Operations Management Notes

Theme 1: Operations Management (Chapter 7)

Objectives/Outcomes

• LO1: Discuss the evolution of operations management
• LO2: Discuss the strategic importance of operations management
• LO3: Differentiate between goods and services
• LO4: Apply the transformation process
• LO5: Interpret operational efficiency calculations
• LO6: Examine the future trends and challenges of operations management

Introduction and Overview of Operations Management

• Operations management has changed how organizations conduct business.
• Organizations now compete on supply chains, not just products/services.
• Operations management impacts all organizations, regardless of size, as they strive for efficient and effective delivery of products and services.
• Organizations must have the capacity and manpower to manage operational challenges.

OP Defined

• Operations management is an organizational function that acquires and efficiently utilizes resources to achieve organizational goals.
• It's a process including planning, organizing, controlling, and supervising production and manufacturing processes.
• Operations management involves managing people, equipment, technology, information, and other resources for producing goods and services.
• It converts materials and labor into goods and services as efficiently as possible to maximize profit.
• In summary, operations management measures productivity, focusing on the ratio of inputs to outputs and reducing wastage.

OP Defined (Continued)

• Operations management (OM) is the business function responsible for managing the process of creating goods and services.
• It administers the complete production timeline of a service/product from input to finished stage, involving planning, organizing, and supervising operations, manufacturing, and service delivery.
• It involves planning, organizing, coordinating, and controlling all resources needed to produce a company’s goods and services.

Examples of Operations Management

• Healthcare: Ensuring efficiency in high-quality care delivery, overseeing administrative costs, managing claims and billing, and legal compliance.
• Manufacturing: Sourcing materials, managing factories, maintenance, overseeing inventory, and ensuring quality for products like home appliances.
• Restaurant: Facility maintenance, employee training and supervision, financial planning, inventory management, compliance, and payroll.
• Retail: Sourcing, inventory, staffing, logistics, store management, and customer service across brick-and-mortar, e-commerce, and chain stores.
• Transportation: Overseeing vehicle maintenance, fuel supply, routing, staffing, and communication.

Introduction and Overview of Operations Management (Continued)

• Efficiency: The relationship between planned and actual resources applied to achieve a goal. It is the ability to achieve an end goal with little waste, effort, or energy. For example, when a process or activity maximizes outputs with given inputs.
• Effectiveness in Management: The capability of management to achieve desired targets in the specified time, focusing on doing what is right.
• Efficiency refers to doing the task correctly, timely, and at minimum possible cost.
• Operations management impacts organizations, ensuring efficient and effective product/service delivery. Smaller organizations may lack the capacity to manage operations due to limited employees, leading to overlapping roles.

Evolution of Operations Management

• Operations management effectively utilizes resources to achieve organizational goals.
• Operational processes, metrics, and methodologies influence the strategic vision of an organization.

Evolution of Operations Management - Principles

• Heizer, Render, and Munson's 16 principles:
  • Unified purpose: Involve lower-level employees in decision-making to foster understanding and create a shared purpose for achieving objectives.
  • Competitor analysis: Determine customer spending patterns to create a competitive advantage.
  • Collaborate with customers: Determine customer needs and buying preferences.
  • Continuous rapid improvements: Invest in improvement tools and techniques for quicker responses, better quality, and flexibility.
  • Focus: Adhere to specified product designs, processes, and activities to prevent unauthorized changes.

Principles of Operations Management (Continued)

• 6. Maintain Equipment: Regularly maintain machinery before considering replacement.
• 7. Organize Resources: Efficient resource organization contributes to efficient production and timely order fulfillment.
• 8. Human Resources Investment: Upskill employees through cross-training, safety initiatives, job rotation, and performance rewards.
• 9. Pull System: Produce only what is required to reduce waste.
• 10. Cut Flow Time: Review processes to remove non-value-adding activities and deliver goods/services faster.

