Now, in the last session we discussed how the performance of an operation can be evaluated along four dimensions. Cost of efficiency, the quality, our ability to provide choice to the customer, and responsiveness. Now, as the owner of a business, of course, I would love my operations to excel at all four of these dimensions. I would love to provide customer's with products at low prices, provide them with infinite choice, high quality service, and all of that immediately. Provide them the product or services when they want them. Obviously, that is often not possible. As the owner of the business, as a manager, as a consultant, I have to make tradeoffs among these four dimensions. Which is really what we're going to be discussing in this session today. Let's look at a specific example. Imaging you're consulting for a call center. The call center currently has problems with response times, customers are waiting a long time, and only 30% of the incoming calls get served in twenty seconds or less. Say for sake of argument, that your goal is to improve this and get 80% of the call serviced in twenty seconds or less. This is called a service level, and we'll talk more about this later on in this course. Now, there's a tension between the forces of responsiveness and productivity in the sense that you could easily imagine a call center that would have an amazing responsiveness. It would have thousands and thousands of employee staff. It would be very inefficient, but it would be very responsive. Vice versa, you could imaging downsizing the workforce so that you have very few workers answering calls, which would be great for your productivity but very poor for your responsiveness. So there is clearly a trade-off between those two dimensions. One of the things that we'll discuss in this course is how you can use your operations and the tools in this course to really position yourself on this graph, because every business needs a different position in terms of the service level. And the managerial decision is how many employees, what you want to hire on a given shift. Next, imagine that you're going out, you're working for this call center. Call center is performing about here in terms of the responsiveness and the productivity. You engage in some benchmarking, and you're looking at a number of other industry players along the lines of responsiveness and productivity. First company that you run into is Company A. Company A, you notice, is a lot more responsive than you have. So in other words, the customers have to wait less, but at the same time you notice that they're a lot less efficient. Then you run into Company B. You know these guys here are having a much better productivity, but they do this at the cost of some responsiveness. So they are cheaper than we are, but they are a lot slower. Both of these make good sense, because they are really reflecting the trade-off that we just discussed on the previous slide. Now, the next company you run into is competitor C. And competitor C is a puzzle for you, really, because these guys are both faster than we are, and they are cheaper. We refer to this difference here as the inefficiency in our operation. And the line that goes, let me say this casually, the line that includes all the industry players to it's lower left, you refer this as the efficient frontier. Obviously, the goal of the operation is to move out here, to the upper right of this graph. Now, an operation that is currently on the frontier, in order to move to the upper right here, it has to innovate and shift the frontier. Everybody else who is off the frontier has a potential to simultaneously improve along multiple of the four dimensions of operational performance without having to make, necessarily, a sacrifice. These are guys that are just doing the work smarter. Now, one of the things that we will talk about in this course is we'll help you evaluate such changes, be it on the frontier to a new frontier, or off the frontier towards more productivity and more responsiveness. We'll help you evaluate these changes before you actually make them. Making these changes is expensive, and so, to the extent that you can evaluate the financial impact before embarking on that, you'll have saved yourself a lot of headache. Now it's time to look at a specific example. What I've shown on this graph is data from the U.S. airline industry. And I plot here on the X axis the efficiency of the carriers as measured by the ratio between the traveled miles that they provide relative to their operating expenses. I also measure on the Y axis a number that is called the yield of the airline, which takes a ratio between the miles of travel service provided by the airline relative to the revenue. Now, take a look here at this concept of the efficient frontier. We see a line that roughly looks like this and that captures basically all of the big lines along a pretty linear line. The interesting outlier on this graph is Southwest Airlines. Southwest has been able to achieve a much higher productivity compared to the big legacy carriers, and thereby has been able to shift the frontier, largely done because of their clever labor productivity, something that we will analyze later on in this course. You also notice how Hawaiian airline has been able to achieve a similar productivity, largely because of their small around network, but has not been able to command the high prices relative to Southwest. Now this is data from 1996. It's interesting to contrast this data with the year 2011. In 2011, you notice that the frontier has changed very dramatically. In fact, Southwest that has been playing across the graph at this game relying on low pricing, has emerged as actually now as an airline that has been able to charge the highest prices in the industry. Yet they had to sacrifice on the productivity side, and they've been overtaken on the productivity side by companies such as JetBlue and Virgin America. So you notice how the frontier if the industry has shifted. New business models have arrived, companies have played different strategies, and because of their operations the industry landscape now is a very different one. All right. What have we learned today? First of all, we notice that you cannot have it all. Just like in normal life, we have to set priorities. And business has to prioritize some of the four dimensions of operational performance, cost, quality, variety, and responsiveness. You have to decide on which of these four dimensions you want to compete. Second, we talked about the concept of the efficient frontier. I occasionally defined the efficient frontier as a line that includes all firms to its lower left. It was arguably a quite casual definition. More formally, in academic terms, we talk about the line of firms that has no other firm that pervade or dominates a firm. That is, for example, cheaper and faster at the same time. The efficient frontier is important as our gap, as in the company to the frontier, measures the inefficiency, the waste that we have in our operation. One thing that we will talk about in this course is through clever operation, through clever process design, we will help your firm to move up toward the frontier, and then once you are on the frontier, we'll have to continually innovate to keep on pushing the frontier to the upper right of the graph.