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OperationsCase Study

13/07/2014

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IMPORTANT NOTICE: This resource was created for presentation to peers in 07/2014 and has not been edited for a wider audience. Some elements are liable to be out of date and inaccurate.

One should seek to keep up to date with the latest developments, consider using the following sources:• www.ausbt.com.au• www.asx.com.au• www.qantasnewsroom.com.au• IBISWorld and Factiva, which are accessible at ezproxy.sl.nsw.gov.au/

login with a State Library of NSW membership• Other news outlets, including the SMH and ABC

Thanks for using this resource.

Spelling mistake? Want something updated? Fundamentally disagree with me about something of no importance? Let me know here: www.matthewkilleen.com/contact/

Since May 2014…

• New flagship lounges opened in LAX and HKG, received very favourable reviews

• The Coalition Government has accepted a proposal by the Labor opposition which scraps some of the Qantas Sale Act's current foreign investment limits (Wed, 16 Jul)

• Qantas Frequent Flyer hits 10 million members, points earn rate decreased by 5-10%

• Increased fuel surcharges on international flights

• Early repayment of $450m of unsecured debt announced

• A380 flooding incident brings negative PR

• Expanding services to Gold Coast, Hamilton Island & Hawaii, cutting less profitable routes (e.g. to AKL)

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Since May 14…✘Domestic market share decreased from 71%

to 69.5%✘Some analysts expect QF losses for 2013-14

to reach as high as $1.2 billion. Final results will be released shortly

✔International market share significantly increased from 23% to 29.6%

✔Morgan Stanley survey shows that domestic customers prefer QF over VA in every category except price

‒ Share price at $1.24 (up from $1.01), but fluctuating with daily changes of +/- 5%

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Traffic and Capacity

• In May 2014, capacity increased by 3%, but demand only increased by 1.5%, resulting in a lower revenue seat factor of 73.4%.

• As a result, on 21 May, QF announced that total domestic capacity growth will be zero for July, August, and September.

• This announcement demonstrates a move away from the irrational behaviour of increasing supply without demand which is, to today, destructive to the industry.

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Operations Syllabus• Role of Operations

Management• Cost leadership and

differentiation

• Operations Influences• Globalisation• Technology• Quality expectations • Cost based competition• Government policies• Legal regulations• Environmental

sustainability• CSR

• Operations Processes• Inputs• Processes – the 4 V’s;

sequencing & scheduling; monitoring, controlling & improvement

• Outputs

• Operations Strategies• Performance objectives• SCM• Outsourcing• Technology • New Product Design• Inventory management• Quality control• Global factors

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Defining Operations for QF

• Operations management is the management of an operating system to achieve the desired organisational outputs (including intangible outputs; features and benefits) from inputs, with an optimum balance of economy, efficiency, and effectiveness.

• Operations management at Qantas must devise strategies in an effort to achieve a competitive advantage, these strategies are guided around the generic principles of cost leadership and differentiation.

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Cost Leadership• Cost leadership is an attempt to control the

market through being the lowest cost producer within an industry.

• It is a paradigm that is more applicable to LCCs which aim to command market share amongst leisure travellers, but when VA made the shift to a full service carrier, QF has been forced to implement some elements of cost leadership in the mainstream brand.

• Cost leadership has proven to be unsustainable in the long term, so the focus for QF has shifted to delivering value to the customer rather than merely competing on cost.

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Achieving Cost Leadership• Economies of scale, by purchase or production of

auxiliary products in bulk (e.g. Q Catering, maintenance), and negotiations with suppliers. This leads to a decreased average cost of production.

• Pursuing cost reductions through tight procedural controls, restructuring, streamlining, and rationalisation.

• Ensuring the most up-to-date technology (e.g. the Boeing 787) in operations to reduce overheads.

• Outsourcing non-core functions of the business.• Gaining exclusive access to a exclusive groups of high

value customers through QFF, Oneworld, and Emirates.• Cutting unnecessary distribution channels & higher use

of e-commerce.

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Differentiation• Differentiation seeks the creation of a

distinction between products that fulfil the same purpose, but are made by different businesses with unique features and characteristics.

• Differentiation may be achieved by the following means:• Increasing R&D funding to create an innovative

product (à la Apple)• Affective engineering, which is design which

seeks an emotional and aesthetic reaction (à la Mercedes)

• Higher levels of service at a reasonable cost (this is what Qantas seeks with its operations & marketing strategies) 13/07/2014

Operations Processes

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Inputs• Transforming Resources• Materials, information, customers

• Transformed Resources• HR, facilities

Transformation Processes

Outputs• Features• Benefits• Customer Service

Operations Processes

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Influences: GlobalisationWhat is globalisation?• Globalisation is the increasing worldwide

integration of economic, cultural, political, religious, and social systems.

