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Topic: operation management

Operations management refers to the administration of business practices to create the highest level of efficiency possible within an organization. It is concerned with converting materials and labour into goods and services as efficiently as possible to maximize the profit of an organization

Role of operation management

Strategic role of operations - the strategic role of business operation management involves operations managers contributing to the strategic direction or plan of the business. Cost leadership: Cost leadership involves aiming to have the lowest costs or to be the most price-competitive in the market. it aims to sell goods and services in the lowest price and still make a profit.Product differentiation: means distinguishing products (goods or services) in some way from its competitors. There are different forms of product differentiation, and product differentiation will be different for goods and for services.

Goods and services differentiation

Sources of differentiation in goods

Varying the actual product features Varying the quality Vary in augmented features

Sources of differentiation in service

Varying the amount of time spent on a service Varying the level of expertise brought to a service Varying the qualification and experience of the service provider Varying the quality of material/technology used in service delivery

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Goods and/or service in different industries

Goods in different industries Operations decisions will vary goods whether they are standardised or

customised goods

Standardised, refers to goods that are mass produced, usually on an

assembly line. They are uniform in quality and meet a predetermined

level of quality. They are produced with a production focus. They are

non-differentiated products

Customised, refers to those that are varied according to the needs of

customers. They are produced with a market rather than a production

focus. They are differentiated products

Layout of the production line will vary whether the product is non-

differentiated or not

Choice of process selection is strategic as it requires a high degree of

cross-functional interaction and coordination

Goods may be classified as perishable or non-perishable

Grocery sector is dominated by perishable goods (food) whereas

household and business goods are generally non-perishable

Perishable goods and operational processes• Operational processes will need to integrate the following factors

- High standards of quality, safety and cleanliness in all operating processes

- Very short lead times and distribution that is as quick and effective as possible

- Appropriate and robust packaging and cold storage processes both through production and distribution

- Non-perishable goods

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- They are more inherently more durable than perishable goods and issues of quality and inventory management will arise

- They will need to integrate the following- Manage all aspects of quality in the process from sourcing through to

production and distribution - Implement effective inventory management strategies and be highly

responsive to market demand in order not to over produce

Intermediate goods Some goods may be produced more than once Goods that have been completed, may become inputs into further

processing For example, steel into tiny screws They are the finished goods of the manufacturer

Services in different industries Services can also be standardised and customised Depending on the company or person requiring the service/highly

specialised, it may differ from what other customers seek or it may be of a standard level

Self-service Refers to the encouraging of customers to take the initiative to help

themselves The financial services and travel industry encourage customers to make

their own transaction online

With this method, businesses can concentrate on customisation when a person cannot help themselves

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Interdependence with other key business functions

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

Finance will collect data and analyse the financial performance of operations

IT will manage communication of information HR will provide suitable staff, organise training based on the

requirements of operations Engineering will assess new technology and develop solutions to

problems Marketing must understand the capabilities and limitations of

operations when specifying product features and design R+D will develop new products based on the capabilities of operations

influences on operations

Globalisation• Globalisation is the integration of different national economies into one

single market which gives the opportunity for customers to purchase products from a business that provides the most value for money- It is a way for goods and services to be traded easily and a development

of a world economy owing to the increasing flow g +s, finance and information around the world

• The impact of globalisation is a twofold. One, the opportunity to reduce costs through establishing a good supply chain. Two, access to a global market to sell the outputs of operations

Global businesses• Globalisation refers to the integration and interdependence of the

economies of different countries, creating a global community• Integration refers to the joining together of different economies through

trade, technology, deregulation and global businesses

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• Results in an increase flow of goods, services, people, finance and information around the world

• Geographic location and distance becomes less of an issue for businesses• When a key function is located outside the home nation it becomes a part

of the global economy • A global business can be described to be integrated with the economies of

different countries• Locations of functions:

Manufacturing may be located where inputs and labour is the cheapest (developing country)

Raw materials may be sourced where it is most abundant Finance located at a financial capital (e.g. New York) Products distributed and sold for consumers of developed nations

(Canada or Germany)• Reasons for the ‘global web’ of operations is to lower costs and have a

competitive advantage • Expansion into countries that offer cheaper labour, tax incentives and

among other benefits. This strategy exposes influences from other currencies, trade agreements, global consumers, technology and difference in culture

Technology

Technology is defined as the design, construction and application of innovative devices, methods and machinery upon operation processesThe use of technology allows business to:

