role of operations management chapter 1
TRANSCRIPT
Business notes year 12
Operations processes
Role of operations management – chapter 1
Operations – business processes that involve transformation or, more generally, “production”
Inputs – tangible things such as raw materials, land, human resources
Outputs – products (goods and services) made from the process of transformation
Transformation is conversion of inputs into outputs
Value adding – creation of extra or added value as inputs are transformed into outputs.
Operation processes include – production of goods and services, production controls, inventory
controls, supply chain management,
Operations and customer focus
Consumers want items which come from businesses who are:
Minimising resources in production – lean production, reducing waste, reflect fair value for any
labour used in processes, operate at low cost to maximise affordability, integrate environmental
awareness, reflect changes in needs of consumers over time.
Minimising waste
Also known as: Lean production – aims to eliminate waste at every stage of production. It involves
analysing each stage of the production processes, detecting where inefficiencies are and correcting
them.
Several sources of waste in business, under use of labour, over production, errors and effects
requiring remediation.
Reflect fair value for any labour uses in processes
Consumer advocating for operations processes in production and supply to integrate notions of fair
price, decent working conditions, ethical sourcing and local sustainability.
Ethical sourcing
Refers to business practices of sourcing from suppliers that engage in ethical conduct such as
payment of fair wages and use of environmentally friendly practices
Operate at low cost to maximise affordability
Consumers seek to buy goods and services at low cost. Businesses aim to maximise affordability
through generating sales revenue. Global sourcing and astute supply chain management are
essential feature of effective operations management.
Operations processes adjust to shifting needs
Improvements in technology = capability and functionality of products is changing
Seen through advancements in communications and digital technologies. Such as apple, Samsung,
Toyota have harnessed technology in innovative ways. Sometimes drive changes in consumer
markets
Strategic role of operations management
Strategic – long-term, broad aims affecting all key business areas, the strategic role of each key
business involves the managers of each function contributing to the strategic direction/ plan of the
business.
Overreaching goal of a business is to maximise profits, focusing on 2 aspects: revenue and costs
Influences on operations management – chapter 2
Operations management – processes of transformation that draw from a range of inputs to make
final products.
Influences on operations management
Globalisation:
Is the removal of barriers of trade between nations. Characterised by an increasing integration
between national economies and a high degree of transfer of capital, labour, intellectual capital,
ideas and technologies. Globalisation is very significant influence on operations management. Global
consumers seek global brands and tend to seek standardised products.
Standardised products – mass produced, uniform in quality and meet a predetermined level of
quality.
Supply chain management (SCM) and the global web
supply chain – refers to range of suppliers a business has and the nature of its relationship with
those suppliers.
Global web: network of suppliers a business has chosen based on lowest overall cost, lowest risk and
maximum certainty in quality and timing of suppliers. A business needs a very predictable and
reliable supply chain, finding suppliers needed so that production processes can flow smoothly. In
supply chain management, the global web strategy is one in which the business aims to minimise
costs across the range of its suppliers. A business will opt for a location with appropriate proximity to
suppliers.
Technology
Defined as design, construction and or application of innovative devices. Technologies such as
computers, cell phones and security devices, can enable people to communicate more easily and
enable improved business processes. Technologies are used for organisation, planning, decision
making, manufacturing and distribution.
Quality Expectations
Significant influence on operations function. Quality – how well designed, made and functioned
goods are. Consumers quality expectations and personal level of satisfaction will indicate whether
the quality has met expectations or not.
Expectations people have = how products are designed, created and delivered.
Quality expectations with goods – quality of design, fitness for purpose, durability
Quality expectations for services – professionalism of service provider, reliability of service producer,
level of customisation.
Cost-based competition
From determining break even point and apply strategies to create cost advantages over competitors.
Recognise that prices cannot keep increasing: therefore reducing costs is a way to maximise profits
when revenues are fixed. They focus on reducing costs to a minimum while maintaining profit
margins.
Fixed costs -those not dependent on the level of operating activity in a business
Variable costs – very direct relationship to the levels of operating activity or production. E.g. labour
cost
Government policies
Polices such as taxation rates, work and health safety, environmental polices all have impact on
business operations. Policies inform law-making, and lead to business opportunities, operations
managers need to be fully aware of the contemporary government policies and what they comprise.
Legal regulation
Range of laws with which a business must comply are collectively termed ‘compliance’. Expenses
associated with meeting the requirements of legal regulations are termed compliance costs.
Compliance costs are the expenses associated with meeting the requirements of legal regulations,
i.e. abiding by all laws.
Operations management has laws that influence how practises and processes are conducted. The
relevant laws will relate to labour and labour management, as well as the environment and public
health including work health and safety – use of machinery and in interacting with the business
environment., training and development – application and technology in appropriate methods, fair
work and anti-discrimination laws – requiring employees to be treated with respect etc,
environmental protection – minimising pollution, eliminating disposing of any toxic residues.
Environmental Sustainability
Meaning that business operations should be shaped around practices that consume resources today
without compromising access to resources for future generations. 3 main aspects of environmental
sustainability – sustainable use of renewable sources, a reduction in the use of non-renewable assets
and the application of the precautionary principle. Precautionary principle – where environmental
impacts are uncertain, a business undertake actions that are most likely to cause least
environmental impact.
Significantly affected by the rise in climate change awareness and the need to integrate a long-term
sustainable view of resource management into business planning and practise. Seen by businesses
trying to minimise water, reduce carbon footprint, recycle food water, electricity etc.
Carbon footprint – amount of carbon produced and entering the environment from operations
processes.
2.3 Corporate social responsibility (CSR)
Open and accountable business actions based on respect for people, community, and broader
environment. Involving the business doing more than just complying with the laws and regulations.
Not just profiting but reflecting a range of community concerns. Business shapes its processes in
such a way to minimise environmental damage and waste. Can integrate principle of CSR by
employing a range of diverse workers and people from all backgrounds.