• Economic globalisation is the process by which the whole world becomes a single market. This means that goods and services, capital, and labour are traded on a worldwide basis, and information flows readily between countries.

• This gives consumers the opportunity to purchase products from businesses in a global market, especially when coupled with technologies such as the internet.

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Influences: GlobalisationHow is globalisation changing the airline industry?• The most significant recent change in the industry is

the open skies policies across the EU, US and ASEAN.• Open skies is the theoretical concept of allowing

freedom to airlines to operate as they wish, to and from any destination. It involves:• Open entry on all routes with no restriction on the number

of carriers that can fly such routes. • Unrestricted capacity and frequency on all routes,

unrestricted route and traffic rights• Rights to control/perform own support functions at airports• Liberal code-sharing opportunities and charter

arrangements

Recommended reading: http://goo.gl/pU4LQSThe Impacts of Globalisation on International Air Transport Activity (OECD Report)

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Influences: GlobalisationHow does it impact Qantas?• New competitors – Qantas now competes

domestically against Virgin Australia, which is largely owned by foreign airlines Air NZ (20%), Singapore Airlines (20%), and Etihad (18%). The international market is also flooded with new operators.

• New customers – The Qantas Group is able to target customers in new markets through new airlines such as Jetstar Japan, Jetstar Asia, and Valuair.

• New partners – QF has moved away from it’s traditional partner of British Airways to form closer ties with Emirates.

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Influences: Technology• Technology in the airline industry is rapidly

changing, and it is important to all players in the airline industry that they keep up to reduce their costs, and to meet consumer expectations.

• Recent developments in the airline industry that may be revolutionary include:• Next generation aircraft – the A350 and B787• Cheaper aircraft for LCCs – the MS21 and C919• On flight 4G and Wi-Fi• New, more ergonomic design of seats

• By keeping abreast of the latest changes, QF can adopt the technology that suits its vision and enhances its competitive advantage.

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Influences: Technology

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Influences: Quality Expectations

• Businesses must continually meet and satisfy the needs of their customers, and this influences operations in the quest to make a consistently high quality product and to drive customer loyalty.

• This is especially important to Qantas perhaps due to the Pareto principle – 80% of sales revenue is generated by the most loyal 20% of customers – if these 20% are not satisfied, QF looses significant sales.

• Customer expectations for an airline span both tangible and intangible measures, such as in-flight entertainment, seat comfort, meal quality, and on time performance.

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Influences: Cost-Based Competition

• This is potentially the most dangerous of the influences for QF, because it operates on a much higher cost base than it’s competitors.

• VA’s decision to increase capacity has forced QF to increase its capacity and reduce its prices to an unprofitable level.

• QF Operations has been forced to reduce its costs by employing outsourcing, seeking economies of scale in some areas and rightsizing in others, and pursuing cost reductions in other areas.

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Influences: Government Policies

• The government aims to strike a balance between allowing businesses to function productively and the needs of the greater community; changes in government may sway the balance from one competing need to the other.

• Key policies that impact Qantas include:• Environmental policy (direct action / potential future

ETS)• IR laws (The Fair Work Act)• The Qantas Sale Act 1992

• 25% max to single foreign investor• 35% total to foreign airlines• 49% total to foreign investors

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Influences: Legal Regulations

• Legal regulation for the airline industry in Australia is some of the most strenuous across the globe.

• The Civil Aviation Safety Authority has the responsibility for the maintenance, enhancement and promotion of the safety of civil aviation in Australia. CASA strictly regulates all Australian airlines Operations.

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Influences: Environmental Sustainability• Environmental sustainability is about meeting the

needs of the present generation without compromising the ability of future generations to meet their needs.

• Qantas is a significant producer of carbon in Australia, 218 kilograms of CO2 are emitted on a return SYD-MEL flight per passenger.

• QF offers customers the option to offset the carbon emissions that result from their flights for a fee.

• Fuel comprises 95% of QF’s emissions, by purchasing more efficient aircraft, improvements will be made in environmental sustainability.

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Corporate Social Responsibility

• Qantas is likely not the best case study to use for CSR and ethical responsibility, they do not have a comprehensive CSR framework.

• You should seek your own case study for this syllabus dot point.

• Recommended case studies include:• NAB (link)• Westpac (link)• Telstra (link)• Stockland (link and next slide)

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CSR Focus on: Stockland• Stockland is an ASX listed company just outside the

ASX200. The company generates its income from both commercial and residential property, including shopping centres, suburban communities, and retirement villages. In 2013, the company generated total revenue of $1.73 bn.

• Stockland’s history began with CSR involved well before the term became fashionable – when founded in 1952, its vision was to “not merely achieve growth and profits but to make a worthwhile contribution to the development of our cities and great country.”

