Download Introduction A study of business management is incomplete without

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.
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 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.
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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
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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)
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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)
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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.
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Recent Developments for OM
 Information technology: (computers, bar codes,

Just-In-Time systems.

Quality emphasis.

Service economy.

Globalization.

Environmental concerns.

Security.
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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
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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
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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
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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
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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
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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
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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.
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