You are on page 1of 26




Operations refers to the business processes that involve transformation

or, more generally, production. It is a term that applies both to the
manufacturing and services sector. In manufacturing, operations
refers to the processes involved in turning raw materials and resources
into outputs of finished goods or products.
Transformation is the conversion of inputs (resources) into outputs
(goods and services).
Apart from transformation, operations involves the creation of value by
Value adding is the creation of extra or added value as inputs are
transformed into outputs.
Operations processes are broad and include aspects of all of the
following activities undertaken in business:
The production of goods and services
Production controls and associated quality controls on processes.
Included in this are input management and capacity (volume of
output) decisions.
Inventory controls
Supply chain management
Logistics and distribution
Management decision making in terms of operational processes

Operations is informed by the business drive to maximise profits and also

by the needs of consumers.
Minimising waste is an operations management approach designed to
eliminate waste.
Minimising waste, also called lean production, aims to eliminate
waste at every stage of production. It involves analysing each stage of the
production process, detecting where inefficiencies are and correcting
The growth of the Fairtrade movement is a direct result of consumers
advocating for operations processes in production and supply to integrate
notions of a fair price, decent working conditions and local sustainability.
In terms of a manufacturing enterprise, businesses will continually seek to
minimise production costs so that the retail prices for consumers are as
reasonable as possible.
As consumers seek innovative goods, businesses will create innovative

Strategic role of operations management cost

leadership, good/service differentiation

Operations management is an essential key business function that

overlaps with the other business functions such as marketing, finance and
human resources management (HRM).
There are several different sources of operations costs in business.
There are input costs, processing or transformation costs and the
costs of getting products to markets.
Cost leadership involves aiming to have the lowest costs or to be the
most price-competitive in the market. A key aspect to cost leadership is
that although trading with the lowest cost, the overall business should still
be profitable.
Economies of scale refer to cost advantages that can be created
because of an increase in the scale of business operations. Typically the
cost savings come from being able to purchase lower cost per unit of input
and from efficiencies created through improved use of technology and
Product differentiation means distinguishing products (goods or
services) in some way from its competitors.
Sources of differentiation in goods include:
varying the actual product features
varying product quality
varying any augmented features

Sources of differentiation in services include:



amount of time spent on a service

level of expertise brought to a service
qualifications and experience of the service provider
quality of materials/technology used in service delivery

For both goods and services, differentiation can be created from

cross branding or strategic alliances.

Goods and/or services in different industries

Goods and services are produced differently.

Goods may be standardised or customised.
Standardised goods are those that are mass produced, usually on an
assembly line. Standardised goods are uniform in quality and meet a
predetermined level of quality. These are generally produced with a
production focus.
Customised goods are those that are varied according to the needs of
customers. These goods are produced with a market focus rather than a
production focus.
Goods may be perishable e.g. food or non-perishable e.g.
household/business goods such as motor vehicles, furniture and computerbase technologies.
The character of the goods will shape the nature of the operations
Intermediate goods have gone through one set of operational processes
then become inputs into further processing.
Services vary according to whether they are highly specialised or more

Self-service means encouraging the customers to take the initiative to

help themselves.

Interdependence with other key business functions

The range of typical business functions is operations, marketing,

finance and human resources.
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.
In most businesses, closely related tasks are grouped together for
example, sales and marketing, finance and administration, and operations
and research and development.
Marketing is about meeting the needs and wants of consumers through
provision of products (both goods and services) at prices that the market
is prepared to pay.
Reports such as income statements, which determine the amount of
money the business has earned after its expenses have been paid, are
very useful to managers and other stakeholders.
The function of human resources is to deal with the people the
business employs and the issues arising from their employment.

Globalisation, technology, quality expectations, costbased competition, government policies, legal
regulations, environmental sustainability

Globalisation refers to the removal of barriers of trade between nations.

