top of the organization know what they are doing.
All functions should be organized in the same manner.
Higher levels of organization ensure that lower levels do their jobs.
Policing and control over employees ensure their compliance.
All employees are interchangeable.
Doing the job right is more important than doing the right job.
Control the people, control the results.
Organizational position is more important than being right.
Top management has the right to set all policies and procedures.
Managers create results; employees do the job.
Organizational hierarchies ensure that things get done.
Employees cannot be trusted on their own.
You can not run a business without the proper organization structure.
Managers know more than employees.
Managers have a right to be obnoxious.
Management is the enemy.
Each function needs its own organization structure.
The more employees reporting to you (and the larger your budget), the more important you are within the organization.
Reader: Check off those mental models and belief systems from the preceding list that exist in your organization. Are there others that you can identify? What are they? Document how these mental models and belief systems affect performance within your organization-positively and negatively.
ORGANIZATIONAL CRITERIA EXAMPLE
The first step in successful operational review planning is to define the company's desired criteria for results as related to their reasons for existence, basic business principles, mental models, belief systems, performance drivers, and so on. These organizational criteria typically encompass the company as an entity as well as its major functions. An example of such an organizational results criteria structure is as follows:
Operate all activities in the most economical, efficient, and effective manner as possible.
Provide the highest quality products to our customers at the least possible cost.
Satisfy our customers so that they will continue to use the company's products and refer the company to others.
Excerpted from Operational Review Workbook by Rob Reider Excerpted by permission.
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Table of ContentsPreface.Introduction.Chapter 1: Overview of Operational Reviews.Stakeholders.Why Businesses Are in Existence.Businesses a Company Is Not In.Some Basic Business Principles.Criteria for Organizational Growth.Mental Models and Belief Systems.Organizational Criteria Example.Economy, Efficiency, and Effectiveness.Specific Objectives.Specific Purposes.Benefits of Operational Reviews.Operational Review Phases.Operational Review Engagement Development.What Functions to Review.Initial Survey.Case Study: Joe Sorry, Inc.Case Situation: Leasing Insurance Costs.Review Questions.Suggested Responses.Chapter 2: Planning Phase.Information to Be Obtained.Sources of Information.Review of Organizational Planning and Budget Systems.Organizational Structure and the Role of Management.Planning Phase Work Program.Case Study: Joe Sorry, Inc., Planning Phase.Case Situation: Purchase Order Quantity Tolerances.Review Questions.Suggested Responses.Chapter 3: Work Program Phase.Benefits of the Operational Review Work Program.Work Program Work Steps.Engagement Control.Case Study: Joe Sorry Company, Work Program Phase.Case Study Situation: Defective Merchandise Returns.Case Study Situation: Equipment Maintenance Review.Review Questions.Suggested Responses.Chapter 4: Field Work Phase.Field Work Techniques.Specific Field Work Techniques.Work Papers.Case Study: Joe Sorry Company, Field Work Phase.Case Situation: Clerical Procedures.Review Questions.Suggested Responses.Chapter 5: Development of Review Findings.Operational Review Finding Attributes.Operational Review Criteria Standards.Some Possible Types of Causes.Effects of Operational Review Findings: Possible Indicators.Review Findings Development Checklist.Case Study: Joe Sorry Company, Development of Findings.Case Study: Finished Goods Shipments.Case Situation: Shipping and Receiving Procedures.Case Situation: Accounts Receivable and Collections.Review Questions.Suggested Responses.Chapter 6: Reporting Phase.Characteristics of Good Reporting.Examples of Reporting Operational Review Results.ABCs of Effective Report Writing.Case Study: Joe Sorry Company, Reporting Phase.Review Questions.Suggested Responses.