Evgueni Markovski 14308185markovse@tcd.ie

Operations Management, Professor D John ManganMSc. Business and Management, Trinity College Dublin, 2014.

Operations Management Report

This essay examines the Operations Management processes of the Danish audio/video company Bang & Olufsen and comes to several recommendations for improving current management of its operations.

For the purposes of this Report, it is essential to note that I will take a holistic approach to the operations management of Bang & Olufsen that considers systems to be more than the sum of their parts and is alternative to reductionism, which takes the perspective of reducing the system to its constituent parts.

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1. Overview of Company and Operations

The Danish based company, Bang & Olufsen (also B&O), is an expert in the design, production and delivery of an exclusive luxury music systems, loudspeakers, multimedia products, telephones as well as having strategic partnerships with automakers for customer-orders.

Bang & Olufsen differentiates itself in terms of design, quality and innovation of its product and services. Over a number of years, Bang & Olufsen has established a selective distribution system with dedicated Bang & Olufsen dealers. That relies primarily on direct distribution. The combination of innovative, high quality products and a dedicated distribution has positioned the company as a supplier of luxury goods.

Company operations take the following format:

• Business to Consumer (B2C)VA (Audio-Video)

B&O PLAY• Business to Business (B2B)

ICEpowerAutomotive

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Figure 1

The Group’s geographical areas are:

• Europe• North America• BRIC• Rest of World

- BRIC includes Brazil, Russia, India and Greater China (Mainland China, Hong Kong, Korea and Taiwan)

In recent years when facing a market in recession, B&O has implemented Formula One’s mentality and focus on “Pole Position Strategy” in how they aim to tackle competition and maximize profit. (Bang & Olufsen, 2011)

Figure 2 – Growth By Region

There are 4 main types of buyers: the private customer, business customer, luxury car dealers and luxury hotels. Whereas the private consumer is limited in their purchasing power, (one of each product at most), it is imperative for B&O to expand their operations in the business category as their company could be in

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the position to purchase more products both at once and in the future. It is the same situation for luxury carmakers and hoteliers, as they use the unique brand image of B&O to add allure to their own products/services. These sectors are of utmost value to B&O as they are the most frequent buyers and have the highest turnovers purchases.

2. Strategy

The goal is to ensure a magical customer experience in the stores. (Bang & Olufsen Annual Report – 2012/13)

From 2000 onwards due to financial slump and lowering consumer confidence, worldwide brand loyalty had seen a drastic fall (Bazinet, Saxty & Frank, 2007). This is why B&O has formulated the “Leaner, Faster, Stronger” strategy in order to stay relevant to their customers in a turbulent global luxury market.

In the first phase of the “Leaner, Faster, Stronger” strategy, Bang & Olufsen has undergone significant process and structure changes, with the goal of enabling a solid basis for market growth and expansion. The product portfolio, production processes and accompanying services have seen simplification and revitalization across all product categories. The speed and level of product innovation have been significantly increased to keep in line with less-designed focused competitors. The retail network has been restructured with the aim of creating a network of more select, but ultimately, more profitable stores.

In the second phase of the “Leaner, Faster, Stronger” strategy, Bang & Olufsen will build on its core values, with the aim of growing the company’s revenue and profitability. This included six “Must-win Battles” in the “Leaner, Faster, Stronger”-strategy launched in 2011, one of which was to increase efficiency in the company’s retail network more by narrowing down of operations to fewer, more productive stores. These are also invested in in terms of service, events, marketing, store design and other customer focused activities. It was decided to accelerate the closure of up to 125 stores primarily in Europe.

The 6 points under the Leaner, Faster, Stronger strategy:

1. Create truly outstanding Bang & Olufsen retail experiences2. Continue to build “sound as our hero”

3. Make TV a growth driver for the business4. Exploit B2B potential of the AV products and solutions

5. Accelerate B&O PLAY through an increased number of product launches and expanded distribution

6. Continue growth momentum in Automotive

(Bang & Olufsen Annual Report 2012/13)

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Figure 3

B&O has focused on how to funnel growth and increase the revenue through alternative distribution for the B&O PLAY brand. Reaching distribution agreements, which were signed with distributors throughout Europe and in other key markets such as China where the company’s e-commerce distributions have been expanded.

