BUSINESS STUDIES -

TOPIC ONE:

OPERATIONS


Role of operations management
Influences on operations management
Operations processes
Operations strategies





Students learn to:
o examine contemporary business issues to:
discuss the balance between cost and quality in operations strategy
examine the impact of globalisation on operations strategy
identify the breadth of government policies that affect operations
management
explain why corporate social responsibility is a key concern in operations
management

o investigate aspects of business using hypothetical situations and actual business
case studies to:
describe the features of operations management for businesses in a tertiary
industry
assess the relationship between operations and the other key business
functions in two actual businesses
explain how operations strategy can help a business sustain its competitive
advantage
recommend possible operations strategies for one hypothetical business

o role of operations management

Operations: B processes that involve transformation/production.
*transformation: conversion of inputs (resources) to outputs (good/service)
*value adding: creation of extra value as inputs transformed into outputs
(tangible/intangible)
Operations are a cost centre: do not directly derive income but do incur cost.

Bs continually seek to minimise production costs (so retail price low/reasonable)
Minimising waste to eliminate waste
New, innovative ideas to encourage/increase customer purchases

Transformation of goods Transformation of services

Strategic role of operations management cost leadership, good/service
differentiation

Strategic: affecting all key B areas- thus, involves operations managers contributing
to the strategic direction/plan of B.

Costs in operations function-
*Inputs: capital, land, resources, machinery leases
*Labour: full/part-time/casual employees, overtime, subcontractors, recruitment/training
*Processing: machine maintenance, electricity, design, scheduling
*Inventory: back order, insurance, theft, damage, storage

*Quality management: sampling/inspecting, warranties/returns/complaints

Cost leadership: aiming to have lowest costs/most price-competitive in market
*Economies of scale: costs advantages created as result of increase in scale of B
operations (savings= cheaper cost per unit of inputs, machinery/technology efficiency)
*Good/service differentiation: distinguishing products (goods/services) from competitors
(eg- Goods) vary product features/quality/augmented features
(eg- Services) vary time spent on service/level of expertise/material, technology quality

Goods and/or services in different industries
Goods:

Standardised goods: mass produced, uniform/predetermined quality
Customised goods: varied according to customer needs
Perishable goods: high quality, safety, clean, appropriate/robust packaging
Non-Perishable goods: manage quality throughout process, highly responsive to
market demand
Intermediate goods: gone through one set of operational processes then inputs
into further processing (eg) manufacturer coverts steel into tiny screws, then used
by electronics manufacturer as essential components.

Services:

Vary according to whether highly standardised (fast food) or customised (dental)
Self-service: encourage customer to take the initiative to help themselves (eg) self-
serve checkouts, online shopping

Interdependence with other key business functions

Interdependence: mutual dependence that key B functions have with one another
(work best when overlap, employees have common goal/support one another)
Tasks within key B functions: closely related tasks are grouped together
(marketing-sales, finance-admin, operations-inputs>transformation>outputs, HR-
R&D and customer service and assistance in the transformation process)

o Influences

Globalisation, technology, quality
expectations, cost-based competition,
government policies, legal regulation,
environmental sustainability

Globalisation:

Globalisation: removal of barriers of trade between nations. Characterised by
increasing integration between national economies, high degree transfer of capital,
labour, intellectual ideas, technology and financial resources (affects consumers
who seek global brands and the organisational design/supply chain)
Supply chain: range of suppliers a B has and their relationship with them (two
types: B innovator or follower)
1. Reverse engineering: process that involves B taking product of competitor that is
already released into market. Product is taken apart to see how made. Imitating
B tries to make own version using different materials at lower cost.

2. Innovation: B creates novel (new) product (thus, leads the market)
Global web: network of suppliers a B has chosen on basis of lowest overall
cost/risk and max certainty in quality/timing of supplies.

