Business Management Unit 3 Outcome 3 Operations Management

3.2 The relationship between operations management and business objectives

• Effectiveness refers to the degree to which a business has accomplished its stated objectives

• Efficiency: refers to how well a business uses resources in achieving these objectives

Operations Management and Business Objectives

• To produce a good or service it is likely the business will require some materials

• The quality of these materials will play a role in the end quality of the good or service

• The cost of these materials may also impact on the cost of the end product

• Higher quality materials are likely to be more expensive for a business to purchase which may force it to increase the price to customers

• The operations department will work closely with other areas in the business

• Operations strategies can be used to achieve objectives by supporting strategies in other areas of the business

3.4 Key elements of an operations system

• Operations management: is the function of a business that converts inputs into outputs. This process is what we call the operations system.
  
  

Inputs

• Inputs: are the resources used to create a good and/or service

• The quality of the inputs can help improve the quality of the final product

• There are six main resources that businesses use to create goods or services:

1. Materials: can come in their natural or processed state

2. Capital - Facilities & equipment:include all the machinery, vehicles, computers etc, as well as the facility or buildings used.

3. Human resources (labour): the managers and employees that work to produce a final good or service. 

4. Time: a non-renewable resource that a business needs to make best use of

5. Information: includes information on customer trends in the market or information on how to make a product

6. Financial: the funds/money required to commence and continue operating the business. 

• It is important to remember that resources are not only the raw materials used in production, rather, inputs (detailed above) are used in the production of a good or service 

• Human resources (labour) must be stated as a resources for all service and manufacturing-based businesses

Service Business: E.g  a doctor will rely heavily on information to provide a high-quality service to patients. They may need to know past history of the patient and information regarding the most up-to-date medical practices will be highly important

Manufacturing Business: E.g a car manufacturer will rely heavily on car parts (raw materials) and equipment (e.g. machines and robots

Processes

• Processes: are all the activities used to transform inputs into the final output

• This process is also referred to as the transformation process

• A business is often trying to use new processes to help improve efficiency or quality

• The type of processes used by a business will again vary depending on the type of good or service that is being produced, as well as the quantity and quality that is being produced

Outputs

• Outputs: are the final product produced by the business. 

• The quality of the output is a direct reflection of the inputs and processes. Outputs can be classed as either goods or services

• Goods are a tangible product (meaning it can be touched or handled) such as a car, phone or book, whilst a service produces an intangible product (meaning it cannot be touched or handled) such as a flight from Melbourne to Sydney or educating VCE students

Operation System examples:

Manufacturing Business – Yakult 

Service Business – Commonwealth Bank of Australia

3.5 Operations management in manufacturing and service businesses

• All businesses use a variety of resources to produce their output, and both types of businesses produce an output that is sold or exchanged for money

Manufacturing Businesses

• Manufacturing business: will transform its inputs into a tangible output

• Tangible outputs: are physical products that can be touched or handled

• With a manufacturing business, the production process and consumption are not linked. For example, a car manufacturer assembles the car in a large factory

• Once it is completed, a consumer will purchase the car and use or consume that product at a later date

• There is very little customer involvement during the production of the output e.g if you have a mobile phone, it is unlikely that you were at the manufacturing facility while it was being produced

• The processes used in a manufacturing business are often more capital intensive, where they use heavy machinery and equipment to produce the final output

Service Businesses

• Service business: will transform its inputs into services that are intangible

• An intangible output means the products cannot be touched or handled

• Because services are intangible, they also cannot be stored

• The production of a service will be linked closely with consumption

• Means that the service will often be consumed while it is being created e.g a customer that receives a haircut will receive the output while the hairdresser is providing the service

• The consumption often occurs at the same time as the processes are being performed.

• The customer often needs to be present to receive the service

• Are often more labour intensive, where humans are typically performing the bulk of the service being provided e.g a haircut primarily relies on the skills of the hairdresser, with the use of capital (such as dryers and clippers) representing a relatively small component of the total inputs

Can a Business have characteristics of both Manufacturing and Service Businesses?

