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HSC Grace De Leon Business Studies

HSC 10:1 – Operations

Chapter 1: Role of operations mgmt.Operations• Operations, it is the business function that is concerned with the transformation of inputs into outputs• Transformation, any changes to inputs that adds value and converts them into outputs• Inputs, raw materials, components and parts used to produce a good or supply a service• Outputs, what is made or supplied by the operations process, the ‘final’ productStrategic role of operations management• Strategic decisions are there to improve productivity, efficiency and quality of outputs

- Efficiency, achieving maximum output with the minimum level of outputs. Reduces wasted resources and keeps costs low

• Decisions needs to fit the strategic goals and vision in the plan and fit into the changing business environment

• Long-term decisions will cover three broad areas- Planning production and delivery- Controls to manage quality- Improving operations

• Strategic decisions will focus on lower costs to an industry benchmark through efficiency and producing of g+ s that is different to its competitors

Costs of operations• The costs of operations include:

- Input: capital, land, resources and lease payments- Labour: wages/salaries, training and redundancy- Processing: machinery maintenance and electricity- Inventory: storage, insurance and logistics- Quality mgmt.: sampling and inspection of goods, warranty claims and machine downtime

Cost leadership• Involves aiming to have the lowest costs or, to be the most price competitive in the market• For this to happen, mgmt. must use a combination of strategies to minimise costs throughout the

operations process• A key strategy is economies of scale• Economies of scale returns to cost savings that can be made through an increase in the scale of the

business; purchase in bulk, improved efficiencies• Other ways to minimise costs include:

- Outsourcing product servicing so that the business focuses on its core function rather than after-sales service and warranty administration

- Exclusive access to a large source of low-cost inputs- Distributing the product using dealers who work with lower profit margins, which is the difference

between the sale price of a product and the cost to make the good or supply the serviceGood/service differentiation• In terms of operations, the key difference between a good and a service is that a good exists before there

is a need for it, whereas a service only exists at the time it is needed/providedProduct differentiation• The manner in which a business distinguishes their product from its competitorsProduct differentiation: goods• Varying the product features e.g. having a basic processed grain cereal or with added ingredients• Varying the product quality e.g. make a low quality model that is affordable then increase the quality

that should reflect the price• Varying any augmented features, refers to add-ons or additional benefits associated with the good e.g.

for a car a spoilerProduct differentiation: services


• Varying the amount of time spent on the service• Varying the level of expertise brought to the service, hiring an experienced professional• Varying the qualifications and experience of the service provider, having qualified + experienced

employees• Varying the quality of materials/technology used in service delivery. High quality technologyCross branding• A marketing strategy that involves two or more businesses that work together to promote their

service/product together, this strategy enables value for both businesses• It is to enhance their brand name through their association with each other• The product/service from both businesses is differentiated, but not from the product, but an external

factor that business brought into the mix.• Benefits include:

- Enhanced prestige- Lower costs as cross promotion costs less than other marketing strategies- Easier and probably one of the most successful marketing strategies- Both businesses are able to promote themselves simultaneously

Goods/services in different industriesGoods in different industries• Operations decisions will vary goods whether they are standardised or customised goods• Standardised, refers to goods that are mass produced, usually on an assembly line. They are uniform in

quality and meet a predetermined level of quality. They are produced with a production focus. They are non-differentiated products

• Customised, refers to those that are varied according to the needs of customers. They are produced with a market rather than a production focus. They are differentiated products

• Layout of the production line will vary whether the product is non-differentiated or not• Choice of process selection is strategic as it requires a high degree of cross-functional interaction and

coordination• Goods may be classified as perishable or non-perishable• Grocery sector is dominated by perishable goods (food) whereas household and business goods are

generally non-perishablePerishable goods and operational processes• Operational processes will need to integrate the following factors

- High standards of quality, safety and cleanliness in all operating processes- Very short lead times and distribution that is as quick and effective as possible- Appropriate and robust packaging and cold storage processes both through production and

distributionNon-perishable goods• They are more inherently more durable than perishable goods and issues of quality and inventory

management will arise• They will need to integrate the following

- Manage all aspects of quality in the process from sourcing through to production and distribution- Implement effective inventory management strategies and be highly responsive to market demand

in order not to over produceIntermediate goods• Some goods may be produced more than once• Goods that have been completed, may become inputs into further processing• For example, steel into tiny screws• They are the finished goods of the manufacturerServices in different industries• Services can also be standardised and customised• Depending on the company or person requiring the service/highly specialised, it may differ from what

other customers seek or it may be of a standard levelSelf-service


• Refers to the encouraging of customers to take the initiative to help themselves• The financial services and travel industry encourage customers to make their own transaction online• With this method, businesses can concentrate on customisation when a person cannot help themselvesInterdependence with other key business functionsInterdependence + operations• Finance will collect data and analyse the financial performance of operations• IT will manage communication of information• HR will provide suitable staff, organise training based on the requirements of operations• Engineering will assess new technology and develop solutions to problems• Marketing must understand the capabilities and limitations of operations when specifying product

features and design• R+D will develop new products based on the capabilities of operations

Chapter 2: Influences on operations


Globalisation• Globalisation is the integration of different national economies into one single market which gives the

opportunity for customers to purchase products from a business that provides the most value for money- It is a way for goods and services to be traded easily and a development of a world economy owing to

the increasing flow g +s, finance and information around the world• The impact of globalisation is a twofold. One, the opportunity to reduce costs through establishing a good

supply chain. Two, access to a global market to sell the outputs of operationsGlobal businesses• Globalisation refers to the integration and interdependence of the economies of different countries,

creating a global community• Integration refers to the joining together of different economies through trade, technology, deregulation

and global businesses• Results in an increase flow of goods, services, people, finance and information around the world• Geographic location and distance becomes less of an issue for businesses• When a key function is located outside the home nation it becomes a part of the global economy• A global business can be described to be integrated with the economies of different countries• Locations of functions:

- Manufacturing may be located where inputs and labour is the cheapest (developing country)- Raw materials may be sourced where it is most abundant- Finance located at a financial capital (e.g. New York)- Products distributed and sold for consumers of developed nations (Canada or Germany)

• Reasons for the ‘global web’ of operations is to lower costs and have a competitive advantage• Expansion into countries that offer cheaper labour, tax incentives and among other benefits. This strategy

exposes influences from other currencies, trade agreements, global consumers, technology and difference in culture