Reduce costs and achieve cost leadership Receive and send information faster Allows people to work anywhere Connects manufactures and consumers

Two technologies that are used in operations are CAM- computer aided manufacturing CAD- computer aided design

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Quality expectation

Quality expectation with goods

quality of design

how well the concept has been developed taking into account customer needs and expectations

nature of the materials innovative evident in the design, which minimises waste

fitness for purpose How well the product does what its designed to do How easy is it to use

durability how reliable and long lasting the product is how easy it can be repaired and maintained, including efficiency of after-

sale services used, such as warranty and service calls

quality expectations in service

professionalism of the service provider, perceived through the cleanliness and layout of the physical facilities the courtesy of staff and the care taken in dialogue and interactions

reliability of the service provider how effective the service is performed? overall levels of competence

government policies

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All businesses operate in a political-legal environment government policies often impact on businesses. Examples include taxation, the environment and wage levels.Government policies all impact on businesses. They have some impact on business operations in terms of costs and opportunities. This include

- Taxation rates- Required materials handling practices- WH&S standards- Training- Public health policies- Environmental policies- Employment relations- Trade and industry policies

Cost- based competition

Cost-based competition is derived from determining breakeven point (the level at which the firm matches total costs and total revenue) and then applying strategies to create cost advantages over competitors

Breakeven point – the point where total cost and total revenue meet where there is no profit or lossFixed cost – Are the cost which do not change regardless of the business activityVariable cost - are the cost which vary in direct relationship to the level of business activity

Environmental sustainability

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• Refers to the development, practice and use of methods of production that allow resources to be used by producers today without limiting the ability of future generations to satisfy their needs and wants

• Managers have a responsibility to protect the natural environment and ensure that their methods of production incorporate sustainable resource use and use technology that won’t damage the environment

• Impacts of resource depletion, site of resource removal, pollution via machinery, removal and storage of waste needs to be taken in account

Corporate social responsibility • CSR, refers to open and accountable business actions based on respect for

its employees, people, community/society, and the broader environment.• It involves businesses not just complying with laws and valuing financial

return but acknowledging the concerns with society and responding• A business’ long-term success is determined by its CSR • Other social responsibilities include:

Human rights Corruption and payment of bribes Corporate transparency and honesty Labour standards, particularly in less developed countries

Ethical responsibility and legal compliance• Complying with legislations cost money, compliance cost, which will be

expensive for a business, so for a business to go ‘further beyond’ demonstrates a business valuing something over than maximised profits because it allocates money over and above what it costs to comply with the law

Ethical responsibility• Ethical behaviour involves making decisions that are not only legally correct

and making higher profits, but also in a sense, morally correct• Business ethics are the principles a business will follow to be a good

corporate citizen • Many businesses publish a code of conduct. They may include:

Supporting charities and local community organisations

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Consulting the community prior to implementing a significant change to the business

Promoting human and civil rights both in Australia and overseas• For operations, they may concern:

Minimising harm to the environment Reducing waste, recycling, and reusing Producing value-for-money, quality products Improved customer service

Legal compliance• Legal compliance requires a business to follow a letter of the law, the

prescribed standards of behaviour • Compliance can fall in a number of areas of a business, they may include:

Labour law compliance: minimum wages, award wages, working hours, breaks, pay for various forms of leave, other on-costs associated with labour, workers comprehension and health and safety laws

Intellectual property: addresses issues related to moral rights such as copyright, patents, trademarks, designs and other original ideas and artistic work

Human rights: rules restricting discrimination on the grounds of disability, culture, sexual preference, gender, age or any other distinguishing feature

Environmental sustainability and social responsibility

Environmental sustainability and social responsibility are features of an ethical approach to operations management. Economic development must be accomplished sustainably.

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Environmental sustainability

• By pursuing environmentally sustainable goals a business will be contributing to a better society

• Economic growth should not occur at polluting and degrading the air, water and forests that are essential to supporting life on the planet, there needs to be a balance between economic and environmental concerns, i.e. environmental sustainability

• Businesses adopt policies of conservation, recycling and restoration to become more responsible

• Businesses that behave in a socially responsible manner is one that improves the quality of life of both internal and external stakeholders

Businesses today are increasingly aware of their impact decisions have on society and the environment

In response to climate change, society expects business to: Adopt greenhouse abetment measures Encourage the development of long term sustainable strategies

Social responsibility

• Businesses shouldn’t be enough just to obey laws but make decisions that are socially responsible Socially responsible, involves taking actions or making decisions that are

morally and ethically correct and are in the best interests of the community

• A socially responsible business tries to achieve two goals simultaneously, one, expanding the business and two, providing for the greater good of society

• Businesses realise that their activities impact on society and need to give careful consideration about their actions

• There is an expectation by society that businesses must consider value achievement other than increase in profit and market share

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Operation processes

Operations processesare at the heart of the success of all businesses. Production involves the skilful bringing together of a numberof inputs, such as finance, equipment, management, technology, raw materials and people, to create the finished goods or services through a series of operations processes.

