Professional Documents
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OPERATIONS
ROLE OF OPERATIONS MANAGEMENT
OPERATIONS AND THE CUSTOMER FOCUS
Operations refer to the business process in the production and transformation of
goods and services/ involve the process of organising and producing outputs.
The main idea of production is the transformation process, which refers to the
conversion of inputs (resources) into outputs (goods and services). Value adding
is the creation of extra or added value as inputs are transformed into outputs. It
involves the process of adding value through each step of the transformation
process in order to produce the desired output.
There are a range of focuses a business can undertake when conducting
operations, most of which placing the customer and their needs/desires at the
foremost. These include:
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Minimising waste
Reflecting fair value for labour
Operating at a lower cost to maximise profit
Integrating environmental awareness
Reflecting the needs of consumers
Since the needs and tastes of consumers vary over time, a business may
be required to REFLECT CHANGES TO THE NEED OF CONSUMERS
through creating innovative products.
The strategy a business will adopt depends on a range of factors such as the
actions of competitors suppliers and the demands of consumers. These strategic
decisions are intended to improve:
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Productivity
Efficiency
Quality of Outputs
Revenue or income
Costs or expenses
COST LEADERSHIP
There are numerous expenses a business can incur when undertaking operations
processes (Input costs, labour costs, Processing costs, Inventory costs (Holding
goods in stock), Quality Management costs). Therefore an intrinsic aspect of
strategic operations management involves cost leadership.
Cost leadership involves aiming to have the lowest costs or to be the most pricecompetitive in the market (through finding ways of minimising cost). A key
aspect to cost leadership is that although trading with the lowest cost, the
overall business should still be profitable.
One aspect of cost leadership (achieving lower costs) arises from a business
creating economies of scale. ECONOMIES OF SCALE refer to cost saving
advantages gained/created by firms due to a decrease in per unit production
costs, leading to increasing returns to scale. These cost savings come from being
able to purchase lower cost per unit of input and efficiencies created from the
improved use of technology and machinery, decreasing production costs in the
long term.
GOODS/SERVICE DIFFERENTATION
A Second key strategy applied by operations managers is that of product
differentiation. Products may be classified as either goods or services. The main
distinction between a good and a service, is that goods are tangible whilst
services are intangible. Generally services only come into being as the result of a
need for that service, whilst goods already exist even before a person seeks
them.
PRODUCT DIFFERENTIATION
Product differentiation means distinguishing products (goods or services) in some
way from its competitors, in order to achieve a greater market share.
GOODS
Goods can be differentiated in a number of ways. Sources of differentiation in
goods include:
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The management of operations within any business is shaped and differ by the
types and ranges of goods and services that are produced.
GOODS IN DIFFERENT INDUSTRIES
Operations decisions vary for goods dependent on whether they are
standardised or customised.
STANDARDISED GOODS goods that are mass produced, usually on an assembly
line. They are uniform in quality and are generally produced with a production
focus. Eg. Milk, Water
CUSTOMISED GOODS goods that are varied according to the needs of
customers. They are usually produced with a market focus rather than a
production focus. Eg. The shift away from CDs to the use of musical downloads
such as Itunes.
The layout of operational processes varies dependent on whether goods
produced are differentiated. A businesses operational process in the production
of goods are strategic as they require a high degree of cross-functional
interaction and coordination across the 4 Key business functions
Goods may also be classified as either perishable (Limited life span as they are
consumed quickly) or non perishable (More Durable).
Eg. Grocery sector is dominated by perishable goods such as food whilst
household and business goods are non-perishable.
Therefore the operational processes will vary between sectors that produce
perishable goods and those that produce non-perishable.
PERISHABLE GOODS AND OPERATIONAL PROCESSES
Integrate the following factors:
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SELF-SERVICE
Means encouraging the customers to take the initiative to help themselves. Eg.
Financial service sector encourage people to make their own transaction online.
In this way a business can achieve customisation if a customer requires help.
the same business goals as the other areas and work in a coordinated and
collaborated/overlapping way to achieve these goals (KBFs work best).
Each function area depends on each other if it is to perform at a capacity.
Eg. In a situation where insufficient finance in a company exists, the money
generated is limited and as a result they arent able to cover the marketing costs
of the business in terms of advertisements, hence the success of the business is
restricted.
INFLUENCES
Background Info.
To successfully manage the operations function, managers must deal with a
range of external influences that impact on operations.