Difference currencies• Businesses need to convert currencies in order to pay for inputs• Depreciation of the AUD against the currency of the country inputs are being sourced from will lead to

rising costs- Depreciation, the fall of the nation’s currency against another. It can fall due to poor economy or

inflation. Currencies in other countries may increase in value because their economy’s performance is better

• The original advantage of relocating and outsourcing will be eroded by the changing value of the currencies in global finance markets

• The business is therefore forced to seek a suppler elsewhere the AUD is a higher value• Reduce risk by ‘hedging’, which refers to any strategy a business takes to reduce financial risk• Risk from the exchange rate changing from when a purchase contract is signed and the time payment is

made• Hedging to eliminate risks from the value of currency appreciating and depreciating• Global businesses enter contracts to buy and sell foreign exchange to purchase inputs from different

businesses, this is called transaction exposure• Hedging can be done by using subsidiaries (a company controlled by a holding company)• Hedging that uses subsidiaries involves a global business avoiding changing between currencies by having

all transactions between its subsidiaries occur in the same currencyTrade agreements• Bilateral trade, is an agreement between two countries to reduce barriers to trade and promote economic

integration• Multilateral trade agreements are between more than two nations• It’s important for a business once they enter the market, is the amount of protection that exists• A business may establish operations in another country that is already member of a trade agreement• Regionalism, has been occurring very recently, it is the classification of world’s nations into regions based

on geography and economic links• There are regions forming economic alliances e.g. Europe. The North American Free Trade Alliance


(NAFTA), Mexico, United States and Canada. The South-East Asian nations (China included)• Trading blocs, are a group of nations that formed a trade alliance by signing a multilateral trade agreement.

Countries in trade blocs have less restrictions so, businesses trade with countries in the same bloc• Using large-scale operations businesses are able to share costs, reduce expenses of development, and

produce and distribute to a larger scaleEmergence of global consumers• Globalisation enables higher incomes and many parts of the world have a rapidly growing middle class who

wish to buy products to increase their quality of life• The demand for consumer goods such as LCD televisions will be enormous in the incoming years• Globalisation opens up new markets and operations may need to change the features, design, quality or

information for a good or service• Product may only need slight changes to match the demands of the target market in different countries• Operations must know the requirements of a product to suit different countries and have the flexibility to

modify products as required• The product is often differentiated in some aspect to suit the different culture of the local market

- It is important to research the differences in language, religion, tastes and ethics on order to sell well in a different market or else there is the chance of failure

Technology• Globalisation has spread technological developments worldwide• Different techniques such as mobiles and e-mail are the main drivers of globalisation, enabling service-

based businesses to penetrate global markets with the international distribution of information• Globalisation allows business access technologies that may be unavailable in their own country• Strategies to acquire technology include, joint ventures or strategic alliance or simply purchasing

businesses that have the acquired technology- Joint venture, a commercial enterprise undertaken jointly by two or more parties which otherwise

retain their distinct identities- Strategic alliance, an agreement between two or more parties to pursue a set of agreed upon objectives

need while remaining as independent organisations• Technological change is a major external influence on biz, as it can help business performance with certain

products or make new products• Technology can result in the development of new methods of production or equipment that can help with

performance in a quicker or at a lower cost• Businesses are encouraged to assess its application of technology to the business• The business will weigh its cost of the upgrade against expected benefits, such as, increased sales or higher

profits• It has changed the operations of manufacturing and service based businesses• Despite the high costs, the benefits in the long term are worthwhile• New technology offers saved time, reduce waste, more efficient business and therefore a profitable

business – also with a competitive advantage• When making a decision about technology, a business must consider:

- Speed of change taking place in that area of technology- Technology that competitors are using- Finances available for change in technology- How long it will take to introduce the technology (especially if all work needs to stop)- Whether staff will need to be retrained or possibly made redundant

• Managing change with a respect to implanting new technology is a challenge for management to maintain effectiveness and efficiency in operations

Different cultures• It is advisable for a business to have someone who is a local expert that can help prevent issues caused by

cultural clashes and communication problemsRobotics• With the progress of technology, employees have been replaced by machinery, such as robots• Robotics, the development of robots, which are machines that can be programmed to perform a variety of


repetitive tasks and can detect change in the environment• They are used where dangerous or hazardous work is required and perform increasingly complicated tasks• In a manufacturing business, robots can result in increased efficiency by working for set periods of time

without a break and performing tasks more precisely than human employees• Employees may become bored with the repetitive task resulting in drop of quality of the product• Robots don’t become ‘bored’, need lunch breaks, take days off or paid a wag• They require a power source, maintenance and repairs if there is any mechanical failure• High costs of robots limits it availability for large manufacturers such as cars• During the 1990’s when employees became assertive, demanding various needs, robots suddenly became

desirableCAD and CAM• Computer-aided design (CAD), is computer technology that allows architects, engineers and designers to

draw and adjust designs using a computer i.e. robotics• Designs can be created based on the specifications or special conditions set by each client’s requirements• Looked from various angles and provides more effective visual presentation than a design on a sheet of

paper• 3D images can be manipulated, allowing for greater product innovation• CAD can be linked directly to the manufacturing process through computer-aided manufacture (CAM)• Computer-aided manufacture (CAM), computer technology that directly links the design process to the

manufacturing process using computers, provides links for exchanging data, which results in time being saved and fewer mistakes being made

• CAM software; the computer can be set to control large sections of production with greater efficiency, fewer errors and fewer staff

• Also allows far greater precision in the calculation of each input required in the production process and calculations of the expected input

• Not only easy in manufacturing but also has a significant influence on service based industries• E-commerce, databases, internet and intranet can save both time and money• Staff will have to be more multi-skilled and IT confident• Overall there will be fewer staff in service-based organisations (e.g. self-serve checkout)• Technology also has an impact on human resources

- Human resources acquiring appropriate skills and abilities and provide ongoing training and update their skills as technology changes

- Same staff may become redundant from their job due to technologyQuality expectations• A business that is customer focused will wish to produce goods and serviced that will satisfy the desires of

its customers• Customers often have a pre-existing idea about the quality that they will get form a certain product or

brand, they have beliefs about:- Durability, how long the product lasts given a reasonable amount of use- Reliability, how long the product functions without needing maintenance or repairs- Fit for purpose, how well the product actually does all the things advertising claims

