Operations management

The role of operations management is to turn inputs into outputs through

production processes

(1) Role of operations management

a. Strategic role
The strategic role of operations management is to provide the business with a
long term competitive advantage through the use of cost leadership and
good/service differentiation:

Cost Leadership
Strategies for cost leadership include:
Economies of scale: exploiting cost savings which accompany
size, this also improves efficiency
Outsourcing
Low cost inputs: control production costs

Good/Service differentiation
Strategies for good/service differentiation include
Quality
Brand image
Technology

Through this the business aims to improve productivity, efficiency and quality.

b. Good and Services in different industries

Management is different in a manufacturing vs. service based industry.
Operations is shaped by the range and types of goods/services provided
Goods:
Standardised goods: mass produced, uniform quality
Customised goods: vary according to customer needs
Perishable goods: short lead times, quick effective distribution, may need
cold storage or packaging
Non-perishable goods
Intermediate goods: processed more than once
Services:
Self-service
Standardised
Customised

c. Interdependence
When each key function area is committed to the same business goals as the
other areas and they work together in a coordinated and collaborative way to
achieve these goals.

(2) Influences
a. GTCQEGL
i.
Globalisation
Globalisation refers to the removal of barriers of trade between nations.
Globalisation is characterised by an increasing integration between national
economies and a high degree of transfer of capital, labour, intellectual capital
and ideas, financial resources and technology.
Supply Chain Management and the Global Web
Supply chain refers to the range of suppliers a business has and the nature of its
relationship with those suppliers.
Global web refers to the network of suppliers a business has chosen on the basis
of lowest overall cost, lowest risk and maximum certainty in quality and timing of
supplies.
A business needs a very predictable and reliable supply chain that is highly
responsive to changes in demand as experienced by the business. Sourcing, an
essential aspect of supply chain management is an operations strategy that
requires finding the suppliers needed so that production processes can be
smooth flowing.
For large global businesses the integration of the range of suppliers creates a
network sometimes called the global web In Supply Chain management, the
global web strategy is one in which the business aims to minimise cost across
the range of its suppliers. Thus, a business will opt for a location that places it in
appropriate proximity to the suppliers. If a high proportion of the suppliers are in
one particular region, this may decide the location of the main operational
processes.
Global sourcing: With globalisation every function can be outsourced or
relocated to reduce costs. Manufacturing maybe located where inputs and
labour are cheapest, such as in a developing country. Raw materials may be
sourced from where they are most abundant. Many businesses expand into
countries that offer cheaper labour, tax incentives and other benefits.
The reason for the global web of operations is to drive costs down and exploit the
competitive advantage each region has to offer.

Currency
Movements in the value of currencies will impact on operations by changing the
costs of inputs used. When operating in multiple countries a business will need to
convert currencies in order to pay suppliers of inputs. A depreciation of the
Australian dollar against the currency of the country inputs are sourced from will
lead to higher costs. A business can reduce this risk by using hedging
Trade Agreements
Trade agreements between countries have formed as a result of globalisation.
The amount of protection that exists in a country will impact on operations.
Nations may reduce barriers between one another or they may place barriers to
the entry of an outsider. If Australian businesses are excluded from economic
clubs they will have to source inputs and components from other countries and
will find it difficult to export to countries in which Australia is not a member of
the trade agreement. Globalisation has seen an increase in geographic
regionalism where there are regions of the globe that are forming an economic
alliance. (NAFTA, Europe and South East Asian countries).
ii.
Technology
Technology may be defined as the design, construction and/or application of
innovative devices, methods and machinery upon operations processes.

Efficiency
New methods of production
New equipment
Competitive advantage
Robots, CAD, CAM

At an administrative level, technologies assist with organisation, planning and

decision making and are in control of operational processes.

Use of planning technologies: Materials Requirement Planning (MRP),

Gantt Charts, Critical Path Analysis (CPA) and other scheduling and
sequencing tools
Use of office technologies such as computers (desk top and laptop),
scanners, facsimile machines, integrated telephone systems, mobile
phones, hand-held organisers
Use of software such as word processing, graphics packages, spread
sheeting programs, graphing programs, multimedia programs and desktop
publishing programs

At a processing level, technologies are used in manufacturing, logistics and

distribution, quality management, all aspects of inventory management, supply
chain management and sourcing.

