Operations

Managing the processes that transform and add value to inputs to create
outputs of goods and services.

Role of operations management

Strategic role of operations management cost leadership, good/service
differentiation
Strategic role = focusing on decisions for achieving long-term goals. The strategic goals are
to improve:

Productivity
Efficiency
Quality of outputs.

It involves operations managers contributing to the strategic direction of strategic plan of

the business

Cost Leadership: involves aiming to have the lowest costs or to be the most price-
competitive in the market. This is gained by offering greater value by means of lower prices,
grater quality or by providing greater benefits and service at no extra cost. Most businesses
who aim to be cost leader will have a high degree of standardisation. Can keep cost down
through:

Economies of scale in production and distribution

Access to cheaper raw materials
Exclusive access to a large source of low cost inputs
Developing an efficient scale of operationseconomies of scale
Using up-to-date technology in production
Controlling production and research costs.

Good/service differentiation: involves differing products from competitors. Is can be

achieved through:

Altering the quality

Faster delivery (efficiency)
Customisation
More features and applications on the physical appearance
Location of operations
Improving the service
Goods and/or services in different industries
Goods can either be:

Standardised (mass produced, uniform in quality, produced with a production focus)

Customised (varied according to the needs of the customer, produced with a market
focus)
Can be reused
Hard to modify once manufactured
Perishable or non-perishable
Tangible product that requires factory/machinery and space
Less labour intensive than services
The manufacturing of goods has become automated with computer-aided design
(CAD) and computer-aided manufacture (CAM).

Services can be:

Standardised (e.g. fast food restaurant)

Customised (e.g. medical services, hairdressers)
They are intangible
Can only be used by the customer once
Easier to change and customise
More interaction with customers
Require more people and have an office-centred production

Interdependence with other key business functions

All key functions are interdependent and rely in each other for success.

Operations- must supply a product that has the features and quality consumers want as
well as being reliable in distributing the product to the market.

Marketing- connects operations directly with the customer. Identifies the nature of
consumers desires and implements marketing strategies to encourage purchase of goods
made in operations.

Finance- required so production and distribution can take place. The finance manager
creates budgets and makes funds available to purchase inputs, equipment and repairs.

Human Resources- required for the hiring of employees to work in production. Ensures that
there are enough employees with the appropriate skills.

Influences on operations
Globalisation, technology, quality expectations, cost-based competition,
government policies, legal regulation, environmental sustainability
Globalisation:

Able to reduce the cost of operations by pursuing a global web strategy (location of
different parts of the production process in different areas) which will reduce labour
costs
abundance of raw materials, technology skills and low transport costs
Can also act as a threat to a business as other businesses who apply cost leadership
can dominate the market
Able to reach new markets and provide franchises
Gives consumers the opportunity to purchase products from the business that
provides the most value for money
Access to a global market for businesses to sell their outputs

Technology:

Enables service-based businesses to penetrate global markets with the international

distribution of information through the internet and smart phones
Can result in the development of new methods of production or new equipment that
helps businesses perform functions more quickly and efficiently (lower cost)
Computer-aided design (CAM) and computer-aided manufacture (CAM) has
impacted the number of employees needed within operations
It improves efficiency, logistics and reduces reliance on human labour

Quality expectations: customer expectations and satisfaction with the product(s).

Operations of the delivery of services can have a positive impact on customer satisfaction.
Customers require world-class standards in products and after-sales support. Customers will
have certain beliefs about:

Durability (how long the product lasts given a reasonable amount of use)
Reliability (how long the product functions without needing repairs or maintenance)
Fit for purpose (how well the product does what it is supposed to)

Cost-based competition: A business can gain a price advantage over its competitors by
using operational strategies that lower costs through:

Cheaper labour and resources

Outsourcingeconomies of scale, global web strategy
 Lowering quality
Using cheaper inputs

Government policies:

Government policies are methods used by the government that encourage the
operations function of a business to be more innovative and competitive.
A common way to support these innovative businesses is to provide monetary
benefits such as a financial grant or tax concessions.
There has been a gradual reduction in protection of Australian businesses forcing
them to be more efficient in their operations and reduce costs.
Free trades, taxation, interest rates, government spending and environmental
incentives.