Influences can cause the business to undergo change in which responsiveness to
change and continually adjusting to external factors is a constant issue.
Influences can also be a threat and opportunity in terms of the operations
process.
Influences:
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Globalisation
regulation
Technology
Environmental sustainability
Quality Expectations
Cost-based competition
Government policies
- Legal
-
GLOBALISATION
Globalisation refers to the increasing financial and economic integration between
economies around the world, through the removal of trade barriers between
nations. Globalisation is characterised by a high degree of transfer of capital,
labour, intellectual capital and ideas, financial resources and technology.
Globalisation provides a source of market opportunities, and allowing for the
sourcing of cheaper intermediaries (Intermediate goods/production materials)
through high degree transfers.
involves a business taking the product of a competitor that has already been
released into the market, and taking it apart to see how it is made. From this the
imitating business then tries to make their own version of the product from the
component parts, but does so using different materials (cheaper materials) and
at a lower cost.
A business that innovates creates novel (new) products, and in doing so leads
the market. Innovations may improve an existing product or it may lead to an
easier way of life through the creation of products that solve a problem in a way
not previously done.
Innovation affects operations processes by differentiating products and therefore
making them new in the market. This means the supply chain will need to be
shaped around the need for innovation, that doesnt provide similar supplies to
other competitors within the same market.
TECHNOLOGY
Plays a very important role in the application of the operations function of
business.
Defined as: The design, construction and/or application of innovative devices,
methods and machinery upon operations processes.
Eg. Wide range of technologies both personal and household (Mobile phones,
security cameras) enabling people to communicate more easily and enable
improved processes in the operations function of a business.
Technologies can be both applied to, and integrated with, the range of processes
that characterise the operations function in business. At an administrative level,
technologies assist with organisation, planning and decision making and are in
control of operational processes. At a processing level, technologies are used in
manufacturing, logistics (ensuring the right items are in the right place at the
right time) & distribution, quality management, all aspects of inventory
management, supply chain management and sourcing.
QUALITY EXPECTATIONS
One of the key goals of the operations function of a business is quality. Quality
refers to how well designed, made, functional the goods are and their degree of
competence with which services are organised and delivered.
The expectations of quality is a significant influence on the operations function of
a business. Within the operations function, quality informs all operations
processes. The expectations that people have of businesses determine the way
that products are designed, created and delivered to customers, hence the
operations function must follow levels of excellence.
QUALITY EXPECTATIONS (Goods)
COST-BASED COMPETITION
Significant influence on operations management arises from the actions of
competitors and the way competitors price their product. In highly competitive
markets, cost-based competition can shape the operations function in competing
businesses.
Cost-based competition Derived from determining breakeven point and
applying strategies to create cost advantages over competitors (reducing costs
maximise profits).
COST BASED COMPETITION AND OPERATIONS MANAGEMENT
Feature of OPM when businesses bring a cost leadership approach to the
operations function (Focus on reducing costs to a minimum whilst maintaining
profit margins).
Businesses apply cost leadership to reduce Fixed costs (Dont change regardless
of the business activity level), & Variable costs (Vary according to business
activity level-production level).
Businesses may also apply cost leadership approach in terms of:
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LEGAL REGULATION
A very significant external factor that affects operations is that of laws and
regulations, which a business must abide by. The range of laws with which a
business needs to comply with is referred to as compliance.
The expenses associated with meeting these standards or complying with these
laws and regulations are referred to as compliance costs.
Relevant laws with which a business needs to comply with, in regards to
conducting the operations function include:
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ENVIRONMENTAL SUSTAINABILITY
Environmental sustainability means that business operations should be shaped
around practices that consume resources today without compromising (limiting)
access to those resources for future generations.
The two aspects to Environmental sustainability are the sustainable use of
renewable resources and the reduction in non-renewable resources.
As a result of the need to integrate a long-term sustainable view of resource
management, in conjunction with increasing climate change awareness, many
businesses act to lower their carbon footprint (Amount of carbon released as
part of the production process)
LEGAL COMPLIANCE
Complying with legislation costs a business money (compliance costs). In
demonstrating ethical responsibility, a business is demonstrating that it values
something more than just earning maximum profits because it is allocating
money over and above what it costs to comply with the law.
