Infrastructure Decisions (Organization)

A company’s operations infrastructure is composed of its policies and systems governing a number of activities, from capital budgeting and equipment selection to organizational structure.  Each of these systems often has repercussions and implications for other infrastructural and structural elements. Capital budgeting and performance measurement systems in particular seem to affect everything else. In addition, human resources policies interact with location and process choices, and sourcing policies, interact with facility decisions. Organizational design also is highly dependent on vertical integration decisions, as well as on decisions regarding how various facilities are located, specialized and interconnected. Therefore many managers, like most economists tend to focus their primary attention on the more quantifiable issues. Along with structural decisions a company’s infrastructure is at least as critical to its success.

The impact of such infrastructural choices is often underestimated. One study of the operating performances of twelve manufacturing plants belonging to three different companies found that less than half the performance variation across plants that belonged to the same company and which used similar equipment and served the same customers could be explained by such traditional structural variables as plant size and age, capital to labour ratios, and union power. The majority of the performance differences could be attributed to differences in policies, procedures and systems. Other studies have found similar results in contexts, outside of manufacturing. For example, in the case of pharmaceuticals process development projects, the underlying development processes and problem solving strategies appeared to account for the bulk of performance differences.

The choices  made for each of these different types of decisions  have varying effects on a company’s operating costs, quality, dependability flexibility, speed / responsiveness and new  product capabilities. For example most companies that continually adjust their production rates so as to chase demand tend to have higher production costs and less consistent quality than those that try to maintain a level rate of production and absorb demand fluctuations through inventories. If it wants to be able to respond quickly to small orders for customized products and rapid changes in customers requirement it probably,  should configure itself so that it has excess capacity, its facilities are tightly coordinated (or individual facilities are focused on supplying the needs of specific customers),  its processing equipment and people are organized more like those of a job shop than a continuous flow line, and it has cultivated suppliers who are able to react quickly to changing requirements.

If on the other hand, it wants to be able to offer low cost and the latest technology it probably should concentrate the production of those items that require large amounts of capital investment and technological expertise into a small number of facilities, possibly located near engineering universities or other technical centres and seek out suppliers who are able to match its needs. Some researchers have found evidence that the structural and infrastructural decisions made by many companies tend to exhibit consistent patterns that allow them to be placed into one of just a few categories, which can be characterized by such competitive strategies as caretakers versus innovators.

Just as the trade-offs made by the designers of an engineered product must be consistent with its intended use, so must these structural and infrastructural decisions mesh together to create a desired set of specific capabilities.  Operations has to be able to do things that are considered  critical  to the company’s success without wasting resources on lower priority pursuits ; otherwise some of the things that are really important will not get done.  Achieving this kind of consistency or fit between strategy, structure and infrastructure in an organization, however, is much more difficult  and complex than when designing a product. Whereas the decisions and trade-offs involved in product design are usually made within a relatively short period of time by a group who work closely together and are often located near one another, structural and infrastructural decisions are usually made at different points in time by different groups of people who often are physically separated and may seldom interact in the normal course of business.

Only infrequently will a company make a basic change in any one of these categories (this being almost the definition of a structural decision) but in any year it probably will make at least   one major decision that falls into one of them. Hence, the company’s competitive priorities and operations strategy need to be clearly communicated to all these groups, and their structural and infrastructural decisions monitored for consistency. Otherwise, unintended drifting may occur.