OPERATIONS STRATEGIES

A LOOK AT THE SYLLABUS

PERFORMANCE OBJECTIVES

What do we consider to be the key areas of interest when considering our operations success?

PERFORMANCE OBJECTIVESObjective Description

Quality Quality is a measure of excellence or a state of being free from defects, deficiencies, and significant variations

Speed How quickly does production take and how quickly can it respond to changes in demand?

Dependability

How uniform, consistent and reliable a businesses products are.

Flexibility How quickly operations processes can adjust to changes in the market?

Customisation

Refers to creation of individualised products to meet the specific needs of customers

Cost Minimisation of expenses so that the operations function can be completed as cheaply as possible.

PERFORMANCE OBJECTIVES

Qantas Sales Depend Foreign

Customers Calling

COME UP WITH SOME KPIS FOR EACHObjective Examples of KPIs

Quality - Number of defects in production- Amount of warranty returns processed. - Awards won.

Speed - Output per hour/day/week- lead times (time between order and delivery)

Dependability

- How uniform/identical the products are

Flexibility - Variation in the output on a daily basis (can you tolerate volatile orders?)

Customisation

- Number of unique orders processed.

Cost - Total production costs- Costs per unit of output- Staff overtime wages level - Total staff efficiency

STRATEGY 1: OUTSOURCING

Outsourcing is the use of external providers to perform non-core business activities on your behalf in exchange for a fee.

Usually this is done because they can do the tasks required at a lower cost than you can.

WHAT TYPES OF THINGS CAN BE OUTSOURCED?

Accounting IT manufacturing Legal advice Pretty much anything nowadays

OUTSOURCING VIDEO

http://www.youtube.com/watch?v=rYaZ57Bn4pQ

OUTSOURCING – PROS AND CONS (P.91)Advantages Disadvantages

- Potential cost savings - Superior quality available from the outsourcer because this work represents their core competency. - Reduced employment on-costs (superannuation, workers compensation insurance). - increased accountability over the area that has been outsourced. - Access to skills/qualifications that are outside the realm of the current staff.-By outsourcing non-core elements of the business, it can better focus on its core duties and drive improvements. - Service Level Agreements (SLAs) can provide compensation to your firm if the quality of work is poor.

- Loss of control over the outsourced process. - loss of ability in the outsourced area within the company. (i.e. Once you outsource your IT systems, you will never be able to reintegrate them back into the company without great expense and time). Loss of corporate memory- Organisational resistance to change from employees- Payback period and costs: The first few years of outsourcing may be more expensive as you have to also consider the redundancy payments due to original workers no longer needed.- Privacy breaches may occur because customer information is stored in another providers property.

OPERATIONS STRATEGIES 2: INVENTORY MANAGEMENT

Inventory Management refers to the amount of stock that a business has on hand at any particular point in time. (raw materials, work-in progress and finished goods).

ADVANTAGES OF HOLDING STOCK?

Consumer demand can be met immediately. Less chance they will leave the premises and buy from somewhere else.

Reduces lead times between order and delivery of product

Making purchases in bulk can reduce the cost price per item. These big purchases need to be warehouses somewhere, hence stock is accumulated.

DISADVANTAGES OF HOLDING STOCK?

Numerous costs including : leasing the facility, insurance, theft and handling expenses, security costs, obsolescence (if can’t be sold),

Stock represents cash tied up and not earning any interest.

HOW THE HELL DO I CALCULATE MY PROFITABILTIY FOR THE SALES I MAKE?!!??!!

VALUING STOCK

A petrol station takes TWO fuel deliveries per week.

Delivery 1] The cost they paid was $1.45 per litre for 500,000 litres.

Delivery 2] The cost they paid was $1.10 per litre for 200,000 litres

VALUING STOCK

http://www.youtube.com/watch?v=ExNsFh0_39s (LIFO vs FIFO)

INVENTORY VALUATION METHODS

Step 1) JB HIFI bought 3 X-boxes at the cost of $500 each in the first delivery.

THEN

Step 2) JB HIFI bought another 5 X-boxes at the cost of $400 each in the second delivery.

STEP 3) A customer comes up and buys an X-box for $450 from you. How much profit does JB-HIFI make?

LAST IN FIRST OUT (LIFO) METHODOne method that can be used is called the LIFO method.

This method of valuing inventory assumes that the last batch order of goods are also the first goods sold and therefore values the cost of this number of units sold at the cost of the last batch purchased.

E.g. The last delivery of 5 X-boxes are assumed to be sold first, and as a result the first 5 X-boxes sold will all be costed at $400 each.

The remaining 3 X-boxes will be costed at the previous cost price $500

Cost Price $ 500 each

Cost price = $400 each

FIRST IN FIRST OUT (FIFO) METHOD Another method that can be used is called the FIFO method.

This method of valuing inventory assumes that first batch of goods purchased are the first goods sold and therefore values the cost of this number of units sold at the cost of the first batch purchased.

E.g. The first delivery of 3 X-boxes are assumed to be sold first, and as a result the first 3 X-boxes sold will all be costed at $500 each.

The remaining 5 X-boxes will be costed at the previous cost price $400 each.

Cost Price $ 500 each

Cost price = $400 each

FIRST IN FIRST OUT (FIFO) METHOD

Cost Price $ 500 each

LIFO PROFITABILITY FIFO PROFITABILITY

5 units sold at cost price of $400 each and sale price of $450 each.

There is a total profit of $250

3 units sold at cost price of $500 each and sale price of $450 each.

There is a total loss of $150

The last 3 units then sell at a cost of $500 each and sold at the sale price of $450 each.

Therefore there is a total loss of $150.

The last 5 units then sell at a cost of $400 each and sold at the sale price of $450 each.

Therefore there is a total profit of $250.

Overall profitability = $100 Overall Profitability = $100

SOME GENERAL CONCLUSIONS• The overall profitability will be identical over a long enough time period. • However, the different methods will produce different results in the short-term.

LIFO PROFITABILITY FIFO PROFITABILITY

5 units sold at cost price of $400 each and sale price of $450 each.

There is a total profit of $250

3 units sold at cost price of $500 each and sale price of $450 each.

There is a total loss of $150

The last 3 units then sell at a cost of $500 each and sold at the sale price of $450 each.

Therefore there is a total loss of $150.

The last 5 units then sell at a cost of $400 each and sold at the sale price of $450 each.

Therefore there is a total profit of $250.

Overall profitability = $100

Overall Profitability = $100

Early on there isBig difference in profitability

Eventually it sorts itself out.

SOME GENERAL CONCLUSIONSLIFO FIFO-Because the cost of goods tend to rise throughout the year, the LIFO method tends to overstate the cost and understand the profit in the current period.

-- Because the cost of goods tend to rise throughout the year, the FIFO method tends to understate the cost and overstate the profit in the current period.

- Most businesses use this because it makes sense to try and sell your oldest inventory first you are able to identify them as older stock (especially if inventory can perish).

- They also prefer this method because it usually produces a higher profitability result in the near term if we assume that the goods become more expensive over time.***

***Note: the opposite effect has happened in our example because the X-box falls in price over time. It is an unusual circumstance.

JUST IN TIME – INVENTORY METHOD

An inventory management system that ensures that the exact amount of material inputs will arrive only as they are needed in the operations process.

Benefits include Easier to conduct stock take (less stock on hand) Retailers can display a wider range of products

because they do not have to stock as many duplicates

Saves on all stock related expenses mentioned earlier