Legal regulations:

The aim of government regulation of a business is to promote safety and fair

business conduct.
Many of the regulatory requirements exist at a local, state and federal level.
It is the legal responsibility of the operations manager to be aware of all the laws
relevant to the operations function and ensure that the business complies with
them.
Work Health and Safety (WHS), anti-discrimination, equal employment opportunity
(EEO), local zoning, and GST collection.

Environmental sustainability:

Ecological sustainability refers to the development 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.
Consumers need to be aware of the cost and disposal of excessive packaging.
Society will have a positive attitude towards businesses that are environmentally
friendly and good corporative citizens.
Involves the use of alternative resources, organic growing, recycling and packaging
and catering for future generations.

Corporate social responsibility

-the difference between legal compliance and ethical responsibility
-environmental sustainability and social responsibility
Corporate social responsibility is a commitment by a business to operate ethically to
protecting and contributing to the resources and interests of customers. It is how success
and profitability is determined and how well it considers the interests of employees,
consumers and the community.

Legal compliance is mandatory and of greater importance than ethical responsibility as

there are not specific laws the business would be breaking, yet unethical behaviours may
lose customers.

Ethical behaviour involves making decisions that are not only legally correct but also
morally correct.
For operations, a code of conduct will be concerned with:
o minimising harm to the environment
o reducing waste, recycling and reusing
o producing value-for-money, quality products
o improving customer service

Environmental sustainability is about the present use not affecting the future use, looking
after the environment for future generations. Social responsibility refers to the positive
effect on the community- protecting interests of customers and wider society, e.g.
initiatives/charity to community.

By pursuing environmentally sustainable goals a business will be contributing to a

better quality of life for society.

Operations processes
Inputs
-transformed resources (materials, information, customers)
-transforming resources (human resources, facilities)
Common direct inputs= labour, energy, raw materials, skills/knowledge, machinery and
technology.

Transformed resources: inputs that are changed or converted in the operations process to a
finished good or service.

Materials- raw materials and intermediate goods (e.g. supplies, parts) used up in the
operations
Information-influence and inform how inputs are used, where and which supplier to
use and to keep control over material inputs.
 Customers-their choices shape inputs. Customers can be changed in different ways,
e.g. feel that value has been added to their lives after seeing a film or going on
holidays.

Transforming resources: resources that remain in the business and carry out the
transformation process to add value to inputs.

Human resources-effectiveness of human resources determines the success of the

transformation. The skill, knowledge, capabilities and labour of people is applied to
materials to convert them into goods and services.

Facilities-plant, machinery, buildings, land, equipment and technology used in

operations.

Transformation processes

-the influence of volume, variety, variation in demand and visibility (customer

contact)
-sequencing and scheduling Gantt charts, critical path analysis
-technology, task design and process layout
-monitoring, control and improvement
The transformation processes are those activities that determine how value will be added.
These processes can add value in four ways:

Physical altering of the physical inputs or the changes that happen to people
Transportation of goods or services, e.g. having them delivered to a more convenient
location
Protection and safety from the environment; for example, protecting assets
Inspection by giving customers a better understanding of the good or service

The influence of volume:

The actual number of products or services produced by the operation.

A business using mass production will produce a high volume with a high degree of
process repetition.
A business with customization and low production will allow for lots of stoppages
and adjustments.
When volume is the largest factor, there will be lots of capital facilities and
technology, but less labour. Assembly lines using convey or belts will be common
and organized.
 Low volume= 5 star restaurant, high volume = fast food restaurant.

The influence of variety:

Variety refers to the range of products made, number of different models and
variations offered in the products or services.
A business producing a high volume product with low variety will be capital
intensive.
Low variety= car factory with small variations. High variety= financial advice.

The influence of variation in demand:

amount of produce desired by customers

Variation can change according to time of day, season, holidays and time of year.
When there are steady levels with no variation, there will be high volume and capital
costs.
Low variation= bread and milk. High variation = ice cream factory

The influence in visibility (customer contact):

Operations will also be influenced by the degree to which customers can see the
operations in action.
Service-based businesses will have a high level of visibility. Speed of operations will
also be important as customers usually have a much lower tolerance for waiting.
High visibility= restaurant. Low visibility= beef producer.

