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PRODUCTION
MANAGEMENT
Lecture 2
EXAMPLE
Operations management can have a very significant impact on a businesss financial
performance. Even when compared with the contribution of other parts of the business, the
contribution of operations can be dramatic. Consider the following example. Kandy Kitchens
currently produce 5,000 units a year. The company is considering three options for boosting
its earnings. Option 1 involves organizing a sales campaign that would involve spending an
extra a100,000 in purchasing extra market information. It is estimated that sales would rise by
30 per cent. Option 2 involves reducing operating expenses by 20 per cent through forming
improvement teams that will eliminate waste in the firms operations. Option 3 involves
investing a70,000 in more flexible machinery that will allow the company to respond faster to
customer orders and therefore charge 10 per cent extra for this speedy service. Table 2.2
illustrates the effect of these three options.
ANALYSIS OF EXAMPLE
Option 1:Increasing sales volume by 30 per cent certainly improves the
companys sales revenue, but operating expenses also increase.
Nevertheless, earnings before investment and tax (EBIT) rise to
a1,000,000.
Option 2 :But reducing operating expenses by 20 per cent is even more
effective, increasing EBIT to a1,200,000. Furthermore, it requires no
investment to achieve this.
Option 3 :The third option involves improving customer service by
responding more rapidly to customer orders. The extra price this will
command improves EBIT to a1,000,000 but requires an investment of
a70,000.
Note how options 2 and 3 involve operations management in changing
the way the company operates.
Note also how, potentially, reducing operating costs and improving
customer service can equal and even exceed the benefits that come from
improving sales volume.
2.
3.
4.
5.
Quality: You would want to do things right; that is, you would not want to make
mistakes, and would want to satisfy your customers by providing error-free goods
and services which are fit for their purpose. This is giving a quality advantage.
Speed : You would want to do things fast, minimizing the time between a
customer asking for goods or services and the customer receiving them in full,
thus increasing the availability of your goods and services and giving a speed
advantage.
Dependability: You would want to do things on time, so as to keep the delivery
promises you have made. If the operation can do this, it is giving a dependability
advantage.
Flexibility: You would want to be able to change what you do; that is, being able
to vary or adapt the operations activities to cope with unexpected circumstances
or to give customers individual treatment. Being able to change far enough and
fast enough to meet customer requirements gives a flexibility advantage.
Cost: You would want to do things cheaply; that is, produce goods and services at
a cost which enables them to be priced appropriately for the market while still
allowing for a return to the organization; or, in a not-for-profit organization, give
good value to the taxpayers or whoever is funding the operation. When the
organization is managing to do this, it is giving a cost advantage.
Mix flexibility
the operations ability to produce a wide range or mix of
products and services;
Volume flexibility
the operations ability to change its level of output or
activity to
Single-factor productivity
Often partial measures of input or output are
used so that comparisons can be made. in the
automobile industry productivity is sometimes
measured in terms of the number of cars
produced per year per employee. This is called
a single-factor measure of productivity.
Single-factor productivity=Output from the operation
One input to the operation
Multi-factor productivity
Total factor productivity is the measure that
includes all input factors.
Multi-factor productivity = Output from the operation
All inputs to the operation
Improving productivity
to reduce the cost of its inputs while
maintaining the level of its outputs
reducing the costs of some or all of its
transformed and transforming resource inputs.
cutting out waste
Worked example
Analysis
Operations
Strategy
Operations strategy
Operations strategy
pattern of strategic decisions and actions
which set the role, objectives and activities
of the operation.
Operational is the opposite
of strategic,
meaning day-to-day and detailed.
The content of operations strategy is the
specific decisions and actions which set
the operations role, objectives and
activities.
The process of operations strategy is the
method that is used to make the specific
content decisions.
Stage 1: Internal neutrality. This is the very poorest level of contribution by the operations
function. It is holding the company back from competing effectively. It is inward-looking and, at
best, reactive with very little positive to contribute towards competitive success. back in any way.
It attempts to improve by avoiding making mistakes.
Stage 2: External neutrality. The first step of breaking out of stage 1 is for the operations
function to begin comparing itself with similar companies or organizations in the outside market
(being externally neutral). This may not immediately take it to the first division of companies
in the market, but at least it is measuring itself against its competitors performance and trying to
implement best practice.
Stage 3: Internally supportive. Stage 3 operations are amongst the best in their market. Yet,
stage 3 operations still aspire to be clearly and unambiguously the very best in the market. They
achieve this by gaining a clear view of the companys competitive or strategic goals and
supporting it by developing appropriate operations resources. The operation is trying to be
internally supportive by providing a credible operations strategy.