Inputs

Inputs are the resources used in transforming or the production process such as :

Labour Energy Raw materials Machinery and technology

Input classification

Inputs can be classified in two different categories

1. Transformed resources 2. Transforming resources

-Transformed resources

These are those inputs that are changed or converted in the operations process; they are transformed by the operations processes. Transformed resources are also considered the resources that give the operations process its purpose or goal.

Materials – materials are the resources which are used in the production and consist of raw materials and intermediate goods

Intermediate goods - are goods manufactured and used in further manufacturing or processing.

Raw materials – are the essential substance in their unprocessed state

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Information - is the knowledge gained from research, investigation and instruction, which results in an increase in understanding.

External information

These are the information business obtained from outside the business. These include:

Market reports Statistics from industry observers and bodies ABS Media reports Academic reports commentary

internal information

internal information comes from within the business and is gathered from internal sources such as

financial reports, quality reportsinternal key performance indicators (KPIs) such as lead times inventory turnover rates production data.

Internal information acts as a transformed resource when it informs processes and creates process improvements.

• Customers-

• Customers their desires and preferences are the starting point to production processes.

• Customers can be changed in different ways• Doctors and hairdressers can transform how customers look and feel,

airlines can change the location of the customer, customers in hotels, cinemas etc. can add value to their quality of life

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• Customers are an input because it is their needs and desires that ‘drive’ the operations business

• Businesses can no longer produce what they think customers want and expect to maintain a competitive advantage

Therefore, this area of operations is closely connected to the market function, in particular market research.

Transformation processes• Every business must consider how it will produce g+s• The transformation processes are those activities that determine how value

will be added • Value can be added by:

Physical altering of the physical inputs or the changes that happen to people when they receive a service

Transportation of g+s, such as having them delivered to a more convenient location for access by consumers Protection and safety from the environment for example, a bank keeps savings secure

Inspection by giving consumers a better understanding of the g+s• The operations manager must select the optimal process out of:

o Available capacity of the facility o Available knowledge skills of employeeso Type of production, whether it be job, batch or flow production

The influence of the four Vs • There are four dimensions of operations referred to as the ‘four vs”

(volume, variety, visibility, variation) most important depends on production

• Production methods:o Job production (single demand), very personalised, unique item.

Highly flexible system, but low output and capital, emphasis on high labour content and skill, high costs per unit

o Batch production (relatively low demand), producing a small number of the same item, done in groups/batches, suits business that satisfies variation in demand

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o Flow production (in high demand), produces large no. of items at the same and are the same continuous flow of inputs and outputs, assembly lines, costs per unit are low, limited variation

Volume • The number of products or services produced by the operation, how much

of a product is made• Using mass production will produce a high volume with a degree of process

repetition • Lots of stoppages and adjustments • There will be lots of capital, facilities, technology and materials used and

less labour

Variety • Number of different models and variations offered in the products or

services, range of products made • High variety usually means low volume • High volume product + low variety = capital-intensive, assembly lines and

producing at lowest costs per unit possible

Variation • Variation can change according to time of day, season, holidays and time of

year, the amount of a product desired by consumers • Steady levels + no variation = high volume + capital costs• That is operations, are routine, with low unit costs and using more capital

than labour• When there is volatility in the pattern of demand, operations will need to

be highly flexible• The operations manager will need to anticipate and plan for changes in the

demand and have a high level of contact

Visibility • Influences on a degree to which customers can see the operations in action,

the nature and amount of customer contact (feedback)• Service-based businesses will have a level of visibility• The implication for operations of a highly visible operations process is that

quality of labour will be significant

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• Operations will need to have well-trained, highly skilled, adaptable staff to handle the individual needs of customers

• Speed of operations usually have a much more lower tolerance for waiting • So, short time lads between customer ordering and delivery will be needed,

otherwise the customer will move onto a competitor • They can either direct or indirect

Sequencing and scheduling • They are the tools to identify all steps in the operations process and

organise them into the most efficient order • Sequencing is the order of tasks in a chain and scheduling is when a certain

task will happen• Task analysis, which refers to the breakdown of how exactly how the

manufacture of a good or activities to provide a service is to be accomplished.

