Page 85 - Operations Strategy

60 CHAPTER 2 • OPERATiOns PERfORmAnCE
table 2.3 the range and response dimensions of the four types of total operations flexibility

Total operations flexibility Range flexibility Response flexibility
Product/service flexibility The range of products and services that The time necessary to develop or modify
the company has the design, purchasing the products or services and processes
and operations capability to produce. that produce them, to the point where
regular production can start.
Mix flexibility The range of products and services that The time necessary to adjust the mix of
the company produces within a given products and services being produced.
time period.
Volume flexibility The absolute level of aggregated out- The time taken to change the aggregated
put that the company can achieve for a level of output.
given product or service mix.
Delivery flexibility The extent to which delivery dates can The time taken to reorganise the opera-
be brought forward. tion so as to replan for the new delivery
date.

base is a further euro, dollar or yen added to its profits. Not surprisingly, low cost is a
universally attractive objective.
Here we are taking a broad definition of ‘cost’ as it applies in operations strategy. In
this broad definition, cost is any financial input to the operation that enables it to pro-
duce its products and services. Conventionally, these financial inputs can be divided
into three categories:
1 Operating expenditure – the financial inputs to the operation needed to fund the
ongoing production of products and services. It includes expenditure on labour,
materials, rent, energy etc. Usually, the sum of all these expenditures is divided by
the output from the operation (number of units produced, customers served, pack-
ages carried etc.) to give the operation’s ‘unit cost’.
2 Capital expenditure – the financial inputs to the operation that fund the acquisi-
tion of the ‘facilities’ that produce its products and services. It includes the money
invested in land, buildings, machinery, vehicles etc. Usually, the funding for facilities
is in the form of a lump sum ‘outflow’ investment, followed by a series of smaller
inflows of finance in the form of either additional revenue or cost savings. Most
methods of investment analysis are based on some form of comparison between the
size, timing and risks associated with the outflow and its consequent inflows of cash.
3 Working capital – the financial inputs needed to fund the time difference between
regular outflows and inflows of cash. In most operations, payments must be made on
the various types of operating expenditure that are necessary to produce goods and
services before payment can be obtained from customers. Thus, funds are needed to
bridge the time difference between payment out and payment received. The length
of this time difference, and therefore the extent of the money required to fund it, is
largely influenced by two processes – the process that handles the day-to-day finan-
cial transactions of the business and the operations process itself, which produces
the goods and services. The faster the financial process can get payment from cus-
tomers and the more it can negotiate credit delays to its suppliers, the shorter the
gap between money going out and money coming in, and the less working capital is
required. Similarly, the faster the operations process can move materials through the

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