Operations

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Chapter 2: The Role of Operations Management

2.1 - 2.2 Strategic Role of Operations Management

Operations Management

Operations: The business function is concerned with the transformation of inputs into outputs

Transformation: Any changes to inputs (resources) that add value and convert them into outputs (goods and services)

Cost Leadership Management

An important strategy in operations management is cost leadership

The aim of cost leadership is to have the lowest costs or be the most price-competitive in the market.

Costs Include:

Input Costs

Labour Costs

Processing Costs

Inventory Costs

Quality Management Costs

Two issues an operations manager should be aware of when using the cost leadership

The company should still make a profit

Quality should not be eroded to to the extent that people will no longer want to buy the product

Goods/Services Differentiation Approach

A second important strategy in operations is product differentiation

Refers to the distinguishing of products (goods and services) in some way from those of competitors

Differentiate by:

Spend more time and money on product design

Focus on reputation of your brand

Make customer service a priority (instead of sales)

Use quality control processes

Customisation

Tangibility and Perishability

Textbook Notes

Operations management is an essential key business function that overlaps with the other business functions such as marketing, finance and human resources management (HRM).

There are several different sources of operations costs in business. There are input costs, processing or transformation costs and the costs of getting products to markets.

Cost leadership involves aiming to have the lowest costs or to be the most price-competitive in the market.

Good/service differentiation means distinguishing goods or services in some way from competitors.

Standardisation involves producing homogeneous goods and services and is usually a high-volume, low-cost approach.

Sources of differentiation in goods include:

varying the actual features, quality and/or augmented features

sources of differentiation in services include:

varying the amount of time spent on a service

the level of expertise offered

self-service options

flexibility

no fuss

quality of materials or technology used in the delivery of the service.

For both goods and services, differentiation can be created from cross branding or strategic alliances.

2.3 Goods and/or Services in Different Industries

Primary, Secondary, Tertiary Industry

Primary Industry: produce the raw materials lie wheat, wool and meat and make use of natural resources such as minerals and forests (e.g. farming or mining)

Secondary Industry: manufacturing industry, where basic materials are turned into saleable products, such as the production of clothing from cotton or wool or the manufacture of electronics or machines

Tertiary Industry: provision of services includes such things as banking information-based services, hospitality, tourism and personal services.

Difference between manufacturing and service industries

Manufacturing outputs are tangible (i.e. they physically exist - you can touch, move, store them.

Services, however, are intangible (i.e. they are real but they don’t physically exist - you cannot touch, move, store, them)

Goods and Services Supplied in Different Industries

The job of an operations manager will be different in different industries

Primary/Secondary (Goods)

Faults

Efficiency (Decrease Waste)

Product Quality

Product Speed

Standardised production/customised production

Tertiary (Services)

Customer Service

Speed of Service

Customisation

Training of Employees

Cost Leadership Strategy

Textbook Notes

Goods and services are produced differently.

Goods may be standardised (mass produced or an assembly line) or customised (varied according to the needs of customers).

Goods may be perishable or non-perishable.

The character of the goods will shape the nature of the operations processes.

Intermediate goods have gone through one set of operational processes then become inputs into further processing.

Services vary according to whether they are highly specialised or more customised.

Services can be standardised and in doing so a cost leadership strategy is being applied.

2.4 Interdependence With Other Key Business Functions

The four key business functions work together to assist a business achieve a competitive advantage and achieve its goal, i.e. to make a point.

Textbook Notes

The range of typical business functions is operations, marketing, finance and human resources.

Interdependence refers to the mutual dependence that each of the key functions have on one another. This means that the various business functions work best when they work together.

In most businesses, closely related tasks are grouped together — for example, sales and marketing, finance and administration, and operations and research and development.

Operations refers to the business processes that involve transformation or, more generally, ‘production’.

Marketing is about meeting the needs and wants of consumers through provision of products (both goods and services) at prices that the market is prepared to pay.

Reports such as income statements, which determine the amount of money the business has earned after its expenses have been paid, are very useful to managers and other stakeholders.

The function of human resources is to deal with the people the business employs and the issues arising from their employment.

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Chapter 3: Influences on Operations Management

3.1-3.3 Globalisation, technology, quality expectations and cost-based competition

Globalisation

The increased integration of different national economies into a global market where trade of goods and services can be more easily conducted across national borders.

Facilitated by the reduction or removal of trade barriers

Enabled by improved technology, communications and transportation

Globalisation Influences on Operations

Allows businesses to reduce costs by offshoring:

locating manufacturing overseas closer to their source of raw materials

locating manufacturing where inputs and labour are cheaper, e.g. in a developing country (which may also offer low tax rates as incentives to foreign businesses).

Allows businesses to make use of the competitive advantages other regions have, e.g. Japan is known for technical innovation, China for inexpensive labour, Italy for design, India for a computer-literate workforce.

Allows certain operations functions to be outsourced to businesses overseas to reduce costs.

In summary, a business can reduce costs, as well as improve quality by setting up global supply chains.

Additionally, globalisation can provide access to a large, global marketplace to sell the outputs a business produces.

Products may need to be modified or differentiated to suit the target market in another country – operations needs the flexibility to achieve this.

Standardised products or services, with minimal changes, are acceptable for companies who base their reputation on quality, reliability and consistency.

Technology Influences on Operations

Production and service provision can be improved through the use of new technology. It may:

improve productivity by making production quicker

reduce costs

improve quality

reduce waste

Influence of Quality Expectations on Operations

In terms of product quality, customers will expect:

Fitness for purpose – does the product do what it is advertised to be able to do? Is it easy to use for this purpose?

Durability – the lifespan of the product with reasonable use

Reliability – how often will the product need maintenance or repair?

