Business Studies Notes

Role of operations management

- strategic role of operations management – cost leadership, good/service differentiation

- goods and/or services in different industries
- interdependence with other key business functions

What is operations?

- Operations refers to the business processes that transform and transform and add value to
inputs to produce outputs
- Operations is not only concerned with manufacturing business, but can also be linked to
business that provide services

Roles

- The operations function is part of the value chain. The operations function adds value to a
product by turning raw materials into finished products

Strategic role of operations management – syllabus dot point one

- Strategic role of operation is to assist the business in achieving long-term goals including the key
objective of profit maximization. It increases profits by reducing costs and differentiating
outputs leading to a competitive advantage.
- Michael Porter theory
-

Cost leadership

- Cost leadership involves aiming to have the lowest costs or to be the most price competitive in
the market.
- A key aspect to cost leadership is that although the business is trading the lowest cost, they
should still be profitable
- Businesses significant costs are contained within the operations function such as inputs, labour ,
processing (design and maintenance) as well as inventory (storage and handling)
- Cost savings measures that operations can use to improve business profitability includes
- Developing economies of scale
- Use of standard components
- Minimization of wastage
Economies of scale

- Cost advantages resulting from an increase in the scale of business operations. These
efficiencies result in lower costs per unit produced and in turn a lower price can be changed to

Use of standard components

- A measure that speeds up manufacturing and reducing costs, as the same units can be
purchased and used on multiple products and all around the world

Minimization of wastage

- Also called lean production, is designed to eliminate waste – lean in this case means no excess.
Waste is non-value adding, though it does not add costs. If we waste can be minimized then
production processes are most efficient

Product differentiation

- Product differentiation involves distinguishing the product. Service in some way from its
competitors
- These types of goods and services produced and their distinguishing features can help a
business to establish ac competitive advantage leading to increased sales and profitability

How to achieve product differentiation

- Varying the product features – changing the options that are available for the product, For
example the provision of leather seats in vehicles

Varying product quality- Businesses can produce the same product however with differing quality
levels. Obviously, the product that is higher quality will be sold at a higher price. This strategy is also
known as price points

Varying augmented features- This refers to any add – ons. For example when purchasing an SLR
camera, consumers have the options to buy different lenses

Measures to receive services differentiation

- Time spend on service

- Level of expertise brought to a service
- Qualifications and experience of the service provider

Goods and Services in Different industries – Syllabus dot point 2

- Standardized goods – Goods that are mass produced. They are uniform in quality and a
produced with a production focus (undifferentiated goods)
- Customized goods – Goods that are varied according to the needs of customers. These goods
are produced with a market focus ( differentiated goods)
 - Perishable Goods – Goods that can only be used once and last only a short time. These goods
need to be of high standards, quality, safety and cleanliness. Their length of production will be
very short and storage is essential
- Non- perishable goods – goods that can be used more than once and are more durable. Effective
inventory management systems are necessary for these types of goods
- Intermediate goods – Goods that are completed but then become inputs for other goods
- Final goods – A good or service purchased directly by the consumer. They are the final output of
production processes

Interdependences with other key business functions- Syllabus dot point three

- Interdependence- This refers to the mutual reliance that the key functions have on one another.
They key business function work best when they overlap towards the common goals
- Each function depends on the support of the other function, if the business is to perform at
capacity. This idea relates the business to a team.

Key business functions How it is impacted by the operations functions

Marketing Marketing will be impacted by the types of
products that can be produced in the operations
function, their speed of production and the cost
at which they can be produced
Finance Finance will be impacted by the operations
function in terms of the amount of money
required to buy the inputs
Human Resources The number of staff required will impact human
resources. Their skills, working methods

Key business function How it impacts the operations function

Marketing Marketing will impact the operations function in
terms of providing information on what the
market wants and the types of products they can
market effectively
Finance Finance will impact the operations function in
terms of the amount of money available which
will then determine the types and quality of
inputs and suppliers
Human Resources Human resources will impact the operations
function in terms of the quality of staff they
provide. How staff are manage. The motivation
levels of staff and permissible working conditions
Influences

- Globalization, technology, quality expectations, cost-based competition, government polices, legal

regulation, environmental sustainability
- Corporate social responsibility
- The difference between legal compliance and ethical responsibility
- Environmental sustainability and social responsibility

Globalization

- Globalization refers to the removal of barriers of trade between nations

- Integration between national economies and a high degree of transfer of capital, labour,
intellectual capital and ideas, financial resources and technology
- Business wise, globalization provides opportunities. It can also be a threat as business effectively
apply cost leadership principles to undercut the market and dominate.

