Operations
Role of operations management
how choices made within one function (eg. operations) impact on the long-term direction, plan and functioning of the business
Operations → refers to the business processes that involve ‘transformation’ or ‘production’
Transforming resources / raw materials into outputs / finished goods.
In the service sector → refers to the processes of supplying /carrying out a service eg. Gardener, Doctor.
In addition to transformation, operations involves the process of value adding; extra or added value onto inputs through applying skills, knowledge and customer wants.
Input to outputs
In order to achieve a competitive advantage
1. Effective operations seeks to:
2. Minimise costs
3. Improve productivity
4. Improve quality
5. Differentiate products
Competitive advantage in operations
waste minimisation - (Lean production): analysing each stage of production, detecting and correcting inefficiencies, minimising waste of resources, improving quality, lead times. Using resources effectively to lower costs and produce less actual waste (which is harmful to the environment) which assists in differentiation
fair value for labour and processes - It is important that labour is not undervalued, and that employees are treated appropriately. These concerns exist thanks to efforts in the union movement, promotion of workers rights, fair trade movement etc. Some business still seek to exploit poor working conditions in international markets, which may lower costs but harm their reputation
Ethical Sourcing - sourcing from suppliers that engage in ethical conduct such as the payment of fair wages and the use of environmentally friendly practices. Consumers are far more aware of businesses that exploit poor labour practices and damaging environmental impacts of businesses operating in low-cost nations such as Vietnam, Bangladesh and India. Consumers have expressed concern about these practices and are increasingly purchasing from businesses that refuse to support unethical practices.
maximise affordability (cost minimisation) - As businesses attempt to maximise profit, so to do consumers seek to pay the least amount possible - maximising affordability is a reflection of both of these concerns.
integrate environmental and ecological sustainability concerns - Promote ecological sustainability eg. alternate /renewable resources, sustainable energy, reduction of greenhouse emissions etc.
reflect changes in trends and social attitudes - As preference and taste changes over time so to must businesses → innovation of new goods and updating of current popular products. eg. iPhone as an innovation of the mobile / music player. Electric cars as a result of both innovation and promotion of environmental concerns
Cost leadership
Aiming to have the lowest costs or to be the most price-competitive in the market. (It is important however to maintain quality AND remain profitable)
Differentiation of services:
* Varying the amount of time spent on a service eg. same day v. next day dry cleaning
* Level of expertise brought to a service; specialised service eg. Telstra salesperson v Telstra technician
* Qualifications and experience of the service provider eg. haircut from a salon or haircut from your mum?
* Quality of materials/technology used in service delivery eg. best hospital equipment, new gym equipment etc.
Goods and/or Services in different industries:
* The operations function within any business is shaped by the range and types of goods and services that are produced.
* Management of operations will differ for producing goods and producing services.
* Grouping different businesses by industry type gives a good indication of the range of G&S in different industries and the strategic role required for each
Good in different industries:
Operations decisions vary depending on whether they are
standardised (mass produced, uniform in quality, production focus) or customised goods (varied according to customer needs, market focused)
* Can also be classified as perishable or non-perishable
* What are some of the concerns of each of these?
Intermediate goods - Goods that may be processed (and value added) more than once. eg. Metals, plastics etc. used in construction
Services in different industries:
Similarly to G, can be standardised or customised based on industry and function etc.
Self-service - Encouraging customers to help themselves, Some encourage it eg. Supermarkets and online shopping. , Allows them to more effectively offer a customised service elsewhere.
Influences: Q EGG LTC CSR
Globalisation
Globalisation is the lessening of trade barriers and restrictions on the transfer of capital, labour, financial resources and technology between nations → an unofficial ‘merging’ of the world's economy or an increase in integration of markets.
