Business Year 12

Operation Management

An operations system is used to transform inputs (e.g. labor, materials, etc.) into outputs (e.g. car, chocolate, beer - any good or service you can think of), through a transformation process.

Operation management is the area of management responsibility that oversees all activities involved in managing an operations system to efficiently and effectively produce finished goods or services, and create improved profit margins for a business.

Business Objectives

Meeting shareholder expectations, financial objectives (i.e. increased profits, increased percentage of market share), and social objectives.

Effective management of operations can have a big impact on the achievement of these key business objectives.

Indications of Business Performance

Operations Management and Business Objectives

Operations are vital to the success of a business, due to this area producing the goods or services that are sold to consumers, which generates sales, revenue, and ultimately profit.

There are a number of strategies the operations manager will implement in order to optimize (make the most effective use of or get the most out of) the business operations system (IPO), to best achieve business objectives:

Relationship Between Operations and Business Objectives

The operations management function has a considerable influence on the quality*,* cost, and availability of an organization’s goods or services. These have a direct bearing on whether the organization achieves its main objectives — to increase profitability, increase market share, provide a good return for investors or to contribute to the wellbeing of the community”.

(Jacaranda Textbook, pg. 100)

Relationship Between Operations and Business Objectives + MEETING SHAREHOLDER EXPECTATIONS

Relationship Between Operations and Business Objectives \n \n FINANCIAL OBJECTIVES

Relationship Between Operations and Business Objectives \n NON-FINANCIAL OBJECTIVES

Inputs

• nputs refer to the resources that are used to produce the business’ goods or services.
• Inputs can include things such as:
• Raw materials -  parts, components and supplies used up in the transformation process;
  • Capital equipment – plant, equipment, machinery and property used to produce goods/services;
  • Labour – people involved in producing goods/offering services;
  • Information – knowledge relevant to business’ operations;
  • Time – time needed to provide good/service;
  • Finance/money – purchasing materials, paying labour, etc.

Processes

• Processes refer to any activity the business undertakes to transform inputs in to outputs (i.e. finished goods/services).
• For example, consider the following operational processes undertaken to produce Yakult.

Outputs

• Outputs refer to the end result of a business’ transformation process – the final good or service that is delivered to the consumer.

Characteristics of Operations Management with both Manufacturing and Service Businesses

Elements of an Operations System

• inputs – resources (i.e. labor, capital, knowledge, time, money, etc.) and raw materials used to produce a good or service output.
• Processes – transformational activities are undertaken to convert raw materials into a finished good or service output.
• Outputs – the end result of the operational processes, which is the finished good or service delivered to consumers.

Manufacturing vs Service Businesses

Key elements of an operations system will be for manufacturing and service businesses

A manufacturing business is any business that combines raw materials and other resources to produce a finished goof that is tangible (i.e. can be seen, touched, and stored for later use).

A service business is any business that uses resources (i,e equipment, labor, knowledge, expertise, etc.) to perform an activity that satisfies a specific need of customers that is intangible (i.e. cannot be seen, touched, or stored for later use).

Characteristics of Operations in Service and \n Manufacturing Businesses \n \n TANGIBLE vs INTANGIBLE

Characteristics of Operations in Service and Manufacturing Businesses

CAPITAL-INT ENSIVE vs LABOUR-INT ENSIVE

Characteristics of Operations in Service and Manufacturing Businesses \n CUSTOMER CONTACT

Characteristics of Operations in Service and Manufacturing Businesses

STORAGE/ CONSUMPTION

Characteristics of Operations in Service and Manufacturing Businesses

STANDARDISED vs CUSTOMISED

View examples on slides

Strategies to improve both the efficiency and effectiveness of operations related to technological development, including the use of automated production lines, robotics, computer-aided design, computer-aided manufacturing techniques, artificial intelligence, and online services.

Technology

• Refers to any tool used by businesses to assist in the designing, producing and selling of a good/service
• Technological development refers to advancements in the tools/equipment used to perform tasks and create products
• In today’s high-tech, internationally competitive world, the acquisition and effective use of up-to-date technology is a key strategy which operations managers use to optimise operations.

Types of Technology \n

Automation

• A strategy that involves replacing human activity and effort with machinery and technology
• Automation is widely used in modern manufacturing operations systems to complete repetitive tasks involved in the production

Example of Automation: Automated Production Lines

• An automated production line involves a process where raw materials (inputs) enter an assembly line and finished products (outputs) leave with little or no human intervention.
• In an automated production line:
• Machinery at a series of workstations adds parts or components in a pre-determined production sequence until the product is finished.
• Workstations are linked by a transfer system.
• Computers act as a system to control the timing, movement, and sequencing, etc. of materials, parts, etc. along the assembly line to ensure production occurs efficiently.

