Strategic > ‘affecting all key business operations’
- The strategic role of the operations management involves operations managers contributing to the strategic direction or strategic plan of the business
- The overarching goal of business is to maximise profits. This is done by:
- Revenue or income > should be maximized to bring greatest possible volume of money
- Costs or expenses > need to be minimized to reduce the overall expenses incurred
- Cost centres do not directly derive income but incurs cost.
- The operations function is a cost centre in a business.
- A strategic aspect of operations management is the management of cost
- There’s different sources of operational costs including; input costs, processing or transformation costs and the costs of getting products to markets.
- There are also costs associated with inventory management and quality management
- Cost Leadership > aiming to have lowest costs or to be the most price-competitive in the market and still being profitable
Economies of Scale and Cost Management
- Economies of Scale > cost advantages created from an increase in scale of business operations.
- Cost savings come from purchasing lower cost per unit of input and from efficiencies created through improved use of technology and machinery
- Products may be classified as either goods or services
- Services are the result of a need for that service, does not exist prior to the need
- Goods already exist even before a person seeks them
- Product differentiation > distinguishing products (goods or services) from competitors
- Varying product features > g. electronics having different servers and displays to be used in differing ways
- Varying product quality > g. a higher quality alternative sold in an alternative trade name so market see’s both the standard and higher quality products being produced from different producers
- Varying augmented features à g including GPS, headlights and self-parking systems in cars
- Amount of time spent on a service à shorter times can be more convenient to both the business and customer
- Level of expertise à higher levels of expertise generally means more quality and can charge higher prices
- Qualifications/Experience of service provider à highly qualified/experienced service providers can significantly affect the quality of service e.g. hairdresser
- Quality of materials/technology used in delivery à programs and medical technology can affect the quality of service provided
- Cross Branding;
- Differentiation can be created from cross branding or strategic alliances
- Offering consumers added benefits from a cross-branding arrangement.
E.g. the Woolworths–Caltex alliance, products are differentiated but is done from external factors that the business has brought into the mix
Goods in Different Industries
- Operations decisions will vary for goods depending whether they are standardised or customised goods
- Standardised Goods à Mass-produced, usually on an assembly line. Standardised goods are uniform in quality and meet a predetermined level of quality
- Customised Goods à Varied according to the needs of customers. These goods are produced with a market focus rather than a production focus
- The choice of the process selection is strategic, as it requires a high degree of cross-functional interaction and coordination, meaning all four key business functions work together to achieve the operations outcome
- Goods may be broadly classified as either perishable or non-perishable. The grocery sector has perishable goods (food), whereas household and business goods are generally non-perishable
Perishable Goods and Operational Processes
- Operational processes will need to integrate the following factors:
- High standards of quality, safety and cleanliness in all operating processes
- Very short lead times and distribution that is as quick and effective as possible
- Appropriate and robust packaging and cold storage processes both through production and distribution
Non-Perishable Goods and Operations Processes
- Non-perishable goods are more durable than perishable goods and therefore issues of quality and inventory management arise for the operations function.
- Operations processes need to integrate the following factors:
- Manage all aspects of quality in the process, from sourcing to production and distribution
- Implement effective inventory management strategies and be highly responsive to market demand in order not to over produce.
- In the manufacturing sector there are motor vehicles, electrical appliances and audio-visual products, computer-based technologies, clothing, footwear and household goods.
- Many of the operational processes are generally similar across all products regardless of industry, except technology, which can be industry-specific.
- Sometimes goods may be processed more than once. Completed goods that have gone through a set of operational processes, may then become inputs into further processing.
- E.g. a manufacturer converts steel into tiny screws. These are finished goods for that manufacturer. These screws are then used in the manufacture of electronics goods as essential components
Services in Different Industries
- Services can be both standardised and customised
- The fast-food industry standardises their services
- Industries that are characterised by professionally educated and trained people. Accounting services, dental surgeries, medical services, legal services are generally customized.
- g. most people visiting a GP is highly likely to receive a customised service
- g. A person buying a house may receive standardised conveyancing services from a solicitor
- g. A person facing criminal charges will need legal assistance that is highly customised for their particular circumstances
Cost Leadership and Standardised Products
- When a product is standardised then costs associated with the production of the product can be minimised.
- Standardised goods can be mass-produced without variation and economies of scale can be achieved. However, it is also true of service delivery.
- When a business offers a service, it can bring a cost leadership to the service by standardising how that service is performed.
- g. In the fast-food industry. When a person enters a fast food restaurant they are subject to highly standardised processes in terms of order taking and customer service. People delivering the service are trained so that they know exactly what to say and how to say it. This approach to services, where a standardised approach is created, is also evidenced in call centre work and other work where administrative processes are routine.
- Self-service means encouraging customers to take initiative to help themselves
- Some industries seek to encourage self-service.
- g. financial services sector and the travel industry encourage people to make their own transactions online.
- Businesses can concentrate on customisation when people cannot help themselves.
- However, an issue with self-service online is that of drip pricing, which is a final price being much higher than advertised online due to additional charges
- Marketing is concerned about the operations process including the design of products, and their subsequent sale to meet consumers needs
- The operations function involves the acquisition or sourcing of products for resale or the sourcing of inputs for production.
- The product design (a marketing requirement) directly affects the operations function
- Reports such as income statements determine the amount of money the business has earned after its expenses have been paid, are very useful to managers and other stakeholders
- Key marketing objective is profitability which relates to the costs of production
- If costs of production in operations can be minimised then profit margins can be increased.
- If operations processes focus on quality then the resulting products can be sold at higher prices and generate higher revenues.