Technology:
Technology: design, construction and/or application of innovative devices,
methods and machinery upon operations processes
Technology is used throughout whole operations process: from admin (desktop
computers, phones)processing (robotics in production process, large machinery)

Quality expectations
Quality: how well designed, made and functional goods are/degree of competence
services are organised and delivered
most consumers have high quality expectations- standards must be followed
(Goods)- quality of design, fitness for purpose, durability.
(Services)- professionalism, reliability, level of customisation

Cost-based competition
Cost-based competition: derived from determining break-even point (TC=TR) and
then applying strategies to create cost advantages over competitors
Fixed costs: do not change, regardless of B activity level
Variable costs: vary in direct response to B activity level (production level)
B that reduce costs: eliminate waste, produce standardised products for larger
markets, high volume input, automated production systems, bulk buy inputs,
achieve economies of scale (economic efficiencies that result from carrying out
process, like production or sales, on a larger and larger scale)

Government policies
Affect B rules/regulations, thus affects management of key B functions
(eg) WH&S, training/rules, public health policies, environment policies,
employment relations
Possibility of Carbon pricing: putting a price on carbon pollution (climate change)

Legal regulation
Compliance costs: expenses associated with meeting the requirements of legal
regulations (abiding by all laws/governmental policies)

Environmental sustainability
Environmental (ecological) sustainability: B operations shaped around practices
that consume resources today without compromising access to such resources for
future generations (significantly affected by climate change awareness)

Carbon footprint: amount of carbon produced and entering environment from
operations processes

corporate social responsibility the difference between legal compliance and
ethical responsibility environmental sustainability and social responsibility

Corporate social responsibility (CSR): open and accountable B actions based of
respect for people/community/society/broader environment. Involves B more than
just complying with laws and regulations (aka. triple bottom line)

difference between legal compliance and ethical responsibility
Legal compliance- requires that B follows prescribed standards of behaviour

(eg) Labour law (minimum/award wages, working hours, WH&S), environmental and
public health (waste disposal), B licensing (zoning restrictions), taxation, trade practices
(address issues of market power, misleading/unfair conduct), migration/offshore labour
(ensure minimum standards are applied to workers from overseas), intellectual property
(addresses moral rights issues: trademarks, designs, original ideas, artistic works),
financial/accounting/corporations (aim to standardise methods/rules around financial
records, ensures company directors follow rules as fiduciaries- person financially trusted
with others money), human rights (discrimination, gender, age)

Outsourcing: use of outside specialists to undertake 1+ key B functions (to try and
reduce compliance costs). Two types:
*Onshore: use of domestic Bs as outsourcing provider
*offshore: taking B activities to provider overseas

Ethical responsibility- B meeting all obligations and taking it further by following
intention and spirit of the law (B shows it values something more than just
earning maximum profits as it allocates money over what it costs to just comply
with standard laws)
International Labour Organisation (ILO): promotes work rights, encourages decent
employment opportunities, enhance social protection, strengthen dialogue in
handling work-relates issues.

environmental sustainability and social responsibility
Economic growth should not be at expense of polluting/degrading environment
(must be balance between economic and environmental concerns)
Growing consumer expectation that products must be clean, green and safe, B to
adopt greenhouse reduction methods, encourage development of long-
term/sustainable strategies.
Socially responsible B: tries to expand B and provide for greater good of society
(recognise that B activities impact on society). (Once customer realise B isnt acting
responsibly can stop buying product. If acting correctly, may increase purchases)

o operations processes

inputs transformed resources (materials, information, customers)
transforming resources (human resources, facilities)
inputs: resources used in the transformation (production) process
(eg) energy (electricity, fuels), labour (mental and physical effort, raw materials
(components- wood, natural resources), machinery/technology (capital equipment) (used

to process, design, make products) (Capital-labour substitution: machinery/technology
displace people by doing the work they do)

transformed resources (materials, information, customers)

transformed resources: inputs that are changed/converted in operations process

Materials: basic elements used in production process. Two types:

1. Raw materials: essential substances in unprocessed (natural) state (from ocean,
forest, recycled waste, mines)

2. Intermediate goods: goods manufactured to use in further
manufacturing/processing
(eg) plastics, copper, oils, silicatesmicrochip-chips, plastics, metals,
labourcomputer

Information: knowledge and information gained from research, investigation and
instruction, which results in increased understanding (value: influences behaviour,
decision-making). Can come from two sources:

1. Internal: comes from within B, gathered from its internal sources-
financial/quality/ reports and internal key performance indicators (KPIs) (eg) lead
times [period between customer's order and delivery of final product], inventory
turnover rates, production data
2. External: information from market reports, statistics from industry
observers/bodies, official government statistics from ABS, media reports,
academic papers