Compliance falls in a number of areas for business:
*Labour Law compliance (Minimum wages,award wages)
*Environmental and Public health compliance (Regulations stopping
dumping)
*Business licensing rules
*Taxation (Any levies, duties or taxes imposed on profits)
*Trade practices and fair market dealings (Address issues of market power)
*Human Rights (Rules restricting Discrimination)
Sometimes Businesses may seek to avoid compliance/compliance costs by using
outsourcing as a business strategy. Outsourcing refers to the contracting out of
particular key business functions to an outside specialist in order to undertake
one or more key business functions.
Outsourcing done both onshore and offshore
Onshore outsourcing involves the use of domestic businesses as the outsourcing
provider
Offshore outsourcing involves taking the activities to a provider in another
country, to therefore take advantage of regulatory differences between nations
(Cheap labour).
(Raises ethical issues concerning
business behaviour)
ETHICAL RESPONSIBILITY
Involves business going beyond the law and taking into account broader social,
community and environmental concerns.
Ethical business enterprises recognise that variation in laws between nations can
undermine social and ethical responsibility. Therefore, they may seek
independent sources, such as the ILO and lobby groups, to create ways of
applying ethical standards across the operations function.
INPUTS
The common direct inputs are labour, energy, raw materials, machinery &
technology (capital equipment).
-
Labour: Requires human effort- both mental and physical. Jobs in the field
of business operations include those in the areas of sourcing and supply
chain, technical support and maintenance for machinery, inventory
management and control, quality processes. Production, logistics,
distribution. Clearly labour is crucial to all aspects of operations.
Energy: in the form of electricity or fuels- which can be converted into
heat, movement, light, sound or other forms of energy, in an essential
INPUT CLASSIFACTION
Transformed resources (what we change) are those inputs that are changed or
converted in the operations process. The transport resources are:
-
Internal Information
Internal information comes from within the business and is gathered from
internal sources such as financial reports, quality reports and internal key
performance indicators (KPIs) such as lead times, inventory turnover rates
and production data. Internal info acts as a transformed resource when it
informs processes and creates process improvements.
Customers are generally thought of as being relevant to outputs. However,
customers become transformed resources when their choices shape inputs. A
consumer orientation takes the preferences and interests of consumers as the
starting point to production process.
Customer relationship management (CRM) refers to the systems that
businesses use to maintain customer contact. CRM software can be used to
improve customer service, increased competitiveness, and identify changes in
consumer tastes.
TECHNOLOGY
OFFICE TECHNOLOGY
Administrative technologies include a range of computer and communications
devices. A number of advancements have occurred in terms of office technology,
most notably with regards to telecommuting.
Telecommuting Refers to travelling to work electronically ie. Working from
home and emailing work into the office
MANUFACTURING TECHNOLOGY
Key manufacturing technologies are robotics, computer-aided design (CAD) and
computer-aided manufacturing (CAM).
*Used to speed up processes and enable further utilisation of raw materials
- Robotics are used in businesses where a programmable machine capable of
doing several tasks is required in conjunction with high quality and minimum
waste.
Allow for high precision work for longer periods of time than human labour, in
conditions that are dangerous. However, robots are expensive and hence
unaffordable for most small to medium scale manufacturers.
TASK DESIGN
Refers to classifying job activities so that employees can successfully perform
and complete the task. (Essential aspect of Transformations processes)
Each individual task is analysed and broken down into separate steps and
allocated to machines and employees with the appropriate skills and knowledge.
Task design allows ongoing adjustments in each activity to ensure continuous
improvement in productivity.
Involves job analysis an can be done after a skills audit has been conducted.
SKILLS AUDIT
Formal process used to determine the present level of skilling and any skill
shortfalls that need to be made up either through recruitment/training.
PLANT LAYOUT
Plant (Office/Factory) layout involves planning the arrangement of workspace to
streamline the transformation process and ensure effectiveness. The method
adopted by managers is dependent on the type of manufacturing operations
conducted by the business in accordance with the level of production. The
alternative layout options are:
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Process layout
Product layout
Fixed position layout
Lead times
Defect rates
IT and Maintenance costs
CONTROL
Occurs when KPIs are assessed against predetermined targets (whereby business
performance is closely measured & regularly scrutinised indicating issues) and
corrective action is taken if there is a discrepancy between performance and
goals.
Control requires operations managers to take corrective action, in terms of
making changes to the transformation process (Redesigning facilities
layout/Adjusting level of technology) in order to correct the problem.
IMPROVEMENT
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OUTPUTS
Outputs refer to the result of business efforts the good or service delivered to
the customer
A business may produce a range of different types of outputs; Eg. Mitsubishi
separates its vehicle manufacturing operations from its customer service
operations.