• Essential when determining separate parts of the process of making a good or providing a service

• Scheduling tools are Gannt Charts and Critical Analysis Path

Gantt charts• Records the number of tasks involved in each particular project and the

estimated time needed for each task, won’t show the relationship between each of the tasks or which activities relies on other activities for materials or machinery

• Shown as a bar graph • Businesses set up milestones on certain dates, and once reached critical

decisions must be made • Businesses that organises production based on customer orders may use

Gantt chart for production scheduling • Gantt chart allows comparisons actual progress to its original planned

progress • Businesses that do not keep to production targets may find their customers

moving onto other suppliers • Gannt charts do not have limitations• The advantages include forces of planning steps and the allocation of time,

and measured actual against panned times

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Critical path analysis (CPA)• Used in situations when an operation involves a series of repeated tasks • It is a flow diagram that shows the interrelationship of tasks – all tasks need

to be completed for the project to be finished • Critical path is the shortest time taken to complete all tasks (basically the

longest time to cover all tasks for a quality product) • The analysis path needs to be timetabled

Technology, task design and process layout Technology • Involves classifying job activities in ways that make it easy for an employee

to successfully perform and complete a task, therefore changing how a business works

• Enables businesses to penetrate global markets with the international distribution of information

• Improves competitiveness by increasing flexibility; more adaptable change• Important technologies workers being able to telecommute, robotics, CAD

and CAM• Improvements in the machines, equipment and devices used to transform

inputs into outputs are called process technologies • A business can change volumes to meet a sudden increase in demand or

produce different variations of products to satisfy consumer tastes• Technology also reduces costs and wastes, improve productivity and

efficiency • Results in the development of new methods of production or new

equipment that helps business perform functions better• Technology can give the business more flexibility as it:

Allows the business to respond to changes in the market more easily, e.g. changing volumes and variations.

Allows the business to apply software modelling programs, the internet and wireless communication to the process.

• Flexible manufacturing systems- integrated approach to using technology

Task design• It is how the task will be completed

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• Involves classifying job activities in ways that make job activities that make it easy for an employee to successfully perform and complete a task

• Often the starting point for recruitment • Each individual task is analysed and broken down into separate steps and

allocated to machines and employees with the appropriate skills, knowledge and capabilities

• Employees are often trained and develop their skills throughout working • Allows ongoing analysis and adjustments in each activity to ensure

continuous improvement in productivity • Leads to group skills and competencies

Process layout• Refers to the arrangement of machinery by function to provide g+s• Once the task has been analysed and the technology requirements

determined, the next strategic decision is to plan the physical layout of the factory or office

• It is influenced by the size of equipment, work areas and storage space• The aim is to have an efficient flow of resources through the business as

possible • Product moves from department to department depending on the

transformation • Allows more flexibility – functional layout • Requires staff to be specialised and know how to use the equipment and

tools in their department • Product layout, used in assembly line for manufacturing large amounts of

goods with few variations. Process layout product moves from station to station

Monitoring, control and improvement • Relates to performance objectives of quality, speed, dependability,

flexibility, customisation and cost in operations • Purpose is to ensure operations processes run efficiently and effectively• Objectives will not be reached without adequate monitoring of operations,

controls to ensure that operations are on track and improve the process

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• Ensure process runs efficiently and effectively, producing g+s it was designed to do

Monitoring, collecting the information about the performance about the operations process. These include:

Operations costs Waste from operations such as leftover materials Defects and substandard goods Quality in terms of the product meeting design specifications Speed of manufacturing or response to customers Volume of output

Control, aims to keep the business’ actual performance as close as possible to what was planned by making, adjustments to the operations along the way

Coping with changes as they occur Effective controls ensure that the business makes and supplies an

appropriate quantity of its products, in the time frame and to standard requirements

• Improvements Suggest adjustments and readjustment may need to be made to day-to-

day activities in the short term and the entire process in the long term Businesses often compare itself to competitors and benchmarks in order

to see if any areas need improvements Competitive advantages gained from following improvements:

• Quality, getting it right first time, defect free products and error free services