• This quality expectation can be simply based on the reputation of the brands’ products in general and the prince paid for the product

• Customers heavily rely on good marketing, therefore operations must produce products with good quality features and design

• But not all good marketed products are of the best quality• Businesses that fall short of customer expectations will suffer long-term damage to its goodwill and

reputation in the market• Operations must be organised to make customer satisfaction and customers are a key influence on business

operationsCost-based competition• A business can gain price advantage over its competitors by using operational strategies that lower costs,

this way it can lower its prices compared to its rivals


• Sales and market should increase as well as profit i.e. cost leadership• Cost leadership works best when there is little difference in products offered by competitors• Reduce costs to produce and supply = maintaining of profit margin• Influence may force business to seek its own cost advantages through sourcing cheaper inputs, updating

technology or outsourcing• If business cannot compete on costs then it switch to differentiation strategy (unique products compared to

its competitors)Government policies• Political decisions affect the business rules and regulations, which in return affect the management of

various key biz. functions• Government policies change time to time due to change in government or social expectations• Government uses methods that encourage operations to become more innovative and competitive• ‘Do more with less’, increases productivity and reduces the cost of producing exports benefits Australian

economy• To support these innovative businesses, is to provide a monetary benefit such as a financial grant or tax

concession• Financial benefits gives funds to invest in leaner operations and new products• AUSTRADE is a government organisation that provides a range of assistance to Australian businesses that

wish to export and expand into the global economy• Businesses can have assistance by financial support and advice about exporters and establishing

manufacturing overseas and an introduction to potential suppliers• Other government policies include reducing the amount of protection certain industries receive from

overseas businesses• The gradual removal of tariffs, quotas and other types of protection has forced Australian businesses to be

more competitive by reducing operational costsLegal regulation• The aim of government regulation of business is to promote safety and fair business conduct. These

regulations exist on a local, state and federal level• If not complied by, there is the definite risk of a penalty• Business practices and procedures are shaped by these laws and regulations• It is the legal responsibility of the manager to be aware of all laws relevant to the operations function and

ensure the business complies with them• In all, regulations require the three.

- One, business operations are safe- Two, negative impact on the environment from operations is minimised or avoided.- Three, if the product/supplies claim to meet a particular standard, safe to use and of a certain quality

and all relevant information is provided, then it must ensure this claim is true.Environmental sustainability• Refers to the development, practice and use of methods of production that allow resources to be used by

producers today without limiting the ability of future generations to satisfy their needs and wants• Managers have a responsibility to protect the natural environment and ensure that their methods of

production incorporate sustainable resource use and use technology that won’t damage the environment• Impacts of resource depletion, site of resource removal, pollution via machinery, removal and storage of

waste needs to be taken in account• Consumers need to be aware of the cost and disposal of excessive packaging and clear instructions on how

to use products and to dispose of it responsibly• Gives the business an ethical reputation and will be seen as ‘good’ in the eyes of society therefore more

sales and customer loyaltyCorporate social responsibility• CSR, refers to open and accountable business actions based on respect for its employees, people,

community/society, and the broader environment.• It involves businesses not just complying with laws and valuing financial return but acknowledging the

concerns with society and responding


• A business’ long-term success is determined by its CSR• Other social responsibilities include:

- Human rights- Corruption and payment of bribes- Corporate transparency and honesty- Labour standards, particularly in less developed countries

Ethical responsibility and legal compliance• Complying with legislations cost money, compliance cost, which will be expensive for a business, so for a

business to go ‘further beyond’ demonstrates a business valuing something over than maximised profits because it allocates money over and above what it costs to comply with the law

Ethical responsibility• Ethical behaviour involves making decisions that are not only legally correct and making higher profits, but

also in a sense, morally correct• Business ethics are the principles a business will follow to be a good corporate citizen• Many businesses publish a code of conduct. They may include:

- Supporting charities and local community organisations- Consulting the community prior to implementing a significant change to the business- Promoting human and civil rights both in Australia and overseas

• For operations, they may concern:- Minimising harm to the environment- Reducing waste, recycling, and reusing- Producing value-for-money, quality products- Improved customer service

• Industries develop code of conducts to improve standards of behaviour by all businesses in the industry• They are not legally enforceable but they guide the behaviour of the business or organisations that satisfy

stakeholders and customersLegal compliance• Legal compliance requires a business to follow a letter of the law, the prescribed standards of behaviour• Compliance can fall in a number of areas of a business, they may include:

- Labour law compliance: minimum wages, award wages, working hours, breaks, pay for various forms of leave, other on-costs associated with labour, workers comprehension and health and safety laws

- Intellectual property: addresses issues related to moral rights such as copyright, patents, trademarks, designs and other original ideas and artistic work

- Human rights: rules restricting discrimination on the grounds of disability, culture, sexual preference, gender, age or any other distinguishing feature

• When operations is established, they are abiding by local, state and federal laws and may incur significant costs, so businesses usually go for the lowest level of compliance permissible to generate maximum profit

• This means business are incurring the lowest necessary compliance costs possibleOutsourcing, compliance and business behaviour• To reduce compliance costs is by structuring their operations are conducted by outside parties• This is known as outsourcing, it involves the use of outside specialists to undertake one or more key

business functions• It could be done onshore or offshore. Onshore is using domestic businesses as the outsourcing provider.

