Operations - Role and Influences.pdf

• Strategic role of operations management – cost leadership, goods/service differentiation. The Role of Operations Management Operation refers to the business processes that involves transformation or production. The creation of goods and the provision of services by businesses. The transformation...

• Strategic role of operations management – cost leadership, goods/service differentiation. The Role of Operations Management Operation refers to the business processes that involves transformation or production. The creation of goods and the provision of services by businesses. The transformation of inputs into outputs or products to be sold. This involves: • Planning activities. • Purchasing inputs. • Managing inventory. • Selecting and implementing manufacturing processes. • Developing strategies to gain a sustainable competitive advantage. Operations - Transformation of inputs into outputs The Strategic Role of Management A strategic decision is one that affects the business in the long term. The strategic goals are to improve: • Productivity. • Efficiency. • Quality of outputs. Therefore, all strategic decisions will focus on lower costs to an industry benchmark through efficiency and producing a good or service that is different to and competitive against rivals in the market. There are 2 types of strategies that are commonly used by businesses to gain and maintain a competitive advantage. These are: • Cost leadership. • Product differentiation. Cost leadership A cost leadership strategy is where a business aims to be the lowest cost manufacturer and most competitive within its industry. The products are the basic, no-frills (Coles label- Home brand) ALDI type with fewer features, perhaps lower quality and using low-cost packaging. Low costs can be achieved through: • Economies of scale in production and distribution. Economies of Scale occur when a business becomes large enough to benefit from its size. Improves negotiation for better supply rates and take advantage of better technologies. • Access to cheaper raw materials – Global sourcing (e.g. Importing from markets in China/South-East Asia where production costs much lower than Australia). • Exclusive access to a large source of low cost inputs. • Distributing the product using dealers who work with lower profit margins. (e.g. Coles and Woolworths attempt to achieve low price with slogans such as ‘everyday low prices.’). The issues that operation mangers need to be aware are: • Competitors can use the same strategy and can achieve even lower costs. • Customers do not perceive the business’s product to be equal to its competitors because competitors offer better technology, features and service. (Cost and quality interaction). • Developments in technology change consumer preferences – Innovation. • Consumers may even feel that these types of ‘throwaway are not environmentally sustainable. • A strong competitor uses aggressive marketing with heavily discounted prices. Case Studies: • IKEA achieves significant economies of scale through flat packs, increased transportation and storage costs due to smaller size. This means competitive advantage can be provided through cheaper sales. • Myer went through cost leadership transformation in 2006 by introducing 8 international distribution centres→ invested in IT which cut costs by 50% by 09. • Jet Star is an established low-cost airline in Australia. However, this low cost requires a quality sacrifice, as in 2010 it was found to have the greatest number of late flights of any domestic Australian airline. Additionally, Tiger Airways is infamous for poor service, which is again an example of sacrificing quality for cost. • Sony and Panasonic invest large amounts of money in research and development, which leads to the creation of innovative products of a greater quality, and as such these products attract a higher price to cover the cost of R&D incurred in their design. Strategies for Product Distribution Other Strategies Include: o Buying in Bulk. o Standardised Products. o High volume and automated production systems. Case Study - Qantas • Staff make up 26% of costs • Fuel 25%. • Maintenance 20%. • Qantas management has targeted $1.5 billion cost reductions by 2015 → through: Economies of scale through bargaining power with fuel, being a member of the Oneworld Alliance→ features 12 of the world's leading airlines and engages in separate bilateral agreements with British Airways, American Airways, and Japan Airways to save costs. • Technology through online booking/check in. • Waste Minimisation → Qantas reduced its waste by 21% in 2011 through recycling, energy efficient materials x in 2010→ Qantas diverted its waste to a Trigeneration waste treatment facility in Sydney → 99.8% of waste is now recycled. Product differentiation Product differentiation means distinguishing goods/services that is different to its competitors. Product differentiation can help a business establish a competitive advantage which leads to profit maximisation. It may be achieved through: • • • • • • • • Better quality than competitors. Faster delivery. Varying time spent on a service. Vary augmented features. Custom designed products. Location of operations. More features and applications = More utility & appeal. Cross-Branding – Adding value