• Speed, increasing speed of production and delivery of services • Dependability, being on time with reliable operations system, equipment

and employees • Flexibility, having processes that are able to change and offer new products

and more choice• Cost improvements, by being efficient and productive to offer more value

Improvements comes when mgmt. decide to increase competitive advantage over competitors

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Outputs

• They are the final good or service that a business offers to a customer• Customers may be a final consumer who are members of the public or

other businesses An output of one business may be an input for another

• Consumers understand the physical product they buy and the service provided by the business

• Customer service is an output of all businesses and perhaps not an essential part of the manufacturing-based business provides

• Goods based businesses can achieve a competitive advantage through improvements in customer service

Customer service• Customer service is an intangible output that requires extensive contact

with customers, is labour-extensive and immediately consumed • As an output it is difficult to measure • When a competitive advantage isn’t achieved with a better product, it can

differentiate itself as better than its competitors because of excellent customer service It is provided for before, diving after a purchase

• Businesses have comprehensive service system’s they induce policies and procedures on how to manage relationships with customers i.e. 7 steps of a successful sale

• Customer service includes: Handling customer returns promptly Answering questions and providing information Frequent and meaningful information Following up customer enquiries and complaints Using technology to offer 24 hour service; social media, email etc.

• Some aspects of technology leave customers frustrated and may leave the business

• Good customer service is an aspect of relationship marketing • Enables businesses to charge higher prices and lessen the need to reduce

costs elsewhere in the business• Outcomes of good customer service is that they keep returning to buy

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Assists in maintaining 80/20, 80% of revenue comes from 20% customer base who return

• Good customer service + higher quality good + premium price in market = high market share

• Customer service can be measured by using the no. of complaints or the length of time to respond to enquiries

• Global businesses have the challenge to replicate business service system in its location Challenges include language barriers, differences in culture

• Training in customer relations and the customer service policies of the business will be important in achieving consistency in service delivery

Warranties • A warranty is an assurance that a business stands by quality claims of the

products they make and provide to the market • By Australian law, goods can only be sold if:

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

They are suitable for the purpose or job they will be used for They match the product the product description in any advertising or

promotion They are free from defects or faults

• These responsibilities make up the statutory (or implied) warranty that gives consumers legal protection under the Fair-Trading Act 1987 (NSW) and the Competitive Consumer Act (2010)

Retailers and manufactures must comply with the warranty and may need to provide a replacement product if a customer is not satisfied

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Operation strategy

• Operations strategy includes all activities involved in the production of a good or the provision of a service

• Operations strategies will support the business’ strategic objectives in conjunction with other key functions

• Effective operations will have a competitive advantage in its marketplaceThere will be specific decisions of what and how the business produces

Performance objectives• They are the key area of focus in operations• A business that can achieve multiple gains a competitive advantage and

may become an industry leader

Quality • Refers to the physical goods and services and the process used to produce

the good • A business must produce a product that meets the customer’s expectations

and also requirements of quality • Quality also refers to the process itself. A quality process is the production

getting it right the first time and the value added Design, how well product is made or service is delivered. Conformance, how well product meets standards with certain

specifications. Service, how reliable, meets specific needs, timely/responsive service is

Speed• Refers to the output divided by input and is sometimes measured in output

per unit of time related to productivity • Speed of operations can be increased using CAD, CAM or robotics• There is a limit, other objectives must be able to keep up, the machine must

be able to keep a hold of itself and the production line too • A risk that may occur whilst increasing speed is that quality may suffer

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Flexibility • Shows how easily and quickly expectations can switch to a new

model or variation of a good to meet a change in the market or changes in what customer wants

• There is also flexibility in volume, which is how quickly operations ca n change from producing few products as a low volume producer to becoming high volume

Increasing outputs to meet customer demand • Demands change due to product life cycle, as a good enters the

growth stage, businesses must match increase of demands and avoid stock-out

Customisation • Refers to creation of individualised products to meet the specific needs of the customers• This is how easily a product can be redesigned to produce a unique g+s that matches the

customers desires • Challenges include as not having the appropriate inputs, limits on what the equipment

or existing technology is capable of or how much time and labour is required

Cost• Refers to the minimisation of expenses so that operations processes are conducted as

cheaply as possible • Costs must be carefully managed and cost data collected and analysed• Of the costs incurred determine the price• Lower costs mean improved profit margins on each product sold which gives the

business more revenue • Business seek to become more efficient and reduce costs, acquiring new technology and

minimising wage is often reduces costs

New product design and development • Life cycle of business can be extended by adding more features or developing a small

improvement in design • Businesses that have the capability of integrating leading-edge technology with skills and

innovative ideas will be a market leader• New product design is a lengthy, expensive process and few products make it to the final

production from the large number that may be initially developed • Many businesses do not have the financial resources, knowledge or time • However, a business may supply their own version of a competitor’s new product and

avoid the expense and risk of product development

Product design + development

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• An approach of design and development comes from a consumer approach Preference and desires of consumers shape what a business should produce

