HSC STUDY BUDDY 1
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Operations Notes
Role of Operations Management
• Operations -‐ refers to the business processes that generally involve transformation/ production of inputs into finished G/S →
- Involves processes that transform and add value to business inputs in the creation of outputs
o Known as the Production Function • Transformation -‐ conversion of inputs (resources) into outputs (G/S) • Value Adding -‐ creation of extra or added value as inputs are transformed into
outputs • Lean Production -‐ is minimising waste in operations → i.e. becoming more efficient
by lowering costs, reducing errors and defects and minimising underuse of labour • The growth of the Fairtrade movement is a direct result of consumers advocating for
operations processes in production and supply to integrate notions of a fair price, decent working conditions and local sustainability
• Customers want firms to integrate environmental awareness strategies and demand ecologically sustainable products → they also want businesses to reflect the changes in consumer preferences over time
• Qantas operations has had to respond to recent challenges of: - Terrorism - Increasing fuel prices - Volcanic eruptions - Global economic downturns - Competing success of low-‐cost rival airlines (tried to counter this with Jetstar)
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Goods Services
Strategic Role of Operations Management
• Each business function has a strategic component → affecting all key business areas → strategic role of operations involves operations managers contributing to the strategic direction or plan of the business → LONG TERM
• Generally the overarching goal of a business is to maximise profits → operations function is a COST CENTRE (attracts cost but does not bring about income)
- Therefore → a strategic aspect of operations management is reducing costs
Cost Leadership
• There are several different sources of operational costs → input, processing, transformation and costs of shipment
• Cost Leadership -‐ involves aiming to have the lowest costs or to be the most price-‐competitive on the market → attract buyers and hence reaches profit maximisation
- This is an intrinsic aspect of strategic operations management → lowering costs is crucial!! → must be done WITHOUT reducing QUALITY!
• This allows a business to achieve; o Economies of scale → lowest cost per unit of input (technology) o Increased efficiencies through improved use of technology/machinery o Cost savings created through purchasing in bulk o Spreading fixed costs over larger output → reduces costs.
• Myer went through cost leadership transformation in 2006 by introducing 8 international distribution centres → invested in IT which cut costs by 50% by 09
Strategies for Cost Leadership
Other Strategies Include:
- Buying in Bulk - Standardised Products - High volume and automated production systems
• Qantas: - Staff make up 26% of costs - Fuel 25% - Maintenance 20%
Qantas management has targeted $1.5 billion cost reductions by 2015 → through: - Economies of scale through bargaining power with fuel - Being a member of the Oneworld Alliance → features 12 of the world's
leading airlines and engages in separate bilateral agreements with British Airways, American Airways and Japan Airways to save costs
- Technology through online booking/check-‐in - Waste Minimisation → Qantas reduced its waste by 21% in 2011 through
recycling, energy efficient materials o In 2010 → Qantas diverted its waste to a Trigeneration waste
treatment facility in Sydney → 99.8% of waste is now recycled
Good/Service Differentiation
Goods Only Services Only Tangible Intangible Can be stored Cannot be stored Output produced before consumption Production and consumption
simultaneously Low customer contact High customer contact Can be transported Cannot be transported Quality easy to examine Quality difficult to examine
Economies of Scale
Technology -‐-‐> up to date
Control Produccon Costs -‐-‐> Labour, raw materials and overheads (equipment)
Control other Costs -‐-‐> Reseach and Development
+ Markecng
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• From an operations perspective, a strategic approach assesses the different options and determines which ones can be undertaken with a cost leadership focus
• Cross branding -‐ adds value to the products by offering consumers added benefits from cross-‐branding arrangements → e.g. Coles/Shell alliance → differentiation from an external factor
• Product Differentiation -‐ means distinguishing products (G/S) from its competitors STRATEGIES BELOW
Goods Services Varying product features/design -‐ colour,
ingredients Angus Burger -‐ 100% Angus Beef
Varying amount of time spent on a service
Prior tutoring offering free workshops Varying product quality -‐ price/quality
interaction Maccas Angus positioned as a premium
product
Varying the qualifications/experience of the service provider -‐ level of specialisation → affects the quality
Varying any augmented features -‐ add-‐ons or additional benefits associated with goods
Reversing camera for Toyota Rav4 Wheel Drive
Varying the quality of technology used in delivery -‐ i.e. quality of phone networks, internet service etc
Goods and/or Services in Different Industries
Goods
• Standardised Goods -‐ those that are mass produced → uniform in quality → production focus NOT customer orientated focus → Big Mac -‐ economies of scale
