Nigel S., Chambers S., Johnson R. Operations Management
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Summary answers to key questions
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➤ Why is good product and service design important?
■ Good design makes good business sense because it translates customer needs into the shape
and form of the product or service and so enhances profitability.
■ Design includes formalizing three particularly important issues: the concept, package and
process implied by the design.
■ Design is a process that itself must be designed according to the process design principles
described in the previous chapter.
➤ What are the stages in product and service design?
■ Concept generation transforms an idea for a product or service into a concept which captures
the nature of the product or service and provides an overall specification for its design.
■ Screening the concept involves examining its feasibility, acceptability and vulnerability in broad
terms to ensure that it is a sensible addition to the company’s product or service portfolio.
■ Preliminary design involves the identification of all the component parts of the product or service
and the way they fit together. Typical tools used during this phase include component structures
and flow charts.
■ Design evaluation and improvement involve re-examining the design to see if it can be done in
a better way, more cheaply or more easily. Typical techniques used here include quality func-
tion deployment, value engineering and Taguchi methods.
■ Prototyping and final design involve providing the final details which allow the product or service
to be produced. The outcome of this stage is a fully developed specification for the package
of products and services, as well as a specification for the processes that will make and deliver
them to customers.
➤ Why should product and service design and process design be considered
interactively?
■ Looking at them together can improve the quality of both product and service design and
process design. It helps a design ‘break even’ on its investment earlier than would otherwise
have been the case.
■ Employ simultaneous development where design decisions are taken as early as they can be,
without necessarily waiting for a whole design phase to be completed.
■ Ensure early conflict resolution which allows contentious decisions to be resolved early in the
design process, thereby not allowing them to cause far more delay and confusion if they emerge
later in the process.
■ Use a project-based organizational structure which can ensure that a focused and coherent
team of designers is dedicated to a single design or group of design projects.
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Chapter 5 The design of products and services
135
Chatsworth, the home of the 12th Duke and Duchess of
Devonshire, is one of the finest and most palatial houses
in the UK, set in over 1,000 acres of parkland in the Peak
District National Park in central England. The original house
was built over 400 years ago and rebuilt starting in the
17th century. The house is vast, with 175 rooms, lit by over
2,000 light bulbs, and with a roof that covers 1.3 acres.
Chatsworth’s many rooms are full of treasures including
famous works of art by painters including Rembrandt, and
tapestries, sculptures, valuable furniture, musical instruments
and even 63 antique clocks which need winding every day.
The gardens cover over 105 acres with over five miles of
footpaths that guide visitors past fountains, small and large
(the largest is 28 metres high), cascades, streams and ponds,
all of which are fed by gravity from four large artificial lakes
on the moors above the grounds. The gardens are a mix
of formal and informal areas. There are sculptures, statues,
rock gardens, a maze and garden views that constantly
change with the seasons, all managed and maintained by
a team of 20 gardeners. Both the house and gardens are
open from March to December and are just two of the
experiences available to visitors. Others include the orangery
gift shop, restaurant and farm shop, which are open all year
round, and the surrounding parkland which is open to visitors
for walking, picnics and swimming in the river. The whole
estate is owned and managed by an independent charity.
Close to the house and gardens, with a separate admis-
sion charge, is the farmyard and adventure playground. The
farmyard is a popular attraction for families and provides
close encounters with a variety of livestock including pigs,
sheep, cows, chickens and fish. The staff provide daily
milking demonstrations and animal handling sessions. The
woodland adventure playground is accessed through the
farmyard and is one of the largest in the country with
a range of frames, bridges, high-level walkways, swings,
chutes and slides.
Simon Seligman is the Promotions and Education
Manager at Chatsworth. As head of marketing he is closely
involved in the design and development of new services and
facilities. He explained the way they do this at Chatsworth.