• Yes. It is more common for businesses to provide both manufactured goods and services together

• Consumers now expect more than just purchasing a manufactured good

• They often expect a quality service while they are purchasing the product, as well as after sales service when they take it home

• E.g Nike no longer just sells shoes and activewear. They also provide a service to go along with their manufactured goods. Consumers can sign up to the Nike Membership where they become part of a community

•  Combining both manufactured goods and services allows businesses to improve their customer experience with the aim of having a life-long customer

3.6 Technological Developments

• Efficiency: is a measurement of how well a business is using its resources

• Effectiveness: is the ability of the business to achieve its set objectives

• Technological development can be described as new applications of scientific knowledge which aim to optimise the operations of businesses

• Businesses that are able to implement technology successfully can often gain a competitive advantage in the marketplace

Automated Production Line

• Automated production line: where a series of machines (often robotics) and workstations are arranged in sequence to perform tasks automatically with little to no employee involvement

• With automation, the role of human resources shifts from direct involvement in production to overseeing design, system monitoring, and adjustments

How can this improve efficiency?

• Speed of Production: Automation enables faster production rates. Machines can work continuously without the need for breaks, increasing overall output

• Reduction in Human Error: Automated systems minimise the chances of errors that are common in manual operations, reducing wastage and the number of products needed to be reworked

• Consistent Operation: Machines can operate for extended hours without a drop in performance, unlike human labour which can vary in efficiency

• Resource Optimisation: Automated production lines use materials and energy more efficiently, reducing waste and operational costs

How can this improve effectiveness?

• Improved quality: Automated systems provide precision and consistency, leading to higher quality products that meet customer expectations

• Customisation: Advanced automated systems can be quickly reprogrammed to produce different variations, allowing businesses to effectively respond to changing market demands

• Reduced labour costs: By automating routine tasks1 human resources in these areas can be minimised, reducing costs

• Meeting Market Demand: With the ability to operate around the clock and speed up production automated lines can meet customer demand

Robotics

• Robotics: are programmable machines that can operate tasks automatically.

• Using robotics allows the business to free their employees from these repetitive tasks so they can be utilised for more complex tasks

How can this improve efficiency?

• Increased Productivity: Robotics can operate continuously without breaks, significantly increasing the volume of output using fewer human resources, leading to lower costs

• Precision and Consistency: Robotics technology reduces the error rate in tasks, leading to reduced wastage of materials

• Increased speed: Robotics streamline processes, completing tasks faster than manual methods, allowing more products to be produced in the same amount of time

• Resource Optimisation: Robotics can optimise the use of materials and energy, reducing operational costs and waste

How can this improve effectiveness?

• Quality Enhancement: The precision of robotics in tasks like assembly, inspection, and testing leads to higher quality products, meeting customer expectations

• Adaptability to market needs: Robotics systems can be reprogrammed and adjusted to cater to changing market demands, helping meet market needs

• Improved Safety: By taking over dangerous tasks, robots enhance workplace safety, reducing the risk of accidents

• Reduced operations costs: Robotics can reduce operations costs due to using fewer resources, leading to improved profits

Computer – Aided Design

• Computer-aided design (CAD): is a software system that enables a product to be created in digital form, modified, analysed and tested before it is put into production

• Can greatly reduce the time and resources used in the product development cycle and helps improve the precision of designs

• Allows for greater creativity in product design as concepts can be tested through simulation before they are produced

• It allows others to see the final product and make suggestions on alterations before the final design moves into the production phase

How can this improve efficiency?

• Streamlined Design Process: CAD allows rapid alterations and modifications to designs without the need to redraw plans from scratch, significantly reducing the time involved in the design phase

• Reduction in Prototype Development: With CAD, the need for physical prototypes is minimised, as designers can make precise adjustments digitally, reducing resource use and waste

• Improved materials management: Using CAD can allow the business to understand the exact number of materials that are required to produce a product, helping to reduce wastage

How can this improve effectiveness?

• Enhanced Creativity: CAD enables greater creativity in design, allowing for more complex and innovative products to be developed, meeting or exceeding market expectations.