Difference between legal compliance sand ethical responsibility
Legal compliance - set of processes and procedures within a specific program to ensure adherence
to government regulation and laws.
Ethical responsibility - ability to recognize, interpret and act upon multiple principles and values
according to the standards within a given field and/or context.
Legal compliance and business operations
Such as:
Labour law compliance – minimum wages, award wages, working hours and breaks
Environmental and public health compliance – regulations stopping dumping, [pollution,
Business licensing rules – those requiring specific levels of training
The difference between legal compliance and ethical responsibility is that legal requirements require
businesses to follow the letter of the law – the prescribed standards of behaviour. Ethical
responsibility sees businesses meeting all their legal obligations and taking it further by following the
intention and ‘spirit’ of the law.
Outsourcing, compliance and business behaviour
Outsourcing – contracting out business functions involves the use of third-party specialist
businesses, e.g. recruitment firms. Aiming to take advantage of the specialist skill s provided by them
and to achieve a reduction in labour costs. Outsourcing may be onshore or offshore.
Onshore outsourcing – involves the use of domestic business as the outsourcing provider
Offshore outsourcing – taking the activities to a provider in another country. Meaning the
compliance requirements are different between nations, taking advantage of cost savings, lower
taxation rates, weaker environmental and intellectual property regulations.
Ethical responsibility
Involves business going beyond the law and considering broader social, community and
environmental concerns. Follow international labour standards that come from the international
labour organisation (ILO). ILO raises matters such as, working women and maternity protection,
provision of safe working conditions.
Environmental sustainability and social responsibility
Economic sustainability – using methods of production that conserve the Earths resources for future
generations.
Environmental sustainability – activities that support long-term economic growth without negatively
impacting social, environmental, and cultural aspects of the community
Community increasingly expects business to: adopt greenhouse abatement (reduction) measures,
encourage the development of long-term sustainable strategies. Socially responsible businesses
achieves 2 goals, expanding the business, providing for the greater good of society.
Central theme – “above and beyond” making profit and obeying the law.
Business studies HSC notes Operations
• strategic role of operations management – cost leadership, good/service differentiation o Cost leadership involves aiming to have the lowest costs or to be the most price competitive in the market. o Products are classified as goods or services
• goods and/or services in different industries o The operations function is shaped by the range and types of goods and services o Standardised goods are mass produced o Customised goods are those that varied according to the needs of customers o Non-perishable goods are inherently more durable than perishable goods • Manage all aspects of quality and inventory management from sourcing through to production and distribution • Implement inventory management strategies and be highly responsive to market demand o Perishable goods have a short life span • High standards of quality, safety and cleanliness • Short lead times and distribution which is quick and effective • Appropriate and robust packaging and cold storage processes through production and distribution
• interdependence with other key business functions
o Interdependence refers to the mutual dependence that the key business functions have on one another
Operations Marketing
Finance Human resources
• globalisation, technology, quality expectations, cost-based competition, government policies, legal regulation, environmental sustainability
o
• corporate social responsibility – the difference between legal compliance and ethical responsibility – environmental sustainability and social responsibility
Operations processes – chapter 3
Chapter 3- Operations processes
Operations processes are those processes involved directly with transformation. The processes may
be broadly classified according to their role in transformation
o Inputs into transformation processes
o The actual processes of transformation
o Outputs of the transformation processes
Inputs, transformation processes and outputs are all important and each of these features of
operations has its own features and presents challenges for operations managers
3.2 Inputs
Inputs are the resources used in the transformation process. Inputs are already owned by most
businesses, including
o Labour
o Energy
o Raw materials
o Machinery and technology (capital equipment)
Labour
o Human effort, both mental and physical is a necessary input into operations processes.
Labour is crucial to all aspects of business operations. Jobs in the field of business operations
include those in the areas of sourcing and supply chain, technical support and maintenance
for machinery.
Energy
Energy may be converted into heat, movement, light, sound etc. and is an essential input
into transformation. Required to bring inputs and transform them to distribute them.
Raw materials
Essential inputs into operations process, such as wood, unprocessed agricultural products,
natural resources, water. Sourced through supply chain and businesses will determine the
volume of raw materials required against the level of demand for their finished goods.
Machinery and technology
Machinery and technology are necessary to enable transformation processes, which are
characteristic for operations. Machinery Is used to process raw materials, as well as to
design and make products. This makes labour redundant. In reality. When machinery and
technology are used in business, some labour may be lost but there is then a period of
retraining that takes place as people acquire new skills relevant to use with new
technologies.
Capital-labour substitution – machinery and technology displace people by doing the work they do.
Input classification
Inputs –
Transformed resources – materials and intermediate goods, information (internal + external),
customers (needs, feedback)
Transforming resources – human resources (labour), facilities (plant, factory or office)
Transformed resources (transformed inputs)
Transformed resources – those inputs that are changed or converted in the operations process.
Transformed resources are:
Materials, information, customers
Materials
Are basic elements used in the production process and consist of 2 types: raw materials and
intermediate goods.
Raw materials: essential substances in their unprocessed state.
Intermediate goods: goods manufactured and used in further manufacturing
Transformed resources become inputs used in the production of other goods and services. E.g.
Raw materials
Silicates, copper, oils, plastics------------transformation process----------silicon chips and memory cards
Inputs
Silicon chips n memory cards
Plastics ------------------------------transformation process-------------desktop and monitor
Metal
Labour
Information:
• Information is the knowledge gained from research, investigation and instruction, which
results in an increase in understanding. The value of information lies in its ability to influence
behaviour or decision making.
External information -
• This information that comes from market reports, statistics from industry observers and
industry bodies, official government statistics from the Australian Bureau of statistics, media
reports, academic papers and commentary management journals and comparative studies.
Internal information
• Coming from within a business such as financial reports, quality reports, internal key
performance indicators (KPIs). KPIs are specific criteria used to measure the efficiency and
effectiveness of the business’s performance. E.g. lead times, production data, inventory
turnover rates. Another source = customer feedback.