Expansion – Refocus

As of 29 January 2013 Bang & Olufsen has signed an agreement with Hengzhunzixun Co. Ltd., from Beijing, China, a joint venture between Sparkle Roll Group Ltd. and Mr. QiJianhong (hereafter referred to as Sparkle Roll). Making Sparkle Roll responsible for opening B1 stores in three cities in China (Chongqing, Wuhan and Wuxi). Also, Sparkle Roll set up and enabled more than 50 dedicated B&O PLAY stores in China in the 2013 calendar year.

To further strengthen the Group’s position in the Chinese market, Bang & Olufsen took over 20 stores from the previous master dealer in mid-China (including stores in Beijing and Shanghai) on 1 June 2013. There were 85 B1 stores in the Rest of the world, compared to 104 at the end of 2011/12. The net movement is thus a reduction of 19 stores, made up of two store openings and 21 store closures.

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3. Effective Supply Chain

As of 2013/14, B&O sells its products in more than 60 countries through 11 National Sales Companies, all of which are 100% owned by B&O, and through a network of independent agents throughout the world. Initiated in 1991, this system of distribution process decided that products would be sold in exclusive B&O outlets where dedicated rained sales people could provide the best shopping experience. Later in 2001, the shops were redesigned as exclusive ³B1´ concept stores and independent ³Shop in Shop´ concept stores which dedicated a significant portion of retail floor to B&O products.

Figure 4 – Supply Chain Concept in B&O

B&O must aim for total integration of the supply chain. This has come to be known as ‘Design for Supply Chain Efficiency’ (DFSCE). This allows Bang & Olufsen to tackle their competition directly through predictable new releases as well as a well-balanced supply chain management system.

Direct Distribution

Bang & Olufsen mainly implement a system of direct distribution, whereby they do not overly rely on third parties to sell their products and alleviate inventory. Although this has higher costs because of the need to set up independent shops,

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Figure 5 – Direct Distribution Concept at B&

the advantage is that this allows B&O to create its own atmosphere, layout, and product positioning within their shop. In their independent B&O shops, they create a show room atmosphere whereby they show off all their products in their most optimum vision. The bypassing of external outlets allows them greater control of brand image to deliver a more comprehensive customer experience that highlights quality and luxury.

B&O place emphasis on Direct Distribution over 3rd part solution as this gives them more control over both brand experience and efficiency of delivery. This reduces operational risks and makes them more resilient in times of economic uncertainty, giving greater retail independency. However, recent sales have indicated growth in third party retail stores around the world. B&O PLAY products were sold in more than 1,000 third-party retail stores B&O PLAY showed strong growth through third party channels, which grew by 130 per cent compared to last financial year (B&O Annual Report 13/14). It is recommended that B&O continue to expand third party retail stores for the selling of their A/V and BEO PLAY products.

Order Process

B&O takes only 30 seconds to confirm an order in their independent shops, with lead times located in Europe, where standard product takes 3-8 days to deliver as opposed to overseas where it is 5-9 days, with long delivery times attributed to remoteness of Norway and Sicily. Also delivery is faster in Europe for variant products, 5-15 days as opposed to 7-16 in their overseas delivery, the longest taking to reach China and New Zealand. With available information for the longest delivery times, B&O should aim or tackle this problem by setting up distribution centers closer to these locations. This will enable them to tackle the

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problem of long delivery times and will be more in line with how they present themselves with a short time for order confirmation.

Figure 6 – Order Process

Longer shipping distances outside of Europe results in higher shipping costs and longer delivery times for B&O. The company would benefit by creating a production facility that produces cost efficient solutions for its non-European markets. There is a clear indication of the need to modify their assembling facilities as this could save the cost of shipping and in turn add value to the value-chain. Another aspect of their efficient processes is their effective inventory management that has a confirmation time of only 30 seconds before production. Although this logistic strategy may not add value to the product: it does make the production and distribution more cost effective and ties up less working capital on inventory management.

Figure 5 – Strategy of Operations

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This is ineffective and creates a weak spot in the production process of Bang & Olufsen in that it leaves operations relying on effective transportation of product around the world. This does not allow for the possibility of adaptation and is instead fixed and dependent on outside influences.

Sales/Personnel

B&O invests in sales personnel training by giving them knowledge about products so that they can in turn give customers information about the company’s lines of products. B&O makes a point of reaching customers demand and as a result increase the value of the B&O brand. The Employees Focus programme for individual personal and career development, the purpose of which is to maintainin and create interesting and challenging jobs throughout B&O is used to attract and retain highly qualified employees at all times. These ensure optimum sales-person with customer interactions by training individual sales staff about each new product after each new launch to understand and give guidance about the product to customers. Another point of differentiation from competitors is B&O’s commitment to every customer, both private and business, by personally installing purchased products by trained staff to make sure one gets the most from their product.