Strengths and weaknesses:

Computer-aided Design (CAD)

• CAD refers to the use of computer programs to prepare product designs, which can then be reviewed, evaluated, and modified without the need for a physical prototype to be built
• CAD enables:
  • 3D diagram of product/prototype
  • Accurate predictions of what final outcome will look like
  • Accurate cost analysis
  • Precise design and customization according to customer needs
  • Production and sharing of technical documents 3-4 times fast than manual methods

Computer-aided Manufacturing (CAM)

• Computer-aided Manufacturing (CAM) refers to the use of computer software in the control of machinery, tools, and equipment during the manufacturing process.

Computer Integrated Manufacturing (CIM)

• CAD and CAM work effectively together, and when this occurs, the entire production process is controlled by a computer. This is known as Computer Integrated Manufacturing (CIM).
• When CIM is used, computerised designs stored in the CAD system are used by the CAM software to direct machinery and complete production of the CAD designs with no human involvement.

Strengths and weaknesses CAD, CAM, CIM

eCommerce and the Growth in Online Shopping

• eCommerce refers to the buying and selling of goods and services, or the transmitting of funds or data, over an electronic network (primarily the Internet)
• Online sales exceeded $20bn for the first time in Australia in 2016 (Australian Financial Review), with online spending growing five times faster than traditional retail spending in bricks and mortar department stores.

Website development

The development and maintenance of an accessible and visible business website has become very important to the competitiveness of a business.

Strength and weaknesses Website development

\n Strategies to improve both the efficiency and effectiveness of operations related to materials, including forecasting, master production schedule, material requirement planning and just in time

Strategies to improve both the efficiency and effectiveness of operations related to materials, including forecasting, master production schedule, material requirement planning, and just in time

Materials management

• The strategy that manages the use, storage, handling, and delivery of materials to ensure the right amount of inputs are available when required by the operations system
• Effective management of materials is very important to the success of operations:
  • Too much inventory = capital (money) tied up in stocks, when it could be used in other areas (e.g. expanding business). Excess stock increases waste (can go off), and increases costs (storage, movement and handling, etc.)
  • Too little inventory = no access to materials, production delays, and an inability to meet customer demand. This can damage the business’ reputation

Materials management strategies

Forecasting

The job of a material manager is to achieve:

• The right MATERIALS, in the right QUANTITY, at the right PLACE, at the right TIME, at the right PRICE, and at the right SOURCE. Forecasting in very important for this.
• Forecasting is a materials planning tool that relies on data from the past and present, and analysis of the trends to attempt to determine future events.
• Effective forecasting enables a business to develop a production plan and minimize the uncertainty of future events by predicting materials and other resource needs.

What does Forecasting involve?

• Materials/Prices
  • What materials are needed?
  • What quantity of materials are needed
  • How much will materials and transportation cost?
• Timing
  • When are the materials needed?
  • How much lead-in time do suppliers need?
  • When does production need to commence?
• Demand
  • What are the historical patterns for demand (previous 5 years)?
  • How much do we need to produce to satisfy demand?
  • Special demand times (e.g. Easter)?

Production and Materials Planning

• Once a materials manager has forecasted materials requirements, production, and material planning will be conducted.
• A production plan is an outline of the activities undertaken to combine resources (inputs) to create goods or services (outputs).
• The production plan includes:
  • Master production schedule (MPS)
  • Materials requirement planning (MRP)

Master Production Scheduling (MPS)

• A master production schedule (MPS) is a plan of what will be produced when it will be produced, where it will be produced, and the quantity in which it will be produced.
• The master production schedule specifies:
  • Quantity and type of each good/service to be produced;
  • How, when, and where production will occur;
  • The labor force requirements.
  • Delivery dates and contract agreements to meet.
• An effective master production schedule ensures that goods will be produced and delivered in time to meet the production schedule and satisfy orders/customer demand.

Materials Requirement Planning (MRP)

• Materials requirement planning (MRP) is a computer-based inventory management system that assists with scheduling and placing orders for materials by developing an itemized list of materials involved in production to meet customer orders.
• Materials requirement planning sets out:
  • Lead times required by suppliers (Boeing issue);
  • The exact number of raw material inputs required to meet satisfy the production schedule;
  • The amount of stock (inventory) on hand;
  • Purchasing procedures (batch vs bulk purchasing).

Pros and cons:

Inventory Control (Just in Time)

• Inventory control is a system used to ensure that costs associated with maintaining an inventory of materials are minimized and that the operations system has access to the right amounts of inputs when required.
• Most businesses today have computerized inventory control systems that use barcoding to monitor stock levels/availability and stock loss (i.e. from theft), and automatically signal management when re-ordering is needed.
• A common strategy used by many businesses is the just in time (JIT) system of inventory control.
• The just-in-time approach ensures that the exact amount of materials inputs arrive only as they are required in the operations system.

