OPERATIONS MANAGEMENT

What is Operations Management?

• Operations Management is the ability to
maintain and/or continually improve the day-
to-day operations of a business using analysis
and management skills in a planned and
organized way.
• It is an integral part of a sturdy business
foundation.
• Rooted in common values and a shared vision,
the management team creates a business and
organizational structure supported by key
people.
• Together, they successfully accomplish day-to-
day operations using investment wisely.
Production systems are continually honed to
achieve short- and longer-term goals that
prove to be successful.
 Lightworks Optics
• LightWorks was founded in January 1997.
• With the vision of becoming the premier
supplier of prototype and production custom
optical systems.
• LightWorks collaboratively work with
customers as an extension of their product
development team to develop and
manufacture high-quality, high-reliability,
integrated optical systems.
• Our goal is to provide our customers a
comprehensive capability to design, engineer,
manufacture, integrate, and test high-technology
optical systems.

• LightWorks customers include space, defense and

commercial companies, with applications ranging
from space-based telescopes and optical systems to
airborne, ground and sea-based optics for military
applications, to commercial optics for medical,
micro lithographic, test and measurement and
other commercial applications.
 Synopsis

• Could a small, employee-owned company

meet its ambitious growth goals without
compromising its high-involvement culture?
LightWorks Optics, based in Orange County,
California, made highly sophisticated optical
components for defense aeronautics, space
exploration, and commercial applications.
• Early in its history, LightWorks had set up an
employee stock ownership plan, or ESOP,
under which employees gradually built up
equity in the closely held firm. In 2007, the
three founders indicated that they hoped to
sell their shares to the ESOP trust in a
leveraged buyout in 2012.
• In order for that to happen, the company
needed to improve its revenue and
profitability significantly; that, in turn, would
require that it bring in more contracts,
especially ones requiring high-volume
production.
• But, LightWorks had to pay attention to its
core capabilities and what it could, and could
not, do effectively.
• Moreover, the company prided itself on its
culture of ownership--one in which all
employees had a stake in the business and a
voice in its decisions.
• Could the president, Dan Barber, and his top
management team reach a consensus on how
to expand production without losing the
benefits of a culture of ownership?
 Related topics
• Employee empowerment
• Employee Stock Ownership plans
• Entrepreneurship
• Open book management
• Organizational change
• Organizational development
• Small & medium-sized enterprises
 LightWorks Optics, INC

• LightWorks Optics was founded in 1997 by

Dan Barber, Roger Johnson, and Don Small.
The three men – all physicists with expertise
in optics (the study of physical properties of
light) – had worked closely together for more
than a decade at another Orange-Country,
California-based firm, the West Coast division
of PerkinElmer.
• In 1996, the three men learned that Corning, a
major multinational, was going to acquire
Optical Corporation of America (OCA).
• They became concerned about their future,
and that of many of their colleagues, and
decided to leave to start their own company.
• Over a six-month period as they planned their
departure, the three partners attended business
classes and worked with an advisor from Small
Business Administration.
• Quietly, they set about developing a business
plan, pro forma financials, and an operating
approach. Their initial plan was simply to seek
the kinds of contracts they were familiar with –
to, as Barber put it, “recreate OCA in the
marketplace” as Corning exited the business.
• In one important respect, however, the
founders did not want to model their
company after their former employer. Barber
commented.
• There were some management issues that we
thought weren’t handled particularly well.
PerkinElmer and OCA didn’t do a very good
job of keeping employees informed and
involved in what was going on.
• In early 1997, the partners incorporated
LightWorks Optics.
• Each contributed $15,000 and a computer – the
sum total of their startup capital.
• Over the following decade, the company
prospered, gradually building a business making
high-quality optical components.
• In 2006, LightWorks’ revenue was around $9
million. Around 90 percent of this amount came
from defense contracts.
• The building housed both LightWorks’
corporate offices and production facility under
one roof. ????
 A Highly Skilled Workforce
• LightWorks recruited almost exclusively from
a network of contracts in defense contractors
in and around Orange Country, including their
former employer.
• Barber commented: “It would have been very
hard to do our recruiting from colleges, or
doing it blind. It’s very risky recruiting people
you don’t know. About 70 percent of our staff
now are former OCA employees. They didn’t
all come over right away, but over these past
years, they’ve migrated over”.