Globalisation is characterised by an increasing integration between
national economies and a high degree of transfer of capital, labour,
intellectual capital and ideas, financial resources and technology.
Global consumers seek global brands and tend to seek standardised
products. This significantly affects the operations function, which is then
structured around a series of global production facilities.
Supply chain refers to the range of suppliers a business has and the
nature of its relationship with those suppliers.
For large global businesses the integration of the range of suppliers
creates a network sometimes called the global web. Global web refers
to the network of suppliers a business has chosen on the basis of lowest
overall cost, lowest risk and maximum certainty in quality and timing of
There are two alternative approaches to the supply chain,
depending whether a business is an imitator or whether it is an innovator:
reverse engineering and innovation.
Reverse engineering is a process that involves a business taking the
product of a competitor that has already been released into the market.
This product is then taken apart to see how it is made. The imitating
business then tries to make their own version of the product from the
component parts, but does so using different materials and at a lower
Innovation occurs when the business creates novel (new) products, and
in doing so leads the market.


Technology plays a very important role in the application of the operations

function of business.

Technology may be defined as the design, construction and/or

application of innovative devices, methods and machinery upon
operations processes.
Such technologies such as mobile phones and computers enable people to
communicate more easily and enable improved processes. In this way,
technology can be seen to be both a range of devices as well as a
range of enabling processes.
Technologies can be applied to, and integrated with, the range of
processes that characterise the operations function in business.
At an administrative level, technologies can assist with organisation,
planning and decision making and are in control of operational processes.
At a processing level, technologies are used in manufacturing, logistics
and distribution, quality management, all aspects of inventory
management, supply chain management and sourcing.

Quality expectations

Quality may be understood to be a specific reference to how well

designed, made and functional goods are, and the degree of
competence with which services are organised and delivered.
The International Standards Organisation (ISO) defines quality as being
the totality of features and characteristics of products (goods)
and services that bears its ability to satisfy stated or implied
People have an inherent belief in what the quality standards should be for
products (goods and services) and their personal level of satisfaction
with their experience of the product will indicate whether the
quality has met with expectations or not.
The expectations that people have of businesses determine the way
that products are designed, created and delivered to customers.
Quality expectations with goods include:
Quality of design the concept, accounting customer needs,
nature of materials and innovative design (minimising waste)
Fitness for purpose how well the products does what it is
designed to do and its usability
Durability how reliable/long lasting the product is and how easily
it can be repaired and maintained, including after-sales such as

Quality expectations with services include:

Professionalism of the service provider the cleanliness and
layout of facilities and courtesy of staff (taking care in dialogue and
Reliability of the service-provider how efficiently the service is
performed and overall levels of competence
Levels of customisation how well the particular needs of the
customer are fulfilled by the service provider through the
application of expertise and experience

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.
Cost-based competition is a feature of operations management when
businesses bring a cost leadership approach to the operations function.
That is, they focus on reducing costs to a minimum while
maintaining profit margins.
Costs may be divided into those which are fixed and those which
are variable.
Fixed costs are those costs that do not change regardless of the level of
business activity.
Variable costs are those that vary in direct relationship to the level of
business activity (level of production).
There are many ways to compete with costs including:

Outsourcing manufacturing operations

Eliminating waste
Bulk buy inputs
Achieve economies of scale
Produce high volume output
Use automated production systems
Produce standardised products of the larger market

Government policies

All businesses operate in a politicallegal environment. Political

decisions affect the business rules and regulations, which, in turn, directly
affect the management of various key business functions.
Government policies change from time to time, most notably due to
a change in government or a change in social expectations. Government
policy is, therefore, a notable source of change and a significant influence
on business operations.
Carbon pricing is the term used for putting a price on carbon.
Policies such as: taxation rates, required materials handling
practices, Occupational Health and Safety (OH&S) standards,
training and rules, public health policies, environmental policies,
employment relations, trade and industry policies all impact on
business operations.
Since policies can inform law-making, and also lead to business
opportunities, operations managers need to be fully aware of the
contemporary government policies and what they comprise.

Legal regulations

The range of laws with which a business must comply are collectively
termed compliance.
The 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.
Laws make clear the standards of society, and businesses are expected to
comply with the standards of behaviour imposed by the legal regulations.
Laws that relate to labour and labour management as well as
environmental and public health include:
Occupational Health and Safety (OH&S): in the use of
machinery and in interacting with the business environment. Safe
and healthy working conditions require that employees be given
appropriate safety training, use of protective equipment, and work
with machines that abide by noise, pollution and safety standards.
Training and development: in the use and application of
technology and in the appropriate methods required to work
Fair work and anti-discrimination laws: requiring that
employees be treated with dignity and respect.
Environmental protection: in the use of minimising pollution,
eliminating and safely disposing of any toxic residues.

