Introduction to Operations Management - I

Prof. B Mahadevan
Efficiency vs Effectiveness in Operations

So far we have seen the results only for the single server queue. So you might come back and say this is too
simplistic. Real life hardly is something like . . . this because in reality, queueing systems are far more complex
involving multiple stages, alternative routing of the jobs, all that. We even saw one such example in this same
module a few videos before if you may recall in the case of that health diagnostic centre. You know, there are
different ways by which the patients of three types were going through the system.

So the question is, what are we going to do with this simple result? There are two important results we found.
One, higher the utilisation, what will happen is queue will build up. Don't go for very high utilisation is one
result which we found. Second result that we found is if you reduce variability in process time, it is always
better. So, these two results are so robust that even in real life complex network of queues, multi-stage,
alternate routing, reality could be quite complex. Even in such complex systems, these results hold good.

Let us say we are interested in some operational performance measure, it can be the queue length. Let's put it
on the y-axis. And we want to know what will happen if the utilisation increases. So, as this curve is showing,
essentially what it says is as we are at the lower end of this utilisation trade off, what it means is utilisation
obviously is very low. The service quality is good and the cost is high because we are not really utilising
resources very well. So, it is a good service, low utilisation but the cost is very high. Whereas if you go to the
other end, what will happen is the utilisation is high and what it means is it is really low cost because we are
able to utilise our resources very well but service quality is poor.

So, these are the two ends to which you can theoretically push this idea. So, if you come down, the quality is
good but utilisation is low, the cost is quite high. If you push it to the other side, the utilisation is ki–high, cost
is low and the service is poor. So, this is the fundamental trade off that we need to make in business. As we
see in this graph, both the ends are not really interesting because you cannot afford to have a very good
service which is too expensive which will make you un-competitive nor can you worry too much about cost
that the service quality is so bad customers are not going to come. So, the thumb rule generally in service firms
is moment you cross 80 percent utilisation, things are not good. So, generally the thumb rule is 80 percent, 85
percent, they don't increase utilisation beyond that because they realize that . . . service . . . becomes . . . not
very good.

In other words, what is this suggesting? It is suggesting that in business, we need to make a trade off between
what is called effectiveness and efficiency. If you want to be very efficient, you cannot afford to be effective.
Look at this example, 100 percent utilisation. Very low you know cost of operation. All those are efficient, but
it is poor service, therefore, it is not effective.

So, let us . . . put all these thoughts together. So, you have two axes here. The expected cost is on the y-axis,
the level of service is on the x-axis. That's the question we are asking given all this discussion. So, this curve
nicely summarizes how the cost behave in real life where you have uncertain process times and uncertain
arrival rates or demand. Now, this curve talks about the–this curve that is sloping down talks about the waiting
costs. So, as the level of service increases, the waiting cost will come down because yo–you tend to be getting
more and more effective, that is what it means. As the level of services comes down, waiting cost will increase.
Now, this–this other curve that you see here is the cost of service. So, what is interesting is if you try to do a
good job of reducing the waiting cost, you will find your cost of service will go up and vice versa. So if you take
these two costs together, this is the third curve which is the total cost. So, essentially we are looking for this
point now.

© All Rights Reserved. This document has been authored by Professor Mahadevan B and is permitted for use only within the course
Introductions to Operations Management-1 delivered in the online course format by IIM Bangalore. No part of this document, including
any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any
means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author.
 Introduction to Operations Management - I
Prof. B Mahadevan
Efficiency vs Effectiveness in Operations

Essentially, in the case of uncertainty, when we make capacity decisions, we are asking how do we locate this
particular point which is a trade off between the cost of service and the cost of waiting. You want to operate in
a way where you are efficient, which is acceptable limits and effectiveness which creates a certain kind of
delight in the minds of the customers. So, this is the–another dimension of capacity analysis involving
uncertainties that we need to keep in mind when we address some of the capacity problems in our work
settings.

© All Rights Reserved. This document has been authored by Professor Mahadevan B and is permitted for use only within the course
Introductions to Operations Management-1 delivered in the online course format by IIM Bangalore. No part of this document, including
any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any
means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author.