Whereas offshore, involves the activities been taken to a provider in another country• This means compliance requirements are different between the nations chosen and allow the business to

take advantage of significant cost savings• Lower taxation rates, lower standards of labour, weaker environmental and intellectual property

regulations all enable businesses to reduce their compliance costs• Offshore outsourcing raises ethical issues concerning business behaviour such as employees work hours,

breaks, working environment pay rate etc.Environmental sustainability and social responsibilityEnvironmental sustainability• By pursuing environmentally sustainable goals a business will be contributing to a better society


• Economic growth should not occur at polluting and degrading the air, water and forests that are essential to supporting life on the planet, there needs to be a balance between economic and environmental concerns, i.e. environmental sustainability

• Businesses adopt policies of conservation, recycling and restoration to become more responsible• Businesses that behave in a socially responsible manner is one that improves the quality of life of both

internal and external stakeholders• Businesses today are increasingly aware of their impact decisions have on society and the environment

(see ‘all in all’)• People in the community are aware of the activities of the business• Growing consumer expectation that products should be ‘clean, green and safe’ and in general, changing

management practices• Production of new and better products in an ecological sustainable manner, the business focus coincides

with stakeholder expectations• The community expects businesses to:

- Adopt greenhouse abatement reduction measures- Encourage the development of long-term sustainable strategies

Social responsibility• Businesses shouldn’t be sufficient enough just to obey laws but make decisions that are socially responsible

- Socially responsible, involves taking actions or making decisions that are morally and ethically correct and are in the best interests of the community

• A socially responsible business tries to achieve two goals simultaneously, one, expanding the business and two, providing for the greater good of society

• Businesses realise that their activities impact on society and need to give careful consideration about their actions

• There is an expectation by society that businesses must consider value achievements other than increases in profit, growth and market share

• When making decisions, managers must take account of their stakeholders and how it’ll affect them• Increased speed of change has resulted in society pressuring businesses to accept responsibility laws have

yet to cover• Managers need to consider if their decision will be good for the community or what it’ll provide for their

business• Businesses use PR to include their responsible and sustainable activities in their marketing, also known as

‘Green Marketing’• Firms may find short-term cost advantages and long-term financial benefits e.g. a business installed

renewable energy systems and may find a cost advantage over businesses that use fossil fuel

Chapter 3: Operations Processes


Processes• Operations processes, are the activities involved in the transformation of inputs into outputs

- May also be referred to as production systems or operations systems• Each activity adds value so that the output has a greater value than the cost of the inputs• The value added objectives are to produce goods and provide services right the first time, save time by

eliminating delays and improve delivery- Waste or costage blowouts = no profit

• When assessing the performance of the operations functions the manager determines how effectively the business makes and assembles raw materials and components into finished goods and services, distributes to wholesalers, retailers and consumers, and provides after sales customer service

• Managers must oversee the whole process to be efficient• The top-down approach, operations function interprets the overall business, and aims to play its role in

achieving business objectives• Often a systems management approach is taken; this focuses on integrating operations with other key

business functions of marketing, finance and human resources to create sustainable competitive advantageInputs• Inputs are the physical raw materials and components used to make a good or skills, creativity or knowledge

to provide services• Inputs can be classified as materials, people or physical resources can further be grouped as transformed or

transforming resources• There are also intangible inputs of time and money -> costs• Common direct inputs

- Labour, refers to human input, both physical and mental- Energy, refers to electricity or fuels. Necessary to bring inputs into business, to transform and distribute- Raw materials, essential for operations processes- Machinery and technology, necessary to enable transformation processes to occur. Often replaces labour

for increased efficiency- Labour + technology must have a balance as the person managing technology must be trained

• Types of inputs:Materials People Physical

Raw materials Labour (physical +mental) Factory and office buildingParts and components Managers LandPower and energy Engineers Machines and toolsSupplies Maintenance Office equipment

Computers

Transformed resources/input classification• Inputs that are changed and converted into something else such as a component or a finished good or

service- They can be the raw materials- Materials + customers and their demands/inputs changes

• Use a combination of materials, information and customers, however depending on the nature of the industry or type of business one of these will be more important

• Serviced based businesses such as schools, information will be processed to produce a ‘product’ unique to specific needs of a customer i.e. customers are the most important resource

• Materials are most important for manufacturers as it needs to be of high wuality• Businesses that involve transporting customers from one place to another (an airplane), will need to use a

combination of the threeMaterials• They are the raw ingredients, components, parts and supplies used up in operations• Supplies are the ones carrying out the production of the output, not a component of the final good/service• Materials can be considered current assets that are constantly flowing in or out of the business and not kept

for more than 12 months


• Some operations do not use up materials but change their location as in a courier business or transport company

• Other businesses organise a change in the procession of the materials – retailers do this• Materials may merely be stored or warehoused, however, inventory kept securely for another business is

still a materials inputInformation• Businesses must know information relevant to their operations• This information is used to make plans, execute operations and keep control over materials inputs• Examples of information include the know-how to operate equipment, work schedules such as critical path,

analysis diagrams, architectural designs, customer orders, engineering plans, and quality analysis reports• Information will come from analysis of the performance of the operations system• As a form of feedback, mistakes from previous operations will be an input into future operations• Information is an input for information-processing businesses such as accountants or banks• This information is analysed in a new form such as tax return or investment adviseCustomers• Customers can be changed in different ways• Doctors and hairdressers can transform how customers look and feel, airlines can change the location of the

customer, customers in hotels, cinemas etc. can add value to their quality of life• Customers are an input because it is their needs and desires that ‘drive’ the operations business• Businesses can no longer produce what they think customers want and expect to maintain a competitive

advantage• Therefore, this area of operations is closely connected to the market function, in particular market researchTransforming resources• These are the resources that remain in the business and carry out change and add valueHuman resources• People are the greatest asset because they provide the skills, knowledge, capability and labour to apply these

to materials to convert them into goods or services• They are especially important in the non-manufacturing process• Operations mgmt.; job design and job specification are key aspects. Job design influences work methods

which impacts on work measurement systems and the degree of job satisfaction• Aspects of good job design includes skill variety, task identity, task importance, autonomy and feedback• Increased productivity of human resources is a goal of operations processesFacilities• They refer to the buildings, land, equipment and technology the business uses in operations• Non-current assets of the business because facilities are used to generate profit through their use for a

period longer than 12 months• Decisions regarding design layout, number of facilities, their location and capacity need to be made• Plant and machinery make a significant difference to a business and its capacity to transform; the most

efficient options are usually the ones chosen• Facilities remain in the business after materials have been used up• Machinery and equipment will be used to physically change the shape and feature of materials• Other facilities are concerned with storing and moving materials and partly finished goods to warehouses• Technology is an essential element as it can enable a business to use its transformed resources in a more

efficient and effective wayTransformation processes• Every business must consider how it will produce g+s• The transformation processes are those activities that determine how value will be added• Value can be added by:

- Physical altering of the physical inputs or the changes that happen to people when they receive a service- Transportation of g+s, such as having them delivered to a more convenient location for access by

consumers- Protection and safety from the environment for example, a bank keeps savings secure- Inspection by giving consumers a better understanding of the g+s