• Instability at other firms worked to

LightWorks’ advantage.
• The downsizing of the industry has let us pull
together people who can do this kind of work.
A lot of these people have been kicked around
in acquisitions, where if the bottom line on
the income statement looks bad, well, you’re
laid off.
• LightWorks workers are highly skilled and
experienced.
But this has both good and bad sides
• Smart people
• People who are good to work with
• Smart people who work together
 Bad side
• Have really big egos, they think they know
everything.
• Resist change that seems like a win
• Very skeptical about things

Employed 50 workers in 2007 in a range of

occupations – engineers, physicist, biz
developers, etc
• Company used matrix structure and was
organized both by function and by project
See exhibit. 2 and 3
Employee
• These people take a lot of pride in what they
do, and they don’t appreciate being treated
that way. ….why employees were committed.
• Our competitors’ failures are our gain.
• We look for people who are unhappy and
looking for other employment.
• It would have been hard without that to build
our company.
 The culture of ownership
• Over time… as shares were allocated to the
trust, employees would build up their equity
stake; the founders’ stakes would, by the
same amount, be diluted.
• When an employee left the company or
retired, he or she would be entitled to be
“bought out” by either the ESOP or the
company at the-current fair market value, as
determined by an independent appraiser.
• By 2007, employees owned about 36 percent
of the company (the remaining shares were
held by the three founders.)
 A High-Involvement Culture
• From the beginning, Barber and his partners
wanted to couple employees ownership with
a high-involvement culture.
• They quickly recognized the importance of
setting up structural mechanisms to enable
both the sharing of information and employee
participation.
 How did it work?
• Barber explained “we have a bi-weekly all- hands
meeting where we go through all financials,
profit and loss by project, how much money we
have in the bank, what invoices we’re issuing, the
full financial outlook of the organization.
• We assess revenue on a monthly basis, compare
that to our break-even costs, and each projects’
earned revenue. Are our financial outcomes good
this month or bad this month?”
• So, it’s information and training at the same
time.
• In addition, to its all-hands meetings, the
company held regular department and project
team meetings.
• Barber maintained an open-door policy and
made himself available to talk with any
employee who wished to see him.
• He said “I own this job, I own a part of this
business.” – employees.

Advantages and disadvantages of the ownership

and involvement culture:
• On the positive side, employees were highly
invested in the company’s success and willing
to go the extra mile to make it happen.
• “The ownership culture – that’s why we’ve
been successful in doing things here… When
we first moved into this building, we set up a
committee, gave people decision-making
power, and people really made things happen.
We accomplished the move more quickly than
anyone thought possible.
 Disadvantages

• There have been numerous times when a

particular project faced a crisis that required
the team to go above and beyond. Our project
teams unfailing do whatever it takes to solve
the project issue and satisfy our customers”.
• Barber pointed out:
• “we want to feel that they own the business.
But it means that if anyone in the organization
is negative enough about a decision, they can
affect that decision.
• I can’t just sit at the top of the org chart and
dictate a decision.
• That’s just not how things work here. I spend
a lot of time working the crowd, so to speak.
I’m back in that area (where employees are
working) a lot”.
 Preparing for the Ownership
Transition/exit strategy
• In 2005 and 2006, the three founders decided
they wanted to sell their remaining equity in
the business to the ESOP trust in 2012, as part
of their exit strategy from the business.
• This would occur through a leveraged buyout,
in which a bank would loan money to the
ESOP trust (through the company, as sponsor)
to buy out the founders.
(By 2012, the founders estimated their collective
ownership share would be around 52 percent;
the ESOP would own the rest.) over time, the
loan would be paid off out company revenue,
and employees would eventually own 100
percent of the company.
• At the time of the buyout, the founders could
decide either to retire or continue working for
the firm full – or part-time on a salaried basis.
• In order for the ESOP trust to qualify for a
bank loan, the company would have to
establish a strong record revenue growth and
profitability over the preceding five-year.

• NB: the exit plan and the LBO is not to be

perused without challenges.
 Barriers/Challenges
• For one thing, he was concerned that the
company was too dependent on military
contracts. In fact, a single defense contractor,
Lockheed Martin, accounted for more than 70
percent of their projected 2007 earnings. The
company anticipated a decline in defense
contracts as the wars in Iraq and Afghanistan
wound down.
• The greatest potential for future growth,
Barber thought, was in space and commercial
applications, particularly in biotechnology and
medical diagnostics. The ideal mix going
forward, he believed, was 20 percent space,
40 percent defense, and 40 percent
commercial.
• A large share of LightWorks’ business was
building complex prototypes and one-of-a-
kind optical devices. Many of the company’s
skilled technicians liked this work, but it was
not a reliable moneymaker.
• Barber commented:
• The culture of a prototyping organization and
the culture of a highly-efficient manufacturing
operation are two different things.
• In a one-off system, you hire people who
know how to do the job and leave them alone.
• In an assembly environment, you tell people
here’s what to do and here’s how to do it.
• In an assembly line operation, it’s still very
precise, but it’s a different mindset.
• He added:
• I was concerned about the potential for a culture
conflict between the prototyping side of the
business and the high volume production side of
the business.
• The first requires a culture of focused attention to
detail and experimentation, and the latter
requires a culture of operational efficiency.
• We had already started to encounter this culture
problem in some of our early production
programs.
• He anticipated particular resistance from the
quality assurance inspectors if the company
moved into high-volume production.