Technology
Equipment and knowledge that are available to help a business perform certain functions or make products. Can cost a lot of money to buy machines for business but in the long run they will have low costs and save money because they don't have the pay wages. (keep pase with the competitors in the industry)
Quality Expectations
Quality → should match the expectations of consumers
Quality expectations are prevalent at all stages of operational processes. The expectations that people have of businesses determine the way that products are designed, created and delivered to customers. This implies that operations processes must follow particular standards or prescribed minimum levels of excellence
Quality expectations of Goods
* Quality of design
* Fitness for purpose
* Durability
Quality expectations of services
* Professionalism
* Reliability
* Levels of customisation
Cost-based Competition
Success = business needs to be at/around the efficiency of their competitors
Costs → have to be reasonable in relation to the price that they sell their product for.
Has a strong influence on competing businesses → goal to become “cost-leader”
Developing strategies to keep costs down as a way to maximise profits.
Most commonly it involves maintaining efficiency in management of fixed and variable costs
* Supplier Rationalisation (Consider ALDI v Coles/WW)
* Bulk buying (Qantas have cut fuel costs alone by $2bn since 2014)
* Eliminating waste
* Operating in an economy of scale
* Producing standardised products
* Outsourcing
Government Policies & Legal regulation
Laws and regulations impact on all aspects of operations and business decisions; some of the key components relate to WH&S, training, fair work and discrimination, public welfare, employment conditions, taxation etc.
The range of laws that a business must operate under and comply with are known as “compliance”
Laws make clear the standards of society and government, and businesses are expected to comply with the standards of behaviour imposed by the legal regulations.
Environmental sustainability
Involves taking into account the negative effects of business operations on the environment, and attempting to adopt ecologically sustainable practices.
Can be viewed as the sustainable use of renewable resources and the reduction in the use of non-renewable resources.
Corporate social responsibility
Positive business actions based on respect of society and the environment. It is increasingly important that business engage in CSR practices in order to maintain their reputation and position as positive companies. Customers are increasingly choosing to support businesses that reflect their values and are willing to pay more in order to do so.
Difference between legal compliance and ethical responsibility
Businesses going beyond laws and regulations are generally said to be acting ethically → an expensive but important practice for companies wishing to maintain positive consumer and employee sentiment.
Legal compliance involves aspects of:
* Labour laws (rates of pay, conditions etc)
* Environmental and health standards
* Licensing, training and certification
* Tax
* Trade practices
* Intellectual Property
* Financial and accounting management
Environmental sustainability and social responsibility
Ideally, economic growth and business success is achieved without compromising resources for future generations
* Promotion of ‘clean, green and safe’ products, promotes ecologically sustainable production
* Socially responsible business attempts to; expand the business, provide for the greater good of society
Why be ethical?
* Good for business
* Good for society and the environment
* Promotes a positive brand image
* Customers generally savvy and find out which businesses operate well
* Customers “vote with their feet & wallets”
* Generally works out (in terms of profit) in the long run
Operations Processes
Input → transformation processes → output
Inputs can be classified as transformed resources (resources that are changed or converted in the operations process) and transforming resources (resources that carry out the transformation process).
Transformed resources (materials, information customers) - Changed/altered in the operations process
* Materials- raw or intermediate, basic elements of production
* Information - internal / external...research, experience, ideas (decides how other inputs are used) reports, KPI’s, budgets etc.
* Customers - transformed resources when their choices shape inputs, operations must cater to their wants/needs through marketing
* Supplies - assist in the operations process eg. stationery
Transforming resources (human resources, facilities) - Inputs that carry out the transformation process
* Human resources- the key component of any business, a good HR function will ensure productivity and efficiency.
* skill, knowledge, capabilities and labour of people is applied to materials to convert them into goods and services.
* Facilities - the buildings, land, equipment and technology the business uses in operations.