Laws that affect business operations include:

Racial Discrimination Act 1975 (Cwlth)

Sex Discrimination Act 1984 (Cwlth)
Workers Compensation Act 1987 (NSW)
Disability Discrimination Act 1992 (Cwlth)
Age Discrimination Act 2004 (Cwlth)
Anti-Discrimination Act 1977 (NSW)
Work Health and Safety (WHS) Act 2012 (Cwlth)
Environment Protection and Biodiversity Conservation Act (1999)
Superannuation Guarantee Act 1992 (Cwlth)
Taxation Act 1953 (Cwlth)
Corporations Act 2001 (Cwlth)
Fair Work Act 2009 (Cwlth)

Environmental sustainability

Environmental sustainability (ecological sustainability) means that

business operations should be shaped around practices that consume
resources today without compromising access to those resources for
future generations.
There are two main aspects to environmental sustainability: the
sustainable use of renewable resources and a reduction in the use
of non-renewable resources.
The operations management function is significantly affected by the
rise in climate change awareness and the need to integrate a longterm sustainable view of resource management into business planning
and practice.
This can be seen in the move by businesses to reduce and minimise
waste: recycle water, glass, paper and metals, and reduce their

carbon footprint. Carbon footprint refers to the amount of carbon

produced and entering the environment from operations processes.

Corporate social responsibility

Corporate Social Responsibility (CSR) is an important influence on

business and it integrates financial, social and environmental goals.
It refers to open and accountable business actions based on respect for
people, community/society and the broader environment. It
involves businesses doing more than just complying with the laws and

The difference between legal compliance and ethical


Legal compliance refers to businesses abiding by the word of the law,

whereas ethical responsibility encompasses a much broader integration
of social, community and environmental concerns. E.g. labour law
compliances, environmental and health compliances, business licensing
rules, taxation, human rights etc.
Compliance costs are those associated with the cost of meeting the
needs imposed by regulations.
Compliance applies to a wide range of business activities.
One way that businesses aim to reduce compliance costs is by structuring
their business operations so that different aspects are conducted by
outside parties. This process known as outsourcing.
Outsourcing involves the use of outside specialists to undertake one or
more key business functions. Outsourcing may be onshore or
Onshore outsourcing involves the use of domestic businesses as the
outsourcing provider.
Offshore outsourcing involves taking the activities to a provider in
another country.
Ethical business enterprises recognise that variation in laws can
undermine social and ethical responsibility.

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.
Environmental sustainability refers to the economic, social and
environmental performance of a business.
Social responsibility refers to a businesss management of the social,
environmental, political and human consequences of its actions.

Common direct inputs

Inputs are the resources used in the transformation (production) process.

There are four common direct inputs: labour, energy, raw materials,
machinery and technology (capital equipment).
human effort (mental and physical). Includes sourcing and
supply chain, technical support/machine maintenance, inventory
management/control, production and distribution.
electricity or fuels; can be converted into heat, movement,
light, sound or other forms of energy. Required to bring inputs into the

business and distribute them. Value adding is proportional to the amount

needed e.g. a motor vehicle requires a high amount of energy.
Raw materials: essential inputs. Basic components include wood,
unprocessed agricultural products, natural resources (minerals and fossil
fuels), water etc. Sourced through supply chain and volume is determined
against the level of demand of the finished good.
Machinery and technology: necessary to enable transformation
processes. Used to process raw materials and design/make products.
There is a concern of capital-labour substitution (machinery and
technology displace people by doing their work, making labour

Transformed inputs/resources

Transformed inputs/resources are those inputs that are changed or

converted in the operations process.
Include: materials, information, customers.
Materials are the basic elements used in the production process and
consist of raw materials and intermediate goods.
Raw materials are the essential substances in their unprocessed state.
Intermediate goods are goods manufactured and used in further
manufacturing or processing.
Information is the knowledge gained from research, investigation and
instruction, which results in an increase in understanding.
Can be external (market reports, statistics, academic papers,
commentary etc.) or internal (financial reports quality reports and key
performance indicators (KPIs). Key performance indicators (KPIs)
are specific criteria used to measure the efficiency and effectiveness of
the business performance.
Customers are thought of as outputs, not inputs, but they become
transformed resources when their choices shape inputs.
Businesses can use customer relationship management (CRM) to
better understand the desires and preferences of customers. Customer
relationship management (CRM) refers to the systems that businesses
use to maintain customer contact.