• Improved Visualisation: The 3D visualisation capabilities of CAD provide a realistic view of the final product, enabling better feedback and decision-making in the design phase

• Analysis and Testing: CAD allows for detailed analysis and simulation tests, ensuring that design flaws are identified and corrected before production, enhancing the overall quality of the final product

• Market Responsiveness: The ability to quickly alter designs in CAD enables businesses to respond swiftly to changing market demands or customer feedback, improving customer satisfaction

Computer – Aided Manufacturing

• Computer-aided manufacturing (CAM) is the use of software and computer-controlled machinery to manufacture products

• CAM is to create a faster and more efficient production process

• CAM is often more precise, which results in less wastage and improves efficiency

How can this improve efficiency?

• Improving Speed: CAM systems automate and expedite the manufacturing process, allowing for faster production of goods.

• Reduced Wastage: CAM offers high precision in manufacturing, reducing material wastage and minimising the need for rework.

• Optimising Resources: With CAM, resources like materials and energy are used more efficiently, reducing operational costs.
  
  

How can this improve effectiveness?

• Consistent Product Quality: CAM provides consistent, repeatable, and reliable production processes, leading to improved brand reputation and customer satisfaction

• Customisation and Flexibility: CAM allows for easy customisation of products, enabling businesses to respond effectively to specific market trends and customer needs

• Meeting market demand: CAM allows production to increase its capacity, helping meet any rise in customer demand

Artificial Intelligence

• Artificial intelligence refers to systems or machines that mimic human intelligence to perform tasks that are traditionally done by humans

• Artificial intelligence improves the efficiency of the business's operations as it ensures there are the correct amount of materials on hand, reducing any wastage by waiting for materials to arrive or from materials being stored for long periods of time and needing to be discarded

• Significantly improves the effectiveness of the operations as it improves the quality of the product, leading to improved customer satisfaction

How can this improve efficiency?

• Process Optimisation: Al algorithms can analyse vast datasets to optimise production schedules, supply chain logistics, and resource allocation, leading to fewer resources being used

• Predictive Maintenance: Al can predict equipment failures before they occur, reducing downtime and maintenance costs

• Automation of Repetitive Tasks: Al automates routine tasks, thereby increasing  overall productivity

• Data-Driven Decision Making: With Al's ability to process and analyze large volumes of data quickly, helping predict customer demand, helping the business plan materials and other resources, resulting in less wastage

How can this improve effectiveness?

• Quality: Al systems can identify defects and inconsistencies in products, ensuring high standards of quality

• Customisation: Al enables businesses to offer customised and personalised products and services by analyzing customer data and preferences

• Enhanced Customer Experience: Al-driven tools like chatbots and personalized recommendation systems can significantly improve customer service and satisfaction, contributing to building stronger customer relationships

• Reduced labour costs: Al can replace human labour for some tasks, leading to reduced costs in human resources, helping improve profits

Online Services

• Online services allow businesses to connect with their customers in some way over an internet connection

• This can be in many forms:

Websites and Mobile Applications

• A business may allow its customers to purchase its products via a website

• Can allow the operations to be more effective and in many instances more efficient

Cloud Computing

• Cloud computing is another online service where remote servers are hosted on the internet to store, manage and process data.

• This can improve the productivity of a business and help reduce costs of needing to host their own servers

• This allows data, contacts, calendars etc. to be stored on the cloud and accessed anywhere with an internet connection

• This greatly improves efficiency, reduces costs, improves mobility of the business and improves collaboration as documents can be accessed and altered by multiple people in different locations

Social Media

• Social media businesses such as Twitter, Facebook TikTok and lnstagram etc., have allowed service businesses to improve their access to customers

• Retail outlets are able to stay in contact and interact with customers

• They are able to improve the service they deliver as the business is able to send a message through social media if it is experiencing any issues and customers are able to express concerns or have their questions answered

3.7 Materials Management

• Materials Management: is the planning, organising and controlling of a business’s supplies

• The aim is to ensure the business has the right type of materials, in the right quantities and at the right time

There are three main types of materials that must be managed in a business:

