Operations Study Notes

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Role of Operations

Role of Operations

Strategic role of operations management

Operations refers to the business processes that are engaged in the transformation of inputs into outputs.

Profit centres are the areas of a business that generate profit and revenue.

Cost centres are the areas of a business that incur costs/expenses.

Strategic role of operations management:

Cost leadership and product/service differentiation through profit maximisation and minimisation of costs/expenses

Strategic roles of operations:

Cost Leadership aims to have the lowest costs or be the most price-competitive by competing with prices, this can be done by:

Lowering costs/expenses = larger profits

Business costs: input, labour, processing, inventory, quality management)

Lowering prices = competitive advantage through:

Invest in R&D

Reduce production costs

Use economies of scale: spread costs, improving efficiency, lower cost per unit

Good/Service differentiation distinguishes its products from competitors by enhancing or adding features to create brand loyalty, creates competition based on products by:

Good differentiation: features, quality, augmented features (add-ons and additional benefits)

Service differentiation: time taken to deliver service, experience and qualifications, quality of material and technology. (e.g. Apple Carplay)

Cross-branding (aka strategic alliances): two businesses form an alliance so they can offer extra benefits to consumers. (e.g. Apple partnering with Mastercard through Apple Pay)

Goods in different industries

Operational processes vary depending on the type of product provided, such as:

Level of similarity

Standardised goods: mass produced (usually on an assembly line) are:

Uniform in quality

Meet predetermined level of quality

Customised goods: customised and tailored to meet individual consumer needs

Produced with a market focus instead of a production focus

Durability (perishable vs non-perishable)

Perishable goods deteriorate and need to be fresh when consumed. As a result, they need special processes such as:

Strict quality, safety and hygiene standards

Short lead times and efficient distribution

Appropriate packaging of products

Non-perishable goods are more durable, thus last longer and don’t spoil, leading to different processing needs, including:

Quality management in sourcing (production  distribution): high-quality materials, management processes and efficient distribution

Inventory control: ensures business stays responsive to market demand (too much = wastage, not enough = reduced profits)

Intermediate goods

Intermediate (semi-finished) goods have gone through operational processes and are subject to further processing before becoming a finished good. (e.g. sand is transformed into glass)

Final (finished) goods have gone through transformation/production processes and are ready to be sold to consumers.

e.g. glass can be further transformed to produce windows

Services in different industries

Level of similarity: services are heterogenous (diverse/different between consumers).

Standardisation can lead to cost leadership as simplified processes are completed with greater efficiency.

Customised services involve a higher level of interaction with the customer (e.g. legal or medical services).

Self-service allows customers to complete a large aspect of the service themselves, meaning businesses don’t have to hire employees to carry out these jobs.

Interdependence with other key business functions

Margin: difference between selling cost and production cost

Marketing and operations: meeting the needs and wants of consumers through pricing products according to trends in the market.

Marketing is concerned with the design of products and their sales to meet consumer demands

Operations is involved in the acquisition/sourcing of products or sourcing of inputs for production

Finance and operations: concerned with recording and summarising financial transactions via reports (e.g. income statement, balance sheet and budgets).

Reports are crucial for ensuring profitability (maximising sales and minimising expenses)

If production costs are minimised, then profit margins can be increased

If operations processes focus on quality = products can be sold at higher prices = increased revenue

HR and operations incorporates all aspects of employment resourcing (acquiring, developing, maintaining, motivating and separating staff)

Effective HR management is vital for businesses

Operational changes result in the use of new technologies = faster processing speeds = impacts HR in a business

As nature of work changes, skills and qualities sought by employees change as well

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Influences On Operations

Influences are changes in the internal/external business environment that present a threat or opportunity to the operations manager.

Globalisation

Globalisation refers to the increasing integration of economies globally due to the removal of trade barriers between nations.

Global value chain: parts of a product are made in different countries globally.

Globalisation is characterised by:

Increasing integration between national economies

High degree of transfer of capital, financial resources + tech

Threat: businesses that effectively apply cost leadership principles can undercut the market and dominate.

Opportunity: provides a source of market opportunities from and to other nations = cost minimisation

Impact on operations:

Offshoring is relocating production overseas (controlled by the business)

Outsourcing is hiring a 3rd party (domestically or internationally) to do the work instead of the business.

Technology: improve quality of products and increase efficiency

Scale of operations: increased customers and volume due to expansion

Offshoring and outsourcing: better communications technology has increased ability to offshore and outsource

Competition: globalisation has led to cost reduction in distribution and emphasis on efficiency of operational processes)

Sourcing inputs: inputs can be sourced globally (e.g. cheaper, higher quality)

Technology

Technology is the design, construction and/or application of innovative devices, methods and machinery upon operations processes.

Plays a significant role in the application of operations

Technologies enable people to communicate more easily and facilitate improved business processes

Administrative technologies: used for planning and organisation

Planning technologies (e.g. sequencing and scheduling tools)

Office technologies (e.g. computers, scanners, mobile phones)

Software (e.g. word processing, graphic and publishing programs)

Process technologies: used for manufacturing and logistics

Large machinery in manufacturing plants (used in assembly line production)

Robotics: used in highly sophisticated production processes requiring precision

Computer technologies: Computer-Aided Design (CAD) and Computer-Aided Manufacturing (CAM)

Impact on operations: decrease cost, increase quality, decrease production times, increase customisation

Quality Expectations

Quality is the expectations of customers in relation to the quality, durability and benefits of a good/service.

An increase in quality expectations has implications for transformed resources (inputs) and transforming resources

The expectations that people have of businesses determine the way that products are designed, created and delivered to customers.

