Time as a Competitive Tool

Learning Objective 5 Describe customer-response time and on-time performance and why delays occur

time between receipt of customer order and product delivery
delivery of product at the time it is scheduled
uncertainty about the timing of customer orders and limited capacity

In addition to quality, companies increasingly view time as a driver of strategy. For example, Capital One has increased the business on its Web site by promising home-loan approval decisions in 30 minutes or less. Companies such as Amazon and Zara attribute not only higher revenues but also lower costs to doing things faster and on time. These firms claim, for example, that they need to carry fewer inventories because they are able to respond rapidly to customer demands.

Managers need to measure time to manage it properly. In this section, we focus on two operational measures of time: customer-response time, which reveals how quickly companies respond to customers’ demands for their products and services, and on-time performance, which indicates how reliably companies meet their scheduled delivery dates. We also show how managers measure the causes and costs of delays.

Customer-Response Time and On-Time Performance

Customer-response time is the time it takes from the point when a customer places an order for a product or service to the point when the product or service is delivered to the customer. Quickly responding to customers is strategically important in many industries, including the construction, banking, car-rental, and fast-food industries. Some companies, such as Airbus, have to pay penalties to compensate their customers (airline companies) for lost revenues and profits (from being unable to operate flights) as a result of delays in delivering aircraft to them.

Exhibit 20-7 describes the components of customer-response time. Receipt time is how long it takes the marketing department to specify to the manufacturing department the exact requirements of the customer’s order. Manufacturing cycle time (also called manufacturing lead time) is how long it takes from the time an order is received by manufacturing to the time a finished good is produced. Manufacturing cycle time is the sum of waiting time and manufacturing time for an order. For example, an aircraft order received by Airbus’s manufacturing department may need to wait for components before the plane can be assembled. Delivery time is how long it takes to deliver a completed order to a customer.

Diagram shows components of customer response time.

Customer response time is divided into five stages and four time zones listed as follows:

Stages:

1. Customer places order for product

2. Order received by manufacturing

3. Machine setup begins for order

4. Order manufactured: Product becomes finished good

5. Order delivered to customer

Time zone

1. Receipt Time - time difference between Customer places order for product and Order received by manufacturing.

2. Waiting Time - time difference between Order received by manufacturing and Machine setup begins for order.

3. Manufacturing Time - time difference between Machine setup begins for order and Order manufactured: Product becomes finished good.

4. Delivery Time - time difference between Order manufactured: Product becomes finished good and Order delivered to customer.

Manufacturing Cycle Time - Waiting Time and Manufacturing Time

Customer-Response Time - all four Time together.

Some companies evaluate their response time improvement efforts using a measure called manufacturing cycle efficiency (MCE):

$MCE = (Value-added manufacturing time \div Manufacturing cycle time)$

Value-added manufacturing activities (see Chapter 14) are activities that customers perceive as adding value or utility to a product. The time spent efficiently assembling the product is value-added manufacturing time. The rest of the manufacturing cycle time, such as the time a product spends waiting for parts or for the next stage in the production process or being repaired, is non-value-added manufacturing time. Identifying and minimizing the sources of non-value-added manufacturing time increases a firm’s responsiveness to its customers and reduces its costs.

Similar measures apply to service-sector companies. Consider a 40-minute doctor’s office visit. Suppose a patient spends 9 of those minutes on administrative tasks such as filling out forms, 20 minutes waiting in the reception area and examination room, and 11 minutes with a nurse or doctor. The service cycle efficiency for this visit equals $11 divided by 40$ , or 0.275. In other words, only 27.5% of the 40 minutes added value to the patient/customer. Minimizing their non-value-added service times has allowed hospitals such as Alle-Kiski Medical Center in Pennsylvania to treat more patients in less time.

On-time performance is the delivery of a product or service by the time it is scheduled to be delivered. Consider FedEx, which specifies a price per package and a next-day delivery time of 10:30 a.m. for its overnight courier service. FedEx measures the on-time performance of the service based on how often the firm meets that standard. Commercial airlines gain loyal passengers as a result of consistent on-time service. But there is a tradeoff between a customer’s desire for a shorter response time and better on-time performance. Scheduling longer customer-response times, such as airlines lengthening scheduled arrival times, displeases customers on the one hand but increases customer satisfaction on the other hand by improving the airline’s on-time performance.