Transformation process
Transformation process and value adding - Value is added throughout the production process through the use of additional materials, information, resources or time leading to an overall increase in the value of the product to a business / the cost to a consumer
Transformation processes
Influence of volume
* Volume refers to quantity produced
* Volume flexibility refers to a business’ ability to adjust volumes with changes in demand
* The ability to meet these changes will impact on lead times - the time it takes to fill an order, a key indicator of operational efficiency
* In managing volume, a business could use: ‘mass production’ “small-batch” or “job production/tailored”
Influence of variety
* Range or “mix flexibility” is the mix of products made, or services delivered through the process.
* The number of different models/alterations offered by a business
* Low-variety operations are capable of producing a high volume of standardised products at a low cost
The influence of variation of demand
An increase in demand = increased inputs from suppliers, increased human resources, increased energy use and increased use of machinery and technology.
* Ability to meet changes in demand rely on;
* ability of suppliers (lead time)
* flexibility & skill of labour
* Quality of machinery
* Increased energy usage
The influence of viability (customer feedback)
Customers and their preferences can shape what businesses make
* Direct contact; surveys, feedback, word of mouth, warranty claims
* Indirect; sales data, market data, consumer reviews, emarketing
Sequencing and scheduling - Tools are used to identify all steps in the operations process and organise them into the most efficient order to complete.
Sequencing: The order in which activities occur
Scheduling: The length of time activities take.
* Two main tools of this include; Gantt charts and Critical Path Analysis (CPA)
Critical path analysis (CPA) - Shows what tasks need to be done, how long they take and what order is necessary to complete those tasks, it shows the interrelationship of tasks.
* The critical path is the minimum length of time it takes to complete all necessary tasks to complete the project. (Technically it's the single longest path as all tasks need to be finished)
* Multiple tasks can be done at once
* With this information, a business will be able to see: order of tasks, which can be done together, provides timing and direction to managers.
Technology
* Used in production to enable people to do things more efficiently
* Robotics, computers, machinery, equipment, systems, tools, CAD/CAM.
* In manufacturing technology allows for increased production, better use of raw materials
* In services, technology opens up markets (internet shopping), opportunities and improves efficiency of delivery
* An increase in use of technology will also result in an increase in costs to the business
* Tech. can be bought outright or leased
* Also requires setup, and training costs (and possibly redundancy)
Task design
* Answers the questions of “What needs to be done? How will the task be completed?”
* Classify job activities in ways that make it easy for an employee to successfully perform and complete the task.
* Each individual task is analysed and broken down into separate steps and allocated to staff with the appropriate skills, knowledge and resources.
* Allows ongoing analysis and adjustments in each activity to ensure continuous improvement in productivity.
* Ensures you have hired and prepared staff to complete the jobs you need done
Process layout
* Process layout - Suitable for HIGH variety, LOW volume- arrangement of equipment so that the components are grouped together by the function (or process) they perform. A process layout requires staff to be specialised and know how to use the equipment and tools in their department eg. Hospital wards, HSIE faculty in school, pastry chefs in a kitchen
* Product(ion) layout - manufacturing of a HIGH volume of constant quality goods (production line), most commonly as an assembly line, arrangement relates to the sequence of tasks performed in manufacturing, the product moves from station to station, as its assembled eg. a car assembly line, subway sandwich.
* Fixed position layout - large-scale, bulky activities it is more efficient to bring materials to the site; workers and equipment come to the one work area.eg. construction.
Monitoring , control and improvement
Monitoring → measuring actual performance against planned, measuring all aspects of operations, from supply chain management and inputs, through to transformation processes and outputs.
Control → If there is a discrepancy between performance and goals, changes and improvements can be made. This is the corrective action taken during the control stage.
→ Aims to keep the business’s actual performance as close as possible to what was planned by making adjustments to the operations process.
Improvement → Reduction of inefficiencies, wastage, and poor work processes
* quality – by getting it right the first time
* speed – by increasing speed of production and delivery of services
* dependability – by being on time
* flexibility – through 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
Outputs
Includes products sold to customers as well as outputs to be used in further production processes for eg. Plastics.