• Another approach is changes and innovations in technology that appeals to consumers because of advancement and functions

• Must implement quality, SCM, capacity mgmt., and cost • SCM as new products draw from suppliers and may extend the range of suppliers, timing

or volume of suppliers• New products have impacts on capacity, may increase use or range of present resources

or an investment in new tech and machinery

service design + development

• Service design takes the position of the customer/consumer in point as the starting point in design

• Services may not require interaction of customer and may be standardised • Must take in account if it’ll explicit or implicit service or if any goods are

required when delivering service• Explicit service, the tangible aspect, what is to be anticipated. It is the

application of time, expertise, skill and effort • Implicit service, the intangible aspect, based on feeling, it is the

psychological wellbeing when the service is delivered-the feeling of being looked after-clients need to feel like their needs are being met, so the service must have a level of skill, time and expertise so customer feels catered for

Supply chain management• Refers to the integrating and managing the flow of supplies throughout the

process in order to meet needs of customers whilst being efficient • Supply chain is influenced by what is sold and what is returned so it involves

sourcing and logistics and distribution• By going backwards of the final product, the supply chain can be

determined

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• Process includes production process, supply of raw materials. Energy, labour, distribution and all sources

• Lead time is the time taken for a supplier to provide its customer with the goods ordered

Sourcing • Refers to the purchasing of inputs for transformation • It is important to consider:

The consumer demand so volume of inputs is required is known Assess how flexible and timely the supplier with respect to changes in

demand Evaluate costs of inputs from supplier compared to others that offer

similar quality• Trends of sourcing

Supplier rationalisation, involves business assessing the number and diversity of its suppliers. Business can determine which supplier are most and least effective, reduces number of suppliers to the least amount

Backwards vertical integration, involves purchasing through merges or acquisitions of suppliers. Always guarantees supply for transformation. Important to treat it as a profit centre as it generates revenues and not wasteful as it may accumulate costs

Cost minimisation, involves using off-shore suppliers, access to lower cost resources/inputs that weren’t previously available

Flexible/responsive supply chain processes, when business only stocks supplies that are needed saves inventory costs

Global sourcing• Refers to purchasing supplies or services without being constrained by

location, the most cost-efficient location for manufacturing a product• There may be an additional incentive of low rates of tax to encourage global

businesses• Inventory management can be improved also with e-commerce it can be set

up so that an email to a supplier is automatically generated when inventory levels are getting close to buffer stock levels

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• Advantages More efficient methods Better access to new technology, IT, equipment and resources Lower costs Increased speed and quality of outputs

• Disadvantages Possible relocation of operations Breakdowns in the business outsourced to will affect the entire

operations Loss of control over quality, reliability and even costs Slower lead times and response to changes in the market Relationship breakdown with stakeholders e.g. redundant employees Increased costs of logistics, storage and distribution managing different

regulatory conditions• Business may

Buy inputs, import its inputs from an overseas supplier that specialises in providing that input.

o Advantages, lower costs from cheapest supplier, don’t need to invest in factory

o Disadvantages, less control over quality, design & cannot protect technological innovations

Make inputs (vertically integrate), taking over a business and produce its own supplies

o Advantages, lower costs through economies of scale and protect innovations

E-commerce• It involves the buying and selling of goods and services via the internet• Many businesses have SCM through electronic ordering (e-procurement), allows

suppliers direct access to the businesses’ level of supplies. When the supply falls behind, the supplier will supply without a formal

request • E-tailing, a business that only uses an online site to sell their g+s• Electronic data interchange (EDI), use of computers, barcodes and scanner

systems to monitor individual stock items and keep accurate records of inventory level, used for real time conversations with suppliers

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• Logistics • Refers to the transportation of physical raw materials, inputs and the

distribution of finished goods and services• Includes transportation (including modes), use of storage warehousing and

