Role ofOperations Management

Operations: business processes that involve transformation or, more generally, production

In manufacturing, operations refers to the processes involved in turning raw materials and resources into outputs or finished products

In the services sector, operations refers to the processes involved in actually carrying out the service

Transformation: conversion of inputs (resources) into outputs (products) Apart from transformation, operations involves the creation of value by businesses Value adding: creation of extra/added value as inputs are transformed into outputs (eg

a whole car is worth more than the total cost of all its parts) Operations processes are broad and include aspects of all of the following activities

undertaken in business:o Production of goods and serviceso Production controls and associated quality controls on processes (including

input management and volume of output decisions)o Inventory controlso Supply chain managemento Logistics and distributiono Management and decision making in terms of operational processes

The operations function overlaps with all of the other key business functions:

The inputs a business utilises in its operations processes is largely dependent on whether the business is a producer of goods or services:

Producer of goods:

Producer of services:Customer Focus

Customers demand many things from businesses that directly affect the operations function:

o Minimisation of waste in the production processo Reflecting fair value for labour used in the production processo Operating at a low cost maximum affordabilityo Integration of environmental awarenesso Keeping up with changes in the wants/needs of consumers

Strategic Component of Operations Management

A strategic aspect of operations management is the management of cost Businesses can gain an advantage over their competitors (ie a competitive advantage)

by minimising their costs Strategies that are commonly used to gain a competitive advantage in this way are:

o Cost leadershipo Product differentiationo Market segmentation

Cost Leadership

Strategy whereby firms aim to be the most price-competitive by reducing their costs to a bare minimum

Often achieved through the creation of economies of scale – advantages created by increasing the scale of business operations (such as lower costs per unit of input when buying larger quantities eg Costco)

Product Differentiation

Product differentiation: distinguishing a product in some way from its competitors There are many forms of product differentiation, and product differentiation will be

different for goods and services Sources of differentiation in goods include varying:

o Actual product features (eg the capacity of engine used in a car)o Product quality (eg Rolls Royce plane engine versus low-cost generic turbine)o Augmented features (eg the additional features of a car such as built-in GPS,

leather seats etc.) Sources of differentiation in services include varying:

o The amount of time spent on a serviceo The level of expertise brought to a service by the service providero The qualifications and experience of the service providero The quality of the materials/technology used in the delivery of the service

For both goods and services, differentiation can be created from cross branding or strategic alliances

Goods/Services in Different Industries

Operations decisions will vary for goods depending on whether they are standardised goods or customised goods

Standardised goods: those that are mass produced and uniform in quality Customised goods: those that are varied according to the needs of customers The layout of operational processes will vary depending on the degree of

differentiation associated with the product that is being produced All four KBFs need to work together to achieve the operations outcome(s):

o Operations & Finance: size of facility, scale of production and output levels determine the funding required

o Operations & Marketing: size of facility, scale of production and output levels are determined by the size of the target market

o Operations and HR: staffing levels, training and work schedules need to be determined so that quality products can be made without interruptions

Operational processes will vary between sectors that produce perishable goods and those that produce non-perishable goods

Businesses producing perishable goods will need to integrate the following factors into their operations processes:

o High standards of quality, safety and cleanlinesso Very short lead times and distribution that is as quick and effective as possibleo Appropriate and robust packaging and cold storage processes through both

production and distribution Businesses producing non-perishable foods will need to integrate the following

factors into their operations processes:o Manage all aspects of quality in the process, from sourcing g through to

production and distributiono Implement effective inventory management strategies and be highly

responsive to market demand in order to not over produce As with goods, services can be both standardised (eg fast food industry, GP)and

customised (eg hairdresser, medical specialist Self-service: encouraging customers to take the initiative to help themselves (eg

financial sector encouraging online banking versus traditional ‘teller’ situation)

Interdependence of KBFs

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, ie that the various business functions work best when they work together

In most businesses, closely related tasks are grouped together – eg sales and marketing, finance and admin, operations and R&D

Influences onOperations Management

Main Influences on Operations ManagementGlobalisation

Globalisation: the removal of barriers of trade between nations Globalisation is characterised by the increasing integration between national

economies and a high degree of transfer of capital, labour, intellectual capital/ideas, financial resources and technology

Key Influences of Globalisation on Operations Management

Operations processes are aimed at satisfying a GLOBAL market Plant and facilities can be located anywhere in the world