The use of large machines in manufacturing plants such as those typical of

assembly line production
The use of robotics in highly sophisticated production processes requiring
great precision

Use of Computer Aided Design (CAD), Computer Aided Manufacture (CAM)

and Computer Integrated Manufacturing (CIM) technologies
Rapid Manufacturing (RM) and tooling technologies

iii.
Quality Expectations
Definition: How well designed managed, made and functional goods are, and the
degree of competence with which services are organised and delivered.
Importance: People have an inherent belief in what the quality standards should
be for products and their personal level of satisfaction with their experience of
the product will indicate whether the quality has met with expectations or not
Implication: The expectations people have of businesses determine the way that
products are designed, created and delivered to customers. Clearly operations
must follow particular standards or prescribed minimum levels of excellence.
Quality expectations in operations can be summarised into several key things
that customers look for in products:

Quality of design (concept, innovation, materials)

Fitness for purpose
Durability (reliability, maintenance)

Services:

Professionalism (cleanliness, courtesy)

Reliability (efficiency, competence)
Customisation (how wells needs are met through application of expertise
and experience)

iv. Cost-based competition

Definition: Cost-based competition is derived from determining breakeven point
(the level at which the firm matches total costs and total revenue) and then
applying strategies to create cost advantages over competitors. Cost-based
competition recognises that prices cannot keep increasing; therefore, reducing
costs is a way to maximise profits when revenues are fixed.
Importance: In highly competitive markets, cost based competition can shape
the operations function in competing businesses.
Implication: Cost-based competition is a feature of operations management
when businesses bring a cost leadership approach to the operations function.
That is, they focus on reducing costs to a minimum while maintaining profit t
margins.

Costs may be divided into fixed and variable.

v. Government policies
Importance: All businesses operate in a politicallegal environment. Political
decisions affect the business rules and regulations, which, in turn, directly affect
the management of various key business functions.
Implication: Government policies often impact on business. Policies such as
taxation rates, required materials handling practices, Occupational Health and
Safety (OH&S) standards, training and rules, public health policies,
environmental policies, employment relations, trade and industry policies all
impact on business operations.
vi. Legal regulations
Importance: The ranges of laws with which a business must comply are
collectively termed compliance. The regulations that shape business practices
and procedures must be followed at the risk of penalty, hence the term
compliance. The expenses associated with meeting the requirements of legal
regulations are termed 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.
Implication: All aspects of business must abide by the laws of business.
Operations management has particular laws that influence how practices and
processes are conducted.
The relevant laws will relate to labour and labour management, as well as the
environment and public health including the following:

OHS
Training and development
Fair work and anti-discrimination
Environmental protection
Public health

Range of laws impacting on business operations:

Racial Discrimination Act 1975 (Cwlth)

Sex Discrimination Act 1984 (Cwlth)
Workers Compensation Act 1987 (NSW)
Disability Discrimination Act 1992 (Cwlth)
Age Discrimination Act 2004 (Cwlth)
Anti-Discrimination Act 1977 (NSW)
Work Health and Safety (WHS) Act 2012 (Cwlth)
Environment Protection and Biodiversity Conservation Act (1999) (Cwlth)
Superannuation Guarantee Act 1992 (Cwlth)
Taxation Act 1953 (Cwlth)
Corporations Act 2001 (Cwlth)
Fair Work Act 2009 (Cwlth)

vii. Environmental sustainability

Definition: Environmental sustainability (ecological sustainability) means that
business operations should be shaped around practices that consume resources
today without compromising access to those resources for future generations
Importance: Awareness of the negative effects of business operations on the
environment has led to a call for businesses to adopt environmentally
sustainable practices
Implication: This can be seen in the move by businesses to reduce and minimise
waste; recycle water, glass, paper and metals, and reduce their carbon footprint.
The carbon footprint refers to the amount of carbon produced and entering the
environment from operations processes.

