You are on page 1of 12

Operations

The role of operation management


Operations management is concerned with those business activities that plan, schedule
and control the business inputs that are transformed into finished goods and services
Operations management is all about managing customer satisfaction
It is the aspect of the business concerned with meeting customer needs
The strategic role of management
The strategic role of operations management is to allocate resources in such a way to
achieve business goals in a dynamic and turbulent environment. The strategic goals are to
improve:
o Productivity
o Efficiency
o Quality of outputs
Cost Leadership
A cost leadership strategy aims to create a competitive advantage by having the lowest cost
of manufacturing the good or delivering the service in the industry. The products are the
basic, no frills type with fewer features.
Low costs can be achieved through:
Economies of scale
Access to cheaper materials (inputs)
Crucial that management has very tight control over manufacturing, supply and overhead
costs. Overhead costs are the expenses that are necessary to the on-going functioning of
the business
Product Differentiation
A product differentiation strategy is concerned with developing products that are different
from its competitors because they have benefits or attributes a customer values. It can be
achieved through:
Better quality
More features and application
A differentiated product can command a higher premium price in the market as customers are
attracted to the product and build up brand loyalty
Goods and services in different industries
Goods
Physical, tangible
More capital intensive
Hard to modify once manufactured
Services:
Intangible
More labour intensive
Easier to change and customise
Interdependence with other key business functions
Specialisation: Where the business is separated into different functions each of which is
highly skilled at its specific task or role
Interdependence: Where the different parts of a business must rely on each other to
perform their task or role

There is a constant flow of information between operations and the other key business
functions: finance, marketing and human resources.
The finance manager will create budgets and make funds available to purchase inputs,
equipment, bills
Market research identifies the nature of goods consumers desire and uses marketing
strategies to encourage purchases
Human resources will ensure that there are enough employees with the appropriate skills.
Concerned with the way it selects, trains and rewards its employees
Globalisation
Globalisation provides opportunities for a business to source its inputs of components parts,
finance, raw materials and labour from a global market, whilst at the same time, selling
finished product or service in the global market
It has created many opportunities for Australian businesses to expand overseas:
1) Opportunity to reduce costs through establishing a global supply chain
2) Access to global market to sell outputs of operations
Globalisation defined as the integration and interdependence of different economies
creating a global market
Technology

Technology is the knowledge of how things are done, including both software and hardware
component
When making decisions about technology, businesses consider: finance available for the
technology, the technology that the competitors use and how long will it take to introduce

Robotics

Robotics refers to the development of robots which are programmable machines used to
carry out a specific task or function

CAD & CAM:

Computer aided design (CAD) is computer technology that allows architects, engineers and
designers to draw and adjust 3D designs using a computer
Computer aided manufacture (CAM) is computer technology that directly links the design
process to the manufacturing process using computers
o Increased efficiency, fewer errors, fewer staff

Quality expectations

Quality is defined as meeting or exceeding a customers expectations


Customers will have certain beliefs about:
o Durability: how long the product lasts given a reasonable amount of use
o Reliability: how long the product functions without needing maintenance or repairs
o Fit for purpose: how well the product actually does all the things advertising claims
Operations aim to maximise quality and consumer satisfaction

Cost-based competition

Cost based competition is a low cost strategy concerned with driving down the costs of
warehousing and transportation, and spreading overhead costs. Costs advantages can be
achieved by:
o Outsourcing
o Using cheaper inputs
o Lowering overhead costs

Overhead costs are the ongoing costs of a business such as rent on premises, electricity,
wages and so on.
It is concerned with providing customers with the best value possible for their money

Government Policies

Government policies impacting on the operations function include regulation, subsidies


and grants, and taxes and tariffs that encourage or discourage aspects of operations or
ways the operations functions are conducted

Legal regulations

Legal regulations are the laws that regulate the way things can be done. Legal regulations
are so important because of the potentially dangerous aspects associated with the use of
equipment
It is a legal requirement to provide a safe working environment. Most responsible
operations functions go further by developing a culture of safety. The term culture in
business refers to the attitudes and values in the business

Environmental sustainability

Environmental sustainability is concerned with air, water, waste and environmentally


sustainable products and operation practices
Refers to the development and the use of methods of production that allow resources to be
used by producers today without limiting the ability of future generations to satisfy their
needs and wants
Customers need to be aware of the cost and disposal of excessive packaging
Society will have a positive attitude towards businesses that are environmentally friendly
and good corporate citizens

Corporate social responsibility (CSR)

Obligation on a business to act in a positive way to have a positive social impact e.g.
donating to charity, reducing environmental impact
CSR is not a legal obligation however if a business is viewed as socially responsible, public
goodwill will be positive. If people see a business not complying with CSR its reputation will
fall, harming sales
Include:
o Buying environmentally friendly inputs
o Using green forms of energy
o Limiting pollution