Integration of the range of suppliers creates a global web, allowing businesses to exploit low resource (particularly labour) costs in other nations

Supply Chain Management

Supply chain: the range of suppliers a business has and the nature of its relationship with those suppliers

A business needs a predictable and reliable supply chain that is highly responsive to changes in demand as experienced by the business

If a high proportion of a business’ suppliers are from a particular region, the business may choose to locate their facility in this region

Alternative Approaches to the Supply Chain

There are two main alternative approaches to the supply chain: imitation (through reverse engineering) and innovation

Reverse engineering occurs when a business studies the product of a competitor and then attempts to make their own version at a lower cost

Innovation, however, occurs when the business creates a new/modified product and subsequently becomes a market leader

Innovation affects operations process by differentiating products and thereby making them novel in the market, which in turn means that:

o The supply chain will need to be shaped around the need for innovationo The business may seek exclusive suppliers

Technology

Technology: the design, construction and/or application of innovative devices, methods and machinery upon operations processes

Technology can be seen to be both a range of devices as well as a range of enabling processes

Technology can be applied to, and integrated with, the range of processes that characterise the operations function in business

o At an administrative level, technologies assist with organisation, planning and decision making and are in control of operational processes

o At a processing level, technologies are used in manufacturing, logistics/distribution, quality management, all aspects of inventory management, supply chain management and sourcing

Quality Expectations

The expectation of quality is a significant influence on the operations function of business

The International Standards Organisation (ISO) defines quality as being ‘the totality of features and characteristics of goods and services that bears its ability to satisfy stated or implied needs

Within the operations management function, quality informs all operations processes The expectations that people have of businesses in terms of product quality determine

the way that products are designed, created and delivered to customers

Cost-Based Competition

Cost-based competition is derived from determining the breakeven point (where costs = revenue) and then applying strategies to create cost advantages over competitors

Cost-based competition recognises that prices cannot keep increasing, therefore reducing costs is a way to maximise profits when revenues are fixed

Cost-based competition is a feature of operations management when businesses bring a cost leadership approach to the operations function (ie they focus on reducing costs to a minimum while maintain profit margins)

Government Policies

A wide range of government policies and legislation influence operations and operations management

These range from industrial relations and workplace laws to product protection legislation and waste/environmental legislation

Even in the design of a production facility, businesses must consider many different articles of legislation, including:

o Noise pollutiono Planning controlso Working conditionso Traffic management

Legal Regulation

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 called compliance costs

Laws make clear the standards of society, and businesses are expected to comply with the standards of behaviour imposed by the legal regulations

The operations function involves the use of any or all of labour, technology, finance, machinery and energy; and each of these will have their own set of legal regulations

Compliance typically falls in a number of areas for businesses:

o Labouro Environmental and public

healtho Business licensingo Tax

o Trade practiceso Migration/Offshore labouro Intellectual propertyo Financial & accountingo Human rights

The legal regulations associated with operations management will relate to labour and labour management as well as the environment and public health, including the following:

o OHS in the use of machinery and when interacting with the business environment

o Training and development of human resourceso Fair work and anti-discrimination lawso Environmental protectiono Rules regarding public health and safety

Environmental Sustainability

Environmental 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:o Sustainable use of renewable resourceso Reduction in the use of non-renewable resources

The operations management function is significantly affected by the increasing awareness of ecological sustainability

Business operations are required to adopt environmentally sustainable practices to reduce their carbon footprint

Corporate Social Responsibility (CSR)

Corporate social responsibility extends a business’ objectives from profit to ‘service to society and the community’

Most large businesses now highlight the way in which the business achieves their CSR in their annual reports

Businesses with a positive CSR image seem to have high reputations among shareholders

To combat the notion that CSR is just a marketing ploy, criteria and measures have been established to measure CSR

A key concept associated with CSR is the triple bottom line – profit, social justice and environmental protection

Legal Compliance v Ethical Responsibility

The difference between legal compliance (see above) and ethical responsibility is that legal requirements require that the business follows the letter of the law whereas ethical responsibility sees businesses meeting all legal obligations and taking it further by following the spirit of the law, rather than just the letter

It is standard for businesses to opt for the lowest level of compliance permissible as a means of keeping costs as low as possible and thereby maintain profits at as high a level as possible