• The operations manager must select the optimal process out of:- Available capacity of the facility- Available knowledge skills of employees- Type of production, whether it be job, batch or flow production- Layout of plant + equipment- Work Health + Safety- Production costs- Maintenance requirements

• Transformation process therefore needs to be designed, planned and controlled to make this flow as smooth and uninterrupted as possible

The influence of the four Vs• There are four dimensions of operations referred to as the ‘four vs’ (volume, variety, visbility, variation)

most important depends on production• Production methods:

- Job production (single demand), very personalised, unique item. Highly flexible system, but low output and capital, emphasis on high labour content and skill, high costs per unit

- Batch production (relatively low demand), producing a small number of the same item, done in groups/batches, suits business that satisfies variation in demand

- Flow production (in high demand), produces large no. of items at the same and are the same continuous flow of inputs and outputs, assembly lines, costs per unit are low, limited variation

Volume• The number of products or services produced by the operation, how much of a product is made• Using mass production will produce a high volume with a degree of process repetition• Lots of stoppages and adjustments• There will be lots of capital, facilities, technology and materials used and less labourVariety• Number of different models and variations offered in the products or services, range of products made• High variety usually means low volume• High volume product + low variety = capital-intensive, assembly lines and producing at lowest costs per unit

possibleVariation• Variation can change according to time of day, season, holidays and time of year, the amount of a product

desired by consumers• Steady levels + no variation = high volume + capital costs• That is operations, are routine, with low unit costs and using more capital than labour• When there is volatility in the pattern of demand, operations will need to be highly flexible• The operations manager will need to anticipate and plan for changes in the demand and have a high level of

contactVisibility• Influences to a degree to which customers can see the operations in action , the nature and amount of

customer contact (feedback)• Service-based businesses will have a level of visibility• The implication for operations of a highly visible operations process is that quality of labour will be

significant• Operations will need to have well-trained, highly skilled, adaptable staff to handle the individual needs of

customers• Speed of operations usually have a much more lower tolerance for waiting• So short time lads between customer ordering and delivery will be needed, otherwise the customer will

move onto a competitor• They can either direct or indirect• Direct contract takes the form of customer feedback (surveys)• Indirect contact comes through a review of sales data and gives an indication of customer preferencesSequencing and scheduling


• They are the tools to identify all steps in the operations process and organise them into the most efficient order

• Sequencing is the order of tasks in a chain and scheduling is when a certain task will happen• Task analysis, which refers to the breakdown of how exactly how the manufacture of a good or activities to

provide a service is to be accomplished.• Essential when determining separate parts of the process of making a good or providing a service• Scheduling tools are Gannt Charts and Critical Analysis PathGantt charts• Records the number of tasks involved in each particular project and the estimated time needed for each task,

won’t show the relationship between each of the tasks or which activities relies on other activities for materials or machinery

• Shown as a bar graph• Businesses set up milestones on certain dates, and once reached critical decisions must be made• Businesses that organises production based on customer orders may use Gantt chart for production

scheduling• Gantt chart allows comparisons actual progress to its original planned progress• Businesses that do not keep to production targets may find their customers moving onto other suppliers• Gannt charts do not have limitations• The advantages include forces of planning steps and the allocation of time, and measured actual against

panned timesCritical path analysis (CPA)• Used in situations when an operations involves a series of repeated tasks• It is a flow diagram that shows the interrelationship of tasks – all tasks need to be completed for the project

to be finished• Critical path is the shortest time taken to complete all tasks (basically the longest time to cover all tasks for a

quality product)• The analysis path needs to be timetabledTechnology, task design and process layoutTechnology• Involves classifying job activities in ways that make it easy for an employee to successfully perform and

complete a task, therefore changing how a business works• Enables businesses to penetrate global markets with the international distribution of information• Improves competitiveness by increasing flexibility; more adaptable change• Important technologies workers being able to telecommute, robotics, CAD and CAM• Improvements in the machines, equipment and devices used to transform inputs into outputs are called

process technologies• A business can change volumes to meet a sudden increase in demand or produce different variations of

products to satisfy consumer tastes• Technology also reduces costs and wastes, improve productivity and efficiency• Results in the development of new methods of production or new equipment that helps business perform

functions better• Technology can give the business more flexibility as it:

- Allows the business to respond to changes in the market more easily, e.g. changing volumes and variations.

- Allows the business to apply software modeling programs, the internet and wireless communication to the process.

• Flexible manufacturing systems- integrated approach to using technologyTask design• It is how the task will be completed• Involves classifying job activities in ways that make job activities that make it easy for an employee to

successfully perform and complete a task• Often the starting point for recruitment• Each individual task is analysed and broken down into separate steps and allocated to machines and


employees with the appropriate skills, knowledge and capabilities• Employees are often trained and develop their skills throughout working• Allows ongoing analysis and adjustments in each activity to ensure continuous improvement in productivity• Leads to group skills and competencies• A skills audit can be used to determine if existing employees are suitable for a specific taskProcess layout• Refers to the arrangement of machinery by function to provide g+s• Once the task has been analysed and the technology requirements determined, the next strategic decision is

to plan the physical layout of the factory or office• It is influenced by the size of equipment, work areas and storage space• The aim is to have an efficient flow of resources through the business as possible• Product moves from department to department depending on the transformation• Allows more flexibility – functional layout• Requires staff to be specialised and know how to use the equipment and tools in their department• Product layout, used in assembly line for manufacturing large amounts of goods with few variations. Process

layout product moves from station to stationMonitoring, control and improvement• Relates to performance objectives of quality, speed, dependability, flexibility, customisation and cost in

operations• Purpose is to ensure operations processes run efficiently and effectively• Objectives will not be reached without adequate monitoring of operations, controls to ensure that

operations are on track and improve the process• Ensure process runs efficiently and effectively, producing g+s it was designed to doMonitoring, collecting the information about the performance about the operations process. These include:

- Operations costs- Waste from operations such as leftover materials- Defects and substandard goods- Quality in terms of the product meeting design specifications- Speed of manufacturing or response to customers- Volume of output

Control, aims to keep the business’ actual performance as close as possible to what was planned by making adjustments to the operations along the way

- Coping with changes as they occur- Effective controls ensure that the business makes and supplies an appropriate quantity of its products, in

the time frame and to standard requirements• Improvements

- Suggest adjustments and readjustment may need to be made to day-to-day activities in the short term and the entire process in the long term