Output must always be responsive to customer demands.
Customer service → vital component of your output as even businesses focusing on goods can achieve a competitive advantage through good customer service.
* how well a business meets and exceeds the expectations of customers in all aspects of its operations
* Exceeding customers’ expectations is likely to be the key in developing long-term customer relationships.
Warranties → Assurance that a business stands by the quality claims of the products it makes
Enforced by the Competition and Consumer Act 2010, Under Australian law all businesses must ensure that the goods they sell:
* have a level of quality that is comparable to the price and product description
* are suitable for the purpose or job they will be used for
* match the product description in any advertising or promotion
* are free from defects or faults.
Operations strategies
Role of Operations - Sets the goals and ensures functions work interdependently
Influences - are external factors that impact upon the Operations process
Operations Processes - Are the actions undertaken by the business to produce a product
Operations Strategies - The actions undertaken by a business to improve Operations Processes and respond to influences
POGO SQUINT
Think of PO as both objectives as well as a strategy to improve:
* Goals that relate to particular aspects of the transformation process.
The 6 main performance objectives that can be allocated to particular key performance indicators (KPIs) are:
Quality, Speed, Dependability, Flexibility, Customisation, Cost.
Performance objectives = “Queen Sits Down For Chocolate Cake”
Quality, including:
design — how well a good is made or a service is delivered
conformance — how well the good or service meets a prescribed design with a certain specification
service — how reliable, suitable and timely the service delivery is
Performance --- how well it meets expectations
Speed: efficiency of production, the time it takes for the production and the operations processes to respond to changes in market demand (variation in demand), aimed at reducing bottlenecks
Dependability: how consistent and reliable a business’s goods or services are
Flexibility: how quickly operations processes can adjust to changes in the market
Customisation: the creation of individualised goods or services to meet the specific needs of the customers
Cost: the minimisation of expenses (fixed and variable) so that operations processes are conducted as cheaply as possible
New product or service design and development
Product design / development: In developing new products there are two distinct approaches to take:
* Consumer approach to development - Understanding what customers want, conducting research (through marketing) and producing products based on this.
* Changes & innovations in technology - Embracing new technology to improve designs or allow your business to build new versions of products
New Product development process
→ The process of bringing a new product to the marketplace is extensive, costly and requires large amounts of time and resources to be diverted into the new processes.
→ Requires operations and marketing to work interdependently to ensure new products are developed according to customer expectations
Generally involves:
* Market research (marketing)
* Product design (marketing)
* Prototype design and testing
* Product refinement
* Production
Service design and development
Customer centred
* Can be broadly classified as customised → hairdresser, dentist etc.) or standardised → sales attendant, cashier etc.
* Both the explicit (tangible benefits) and implicit (psychological) aspects need to be addressed
* Services using goods; often delivery of a service requires the use of tools / goods, the provision of these must also be considered
Supply chain and management
The network of supplier providing resources to be used in the production and distribution of a product
* Involves integrating and managing the flow of supplies throughout the inputs, transformation processes and outputs in order to best meet the needs of customers.
* Supply chain for a product can be determined by starting with the final product and then tracing backwards through all processes that add value, all the way to inputs.
Sourcing / global sourcing -
1. purchasing of inputs for the transformation process
2. it is important to also consider quality expectations, demand, flexibility and cost.
3. Global sourcing allows companies to find suppliers that best meet their requirements.
E-commerce -
* supply chain managed through electronic ordering (e-Procurement) and distribution.
TWO SCM approaches for e-commerce:
* Business 2 Business “B2B”: Allows suppliers access to stock information, Woolworths, Coles etc. use to automatically reorder sold stock
* Business 2 Consumer “B2C”: Business sells direct to consumer through an electronic format eg. eBay.
Logistics -
* broadly refers to ‘distribution’ but includes transportation, storage, warehousing and distribution centres, materials handling and packaging (legal & safety requirements).