b. Corporate Social Responsibility (aka triple bottom line)

The continuing commitment of the business to behave ethically and contribute to
economic development whilst improving quality of life of the workforce and their
families as well as community life and society at large.
The difference then between legal compliance and ethical responsibility is that
legal requirements require that a business follows the letter of the law the
prescribed standards of behaviour. Ethical responsibility sees businesses meeting
all of their legal obligations and taking it further by following the intention and
spirit of the law.
Legal compliance:
Requires that a business follows all relevant applicable, state and federal laws,
which may incur significant costs. These laws shape the conduct of the business:
Labour law compliance: e.g. compensation, leave, H+S laws, minimum
wages
Environmental and public health compliance: pollution, disposal of
waste
Business licensing rules: required levels of training, zoning restrictions,
work hours
Taxation: levies, duties, taxes imposed on profit
Financial and accounting regulations: aim to standardise methods
and rules of financing records and reports and ensuring company directors
follow particular rules
Ethical Responsibility
Involves making decisions which are legally and morally correct. Business ethics
are the principles a business will follow to be a good corporate citizen.
Code of Conduct
This shows the businesses commitment to ethical behaviour and covers:

 Supporting charities
Consulting the community prior to significant change
Promoting human and civil rights in Australia and overseas
For operations:

Minimising harm to the environment

Reducing waste, recycling, reusing
Producing value for money (quality products)
Improved customer service

When businesses conduct their operations, so that they are abiding by all
relevant and applicable local, state and federal laws, they may incur significant
costs. Given that the main goal of business is to generate maximum profit, it is
easy to see why many businesses opt for the lowest level of compliance
permissible.
Sometimes businesses seek to avoid compliance by using outsourcing as a
business strategy. This means that the compliance requirements are different
between the nations chosen and allow the business to take advantage of
significant cost savings. Lower taxation rates, lower standards of labour, weaker
environmental and intellectual property regulations all enable businesses to
reduce their compliance costs. Of course, the use of offshore outsourcing raises
ethical issues concerning business behaviour

(3) Processes
Processes involved directly with transformation.

a. Inputs
Inputs are the resources used in the transformation (production) process.
Four common direct inputs:

Labour
Energy
Raw materials
Machinery and technology

Transformed resources
The resources changed/ converted in the operations processes
1. Materials- raw or intermediate
2. Information: used to inform how inputs are used, where they are drawn
from and which suppliers and supplies are available
External information: e.g. market reports, statistics, media reports, academic
papers and commentary and management journals
Internal information: gathered from internal sources such as financial reports and
KPI.

3. Customers- Customer become transformed resources when their when

their choices shape inputs
Transforming resources
The resources which carry out the transformation process
1. Human resources-it is employees who coordinate and combine other
resources and therefore can determine the success with which
transformation and value adding occurs
2. Facilities- refer to the plant (factory or office) and machinery used in the
operations processes. The plant and machinery can make a very
significant difference to a business and its capacity to transform

b. Transformation processes
The conversion of inputs (or goods) into outputs (or service). This process needs
to be designed, planned and controlled to make it flow as smooth as possible and
as uninterrupted as possible.

I. Influence of:
Volume: volume flexibility
How quickly the transformation process can adjust to increases and decrease in
demand. Also involves managing lead times (the time it takes for an order to be
fulfilled when it is made)
Variety: (e.g. customisation)
The greater the variety, the more variation in operations processes.

Mix flexibility: product range or choice

Variation in demand: (e.g. seasonal demand)

Increase in demand requires more inputs and HR although this is affected by
suppliers, labour machinery capacity and energy use. Business will attempt to
forecast this
Visibility (customer contact): customer feedback directly affects the
operations

Direct: surveys, interviews, warranty claims

Indirect: sales data, market share data

II. Sequencing and Scheduling

Sequencing and scheduling are the tools used to organise operations processes
into the most efficient order.
Sequencing: order in which activities occur
Scheduling: length of time activities take

Tools which assist in this are:

Gantt chart: (almost a bar chart) outlines activities to be performed, the
order in which they should take place and their length. Gantt charts are
used for any process which has several steps and involves a number of
activities which need to be performed.