Stage 4: Externally supportive. Yet Hayes and Wheelwright suggest a further stage stage 4,
where the company views the operations function as providing the foundation for its competitive
success. Operations looks to the long term. It forecasts likely changes in markets and supply, and
it develops the operations-based capabilities which will be required to compete in future market
conditions. Stage 4 operations are innovative, creative and proactive and are driving the
companys strategy by being one step ahead of competitors what Hayes and Wheelwright call
being externally supportive.
Top-down strategies
A large corporation will need a strategy to
position itself in its global, economic, political
and social environment
This will consist of decisions about what types
of business the group wants to be in, what
parts of the world it wants to operate in, how
to allocate its cash between its various
businesses, and so on. Decisions such as these
form the corporate strategy of the
corporation.
Bottom-up strategies
Emergent strategies
Emergent strategies
Strategy is gradually shaped over time and based
on real-life experience rather than theoretical
positioning.
Indeed, strategies are often formed in a relatively
unstructured and fragmented manner to reflect the
fact that the future is at least partially unknown
and unpredictable (see Figure ).
This view of operations strategy is perhaps more
descriptive of how things really happen, but at
first glance it seems less useful in providing a
guide for specific decision-making.
Bottom-up strategies
When any group is reviewing its corporate
strategy, it will also take into account the
circumstances, experiences and capabilities of the
various businesses that form the group.
Similarly, businesses, when reviewing their
strategies, will consult the individual functions
within the business about their constraints and
capabilities.
They may also incorporate the ideas which come
from each functions day-to-day experience.
Therefore an alternative view to the top-down
perspective is that many strategic ideas emerge
over time from operational experience.
Market-requirements-based strategies
To satisfy the requirements of its markets.
To survive in the long term.
Understanding markets is usually thought of as the
domain of the marketing function, it is also of
Importance to operations management.
It is impossible to ensure that operations is
achieving the right priority between its
performance
objectives
(quality,
speed,
dependability, flexibility and cost).
Order-winning factors
Importance of competitive factors is to distinguish
between order-winning and qualifying factors.
Order-winning factors are those things which
directly and significantly contribute to winning
business.
They are regarded by customers as key reasons
for purchasing the product or service.
Raising performance in an order-winning factor
will either result in more business or improve the
chances of gaining more business.
Qualifying factors
Qualifying factors may not be the major competitive
determinants of success, but are important in another
way.
They are those aspects of competitiveness where the
operations performance has to be above a particular
level just to be considered by the customer.
Performance below this qualifying level of
performance will possibly disqualify the company from
being considered by many customers.
But any further improvement above the qualifying
level is unlikely to gain the company much competitive
benefit.
It is about four years now since we specialized in the small-to-medium firms market. Before that we
also used to provide legal services for anyone who walked in the door. So now we have built up our
legal skills in many areas of corporate and business law. However, within the firm, I think we could
focus our activities even more. There seem to be two types of assignment that we are given. About
forty per cent of our work is relatively routine. Typically these assignments are to do with things
like property purchase and debt collection. Both these activities involve a relatively standard set of
steps which can be automated or carried out by staff without full legal qualifications. Of course, a
fully qualified lawyer is needed to make some decisions; however, most work is fairly routine.
Customers expect us to be relatively inexpensive and fast in delivering the service. Nor do they
expect us to make simple errors in our documentation, in fact if we did this too often we would lose
business. Fortunately our customers know that they are buying a standard service and dont expect
it to be customized in any way. The problem here is that specialist agencies have been emerging
over the last few years and they are starting to undercut us on price. Yet I still feel that we can
operate profitably in this market and anyway, we still need these capabilities to serve our other
clients. The other sixty per cent of our work is for clients who require far more specialist services,
such as assignments involving company merger deals or major company restructuring. These
assignments are complex, large, take longer, and require significant legal skill and judgment. It is
vital that clients respect and trust the advice we give them across a wide range of legal
specialism's. Of course they assume that we will not be slow or unreliable in preparing advice, but
mainly its trust in our legal judgment which is important to the client. This is popular work with
our lawyers. It is both interesting and very profitable. But should I create two separate parts to our
business, one to deal with routine services and the other to deal with specialist services? And, what
aspects of operations performance
should each part be aiming to excel at? (Managing Partner, Branton Legal Services)
The process of
operations strategy
The process of
operations strategy