Transforming inputs/resources

Transforming inputs/resources are those inputs that carry out the

transformation process.
The two main transforming resources are human resources and
Human resources coordinate and combine their resources to produce
goods and services.
The effectiveness with which human resources carry out their duties can
determine the success with which transformation and value adding occurs.
Facilities include the plant (office or factory) and machinery used in the
operations process.
Major decisions include the design layout of the facility, number of
facilities to be used, their location and capacity.

Transformation processes
Value adding

The purpose of producing something is to add value, and therefore sell at

a higher price and make a profit.
As inputs are added and processed into final goods for consumption, value
is added.

Specific influences on transformation processes

Volume: refers to how much of a product is made. Volume flexibility

refers to how quickly the transformation process can adjust to
increases/decreases in demand. This responsiveness to the changes in
volume is essential to effectively manage lead times. Lead time is the
time it takes for an order to be fulfilled from the moment its made.
Variety: the mix of products made, or services delivered through the
transformation process, is called mix flexibility. Mix flexibility is known
by consumers as product range or variety of choice. The greater the
variety made, the more the operations process need allow for variation.
Variation in demand: an increase in demand will require inputs from
suppliers, increased human resources/energy use/machinery and
technology. A decrease in demand will require operational flexibility as
staff may need to have their hours reduced, production may need to slow
to avoid inventory build up and suppliers may put on pressure due to
contractual agreements.
Visibility (consumer contact): customers and their preferences can
shape what business make. Customer contact can be direct or indirect.
Direct contact refers to customer feedback through surveys, interviews,
letters, wikis, blogs and verbal contact. Indirect contact comes through a
review of sales data giving an indication of customer preferences and
market share data, through an observation of peoples decision-making
processes and through customer reviews.

Sequencing and scheduling Gantt charts, critical path


Sequencing refers to the order in which activities in the operations

process occur.
Scheduling refers to the length of time activities take within the
operations process.
Gantt charts: an excellent management tool for an operational manager.
The Gantt chart is a type of bar chart that shows both the scheduled and
completed work over a period of time. It is often used in planning and
tracking a project. Gantt charts outline three things:
Activities that need to be performed.
The order in which they are performed.
How long each activity is expected to take.

The advantages of using a Gantt chart are:

Forces the manager to plan tasks in advance.

Makes it easy for the manager to monitor actual performance
against planned performance.

Critical path analysis: another visual tool that operations managers

could use. The Critical Path Analysis (CPA) is a scheduling method or
technique that shows what tasks need to be done, how long they take and
what order is necessary to complete those tasks.
It is a diagram that shows two ways of producing something:
Critical path: this is the shortest length of time it takes to
Non-critical path

This allows the operations manager to coordinate activities to final detail

e.g. down to minutes/days.


Generally, technology is the application of science or knowledge that

enables people to do new things or perform established tasks in new and
better ways.
Business technology involves the use of machinery and systems that
enable businesses to undertake the transformation process more
effectively and efficiently. Most technology impacts every aspect of
business, assisting employees to work more productively.
Office technology includes computers, keyboards, telephones,
answering machines, photocopiers etc.
Manufacturing technology: Key manufacturing technologies are
robotics, computer-aided design (CAD) and computer-aided
manufacturing (CAM).
Robotics 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
Computer-aided manufacturing (CAM) is software that controls
manufacturing processes.

Task design

Task design involves classifying job activities in ways that make it easy
for an employee to successfully perform and complete the task.
Typically, there is a separation between manufacturing and
administrative operations. In task design, it is necessary to have group
skills and competencies because this helps when obtaining staff. A
prospective employee will be screened against these skills and
competencies to ensure a match.

Attracting the right candidate for the task or job is the final part of a
process that starts with task design and ends with selection, that is: Task
design > Job description > Person specification > Recruitment >
Sometimes, a business already has available staff. However, the staff may
not have the requisite skills. Under these circumstances the managers
may wish to conduct a skills audit. Skills audit is a formal process used
to determine the present level of skilling and any skill shortfalls that need
to be made up either through recruitment or through training.