• As it had tried to attract more low-cost, high-

volume assembly work, the company had
sought to drive down quoted prices. But it had
run into a difficult obstacle.
• Each contract had to build in indirect costs
(“overhead”) for such things as
administration, business development, and
quality control. LightWorks had tried to
charge a larger share of its overhead to its
prototype and one-of-a-kind jobs, to enable it
to bid at lower price points on its high-volume
work.
• However this was not permitted on military
contracts, which were governed by rules set
by the Defense Contractors Auditing Agency.
• DCCA required that contractors carefully
segregate direct and indirect costs, and then
charge all indirect costs to each contract on an
“equitable” basis.
• Barber explained:
• We were having a lot of problems with our
pricing structure.
• Engineering, quality – we’re carrying a lot of
resources here (in Tustin) that aren’t really
necessary if you go into a focused
manufacturing operation.
• We tried to set up a different rate structure
for prototyping projects and manufacturing
projects, but we are governed by DCCA rules.
• The only way we can allow a different rate
structure is if (we) set up a totally different
facility, and the resources of that facility are
only used for the products that are produced
there.
• To get our cost structure down, we needed to
go elsewhere.
• Here (in Tustin) you’re carrying the whole
front part of the building (engineering, design,
quality control, corporate functions, etc.)
• In other facility, (we) wouldn’t be carrying the
whole front part of the building.
The Decision to establish a new facility
• Option 1 was to make no change and continue
on the company’s present path.
• Option 2 was to upgrade and expand their
existing diamond-turning operation in Tustin
and rent local office space nearby for staff
displaced by this expansion.
• Option 3 was to try optimize the space they
already had – “shifting things around and
using the space we’ve got more efficiently”.
• Option 4 was to lease the building next door,
which was vacant, to expand their available
production space.
• Option 5 and 6 involved opening a dedicated
high-volume production facility (HPVF) in
Vista, California, about an hour’s drive south,
with displaced employees to offices nearby,
and develop an offsite location for HPVF.
• Option 8 was to continue to operate the Tustin
facility and to open an HPVF out of state in a
low-labor cost region, possibly in Mississippi.
Note that:
• Opening a plant in Mississippi would be
expensive initially but have the potential of
lowering labor costs significantly over the
longer term.
• But, could the company operate a second
facility at such a distance and still maintain its
ownership culture?
• Expansion next door would make it easy for
the engineers and quality inspectors to go
back and forth as various projects dictated,
but would this satisfy the DCAA requirements?
• Barber was concerned that indirect costs at
headquarters would have to be allocated to
contracts fulfilled so close by.
• But, perhaps that wouldn’t matter so much if
the company moved decisively into
commercial production.
• The Vista plant would be cheaper than Tustin
to operate, although not as cheap as
Mississippi.
• It would satisfy the DCAA rules and enable the
company to charge less of overhead, Barber
thought.
• But would even an hour away be too far?
• Perhaps shifting to high-volume
manufacturing anywhere would pose too big a
threat to the firm’s culture.
 Resistance to Change
• There was a lot of pushback, a lot of
resistances to change.
• The message was, basically, don’t make any
changes until you’re forced to.
• ‘I’m comfortable where I am, don’t change
anything’.
• Eventually, that might lead to layoffs here.
• Others were resistant because they felt they
could figure out a way to do our work more
efficiently here. They kept saying, ‘we can find
a way to make this happen’.
• There was just a fear factor that it wouldn’t
work, fear that it would hurt the company.
• The (management) group was well aware of
resistance from the rank-and-file.
• Our employees were worried that they would
have to travel frequently between the two
sites.
• Some were concerned that we would
gradually shift production to the satellite
facility, so there would be less work here in
Tustin.
• kent(Weed), Phil(Eads), and Todd(Sanders)
were mostly positive. They were going to lead
it (the expansion), so they were on board. But
Al(DeLiso), from quality control, said, ‘You’ve
got to be crazy’. Greg(Paddock) said point
blank, ‘ my people aren’t going to support it,
so you’d better watch out.
• Whatever action was taken, Barber knew the
support of the whole organization was crucial.
• One of the risks in an employee-owned
environment is that the possible (negative)
reaction to an autocratic decision is orders of
magnitude worse than in any other kind of
organization.