Buisness studies part 1 year 12_Operations.pdf

Notes: Role of operations management: Strategic role of operations management: The Operations function within a business involves taking inputs and changing into a finished product. Thus, the operations function is concerned with inputs, transformation processes and outputs. The operations depart...

Notes: Role of operations management: Strategic role of operations management: The Operations function within a business involves taking inputs and changing into a finished product. Thus, the operations function is concerned with inputs, transformation processes and outputs. The operations department in any business transforms business inputs by adding value at each stage of the production process to meet the business goals.Operations management is the coordination of this process. The role of operations management involves duties such as sourcing raw materials, making sure that production processes provide quality that meet customer demand and is produced in a timely manner ,establishing the most efficient production process and working out the best way to get the finished product to the customer. The operations manager role means that they will be essential in the achievement of a business's goals. The operations department and manager need to know what resources and production methods are needed to meet these goals. If the correct resources are not bought and bad production processes are used the final product will not be up to customer standards and the business will have trouble attracting and keeping customers.. The strategic role of operations is to carry out the transformation process in a way that will help the business achieve its strategic goals. This can be done by improving the efficiency and competitiveness of a business through cost leadership and good/service differentiation. Making a profit is the main goal of businesses and to achieve this a business revenue must outweigh its costs. The operations manager works to keep costs of inputs and production processes as low as possible without reducing the quality of the final product. When a business has the lowest cost in the industry, it is known as being a cost leader and has cost leadership within that industry. By keeping costs to a minimum and keeps customers' thinking hey are getting value for money , the business will be able to offer a product to customers at a competitive price and be able to have good profit margins.If these steps are successful the business could become the leading provider of a particular good or service based on their lowered costs. Good/service differentiation occurs when a business makes its good or service stand out from other similar products in the market. Differentiation through operations can be achieved through higher quality products, faster delivery, custom-designed products, more features and applications and incorporation of new technology. A differentiated product can command a higher price in the market as customers are attracted to the product and as such production costs do not have to be as low as when utilising the cost leadership strategy. The role of operations management is to manage the process of transforming inputs into outputs in such a way as to meet the overall business goals. Cost leadership is when the primary goal of operations is to achieve a competitive advantage through the lowest costs in an industry. Product differentiation means that firms endeavour to establish a unique position in the market for their product. Goods and services in different industries Operations management is concerned with producing goods and services. It is important to identify whether a business is mainly producing a good or a service, because the features of operations management are different for each. Businesses provide either a “good” or a “service”, or both. A “good” refers to something tangible – that is, something you can touch. A “service” refers to something intangible – that is, something that you cannot touch. Many businesses offer both a good and a service – for example, a restaurant provides food (which is tangible) and table service (which is intangible); or a car dealership provides a car (which is tangible) as well as customer service and a warranty (which are intangible). Operations is interdependent with the other key business functions of marketing, finance and human resources and each business function needs to interact in a coordinated way in order to bring about business success. For example when market research conducted by marketing identifies the nature of goods consumers’ desire , operations must supply a product that has the features and quality consumers demand and work to distribute this product to the market. For a manufacturer of mobile phones, the marketing function will conduct market research to determine the features that potential consumers of new products will want in their phones. Finance will work to source the most appropriate source of funds to construct and equip a new plant and to acquire the resources needed. Human resources will recruit and train the staff necessary for a successful operation. The operations of a business refers to the production processes that go into making the good or services.Operations department and manager source the inputs that are needed in the production process and determine how the process will take place. Influences Globalisation, technology and customer expectations The operations function of a business is affected by a range of influences including globalisation, technology, quality expectations of customers, cost-based competition, government policies, legal regulations, environmental sustainability and corporate social responsibility. Although the business cannot control these factors, to be effective, management will monitor them and make sure that the business has the capacity to adapt to changes and, thus, promote the future success of the business. Globalisation refers to the impact that the world beyond Australia has on a business. It is the increased economic integration of the world’s nations. Increased trade (imports and exports), advancements in transportation and communications ,including e-commerce, are some of the factors that have driven globalisation. The influence of globalisation can be illustrated by looking at the hypothetical shoe manufacturer, Runners, in 1990 compared to today: In 1990, the head office of Runners was in Sydney. The design department was in Melbourne. The production of the shoes was in a factory in Wollongong. The shoes were sold in specialist shoe stores in Australian capital cities for $200. Today, the head office of Runners is in Sydney. The design department is in Melbourne. The production of the new shoe range has moved from Wollongong, NSW, to Manila, in the Philippines, in order to reduce labour costs. The finance to set up the new production factory is from Japan, as it has a competitive interest rate. The machinery for the new factory is sourced from Germany. The product is sold for $100 in specialist stores in all Australian capital cities, as well as all over the world. Globalisation has both positive and negative impacts on the ability of a business to meet its goals. On the positive side it provides the business with new customers as well as access to new technology and financial markets. It enables the business to gain access to a greater range of cheaper inputs and more cost-effective production processes.Pacific Brands is an example of a business that moved production of its clothing brand, Bonds, to foreign factories in order to reduce its cost of labour. However, on the negative side, globalisation can mean greater competition for the business as competing businesses have access to these same resources. International businesses will be able to operate in Australia under trade agreements and relocating production overseas can lead to bad publicity and a loss of customers. For example, when Qantas announced that it was going to have its planes maintained overseas, it caused a media outcry over the loss of Australian jobs and the potential of increased safety risks. Technology is another influence on operations. Access to new technologies can mean that the business is able to make its production processes more efficient and even improve quality. Tasks that involve labour can be taken over by machinery, cutting costs. However, while taking advantage of new technology will give a business advantages in the long run, implementing it can be expensive. Businesses need to be aware of technological developments and incorporate them into their product in order to be competitive.Most television manufacturers now incorporate internet connectivity that allows customers to stream online content. A business that failed