‘It is a pretty abstract and organic process. Looking back
over the last 25 years we either take occasional great leaps
forward or make frequent little shuffles. The little shuffles
tend to be organic changes usually in response to visitor
feedback. The great leaps forward have been the few major
changes that we decided we wanted to bring about.’
One of those great leaps forward was the decision to
replace the children’s adventure playground attached
to the farmyard. Simon explained, ‘The existing adventure
playground was clearly coming to the end of its life and it
Case study
Chatsworth – the adventure playground decision
was time to make a decision about what to do with it. It was
costing us about £18,000 each winter to maintain it and
these costs were increasing year on year. We believed we
could get a better one for around £100,000. The trustees
asked me, the deputy estate manager with line responsibil-
ity for the farmyard and the farmyard manager to form a
group and put forward a report to the trustees setting out
all the options. We asked ourselves several detailed ques-
tions and some fundamental ones too, such as why are
we replacing it, and should we replace it at all. We came
up with four options, remove it, do nothing, replace with
similar, replace with substantially better.’
It was felt that removing the playground altogether
was a realistic option. The Duke and Duchess had a view
that Chatsworth should be true to its roots and traditions.
Whereas one could make an argument for a farmyard
being part of a country estate, an adventure playground
was considered to fit less well. The downside would be
that the lack of an adventure playground, which is a big
attraction for families with young children, could have an
impact on visitor numbers. However, there would be a
saving in terms of site maintenance.
The ‘do nothing’ option would entail patching up the
playground each year and absorbing the increasing main-
tenance costs. This could be a low-impact option, in the
short term at least. However, it was felt that this option would
simply delay the replace or remove decision by five years
at most. The current playground was no longer meeting
international safety standards so this could be a good
opportunity to replace the playground with something
➔
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similar. It was estimated that a like-for-like replacement
would cost around £100,000. Replacing the playground
with a substantially better one would entail a much greater
cost but could have an impact on visitor numbers. Simon
and his team keep a close eye on their competitors and
visit them whenever they can. They reported that several
other attractions had first-rate adventure playgrounds.
Installing a substantially better playground could provide
an opportunity for Chatsworth to leapfrog over them and
provide something really special.
‘We tried to cost out all four alternatives and estimate
what we thought the impact on visitor numbers might be.
We presented an interim report to the Duke and the other
trustees. We felt that maintaining the status quo was in-
appropriate and a like-for-like replacement was expensive,
especially given that it would attract little publicity and few
additional visitors. We strongly recommended two options:
either remove the playground or go for a great leap forward.
The trustees asked us to bear in mind the “remove” option
and take a closer look at the “substantially better” option.’
Three companies were asked to visit the site, propose
a new adventure playground and develop a site plan and
initial design to a budget of £150,000. All three companies
provided some outline proposals for such a figure but they
all added that for £200,000 they could provide something
really quite special. Furthermore, the team realized that they
would have to spend some additional money putting in
a new ramp and a lift into the farmyard at an estimated
£50,000. It was starting to look like a very expensive pro-
ject. Simon takes up the story, ‘One of the companies came
along with a complete idea for the site based on water,
which is a recurring theme in the garden at Chatsworth.
They had noticed the stream running through the play-
ground and thought it could make a wonderful feature.
They told us they were reluctant to put up a single solu-
tion but wanted to work with us, really engage with us, to
explore what would really work for us and how it could be
achieved. They also wanted to take us to visit their German
partner who made all the major pieces of equipment. So,
over the next few months, together, we worked up a com-
plete proposal for a state-of-the-art adventure playground,
including the structural changes in the farmyard. The
budget was £250,000. To be honest, it was impossible to
know what effect this would have on visitor numbers, so in
the end we put in a very conservative estimate that suggested
that we would make the investment back in seven years.
Over the next few years we reckon the playground led to
an increase in visitor numbers of 85,000 per year and so we
recouped our investment in just three years.’
Questions
1 What do you think make up the concept, package and
process for the adventure playground?