• Customised Goods -‐ varied according to the needs of customers → market focus rather than production focus → tailored suits
• The layout of operational processes will vary depending on the level of product differentiation
- The choice of process selection is strategic as it requires a high degree of cross-‐functional interaction and coordination
- All 4 key business functions need to work together to achieve the operations outcome
• Goods can be both perishable (foods) and non-‐perishable (cars, electronics, furniture, clothes) → operations processes will vary between sectors
Perishable Non-‐perishable High standards of quality, safety and
cleanliness in all operating processes Short lead times and distribution that is
quick and effective Appropriate robust packaging and cold
storage processes both through production and distribution
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 to NOT over produce
• Intermediate Goods -‐ finished goods at one stage of production may be reused to finish other products for different businesses
Services
• Services can also be standardised and customised - fast-‐food industry aims to standardise service - Differs from professional services that are customised (legal/medical
services) • Self-‐service -‐ means encouraging the customer to take the initiative to help
themselves → shown through self-‐service checkouts in Coles/Woolworths - Online booking for travel industry → lowers costs + increase efficiency
Interdependence With Other Key Business Functions
• Although a business can separate key business functions into departments that perform their distinct roles → the functions are interdependent → relies on the coordination of others to perform effectively → cross-‐coordination!
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• Interdependence -‐ refers to the mutual dependence that the key functions have on each other → each must work towards common goals and depends on the support of others
Tasks Within the Key Business Functions
Operations Operations and operations management has direct links to all other key business functions → they all exist because of operations → the process of making a good
Marketing Marketing connects the operations function directly with customers → marketing allows for effective analysis of target markets to know what type of products to produce → to work towards the strategic goal of profit maximisation
Finance The business will be based on budgets and operations can only work effectively by obtaining funds from finance → finance will make their budgets based on expenses provided by operations and other business functions.
• They also carefully monitor the inputs and outputs of operations through working capital management where there are controls on current assets/liabilities. → monitor marketing through cash flow/profitability management and cost/revenue controls
Human Resources
Most of the employment generally stems from operations → key link between HR. Retaining employees is pivotal to the effectiveness of operations management → developing employees allows for more efficient processes and economies of scale. → recruitment of staff -‐ pilots/baggage handlers for Qantas
Influences on Operations Management
Main Influences on Operations Management
Globalisation Globalisation -‐ The process of globalisation has led to increasing integration between economies → transfer of skills, labour, resources, technology and capital - Deregulation of financial markets
This has provided a source of cost-‐saving opportunities for operations → can choose appropriate means of outsourcing their operations to different countries → allows them to adapt to changing business environments - Use of manufacturing plants for production means that firms
can achieve massive economies of scale advantages → because supply of raw materials are cheaper and easier
o Optus call centres in Philippines o Apple IPAD in China -‐ low cost & mass production
BUT → can be a threat as big TNCs now can dominate and monopolise the market if they become too powerful
Supply Chain -‐ refers to the range of suppliers a business has and the relationship with those suppliers → needs a reliable supply chain that is responsive to changes in demand → COST LEADERSHIP
Integration of a range of suppliers leads to a global production web strategy → operations structured around global production facilities → supply of cheap labour, government incentives for TNCs (e.g. China 1980s), lower tax rates etc → minimises costs
Imitator -‐ creates similar products to those that currently exist → Angry Angus at Burger King imitates Maccas Angus Burger - Reverse Engineering -‐ a process of taking a competitor's
product and making a cheaper version using different materials → Hot Dollar makes cheaper products by doing this
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Innovations may make a technological breakthrough that allows for a leap in the quality of life and opportunities for consumers → affects operations processes by differentiating products and making them new on the market - Supply chain is shaped around innovation → APPLE
Globalisation led to Qantas establishing subsidiary carriers in Asia to becomes more cost competitive
- More than 70% of Qantas assets are geared to the global market
- But did lead to industrial tensions in 2011 Technology Technologies such as mobile phones/computers have enhanced