The marketing function relies on operations to produce a product with the features and quality that buyers expect (in line with the product’s target market).

i.e. product quality does not always have to be at the highest level.

Thinking point: compare Rolls-Royce prestige cars to cheaper family cars.

If customers’ quality expectations are not met, a company’s reputation can be damaged, impacting upon sales, market share and ultimately profits.

Influence of Cost-Based Competition on Operations

Cost Leadership Strategy

i.e. make your costs and prices lower than competitors to increase market share and profit

In a highly competitive market, this influence will cause a business to attempt to reduce their costs and lower their prices by:

reducing both fixed and variable costs

sourcing cheaper inputs

seeking improvements in technology

outsourcing or offshoring certain operations activities.

If a business cannot compete on a cost basis, product differentiation could be used as an alternative strategy.

Textbook Notes

Globalisation is a reference to the removal of barriers of trade between nations.

Globalisation is characterised by an increasing integration between national economies and a high degree of transfer of capital (facilities and machinery), labour, intellectual capital and ideas, financial resources and technology.

Globalisation has significantly affected the operations function of large and global businesses.

Globalisation affects consumers who seek global brands and this, in turn, shapes the operations function.

Technology plays a very important role in operations — from administration, through to all operations processes.

Management of quality expectations in both the manufacture of products and the delivery of services is a goal of operations management.

Quality expectations differ between goods and services.

Whether quality expectations relate to goods or services, in both cases they lead to consumers having a perception about the standard of products, and accordingly consumers will be prepared to pay a higher price for higher quality.

Another factor affecting and shaping operations is cost-based competition. Here a business can apply cost leadership to reduce both fixed and variable costs.

3.4-3.5.1 Government Policies, Legal Regulation, Environmental Sustainability

Influence of Government Policies on Operations

Government policies can assist the operations function of a business to be more innovative & competitive.

Financial grants or tax concessions provide more funds for businesses seeking to be innovative in their operations and product development.

The instant asset write-off policy allows tax write offs for businesses on the purchase of items such as technological equipment.

The Emissions Reduction Fund (ERF) incentivises Australian businesses to cut the amount of greenhouse gases they create. This can be through:

new technology

upgrading equipment

changing business practices to improve productivity or energy use.

The removal of government protection for certain industries (i.e. subsidies, tariffs and quotas) has forced some businesses to relocate operations to countries where resources are cheaper.

E.g. the clothing industry – including Bonds manufacturer Pacific Brands moving all manufacturing out of Australia to China in 2010.

Influence of Legal Regulations on Operations

Operations managers must make sure their business complies with all laws relating to operations (or risk heavy fines, as well as damage to reputation resulting in lower sales and profits).

Legal regulations can ensure, for example:

safety of operations (Work Health and Safety Act 2012 Cth)

protection of the environment from pollution from business operations (Environment Protection and Biodiversity Conservation Act 1999 Cth)

that a business's products meet certain standards, e.g. in relation to being safe, of a particular quality and clearly labelled (Competition and Consumer Act 2010 Cth)

that the risk of modern slavery in the operations and supply chain of a reporting entity (and its owned and controlled entities) is minimised. The Modern Slavery Act 2018 (Cth) (Commonwealth Act) commenced on 1 January 2019. It mandates that large companies report about such risks as well as the steps it has taken to respond to the risks identified.

Influence of Environmental Sustainability on Operations

Environmental sustainability – using production methods that allow resources to be used by producers today in a way that will not impact future generations’ access to those resources.

Operations managers need to consider:

reducing use of non-renewable resources

sustainable use of renewable resources

using technologies that minimise damage to the environment.

Key areas when making sustainable operations decisions: resource depletion, pollution caused by machinery, removal of waste, excessive packaging, how consumers can responsibly dispose of or recycle their products.

Note: In addition to benefiting the environment & future generations, adopting environmentally sustainable operations practices will benefit businesses:

Society will have a positive attitude towards businesses that are environmentally friendly.

This is likely to result in increased sales and customer loyalty

Textbook Notes

Government policy is a source of change for business.

Government policies affect operations decisions.

Policies from the government are reflected in laws and regulations.

Managers who do not comply with government regulations in respect to human resources, the environment and public health risk fines and, in some cases, jail.

While some government policies restrict business practices, other policies encourage business and provide opportunities.

3.5.2-3.5.5 Corporate Social Responsibility

Corporate Social Responsibility (CSR)

CSR refers to the evaluation of a company’s performance according to financial, social and environmental criteria in annual reports, separate sustainability reports or ‘triple bottom line’ reports.

Triple bottom line refers to a company’s focus on people, the planet and profit.

CSR reporting is voluntary and is compiled to target stakeholders such as employees, customers, governments, suppliers, the community, shareholders and analysts.

Common CSR issues include equity and justice, human rights, corruption and the payment of bribes, corporate transparency, environmental issues and labour standards.

The Difference Between Legal Compliance and Ethical Responsibility

Legal compliance in operations may involve legal regulations in waste management, supply chain management or redundancy payments.

A business is also bound by company laws monitored by ASIC, taxation laws (the ATO) and employment contracts and conditions in the Fair Work Act.

Ethical responsibility is more about doing the ‘right thing’. It goes beyond just complying with the law and making profits for the company. It involves following the intention and ‘spirit’ of the law and not just doing the bare minimum required for legal compliance.

Business ethics are the principles companies follow in order to be ‘good global citizens’.

This may involve such things as supporting charities or promoting human rights.

For operations, ethical responsibility may involve such things as minimising harm to the environment, recycling or producing value-for-money, quality products or avoiding supply chains using slave labour.