Globalization and operations management

- The influence is that businesses are increasingly orientating their practices towards the global
market, and to a global demographic
- Global customers seek global brands and tend to seek standardized products meaning business
have to adapt, thus being influenced by globalization
- This affects the operations function which is then structured around a series of global
production facilities
- Creation of regional operations
 - Influences include – adapting to global customers, the choice of location for manufacturing
facilities, the quality management, logistics and inventory management processes
- Example- ASICS – uses globalization and economies of scale to design their shoes in Japan but
have the manufacturing completed in China for a global market

Technology

- Technology is defined as he design, construction and/or application of innovative devices,

methods and machinery upon operations processes.
- Technology is applied to the operations management with the range of processes that
characterize the operations function
- These include- at an administrative level – use of planning technologies Materials Requirement
Planning (MRP)
- Use of office technologies such as computers (desk top and laptop) scanners, telephones
systems, mobile phones
- Use of software such as word processing, graphics packages, spreadsheet programs. Multimedia
programs
- At a processing level , technologies are used in manufacturing (machinery) , logistics and
distribution, quality management, all aspects of inventory management (stock count) , supply
chain management and sourcing

Quality expectations

- The expectations of quality is significant influence on the operations function of business.

- Quality is defined as being ‘ the totality of features and characteristics of products (goods) and
services that bears its ability to satisfy stated or implied needs’ – The International Standards
Organisation (ISO)
- Within operations management function, quality informs all operations processes.
- The expectations that people have of businesses determines the way the products are designed,
created and delivered to customers
- Quality expectations – goods - include
- Quality of design – how well the concept has been developed, taking into account customer
needs and expectations , nature of the materials used and innovations evident in the design
which minimizes waste
- Fitness for purpose – how well the product does what it is designed to do and how easy it is to
use
- Durability – how reliable and long lasting the product is, how easily it can be repaired and
maintained, including efficiency or after-sales services used, such as warranty claims and service
calls
- Services
- Professionalism of the services provider
- Reliability of the service provider
- Level of customization
Cost – based competition

- This is the actions form competitors and this significantly inflcuences the operations manament
function

Operations processes

Inputs

- Transformed resources (materials, information, customers

- Transforming resources ( human resources, facilities

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

Outputs

- Customer service
- Warranties

Task design

- A key part of the transformation process is to determine the job activities that will be
undertaken by an employee in the transformation process
- Consideration needs to be given to the types of tasks performed and the skills competencies
needed to perform them
- The operations manager has to think what inputs are needed to be outputs and the skills and
qualifications are required
Sequencing and scheduling

- One of the key goals of the operations function is to provide goods and services in the shortest
possible time. This will involve careful analysis and organisation of activities in transformation
processes
- Sequencing refers to the order in which the activities take place
- Scheduling refers to the length of time each activity will take within transformation processes

Tools of Sequencing and Scheduling

- Operations managers use a range of tools to organize the sequence and schedule of tasks
- Gantt Chart
- Critical path analysis

Plant layout (processes layout)

- The organisation of a business office or manufacturing facility can impact on the efficiency and
costs of the operations function
- Plant layout refers to the arrangement of machinery and staff within the business
- Considerations when determining the optimal plant layout include
- Physical space available and what is required by specific activities
- Ensuring an efficient flow of goods through the layout
- Compliance with WH and S standards and provision of a work environment that promotes
quality outputs

Types of plant layout

Process layout

- Organizing the layout by grouping of machinery/ work together that perform similar processes

Product layout

- Organizing the location of machinery and work according to the sequence it is performed for
example an assembly line