Obvious type of output is the good or service produced.
There however exist more subtle outputs including
-
Customer service
Warranties
CUSTOMER SERVICE
Refers to how well a business meets and exceeds the expectations of customers
(in terms of the final product delivered to the customer). The better the
customer service, the greater the market share and ability to grow twice as fast
as competitors. Intangible output that requires extensive contact with customers.
Features:
-
WARRANTIES
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If warranty claims occur, a business can identify issues that exist in the
production process and use this information to improve transformation
processes.
OPERATIONS STRATEGIES
Operations strategy refers to the decisions which affect the long-term
capabilities of the operations function. The aim of operations strategy is to
manage and use the resources of the business to achieve and maintain
competitive advantages in the marketplace. (In turn)
OVERVIEW
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Performance objectives
- Quality management
New product or service design and development
resistance to change
Supply chain management
factors
Outsourcing
Technology
Inventory Management
- Overcoming
-Global
(Goals are set in order to become more efficient, productive and profitable)
They establish standards which can be used to evaluate the performance of
operations
The following are the performance objectives:
QUALITY
-
Quality refers to how well designed, made, functional the goods are and
their degree of competence with which services are organised and
delivered. (Crucial aspect that distinguishes products in the market)
Quality of design
Quality of conformance
Quality of service
QUALITY OF DESIGN
Refers to how well a good is made or a service is delivered. Design determines
the inputs and how the transformation process will be arranged, and the
production performed. A high quality design will be typically:
SPEED
Refers to the time it takes for the production and the operations processes to
respond to changes in market demand.
DEPENDABILITY
Dependability, as a performance objective, refers to how consistent and reliable
a businesss products are.
Regarding goods, Dependability refers to how long the products are useful before
they fail (Durable). One measure of dependability is measured by warranty
claims.
In terms of services, Dependability refers to consistency of service standards and
reliability. A measure for service dependability is the number of complaints
received.
FLEXIBILITY
Flexibility refers to how quickly operations processes can adjust to changes in
market.
Changes in market demand causes a pressure on capacity, thus a business
needs to meet the increase in demand and thereby avoid a stock-out (Business
runs out of stock).
For goods, flexibility can be achieved through:
-
CUSTOMISATION
COST
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Over time, businesses seek to become more efficient and thus allocate cost
better.
Ways of reducing (Operational) costs:
-
Moreover, a business will also seek to reduce supplier costs, manage inventory
(reduce cost), maximise flexibility and find distribution methods that are cost
effective.
Supply Chain Management involves the management and flow of supplies (Raw
materials, Information & Finance) throughout the inputs; transformation
processes (Value adding) and outputs to best meet the needs of customers.
-
SOURCING
SOURCING, in the context of SCM, involves the purchasing of inputs for the
transformations process
4 recent trends in sourcing
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GLOBAL SOURCING
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DISADVANTAGES
E-COMMERCE
-
Involves the buying and selling of goods and services via the internet
B2B refers to direct access from one business (supplier) to another (buyer),
allowing the supplier to assess the needs of the business and meet them in a
timely manner.
Example: Intel selling microprocessors to Dell
B2C refers to the selling of goods and services to consumers over the internet,
with payment usually by credit card
Example: Agoda.com Sells accommodation to travellers on behalf of hotels.
LOGISTICS
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***
Distribution: Refers to the ways of getting the goods or services to the customer
The type of product and the cost of transportation will determine the mode of
transportation AND distribution selected
STORAGE involves finding a secure place to hold stock until it is required, whilst
the type of storage (Aim to preserve product) (Short and long term) is dependent
The premises
stacking and moving the stock
carrying excess stock or redundant stock if not sold
losses from theft or reasons not accounted for
stock subject to damage (e.g. water damage) if not correctly stored.
Despite the costs associated with warehousing, it can be very useful as a storage
point for durable items that may need to be transported with little notice
Distribution centres are strategically located so as to minimise the time it take to
supply stock to retail outlets. Demand driven and hence set up to distribute
goods with a shorter storage time.
A final aspect of logistics concerns 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
Payback periods and costs: refers to how long it takes to repay the cost
of organising outsourcing and make the required organisational changes.
Communication & Language: Refers to issues that exist between the
business and the outsourcing vendor. Outsourcing often occurs across two
or more regions, hence there can be cultural differences, language
differences and differences in the way business issues and problems are
managed. This can lead to a misalignment/miscommunication between
the business and the outsourcing vendor.