Sequencing= a plan showing the order in which activities occur

Scheduling=used to plan the length of time activities take and the sequence of the use of
resources
Gantt charts records the number of tasks involved in each particular project and the
estimated time needed for each task, good for long-term projects, easy to understand
Critical path analysis a scheduling tool that allows manager to see shortest length of time to
complete all tasks, precise in timing, good for short-term tasks

Technology: It makes task more effective and efficient, high-tech or low-tech, less
employees needed, increasingly important, cost is also relevant, allows more work to be
done in a shorter time, machinery/manufacturing technology-robotics, CAD and CAM.
Task Design: is how the task will be completed. It allows for ongoing analysis and
adjustments in each activity to ensure continuous improvement in productivity. Classifying
job activities, what needs to be done, making it easy for an employee to successfully
complete tasks, job analysis, can be cone after a skills audit is conducted.
Process layout: arrangement of machines in a sequence-grouped together by
function/process they perform

Monitoring- the systematic collection and analysis of information as a task progresses.

These include: quality, speed, dependability, flexibility, customisation and costs. It is aimed
at improving the efficiency and effectiveness of an operations process. The purpose of it is
to see if resources have been allocated properly and are being used efficiently.
Control- a function that aims at keeping the businesss actual performance as close as
possible to what was planned by making adjustments to the operation process. It is about
assessing the performance of a business.
Improvement- suggests that adjustments and readjustments may need to be made to day-
to-day activities in the short term and even the entire operations process in the long term.
There can be improvements in: quality, speed, dependability, flexibility and cost.

Outputs
-customer service
-warranties

Outputs: good or service provided/delivered to a customer, are the final products that a
business offers to customers.

Customer service- is a service provided to customers before, during and after a purchase. It
is an intangible output that requires extensive contact with customers. Good customer
service will increase customer satisfaction. How a business meets and exceeds the
expectation of customers in all aspects of its operations, key in developing long-term
relationships.

Warranties- an assurance that a business stands by the quality claims of the products that
they make and provide to the market. Agreement to fix defects in products, an assessment
of warranty claims can help a business to adjust transformations processes to be more
effective.

Operations strategies
Performance objectives quality, speed, dependability, flexibility,
customisation, cost
Quality= quality of service/conformity/design, can be measured in rate of returns and
feedback. Good quality prevents costs by product recalls and repairs, dimensions of quality
are: durability, performance, serviceability (convenient to repair) and aesthetics (does it
look good).

Speed= time it takes for production/operations process to respond to changes in the market
demand, tested by analysing wait time and production speed, if the production is too fast
the quality may suffer.

Dependability= consistency and reliability of products, measured by warranty claims and

complaints.

Flexibility= how quickly processes adapt to market change, technology, ability to make
changes to operations due to external factors.

Customisation= creation of individualised products to meet specific customer needs.

Cost= minimisation of expenses so that operations processes are conducted as cheaply as

possible.

New product or service design and development

New product: design, development, launch and sales of new products allows a business to
grow and maintain a competitive advantage, different approaches (customer
approach/changes or innovation in technology).

Service design and development: more complex, adding to the service offered to the
customer, can be adding to variety/increase of choice, develop within cast structure.

Supply chain management logistics, e-commerce, global sourcing

Supply chain management is the stream of processes of moving goods from the customer
order through the raw material stage, supply, production and distribution of products to the
customer. Integrating and managing the flow of supplies throughout the
inputs/transformation process/outputs to best meet the needs of customers, supplier
rationalism/backwards vertical integration/cost minimisation/flexible responsive supply
chain process

Logistics: the transport of physical raw materials, inputs and the distribution of finished
goods to markets. It involves the integration of information, transportation, inventory,
warehousing, materials handling and packaging. Computerisation can make the task
faster/more efficient. The role of logistics is to ensure that operations have the right items
at the right quantity and the right time at the right place.