communication processes allowing for greater operations efficiency and a competitive advantage →self service checkouts in Woolworths
Technology assists with organisation, planning and decision making and are the centre of operational processes → manufacturing, quality management and all aspects of inventory management
HOWEVER → it means staff need to constantly be trained → can be costly for businesses in short-‐term but in long-‐term leads to greater efficiencies, economies of scale and profits
Need to consider: - Technology by competitors - Cost of fitting - Staffing implications - Whether to use CAD/CAM technology
Qantas → newer planes (airbus A380) → able to carry more passengers and use less fuel than the 747 → Qantas spends $300 million annually on training
Quality Expectations
Expectation of quality is a significant influence on operations → how well designed, made and functional goods are
Quality impacts on the reputation of a business and a poor quality could damage the strategic goal of profit maximisation
Therefore → operations must follow particular standards Qantas → new generation check-‐in, new Q Bag Tags, in-‐flight entertainment + newer planes
Goods Services Quality of design → the materials used and the level of innovation
Professionalism of the service provider → cleanliness/layout of facilities
Fitness for purpose Reliability of the service-‐provider → efficiency
Durability -‐ reliability or how long-‐lasting it is
Level of customisation
Cost-Based Competition
Cost-‐based competition -‐ derived from determining the breakeven point and then applying strategies to create cost advantages over competitors
- can use reverse engineering
Reducing fixed and variable costs is a way to maximise profits → do this without impacting on QUALITY → relates to applying a cost leadership approach
Qantas → outsourcing operations, reform to HR practices, online bookings
Government Policies
Political decisions affect business regulations which can affect operations management
- Government policy is a notable source of change and a significant influence on business operations
o e.g. Emissions Trading Scheme has changed the processes of operations in Australia + GST has increased the prices of products
Policies such as taxation rights, quotas, OHS etc all impact on business operations → environmental/employment regulations
- E.g. reduced protection levels This can also lead to new business opportunities Qantas → Deregulation and carbon tax ($20 per tonne of carbon dioxide) has placed pressure on operations to minimise costs
• Fair Work Act 2009→ has increased union bargaining power which potentially has increased Qantas' operating costs
Legal Regulation
Compliance Costs -‐ are the expenses associated with meeting the requirements of legal regulations → i.e. auditors reports etc
The process of operations is associated with the use of labour, technology, finance → and the laws regulating these must be obeyed
E.g. OHS, Fair Work Act, anti-‐discrimination laws, environmental protection and taxation
Compliance with Work Health and Safety Act 2012 (Cth) and the Competition and Consumer Act 2010 (Cth) is crucial
Qantas was fined $20 million by ACCC in 2008 for illegally increasing their freight charges with other airlines
- Subject to regulatory control of the Civil Aviation Authority - Under the Qantas Sale Act 1992 → Federal Government
restricts foreign investment to 49%, which decreases Qantas' access to equity capital
Environmental Sustainability
Associated with intergenerational equity → to ensure that operations are shaped around practices that don't damage the environment for future generations - Sustainable use of renewable resources - Reduction in the use of non-‐renewable resources
Therefore → operations need to implement a long-‐term sustainable view of resource management into business planning → carbon tax has ensured businesses pursue this → by reducing their carbon footprint → reduce160 million tonnes/year by 2020
Qantas → environmentally sensitive aircrafts (Boeing 787 and Airbus A380), Trigeneration wastage recycling facility in Sydney in 2010 + fuel conservation
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Corporate Social Responsibility
• Corporate Social Responsibility (CSR) -‐ refers to open and accountable business practises based on respect for people, community, society and the broader environment
- More than just complying with laws and regulations → not simply profit minded but community minded with social expectations/responsibility
o Involves the company's vision, ethics and values → the way products are manufactured, marketed, priced and distributed
- Operations managers need to focus on the quality of their management with people and processes → treated ethically and fairly
- Production of environmentally friendly products → Green Carry Bags at Coles - Qantas Reconciliation Action Plan → focuses on employing Indigenous
Australians o Donated $2 million to charity in 2011 o Scheme for customers to pay extra to offset their carbon dioxide
emissions → offset 240,000 tonnes of carbon in 2011
Difference Between Legal Compliance and Ethical Responsibility
• Legal compliance involves strictly observing the laws and adhering to all minimum standards
• Ethical responsibility goes further than that → they follow it by their own intentions and it is the 'spirit' and 'culture' of the business → it is about what is morally right.