Loss of control of standards and information security: when a
business opts to outsource, it can feel a loss of control over standards and
also over how information is used. Recent issues have occurred where a
Chinese manufacturer of toys for the Mattel brand (a leading United States
of America toy brand) did not adhere to the design specifications outlined
in the Service Level Agreement (SLA) and used too much lead in toys
Technology is defined as the design and innovative devices used upon the
operations process. The use of technology can be an operations strategy
particularly if it enables the business to gain a competitive advantage.
Technology in the operations function may be classified according to whether it
applies to and improves inputs, transformations processes and outputs; or
whether it makes the managerial and administrative functions smoother.
Technology can be divided into two main categories:
LEADING EDGE
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Consumer demand can be met when there is stock available. This may
prevent the consumer from seeking to buy from an alternative business
(Respond quickly to changes in demand)
If a particular product line runs out, an alternative can be offered thereby
generating income rather than a loss in sales
Reduces lead times between order and delivery
Stocks can be distributed to distribution centres, which then rapidly
transport the products to places as indicated by the demand
Older stock can be sold at reduced prices and thereby encourage cash
flow and also attract sales of other products
LIFO (LAST-IN-FIRST-OUT)
Method of pricing inventory that 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. The simplified application of LIFO would cost each unit sold at the last
cost recorded.
Gross Profit = Total sales Total cost of sales
ADVANTAGE OF USING LIFO
-
Prices used to calculate the cost of sales & Gross profit are more recent
and therefore closely reflect their economic value
However it may overstate cost and understate gross profit. Moreover, it
may undervalue stocks on hand at the end of the period
FIFO (FIRST-IN-FIRST-OUT)
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 recorded.
This method is especially used for perishable products that have a use-by or
best before date.
Under a FIFO approach, stock costs may be understated and profits overstated.
Moreover, stocks at the end of the period may be overvalued
Gross Profit = Total sales Total cost of sales
JUST-IN-TIME (JIT)
One means of managing stock is to apply a JIT approach, which aims to
overcome the problem of end-of-period stock valuation.
Just-in-time (JIT) is an inventory management approach which ensures that the
exact amount of material inputs will arrive only as they are needed in the
operation process. The aim is to hold as little stock as possible.
Advantages:
However a JIT approach requires a very flexible operations function that has a
high ability to respond quickly to changes in market demand, as well as reliable
supplier deliveries.
o QUALITY MANAGEMENT *
CONTROL
ASSURANCE
IMPROVEMENT
4) Customer focus- All employees considering what customers what and the
best way to achieve
o
Financial
Psychological/emotional.
FINANCIAL COSTS AND RESISTANCE TO CHANGE
One major cause of a resistance to change from managers and business owners
is that of financial costs.
The main financial costs associated with change include:
-
There are four key global factors that affect operations strategy and provide
opportunities for operations managers: global souring, economies of scale,
scanning and listening, and research and development (R&D).
GLOBAL SOURCING
Global sourcing is a broad term that refers to businesses purchasing supplies or
services without being constrained by location, and it therefore includes all
outsourcing.
Global sourcing as an operations strategy involves the sourcing of any business
operations (process of acquiring inputs overseas) that gives the business cost
advantages & similar quality inputs from other countries.
Sourcing examines whether a business should make or buy its inputs, or use a
combination of both options. The decision will be influenced by price, quality,
size and scope of market, nature of product and available technology and local
resources.
ECONOMIES OF SCALE
Defined: Cost Saving advantages gained by firms due to a decrease in production
costs leading to increasing return to scale. The means with increasing output
there is a decrease in per unit of production costs
Economies of scale become a global factor when businesses sell to global
markets. As the scale of production increases, the cost per unit falls resulting in a
rise in profitability. Moreover, product lifecycles are extended, which means there
is greater added value on production.
Economies of scale/a decrease in production costs arise through:
-
o
o
o
o
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Refers to scanning the global environment to identify and learn the critical
global trends that may impact the business. For example:
Changing consumer demands
New Products and services developed in other countries
New Manufacturing processes available
Technological innovations
Valuable operations management tool as it can help managers adapt best
practice to the business operations
RESEARCH AND DEVELOPMENT
Research and Development enables businesses to create leading edge
technologies, and to create innovative products and solutions, which
therefore has a significant impact on the competitive advantage of a
business.
Government encourages R&D, and may offer taxation incentives and grants.
These incentives
and grants assist businesses to invest and allocate
resources into R&D.
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