- In most businesses the operations function are going through change
- New technologies have replaced the work done by employees in the operations of a product
- The use of outsourcing means that communication between human resources can be more complicated and that there is an increasing reliance on technology
- Globalisation à the removal of barriers of trade between nations
- Characterised by an increasing integration between national economies and a high degree of transfer of capital, labour, intellectual capital and ideas, financial resources and technology.
- Provides a source of market opportunities both from other nations and to other nations.
- Can be a threat to businesses that effectively apply cost leadership principles as it can undercut the market and dominate
Globalisation and Operations Management
- Large businesses are increasingly orienting their practices towards the global market, with a view to meeting the needs of global consumers
- Global consumers seek global brands and tend to seek standardised products
- Following processes are features of global businesses that target global markets:
- Product design meets the needs of global consumers
- The choice of location for manufacturing facilities
- The quality management, logistics and inventory management processes are aimed at a global market
- Manufacturing plants for the production of goods means that business can achieve massive economies of scale advantages à g. Apple (product designed in USA but manufactured in China for a global market)
- Production of services on a global scale within sectors such as financial services, travel and tourism services, software development and telecommunications also has significant implications on operations processes
Supply Chain Management and the Global Web
- Supply Chain à range of suppliers a business has and their relationship with those suppliers
- A business needs a predictable/reliable supply chain that’s highly responsive to demand changes
- Sourcing is an operations strategy that requires finding the suppliers needed so that production processes can flow smoothly
- Global web à network of suppliers a business has chosen on the basis of lowest overall cost, lowest risk and maximum certainty in quality and timing of supplies.
- Global web strategy is when the business aims to minimise cost across the range of its suppliers
- A business will locate in places that is in appropriate proximity to the suppliers
- If a high proportion of suppliers are in a particular region, this may identify the main location of operational processes
- Technology à the design, construction and/or application of innovative devices, methods and machinery upon operations processes
- Technologies enable people to communicate more easily and enable improved processes
- It’s seen as both a range of devices as well as a range of enabling processes and applications
Technology and Operations Management
- Administrative à assists with organisation, planning, decision making and are in control of operational processes
- Processing à used in manufacturing, logistics and distribution, quality management, all aspects of inventory management, supply chain management and sourcing
- Quality à reference to how well designed, made and functional goods are, and the degree of competence with which services are organised and delivered
- Quality and expectations cannot be separated
- People have a belief in what quality standards should be for products and their personal level of satisfaction with the product will indicate whether the quality has met with expectations or not.
Quality Expectations and Operations Management
- Quality informs all operations processes
- People’s expectations of businesses determine the way that products are designed, created and delivered to customers
- Operations processes must follow particular standards or prescribed levels of excellence.
- Quality Expectations:
- Quality of design
- Fitness for purpose
- Reliability of Service Provider
- Level of Customisation
- Cost-based competition à derived from determining breakeven point then applying strategies to create cost advantages over competitors
- It recognises that prices cannot keep increasing; thus, reducing costs is a way to maximise profits when revenues are fixed
- Mass customisation enables cost-based competition even when products are differentiated rather than standardised
Cost-Based Competition and Operations Management
- Focus on reducing costs to a minimum while maintaining profit margins
- Costs may be divided into those that are fixed or variable
- Fixed costs do not change regardless of the business activity level
- Variable costs vary according to the business activity level (production level)
- Political decisions affect business rules and regulations, which directly affect the management of various key business functions.
- Government policies change from time to time, often due to change in government or change in social expectations
- Government policy is a notable source of change and a significant influence on business operations.
Government Policy and Operations Management
- Policies such as taxation rates, required materials handling practices, Work Health and Safety (WH&S) standards, training and rules, public health policies, environmental policies, employment relations, trade and industry policies all impact on business operations
- Policies can inform law-making, and also lead to business opportunities
- Operations managers need to be aware of new government policies and what they comprise
- The range of laws that a business must comply with is collectively termed ‘compliance’
- Regulations that shape business practices and procedures must be followed at the risk of penalty, hence the term compliance.
- Expenses associated with meeting legal regulation requirements are called compliance costs
- Laws make clear the standards of society, and businesses are expected to comply with the standards of behaviour imposed by the legal regulations
Legal Regulation and Operations Management
- The transformation or conversion involves the use of any or all of labour, technology, finance, machinery and energy. The relevant laws will relate to labour and labour management, as well as the environment and public health including the following.
- Work Health and Safety (WHS): Safe and healthy working conditions require that employees be given appropriate safety training, use of protective equipment, and work with machines that abide by noise, pollution and safety standards
- Training & Development: in the use and application of technology and in the appropriate methods required to work effectively
- Fair Work & Anti-Discrimination Laws: requiring employees to be treated with dignity and respect.
- Environmental Protection: use of minimising pollution, eliminating and safely disposing of any toxic residues.
- Apply Rules Related to Public Health: including any fair trading rules which influence product safety standards and fitness for purpose of products.
- Environmental Sustainability à business operations should be shaped around practices that consume resources without compromising access to resources for future generations
- These are the sustainable use of renewable resources and a reduction in the use of non- renewable resources
Environmental Sustainability and Operations Management
- Operations management is significantly affected by the rise in climate change awareness and the need to integrate a long-term sustainable view of resource management into business planning and practice
- This can be seen in the move by businesses to minimise waste; recycle water, glass, paper and metals, and reduce their carbon footprint
- The carbon footprint refers to the amount of carbon produced and entering the environment from operations processes
- Corporate social responsibility à refers to open and accountable business actions based on respect for people, community/society and the broader environment. Involves businesses doing more than just complying with the laws and regulations
Difference Between Legal Compliance and Ethical Responsibility
- All businesses should comply with all laws and regulations
- Some businesses go much further than simply adhering to the minimum requirements set out under the law; they demonstrate a commitment to ethical responsibility.