2 Describe the four options highlighted in the case in
terms of their feasibility, acceptability and vulnerability.
3 What does the concept of interactive design mean for a
service such as the adventure playground described here?
Part Two Design
136
These problems and applications will help to improve your analysis of operations. You
can find more practice problems as well as worked examples and guided solutions on
MyOMLab at
www.myomlab.com.
How would you evaluate the design of this book?
A company is developing a new web site that will allow customers to track the progress of their orders.
The web site developers charge A10,000 for every development week and it is estimated that the design will
take 10 weeks from the start of the design project to the launch of the web site. Once launched, it is estimated
that the new site will attract extra business that will generate profits of A5,000 per week. However, if the web
site is delayed by more than 5 weeks, the extra profit generated would reduce to A2,000 per week. How will a
delay of 5 weeks affect the time when the design will break even in terms of cash flow?
How can the concept of modularization be applied to package holidays sold through an online travel agent?
One product where a very wide range of product types is valued by customers is that of domestic paint.
Most people like to express their creativity in the choice of paints and other home-decorating products that
they use in their homes. Clearly, offering a wide range of paint must have serious cost implications for the
companies which manufacture, distribute and sell the product. Visit a store which sells paint and get an idea
of the range of products available on the market. How do you think paint manufacturers and retailers manage
to design their products and services so as to maintain high variety but keep costs under control?
4
3
2
1
Problems and applications
M05_SLAC0460_06_SE_C05.QXD 10/20/09 9:26 Page 136
Design becomes particularly important at the interface between products or services and the people that use
them. This is especially true for internet-based services. Consider two types of web site:
(a) those which are trying to sell something such as Amazon.com, and
(b) those which are primarily concerned with giving information, for example bbc.co.uk.
For each of these categories, what seems to constitute ‘good design’? Find examples of particularly good and
particularly poor web design and explain what makes them good or bad.
5
Chapter 5 The design of products and services
137
Bangle, C. (2001) The ultimate creativity machine: how BMW
turns art into profit, Harvard Business Review, Jan, 47–55.
A good description of how good aesthetic design translates
into business success.
Bruce, M. and Bessant, J. (2002) Design in Business:
Strategic Innovation through Design, Financial Times
Prentice Hall and The Design Council. Probably one of the
best overviews of design in a business context available
today.
Bruce, M. and Cooper, R. (2000) Creative Product Design:
A Practical Guide to Requirements Capture Management,
Wiley, Chichester. Exactly what it says.
Goldstein, S.M., Johnston, R., Duffy, J. and Raod, J. (2002)
The service concept: the missing link in service design
research? Journal of Operations Management volume 20,
issue 2, April, 121–34. Readable.
The Industrial Designers Society of America (2003) Design
Secrets: Products: 50 Real-Life Projects Uncovered (Design
Secrets), Rockport Publishers Inc, Gloucester, Mass. Very
much a practitioner book with some great examples.
Lowe, A. and Ridgway, K. (2000) A user’s guide to quality
function deployment, Engineering Management Journal,
June. A good overview of QFD explained in straightforward
non-technical language.
Selected further reading
www.cfsd.org.uk The centre for sustainable design’s site.
Some useful resources, but obviously largely confined to
sustainability issues.
www.conceptcar.co.uk A site devoted to automotive design.
Fun if you like new car designs!
www.betterproductdesign.net A site that acts as a resource
for good design practice. Set up by Cambridge University
and the Royal College of Art. Some good material that
supports all aspects of design.
www.ocw.mit.edu/OcwWeb/Sloan-School-of-Management
Good source of open courseware from MIT.
www.design-council.org.uk Site of the UK’s Design Council.
One of the best sites in the world for design-related issues.
www.nathan.com/ed/glossary/#ED
www.opsman.org Lots of useful stuff.
Useful web sites
Now that you have finished reading this chapter, why not visit MyOMLab at
www.myomlab.com where you’ll find more learning resources to help you
make the most of your studies and get a better grade?
