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Introduction A study of business management is incomplete without an understanding of modern approaches to managing operations. Operations management provides a systematic way of examining organisational process. Operations management presents interesting career opportunities and the concepts and tools of operations management are widely used in managing other functions of a business. Time frame of management decisions shall be discussed along with the different types of transformations processes. Services are compared to goods production with emphasis on the primary inputs, resources, the primary transformation functions and the typical desired outputs in a variety of service and operations examples. Value added services are also discussed along with their benefits to external customers. Role of operations managers in the organization is defined. Historical roots of the development of operations management are traced from scientific management trough the moving assembly line, the Hawthorne studies and on to today's current manufacturing topics including supply chain management. The discussion will also include current issues facing operations management managers including developing flexible supply chains to enable mass customization of products and services, managing global suppliers, production and distribution networks, increased commodisation of supplies, achieving the service factory an achieving excellent services. What is operations management? According to Roberta R, and Bernard W T 3rd (2009) it is the design, operation and improvement of productive systems that create the organization's primary products and services. This involves the transformation of inputs to outputs and is the core of any business. It includes planning, designing and operating systems to achieve goals of the organisation. In a more simple way it is the set of activities that create goods and services by transforming inputs into outputs. It is managing resources so that they flow through a defined productive system in a controlled manner to produce goods and services so that maximum value is added, consistent with organisational goals. OPERATIONS FUNCTION OM FUNCTIONS INCLUDE: 1. organising work and selecting processes. 2. Locating and arranging facilities. 3. Managing inventories. 4. Controlling quality 5. measuring productivity. Operations managers deal with: people, technologies and deadlines. Why study Operations Management? We should know how goods and services are produced. The cost incurred in creating goods or services need to be managed. The impact and influence of new technologies on the creation of goods and services. Global nature of operations and competition. 1 Operations management is the binder of departments i.e. related to all areas of any business it is the link between functions. Operations management as a critical responsibility of every manager Efficiency: performance to a standard e.g. Time to assemble a car. The emphasis is value added activities. Effectiveness: the contribution that the activity or department provides to the overall mission of the business. Utilization: percent of time that is devoted to value added activities. Productivity: efficiency*utilization. Value addition: value added is the difference between the cost of inputs and the value or price of outputs. Operations Interfaces 3. TRANSFORMATION PROCESS The transformation process refers to a series of activities along the value chain extending from supplier to customer. Activities that do not add value are superfluous and should be eliminated. What is a production system? A production system is defined as a user of resources to transform inputs into some desired outputs. 2 Operations as a transformation process INPUTS Material Machines Labour Management Capital OUTPUTS TRANSFORMATION PROCESS Goods and Services at competitive prices and value Feedback Types of transformation processes Physical Locational Exchange Physiological Psychological Informational Manufacturing Transportation/warehouse Retail Health care Entertainment Communications Classes of productive systems Manufacturing and processing systems. Raw materials are transformed into tangible physical goods through refining, processing, fabrication and assembly e.g. automobiles, televisions, burgers. Service Delivery Systems Effort, knowledge and skills are utilized to perform and deliver personal services e.g. baking, hospitals etc. Transformation Enablers The 5Ps of operations management: people, plants, parts, processes and planning and control. Differences Between Services and Goods “If you drop it on your foot, it won’t hurt you.” (Good or service?) Characteristics of goods: 1) Tangible product 2) Consistent product definition 3) Production usually separate from consumption 4) can be inventoried 5) low customer interaction Characteristics of a service: 1. intangible product 2. produced and consumed at the same time 3. often unique and inconsistent product definition 3 4. high customer interaction 5. often knowledge based 6. frequently dispersed Goods and Services Good *can be resold *can be inventoried *some aspects of Quality measurable *selling is distinct from production *product is transportable *site of facility important for cost *often easy to automate *revenue generated primarily from tangible product Service Reselling unusual Difficult to inventory Quality difficult to measure Selling is part of service Provider not product is transportable Site of facility important for customer contact often difficult to automate Revenue generated primarily from intangible service Other characteristics Characteristic customer contact uniformity of input layout content uniformity of output output measurement of productivity opportunity to correct quality problems before delivery to customer inventory evaluation Difficult patentable good low high low high tangible easy high service high low high low intangible difficult low much easier little More usually not usually OPERATIONS AS A SERVICE Core service core services are basic things that customers want from a product they purchase. Core service performance objectives Quality Flexibility Operations management Price (or cost reduction) 4 Speed Core factory