role of operations management

● strategic role of operations management - cost leadership, good/service

differentiation

Cost leadership:
○ When a business reduces its overall production costs so that the sales price is reduced
○ Provides a competitive advantage = increased production volumes
○ Economies of scale is the number one way to reduce costs
○ Can be achieved through standardisation, avoiding overextension of human resources,
relocation, offshore outsourcing, changing suppliers

Good/service differentiation:
○ Distinguishing a product from that of competitors
○ A product can be differentiated through its features, quality and durability
○ A service can be differentiated through the amount of time spent on the service, level
of expertise, how effective the service was after completion
○ Two businesses can undergo cross branding to enhance the value of their products →
consumers gain benefits from the ally business e.g rewards points to spend

● goods and/or services in different industries

GOOD SERVICE

Standardised Mass produced, homogeneous in The way the service is performed and
characteristics and quality the outcome is identical for
consumers

Example iPhone Movies

Customised Characteristics and features The time, expertise and outcome of a

specifically cater to a consumer’s service is different for each consumer
needs to meet individualised needs

Example Personalised phone case Lawyer

Industries Secondary, tertiary Tertiary, quaternary and quinary

 PERISHABLE GOODS NON-PERISHABLE INTERMEDIATE GOODS
GOODS

○ Have to be ○ Goods that do not have ○ Have undergone one stage

used/consumed by a
specific date
○ Short period between
production, cartage and
distribution
○ Safety and cleanliness
maintained during
production + storage
an expiry date
○ Quality management is
extensively undertaken
due to increased time
frame
of operations but are further
processed to become
outputs

E.g // milk E.g // car E.g // glass

● interdependence with other key business functions

Marketing ○ The design of products and packaging is created through operations

○ Product innovation and research
○ Consumer demand as a result of an effective marketing mix may impact the
volume and quality of operations
○ Distribution channels may impact logistics, supply china and inventory
issues

Finance ○ Budgets to allocate capital to operations

○ Reduce operational costs to achieve profitability
○ Monitoring cash flows and revenue to meet current demand
○ Adapt operations to meet financial goals and forecasts

Human resources ○ The need for more or less employees, due to outsourcing or automation
○ Retraining/education and amendments to organisational structure due to
new technology and operational processes

influences

● globalisation, technology, quality expectations, cost-based competition,

government policies, legal regulation, environmental sustainability

INFLUENCE DEFINITION INFLUENCE ON OPERATIONS

Globalisation ○ When businesses transfer their ○ Businesses may establish

capital, labour, technological production plants in nations with
and intellectual resources cheaper taxation, property and
between national economies labour costs
○ Depreciation of currency may

Technology ○ Integrating devices, machinery
and digital applications in
operations to enhance
productivity and efficiency
○ Quality and efficiency of
technology determined by
availability of staff and funding
Quality ○ How effective and appealing
expectations the overall design, structure,
functionality and provision of a
good or service is
○ Durability, reliability, fit for
purpose
Cost-based ○ When a business maintains cost
competition leadership through operations
by alleviating fixed and
variable costs
○ Find ways to reduce costs and
match the costs of competitors
Government ○ Ensures competitive behaviours
policies that are safe and ethical
○ Encourages growth and
innovative operations
○ Grants funding and subsidies to
businesses e.g Aus-Industry
○ Deregulates trade
Legal regulations ○ State or federal laws that
businesses must comply with
○ Objective is to promote safe
and fair business practices
result in increased production
costs
○ Trade agreements and alliances
allow for broader distribution
and decreased costs
○ Lessens the need for human
resources, thereby alleviating the
cost of inputs
○ Used for quality management
and improvement
○ Increase speed of production
○ May malfunction and be
expensive outright
○ Businesses must invest in more
durable and viable inputs whilst
keeping costs at a minimum
○ More effective quality and
supply chain management
systems must be implemented
e.g retraining staff, new
technology
○ Staff providing a service must be
competent, efficient and
professional
○ Globalisation may be undertaken
to alleviate operational costs
whilst maximising profitability
in the global market
○ Investing in efficient and updated
technologies to lessen the need
for human resources and regular
maintenance costs
○ Fair Work Act → set working
conditions and rights which may
increase costs
○ Taxes on land and material use
causes businesses to modify their
inputs and transformation
processes
○ Competition and Consumer Act
(2010)
○ Occupational Health and Safety
○ Sex Discrimination Act
○ Workers Compensation Act
○ Anti-Discrimination Act
 ○ Environmental Protection and
Biodiversity Conservation Act