Principles of Operations Management (Continued)

• 11. Fix Causes: Identify and address the root cause of problems rather than treating symptoms.
• 12. Visibility Management: Encourage employees to work towards strategic objectives and publicize achievements to develop competency and increase productivity.
• 13. Total Quality Control: Ensure materials, processes, and partners align with best practices.
• 14. Cut Set-Up Time: Provide additional support to processes and activities for efficient flow from production to customer.
• 15. Reduce Human Error: Ensure machinery functions optimally at all times.
• 16. Simple Best Equipment: Procure simple, flexible, multifunctional machines to reduce operational costs.

Strategic Importance/Role of Operations Management

• Operations management must collaborate and communicate with senior management regarding strategic decisions (strategic, tactical, and operational levels).
• The following are the ten strategic operations management decisions:
  • 1. Design of goods and services: Meet the requirements of effective operations such as quality, cost, and resources.
  • 2. Managing quality: Align organizational policies and procedures with the required level of quality expected by customers.
  • 3. Process and capacity strategy: Utilize capacity resources (labor, machinery, and technology) to determine the production of goods/services.
  • 4. Layout strategy: Optimize production layout to facilitate the efficient flow of information, personnel, and materials.

Strategic Importance/Role of Operations Management (Continued)

• 5. Location strategy: Align location requirements for customers, distance to warehouses, distribution infrastructure, and costs.
• 6. Scheduling: Align short, medium, and long-term schedules for facilities and personnel to meet customer needs.
• 7. Human resources and job design: Acquire qualified human capital for the required production of goods/services.
• 8. Supply chain management: Integrate supply chain requirements into the overall organizational strategy.
• 9. Inventory management: Balance inventory required for production, inventory to be held, and the amount distributed to the end customer.
• 10. Maintenance: Ensure the continuous functional capability of all production machinery for reliable manufacturing.

Scope of Operations Management

• The scope of operations management outlines its cross-functionality and multifunctionality.
• Cross-functionality implies a heightened need for communication and transparency between all functional departments.
• This ensures that all activities contribute towards strategic objectives.
• Failure can result in duplication of tasks, misalignment of objectives, misappropriation of funds, or unmet customer needs.
• Understanding operations management across organizational levels allows other departments to be aware of their roles in assisting the operations function.

Scope of Operations Management (Continued)

• Chopra, Lovejoy, and Yano (2004) outlined the scope of operations management to include the following multifunctional areas:
  • Operations management/marketing: Marketing generates demand for goods/services, creates customer interest and awareness to generate sales and revenue.
  • Operations management/finance: Finance procures assets directly and indirectly involved in production.
  • Supply chain: Includes the management of all components related to transforming raw materials into final goods and services.

Scope of Operations Management (Continued)

• Chopra, Lovejoy, and Yano (2004) mentioned the scope of operations management to include the following multifunctional areas:
  • Service operations: Involve managing service components such as delivery, performance measures, and consumption.
  • Operations strategy: Aligned to the needs and deliverables of strategic imperatives in collaboration with other departments.
  • Process design and improvements: Managing the innovation process, determining product improvements in consultation with R&D and consumers.

Benefits Realized with Effective Operations Management

• Understanding the role and scope of operations management allows organizations to capitalize on efficiencies and reap benefits:
  • Operations management is essential for daily activities across every industry and organization.
  • It measures productivity, focusing on the ratio of inputs to outputs and reducing wastage.
  • Through optimum resource utilization, organizations can experience a positive increase in profits by reducing operating costs.
  • It coordinates organizational activities and processes to align with product/service offerings, meeting customer requirements and creating satisfaction.
  • It helps in selling goods/services; management of sales and quality becomes essential.

Differentiating Between Goods and Services

Transformation Model

• The key aim of operations management is to transform raw materials (inputs) into finished goods (outputs) and deliver them timely.
• The transformation process consists of inputs, transformation process, output, and feedback.
• The purpose is to add value to inputs through the transformation process so the output meets customer needs and specifications.

