For years now we’ve been working on helping our members get more scale out of their operations. We’ve talked about cross-skilling, removing process waste, reorganizing, centralizing, and a variety of other methods to increase the number of transactions that can be processed with a pre-existing set of fixed resources and to decrease the unit cost associated with each transaction.
We’ve also been talking a lot about hidden inefficiencies. These are essentially things that keep you from getting those economies of scale. However, what’s struck us as we’ve advanced our research on hidden inefficiencies is that a few fundamental concepts about Operations contradict the notion of economies of scale as an end goal:
1) Economies of scale depend on volume. While before disintermediation transactional volumes in Operations could almost be guaranteed to increase as revenue increased, in today’s self-service world, that’s no longer the case. In fact, members more commonly cite managing fluctuating transactional volumes as a challenge than they do steadily-increasing transaction volumes.
2) Operations is generally heavily invested in fixed cost resources such as staff and infrastructure. This means that once inefficiencies are found and eliminated the natural end result is the creation of excess capacity, not a reduction in costs. The heavy reliance on fixed costs also makes it very difficult for Operations executives who are intent on achieving sustainable cost reductions to flex as resource needs change, which means even if they succeed in shedding the excess capacity it will likely return in the form of fixed costs.
Given these two factors, we’ve been asking ourselves the question: Has the quest for economies of scale led Ops executives to invest too heavily in fixed resources? In Operations, what is the “right” mix of fixed and variable costs given fluctuating work volumes AND an increased tendency toward exceptions-based work?