DCs and materials handling and packaging• Transport logistics, the organisation of the physical movement of goods

from their point of origin to destination. The route, method and speed of transportation are all factors to consider when delivering materials, inputs or final goods to their user when required

- Role of logisticians is to ensure that operations have the right item at the right quantity, time and place

- Distribution • Transportation and distribution

- This aspect concern the physical movement of inventories - Type of product and cost of transportation will determine mode of

transport • Storage, warehousing and distribution centres

- Storage, involves finding a secure place to hold stock until required. Must consider issues such as long-term or short-term,

- Warehousing, use of facility for the storage, protection and later distribution of stock. Costs of warehousing includes the premises, insurance and security of stock, stacking and moving of stock and carrying excess or redundancy stock if not sold

- Distribution centres (DCs), different to warehousing as it doesn’t hold long-term stock, strategically located to minimise the time it takes to supply stock to retail outlets

Outsourcing Involves the use of external providers to perform business activities Efficient as it lowers costs and access to other resources Types of outsourcing includes: Manufacturing, HR, administrative work and IT, finance and accounting

outsourcing (FAO), knowledge, process outsourcing (KPO), legal process outsourcing (LPO)

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Must consider whether or not to outsource, what geographical location is favoured, what vendors to use and level of contract, the KPIs and service level required

A business may wish to focus on its core activity and organise other businesses provide support services such as security transport or maintenance, by doing this resources are freed up to be used elsewhere in the business

Advantages Disadvantages Simplification, reduction of

activities Efficiency and process capability,

access to cheap labour Increased process capability Increased accountability Access to skills/resources lacking

within business Capacity to focus on core business

or key competencies Improvements to in-house

performance

Payback periods and costs Communication and language Loss of control standards and info security Hierarchies Organisational change and redesign Loss of corporate memory and

vulnerability Information technology

Technology • Technology in operations when applied can improve inputs, transformation

and outputs or whether it makes the managerial and administrative functions smoother

Leading-edge• The most advanced or innovative at any point in time • Can help businesses to create more products quickly and to higher

standards, reduce waste and operate more effectively

Established • Most widely used and accepted

Help establish for productivity and speed

Inventory management

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• Refers to the amount of raw materials, work-in-progress and finished goods that a business has on hand at any particular point in time

• Stock is the goods that are partially processed • Inventory mgmt. aims to have enough stock available but not too much and

to identify stock that is not selling well • Businesses monitor and control inventory so they do not accumulate dead

stock and identify and sell slow moving stock• Management takes into account factors such as cartage and freight stock,

perishability or life span of the product and seasonal patterns in demand

Advantages Disadvantages • Consumer demand can be met

when there is stock available • An alternative can be used if one

other runs out • Reduces lead time between order

and delivery • Stocks give immediate revenue,

hard if its only partially transformed (inputs)

• Stocks can be distributed to distribution centres, which then rapidly transport the products to places as indicated by demand.

• Store of stock allows the business to promote use of products in non-traditional or even new markets.

• Older stock can be sold at reduced prices encourages cash flow and also attract sales of other products.

• Stocks are an asset and are of value to the business, reflecting well on the balance sheet.

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• the costs associated with holding stock (see figure 4.15), 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.

LIFO (last-in-first-out)

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Simplified action of LIFO would cost each sold unit at the last cost recorded

The stock purchased most recently us sold first Last stock delivered is first used and sent out No use by date such as machinery

FIFO (first-in-first-out)• The simplified application of FIFO would cost each unit sold at the first cost

recorded.• The first stock has been purchased is the oldest and is sold first• Perishable items• Costs of goods and items will be lower and income higher

JIT (just-in-time)• Aims to overcome the problem of end-of-period stock valuation: a lean

production method, only enough products that meets demand• Hold as minimal stock as possible and only bring in stock from suppliers as

required • Advantages include, reduction storage costs, increases the liquidity of

working capital and reduces chance of stock becoming obsolete and perishable stock spoiling

• Allows retailers to display wider range of products

Quality management • Quality management is ensuring that the outputs of the business are

consistent, durable and reliable • For a consumer, it could mean:

Is well made, not defective and lasts a long time Does everything that advertising claims Has good customer service

• For a business: Quality of outputs meet the quality standard stated in the operation

plan Outputs are of a consistent quality

Control

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• Involves checking transformed and transforming resources in all stages of the production process. Inspection, measurement and intervention