Customers
Customer become transformed resources when their choices shape inputs. Consumer
orientation takes preferences and interests of consumers as starting point to production
processes. Consumers act as inputs and desires and preferences act as a transformed resource.
Businesses implement a customer relationship management (CRM) program to better
understand the desires and preference of customers. CRM is a system business use to maintain
customer contact. Used to improve customer service, increase competitiveness and identity
changes in consumer tastes.
3.2.4 Transforming resources
The other collection of inputs to any operations processes are transforming resources which are
those inputs that carry out the transformation process. The 2 main transforming resources are
Human resources
Humans are the single most important input into a business. Effectiveness human resources carry
out their work duties and responsibilities can determine the success which transformation and value
adding occurs. By attracting, retaining, motivating staff to ensure they can meet consumer needs.
Facilities
Once a business has determined the type of operations process to use, it will need to
undertake a complex set of design planning decisions involving the production facilities
Facilities – plant (office/factory) and machinery used in the operations processes
Businesses need to: decide
Whether the required facilities should be in one or two large sites or divided among
numerous smaller sites, special conditions (energy, water requirements), most efficient etc
etc.
Transformation processes
Main factor is transformation process
Transformation – conversion of inputs (resources) into outputs (goods and services).
‘transformation’ - implies physical changes but also includes conversion of resources into
services. E.g., your school takes its main inputs – students, the syllabus, staff and buildings –
and produces educated, employable graduates. A manufacturer transforms inputs into
tangible products (goods that can be touched). A service organisation transforms inputs into
intangible products (services that cannot be touched but that have effects that can be felt).
Transformation processes and value adding
Conversion of inputs into outputs, transformation processes are also directly involved with
value adding. Costs are incurred when something created by manufacturing is processed or
when a service is created. The addition of cost in transforming the inputs into a process,
which will turn them into outputs, adds value.
The influence of volume, variety, variation in demand and visibility (customer contract)
Questions such as:
How much to make – what volume of input to drawn in and to process?
How much variation – what range of outputs should be made in the process of transformation?
How much variation in demand will there be – and how quickly can the operations processes
respond to changes in demand?
How much customer contact should be there be and what, if any, role should it have on
transformation processes?
The influence of volume
• Volume refers to how much of a product is made. Volume flexibility refers to how quickly
the transformation process can adjust to increase or decreases in demand. This
responsiveness to the required changes in volume is essential to effectively managing lead
times.
• Lead times is the time it takes for an order to be fulfilled from the moment it is made. If
business cannot quickly adjust to changes in market demand, they can over produce, which
may lead to wastage and increased inventory costs.
The influence of variety
• The mix of products made, or services delivered, through the transformations process is
sometimes called mix flexibility.
• Mix flexibility is known by consumers as product range or variety of choice.
The influence of variation in demand
An increase in demand = increased inputs from suppliers, increased human resources, increased
energy use and increased use of machinery and technology.
This can be hard to meet if:
• suppliers cannot supply quickly enough • labour is not flexible enough, skilled or available • the adopted machinery cannot adjust to increased capacity quickly, either because it
is not designed to or because it breaks down • increased energy and power are not able to be readily sourced.
The influence of visibility (customer contact)
Customer contact or ‘feedback’ can directly affect transformation processes. customers and
their preferences can shape what businesses make. Customer contact may be direct or
indirect. Direct contact, form of customer feedback given through surveys, interviews,
warranty claims, letters, wikis and blogs and verbal contact. Indirect feedback comes
through a review of sales data that gives an indication of customer preferences and market
share data, through an observation of peoples’ decision-making processes and through
consumer reviews.
3.3.3 Sequencing and scheduling
Sequencing – order in which activities in the operations process occur.
Scheduling – length of time activities take within the operations process
2 main scheduling tools are Gantt charts and critical path analysis
Gantt charts
Outlines the activities that need to be performed, the order in which they should be performed and
how long each activity is expected to take. Gantt charts can be used for scheduling simple routines
e.g. completing a homework assignment.
Critical path analysis
Scheduling method that shows tasks needed to be done, how long they take, and what order is
necessary to complete those tasks.
Critical path is red
Non critical is black
Showing what must be done to make the product and how quick it can be made
3.3.4 Technology
Technology is the application of science or knowledge that enables people to do new thigs or
perform established tasks in new and better ways.
Office technology
• Computer or tablet
• Keyboard and mouse
• USB and other data storage devices such as external hard drives and cloud storage
• Modem
• Mobile phones/ hand free telephones/ wireless enabled phones
• Paging services and answering machines
• Combined printer; photocopier, scanner and facsimile machine
• Transfer money and EFTPOS machines
Developments of the above technology have created the opportunity for people to do more
work in less time, which means a greater range of tasks can be completed in their working time.
These technologies have also enabled office workers to work at a great distance from the office.
Increasingly people telecommute and work from home.
Manufacturing technology
Key manufacturing technologies are robotics, computer-aided design (CAD) and computer-aided
manufacturing (CAM).
Robotics applies to highly specialised forms of technology, capable of complex tasks. Robots are
used in engineering and specialised areas of research, as well as on assembly lines where a
programmable machine capable of doing several different tasks is required.
Computer-aided design (CAD) is a computerised design tool that allows businesses to create
product possibilities from a series of input parameters. It is used in a range of business sizes and
types. It is a computerised graphical design tool that generates three-dimensional diagrams from a
set of given input data (parameters).
Computer-aided manufacturing (CAM) is software used to allow the manufacturing process to
become computer controlled. The CAD software can be linked to the CAM software to allow the
instantaneous manufacturing of designs that are accepted by clients.
3.3.5 task design
Task design involves classifying job activities in ways that make it easy for an employee to
successfully perform and complete the task. Task design overlaps the employment relations
functions of job analysis, job description and person specification.