- Businesses often compare itself to competitors and benchmarks in order to see if any areas need improvements

- Competitive advantages gained from following improvements:o Quality, getting it right first time, defect free products and error free serviceso Speed, increasing speed of production and delivery of serviceso Dependability, being on time with reliable operations system, equipment and employeeso Flexibility, having processes that are able to change and offer new products and more choiceo Cost improvements, by being efficient and productive to offer more value

- Improvements comes when mgmt. decide to increase competitive advantage over competitors• Challenge is to maintain continuous improvement and a system like total quality management will assistOutputs• They are the final good or service that a business offers to a customer• Customers may be a final consumer who are members of the public or other businesses

- An output of one business may be an input for another• Consumers understand the physical product they buy and the service provided by the business


• Customer service is an output of all businesses and perhaps not an essential part of the manufacturing-based business provides

• Goods based businesses can achieve a competitive advantage through improvements in customer serviceCustomer service• Customer service is an intangible output that requires extensive contact with customers, is labour-extensive

and immediately consumed• As an output it is difficult to measure• When a competitive advantage isn’t achieved with a better product, it can differentiate itself as better than

its competitors because of excellent customer service- It is provided for before, diving after a purchase

• Businesses have comprehensive service system’s they induce policies and procedures on how to manage relationships with customers i.e. 7 steps of a successful sale

• Customer service includes:- Handling customer returns promptly- Answering questions and providing information- Frequent and meaningful information- Following up customer enquiries and complaints- Using technology to offer 24 hour service; social media, email etc.

• Some aspects of technology leave customers frustrated and may leave the business• Good customer service is an aspect of relationship marketing• Enables businesses to charge higher prices and lessen the need to reduce costs elsewhere in the business• Outcomes of good customer service is that they keep returning to buy

- Assists in maintaining 80/20, 80% of revenue comes from 20% customer base who return• Good customer service + higher quality good + premium price in market = high market share• Customer service can be measured by using the no. of complaints or the length of time to respond to

enquiries• Global businesses have the challenge to replicate business service system in its location

- Challenges include language barriers, differences in culture• Training in customer relations and the customer service policies of the business will be important in

achieving consistency in service deliveryWarranties• A warranty is an assurance that a business stands by quality claims of the products they make and provide to

the market• By Australian law, goods can only be sold if:

- They have a level of quality that is comparable to the price and product description- They are suitable for the purpose or job they will be used for- They match the product the product description in any advertising or promotion- They are free from defects or faults

• These responsibilities make up the statutory (or implied) warranty that gives consumers legal protection under the Fair Trading Act 1987 (NSW) and the Competitive Consumer Act (2010)

• Retailers and manufactures must comply with the warranty and may need to provide a replacement product if a customer is not satisfied

Chapter 4: Operations strategy


• Operations strategy includes all activities involved in the production of a good or the provision of a service

• Operations strategies will support the business’ strategic objectives in conjunction with other key functions

• Effective operations will have a competitive advantage in its marketplace• There will be specific decisions of what and how the business produces


Performance objectives• They are the key area of focus in operations• A business that can achieve multiple gains a competitive advantage and may become an

industry leaderQuality• Refers to the physical g+s and also the process used to produce the good• A business must produce a product that meets the customer’s expectations and also

requirements of quality• Quality also refers to the process itself. A quality process is the production getting it right

the first time and the value added- Design, how well product is made or service is delivered.- Conformance, how well product meets standards with certain specifications.- Service, how reliable, meets specific needs, timely/responsive service is

Speed• Refers to the output divided by input and is sometimes measured in output per unit of time

related to productivity• Speed of operations can be increased using CAD, CAM or robotics• There is a limit, other objectives must be able to keep up, the machine must be able to keep a

hold of itself and the production line too• A risk that may occur whilst increasing speed is that quality may sufferFlexibility• Shows how easily and quickly expectations can switch to a new model or variation of a good

to meet a change in the market or changes in what customer wants• There is also flexibility in volume, which is how quickly operations ca n change from

producing few products as a low volume producer to becoming high volume- Increasing outputs to meet customer demand

• Demands change due to product life cycle, as a good enters the growth stage, businesses must match increase of demands and avoid stock-out

Customisation• Refers to creation of individualised products to meet the specific needs of the customers• This is how easily a product can be redesigned to produce a unique g+s that matches the

customers desires• Challenges include as not having the appropriate inputs, limits on what the equipment or

existing technology is capable of or how much time and labour is requiredCost• Refers to the minimisation of expenses so that operations processes are conducted as

cheaply as possible• Costs must be carefully managed and cost data collected and analysed• Of the costs incurred determine the price• Lower costs mean improved profit margins on each product sold which gives the business

more revenue• Business seek to become more efficient and reduce costs, acquiring new technology and

minimising wage is often reduces costs• Businesses also reduce supplier costs, manage inventory, maximise flexibility and find

distribution methods that are cost and time effectiveNew product design and development• Life cycle of business can be extended by adding more features or developing a small

improvement in design• Businesses that have the capability of integrating leading-edge technology with skills and

innovative ideas will be a market leader• New product design is a lengthy, expensive process and few products make it to the final

production from the large number that may be initially developed• Many businesses do not have the financial resources, knowledge or time


• However a business may supply their own version of a competitor’s new product and avoid the expense and risk of product development

Product design + development• An approach of design and development comes from a consumer approach

- Preference and desires of consumers shape what a business should produce• Another approach is changes and innovations in technology that appeals to consumers

because of advancement and functions• Must implement quality, SCM, capacity mgmt., and cost• SCM as new products draw from suppliers and may extend the range of suppliers, timing or

volume of suppliers• New products have impacts on capacity, may increase use or range of present resources or

an investment in new tech and machinery

Service design + development• Service design takes the position of the customer/consumer in point as the starting point in

design• Services may not require interaction of customer and may be standardised• Must take in account if it’ll explicit or implicit service or if any goods are required when

delivering service• Explicit service, the tangible aspect, what is to be anticipated. It is the application of time,

expertise, skill and effort• Implicit service, the intangible aspect, based on feeling, it is the psychological wellbeing

when the service is delivered-the feeling of being looked after-• Clients need to feel like their needs are being met, so the service must have a level of skill,

time and expertise so customer feels catered forSupply chain management• Refers to the integrating and managing the flow of supplies throughout the process in order

to meet needs of customers whilst being efficient• Supply chain is influenced by what is sold and what is returned so it involves sourcing and

logistics and distribution• By going backwards of the final product, the supply chain can be determined• Process includes production process, supply of raw materials. Energy, labour, distribution

and all sources• Lead time is the time taken for a supplier to provide its customer with the goods orderedSourcing• Refers to the purchasing of inputs for transformation• It is important to consider:

