Chapter 8 slides operations management

Business Management a
functional focus

Chapter 8
Operations Management

Copyright 2012 FDC - Business
1
Management a functional focus

Learning objectives
After studying this chapter a person should be able to:
•Describe the difference between strategy and operational effectiveness
•Understand what is Operations Management
•Understand the role of Operations Management
•Understand the Transformation System
•Describe the Transformation System in a System Perspective
•Describe Inputs, Transformation and outputs
•Describe why OM is important
•Define Operations Management
•Understand OM in Small Organisations
•Describe OM in Not-for-Profit Organisations
•Describe the Characteristics of the Operations Process
2

What is operations management ?
• Operations management can be defined as all
those business functions that perform the
activities of planning, organising, leading and
controlling the resources required to produce
an organisation’s goods and services, in order
to create value. - adapted from Reid & Sanders

3

Operations management and the
value chain
OM across business OM within business
functions functions

Risk Management
Finance Margins
Secondary

Input/ HR Output/
activities

Trigger IT Result
Inbound Operations/ Outbound Marketing &
Logistics Production Logistics Sales Margins

Primary activities

4

The role of Operations Management

Customer Feedback
(Design)
Input Output
Transformation Process

Performance Feedback
(Control)

5

The Transformation System
Environment
•Goods •Technology
•Government Regulations •Suppliers
•Competitors •Economy

INPUTS TRANSFORMATION
•Capital •Alteration
•Materials •Transportation OUTPUT
•Equipment •Storage •Goods
•Facilities •Inspection
•Suppliers •Facilitating goods
•Labour •Services
•Knowledge
•Time

Action Data Action Data Data

Monitor and Control

Source: Adapted from Meredith & Shafer (220: 5)
6

The Transformation System – wine
Constraints

•Type of grapes (white/red)
•Sugar content
•Unwanted material

INPUTS
TRANSFORMATION OUTPUT
INPUTS INTO
•Yeasting process •Right quality wine A
•Grapes
NEW/DIFFERENT
PROCESS
(Bottling process)

Tools and techniques

•Yeast
•Container (Steel/wooden)
•Time

7

The Transformation System – A
System Perspective
% Service % Physical product
100 50 0 0 50 100
Medical examination
Accounting services
Handmade clothing
Cinema movie
Building bricks

8

Differences between goods and
services
• Intangibility
• Heterogeneity
• Simultaneous production and consumption
• Perishibility

9

Products vs Services
Criteria Product (product Service (service provider)
manufacturer)
Durability A physical, durable product Intangible, perishable product
Inventory Output can be inventoried Output cannot be inventoried
Customer Low contact with customers High contact with clients
involvement
Operation Large production facility Small service facility
facility
Resource Capital intensive Labour intensive
intensity
Quality The quality of the product is The quality of the service is not
easily measured easily measured
Re-usability The product can be resold The service cannot be resold
Patents A product can be patented A service can only be patented
with difficulty

10

Examples – Inputs – Transformation
system - Outputs
Organisation Inputs Transformation Outputs
Post Office • ? • ? • ?

Bank • ? • ? • ?

Manufacturer • ? • ? • ?

School • ? • ? • ?

Importance of Operations
Management
An effective operation can give four types of advantage to the
business:
• Operations management can reduce the cost of products and
services by being efficient
• Operations management can increase revenue through increased
customer satisfaction in producing quality goods and services.
• Operations management can reduce the amount of investment
(capital employed) necessary to produce the goods and service by
being effective and innovative in the use of resources.
• Operations management provides the basis for innovation by
building a solid base of operations and knowledge

12

All parts of the organisation are
Operations
Operations as a function – meaning the part of the organisation which
produces the products and services for the organisation’s external
customers.

Operations as an activity – meaning any processing of input resources
in order to produce products and services, for either internal or external
customers.

NB – ALL PARTS OF THE ORGANISATION ARE
OPERATIONS

13

Characteristics of operation processes
Inputs – Transformation - Outputs

But these activities do differ in:

V = The Volume of their output

V = The Variety of their output

V = The Variation in demand

V = The degree of Visibility which customers have of the
product/service

14

The VOLUME dimension

High Volume Operations Low Volume Operations
 The transformation is highly  There is low repetition in the
repeatable transformation process
 Repeatability leads to  Employees perform more than
specialisation one task
 Specialisation leads to  More tasks require less
customisation systemisation
 Customisation is capital  Low volume leads to high unit
intensive costs
 High volume leads to lower
unit cost

15

The VARIETY dimension
Low Variety Operations High Variety Operations
 The transformation process is  The transformation process
well- defined can be highly flexible
 Well-defined processes  The transformation can be
requires standardised highly complex
processes  The transformation process
 Standardised transformation meets the customer’s specific
processes are very routinely needs
by nature  High variety operations lead to
 Low variety in the high unit costs
transformation processes
leads to a lower unit cost

16

The VARIATION dimension
Low Variation Operations High Variation Operations
 The transformation process is stable  Operations needs to consider the
 The transformation process is highly changing demand patterns
routinely  Operations must be highly flexible
 The demand and output are to adapt operational processes, in
predictable very short notice, to changing
 There is a relatively high utilisation demands
of inputs  Anticipation (how will the customer
 Low variation leads to low unit respond tomorrow) of customer
costs behaviour is required
 Organisation must be able to change
capacity (The inputs and the
transformation must be changeable)

17

The VISIBILITY dimension
Low Visibility Operations High Visibility Operations
 There is a time lag between  There is a short waiting tolerance.
production and consumption.  Service perceptions play a role in the
 The transformation process and output quality of service.
from the transformation is highly  A high degree of customer contact
standardised. skills is required: the customer is
 Employees in the transformation closely involved in the transformation
process do not require a high level of process
contact (personal) skills  There is a high degree of variety
 There is a high staff utilisation as present as you do not know what the
employees concentrate on only a customer requires and needs, to adapt
limited number (few) tasks to the situation in a moment
 The transformation process requires  The per-unit cost is very high as the
the centralisation (perform in one employee is dedicated to the customer
place) of the transformation for a variety (not standardised) set of
 Low visibility leads to low unit cost services

18

The implications of the four V’s
All four V’s have implications for the cost of creating the product or
service.