E-commerce: the use of internet to buy and sell goods and services. Alter operation process,
e-procurement, managing supplies in an organised way, makes trading easier, cheaper
access to global markets, privacy and security issues, and increased risk of purchasing
unsatisfactory or faulty materials.

Global sourcing: business acquires the inputs it needs for production across the borders of a
number of countries. A business seeks to find the most cost effective location for
manufacturing a product, even if the location is overseas, may be cheaper to purchase
inputs from overseas than create them, keep control over complex supply chains, lower
costs, loss of control over quality, reliability and costs, slower lead times.

Outsourcing advantages and disadvantages

Outsourcing: occurs where other businesses provide the raw materials and components,
and also service inputs.

Advantages- external provider specialised, lower costs, greater effectiveness, require less
capital expenditure, can use employees of other business, may contribute to the speed, give
the business flexibility to choose the suppliers it wants, requires less input from
management, the business can focus on its core business.

Disadvantages- if ineffective may be more expensive, not in control, if competitors are

doing the same=less competitive advantage, dependent on other businesses, can involve a
loss of jobs, can the security and confidentiality issues.

Technology leading edge, established

Leading edge= most advanced or innovative, is sometimes still being developed

Established= developed and widely used

Inventory management advantages and disadvantages of holding stock,

LIFO (last-in-first-out), FIFO (first-in-first-out), JIT (just-in-time)
Inventory management refers to the systems and processes that identify the quantity of
goods or materials to be ordered and the timing of the delivery of those goods or materials.
Inventory control has 3 aims: determine maximum and minimum stock, provide details of
changes in inventory to trigger management decisions to reorder, strategies applied impact
transformation process.

Advantages of holding stock: consumer demand can be met, reduces lead times between
order/delivery, storage of stock allows business to promote products in non-traditional/new
markets, stock adds value to business, making products in bulk can reduce costs,
dependability of delivery
Disadvantages of holding stock: costs with storage, invested capital/labour/energy can be
used elsewhere, if stock is unsold the business experiences a loss, increased management
costs, goods may pass their expiry or use by date.

LIFO (last-in-first-out): last goods produced are the first out or used and therefore each
unity sold/used is the last one recorded, the newer stock is displayed for sale before
products purchased at an earlier date. This endures that up-to-date stock is on display for
customers.

FIFO (first-in-first-out): first goods produced are the first ones sold/used, therefore the cost
of each unit sold/used is first recorded, can be used if price of supplies/goods remain
relatively stable, used when products have a used-by date.

JIT (just-in-time): ensures exact amount of products or materials arrive only as they are
needed, can save money as it eliminates inventories but require flexible operations/reliable
suppliers.

Quality management
-control
-assurance
-improvement
Quality management: involves setting performance objectives that clearly set quality as a
foremost goal.

Quality Control- involves checking transformed and transforming resources in all stages of
the production processes, failure to meet pre-determined targets=corrective action

Quality Assurance- involves monitoring and evaluation of the various processes of a project,
service or facility to ensure that a minimum level of quality is being achieved by the
production process. Assures set standards are met, pre-determined (universal) quality
standards

Quality Improvement- involves continuous improvement in all functional areas to reduce

the rate at which mistakes occur. Ongoing commitment to improving goods/service and
total quality management-quality is a commitment/responsibility of all staff

Overcoming resistance to change financial costs, purchasing new

equipment, redundancy payments, retraining, reorganising plant layout,
inertia
Major reasons for resistance to change are:
Financial costs-purchasing new equipment, redundancy payments, retraining,
reorganisation of plant layout

Inertia- psychological resistance, fear of losing jobs/uncertainty.

Global factors global sourcing, economies of scale, scanning and learning,

research and development
Global sourcing: refers to the process of acquiring raw materials, services and various parts
that are needed to manufacture goods or services. A business may use a global web
strategy.

Economies of scale: occur when the amount of production increases and as a result of this
increased output there is a decrease in the cost of production per unit of output.

Scanning and learning: involves monitoring a businesss internal and external environment
so that it can gather, analyse and use information for tactical or strategic purposes. Scanning
the global environment to identify and learn the critical global trends that may impact on
the business.

Research and development: helps business to creating ideas for new products or services
that will give them a leading edge over other businesses.