Advantages: Gantt charts force managers to plan the steps and time and also
make it easier to monitor actual performance against planned.

Critical Path Analysis (cpa):

o Shows what tasks need to be done
o How long they take
o What order is necessary to complete the tasks
The critical path is the longest and ensures all the tasks have time to be
completed. Some tasks can be performed simultaneously.

Advantages: the CPA gives direction and organisation to the processes and
enables the manager to plan use of their time ahead.

III. Technology, task design and process layout

Technology
The use of machinery to undertake transformation more effectively and
efficiently.
Office:

Computers / laptops
Mobile phones
Printers/ faxers, photocopiers

Manufacturing:

Robotics
CAD, CAM

Task design
How the task will be completed. This involves separating the task, analysing it
and allocating jobs.

Classifying job activities in ways to make it easier for employees to

successfully perform and complete the task
Deciding how the task will be completed
Breaking down the task into a series of jobs
Allocating these jobs to employees with sufficient skill levels

Process layout
The physical layout of the factory to increase efficiency, avoid waste of space
and to ensure safety.

Fixed position: employees and equipment come to the product (remains in

one location)
Process layout: grouped together by function
Product layout: equipment arrangement related to the sequence of the
tasks

IV. Monitor, control and improvement

Monitoring: measuring actual performance against planned using Key
Performance indicators (KPI)

Lead times
Inventory turnover rates
Defect rates and warrant claims
Process flow rates

Controlling: comparing intended performance against actual then taking

corrective action

Regular performance review

Improvement: reduction of inefficiencies and wastage, poor work processes and

elimination of bottle necks. Usually improvement is sought in:

Time
Process flow
Quality
Cost
Efficiency

c. Outputs
The result of a businesss efforts/ the final product. There are also subtle outputs,
these are ways in which the output will be assessed by consumers.

Customer service: how well a business meets and exceeds the

expectations of customers
o All outputs are aimed at customer needs and wants
o Businesses must listen to customers to keep existing ones
Warranties: promises to correct defects in products/ services
o Effectiveness of operations can be measured in warranty claims

(4) Strategies
Activities involved in the production of a good or provision of a service

a. Performance Objectives
Quality
Adds value with minimum defects or waste
Encourages customer loyalty
Commands a premium price
Speed
Relates to productivity
Reduced wait times
Shorter lead times
Faster processing rates
Dependability
Consistency and reliability
Measure using warranty claims
Service standards and reliability
Measure with number of complaints
Flexibility
How quickly operations can adjust to changes
New technologies increase flexibility and capacity
Wider variety(more range)
Customisation
Commands a premium price
Cost
Minimisation of expenses to reduce costs

b. New Product or service Design and Development

Two approaches to new product design and development:

Preferences and desire of customers

Change and innovations in technology

Steps involved in the design process:

Important considerations in designing of goods:

Quality: customers demand a certain quality and certain attributes and

features
Capacity management: new product may increase the use and range of
present resources or require the acquisition of new technology and
machinery
Supply chain management: new product may extend the range of
suppliers sought and also the timing and volume of supplies
Cost:

Important considerations in designing service:

Explicit service:
Explicit service is also called the tangible aspect of the service being
provided, such as the application of time, expertise, skill and effort.
Implicit service:
Implicit service is based on a feeling and is therefore intangible. The implicit
aspects of a service are the psychological wellbeing the feeling of being
looked after that comes with the provision of the service.