- The difference between legal compliance and ethical responsibility is that legal requirements require that a business follows the letter of the law, whilst ethical responsibility sees businesses meeting legal obligations and taking it further by following the intention and ‘spirit’ of the law.
- Complying with legislation costs a business money, which is referred to as compliance costs
- In demonstrating ethical responsibility, a business is demonstrating that it values more than earning maximum profits because it is allocating money over and above what it costs to comply with the law
Legal Compliance and Business Operations
- Compliances Include:
- Labour Law Compliance à minimum wages, award wages, working hours, breaks, pay for various forms of leave, other on-costs associated with labour, workers compensation and work health and safety laws.
- Environmental & Public Health Compliance à regulations stopping dumping, pollution (air, land and water), requiring certain standards of operating and disposing of waste.
- Business Licensing Rules à such as those requiring particular levels of training or certification and those placing conditions on operations (such as restricted working hours, zoning restrictions, and content and disclosure restrictions).
- Taxation à any levies and duties as well as taxes imposed on profits.
- Trade Practices and Fair Market Dealings à address issues of market power, misleading and unfair conduct, price collusion, market competition and product safety.
- Migration & Rules on the Use of Offshore Skilled Labour à ensure minimum standards are applied to labour brought in from other nations.
- Intellectual Property à addresses issues related to moral rights such as copyright, patents, trademarks, designs and other original ideas and artistic works.
- Financial & Accounting Regulations à aim to standardise methods and rules around financial records and reports, and ensuring that company directors follow particular rules as fiduciaries (a person in a position of financial trust with respect to others’ money)
- Corporations Law à imposes duties on directors and others who work in responsible positions within corporations.
- Human Rights à rules stopping discrimination on the grounds of disability, culture, sexual preference, gender, age or any other distinguishing feature.
- Outsourcing, Compliance and Business Behaviour
- Businesses aim to reduce compliance costs by structuring their business operations so that different aspects are conducted by outside parties (Outsourcing)
- Outsourcing involves the use of outside specialists to undertake one or more key business functions
- Onshore outsourcing à involves domestic businesses as outsourcing provider
- Offshore outsourcing à involves overseas businesses as outsourcing provider
- Offshore outsourcing allows the business to take advantage of significant cost savings; lower taxation rates, lower standards of labour, weaker environmental and intellectual property regulations all enable businesses to reduce their compliance costs
- Offshore outsourcing raises ethical issues concerning business behaviour
- Ethical responsibility involves businesses going beyond the law and taking into account broader social, community and environmental concerns
- When laws and regulations differ between nations, it can be hard to know how to be ethical in given business situations
- In manufacturing operations there can be significant international differences in standards for labour in terms of wages, health and safety, training and so on. A business may choose to follow international labour standards that come from the International Labour Organization (ILO).
- ILO holds annual conventions called the International Labour Conference and raises matters of importance to workplaces and the rights of employees.
Environmental Sustainability and Social Responsibility
- Economic growth should not occur at the expense of polluting and degrading the air, water and forests that are essential to supporting life on this planet
- There should be a balance between economic concerns and environmental concerns AKA environmental sustainability
- The social conscience of responsible business owners has led them to adopt policies of conservation, recycling and restoration
- Ecological sustainability requires businesses to evaluate the environmental effects of their operations
- The growing consumer expectation that products should be ‘clean, green and safe’ is changing management practices in a number of Australian businesses
- By producing new and better products in an ecologically sustainable manner, the business focus coincides with stakeholder expectations.
- Corporate social responsibility (CSR) refers to a business’s management of the social, environmental, political and human consequences of its actions
- A socially responsible business tries to achieve two goals simultaneously:
- Expanding the business
- Providing for the greater good of society
- Customers may react and stop buying a business’s product if they learn that the business is exploiting employees, accepting bribes or polluting the environment
- Customers will also reward socially responsible businesses by purchasing more of their products
INPUTS (resources used in the transformation process)
Common Direct Inputs:
- Raw Materials
- Technology and Machinery
Transformed Resources (inputs that are changed or converted)
Materials à basic elements used in the production process
- Raw Materials à essential substances in their unprocessed state e.g. oil, wood, steel
- Intermediate Goods à goods manufactured and used in further manufacturing or processing e.g. nails, microchips
Information à knowledge gained from research, investigation and instruction, resulting in increased understanding
- The value of information lies mainly in its ability to influence behaviour or decision making
- Information is a resource when it is used to inform how inputs are used, where they are drawn from, which suppliers and supplies are available
- External Information à Outside data
- g. information on new technologies can influence which machinery and technology is purchased and how it is applied to the operations function
- Internal Information à Business data
- Comes from Key Point Indicators, financial reports, quality reports, customer feedback
- Internal information informs processes and creates process improvements
- Customers are transformed resources as their choices shape inputs
- The customer acts as an input and their desires and preferences act as a transformed resource
- Businesses may implement customer relationship management programs (CRM) to improve customer service, increase competitiveness and identify changes in consumer tastes
Transforming Resources (inputs that carry out transformation process)
- Staff should be well qualified, hard working and disciplined can bring great productivity and efficiency to business operations
- The effectiveness with which human resources carry out their work duties and responsibilities can determine the success with which transformation and value adding occurs
- Strategies of improving employee skills through training and development may be used
- Setting performance objectives for individual staff members to improve their efficiency will help the business achieve its objectives
Facilities à the plant (factory or office) and machinery used in the operations processes
- Major decisions include the design layout of the facilities, the number of facilities to be used, their location and their capacity
- The facilities can determine the nature of the operations environment
Influence of Volume, Variety, Variation in Demand and Visibility
The Influence of Volume
- Volume refers to how much product is made
- Volume flexibility is how quickly the transformation process can adjust to increases or decreases in demand.