Customers: become transformed resources when their choices shape inputs- their
preferences/interests are a starting point to production process. Their desires are
inputs and act as a transformed resource.
*Customer relationship management (CRM): systems that Bs use to maintain
customer contact (can improve customer service, increase competitiveness,
identity changes in consumer tastes)

transforming resources (human resources, facilities)

Transforming resources: inputs that carry out transformation process (enable
change/value adding to occur). Two main types:

1. Human resources (HR): employees said to be single most important/crucial
input into B. Hard working, well qualified, disciplined staffgreat productivity,
efficiency. (eg) setting performance objectives to motivate staff,
training/development to enhance skills

2. Facilities: plant (factory, office) and machinery used in operations process

transformation processes the influence of volume, variety, variation in
demand and visibility (customer contact) sequencing and scheduling Gantt
charts, critical path analysis technology, task design and process layout
monitoring, control and improvement


Transformation: conversion of inputs (resources) into outputs (goods, services).
The transformation process differs between:
1. Manufacturer: transforms inputs into tangible products (can be touched).
Use machinery, robots, computers to transform inputsoutput
2. Service: transforms inputs into intangible products (cannot be touched).
Rely heavily on customer interaction, more labour-intensive (staff are
crucial to operations)
Transformation process also directly involved with value adding.

Influence of volume, variety, variation in demand and visibility (customer contact)
Volume: how much of a product is made
Variety: range of products made
Variation in demand: amount of product desired by consumers (B try to predict)
Visibility: nature and amount of customer contact (feedback). Can be direct
(surveys, interviews, letters) or indirect (data review- market share, customer
reviews)
Lead time: time taken for order to be fulfilled from moment it is made
Max flexibility: mix of products made, services delivered through information
process