1. Raw materials

2. Unfinished goods

3. Finished goods

Forecasting

• Forecasting: is a materials management strategy that involves predicting future demand for products based on historical data, market trends, and seasonal variations

• This predictive strategy helps ensure inventory levels are aligned to market needs, and minimises the risk of material shortages or excesses

• Forecasting allows operations managers to adjust procurement and production schedules, ensuring the right amount of materials are available precisely when needed

• This alignment is crucial for maintaining a continuous flow in production, improving effectiveness as it helps meet customer demand

• It also minimises inventory costs associated with storing large quantities of materials that may not be used, improving efficiency

Master Production Schedule

• Master production schedule (MPS): details what is to be produced, the quantities of each product to be produced and when they are going to be produced. (This is often software based)

• This gives the materials manager an indication of what materials will be required to meet the schedule

• Will also outline the types and number of employees that are required to complete the work

• The MPS can improve effectiveness because like forecasting, it enables the business to ensure it has enough materials on hand to meet the demand

• The MPS improves efficiency by enabling production to flow continuously, improving productivity along with reducing wastage

Materials Requirement Planning

• Materials requirement planning (MRP): is an inventory control system that provides an itemised list of materials needed to produce specific forecasts or orders

• The MRP outlines:

- The specific type of materials required to meet the MPS

- The exact quantities of each material

- The times they will be delivered

• Can be used to determine the exact materials required to meet the MPS

• Will include the specific materials needed and the exact quantities, as well as when they should be delivered

• Ensures that the business is never understocked with supplies, so that production is continuous, improving effectiveness as it allows the business to meet customer demands

• Efficiency can be improved as it ensures the business isn't overstocked where money is tied up with idle stock

Just in Time

• Just-in-time (JIT): is where materials are delivered just as they are needed in the production process

• This approach significantly reduces the need for storage, minimising costs associated with inventory management, and reduces the risks of stock damage and/or parts becoming obsolete, which therefore helps to minimise overall wastage

• With just-in-time, materials are no longer stored for extended periods of time, if at all. Instead, when they arrive at the facility, they are added into the production line immediately, or soon after arrival

• A key to JIT's success is the development of robust and reliable relationships with suppliers

• This system requires the business to have a network of dependable suppliers, and often backup options, to reduce the risks of disruptions to the regular deliveries

3.8 The Management of Quality

• Businesses use quality management to make sure that their products meet customer expectations

• Quality strategies are used to improve the efficiency and effectiveness of operations for both manufacturing and service based businesses

Quality Control

• Quality control checks for defects by performing inspections at various points in the production process to check for defects in the product

• This is where they set their own internal business standards for the quality of their products

• The aim of quality control is to identify problems early so they can be rectified quickly

• In order to do this effectively there must be:

- Benchmarks set

- Inspections conducted on a regular basis

- Comparisons made between the product and the set benchmark

- Corrective action in the event that product quality is deemed to be below the benchmark

Manufacturing

• A car manufacturer will most likely examine every car at various stages along the production line

• The quality of a motor vehicle is critical to the safety of the consumer

Service

• Management at a clothing retailer may decide to use a secret shopper to check on the quality of the service employees are delivering to customers

• The secret shopper will interact with a sales employee as a normal customer and assess the quality of the customer service being delivered

Quality Assurance

• Quality Assurance is a process whereby a business receives certification that its systems and processes meet strict national and/or international standards, as determined by the International Standards Organisation (ISO)

• The ISO provides guidelines on how businesses should establish quality assurance systems by adopting specific procedures, controls, and recording and documentation measures

• The quality assurance helps the business to become more effective because it ensures that the operations system meets an independent standard, resulting in better quality, an improved reputation, and higher sales/profits

• Having the correct procedures in place also improves efficiency because it results in errors being rectified early, resulting in less wastage, improving efficiency

Total Quality Management

• Total quality management (TQM) is a whole organisation approach to achieving quality based on continuous improvement in the area of quality

• Quality is embedded into the culture and every employee understands that they have a role to play in improving quality

• The aim of TQM is to have a production process that is defect-free (zero defects), where if a product is not fit for purpose at any stage, it will not continue through the transformation process until it is fixed, so it will be of a high standard for the next customer