- Lead times is the time it takes for a product order to be made and is influenced greatly by the businesses responsiveness to changes in demand
- If businesses cannot quickly adjust to changes in market demand
- Over produce à lead to wastage and increased inventory costs.
- Under produce à loss in sales as customers may go to competing businesses
The Influence of Variety
- The mix of products made, or services delivered through the transformations process, is sometimes called mix flexibility
- Mix flexibility à is the range of products or services delivered through the transformation process
- Influences transformation processes as the greater the variety; the more the operations process needs to allow for variation
- Can be difficult to achieve and a large plant may be required.
The Influence of Variation in Demand
- An increase in demand will require increased inputs from suppliers, increased human resources, increased energy use and increased use of machinery and technology.
- Increased demand may be hard to meet if:
- Suppliers cannot supply quickly enough
- Labour is not flexible enough, skilled or available
- Machinery cannot adjust to increased capacity quickly – from design or break down
- Increased energy and power cannot be readily sourced
- Results of Decreases in Demand:
- Operational flexibility
- Staff may have hours reduced
- Production may slow to avoid inventory build up
- Suppliers may put on pressure due to contractual agreements
- Predicting Demand à Businesses try to forecast demand so that adjustments are anticipated
- Christmas has higher demand
- Seasonal Factors – e.g. air conditioners may be in higher demand during summer
The Influence of Visibility
- Visibility à the nature and amount of customer contact
- Customers and their preferences influences businesses products
- Direct Customer Contact/Feedback;
- Warranty claims
- Verbal Contact
- Indirect Customer Contact/Feedback:
- Review of sales data that indicates customer preferences and market share data
- Observation of peoples’ decision-making processes and through consumer reviews
- Customer contact is essential for profit maximization and shapes the transformation processes
Scheduling and Sequencing
- Sequencing and scheduling are two very important aspects that assist with structuring and ordering the transformation processes.
- Sequencing refers to the order in which activities in the operations process occur.
- Scheduling refers to the length of time activities take within the operations process.
- When planning operations processes that involve activities central to transformation, various scheduling tools will be used.
- Gantt charts outline the activities that need to be performed, the order in which they should be performed and how long each activity is expected to take.
- They are used for any process that has several steps and involves a number of different activities that need to be performed
- They force a manager to plan the steps needed to complete a task and to specify the time required for each task.
- They make it easy to monitor actual progress against planned activities
Critical Path Analysis
- A scheduling method that shows what tasks need to be done, how long they take and what order is necessary to complete those tasks
- The critical path is the shortest length of time it takes to complete all tasks necessary to complete the process or project.
- Some tasks can be performed simultaneously because each activity on the schedule must be completed to make the final product
- This type of analysis enables a manager to see what needs to be done and allows the timing of tasks to be considered.
- A business is able to see what order activities need to be done in
- Scheduling gives direction and organisation to operations processes, provides overall coordination and enables a means of control
Technology, Task Design and Process Layout
- Technology is the application of science or knowledge that enables people to do new things or perform established tasks in new and better ways
- Business technology involves the use of machinery and systems that enable businesses to undertake the transformation process more effectively and efficiently
- In manufacturing, technology can be used to speed up processes and enable fuller utilisation of raw materials à more cost effective
- In services, office and communications technology have enabled whole markets to open up and allow for a small to medium business to trade globally
- The capital cost of technology is relatively high with additional costs such as set-up, siting, cabling, and programing
- Office Technology:
- Computers, phones, printers, EFTPOS machines
- Technologies have enabled office workers to work away from the office
- In many businesses, the ‘virtual office’ and ‘paperless trading’ are becoming a reality
- Manufacturing Technology:
- Robotics à shapes transformation processes so they’re high quality, of a consistently high standard, efficient and minimise waste
- Computer-aided design (CAD) à allows businesses to create product possibilities from a series of input parameters
- Computer-Aided Manufacturing (CAM) à allows manufacturing process to become computer controlled
- Task Design à classifying job activities in ways that make it easy for an employee to successfully perform and complete the task
- It breaks down work into a series of jobs in which each contributes to the final goal
- It is necessary to group skills and competencies because this helps when obtaining staff
- Prospective employees will be compared with relative skills/competencies to ensure they match
- Skills Audit à a formal process used to determine the present level of employee skilling and any skill shortfalls that need to be made up either through recruitment or through training
Workplace Layout: the way the workplace is organised
- Process Layout à arrangement of machines so that the machines and equipment are grouped together by the function they perform e.g. hospitals,
- Product Layout à where the equipment arrangement relates to the sequence of tasks performed in manufacturing a product, used for mass production, ‘assembly line’
- Fixed Position Layout à operational arrangement in which employees and equipment come to the product e.g. worksites
Office Layout: (the way the workplace is organised)
- Typically an office space is organised around discrete workstations
- Office layout is tailored to meet the needs of the business
- In a manufacturing business, office layout is often informal à may overlook the factory floor so managers can supervise from their desk
- In an accountant’s office, clients need to feel welcome as they seek advice and information
- In a doctor’s surgery, privacy is a concern for patients so the layout of the surgery reflects this
Monitoring, Control, Improvement
Monitoring: (process of measuring actual performance against planned performance)
- Monitoring involves the measuring of all aspects of operations, from supply chain management and the use of inputs, through to transformation processes and outputs
- Monitoring is arranged around the needs to measure key performance indicators (KPIs)
Control: (occurs when KPIs are assessed and corrective action is taken if required)
- Compares what was intended to happen with what actually occurred
- If there is a discrepancy with performance and goals, changes and improvements can be made
- Operations managers will make changes to the transformation process such as redesigning the facilities layout or adjusting the level of technology in order to correct any problems
- Improvements in processes are often framed around quality
Improvement (systematic reduction of inefficiencies and wastage, poor work processes and the elimination of any bottlenecks)
- A bottleneck is an element that slows down the overall processing speed or creates an impediment leading to a backlog of incompletely processed product
- Improvement is done in these areas:
- Process Flows
- Continuous Improvement
- An ongoing commitment to achieving perfection.