Outsourcing

By using outside specialists to undertake one or more KBFs (ie by outsourcing), businesses can quite easily reduce compliance costs, as the business they are outsourcing to becomes responsible for the associated compliance costs

Outsourcing can be both domestic (onshore) or global (offshore) There are many ethical issues regarding the exploitation of nations with loose labour

regulations in developing nations

Ethical Responsibility

Ethical responsibility involves businesses going beyond the law and taking into account broader social, community and environmental concerns

In manufacturing operations there can be significant international differences in standards for labour in terms of wages, health, safety and so on

A business may choose to follow international labour standards set by the International Labour Organisation (ILO)

Environmental Sustainability and Social Responsibility

The principle of ecological sustainability requires businesses to evaluate the full environmental effects of their operations

Additionally, the growing consumer expectation that products should be ‘clean, green and safe’ is changing management practices in a number of Australian businesses

By producing new and better products in an ecologically sustainable manner, the business focus coincides with stakeholder expectations

Corporate social responsibility refers to a business’ management of the social, environmental, political and human consequences of its actions

A socially responsible business tries to achieve two goals simultaneously:o Expanding the businesso Providing for the greater good of society

It recognises that business activities have an impact on society and as such businesses need to give careful consideration to their actions

The central theme is ‘above and beyond’ making a profit and obeying the law Social responsibility is good business as customers eventually find out which

businesses are acting responsibly and those that are not Reebok and Levi Strauss place a great deal of importance on their corporate social

responsibilities – both companies have taken action against overseas suppliers based on their human rights and environmental codes of conduct

Operations Processes

Operations processes are those processes involved directly with transformation The processes may be broadly classified according to their role in transformation:

o inputs into transformation processeso the actual processes of transformationo outputs of the transformation processes

Inputs

There are many different types of inputs used in the transformation process, but generally there are four common direct inputs, including:

o Labour – human elemento Energy – in the form of electricity and fuelso Raw materials – the basic components of goodso Machinery and technology – used to process raw materials

Inputs may be divided into those that are transformed (eg materials, information) and transforming resources (eg labour, facilities)

Transformation Processes

It is important to understand that the transformation process differs between manufacturing businesses and service businesses

A manufacturer transforms inputs into tangible products A service organisation transforms inputs into intangible products The operations process of a manufacturer tends to be highly automated or mechanised Manufacturers use machinery, robots and computers to transform inputs into outputs Service providers rely heavily on interaction with the customer and their processes

tend to be more labour-intensive; that is, staff are crucial to the operations The more transformation processes that are applied to inputs, the greater the final

value the product will have (aka value adding)

Influence of Volume

Volume flexibility refers to how quickly the transformation process can adjust to increases and decreases in demand

Lead time: the time it takes for an order to be filled; flexibility of volume is effective to the effective management of lead time

Over producing leads to wastage and higher inventory costs Under producing leads to lost sales Eg Leapster explorer (more games than consoles sold out four weeks before

Christmas)

Influence of Variety

Mix flexibility product range or variety of choice The greater the variety of products being made, the more the operations process needs

to allow for variation Eg whitegoods (large variety of products but many share similar components)

Influence of Variation in Demand

An increase in demand requires:o Increased inputs from supplierso Increased human resourceso Increased energy consumptiono Increased use of machinery and technology

Can be hard to meet increases in demand if:o Suppliers cannot supply quickly enougho Labour is too inflexible or unskilled or unavailableo The adopted machinery cannot adjust to increased capacity quicklyo Increased energy and power are not able to be readily sourced

A decrease in demand will also require operational flexibility, as staff may need to have their hours reduced, production 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

Influence of Visibility

Customer contact or ‘feedback’ can directly affect transformational processes because customers and their preferences can shape what business make

May be direct or indirect:o Direct contact takes the form of customer feedback given through surveys,

interviews, warranty claims, letters, wikis and blogs and verbal contacto Indirect feedback comes through a review of sales data that gives an indication

of customer preferences and market share data, through an observation of peoples’ decision making processes and through consumer reviews

Sequencing and Scheduling

A key process of operations management is production planning – this planning involves sequencing and scheduling

Sequencing: the order in which activities in the operations process occur Scheduling: the length of time activities take within the operations process When planning operations processes that involve activities transformation, various

scheduling tools will be used The two main scheduling tools are:

o Gantt charts

o Critical Path Analysis (CPA) The 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 said tasks