Environmental Sustainability and Social Responsibility

The issue of environmental sustainability is of great importance in operations management. Businesses need to ensure that they are upholding stakeholders’ expectations of responsible behaviour.

Environmental sustainability – the need to use finite resources e.g. water, timber, minerals today in a way such that future needs are not compromised. It also refers to the minimisation of the impact on the environment from business processes.

By pursuing environmental sustainability, a business will be contributing to a better quality of life for society, i.e. they are being socially responsible.

Social responsibility involves taking actions or making decisions that are morally and ethically correct and are in the best interests of the community.

CSR and Social Responsibility

Advantages to businesses that demonstrate social responsibility:

stronger patronage and hence increased sales and profits

attract and retain the best staff

attract ethical investors.

Textbook Notes

Business operations are required to adopt environmentally sustainable practices to reduce their carbon footprint.

Corporate social responsibility (CSR) is an important influence on business and it integrates financial, social and environmental goals.

Legal compliance refers to businesses abiding by the word of the law, whereas ethical responsibility encompasses a much broader integration of social, community and environmental concerns.

Compliance costs are those associated with the cost of meeting the needs imposed by regulations.

Compliance applies to a wide range of business activities.

Ethical business enterprises recognise that variation in laws 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.

Environmental sustainability and social responsibility are features of an ethical approach to operations management.

Economic development must be accomplished sustainably.

Environmental sustainability refers to the economic, social and environmental performance of a business.

Social responsibility refers to a business’s management of the social, environmental, political and human consequences of its actions.

Page 3

Chapter 4: Operations Processes

4.1-4.2.3 Inputs - Transformed resources and transforming resources

Operations Processes Overview

Operations processes are the processes involved in the transformation of inputs into outputs (i.e. the production system).

The operations process: input-transformation-output

Operations processes add value so that the output has greater value than the cost of the inputs. This allows the outputs to be sold for a profit.

An operations manager aims to meet the strategic goals of operations (improve productivity, efficiency and quality of outputs) and must consider issues such as:

What production processes are necessary?

What will the sequence of these processes be?

How frequently will the operations process need to be adjusted?

What technology will be necessary?

Common Inputs

Materials:

Raw materials – e.g. wood, minerals

Parts and components (i.e. intermediate goods that have already undergone some transformation from their ‘raw’ state)

Energy – e.g. electricity, gas

People – labour (physical & mental), maintenance staff, managers etc.

Physical – factory/office buildings, machines, office equipment

Intangible – time, finance, knowledge

Inputs - transformed versus transforming resources

Inputs can be classified as either ‘transformed resources’ or ‘transforming resources’.

Transformed resources are the inputs that are changed into something else (a good or service or a component) during the operations process.

The three main types of transformed resources are materials, information and customers.

Transforming resources are the inputs that remain in the business and are applied to the other inputs to change them to add value. They are not used up in the operations process.

The two main types of transforming resources are human resources and facilities.

Inputs - Transformed Resources

Materials:

There are two main categories of materials used as inputs:

Raw materials - mineral ore (e.g. iron ore), wood, oil and water.

Intermediate goods - materials that have already been transformed and are then used in further operations processes, e.g. a microchip used as an input by a computer manufacturer.

Information:

Used to make plans & execute operations

External information – e.g. from government statistics, market and industry reports, media reports, academic papers

Internal information – from within the business, from its own financial and operational statistics, or quality reports. Information becomes a transformed resource when it is used to improve processes or inform processes.

E.g. For Qantas, the individual bookings (information) made by customers are analysed and transformed into decisions about which aircraft to use, which services to offer etc.

Financial service example – information is an input that gets transformed by accountants or financial institutions into a tax return or investment advice.

Customers:

There are many different ways that customers can be changed.

Doctors and hairdressers can transform the way customers feel and look.

Airlines change the location of their customers.

Cinemas entertain customers, improving their quality of life.

Customers are also an input in that it is their desires and preferences that ‘drive’ the operations of a business.

To maintain a competitive advantage, the operations process must be responsive to what customers want and expect.

Inputs - Transforming Resources

Recap: Transforming resources are the inputs that remain in the business and are applied to the other inputs to change them to add value. They are not used up in the operations process.

Human resources: the skill, knowledge and physical labour of people is applied to materials to transform these into goods and services.

Facilities: are the buildings (e.g. factories, warehouses, offices), land, equipment and technology that a business uses in its operations.

4.3-4.3.1 The influence of volume, variety, variation in demand and visibility

In the process of transformation, decisions will need to be made about the following questions.

How much to make — what VOLUME of input to process into outputs?

How much VARIETY — how many different outputs should be made?

How much VARIATION in demand will there be — can the business make more or less when customers want more or less? How quickly can the business respond to these changes in demand?

How much CUSTOMER CONTACT should there be (should the production process be very visible?)

The VARIATION in demand is an important issue.

Constant Demand:

Full Time Workers

Bulk Material Workers

Seasonal Demand:

Contract Workers

Season Material Workers

Unpredictable Demand:

Casual Orders

Frequent Material Orders

The VARIATION in visibility

Some production is very visible (the customers “see it in action”), so the workers need to demonstrate quality in the transformation process.

Transformation Processes

Transformation processes are the activities involved in the transformation of inputs into outputs (i.e. production activities).

Each activity adds value so that the output has a greater value than the cost of inputs. The outputs will be sold for a profit.

The operations manager’s goals are:

to produce goods and provide services which are right the first time

to cut costs by eliminating delays and improve delivery times

to produce in a dependable and flexible manner

to control input costs

Manufacturers have highly automated operations processes using machinery, robots & computers.

Service providers’ processes are more labour intensive.

Operations Processes

Job production - producing products and services that require high quality and customisation. Outputs are made on demand to suit customer requests. Flexible, time-consuming system with a low output. Costs per unit are high.