- The process becomes one of setting higher and higher standards in the continual pursuit of improvement
- Customer service à how well a business meets and exceeds the expectations of customers in their operations aspects
- If a customer expresses dissatisfaction with a product for it being defective, not meeting quality expectations, finds wait times/lead times too long or returns the product or makes a warranty claim, then operations processes needs review
- customer service is to make sure the right good or service is delivered or provided at the right place at the right time.
- Businesses that provide superior customer service can;
- Charge 10% more for their goods and services
- Grow twice as fast as competitors
- Increase their market share and profits
- To keep existing customers & attract new ones, the business needs to talk and listen to the customers wants and needs
- Exceeding customers’ expectations is likely to develop long-term customer relationships
- Failure to deliver good customer service will drive customers away
- Warranty à a promise made by a business that they will correct any defects in the goods that they produce or in the services that they deliver
- The amount of warranty claims is a good way to assess the effectiveness of operations processes
- Operations managers need to trace the source of the fault in manufacturing and rectify it.
- Warranty claims lead the business to improve transformation processes.
- Quality is determined by consumer expectations, which are used to inform the production standards applied by the business
Quality of Design
- Quality of design comes from an understanding of consumers and their preferences
- Typically, a high-quality design for a good will be clear from the high-grade materials used in manufacturing, the care and presentation of the good, how aesthetically pleasing and functional the good is, and how robust and long-lasting it is
- As high-quality inputs add cost, this will be reflected in a higher price that some consumers may not want to pay
Quality of Conformance
- Quality of conformance is the focus on how well the product meets the standard of a prescribed design with certain specifications (does not have to require high-quality inputs)
- Quality of conformance is a measure of how consistently products achieve compliance with the desired specifications regardless of the standard of the specifications.
- g. a Mercedes Benz vehicle combines very high-quality design with high standards of conformance. A cheap plastic toy is of very low-quality design but if it meets the low-quality design specifications, it would have a high standard of conformance, indicating a certain quality of process.
Quality of Service
- Quality refers to;
- How reliable the service is
- How well the service meets the specific needs of the client
- How timely or responsive the service delivery is
- Quality is a crucial aspect that distinguishes products in the market
- Speed refers to the time it takes for the production and the operations processes to respond to changes in market demand
- As a performance objective, speed aims to satisfy customer demands as quickly as possible.
- Goals for speed include: reduced wait times, shorter lead times and faster processing times
- To achieve these goals requires a reduction in procedural and technical bottlenecks and smooth internal communications
- Dependability refers to how consistent and reliable a business’s products are
- In goods, dependability refers to how long the products are useful before they fail.
- One measure of dependability is measured by warranty claims. A highly durable product is a dependable product. Perishable products can also be dependable if they are of consistent and predictable standard.
- In services, dependability refers to consistency of service standards and reliability. A measure for service dependability is the number of complaints received; the fewer the complaints the more dependable the service
- Flexibility refers to how quickly operations processes can adjust to changes in the market.
- g. changes in market demand cause a pressure on capacity. However, it may take three months for the business to change capacity. Similarly, it can take businesses months to create a new product or extend a product line.
- Time and flexibility are related; the faster the processing time the greater the likelihood that processes can be adjusted quickly.
- Improving Flexibility in Goods;
- Increasing capacity of production
- Using plant and machinery better
- New technologies that increase flexibility and capacity
- Changing product design to create a broader variety
- Improving Flexibility in Services;
- Increasing number of service providers
- Increasing provider’s skill level
- Improving the level of technology used in providing the service
- Customisation refers to individualised products to meet the specific needs of the customers
- Services are generally customised, although aspects of services can be standardised as seen in the fast-food sector.
- A customer orientation to operations might imply that over time businesses would push operations processes towards customisation.
- Variations in product features such as colour, size and functionality offer some level of differentiation between products
- Full customisation is rare and can only be offered when products are created after an order specifying the requirements is received
- The cost of customisation is higher than the cost of mass producing standardised products.
- Only businesses with a product that can be easily adapted tend to customise unless the actual business model is one of a customised approach to all products.
- Cost to the minimisation of expenses so that operations processes are conducted as cheaply as possible
- When a business sets up its operations processes, often the costs incurred determine the price.
- New technologies can help a business to lower costs, use inputs better and minimise wastage.
- A business will also seek to reduce supplier costs, manage inventory to reduce cost and maximise flexibility, and find distribution methods that are most cost and time effective.
Product Design and Development
- Different approaches to product design and development
- 1st à arises from a consumer approach to product development. The preferences and desires of consumers, as identified by market research, determine which products are designed and developed.
- 2nd à arises from changes and innovations in technology that enable new, appealing products to be made because they use advanced technologies, giving products greater functionality
- Important considerations when designing and developing a product are quality, supply chain management, capacity management and cost
- Supply chain management is an important consideration as a new product will draw from suppliers and may extend the range of supplies sought, the timing or the volume of supplies.
- Quality must be considered because in this market-orientated production, the customers will demand particular quality, and certain attributes and features.
- Any new product will have an impact on capacity and may increase the use or range of present resources, or require an investment in new technology and machinery.