Process layout

Process layout: arrangement of machines such that they are grouped

together by the process they perform.
Plant layout: the arrangement of equipment, machinery and staff within
the facility.
Product layout: where the equipment arrangement relates to the
sequence of tasks performed in manufacturing.
Process production: deals with high-variety, low-volume production.
Product production: (mass production) is characterised by the
manufacturing of many quality goods.
Project production: deals with layout requirements for large-scale, bulky
activities e.g. the construction of bridges, ships, aircraft or buildings.
Fixed position layout: operational arrangement in which employees and
equipment come to the product.
Office layout (workstations): desk areas required by office workers,
usually fitted with access to a computer monitor etc.

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 is the process of measuring actual performance against
planned performance. During operations processes monitoring is crucial.
Monitoring involves the measuring of all aspects of operations, from
supply chain management and the use of inputs, through to
transformation processes and outputs.
Monitoring of the Key Performance Indicators (KPIs) gives operations
managers a chance to measure how the business is going and to assess
performance against targeted levels of performance.
Typical KPIs include:

lead times/wait times/idle times

inventory turnover rates/stock-out rates
defect rates, repair rates and warranty claims
process flow rates
capacity and volume rates/capacity utilisation rates
IT and maintenance costs

direct and indirect cost analysis

Control occurs when KPIs are assessed against predetermined targets

and corrective action is taken if required. This means controlling compares
what was intended to happen with what has actually occurred. If there is a
discrepancy between performance and goals, changes and improvements
can be made.
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 in order to correct the problem.
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 is typically sought in time, process flows, quality,
cost and efficiency.


Outputs refer to the end result of the business efforts the good or
service that is provided or delivered to the customer.
Outputs must always be responsive to customer demands. Issues of
quality, efficiency and flexibility must be balanced against the resources
and strategic plan of the business.
A business outputs also include customer service and warranties.
Combined, customer service and warranties imply that the inputs and
transformations processes are subject to scrutiny as the outputs will be
assessed by consumers.

Customer service

Customer service refers to how well a business meets and exceeds the
expectations of customers in all aspects of its operations.
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.
Exceeding customers expectations is likely to be the key in developing
long-term customer relationships. Of course, such services must be able to
be delivered. Failure to do so will drive customers away.


A warranty is a promise made by a business that they will correct any

defects in the goods that they produce or in the services that they deliver.
Warranty claims are made against goods that have defects arising from
an issue in transformation. Although a small proportion of warranty claims
are false, the number of claims made against a business on a particular

product line or product range will give an indication of problems in the

An assessment of warranty claims can help a business to adjust
transformations processes so that they become more effective.

Performance objectives

Performance objectives are goals that relate to particular aspects of the

transformation processes. These objectives or targets will be set so that
the business becomes more efficient, productive and profitable.
The six main performance objectives are: quality, speed,
dependability, flexibility, customisation and cost.


Quality is often determined by consumer expectations, which are used to

inform the production standards applied by the business.
Quality performance objectives include:
quality of design
quality of conformance
quality of service

Quality of design arises from an understanding of consumers and their

preferences. It extends to how well a product is made or a service is
Typically, a high-quality design for a good will be clear from the high-grade
materials used in manufacturing, the care and presentation of the good,
how aesthetically pleasing and functional the good is, and how robust and
long-lasting it is.
Well designed and produced goods will normally attract a high
As a performance objective, a business needs to decide the quality of
product it will deliver to the market.
As high quality inputs add cost, this will be reflected in a higher price that
some consumers may not want to pay.

Quality of conformance is the focus on how well the product meets the
standard of a prescribed design with certain specifications.
The specifications do not have to require high-quality inputs.
Quality of service: Quality of design and quality of conformance can be
applied to the design and delivery of services.
In this sense quality refers to:
how reliable the service is
how well the service meets the specific needs of the client
how timely or responsive the service delivery is


Speed refers to the time it takes for the production and the operations
process to respond to changes in market demand.
As a performance objective, speed aims to satisfy customer demands as
quickly as possible. Therefore, goals for speed include:
reduced wait times
shorter lead times
faster processing times


Also called reliability, dependability, as a performance objective, refers

to how consistent and reliable a businesss products are.
Dependability, in respect of goods, refers to how long the products are
useful before they fail.
In respect of services, dependability refers to consistency of service
standards and reliability. A measure for service dependability is the
number of complaints received; the fewer the complaints the more
dependable the service.