* Strategy to ensure “Right item @ right time @ right place @ right price”
Concerned with HOW you receive your product, HOW you store it and HOW your customer receives it
Outsourcing
Advantages and disadvantages
When to use outsourcing?
Factors that must be considered:
* Will it be cheaper and more efficient than performing the work in house?
* Geographical factors to consider?
* Impact on Supply Chain management
* Length of contract, the KPIs and service levels are required
Co-sourcing - Work carried out by an external expert that works within the business as a contractor, allowing them to work closely in the business
Advantages:
* Simplification
* Efficiency and cost savings
* Increased process capability (you can specialise in what you do)
* Access to skills/resources lacking within the business
* Focus on core business or key competencies / Improvements to in-house performance
* Better technology
* Specialist outsourcing companies have expert knowledge of laws
Disadvantages:
* Reliant on other businesses
* Communication and language
* Loss of control of quality standards and information security
* Hierarchies - inefficiency associated with theses
* Organisational change and redesign
* Loss of corporate ability
* Less control of Variation in demand
* Slower lead time
* Loss of relationship with stakeholders such as local community, former staff
Technology
ESTABLISHED TECH
LEADING EDGE TECH
Has been developed and widely used, and is simply accepted without question, most common in industry
Some common established tech includes:
* Eftpos
* Barcoding
* CAD/CAM
* Warehousing inventory
* IT
Most advanced or innovative at any point in time
Advantages:
Speed, standards, efficiency
Disadvantages:
Leading edge tech requires innovative thinking and inputs to design and develop new processes
Inventory management
Inventory (stock) 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, which has yet to be sold
* Controlling the level of inventory in a business is very important → the business must hold enough to meet demand, but not too much.
* Too much inventory will increase storage costs
* Not having enough stock on hand will result in lost sales and potentially damage the business’s reputation as a reliable supplier.
Holding stock
Advantages
Disadvantages
* Meet consumer demand
* Offer alternatives
* Reduce lead times - Quick distribution
* Generate revenue
* Allows promotion
* Sale on older stock - cash flow
* Assets on balance sheet
* Economies of scale?
* Storage costs
* Potential obsolescence - lost investment
Inventory management methods
1. Last In First Out - LIFO
The stock purchased most recently is sold first.
This method can be used for goods that have no use-by date.
When calculating COGS we use the value of the most recent (last) stock purchased as the value for all stock (this will overvalue COGS)
When calculating the value of remaining stock we use the value of the older stock (this will undervalue remaining stock
2. First In First Out - FIFO
Assumes that the first stock that has been purchased is the oldest and will be sold first.
FIFO is more appropriate for perishable items such as food and drink.
When calculating the value of stock sold (COGS) we use the value of the first stock purchased as the value for all stock.
When calculating value of remaining stock we use the last purchased value
LIFO
FIFO
Method
Most recent stock purchased sold first
First stock purchased sold first
Calculating COGS
Remember the COGS formula
Opening stock + purchases - closing stock
Most recent (Last) cost used
Oldest stock (First) cost used
Effect on COGS
Overvalued (= less Gross Profit)
Overinflating COGS
Undervalued (= more Gross profit)
Calculating remaining stock
Oldest (FIRST) stock cost used
Most recent (LAST) stock cost used
Effect on remaining stock
Undervalued
Overvalued
Effect on GrossProfit
Undervalue
Overvalue
Just in time
Advantages
Disadvantages
* Low storage costs (including insurance)
* Allows display / keeping of variety of stock
* Reduces losses (shrinkage)
* Reduces chances of Obsolescence
* More CASH available
* Requires well organised, flexible operations process
* Must respond quickly to market changes
* Lead times may be impacted
* Requires reliable suppliers / transport
* Difficult to promote, deal with increase in demand
Quality management - Refers to those processes that a business undertakes to ensure consistency, reliability, safety and fitness of purpose of a product.
