Trade-Offs & The Efficient Frontier

Trade-Offs & The Efficient Frontier

In this lesson, you’re expected to:
– understand the trade-offs faced between performance objectives
– learn about the efficient frontier
– see how focused operations can deal with trade-offs
Trade-offs in Operations
As it often happens in our personal lives, it is virtually impossible to excel in every performance objective, such that organizations must face trade-offs.
Trade-Off between Performance Objectives

• We know that it is virtually impossible to excel in every aspect of our lives. The same applies to operations objectives.

• There may be a trade-off between performance objectives, such that improving the performance of one performance objective might only be achieved by sacrificing the performance of another.

Reference: Slack et al. (2010)
As an example, take a look at this trade-off summary by Harvard Business School Professor, Wickham Skinner: 

”Most managers will readily admit that there are compromises or trade-offs to be made in designing an airplane or truck. In the case of an airplane, trade-offs would involve matters such as cruising speed, take-off and landing distances, initial cost, maintenance, fuel consumption, passenger comfort and cargo or passenger capacity. For instance, no one today can design a 500-passenger plane that can land on an aircraft carrier and also break the sound barrier. Much of the same thing is true in [operations]”

[Optional] The Sand Cone Model
Check out this article about trade-off models:
What is an ‘Efficient Frontier’?

An efficient frontier is a set of optimal combinations of a pair of conflicting objectives.

As we can see in the figure below, the idea behind the efficient frontier is that, given a certain process or technology, there is a set of optimal combinations of a pair of conflicting objectives.
Every point above the efficient frontier is not feasible, and every point below the line is considered suboptimal, e.g. point ”x” is suboptimal, because one can get more variety, while maintaining cost efficiency (point ”A”) or get more cost efficiency while maintaining variety (point ”C”).
The New ‘Efficient Frontier’
However, efficient frontiers can be expanded by process and technology improvements, as seen in the figure below.

Source: Slack et al. (2010)

Focus vs Trade-offs
An extreme option for dealing with trade-offs is aiming at a ”focused” operation

Operation ”focus” means dedicating each operation to a limited, manageable set of objectives, products, technologies or markets.

This is followed by structuring policies and support services so that they focus on one explicit task rather than on a variety of inconsistent or conflicting tasks.

The idea of “focus” is similar to that of “marketing segmentation” used by marketing managers. Thus, “focus” can be regarded as “operations segmentation”.

An “Operation-within-an-Operation”

• The idea of focus implies that an operation serving different markets, with different competitive strategies, should be an “operation-within-an-operation”.

• An operations focusing decision sometimes implies the need of setting up completely new operations if further products / services are added to the current mix.

• However, setting up new operations is not always feasible, necessary or desirable and the concept of “operation-within-an-operation” (or “plant-within-a-plant” or “shop-within-a-shop”) is a practical response that allows an organization to obtain the benefits of focus, without the expense of setting up independent operations.

• An “operation-within-an-operation” is basically an organization partition that is loosely coupled with other similar partitions, integrated by the senior management.

[Optional] Process Strategy & Operations Frontier
Watch this 6-minute video by Prof. Bussom from Widener University to learn more:
Jim Rohn Sứ mệnh khởi nghiệp