Operations Audit

Operations Audit

The purpose of an audit is to take stock, to obtain a realistic estimate of the status of the operations, function and how effective it is in giving life to the enterprise strategy.

The categories for inquiry are the basics of operations strategy but in each category we need to assess objectively how well the strategic element is being implemented which means comparisons with standards. Strategic standards are found in the performance
of competitors. The firm should know the technology employed by competitors, quality standards maintained by them and their costs. Also kinds of delivery times customers can obtain from competitors and the locations of competitor capacities, and their status in markets.

Are there structural differences in product lines, scale of operations, and markets that give certain competitors operations advantages? The list can become very long but these are crucial questions for which comparative data among all competitors, including the subject firm, are needed if strategic planning for operations is to be effective.

The operations audit requires objectively. It may be difficult for internal staff to see its own operations in a true form thus outside analysts and consultants may have an important role to perform  in this

A product of the operations audit should be an assessment of the status of the operations strategy. One approach to summarize the results of the audit is to ask the managers to specify how well each of the elements of operations strategy is currently performed. The numbers in this status assessment are based on a 100 point scale
and indicate the level of attainment for a specified criterion.

There are two ways to think about these ratings. One is to assign ratings with respect to competitors. For example, a rating of 100 may denote the highest attainment on a criterion, that is, the company is the industry leader. A rating of zero denotes the worst performance in the industry. A rating of 50 may denote a median performance a rating of 75 may denote performance within the top twenty five per cent and soon. A score of 90 for the impact of element process flow and technology, on the cost criterion signifies that the company’s process and technology is capable of producing at low cost; that is, 90 per cent of the competitors have a higher cost of production than the company.

For some cases, the ratings may be based on a relative comparison with what can be achieved by the organization. For example, for the operating decisions element, a rating of 25 on the flexibility criterion signifies that the company places low emphasis on this criterion when planning for inventory, production, and capacity decisions.

However, a rating of 90 on the quality criterion indicates that the company places extremely high emphasis on the quality implications of its operating decisions.   In these cases, 100 points indicate the
highest level that the organization can attain on a criterion, zero being the lowest,50 points the moderate level and so on.

It is clear that for example XYZ company is set up for low cost production but emphasizes on high quality (or consistent quality). The production system will have difficulty however, in responding to new design features and customization as flexibility is given low priority in the five basic elements of operations strategy. Curiously, however in the positioning element, flexibility is given a higher rating than cost.

This may be because positioning is largely determined by the marketing group. The marketing group prefers to compete by segmenting the market and by providing the design features appropriate for each segment. This mismatch must undoubtedly produce strains on manufacturing. The marketing group must also face some problems in slow response to customers’ needs and longer lead times for delivery.

The audit provides insights into existing problem areas, and it also highlights some possible directions. In developing alternatives, however, it is important to keep the enterprise’s strategic goals in sight. Where are the important problems with current strategies and their implementation? Is there sufficient capacity? Is the current technology the appropriate one? If we are not cost competitive, what strategies can change that situation? Are there operations control technologies whose installation could solve or improve current operations performance deficiencies?

The above questions are typical of those that should be considered in developing possible strategic alternatives. The planned status of the operations function relative to the four criteria is provided. For example, our hypothetical company probably employs low skilled workers who are paid low wages. However, since the quality level produced by these workers is high, inspection processes must be thorough to achieve a consistent high level of quality. Now, with a much greater emphasis on flexibility and quality skilled workers need to be substituted or the labour force may require extensive retraining.