Quality expectations with goods:

Quality of design: how well a product has been developed and executed (how innovative it is and quality of materials used)

Fitness for purpose: how well product does intended job and how easy it is to use

Durability: how long goods last – how easily goods can be maintained and repaired in its lifetime

minimise costs, increase efficiency, limit wastage, and increase the quality of

the product, leading to the business success

minimise costs, increase efficiency, limit wastage, and increase the quality of

the product, leading to the business success

minimise costs, increase efficiency, limit wastage, and increase the quality of

the product, leading to the business success

Quality expectations with services:

Professionalism: the manner (dialogue) that staff engage with customers and the physical environment (cleanliness)

Reliability: overall competence and efficiency of the service provider

Level of customisation: how the service is tailored to meet individual customer needs

Impact on operations: impacts production process (the way the products are designed, manufactured and delivered)

Cost-based competition

Breakeven point is the level at which the firm’s total revenue is exactly equal to its total costs.

Fixed costs aren’t dependent on the production output and remain the same (e.g. leases, insurance).

Variable costs change according to levels of output (e.g. labour, energy costs)

Cost-based competition focuses on creating cost leadership by determining breakeven point and then applying management strategies (cost reduction).

Impact on operations:

Reduce supply costs by:

Lower quality inputs

Cheaper nations

Bulk-buying inputs

Improve production by:

Economies of scale (EOS) = better use of machinery, boosted efficiency

Standardised products = less inputs and efficient production.

Automated production = speed-up production processes

Lean production = minimises waste and costs

Improve output by:

Economies of scale: high volume of output reduces production costs = increases fixed costs

Government Policies

Government policy are a set of goals that the government aims to achieve in society.

All businesses operate in a political-legal environment

Political decisions: influence business rules + regulations = affects management of key business functions

Government policies: constant change significantly influences business operations

STUDENTS LEARN TO: Identify the breadth of government policies that affect operations management.

Breadth of government policies:

Taxation rates

Required materials handling practices

Work Health and Safety (WHS) standards

Industry training requirements

Public health, environment, trade and industry policies

Employment relations

Impact on operations:

Leads to business opportunities (e.g. if tax rates fall = higher revenue)

More efficient production

Higher product quality

Legal Regulation

Compliance are the laws with which businesses must abide.

Compliance costs are the expenses associated with meeting the requirements of legal regulations

Example of regulations

Effect on operations

Work, Health and Safety

Ensures workers are subject to a safe working environment with minimal risks.

e.g. Safety standards, appropriate PPE is provided

Training and development

Employees operating machinery and technology need to be trained to do so safely and effectively

Environmental protection laws

Operations processes are undertaken without damaging the environment (e.g. decrease pollution)

Australian Consumer Law (ACL)

Products need to be fit for purpose so operations needs to implement quality management processes

Impact on operations:

Shapes the practices and procedures of the operations function must follow

If a business fails to comply, they risk penalties

Environmental Sustainability

Environmental sustainability means that business operations should be shaped around practices associated with resource consumption to prevent compromising resources.

Business operations should ensure they apply environmental sustainability practices, such as:

Sustainable use of renewable resources

Reduction in use of non-renewable assets

Application of the precautionary principle: where environmental impacts are uncertain, actions are undertaken to decrease environmental impact.

Businesses need to reduce and minimise waste and reduce their carbon footprint to ensure environmental sustainability in the long-term.

Operations needs to integrate a long-term sustainable view of resource management into business planning and practice

e.g. reduce and minimise waste; recycling water, glass, paper and metals, reducing carbon footprint

Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) refers to open and accountable business actions based on respect for people, community and the broader environment.

Triple Bottom Line refers to the financial profitability, social impact and the environmental impact of a business.

CSR involves businesses doing more than just complying with the laws and regulations

They place values on financial returns and social responsibility, as well as environmental sustainability

Annual reports outlines the financial returns and social responsibility of a business, as well as expenses related to ensuring environmental sustainability

STUDENTS LEARN TO: Explain why Corporate Social Responsibility is a key concern in operations management.

CSR is a key concern in operations management for contemporary businesses

It involves processes of transformation drawing from a range of inputs to make final products

The principles of CSR require businesses to manage the effects of its activities on society/community and the environment

This requires an understanding of where and how its inputs are sourced, so it only draws from suppliers that adhere to appropriate standards

Also requires businesses to minimise environmental damage and waste, and ensure recruitment of employees is from a diverse and inclusive range of people from all backgrounds

The difference between legal compliance and ethical responsibility

Legal compliance is when businesses adhere to the laws, however breaches of laws attract penalties.

Ethical responsibility is about going beyond the law and doing what is fair and morally right.

Legal compliance

Legal requirements require businesses to follow the prescribed standards of behaviour outlined by the law.

Penalties are applied for breaches of laws

Compliance falls into a number of areas, but not limited to:

Compliance Area

Description

Labour Law Compliance

Includes minimum wages, award wages, working hours, breaks, leave entitlements, on-costs associated with labour, workers compensation, and WHS (Work Health and Safety) laws.

Environmental and Public Health

Regulations preventing pollution (air, land, water), dumping, and requiring operating and waste disposal standards.

Business Licensing Rules

Includes required training or certification levels and conditions on operations like working hours, zoning restrictions, and content/disclosure requirements.

Taxation

Covers levies, duties, profit taxes, and superannuation. Tax policies can encourage or discourage certain business practices.

Trade Practices and Fair Dealings

Addresses misuse of market power, misleading conduct, price fixing, monopolies, market concentration, and product safety.

