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Operations Management

By
Tauseef Iqbal Khan
Faculty Member- IQRA University
Introduction
• Both the structure and the scope of an operation’s supply network
are decisions that shape how the operation interacts with its
markets, its suppliers, in fact with the world in general
• No operation exists in isolation. All operations are part of a larger
and interconnected network of operations. This is called the
operation’s supply network
• It will include the operation’s suppliers and customers, as well as
suppliers’ suppliers and customers’ customers, and so on
• At a strategic level, operations managers are involved in deciding
how much of the network it should own. This is called the scope of
the operation
• They are also concerned with the shape and form of their network.
This is called the structure of the network
Chapter 4 Operations Scope And
Structure
Learning Objective
• Supply network design and capacity planning
• Supply network design
• Supply network configuration
• Operations location decisions
• Fundamental issues in capacity planning for
the supply network
Supply Networks
• A supply network is an interconnection of
organizations that relate to each other through
upstream and downstream linkages between the
different processes and activities that produce
value in the form of products and services to the
ultimate consumer
• In other words, a supply network is the means of
setting an operation in the context of all the
other operations with which it interacts, some of
which are its suppliers and its customers
Supply Networks
• Suppliers that directly supply the operation are often
called first-tier suppliers
• Second-tier suppliers supply them; however, Similarly,
‘first-tier’ customers are the main customer group for
the operation. These in turn supply ‘second-tier’
customers, although again the operation may at times
supply second-tier customers directly like in case of
second-tier customers
• The suppliers and customers who have direct contact
with an operations are called its immediate supply
network
Two-way Flow Through The Network
• Materials, parts, information, ideas and
sometimes people all flow through the network
of customer–supplier relationships formed by all
these operations (Forward Flow)
• But also along with the forward flow of
transformed resources (materials, information
and customers) in the network, each customer–
supplier linkage will feed back orders and
information (Reverse Flow) So flow is a two-way
process with items flowing one way and
information flowing the other
It Is Important To Consider The Whole
Supply Network
• It helps an understanding of competitiveness
• It helps identify significant links in the network
• It helps focus on long-term issues
The Scope & Structure Of An
Operation’s Supply Network
• The scope of an operation’s activities within the
network is determined by two decisions
 The extent and nature of the operation’s vertical
integration
 The nature and degree of outsourcing it engages in
• The structure of an operation’s supply network is
determined by three sets of decisions
 How should the network be configured?
 The long-term capacity decision
 The location decision?
Vertical Integration
• The scope of an operation’s supply network
determines the extent that an operation does
things itself and the extent that it will rely on
other operations to do things for it.
• This is often referred to as ‘vertical
integration’ when it is ownership of whole
operations that are being decided, or
‘outsourcing’ when individual activities are
being considered
An Organization's Vertical Integration
Strategy
• The direction of any integration (backward or ‘upstream’ vertical
integration) or (forward or ‘downstream’ vertical integration)
• Backward vertical integration, by allowing an organization to take
control of its suppliers.
• Forward vertical integration, on the other hand, takes an
organization closer to its markets
• The balance among the vertically integrated stages – This is not
strictly about the ownership of the network. It refers to the amount
of the capacity at each stage in the network that is devoted to
supplying the next stage
• So a totally balanced network relationship is one where one stage
produces only for the next stage in the network and totally satisfies
its requirements.
Advantages & Disadvantages Of
Vertical Integration
Advantages
• It secures dependable access to supply or
markets
• It may reduce costs
• Vertical integration also reduces the ‘transaction
costs’ of dealing with suppliers and customers.
Transaction costs are expenses, other than price,
which are incurred in the process of buying and
selling
• It may help to improve product or service quality
Advantages and disadvantages of
vertical integration
Disadvantages
• It creates an internal monopoly. Internal supply is
less subject to the normal competitive forces that
keep operations motivated to improve
• You can’t exploit economies of scale
• It results in loss of flexibility
• It cuts you off from innovation
• It distracts you from core activities (loss of focus)
Outsourcing
• Outsourcing is also known as the ‘do-or-buy’
decision
• Although most companies have always
outsourced some of their activities, a larger
proportion of direct activities are now bought
from suppliers
• Also many indirect and administrative processes
are now outsourced. This is often referred to as
Business Process Outsourcing (BPO)
Operation’s Performance Objective
Performance Make Buy (Outsourced)
Objective
Quality •Easy to track Quality Issues •Market Expertise
•Danger of Complacency •Difficulty in
communication
Speed •Through synchronized •Can built pressure on third
schedules party to accelerate

