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PRODUCTION
MANAGEMENT
Lecture 2
Operations performance and
Operations Strategy
Introduction
The quality objective
The speed objective
The dependability objective
The flexibility objective
The cost objective
The ‘top-down’ and ‘bottom-up’ perspectives
The market requirements and operations
resources perspectives
The process of operations strategy
EXAMPLE
Operations management can have a very significant impact on a business’s financial
performance. Even when compared with the contribution of other parts of the business, the
contribution of operations can be dramatic. Consider the following example. Kandy Kitchens
currently produce 5,000 units a year. The company is considering three options for boosting
its earnings. Option 1 involves organizing a sales campaign that would involve spending an
extra a100,000 in purchasing extra market information. It is estimated that sales would rise by
30 per cent. Option 2 involves reducing operating expenses by 20 per cent through forming
improvement teams that will eliminate waste in the firm’s operations. Option 3 involves
investing a70,000 in more flexible machinery that will allow the company to respond faster to
customer orders and therefore charge 10 per cent extra for this ‘speedy service’. Table 2.2
illustrates the effect of these three options.
ANALYSIS OF EXAMPLE
• Option 1:Increasing sales volume by 30 per cent certainly improves the
company’s sales revenue, but operating expenses also increase.
Nevertheless, earnings before investment and tax (EBIT) rise to
a1,000,000.
• Option 2 :But reducing operating expenses by 20 per cent is even more
effective, increasing EBIT to a1,200,000. Furthermore, it requires no
investment to achieve this.
• Option 3 :The third option involves improving customer service by
responding more rapidly to customer orders. The extra price this will
command improves EBIT to a1,000,000 but requires an investment of
a70,000.
• Note how options 2 and 3 involve operations management in changing
the way the company operates.
• Note also how, potentially, reducing operating costs and improving
customer service can equal and even exceed the benefits that come from
improving sales volume.
The ‘stakeholder’ perspective on
operations performance
Operations can contribute to competitiveness
Top management’s performance objectives
for operations
• Of all stakeholder groups, it is the organization’s top management who
can have the most immediate impact on its performance.
• They represent the interests of the owners (or trustees, or electorate, etc.)
and therefore are the direct custodians of the organization’s basic purpose.
• They also have responsibility for translating the broad objectives of the
organization into a more tangible form. So what should they expect from
their operations function.
• Broadly they should expect all their operations managers to contribute to
the success of the organization by using its resources effectively.
• To do this it must be
• creative, innovative and energetic in improving its processes, products
and services. In more detail, effective operations management can give
five types of advantage to the business:
OM five types of advantage to the
business
• It can reduce the costs of producing products and services, and being
efficient.
• It can achieve customer satisfaction through good quality and service.
• It can reduce the risk of operational failure, because well designed and
well run operations should be less likely to fail, and if they do they
should be able to recover faster and with less disruption (this is called
resilience).
• It can reduce the amount of investment (sometimes called capital
employed) that is necessary to produce the required type and quantity
of products and services by increasing the effective capacity of the
operation and by being innovative in how it uses its physical resources.
• It can provide the basis for future innovation by learning from its
experience of operating its processes, so building a solid base of
operations skills, knowledge and capability within the business.
The Five Operations Performance Objectives
1. Quality: You would want to do things right; that is, you would not want to make
mistakes, and would want to satisfy your customers by providing error-free goods
and services which are ‘fit for their purpose’. This is giving a quality advantage.
2. Speed : You would want to do things fast, minimizing the time between a
customer asking for goods or services and the customer receiving them in full,
thus increasing the availability of your goods and services and giving a speed
advantage.
3. Dependability: You would want to do things on time, so as to keep the delivery
promises you have made. If the operation can do this, it is giving a dependability
advantage.
4. Flexibility: You would want to be able to change what you do; that is, being able
to vary or adapt the operation’s activities to cope with unexpected circumstances
or to give customers individual treatment. Being able to change far enough and
fast enough to meet customer requirements gives a flexibility advantage.
5. Cost: You would want to do things cheaply; that is, produce goods and services
at a cost which enables them to be priced appropriately for the market while still
allowing for a return to the organization; or, in a not-for-profit organization, give
good value to the taxpayers or whoever is funding the operation. When the
organization is managing to do this, it is giving a cost advantage.
The Quality Objective
• Quality is consistent conformance to customers’
expectations
• Quality is the most visible part of what an
operation does
• It is something that A customer finds relatively
easy to judge about the operation
• It is clearly A major influence on customer
satisfaction or dissatisfaction
• A customer perception of high-quality products
and services means customer satisfaction
• And therefore the likelihood that the customer
will return.
Quality Inside The Operation
• Quality reduces costs. The fewer mistakes made
by each process in the operation, the less time
will be needed to correct the mistakes and the less
confusion and irritation will be spread.
• Quality increases dependability. Increased costs
are not the only consequence of poor quality. At
the supermarket it could also mean that goods run
out on the supermarket shelves with a resulting
loss of revenue to the operation and irritation to
the external customers.
The Speed Objective
The Speed Objective
• Inside the operation, speed is also important.
• Fast response to external customers is greatly
helped in:
• decision-making and
• speedy movement of materials and
• information inside the operation.
Speed inside the operation
• Speed reduces inventories.
• Speed reduces risks.
– Forecasting tomorrow’s events is far less of a risk
than forecasting next year’s.
– The further ahead companies forecast, the more
likely they are to get it wrong.
– The faster the throughput time of a process the
later forecasting can be left.
The dependability objective
Dependability inside the operation
• Dependability saves time
• Dependability saves money.
• Dependability gives stability
The flexibility objective
The flexibility objective
• Product/service flexibility –
– the operation’s ability to introduce new or modified
products and services;
• Mix flexibility –
– the operation’s ability to produce a wide range or mix of
products and services;
• Volume flexibility –
– the operation’s ability to change its level of output or
activity to
• Produce different quantities or volumes of products and
services over time;
• Delivery flexibility –
– the operation’s ability to change the timing of the delivery
of its services or products.
Flexibility inside the operation
• Flexibility speeds up response.
• Flexibility saves time.
• Flexibility maintains dependability.
Low cost is a universally
attractive objective
• Productivity
• Single-factor productivity
• Multi-factor productivity
Single-factor productivity
• Often partial measures of input or output are
used so that comparisons can be made. in the
automobile industry productivity is sometimes
measured in terms of the number of cars
produced per year per employee. This is called
a single-factor measure of productivity.
• Single-factor productivity=Output from the operation
One input to the
operation
The cost objective
• Productivity is the ratio of what is produced
by an operation to what is required to
produce it. The measure that is most frequently
used to indicate how successful an operation is
at doing this is productivity.
• Output from operations
Input to operations
Multi-factor productivity
• Total factor productivity is the measure that
includes all input factors.