• Three steps: Feed-forward, careful planning, before production begins to prevent

problems Concurrent, during work in progress, or manufacturing process Feedback controls, checking the final product, after production or

delivery of the service is complete • Control involves establishing evaluation procedures and setting standards

to measure performance • Business may use benchmarking (the average industry performance)• Codes or practice –the minimum level of service that registered members of

a profession are expected to provide- are used by firms

Assurance • Involves establishing and using a set of procedures and/or processes

(standards) that will prevent product defects from occurring or errors in delivering services

• Using a system to ensure that set standards are achieved in production • Done through taking a series of measurements and assessing them against

pre-determined quality standards • Consider notion of ‘fitness of purpose’ or how well a product does what its

designed to do, desire of ‘right the first time’, so that products doesn’t need to be reworked which wastes time, resources and energy

Improvement • Continuous • The belief that over time processes will be made more effective and

efficient • Could be monumental or eventual • Improvements come from inclusion of staff, staff is encouraged to

demonstrate initiative and to suggest area of improvement

• Total quality management• Focuses on managing the business as whole to deliver quality to customers

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• Reviews actions of competitions through benchmarking • To achieve total quality management objectives requires four elements:

benchmarking, employee, empowerment, a focus on the customer and continuous improvement.

Overcoming resistance to change• Operations mgmt. need to be responsive to changes in the internal and

external environments to remain competitive • Legislative changes, economic conditions, social change and technological

breakthroughs all impact on the business and shape its competitors

Financial costs• Major cause of resistance by owners and managers • Modern businesses usually requires significant investment of funds and

therefore management need to weigh up costs and benefits to determine the viability of change

• Financial change should include the cost of, purchasing new equipment, redundancies, retraining employees and costs associated structural reorganisation of the business, including change to plant and equipment layouts

Purchasing new equipment • Considered to be capital cost, quite high • Significant market advantages and key operational goals better achieved

(flexibility, speed and shorter lead times, consistency in production)

Redundancy payments • The loss of work arising from job skills no longer required or relevant to

workplace • Loss of jobs, employee needs to retrain or ‘upskill’ to relevant job skills• Redundancy payout is the money given to employees when forced out of

job, is quite high depends on length of time worked, level of pay prior to redundancy, amount of unused leave, outstanding wages

• Legal in Australia if, Award of Enterprise Agreement, not a small business (more than 15) and employee is full-time and worked more than 12 months

• Common when machinery and tech replace labour

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Retraining • These costs come about because there has been a reorganisation of the

business’ internal structure or the acquisition of tech that requires staff to retrain and update skills

• Training can be conducted inside or off-site

Reorganising plant layout

• Refers to the facility in which machinery is arranged • When new equipment is purchased or change in process layout machinery

will be needed to move. Requires machinery to be shut down and moved, possible additional power outlets installed and downtime (transferring old machines to new machines)

Inertia • Refers to the psychological resistance to change; the fear of change• No direct financial cost of inertia, but staff who are reluctant may react in a

way to cause costs, e.g. sick days or poor work performance • Resistance can be taken care of by identifying the source of resistance and

assessing whether or not there is a need to accommodate change• Lowering resistance to change through communicating a need for change

will result in widespread support for the change.

Global factors• They are an opportunity to source inputs from overseas suppliers, expand

and achieve economies of scale and develop new products for an international market

Global sourcing

• Involves sourcing any of the business operations that gives cost advantages not to be restrained by location

• Acquire less expensive but similar quality inputs from other countries • Best decision made on cost, efficiency, productivity, technical ability and

operate large hours

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• Advantages, expertise, labour specialisation, access to greater resources • Disadvantages, time to find suitable supplier and build good relationship,

lack of expertise in international transactions, increased lead times, less control over quality and reliability and competitors may use same supplier

Economies of sale• Refers to the cost advantages that can be gained by producing on a larger

scale• Costs per unit are lowered when resources can be used more efficiently to

produce more• Expansion means new customers, therefore increase output, lower costs,

increase sales and achieve profit maximisation

Scanning and learning • Refers to mgmt. being prepared to look at the practices of other businesses

and reorganise to be better and more efficient in doing things • Look at global market for trends that may impact on business success,

acting in a manner that minimises the negative impacts and maximises the positive impacts

• Help managers adapt best practice to the business operations

Research and development(R&D)• The creation of new products and improvement of new ones • Advantages, extend product cycle, new g+s developed in other countries,

manufacturing processes available, technological innovations and builds reputation