services I) quality (making things better) better design, technology, know-how better manufacturing processes equipment layout small lot production quality circles vendor certification II) flexibility (being more agile) able to introduce new products adapt to customer demands integral part of quality and delivery capabilities by product of actions to improve quality and delivery capabilities product development is in teams not sequential III) Speed to market (making things faster than competitors) Technology: robotics, facility location – globally, improved labour/management relations. Continuous improvement equipment maintenance supervisory training job enrichment and enlargement IV) Price or Production Cost (making things less expensively) cost reduction through technology robotics direct labour reduction product and process improvement value analysis product standardization lead and cycle time reduction Value added services (VAS) VAS aims at differentiating the organisation from competitors and building relationships that bind customers to the firm in a positive way. VAS Categories Problem Solving (help internal and external groups solve problem) Information (performance data on products, use data for improvement Operations Management Field Support (replace defective parts quickly) 5 Sales Support (enhance sales/marketing through equipment demonstrations History of operations management Prior to 1700’s - Most products custom-made on a small scale with local distribution. Local craftsmen. Products were handmade and unique. Industrial Revolution Mechanized production and distribution. Allowed mass production and wider distribution. Fostered division of labor. Key developments: Steam engine (1769). Interchangeable parts (1798). Machine tools (1798). Results: Production increased. Prices decreased. Workers replaced by machines. Need to manage complex production systems. Scientific Management Study production systems scientifically to improve them (beginning in 1880’s). There are ‘scientific laws’ for production systems that can be used to improve (optimize) production. Work smarter, not harder. Management is responsible for productivity. Related Fields Operations Management. Industrial Engineering. Social and psychological factors. Operations Research/Management Science (Mathematical modeling). Logistics. 6 Recent Developments for OM Information technology: (computers, bar codes, Just-In-Time systems. Quality emphasis. Service economy. Globalization. Environmental concerns. Security. 7 EDI, internet, wireless, etc.) OM challenges paradigm shift FROM TO Global focus Local or national focus Just-in-time Batch shipments Supply chain partnering Low bid purchasing Rapid product development Lengthy product development Mass customization Standard products Empowered employees Job specialization 8 CHAPTER 2 Operations Strategy What is operations strategy? OS refers to the need for businesses to produce a variety of products and or services. Rationale of output variety PLC concept specifies that all output designs eventually die. Risks of obsolescence and competitive pressures increase with time. PLC diversification reduces impacts of additions or deletions on the organisation. Necessary to satisfy the organization's objectives. Necessary to remain competitive and incorporate new technology. Ability to achieve greater total demand for outputs which complement each other, than the sum demand for outputs taken individually (Product line Concept). Operations Strategy Operations function is key to an organisation as it produces all value added goods and services working closely with other departments. Each of these functions are influenced by operations bounded together by common goals. The Strategic role of an organisation is to coordinate the activities of all these not only to meet the needs of customers, but also fulfils the strategic intentions of the organisation. OS is concerned with helping he operations is concerned with helping the operations contribute to the organisation's competitiveness or strategic direction. Hence operations must be closely monitored in supporting these different requirements if the business is to continue to grow profitably. Operations Performance Objectives The best strategy can only be effective through an inept operation function. An organisation should ensure that operations contribute effectively to the organisation's strategy. It must address 5 basic performance objectives in order to position the firm in the market. 1. The quality of goods and services 2. The Speed at which they are delivered to customers. 3. The dependability with which the operation keeps its delivery promises. 4. The flexibility of the operation to change what it does 5. The Cost of producing its good and services. NB. achieving high performance in any one of these can give a competitive edge to the business. However it is difficult to the “best” at more that two of these competitive factors and events at Toyota is a good testimony as shown below. Akio Toyoda, the president and CEO of Toyota, issued the following statement in regards to the recalled vehicles: “ Toyota has, for the past few years, been expanding its business rapidly. Quite frankly, I fear the pace at which we have grown may have been too quick. I would like to point out here that Toyota's priority has traditionally been the following: First; Safety, Second; Quality, and Third; Volume. These priorities became confused, and we were not able to stop, think, and make improvements as much as we were able to before, and our basic stance to listen to 9 customers' voices to make better products has weakened somewhat. We pursued growth over the speed at which we were able to develop our people and our organization, and we should sincerely be mindful of that. I regret that this has resulted in the safety issues described in the recalls we face today, and I am deeply sorry for any accidents that Toyota drivers have experienced. Especially, I would like to extend my condolences to the members of the Saylor family, for the accident in San Diego. I would like to send my prayers again, and I will do everything in my power to ensure that such a tragedy never happens again. Positioning the firm Competitive Dimensions Cost or Price – Make the Product or Deliver the Service Cheap Waste elimination – relentlessly pursuing the removal of all waste Examination of cost structure – looking at the entire cost structure for reduction potential Lean production – providing low costs through disciplined operations Quality – Make a Great Product or Deliver a Great Service – Minimizing defect rates or conforming to design specifications; please the customer – Ritz-Carlton - one customer at a time – Service system is designed to “move heaven and earth” to satisfy customer – Every employee is empowered to satisfy a guest’s wish – Teams at all levels set objectives and devise quality action plans – Each hotel has a quality leader Delivery Speed – Make the Product or Deliver the Service Quickly – Fast moves, fast adaptations, tight linkages – Internet - conditioned customers to expect immediate responses – Service organizations - always competed on speed (McDonald’s, DHL, and Federal Express) – Manufacturers - time-based competition: build-to-order production and efficient supply chains – Fashion industry - two-week design-to-rack lead time of Spanish retailer, Zara Delivery Reliability – Deliver It When Promised Coping with Changes in Demand – Change Its Volume Flexibility and New Product Introduction Speed – Change It – Ability to adjust to changes in product mix, production volume, or design – National Bicycle Industrial Company – offers 11,231,862 variations – delivers within two weeks at costs only 10% above standard models – mass customization: the mass production of customized parts 10 Other Product-Specific Criteria – Support It The strategy upon which a company embarks also determines the strategy of the operations function. The key duty of operations management is therefore to support company strategy by bringing, the operations function in line with the wishes of the organisation. Companies try every possible approach to attract customers earn their loyalty on repeat sales, out compete rivals and win an edge in the marketplace. The following 5 generic Strategies are available to operations managers and their organisations. MARKET TYPE A broad range of buyers: Wide market STRATEGY Overall low cost Leadership strategy Broad differentiation strategy Best cost provider strategy A particular buyer segment or market Focused low cost strategy niche Focused differentiation Strategy 1. A low cost leadership strategy: striving to be the overall low cost provider of a product or service which appeals to a broad range of buyers. 2. A broad differentiation strategy: seeking to differentiate the company's product offerings from rivals in ways which will appeal to abroad range of buyers. 3. A best cost provider strategy: giving consumers more value for their money by combining an emphasis on low cost with an emphasis on upscale differentiation, the target is to have the best (lowest) costs and features. 4. A focused or market niche strategy: based on lower cost and concentrating on a narrow buyer segment and out competing rivals on the basis of lower costs. 5. A focused or market niche differentiation: offering niche members a product or service customized t their taste and requirements. Each generic approach or strategy stakes out a different market position and involves totally different approaches to managing the organisation: A low cost strategy will require the production costs to be as low as possible with a lot of attention being given to productivity improvement and low operations costs. A broad differentiation strategy could require a high quality product, with attention being 11 given to fast reaction times and short production life cycles. A niche strategy could require small batch sizes, with attention being given to flexible manufacturing techniques and cross training employees. Low cost provider strategies Striving to be the industry’s low cost provider is a powerful competitive approach in markets where buyers are price sensitive. The aim is to open a suitable cost advantage over competitors and the company’s lower cost edge as a basis for either under pricing competitors and gaining market share at their expense or earning a higher profit margin by selling at the going market prices. A cost advantage generates superior profitability unless it is used up in aggressive price cutting to win sales from rivals. Opening up a cost advantage To achieve a cost advantage, a firm’s costs across its value chain must be lower that competitor’s cumulative costs. There are two ways of achieving this: a) Do a better job than rivals at performing internal value chain activities efficiently and of managing the factors that drives the costs of value chain activities. b) Revamp the value chain to bypass some cost producing activities that do not add value. Controlling the cost drivers A firm’s cost position is the result of the behaviour of costs in each activity in its total value chain. The major cost drivers which come into play in determining a company’s costs in each activity segment of the chain fall into two categories: a) Structured determinants of costs Economies or diseconomies of scale – economies and diseconomies of scale can be found or created in virtually every segment of the value chain. For example, manufacturing economies can sometimes be achieved by simplifying the product line and scheduling longer production runs. Or in distribution through the Delta beverage model where designated trucks are used to deliver its products in bulk to various distribution centers. Learning and experience curve effects – experience based cost savings can come from improved layout, gains in labour efficiency, debugging of technology, product design modifications which enhance manufacturing efficiency and the redesigning of machinery and equipment to gain increased operating speed. Learning benefits can be kept proprietary by building or modifying production equipment in-house, retaining key employees, limiting the dissemination of information through employee publications and enforcing strict no disclosure provisions for employment contracts. Linkages with other activities in the chain – when the cost of one activity is affected by how others are performed, companies can lower costs of linked activities through superior coordination