The difference between legal compliance and ethical responsibility

A business must obey laws and regulations. For operations management these concern
safety, quality and environmental impact
If laws are breached they will face punishments. These may be fines, imprisonment or loss
of reputation
Ethical responsibility refers to the obligation for people in business to act in a way that is
viewed as morally right. This can be difficult as ethics change over time and there is no
universal consensus on what is ethical
If a business buys inputs abusing human rights, it is not breaking any laws if procedures
are followed. However customers may view this as ethically irresponsible

Inputs

Transformed resources

Are inputs that are changed or converted into something else as a component or a finished
good or service
Three main types are: materials, information and customers

Materials:

are the raw ingredients, components, parts and supplies (gas and electricity) used up in
operations

Information:

is stored in files, in computer programs and in databases. The information is used to make
plans, execute operations and keep controls over material inputs
An effective information system enables the business to be proactive and not just reactive
to external and internal changes
Information sources may be internal or external
o External: provided in government reports, trade journals, market research
o Internal: provided in the companies report, production date, date on worker
performance

Customer

Consumers can be changed in many ways. Doctors and hairdressers transforms how
customers feel and look
Customers are also an input because it is their need and desires that drive the operations
of a business

Transforming resources

These are resources that remain in the business and are applied to the inputs to change
them to add value. They are the resources that assist in the value adding activities

Human resources

Many businesses recognise that people are their greatest asset because they skill,
knowledge, capabilities and labour of people is applied to materials to convert them into
goods and services

Facilities

Are the buildings, land, equipment and technology the businesses use in operations.
Facilities remain in the business after materials have been used up. Machinery and
equipment will be used to physically change the shape and features of materials

Transformation process

The process that change inputs into outputs

The 4Vs
Volume

One of the biggest influences on decisions about the transformation process is much is to
be produced. Volume is the actual number of products or services produced by the
operation. The following are some issues that need to be considered:

Machinery: large volumes of production of one good makes expensive machinery cost
effective as costs are spread over many units
Suppliers: bulk discounts may be given by suppliers for bulk orders. This may entice
businesses to use a grade of inputs
Economies of scale: the more a business produces, the cheaper the cost

Variety

Refers to the number of different models and variations offered in the products or service
If there is no variety of output a mass production method such as assembly line may be
used
A business produces one standard product but with some variation
Standard products with a wide variety means a business will have a higher level of
customisation, flexibility and be more labour intensive

Variation In demand

When there is steady levels with no variation, there will be high volume and capital costs
Relates to if demand levels are:
o Constant: if this is the case it easier to manage the process, machinery
requirements, workers and materials will be predicted
o Seasonal: fluctuations in demand occur throughout the year. Operations managers
have to take trends into consideration when planning and make products
o Unpredictable: this is very difficult for managers as they dont know when machines
should be running or when materials are needed

Visibility

Operations will also be influenced by the degree to which customers can see the
operations in action
Service based operations will have a high level of visibility.

Scheduling and sequencing

Scheduling and sequencing tools are used to identify all steps in the operations process
and organise them into the most efficient order to complete

Gantt Chart

Record the number of tasks involved in each particular project and the estimated time
needed for each task, but will not show the relationship between each of the tasks
It allows the business to compare the actual progress to the original expected progress
Advantages: simple and straight forward
Disadvantages: not good for complex projects with a lot of activities that occur at the same
time

Critical path analysis

A network diagram depicting the longest path. Allows managers to distinguish between
critical and non critical tasks and reallocate and reschedule resources and activities to
keep a project on time
Advantages: clearly shows how events are interrelated and which are most important in
terms of time
Disadvantages: network diagrams can be confusing and calculations can be incorrect

Technology

Technology is a key input into the operations process


The machines and equipment that actually create or deliver the product are called process
technology
Product technology is quite different and this is the innovation in the products themselves
Technology can give the business more flexibility as it:
o Allows the business to respond to changes in the market more easily e.g. changing
volumes and variations
o Allows the business to apply software modelling program, the internet and wireless
communication to the process

Task design

Task design is the way overall transformation process is broken down into manageable
activities
Task design is concerned with working out the most efficient and effective transformation
process.
Once the overall task is broken into manageable bits the task design focuses on the skills
and equipment needed to do each task
Task design allows ongoing analysis and adjustments in each activity to ensure continuous
improvements in productivity

Process layout

Process layout refers to the physical location of the transforming resources


The layout determines the way the transformed resources (materials, information or
customers) flow through the operation.
the objective of process layout is to allocate the tasks needed to transform the resources
the most efficient and effective way
Product layout: where a product moves from station to station such as in a car assembly
line
Products layout are used for assembly line manufacturing of large volumes of goods