Transformation Model - Inputs

• Inputs are resources used in the direct creation of goods/services:
  • Transformed resources: These are transformed to create specific goods and services, such as:
    • Information (consultancy and marketing firms)
    • Material (aluminum, wood, fruit/vegetables)
    • Customers (hospitals, car washes, hairdressers)
  • Transforming resources: Resources used in the transformation process:
    • Facilities (security manager at a shopping mall)
    • Staff (production line worker transforming material into clothes)

Transformation Model - Transformation Process

• Specific inputs undergo activities that add value and create the desired output.
• The transformation process includes:
  • Changing the location of materials
  • Changing the physical appearance of materials or customers
  • Changing the initial intention of information
  • Changing the mental and/or physical state of customers
  • Changing the ownership of material and/or physical state of customers
  • Accumulating or storing information, materials, or customers

Transformation Model - Types of Transformation & Outputs

• Types of Transformation:
  • Transportation (mobilizing materials and/or customers, e.g., taxi services)
  • Supply (transferring ownership of goods, e.g., retailing)
  • Manufacturing (creation of goods, e.g., clothing)
  • Services (storing goods, engaging with customers, e.g., hospital treatment, warehouse storage)
• Outputs:
  • The ideal output aligns with customer specifications.
  • Defective outputs may occur.
  • Organizations should outline sustainable measures to minimize waste.

Transformation Model - Feedback

• Transformation ends when output has been produced.
• Due to changing customer needs, organizations should review and upgrade offerings through feedback.
• Feedback provides information on the functionality of goods/services.
• This is used to make changes, design products/services, or alter the process to increase efficiency.

Operational Efficiency

• Organizations calculate operational efficiency to determine if processes, procedures, and activities are optimal.
• Operational efficiency is not a one-off activity; continuous monitoring and reviewing are essential.
• It addresses three key aspects: people, technology, and processes.
• Two main calculations for gauging efficiency are productivity and efficiency.
• Productivity calculation measures the ratio of labor to output (addressing the people aspect).
• Efficiency calculation measures the ratio of machine output within a process (addressing process and technology).

Calculating Productivity

• Productivity Formula: $Productivity = \frac{Output}{Input}$

Example Calculation of Labour productivity in hours per laptop

• Factory A produces Laptop A, while Factory B produces Laptop B.
• The Table below indicates the labour required per factory to produce Laptop A and Laptop B respectively.
• Labour productivity in hours per laptop is ?
• $Factor A= \frac{Output}{Input} = \frac{20 000}{40 000} = 0.5$
• $Factor B= \frac{Output}{Input} = \frac{35 000}{85 000} = 0.41$

Calculation of Labour Productivity in Rands per Laptop

• Labour productivity in rands per Laptop is:
• $Factor A = \frac{Output}{Input} = \frac{20000 \times 12000}{40000 \times 15} = R400/laptop$
• $Factor B = \frac{Output}{Input} = \frac{35000 \times 10000}{85000 \times 12} = R343.14/laptop$
• Based on these calculations, Factory A is more productive in terms of labor hours. However, based on labor productivity in rands, Factory B is more productive.

Operational Efficiency - Calculating Efficiency

• When calculating the efficiency of a specific process, an organization examines the actual output against a predetermined value.
• The formula for measuring efficiency is:
• $Efficiency = \frac{Actual \space output}{Standard \space output}$

Example Calculation for Efficiency

• Factory A's machine recently broke down and newer model parts were purchased to fix the machine. Previously, the machine was able to produce 20,000 Laptops As in a week; however, with the new fixtures and additions, when measured, the machines was actually able to produce 27 000 Laptops. The efficiency of the machine is:
• $Efficiency = \frac{Actual \space output}{Standard \space output} = \frac{27000}{20000} = 135\%$

Future Trends in Operations Management

• Operations will explore the impact of the Fourth Industrial Revolution (4IR) on business operations and operational leaders.
• Understanding these trends and their impact on operational activities is key to survival (Zamolo, 2020).
• Key trends in a post-COVID-19 environment include:
  • Increase information visibility
  • Increase organizational communication
  • Get mobilized
  • Safety first
  • Enhance employee experience
  • Get demand in hand
  • The customer service department is always right

Future Trends in Operations Management - Information Visibility

• Increase information visibility:
  • Organizational data created, processed, and distributed outside data centers may increase by 50% in the next two years.
  • Organizations must understand the power of consumers and leverage information by developing new products.
  • Digitalization enables workforce optimization, productivity, and cost and safety reduction.