Fixed position layout

- The product remains in one location and a=machinery and machinery employees come to it

LEAVE SPACE FOR INFLUCENCES

Corporate Social Responsibilities

- Corporate social responsibility (CSR) refers to open and acceptable business practices that
respect people, society and the environment
 - More that just compliance it involves meeting all obligations and following the intention or spirit
of the law (addressing social, community and environmental concerns as well financial concerns)

Legal Compliance vs Corporate social responsibility

- Businesses both in Australia and around the world must follow the legal regulations stipulated
by local, state and federal governments. These include zoning rights, WHS, Minimum wage and
employment conditions, environmental standards and taxation and superannuation
- Corporate Social Responsibility represents a commitment to going ‘above and beyond’ these
minimum requirements to empower individuals and communities, promote, and protect social
and environmental conditions. Businesses must recognized that they exist within a society and
that their actions should seek to improve their society
- EXAMPLE –
LEGAL COMPLIANCE CSR
Paying minimum wage Paying a ‘living wage’
Adhering to existing environmental Committing to act on climate change
regulations
Employing and selling to people in the local Integrate within a local community through
community programs, initiatives and sponsorships
It will impact operations processes in terms of

- Use of outsourcing (do outsourcing business meet the CSR as well?)

- The standard of the facilities and resources provided
- How to deal with differing national laws
- It is all about the business ensuring that the business is aware of and manages the social,
environmental, political and human consequences of their actions and operations process

The triple bottom line

- CSR involves defining success through achieving TRIPLE BOTTOM LINE

- Making gains and positive contributions in the areas of finance, environmental sustainability and
social goals
- The triple bottom line is often described as ‘People, Planet and Profit

Environmental sustainability

- Protect and conserve the natural environment for future generations

- Lower levels of water , air and noise pollution resulting from the transformation process
- Look for and utilize environmentally friendly production processes
- Investigate options to recycle and reuse waste materials by-products
- Inputs – materials – equaling the volume and source of raw materials
- Inputs- facilities- does my equipment consider the environment. Where I conduct my operations
- Transformation process- technology -

Social responsibility

- To respect people, groups and society as a whole

- Social responsibility refers to the degree to which business are mindful of the social impact of
their operations on individuals and broader society
 - It is being accountable for how their decision making may
- Infringe human rights
- Proliferate economic inequality, social disadvantage or anti-social behavior
- Discourage opportunity and disempowerment their local communities

Why is it an influence?

- CSR, Environmental sustainability and social responsibility are all influences because this
growing environmental and social consciousness is driving purchasing decisions

Operations strategies

New Product and Service Design and development

- Designed to invigorate the operations process is related to the introduction of new products or
services and their production into the operations function
- A key part of operations is to deliver the types of products demanded by customers – that is,
responding to changes in technology and quality expectations
- Customer Focused design – find out what people want and then develop products to satisfy
them
- Product focused design – use changes and advances in technology to come up with products

Steps in design and development of new products and services include

- Market research and specification development – what do you want the new product to be and
do – IKEA – Life at home report and home visits
- Design product prototype – IKEA – Test lab at their birthplace and headquarters in Almhult,
Sweden
- Test prototype -
- Product and production process refinement – how to put the mew product into commercial
production – IKEA – Designers work with a diverse team of technicians, manufacturers and
specialists – often right on the factory floor - 20,000 co- workers produce wood- based furniture
and boards at 36 sites in 11 countries
- Full commercial production and distribution

Impact

- IKEA’s Democratic Design – Form, Quality, Function, Low price and Sustainability

Democratic design

- NPSDD as an operations strategy and be measured and evaluated by ‘if’ and ‘how’ new products
will be added to operations activities
- IKEA has consistently embraced an evolution of all of their products and services. Within IKEA
there is an overall product range of 9500, with approximately 2500 new product item added
each year
 - Effectiveness can be evaluated through Financial statements
-

