Carillion: an operations management perspective

Much has been, and will be, said about the collapse of Carillion, the UK’s second largest construction company and major provider of facilities management services to both the public and private sectors.  In this blog, I aim to specifically to discuss this from an OM perspective, albeit there are significant strategic, financial, and human resource issues too.

The company was a typical example of the servitisation strategy.  It is an operator that made or built things (roads, infrastructure, hospitals, schools, houses and etc.) that got into services related to what it made (facilities management, cleaning services, catering, and etc.).  I’ve discussed this before, but the rationale for this is basically that revenue generated from product sales can be erratic, whereas sales from services tend to be more stable, especially if they are provided on a relatively long-term contract basis.  The ‘lumpy’ nature of revenue is especially true in the construction industry which is very project based.  So adopting servitisation as a strategy appears to be a wise move, except….

The challenge of servitisation is that managing production and managing services are very different and hence finding the right management team or teams is essential.  In Carillion’s case, this should not of been too much of a problem as it it expanded into services largely through the acquisition of other companies, who should have the necessary expertise in their field.

But Carillion faced two specific challenges not necessarily faced but all operators adopting this strategy.  First, both the construction industry and the facilities management sector are relatively low margin businesses.  Both have to be managed extremely well if profit is to be made and sustained, with tight control over costs (see previous blog).  Second, both are based on a contract business model i.e. the operator bids either for specific construction projects or for service management contracts.  This is one of the reasons that margins are so low (i.e. high competition), but it also means that managing operations is conducted in a climate of uncertainty about any future level of demand.   This results in trying to manage the workforce as flexibly as possible.  In the construction industry, this is largely through a complex web of sub-contractors; whereas in the service arena it is through adopting practices associated with the so-called gig economy.  All of which limits the opportunity for both economies of scale and economies of scope.   In other words, being big is not necessarily advantageous – and especially so now that the firm has gone into liquidation.


Posted in Chap 01 Introduction, Sector: Construction, Sector: Public Services & Charities | Tagged , , , , | 1 Comment

Sustained cost transformation

All organisations need to manage their costs.  Most will also be striving to minimise these costs.  But there is lots of evidence to show that firms are not in control of their costs as they would like to be, nor do they take full advantage of the potential cost savings that they can make.  The consulting firm Bain & Co advise on this problem and they promote the concept of “sustained cost transformation”.  It seems there are three key elements of their approach:

  • empower lower levels of the organisation and encourage them to think more strategically
  • create cross-functional teams
  • get the organisational culture right.

This video explains it all in more detail.

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Uber v. Grab – who is best adapted to the south east Asia market?

At first sight both Uber and Grab have the same business model – an app-based taxi service.  Uber is global, whereas Grab is regional – operating in cities around south-east Asia. But are they really the same?  And which is best placed to succeed in the southeast Asian market?

First, there are some specific features of this market that make it different to the U.S.A. – from where Uber originates.  South-east Asian cities already have a plethora of local taxi and/or bus services; car ownership and credit card coverage is relatively low; and web-based maps of cities are not as reliable.  So it is a tough market in which to set up this kind of business (and neatly illustrates the idea that business models need to be adapted in order to meet local conditions).

Uber and Grab’s business models are the same in many respects – customers call for a ride using an app, drivers are allocated to customers using algorithms and analytics, drivers operate on a ‘freelance’ basis using their own vehicles, and they rely on in-car technology to both find the customers and their destinations.  But there are some variations.  Until recently Uber customers could only pay by credit card, whereas Grab customers can pay cash.  Also Uber customers pay a fare based on journey length and/or time, whereas Grab customers pay a fixed fare.

So who is winning out?  Grab is doing well because its drivers are trusted more, its fare structure is simple, and payment is in cash.  But Uber’s technology is more sophisticated, its algorithms are more accurate, and its app performs better.  For Grab to outperform Uber it needs to improve its technology significantly.  For Uber to outperform Grab it needs to simplify its fare structure, allow cash payment (which it has started to do) and build trust.  Watch this space…


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Disrupting an entire industry – from the heart

This 35 minute video shows Jay Rogers, CEO and Co-Founder of Local Motors talking about his operations.  In it he discusses how his company is reinventing the automative industry.   At the heart of this are co-creation, micro-manufacturing and the reconfigurable factory, which gives his operation economies of scope.  He explains these concepts in some detail.  And as a result he claims his company can launch new vehicles onto the market five times faster and with 100 times less capital than conventional motor manufacturers.  But after 10 minutes explaining this, he gets to talk about his personal philosophy, his company’s culture and how it is fundamental to his business model (a concept that readers of this blog will be familiar with).  It is interesting to consider how this model of manufacturing changes the conventional view of the product life cycle, by creating much shorter life cycles for this industry sector.

Posted in Chap 03 Processes and life cycles, Chap 10 Processes and technology, Sector: Manufacturing | Tagged , , , , | Leave a comment

The world of work in 2030

Scenario planning originated in Shell as a result of the 1973 energy crisis.  Scenarios are developed by taking one or two major trends and extrapolating them into the future.  The idea is to devise a number of alternative scenarios, each of which is feasible, so that plans can be developed to operate within each scenario.  This enables management to make the right decisions as things develop over time.

This what Hesse and Olsen (2017) have done with regards to the nature of work over the next decade or so.  They have envisioned four possible worlds but “of course, it’s likely that the future will be one in which elements of all four of these worlds are influential”.  They’ve named each of these scenarios after a colour – here’s a synopsis…

Red world: Innovation is king.  Innovation outpaces regulation as organisations and individuals race to meet emerging customer needs.  Digital platforms ensure winning ideas  develop quickly up to scale. Niche operators and specialists will flourish in this world, so most organisations will have a small core of employees, processes will be automated and services will be outsourced.  High performers will be those who create highly successful new ideas., and they’ll be rewarded based on their intellectual property rights.