Batch production - products are made in groups or batches. A good example is a bakery that makes a number of slightly different breads, using the same process and produced in batches - can deal with unexpected increases in demand.

Mass production (or line production) - a continuous flow of inputs and outputs, e.g. assembly lines. Little variation in products - high volume output of a standardised product. Costs per unit are low, due to a high level of automation and economies of scale.

The Influence of Volume

Volume is the actual number of products or services produced by the operation.

Volume of production can differ significantly between different types of businesses within a particular industry.

A high volume business using mass production will have processes with a high degree of repetition.

A low-volume business will use a production process that allows for stoppages and adjustments.

The implication for operations when volume has the strongest influence is that there will be a large amount of capital, facilities, technology and materials used and much less labour. Assembly lines using conveyor belts will be common and will be organised in a fixed sequence of activities.

Low-volume operations will use much less equipment with the emphasis on multi-skilled labour and may be involved in a ‘craft’-type industry such as wedding dress design.

A business that has low costs as its objective will use a high-volume operation, while a business that chooses product differentiation and flexibility will likely use a low-volume operation.

The Influence of Variety

The variety of products and services offered by a business will depend on the different needs of its customer base.

Variety refers to the number of different models and variations offered by a business in its products or services.

If the business has customers with different needs, goods and services will have to be modified or a wide variety of models and options will need to be provided.

Implication for operations processes: generally, more variety means a more expensive operations process.

Sophisticated technology allows production changes from one product to another without too much disruption to the operations process.

Low-variety operations produce a high volume of a standardised product with a low cost.

The Influence of Variation in Demand

Demand may change over time, e.g. seasonal change may cause variations in demand for an air conditioner or ice cream manufacturer.

Less predictable changes in demand also occur e.g. reduced demand for airline flights following natural disasters such as the Japanese tsunami.

Implication: generally it’s more difficult to respond to decreases in demand than increases in demand.

A lot of effort goes into predicting demand, with input from the marketing function.

The Influence of Visibility (customer contact)

Physical retail outlets have a higher level of customer visibility than online operations.

Operations will be influenced by the degree to which customers can see the operations in action.

Service-based businesses will usually have a high level of visibility, while customers will rarely see the operations process of a manufacturing business.

The implication for operations of a highly visible operations process is that the quality of labour will be significant.

Operations will need to have well-trained, highly skilled, adaptable staff who are able to handle the individual needs of customers.

A close relationship with the human resources function is needed.

Speed of operations will also be important - i.e. short time lags between customer ordering and delivery will be needed; otherwise the customer will move on to a competitor.

4.4-4.4.2 Sequencing and Scheduling

Sequencing and Scheduling

Sequencing and scheduling tools are used to identify steps in the operations process and organise them into the most efficient order to complete.

Sequencing is the order in which activities in the operations process take place.

Scheduling refers to the length of time procedures in an operations process take.

Gantt charts and critical path analysis are the main sequencing and scheduling tools used by project managers.

They assist with task analysis and structuring and ordering the transformation processes.

Sequencing and Scheduling: Gantt Charts

A Gantt chart records the number of tasks involved in a project and the approximate time needed for each task.

A company can set the dates for the completion of each stage of operations (known as ‘milestones’) and hence allow planning, organisation of staff rosters etc.

They can also track their actual progress against their predicted progress, assisting companies to keep to production targets.

Sequencing and Scheduling: Critical Path Analysis (CPA)

Critical path analysis is a scheduling method that shows:

what tasks need to be done

how long they will take and

the order that is necessary to complete the tasks.

REMINDER: the critical path is the shortest length of time it takes to complete all tasks necessary to complete the project.

This is usually the longest path through the diagram.

4.5-4.5.3 Technology, Task Design and Process Layout

Task Design

Task design involves classifying job activities in order to make it easier for an employee to successfully perform and complete a task.

Technology

Technology can:

enable a business to do new things or perform existing tasks in better ways

improve the competitiveness of operations by giving it more flexibility, as it allows the business to respond to changes in the market more easily

allow a business to produce non-standardised versions of its standard product to satisfy individual clients

lead to improvements to productivity: less waste and more efficient use of time

speed up operations processes and therefore cost effectiveness

reduce labour costs.

Manufacturing technology – CAM, CAD and robotics

CAM (computer-aided manufacturing) is software which can be used to control the manufacturing process.

CAD (computer-aided design) can create 3D diagrams from input data.

This allows businesses to simulate and modify designs easily, resulting in the fast development of innovative and differentiated products.

CAD software can be linked to the CAM software to allow the instantaneous manufacturing of designs.

Robotics are used in highly specialised, complex tasks, e.g. in engineering and also in assembly lines.

Task design - deciding how a task will be completed

What needs to be done? Who will do it? How can it be done more efficiently?

Each task is analysed and broken down into separate steps and allocated to machines and employees with the appropriate skills, knowledge and capabilities.

Continual adjustment of task design in the operations process is necessary in order to maintain competitiveness.

Task design must consider new ideas, technological change, training and the skills of the workforce.

Process Layout

After a task has been analysed and the technology requirements determined, the physical layout of the business’s factory or office needs to be planned (i.e. the plant layout).

The objective is to have as efficient a flow of resources through the business as possible.

In a process layout machines and equipment are grouped together by the function (or process) they perform (sometimes called functional layout).

Example: hospitals (maternity ward, ICU).

Process production (use of process layout for intermittent production)

Process production deals with high variety / low volume production.

The product moves from department to department, depending on what transformation is needed.

The necessary machinery is organised according to this sequence.

Example: banks (services) use a process layout to accommodate handling customers with different needs.