- Acts with integrity and honestly to community standards • Firms must legally comply with;
- Labour laws -‐ Fair Work Act - Environmental and public health compliance - Business licensing rules - Taxation - Trade practices - Intellectual property laws - Financial and accounting regulations - Human rights
• To be ethical: - Code of ethics - Corporate culture change - Role model appropriate behaviour
• This requires a lot of compliance costs → therefore many businesses opt for the lowest levels of compliance that is permissible → BUT NOT RECCOMMENDED -‐ can damage a firms' reputation
• The Body Shop gives staff two days paid leave a year devoted to community projects → leads to content staff who enjoy their work → benefits the business
Outsourcing, Compliance and Business Behaviour
• Outsourcing allows outside specialists to undertake key business functions → can be onshore and offshore
• This allows firms to take advantage of regulatory differences between nations and cut costs→ e.g. minimum wage, lower taxes and weaker environmental
• This raises ethical issues concerning business behaviour
Ethical Responsibility
• Involves businesses going beyond the law and taking into account broader social, community and environmental concerns → however with differing laws between nations it is hard to determine whether a business is ethical or not
• Therefore, businesses may follow guidelines set by international bodies → e.g. International Labour Organisation (ILO)
Environmental Sustainability and Social Responsibility
• Environmental sustainability comes from balancing economic concerns with environmental concerns
• Social Responsibility -‐ concerned with the business interacting in a positive way in terms of its operations with the local community and improving the quality of life of community members
• Many businesses and governments have adopted policies of conservation, recycling and restoration → ecological sustainability requires businesses to evaluate the full environmental effects of their operations
• Growing consumer expectation of 'green' products is changing management practises in Australia → adopting greenhouse reduction measures and developing long-‐term sustainable strategies
• CSR is about going 'above and beyond' making a profit and obeying the law • This leads to a positive business reputation and can actually enhance profits →
therefore → short-‐term increase in costs but the long-‐term is beneficial!!! - E.g. Renewable energy through solar power - Billabong voluntarily measures its carbon emissions using the National
Greenhouse and Energy Reporting Act 2007 and adopts energy efficient practices by using LED systems which use less power in retail outlets
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Operations Processes
• Operations Processes -‐ refers to the input→ transformation→ output process
Inputs
• Inputs -‐ are the resources used in the transformation (production) process
Common Direct Inputs
Labour Human Effort → physical + mental Energy Electricity/fuels → converted into heat, movement, light and sound Raw Materials
Wood, agricultural products, natural resources, minerals, water, fossil fuels etc.. → i.e. anything in an unprocessed state
Machinery and Technology
Machinery is used to process raw materials and to design/make products → integrated with technologies to perform complex tasks
o Capital-‐labour substitution -‐ when machinery and technology replace labour → makes labour redundant in short-‐term → long-‐term they acquire new skills
Input Classification
Transformed Resources (materials, information, customers)
• Transformed Resources -‐ are those inputs that are changed or converted in the operations process