Migration and Offshore Labour Rules

Ensures minimum standards are maintained for skilled labour brought in from other countries.

Intellectual Property

Protects copyright, patents, trademarks, designs, and original creative works, recognizing the moral rights of creators.

Financial & Accounting Regulations

Standardizes financial reporting methods and enforces rules for company directors acting as fiduciaries (trusted with others' financial interests).

Corporate Governance

Involves rules, policies, and decisions guiding a business's operations, placing responsibility on directors to ensure ethical and responsible corporate behaviour.

Human Rights

Prohibits discrimination based on disability, culture, sexual orientation, gender, age, or other distinguishing traits.

Outsourcing, compliance and business behaviour:

Outsourcing involves the use of outside specialists to undertake 1+ key business functions.

Onshore outsourcing: using domestic businesses as the outsourcing provider

Offshore outsourcing: taking the activities to a provider in another country.

Businesses aim to reduce compliance costs by structuring their business operations, which allows outsourcing

Offshoring:

Outsourcing may be taken onshore or offshore

Offshore outsourcing: compliance requirements are different between the nations, allowing the business to take advantage of cost savings

Lower taxation rates, lower standards of labour, weaker environmental and intellectual property regulations enable businesses to reduce their compliance costs

Outsourcing:

Outsourcing allows business behaviours and processes to go ‘unseen’ by consumers

Breaches occurring this way are passed onto the contractor without legal responsibility for the business outsourcing its production

As a result, businesses in Australia have become more responsible when choosing contractors to produce their goods or deliver services overseas

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’s hard to know how to be ethical

Under such circumstances, businesses may guide their decision making after consulting with special interest groups or following guidelines set down by international bodies

In manufacturing operations, there can be significant international differences in standards for labour in terms of: wages, health + safety and training

By following international guidelines, such as the International Labour Organisation, businesses:

Promote rights at work

Encourage adequate working conditions

Enhance social protection

Environmental sustainability and social responsibility

Features of the triple bottom line: people, planet, profit

2 main elements of CSR:

Environmental sustainability

Aim: ensure business development isn’t at the expense of the environment

Conserving natural resources for future generations

Businesses are expected to take actions that help protect the environment through:

Ethically sourcing materials

Responsible outsourcing

Adopt policies on conservation recycling and sustainable production

Reduce their carbon footprint

Social responsibility

Aim: contribute to the greater good of society while still expanding the business

Businesses are expected to show more concern for the societies in which they operate through:

Social initiatives

Maximising their profits

Actions through which they can do this include:

Ethical production: observe human rights with the working conditions of employees

Product quality: observe quality standards and ensure products meet safety requirements

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Operations Processes

Operations Processes

The transformation process produces tangible goods that meet consumer demands. (aka value chain as transformation processes adds value at each stage of production)

Operations processes are those directly involved with transformation

They are classified according to their role in transformation:

Inputs into transformation processes

Transformation processes

Outputs of the transformation process

Each feature presents challenges for operations managers.

Inputs

Inputs are the resources used in the transformation process.

Some inputs are owned by the business, while most are provided by suppliers

Common direct inputs (processed raw materials):

Labour: human resources necessary for transformation process

Energy: electricity or fuels that can be converted into other forms of energy

Raw materials: sourced through supply chain and determine (e.g. wood, cotton)

Machinery and technology – capital equipment (robots, assembly lines)

Inputs are classified either as transformed or transforming resources.

Transformed resources

Transformed resources are those that have been changed/converted in the operations process.

Key Performance Indicators (KPIs): specific criteria used to measure the efficiency and effectiveness of the business’s performance.

Example: lead times, inventory turnover rates and production data

Customer relationship management (CRM): system that businesses use to maintain customer contact.

Materials are the basic elements used in the production process and consists of:

Raw materials: unprocessed materials (e.g. oil, wood, steel)

and

Intermediate goods: semi-finished goods that undergo further processing

Information is the knowledge gained from research, investigation and instruction, resulting in an increased understanding.

Highly valuable due to its ability to influence behaviour or decision making

They act as a transformed resource when used to inform how inputs are used, where they are drawn from, which suppliers and supplies are available.

Internal information: information that comes from within the business and is gathered from internal sources.

e.g. financial reports, quality reports, internal KPIs, and customer feedback.

External information: information drawn from data (e.g. market reports) and sources such as the Australian Bureau of Statistics (ABS)

Customers

Customers act as an input and their desires and preferences act as a transformed resource

Businesses can implement a (Customer Relationship Management) CRM program to improve customer service, increase competitiveness and identify changes in consumer tastes

This in turn can improve services, reduces production costs and customer feedback

Products are transformed through the use of the good.

E.g. a customer using an exercise machine to lose weight and become fitter

Services are transformed by the service delivered.

E.g. customised service depending on the needs of the consumer

Transforming resources

Transforming resources are those that carry out the transformation process, enabling change and value adding to occur.

Human resources: employees that design, create and deliver products.

Facilities: plants and machinery used to carry out the transformation process.

Human resources are responsible for combining other resources to create goods and services.

