Study to understand Operations Management effectively!

1. Business Management a
functional focus
Chapter 8
Operations Management
Copyright 2012 FDC - Business
1
Management a functional focus

2. 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
Copyright 2012 FDC - Business
2
Management a functional focus

3. 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
Copyright 2012 FDC - Business
3
Management a functional focus

4. 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
Copyright 2012 FDC - Business
4
Management a functional focus

5. The role of Operations Management
Customer Feedback
(Design)
Input Output
Transformation Process
Performance Feedback
(Control)
Copyright 2012 FDC - Business
5
Management a functional focus

6. 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)
Copyright 2012 FDC - Business
6
Management a functional focus

7. 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
Copyright 2012 FDC - Business
7
Management a functional focus

8. 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
Copyright 2012 FDC - Business
8
Management a functional focus

9. Differences between goods and
services
• Intangibility
• Heterogeneity
• Simultaneous production and consumption
• Perishibility
Copyright 2012 FDC - Business
9
Management a functional focus

10. 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
Copyright 2012 FDC - Business
10
Management a functional focus

11. Examples – Inputs – Transformation
system - Outputs
Organisation Inputs Transformation Outputs
Post Office • ? • ? • ?
Bank • ? • ? • ?
Manufacturer • ? • ? • ?
School • ? • ? • ?

12. 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
Copyright 2012 FDC - Business
12
Management a functional focus

13. 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
Copyright 2012 FDC - Business
13
Management a functional focus

14. 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
Copyright 2012 FDC - Business
14
Management a functional focus

15. 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
Copyright 2012 FDC - Business
15
Management a functional focus

16. 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
Copyright 2012 FDC - Business
16
Management a functional focus

17. 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)
Copyright 2012 FDC - Business
17
Management a functional focus

18. 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
Copyright 2012 FDC - Business
18
Management a functional focus

19. 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.
Copyright 2012 FDC - Business
19
Management a functional focus

20. Operations objectives
The objectives that are applicable to all
operations are the:
• quality objective;
• speed (time) objective;
• dependability objective;
• flexibility objective;
• cost objective.
Copyright 2012 FDC - Business
20
Management a functional focus

21. Quality objectives
• What is quality?
• Conformance to specifications
• Fitness for use
– Value for price
– Support services
– perception
Copyright 2012 FDC - Business
21
Management a functional focus

22. 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.
Copyright 2012 FDC - Business
22
Management a functional focus

23. 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.
Copyright 2012 FDC - Business
23
Management a functional focus

24. 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.
Copyright 2012 FDC - Business
24
Management a functional focus

25. 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.
Copyright 2012 FDC - Business
25
Management a functional focus

26. Manufacturing operational processes
Project processes
High Jobbing processes
Unique Batch proccesses
- ness
Mass proccesses
Low Continuous proccesses
Low VOLUME High
Copyright 2012 FDC - Business
26
Management a functional focus

27. Service operational processes
Professional service
High
Service shop
Unique
- ness
Mass services
Low
Low VOLUME High
Copyright 2012 FDC - Business
27
Management a functional focus

28. 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.
Copyright 2012 FDC - Business
28
Management a functional focus

29. 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
Copyright 2012 FDC - Business
29
Management a functional focus

30. Vision – mission relationships
Customers Competitors
OPERATIONAL
Organisational
ACTIVITIES
Culture
Vision/ mission BUSINESS
Value created
statement STRATEGY
Organisational
Resources
Organisational Organisational
Strengths Weaknesses
Copyright 2012 FDC - Business
30
Management a functional focus

31. Approaches to operations strategy
Top- Bottom-
Down Up
Approach Approach
OPERATIONAL STRATEGY Value creation
Market Resource
Requirement Capability
Approach Approach
Copyright 2012 FDC - Business
31
Management a functional focus

32. 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)
Copyright 2012 FDC - Business
32
Management a functional focus

33. 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
Copyright 2012 FDC - Business
33
Management a functional focus

34. 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
Copyright 2012 FDC - Business
34
Management a functional focus

35. 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
Copyright 2012 FDC - Business
35
Management a functional focus

36. Conclusion
• What is the relation between purchasing,
logistics and o?perations management
Copyright 2012 FDC - Business
36
Management a functional focus