• TQM is a proactive system that aims to remove all faults or errors before production occurs, and the system encourages the belief in continuous improvement (Kaizen) – an ongoing commitment to achieving the highest possible standards

TQM is based on three key aspects:

1. Continuous improvement

•  The business uses regular evaluation to have ongoing improvement into the future

2. Employee empowerment

• Employees are given responsibility to improve the quality of the business

3. Customer focus

• The entire focus of TQM is on the end customer

•   TQM enables the business to gain a competitive advantage by having a strong focus on quality and looking to continually improve

• This can improve customer satisfaction and boost customer loyalty, resulting in a higher level of effectiveness

• Due to the culture of the business continuously looking for ways to improve all systems, it should result in improved efficiency, as fewer resources will go to waste

3.9 Waste Minimisation

• Waste minimisation: the process of reducing the amount of resources that are misused or discarded by the business during its operations

• Minimising waste is an important aspect of a business improving its efficiency and effectiveness

• Excessive waste means that a business is using more resources than it needs to in order to produce a good or service

• A structured approach allows all employees to be aware of the processes implemented and this can form part of the training of new employees and be built into the culture of the business

Reduce

• The first step is for a business to reduce its consumption of resources where possible

• This can improve the efficiency of the business, as fewer resources are being used, as well as reduce the impact on the environment

• The concept of 'reducing' is that if there is less waste, there is less to reuse and to recycle

• This also improves the effectiveness of the business as it can lead to increased profits as well as help the business to achieve objectives relating to sustainability

• Below are some examples of how businesses can reduce their waste:

- Moving documents into digital form rather than having printed paper

- Reducing energy consumption by turning off lights and/or power of the facility during employee breaks

- Implementing materials strategies such as forecasting and just-in-time to reduce wastage in the area of materials

- Reduce the amount of packaging used in the products produced. If packaging is required, using more sustainable materials for the packaging

- Introduce technology that will improve accuracy and consistency in the operations system to reduce wastage

Reuse

• Another way to reduce waste is to 'reuse' resources. Once the business has looked to 'reduce', they can look to reuse rather than discard

• Businesses can look to reuse resources again for the same purpose or repurpose the resource for a different purpose

• Ultimately, fewer resources are being discarded which can improve efficiency as the business is again using fewer resources

• This can lead to improved profits and greater sustainability, helping the business be more effective

• Businesses can also make resources  available to their employees and the wider community

Recycle

• Recycling is a series of steps that takes a used resource and processes it and remanufacturers it into a new product

• If a business has looked to reduce and reuse its resources, any waste produced should be assessed to see if it can be recycled

• Recycling reduces the need to use more of the earth's natural resources to produce products, as well as minimises the amount of material that ends up in landfill, or in our oceans

• This often requires education for employees so that they know what materials can be recycled

• It may also require a team to be able to sort the materials for recycling

• Businesses can also support recycling by purchasing inputs that have been recycled

3.10 Lean Management

• Lean management: where a business establishes systems that aim to eliminate waste and inefficiencies in the operations system and maximise customer value

• Lean management aims to create more value for customers while using fewer inputs

• Lean management is based around continuous improvement where small, on-going incremental changes are made to processes in order to improve the end quality for the customer along with improved efficiencies throughout the business

• There are generally 7 ways in which waste can occur, this is known as TIMWOOD:

- Transportation: inefficient movement of materials or products

- Inventory: supplies that are unused and discarded or idle supplies

- Motion: excess movement of people, machines, materials or the product

- Wait times: excessive wait times between production and distribution or waiting between processes

- Overproduction: producing more than consumers demand

- Over processing: performing operations on the product that do not add value

- Defects: defective products that need to be fixed or go to waste

NOTE: TIMWOOD isn’t part of the study design, rather, it is a way students can identify and remember the different types of waste that can occur throughout the operations system
Enacting Lean Management

• One approach to lean management is to implement the principles of pull, one-piece-flow, takt and zero defects

• This strategy allows a business to reduce the key areas of waste within its business

Pull

• Pull: where customer demand dictates the rate at which goods or services are produced