Sequencing and scheduling (Gantt charts, critical path analysis)
`````````````````````````````````````````````````````````````````ue
ncing: order in which activities in operations process occur
Scheduling: length of time activities take within operations process
Gantt chart: type of bar chart, showing both scheduled and completed work over
period of time. Often used in planning/tracking a project (created by Henry Gantt)
Critical path analysis: scheduling technique/method that shows what tasks need to
be done, how long theyll take and what order is necessary to complete those tasks.
(shortest length of time it takes to complete all tasks necessary to complete
project/process)

Technology, task design and process layout
Technology: application of science/knowledge that enables people to do things/
perform established tasks in new/better ways.
(eg) office technology: computer, keyboard, USB/storage devices, mobiles, printers

Telecommute: to commute/travel to work electronically. Meaning home or another
location becomes worksite and work is delivered via internet/email.

Manufacturing technologies-
1. Robotics: used in engineering, specialised areas of research, assembly lines
(where programs are capable of doing several different tasks required)
2. Computer-Aided Design (CAD): computerised design tool that allows B to create
product possibilities from a series of input parameters.
3. Computer-Aided Manufacturing (CAM): software that controls manufacturing
processes
4. Task design: classifying job activities in ways that make it easy for an employee
to successfully perform and complete the task.
5. Skills audit: formal process used to determine the present level of skilling and
any skill shortfalls that need to be made up either through recruitment/training

Plant (factory/office) layout: the arrangement of machinery and staff within the
facility.

*planning the layout of workspace to make sure production is streamlined to
flow smoothly, efficiently and quickly.
(eg) enough physical space for projected volume of production, appropriate
technology, stock location, links between processes/stages in production,
conformity to WH&S.
There are 3 alternative layout options:
1. Process layout: arrangement of machines so machines/equipment are
grouped together by function (process) they perform.

Process production: deals with high variety, low volume production (each
product has different sequence of production, which is intermittent, moving
from one department to another, necessary machinery is arranged according
to this sequence)

2. Product layout: where equipment arranged relates to sequence of tasks
performed in manufacturing a product (eg) assembly line layout
Product production: (mass production) characterised by the manufacturing
of a high volume of constant quality goods

3. Fixed position layout: operational arrangement in which employees and
equipment come to the product
Product projection: deals with layout requirements for large-scale, bulky
activities (eg) construction of buildings, bridges, ships.

*Office layout: tailored to B needs. Typically organised around workstations.
Workstations: desk areas required by office workers, usually fitted with access to a
computer, keyboard, printer

Monitoring, control and improvement
Monitoring: process of measuring actual performance against planned
performance.
Typically arranged around the needs to measure KPIs (lead times, inventory
turnover, defect rates, IT, maintenance costs)

Control: occurs when KPIs are assessed against predetermined targets and
corrective action is taken if required (what intended to happened vs. what
occurred)

Improvement: systematic reduction of inefficiencies and wastage, poor work
processes and the elimination of any bottlenecks
*Bottlenecks: aspect of transformation process that slows down overall processing
speed/creates barrier leading to backlog of incompletely processed products
(eg)- Improvements: time (lead/wait), process flows (smooth transitions between
transforming goods), quality (goals, measure standards, assess returns/warranties), cost
(per unit of production), efficiency (reducing waste, greater output per unit input)
Continuous improvement: ongoing commitment (striving) to achieving perfection
(setting higher and higher standards)

outputs customer service warranties

Outputs: end result of B efforts (the good/service provided/delivered to customer).
Must be responsive to consumer demands


Customer service

Customer service: how well a B meets/exceeds expectations of customers in all
aspects of operations.
Market research has shown Bs who provide superior customer service can change
up to 10% extra for the same goods/services, grow 2x as fast as competitors and
increase their market share/profits.

Warranties

Warranty: promise made by a B that they will correct any defects in goods
sold/services delivered.
Assessment of warranty claims can help B adjust transformation processes so that
they become more effective.

o operations strategies

performance objectives quality, speed, dependability, flexibility,
customisation, cost new product or service design and development

performance objectives: goals that relate to particular aspects of the
transformation process. (to make B more efficient, productive, profitable). There
are six main KPIs:

quality

often determined by consumer expectations.
Includes quality of
*design: way it looks and thus, materials used
*conformance: focus on how well product meets standards of prescribed design with
certain specifications
*service: reliability, meeting needs of clients, timely responsive delivery.

Speed

Speed: time takes for production and operations process to respond to market
changes (demands).
(eg) speed goals- reduce waiting time, shorter lead times, faster processing times.

Dependability

Dependability (reliability): how consistent/reliable a B products are.
(eg) Goods: how long products are useful before they fail
(eg) Services: consistency of service standards and reliability.

Flexibility

Flexibility: how quickly operations processes can adjust to market changes. (closely
related to time)