Approaches to QM:
* quality control — inspection, measurement and intervention - requires setting of goals / standards first then judging based of these, a reactive approach
* quality assurance — application of international quality standards, proactive approach - emphasises quality in operations design, globalised approach - from the International Standards Organisation (ISO 9001) certification (consistent processes around the world)
* quality improvement — total quality management (‘holistic’ approach- requires four elements: benchmarking, employee empowerment, a focus on the customer and continuous improvement) and continuous improvement. Essentially through experience - over time processes will be made more efficient and effective through staff. This includes seeking feedback from experienced workers in order to improve operations processes
In reference to a business you have studied, Assess the use of QM strategies
Qantas has successfully utilised a range of Quality management (QM) strategies to manage the expectations of their consumers and achieve profitability. They have successfully used QA processes to proactively ensure their operations are effective before they commence. This involves their outsourcing to specialist engineering firms in Malaysia and Hong Kong for their maintenance and engineering, by using specialist firms they ensure they meet global aviation standards and quality of their business is maintained. Their success is evident in in their world renowned reputation and track record of never having a major incident.
QC is also used effectively by Qantas as they conduct safety and cleanliness inspections prior to flights to ensure their high customer quality expectations are met. By ensuring that planes are operational and clean customers are going to consistently be satisfied by the service level received, this has assisted in Qantas posting record profits in both 2018 and 2019.
Resistance to change:
Overcoming resistance to change - All businesses are subject to change from the external environment, (legal, economic, market, social etc.) change can also come from within the business through the initiative of staff or the application of technology and a focus on innovation. There are 2 different sources: financial and psychological/emotional
Financial costs and resistance to change
* cost of purchasing new equipment (cost v efficiency)
* cost of redundancies (why would these occur?)
* costs of retraining employees
* costs associated with structural reorganisation of the business, including plant and equipment layouts
Psychological resistance to change — inertia
Inertia - describes a psychological resistance to change
* A feeling of uncertainty or fear of the unknown
* job prospects may be threatened
* staff fear loss of opportunities or find new technology and equipment intimidating
* they may also be complacent in what they are doing.
Strategies to overcome resistance to change
* Using change agents
* assess the need to accommodate change through adjustments to business processes
* communicating with employees about the need for change and getting widespread support for the change
* change models such as Kurt Lewin’s unfreeze (breakdown) -change (implement)-refreeze (support) model or Kotter’s eight-step change model
Global factors: global strategies
global sourcing (Qantas have started using NZ based pilots as they are paid less, looking to expand JetStar Asia to take advantage of lower wages there)
global economies of scale (remember high volume production = lower cost per unit - Qantas recently started conducting plane repairs in Asia as they have larger maintenance facilities)
scanning and learning - staying fully informed of global developments and what competitors are doing
research and development (R&D) - activity to stay ahead of competitors - Qantas does little as it is a service, but have research customer preferences for food & entertainment and developed new menus (Neil Perry designed) and entertainment systems (in flight WiFi)
Economies of scale, Scanning & Learning, R&D
* Global Economies of Scale: occurs when a cost advantage is gained by producing or buying a large quantity of products, reducing cost per unit. This is the same, except global!
* Scanning & Learning: using the global market to identify trends, and integrating global knowledge, practices, research, laws and policies to improve efficiency
* R&D: Conducting your own but also implementing others’ new innovative strategies from overseas to improve products, and reduce costs
Global sourcing involves the sourcing of any operations components (inputs, tech, processes, etc.) that gives the business cost advantages by ‘shopping’ globally, generally outsourcing is the most common
Positives
Negatives
* cost advantages
* access to new technologies
* expertise and labour specialisation
* ability to operate over extended hours.
* Relocation
* increased cost of logistics storage and distribution,
* managing different laws
* increasing complexity of overall operations (financial and contractual)
* Possible exploitation of workers
* Social costs
Case study
Qantas with technology
Tiffany and co with ethical