TABLE 3.1 The steps involved in the task design process
STEP EXAMPLE
Define what needs to be done in a general statement
• A skilled competent electrician
Analyse the general job into specific duties • Understand electrical circuits • Ability to work carefully and
independently to prescribed electrical standards
• Capacity to correctly install electrical devices and adjust capacity as required
• Capacity to source correct parts and use in prescribed ways
• Follow directions • Communicate clearly with builders
and site managers Allocate a degree of difficulty and a time element
• Supervision: 10 minutes supervision per hour
• Difficulty: 8/10 Match tasks to existing state/federal awards (base)
• $30/hour first year licensed electrician
Articulate the task via job descriptors and a pay scale to allow for a range of experiences in a range of work settings. (This indicates the types of skills/experience and qualifications needed to successfully complete the task.)
• Licensed electrician $73 000 p.a. Duties: to plan and install a range of electrical items and associated circuitry into a range of building types (residential, commercial and educational).
Skills audit
A formal process used to determine the present level of skilling and nay skills shortfalls that
need to be made up either through recruitment or through training.
Workplace layout
There are several different ways to organise the physical layout of a workplace. The
alternative layout options are:
• Process layout
• Product layout
• Fixed position layout
Process layout
The process layout is the arrangement of machines such that the machines and equipment
are grouped together by the function (or process) they perform. This type of layout is typical
of hospitals, for example, where areas are dedicated to types of medical care, such as
maternity wards and intensive care units.
Process layout for intermittent production
Process production deals with high-variety, low-volume production. In this process, each
product has a different sequence of production and the production is intermittent, moving
from one department to another. The necessary machinery is arranged according to this
sequence.
A feature of this approach, often used by businesses, is the creation of work cells or work
teams (see figure 3.12). Cellular or team-based work arrangements can be used to create
combinations of machinery and equipment to produce a single product or a range of similar
products.
Product layout
Product production (mass production) is characterised by the manufacturing of a high
volume of constant quality goods
This type of layout is referred to as product layout where the equipment arrangement
relates to the sequence of tasks performed in manufacturing a product
Operations managers must set times for the assembly task, which requires an
understanding of not only the nature of the task but also the tools and skills required.
Fixed position layout
Project production deals with layout requirements for large-scale, bulky activities such as
the construction of bridges, ships, aircraft or buildings. With project production, it is more
efficient to bring materials to the site; workers and equipment come to the one work area.
A fixed position layout is where a product remains in one location due to its weight or bulk.
Office layout
Typically, an office space is organised around discrete workstations.
Workstations – desk areas required by office workers, usually fitted with access to a
computer monitor, keyboard, telephone, mouse and mouse pad etc.
Office layout is tailored to meet the needs of the business. In a manufacturing business the
office layout is often informal. It may even overlook the factory floor so that managers can
supervise from their desk. In an accountant’s office, clients need to feel welcome as they
seek advice and information
3.3.6 Monitoring, control and improvement
All operations processes should be monitored for their effectiveness. The main
transformational processes should be subject to control. This requires effective monitoring
and a focus on continuous improvement. Monitoring and control lead to improvements when
there is a focus on quality and standards.
Monitoring
Monitoring is the process of measuring actual performance against planned performance.
Monitoring involves the measuring of all aspects of operations, from supply chain management and
the use of inputs, through to transformation processes and outputs.
It is arranged around the needs to measure key performance indicators (KPIs). KPIs are
predetermined variables that are measured so that appropriate controls to operations processes can
be made.
Monitoring of the KPIs gives operations managers a chance to measure how the business is going
and to assess performance against targeted levels of performance.
Control
Control occurs when KPIs are assessed against predetermined targets and corrective action is taken
if required. It compares what was intended to happen with what has occurred. Control requires
operations managers to take corrective action. That is, the operations manager will make changes to
the transformation process such as redesigning the facilities layout or adjusting the level of
technology to correct the problem.
Improvement Improvement refers to systematic reduction of inefficiencies and wastage, poor work processes and
the elimination of any bottlenecks.
A bottleneck is an aspect of the transformation process that slows down the overall processing
speed or creates an impediment leading to a backlog of incompletely processed products.
Improvement typically is sought in time, process flows, quality, cost and efficiency.
Continuous improvement The concept of continuous improvement involves an ongoing commitment to achieving perfection.
Although the goal of perfection will never be reached, striving for improvement is important
to the business culture. The process becomes one of setting higher and higher standards in
the continual pursuit of improvement.
Advantages of manufacturing technology:
Increase in Quality / Decrease in Human Error - Quality enhancement is one of the main
benefits of manufacturing technology. With production software, humans are needed less,
and robotics begin to play a substantial role.
Disadvantages of manufacturing technology:
Limited Creativity - Manufacturing technology completely limits creativity due to the
abundance of automation/machinery and lack of employees within the production facility.
3.4 outputs
Outputs are the result of a business’s efforts — the final good or service that is delivered or
provided to the consumer
The most obvious output of the operations process is the goods made or services provided.
However, there are other, more subtle outputs. Customer service refers to how well a
business meets and exceeds the expectations of customers in all aspects of its operations
3.4.1 Customer service
This means that inputs, transformations processes and outputs are all aimed at meeting or
exceeding customer expectations.
In its totality, this is customer service. If a customer expresses dissatisfaction with a
product on account of it being defective, not meeting quality expectations, finds wait
times/lead times too long or returns the product or makes a warranty claim, then the
operations processes need review.
Central to customer service is to make sure the right good or service is delivered or provided
at the right place at the right time
• charge an average of 10 per cent more for the same goods and services
• grow twice as fast as their competitors • increase their market share and profits.
Customer service can no longer be regarded as merely explaining the refund policy or
providing a complaints department. Rather, it is an attitude that should be adopted by all
departments and employees within the business.
3.4.2 Warranties
A good way to assess the effectiveness of operations processes is to measure the number
of warranty claims.
Warranty claims are made against goods that have defects arising from an issue in
transformation.
Operations strategies
4 operations strategies
To achieve operations goals and broader business goals, operations managers can apply
numerous operations strategies.