M05_SLAC0460_06_SE_C05.QXD 10/20/09 9:26 Page 137
Introduction
No operation exists in isolation. Every operation is part of a
larger and interconnected network of other operations. This
supply network will include suppliers and customers. It will also
include suppliers’ suppliers and customers’ customers, and so
on. At a strategic level, operations managers are involved in
‘designing’ the shape and form of their network. Network design
starts with setting the network’s strategic objectives. This helps
the operation to decide how it wants to influence the overall
shape of its network, the location of each operation, and how
it should manage its overall capacity within the network. This
chapter treats all these strategic design decisions in the context
of supply networks (see Figure 6.1).
Chapter 6
Supply network design
Key questions
➤ Why should an organization take a
total supply network perspective?
➤ What is involved in configuring a
supply network?
➤ Where should an operation be
located?
➤ How much capacity should an
operation plan to have?
Figure 6.1 This chapter examines supply network design
Check and improve your understanding of this chapter using self assessment
questions and a personalised study plan, audio and video downloads, and an
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M06A_SLAC0460_06_SE_C06A.QXD 10/20/09 9:27 Page 138
When he was a student at the University of Texas at
Austin, Michael Dell’s sideline of buying unused stock
of PCs from local dealers, adding components, and
re-selling the now higher-specification machines to
local businesses was so successful he quit university
and founded a computer company which was to
revolutionize the industry’s supply network management.
But his fledgling company was just too small to make
its own components. Better, he figured to learn how to
manage a network of committed specialist component
manufacturers and take the best of what was available in
the market. Dell says that his commitment to outsourcing
was always done for the most positive of reasons. ‘We
focus on how we can coordinate our activities to create
the most value for customers’. Yet Dell still faced a cost
disadvantage against its far bigger competitors, so they
decided to sell its computers direct to its customers,
bypassing retailers. This allowed the company to cut out
the retailer’s (often considerable) margin, which in turn
allowed Dell to offer lower prices. Dell also realized that
cutting out the link in the supply network between them
and the customer also provided them with significant
learning opportunities by offering an opportunity to get
to know their customers’ needs far more intimately.
This allowed them to forecast based on the thousands
of customer contact calls every hour. It also allowed
them to talk with customers about what they really
want from their machines. Most importantly it allowed
Dell to learn how to run its supply chain so that
products could move through the supply chain
to the end-customer in a fast and efficient manner,
reducing Dell’s level of inventory and giving Dell
a significant cost advantage.
However, what is right at one time may become a
liability later on. Two decades later Dell’s growth started
to slow down. The irony of this is that, what had been
one of the company’s main advantages, its direct sales
model using the Internet and its market power to squeeze
price reductions from suppliers, were starting to be seen
as disadvantages. Although the market had changed,
Dell’s operating model had not. Some commentators
questioned Dell’s size. How could a $56 billion company
remain lean, sharp, and alert? Other commentators
pointed out that Dell’s rivals had also now learnt to run
efficient supply chains (‘Getting a 20-year competitive
advantage from your knowledge of how to run supply
chains isn’t too bad.’) However, one of the main factors
was seen as the shift in the nature of the market itself.
Sales of PCs to business users had become largely
a commodity business with wafer-thin margins,
and this part of the market was growing slowly
compared to the sale of computers to individuals.
Selling computers to individuals provided slightly
better margins than the corporate market, but they
increasingly wanted up-to-date computers with
a high design value, and most significantly, they
wanted to see, touch and feel the products before
buying them. This was clearly a problem for a company
like Dell which had spent 20 years investing in its
telephone- and later, internet-based sales channels.
What all commentators agreed on was that in the
fast-moving and cut-throat computer business,
where market requirements could change overnight,
operations resources must constantly develop
appropriate new capabilities.