to products by offering added benefits from a crossbranding arrangement e.g. Woolworth accumulating points to reduce petrol costs. Product Differentiation: Goods • Varying the actual product features (e.g. Leather seats for motor vehicles). • Varying any augmented features – Refers to any add-ons or additional benefits (e.g. when purchasing an SLR camera, consumers have the options to buy different lenses). • Varying product quality – Low-quality model = very affordable price, Increasing quality = higher price. Product Differentiation: Services • • • • Varying the amount of time spent on a service. Varying the level of expertise brought to a service. Varying the qualifications and experience of the service provider. Varying the quality of material/technology. A differentiated product can command a higher premium price in the market as customers are attracted to the product and build up brand loyalty. Case Study – Apple • Apple’s IPod: At the time of the iPod’s introduction, most competitors were pursuing a cost-leadership strategy and the prices of mp4 players were falling rapidly as manufacturers incorporated a raft of cost-saving strategies. Apple incorporated attributes such as a cool design and intuitive technology. The strategy was responsible for Apple’s spectacular growth during the early 2000s. Case Study – Aldi • Aldi uses product differentiation, by selling unusual goods such as computers, chairs, gazebos, and other wholesale goods in comparison to other supermarkets who only sells fresh food. Goods and services in different industries Operations processes will vary for goods depending on whether they are standardized or customized goods. Standardized goods are mass produced, uniform in quality and meet a predetermined level of quality. (E.g. A Big Mac will be the same in Sydney as in Paris. Apple products will be the same worldwide despite local pricing.) Customized goods are those that varied to the need of customers, and are produced with a market focus rather than a production focus. (E.g. McDonalds customise their products throughout the world. Norway sells Mclaks (salmon), Chile uses an avocado paste as its sauce, Hong Kong uses rice burgers, Canada has lobster dinners and Germany sells is burgers with beer.) Perishable Goods require high standard of quality, safety and cleanliness, very short lead times and efficient distribution and packaging. Non-perishable Goods are more durable than perishable goods and processes need to manage all aspects of quality, from sourcing production and distribution to effective inventory managements and being highly responsive to market demand. Operations processes will vary for goods and services depending on whether they are standardized or customized. Manufacturing outputs: • Physical, tangible. • Can be reused. • More capital intensive (machinery). • Can be stored. • Hard to modify once manufactured. (e.g. Cars, Bikes). Services outputs: • Intangible. • Can only be used by customer once. • More labour intensive. • More interaction with customers. • Easier to change and customise. There are some similarities, they both: • Use technology. • Must make predictions. • Deal with customers and suppliers. • Make decisions about capacity (level of inventory). Case Study – Kmart (Retail Industry) • Kmart provides a ‘shopping experience’ and customers have expectations about the service they are purchasing. They expect the products they are purchasing to be in good condition, the surroundings to be clean and pleasant and - most importantly - a high level of customer service. In addition, they expect goods to be available when they want them and to have access to the shops when they want to shop. Case Study – Ford Motor Company (Manufacturing Industry) • There is a good component, the car, and a service component, the after sales aspects of maintenance and warranty. When the business purchases products such as engines or brakes from its suppliers, Ford expects the parts to be manufactured to the specifications it gave to the suppliers. This determines the reliability its customers expect from Ford. Ford customers also expect the car will be well designed and be available when they want it. Interdependence of operations and the business • Specialisation – Where the business is separated into different functions, each of which is highly skilled at its specific task or role. • Interdependence – where the different parts of a business must rely on each other to perform their task or role. There will be a constant flow of information between operations and the other key business functions: marketing, human resources, and finance. Operations → Finance • Operations relies on finance to provide funds/capitals to transform into output e.g. Restaurant using money to purchase raw materials (inputs) and transform into dishes. • Finance relies on operations to make goods and provide services that contribute to sales and therefore profits. Finance also create budgets to provides funds to allocate to key business areas, purchase inputs, equipment, and repairs. • Finance relies on operations to effectively allocate resources to reduce costs and maximize profitability. • The finance manager will create budgets and make funds available to purchase inputs, equipment, repairs. Operations → Marketing • Market research identifies the