Future Trends in Operations Management - Organizational Communication

• Increase organizational communication:
  • Hierarchical structures are giving way to flatter organizational models to improve communication.
  • Flatter models increase information flow, unlike hierarchical structures favoring upper management reporting.
  • Clear operational communication is the foundation for efficient and effective productivity, improving employee satisfaction and retention.
  • Better communication increases manufacturer's bottom line due to savings from timely communication across the supply chain.

Future Trends in Operations Management - Mobility and Safety

• Get mobilized:
  • Employees can connect across locations and departments in real time through operational communication platforms.
  • Mobile access for remote staff provides access to information, resources, and tools.
  • Cloud-based apps enable swift decision-making; messaging software helps quickly resolve miscommunication.
• Safety first:
  • Employee health and safety must be a priority.
  • Operations managers must identify ways to reduce health incidents and workplace accidents, incorporating new regulations and compliance measures.
  • Flexibility and adaptation are crucial for ensuring compliance.

Future Trends in Operations Management - Demand and Customer Service

• Get demand in hand:
  • Consumer online purchasing has massively increased, affecting supply chain stakeholders and brick-and-mortar retailers.
  • Operations managers must encourage demand-responsive supply chains to capture different segments.
  • Agile supply chains ensure responsiveness and continuous alignment of production levels with demand.
• The customer service department is always right:
  • Operations managers must integrate responses from customer service to understand end-users.
  • Emphasize relationship management between all stakeholders within the organization and along the supply chain.

Future Trends in Operations Management - Employee Experience

• Enhance employee experience:
  • Organizations must emphasize an employee-centric culture promoting personal and career development.
  • Achieve customer-centric goals by strengthening key relationships (internal and external).
  • Heighten responsibility towards transparent and accessible internal communication.
  • Provide employees with clear performance expectations, feedback, tools, and systems necessary for desired outcomes.

Challenges in Operations Management

• Challenges often stem from cross-functionality, affecting the broader organization. Key challenges include:
  • Globalization
  • Fourth Industrial Revolution (4IR)
  • Environmental sustainability
  • Ethical conduct
  • Strategy

Challenges in Operations Management - Globalization & 4IR

• Globalization:
  • Increased cross-border interaction between organizations has grown due to technology.
  • These interactions must be monitored and measured to ensure objectives are achieved profitably.
• Fourth Industrial Revolution (4IR):
  • Technology development requires upskilling employees to contribute effectively.
  • Gaps may arise if employees are not capacitated to meet current trends.
  • Staff must be trained to use technology effectively to avoid inefficiencies.

Challenges in Operations Management - Sustainability & Ethics

• Environmental sustainability:
  • Sustainability initiatives are essential for reducing carbon footprints and improving waste management.
  • Implementing these initiatives adds costs, which may be passed on to customers.
  • Some organizations might avoid sustainability due to concerns about consumer willingness to pay more for sustainably sourced goods.
• Ethical conduct:
  • As organizations grow, individuals are given financial responsibility, increasing the potential for unethical behavior.
  • Unethical behavior can cripple operations if not managed and can cause loss of credibility and market share.

Challenges in Operations Management - Strategy

• Strategy:
  • The organization's strategy must consider environmental issues (STEEPLE).
  • Objectives are filtered down to tactical and operational levels.
  • A sustainable business strategy must be adopted to answer the objectives and accept a sustainable environment.