Environmental ○ When businesses adopt ○ Investment in renewable inputs

sustainability sustainable and renewable and technology → operational
inputs to reduce their ecological structures and required skill sets
footprint of employees modified

● corporate social responsibility

○ Consumer awareness of environmental and ethical business practices e.g
exploitation, working conditions, ecological impact of operations

𑁋 the difference between legal compliance and ethical responsibility

LEGAL COMPLIANCE ETHICAL RESPONSIBILITY

A business complies to the law as a minimum
Prioritises profitability over ethical
responsibilities
A business complies to all laws whilst going
further to improve working conditions and the
impact of their operations
Shows that profitability is not their priority → gain
consumer loyalty through respecting needs of the
community

E.g // businesses may undergo offshore E.g // paying employees above the minimum
outsourcing to take advantage of lower wage requirements
labour costs → no consideration of employee
human rights

𑁋 environmental sustainability and social responsibility

ENVIRONMENTAL SUSTAINABILITY SOCIAL

RESPONSIBILITY

Ensuring that operational processes do not cause Business that has the objective of fostering long
degradation of natural resources or pollution term growth whilst providing for the greater good
of society

E.g // products that can be reduced, reused E.g // businesses that do not rely on child labour
and recycled
 operations processes

● inputs

𑁋 transformed resources (materials, information, customers)

Materials Raw materials and intermediate goods which are transformed into outputs

Information Knowledge obtained from research and investigation

○ Internal → within the business e.g financial records, sales statistics
○ External → outside of the business e.g statistics from the ABS, media
and academic reports

Customers When the needs and habits of consumers are the basis of inputs and therefore
the final output

𑁋 transforming resources (human resources, facilities)

Human resources Knowledge, skills and expertise that determines the level of productivity
and efficiency

Facilities Machinery, technology, plant layout and location of the operational process

● transformation processes

𑁋 the influence of volume, variety, variation in demand and visibility

(customer contact)

Volume ○ The number of goods or services that need to be produced

○ High volume → mass production
○ Low volume → products that are handmade, stoppages

Variety ○ The number of variations of a product

○ More variety in g/s → more expensive as it tailors to specific
needs

Variation in ○ Changes in demand over time

demand ○ May be due to weather, holidays, events
○ Operations must be adapted

Visibility ○ How visible the operations process is to consumers

○ Leads to higher costs → human resources
○ Consumers are more tolerant to longer lead times as they can
see processes being undertaken
 𑁋 sequencing and scheduling - Gantt charts, critical path analysis

Sequencing: the order which activities occur

Scheduling: the duration of each activity

○ Gantt charts
➢ Shows the activities that need to be completed in order and the
duration of each activity
➢ Advantageous in allowing managers to monitor progress, organise
resources and plan the time needed to meet goals

○ Critical path analysis

➢ Tool depicting a network of operational activities
➢ Each path has a sequence and shows the duration of each activity
➢ The longest path is the critical path → ensures that all tasks are
completed to produce the output

Path 1 (top) 2+2+6+3+3 16 hours

 Path 2 (middle) 2+6+2+3 13 hours

Path 3 (middle-low) 2+6+5+8 21 hours

Path 4 (low) 7+5+8 20 hours

∴ path 3 is the critical path

𑁋 technology, task design and process layout

Technology ○ A device that is utilised in the operations process

○ Office technology e.g printers, computers
○ Manufacturing technology e.g robotics, computer-aided manufacturing
and computer-aided design

Task design ○ Breaking down the number of tasks that need to be completed and
determining the most appropriate staff to do these
○ Recruiting staff based on skills and experience → whether they are
compatible with job requirements

Process layout ○ How equipment and machinery are arranged

○ Intermittent production → low volumes of inputs with a high
variety, layout divided into specific areas/teams
○ Mass/product production → assembly line of machines ordered in
sequence
○ Fixed position layout → heavy/bulk products remain in one location
due to their weight
○ Office layout → common and small work spaces, innovative for
employee satisfaction

𑁋 monitoring, control, improvement

Monitoring ○ Measuring actual performance against forecasted performance

○ Key performance indicators (KPIs) are used to control processes e.g
defects, volume of inventory