Also called adaptability, flexibility refers to how quickly operations

processes can adjust to changes in the market.
Flexibility can be best achieved by increasing the capacity of
production. This can be done by using plant and machinery better.
Alternatively a business can buy new technologies that increase flexibility
and capacity.
With services, flexibility can be achieved through increasing the number
of service providers, increasing the providers skill level and through
improving the level of technology used when providing the service.


Most products tend to be standardised; however, over time customer

preferences are creating a custom option for goods.

Customisation refers to creation of individualised products to meet the

specific needs of the customers.
Services are generally customised, although aspects of services can be
standardised as seen in the fast-food sector.
Variations in product features such as colour, size and functionality offer
some level of differentiation between products. Consequently, the
production of many of todays goods and services are based on the
principle of mass customisation. Mass customisation is a process that
allows a standard, mass produced item to be personally modified to
specific customer requirements.


Cost as a performance objective refers to the minimisation of expenses so

that operations processes are conducted as cheaply as possible.
Over time, businesses seek to become more efficient and thus allocate
cost better.
The acquisition of new technologies can help a business to lower costs,
use inputs better and minimise wastage.
Moreover, a business will also seek to reduce supplier costs, manage
inventory to reduce cost and maximise flexibility, and find distribution
methods that are most cost and time effective.

New product or service design and development

Product design and development

There are two different approaches that determine product design and
The preferences and desires of consumers, as identified by
market research, determine which products are designed and
Changes and innovations in technology enable new, appealing
products to be made because they use advanced technologies, which
give products greater functionality.

Important considerations when designing and developing a product are

quality, supply chain management, capacity management and
Value is directly related to cost but also includes the customers
perception of product utility. Product utility is defined as the usefulness
and value that a product has from the consumers point of view.

Service design and development

Services differ from goods in that they are intangible and as they
are produced they are also consumed.
Service design, being customised in nature, has always taken the position
of the customer or client as the starting point in design.

When designing services, there are important aspects that 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.
Explicit service is also called the tangible aspect of the service being
provided, such as the application of time, expertise, skill and effort.
Implicit service is based on a feeling and is therefore intangible. The
implicit aspects of a service are the psychological wellbeing the feeling
of being looked after that comes with the provision of the service.

Supply chain management

Supply chain management (SCM) involves integrating and managing

the flow of supplies throughout the inputs, transformation processes
(throughput and value adding) and outputs in order to best meet the
needs of customers.
There are three key aspects to supply chain management. In order of
processing, these are:
sourcing, including global sourcing


Also called procurement or purchasing, sourcing refers to the

purchasing of inputs for the transformation processes.
Sources or inputs are drawn from a range of suppliers.
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.
In recent years there have been four particular trends in SCM. These
trends include:

supplier rationalisation
vertical integration (backwards)
cost minimisation
flexible/responsive supply chain processes

Supplier rationalisation involves assessing the number of suppliers in

order to reduce the number of suppliers to the least amount.
Backwards vertical integration: Another trend in sourcing has been the
purchasing through mergers or acquisitions of suppliers. As a strategy, this
guarantees supply for the transformation processes, as the supplier is
then owned by the business. The operations managers must decide
whether backwards vertical integration of this kind will actually achieve
time and cost savings.
Cost minimisation: A third trend is the use of offshore suppliers. This
strategy is focused on cost minimisation. As new offshore markets
develop, there is increasing access to low-cost resources/inputs.

Flexible/responsive supply chain processes: For manufacturing

businesses, the notion of lean processes is relevant. A lean organisation
is one that minimises waste, seeks to continually lower costs or improve
processes and processing speed.


E-commerce involves the buying and selling of goods and services via
the internet.
Many businesses these days have their supply chain managed through
electronic ordering. E-procurement, or the use of on-line systems to
manage supply, allows suppliers direct access to the businesss level of
supplies. When stock falls to a pre-determined point, the supplier will
supply even without a formal request from the buyer.
Business to business (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.
Business to consumer (B2C) is the selling of goods and services to
consumers over the internet, with payment usually by credit card.