Materials Materials -‐ basic elements → raw materials and intermediate goods - Raw Materials -‐ unprocessed state → Qantas -‐ Fossil Fuel - Intermediate Goods -‐ used in further processing → food ingredients
Information Information -‐ is the knowledge gained from research → increases understanding and can influence behaviour or decision making
- i.e. used to make informed decisions about how inputs are used → which suppliers to use etc
External Information -‐ comes from statistics from industry bodies → ABS, Census, media reports etc
Internal Information -‐ comes from within the business → gathered from financial reports, KPI's (lead times, inventory turnover rates and production data → measures efficiency/effectiveness of business performance) → used as an input when it informs process improvements
Qantas discontinued services to Ballina Airport and replaced it with Jetstar since it was no-‐longer seen as a business segment of the transport market
Customers Customers become transformed resources when their choices shape inputs → consumer orientation → their desires and preferences act as a transformed resource
Customer Relationship Management -‐ refers to ways that businesses maintain customer contact → identifies changes in consumer tastes
- An example of marketing interdependence Qantas → customers transformed by having their location changed
Transforming Resources (human resources/facilities)
• Transforming Resources -‐ are those inputs that carry out the transformation process → enables change and value adding to occur
Human Resources
Well qualified, disciplined + hard working staff can bring great productivity and are valuable inputs → operate on machinery that makes G/S
Effectiveness of HR can determine the success of transformation and value adding → ensuring staff motivation remains high
This can improve the performance of operations processes → good job design, training, flexible work practices and good communication
Qantas → cleaners, baggage handlers + pilots Facilities Facilities -‐ refer to the plant (factory or office) and machinery used in the
operations processes → efficient plant design is crucial Ultimately determines the firms capacity to transform → nature of the
operations environment → achieves the core function -‐ producing output. Facilities which integrate modern technologies, well designed and are
labour friendly will promote productive operations Qantas → terminal buildings, aircraft, computers, maintenance facilities
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Transformation Processes
• Transformation -‐ is the conversion of inputs (resources) into outputs (G/S) - Implies physical changes AND the conversion of resources into services - Transformation process differs between manufacturing businesses and service
businesses → o Operations processes of manufacturer -‐ tends to be highly
automated/mechanised → tangible! o Services rely highly on interaction with customers → processes are labour-‐
intensive → intangible! • Value adding is a critical part of this process → can give a product greater usefulness
or increase overall utility to consumers → they pay more → ↑ revenue
The Influence of Volume, Variety, Variation in Demand and Visibility (customer contact) → THE 4 V's
Volume Volume -‐ refers to how many G/S are produced - Firms with high volume are likely to produce standardised products - Firms with low volume will tend to produce customised products
Lead Times -‐ the time it takes for an order to be fulfilled from the moment it is made
Volume Flexibility -‐ refers to how elastic the transformation process is to adjusting to changes in demand
- This is crucial is managing lead times - If businesses cannot quickly adjust to changes in demand -‐ they
can overproduce → wastage and increased inventory costs o If they under-‐produce → loss in sales!!!