Blue world: Corporate is king.  Corporations become bigger and even more global based on their power to harness the technologies of i4.0.  With these organisations (like the sports teams of today) there will be star performers who are hugely rewarded for their special talents.  To get the best out these individuals, companies will invest in medical and intellectual technologies and techniques designed to enhance their performance.

Green world: Companies care.  “Reacting to public opinion, increasingly scarce natural resources, and stringent international regulations, companies push a strong ethical and ecological agenda”.  All employees are committed to a sustainable future and work is organised on a highly ethical basis, which includes flexible work hours and commitment to  socially useful projects.

Yellow world: Humans come first.  Small businesses thrive based on the craft skills of artisan workers.  There is a strong sense of collectivism with worker loyalty given to society as a whole rather their employer.  This may see the re-emergence of workers’ guilds that thrived in medieval times.


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Subaru’s 30 year secret gaff

Earlier today in Tokyo, Subaru’s President and and CEO apologised for failing to ensure that final inspections of its motor vehicles were carried out by properly certified employees.  This had been going on for 30 years!  It appears that “the root of the problem was that management and staff did not fully appreciate the importance of the final inspections”.  What?

P.S. Last month Subaru recalled 395,000 vehicles in Japan, forecast to cost the company $177 million.  See! That’s why it’s important.


Posted in Chap 09 Quality, Sector: Manufacturing | Tagged , | Leave a comment

Emerging trends in internationalisation

We have long been blogging about how digitization and advanced manufacturing are transforming operations. These same factors are also influencing the way in which firms expand internationally. This has lead to the BCG Henderson Institute (2017) identifying seven emerging trends that take advantage of Industry 4.0, as follows…

  • Cross-border servitisation. The servitisation strategy makes in potentially easier to cross borders, as services can be traded more simply than manufactured goods, especially if supported by digital platforms. Aerospace, mining, medical care and agricultural equipment are all sectors adopting this apporach.
  • Asset light market entry. We have previously identified that ecommerce operators have lower start up costs. These lower costs also apply to expanding internationally. For instance, 60% vendors on ebay have sold products in at least ten foreign markets.
  • Digital interconnectivity. Remote sensing and software enables to firms to maintain and service their products anywhere in the world, and even upgrade them remotely.
  • Digital ecosystems. Firms are partnering across the globe to harmonise and rationalize IT systems to improve their interoperability, thereby accelerating commercialisation. Whilst technology companies, such as Amazon and Apple, have lead the way in this, older industrial companies, such as GE and VW, are also adopting this approach.
  • Global personalization. Big data and analytics are enabling companies to personalise their offer to anyone anywhere in the world. For instance, Netflix does not segment its market by country, it does so on the basis 1,300 ‘taste communities, ie segments based on viewing habits and preferences.
  • Multilocal manufacturing. There is a shift away from concentrating production on a few low cost countries, towards a larger number of smaller, agile, automated production plants. Sport shoe manufacturers such as Adidas and New Balance are leaders in this field.
  • Multiple national identifies. To mitigate political risk, major global firms are supporting specific national programmes designed to address economic and/or socio-political issues in each country. These are often related to job-creation, working conditions and infrastructure development.

Although BCG identify the above as ‘business models’, they are really trends as firms may adopt more than one of the above and combine them into their own specific business model.


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Lean six sigma applied to service operations

In our book (page 18) we argue that manufacturing and service operations are not so different, except for the the concept of “simultaneity/inseparability” i.e. direct delivery of the offer to the consumer.  Even so there is a danger that some of the concepts we discuss -such as “lean” and six sigma – are seen to apply only to manufacturing (even though our Operations Insight on six sigma is about Starwood Hotels).  Just in case there was any doubt, this Bain & Co article explains how lean six sigma can be applied to services.

In it, Guarraia et al (2008) propose that three tools are used to diagnose the most critical opportunities – enterprise value stream mapping, benchmarking and prioritising.  Having identified targets areas, the traditional DMAIC (Define, Measure, Analyze, Improve, Control) processes are applied.  The article goes on to illustrate this in five different industry contexts – mobile telephony, retailing, banking, finance, and energy.

Posted in Chap 09 Quality, Chap 15 Lean and agile, Sector: Entertainment & Sport, Sector: Financial Services, Sector: Hospitality & Tourism, Sector: Public Services & Charities, Sector: Retail | Tagged , , , , | Leave a comment

The £850,000 seventeen minute delay

Earlier in the week, the House of Commons Business Select Committee invited representatives from the UK’s automotive manufacturers to explain to them the impact of Brexit on this sector.  Honda UK’s representative gave a fascinating insight into his operation’s just-in-time supply chain.   In 2016, this company assembled 134,000 vehicles.  To do this they import 2m components a day on 350 trucks. As result they hold only one hour’s supply of components from the EU on their production lines.

This means that if as a result of Brexit shipments are held up at ports assembly would grind to a halt.  They estimated that if clearing customs increased to 17 minutes instead of the current 2 minutes it would cost them £850,000 a year.

Further information about their supply chain can be found on their website, where Honda UK give some guidance as to what they expect from their suppliers.  They list five things (OWs):

  1. Quality
  2. Cost
  3. Delivery
  4. Development ie innovative suppliers
  5. Management leadership


Posted in Chap 05 Supply chain, Sector: Manufacturing | Tagged , , | Leave a comment

Operations Insight: Quality control of precision engineering products

This Zeiss promo video gives great insight into how a company manufacturing engines for high performance race cars uses technology to monitor the quality of its components.

Posted in Chap 09 Quality, Sector: Manufacturing | Tagged , , | Leave a comment