to grasp the influence of technology is the previous photographic giant, Kodak. Kodak did not embrace the shift to digital photography and clung to film, eventually resulting in its demise. Businesses providing a service must also keep up to date with new technologies. Hotels and airlines for example have expectations of online booking systems and provision of wifi to customers. Quality expectations of customers are a significant influence on the operations of a business. Quality is how well designed, made and functional goods are, and the degree of competence with which services are organised and delivered. Quality and expectations are linked as all people have a belief in what quality standards should be for products, and their level of satisfaction will indicate whether the quality has met their expectations. The expectations people have of businesses determines the way that products are designed, created and delivered to customers. For example, a good such as an expensive luxury car will need to be made from high quality materials, include innovative or new product features, have an extended warranty and also offer the customer a high quality experience throughout the purchasing process. If this does not occur, the customer’s expectations will not be met and they will not make repeat purchases. On the other hand, a $15 toaster purchased from a bargain store will not be expected to last too long, and will be thrown away and replaced once it stops working. Furthermore as businesses aim to make a profit they try to keep costs to a minimum due to cost-based competition. This can be done by purchasing inputs in bulk or by reducing waste in the production process, for example. If a business is able to reduce their costs, they will then be able to reduce their prices and attract customers away from competitors. A business that is a cost leader will find that other businesses will try to copy what they do. This can be seen in the rivalry between Coles and Woolworths; when one drops the price of milk, bread and mince – the other matches the price. This means that operations management must always be sourcing new suppliers, entering into agreements with suppliers and monitoring production techniques so that customers don’t move to the competitor. Government policies will influence operations processes. If the government is encouraging rural businesses with subsidies, management may find it beneficial to relocate production to a country town. If the government increases taxes on some inputs, this will make the production of some goods and services more expensive. It is important for operations managers to be aware of government policies affecting them as they can change from time to time, depending on changes in the business environment and social expectations. Globalisation, technology, cost-based competition and government policies are all influences on the operations processes of a business. Operations managers must maintain an awareness of developments in each of these areas in order to take advantage of emerging opportunities and minimise the potential threats. Laws, regulations and environmental sustainability The operations function of a business can be impacted by external factors such as legal regulations,consumer shift towards environmentalism and corporate social responsibility. The operations manager needs to adapt to these influences in order to maximise business performance. Legal regulations are one of the major external influences on operations.The operations manager is obligated to be aware of all laws and regulations that relate to their workplace. There can be penalties if breaches are noted, or the business’s reputation can be damaged if the breach becomes known to the public.An example of how law affects business is the Commonwealth Work Health and Safety Act of 2011 states that protective equipment must be worn in dangerous environments.Operations managers must take into account all of these influences, when organising their operations to be successful. Observing laws and regulations often incurs a cost for the operations function of a business. These costs are called compliance costs. For example, if the cost to supply dust masks to all employees could be $500 and there are 10,000 employees the law will cost the business $5,000,000. Safework NSW is the state government body that inspects workplaces and investigates potential breaches of the Work Health and Safety legislation, and imposes penalties where breaches are found to have occurred. A search of contemporary news stories will reveal businesses that have been penalised as a result of failures in the operations management of a business to follow their legal obligations. One example is a luxury jewellery brand that was fined tens of thousands of dollars in 2015 for failing to provide a safe workplace, following an investigation prompted by the death of a young diver. Environmental sustainability means to use production processes that minimise environmental harm and allow future generations the same potential access to resources as the present generation. Environmental sustainability includes maintaining unpolluted rivers and streams, maintaining clean air around factories, and preventing the extinction of species.Cunsumer sentiment towards the environment has been increasing for a while and many environmental lobby groups, such as Greenpeace and The Worldwide Fund for Nature (WWF), have contributed to this by increasing awareness of the impact on the envirmnet. As a result, many consumers are choosing to purchase from businesses that have an established track record of looking after the environment through their production processes. Some certification processes have emerged to provide customers with assurances that products are in accordance with environmental sustainability principles. Rainforest Alliance certified coffee or chocolate, for example, is guaranteed to have been produced without chopping down old growth rainforest, the home to many endangered species such as the orangutan. Although raw materials sourced from certified sources cost more than uncertified raw materials, there is a marketing advantage to having certification associated with a business’s products. Many customers are willing to pay a higher price for knowing that they are contributing to environmental sustainability.Magnum is a premium chocolate that has chosen to source Rainforest Alliance certified raw materials and as such charges a higher price than its competitors. Failing to practise environmental sustainability can lead to a consumer backlash. An example is Volkswagen who faked compliance with environmental emissions standards on its diesel cars. The deception, revealed in 2016, has significantly damaged the business’s brand and sales. Clearly, environmental sustainability is a key influence on operations management. In order to attract and keep customers, businesses must be seen to be engaging in behaviours that keep the environment healthy, both now and for future generations. This often impacts on the ability of operations managers to be cost effective in production processes because purchasing environmentally friendly inputs and disposing of waste products can be expensive. Corporate social responsibility is a key influence on operations. Corporate social responsibility refers to businesses “doing the right thing” by society as a whole. They have a responsibility to all of their stakeholders: their customers, suppliers, the community surrounding a production plant, and workers in a factory in a developing country and the environment,. Corporate social responsibility is about making a positive difference to society. One business that demonstrates positive corporate social responsibility is Coles through its Aboriginal and Torres Strait Islander Plan which aims to provide more jobs for indigenous people and to actively develop their careers within the company. An example of a business that demonstrated poor corporate social responsibility is James Hardie. James Hardie manufactured asbestos-related products that cause cancer, and thousands of compensation claims were made against the business. James Hardie restructured its business, separating itself from the Medical Research and Compensation Fund set up to fund compensation payments. When the Fund ran out of money, James Hardie refused to accept responsibility. The public backlash against James Hardie was very strong because it had not “done the right thing” according to the standards of Australian society as a whole. Corporate social responsibility encompasses both legal compliance and ethical responsibility. Ethical responsibility sets a higher standard for a business than mere legal compliance. This is because laws do not cover all things that a society expects a business