Variety Refers to how many different types of G/S are produced by the business Mix Flexibility -‐ the mix of G/S delivered through the transformation
process - The greater the variety → the more operations processes required
Variation in Demand
Increase in demand will require increased inputs from: suppliers, HR, energy use, machinery and technology - Capacity constraints within the firm → inflexible labour, suppliers,
machinery, energy/power → may harm the goals
Decreased demand will also require the same operational flexibility as staff may need to have their hours reduced, production may need to slow down and supplier contracts may need to be down-‐sized
THEREFORE -‐ forecasting fluctuations in demand is crucial → so that adjustments can be anticipated so the firm can act accordingly → e.g. Christmas peak periods and other seasonal changes (heaters in winter)
Qantas → experiences peak periods during school holidays and special events such as the London 2012 Olympic Games or the World Cup BUT -‐ Qantas struggles with unpredictable events such as the June 2011 Christchurch Earthquakes, Thailand Floods or the Japanese Tsunami which all resulted in sharp falls in sales
Visibility (customer contact)
Service businesses would have higher visibility than manufacturing Customer contact/feedback directly affects transformational processes →
their preferences shape what businesses make Direct -‐ surveys, interviews, warranty claims, blogs etc Indirect -‐ review of sales data, market share data and observation of
customer decision-‐making processes Since Qantas is a service → experiences high visibility (continuous customer contact)
Sequencing and Scheduling
• Sequencing -‐ refers to the order in which activities in the operations process occur • Scheduling -‐ refers to the length of time activities take within the operations process - They assist in structuring and ordering the transformation process! - With careful sequencing and scheduling → costs of operations can be minimum
Qantas uses Sabre Air Flight Suite Systems (a complex scheduling software) which automates its flight scheduling → ensures there is adequate time for cleaning, catering and engineering support before arrival and take-‐off
Gantt Charts
• Gantt Chart -‐ is a bar chart that shows both the scheduled and completed work over a period of time → used in planning and tracking projects
- Outlines activities that need to be performed, the order to be performed and how long they are expected to take
• Advantages 1. Forces a manager to plan the
steps needed to complete a task and specify time required
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2. Make it easy to monitor actual progress against planned activities
Critical Path Analysis
• Critical Path Analysis -‐ is a scheduling technique that shows what tasks need to be done, how long they take and what order is necessary → in a sequence
- Some tasks need to be completed before others can begin • Therefore, a manager can see what needs to be done and allows the timing of tasks
to be considered → a business can see in what order activities need to be done • Gives the firm a sense of direction and organisation to operations processes,
provides overall coordination and ultimately a means of control • Critical path is the shortest length of time to complete all tasks necessary → shortest
time possible to complete the operations process • In this case, the shortest path is:
(1) day +(15)days +(1) day +(2) days +(1) day +(1) day =21 DAYS Quality Test Materials
Make Components
Paint Components
Final Assembly
Quality Test Product
Dispatch
Technology
• Business technology involves the use of machinery and systems that enable businesses to undertake the transformation process more effectively and efficiently
• Firms need to acquire up-‐to-‐date technology to compete → speeds up processes and enables fuller utilisation of resources → more cost-‐effective operations processes
• Initial capital cost of technology is quite high → businesses may decide to lease it (tax deductible)
- May lead to the displacement of workers or new costs involved with training
Qantas → technology such as online check-‐in/booking and electronic bag tags have increased productivity and have replaced human capital
Office Technology
People have begun to telecommute → emails checked from home, Skype meetings, paperless trading
Manufacturing Technology
These include robotics on assembly lines -‐ efficient and minimise waste - Don't demand higher wages/working conditions → favourably
better than labour Computer-‐aided design (CAD)-‐ allows firms to create products from
inputs on computers → useful in transformation processes - Generates 3D pictures which assists the designer to visualise
the product - Also can allow users to modify materials used in order to
change the cost of production Computer-‐aided manufacturing (CAM)-‐ allows manufacturing
process to become computer controlled → factory's etc..