Best achieved by increasing capacity of production (eg) using plant/machinery
better, purchasing new equipment

Customisation


Customisation: creation of individualised products to meet the specific needs of
the customers.
Mass customisation: process that allows a standard, mass produced item to be
personally modified to specific customer requirements. (eg) car, computer.

Cost

Cost: minimisation of expenses so that operations processes are conducted as
cheaply as possible.
(eg) reduce waste, use inputs better, reduce supplier costs, manage inventor,
maximise flexibility.

new product or service design and development

Product design has 2 approaches:
1. Preferences/desires of consumers
2. Innovations in technology which allow appealing products to be made

Steps in the process:
1. Market research, product concept, specification development
2. product design, prototype development, decide quality parameters
3. prototype testing/assessment
4. product/production process refinement
5. production, product launch, distribution, product line extension (over time).

Throughout whole design/development process quality, supply chain (from 1
st

supplierconsumer), capacity management and cost should be considered by
managers

Product utility: usefulness and value of product from consumer point-of-view.

Services:
Explicit service: tangible aspect of service provided (time, expertise, skill, effort)
Implicit service: based on feeling- intangible (physiological wellbeing, feeling
looked after).

supply chain management logistics, e-commerce, global sourcing

Supply Chain Management (SCM):

Three key aspects of SCM:

Sourcing/Global sourcing:

Sourcing (procurement, purchasing): purchasing of inputs for the transformation
processes.
(eg) factors influencing sourcing: consumer demand, input quality, flexibility,
timeliness, supplier costs

Trends in SCM (in recent years):


Supplier rationalisation: assessing number of suppliers to reduce number of
suppliers to least amount. (assess most/least effective suppliers) (less
contracting/wastage/duplications and improved timeliness)
Backwards vertical integration: purchasing through mergers/acquisitions of
suppliers (to guarantee supply in transformation process as supplier is owned
by the B)
Cost minimisation: use of offshore suppliers (increased access to low-cost
inputs/resources)
Flexible/responsive supply chain process (a lean organisation): tries to
minimise wastes, increase processing speed, reduce costs. (eg) not carrying
inventories, but ordering as per demand (thus, no storage costs, only orders
what is necessary, ensures resources used optimally).

Global sourcing: B purchasing supplies/services without being constrained by
location (buying/sourcing from wherever suppliers are that best meet sourcing
requirements).
Advantages: cost/expertise advantages, access to new
technologies/resources.
Disadvantages: possible relocation of certain operations, increased
logistics/storage/distribution costs, increasing complexity.

E-commerce

E-commerce: buying and selling goods via the internet.
E-procurement: (use of online systems to manage supply) allows suppliers direct
access to B levels of supplies
B2B (B to B): direct access from one B (supplier) to another B (buyer) - allowing
supplier to assess needs of buyer and meet them in timely manner.
B2C (B to consumer): selling of goods/services to consumers over internet, with
payment usually by credit card.

Logistics

Logistics: distribution, transportation (and transport modes), storage use
(warehousing, distribution centres), materials handling and packaging (eg-
glassware, foods).
Distribution: ways of getting goods/services to customer. (motorbike courier, van,
truck, aeroplane, ship, train)
Storage: finding a secure place to hold stock until required. (alternative options
include: Just In Time - JIT)
Warehousing: use of warehouses for storage, protection and (later) distribution of
stock. (Incur costs: premises, insurance/security, stacking/moving/carrying,
subject to damage)

outsourcing advantages and disadvantages technology leading edge,
established

Outsourcing (Business Process Outsourcing- BPO): involves use of external
providers to perform B activities
(Theory: provider will be specialised in the area, thus, lower cost, greater effectiveness).

advantages


Simplification: reducing number of activities performed within B.
Efficiency/cost savings: access to skilled and cheaper labour
Increased process capability: access to improved technologies, highly skilled labour
Increased accountability: through use of service level agreements (SLAs) which
contractually bind the vendor to pre-determined targets on KPIs.
Access to skills/resources B lacks: B may find OS (overseas) labour is low cost, yet
highly-skilled.
Capacity to focus on core B/key competencies (abilities): enables B to focus on its
vision, purpose, sustainable advantage (through innovation)
Strategic benefits: breaks down trade barriers, using vendors who outsource to
other B competitors can bring expertise from their past experiences, trading in
different time zones (get the job done overnight, ability for B to be working more
hours of day), creating strong partnership between Bs (vendor possibly suggest
innovative solutions to B increase B efficiency/productivity)
Improvements to in-house performance: allows B to focus on internal changes that
reduce costs and improve profitability.

disadvantages

Payback periods/cost: time taken to repay cost of organising outsourcing or to
make required organisational changes.
Communication/language: varied B goals/expectations, OS regions have different
cultures, languages, B management strategies.
Loss of control of standards/information security
Hierarchies: B may outsource to reduce B hierarchy costs, yet managing complex
outsourcing agreements can create new hierarchies B inefficiency.
Organisational change/redesign: (eg) downsizing- loss of domestic employment.
Loss of corporate memory/vulnerability: reliance on outside provider, lack
knowledge of key B process/solutions by transferring to external sources.
Disasters (eg- earthquakes) can also lead to severe communication disruption and