Operational Risks

Suppliers

B&O depends on an extensive number of suppliers, mainly from European and Asian regions, and strives to maintain long-term supplier relations with regard to the purchase of development services and production goods. However, B&O needs to reevaluate their supplier relationship with Phillips, as they are also competitors in the A/V sector. It is imperative for the long-term operations security that Bang & Olufsen ensure that the suppliers of critical materials are assured through contracts and agreements and co-operation with several key suppliers.

Insurance

B&O’s insurance policy must cover any damage arising to Bang & Olufsen’s assets and any claims that Bang & Olufsen may incur so that such damage or claims do not impact the company’s capital and future operations to any significant extent. Consistent with this, the Group can be self-insured in respect of minor risks, while major risks are fully insured. In those instances, when deemed financially beneficial, insurance policies contain an excess. In respect to the above, a global insurance programme has been established to include all-risk, operational losses, business and product responsibility. Bang & Olufsen has a written contingency plan and works continuously with risk management in

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order to protect against damage to own and contractors’ facilities. (Bang & Olufsen)

ITIT risk The Group is dependent on reliable IT systems for its day-to-day operations, to ensure control of product procurement and to increase the efficiency of the Group’s supply chain. Work is continuously being undertaken to hedge these risks in the form of firewalls, access control, emergency plans etc. The overall IT platform and infrastructure have been outsourced to a major global supplier, which significantly reduces the risk

Service

B&O provides 12 years of service after products have been taken outof production. This aids for customers to better rely on B&O as a long term investment in its brand as well as adding customer-perceived value (Kotler, 2011). To ensure effective delivery of this service, B&O provide facilities for producing spare parts for non-market items and the direct cost of producing these parts as an additional service. Their focus on services highlights the high quality experience of B&O and solidifies them in the luxury market. B&O balances between its product and services to deliver an all-encompassing brand experience that enhances the company vision of great design and quality.

Figure 6 – Balance between Goods and Services (Blackboard)

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4. Role of Design

Innovation

Designers are used as gatekeepers of languages inspired by socio-cultural phenomena, which are not visible today, but could be elements of tomorrow’s society. (Reilly & Tushman, 2004)

B&O product design is the most important factor for value creation as B&O product and brand mostly depends on its product design. ICEpower, (ICEpower, 2011) the daughter company of B&O, is the internal technology on which B&O products are based. ICEpower was invented by B&O with the intent for the company to get new technology first, before its competitors. It is essential to maintain full control of ICEpower’s development as this adds value for the long-term development of B&O.

Product / service design

B&O have a designated location for idea generation. Ideas are allowed to come to fruition in a specific “Idealand” which employs people from different multifunctional backgrounds. The cross-functional team put together works on project and remains tight knit. Designers form a “thesis”, which is the initial idea for a product and that is then processed by the engineers who provide an “antithesis”, or the potential possibilities for how to bring this product to realization. The process then transcribes to a ”synthesis”, an actual product concept.

Process design

B&O production processes provide no standard procedure for product design, development and production although it employs design at the core of product development. As a possible explanation for why the economic recession affected the company in 2008 have been that continually, “designers were simply unable tocomprehend customer’s needs and focused on minor altercations subjected on their own optimism” (Lovallo & Kahneman, 2003). B&O failed to be “flexible to change options and not simply adopt basic values to suit a particular client or designer” (Vergantti, 2003).

It is also essential for B&O to follow the Lean Thinking Principles developed by Womack, and Jones (2005) with a focus on continuing processes development and linking goods and services to solve consumer problems. As shown in Figure 6, it is essential to be on balance between goods and the servicing of those goods, a task which B&O manages to maintain.

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Figure 8 – Four Stages of Outsourcer and Outsourcee Relationship Development (Blackboard)

It is essential for the longevity of Bang & Olufsen to align its innovation and design strategy with competitive stage of outsourcer and outsourcee relationship. This shows long-term development and incorporates within it both designer independence and helps maintain a vertically integrated operation. (Figure 9).

Figure 9 – Types of Supply Relationship (Blackboard Figure 10 – Design of product and process of production (Blackboard)

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Design

Bang & Olufsen is devoted to creating innovative and durable concepts and designs that differentiate the company from the competitions. The company’s concept developers collaborate with a number of selected external designers who have a high degree of independence and considerable influence, which helps ensure that the interaction between user-friendliness and technology is fully optimized. By harnessing co-operation with external teams of designers, B&O constantly generates new input and maintains a broad creative horizons in terms of design processes and functions.

