Now, in the last session we discussed how the performance of an operation can be evaluated to long four dimensions, cluster efficiency, the quality, ability to provide choice of the customer and responsiveness. Now as the owner of the business of course, I would love my operations to excel at all four of this dimensions. I would love to provide customers this product at low prices, provide them with infinite choice, high quality service, and all of that immediately, provide them the product or services when they want them. Obviously that is often not possible. As the owner of a business, as a manager, as a consultant I have to make tradeoffs among these four dimensions which is really what we're going to be discussing in this section 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 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 served in 20 seconds or less, this is called a service level and we'll talk more about this later on in this course. 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 employee staff. It would be very inefficient but it would be very responsive. Vise versa you could imagine down sizing the work force so that you have very few workers answering calls which would be great for your productivity but very poor for your responsiveness. because there's clearly a trade-off 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 the 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're going out you're working for this call center and the call center is performing about here in terms of the responsiveness and the productivity. You engage in some bench marking 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 than you have. So in other words, the customers have to wait less. But at the same time you notice that they're a lot less efficient. Then you run into company B. Now these guys here are having a much better productivity. But they do this 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 tradeoff that we just discussed on the previous slide. Now the next company you run into is competitor C, and competitor C is a puzzle for you only 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 prepares to its lower left, we refer to this as the efficient frontier. Obviously, the goal of an operation is to move our tier 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 was off the frontier has the potential to simultaneously improve along multiple of the four dimensions of operational performance without having to make necessarily sacrifice. These are guides to just doing the work smarter. Now, one of the things that we talk about in this course is we'll help you evaluate such changes be it on the frontier to a new frontier or also frontier towards more productivity and more responsiveness. 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. But I've shown on this graph, this data from the US airline industry. And I've put here on the x axis, the efficiency of the carriers as measured by the ratio between the traveled miles that they provide for their operating expenses. I also measured on the y axis that is called the yield of the airline which takes a ratio between the miles that's traveled, service provided by the airline relative to the revenue. Now, take a look here at the 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 Airline Southwest has been able to achieve a much higher productivity compared with the big legacy carriers and thereby has been able to shift the frontier, largely done because of their clever labor productivity, something we will analyze later on in this course. You 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's interesting to contrast this data with the year 2011. In 2011 you notice that the frontier has changed very dramatically. In fact Southwest that has been playing across the graphic game relying on low pricing has emerged as 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've 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 model has arrived, companies have three different strategies and because of the 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, we have to set priorities, the business has to prioritize some of the four dimensions of operational performance. Cost, quality, variety and responsiveness. You have to decide in which of these four dimensions you want to compete. Second, we talked about the concept of the efficient frontier. I had currently defined the efficient frontier as a line that includes all firms to it's lower left. It was arguably a quite casual definition. Well formally in academic terms we talked about the line of firms that has no other firm that prorate dominates a firm. That is, for example, cheaper and faster at the same time. The efficient frontier is important as our gap as in the company to the frontier measures the inefficiency, the waste that we have in our operation. Once 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.