Control ○ When KBFs are assessed against business goals

○ Corrective action is taken if needed

Improvement ○ Alleviating operational discrepancies, bottlenecks and wastage to

improve quality, cost, efficiency and lead times
○ Six sigma: define, measure, analyse, improve control
 ● outputs

Customer ○ Meeting and exceeding customer needs and expectations

service ○ Consumer dissatisfaction → corrective action needs to be taken
○ Objective is to maintain consumer loyalty and expand consumer base

Warranties ○ Claims that are made against defective goods → businesses revise
transformation processes since they know the source of the defect
○ Longer consumer warranties → more confident that consumers are in product
durability

operations strategies

● performance objectives - quality, speed, dependability, flexibility, customisation,

cost

Quality ○ How effectively a good or service meets consumer expectations

○ Higher quality inputs → increased costs → increased unit price

Speed ○ How long it takes for operations processes to adapt to market

demand
○ E.g shorter lead times, faster processing, reduced wait times

Dependability ○ How reliable a business’ outputs are

○ Goods → how long the product is useful before it fails →
measured by warranties
○ Service → consistent service standards → measured by
complaints

Flexibility ○ How quickly operational processes can adapt to market

changes
○ Goods → increasing volume of production to meet demand
○ Services → more human resources, technology, training

Customisation ○ Individualised products created to meet specific needs

○ Increased production costs as goods aren’t generally mass
produced
○ Mass customisation → mass production of products with
distinctive features

Cost ○ Allevating costs to achieve cost leadership

○ Ensuring that quality and profitability is maintained
 ● new product or service design and development

DESIGN DEVELOPMENT

○ Propounding product concept ○ Refining operations processes in

○ Market research accordance to consumer feedback
○ Designing and testing out the prototype ○ Launch and distribution of a product
(trialed by prospective consumers)

● supply chain management - logistics, e-commerce, global sourcing

○ Managing the flow of supplies through operations (inputs, transformation

processes and outputs)

Logistics ○ How products are distributed to consumers e.g transportation

○ Must be cost effective and produce short lead times
○ Storage, warehouse and distribution centres → holds stock, short-term
storage for retailers → larger = more costs
○ Material handling and packaging

E-commerce ○ Using technology, mainly through automated ordering of stock, to sustain

lead times and output
○ E-procurement → if stock falls to a predetermined point, the supplier will
continue to supply even without a formal request from the business
○ B2B (business-to-business)→ directly selling to another business
○ B2C (business-to-consumer) → directly selling to a consumer

Global sourcing ○ The purchasing of inputs → business purchases supplies without being
constrained to location → ensures cost minimisation
○ Supplier rationalisation → business compares all suppliers and chooses
the most reliable (short lead times) and cost effective
○ Backwards vertical integration → ownership of suppliers for reduced
costs, reliability and more control
○ Flexible supply chain → having minimum stock to avoid higher costs
 ● outsourcing - advantages and disadvantages

○ Outsourcing is when businesses acquire external providers to perform business

activities

ADVANTAGES DISADVANTAGES

○ Access to skills/resources currently not ○ Cost minimisation may take 2 or 3 years

within the business → businesses have to repay the cost of
○ Cost minimisation organisational changes and
○ Improved product quality accommodating for outsourcing
○ Business can focus on KBFs that they ○ Language barriers may cause
cannot outsource misunderstanding
○ Strategic benefits: ○ Security of business information may be
1. Vendor has previous industry impeded
experience ○ Loss of control over standards
2. Passing barriers that prevent foreign ○ Changes to organisational structure and
companies from trading employment → redundancies
3. Work completed overnight due to ○ Adapting information technology to suit
different time zones the vendor
4. Vendor may suggest innovative
business solutions

● technology - leading edge, established

LEADING EDGE ESTABLISHED

Most recent technological advancements Technology that has already been established
but is broadly used

Provides businesses with a competitive Monitors and controls basic production

advantage → product innovation, new standards
markets

E.g // 5G E.g // robotics

 ● inventory management - advantages and disadvantages of holding stock, LIFO
(last-in-first-out), FIFO (first-in-first-out), JIT (just-in-time)

HOLDING STOCK

ADVANTAGES DISADVANTAGES

○ When stock is available, consumer ○ Increased insurance, cartage,

demand can be met
○ If a specific product runs out, an
alternative can be offered
○ Reduces lead times
○ Older stock can be sold at reduced
prices → improve cash flow
○ Products made in bulk achieve the
economies of scales
handling, labour and storage costs
○ Obsolete or perishable products may
be wasted
○ Labour, energy and capital resources
cannot be used elsewhere
○ Products decrease in value over
time