information loss.
Information Technology (IT): cost and time associated with keeping up to date with
IT, especially regarding separate nations (eg- source not up-to-date with latest IT)

Technology:

leading edge

Leading edge technology: technology that is most advanced/innovative at any point
in time.
(create products quicker, higher standards, less waste, more effective)

established

Established technology: technology that has been developed, widely used and
accepted without question. (eg- use of computers, software).

inventory management advantages and disadvantages of holding stock, LIFO
(last-in-first-out), FIFO (first-in-first-out), JIT (just-in-time)

inventory (stock): amount of raw-materials, work-in-progress and finished goods
that a B has on hand at any particular point in time.


advantages of holding stock:

consumer demand can be met quickly (prevent customer purchase from another B)
if product line runs out, alternative options can be offered (no lost sale)
reduces lead times
gives B opportunity to generate immediate revenue
allows B to promote use of products to non-traditional/new markets
older stock can be sold at reduced prices, thus encourages cash flow/attracts sales
stocks are asset of B- reflects well on balance sheet
making products in bulk may reduce costs (economies of sale) and may be cheaper
than cost of holding stock once made (costs of holding can be up to 30% value of
stock)

disadvantages of holding stock:

costs associated with holding stock (eg) storage charges, spoilage, insurance, theft,
handling expenses
invested capital, labour, energy cannot be used elsewhere (already been used to
create/hold stock)
cost of obsolescence (stock that remains unsold).

LIFO (last-in-first-out)

LIFO: method of pricing inventory that assumes the last goods purchased are also
the first goods sold, thus the cost of each unit sold is the last recorded.

FIFO (first-in-first-out)

FIFO: method of pricing inventory that assumes the first goods purchased also also
the last goods sold, thus the cost of each unit sold is the first cost recorded.

JIT (just-in-time)

JIT: inventory management approach which ensures that the exact amount of
material inputs will arrive only as needed in the operations process.
(Aims to have B only make enough products to meet demandreduce
holding/insurance costssaves money)

quality management control assurance improvement

Quality management: processes that a B undertakes to ensure consistency,
reliability, safety and fitness of purpose of product.

Three quality management approaches:

control

Quality control: use of inspections (attribute inspection) at various points in
production process to check for problems and defects

Assurance


Quality assurance (QA): use of a system to ensure that set standards are achieved
in production.
(eg) fitness for purpose (how well product does what its designed to do), desire to
achieve right first time (products do not need to be reworkedsaves time, energy,
resources)

Improvement

Continuous improvement: ongoing commitment to improving B goods/services
(over time B processes made more efficient and effective)
Six stigma: quality management approach that seeks to identify and remove the
causes of problems in the operations processes, achieving virtually defect-free
production.
Total quality management (TQM): managing the total B to deliver quality to
customers. (holistic approach that is ongoing; requires: benchmarking, employee
empowerment, focus on the customer, continuous improvement)

overcoming resistance to change financial costs, purchasing new equipment,
redundancy payments, retraining, reorganising plant layout, inertia

financial costs:

purchasing new equipment

purchasing new equipment is considered capital cost (high cost, but can be
recouped through use).
(eg) advantages: improved processing flexibility/speed/lead times, more consistency,
higher overall quality of processing, reduced wastage/losses from equipment failure

redundancy payments

redundancy: loss of work arising from job skills that are no longer
required/relevant in the workplace.
payments are made to redundant employee, varying in value depending on:
length of employment, level of pay, amount of unused leave, outstanding wages
(thus, payments can be accumulative)

retraining

retaining costs arise from reorganisation of B internal hierarchy/acquisition in
technology.

reorganising plant layout

major changes (eg- reengineering of systems) often require extensive
reorganisation of facility layout. Costs include: transport/placing/bringing power
to new plant and equipment, downtime when transferring from old to new
machinery and when testing new technologies (loss of productivity due to staff
having to reorient themselves in new work processes/arrangements)

inertia


inertia: describes physiological resistance to change. (feeling of uncertainty, fear of
the unknown resistance to change)
managing change effectively: managers must anticipate and adjust to changing
circumstances; to be proactive- not reactive, communicate the vision with all those
the change will affect to encourage understanding and support for the change
Change agents: somebody who initiates a change or facilitates change process.

global factors global sourcing, economies of scale, scanning and learning,
research and development

global sourcing

RECALL global sourcing: B purchasing services/supplies without being constrained
by location (includes all outsourcing)

economies of scale

RECALL Economies of scale: cost advantages gained by producing on a larger scale.
Can lead to significant cost savings in various aspects of the B enterprise.

scanning and learning

B can benefit from scanning the global environment and learning from the best B
practices worldwide. (helps managers adapt best practices to B operations)
Kaizen: Japanese word for improvement. Emphasises continuous improvement in
all areas of B. (quality, care, continuous improvement)

research and development (R&D)

R&D helps B to create leading edge technologies and create innovative
products/solutions (increases B competitive advantage/quality)