• Stockland faces the challenge of balancing profit and its goals towards the community with declining profit in FY13.

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CSR Focus on: Stockland• CSR Achievements include the following:• Stakeholder engagement plans for all development projects.

• Average priority stakeholder engagement plan rigour score of 4.5/5

• A climate change action plan, including reduced emissions by 7% across offices.

• Employee volunteering programmes that saw over 9,000 hours contributed.

• Human Resource-centred outcomes• 89% of employees believe Stockland achieves the right

triple bottom line balance• 94% of employees believe Stockland is socially

responsible• 28% of retail waste diverted to landfill• The creation of green commercial and residential areas.

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Linking Influences & Strategies

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Globalisation Economies of scaleGlobal sourcingResearch & development

Technology New product designLeading edge technologySupply chain management

Quality expectations Quality controlPerformance objectives

Competition on cost Economies of scalePerformance objectivesOutsourcing

Government policies All strategies+ legal regulation+ CSR+ environmental sustainability

Performance Objectives• Performance objectives are key areas of focus for

operations where standards are established to evaluate the functioning of operations.

• Qantas aims to achieve acceptable standards across all performance objectives in an effort to maintain status as a dominant industry leader.

• Quality• Quality is defined as the totality of the features and

characteristics of a product or service that bear on its ability to satisfy stated or implied needs.

• It directly relates to consumer expectations of the product rather than the business’ perceptions of quality.

• For QF, quality is both the tangible product features and the intangible level of customer service provided to customers.

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Performance Objectives• Dependability

• Dependability is the consistency and reliability of the product or service, for Qantas this is measured by On Time Performance.

• The Bureau of Infrastructure and Transport releases OTP figures on a monthly basis.

• For May 2014, Qantas led the percentage of flights on time:• Qantas – 90.3% OT Dept.• Virgin Australia – 88% OT Dept.• Jetstar – 85% OT Dept.• Tigerair – 80.1% OT Dept.

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Performance Objectives• Flexibility

• Flexibility refers to how quickly and easily operations processes can adapt to changes in the market.

• For QF, flexibility is achieved through the use of a variety of aircraft which can suit the needs of changing markets.

• For example, on a SYD-MEL route, QF can change the aircraft depending on the level of demand – from a 737 seating 170, to an A330 seating 290.

• Customisation• Customisation is achieved through different fare types

and travel classes.• QF offers discount, semi-flex, and fully flexible fares to

suit the needs of customers varying from tourists to business customers.

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Performance Objectives• Cost

• Cost is a key area where QF’s mainline brand does not have a competitive advantage, but JQ does to some extent.

• New technologies such as the B787 reduce wastage and better use inputs to provide for an increase in efficiency.

• Qantas is also seeking to reduce supplier costs, minimise distribution channel conflicts, and manage the supply chain better so as to minimise wastage in these areas.

• Speed• Speed relates to productivity through the pace of

operations.• For Qantas, this mostly relates to turnaround times (the

time in which it takes a plane to be serviced and read to be sent on another route).

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New Product Development & Technology• Continuous improvement through the creation, design

and development of new products or services is essential for Qantas to sustain a competitive advantage.

• Qantas has historically been at the forefront of NPD with innovations such as the SkyBed, iPads and Qstreaming. Today’s innovations include the B787 and it’s new business class product on the A330.

• Today, QF is not in the business of implementing leading edge technology due to the risks associated with them (e.g. early 787 flaws, Concorde disaster).

• Qantas is taking part in line filling of LCCs in Asia – the practice of filling the entire range out with products to ensure that there are no gaps in the market left for the competitors to fill.

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Outsourcing• Outsourcing is the buying in of components,

sub-assemblies, finished products, and services from outside suppliers rather than by supplying them internally.

• QF is undertaking business process re-engineering, when specific activities are being redefined as non-core activities.

• Qantas has been criticised for its outsourcing of heavy maintenance to companies such as Lufthansa Technik.

• Qantas announced last year that it was shutting its heavy maintenance base at Avalon at a loss of up to 300 jobs.

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Outsourcing• Advantages

• Less need for management input about non-core production processes – rationalisation & simplification of middle management.

• The contracted businesses can achieve economies of scale, which can be passed on to customers.

• The capacity to focus on core business competencies after non-core functions have been outsourced may improve in-house performance.

• Reduces strain on cash flow (spread evenly according to demand), optimises resource utilisation.

• Disadvantages• Less managerial control over the processes, which impacts on

quality, reliability, and costs.• Competitors may use the same firm, and this may eliminate a

competitive advantage.• Poorer relationship with stakeholders – esp. unions,

employees, and their families. 13/07/2014

Supply Chain Management• Supply chain management is the management of the

links between an organisation and its suppliers and customers to achieve strategic advantage.