to follow. Ethical actions taken by firms that are not required by the law could include, providing meaningful employment and treating their employees and stake holders with respect, recycling waste products such as paper and plastic, taking care to schedule deliveries in times when traffic congestion and noise can be minimised and by supporting local charities and sporting groups. Many industries have a code of conduct to set the standard of all businesses in an industry. A code of conduct is not legally enforceable. An example is the Commercial Television Industry Code of Practice. One element of this code is specific rules for content after 7.30pm to limit the exposure of children to potentially unsuitable material. The Alcohol advertising Code of Ethics says that the advertising of alcohol must not suggest change of mood, social or sexual success or be associated with water sports. For the operations department, ethical responsibility is an expensive influence on the production process as processes need to be designed to meet customer expectations in this area. Ethical standards make the business look good to the community and will increase reputation,public perception and sales but can be costly to implement. Considering legal compliance and ethical responsibility may be expensive for businesses but ignoring this responsibility can cause fines, legal action, loss of investment, bad media coverage and losing customers. Management of the operation function needs to consider all of the influences that will affect the production process. If managers fail to respond to such things as legal and ethical requirements, the business will not be able to achieve sustainable success. Operations processes Inputs Operations processes are those procedures that ensure that the business has all of the inputs and transformation processes needed to develop the output. An input is something that goes into the making of a product. Most goods and services are produced using a number of inputs which, when put together, are transformed into something desired by customers. At each stage of the production process, this transformation will add value so that customers will pay more for the final product than the cost of the ingredients. An example of this is the processing of apples to become a component of an apple pie. The operations department is responsible for sourcing the inputs and deciding on how they should be combined to bring about this value adding. Another name for an input is a “resource”. When considering how to blend these inputs, the operations manager will have to consider which resources will be transformed and which ones will do the transforming. The major inputs into the operations process are human resources, facilities, materials, information and customers. A transformed resource is a resource that is changed during the production process. Transformed resources are materials, information and customers. Materials take the form of raw or partly processed materials. Raw materials for a steel manufacturer include coal and iron ore. Raw materials for an apple pie manufacturer include apples, flour, butter and sugar. Information is an input for many businesses. Information is provided to accountants in the form of raw data. This information is then transformed by the accountant into a different form, such as budgets, projections, Balance Sheets, Income Statements, or Cash Flow Statements. These documents are outputs for the transformation process undertaken by the accountant. Customers are an input in the transformation process for service related businesses, such as a hairdressing salon or an airline. Customers are changed as a result of the production process. With a hairdressing salon, the customer has their appearance changed. Transforming resources are those elements of the transformation process that carry out the change. Transforming resources are not intended to change themselves as a result of the transformation process. Transforming resources are human resources and facilities. Each of these are intended to be in the same state prior to, and at the conclusion of, the transformation process. Human Resources refers to the staff who carry out the transformation process. For a steel works, the human resources are engineers; for an apple pie manufacturer – the bakers; for an accounting firm – the accountants; for an airline – the pilots; and for a hair dressing salon – the hair dresser. Staff may need specialist training or skills, and they play an important role in adding value to the inputs that go into creating the good or service. Employees are vital in the design and creation of a product. It is up to operations management to work with the human resources department to make sure that the necessary employees are recruited and the appropriate training takes place. Facilities primarily refers to the plant, machinery and equipment used in the transformation process. For a steel works, it would include the blast furnace; for a hairdresser, it would include the scissors; for an airline, it would include aeroplanes; and for an accountant, it would include a computer. (show graphics of the facilities as they are each mentioned). There are issues that an operations manager should consider linked to the facilities, such as giving consideration to the physical location and layout of the production plant. Management must consider how easy is it for suppliers to access the premises and how easy it will be to distribute the finished product to customers. The difference between transformed and transforming resources can be summarised by going back to the apple pie example. The transformed resources include the apples, flour, butter and sugar (the “materials”), and the transforming resources include the pulping machine and ovens (the “facilities”), and the staff operating the pulping machine and the ovens (the “human resources”). The pulping machine and the oven are making the change process occur – they are changing the apples into pulp, and changing the raw apple pie into cooked apple pie. The pulping machine and the oven are intended to be in the same state at the start of the process, as at the end. This is what makes them transforming resources. The same could be said for the human resources operating the machinery. The staff make the change process occur. The staff themselves are not intended to change. Inputs into the operations processes include transformed resources – that are changed themselves – and transforming resources – that make the process of change occur. The operations manager needs to appreciate the nature of these various inputs in order to make wise decisions to lead to the achievement of a business’s overall goals. Transformation processes Transformation processes are the processes that take the inputs and convert them into something more valuable. Operations managers need to consider the way they transform their inputs. They must take into account various influences on the process such as the 4V’s, as well as sequencing and scheduling, technology, task design and plant layout. To establish and maintain a competitive advantage they must also monitor their processes and work to continually improve their operations and their output. The four V’s _- volume, variety, variation in demand and visibility – all have a strong influence on the transformation process. Volume refers the level of output that is possible given the production processes. Businesses relying on mass production produce a large volume of identical items. A business producing a low volume allows for customisation of the product, which takes more time. Businesses producing a high volume rely heavily on expensive facilities such as conveyor belts and a set sequence of activities. Businesses producing a low volume rely heavily on labour to provide customisation in accordance with customer needs. Let’s consider an example. The Fast Food chain Subway produces a high volume of subs by using a production line system. Customers place their orders and then staff add components such as meat, salad and sauce to the order as the sub moves through the assembly process. This production line systems allows Subway to produce many sandwiches an hour. In contrast, in an exclusive restaurant with table service, the chef generally spends a lot of time making each item. This means that it produces fewer items per hour. Variety refers to the number of different models or options provided by a business. A business with a low degree of variety will be able to keep production costs per unit low by relying on expensive mass production facilities. A business with a high degree of variety will be able to meet a greater range of customer expectations, although at a higher cost of production per unit. Let’s consider an example. Bunnings