You can see that the strategies relate to inputs, sourcing and supply chain management and
transformation (or throughput) processes that involve technology, quality management and
inventory management as well as outputs.
As with all strategies or tactics, the starting point is a set of goals or performance objectives.
These performance objectives help define what inputs are required and influence all aspects
of the transformation processes.
4.2 Performance Objectives
Performance objectives – are goals that relate to aspects of the transformation processes.
Six main objectives are:
Quality
Speed
Dependability
Flexibility
Customisation
Cost
4.2.1 Quality
Often determined by consumer expectations, to inform the production standards apllied by
the business
Quality performance objectives include:
Quality of design, quality of conformance, quality of service.
Quality of design
Arises from consumer and their preferences. How well the product is made, or service is
delivered. Design determines inputs and how the transformation process will be arranged.
Quality of conformance
Quality of conformance is the focus on how well the product meets with standard of a
prescribed design with certain specifications. It is a measure of how consistently products
achieve compliance the desired specifications regardless of the standard of specifications.
Quality of service
Referring to:
How reliable the service is, how well the service meets specific needs of the client, how
timely or responsive the service delivery is.
4.2.2 speed
Refers to the time it takes for the production and operations process to respond to changes
in market demand. Speed aims to satisfy customer demands as quickly as possibel.
Goals for speed:
Reduced wait times
Shorter lead times
Faster processing times
4.2.3 Dependability
Refers to how consistent and reliable a business's products are. This can be measured by
using warranty claims. Highly durable = dependable product. In the aspect of services, a
measure is the number of complaints received; fewer complaints = more dependable
service.
4.2.4 Flexibility
Flexibility refers to how quickly operations processes can adjust to changes in the market.
Can be best achieved by increasing the capacity of production. Using plans and better
machinery.
4.2.5 Customisation
Refers to creation of individualised products to meet the specific needs of the customers.
Mass customisation: a process that allows a standard, mass-produced item such as a
motor vehicle or computer, to be personally modified to specific customer requirements.
4.2.6 Cost
Cost as a performance objective refers to the minimisation of expenses such that operations
processes are conducted as cheaply as possible.
SUMMARY
• Operations strategies are based around the need to achieve performance objectives. • Performance objectives are goals that relate to aspects of the transformation function
and can be allocated to key performance indicators (KPIs) in the following areas. • Quality, including:
• design — how well a good is made or a service is delivered • conformance — how well the good or service meets a prescribed
design with a certain specification • service — how reliable, suitable and timely the service delivery is
• Speed: the time it takes for the production and the operations processes to
respond to changes in market demand • Dependability: how consistent and reliable a business’s goods or services are • Flexibility: how quickly operations processes can adjust to changes in the
market • 80Customisation: the creation of individualised goods or services to meet the
specific needs of the customers
• Cost: the minimisation of expenses so that operations processes are
conducted as cheaply as possible • Each of the performance objectives will be allocated targets or goals.
4.3 new product or service design and development
4.3.1 product design and development
2 different approaches -
1st – a specific approach to product development. Preferences and desires of consumers
determine which products are designed and developed
2nd - from changes and innovations in technology that enable new, appealing products to be
made because they use advanced technologies.
Factors important to consider when designing and developing a product:
Supply chain management – a new product will draw from suppliers and may extend the
range of supplies sought, the timing or the volume of supplies.
Quality is a factor that must be considered because in this market-orientated production, the
customers will demand quality, and certain attributes and features.
Capacity management - new product will have an impact on capacity and may increase the
use or range of present resources or require an investment in new technology and
machinery.
Cost must be considered. Cost arises from the addition of value through processing. Cost
can be determined from the amount of inputs, time and energy used in processing.
Product utility is defined as the usefulness and value that a product has from the
consumer’s point of view. These four factors (quality, supply chain management, capacity
management and cost) should be considered by operations managers while proceeding
through all aspects of product design and development.
4.3.2 service design and development
When designing services, important aspects must be considered. These include what the
explicit service will be, what the anticipated implicit service will be and what, if any, goods
will be required with the delivery of the service. Cost will be determined once the previously
mentioned features have been determined.
Explicit service -called the tangible aspect of the service being provided, such as the
application of time, expertise, skill and effort.
Implicit service – based on feeling and intangible. These include the psychological wellbeing
– the feeling of being looked after – that comes with the provision of the service.
Services using goods
While performing a service, goods may be required. For example, a surgeon performing
knee surgery will require swabs, bandages, sutures, medical equipment, an operating
theatre and so on.
These additional aspects must be considered when designing and developing a service. The
additional aspects can also assist the delivery of a service.
4.4 supply chain management
SCM – involves integrating and managing the flow of supplies throughout the inputs,
transformation processes and outputs to best meet the needs of customers.
For a product can be understood by starting with the final product and then tracing
backwards through al processes that add value, all the way to inputs.
KEY ASEPCTS to supply chain management:
• sourcing, including global sourcing • e-commerce • logistics.
4.4.1 sourcing
Is the purchasing of inputs for the transformation processes.
When determining which sources to use (choosing a supplier), a business will need to do
each of the following.
• Assess consumer demand so that the volume of inputs required is known. • Determine the quality of inputs that match the quality of the products that the
business would like to deliver to the market in produced goods. • Assess how responsive (flexible) and timely the supplier is with respect to changes in
demand.
• Evaluate the cost of supplies/inputs from the supplier against other suppliers offering
supplies of similar quality.
4.2.2 Global sourcing
Is a broad term that refers to businesses purchasing supplies or services without being
constrained by location. In the supply chain management activity, global sourcing means
buying or sourcing from wherever the suppliers are that best meet the sourcing
requirements.
Benefits:
• A reduction in costs, especially labour costs. ... • Access to fresh research, design, and specialised intellectual capital. • Availability of new technology and capacity. ... • Superior quality.
Challenges:
• Time differences. • Language barriers. • Quality expectations. • Compliance issues. • Production scheduling.
