OPERATIONS MANAGEMENT

TRADE-OFF ANALYSIS
Trade-off refer to the idea that the improvement in one aspect of operations performance
comes at the expense of deterioration in another aspect of performance, now substantially
modified to include the possibility that in the long term different aspects of operations
performance can be improved simultaneously.

Most notably, better quality, speed, dependability and flexibility can improve cost
performance. But externally this is not always the case. In fact there may be a ‘trade-off’
between performance objectives. In other words improving the performance of one
performance objective might only be achieved by sacrificing the performance of another.
So, for example, an operation might wish to improve its cost efficiencies by reducing the
variety of products or services that it offers to its customers.

Possible trade-offs between and among the performance objectives can result in lower
overall cost and/or better service. For example an analysis of total cost with a change to a
higher cost mode of transport as indicated in the table below, shows improvement in
service and cost-savings.

Analysis of total cost with a change to a higher cost mode of transport

Thus, the increase in transportation cost, following a switch from a low cost mode to a
high cost mode of transport has resulted in a reduction in inventory holding cost,
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packaging cost, as well as warehousing cost. In addition, there has been a reduction in the
cost associated with lost sales, which means the organization has become more
responsive to customers’ demand. Ultimately, total cost has reduced from Ghc 16.00 to
Ghc 12.90 leading to a cost saving of Ghc3.10.

Analysis of total logistics cost with a change to more warehouses

However, in the case of analysis of total cost with a change to more warehouses, the
associated increase in warehousing and inventory holding costs did not finally lead to a
reduction in total cost as indicated in the table above. By transporting in bulk, goods that
exceed current operations requirement may be held in inventory to meet future
operational requirements. This will make the organization responsive and dependable to
customers. Once stock must be held, the firm must bear the cost of holding inventory.
Inventory holding cost may include inventory capital cost, inventory risk costs, inventory
space cost as well as inventory service costs. Thus, cost savings made in transporting
goods in bulk are swallowed by the associated inventory holding cost, which tends to
increase total cost. A firm therefore has to decide whether or not transporting in bulk will
meet its competitive priorities.

The scenario above does not necessarily mean that the decision to invest in more
warehouses was wrong. Even though total cost eventually went up in the short run, in the
long run the decision may pay off.