- The consumer demand so volume of inputs is required is known- Determine quality of inputs that match quality of products that the business would like

to produce for the market- Assess how flexible and timely yhe supplier with respect to changes in demand- Evaluate costs of inputs from supplier compared to others that offer similar quality

• Trends of sourcing- Supplier rationalisation, involves business assessing the number and diversity of its

suppliers. Business can determine which supplier are most and least effective, reduces amount of suppliers to the least amount

- Backwards vertical integration, involves purchasing through merges or acquisitions of


suppliers. Always guarantees supply for transformation. Important to treat it as a profit centre as it generates revenues and not wasteful as it may accumulate costs

- Cost minimisation, involves using off-shore suppliers, access to lower cost resources/inputs that weren’t previously available

- Flexible/responsive supply chain processes, when business only stocks supplies that are needed saves inventory costs

Global sourcing• Refers to purchasing supplies or services without being constrained by location, the most

cost-efficient location for manufacturing a product• There may be an additional incentive of low rates of tax to encourage global businesses• Inventory management can be improved also with e-commerce it can be set up so that an

email to a supplier is automatically generated when inventory levels are getting close to buffer stock levels

• Advantages- More efficient methods- Better access to new technology, IT, equipment and resources- Lower costs- Increased speed and quality of outputs

• Disadvantages- Possible relocation of operations- Breakdowns in the business outsourced to will affect the entire operations- Loss of control over quality, reliability and even costs- Slower lead times and response to changes in the market- Relationship breakdown with stakeholders e.g. redundant employees- Increased costs of logistics, storage and distribution managing different regulatory

conditions• Business may

- Buy inputs, import its inputs from an overseas supplier that specialises in providing that input.

o Advantages, lower costs from cheapest supplier, don’t need to invest in factoryo Disadvantages, less control over quality, design & cannot protect technological

innovations- Make inputs (vertically integrate), taking over a business and produce its own supplies

o Advantages, lower costs through economies of scale and protect innovationsE-commerce• It involves the buying and selling of goods and services via the internet• Many businesses have SCM through electronic ordering (e-procurement), allows suppliers

direct access to the businesses’ level of supplies.- When the supply falls behind, the supplier will supply without a formal request

• E-tailing, a business that only uses an online site to sell their g+s• Electronic data interchange (EDI), use of computers, barcodes and scanner systems to

monitor individual stock items and keep accurate records of inventory level, used for real time conversations with suppliers

Logistics• Refers to the transportation of physical raw materials, inputs and the distribution of

finished goods and services- Includes transportation (including modes), use of storage warehousing and DCs and

materials handling and packaging• Transport logistics, the organisation of the physical movement of goods from their point of

origin to destination. The route, method and speed of transportation are all factors to consider when delivering materials, inputs or final goods to their user when required

• Role of logisticians is to ensure that operations have the right item at the right quantity, time and place


• Distribution- Refers to the way of getting g+s to the customer

• Transportation and distribution- This aspects concerns the physical movement of inventories- Type of product and cost of transportation will determine mode of transport

• Storage, warehousing and distribution centres- Storage, involves finding a secure place to hold stock until required. Must consider

issues such as long-term or short-term,- Warehousing, use of facility for the storage, protection and later distribution of stock.

Costs of warehousing includes the premises, insurance and security of stock, stacking and moving of stock and carrying excess or redundancy stock if not sold

- Distribution centres (DCs), different to warehousing as it doesn’t hold long-term stock, strategically located to minimise the time it takes to supply stock to retail outlets

• Materials handling and packaging, particular handle or care must be taken with certain goods

Outsourcing• Involves the use of external providers to perform business activities• Efficient as it lowers costs and access to other resources• Types of outsourcing includes:

- Manufacturing, HR, administrative work and IT, finance and accounting outsourcing (FAO), knowledge, process outsourcing (KPO), legal process outsourcing (LPO)

• Must consider whether or not to outsource, what geographical location is favoured, what vendors to use and level of contract, the KPIs and service level required

• A business may wish to focus on its core activity and organise other businesses provide support services such as security transport or maintenance, by doing this resources are freed up to be used elsewhere in the business

Advantages Disadvantages• Simplification, reduction of activities• Efficiency and process capability, access

to cheap labour• Increased process capability• Increased accountability• Access to skills/resources lacking within

business• Capacity to focus on core business or key

competencies• Improvements to in-house performance

• Payback periods and costs• Communication and language• Loss of control standards and info

security• Hierarchies• Organisational change and redesign• Loss of corporate memory and

vulnerability• Information technology

Technology


• Technology in operations when applied can improve inputs, transformation and outputs or whether it makes the managerial and administrative functions smoother

Leading-edge• The most advanced or innovative at any point in time• Can help businesses to create more products quickly and to higher standards, reduce waste

and operate more effectivelyEstablished• Most widely used and accepted• Help establish for productivity and speedInventory management• Refers to the amount of raw materials, work-in-progress and finished goods that a business

has on hand at any particular point in time• Stock is the goods that are partially processed• Inventory mgmt. aims to have enough stock available but not too much and to identify stock

that is not selling well• Businesses monitor and control inventory so they do not accumulate dead stock and

identify and sell slow moving stock• Management takes into account factors such as cartage and freight stock, perishability or life

span of the product and seasonal patterns in demandAdvantages Disadvantages

• Consumer demand can be met when there is stock available

• An alternative can be used if one other runs out

• Reduces lead time between order and delivery

• Stocks give immediate revenue, hard if its only partially transformed (inputs)

• Stocks can be distributed to distribution centres, which then rapidly transport the products to places as indicated by demand.

• Store of stock allows the business to promote use of products in non-traditional or even new markets.

• Older stock can be sold at reduced prices encourages cash flow and also attract sales of other products.

• Stocks are an asset and are of value to the business, reflecting well on the balance sheet.