4.3.3 E-commerce
Involves the buying and selling of goods and services via the internet. With reference to
supply chain management, e-commerce is relevant to forms of sourcing. The impact of e-
commerce may be explained with reference to the business and its sourcing, and the
customer and their orders that are received electronically.
Business sourcing and e-commerce (e-procurement)
E-procurement - the use of online systems to manage supply, allows suppliers direct access
to the business’s level of supplies
B2B - refers to direct access from one business (the supplier) to another (the buyer),
allowing the supplier to assess the needs of the buyer and meet them in a timely manner.
E-commerce and the consumer
B2C - Businesses may opt to sell directly to consumers in transactions called business-to-
consumer — B2C Alternatively, technology may allow specialist sites to sell or auction to
customers
4.4.4 logistics
Third supply chain strategy. Involves the use of logistics. Logistics is a term broadly
referring to distribution but also includes:
• transportation (including transportation modes) • the use of storage, warehousing and distribution centres • materials handling and packaging.
Distribution
Is ways of getting the goods or services to the customer. A business may use different forms
of physical distribution:
Transportation and distribution
Physical movement of inventories. The type of product and the cost of transportation will
determine the mode of transportation selected. Some products, due to their nature, can be
transported only by modes (for example, coal and crude oil, which can be transported only
by freighter on the seas or by train on land), whereas for other products there is a variety of
choices
Storage, warehousing, and distribution centres
Storage - involves finding a secure place to hold stock until it is required
Storage may be long term or short term and may have characteristics that help preserve the
product. For example, cold storage is used for perishable goods and assists to increase the
shelf-life of the product
When dealing with inventories or stocks, a business must address the issues of storage,
warehousing and the use and location of distribution centres.
Warehousing
The use of a facility for the storage, protection and, later, distribution of stock. Warehouses,
also called distribution centres or distribution hubs, are places for holding inventories and
therefore particular costs are associated with warehousing including the cost of:
• the premises • insurance and security for the stock • stacking and moving the stock • carrying excess stock or redundant stock if not sold • shrinkage costs and losses from theft or reasons not accounted for • stock subject to damage (e.g. water damage) if not correctly stored.
Distribution centres (DCs)
Slightly different to a warehouse in that it is not intended for long term storage. Rather,
distribution centres are strategically located to minimise the time it takes to supply stock to
retail outlets. The use of distribution centres is an important operations strategy and requires
mangers to balance the cost of such centres with the time saved in logistics
Materials handling and packaging
Final aspect of logistics concerns materials handling and packaging. Materials handling is an
important aspect of the movement and storage of goods, and therefore particular standards
and methods of operating need to be applied.
4.5 Outsourcing – advantages and disadvantages
The use of external providers to perform business activities. The theory behind outsourcing
is that when a service is performed by an external provider that specialises in a particular
business function, it will do so at a lower cost and with a greater effectiveness than the same
task done within the business hierarchy.
4.5.1 The outsourcing decision
Operations managers need to assess whether the use of outsourcing is viable. The factors
that must be considered when assessing whether and when to use outsourcing are:
• Whether to outsource or not: this requires assessing whether the use of outsourcing
is cheaper and more efficient than performing the work in house. • If deciding to outsource, the managers must decide which geographical location is
favoured. • The managers must also decide which vendors to use. • 92If the decision is to outsource then details such as the management of the
outsourcing contract, the length of contract, the KPIs and service levels are required.
Co-sourcing
Variation on outsourcing where the two parties are fully involved in managing the success of
the aspect of business.
The work is not done by an external party, but by an external expert who works within the
business as a contractor. Co-sourcing is increasingly popular as it helps the business take
better control over what is given to a specialist third party.
4.5.2 Advantages of outsourcing
• Simplification. This arises from reducing the number of activities performed within the
business. • Efficiency and cost savings. Access to cheaper labour, regulatory differences and
skilled labour in offshore locations all lead to cost savings for business. • Increased process capability. This comes from access to improved technologies and
highly skilled labour. Improved process capability means products are produced and
delivered to the market with improved levels of service. • Increased accountability. This is achieved using service level agreements (SLAs),
which contractually bind the vendor to pre-determined targets on KPIs • Access to skills/resources lacking within the business. May well find that there is
access to highly skilled and disciplined labour at low cost. This gives a double saving
as there is then no need to spend money on training
Strategic benefits. There are four important aspects to this.
• The first benefit arises from using outsourcing to get around trade barriers. For
example, global businesses may offshore into different Chinese provinces to become
a ‘local’ supplier and hence get around barriers that prevent foreign companies from
trading.
• A second benefit is that the use of a vendor that outsources for others within the
same industry can bring the benefit of expertise gained from outsourcing to
competitors. • A third benefit arises from trading in different time zones. The use of India, Malaysia,
the Philippines, Vietnam and China for processing work allows businesses in
Australia, USA and Europe to conduct operations during the day and to have
processing work done overnight by the outsourcing vendor. • A fourth benefit is that strong partnerships between the business and the outsourcing
vendor can lead to the vendor suggesting innovative solutions to the business that
may increase the business efficiency and productivity over time. •
4.5.3 Disadvantages of outsourcing
Payback periods and cost. This refers to how long it takes to repay the cost of organising
outsourcing and make the required organisational changes.
Communication and language. This is an issue between the business and the outsourcing
vendor and is a key issue in managing the relationship.
Loss of control of standards and information security. When a business opts to outsource, it
can feel a loss of control over standards and over how information is used.
Hierarchies. A business using outsourcing may be aiming to eliminate costs associated with
hierarchies yet managing complex outsourcing agreements can create its own hierarchies,
thereby maintaining business inefficiency.