• Rather than a business producing as much as possible and trying to push these products to the market, the pull concept is where the business only produces the amount that the market demands

• Allows the business to stop over-producing so that waste is greatly reduced

• This minimises wastage as it reduces large amounts of completed stock in storage that either needs to be discounted in order to sell, or discarded completely

• It also ensures that money is not tied up in inventory that cannot be sold, allowing the business greater flexibility

One – Piece Flow

• One-piece-flow: where the focus is on one-piece at a time, rather than multiple tasks are being performed on a product at a time – thus, minimising interruptions and idle/waiting times within the operations system

• Instead, one piece being focused on at a time during production reduces waiting times as the product has a continuous flow through production

• This does not necessarily mean that only one item is produced at a time

• Multiple items can be in the production process at one time, however only one item is at a given stage of the production process at one time

• It is important that the processes are aligned in a logical sequence to reduce excess motion

• By producing in a smooth, uninterrupted manner, idle time is minimised

• This improves efficiency, as costs are reduced and waste minimised

• Quality is improved, enabling the business to be more effective

Takt

• Takt: refers to the speed in which a business needs to produce products to meet customer demand

• Allows a business to have a continuous flow and adapt quickly to any rises or falls in demand. It is better to have a continuous flow of production rather than having various starts and stops

• Having a continuous flow allows the business to synchronise processes with the customer demand which reduces waiting times throughout the production

• A consistent rhythm creates fewer errors from employees, further reducing wastage

• As demand in the market increases, the business can increase the speed of production, and when the demand slows, production can operate at a slower speed

• The number of employees and resources used to produce goods or services are aligned to the demand

Zero Defects

• The Zero defects: is about identifying errors or defects as soon as they occur so they can be rectified immediately

• The business is striving for perfection by continuously improving until it achieves zero defects

• Defects cause waste and a lean business will aim to have zero defects

• Although errors will always occur in operations, a lean business will aim to not pass on defects to the next area of production

• By not accepting or passing on defects, issues are resolved efficiently, avoiding the need for products to be reworked

• While it takes time to rectify an error on the spot, it is more time consuming if the error is identified after other processes have been performed on the product

• Focusing on zero defects, not only improves the quality for the customer, it also reduces wastage as fewer resources are used to produce the good or service

Lean Management Summary:

• Overall, lean management is able to improve the efficiency of a business's operations as fewer resources are being used to produce the good or service

• The reduction of wastage ensures that the business is able to make better use of resources to produce each output, improving efficiency

• Lean management also improves effectiveness as it is able to improve customer value

• Having fewer defects, meeting customer demand and reduced waiting times helps improve customer satisfaction

• The improvement in efficiency through effective use of resources can reduce operating costs, leading into improved profits

3.12 Corporate Social Responsibility considerations for an operations system

• As part of this operations system, it is imperative that operations management consider their corporate social responsibilities in the production of goods and services

• Corporate Social Responsibility: takes into account an approach that is both ethical and socially responsible. It is where a business goes above and beyond legal expectations required by regulators, to express concern for how its practices impact on the environment, societies’ health and welfare, and demonstrates an ethical concern for its workforce

• These three areas (environment, society and economic) are often known as the 'triple-bottom line' where the business can evaluate how well it has performed:

- environmentally (which relates to its impact on the natural environment)

- socially (which relates to the impact on employees, customers and the
community)

- economically (which relates to its ability to generate profit)

• While the goal of the operations function is to produce a good or service in the most effective and efficient way, many businesses will also aim to achieve this by ensuring that its production has a positive social and environmental impact

Implementation

• Implementing CSR into the business' operations can often be costlier or, in some cases, slow down production

• There are also direct benefits, including improved reputation, reduced long term costs, and providing a workplace that employees are more likely to value

Environmental Sustainability of Inputs

• Environmental sustainability: refers to the responsibility to conserve natural resources and protect global ecosystems now and into the future.