Operations strategies

Outsourcing

- Involves the use of external providers to perform operations activities

- Manufacturing
- Design
- Sourcing of inputs
- Logistics (transporting inputs and outputs)
- Outsourcing is often associated with employing low wage labour in the manufacturing process
But it can often be used to take advantage of external providers who have expertise , relevant
skills, resources and comparative advantage
- Outsourcing can allow the business to adopt a leaner, more responsive structure but to be
effective in achieving these gains, outsourcing must be monitored

Advantages of outsourcing

- It allows simplification of business processes and activities (ability to focus on key business
activities)
- This results in greater efficiency and ultimately cost savings
- Using an external provider come with improved process capability
- Access to the latest technology without the capital investment as well as access to skills.
Resources which are lacking in the business
- Flexibility – outsourcing allows greater Flexibility in terms of use of labour and respond to
demand
- The strategic (long term) benefits include the ability to avoid trade barriers by using domestic
business, acknowledge of competitors through common providers, exploiting time differences
between countries and expert advice from providers

Mcdonalds – Ingam – used to source chicken breast for chicken nugggets- felixiblity

- McCain – produces potatoes for Maccas that do not require as much water and are able to be
stored longer

Disadvantages of Outsourcing

- Outsourcing may come with an up-front cost and sizeable pay back period. It may take time
form the initl investment to pay for itself
- The external providers may produce language barriers
- Loss of control over standards and information security
- Outsourcing can cause job losses and may lead resistance to change
- Certain activities and their skills will also lead to a loss of corporate memory
- Brand reputation can be impacted
 - outsourcing assist a business to achieve a competitive advantage – knowledge of competitors as
they have expert advice, thus achieve a competitive advantage, thus keeping up with
competitors , cheap as business does not have to manufacture products

IKEA

Outsourcing manufactures to local suppliers

- IKEA does produce many of its products in Sweden using subsidiary business, however it does
also have an extensive network of external providers (1,350 providers in 52 countries)
- In particular, IKEA has outsourced more labour intensive manufacturing to Romania and Poland
to satisfy its European markets
- In the Asia Pacific, a growth region for IKEA, it has outsourced labour – intensive production to
China, Malaysia, Vietnam and Myanmar
- Advantages of low wage costs
- Self services checkouts
- POS
- Online PAX wardrobe planner software

Technology

- Refers to the design, construction and application of innovative devices, methods and
machinery to operations processes
- The focus of this strategy is the type of technology to implement and how it is integrated across
operations processes

Existing technology

- The use of developed and widely used technology such as computers , barcoding and POS (point
of sale), data, robotic, CAD (Computer Aided Manufacturing)

Cutting edge technology

- The use of the most advanced or innovate technology at any one time. It may help the business
develop a competitive advantage due to –
- High quality levels
- Faster processing and production
- Reduction in waste
- How ever managers need to ensure that the actual benefits can be achieved and that is worth
the cost of the investment
- TRADFRI – IKEA’s smart lighting system

Explaining the impact of the strategy

- How could use of established and leading edge technology assist a business to achieve a
competitive advantage – businesses can use cutting edge technology to differentiate products
from competitors, differentate services from competitiors, interaction with products and
consumers,
Quality management

- Refers to the processes to ensure consistency , reliability, safety and fitness for purpose of the
business’s products
- Consideration in quality management include
- Reducing waste and defects
- Increasing conformity to standards
- Reducing variance in final outputs

Approaches to meeting quality expectation in operations include

Quality control Quality Assurance Total Quality Management

Inspection to check for Implementing a system to A commitment to excellence
problems and then fix them ensure standards are achieved and continual improvement
in production

Quality Control

- A reactive approach that involves the use of inspection at various points in the production
process to check for problems and defects

Quality Assurance

- A more proactive approach that involves the use of a system so that the business achieves set
standards in production
- International Organisation for Standardization (ISO) provides guidelines on how business should
establish quality assurance systems by adopting specific procedures, controls and recording and
documentation methods
- IKEA’s quality compliance standards for all suppliers are called go/nogo

Total Quality Management

- TQM is an ongoing, business wide commitment to excellence that is applied to every aspect of
the business operation The aim is to create a defect free production process and maintain
customer focus in operations
- To achieve TQM objectives a range of approaches can be used including
- Employee empowerment (Quality circles)
- Continuous improvement (Constant evaluation)
- Customer focus (what do customers require)