provides pre-fabricated kitchen cabinets in a couple of styles and sizes. Customers will need to design their kitchen to fit around the size of the cabinets. In contrast, a custom kitchen joinery will come to a customer’s house, measure the size of the kitchen, listen to the preferences of the customer about colour and style, and design and manufacture a kitchen to match the exact needs of the customer. Bunnings provides low variety; the customer kitchen joinery provides high variety. Variation in demand refers to the change in demand that occurs over time. This could be due to the time of the day, season, school holidays, or time of the year. A business with a high variation in demand and a high degree of volatility needs flexible operations processes. The operations manager will need to constantly monitor the market and adjust accordingly. Let’s consider an example. A milk producer has steady, reliable supply and demand and can use routine operations processes with a heavy reliance on expensive facilities, leading to low per-unit costs. On the other hand, a small ice-cream van that travels around the streets has fluctuating demand according to the season and the weather. The operator needs to increase their service in summer and during hot weather, and reduce their service during winter and rainy weather. Flexibility is crucial. Visibility refers to the degree of customer contact with the operations processes. For a business with a high level of customer contact, the operations processes are completely visible to the customer. This is particularly true for service-based businesses, such as a hairdressing salon or a dentist. The transformation process is actually happening to them – the customer – so they are completely aware of the operations process. An operations manager in a highly visible business will make sure that the staff are well trained and skilled in customer service. For a business with a low level of customer contact, the operations processes are not visible to the customer. This is particularly true for manufacturing based businesses, such as Bluescope Steel. The customer does not see the transformation process within the production plant. They only see the final output – the finished product. Production line workers do not require extensive training in customer service. Sequencing and scheduling are two important tools that assist with allocating resources as efficiently as possible so that the least amount of waste occurs. Prior to starting the production process, the operations manager needs to plan the sequence of operations needed to create the product. By looking at the sequence, management will be able to determine the best layout of the business, what inputs are needed and when they are needed. For example, Dominos operates in shop fronts with fairly small preparation and cooking areas. The operations department have determined the best sequence of operations to make best use of the resources used and to produce a quality product on time. Once the sequence is decided, management can work on scheduling the production process. Scheduling refers to the length of time activities take within the operations process. It involves timetabling the events so that resources arrive on time and so that the appropriate amount of labour is employed. In order for scheduling to be successful, managers have to work out timings for each part of the production process. To do this, they will use different planning tools. One tool is a Gantt chat. This is a type of bar chart which shows all of the different tasks that must be performed and possible time frames. The Gantt chart shows jobs that overlap and that can be undertaken at the same time. For example, in Dominos, while the pizzas are cooking, customers can be served at the same time, or new pizzas made ready for the oven. Another tool is critical path analysis which allows management to map out the production process in order to determine the longest possible time frame the project could take. It is like a flow chart that shows how one task will lead to another. It also highlights tasks that can take place at the same time without interfering with each other. Critical path analysis assists in both sequencing and scheduling. For managers, it can highlight where problems might occur. For example, a construction company will use a critical path analysis to work out when the electricians can do their installations without stopping the work of other tradesmen who will need to access electricity. An important part of the operations process today is the use of technology. Business technology involves the use of machinery and systems that enable businesses to undertake the transformation process more effectively and efficiently. To compete, it is important that businesses can acquire the most up to date technology. Technology used in the service sector includes computers, mobile phones, internet, EFTPOS, just to name a few. These technologies mean that more work can be done in less time, and has also enabled work to be done away from the office, such as at home. Technology used in the manufacturing industry includes robotics, computer aided design and computer aided manufacturing. Robotics allow complex tasks to be completed that might not be able to be done by humans. They allow a high degree of precision and accuracy. Computer aided design is the use of computers to produce two and three-dimensional products that can be viewed on a computer. This makes it easier to analyse and modify the design if necessary, before actually making the product. Computer aided manufacturing is the use of computer software to control machines used in the manufacturing process. It transforms the computer design into an end product. An example of this is car manufacturers using computer aided design in designing a prototype of a car, rather than making a full-scale plaster or fibre glass model as was previous practice. Once the design is agreed upon, computer aided manufacturing is used to manufacture the final product. While developing or adopting new technologies may be expensive in the short run, in the long run it results in more cost-effective practices and, therefore, higher profits. Task design refers to planning the flow of activities needed to complete a task. This flow needs to be organised into a logical sequence so that employees can successfully perform and complete their allocated task. When looking at task design, management needs to consider what needs to be done, what machinery is required, the difficulty of the task, who will undertake the task and the specific skills and time needed to complete the task. Process layout refers to the physical design of the production process. The layout is important as it will determine the efficient flow of activities. The type of activities carried out will impact on the layout. If electricity is needed, these tasks need to be located near outlets or a safe way of dealing with power cords needs to be considered. The layout should ensure that workers don’t interfere with other’s tasks as this will slow down the process and could cause accidents. At all times the process layout needs to emphasise a smooth flow of production and workplace health and safety. This can be seen at Coca Cola , where the process layout means that the filling and sealing of the coke cans happens as quickly as possible and with very few workplace accidents. By addressing these factors, and by communicating with the workers involved so that they have an input, the operations managers should see an effective and efficient completion of the activities required in the production process. All operations processes should be monitored for their effectiveness. Monitoring and controlling will lead to improvements in operations processes. Monitoring means to constantly check to see if the business is meeting its goals. Management needs to see if all of the processes put in place are actually working in the way that they should. If they are not there will be problems in creating the good or service to the expected quality and in the anticipated time frame. Managers will put into place Key Performance Indicators (KPIs) so that they can measure progress against them and see if targets are being met. Examples of KPIs include lead times, defect rates, warranty claims and process flow rates just to name a few. For example, Coca Cola may have a daily performance indicator requiring a certain number of cans and bottles to be produced. A supermarket may have expectations of reaching a certain value of sales each week. By monitoring these indicators, the business can see if these targets are being met. If the business is falling below KPIs then the reasons can be analysed so that corrective action can be taken. When managers control