Chapter 20

Measuring the Effects of Improvements in

Operations Management

Vedran Capkun, Ari-Pekka Hameri and Lawrence A. Weiss

Abstract This paper examines the relationship between a managerial focus on re-
ducing inventory and improvements in value added. We analyze financial informa-
tion on large non-service US based firms over the 25 year period from 1980 to 2004.
Our results show a very strong correlation between the increase in value added and
the decrease in days of inventory speed across all manufacturing industries. The
results strongly support the operations management literature which claims a man-
agerial focus on efficiency, in particular increasing the speed of operations, will
result in significant value creation for firms. The results also imply that the concept
of competition based on operational speed has not been transferred across all firms
and the potential for improvement still exits in most industries.

20.1 Introduction

Operational speed, defined as the lead time from order handling, through production
and delivery, to the customer, has long been recognized as one of the common char-
acteristics of successful companies in competitive business environments. All oper-
ational management methods to improve operations are supposed to make processes

Vedran Capkun
HEC School of Management, 1, rue de la Liberation, 78351 Jouy-en-Josas cedex, France, tel. +33-
1-39-67-96-11 fax. 70-86
e-mail: capkun@hec.fr
Ari-Pekka Hameri, corresponding author
Ecole des HEC, University of Lausanne, Internef, Lausanne 1015 Switzerland, tel +41 21 692 3460
fax 3495
e-mail: Ari-Pekka.Hameri@unil.ch
Lawrence A. Weiss
McDonough School of Business, Georgetown University, Old North G01A, Washington, DC
20057-1147, USA, tel. +1-202-687-3802 fax. 4031
e-mail: law62@georgetown.edu

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250 Vedran Capkun, Ari-Pekka Hameri and Lawrence A. Weiss

faster, more controllable and accurate. This includes business process engineering,
total quality management, vendor managed inventories, supply chain integration,
just-in-time, lean thinking, and activity based management. Among the best known
firms which focus on operational speed are the computer assembler Dell and the
apparel company Zara. These companies avoid the perilous impact of supply chain
dynamics by operating at speeds where the capital bound by their operations is a
fraction of the overall volume of their business. This provides them with the agility
to react to sudden demand variations and outperform their competitors. These com-
panies are also less dependent on forecasts and preplanned operations giving them
an additional advantage and cost efficiency over their slower competitors. Schmen-
ner, 1988; Stalk and Hout, 1990; Womack and Jones, 1996, all find a strong positive
relationship between financial results and those firms who set operational speed as
their key strategic approach.
According to the operations management literature, each operation that is part
of a business process should add to the value of the end-product. The more effi-
ciently a company creates value which customers are willing to pay for, the greater
the firm’s ability to deliver value to its stakeholders. One of the first steps to in-
creasing the value creation capability of a process is to remove those operations that
do not add value (in the sense of providing something a customer is willing to pay
for). Essentially a process should create value without bottlenecks and the process
variability, inherent or external, should be minimized (see Schmenner and Swink,
1998). Whether the term used is swiftness, operational speed, or reduced days of
supply, the aim is to improve operational speed by reducing the lead times of the
value creation processes of the company.
The majority of success stories in operations management stem from automo-
tive, machinery and job-shop (i.e. assembly) industries. It is important to review
how just-in-time and other operational methodologies have affected these and other
industries since their introduction in early 1980’s. The paper begins by presenting
the relevant literature on lead time reduction and competition based on speed. This
is followed by a description of the research hypothesis, sample description, and ap-
plied methodologies. Then we document the relationship between value creation
and operational speed by using financial information from large U.S. companies.
Next, we illustrate how development in operational speed has taken place in general
and across different industries. Finally, we present a summary of our key findings
with their managerial implications.

20.2 Literature Review

Manufacturing processes have come a long way since Henry Ford’s moving assem-
bly line and mass production. Ford’s focus was on output and cycle time, however,
he also provided examples of how repeating tasks improve lead time along the tradi-
tional learning curve - like the case of disassembling excess war ships after the First
World War (Ford, 1922). Scale and cost centric manufacturing were a managerial