Should be motivated and skilled  makes transformation efficient and effective

Operations needs employees to make the transformation process as efficient and effective as possible

Businesses can achieve this by:

having a reliable workforce that can do the job when required

improving employee skills through training and development

Adhering to work, health and safety standards

Ensuring staff motivation remains high

Facilities consist of plants (e.g. factory, office) and machinery (e.g. technology, equipment)

Plant: businesses need to decide on the location, size of facility and most efficient layout

Machinery: operations managers will need to choose what type and amount of machinery they need, and to what extent it will be used

Transformation process

Each of the Vs are determined by the level of demand in the market and can be managed using Critical Path Analysis and/or Gantt Charts

A service organisation transforms inputs  intangible products and rely on consumer interaction and staff to carry out processes

Manufacturers use machinery, robots and computers to transform inputs  outputs

A service provider applies time, skill and experience

They assist consumers to improve their quality of life through consuming its product

The influence of Volume

Transformation process is the conversion of inputs (resources) into outputs (goods/services).

Volume: how much of a product is made.

Volume flexibility: how quickly the transformation process can adjust to increases or decreases in the market.

Lead time: time it takes for an order to be fulfilled from the moment it is made.

Economies of scale: producing products in bulk and taking advantage of discounts.

Volume = how much should we make?

As volume increases, cost of production decreases (due to economies of scale) = cost leadership

Producing more volume can increase complexity of operations (need more output = more technology = more staff training)

Effect on production:

Slow response to falling demand = overproduction = high inventory costs and wastage

Slow response to rising demand = underproduction = lost sales and profits

Balanced response to demand = shorten lead times

How can businesses achieve economies of scale:

Technology

Bulk buying

Change supplier

Outsource/offshore (labour advantage)

The influence of Variety

Mix flexibility: the mix of products made, or services delivered, through the information process.

Variety = What range of products should we make/offer?

Influence of variety on transformation process is:

The greater the variety, the more the operations process needs to allow for this variation

e.g. High variety = small clothing boutique and Low variety = clothing factory

Effect on production:

The more variety, the more operations has to adapt

More inputs  wide range of materials

Larger range of transformation process  more facilities

The influence of Variation in Demand

Transformation process is the conversion of inputs (resources) into outputs (goods/services).

Variation in demand = how much variation in demand will there be and how can we respond to changes in demand?

Low variation in demand means the level of demand remains a stable and predictable demand pattern.

High variation in demand means the level of demand changes significantly overtime.

Effect on production:

To manage variation effectively, businesses need to be able to anticipate changes in demand.

e.g. high demand for toys during Christmas = high production during Christmas

e.g. low demand for sweaters during summer = low production during summer

Rising demand requires more suppliers, labour, machinery, energy

It can be hard to respond to demands if suppliers can’t supply on time, staff are unskilled and unavailable, there’s a lack of energy and machinery can’t adjust to increases in capacity

Fall in demand means reduced staff hours and slower production

The influence of Visibility (customer contact)

Visibility: degree to which customers can see the process.

Visibility = How much consumer contact should we have and how should this influence the operations process?

Customers and their preferences can shape production decisions = directly affecting transformation processes

Direct contact: customer feedback (e.g. surveys, interviews, warranty claims, letters, social media posts, verbal contact)

Indirect feedback: review of sales data, giving an indication of customer preferences or market share

Businesses seek to maximise sales; customer contact is essential and ultimately shapes the transformation processes

Sequencing and Scheduling

Sequencing: order in which activities in the operations process occur.

Scheduling: length of time activities take within the operations process.

Planning tools used to coordinate the operations process

Sequencing and scheduling assist with structuring and ordering transformation processes

Various scheduling tools are used when planning operations processes

Aims:

Provides a sense of direction and organisation to make sure everything runs smoothly

Allows adjustments to be made when there are hold-ups so that completion time isn’t affected

The two scheduling tools used for operations processes are:

Gantt charts outline the activities that need to be performed, the order in which they should occur and how long each activity is expected to take.

Used for any process that has several steps to produce an output

Each bar represents the length of time taken to perform an activity

Example of a Gantt Chart

Advantages of using a Gantt Chart:

Forces a manager to plan the steps needed to complete a task

Specifies time required to complete each task

Makes it easy to monitor actual progress vs planned activities

Gantt chart shows an operations manager what has to be done and when in order to manage their projects and resources efficiently.

Critical path analysis

Critical Path Analysis: a scheduling method or technique showing what tasks need to be done, how long they take and what order is necessary to complete those tasks.

Critical Path: the minimum length of time needed to complete all activities in a project.

* Always choose the longest path as it allows all activities to be completed

* Calculate length of each path and select the longest one

All of the activities need to be completed

Example of Critical Path Analysis

Advantages of Critical Path Analysis:

Scheduling enables a manager to identify what needs to be done and allows the timing of tasks to be considered

Manager will be able to see the order of activities that needs to be undertaken, and can be done so simultaneously

Scheduling gives direction and organisation to operations processes, providing overall coordination and enabling a means of control

Transformation Processes

Technology

Technology: application of science or knowledge, enabling people to do new things or perform established tasks in new and better ways.

Business technology: use of machinery and systems that enable businesses to undertake the transformation process more efficiently and effectively.

Robotics: applies to highly specialised forms of technology that is capable of completing complex tasks.

Computer-Aided Design (CAD): computerised design tool that uses inputs to generate product ideas.

Computer-Aided Manufacturing (CAM): software that controls manufacturing processes.

Most technology affects all aspects of a business, assisting employees to work more productively.

Manufacturing sector: technology can be used to speed up processes and make activities more efficient and cost-effective.

Robotics: used in engineering and specialised areas of research, as well as on assembly lines where multiple different tasks are required.

