TOPIC 1 - OPERATIONSROLE OF OPERATIONS MANAGEMENT

Introduction

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 businesses. 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 them. 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 goods.

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 machinery. 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:

varying the amount of time spent on a service varying the level of expertise brought to a service varying the qualifications and experience of the service provider varying the 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 computer-base technologies. The character of the goods will shape the nature of the operations processes. 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 customised. 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.

INFLUENCES

Globalisation, technology, quality expectations, cost-based competition, government policies, legal regulations, environmental sustainability

Globalisation

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 supplies. 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 cost. Innovation occurs when the business creates novel (new) products, and in doing so leads the market.

Technology

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 needs. 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 warranty

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 interactions) 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 effectively. 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) (Cwlth) 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 long-term 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 regulations.

The difference between legal compliance and ethical responsibility

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 offshore. 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.

OPERATIONS PROCESSES

Inputs

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). Labour:human effort (mental and physical). Includes sourcing and supply chain, technical support/machine maintenance, inventory management/control, production and distribution. Energy: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 redundant).

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 facilities. 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 analysis

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 complete. Non-critical path

This allows the operations manager to coordinate activities to final detail e.g. down to minutes/days.

Technology

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 parameters. 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 > Selection. 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

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.

Warranties

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

OPERATIONS STRATEGIES

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

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 delivered. 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 price. 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

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

Dependability

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.

Flexibility

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.

Customisation

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

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 development:

The preferences and desires of consumers, as identified by market research, determine which products are designed and developed. 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 cost. 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 e-commerce logistics

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

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

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 customer. 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 flowers). 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 product. 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

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.

Advantages

There are numerous advantages associated with outsourcing:

simplification 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

Disadvantages

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-in-progress 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 revenue. 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 resources

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 improvement.

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 depreciation. 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 relevant. 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 redundant the amount of unused leave that the employee has accrued (including annual leave and long service leave) any outstanding wages

Retraining

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 arrangements.

Inertia

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 operations. 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 grants. 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.