TABLE 4.3 A summary of the different forms of outsourcing with reference to examples
Forms of outsourcing Onshore Offshore Captive or in house (do-it-yourself)
Commonwealth Bank of Australia (CBA), Sydney
Dell or Intel in Penang, serving all of Dell or Intel globally
Non-captive (outsourced to third parties through the market) External providers/vendors
Unilever India, using Capgemini in Bangalore and Dairy Farm in Hong Kong using Capgemini
British Airways (UK) using WNS Global Services (Mumbai, India) or General Motors using AT&T (Americas)
4.6 technology – leading edge, established
4.6.1 leading edge technology
Is the technology that is the most advanced or innovative at any point in time.
It can help businesses to create products more quickly and to higher standards, with less
waste, and help a business to operate more effectively. Leading edge technologies are
created by innovative processes and innovative thinking. When innovative inputs are
created, new products can be made, which can change markets.
e.g., Nanotechnology
4.6.2 established technology
Is technology that has been developed and widely used and is simply accepted without
question. Such technologies include the use of computers and various software packages in
managing business operations and functions
established technologies include:
• barcoding and point-of-sale (POS) data for inventory management • robotics for complex and detailed manufacturing • computer-aided design (CAD), computer-aided manufacturing (CAM) and computer-
integrated manufacturing (CIM) for integrating transformations processes • 98information processing technologies and information technologies (IT) for
administration, logistics, input modelling, demand analysis and distribution
• flexible manufacturing systems (FMS) for transformations processes.
4.7 inventory management
Inventory - The number of raw materials, work-in-progress and finished goods that a
business has on hand at any point in time.
4.7.1 advantages of holding stock
• Consumer demand can be met when stock is available. This may prevent the
consumer from seeking to buy from an alternative business. This is a risk reduction
strategy. • If a particular product line runs out, an alternative can be offered, thereby generating
income for the business instead of a lost sale. • It reduces lead times between order and delivery.
4.7.2 disadvantages of holding stock
• the costs associated with holding stock (see figure 4.14), including storage charges,
spoilage, insurance, theft and handling expenses. • the invested capital, labour and energy cannot be used elsewhere as it has been
used to create the stock • the cost of obsolescence, which can occur if stock remains unsold.
4.7.3 inventory valuation methods
The main inventory valuation techniques include:
• LIFO (last-in-first-out) • FIFO (first-in-first-out).
Assume that a business buys and re-sells mobile phones. It purchases 1000 mobile phones
in a batch for $100 each. Call this stock ‘Batch A’. Assume half of Batch A stock is sold for
$150 each. There are 500 mobile phones left in stock. A second batch, Batch B, of 1000
mobile phones is then purchased at a cost of $110 each. This takes the stock up to 1500
mobile phones. Another 900 mobile phones are sold, but this time at a price of $160. This
leaves 600 phones in stock. A third batch, Batch C, of 500 phones is purchased at $120
each. The business sells 800 phones for $180 each, leaving stock of 300 phones at the end
of the period.
• Batch A Purchase 1000 phones @ $100. Total cost is $100 000.
• Batch B Purchase 1000 phones @ $110. Total cost is $110 000.
• Batch C Purchase 500 phones @ $120. Total cost is $60 000.
• Total sales==(500×$150)+(900×$160)+(800×$180)$75 000+$144 000+144 00
0=$363 000 •
LIFO (last-in-first-out) A total of 2200 items were sold. In businesses applying a LIFO approach, the business
would apply cost on a last-in-first-out basis, meaning the stock bought last would assume to
have been sold first. This would give the following cost:
The last group of 500 phones would be assumed to have sold first. Therefore, 500 of the
phones would attract a cost of $120 each for a total cost of $60 000. The second last
purchased cost would apply to the next 1000 phones sold. This gives the cost of that 1000 at
$110 each, totalling $110 000. The first stock sold is assumed to have sold last, meaning the
remaining 700 phones that sold would be given the first cost of $100 each for a total of $70
000.
Under this analysis, the total cost of goods sold is $60 000 + $110 000 + $70 000 = $240
000 and the unsold stock has a value of 300 units × $100 = $30 000.
FIFO (first-in-first-out) A total of 2200 items were sold. In businesses that apply a FIFO approach, the business
would apply cost on a first-in-first-out basis, meaning the stock bought first would assume to
have been sold first. This would give the following cost:
The first group of 1000 phones would be assumed to have sold first. Therefore, 1000 of the
phones would attract a cost of $100 each for a total cost of $100 000. The second
purchased cost would apply to the next 1000 phones sold. This gives the cost of that 1000 at
$110 each, totalling $110 000. The last stock sold is assumed to have sold last, meaning the
remaining 200 phones that sold would be given the first cost of $120 each for a total of $24
000.
Under this analysis, the total cost of goods sold is $100 000 + 110 000 + $24 000 = $234
000 and the value of unsold stock 300 × $120 = $36 000.
4.7.4 LIFO and FIFO – their impact
If LIFO is used, it may overstate cost and understate gross profit (especially when the cost of
purchased goods rises over time). Moreover, it may undervalue stocks on hand at the end of
the period. Alternatively, under a FIFO approach, stock costs may be understated, and
profits overstated. Moreover, stocks at the end of the period may be overvalued.
4.7.5 Just-in-time (JIT) JIT - Aims to overcome the problem of end-of-period stock valuation: a lean production
method. JIT approach aims to have the business make only enough products to meet
demand. Allows retailers to display a wider range of products as they need to store less and
can order in response to consumer demand. Therefore, saves money as there are no
expensive holding and insurance costs.
4.8 quality management
Refers to those processes that a business undertakes to ensure consistency, reliability,
safety and fitness of purpose of product. In operations, quality management includes quality
controls at each stage of processing.
Common contemporary approaches include:
• quality control — inspection, measurement and intervention • quality assurance — application of international quality standards • quality improvement — total quality management and continuous improvement.
4.8.1 Quality control (QC) Quality control (QC) reduces problems and defects in the product by using inspections at
various points in the production process.
Inspection and quality control
To ensure outputs meet required standards, businesses set inspections of all or part of the
total volume of production. When an inspection is conducted, the goods or services under
inspection can be passed as ‘okay’ or ‘defective’. This is an attribute inspection, which might
answer questions such as: does an electric switch turn off and on? Does a hinge open and
close?