- Cost must be considered as it arises from the addition of value through processing. Cost can be determined from the amount of inputs, time and energy used in processing. Value is directly related to cost but also includes the customer’s perception of product utility.
- Product utility is defined as the usefulness and value that a product has from the consumer’s point of view
Service Design and Development
- Services differ from goods in as they are intangible and are also ‘consumed’
- Service design, being customised in nature, has always taken the position of the customer or client as the starting point in design. However, some services do not require interaction with the customer and therefore tend to be largely standardised in nature.
- When designing services, important aspects must be considered. These include what the explicit service will be, what the anticipated implicit service will be and if any goods will be required with the delivery of the service. Cost will be determined once the previously mentioned features have been determined.
- Explicit Service à the tangible aspect of the service being provided such as the application of time, expertise, skill and effort
- Implicit Service à based on a feeling and is therefore intangible. Involves the psychological wellbeing, the feeling of being looked after, that comes with the provision of the service.
- When it comes to design, the service, level of skill, time and expertise must be considered so that as the service is being delivered, the customer knows that they have been specifically catered for. This would give implicit satisfaction.
Services Using Goods
- Sometimes in the delivery of services, goods may be required.
- g. a surgeon performing knee surgery will require swabs, bandages, sutures, medical equipment, an operating theatre and so on
- g. a tutor may need specialised books, access to a networked computer, paper and stationery.
- These additional aspects must be considered when designing and developing a service. The additional aspects can also assist the delivery of a service.
- Supply chain management à involves integrating and managing the flow of supplies throughout the inputs, transformation processes (throughput and value adding) and outputs in order to best meet the needs of customers.
- Logistics is a term broadly referring to distribution but includes transportation (including transportation modes), the use of storage, warehousing and distribution centres, materials handling and packaging.
- Distribution refers to the ways of getting the goods or services to the customer
Transportation and Distribution
- Various modes of transportation can be used and each has its own strengths and weaknesses
- The type of product and the cost of transportation will determine the mode of transportation selected
Storage, Warehousing and Distribution Centres
- Storage à involves finding a secure place to hold stock until it is required
- Storage on inventory is necessary when there are numerous outlets through which stock is sold and when demand is variable and needs a responsive supply chain
- Warehousing à use of a facility for the storage, protection and distribution of stock
- Warehousing Costs;
- Insurance and stock security
- Stacking and moving stock
- Stock subject to damage or theft
- Distribution Centres à strategically located to minimise the time it takes to supply stock to retail outlets
- Important operations strategy and requires mangers to balance the cost of such centres with the time saved in logistics
Materials Handling and Packaging
- Materials handling is an important aspect of the movement and storage of goods, and therefore particular standards and methods of operating need to be applied
- g. delicate glassware needs to be transported and stored carefully, and it needs to be packaged in a way that protects it from damage
- The government has regulations that require dangerous goods be stored and handled in particular ways, and it also requires packaging to be of a particular standard and to carry warnings
- E-commerce involves the buying and selling of goods and services via the internet
Business Sourcing and E-Commerce (E-Procurement)
- E-procurement allows suppliers direct access to the business’s level of supplies
- When stock falls to a pre-determined point, the supplier will supply without a formal request from the buyer.
- B2B (Business-Business) refers to direct access from one business (the supplier) to another (the buyer), allowing the supplier to assess the needs of the buyer and meet them in a timely manner.
- Woolworths uses e-procurement
E-Commerce and the Consumer
- B2C (Business-Consumer) is the selling of goods and services to consumers over the internet, with payment usually by credit card.
- A business that sells direct to consumers via the internet or that allows other internet-based businesses to do so clearly must be able to manage supplies that are affected by this diversity of ordering options.
- In this case, it should be clear that stock levels must be managed well and information exchanged frequently so that accurate stock levels can be presented to prospective customers
- Sourcing refers to the purchasing of inputs
- When determining which sources to use (choosing a supplier), a business will need to do each of the following;
- Assess consumer demand so that the volume of inputs required is known.
- Determine the quality of inputs that match the quality of the products that the business would like to deliver to the market in produced goods
- Assess how responsive (flexible) and timely the supplier is with respect to changes in demand
- Evaluate the cost of supplies/inputs from the supplier against other suppliers offering supplies of similar quality
- Global sourcing refers to businesses purchasing supplies or services without being constrained by location.
- In the supply chain management activity, global sourcing means buying or sourcing from wherever the suppliers are that best meet the sourcing requirements.
- Benefits include cost and expertise advantages, and access to new technologies and resources.
- Challenges include the possible relocation of aspects of operations, the increased cost of logistics, storage and distribution, managing different regulatory conditions between nations, and the increasing complexity of overall operations when sourcing from diverse locations
- Factors that must be considered when assessing whether and when to use outsourcing are:
- Whether to outsource or not
- Favoured geographical location
- Which vendors to use
- The management of the outsourcing contract, the length of contract, the KPIs and service levels are required
Co-Sourcing à Where two parties are fully involved in managing the success of the particular aspect of business.
- Simplification à arises from reducing number of activities performed within the business
- Efficiency and cost savings à access to cheaper labour, regulatory differences and skilled labour in offshore locations all lead to cost savings for business.
- Increased process capability à comes from access to improved technologies and highly skilled labour. Improved process capability means products are produced and delivered to the market with improved levels of service.
- Increased accountability à use of service level agreements (SLAs), which contractually bind the vendor to pre-determined targets on KPIs
- Access to skills lacking within the business à outsourcing to a nation such as India or Vietnam, may find that there is access to highly skilled labour at low cost. This gives a double saving as there is then no need to spend money on training and developing labour resources.