However, Michael Dell says it could regain its spot
as the world’s number one PC maker by switching its
focus to consumers and the developing world. He also
conceded that the company had missed out on the boom
in supplying computers to home users – who make up
just 15% of its revenues – because it was focused on
supplying businesses. ‘Let’s say you wanted to buy a
Dell computer in a store nine months ago – you’d have
searched a long time and not found one. Now we have
over 10,000 stores that sell our products.’ He rejected
the idea that design was not important to his company,
though he accepted that it had not been a top priority
when all the focus was on business customers. ‘As
we’ve gone to the consumer we’ve been paying quite
a bit more attention to design, fashion, colors, textures
and materials.’
Chapter 6 Supply network design
139
Operations in practice Dell: no operating model lasts forever
1
Source: Corbis/Gianni Giansanti/Sygma
M06A_SLAC0460_06_SE_C06A.QXD 10/20/09 9:27 Page 139
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The supply network perspective
A supply network perspective means setting an operation in the context of all the other
operations with which it interacts, some of which are its suppliers and its customers.
Materials, parts, other information, ideas and sometimes people all flow through the network
of customer–supplier relationships formed by all these operations. On its supply side an
operation has its suppliers of parts, or information, or services. These suppliers themselves
have their own suppliers who in turn could also have suppliers, and so on. On the demand
side the operation has customers. These customers might not be the final consumers of the
operation’s products or services; they might have their own set of customers. On the supply
side is a group of operations that directly supply the operation; these are often called first-tier
suppliers. They are supplied by second-tier suppliers. However, some second-tier suppliers
may also supply an operation directly, thus missing out a link in the network. Similarly, on
the demand side of the network, ‘first-tier’ customers are the main customer group for the
operation. These in turn supply ‘second-tier’ customers, although again the operation may
at times supply second-tier customers directly. The suppliers and customers who have direct
contact with an operation are called its immediate supply network, whereas all the operations
which form the network of suppliers’ suppliers and customers’ customers, etc., are called the
total supply network.
Figure 6.2 illustrates the total supply network for two operations. First is a plastic home-
ware (kitchen bowls, food containers, etc.) manufacturer. Note that on the demand side the
Figure 6.2 Operations network for a plastic homeware company and a shopping mall
Supply network
Supply side
Demand side
First-tier
Second-tier
Immediate supply
network
Total supply network
M06A_SLAC0460_06_SE_C06A.QXD 10/20/09 9:27 Page 140
homeware manufacturer supplies some of its basic products to wholesalers which supply
retail outlets. However, it also supplies some retailers directly with ‘made-to-order’ products.
Along with the flow of goods in the network from suppliers to customers, each link in the
network will feed back orders and information to its suppliers. When stocks run low, the
retailers will place orders with the wholesaler or directly with the manufacturer. The whole-
saler will likewise place orders with the manufacturer, which will in turn place orders with its
suppliers, which will replenish their own stocks from their suppliers. It is a two-way process
with goods flowing one way and information flowing the other. It is not only manufacturers
that are part of a supply network. The second (service) operation, an operation which manages
an enclosed shopping mall, also has suppliers and customers that themselves have their own
suppliers and customers. Figure 6.2 shows the supply network for an operation which manages
an enclosed shopping mall.
Why consider the whole supply network?
There are three important reasons for taking a supply network perspective:
It helps an understanding of competitiveness. Immediate customers and immediate suppliers,
quite understandably, are the main concern to competitively minded companies. Yet some-
times they need to look beyond these immediate contacts to understand why customers
and suppliers act as they do. Any operation has only two options if it wants to understand
its ultimate customers’ needs at the end of the network. It can rely on all the intermediate
customers and customers’ customers, etc., which form the links in the network between the
company and its end-customers. Alternatively, it can look beyond its immediate customers
and suppliers. Relying on one’s immediate network is seen as putting too much faith in
someone else’s judgement of things which are central to an organization’s own competitive
health.
