Operating costs are the day to day expenses which are in relations to the functioning of a business. These costs include materials, services, small repairs, minor tools, training expenses etc. These expenses also include money for monitoring and maintaining the company. Companies try to reduce these costs in order to achieve competitive advantage and a larger share of the profit to be grabbed. They adapt to different methods of operations to attain cost effectiveness.
EXAMPLE NO 1
McDonald’s has the largest chain of restaurants around the globe. The employees know that their priority is to serve the customer with “zero latency” so they perform all their tasks speedily and with extensive training this is made possible for McDonald’s employees. McDonald's inputs include their machinery, poultary products, meat, spices, cooking utencils, investment,etc. The inputs are transformed by the process of cooking , deepfrying, cleaning, maintaining and monotorind which leads to the output of hamburgers, french fries, breakfast items, milkshakes and desserts. McDonald doesn’t start preparing the burgers until and unless it gets an order to do so.
Previously in the manual system McDonald’s would cook the hamburgers and place them beneath heating lamps. The burgers were stored as long as they could be and when they couldn’t be sold off they are trashed. But since the application of the JIT system the wastage for the company has decreased and the customers get freshly made burgers, which in turns delights them. With the new system McDonald has less burgers as raw material and gives the customer quick service and make it truly a fast food restaurant. So the JIT system had turned the “burger assembly” into an efficient system that has reduced the ordering cost for the company. Previously McDonald had a high holding cost because the burgers become spoil very quickly and then cant be used but because of the JIT inventory system the holding cost is seem to take a slump.
The competitive advantage that Mc Donald gets is that it doesn’t have to charge its customers with high cost because of reduced spoilage cost and this in turn won’t be transferred on the customers. Previously McDonald carried high inventory because they wanted to have food when the customer demanded for it whereas now it carries less inventory due to its efficient inventory management system. Moreover due to orders being prepared at the spot the customers are also satisfied as attention is paid to every detail in their order and the alterations the customer asks for can be easily implemented.
EXAMPLE NO 2
Dell Corporations sells a wide variety of computers and modified services to cater to individual customer needs. The company sells its products to customers using indirect and direct methods and its customers range from individual to corporate customers. The inputs of Dell are the raw materials, devices, employees, assembling plant; premises the processes include assembling, manufacturing, marketing while the outputs are personal computers, servers and networking products and software. Dell Corporation decentralizes its decision making process so that employees are empowered to make decisions which they consider appropriate. This not only frees the top management from decision making but also reduces the cost. Dell also has the concept of having virtual teams it encourages novel ideas from its employees which leads to competitive advantage for the company.
Dell computer also uses the process of just-in-time system that Dell uses promotes customers to give orders directly to them and they make what the customer wants and when they would like it. By this process raw material in stock is seen to decline and inter-reliant distribution also increases productivity. This paved the way to the appliance of the pull approach in the supply chain. This pull strategy gives Dell an edge over its competitors. Because of the efficiencies generated by using the JIT system Dell need not keep 20-30 days of raw material in its storehouse but it just needs to keep about 5 days worth of raw material with them. We can see a win-win situation for both the customers and the company.
By integrating the integral system a closer bond is established between both parties. Dell has focused on its customers and the build-to-order way since its commencement. Until and unless an order is placed Dell doesn’t start with the assembling of the product. The main problem in the computer business is that the computer obsolete if they are kept idle. So Dell implemented the JIT system to counter this key adversity. Dell uses “internet-based applications” to link to its suppliers. Dell uses the JIT concept so efficiently by integrating the entire system to it. The amount of supplies it orders is only sufficient to last the production of 2 hours and after that they re order! This reduces the storage cost and the expense of goods being obsolete.
EXAMPLE NO 3
Wal-Mart is the prime retail corporation in United States and has been position the best on the Fortune 500 Index. The employees there follow the "Sundown Rule" which is a company instruction that the management has to get back to the customers or suppliers queries within 24hours. Additionally the 10 foot rule is followed which states that the store employees must welcome and attend to a customer in a store when surrounded by 10 feet of them. This increases customer hospitality and gives the company a competitive advantage.
The input of Wal-Mart are the commodities purchased, POS terminals, capital, fixtures, etc which will be processed by sorting the goods, displaying it in a proper manner, maintenance of the store, organizing the whole set-up. The end result would be well-sorted products and highly efficient services. By using the JIT inventory system Wal-Mart has low ordering cost, now all it does is order small amount in greater rate to be profitable. High holding costs and low ordering costs are the factors that drive JIT. Generally, it's the ability to lower ordering costs that make it a feasible solution.