Goods required: the additional aspects of a service must be considered

e.g. doing an operation you need specialised equipment

c. Supply Chain Management

The combination of suppliers used to purchase raw materials. This involves
integrating and managing the flow right throughout the entire operations
process.
Recent trends in Supply Chain Management:

Supplier rationalisation
Vertical integration
Cost minimisation
Flexible/ responsive supply chain processes

Global Sourcing: businesses purchasing supplies or services without being

constrained by location.
Considerations when sourcing:

Volume of inputs determined by consumer demand

Quality
Flexibility/ response of supplier
Cost against other suppliers

 E-commerce: buying and seling of goods and services via the internet and
also particular forms of souring
E-procurement: online systems which manage supplies and allows
suppliers direct access to the business level of supplies
B2B: Refers to direct access from one business to another
B2C (business to consumer): business selling direct to consumers

Logistics: distribution, although this includes:

Transportation
Storage, warehousing and distribution centres
Materials handling and packaging
The type of product and the cost of transportation will determine the mode of
transportation selected

d. Outsourcing
Involves the use of external providers to perform business activities. The theory
is external providers who specialise in the area can so at a lower cost and
greater effectiveness.
Considerations when outsourcing:

Is it cheaper and more efficient

Geographical location
Which vendors to use?
Contract, KPIs and service levels

Advantages
Simplification
Efficiency and cost savings
Increased process capability
Increased accountability
Access to skills/ resources
Capacity to focus on core

Strategic Benefits:
Outsourcing gets around trade
barriers
Vendors have benefits of
expertise gained form
outsourcing to competitor
Different time zones
Strong partnership= vendors
suggest innovative solutions

Disadvantages
Payback periods and cost
Communication and language
Loss of control standards
Hierarchy
Organisational change and
redesign (downsizing, job losses)
Loss of corporate memory and
vulnerability
Information technology

Focus on core

e. Technology
Leading edge technology
Technology that is the most advanced or innovative at any point in time.
Utilising the best technology available can:

Create products quicker

Higher standard procedures
Less waste
More effective operations

Leading edge technologies are created through innovative processes and

innovative thinking.
Established Technology
Technology that has been developed and widely used without question.
Established technologies are functionally sound and help to establish basic
standards for productivity and speed. These include:

Boarding and point of sale (POS) data (inventory management)

Robotics
CAD
CAM
CIM (computer integrated manufacturing)
IT and IPT
FMS (flexible manufacturing systems)

f. Inventory management
Amount of raw materials, work-in=progress and finished goods that a business
has on hand at any particular point in time.
Holding stock:
Advantages
Consumer demand can be met
One item runs out, an alternative
can be offered
Reduced lead times (between
order and delivery)
Generate immediate income
Quickly distributed to
distribution centres
Older stock can be sold at

Disadvantages
Costs (storage, spoilage,
insurance, theft, handling)
Extra capital, labour and energy
Obsolescence

reduced prices
Stocks are assets= good balance
sheet
Economies of scale

Last in First out (LIFO): Each unit is sold at the last cost recorded, meaning
the stock bought last would assumed to have been sold first
First in First out (FIFO): cost each unit at the first price recorded, meaning
the stock bought first would have been sold first
Just in time (JIT): Jit ensures that the exact amount of material inputs will
arrive only as they are needed. It aims to have the business only make
enough products to meet demand. It allows:
o Display a wider range of products (less storage, can order in
response to demand)
o Saves money (no holding and insurance costs)
o Shrinkage and obsolescence are minimised
Although JIT requires high ability to respond quickly to demand and a
reliable supplier.

g. Quality Management
The processes a business undertakes to ensure consistency, reliability, safety
and fitness of purpose of products.
Quality Control: Inspection, measurement and intervention
Quality control reduces problems and defects by using inspections to test the
quality of products against set standards and then taking appropriate action to
correct any deviations.
Quality assurance (QA): application of international quality standards
Involves the use of a system to ensure that set standards are achieved. Aspects
of Quality assurance are:

Fitness for purpose

Right first time

Quality Improvement: Total Quality Management (TQM) and Continuous

improvement are the two aspects of quality improvement

Total Quality Management: This concept ensures quality becomes a

commitment and responsibility of every employee of the business.