*THE MOST RECENT STOCK IS VALUED MORE THAN OLDER STOCK

LIFO ○ Most recent stock brought into inventory are sold first
(last-in-first-o ○ Ensures that profitability is maximised when demand is high as the
ut) most valuable stock is sold first
○ Used during inflation as businesses can match revenue and costs →
ensures that losses aren’t incurred
○ Earlier stock depreciates in value → increased inventory

FIFO ○ Oldest stock in inventory is sold first

(first-in-first- ○ Most common management approach
out) ○ Reduces wastage and therefore losses
○ Viable for a business who is experiencing increased inventory costs as
the stock will not decrease in value → higher profit margins

JIT ○ Purchases stock to meet current consumer demand

(just-in-time) ○ Alleviates storage and insurance costs
○ Must be quickly adaptable to market demand

E.g. a business orders (in chronological order):

1. 200 pairs of joggers at $30 each → sells 150 for $50 each
2. 100 pairs of joggers at $35 each → sells 60 for $55 each
At the end of the accounting period, 210 of the 300 pairs were sold.
 Calculate the total costs of stock, sales and gross profit
LIFO FIFO

Sales (the same for 150 x $50 = $7500

both) 60 x $55 = $3300
= $10800

Costs 100 x $35 = $3500 200 x $30 = $6000

110 x $30 = $3300 10 x $35 = $350
= $6800 = $6350

Gross profit (sales $10800 - $6800 $10800 - $6350

- costs) = $4000 = $4450

● quality management
𑁋 control
𑁋 assurance
𑁋 improvement

○ Quality management is process that ensures products meet quality standards and are
therefore reliable, durable and fulfil their functionality
Quality control ○ Testing the final output at the end of production
○ Benchmarks predetermined based off consumer expectations
○ Actual performance measured against standards
○ If outputs do not meet standards, the batch isn’t sold

Quality assurance ○ Having staff check that products meet standards at every stage of the
assembly line
○ Reduces prospect of defects
○ Motivates staff it as it provides them with responsibility

Quality ○ Adapting processes over time to improve quality standards

improvement ○ Eliminates defects and gradually enhances operations
○ Workers have input into how processes can be improved

● overcoming resistance to change - financial costs, purchasing new equipment,

redundancy payments, retraining, reorganising plant layout, inertia

Financial costs ○ Purchasing new equipment

○ Retraining staff
○ Reduncies
○ Changes in organisational structure and plant layout

Purchasing new ○ Usually expensive but a long term investment

equipment ○ Results in shorter lead times
○ Improved output volumes
 ○ Reduced waste
○ Improved quality

Redundancy ○ Value of payout depends on years of service, skill, outstanding

payments wages and leave
○ During capital-labour substitution, redundancy costs can be high as
several employees are leaving

Retraining ○ New technology or organisational structure requires the skills of

staff to be aligned with changes
○ Decreases productivity for a short period of time whilst staff are
being trained

Reorganising plant ○ Costs including removing, transporting and installing new

layout equipment
○ Productivity decreases for a short period but this is made up for
with improved productivity and efficiency thereafter

Inertia ○ Employees are fearful and uncertain about change

○ Managers must consider the timing, pace and impact of change
○ The roles and responsibilities of employees should be
communicated in advance
○ A positive business culture and support for employees is essential

● global factors - global sourcing, economies of scale, scanning and learning,

research and development

Global sourcing ○ When a business outsources services or acquires inputs from the most
cost effective location without restrictions
○ Advantages: access to leading-edge technology, labour specialisation,
ability to operate for more hours per day
○ Disadvantages: relocating operations, ensuring compliance to different
national regulations, inflation of currency exchange rates, language
barriers, increased supply chain costs

Economies of ○ Producing a large volume of outputs at a reduced cost

scale ○ Increased productivity and profitability since more markets can be
accessed
○ Attained through capital + technological investment, HR training and
global advertising

Scanning and ○ Observing and emulating the practices of successful businesses

learning ○ Businesses take corrective action on strategies to improve
○ Social media of competitors, publications, forums, conferences and
experiences of staff that previously worked in other businesses

Research and ○ Long term investment in R&D creates leading-edge technologies

development ○ Generates innovative and quality products
(R&D) ○ R&D is centred around the needs of the target market