Monitoring, control and improvement


Monitoring

Monitoring refers to collecting information about the performance of operations process


The purpose of monitoring and control is to ensure the operations process runs efficiently
and effectively producing the goods and services it was designed to do

Control

Control is the process of comparing actual output with what was planned
Control is concerned with making the adjustments when things go wrong

Improvement

Improvement: is the function that suggests that adjustments and readjustment may need
to be made to day to day activities in the short term and even the entire operations
process in the long term
Continuous improvement is the continuous search for small incremental steps that
improve the operations function
One of the most common strategies is total quality management (TQM).
This is the approach that puts improvement, particularly improving quality, at the core of
every activity in the business

Outputs

Outputs are the final product or service that a business offers to customers. They may be
the final services or educated people (education)
Outputs in banking are home loans and investments. Outputs in education are socially
responsible young adults

Customer Service

Customer service refers to the customer and product or service provider interactions
It is concerned with things like resolving problems the customer is experiencing, answering
their questions effectively and making the interaction between customer and service
provider pleasant
Customer service is an integral part of what is generally called customer relationship
management
Customer relationship management is all about understanding customer needs and
working out ways to meet those needs

Warranty

A warranty is a contractual agreement between the manufacturer of the product and the
customer
Implied warranties are unwritten promises that are created by common law where the
customers have to get fair value for their purchases
Under Australian law, all goods must: have a level of quality, be suitable for the job, match
the promotion and be free from defects
Businesses must comply this under the Fair trading Act 1987 (NSW) and the Competition
and Consumer Act 2010 (Cth)

Chapter 4: OPERATIONS STRATEGY

The group of people who judge the operations functions are called stakeholders and
aspects of operations performance they are judging are called performance objectives
Stakeholders are those groups, such as shareholders, employees and suppliers on whom
business decisions impact

Performance objectives
Quality

Having the highest quality goods and services


Good quality prevents costs by product recalls and repairs

Speed

Speed refers to the time difference between a customers request for a good or service
and when it is actually received
This relates to productivity
CAD and Cam can increase the speed without compromising quality
A risk of increasing speed of operations is that the quality might suffer

Dependability

Dependability means consistently good in quality or performance. This is a key


performance indicator for transport businesses such as couriers, bus and ferry and general
delivery services

Flexibility

Flexibility is the ability to change things like the products and services the business offers,
the mix of products, the volume of products manufactured and the speed at which they
are delivered.

Customisation

Customisation is the ability to modify a standard product to meet the individual needs of
the customer

Costs

The cost of producing goods is influenced by the cost of the inputs, and this varies greatly
in different businesses

New product or service design and development

New products must be developed for a business to maintain a competitive advantage


New product design is a lengthy, expensive process and few products make it to the final
production from the large number that may be initially developed
Many businesses do not have the financial resources, knowledge or time
The new development process is as below:
o Concept development: many ideas are discussed and assessed
o Cost benefit analysis: economic analysis to determine if the product is worth
pursuing
o Production design: engineers design the product, work through technical difficulties
and create features
o Product testing: feedback from testing and market research

OR

The new alternative development process is as below:


o Concept generation: generating ideas for the product
o Concept screening: is about evaluating the concepts and deciding which are worth
developing and which should be dumped
o Preliminary design: is the first attempt and setting out specific product components
and setting out the processes that will make the product
o Evaluation and improvements: is the stage concerned with carefully evaluating the
preliminary design and trying to improve it before it is tested in the market place
o Prototyping and final design: the stage is to test the improved design in the market
place before taking the risk of full scale production

Supply chain management

Supply chain management refers to those activities that procure materials and services,
transform them into products and services and deliver them to customers
Lead time is the time it takes for a supplier to provide its customer with the goods ordered

Logistics

Logistics is the crucial aspect in the supply chain management


Logistics management is concerned with all the business activities that acquire the
materials, moving and storing them.
Many businesses outsource the logistics function to businesses that specialise in this
function

The goal is to achieve an efficient steady flow of material through the supply chain

E-commerce

E-commerce is the use of the internet to buy both goods and services
Electronic data exchange (EDI) is the use of computers, barcodes and scanner systems to
monitor individual stock items and keep accurate records of inventory levels
E-procurement refers to electronic methods, primarily through the internet used in the
purchasing process

Global sourcing

Global sourcing is where products are acquired outside the home country

Advantages:

Significant savings in costs


More efficient
Better access to IT, technology and equipment

Disadvantages

Loss of control over quality, reliability and even costs


Slower lead times and response to changes in the market

Outsourcing

Outsourcing is the term used when goods and services that would normally be part of the
business are obtained outside the business