• Many of Qantas logistics and systems are in house, including catering and some heavy maintenance, the main variable input which Qantas must source is fuel.

• Fuel prices are highly variable, on 27 Jun the price was $2.93 per gallon, down 1.5% from the past week, but up 2.4% vs. one month ago.

• QF has been able to source cheaper HR through its JetConnect shell company in NZ, which operates all QF marketed flights between Australia and New Zealand (up to 40% cheaper wages, and no super levy).

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Inventory Management• Inventory is the products or supplies of an organisation on hand

or in transit at any time. For a manufacturing company, inventory includes raw materials, work in progress, and finished goods.

• For QF, ‘stored’ inventory includes engineering expendables, consumable stores, and works in progress. Alternatively, the queues of customers can represent a type of customer inventory.

• QF utilises a predetermined decision model as to how much stored inventory to order and keep at any given time. The dynamic lot-sized model is used where demand varies over time, to minimises total holding and ordering costs.

• Other factors which must be considered for inventory managers in a manufacturing business include:• The lead time for supplies• Cartage and freight costs• Perishability of the products• Seasonal patterns in demand• Costs of handling and packaging

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Quality Management• Quality management involves the development of policies and

procedures that a business puts in place to ensure customer expectations are consistently satisfied in relation to the key quality outcomes.

• Quality management is broadly classified as a three-tier process including the strategies of control, assurance, and improvement.

• QC at Qantas includes systematic inspection of inputs and outputs, and sampling of key statistics at various stages in Operations to ensure that acceptable tolerances are not being exceeded.

• QA involves the design and implementation of systematic activities aimed at preventing quality problems (e.g. IATA)

• TQM & continuous improvement is defined as the ongoing process of improving an organisation's goods or services, with the aim of increasing customer satisfaction. In a highly competitive environment, QF needs to search actively for ways of reducing costs, improving quality, and eliminating waste.

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Global Factors: Sourcing• Global sourcing relates to the operations strategy that sees

the business source supplies without the constraint of geographical location, allowing firms to take advantage of inputs from low-cost regions.

• Boeing, in the production of the 787 used global sourcing not just for low prices, but also for higher quality. The 787’s competitive advantage to airlines is high fuel-efficiency; using 20% less than the B767/A330 generation of aircraft, and to end-users is the high levels of on-board comfort.

• These are achieved through global sourcing of components from firms who can offer a specialised advantage. This includes engines from Rolls Royce (UK), landing gear from Messier-Dowty (FR), the centre fuselage from Alenia Aeronautica (IT), the vertical tail assembly from Boeing AU, and cabin lighting from Diehl Luftfahrt Elektronik (DE).

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Global Factors: Economies of Scale

• Economies of scale are the factors which make it possible for larger organisations to produce goods or services more cheaply than smaller ones.

• Economies of scale which are internal to businesses are due to the division of labour and equipment which brings about higher productivity. Also, in a larger firm the breakdown of any particular piece of equipment, or the absence of any individual worker, causes less disruption to production.

• QF in particular benefits from economies of scale in that it has preferential access to airport infrastructure in Australian airports, however it is historically uncompetitive on an international scale.

• In order to strengthen its economies of scale, QF is streamlining its excessively complex management and unwieldy administrative staff.

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Global Factors: Scanning & Learning• Scanning of the global environment is essential to identify

and understand trends that may impact QF. These trends occur on a macroeconomic basis, as well as in the immediate industry that the firm operates.

• Amongst other things, some of the key areas that firms must be aware of in relation to operations include:• Global demand for the good or service, and which markets

are growing & shrinking• New technologies and products to offer customers• Emergence of competitors• Changing demographic and sociocultural factors (including

institutional and legal)• New opportunities for investment and expansion

• Qantas scanning is not scheduled or ad hoc, rather it is continuous and ongoing.

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Global Factors: R&D• Qantas currently does not take part in extensive research and development – this frees up a substantial amount of working capital.

• Historically, Qantas has undertaken R&D in cooperation with other firms – in 2011 QF worked with Solazyme to investigate investigate the potential use of algal-derived sustainable biofuels.

• Qantas also trialed in flight internet on the A380 in 2012, however it axed its plan, citing a lacklustre response from travellers – average take-up during the commercial trial was less than 5 per cent.

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Operations Essay Questions• How does globalisation influence the operations

strategies used by business in Australia?• Why are corporate social responsibility and

environmental responsibility key concerns in operations management?

• How does an understanding of the influences on operations contribute to business success?

• Assess strategies that management may use to respond to influences on operations.

• Analyse the impact of operations strategies in sustaining a business’ competitive advantage.

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