Shapes the transformation process, achieving high quality goods in an efficient way, as well as minimising waste

Achieves a level of accuracy which is unattainable by human labour

Computer-Aided Design (CAD):

Allows visualisation of end-product and calculation of material usage and time required to complete the task

CAD software makes it easy to customise products according to consumer needs

Can be used by designing the sequence of steps that would need to be taken to create good in shortest possible lead time with the least amount of material

Computer-Aided Manufacturing (CAM):

CAD software can be linked to CAM software to allow the instantaneous production of designs that are accepted by clients

Can be used to calculate the quantity of each input resource required for production

CAM software can be used to store historic purchasing records to assist with present decisions

Services sector:

Developments in technology include: computers, tablets, USB, keyboard, mouse etc.

Allows employees to complete more tasks in less time

Allow some people to telecommute (work from home)

Task Design

Task Design: classifying job activities in ways that make it easier for an employee to successfully perform and complete the task.

Skills audit: formal process used to determine the present level of organisational skills expected of employees.

Breaking down the work into a series of jobs where each contributes to the final goal

What tasks need to be performed? How will they be performed? What skills are needed?

Will inform the job description made by HR

Managers may wish to conduct a skills audit to assess staff skills

Process Layout

Plant layout: arrangement of equipment, machinery and staff within the facility.

There are 3 types of plant layouts:

Process layout:

Process layout: Machines and equipment are grouped together according to the function (process) they perform

Machines and equipment are grouped together according to the function (process) they perform.

Used when a product is highly varied and being produced in low volumes

e.g. hospitals have areas dedicated to particular types of medical care

Product layout:

Product production: production that is characterised by the manufacturing of a high volume of constant quality goods.

Product layout: equipment arrangement relates to the sequence of tasks performed in manufacturing a good.

Used when a product is standardised and being produced in very large volumes

Assembly line is the most common layout for this type of production

Aims to achieve the best possible combination of personnel and machine use

Work stations are arranged to match the sequence of operations

Emphasis is placed on sequencing the flow from one work cell to another

e.g. assembly of motor vehicles or the production of TV sets

Fixed position layout:

Project production: layout requirements for large-scale activities.

Fixed position layout: an operational arrangement in which employees and equipment come to the product.

Project production is more efficient where materials are brought to the site

Workers and equipment come to the one work area

(e.g. construction of bridges, ships, aircraft or buildings).

Office layout

Enables the work to be performed efficiently in a safe office environment

Layout is tailored to meet the needs of the business

(e.g. manufacturing businesses have informal office layouts, or ones that overlook production activities)

Monitoring, Control and improvement

All operations processes should be monitored for effectiveness

Processes need to be controlled, which requires effective monitoring and a focus on continuous improvement

Monitoring and control = improvements when there is a focus on quality and standards

Monitoring

Monitoring: is the process of measuring actual performance VS planned performance

Key performance indicators (KPIs): predetermined variables that are measured so that appropriate controls to operations processes can be made.

KPIs compare actual VS forecasted levels of business performance

Controlling

Controlling compares what was intended to happen VS what has occurred

Businesses goals are set, and then assessed and compared against KPIs

Once KPIs are assessed, a business takes corrective action if needed = controlling processes

Improvements in processes are often framed around quality (e.g. quality control, assurance and improvements)

e.g. of changes include restructuring facilities layout, adjusting the level of technology

Improvement

Improvement: Improvement is the systematic reduction of inefficiencies and wastage, poor work processes and the elimination of any bottlenecks

Bottleneck: aspect of the transformation process that slows down the processing speed, leading to a backlog of incompletely processed products.

improvement is sought in time, process flows, quality, cost and efficiency

Outputs

Outputs are the result of a business’s efforts (final good/service) that is delivered or provided to the consumer

Quality, efficiency and flexibility must be balanced against the resources and strategic plan of the business

Customer service:

Customer service: predetermined variables that are measured so that appropriate controls to operations processes can be made.

Customer focus benefits all business activities that are directed at meeting or exceeding customer expectations

(e.g. inputs, transformation processes, output)

If a customer expresses dissatisfaction with a good or service, operations processes needs to review and take corrective action

Exceeding customers’ expectations = long-term customer relationships

Not exceeding customers’ expectations = drive customers away

Warranties: business’s promise to correct any defects in goods provided or services delivered.

Warranties

Warranties allow businesses to repair, refund or replace issues that consumers face with products

Measuring the number of warranty claims is a good way of assessing the effectiveness of operations processes

Claims are made against goods that have defects arising from an issue in transformation

The more warranties claims in the transformation process = the more defects the product has

Services also provide warranties, enabling customers to cancel contracts, get a refund or be compensated

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Operations Strategies

Performance objectives

Performance objectives: goals that relate to particular aspects of the transformation processes.

Quality: how well designed and functional goods are, and the degree of competence with which services are organised and delivered.

Enables the business to become more efficient, productive and profitable

Each objective is allocated a specific target based on the metrics used to assess the objective

Allows businesses to achieve efficiency, profitability and productivity

6 main performance objectives that can be allocated to KPIs are:

Quality

Objective: products meet consumer demand/expectation while remaining cost-efficient and cost-effective.

How to achieve it: adopt quality management processes throughout transformation process

Determined by consumer expectations and preferences

Quality performance objectives include:

Quality of design: How well the product is made or a service is delivered.

A product design determines inputs and the response of the transformation process to the inputs to produce the good/service

Quality of conformance: focus on how well the product meets the design specifications.

The higher the conformance = the better

Allows production processes to be more efficient

Measures how consistently products achieve compliance with the desired specifications

Quality of service

Quality of design and conformance can be applied to the design and delivery of services

e.g. service reliability, ensuring the service meets consumer demand and ensuring the delivery is responsive to consumer expectations.

Speed

Speed: measures the time it takes for the production processes to respond to changes in demand.