IKEA – TQM (Total Quality Management)

- ‘Product quality is the foundation for us is our vision’

- Called ‘Everyday Product Quality’
- Customer quality perception
- Costs of poor quality
- Secure compliance
- IKEA believes that their products must be
 - Well –designed
- Safe to use
- Customer friendly
- Durable and functional

How could use of quality management assist a business to achieve a competitive advantage

- The use of quality management can assist a business to achieve a competitive advantage
through their empowerment of employees

Operations strategies

- Supply chain management – logistic, e-commerce and sourcing

Supply chain management

- A supply chain refers to the linkages between a business and its main suppliers of inputs such as
raw material , services, utilities , capital equipment and information
- Supply chain management (SCM) involves activities to integrate, manage and control this flow of
suppliers through the operations processes
- It involves
- Sourcing
- Logistics
- E- commerce

Why would you want to integrate, manage and control the supply chain?

- The supply chain is often referred to as the value chain because at each stage greater value is
added to achieve profit
- Therefore integrating, managing and controlling this process, by reducing costs and/or
shortening the length of the chain will result in reduced final costs for the business and lower
price for consumers

Sourcing

- Sourcing relates to the purchasing pf inputs and the way which this is done can be adapted and
altered
- A business could rationalize its suppliers by reducing the number of suppliers in order to achieve
economies of scale and efficiency of processing
- Another sourcing strategy a business may be to implement backwards vertical integration
- Backwards vertical integration occurs when a business mergers or takes over a business that
suppliers it with inputs – the previous link in the supply or distribution chian. This would
guarantee supply, its cost and quality
- A futher way of minimizing costs or controlling the supply chian is through global sourcing
- Globalisation has allowed business to source inputs from overseas from a range of suppliers
who offer specialized inputs, hiher quality, lowest cost or proximity to consumers

Logistics

- Logistics refers to movement and handling of inputs and the distribution of outputs
 - It involves consideration of
- The Type of transport used
- The storing and warehouse of material
- Materials, handling and packaging
- Effective logistics strategies involve low cost transportation of unit loads such as containers and
pallets and quick service response times
- Business employing effective logistics maintain storage and large distribution centres to
consolidate orders and dispatch goods to their stores speedily, helping to meet demand and at
the same time reducing the cost of distribution and transportation

E-commerce

- Short for electronic commerce is the buying and selling for information, goods and services via
the digital space
- Whether it be the internet or mobile apps
- It can be defined as B2C (business to consumer)
- B2B (Business to Business)
- E-Commerce can be used to shorten the supply chain or allowing more rapid response to
demands an needs
- The rapid spread of ICT has changed the way that business is done by providing consumers with
more flexible means to buy goods and services , and for businesses to advertise and procure
goods and services required as inputs in the operations process
- In this way E-Commerce has been an appropriate response to transformative technological
influences

Inventory management

- Inventory (stock) refers to the amount of raw materials, work in progress (WIP) and finished
goods the business has on hand
- Business hold inventory in order to minimize lead times and ensure a rapid response to
customer orders
- Involves the activities that determine decisions around the amount of inventory that should be
held, how inventory is valued/accounted for and decisions of when to restock/reorder

Why is it important

The amount of inventory will impact speed, flexibility and costs of

operations processes

How inventory is valued will impact quality and costs of operations

process
When to reorder Dependability, speed and costs of operations
processes
What are disadvantages of holding inventory?

- It comes with associated storage, spoilage, insurance theft and handling cots
- It represents money that is tied up and cannot be allocated and invested elsewhere
- Over time, inventory can become obsolete

What are the advantages of holding inventory?