Advantages

Reduce costs: purchasing components from specialists businesses can be significantly


cheaper
Access top expertise: large suppliers may provide innovations to improve the product that
are not available in-house
Access to the best technology: the big specialist companies have the best technology
where a smaller business might be left out with out-dated technology

Disadvantages:

Increased transportation costs: the cost of delivering the outsourced product from a
supplier can be substantially high
Loss of control: problems can develop because the managers outsourcing the activity have
no control over the manufacturing process
Language problems can be significant: language different from ones own can make
communication difficult

Technology

Leading edge technology: the very latest way of doing something


Established technology: is the way something has been done for some time

Inventory management

Inventory management is often called stock and refers to the store of transformed
resources waiting to be processed

Advantages of holding stock

Stock is ready to use


No need to rely on suppliers

Disadvantages of holding stock

Cost of storage
The stock can become obsolescence

LIFO (Last in first out)

The stock purchased the most recent is sold first


LIFO: last stock delivered into the business is the first used and sent out
This method can be used for goods that have no used by date such as machinery
Advantages: the newer the more expensive it can be sold for

FIFO (First in First Out)

Assumes that the first stock that has been purchased is the oldest and will be sold first
FIFO is used for perishable items
Cost of goods sold will be lower and income higher

JIT (Just in time)

The aim of JIT is to hold as minimal stock as possible and only bring in stock from suppliers
as required
Advantages: reduces costs of storage, increases the liquidity of working capital, reduces
the change of perishable stock spoiling

Quality management

Quality management is ensuring that the outputs of the business are consistent, durable
and reliable

Quality control

Quality control is the sampling technique that checks the quality of an item in the
transformation process
Is concerned with minimising the variations to defined limits and then building systems
and procedures to ensure those limits are never exceeded

Quality assurance

Quality assurance involves putting into place systems and procedures that make sure an
error or fault will not happen
Quality assurance is important as it provides managers with the confidence that they can
produce a quality product all the time

Quality improvement

There are many approaches to quality improvement, but the most common is total quality
management (TQM)
The total quality management (TQM) approach to quality relies on continuous
improvement in all functional areas not just operations (Kaizen)
Improvements in quality can be measured using key performance indicators (KPIs)

Overcoming Resistance to Change


Financial Costs

Successful managers plan the use of the business financial resources in order to overcome
resistance to change
Part of the plan might involve explaining to shareholders why a greater proportion of the
business profit need to be reinvested in the business as retained profits rather than
distributed to shareholders as dividends

Purchasing new equipment

There are several strategies that can be used to overcome the resistance to change
caused by the cost of purchasing new equipment
The first is to outsource the components that would be manufactured by that equipment to
businesses that have invested in the latest technology
Leasing is another strategy where the equipment is owned by a financier and the business
has the right to use it in return for monthly payments

Redundancy payments

The most effective strategy to overcome the resistance to change caused by redundancy
payments is to go to the shareholders for additional cash
This basically is asking shareholders to contribute additional capital in turn of increasing
productivity and improving the business competitive position
Another strategy is to plan for redundancies beforehand so the necessary finance can be
raised over a longer period of time

Retraining

the most effective strategy to overcome the resistance to change caused by a lack of
training is to change the culture in the business
a strategy to change the culture should be based on ensuring as many employees as
possible embrace change
this can only be achieved by continuous training so that there is always improvement in
everything that is being done

Reorganising Plant Layout

Managers of many manufacturing businesses are reluctant to replace equipment that is


still working well

Inertia

Inertia is the lack of resole or energy to do something about a problem


There is only one effective strategy to overcome inertia and that is to change the
management team
Inertia is the reason the successful restructuring of businesses require new managers

Global factors

Global factors are concerned with finding ways to improve the competitive position of the
business in a global environment

Global Sourcing

Global sourcing is where products are acquired outside the home country or where
components or products are manufactured outside the home country

Economies of Scale

Economies of scale is where the more you buy the less you have to pay essentially it is
buying in bulk

Scanning and learning

Scanning is being aware of the changing environment


o Scanning is often called acquisition
o The most aspect of scanning is to decide what changes in the environment need to
be monitored and where those changes impact on their business
o Another aspect of scanning is interpretation
o It is concerned with working out what the data means. Managers will need to decide
to what extent they need to make changes in their goals and strategies when they
pick up changes in the global environment
Learning is concerned with taking action to adapt to the way things are done in the
business to regain a competitive position
scanning and learning should be a continuous proves if the business wants to maintain or
improve a competitive position
continuous improvement is needed to adapt to the constantly changing technology, the
actions of competitors and the broad global factors that make up the external environment

Research and Development

Research and development is the business function concerned with developing new ideas
and ways of doing things
These new ideas are the basis for new products and process design
It is concerned with taking advantage of things like new materials and new knowledge of
ways things can be done to develop a product
The business that first adopts this usually has an advantage

You might also like