• Production in bulk reduces costs due to economies of scale in purchasing inputs. Cheaper than the cost of holding the stock once it is made

• the costs associated with holding stock (see figure 4.15), including storage charges, spoilage, insurance, theft and handling expenses.

• the invested capital, labour and energy cannot be used elsewhere as it has been used to create the stock

• the cost of obsolescence, which can occur if stock remains unsold.

LIFO (last-in-first-out)• Simplified action of LIFO would cost each sold unit at the last cost recorded• The stock purchased most recently us sold first• Last stock delivered is first used and sent out• No use by date such as machinery• Advantage, on revenue statement the newer and most expensive stock is sold, making a

higher cost of goods sold and lower profit. Thus less taxFIFO (first-in-first-out)• The simplified application of FIFO would cost each unit sold at the first cost recorded.• The first stock has been purchased is the oldest and is sold first• Perishable items


• Costs of goods and items will be lower and income higherJIT (just-in-time)• Aims to overcome the problem of end-of-period stock valuation: a lean production method,

only enough products that meets demand• Hold as minimal stock as possible and only bring in stock from suppliers as required• Advantages include, reduction storage costs, increases the liquidity of working capital and

reduces chance of stock becoming obsolete and perishable stock spoiling• Allows retailers to display wider range of products• Requires a very flexible operations function with flexible processing.• Responds quickly to change in market demand as well as reliable supplier deliveries which

must be received at the appropriate time.Quality management• Quality management is ensuring that the outputs of the business are consistent, durable and

reliable• For a consumer, it could mean:

- Is well made, not defective and lasts a long time- Does everything that advertising claims- Has good customer service

• For a business:- Quality of outputs meet the quality standard stated in the operation plan- Outputs are of a consistent quality

Control• Involves checking transformed and transforming resources in all stages of the production

process. Inspection, measurement and intervention• Three steps:

- Feed-forward, careful planning, before production begins to prevent problems- Concurrent, during work in progress, or manufacturing process- Feedback controls, checking the final product, after production or delivery of the service

is complete• Control involves establishing evaluation procedures and setting standards to measure

performance• Business may use benchmarking (the average industry performance)• Codes or practice –the minimum level of service that registered members of a profession are

expected to provide- are used by firmsAssurance• Involves establishing and using a set of procedures and/or processes (standards) that will

prevent product defects from occurring or errors in delivering services• Using a system to ensure that set standards are achieved in production• Done through taking a series of measurements and assessing them against pre-determined

quality standards• Consider notion of ‘fitness of purpose’ or how well a product does what its designed to do,

desire of ‘right the first time’, so that products doesn’t need to be reworked which wastes time, resources and energy

Improvement• Continuous

- The belief that over time processes will be made more effective and efficient- Could be monumental or eventual- Improvements come from inclusion of staff, staff is encouraged to demonstrate initative

and to suggest areas of improvement• Total quality management

- Focuses on managing the business as whole to deliver quality to customers- Reviews actions of competitions through benchmarking- To achieve TQM objectives requires four elements: benchmarking, employee


empowerment, a focus on the customer and continuous improvementOvercoming resistance to change• Operations mgmt. need to be responsive to changes in the internal and external

environments to remain competitive• Legislative changes, economic conditions, social change and technological breakthroughs all

impact on the business and shape its competitorsFinancial costs• Major cause of resistance by owners and managers• Modern businesses usually requires significant investment of funds and therefore

management need to weigh up costs and benefits to determine the viability of change• Financial change should include the cost of, purchasing new equipment, redundancies,

retraining employees and costs associated structural reorganisation of the business, including change to plant and equipment layouts

Purchasing new equipment• Considered to be capital cost, quite high• Significant market advantages and key operational goals better achieved (flexibility, speed

and shorter lead times, consistency in production)Redundancy payments• The loss of work arising from job skills no longer required or relevant to workplace• Loss of jobs, employee needs to retrain or ‘upskill’ to relevant job skills• Redundancy payout is the money given to employees when forced out of job, is quite high

depends on length of time worked, level of pay prior to redundancy, amount of unused leave, outstanding wages

• Legal in Australia if, Award of Enterprise Agreement, not a small business (more than 15) and employee is full-time and worked more than 12 months

• Common when machinery and tech replace labourRetraining• These costs come about because there has been a reorganisation of the business’ internal

structure or the acquisition of tech that requires staff to retrain and update skills• Training can be conducted inside or off-siteReorganising plant layout• Refers to the facility in which machinery is arranged• When new equipment is purchased or change in process layout machinery will be needed to

move. Requires machinery to be shut down and moved, possible additional power outlets installed and downtime (transferring old machines to new machines)

Inertia• Refers to the psychological resistance to change; the fear of change• No direct financial cost of inertia, but staff who are reluctant may react in a way to cause

costs, e.g. sick days or poor work performance• Resistance can be taken care of by identifying the source of resistance and assessing

whether or not there is a need to accommodate change• Lowering resistance to change through communicating a need for change will result in

widespread support for the change.• Change agents intimate change of facilitate the change processGlobal factors• They are an opportunity to source inputs from overseas suppliers, expand and achieve

economies of scale and develop new products for an international marketGlobal sourcing• Involves sourcing any of the business operations that gives cost advantages not to be

restrained by location• Acquire less expensive but similar quality inputs from other countries• Best decision made on cost, efficiency, productivity, technical ability and operate large hours• Advantages, expertise, labour specialisation, access to greater resources


• Disadvantages, time to find suitable supplier and build good relationship, lack of expertise in international transactions, increased lead times, less control over quality and reliability and competitors may use same supplier

Economies of sale• Refers to the cost advantages that can be gained by producing on a larger scale• Costs per unit are lowered when resources can be used more efficiently to produce more• Expansion means new customers, therefore increase output, lower costs, increase sales and

achieve profit maximisationScanning and learning• Refers to mgmt. being prepared to look at the practices of other businesses and reorganise

to be better and more efficient in doing things• Look at global market for trends that may impact on business success, acting in a manner

that minimises the negative impacts and maximises the positive impacts• Help managers adapt best practice to the business operationsResearch and development(R&D)• The creation of new products and improvement of new ones• Advantages, extend product cycle, new g+s developed in other countries, manufacturing

processes available, technological innovations and builds reputation• Problems, consume valuable financial resources, wasteful, commercial conflict

Documents

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