Technology, Task Design and Process Layout

The type and amount of technology used in the operations processes and systems will be influenced by:

o The type of product being producedo The availability of capital and the cost of alternative inputso The prevailing technologyo The knowledge/skill of management and staff

The type and application of technology will affect the task design of the production process, the design and layout of the production facilities and operations and the tasks undertaken in the operations

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 processes more effectively and efficiently

Office/administration technologies include a range of computer and communications technologies

Manufacturing technologies include:o Robotics: a programmable machine capable of doing several different taskso Computer aided design (CAD): a computerised design tool that creates

products from a series of input parameterso Computer aided manufacturing (CAM): software that controls

manufacturing processes

Task Design

Task design involves classifying job activities so that employees can successfully perform and complete the task – is an essential aspect of transformations processes

Task design involves job analysis and can be done after a skills audit has been conducted

Plant Layout

Plant layout can have a significant impact of the effectiveness of transformation processes

There are three different forms of layout for manufacturing plants:o Process layout: machines and equipment are grouped together by the function

(process) they performo Product layout: machines and equipment relates to the sequence of tasks

performed in manufacturing a product eg assembly lineo Fixed position layout: employees and equipment come to the product

Most modern office layouts use a workstation layout

Monitoring, Control and Improvement

Monitoring is the process of measuring actual performance against planned performance and involves LL aspects of operations processes

Monitoring is typically arranged around the needs to measure the Key Performance Indicators (KPIs) which are predetermined variables that are measured so that appropriate controls to operations processes can be made

Typical KPIs include:o Lead times/wait times/idle timeso Inventory turnover rates/stock out rateso Defect rates, repair rates, warranty claimso Process flow rateso Capacity and volume rates/capacity utilisation rateso IT and maintenance costso Direct and indirect cost analysis

Control occurs when KPIs are assessed against pre-determined targets and corrective action is taken if required – ie the operations manager will make changes to the transformation process eg redesigning facilities or adjusting level of technology

Improvement: the systematic reduction in inefficiencies and wastage, poor work processes and the elimination of any bottlenecks

Improvement is typically sought in the following areas:o Time – wait times and lead timeso Process flows – transitions between processeso Quality – standards and assessment of returns and warranty claimso Cost – per unit costs of production, fixed/variable expenses and per unit

delivery costso Efficiency – through the reduction of waste and the creation of greater output

per unit of input One particular approach to the systematic reduction of inefficiencies and the active

creation of improvements is called Six Sigma

The concept of continuous improvement involves an ongoing commitment to achieving perfection – Japanese business culture applies the term ‘kaizen’ to describe the process

Outputs

Define Measure Analyse Improve Control

The goal of the operations process is to produce physical products and services that satisfy consumers in such a way that the output has a competitive advantage over that of its competitors

This advantage is gained to a large extent in the relationship between quality and price Central to customer service is making sure the right good or service is delivered or

provided at the right place at the right time For manufactured goods, customer service is provided through replacing the good if it

is faulty, providing education on its use, repairing the good if it is not working properly and maintaining/servicing it

In service industries where the service is often provided and consumed at the same time, customer service will reflect more the quality of the product and services provided as outputs of the business

Warranty claims are made against goods that have defects analysing a business on a particular product line/range will give an indication of problems in the processing

Operations Strategies There are nine key strategies that we will investigate relating to operations

management, as follows:

Performance Objectives

Performance objectives are goals that relate to particular aspects of the transformation processes

The six main key performance indicators are:o Quality – design, conformance and serviceo Speed – the time it takes for production and operations processes to respond to

changes in market demando Dependability – refers to how consistent and reliable a business’ products are

eg the fewer the complaints the more dependable the serviceo Flexibility – refers to how quickly operations processes can adjust to changes

in the market

o Customisation – refers to the creation of individualised products to meet the specific needs of the customers

Mass customisation is a process that allows a standard, mass produced item to be personally modified to specific customer requirements eg iPod

o Cost – refers to the minimisation of expenses so that operations processes are conducted at as low a cost as possible

New Product Design and Development

The design, development, launch and sale of new products enables businesses to grown and to attain a competitive advantage

There are two key methods of product design and development:o A consumer approach – the preferences and desires of consumers, as identified

by market research, determine which products are designed and developedo Changes in innovation and technology that enable new, appealing products to

be made because they use advanced technologies, which give products greater functionality