Production Layout

Process layout is different to product layout, in which the product moves from station to station, e.g. in a car assembly line.

Product production or mass production involves manufacturing a high volume of standardised quality goods.

Fixed Position Layout

Fixed position layout: employees and equipment come to the product due to the weight or bulk of the product (e.g. a ship).

Fixed position layout is often appropriate for project production, which deals with layout needs for large-scale, bulky activities, e.g. bridge construction.

Office Layout

An office layout is designed for staff to be able to work efficiently.

It typically uses workstations (typical in service-based businesses).

Process Layout Activity

Business Activity

Optimal Layout

Hospital

Process Layout

Motor Vehicle Production

Product Layout

Insurance Company

Process Layout

Bridge Construction

Fixed Position Layout

TV Show Production

Fixed Position Layout

4.6-4.6.3 Monitory, Control and Improvement

Monitoring, Control and Improvement

There are always areas for improvement in operations processes.

Businesses will compare themselves against competitors and industry benchmarks in order to determine areas that need improvement.

Monitoring is observing what happens in operations processes, and measuring actual performance against key performance indicators (KPIs).

Control refers to making adjustments to operations processes if they are not meeting KPIs.

This will help to ensure quality and timeliness.

It may involve coping with changes as they occur, e.g. changes in demand.

Improvement refers to the systematic reduction of inefficiencies and wastage, poor work practices and the elimination of any bottlenecks.

Through monitoring, control and improvement a business can ensure that:

The operations process runs efficiently and effectively

The operations process produces the goods and services it was designed for.

Monitoring

Monitoring may include the collection of data that can be used to assess the performance of operations, such as:

Operations costs

Waste levels from operations, e.g. leftover materials

The number of goods with defects

The quality of the product

Lead time (the time between the start and completion of the production process)

Response time to customers’ requests

The volume of output.

4.7-4.7.2 Outputs - Customer service and warranties

Outputs

Outputs are the goods & services provided to customers.

The purpose of operations is to produce an output that has a value to customers that is greater than the cost of its inputs.

Note: customers may be members of the public, or other businesses.

Some outputs are used by other businesses as inputs, e.g. cotton fibre produced by a cotton farm will be an input for a clothing manufacturer.

Waste, defective products and worn-out machinery may also be considered a secondary output.

Intangible outputs include customer service and warranties.

Customer Service

Customer service is an intangible output that requires extensive contact with customers, is labour-intensive and is immediately consumed.

Customer service is provided to customers before, during and after a purchase.

Customer service as an output is very difficult to measure.

Many businesses have policies and procedures on how to manage relationships with customers.

A business can differentiate itself as better than its competitors because it has better customer service.

Good customer service will increase consumer satisfaction and contribute to a competitive advantage because it can create long-term relationships and therefore brand loyalty.

Customer service can include the following:

Handling customer returns promptly

Answering questions and providing information

Frequent and meaningful communication

Anticipating customer needs

Updates and advice on new products

Following up customer enquiries and complaints

Using technology to offer a 24-hour service, e.g. via email / Facebook.

Good customer service leading to brand loyalty can enable a business to charge higher prices and lessen the need to reduce costs elsewhere in the business.

Warranties

A warranty is an assurance that a business stands by the quality claims of the products it makes and provides to the market.

Under the Australian Consumer Law (ACL) businesses have the responsibility to ensure that the goods they sell:

have a level of quality that is comparable to the price and product description

are suitable for the purpose or job they will be used for

match the product description in any advertising or promotion

are free from defects or faults.

A warranty is an agreement to replace or repair items not meeting the above expectations (under the Competition and Consumer Act 2010 (Cth)).

Warranty claims information can help a business to improve its operations processes by locating the cause of defects.

Operations needs to make sure that the product will usually outlast the warranty period.

Marketing can also use optional extended warranties to increase revenue IF the product will most likely keep working normally.

Page 4

Chapter 5: Operation Strategies

5.1-5.2.6 Performance objectives - Quality, Speed, Dependability, Flexibility, Customisation, Cost

Performance Objectives

Performance objectives influence all areas of the transformation process.

Meeting the performance objectives will help a business become more efficient, productive and profitable.

This will enable businesses to gain a competitive advantage.

Performance objectives are goals that relate to aspects of the transformation process. The main ones are:

Quality: by getting it right the first time and having defect-free products and error-free services

Quality of design and materials

Conformance to specifications, e.g. standards for sunglasses

Quality of service

Speed: by increasing speed of production and delivery of services

Importance of removing operations process bottlenecks to satisfy customer demands as quickly as possible

Dependability: by being on time with a reliable operations system, equipment and employees

How reliably and consistently the product performs

Can be measured by the number of warranty claims or customer complaints

Flexibility: through having processes that are able to be changed quickly to meet changes in market requirements (e.g. variation in demand or shifting production to new products)

Companies need the ability to meet increased demand or vary a good to meet customers’ preferences. This can be achieved by:

Thoughtful use of plant and machinery – improving efficiency

Adopting new technology that increases production flexibility

Changing product design to allow more variety.

Customisation: by creating individualised products to meet customers’ specific needs/provide more individualised options

How a product can be redesigned to meet clients’ wants

Customisation example: In 2014 Domino’s Pizza invited customers to create their own pizzas, and earn a ‘slice’ of the profit. The marketing campaign was called Pizza Mogul and enabled customisation of the output using a website and mobile app.

Cost: by reducing cost, being efficient and productive, and offering more value.

A business will seek to reduce costs in all aspects of operations, including:

Reducing operational costs by using new technology

Reducing supplier costs (e.g. through global sourcing or negotiating a discount for buying inputs in bulk)

Finding efficient distribution methods

Managing inventory (stock).