Bottleneck: delays in the processing speed.

Objective: to satisfy customer demand as quickly as possible in response to fluctuating consumer demand.

(e.g. reduced waiting, shorter lead times, quicker processing times).

How to achieve it: change input levels and processing times

This requires fewer procedural and technical bottlenecks, and smooth communication

Dependability

Dependability: how consistent, reliable and long-lasting products are.

Objective: to reduce warranty and customer complaints

How to achieve it: through quality management processes

Dependability of goods: how robust the item is before it fails

Measured through warranty claims

Highly durable good = dependable good

Perishable goods can be dependable if they are of consistent and predictable standard

Dependability of services: consistency of service standards and reliability

Measured through number of complaints received

< complaints = more likely the service is dependable

Flexibility

Flexibility: how quickly operations processes can adjust to changes in the market.

Objective: to improving processing times

How to achieve it:

Goods

Increasing the capacity of production by using plant and machinery better

Investing in new technology = increased flexibility and capacity

Changing product design = increased variety

Services

Increasing number of service providers

Increasing employee skill level

Improving the level of technology used when delivering the service

Customisation

Customisation: creation of individualised products to meet the specific needs of customers.

Mass customisation: process that creates a standard, mass-produced item which is then modified to specific customer requirements.

Objective: satisfy customers by using their specific desires as inputs in the transformation process.

How to achieve it: use a differentiation strategy

The steps in the product design and development process

Goods can be standardised or customised

Customer orientation allows businesses to orient processes towards customisation

Variations in the features of goods (e.g. colour, size and functionality) help differentiate products

Services are often customised; however aspects are standardised (e.g. fast food sector).

Customer focus offers differentiation, however most services these days are based on mass customisation

Cost

Cost: minimisation of expenses so that operations processes are conducted as cheaply as possible.

Objective: to achieve cost leadership

How to achieve it:

Acquisition of new capital equipment

Efficient use of inputs

Waste reduction

Discounts

Inventory management (e.g. minimising warehousing and identifying efficient distribution processes)

Supply chain management

New product or service design and development

Operations processes require creation, design and development of new products

Enables business growth = competitive advantage

New Product Design and development

There are different approaches to new product design + development:

Customer preferences determine which products are designed and developed

Changes + innovations in technology, enabling production of appealing products with greater functionality

Developing goods – key considerations:

Product utility: usefulness and value that a product has from the customer’s point of view.

Quality: customers demand high-quality products with certain attributes and features

Supply chain management: new products are drawn from suppliers, thus may extend the range of supplies sought, as well as the timing or volume of supplies

Thus, can increase the use/range of present resources or require an investment in new capital equipment = impacting capacity

Capacity management:

Capacity and resources will be impacted and may require new resources or technology

Cost:

Determined through the quantity, type of inputs, time and energy used in processing.

Value is directly related to cost and customer’s perception of product utility

Service design and development

Explicit service: tangible aspect of the service being provided (e.g. application of time, expertise, skill and effort).

Implicit service: intangible aspects of the business (e.g. feeling of being looked after)

Services that are standardised often have limited interaction with customers

Businesses will provide either explicit or implicit service

In design, implicit and explicit aspects need to be addressed

customers need to be satisfied and feel that their needs are being met

Services using goods:

goods may be required in the delivery of services

these additional aspects need to be considered when designing and developing a service as each can complement the delivery of the service

Supply Chain Management (SCM)

Supply Chain Management: Involves integrating and managing the flow of supplies throughout the inputs, transformation processes and outputs to best meet consumer needs.

Supply chain management involves logistics, e-commerce and global sourcing

Concerns of Logistics:

Distribution: the way of getting the goods or services to the consumer.

e.g. channel choice, distribution channels

Transportation: the physical movement of inventories.

The type of good and the cost of transportation determines the mode of transportation selected

Storage: finding a secure place to hold stock until it’s required.

A business must address the issues of storage, warehousing and the use/location of distribution centres

Storing of inventory is necessary when there are numerous sales outlets and demand is variable

Storage can be short or long-term

Warehousing: use of facilities for the storage, protection and, later, distribution of stock.

They hold inventories and therefore face costs are associated with warehousing

Distribution centres: strategic short-term storage before distribution to retail outlets.

Aims to minimise the time it takes to supply stock to retail outlets

They have easy access to either a railway hub or a major road network

Materials handling and packaging:

Standards and methods are applied to ensure appropriate handling (e.g. for delicate goods like glass) and for dangerous/hazardous goods

Concerns of e-commerce:

e-commerce: buying and selling of goods/services via the internet.

e-procurement: use of online systems to manage supply.

B2B arrangement: automatic replacement of stock when it falls to a predetermined point.

B2B: direct access from one business (the supplier) to another (the buyer).

E-commerce is relevant for sourcing and impacts:

E-commerce and business sourcing

Managed through electronic ordering

E-procurement allows suppliers direct access to the business’s level of supplies

B2B allows the supplier to assess the needs of the buyer and meet them in a timely manner = efficient SCM

E-commerce and the consumer

Business-to-consumer (B2C) transactions: business chooses to sell directly to consumers

Technology allows specialist sites to engage with customers, however must be able to manage supplies efficiently and reflect accurate stock information on website

It’s also impacted physical distribution as consumers are shopping and making purchases online

Supply chain management is effective when:

Reduction in input costs

Reduction in distribution costs

Reduction in management time spent in supplier management

Concerns of global sourcing:

Sourcing: purchasing of inputs for the transformation process.