High volume, low variety, low variation and low visibility help to keep
transformation costs down – conversely will

Low volume, high variety, high variation and high visibility carry a cost
penalty for the transformation process and organisation as a whole.

The position of an organisation (and operations) in the four dimensions
is determined by the demand of the market it is serving.

19

Operations objectives
The objectives that are applicable to all
operations are the:
• quality objective;
• speed (time) objective;
• dependability objective;
• flexibility objective;
• cost objective.

20

Quality objectives
• What is quality?
• Conformance to specifications
• Fitness for use
– Value for price
– Support services
– perception

21

Speed / time objectives
Speed inside operations can also lead to the
following benefits:
• speed reduces inventory;
• speed increases liquidity;
• speed reduces risk (uncertainty about the
future);
• speed can create a competitive advantage;
• speed provides slack time.

22

Dependability objective
Inside operations, dependability provides various
benefits, such as:
• saving time;
• saving money;
• ensuring stability in operations;
• easing scheduling of the input-transformation-
output process;
• influencing perceptions, which in turn influences
the quality objective.
23

Flexibility objective
Inside operations, flexibility provides the various
benefits, such as:
• saving time;
• saving costs;
• maintaining dependability;
• speeding-up response to customer or market
needs.

24

Cost objective
• The above four operations objectives are very
important – but all of them influence the cost
objective.
• The input into the transformation process needs
to be of the correct quality (A-grade anthracite),
at the right time (Just in time – JIT), and the
demand can vary due to seasonal changes – but
at the right price (cost).
• The lower the input cost (fixed cost and variable
costs) the higher the potential profits.
25

Manufacturing operational processes

Project processes

High Jobbing processes

Unique Batch proccesses
- ness

Mass proccesses

Low Continuous proccesses

Low VOLUME High

26

Service operational processes

Professional service
High

Service shop
Unique
- ness
Mass services

Low

Low VOLUME High

27

Responsibilities of Operations
Management
The responsibilities of operations managers in the effective and efficient
production of goods and services can be divided into:
DIRECT RESPONSIBILITY – for the activities which produces and
delivers products and services.

INDIRECT RESPONSIBILITY – for the activities of the other functions of
the organisation.
BROAD RESPONSIBILITY – to respond to the emerging challenges of
OM in the future.

28

Direct responsibilities
• Understanding the strategic objective of the organisation –
see slide 30
• Developing an operations strategy for the organisation – see
slide 31
• Designing the products, services and processes for the
organisation
– Design, physical product, process and work place
• Management tasks for operations
– Planning, controlling, sequencing - see slide 32
• Improving the performance of operations
– Benchmarking, TQM

29

Vision – mission relationships

Customers Competitors

OPERATIONAL
Organisational

ACTIVITIES
Culture
Vision/ mission BUSINESS
Value created
statement STRATEGY

Organisational
Resources

Organisational Organisational
Strengths Weaknesses

30

Approaches to operations strategy
Top- Bottom-
Down Up
Approach Approach

OPERATIONAL STRATEGY Value creation

Market Resource
Requirement Capability
Approach Approach

31

Sequencing
• Physical constraints sequencing
• Customer priority sequencing
• Due date sequencing
• Last-in-first-out sequencing (LIFO)
• First-in-first-out (FIFO)
• Longest operating time (LOT)
• Shortest operating time (SOT)

32

Indirect responsibilities
BUSINESS FUNCTIONS Indirect responsibilities of Indirect responsibilities of
the Operation function the other function
Logistics function Provide logistics with the Understand the input needs
input standards for optimal in relation to the required
transformation standards

Financial function Provide finance with relevant Provide financial analysis for
operational data performance and decisions
Human resource (HR) Provide HR with the required Understand the people
function job specifications competencies required by
operations

Marketing function Assist marketing in defining Understand capabilities and
products and services constraints of operations
Information technology Understand and provide the Provide requirements for
function relevant operational systems design, planning
information required and improvement

33

Broader Responsibilities
Increasingly recognised that organisations and their activities have a set
of broader responsibilities.

Some are longer term focused, while others focus on other stakeholders
of the organisation.

Organisations interpret these responsibilities in different ways – but the
following are of particular relevance to operations managers:
• Globalisation
• Environmental protection
• Social responsibility
• Technology awareness
• Knowledge management

34

Product / process design
Market research, competitors,
customers, suppliers, sales, research
& development

SELECTION
• Idea generation
• Screening & testing

PRODUCT DESIGN
Rejects
• Pre-liminary design
to • Evaluate & improve
garbage • Final design

PROCESS DESIGN
• New operational processes

35

Conclusion
• What is the relation between purchasing,
logistics and o?perations management

36

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