There are many steps in the design/development process:o Market research, product concept and specification developmento Product design and prototype developmento Prototype testing and assessmento Product refinement and refinement of production processeso Production, product launch and distribution

Important considerations when developing/designing a product are:o Qualityo Supply chain managemento Capacity managemento Cost

New Service Design and Development

Due to the customised nature of service design, the customer or client marks the starting point in its design

When designing services, it is important to consider 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

Cost will be determined once the previously mentioned features have been determined Explicit service: the tangible aspect of the service being provided, such as the

application of time, expertise, skill and effort Implicit service: the psychological feeling of being looked after that comes with the

provision of a service

Supply Chain Management

Supply chain management (SCM) involves integrating and managing the flow of supplies throughout the inputs, transformation processes and outputs to best meet the needs of customers

You can determine the supply chain for a product by back tracking through all processes that add value, all the way back to the raw inputs

This top-down or systems approach is necessary when creating strategies for supply chain management

There are three key aspects to supply chain management:o Sourcing (including global sourcing)o E-commerceo Logistics

Sourcing

Sourcing: the purchasing of inputs for the transformation processes Also called procurement or purchasing Involves planning, implementing and controlling the efficient and effective flow and

storage of goods and services and related information between the point of origin and the point of consumption

In recent years there have been four particular trends in SCM:o Supplier rationalisation – reducing the number of suppliers to an absolute

minimumo Backwards integration – merger/acquisition with supplierso Cost minimisation – often through the use of offshore supplierso Responsive supply chain processes – lean’ processes

Global Sourcing

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 refers to the buying or sourcing from wherever the suppliers are that best meet the sourcing requirement

E-Commerce

Involves the buying and selling of goods and service via the internet Two main types:

o Business-to-business (B2B) – a business purchases supplies onlineo Business-to-customer (B2C) – businesses sell their products to consumers via

the Internet

Logistics

The third supply chain strategy involves the use of logistics Logistics is a term broadly referring to distribution but also includes:

o Transportation

o The use of storage, warehousing and distribution centreso Materials handling and packaging

Transportation

The type of product and the cost of transportation will determine the mode of transportation selected

Storage

Storage involves finding a secure placed to hold stock until it is required Storage on inventory is necessary when there are numerous outlets through which

stock is sold and when demand is variable and requires a responsive supply chain May be long term or short term and may have certain characteristics that help

preserve the product eg cold storage for perishable goods Closely linked to warehousing although storage does not necessarily require the use of

warehouses Alternative inventory options such as JIT can minimise storage and associated costs

Warehousing

Warehousing: the use of a facility for the storage, protection and eventual distribution of stock

Costs associated with warehousing include:o Rent of premiseso Insurance/security of stocko Stacking and moving stocko Carrying surplus stocko Shrinkage and loss due to thefto Damaged stock

Less popular in recent times as managers tend to use lean and flexible SCM strategies

Distribution Centres

Slightly different to a warehouse in that it is not intended for long term storage, but is instead strategically located as close to retailer(s) as manageable

Requires managers to balance savings in logistics with costs associated with distribution centres

Materials Handling and Packaging

Some products require certain skills, care and/or attention when being moved eg delicate glass of dangerous chemicals

If this is the case particular standards and methods of operating need to be applied

Outsourcing

Outsourcing: the use of external providers to perform business activities Common activities that are outsourced include:

o ITo HR managemento Trainingo Accountingo SCM

The factors that must be considered when assessing whether and when to outsource are:

o Whether the use of outsourcing is cheaper and more efficient than performing the task in-house

o Which geographical location is favourableo Which vendors to useo Management/length of outsourcing contracto KPIs and service levels required

There are four different outsourcing options that can be used:o Creation of shared services centres (SSCs) – an in-house outsourcing option

that involves the creation of a centre that performs work for multiple subsidiaries

o Fee-for-service arrangements – A low-risk, short-term strategy that involves engaging a supplier for fixed services at a pre-determined cost, allowing a business to test the outsourcing market prior to making a significant change

o Joint ventures – the business engages an outsourcing provider but the provider is also free to take on work from other businesses in the same industry

o Build-operate-transfer approach – involves offshore outsourcing and contracting with external organisations: the use of contracts that detail agreed levels of service against pre-determined KPIs

