Role of Operations Management

Syllabus Points Content

Role of operations management

Introduction:
The strategic role of Businesses can maximise profits by either:
operations - income/revenue (for volume)
management
- Costs or expenses
– Cost leadership - Profit centres (directly derive income)
– Good/service - Cost Centres (do not directly derive income but do incur a cost)
– Differentiation
The allocation of resources and overall design of the operating system that will
benefit the business in the long term. Main examples:
- Cost leadership (high output, as cheaply as possible)
- Differentiation (innovations that make the good/service different to
competitors)

Cost Leadership in the operations functions

Cost leadership aims to have the lowest costs or be the most price competitive in
the market.

Costs involved in operations

- Input costs (land, interests, facilities)
- Labour costs (employees, overtime, training)
- Processing costs (machinery, electricity,)
- Inventory costs (storage, backorder, logistics)
- Quality management controls (preventing errors, sampling)

Economies of scale and cost management

Economies of scale refer to cost advantages that can be created because of an
increase in the scale of business operations.
- Usually from being able to purchase lower cost per unit of input and
efficiencies.
- More products being produced usually equates to lower costs of production.
Ways to decrease costs of production:
- Buy in bulk
- Efficient production
- Reduction in promotion costs
- Cheaper capital
- Reduction in logistics costs
Production differentiation
means distinguishing products (goods or services) in some way from its competitors.

Goods
Varying the actual product features Increasing complexity or options
Example, breakfast cereal w/ or w/out
sugar

Varying product quality Lower quality model contrasted by a

higher quality model (which is more
expensive)
Example, Woolworths home brand vs
McCain

Varying any augmented features Add-ons or additional benefits on a

product which varies it.
For example, a car with GPS

Services
Varies the amount of time spent on a Differentiates from other service
service providers through time. For example,
faster to mow lawns.

Varying the level of expertise brought to Higher level of expertise = more

a service specialised service.
Example, Employee’s with a master's
vs degree

Varying the qualifications and Highly qualified service providers affect

experience of the service provider the quality of service.
Example, well-known surgeon = quality
guaranteed

Varying the quality of Using higher quality materials or

materials/technology used in service technology.
delivery Examples, accounting software, CAD,
CAM, X-RAY

Cross Branding
Adding value to products by offering consumers added benefits from cross-branding
arrangements.
Examples, are Woolworths + Caltex, and Coles + Shell.
Goods and/or
services in different 1.3 Goods and/or services in different industries
industries
Goods in different industries
Standardised goods - Mass produced
- Uniform in quality
- Predetermined level of quality

Example → Nike t-shirts (made in a factory

with blueprints for quality level)

Customised goods - Varied according to customer

needs
- Focus on the market instead of
production

Example → interior design of a house

Perishable Goods and operation processes

- High standards of quality
- Quick lead times and distribution
- Appropriate and robust packaging

Intermediate goods
- Goods processed more than once
- One set of operation processes → inputs in further processing
- Manufacturer makes screws → used in construction

Goods/service differentiation

Characteristic For Goods For Services

- Tangibility and Physical thing, can get Are intangible, only exist
perishability spoiled whilst service is being
performed

- Customisation Tend to be standardised Usually customised

- Ownership Can be owned and Can’t be owned

transferred

- Time between Time between production Usually at the same time

production and and consumption can be
consumption long

- Determination of Costs to produce and Dependant on the market

value distribute, inputs and Better quality = more
margin expensive
 Services in different industries
- Standardised (fast food, retailers,)
- Customised (Accounting, dentist, medicine)

Cost leadership and standardised products

Standardised goods can be:
- Costs of production can be lowered.
- Mass produced (without variation, thus achieving economies of scale)
- Cost leadership (how fast service can be delivered)
- Fast food industry (standardised, fast, industrial,

Self service
- encouraging the customers to take the initiative to help themselves
- businesses can concentrate on customisation
- Drip pricing (business advertises a price, but additional costs are added)

Interdependence Key Business functions

with other key - Operations (production + provision of services)
business functions - Marketing (sales and advertising)
- Finance (financial planning + management)
- Human resources (employees + recruitment)

Interdependence - dependence of functions on eachother, working as a team,

Operations
- Production
- Manufacturing and services sector
- Inputs → outputs
- Turning raw materials into finished products

Marketing
 - Meeting the wants and needs of customers
- Selling goods at the price that the markets wants to pay
- Motives for buying
- Pricing strategies
- Product promotion and distribution

Marketing (design of products)→ Operations (sourcing input materials)

Finance
- Recording and summarising financial transactions
- Income statements, balance sheets, cash flow
- Profitability (Maximise sales, minimise expenses)
- Cheaper production → higher profit margins
- Higher quality → higher selling price

Human Resources
- Deal with employees
- Deal with issues surrounding employment
- Single most important resource of the business

- Acquiring (recruitment, e.g internal or external)

- Developing (training)
- Maintenance (keeping employees safe and happy)
- Separation (voluntary and involuntary

Outsourcing
- Product = Businesses getting goods or services from an outside source
- Employees (external recruitment) = recruiting employees from outside firm

Other Information:

1.1 Introduction:

What are operations?

- The production of goods and services
- Production controls and associated quality control on processes. This includes input management and
capacity decisions.
- Inventory controls
- Supply Chain Management
- Logistics and distribution
 - Management decision-making in terms of operational processes.

Operations and the customer focus

Customers want innovative products at low cost that improve quality of life.
Customers also want firms that:
- Minimise waste during production
- Reflect fair value for labour
- Low operating costs
- Are environmentally aware
The focus on waste minimisation, ecological sustainability and ethical conduct is increasingly shaping the
operations function.

Minimising Waste
Also known as lean production, and aims to eliminate waste. Waste includes:
- Underuse of employment
- Under utilisation of machinery
Less waste = more efficient production

Types of Waste:
- Overproduction
- Waiting time
- Transport
 - defects
Waste adds Cost but not Value

Operate at low cost so as to maximise affordability

● If the operations functions are managed well, it can give a business a competitive advantage.
● Effective operations can lower costs and retail prices through efficiency
● It can bring differentiated products to the marketplace, better quality, and cheaper prices.
● Operations create products that satisfy the wants of consumers in the target market.
● Global sourcing and astute supply chain management, where businesses get their supplies from.

Operations processes adjust to shifting needs

- Technological advanced
- Keeping up with changes in consumer demands

Fair Trade
A lot of consumers are conscious of how people are treated in other countries, and will only purchase products
that ‘do the right thing by animals, the environment and people.
Works for:
- Gender equality
- A fairtrade minimum price (costs for sustainable products
- Fairtrade premium (additional costs of improving conditions.)
Production differentiation