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 refers to the ways of getting the goods or services to the

There are various modes of transportation that can be used and each
has its own strengths and weaknesses. The type of product and the
cost of transportation will determine the mode of transportation
selected. Some products, due to their nature, can only be transported by
particular modes (for example coal and crude oil), whereas for other
products there is a variety of choices (for example native Australian
Storage involves finding a secure place to hold stock until it is required.
Storage is a factor that must be addressed by most businesses some or all
of the time.
Storage may be long term or short term and may have particular
characteristics that help preserve the product. For example, cold storage
is used for perishable goods and assists to increase the shelf-life of the
Warehousing is defined as the use of warehouses for the storage,
protection and, later, distribution of stock. Warehouses are a place 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

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. This is because some products require particular skills,
care or attention when being moved.
The government has regulations that require dangerous goods be stored
and handled in particular ways, and it also requires packaging to be of a
particular standard and to carry warnings.


Outsourcing involves taking to market those internal business processes

and activities that can be done better and at lower cost when given to
external vendors.
The term outsourcing is often called business process outsourcing (BPO)
and captures a range of outsourced business processes including:
finance and accounting outsourcing (FAO)
knowledge process outsourcing (KPO)
legal process outsourcing (LPO)

The outsourcing decision should consider several factors and can

involve the use of different options.


There are numerous advantages associated with outsourcing:

efficiency and cost savings
increased process capability
increased accountability
access to skill/resources lacking within the business
provides a capacity to focus on core competencies thus improving
in-house performance and several strategic benefits


The disadvantages associated with outsourcing include:

the cost and uncertainty associated with payback

issues with communication and language
loss of control of standards and information security
loss of corporate memory and costs associated with IT,
organisational change, redesign and management of hierarchies

Technology leading edge, established

The thoughtful application of technology helps a business create

a competitive advantage.
Both forms of technology give businesses efficiencies, productivity gains
and a capacity to improve operations processes.

Leading edge technology

Leading edge technology is the technology that is the most advanced

or innovative at any point in time.
Operations managers can distinguish their operations processes by
utilising the best available technologies. This can help businesses to
create products more quickly and to higher standards, with less
waste, and also help a business to operate more effectively.

Established technology

Established technology is the 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.

Inventory management

Inventory or stock refers to the amount of raw materials, work-inprogress and finished goods that a business has on hand at any particular
point in time.
Inventory management is another crucial facet of operations
management, and the strategies applied to the management of inventory
will have a significant impact on transformations processes.

Advantages of holding stock

There are several advantages associated with holding stock:

Consumer demand can be met when there is stock available.
It reduces lead time between order and delivery.
Stocks give the opportunity for a business to generate immediate
Older stock can be sold at reduced prices and thereby encourage
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.
Making products in bulk may reduce costs as there are economies
of scale in purchasing inputs.

Disadvantages of holding stock

There are many perceived disadvantages of holding stock. These include:

The costs associated with holding stock, 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)

The LIFO (last-in-first-out) method of pricing inventory assumes that

the last goods purchased are also the first goods sold and therefore the
cost of each unit sold is the last cost recorded.

FIFO (first-in-first-out)

The FIFO (first-in-first-out) method of pricing inventory assumes that

the first goods purchased are also the first goods sold and therefore the
cost of each unit sold is the first cost recorded.

JIT (just-in-time)

JIT (just-in-time) is an inventory management approach which ensures

that the exact amount of material inputs will arrive only as they are
needed in the operation process.
A JIT approach also allows retailers to display a wider range of products as
they need to store less and can order in response to consumer demand.
However, a JIT approach requires a very flexible operations function
with flexible processing.
It also requires a very high ability to respond quickly to changes in market
demand as well as reliable supplier deliveries which must be received at
the appropriate time.

Quality management

Quality management refers to those processes that a business

undertakes to ensure consistency, reliability, safety and fitness of purpose
of product.
There are numerous approaches to achieving quality within businesses,
but many of the more 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

Quality control

Quality control involves the use of inspections at various points in the

production process to check for problems and defects.

Quality control management may require that labour is appropriately

trained to apply quality standards throughout working processes.
To ensure output meets required standards, many businesses carry out
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.