and or joint optimization. Sharing opportunities with other business units within the firm – activities shared with a sister unit can create significant cost savings. Cost sharing can help achieve scale economies, shorten the learning curve in mastering a new technology and or achieve fuller capacity utilization. The benefits of vertical integration versus outsourcing – partially or fully integrating into activities of either suppliers of forward channel allies can allow an enterprise to detour suppliers or buyers with considerable bargaining power. Vertical integration can also result 12 in cost saving when it is feasible to coordinate or merge adjacent activities in the value chain. On the other hand it is sometimes cheaper to outsource certain functional activities to outside specialists, who by virtue of this expertise and volume can perform the activity/function more cheaply. Location variables – locations differ in their prevailing wage levels, taxes, rates, energy costs, inbound and outbound shipping and freight costs etc. opportunities may exist for reducing costs by relocating plants, field offices, warehousing or headquarters operations. Executing cost drivers Timing considerations associated with first mover advantages and disadvantages – sometimes the first major brand is able to establish and maintain its brand name at lower cost than later brand arrivals. Being a fist mover turns out to be cheaper than being a late mover. On the other hand, in high tech-industries where new technology is always being developed, late purchasers can benefit from waiting to install second or third generation equipment which is both cheaper an more efficient. First generation users often incur added costs associated with debugging and learning how to use an immature and imperfect technology. Likewise companies, which follow rather than lead new product development efforts sometimes avoid the costs which pioneers incur in performing path breaking Research and Development and opening up new markets. The percentage of capacity utilization – high fixed costs as a percentage of total costs create a stiff unit cost penalty for under utilization of existing capacity. Increased capacity utilization spreads indirect and overhead costs over the larger unit volume and enhances the efficiency of fixed assets. Strategic choices and operating decisions – managers at various levels affect a firm’s costs through the decisions they make for example: Increasing/decreasing the number of products offered. Adding/cutting the services provided to buyers. Incorporating more/less performance and more/fewer quality features into the product. Paying higher/lower wages and fringe benefits to employees relative to rivals and firms in other industries. Increasing/decreasing the number of different forward channels utilized in distributing the firm’s products. Putting more/less emphasis on higher productivity and efficiency as compared to rivals. Managers intent on achieving low cost leadership have to understand which structural and exceptional factors drive costs of each activity in the firm’s total value chain. They have to use their knowledge about the cost driver to reduce costs for every activity where cost savings ca be identified. Differentiation strategies This becomes an attractive approach whenever buyers’ needs and [references are too diverse to be fully satisfied by a standardized product. To achieve success with a differentiation strategy the company needs to study the needs and expectations of the buyers and to carefully learn what they consider important, what they think has value and what they are willing to pay for it. Companies needs to incorporate one or more attributes and features with buyer appeal into their products, service offerings-enough to set its offerings visibly and distinctively apart. Competitive advantage results once sufficient number of buyers become strongly attached to the differentiated 13 attributes and features. The stronger the appeal of differentiated features to the buyers, the stronger the company’s competitive edge. Successful differentiation allows a firm to: Command a premium price for its product. Increase unit sales (because additional buyers are won over by the differentiating features). Gain buy\r loyalty to its brand (because some buyers are strongly attracted to the differentiating features) Differentiation strategy’s impact on the organisation Differentiation is not something hatched in the marketing and advertising offices, nor is it limited to catcalls of quality and service. The possibility for successful differentiation exist in activities performed anywhere in the industry’s value chain. The most common places in the value chain where differentiation opportunities exist include: Purchasing and procurement activities - which ultimately spill over to affect the performance or quality of the company’s end product. Product oriented R&D activities which hold potential for improved designs and performance features, expand end uses and applications, wider product variety, short lead times in developing new models, more frequently being the fist on the market victories, added user safety, greater recycling capability and enhanced environmental protection. Production process – oriented R&D activities that allow custom order manufacture, environmentally safe production methods and improve product quality, reliability or appearance. Manufacturing activities which can reduce product defects, prevent premature product failure, extend product life, allow better warranty coverage, improve economy of use, result in more end user convenience and enhance product appearance. (the quality edge enjoyed by Japanese automakers stems from their superior performance in manufacturing and assembly line activities). Outbound logistics and distribution activities which allow for faster delivery, more accurate order filling, and fewer warehouse and on the shelf stock outs. Marketing, sales and customer service activities which can result in such differentiating attributes as superior technical assistance to buyers, faster maintenance and repair, more and better product information provided to customers, more and better credit on frequent sales calls and greater customer convenience. 14