the production process they look at the information gathered during the monitoring process and decide what action is needed. For example, if the supermarket finds that it is not reaching its sales targets, it will look for reasons and take action designed to remedy the problem. The actions of monitoring and controlling means that the business can carry out continuous improvement. The scrutiny of practices will see the reduction of wastage and inefficiencies. By monitoring operations, the business is able to observe practices and then do such things as reduce the time that it takes to provide the customer with the good or service; lower the costs involved in providing the product; eliminate dangerous work place practices; and provide a better-quality product. Transformation processes are at the centre of operations management. The operations manager must understand the influence of Volume, Variety, Variation in demand and Visibility in order to efficiently and effectively achieve business objectives. Consideration must be given to sequencing and scheduling, technology, task design and process layout. In addition, monitoring, control and improvement are crucial for a business to maintain or improve its competitive advantage. Business outputs An output is what is produced as a result of the transformation process. An output can be a good (something tangible) or a service (something intangible). It is important for operations managers to correctly identify all elements of the output so that opportunities for a competitive advantage can be recognised. Customer service and warranties are an important part of the output for many businesses that should not be overlooked. By transforming inputs in the production process, the business is able to produce an output which is the good or service sold to the customer. An example of an output for a bakery business is an apple pie. The bakery takes the inputs of apples, flour, sugar, butter; as well as the baker and the ovens, and through the baking process transforms the materials into an apple pie. The output for a hair salon business is a new hair style. The hair salon takes the inputs of the customer’s hair, as well as the hair dresser and the scissors, and through the hair cutting process transforms the customer’s hair into a new hair style. The output for an accounting firm is a set of financial statements. The accounting firm takes the inputs of raw financial data, as well as the accountant and a computer, and through the accounting process transforms the raw financial data into a set of financial statements. The output for an airline is a new location. The airline takes the inputs of a customer, as well as the pilot and the aeroplane, and through the transportation process transforms the customer to a new location. To maintain a good relationship with the customer, the output can be supported by customer service and warranties. Customer service refers to how well the business can meet the expectations of customers in their decision to buy the good or service. Operations management has the responsibility for providing a product that meets customers’ expectations in terms of quality. If customers are disappointed in these things, they will look to other businesses for an alternative product. A product that meets quality expectation and which is provided in a timely fashion will encourage customer loyalty and enable the business to meet its goals. Customer service requires time and skill from the staff providing it. It can be provided before, during and after purchase, and tends to be a more significant component for service-based businesses than for manufacturing-based businesses. Customer service includes answering questions about a product when a customer is deciding what model to purchase; phoning or emailing a loyal customer inviting them to the launch of a new product in which they are likely to be interested and the prompt and courteous handling of complaints. Customer service is about developing and maintaining a relationship with the customer in order to ensure repeat business. Warranties are a promise that a product will meet its advertised purpose. In Australia, all products sold must come with a warranty or guarantee which is valid for a period of time and provides for a replacement product or a refund. This is set out in the Commonwealth Competition and Consumer Act of 2010. While a warranty does not have to be written, many businesses, when selling a physical product that is over a certain value, will provide a written warranty that sets out the rights of consumer and seller. Management can look at the number of warranty claims as a way of monitoring the effectiveness of the production process. Customers will only make a warranty claim when the product is defective in some way. If the number of claims is high, there is a problem with the production process. Action can then be taken to fix any problems. By having effective monitoring and control mechanisms in place, the business will be able to reduce warranty claims and develop a reputation for reliability, which provides an advantage over competitors. Outputs are the end product of the transformation process and include both goods and services. Operations managers should give consideration to customer service and warranties, as they are also outputs and have the capacity to provide a competitive advantage to a business. Operations strategies Performance objectives To achieve operations goals and improve processes, managers can apply various operations strategies such as new product/service design and development, supply chain management, outsourcing, technology, inventory management, quality management, overcoming resistance to change and global factors. These strategies will ensure that value adding occurs in the transformation process and that customers’ needs are met. An effective operations strategy will also give a business a competitive advantage. However, before these strategies are implemented, the operations manager will need to set goals or performance objectives to be met. Performance objectives – Quality, speed, dependability, flexibility, customisation, cost. Performance objectives are goals that relate to certain aspects of the production process and allow management to set targets and standards that need to be met. Regular monitoring and control needs to be carried out to make sure that performance objectives are met. Quality refers to the standard of the finished product. If customers consider the product to be of poor quality, they will not continue to buy the product. Therefore, management will set performance objectives around the design of the product and the resources used in the product. Quality will be monitored at different stages of the production process. However, the cheaper the product, the lower the expectation of customers. For example, customers who buy a Dominos Value pizza will expect less toppings than if they buy a Chef’s Best; but purchasers of either product will expect it to be cooked to an edible standard and to receive the same customer service. Speed refers to how fast the business is able to deliver the product. It does not matter how good the quality of the product is if the customer does not get that product in the expected timeframe. Performance objectives around speed will include reducing the time involved to take the customer’s order, make the product and deliver it to the customer. This is known as lead time. The shorter the lead time, the quicker the customer gets their order. Coles and Woolworths have enabled online shoppers to choose the window of time that they want the product to be delivered. The smaller the time frame, the more expensive the delivery fee. Dependability means that the customers do not get fluctuations in the service provided. Management must make sure that the operations processes are consistent; so that the business is seen to be reliable and dependable. This is important if a business is to retain customers and maintain customer loyalty. Performance strategies in this area could concentrate on reducing customer complaints. In order to be seen as dependable in their delivery service, both Coles and Woolworths will email or SMS customers about the delivery of their groceries, as well as letting them know if some goods are not available. Customers can track the delivery to see if there are any delays due to traffic. Flexibility refers to how fast the business is able to respond to changes in such things as increased demand or availability of inputs. For example, if a key ingredient is suddenly not available due to a natural disaster, the business needs to have an alternate supplier or product to meet customer demand. The business needs to have a critical path analysis in place that looks at these issues