- Capacity to focus on core business or key competencies à the use of outsourcing enables a business to focus on that which it cannot outsource: its vision, purpose, sustainable advantage through innovation and so on.
- Strategic benefits:
- Using outsourcing to get around trade barriers. E.g. global businesses may offshore into different Chinese provinces to become a ‘local’ supplier and hence get around barriers that prevent foreign companies from trading.
- Use of a vendor that outsources for others within the same industry can bring the benefit of expertise gained from outsourcing to competitors.
- Trading in different time zones. By conducting operations during the day and having processing work done overnight by the outsourcing vendor
- Strong partnerships between the business and the outsourcing vendor can lead to the vendor suggesting innovative solutions to the business that may increase the business efficiency and productivity over time.
- Improvements to in-house performance à business using outsourcing and therefore focusing on core competencies can improve in-house performance as it can really focus on making internal changes that reduce cost and improve profitability.
- Payback periods and cost à refers to how long it takes to repay the cost of organising outsourcing and make the required organisational changes.
- Communication and language à issue between the business and the outsourcing vendor. When negotiating to outsource, the business might focus too much on the decision to outsource rather than consider the ongoing relationship with the vendor. This can lead to confusion over expectations. Moreover, as outsourcing often occurs across two or more regions, there can be cultural differences, language differences and differences in the way business issues and problems are managed.
- Loss of control of standards and information security à when a business opts to outsource, it can feel a loss of control over standards and also over how information is used.
- Hierarchies à a business outsourcing may be aiming to eliminate costs associated with hierarchies, yet managing complex outsourcing agreements can create its own hierarchies, thereby maintaining business inefficiency.
- Organisational change and redesign à There may be downsizing, causing the loss of domestic employment. An option can exist for job migration for employees who may be losing work to gain employment in the outsourcing vendor business. However, even if desired, work permits/work visas may prevent this from being an option.
- Loss of corporate memory and vulnerability à Key knowledge of processes and solutions may be lost with the transfer of business processes to outside parties. To counter this, some businesses such as the banks create ‘shadow teams’ to retain corporate knowledge and, if required, processing capability. Business may also require that the outsourcing vendor have strategies in place in case there is a regional crisis (such as an earthquake) that severely disrupts communication and leads to information losses.
- Information technology à There is a cost and time associated with the use and adaptation of IT to the specific requirements of the business and the outsourcing vendor. The cost and time can significantly reduce any financial advantages accruing in the short term with the use of outsourcing
- Leading edge technology à most advanced or innovative technology at any point in time.
- Operations managers can distinguish their operations processes by utilising the best available technologies. This can help businesses to create products more quickly and to higher standards, with less waste, and also help a business to operate more effectively
- Innovative processes and innovative thinking create leading edge technologies. When innovative inputs are created, new products can be made, which can change markets
- Established technology has been developed and widely used, and is simply accepted
- Established technologies are functionally sound and help to establish basic standards for productivity and speed
- In the operations function, established technologies include:
- Barcoding and point-of-sale (POS) data for inventory management
- Robotics for complex and detailed manufacturing
- Computer-aided design (CAD), computer-aided manufacturing (CAM) and computer-integrated manufacturing (CIM) for integrating transformations processes
- Information processing technologies and information technologies (IT) for administration, logistics, input modelling, demand analysis and distribution
- Flexible manufacturing systems (FMS) for transformations processes
- Inventory/stock is the amount of raw materials, work-in-progress and finished goods that a business has on hand at any particular point in time
- Inventory management is crucial in operations management, and the strategies applied to the management of inventory will have a significant impact on transformations processes
LIFO (Last in First Out)
- LIFO à method of pricing inventory assumes that the last goods purchased are also the first goods sold and therefore the cost of each unit sold is the last cost recorded.
- In businesses applying a LIFO approach, the business would apply cost on a last-in-first-out basis, meaning the stock bought last would assume to have been sold first
- If LIFO is used, it may overstate cost and understate gross profit
FIFO (First in First Out)
- FIFO à method of pricing inventory assumes that the first goods purchased are also the first goods sold and therefore the cost of each unit sold is the first cost recorded.
- In businesses that apply a FIFO approach, the business would apply cost on a first-in-first-out basis, meaning the stock bought first would assume to have been sold first
- In a FIFO approach, stock costs may be understated and profits overstated
JIT (Just in Time)
- Just-in-time à inventory management approach which ensures that the exact amount of material inputs will arrive only as they are needed in the operation process.
- A JIT approach allows retailers to display a wider range of products, as they need to store less and can order in response to consumer demand. This saves money, as there are no expensive holding and insurance costs
- A JIT approach requires a flexible operations function, ability to respond quickly to changes in market demand and as well as reliable supplier deliveries
- It is a method of managing the flow and storage of stock
- Quality Control à involves the use of inspections at various points in the production process to check for problems and defects
- A business needs to have defined quality standards and parameters, which need to be broadly applied across the range of products and processes.
- A range of rests and pre-determined quality targets then needs to be designed to assess the quality of produces and processes against standards.
- This reactive approach needs to be balanced against a more proactive approach that encourages a continuous improvement model.
- Quality control management may require that labour be appropriately trained to apply quality standards throughout working processes.
Inspection and Quality Control
- To ensure output meets required standards, many businesses carry out inspections of all or part of the total volume of production.
- In an inspection, the goods or services under inspection are passed as either ‘okay’ or ‘defective’
- In service businesses, an inspection of employee performance may be conducted. E.g. A bank may inspect teller accuracy, courtesy, speed and efficiency; and a supermarket may check operator scanning rates
- Quality Assurance à use of a system to ensure that set standards are achieved in production.