5.3-5.3.2 New Product

New product or service design and development

Important for maintaining a competitive advantage

May be influenced by market research, however some companies rely on changing technologies to develop products they think customers will like, e.g. Apple, Uber

If a successful new product is the ‘first to market’, it can dominate market share, e.g. the Apple iPad.

Apple innovates continuously to establish their brand, whereas others improve quality and range more gradually over time, e.g. Hyundai.

Wotif is an example of process innovation, offering ‘last minute’ hotel rooms at discounted prices.

The process can be very expensive (as it often involves sophisticated technology) and time-consuming.

For this reason some businesses imitate a competitor’s product.

This avoids the costs and risks of new product development. Even though they are ‘second to market’, their product may have additional features that give it a competitive edge.

Important considerations when designing and developing new products:

quality (in line with customers’ expectations)

supply chain management (will our current suppliers be able to handle the extra/different demand for supplies?)

capacity management (what will be the impact on our current facilities and resources?)

cost (what are the inputs, time & energy required?)

5.4-5.4.3 Supply Chain Management

Supply Chain Management

Supply chain management refers to controlling the flow of supplies through the whole operations process from sourcing raw materials to final delivery to the customer.

Businesses must manage their supply chain effectively if they are to be competitive.

Supply chain management aims to minimise input costs, reduce waste, provide fast delivery to markets and therefore have satisfied customers.

Every link in the supply chain needs to be cost effective for a company to maintain its cost advantage over competitors.

Using supply chain management as an operational strategy involves three key components:

logistics

E-commerce

sourcing, including global sourcing.

Logistics

Logistics is an important part of supply chain management. It focuses on the transferring of inputs, resources and outputs through the supply chain as quickly as possible.

Logistic Involves:

transportation and distribution via trucking, railroads, shipping & airfreight.

E.g. trucking provides the greatest flexibility and reliability for Coca-Cola Amatil. Trucks with inbuilt conveyor belts can deliver empty cans to the factory just in time (JIT) and feed directly onto the factory conveyor belt.

storage, warehousing and distribution centres.

Distribution centres are used for short term storage in strategic locations closer to customers to minimise the time required to provide supplies.

materials handling and packaging.

E-Commerce

E-commerce is the use of the internet to buy and sell goods and services.

E-commerce has a big impact on supply chain management:

It replaces costly and time-consuming manual processes.

Information on quantity, quality, availability and price of goods and services is instantly accessible from local and international suppliers.

Many businesses manage their supply chain through e-procurement (the use of online systems to manage supply).

This means that suppliers can have direct access to information about a business’s level of supplies online.

If supply levels reach a predetermined point, the supplier will send more supplies without a further request.

Woolworths is an example of a business that uses this e-procurement system.

Sourcing

Firstly a business must determine its quantity and quality requirements for every input needed in the operations process.

Businesses will then look for suppliers who can provide:

a reliable and flexible supply of inputs

acceptable quality inputs

competitive price

Suppliers will also have to be able to provide the required volume of inputs with a short lead time.

i.e. the time between the supplier receiving a request for inputs until the delivery of the inputs to the purchaser.

Global Sourcing

Global sourcing refers to obtaining inputs from the global marketplace due to:

lower cost

unavailability of certain inputs in the home country

better variety, reliability or quality of supply.

Example of global sourcing - Australia has a huge supply of iron ore and coal, which it supplies to steel mills in China.

Some businesses may choose to locate their operations processes closer to their supply of raw materials or to where there is a source of cheap labour in order to achieve lower costs.

Supply Chain Management - Aldi

Aldi’s products are cheaper due to their effective supply chain management. They are increasingly taking market share from Woolworths and Coles.

Aldi limits its supply chain by only including products that customers purchase regularly.

They also have close partnerships with their suppliers, who produce Aldi-branded products according to strict quality controls. This avoids the high costs of “brand” advertising.

Aldi also has close partnerships with their transport suppliers. They provide trucks and facilities exclusively for Aldi’s requirements which minimises costs.

Aldi also minimises supply chain costs in-store - no bags are provided and products are displayed in open cartons.

5.5-5.5.3 Outsourcing

Outsourcing

Outsourcing refers to the use of external providers to perform some part(s) of the operations process. (It is also known as business process outsourcing - BPO.)

It is a supply chain management strategy that can provide significant value to a company.

Examples of outsourcing:

Mobile phone companies outsourcing their customer service function to a customer service centre in India.

Apple bought the main iPad 2 microprocessor from Samsung.

Outsourcing can allow a business to focus on its strengths, or core competencies.

Businesses outsource functions that other businesses do more efficiently and more cheaply.

Activities which may be outsourced include: manufacturing, design, administrative work, human resource functions or even supply chain management, e.g. to Toll or Linfox.

Vertical integration is the opposite of outsourcing.

It means that the business performs all of the operations processes themselves and makes all of their own inputs.

Outsourcing - Advantages

The following advantages of outsourcing will improve profits and/or enable lower prices:

lower costs, e.g. cheaper labour (potentially if outsourced overseas)

access to specialist knowledge and skills of staff in other companies

more efficient methods

access to new technology to improve processes

increased speed

improved quality of goods or services produced

businesses can focus on & improve their core competencies.

Outsourcing - Disadvantages

loss of control over quality, reliability or costs

the possibility that a business you outsource to will develop expertise about your product and launch a rival product

slower lead times and response to changes in the market

loss of key knowledge within the business by relying on the outsourcing provider

loss of internal jobs affecting morale of remaining staff

communication difficulties with outsourcing overseas.

5.6.2 New Technology

Technology

Keeping up with advances in technology is crucial for a business.

The use of technology is an operations strategy that can assist a business to gain a competitive advantage.