Quality assurance

Quality assurance (QA) involves the use of a system to ensure that set
standards are achieved in production.
Aspects of quality that are important to QA include:
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

A widely used international standard is the ISO 9000 series of quality

certifications. ISO stands for International Organization for
Standardization. ISO standards are voluntary but many businesses
comply with their requirements to enhance their domestic and
international competitiveness.

Quality improvement

Quality improvement focuses on two aspects: continuous

improvement and total quality management.
Continuous improvement is an ongoing commitment to improving a
businesss goods or services.
Improvement may be a monumental breakthrough achieved through
innovation all at once or it may be incremental and gradual over time.
Six Sigma is a quality management approach that seeks to identify and
remove the causes of problems in the operations processes, achieving
virtually defect-free production.
The total quality management (TQM) concept focuses on managing
the total business to deliver quality to customers.
Innovation, employee involvement and quality are closely aligned and
indicate quality working processes.
To achieve TQM objectives requires four elements: benchmarking,
employee empowerment, a focus on the customer and continuous

Overcoming resistance to change

Financial costs

One major cause of a resistance to change from managers and business

owners is that of financial costs. The 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

The purchase of equipment such as machinery and technology is

considered a capital cost.
Such costs are usually quite high and the cost can be recouped through
use (which adds value in transformation processes) and through
Despite the high cost, a business may find some key operational goals
are better achieved by purchasing new equipment, such as:

improved processing flexibility

improved processing speeds and shorter lead times
more consistency in production
higher overall quality of processing
reduced wastage and losses from equipment failure

Redundancy payouts

Redundancy is defined as a 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. A Redundancy payout is the money that is given to employees
when they are forced out of work because their job skills are no longer
Typically, 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 the being made
the amount of unused leave that the employee has accrued
(including annual leave and long service leave)
any outstanding wages


This cost arises from change that causes a reorganisation of the businesss
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.
In the second situation, the purchase of technology often requires
training or retraining on new software.

Reorganising plant layout

Minor changes may have little or no effect on plant layout. However,

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.
Further costs are incurred in the downtime when transferring from the
old machinery to the new machinery and when testing new equipment,
machinery and technology.
Further costs come with losses of productivity, arising from staff
orientating themselves with new work processes and


Inertia is a term that describes a psychological resistance to change.

Inertia can be due to a feeling of uncertainty or fear of the unknown.
Although inertia is not a financial resistance to change, when people do
not change or adapt then the business can feel financial effects of
that resistance.
Resistance to change can be overcome by a business identifying the
source(s) of change and assessing whether there is a need to
accommodate change.
Lowering the resistance to change through communicating a need for
change will result in widespread support for the change.
Change agents initiate change or facilitate the change process.

Global factors
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.
Global sourcing ensures that the outsourcing decision is exposed to the
global market so that the best decision is made based on cost, efficiency,
productivity, technical ability and an ability to operate over more hours of
the day.
The 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, and the increasing complexity of overall operations when sourcing
from diverse locations.

Economies of scale

Economies of scale refer to cost advantages that can be gained by

producing on a larger scale. This means that businesses can lower their
per unit input costs.
Economies of scale can lead to significant cost saving in various
aspects of the business enterprise.
Economies of scale arise in several different areas of business. There are
clear production advantages of producing high volumes. There are also
economies of scale that can be derived on capital investment and the
improved use of technologies.
For very large multinational corporations (MNC), economies of scale
can arise in marketing, with global branding and global advertising saving
costs on duplication.
Further economies of scale can be created in the field of human
resources (HR) through the application of training, and development and
range of HR strategies globally.

Scanning and learning

Scanning and learning can be a very valuable operations management

tool as it can help managers adapt best practice to the business
All businesses can benefit from scanning the global environment and
learning from the best practice of businesses around the world.
Kaizen is Japanese for improvement. It emphasises continuous
improvement in all areas of a business, from the way the CEO manages to
the way assembly line workers perform their jobs.
Another source of learning comes from staff members and managers
who have worked in other businesses and in other nations. Diversity of
experience helps businesses learn how to handle any issue with flexibility
and insight.

Research and development (R&D)

Research and development (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
A central aspect of R&D is ascertaining what consumers want and
assisting to create products that meet their needs.
R&D can make a very big difference to the level of innovation, quality
and competitive advantage of a business.