4.8.2 Quality assurance (QA) - international quality standards
Involves the use of a system to ensure that set standards are achieved in production. This is
done through taking a series of measurements and assessing them against pre-determined
quality standards.
• the notion of ‘fitness for purpose’ or how well a product does what it is designed to do • the desire to achieve ‘right first time’ so that products do not need to be reworked,
which wastes time, energy and other resources.
4.8.3 Quality Improvement (QI)
Focuses on two aspects: continuous improvement and total quality management
Continuous improvement
is the belief that over time processes will be made more efficient and
effective. Improvement may be a monumental breakthrough achieved through
innovation all at once or it may be incremental and gradual over time. E.g.,
improvement in processes
Total quality management (TQM)
Focuses on managing the total business to deliver quality to customers.
4.9 overcoming resistance to change
Changes include economic conditions, legislative changes, technological breakthroughs etc.
Change can sometimes be resisted due to uncertainty and how stressful it can become.
Uncertainty represents risk.
Resistance to change arises from 2 principal sources within a business:
• Financial
• Phycological/emotional
4.9.1 Financial costs and resistance to change
main financial costs associated with change include the:
• cost of purchasing new equipment • cost of redundancies • costs of retraining employees
• costs associated with structural reorganisation of the business, including changes to
plant and equipment layouts.
Purchasing new equipment
A major cost associated with change is investing in equipment, such as machinery
and technology is considered a capital cost.
• A business may find some key operational goals are better achieved e.g.
• Improved processing flexibility
• Improved processing speeds
• More consistency in production
• Higher overall quality of processing
Redundancy payout
Redundancy - loss of work arising from job skills that are no longer required or
relevant to the workplace. A significant cost associated with redundancies is the
redundancy payout. Redundancy payout is the money that is given to employees
when they are forced out of work because their job skills are no longer relevant.
Redundancy payouts are quite high because the value of the payout depends on:
• the length of employment the employee has had with the business. Under legislation
a certain number of weeks of pay must be paid when a person is made redundant • the level of pay the employee is on prior to being made redundant • the amount of unused leave that the employee has accrued (including annual leave
and long service leave) • any outstanding wages.
Retraining
change that causes a reorganisation of the business’s internal hierarchy or from the
acquisition of technology. In the first instance, job roles may change requiring
employees to acquire different work skills. This can be achieved through training.
Reorganising plant layout
Plant refers to the facilities in which the machinery is arranged. Typically, the plant
layout is organised around the needs of the product and the transformation
processes required to create the products. Major changes such as the complete re-
engineering of systems often require extensive reorganisation of the layout within the
facility. There can be high costs associated with reorganising the plant. One cost is
incurred when transporting, placing and bringing power to the new plant and
equipment.
4.9.2 psychological resistance to change – inertia
Resistance arises from inertia. Inertia is a term describing a phycological resistance to
change. A feeling of uncertainty or fear can stop or delay business owners to make changes.
4.9.3 strategies to overcome resistance to change
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.
People that are proactive – initiate change rather than react to events
People that are reactive – wait for a change to occur and then respond to it
4.9.4 change management strategies
Managing change a business should formalise its approach to change management. This
can be done by applying the following steps for change management.
• Identify the source(s) of change and assess whether there is a need to accommodate
change through adjustments to business processes. The sources of change are
external, and the business is responding to the threat that change can pose. • Lower the resistance to change through communicating with employees about the
need for change and getting widespread support for the change. • There may be a need to use change agents (internal staff or external professionals).
If staff are included in the process of creating a culture of change and setting goals,
they will be more supportive. • It may be necessary to apply change models such as Kurt Lewin’s unfreeze-change-
refreeze model or the more contemporary Kotter’s eight-step change model (see the
following Snapshot), which has been applied by businesses.
4.10 Global factors
Opportunities:
Global sourcing
Economies of scale
Scanning and learning
Research and development
4.10.1 global sourcing
global sourcing is a broad term that refers to businesses purchasing supplies or services
without being constrained by location.
Global sourcing as an operations strategy involves the sourcing of any business operations
that gives the business cost advantages. In this broad meaning, global sourcing includes any
business operations outsourced.
Benefits of global sourcing include cost advantages, access to new technologies,
advantages of expertise and labour specialisation, access to other resources and the ability
to operate over extended hours.
Challenges arising with global sourcing include the possible relocation of aspects of
operations, the increased cost of logistics, storage and distribution, managing different
regulatory conditions between nations.
4.10.2 economies of scale aka bulk buying
Refers to cost advantages that may be gained by increasing size, scale or population.
businesses can lower their per unit input costs. Economies of scale becomes a global factor
when businesses respond to increases in demand and volume that necessitate making
higher product volumes.
As the scale of production increases, the costs per unit falls. This means that profitability can
rise.
Economies of scale can also be derived on capital investment and the improved use of
technologies
4.10.3 Scanning and learning
Management journals, industry and business associations, conferences and other forums
act as opportunities for business people to learn from one another. Another source of
learning comes from staff members and managers who have worked in other businesses
and in other nations.
4.10.4 Research and development (R&D)
R&D helps businesses to create leading edge technologies, and to create innovative
products and solutions. Government encourages R&D and may offer taxation incentives and
grants. These incentives and grants assist businesses to invest and allocate resources into
R&D.
• Four key global factors affect operations strategy and provide opportunities for
operations managers: global sourcing, economies of scale, scanning and listening,
and research and development (R&D). • Global sourcing is a broad reference to sourcing business supplies or services
without being constrained by location and it therefore includes all outsourcing. • Economies of scale can lead to significant cost saving in various aspects of the
business enterprise. • Scanning and listening can be a very valuable operations management tool as it can
help managers adapt best practice to the business operations. • R&D can make a very big difference to the level of innovation, quality and
competitive advantage of a business.