Dependability •Less •High

Flexibility •The observation of change is •Can provide due to


high but response time is low specialty

Cost •May be low but difficult to •Have high economies of


achieve economy of scale scale and learning curve
Outsourcing Vs Offshoring
• Two supply network strategies that are often confused
are those of outsourcing and offshoring
• Outsourcing means deciding to buy-in products or
services rather than perform the activities in-house
• Offshoring means obtaining products and services from
operations that are based outside one’s own country
• Of course, one may both outsource and offshore
• Offshoring to a lower cost region of the world is usually
done to reduce an operation’s overall costs
Configuration Of Supply Network
• Globalization is termed where products, raw
materials, money, technology and ideas move
(relatively) smoothly across national boundaries
• Another trend in some supply networks is that of
companies within a network bypassing customers
or suppliers to make contact directly with
customers’ customers or suppliers’ suppliers.
‘Cutting out the middle men’ in this way is called
Disintermediation
Co-opetition
• One approach to thinking about supply
networks sees any business as being
surrounded by four types of players: suppliers,
customers, competitors and complementors
• All the players in the network, whether they
are customers, suppliers, competitors or
complementors, can be both friends and
enemies at different times. The term used to
capture this idea is ‘co-opetition
The Idea Of The ‘Business Ecosystem
• An idea that is closely related to that of co-opetition in
supply networks is that of the ‘business ecosystem’
• An economic community supported by a foundation of
interacting organizations and individuals—the organisms of
the business world. The economic community produces
goods and services of value to customers, who are
themselves members of the ecosystem
• The terminology and metaphors used to describe business
ecosystems are obviously based on that used to describe
‘natural’ biological systems, where elements in the
‘ecosystem’ affect and are affected by the others
Describing Supply Networks – Dyads
And Triads
• There are many operations, all interacting in different ways,
to produce end products and service
• To understand them better, supply network academics and
professionals often choose to focus on the individual
interaction between two specific operations in the
network. This is called a ‘dyadic’ (simply meaning ‘two’)
interaction, or dyadic relationship, and the two operations
are referred to as a ‘dyad’
• However, more recently, and certainly when examining
service supply networks, many authorities make the point
that dyads do not reflect the real essence of a supply
network. Rather, they say, it is triads, not dyads, that are
the basic elements of a supply network
How Much Capacity Should Operations
Plan To Have?
• Most organizations have decisions to make
about how big (in terms of capacity) they
want to be
• All types of operation exhibit economy of
scale effects where operating costs reduce as
the scale of capacity increases.
• Diseconomies of scale increase operating
costs above a certain level of capacity
resulting in a minimum cost level of capacity.
Being Small May Have Advantages
• They allow businesses to locate near to ‘hot
spots’ that can tap into local knowledge networks
• Often larger companies centralize their research
and development efforts, so losing touch with
where innovative ideas are generated
• Taking advantage of the potential for human
resource development, by allowing staff a greater
degree of local autonomy
• Exploring radically new technologies by acting in
the same way as a smaller more entrepreneurial
rival development.
The Timing Of Capacity Change
• Changing the capacity of any operation in a supply network
is not just a matter of deciding on its optimum capacity
• In deciding when new capacity is to be introduced the
company can mix three strategies
• Lead Demand Case (Introduce capacity when demand
exceeds existing infrastructure)
• Lag Demand Case (Introduce Capacity well above demand)
• Capacity is introduced to sometimes lead and sometimes
lag demand, but inventory built up during the ‘lead’ times
is used to help meet demand during the ‘lag’ times. This is
called ‘smoothing with inventory
Problem
• A specialist graphics company is investing in a
new machine which enables it to make high-
quality prints for its clients. Demand for these
prints is forecast to be around 100,000 units in
year 1 and 220,000 units in year 2. The maximum
capacity of each machine the company will buy to
process these prints is 100,000 units per year.
They have a fixed cost of €200,000 per year and a
variable cost of processing of €1 per unit. The
company believe they will be able to charge €4
per unit for producing the prints. What profit are
they likely to make in the first and second years?
Problem
• Year 1 demand = 100,000 units; therefore the company
will need one machine
Cost of producing prints = fixed cost for one machine +
variable cost * 100,000
= € 200,000 + (€ 1 * 100,000)
= € 300,000
Revenue = demand * price
= 100,000 * € 4
= € 400,000
Therefore profit = € 400,000 - € 300,000
= € 100,000
Problem
Year 2 demand = 220,000; therefore the company will need three
machines
Cost of manufacturing = fixed cost for three machines + variable cost *
220,000
= (3 * € 200,000) + (€ 1 * 220,000)
= € 820,000
Revenue = demand * price
= 220,000 * € 4
= € 880,000
Therefore profit = € 880,000 - € 820,000 = € 60,000
Note : the profit in the second year will be lower because of the extra
fixed costs associated with the investment in the two extra
machines.
Where Should Operations Be Located?
• The location of each operation in a supply network is
both a key element in defining its structure, and also
will have an impact on how the network operates in
practice
• Poor location of any operation in a supply network can
have a significant impact, not just on their profits, but
also those of others in the network
• Location decisions will usually have an effect on an
operation’s costs as well as its ability to serve its
customers (and therefore its revenues)
• In addition, location decisions, once taken, are difficult
to undo
Why Relocate?
• It is usually for one or both of two reasons –
changes in demand or changes in supply
• Changes in demand If customer demand shifts
it may prompt a change in location
• Changes in supply The other stimulus for
relocation is changes in the cost, or
availability, of the supply of inputs to the
operation
Evaluating potential changes in
location
• An operation should only change its location if
the benefits of moving outweigh the costs of
operating in the new location plus the cost of
the move itself
Set location evaluation criteria
• Capital requirements
• Market factors
• Cost factors
• Future flexibility
• Risk factors