It helps identify significant links in the network. The key to understanding supply networks
lies in identifying the parts of the network which contribute to those performance objectives
valued by end-customers. Any analysis of networks must start, therefore, by understanding
the downstream end of the network. After this, the upstream parts of the network which
contribute most to end-customer service will need to be identified. But they will not be
equally significant. For example, the important end-customers for domestic plumbing parts
and appliances are the installers and service companies that deal directly with domestic con-
sumers. They are supplied by ‘stock holders’ which must have all parts in stock and deliver
them fast. Suppliers of parts to the stock holders can best contribute to their end-customers’
competitiveness partly by offering a short delivery lead time but mainly through depend-
able delivery. The key players in this example are the stock holders. The best way of winning
end-customer business in this case is to give the stock holder prompt delivery which helps
keep costs down while providing high availability of parts.
It helps focus on long-term issues. There are times when circumstances render parts of a
supply network weaker than its adjacent links. A major machine breakdown, for example,
or a labour dispute might disrupt a whole network. Should its immediate customers and
suppliers exploit the weakness to enhance their own competitive position, or should they
tolerate the problems, and hope the customer or supplier will eventually recover? A long-term
supply-network view would be to weigh the relative advantages to be gained from assisting
or replacing the weak link.
Design decisions in supply networks
The supply-network view is useful because it prompts three particularly important design
decisions. These are the most strategic of all the design decisions treated in this part of the
book. It is necessary to understand them at this point, however, because, as well as having
Chapter 6 Supply network design
141
Downstream
Upstream
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a particularly significant impact on the strategy of the organization, they set the context in
which all other process design decisions are made. The three decisions are:
1 How should the network be configured? This means, first, how can an operation influence
the shape which the network might take? Second, how much of the network should the
operation own? This may be called the outsourcing, vertical integration or do-or-buy
decision.
2 Where should each part of the network be located? If the homeware company builds a
new factory, should it be close to its suppliers or close to its customers, or somewhere in
between? This decision is called the operations location decision.
3 What physical capacity should each part of the network have? How large should the
homeware factory be? Should it expand in large-capacity steps or small ones? These type
of decisions are called long-term capacity management decisions.
Note that all three of these decisions rely on assumptions regarding the level of future demand.
The supplement to this chapter explores forecasting in more detail. Also, in Chapter 13, we
will cover the more operational day-to-day issues of managing operations networks. In this
chapter we deal with these three related strategic decisions.
Configuring the supply network
Changing the shape of the supply network
Even when an operation does not directly own, or even control, other operations in its
network, it may still wish to change the shape of the network. This involves attempting to
manage network behaviour by reconfiguring the network so as to change the scope of the
activities performed in each operation and the nature of the relationships between them.
Reconfiguring a supply network sometimes involves parts of the operation being merged –
not necessarily in the sense of a change of ownership of any parts of an operation, but rather
in the way responsibility is allocated for carrying out activities. The most common example
of network reconfiguration has come through the many companies that have recently
reduced the number of direct suppliers. The complexity of dealing with many hundreds of
suppliers may both be expensive for an operation and (sometimes more important) prevent
the operation from developing a close relationship with a supplier. It is not easy to be close
to hundreds of different suppliers.
Disintermediation
Another trend in some supply networks is that of companies within a network bypassing
customers or suppliers to make contact directly with customers’ customers or suppliers’
suppliers. ‘Cutting out the middlemen’ in this way is called disintermediation. An obvious
example of this is the way the Internet has allowed some suppliers to ‘disintermediate’ tradi-
tional retailers in supplying goods and services to consumers. So, for example, many services
in the travel industry that used to be sold through retail outlets (travel agents) are now also
available direct from the suppliers. The option of purchasing the individual components of
a vacation through the web sites of the airline, hotel, car hire company, etc., is now easier
for consumers. Of course, they may still wish to purchase an ‘assembled’ product from retail
travel agents which can have the advantage of convenience. Nevertheless the process of
disintermediation has developed new linkages in the supply network.