It can make production processes and/or office processes more efficient, thereby leading to cost efficiencies and increased profits.

It can also save time and improve quality.

Aviation technology has led to new faster, larger and more fuel-efficient aircraft.

However there can be problems with leading edge technology. For example, the Boeing Dreamliner experienced problems with its electrical systems, its lithium-ion batteries as well as cracks in the wings. These problems have cost them $2 billion dollars..

Leading Edge Technology

In a competitive market, businesses seek a competitive advantage by being the first to develop and implement new technology.

Leading-edge technology is also referred to as ‘cutting edge’. It is the very latest way of doing something.

If a business can incorporate leading-edge technology, this will give it a step ahead of its competitors.

Established Technology

This is technology that has been tried and proven.

It is very reliable and dependable.

In operations the implementation of technology will enable a business to:

save time and money

have better control over operations

improve quality

conduct business across geographic boundaries.

Types of established manufacturing technology include CAD, CAM and robotics.

Radio Frequency Identification (RFID)

RFID (radio frequency identification) technology was a leading edge technology that Walmart has successfully integrated into its inventory management since 2003 to reduce costs and gain a competitive advantage.

How RFID is used at Walmart:

When a product is scanned at the checkout, the supplier is automatically notified that the item needs to be replaced, and an automatic order is sent to the factory to produce another one.

Walmart will have its new product within 2 days, so does not have to hold large stocks of inventory, thereby saving costs.

The system is extremely reliable – it is not affected by ‘human error’ in the ordering process.

5.7-5.7.4 Inventory Management

Inventory Management

Inventory (or stock) refers to:

raw materials in storage waiting to be processed

partly finished goods in the transformation process

finished goods ready to supply to the customer.

The business must hold enough stock to meet demand, but not too much.

Holding too much stock will increase storage costs.

Not having enough stock on hand may result in lost sales and damage to the business’s reputation as a reliable supplier.

Inventory management strategies can assist a business to maintain a competitive edge by:

maintaining its reputation as a reliable supplier

reducing costs.

Technology has helped to improve efficiency and accuracy in inventory management:

barcodes and electronic barcode readers keep track of stock levels and stock location

software programs for inventory management systems can update records, generate orders and predict demand

e.g. RFID (radio frequency identification) technology assists Walmart with inventory management, resulting in greater efficiency and reduced costs.

Effective inventory management will assist a business to:

maximise sales

identify stock that is not producing good sales

minimise costs

have enough stock available but not too much.

Advantages of Holding Stock

lower costs

by buying large quantities of raw materials or components and negotiating quantity discounts

providing a buffer when customer demand or inventory supply is uncertain (just-in-case)

ensuring customer demand is met

reducing lead times between order and delivery.

assisting a business to expand

e.g. by promoting its products in non-traditional or even new markets and having a ready supply.

Disadvantages for Holding Stock

the costs of storage

e.g. warehouse costs, security costs, insurance

the cost of obsolescence, which means the product is no longer of use to customers because it is out of date

e.g. mobile phones when new models come out

spoilage of perishable items, or damaged packaging

shrinkage i.e. unexplained inventory loss, typically between 1% and 3% p.a.

JIT (Just-in-Time) Management

This is a lean production method which aims to:

have the business make only enough products to meet demand

hold as little stock as possible

save money as there are no expensive holding and insurance costs

minimise losses due to obsolescence

eliminate waste through overproduction.

It relies on the supplier being able to supply promptly, utilising sophisticated scheduling software.

Strategies to Value Inventory

LIFO – last-in-first-out - most recently purchased stock is sold first

on an income statement, newer, more expensive stock is sold

assumes the oldest inventory items remain on the balance sheet

costs (i.e. COGS) will be higher on an income statement and profits will be lower, reducing the amount of tax the business pays

current assets, i.e. stocks remaining at the end of the period, will be undervalued.

LIFO assumes that the cost of purchased stock rises over time with inflation.

FIFO – first-in-first-out: oldest stock is sold first.

assumes the most recently acquired inventory items remain on the balance sheet.

Under a FIFO approach:

costs (i.e. COGS) on an income statement will be lower and profits will be higher, increasing the amount of tax the business pays

current assets, i.e. stocks remaining at the end of the period, will be valued higher compared to LIFO.

FIFO assumes that the cost of purchased stock rises over time with inflation.

5.8-5.8.3 Quality Management

Quality Management

For a consumer, quality means that the business’s product:

is well made, long lasting and not faulty

does everything that it is claimed to be able to do

is backed by good customer service.

For a business, quality means:

the quality of outputs meet the quality standard stated in the operations plan

outputs are of a consistent quality.

Quality management can assist a business to sustain a competitive advantage by:

ensuring consistent standards and therefore maintaining customer satisfaction

building a reputation for reliability

in some cases allowing a business to command higher prices due to superior quality

avoiding costly returns or product recalls.

The Australian Consumer Law ensures products perform the way they are meant to and provide consumers a guarantee of acceptable quality:

Competition and Consumer Act 2010 (Cth).

Quality Management - Quality Control

Quality control involves checking whether what was expected to happen actually occurred.

i.e. checking the results against the plan. Quality control should involve checking the quality of the product at different stages of the transformation process.

It involves inspection and intervention in all stages of the production process.

Three types:

Feed-forward controls involve careful planning before production begins (anticipating potential problems and making amendments).

Concurrent controls used during the manufacturing process, e.g. Coca Cola cans are measured by a laser beam to ensure they contain the correct amount of soft drink.

Feedback controls – checking the finished product and getting customer feedback.

Quality Management - Quality Assurance

Setting standards before production and measuring achievement compared to these standards.

A business can achieve a quality certificate from organisations which set quality standards, such as Standards Australia or ISO (International Organisation for Standardization).