Global sourcing: requires the decision by management to acquire supplies or services without being constrained to engage with suppliers while meet sourcing requirements.

Sourcing revolves around 4 factors:

Cost of supplier

Consumer demand

Quality of inputs required

Flexibility and timeliness of supply

Global sourcing:

Increase in technology usage has led to businesses utilising global sourcing

Businesses have a wider variety of suppliers to choose from

Benefits:

Inputs are cheaper

More suppliers to choose from

Challenges:

Economic costs

Time and logistical costs

Legal and ethical issues

NOT SPECIFICALLY IN THE SYLLABUS, BUT GOOD TO KNOW: SUPPLY CHAIN TRENDS

Purchasing of suppliers via merging and acquisitions

Merge: joining with another business

Acquisition: taking over another business

Supplier rationalisation: requires assessment of the number and diversity of suppliers to reduce suppliers as much as possible.

Managing supply chains effectively:

Speed: faster transactions = faster access to revenue

Revenue: satisfying customer demand more quickly = boost revenue

Inventory: reduce inventory = save on costs of storage, insurance and obsolescence

Outsourcing – advantages and disadvantages

Outsourcing: use of external providers to perform business activities.

‘Outsourcing’ is often called Business Process Outsourcing (BPO)

Can be done domestically or internationally

e.g. manufacturing, product design, financial reporting, IT, paralegal support

There are 2 forms of outsourcing:

Captive or in house (do-it-yourself)

Non-captive (outsourced to third parties through the market) – external providers/vendors

Outsourcing Decision:

Whether to outsource or not

Assessing whether the outsourcing is cheaper and more efficient than performing work internally

Deciding to outsource

Decide on geographical location

Decide on which vendors to use

The length of the contract, KPIs and service levels

Outsourcing options

Option 1: creation of shared services centres (SSC)

An in-house outsourcing option involving the creation of an in-house centre that performs work for multiple subsidiaries

Option 2: use of ‘fee-for-service’ arrangement

A low-risk, short term strategy

Involves engaging a supplier for fixed services at pre-determined price

Allows the business to test the outsourcing market prior to making a change

Option 3: joint ventures

Business engages an outsourcing services provider, but can also outsource to other businesses in the same industry

Option 4: use of a ‘build-operate-transfer’ approach

Involves offshore outsourcing and involves contracting with external organisations

Use of contracts that detail agreed levels of service against pre-determined KPIs

Advantages of outsourcing

Simplification: reduction of activities performed within the business

Efficiency and cost savings: access to cheaper labour, regulatory differences and skilled labour in offshore locations = cost savings

Increased process capability: access to improved technologies and highly skilled labour

Access to skills/resources: access to highly skilled labour at lower costs when outsourcing.

Disadvantages of outsourcing

Communication and language: communication issues between business and outsourcing vendor due to language barriers etc

Information security: outsourced business doesn’t adhere to regulations/specifications = information isn’t secure

Information technology: growth of outsourcing results in an increasing need for supporting information technology (IT)

Technology – leading edge, established

The use of technology can be an operations strategy if it helps the business to create a competitive advantage

Technology plays a crucial role in ensuring business success

Can be classified according to whether it:

Applies to and improves input, transformation processes and outputs

Makes the managerial and administrative functions work more smoothly

Leading edge technology

Leading edge technology: technology that is the most advanced or innovative at a point in time.

Operations processes can be distinguished by utilising leading edge technology

Helps businesses create products more quickly = achieve higher standards and reduced waste = effective operation

Leading edge technologies are created by processes and thinking

When inventive inputs are created, new products can be made = change markets

Established technology

Established technology: technology that has been developed and is widely used and simply accepted without question.

E.g. include the use of computers and various software packages in managing business operations and functions

Established technologies are functionally sound and help to establish basic standards in productivity and speed

Established technologies include:

Barcoding

Robotics

Computer-aided design (CAD)

Computer-aided manufacturing (CAM)

Computer-integrated manufacturing (CIM)

Information processing technologies (IT)

How do you know if technology is successful?

Reduction in cost of production

Increase in speed of delivery (e.g. introducing online checkout systems)

Increased customisation (e.g. choose toppings for a burger)

Inventory management

Inventory (stock): amount of raw materials, work-in-progress and finished goods that a business has on hand at any particular point in time.

Inventory management has a significant impact on transformations processes and in operations strategies

Advantages of holding stock

Consumer demand can be met when stock is available

This may prevent the consumer from buying from a competitor

An alternative can be offered if a particular line of goods runs out

Generates income for the business instead of losing sales

Reduced lead times between order and delivery

Disadvantages of holding stock

Costs (including storage charges, spoilage, insurance, theft and handling expenses

Invested capital, labour and energy

Cost of obsolescence

FIFO and LIFO

FIFO (First In First Out): a method of pricing inventory assuming that the first goods purchased are the first goods sold.

LIFO (Last In First Out): a method of pricing inventory that assuming that the last goods purchased are also the first goods sold.

Inventory valuation techniques assist businesses in determining COGS and gross profit

This is done through inventory valuation techniques, such as:

First in First Out (FIFO)

Business would apply cost on a first-in-first-out basis

Used for perishable goods that have an expiry date

In times of falling prices

FIFO overstates COGS

Understates profit

Undervalues inventory in the balance sheet

Minimises taxes

In times of rising prices

COGS is understated

Profits is overstated

Inventory is overvalued in the balance sheet

Maximises taxes

Last in First Out (LIFO)

Business would apply cost on a last-in-first-out basis

Used to ensure the up-to-date stock is on display for customers

In times of falling prices

Understates COGS

Overstates profits

Overvalues inventory on balance sheet

Maximises taxes

In times of rising prices

Overstates COGS

Understates profits

Undervalues inventory in the balance sheet

Minimises taxes

Just In Time (JIT)

Just In Time (JIT) ensures that the exact amount of material inputs will arrive only as they are needed.

