Operations Management: Role, Strategies, and Interdependence Study Notes

Introduction to Operations Management

• Definition of Operations: Operations refers to the business processes that involve transformation or, more generally, ‘production’.
• Scope of Operations: It is a broad term that encompasses the following areas:
  • Production of goods and services.
  • Production and quality controls.
  • Inventory controls.
  • Managing the supply chain.
  • Logistics.
  • Operational process decisions.

Strategic Role of Operations Management

• Strategic Operations: Refers to long-term aims that affect all key business areas. The goal is to achieve a long-term competitive advantage over competitors.
• Profit Maximisation: Businesses generally focus on maximising profits by managing two primary factors:
  • Revenue.
  • Cost of Production.
• Primary Strategic Approaches: The two main ways to achieve a competitive advantage are through Cost Leadership or Product Differentiation.

Cost Leadership

• Definition: Cost leadership is a strategy where a business aims to produce the best value of products or services at a relatively low cost compared to its competitors.
• Methods of Achievement:
  • Economies of Scale: These are cost advantages created by an increase in the scale of operations.
  • Outsourcing: Used to reduce Human Resources ($HR$) and production costs.
  • Standardisation: Offering high volumes of standardised products using fewer, standard components with limited varieties or models.
• Focus: Profit margins per unit are typically low, so the business focus shifts to the volume of units sold.

Classification of Operations Costs

• Input Costs:
  • Capital, land, and resources.
  • Interest on investment.
  • Leases on machinery.
• Processing Costs:
  • Machinery maintenance.
  • Installation and testing.
  • Electricity and scheduling.
  • Product design, templates, tooling, and prototyping.
• Labour Costs:
  • Full-time, part-time, and casual employees.
  • Subcontractors and overtime.
  • Recruitment, training, redundancy, and rostering.
• Inventory Costs:
  • Logistics, distribution, and storage.
  • Back orders and inventory management.
  • Insurance, deterioration, shrinkage (theft), and damaged goods.
• Quality Management Costs:
  • Prevention of loss through quality planning and training.
  • Sampling and inspection of goods and processes.
  • Error remediation through warranty claims, sales returns, and complaints.
  • Costs associated with machining errors, injury, and machine downtime.

Goods and Service Differentiation

• General Concept: Most businesses start with a standardised good or service and then customise its operation to differentiate it from competitors.
• Mechanism of Differentiation: This can be achieved through:
  • Better quality and higher reliability.
  • Faster delivery times.
  • Custom-designed products.
  • Additional features and applications.
  • Incorporation of new technology.
  • Clever product design.
• Differentiating Goods:
  • Varying actual product features.
  • Varying product quality.
  • Varying augmented factors.
• Differentiating Services:
  • Varying the amount of time spent on a service.
  • Varying the level of expertise or qualifications of the service provider.
  • Varying the quality of materials/technology used.
  • Cross-branding.

Comparison Between Goods and Services

• Tangibility and Perishability:
  • Goods: Tangible (physical dimension). Some are perishable (e.g., fresh fruit).
  • Services: Intangible; they exist only while being performed, though effects may endure.
• Customisation:
  • Goods: Tend to be standardised but can be customised.
  • Services: Generally customised (e.g., hairdresser), though some are highly standardised.
• Ownership:
  • Goods: Can be owned and transferred via sale.
  • Services: Cannot be owned.
• Time between Production and Consumption:
  • Goods: There can be a considerable length of time between production and consumption.
  • Services: Production and consumption are simultaneous.
• Determination of Value:
  • Goods: Value is ascertained by costing all inputs and adding a margin.
  • Services: Value is highly subjective; it increases with higher levels of skill, education, and expertise.

Operations in Different Industries

• Standardised vs. Customised Goods:
  • Standardised Goods: Mass-produced, usually on an assembly line, and uniform in quality.
  • Customised Goods: Varied according to customer needs and produced with a market focus.
• Perishable vs. Non-Perishable Goods:
  • Perishable Goods: Require high standards of safety/cleanliness, very short lead times, quick distribution, and cold storage.
  • Non-Perishable Goods: Durable; focus is on managing quality from sourcing to distribution and implementing effective inventory management to avoid overproduction.
• Intermediate Goods: Goods that have been processed then become inputs for further processing (e.g., steel turned into screws for electronics).
• Services Industry Variations:
  • Standardised services (e.g., GP visit or fast food where employees follow scripts).
  • Customised services (e.g., medical specialist).
  • Self-Service: Encouraging customers to help themselves to reduce costs (e.g., online airline transactions).

Interdependence of Key Business Functions

• Definition of Interdependence: This refers to how different business functions (Operations, Marketing, Finance, Human Resources) work with and rely on each other to meet common goals.
• Specialisation: Each function is separated and highly skilled at its specific role.
• Synergy: The idea that "the whole is greater than the sum of all the individual parts."
• Functional Breakdown:
  • Operations: Manufacturing, provision of services, value adding (domestic or global).
  • Marketing: Sales, advertising, product design, and marketing strategies.
  • Finance: Administration, financial management, planning, and change management.
  • Human Resources ($HR$): Industrial relations ($IR$), personnel, and recruitment.

Operations and Customer Focus

• Contemporary business practices aim to fulfill customer desires for:
  • Minimised waste.
  • Reflect fair value for labour used.
  • Operation at low cost for affordability.
  • Integration of environmental awareness and ecologically sustainable practices.
  • Responsiveness to changing customer needs over time.

Case Study: Qantas

• Main Costs for Qantas:
  • Staff: $28\%$
  • Aircraft operation and maintenance: $23\%$
  • Fuel: $21\%$
  • Depreciation: $21\%$
  • Marketing: $4\%$
• Cost Reduction Strategy: Qantas exploits Economies of Scale ($EOS$) by joining the Oneworld Alliance to reduce flight paths.

Case Study: Foxconn and TCL

• Foxconn: World's largest manufacturer of smartphones, tablets, and gaming consoles for clients like Apple, BlackBerry, HP, and Sony.
• Scale: Largest factory in Shenzhen is $3.6\,\text{km}^2$ and employs more than $140,000$ workers.
• TCL LCD Industrial Park: Employs $10,000$ workers and produces more than $18\,\text{million}$ TVs a year at a rate of $160$ TVs per hour.
• Strategic Advantage: These enormous economies of scale allow them to gain a cost advantage over rivals.

Case Study: McDonald’s

• Transformation Model:
  • Inputs: Ideas, information, entrepreneurial ability, natural resources/raw materials, human resources, capital (machinery/technology).
  • Throughputs: The transformation and value-adding process.
  • Outputs: Finished goods and intermediate goods.
• Customer Focus Goals: McDonald's focuses on waste management, fair labour wages, low cost of production, and environmental awareness.

Questions & Discussion

• Question: Explain the interdependence of operations and finance in a business. Support your answer with relevant examples.
• Model Answer:
  • Definition: Interdependence refers to how business functions rely on each other to meet goals.
  • Cause: Operations relies on Finance to ensure there is a sufficient source of funds to carry out transformation processes.
  • Effect: Finance relies on Operations to produce the actual ‘product’ that generates sales and providing funds for all business functions. In this way, they work together to achieve goals.
  • Example: If a toy manufacturing business wants to increase production of a popular item, Finance must review funds and create a budget to purchase the necessary inputs and equipment, which eventually results in increased revenue for the business.