so that management can build solutions. In addition, training and developing staff so that they can meet changed circumstances is also important. Customisation means the ability of the business to adapt the product to meet the different needs of different customers. In some businesses this has been quite easy, for example, a hair dresser listens to the client and provides a style to meet their request. However in the past, larger businesses struggled to customise their products. Today, technology has allowed businesses to move away from a one size fits all approach and has let them adapt their production processes to satisfy individual tastes. Most airlines, for example, have websites that allow customers to choose their flight and include the extras that suit them. The greater the customisation of a product, the more expensive the final price. If an operations manager has specific objectives that they aim to achieve in regards to quality, speed, dependability, flexibility, customisation and cost, then the operations activities will become more efficient, productive and profitable. Operations strategies Once the performance objectives have been established, operations managers will implement various strategies to ensure these objectives are achieved. New product or service design and development is important in meeting the changing needs of customers. A business will always be looking to retain current customers and attract new customers. To do this they will need to revitalise their existing products or introduce new ones. This can be seen in the case of car manufacturers who constantly change their product to reflect the changing tastes and needs of consumers. An existing model will be updated to include such things as a GPS and a reversing camera, or a slow selling model will be scrapped and a whole new model will be launched by the business. So that the product range is consistently fresh and meets market needs, the operations department must consult with the marketing department to determine what consumers want. Operations management must ensure that production processes are in place to meet these demands. Although this process can be expensive and time consuming, a business with a unique and innovative product will dominate the market. Supply chain management refers to obtaining inputs on time and providing customers with their product on time. If the supply chain is to be efficient, management must have procedures in place so that they order inputs in a timely manner. If the ingredients to make the product do not arrive this will mean that orders cannot be completed on time; on the other hand there should not be too many inputs or too much of the finished product as this can lead to storage issues, spoilage and theft. Effective operations managers will monitor their stock levels and movement of stock with computer systems. For example, when a customer buys a box of cereal from a grocery store, it will be scanned at the checkout and the computer will record this transaction. The computer will send an alert to the person who is in charge of ordering stock when stocks of cereal become low so that more can be ordered. This same system will also show management which products are popular, and which are slow to sell. Logistics management is the coordination of the supply chain in a way that is logical, that is in a sensible organised flow. Logistics management plans, organises and monitors activities such as the transportation of the inputs and the finished product , the level of inventory and how the stock is warehoused. It also looks after the safe handling of materials and the packaging of the finished product so that it arrives safely to the customer. Logistics will often be responsible for the security of the business. As logistics is such an important part of business operations and often involves skills that the business does not have, businesses will outsource aspects of the supply chain, meaning that they will use another business to carry out some of these tasks. Toll Holdings and Linfox are examples of companies that provide distribution solutions for many businesses in Australia. Outsourcing distribution means that a business does not have to maintain a fleet of vehicles and allows a business to concentrate on its core business. An example of this is where Coca Cola Amatil has a contract with Linfox to deliver its soft drinks to retailers. E-commerce means electronic commerce. That is, through the use of technology, customers can now place orders on line from anywhere in the world. E-commerce provides opportunities for a business to gain more customers but it also creates competition as it provides opportunities for other businesses to attract customers. Management will need to provide an efficient, up to date website if the business is to be able to take advantage of the opportunities provided by e-commerce. For some businesses this will involve hiring specialist staff or outsourcing to a business that specialises in web design. For the operations department, ensuring that the customer receives their on-line order is an important responsibility. Many businesses have taken advantage of Australia Post to do this. As online sales grew Australia Post adapted its operations to act as a provider for the delivery of these purchases. Global sourcing occurs when businesses look beyond Australia for resources, ideas and customers. This has been made easier with technological advances. Speedier communication has allowed for efficient communication with overseas suppliers and communications and better transportation modes mean that supplies are delivered faster and customers receive their goods faster. Operations management will look overseas to access cheaper resources or production processes, to have access to latest technology or to take advantage of relaxed government regulations. The advantages of global sourcing for businesses include being able to reduce costs, gain competitive advantages and, therefore, be more profitable. Outsourcing is where a business will contract out some of its operations to other businesses that specialise in these tasks. As discussed earlier this is usually undertaken in order to be cost efficient or to gain access to specialist services that it does not have. For example, Coca-Cola Amatil does not own its own transport fleet as it wants to focus its energy on what it does best, producing beverages. The convenience store chain, Seven-11, uses Toll Holdings to deliver its petrol and groceries as the logistics company has the vehicles for safe storage and delivery and the drivers have the skills to negotiate the tight driveway. Outsourcing has both advantages and disadvantages. The advantages include allowing the business to focus on its core activities while giving it access to expert information and service. It can reduce costs, as the business does not have to maintain equipment and technicians. On the negative side, management loses control over some of the production process, it is difficult to maintain quality as well as security and confidentiality issues may arise. In addition it can lead to a loss of jobs and career prospects in the business causing employee unhappiness. For these reasons, it is important that the operations management weighs up advantages and disadvantages before making the decision to outsource any of its production processes. Technology gives a business a competitive advantage against other businesses but can also be expensive to put in place. This means that the operations manager will have to decide whether to implement leading edge technology, or use established technologies. Leading edge technology is the technology that is the most advanced or innovative. It allows businesses to produce products more quickly, to a better quality and with less mistakes. Although it is extremely expensive, it allows operations to be more efficient and effective, providing them with a competitive advantage. On the other hand, established technology is technology that is widely used by most businesses. Some examples include computers and CAD and CAM. Although established technology is cheaper to purchase and install, it could result in a business falling behind competitors. Apple and Samsung are both leaders in mobile phone innovations and for this reason can charge high prices. Other mobile phone manufacturers take advantage of their research and adopt it, providing more economical products for their customers. Inventory management refers to the management of the products that the business sells and the inputs that go into providing the good or service. Depending on what they provide, different businesses will have different requirements when it comes to inventory. For example, a car dealership will have only a few samples of each