Technology

The use of technology can be an operations strategy, particularly if it helps the business to create a competitive advantage

Technology in the operations function may be classified according to whether it applies to inputs, transformational processes and outputs, or whether it applies to managerial and administrative functions

The two main types of technology are:o Leading edgeo Established

Leading Edge

Technology that is the most advanced or innovative at any point

Allows businesses to:o Speed up productiono Produce to a higher standardo Minimise wasteo Operate more effectivelyo Eg Siri on iPhone

Is created by innovative processes and thinking – Henry Ford quote “faster horse”

Established

Technology that has been developed and widely used and is simply accepted without question

o Eg computers, faxes and phones in administration Functionally sound and help to establish basic standards for productivity and speed

o Eg CAD, POS data for inventory management

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

Stock is the product, either in partial or full transformation, which has yet to be sold and therefore represents the difference between what is supplied and what is sold (ie difference between inputs and outputs)

Advantages of holding stock include:o Ensures adequate supply for sale, which in turn ensures happy customerso Buying in bulk allows businesses to take advantage of bulk discounts

(economies of scale) Disadvantages of holding stock include:

o Storage/warehousing costso Slow-moving stock ties up money without generating incomeo Difficult to accurately monitor stock on a regular basiso Risk of theft, damage and deterioration

At the end of an accounting period, it is important that the value of unsold stock be determined

It is also very important to know the value of stock sold so that profit can be correctly determined

The main inventory valuation techniques are:o LIFOo FIFOo Weighted average cost (WAC)

LIFO

If the business restocks shelves by pushing the old items back to make room for new items of the same kind, then the last items stocked with be the first items sold (ie last in first out – LIFO)

This usually occurs with long-life or non-perishable goods The simplified application of LIFO (in terms of cost analysis) would cost each unit

sold at the last cost recorded

FIFO

Perishable items, such as dairy and produce, are restocked from the back so that older items are pushed to the front and sold first out ie first in first out – FIFO)

Common Example

Batch a – buys 1000 phones for $100 each and sells 500 phones for $150 – 500 in stock

Batch B – buys 1000 phones for $110 each and sells 900 phones for $160 – 600 in stock

Batch C – buys 500 phones for $120 each and sells 800 phones for $180 – 300 in stock

LIFO – Simple Analysis

Total sold = 2200 Last cost = $120 Total costs = $264 000 Total revenue = (500x150) + (900x160) + (800x180) = $363 000 Gross profit = $99000

FIFO – Simple Analysis

Total sold = 2200 First cost = $100 Total costs = $220000 Total revenue = $363000 Gross profit = $143000

Weighted Average Cost

Alternative to FIFO or LIFO is to use an average cost of S110 Total sold = 2200 Average cost = $110 Total costs = $242000 Total revenue = $363000 Gross profit = $121000

Impact of LIFO and FIFO

Method of valuation affects both the calculation of the value of goods sold (which in turn affects gross and net profits) and also the value of unsold stock

LIFO often overstates cost and understates gross profit, as well as undervaluing stocks held at the end of the period

FIFO often understates cost and overstates gross profit, as well as overvaluing stocks held at the end of the period

Just-in-Time (JIT)

JIT approach aims to overcome the problem of end of period stock valuation by using a lean production method

This is because a JIT approach aims to have the business only make enough products to meet demand – ie to have no leftover stock at the end of the accounting period

A JIT approach allows retailers to display a wider range of products (as less storage is required) and can subsequently order in response to demand

A JIT approach requires a very flexible operations function, with flexible processing and suppliers, as well as a very high ability to respond quickly to changes in demand

The main benefits of JIT include:o Reduced warehousing and storage costso Improved flow of products from warehouses to shelveso Simplified inventory flow managemento Increased emphasis on supplier relationshipso Arrival of supplies at regular intervalso Synchronisation of production/supply with demand

Quality Management

Quality is a term used to describe the degree of excellence of a product/service and its fitness for a stated purpose

Quality mgmt. refers to those processes that a business undertakes to ensure consistency, reliability, safety and fitness for purpose of a product

The contemporary approaches to achieving quality within businesses includeo Quality control – inspection, measurement and interventiono Quality assurance – application of international quality standardso Quality improvement – TQM and continuous improvement

Quality Control

Quality control reduces problems and defects in the product by using inspections at various points in the production process