Innovation processes are described by Bang & Olufsen, (Annual Report, 2013/14) as the definition, creation and realization of the right products for customers in the target group. The strategy of product and technology management is continuously developed and compared/contrasted to general market developments, input from markets and customers, completed technology projects and Bang & Olufsen’s so-called technology radar, which contains information on, and an overview of, expected future technologies. (B&O Annual report 2013/14)

5. Improvement – Recommendations.

Bang & Olufsen works systematically with CSR and is certified in accordance with ISO 9001 (quality within the automotive industry), ISO 14.001 (environmental management) and OHSAS18.001 (work environment management). The management systems contribute to ensure that the efforts are concentrated in the areas with main potential for improvement.

Bang and Olufsen’s Code of Conduct, containing the company’s demands to suppliers within the CSR area, supports its CSR policy. Through the Code of Conduct Bang & Olufsen demands suppliers to comply with the CSR demands in their own supply chains. External audits of the suppliers, as well as their sub-suppliers, are carried out when there is a concrete suspicion of breach of the Code of Conduct.

In todays competitive operations environment, it is essential not just to keep up, but to be seen keeping up and ahead of the competitors. This issue of visibility is why I include the recommendation that B&O implement bi-annual external audits of their suppliers and sub-suppliers with the intention to diagnose and prevent potential problems that would allow them to keep ahead in terms of effective operations.

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Bang & Olufsen’s purchase department has prepared a set of guidelines: “Moral and ethics in the purchase department at Bang & Olufsen”, which includes internal anti corruption guidelines. The internal anti-corruption guidelines have been extended to include the sales organization, which is especially relevant for new markets where Bang & Olufsen is currently expanding its business. It is essential to look at competitor strategy in dealing with moral and ethics issues when expanding to certain markets where corruption is suspected to be a prevalent challenge for business as this will provide an insight into what aspects B&O must focus on.

Figure 12 – Sandcone Model of Improvement (Blackboard)

It is imperative that B&O follows the Sandcone model of improvement in order to build on its existing core values as a company. With a focus on the quality of its products, B&O must maintain this structure for future processes improvements. Hand in hand with this, B&O would highly benefit from integrating clear performance measures (Shaw, Grant, and Mangan, 2010), which are essential in how the company manages and navigates its organization through turbulent and competitive global markets. These measures in conjunction will allow organizations to track progress against their strategy and identify areas of improvement, ultimately acting as the optimum benchmark against competitors or industry leaders. Kaplan and Norton (1992) devised the balanced scorecard to provide managers with a fast but comprehensive view of their business through four key perspectives: financial, customer, internal business and innovation and learning that B&O could look to implement in its process management.

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References:

Bang & Olufsen, Annual Reports from 2000/01 to 2013/14 available at: http://www.bang-olufsen.com/en/investors/company-announcements/annual-reports (accessed 13/11/14)

Bazinet, J. Saxty, S. and Frank, B. (2008), Brand strategies for an economic downturn. Admap Magazine. Issue 497.

Kaplan, R.S. and Norton, D.P. (1992), The balanced scorecard – measures that drive performance, Harvard Business Review, Vol. 70 No. 1, pp. 71-9.

Kotler, P. Keller, K. Brady, M. Goodman, M. Hansen, T. (2012), Marketing Management. 2e, London; Pearson Education Ltd. Print.

Lovallo, D. and Kahneman, D. (2003), Delusion of Success. Harvard Business Review.

Mangan, J. (2014), Operations Management Class Notes, Blackboard.

Reilly, C. A.O. and Tushman L. M. ( 2004), The Ambidextrous Organization. Harvard Business Review. pp. 74 -84.

Shaw, S. Grant B. D. and Mangan, J. (2010), Developing environmental supply chain performance measures. Benchmarking: An International Journal, Vol. 17 No. 3 pp. 320-339. Available at www.emeraldinsight.com/1463-5771.htm (last accessed 24/11/14)

Slack, N. Chambers, S. and Johnston, R. Operations Management, 6th Edition, Pearson Education Ltd. Print.

Verganti, R. (2003). Design as Brokering of Languages: Innovation Strategies in Italian Firms. Design Management Journal. pp. 34-42.

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Womack, P. J. and Jones, T. D. (2005) Lean Production. Harvard Business Review. (accessed via BlackBoard)

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