It’s a method of managing the flow and storage of stock

Makes only enough products to meet demand

Used for lean production (less waste and more efficiency)

Advantages:

Good/service differentiation

No excess stock

No extra storage

Customise

Disadvantage:

No benefit of bulk buying

Economies of scale are difficult to achieve

Needs to have a flexible work arrangement

How do you know if inventory management is successful?

Reduction in inventory costs (inventory, storage, security, insurance)

Reduction in inventory outages

Reduction in inventory obsolescence costs

Reduction in production time lost as a result of inputs not being available when required

Quality Management

Quality: describes the degree of excellence of a product or service, and its fitness for a stated purpose.

Quality management: processes that a business undertakes to ensure consistency, reliability, safety and fitness of purpose of product.

Quality Assurance: systems to ensure set standards are achieved in production.

Quality Control: use of inspections at various points in the production process to check for problems and defects.

Continuous improvement: an ongoing commitment to improving a business’s goods or services.

Contemporary approaches to quality as an operations strategy include:

Quality control: inspection, measurement and intervention

Quality assurance: application of international quality standards

Quality improvement: total quality management and continuous improvement

Quality Assurance

Business emphasises quality in the design of a product, providing a level of assurance to consumers

QA has been developed in response to the impact of globalisation and an international emphasis on quality

Emphasis on quality

Aspects of QA include:

Product must be fit for purpose

How well a product does what it’s designed to do

Right first time

Product is manufactured correctly the first time

International Organisation for Standardisation (ISO):

A widely used international standard is the ISO 9001 series of quality certifications

Standards are voluntary

Enhances domestic and international competitiveness

Quality Control

Less defects in the production process by:

Inspection: random testing and regular auditing to assess the quality of products

Measurement: compare it to pre-determined specifications and quality standards

Intervention: taking corrective action when products don’t meet pre-determined quality standards

Quality Improvement

Quality improvement emphasises 2 concepts:

Total Quality Management (TQM)

Focus on the total business to deliver quality to its customers (transformation/production process)

Holistic approach emphasising the commitment and responsibility of employees to strive for excellence

Achieves customer satisfaction

2. Continuous Improvement (aka Kaizen)

Ongoing commitment to improving a business’s goods and services

Successful through demonstrating initiative and contributing innovative ideas on how to improve quality products

Enables businesses to obtain and maintain a sustainable competitive advantage over its competitors

Achieve total quality management objectives:

Benchmarking

Employee empowerment

Focus on the customer

Continuous improvement

Overcoming resistance to change

Redundancies: loss of work arising from job skills that are no longer needed or relevant to the workplace.

Change agents: consultant paid to come in and fix issues.

Inertia: psychological resistance to change

An influence on operations strategy arises from the need to manage and be responsive to change

External changes are caused by:

Legislation

Economy

Society’s expectations

New technology

Internal changes are brought on by:

Staff initiative

Use of available technology

Innovation of goods or services

Change can often be resisted and cause uncertainty by consumers

Resistance to change arises from 2 principal sources within a business:

Financial costs:

Purchasing new equipment: major cost due to the initial high capital costs

Redundancies: costs associated with payouts given when employees lose their jobs due to skills not being needed

Retraining employees: new technology means employees need to acquire additional skills through training

Structural reorganisation (changes to plant and equipment layout): costs associated with purchasing new equipment/machinery and reorganising the layout

Inertia: a feeling of uncertainty or fear of the unknown

When change is imminent or pressing, leading to people become resistant to the change

Change management strategies:

Identify the need for change – SWOT

Setting SMART goals

Creating a culture of change – change agents

Use of change models

Lewin’s change management model

Unfreeze  Change  Refreeze

Unfreeze: Unfreeze: breaking down the systems and preparing the business for change.

Change: the new procedures and models must be communicated.

Refreeze: positive re-enforcement to ensure changes last.

Kotter’s 8 step model

Global factors

Global sourcing: businesses purchasing supplies/services without being constrained by location.

Economies of scale: cost advantages gained by increasing the size or scale of production.

Several global factors present opportunities when assessing the operations strategies in managing a business

These factors facilitate a comprehensive examination of the impact of globalisation on operations strategy

These are classified as:

Global sourcing

Involves sourcing any operations that gives the business a cost advantage

e.g. international outsourcing and offshoring

Businesses must consider the risks of global sourcing:

Cost of logistics, storage and distribution

Delays in supply chain

Different regulations

Trade barriers (e.g. tariffs on electronics in China)

Financial risks (e.g. exchange rates)

Economies of scale

EOS is achieved when businesses can lower their per unit input costs

The need to sell to global markets becomes a decision based on cost advantages

Achieved by ability to purchase in bulk, improved technologies allowing mass production

Scanning and learning

It’s an effective global operations strategy when identifying and learning from other business practices

The central focus of scanning and learning is adopting the Kaizen theory

Sources of learning:

Management journals, industry and business associations, conferences and other forums

Staff members and managers who have a diversity of experience

Research and Development (R&D)

Allocation of resources for R&D allows businesses to create leading edge technologies and to create innovative products and solutions

Government encourages R&D, offering taxation incentives and grants as inducement for businesses to invest in R&D

Makes a big difference to the level of innovation, quality and competitive advantage of a business