Thursday, March 27, 2008

Operations (or What I had to think about today)

Sorry - I've just realised this is a very involved post about work! I'll be back to the dodgy photos tomorrow :)

I had an intense day today at our Bristol office with the other members of the Operations Strategy team. Immersion in operation management strategy all day = exhausted brain.

Just to give you some background:

I work for ABC which is a PLC i.e. with public shareholders. The management board of our parent group sets out the growth and profit targets for each operating company. All the employees are aware of this, but most of us just get on with it and leave the management to the Directors. However, last week I was asked to be part of the strategy team. Eeeek.

This year ABC Group has told ABC-UK-CakeShop (my operating company) that as part of the latest 5 year targets, we have to achieve 5% growth every year and 0.5% increase in profit every year.

That's not easy. 5% growth means that if you are a 1000-employee company, you need to hire 50 new staff a year to grow by 5%. You need to provide enough office space, IT support, HR support, training etc for those additional 50 people. Plus, if natural staff turnover is about 10% anyway, you actually need to recruit 150 a year. There are a lot of costs associated with recruitment - because you don't just want to recruit the next guy on the street. It is estimated that the recruitment costs for each new member of staff is equivalent to one year of his or her salary. HR time, management time, agency costs, handover costs, inefficiency while "learning the ropes", colleagues having to "show you the ropes"....adds up to tens of thousands of pounds in lost earnings.

And most important of all, if we hire 50 additional staff, we need to make sure that our sales income can support all of these guys.

Consider that we need to do this every year....

0.5% profit increase per year is even harder to achieve. This means, year on year, we need to become more and more efficient at generating profit. We can't just charge our Clients more money every year without any added value (they would just tell us to **** off). How can you make everyone in your company produce 0.5% more profit this year than last year?

This isn't just increase in profit but increase in percentage profit. For example, 2008, you have 100 staff. If overall costs are £20,000 per staff member; then £2,000,000 is break even. If you earn £2,080,000, that's £80,000 profit - 4%.

Now it's 2009, you have 105 staff which hits the 5% growth target. Break even is £2,100,000. You earn £2,185,000 i.e £85,000 profit. More money than last year, but still only 4% profit so you have actually failed. Vastly oversimplified, I know - but just an illustration.

One obvious way is to outsource our low-end or back-office work to other countries i.e. reduce the direct costs. Everyone knows about Indian call centres, right? We are already doing this i.e. we have ABC-Manila which handles work for the UK and Hong Kong. ABC-India is also up and running, so soon we will be under pressure to send work there too.

The thing is, that's not enough. We will also be competing with companies from countries with lower costs eg India or China. That's already happened with software and telecoms providers. Within the next few years, we predict that the big players from these countries will also try to penetrate the UK market in our industry.

There are other strategy teams looking at different aspects, but I am in the Operations team which is all about delivery. How we can improve our systems and processes company-wide, how we can produce more for less, while still improving quality.

The UK Ops Director is ultimately in charge of this and it is an immense reponsibility. Operations seems to be today's theme. Terminal Five at Heathrow opened today and the baggage system has gone haywire. BA's Director of Operations has been on the news apologising profusely. I bet he's having a bad day.

1 comment:

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