A component certified under ISO standards will be of the same quality no matter which country it’s made in.

ISO standards are voluntary, but meeting them enhances competitiveness.

Quality Improvement - Continuous Improvement

Increases in customer satisfaction result in increasing sales and profit.

Maintaining competitive advantage and gaining market share requires improvements in quality over time.

Continuous improvement may be the result of an innovation breakthrough or just be gradual over time.

It can be ideal for businesses to create an improvement culture in which all staff are encouraged to suggest areas where improvements can be made.

Quality Improvement - Total Quality Management (TQM)

Total quality management relies on continuous improvement in all aspects of operations.

Quality is the responsibility of all employees to prevent quality problems – build it right in the first place.

TQM involves:

benchmarking and comparison with competitors

employees being empowered to make suggestions on quality issues

a focus on the customer

developing a business culture that seeks continuous improvement.

5.9-5.9.2 Overcoming Resistance to Change

Overcoming Resistance to Change

Businesses are always changing in response to both:

the external environment, e.g. legislative and regulatory changes, social and economic changes, new breakthroughs in technology, globalisation

the internal environment, e.g. innovation from within the company or new initiatives from staff.

Understanding why there is resistance to change and developing strategies to overcome this resistance can assist a business to maintain a competitive advantage.

Reasons for Resistance to Change

In operations resistance to change usually relates to financial costs and inertia (psychological resistance to change).

Financial costs include:

purchasing new equipment

redundancy payments for employees whose skills are no longer required

retraining costs related to new equipment and technology

reorganisation costs as change may require a new layout of the plant, factory or office.

Inertia – staff may react emotionally to change and want things to remain as they are as they fear the unknown.

Strategies to Overcome Resistance to Change

Managers need to develop strategies to overcome resistance to change.

Steps for change management:

Identify the source of change and what adjustments may need to be made to operations processes.

Communicate with employees regarding the need for change to create understanding and support for the change.

Use a change agent if necessary to facilitate the change process (an existing staff member or external professional who aims to create a culture of change by including staff in goal setting etc.).

Use change models, e.g. Lewin’s unfreeze/change/refreeze model or Kotter’s eight-step change model (see following slides).

Kurt Lewin’s unfreeze/change/refreeze model

Unfreezing: This process breaks down the forces supporting the existing system and prepares the business for change.

Change: The new procedures and behaviours must be communicated and implemented.

Refreezing: This requires that the manager offers positive reinforcement to make sure the change lasts.

John Kotter’s 8 Step Model

Establish a sense of necessity: Examine the current business environment to highlight impending threats or potential opportunities.

Form a guiding group: Establish a team of people to act as facilitators.

Create a vision: Provide employees with a clear, shared sense of direction that will allow them to achieve a common objective.

Communicate the vision: Communicate the vision with all those the change will affect to build cohesion between employees to dispel fear of the unknown.

Empower people to fulfil the vision: People who have the opportunity to be actively involved in the change process generally develop a sense of ownership.

Recognise and reward achievements: Recognition and reward should be given to encourage further risk taking and reinforce the positive aspects of embracing change.

Consolidate improvements: As the change process proceeds, assemble the benefits attained into the business’s operating procedures and systems.

Institutionalise the changes: Make a clear statement to show the connections between the new procedures and the success of the business.

Managing Change Effectively

To be constructive, changes must:

occur at a pace at which they can be absorbed by, and

integrated into, the business

be evaluated thoroughly to assess their overall impact.

Poorly managed changes normally result in employee

resistance, tension and lost productivity.

be introduced into a workplace culture that supports

employee participation.

5.10-5.10.4 Global Factors

Global Sourcing

Involves businesses obtaining inputs or services from around the world in order to reduce overall costs and improve their products.

Global sourcing allows businesses to:

access superior technology

access cheaper labour

access resources not available locally

access expertise in certain areas

locate manufacturing where it is cheapest to do so

access finance from the country with the lowest interest rates

have longer operating hours.

Using global sourcing can result in increased complexity of operations:

coordinating the delivery of each input becomes more difficult and requires efficient scheduling

there may be language and cultural barriers

lead times may be increased

there will be less control over the quality and reliability of inputs

there may be different regulatory requirements between nations

there is risk associated with exchange rate fluctuations.

Economies of Scale

As a business produces on a larger scale to supply a global market, the actual cost of each individual item produced decreases.

This may provide a competitive advantage and increased profitability.

If a business expands globally it can achieve production economies of scale by:

producing more output to export and

investing in larger manufacturing facilities and benefiting from the savings due to mass production.

Other economies of scale can be gained by expanding operations globally, e.g. large businesses can obtain discounts for bulk orders of inputs.

Scanning and Learning

Continuously monitoring trends in the global environment will assist managers in making strategic business planning decisions for operations.

Through scanning and learning, businesses can be alert to developments or changes in things such as:

global demand for the goods and services they produce

the location of the lowest-cost sources for transformed and transforming resources

the number of new global competitors

technological innovations

which nations are offering incentives to attract global businesses.

Businesses can use learnings from employees who have worked for other global businesses, management journal articles, social media, conferences or industry associations to find out about global competitors’ plans, developments and innovations.

Research and Development (R&D)

Time and money committed to global R&D can result in the creation of new products or the improvement of existing ones, or improvements to the production process.

Global R&D needs to be ongoing so businesses can keep ahead of global competitors who are also trying to create new products or improve existing ones.

The creation of innovative new products may:

open up new markets globally

give the business a more prominent brand name and hence increased sales both locally and globally if it establishes a reputation for having innovative products

result in improvements in quality or reduced costs.

The government supports innovation and may offer taxation incentives or grants for R&D.