- Involves taking a series of measurements and assessing them against pre-determined quality standards
- Quality assurance is a proactive approach to quality rather than a reactive one. This means that a business emphasises quality in the design of a product and brings it to the market with a level of quality that provides comfort to prospective buyers
- Aspects of quality that are important to Quality Assurance include:
- Notion of ‘fitness for purpose’ or how well a product does what it is designed to do
- Desire to achieve ‘right first time’ so that products do not need to be reworked, which wastes time, energy and other resources.
- A series of quality assurance standards should also be developed in response to the impact of globalisation and the international emphasis on quality
- A widely used international standard is the ISO 9000 series of quality certifications. ‘ISO’ stands for International Organization for Standardization. ISO standards are voluntary but many businesses comply with their requirements to enhance their domestic and international competitiveness
- Continuous improvement may be a monumental breakthrough achieved through innovation all at once or it may be incremental and gradual over time
- The basis of successful improvements is the inclusion of staff into improvement processes. All staff are encouraged to demonstrate initiative and to suggest areas where improvements can be made. In this way, all processes can be improved simultaneously
Total Quality Management
- Total quality management à focus on managing total business to deliver quality to customers
- Ongoing commitment to excellence that is applied in every aspect of business operations
- Build the product right in the first place and you avoid the expense of inspection and the waste of rejected products
- To achieve TQM objectives requires four elements: benchmarking, employee empowerment, a focus on the customer and continuous improvement
- Main financial costs associated with change include:
- Cost of purchasing new equipment
- Cost of redundancies
- Costs of retraining employees
- Costs associated with structural reorganisation of the business, including changes to plant and equipment layouts
Purchasing New Equipment
- The purchase of equipment such as machinery and technology is considered a capital cost. Such costs are usually quite high and the cost can be recouped through use and through depreciation.
- Although the purchase of new equipment can be high, there can be very significant market advantages from making the capital investment. In so doing, a business may find some key operational goals are better achieved, such as:
- Improved processing flexibility
- Improved processing speeds and shorter lead times
- More consistency in production
- Higher overall quality of processing
- Reduced wastage and losses from equipment failure.
- Redundancy payout is the money that is given to employees when they are forced out of work because their job skills are no longer relevant.
- Redundancy payouts are quite high because the value of the payout depends on:
- The length of employment the employee has had with the business
- The level of pay the employee is on prior to being made redundant
- The amount of unused leave that the employee has accrued
- Any outstanding wages
- Redundancy costs can be very substantial because the cumulative effect of the payments that must be made can be high. This is especially the case when many employees are made redundant. This typically occurs when capital, in the form of machinery and technology, replaces labour in what is called ‘capital-labour substitution’.
- Cost arises from change that causes a reorganisation of the business’s internal hierarchy or from the acquisition of technology
- Job roles may change requiring employees to acquire different work skills. This can be achieved through training.
- Also, the purchase of new technology often requires training or retraining on new software
- Retraining may be performed on the job or off the job
Reorganising Plant Layout
- Major changes such as the complete re-engineering of systems often require extensive reorganisation of the layout within the facility. There can be high costs associated with reorganising the plant.
- Costs of Reorganising:
- Transporting, placing and bringing power to the new plant
- Transferring from the old machinery to the new machinery
- Testing new equipment, machinery and technology
- Losses of productivity from staff orientating themselves with new work processes and arrangements
- Inertia à describes a psychological resistance to change.
- A feeling of uncertainty or fear of the unknown, when change is imminent or pressing, can lead people to resist.
- How much resistance would be felt by people who feel like their job prospects may be threatened, who fear loss of career opportunities or who find new technology and equipment intimidating.
- Although inertia is not a financial resistance to change, when people do not change or adapt then the business can feel financial effects of that resistance
Strategies to Overcome Resistance to Change
- Identifying the reasons for resistance to change are important because the resistance needs to be carefully managed if businesses are to successfully adapt to circumstances and situations that change.
- Even though change is continuous, sometimes there is major change that acts like a discontinuity
- Successful managers anticipate and adjust to changing circumstances rather than being passively swept along or being caught unprepared. Such people are proactive — they initiate change rather than simply react to events, rather than reactive — those who wait for a change to occur and then respond to it.
- To be constructive, changes must:
- Occur at a pace at which they can be absorbed by, and integrated into, the business
- Be evaluated thoroughly to assess their overall impact. Poorly managed changes normally result in employee resistance, tension and lost productivity.
- Be introduced into a workplace culture that supports employee participation.
Change Management Strategies
- Identify the source(s) of change and assess whether there is a need to accommodate change through adjustments to business processes
- Generally sources of change are external and the business is responding to the threat that change can pose
- Lower the resistance to change through communicating with employees about the need for change and getting widespread support for the change.
- If staffs are included in the process of creating a culture of change and setting goals, they will generally be more supportive.
- Adapting to change through overcoming the financial and psychological resistance can help businesses to create sustainable competitive advantage even when faced with what appear to be threats.
- Global sourcing à refers to businesses purchasing supplies or services without being constrained by location
- Involves a business sourcing inputs from the cheapest regions, manufacturing where it’s cheapest to do so and obtaining finances from countries with the lowest interest rates
Economies of Scale
- Economies of scale can lead to significant cost saving in various aspects of the business enterprise
- Strategy to reduce production costs by increasing in size
- A business can also achieve productions economies of scale
Scanning and Learning
- The business must identify the global environment and the critical global trends that may impact on the operations
Research and Development
- Innovative strategy associated with the creation of new products and the improvement of existing ones
- R&D Can:
- Extend the product cycle
- Open up international markets
- Business reputation as a leading innovator
- Lead to quality improvements
- Reduce costs
- Provide higher profit margins