- It will enable the business to meet consumer demands immediately

- It offers consumers both immediate variety and volume which can generate greater revenue
- It can reduce lead times in the production process
- It allows business to make bulk purchases and achieve of economies of scale

The valuing of inventory

- One of the fundamental jobs an accountant is to ‘account for’ the value in the business
- This includes valuing the inventory held by the business
- This is where we get the term ‘stock take’ - it is the physical counting of the inventory
- The financial outcomes of operations and the business will be significantly impacted by HOW
inventory is used

Problem with inventory

- The difficult arises that the price paid for inputs often changes over time due to improved
production process, supply shortages and marketing fluctuations
- The business needs a way to determine the inventory

Last in First out (LIFO)

- LIFO assumes that the last stock bought by the business is sold first and therefore the cost of
each unit sold is the last cost recorded
- So we have 16 cartons of milk and we last paid 2.50

First in First out (FIFO)

- FIFO assumes that the first stock bought by the business is sold first and therefore the cost of
each unit sold is the first cost recorded

Weighted Average Cost

- Weighted Average Cost (WAC) determines the average cost of inventory purchased in the period
cost of inventory purchased in the period and uses that it calculated

Impact

- It is legal to choose between these three valuing options but

- There will be significant variations in the outcomes they provide
- LIFO tends to overvalue inventory
- FIFO tends to undervalue stock and overstate profits
Just in Time

- A method that can be used to reduce the problems associate with valuing inventory is to adopt
a Just-In-Time (JIT) inventory management system
- This type of system ensures that the exact level of inputs arrive in the business only as needed
- The JIT inventory management approach offers cost savings, flexibility in customization and
reduces inventory losses
- However, it dependent on reliable supplier , on time deliveries and accurate procurement
strategies otherwise customers will be left waiting

IKEA

- IKEA is both a retail store and warehousing space making inventory management central to the
consumer experience
- The bottom shelf that customers access is the oldest stock with newer stock placed above
- It is placed below when the stock is running low
- This alleviates some of the issues with valuing inventory

SKUs (Stock Keeping Units)

- Every IKEA product has a identification label fitted

- These labels contain information on origin, composition and date of manufacture
- It is also linked to the POS data on sales and pricing
- This reduces the assumptions in valuing inventory

Glboal factors – Global sourcing, economies of scale

Global factors

- Refers to the strategies that have enabled by an integration of the global economy, business and
consumer networks
- In essence, looking at the following global factors, it is about arguing that an increasingly
globalized business environment has intensified and expanded the reach and potential of
existing operations strategies
- Several global factors present opportunities when assessing the operations strategies available
for operations managers. These opportunities may be classified as
- Global sourcing
- Economies of scale
- Scanning and learning
- Research and development

Global sourcing

- As an operations strategy involves the sourcing of any business operations from across the
global that give the business cost advantages
- Access to new technology
- Advantages of expertise and labour specialization
 - Access to other resources
- Ability to extend operating hours

Limitations

- Costs of relocation of operations

- Different regulatory conditions
- Increased cost of logistics, storage and distribution
- Increased complexity from multiple locations

Global sourcing links to operations

- Outsourcing (intensifying/easier)

Economies of scale

- Economies of scale refers to the cost advantages that can be gained by producing on a larger
scale
- This means that business can lower their per unit input costs
- Economies of scale become a global factor when businesses sell to global markets
- Clearly, any individual nation has limited population to sell to and the need to sell to global
markets becomes a decision based on scale advantaged
- As the scale of production increases, the costs per unit falls

Scanning and learning

- All business can benefit from scanning the global environmental learning from the best practice
in the world
- From international business papers and journals, global conferences to staff members from
other countries, this diversity of experience and wisdom
- Link to operations factors
- S and L links to new product or service and development
- SL links to technology giving access to the latest technology
- SL links to overcoming resistance to change

Research and development

- Innovative companies spend time and money on research and development (randD) R and D

Within government

- Govt aroujnd the world encourage business to invest in R and D and may offer taxation
incentives and grants
- These incentives and grants assist businesses to invest and allocate reosurces into R and D
ASSESSMENT NOTES

Evaluate the response of operations strategies to external influences

Evaluate – to make a judgement based on a set of established criteria (key performance objectives)

Response of operations strategies – we are evaluating this object

External influences - this is the subject that is having the effect

Structure

- Introduction/ executive summary = 150 words

- 3 sections / controlling ideas – what is the influence how has it impacted the business? What
strategy/ strategies have been used – evaluate the response
- 900 – 1200 words
-