How can effective management of materials optimize operations?

Effective management of materials can improve the efficiency and effectiveness of the operations system.

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Strategies to improve both the efficiency and effectiveness of operations related to quality, including Quality control, Quality assurance, and Total Quality Management

Quality Management

• Quality refers to the degree of excellence of a good or service and its fitness for a stated purpose
• Quality management refers to the management of all production processes to ensure output are consistently reliable, durable, and free from defect.

Quality Management Strategies

Quality control

• Refers to a process where products and services are regularly inspected and evaluated during production/delivery to ensure they meet benchmark standards.
• The purpose of QC is to ensure problems and defects are identified before product completion/service delivery (i.e preventative measure)
• QC involves four key responsibilities
  • Establish quality standards/benchmarks
  • Test/inspect samples of goods/service
  • Compare actual quality and benchmark
  • Take Corrective action where necessary
• Strength and weaknesses
• \

Quality Assurance

• Refers to a process in which a business receives certification that its systems and processes meet accepted quality standards of and external organization.
• QA is a proactive measure (as opposed to qc which is reactive) the business submits itself to rigorous testing to determine if it meets quality standards set by a certification body (e.g Standards, Australia, International Organization for Standardization (ISO))
• Undertaking QA guarantees ‘quality approval’ (i.e ‘real’ quality, as opposed to ‘official’ quality)
• Strengths and Weaknesses

Total Quality Management

• Refers to a holistic, business-wide approach to the management of quality where all members of the business commit to achieving excellence in every aspect of the business operations.
• The aim of TQM is to create a defect-free production process - all waste and inefficiency in operations are eliminated, and ‘perfection’ is achieved in every single part of the operation system.

Strategies to Improve Efficiency and Effectiveness of Operations through waste minimization in the production process, including reduce, reuse, recycle

Waste Minimisation

• Waste is any resource (raw material, labor, time, etc.) that is discarded after use, or outputs which are defective/of no use.
• Waste minimization refers to a process involving the reduction of the amount of unwanted or unusable resources produced by a business in an attempt to improve the efficiency and effectiveness of operations and maximize value for the end customer.

Lean Management

Lean management is a waste minimisation strategy that uses a range of measures (traditionally used by Japanese businesses) in an attempt to improve the efficiency and effectiveness of operations by eliminating waste, reducing costs and improving quality.

Principles of Lean Management

• Pull System
  • A lean technique for reducing waste of any production process. Applying a pull system allows you to start new work only when there is a customer demand for it. This gives you the opportunity to reduce overhead and optimize storage costs.
• Kaizen (continuous improvement)
  • All areas the business responsible for working together to proactively achieve regular incremental improvements in operations
• One Piece Flow
  • Achieving a steady flow in production without constant starts or stops
• Zero Defects
  • Zero defects is a way of thinking and doing that reinforces the notion that defects are not acceptable, and that everyone should “do things right the first time.” The idea is that with philosophy of zero defects, you can increase profits both by eliminating the cost of failure and increasing revenues through increased customer satisfaction. This strategy can be implemented with a focus on preventative quality control (eg extensive cleaning), and proactively addressing the flaws in systems and processes

Strengths and Weaknesses of Wast Minimisation

Corporate social responsibility considerations for an operations system, including the environmental sustainability of inputs and the amount of waste generated from processes, and the production of outputs

Corporate social responsibility (Social, Economic, Environmental, Ethical, Legal Stakeholder)

(SEEELS)

The commitment by organizations to go above and beyond legal obligations to conduct their business in an ethical manner, to take responsibility for the economic, social, and environmental consequences of their activities, and to be accountable to a wide range of stakeholders, including employees, customers, and suppliers.

CSR in the operations system

Manage Inputs

• Sustainable Procurement - source inputs that do not harm the environment
• Source ‘Fair Trade’ input, or use socially responsible suppliers* only
• Use renewable energy sources (e.g. solar) to power production process.
• Source inputs locally to lower carbon emissions involved in supply chain.

Manage processes

• Ensure operational processes promote a healthy/safe working environment for employees, and ensure all employees have access to training.
• Introduce waste minimisation processes/green technologies to reduce waste.
• Retain all processes in Australia to ensure local employment opportunities.

Manage Outputs

• Ensure outputs are high quality - fit for purpose, safe, durable and reliable.
• Ensure goods produced benefit society in some way, without causing harm for society or the environment (e.g. Toyota Prius).
• Be proactive with product recalls if potential to cause harm (e.g. Toyota, VW).