TQM requires four elements:

Benchmarking
Customer focus
Employee empowerment
Continuous improvement

Continuous Improvement: an ongoing commitment to improving a

businesss goods and services. All staff are encouraged to demonstrate
initiative and to suggest areas where improvements can be made. In this
way, all processes can be improved simultaneously and ownership of
improvement extends to all.

h. Overcoming resistance to change

All businesses are subject to change from the external environment, A notable
influence on operations arises from the need to manage and be responsible to
change. Resistance asrises from two sources:

Financial
Psychological/ emotional

Financial Costs: Financial costs can be a concern to business owners and

operations managers who need to manage change.

Purchasing new equipment: although this increases processing

flexibility, shorter lead times, more consistency, higher quality, reduced
wastage and losses from equipment failure
Redundancy Payout: a redundancy payout is the money given to
employees whose skills are no longer relevant as a result of machinery
and technology
Retraining: arises from:
o Change to hierarchy: requiring employees to acquire different job
skills
o Acquisition of new technology
Reorganising plant layout: When changes occur and the needs of the
product change, change needs to be made to the plant layout. Costs
include:
o Transporting, placing, bringing power to new equipment or new
plant
o Downtime
o Loss of productivity from staff having to re-orientate themselves
with new work processes and arrangements

Psychological:

Inertia: psychological resistance to change.

Change management strategies

To manage significant change, a business should formalise its approach to
change management. This can be done by applying the following steps for
change management.

Identify the source(s) of change and assess whether there is a need to

accommodate change through adjustments to business processes.
Generally the sources of change are external and the business is
responding to the threat that change can pose.
Lower the resistance to change through communicating with employees
about the need for change and getting widespread support for the change.
There may be a need to use change agents (internal staff or external
professionals). If staff are included in the process of creating a culture of
change and setting goals, they will generally be more supportive.
It may be necessary to apply change models such as Kurt Lewins
unfreezechange- refreeze model or the more contemporary Kotters eightstep change model (see the following Snapshot), which has been applied
by businesses. Adapting to change through overcoming the financial and
psychological resistance can help businesses to create sustainable
competitive advantage even when faced with what appear to be threats.

Change models
Unfreeze/ change / refreeze:
1. Unfreeze: break down forces supporting existing system and prepare for
change
2. Change: the new procedures and behaviours must be communicated and
implemented
3. Refreeze: offer positive reinforcement to make sure the change lasts
John Kotters eight-step model
1. Establish a sense of necessity. Examine the current business
environment to highlight impending threats or potential opportunities.
2. Form a guiding group. Establish a team of people to act as facilitators.
3. Create a vision. Provide employees with a clear, shared sense of direction
that will allow them to achieve a common objective.
4. Communicate the vision. Communicate the vision with all those the
change will affect to build cohesion between employees to dispel fear of
the unknown.
5. Empower people to fulfil the vision. People who have the opportunity
to be actively involved in the change process generally develop a sense of
ownership.
6. Recognise and reward achievements. Recognition and reward should
be given to encourage further risk taking and reinforce the positive
aspects of embracing change.
7. Consolidate improvements. As the change process proceeds, assemble
the benefits attained into the businesss operating procedures and
systems.
8. Institutionalise the changes. Make a clear statement to show the
connections between the new procedures and the success of the business

i. Global Factors
Global sourcing: the sourcing of any business operations which give the
business cost advantages. It ensures the best decision is made based on:

Cost
Efficiency
Productivity
Technical ability
Ability to operate longer

Benefits include:
Cost advantage
Access to new technologies
Expertise and labour
specialisation
Other resources
Extended working hours

Challenges
Possible relocation of aspects of
operation
Increased cost in logistics
Storage and distribution
Different conditions between
nations
Exchange rate fluctuations
Language and cultural variations
Poorly developed service level
agreements

Economies of scale:

Global branding / advertising

Can sell globally= economies of scale

Scanning and learning:

Opportunities to learn from one another:

Management journals
Industry and business associations
Conferences
Forums
Staff members who have worked in other businesses

Kaizen: emphasized continuous improvement in all areas of business

Research and development:
R & D helps to create Leading edge technologies and innovative products and
solutions. A central aspect of R&D is ascertaining what consumers want and
assisting to create products that meet their needs. Government encourages R&D
and may offer taxation incentives and grants