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 OK or defective

Quality Assurance

Quality assurance (QA) involves the use of a system to ensure that set standards are achieved in production

This is done through taking a series of measurements and assessing the against the pre-determined quality standards

Aspects of quality that are important to QA include:o The notion of fitness for purpose – how well the product does what it’s

designed to doo The desire to achieve it ‘right first time’, so that products don’t need to be

reworked A widely used international standards is the International Standards Organisation

(ISO) 9000 series of quality certifications

Quality Improvement – Continuous Improvement

Continuous improvement centres around the belief that, over time, processes will continue to be made more efficient and effective

In order to maintain high levels of quality and satisfied customers, the business should continuously seek to streamline processes, eliminate waste, improve quality and maximise efficiency/effectiveness of operations

Quality Improvement – TQM

TQM is a holistic approach in that quality becomes both a commitment and the responsibility of every employee of the business

It is an ongoing, business-wide commitment to excellence that is applied to every aspect of operation

Is very closely linked with the notion of continuous improvement There are four key objectives associated with TQM:

o Benchmarkingo Employee empowermento Customer focuso Continuous improvement

Overcoming Resistance to Change

Resistance to change arises from two principal sources within a business:o Financialo Psychological

The most important step in overcoming resistance to change is ensuring that managers understand the reasons for the resistance to change

Once these factors have been identified, managers can implement strategies to overcome the resistance

Financial Costs Associated with Resistance to Change

Purchasing new equipment – can improve process flexibility, processing speeds, lead times, production consistency, overall quality and wastage/losses

Redundancy payouts – typically quite high because the payout depends on length of employment, pay level prior to redundancy, any unused leave and any outstanding wages

Retraining – arises from either new technology or internal restructuring, both of which require employees to gain new skills

Reorganising plant layout – also includes relocating to a new plant, as well as costs in the form of lower productivity as employees adjust to the new plant layout

Reorganising plant layout – also includes relocating to a new plant, as well as costs in

the form of lower productivity as employees adjust to the new plant layout

Psychological Resistance to Change – Inertia

Inertia is a term that describes a psychological resistance to change – a feeling of uncertainty when change is imminent can lead people to resist the change

For change to be effective it must:o Occur at a pace at which it can be absorbed by and integrated into the businesso Be thoroughly evaluated to assess the overall impact – poorly managed change

normally results in employee resistance, workplace tension and lost productivity

o Be introduced into a workplace culture that supports employee participation

Change Management Strategies

To manage significant change, a business should apply the following steps:o Identify the source of change and whether there is a need to accommodate

change through adjustments to business processeso Communicate with employees about the need for change and gain widespread

support for the changeo There may be a need for change agents – internal staff or external

professionals. If staff are included in the process of creating a culture for change and setting goals, they will generally be more supportive

o It may be necessary to apply change models, such as Kurt Lewin’s unfreeze-change-refreeze model or the more contemporary Kotter’s eight-step change model

Global Factors

There are several global factors that present opportunities when assessing the operations strategies available for operations managers

These can be classified as:o Global sourcingo Economies of scaleo Scanning and learningo R & D

Global Sourcing

Global sourcing as an operations strategy involves sourcing inputs from overseas, creating cost advantages for the business

In this broad meaning, global sourcing also includes any business operations that are outsourced

Advantages include:o Cost advantageso Access to new technologyo Expertise and specialisation of labouro Access to other resourceso Ability to operate over extended hours

Disadvantages include:o Possible relocation of aspects of operationso Increased cost of logistics, storage and distributiono Managing different regulatory conditions between nationso Increasing complexity of overall operations when sourcing from diverse

locations

Economies of Scale

Refers 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 become a global factor when firms sell to global markets Advantages include:

o As the scale of production increases, the costs per unit fall, meaning profitability will rise

o Product lifecycles are extended, meaning there is greater added value on production

o Economies of scale can be derived on capital investment and the improved use of technologies

o Economies of scale can arise in marketing, with global branding and advertising saving costs on duplication

Scanning and Learning

All businesses can benefit from scanning the global business environment and learning from the global practice of business around the world

Research and Development

Innovative companies engage in R&D R&D helps businesses create leading edge technologies and to create innovative

products/solutions A central aspect of R&D is ascertaining what consumers want and assisting to create

products that meet their needs