car, waiting for the customer’s decision on colour before providing the final product. A supermarket will need to stock large quantities of popular items so that customers can take them home with them so that the customer doesn’t go to the competition. For inventory management to be efficient, managers will look at stock requirements to meet demand and the handling and storage of this stock. These tasks have been made easier with such things as electronic stock monitoring systems. When making decisions about how to manage inventory, managers will look at the advantages and disadvantages of holding stock. Holding stock will mean that customer demand is met immediately and that the business can take advantage of discounts offered by buying in bulk. On the other hand, holding stock means that business has to provide storage facilities; and if the stock is slow to move it can affect cash flow and the stock can be subject to damage, spoilage and theft. There are three different strategies that operations managers can implement to manage their stock. The first is called first in first out or FIFO. The movement of old stock is important to a business because, until it is sold, it is not making any money for the business. For this reason, most businesses will use this system to move the stock. This is essential in businesses such as a supermarket where the older stock may spoil. The supermarket will place new milk cartons behind the older milk on the shelf so that the milk with the shorter expiry date sells first. Another strategy is called last in first out or LIFO. Some businesses will use this system where new items are placed in front of older stock. This is used where products are heavy or do not become outdated. Businesses that are running special promotions on products may also use this inventory system. For a supermarket this can mean having the special promotion goods at the start of each aisle to catch a customer’s attention. The third strategy is called Just in time inventory management, or JIT. This is where the product is made or delivered just in time to meet consumer demand. Once again, modern technology involving electronic stock monitoring systems have made this a lot easier for many businesses. Just in time allows a business to cut down on the costs involved in holding stock at the retail outlet. In order to meet customer demand, many businesses will warehouse bulk stock on the outskirts of large urban areas, where rent is cheaper. The products can be delivered just in time to meet the customer need. This can be seen in supermarkets where every time a product is scanned, it sends a message to the monitoring system that there is one less of this product on the shelf. When stocks fall below a certain level, an alert is sent to the warehouse that new stocks are needed by that supermarket store. Operations managers need to consider changing customer needs, managing an efficient supply chain, outsourcing its operations, technological advancements and the business’ inventory requirements in order to achieve their performance objectives. A variety of operational strategies can be adopted by an operations manager in order to provide a business with an advantage over its competitors. Developing new products, giving attention to supply chain management, outsourcing, keeping up with leading edge technology and inventory management keep operations at their most efficient and effective levels. Quality management Quality management is the process by which the operations department ensures the product meets the standards set out in the operations plan. It is crucial to maintaining or improving the competitive position of a business, as it assists a business to build customer loyalty, boost sales and profit. Quality control, assurance and improvement are three aspects of quality management. Quality Control is checking that what was expected to happen, did happen; that is, checking the results against the plan. Control should be ongoing and involve checking the quality of the product at different stages of the transformation process. To do this, management will put in place feed-forward, concurrent and feedback controls to monitor the production process. Feed-forward controls involve planning before production begins so that any problems can be anticipated, and possible solutions developed. Baker’s Delight will trial its recipes in the test kitchen before sending them out to the franchises. The bakers at each franchise have a control run of cooking the new baked product before it goes on sale to customers. Concurrent controls are used during the production process. Coca Cola sends a laser beam through each can of coke while it is on the assembly line. If there is not enough liquid in a can, it is rejected. Feed-back controls occur at the end of the process and can involve customer feedback to see how satisfied they are with the product. Spec Savers emails its customers after a consultation to get a rating on the quality of the service. Quality Assurance occurs when the business establishes a set of standards to be met by the whole organisation in delivering the good or service. The aim of quality assurance is to meet or exceed customer expectations. This will often involve building a culture within the workplace so that every employee strives to produce an output of the highest standard. An example of this can be seen in Apple’s vision statement “to make the best products on earth, and to leave the world better than we found it.”. In supporting statements it also mentions “best user experience” and “top quality products”. These goals, made available to all employees, will bring about an approach to providing the best service and product to customers across all areas of the business. Some businesses will have such a focus on quality assurance that they will pay for external auditors to come in and assess how well the business meets its quality standards. This can result in the awarding of certificates stating that the business has met certain industry standards. Improvement means to get better at doing things. Businesses look to continuous improvement in their production processes as this will provide a better good or service and build loyalty in existing customers as well as attracting new customers. Operations management will look at streamlining processes so that waste is eliminated, as well as maximising the skills of the workforce so that a quality product is provided at a price that customers are willing to pay. Total Quality Management is a specific approach to continuous improvement that was developed by the Toyota factories in Japan. One of the major principles of total Quality Management is that quality is the responsibility of all employees, and employees should think about ways to consistently improve what they do. Quality control, assurance and improvement are crucial elements of operations management in order for a business to achieve its targets. Control, assurance and improvement should occur before, during and at the end of the production process. Quality management is important because it allows customer expectations regarding product quality to be met, and sales and profit maximised. Managing change in business Adapting to change is crucial to sustaining or improving a business’s competitive advantage. Any business has resisting forces against change. These reasons relate to cost and inertia, and it is helpful for operations managers to be aware of strategies to overcome resistance to change in order to more efficiently and effectively achieve a business’s goals. Change often involves a financial cost to implement. This financial cost is often seen as “too high”, or that current processes are seen to be adequate. An operations manager needs to weigh up the potential costs and benefits of maintaining the current processes, against the potential costs and benefits of adopting new processes. If the potential benefits outweigh the costs, then this should be clearly communicated to those who resist the change on financial grounds, in order to convince them to change their position. Let’s explore a few ideas here: purchasing new equipment, redundancy payments, re-training, re-organising plant layout, and inertia. The cost of purchasing new equipment is one reason for resistance to change that an operations manager may need to overcome. New equipment can be advantageous to the operations processes of a business if it allows for higher quality or more speedy production. These factors should lead to reduced production costs, increased sales, or both, ultimately improving the profitability of the business. The high up-front cost of purchasing the new equipment is worth it if the long-term expected increase in profits exceeds the investment. The operations manager will rely