Co-opetition
One approach to thinking about supply networks sees any business as being surrounded by
four types of players: suppliers, customers, competitors and complementors. Complementors
enable one’s products or services to be valued more by customers because they can also have the
Outsourcing
Vertical integration
Do or buy
Location
Long-term capacity
management
Disintermediation
M06A_SLAC0460_06_SE_C06A.QXD 10/20/09 9:27 Page 142
complementor’s products or services, as opposed to when they have yours alone. Competitors
are the opposite: they make customers value your product or service less when they can have
their product or service, rather than yours alone. Competitors can also be complementors and
vice versa. For example, adjacent restaurants may see themselves as competitors for customers’
business. A customer standing outside and wanting a meal will choose between the two of
them. Yet, in another way they are complementors. Would that customer have come to this
part of town unless there was more than one restaurant to choose from? Restaurants, theatres,
art galleries and tourist attractions generally, all cluster together in a form of cooperation to
increase the total size of their joint market. It is important to distinguish between the way
companies cooperate in increasing the total size of a market and the way in which they
then compete for a share of that market. Customers and suppliers, it is argued, should have
‘symmetric’ roles. Harnessing the value of suppliers is just as important as listening to the
needs of customers. Destroying value in a supplier in order to create it in a customer does not
increase the value of the network as a whole. So, pressurizing suppliers will not necessarily
add value. In the long term it creates value for the total network to find ways of increasing
value for suppliers and well as customers. All the players in the network, whether they are
customers, suppliers, competitors or complementors, can be both friends and enemies at
different times. The term used to capture this idea is ‘co-opetition’.
2
In-house or outsource? Do or buy? The vertical integration
decision
No single business does everything that is required to produce its products and services. Bakers
do not grow wheat or even mill it into flour. Banks do not usually do their own credit check-
ing: they retain the services of specialist credit checking agencies that have the specialized
information systems and expertise to do it better. This process is called ‘outsourcing’ and has
become an important issue for most businesses. This is because, although most companies
have always outsourced some of their activities, a larger proportion of direct activities are now
being bought from suppliers. Also many indirect processes are now being outsourced. This
is often referred to as ‘business process outsourcing’ (BPO). Financial service companies in
particular are starting to outsource some of their more routine back-office processes. In a
similar way many processes within the human resource function from simply payroll services
through to more complex training and development processes, are being outsourced to
specialist companies. The processes may still be physically located where they were before,
but the staff and technology are managed by the outsourcing service provider. The reason for
doing this is often primarily to reduce cost. However, there can sometimes also be significant
gains in the quality and flexibility of service offered. ‘People talk a lot about looking beyond cost
cutting when it comes to outsourcing companies’ human resource functions’, says Jim Madden,
CEO of Exult, the California-based specialist outsourcing company, ‘I don’t believe any com-
pany will sign up for this [outsourcing] without cost reduction being part of it, but for the clients
whose human resource functions we manage, such as BP, and Bank of America, it is not just
about saving money.’
The outsourcing debate is just part of a far larger issue which will shape the fundamental
nature of any business. Namely, what should the scope of the business be? In other words,
what should it do itself and what should it buy in? This is often referred to as the ‘do-or-buy
decision’ when individual components or activities are being considered, or ‘vertical integration’
when it is the ownership of whole operations that is being decided. Vertical integration is the
extent to which an organization owns the network of which it is a part. It usually involves an
organization assessing the wisdom of acquiring suppliers or customers. Vertical integration
can be defined in terms of three factors.
3
1 The direction of vertical integration. Should an operation expand by buying one of its
suppliers or by buying one of its customers? The strategy of expanding on the supply
side of the network is sometimes called ‘backward’ or ‘upstream’ vertical integration,
Chapter 6 Supply network design
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