nature of goods consumers’ desire and marketing strategies encourage purchases and operation must supply a product that consists the features and quality consumers demand as well as reliably distributing this product to the market. Operations → Human Resources • Human resources discuss training and development needs and will ensure that enough employees with the appropriate skills. • Operations identifies the skills needed to produce the goods and services demanded by consumers. • Provide suitable staff based on operations requirements. • Industrial relations. Influences: globalization, technology, quality expectations, cost-based competition, government policies, legal regulation, environmental sustainability. Globalization is a process that is leading to the development of a single world market. Globalization gives consumers the opportunity to purchase products from the business that provides the most value for money. Globalization has created many opportunities for Australian businesses to expand overseas. First, there is the opportunity to reduce costs through establishing a global supply chain. Second, access to a global market to sell the outputs of operations. • Globalization is defined as the integration and interdependence of the economies of different countries, creating a global economy. • Integration refers to the joining together of different economies through trade, technology, deregulation, and global businesses. The reasons for the global web of operations are to drive costs down and exploit the competitive advantage each region has to offer. • Increased global market due to deregulation (lower cost of communication & transport). • Global Labour Market → increased flow of skills allowing companies to hire people from overseas. (E.g. Managing Director of David Jones is recruited by Dubai to launch new shopping centres). • Outsourcing is a practice used by different companies to reduce costs by transferring portions of work to outside suppliers in low cost countries such as China, Bangladesh, and India rather than completing it internally, companies are able to outsource due to globalization and thus achieve competitive advantage. (Strategic role of Cost Leadership) Case Study – Jetstar • Jetstar employing staff based in Singapore and have a maintenance centre based in Singapore. Inputs: Source Cheaper inputs from overseas – HR & Raw Materials and source exclusive inputs. Transformation: Outsource manufacturing. Output: Sell overseas and expand operations. 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 suppliers. • Global Web – Refers to the network of suppliers a business has chosen on the basis of lowest overall cost Different currencies • A depreciation of the Australian dollar (AUD) against the currency of the country inputs are being sourced from will lead to rising costs • Businesses use hedging. This is any strategy used by a business to reduce financial risk. This is to eliminate the risks from the value of currency appreciating and depreciating. • Global businesses use transaction exposure. This is entering into contracts to buy and sell foreign exchange to purchase inputs from businesses in other countries. • Subsidiary - A business that is owned by the global corporation that supplies inputs. Hedging uses subsidiaries so that all transactions are in the same currency. • Special contracts between global businesses called derivatives are used. Trade agreements • A bilateral trade agreement is an agreement between two countries to reduce barriers to trade and promote economic integration. Multilateral trade agreements are between more than two nations. • Regionalism has been occurring very recently. This is the classification of the world’s region based on their geography and economic links. • There have been regions forming economic alliances, e.g. Europe, the North American Free Trade Alliance, or NAFTA, members (Mexico, United States, and Canada) and the South- East Asian nations (including China). • Trading blocs- A group of nations that have formed a trade alliance by signing a multilateral trade agreement. Countries in trading blocs have less restrictions so, businesses trade with countries in the same bloc. By using large-scale operations model businesses can share costs and reduce the expense of developing, producing and distributing products to the global market. Global consumers • Globalization enables higher incomes and many parts of the world have a rapidly growing middle class who wish to buy goods and services that improve their quality of life. • Products will have to be differentiated in some aspect to suit the different culture of the local market. • Market research is needed to inspect the language, religion, and ethics. Cultures • It is advisable for global businesses use local experts that can help prevent issues caused by cultural clashes and communication problems. Technology Technology is the knowledge of how things are done. If businesses do not respond to progresses in technology could result in failure. (E.g. Nokia – Failure to respond to changes, unable to compete with Apple and Samsung). Adopting the new technologies, such as the extensive use of robots in car manufacturing, may not make a business more competitive if the technology is widely adopted but it prevents the loss of competitiveness. (E.g. Qantas – Purchased A380 to allow the business to transport customers at lower cost). • Technologies such as smart phones and the internet are drivers of globalization, enabling service-based businesses to penetrate global markets with the international distribution of information. • Strategies to acquire technology include a joint venture or strategic alliance with another business or simply purchasing businesses that have the desired technology. • Technology can result in the development of new methods of production or new equipment that helps businesses perform functions more quickly and often at a lower cost. Inputs – Source advanced machinery to be used in the production process. Transformation – Output – produce higher quantity and better-quality outputs. When making decisions about technology, factors need to consider: • The speed of change taking place. • The technology that competitors use. • The finances available for a change. • How long it will take to introduce. Robotics Robotics refers to the development of robots, which are programmable machines that have sensors that can detect changes in their environment. Use of robotics increases productivity and reduces costs. Benefits of Robots: • Don’t need breaks. • Are more precise. • Have no emotions. • Need to be paid. CAD & CAM • • Computer-aided design (CAD) is computer technology that allows architects, engineers, and designers to create and edit and modify three dimensional designs using a computer. The designs can be created based on the specifications or special conditions set by each client’s requirements. • The blueprints can be sent around the world and viewed with ease. • It allows designs to be looked at from various angles and provides a more effective visual presentation. Computer-aided manufacture (CAM) Computer technology that directly links the design process to the manufacturing process using computers. • This process provides electronic links for exchanging data, which results in time being saved and fewer mistakes being made. • With CAM software, the computer can be set to control large sections of production with greater efficiency, fewer errors and fewer staff. → This is improved from the past where manual machines are engineered depending on the design the producer wanted. Quality Expectations Quality expectations are an important influence on most operations functions. Quality, could best be defined as meeting, or exceeding, a customer’s expectations. Service: • Customer will have expectations regarding the: • Professionalism of the service provider – Cleanliness/layout of facilities. • Reliability – How efficient is the service provider. • Level of Customisation - Quality of input → Standardized or customized different price points provide different level of service, more expensive = more customized (E.g. Toni and Guy VS Just Cuts, LV VS Target). Goods: • Customers will have certain expectations regarding the: • Durability – How long the product lasts given a reasonable amount of use. • Reliability – How long the product functions without needing maintenance or repairs. • Fit for purpose – How well the product does all the things advertising claims. • Operations must be organized to maximize quality and customer satisfaction. Inputs – Source better quality raw materials. Transformation – Output – Higher quality outputs. Cost based competition Cost-based competition is a low-cost strategy concerned with driving down the costs of warehousing and transportation, and spreading overhead costs. → Best possible value of money by reducing costs of: Warehousing and transportation. • A business can gain a price advantage over its competitors by using operational strategies that lower costs. In this way the business can reduce its prices lower than its rivals. Cost advantages can be obtained by: • Outsourcing. • Using cheaper inputs. • Lowering quality of products. • • Reducing warehousing costs using distribution centres which substantially reduces overhead costs (Rent, staff, fixtures, electricity) Overhead costs are the ongoing costs of a business such as rent on premises, electricity, and wages. Cost-based competition is a strategy to reduce costs whist still maintaining quality → best value for the money, it will attract more customers and therefore achieving the competitive advantage. Case Study • Kmart is now opening 24 hours to spread its overhead costs over higher inventory turnover. • Woolworths’ managers re-engineered its warehouses and transportation logistics to reduce costs by billions of dollars and as a result were able to offer a shopping experience that induced many Coles’ customers to switch to Woolworths. Government policies Government policies can be an important influence on the operations function in a business. Government policies impacting on the operations function include regulation, subsidies and grants, and taxes and tariffs that encourage or discourage aspects of operations or ways the operation functions are conducted. • There has been a gradual reduction in ‘protection’ of Australian businesses forcing them to be more efficient in their operations and reduce costs. • Competition Policy – Monetary and non-monetary incentives for businesses to encourage businesses to become more efficient. • It’s a government policy to encourage businesses to adopt ‘green’ and environmentally friendly operating methods. • • Input – Government provides subsidies for use of recyclable material and therefore businesses will source recyclable materials (E.g. Solar panels of renewable energy). • Transformation – Reducing reliance on non-renewable energy (E.g. Carbon tax). • Output – Distribution of products (E.g. Aldi uses biodegradable plastic bag). Local Zoning and Lock out laws (E.g. Pubs and bars are not to operate at certain times). Legal regulation Legal regulations are the laws that regulate the way things can be done. Legal regulations are so important because of the potentially dangerous aspects associated with the use of equipment. • The aim of government regulation of business is to promote safety and fair business conduct. Many of the regulatory requirements exist at a local, state, and federal level. • It is the legal responsibility of the operations manager to be aware of the all laws relevant to the operations function and ensure that the business complies with them. (E.g. National Minimum Wage and WH&S). Impact of legislation Area of regulation Legislation Legal obligations and implications Workplace safety • Occupational Health and Safety Act 1991 (Cth) Employers must make sure that employees are provided with a good working environment. Hazardous material • Occupational Health and Safety Act 1991 (Cth). • Dangerous Goods (Road and Rail Transport) Act 2008 (NSW). Training, warning signs and safety precautions to prevent injury. Safe measures to transport hazardous and dangerous goods. Environmental protection Federal Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act). Operations must ensure hazardous waste, fuels and chemicals do not enter the environment. Environmental sustainability Environmental sustainability is concerned with air, water, waste and environmentally sustainable products and operations practices. • Ecological sustainability refers to the development and use of methods of production that allow resources to be used by producers today without limiting the ability of future generations to satisfy their needs and wants. (e.g. Renewable energy, recycling). • Increased awareness in contemporary society (E.g. Adidas created shoes from ocean waste – turned plastic pollution to high performance products). • Aims to reduce carbon footprint, waste, and pollution in the operation process (E.g. Aldi uses biodegradable plastic bags/Woolworth encourages customers to bring own reusable bags). • Consumers need to be aware of the cost and disposal of excessive packaging. • Society will have a positive attitude towards businesses that are environmentally friendly and good corporate citizens. • Increased cost for business, positive social impact = increased sales (e.g. Toyota Prius, ethanol E10 Fuel, recyclable packaging, and eco-friendly fluorescent bulbs). Carbon footprint= refers to the amount of carbon produced and entering the environment from operation processes → (E.g. Reduce 160 million tonnes/year by 2020 Qantas → environmentally sensitive aircrafts Boeing 787 and Airbus A380, Trigeneration wastage recycling facility in Sydney in 2010 + fuel conservation). Case Studies: • Orica Limited is a large Australian-based global business employing some 15 000 people. Its main products relate to mining and infrastructure equipment. They aim to meet the needs of customers and the community in a sustainable manner for the benefits of future generations. The Orica environmental sustainability strategy is based on the following key objectives: • Carbon neutral - no net generation of greenhouse gases to the atmosphere. • Water neutral - no net consumption of potable water. • Zero waste - no net generation of waste to landfill and innovative ways to prevent, reduce, reuse, and recycle by-product streams. • Environmentally friendly operations, products and services that have no unintended consequences to the environment and the community.’ The business has already reduced greenhouse gases by 51% in 2010 and this exceeded their target by 35%. • Adidas – Creating shoes with plastic waste collected from the ocean • WorldStrides – An educational tour company in North QLD that provides tour activities that assists environmental conservation including calculations of carbon footprint from tours and plant trees accordingly to offset impact. Corporate Social Responsibility (CSR) Corporate social responsibility refers the relationship between business and the broad society and the way this relationship is perceived and managed. • CSR is how success and profitability is determined by how well it considers the interests of employees, consumers, and the community. • Ensures that business activities benefit the society (e.g. reducing pollution, resource management that promotes sustainability, and economic sensitivity to local communities). • There’s usually a cost associated with CSR however, business receive benefits in the form of enhanced reputation (Goodwill) and consumer acceptance. (e.g. supporting disadvantaged groups - Qantas Reconciliation Action Plan→ focuses on employing Indigenous Australians). • This is an extension of the triple bottom line. (financial, social, and environmental evaluation). • Other social responsibilities are: • Human rights. • • • Corruption. Labour standards. Social Responsibility. Case Study – Tom’s Shoes • Blake Mycoskie created TOMS Shoes, a company that would match every pair of shoes purchased with a new pair of shoes for a child in need. Since 2006 Tom’s footwear has given over 60 million pair of shoes to children in need. • TOMS Eyewear helped restore sight to over 400,000 people in need. By providing prescription glasses, medical treatment and/or sight-saving surgery with each purchase of eyewear. As well as supporting sustainable community-based eye care programs, the creation of professional jobs (often for young women) and helps provide basic eye care training to local health volunteers and teachers. • TOMS Bag was founded to help provide training for skilled birth attendants and distribute birth kits containing items that help a woman safely deliver her baby. As of 2016, TOMS have supported safe birth services for over 25,000 mothers. The difference between legal compliance and ethical responsibility Ethical Responsibility refers to the business decisions that is not only legally correct but also morally correct. Many businesses publish a code of conduct. This code will cover issues such as: o Supporting charities and local community organisations o Consulting the community prior to implementing a significant change to the business o Promoting human and civil rights both in Australia and overseas. • o o o o • For operations, Ethical responsibility will be concerned with: Minimising harm to the environment Reducing waste, recycling, and reusing Producing value-for-money, quality products Improved customer service. Legal Compliance refers minimum requirements set out by the laws will impact the operations strategies used. (Prescribed standard of behaviour) For example: • Operations cannot release more than a legal maximum amount of pollution • Products must meet minimum standards for quality and safety for consumers • Products created by Operations must perform as they are promoted to • Employees must have a safe working environment (e.g. no dangerous machinery, or unsafe procedures). Legal compliance refers to the legal responsibility business and individuals must obey the law. Legal responsibility is the BARE MINIMUM whilst Ethical responsibility is what businesses do EXTRA to increase goodwill. (e.g. ANZ Bank’s mentoring scheme to encourage young indigenous people into the workforce) Case Studies The Body Shop • Staff are given 2 days paid leave to develop community projects • Low staff turnover suggests high level of employee satisfaction • Sponsoring local community projects Coca Cola • demonstrates corporate social responsibility in regard to environmental sustainability through its extensive water recycling program, which has significantly reduced water wastage at the company’s production facilities in Australia and around the world. Woolworth • In response to the $50 million cost of lost trolleys every year, Woolworths launched a tracking system for its lost trolleys, which also has the environmental benefits of removing abandoned trolleys from waterways and bushland • Environmental Sustainability and Social Responsibility Environmental sustainability is the ability to maintain the qualities that are valued in the physical environment. Generally concerned with energy efficiency and climate change, water, and waste management. • By pursuing environmentally sustainable goals a business will be contributing to a better quality of life for society. • Waste Management is a broad term that refers to the collection, transport, processing, and recycling of waste materials. The focus of waste management strategies is the reduction of landfill waste. (E.g. BMW AG design their cars to ensure that as much as possible of the car can be built from recycled materials and as much as possible of the car can be recycled. More than 80% of a modern BMW can be recycled.). • Negative Externalities. • Businesses have an Australian SAM Sustainability Index. This measure determines the performance of Australian companies in terms of their environmental sustainability and social responsibility. (How an Australian business is ranked in this index will generally tell you how good they are at promoting sustainable practices and being socially responsible). • A good public image will encourage long-term profitability. Social responsibility is the way business practices impact, in a positive way, on the society in which the business operates. Socially responsible business practices are expensive to implement in the short-term (e.g. renewable energy thorough solar panels) but there will be long term advantages. (E.g. Billabong voluntarily measures its carbon emissions using the National Greenhouse and Energy Reporting Act 2007 and adopts energy efficient practices by using LED systems which use less power in retail outlets). Operations Processes Operations processes are the activities involved in the transformation of inputs into outputs. This may also be referred to as the production system or operations system. Transformation – Refers to the conversion of inputs (resources) into outputs (goods and services) (e.g. Sony takes plastic, metal, glass, and electronic parts and transform them through design, manufacturing and assembly into numerous electronic products). • Each activity adds value so that the output has a greater value than the cost of inputs.