• Businesses should consider the sustainability of the environment when making decisions with their inputs to facilitate a more sustainable future

• e.g implementing materials that are better for the environment or using renewable energy to power the facility, helping to minimise the impact on the environment

The amount of waste generated from processes

• The inputs used in a production process create waste. Implementing strategies to reduce the amount of waste generated in the operations system will reduce the impact on the environment

• A business can use a range of strategies for waste minimisation, including the reduce, reuse and recycle method

• Introducing lean management can also help to minimise wastage from the operations system which can lead to improved productivity, lowered costs and enhanced competitiveness

• Can help to deliver a product that is free from harm for the consumer and decrease wastage in the processes area of the operations system

Production of Outputs

• Effective operations management will also work towards delivering a product that is defect free and adds real value to the consumer

• The ongoing provision of high quality service to customers is not only ethical, but helps to improve the image and reputation of the business

• Packaging decisions that minimise the impact on the environment are also a socially responsible consideration

Business CSR Consideration

3.14 Global considerations in operations management

• The cost of manufacturing products can be highly expensive as the cost of local suppliers and wages are high compared to other less developed countries

• Those manufacturing businesses that still exist in Australia will often consider using overseas businesses in the operations process

Global Sourcing of Inputs

• A business may decide to source inputs for a variety of reasons

• It may be that raw materials are cheaper than if they were to be sourced locally

• Businesses that are able to decrease their raw material costs need to also consider the quality of the materials

• If the quality is comparable to local materials, then it can make sense to source materials from overseas suppliers

• This cost savings can help to improve productivity and competitiveness for local businesses

Benefits

• The benefit of sourcing global inputs is that it typically reduces production costs, improves productivity, lowers prices and boosts competitiveness

• This enables an Australian business to improve its profitability and maintain its share of an increasingly global market

• This will not only mean that Australian businesses can potentially sell more products to overseas buyers (i.e. exports), but it will also help Australian businesses to compete against imports

Limitations

• The drawback associated with global sourcing of inputs is that it creates job losses (or reduced hours of employment) for Australian workers, particularly in the short term

• Businesses also need to consider the corporate social responsibility practices of suppliers

• They need to ensure that the standards of the workplace conditions are acceptable and the quality of the processes remains high

• A consideration when sourcing inputs globally is the exchange rate. This can alter daily and if the Australian dollar is weak against the foreign currencies, the costs of purchasing imported inputs can increase dramatically

Overseas Manufacture

• Overseas manufacture is also referred to as offshoring, meaning a good is produced in a country that is different to the location of the business’s headquarters

• The cost of manufacturing in Australia is relatively high due largely to the cost of labour (e.g. wages) and the regulatory burden imposed by governments

• As a result, many businesses have decided to manufacture their products overseas. Many clothing businesses use manufacturers from China, Indonesia, Bangladesh and Vietnam

• The cost of manufacturing in these countries is much less than Australia as the average wage cost is much lower, and local businesses face a much lower cost complying with government laws and regulation.

• These lower costs enable businesses to deliver lower prices, improved competitiveness and higher profitability

• Obtaining approval from foreign governments and setting up a new facility can be a timely and costly process

• However, the business is able to have more control over their production process while still taking advantage of the lower wage costs

Global Outsourcing

• Global outsourcing is where a business uses organisations from around the globe to undertake some of the business’ functions

• This is typically done to reduce costs, improve quality or improve productivity

The following are some examples of tasks that are regularly outsources by businesses (both service and manufacturing):

• Software development

• Call centres (both technical support and sales)

• Finance and accounting

• Packaging and distribution

• Research & analysis

• Data entry

Benefits

• Outsourcing these tasks allows a business to take advantage of the expertise of other businesses

• Not only can this be highly cost effective, but it potentially enables the business to make use of the skills of a highly experienced call centre

Limitations 

• A downside is that the Australian business will lose some control over the processes they are outsourcing

• Language and cultural barriers are also an issue that needs to be addressed to ensure the activities are being completed to expected standard

• It can take time for businesses to find the best organisation to partner with and, for small businesses that do not have the finances to travel and physically view the facilities, it can be difficult to find a reputable outsourcing organisation

• There can also be security and confidentiality concerns with how sensitive personal data can be handled outside of Australia