on projected cost and sales forecasts to make this decision. Close communication with the marketing department is needed to make an accurate decision. The cost of redundancy payments is another reason for resistance to change that an operations manager may need to overcome. As a result of a proposed change, some positions will no longer exist – they will be out-of-date or and workers become “redundant”. Automation, computerisation and robotisation has seen many jobs in primary and secondary industries disappear. Many businesses are legally required to make redundancy payments to employees when jobs are lost. If a business is considering a change that will make a large number of long-term employees redundant, the total cost of redundancy payments may be so high that the proposed change is not worth it. The operations manager needs to make an accurate assessment of the cost of redundancy payments and be prepared to demonstrate that this is less than the benefits expected to flow from the proposed change. Close communication with the human resources department is needed to make an accurate decision. Another reason for resistance to change that an operations manager will encounter is the need for staff retraining. A new computer software program, for example, could mean that staff may have to spend a lot of time and energy learning a new skill. Some staff may fear that they will be expected to learn this in their own time, or even at their own expense. Operations managers can greatly reduce resistance to this change by providing sufficient staff training during work hours and allowing a transition period for the introduction of the new software program. The financial cost of this needs to be factored in by the operations manager. Staff concerns should be clearly addressed so that the operations manager can maintain the trust of the staff and reduce potential resistance. Low staff morale can have a negative impact on productivity and must be avoided where possible. The cost associated with reorganising plant layout is an additional reason for resistance to change. New machinery or equipment may require a change to the physical organisation of operations. Staff may have to move locations or work with different people, causing them to resist the changes. Perhaps a certain product line in a retail store may have increased in popularity, justifying a relocation to boost overall profitability. The operations manager should clearly communicate with employees about the nature of the changes, and why they are needed, so that there is as little resistance as possible. Inertia is a further reason for resistance to change that operations managers will need to overcome. Inertia refers to the tendency to want a situation to stay the same because people are comfortable and used to it. Changes creates uncertainty. If a business has a history of failed change attempts, inertia is likely to be a major cause of resistance to change. If this is the case, operations managers should focus on motivating staff and creating a positive culture that embraces change. The use of change agents may be beneficial. Operations managers should clearly set out the case for change, provide a realistic timeframe, adequate staff training where necessary, and address specific concerns of staff. Where possible, the operations manager needs to include all management levels in the decision-making process so that all see the need for the change and are able to work with their own teams to bring it about. Overall, to reduce resistance to change, operations managers must ensure that all relevant stakeholders understand the reasons for change. Managers must set achievable goals, and create a culture of change so that stakeholders are more likely to be embrace the change. Change management skills are crucial for an operations manager to move a business to a higher level of performance Global factors in business In today’s business environment, global factors have an impact on operations within a business. It is therefore vital that operations managers implement global strategies that will help a business succeed in the global market. Global sourcing has become a feature of many businesses today. Many operations departments source their inputs from countries across the globe and assemble them in other locations. The decision as to which country to source inputs from can relate to the location of the raw materials, such as tin or copper. The decision can also relate to the cost. It may be cheaper to purchase component parts from a low-wage country. The decision could relate to quality – perhaps a particular location has a highly skilled workforce which manufactures a product to a very high standard using leading edge technology. The Barbie doll is a good example of global sourcing. It is designed in the United States, has plastic pellets made in the Middle East, and body parts are assembled in China. For the toy company Mattel, this is the most cost-effective way to make this doll. Economies of scale is one benefit of global expansion. As a business expands, it has access to larger markets and is able to increase its production capacity to match the increase in sales. Economies of scale refers to per-unit costs savings that occur as a result of increasing the size of production. Put simply, as output increases, average cost of production decreases. Economies of scale can be illustrated by looking at an example of a bottling facility. The cost to set up the facility is $1 million. If the factory works part of each day and produces 1 million bottles a year, and the raw materials and labour for each bottle is $1 per bottle, then the cost to make each bottle is $2. The bottling facility could look at overseas expansion – selling its bottles into Pacific countries. This will mean that the demand will increase by ten times. The same factory, by operating additional hours in the day, will be able to produce ten times as many bottles, resulting in a much lower average cost per bottle of $1.10. By increasing its size of production, the business is able to spread the cost over more units. Economies of scale is a significant potential advantage of global expansion that operations managers should consider. The trend towards globalisation provides opportunities for operations managers to observe changing technology, competitor actions, and factors in the external business environment in order to identify potential opportunities and threats facing the business. These observations are referred to as scanning and learning, and they can provide the potential for a business to advance its position in relation to competitors. An example of successful scanning and learning would be if a high-end women’s clothing brand in Australia observed a particular fashion trend in Europe. The fashion designer for the women’s clothing brand would then incorporate this trend in the upcoming season’s designs. Another example of scanning and learning would be if a washing machine manufacturer noted that a competitor had moved its production facilities to Turkey to take advantage of a new government policy. The operations manager would need to consider whether its own operations processes would be better to be relocated from Germany to Turkey, with reduced costs and only a minor reduction in product quality. Clearly, scanning and learning in the global environment is crucial for operations managers to achieve a business’s goals. Research and development is another critical element for operations managers to consider in the ever-changing global business environment. Research and development refers to the development of new ideas and new ways of doing things. Research and Development costs can be huge for many industries and can be crucial for promoting future growth in sales and reduced costs of production. Industries for which Research and Development is crucial include the pharmaceutical industry and the car industry. Businesses in these industries spend large amounts money on research and development. Just one idea can result in huge sales and profits. Apple is a business that has spent millions of dollars on research and development over the years to identify and develop successful products. These successful products have included the mouse, touch screen technology, the iPod, the iPhone and the iPad. Clearly, global factors are a key influence on operations strategies in a business. An operations manager needs to be aware of such things as competitor activities, global changes in consumer preferences, and technological advancements. In addition, the operations manager needs to understand the potential opportunities from economies of scale and research and development. Global factors provide both threats and opportunities for the operations processes of a business.