Task Design
• Task Design -‐ involves classifying job activities in ways that make it easy for an employee to successfully perform and complete the task
- Overlaps the employment functions of job analysis, job description and person specification
- An example of the interdependence between HRM and operations
Task Design → Job Description → Person Specification → Recruitment → Selection • Skills Audit -‐ process used to determine the present level of skilling and any skill
shortfalls that need to be made up either through recruitment or training
Plant (Factory/Office) Layout
• Plant Layout -‐ is the arrangement of equipment, machinery and staff within the facility → has a huge impact on efficiency of operations
• Must conform with legal regulations (OHS), adequate stock levels, space and lighting
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Process Layout
• Process Layout (functional layout) -‐ arrangement of machines so that they are grouped with equipment by the functions they perform
- Typical of hospitals → different areas of care
Qantas is one of the few airlines in the world that own their own terminals → A MAJOR EXPENSE for Qantas
Intermittent Production
Process Production -‐ deals with high-‐variety, low-‐volume production Each product has a different sequence of production that is intermittent
→ i.e. moving from one department to another Involves team based works through 'work cells'
Product Layout
Product layout -‐ where the equipment arrangement matches the sequence of tasks performed in manufacturing a product
Here an assembly line is common Fixed Position Layout
Fixed Position Layout -‐ is where a product remains in one location due to its weight/bulk
Project Production -‐ deals with layouts for big activities → i.e. construction of bridges → every stage of production is in one area
Office Layout
Workstations -‐ common in service based sectors Needs to have smooth workflow → provide space for breaks
Monitoring, Control and Improvement
• All operations processes should be monitored for their effectiveness → transformational processes should be controlled and improved
Monitoring Monitoring -‐ process of measuring actual against planned performance
Involves measuring supply chain management and the use of inputs through to transformational processes and outputs - KPI's → lead times, inventory turnover, warranty claims, defects
Gives managers a chance to measure how the business is going!!! Control Control -‐ comparing with what was intended to happen and actually
happened → assessing the performance If there is a discrepancy → changes and improvements can be made Strict controls are crucial -‐ setting challenging but reasonable
performance targets Control requires managers to take corrective action → make changes
to the transformation process or redesign facilities layouts to correct problems
Improvement Achieved through the reduction of inefficiencies, wastage , poor work processes and elimination of any bottlenecks
Improvements in time, process flows, quality, cost and efficiency is critical Continuous improvement -‐ an ongoing commitment to achieving perfection
→ important to business culture
Outputs
• Output -‐ refers to the end result of the business efforts -‐ the G/S that is provided or delivered to the customer
• Should always be responsive to customer demands → issues of quality, efficiency and flexibility must be balanced against the resources and strategic plan of the business
• Customer service and warranties imply that the inputs and transformations processes are subject to scrutiny as the outputs will be assessed by customers
Customer Service
Since customer focus always shapes operations processes → inputs, transformations processes and outputs are all aimed at exceeding customer expectations = customer service!
Is an example of the interdependence with marketing! If this is negative → operations processes need review Customers are the life-‐blood of a firm → without customers = no
business One dissatisfied customer tells 11 others → FUNDAMENTAL Qantas Closed Loop Feedback Program enables direct feedback from 11,000 frequent flyers annually
Warranties The effectiveness of operations can be accessed through warranty claims Warranty -‐ a guarantee that faulty products will be repaired or replaced
- Can be implied -‐ acceptable standards -‐ fit for purpose - Can also be expressed -‐ which expire after a time period
Operations need to trace the source of the fault in manufacturing and rectify it → warranty claims can lead to improved transformation processes
Mazda 3 defect detected in LED panel → replaced components to rectify faults → major cost for the firm
Note: ALL OPERATIONS SHOULD BE MONITORED AGAINST KPI's FOR THEIR EFFECTIVENESS
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Quality -‐ Being RIGHT -‐
meecng customer
expectacons
Speed -‐ Being FAST
Dependability -‐ Being On
Time
Flexibility -‐ being ABLE TO
CHANGE
Customisacon -‐ being able to
prodivde MORE
OPTIONS
Cost -‐ Being PRODUCTIVE
(cost leadership)
Operations Strategies
Performance Objectives
THIS ALL LEADS TO AN INCREASE IN COMPETITIVENESS
Performance Objectives (contd)
• Performance Objectives -‐ are goals that relate to particular aspects of the transformation processes - These objectives/targets will be set so that the business can become more
efficient, productive and profitable - Can be viewed as Key Performance Indicators (KPI's)
Quality Quality is often determined by consumer expectations which inform the production processes of the business
High quality will lead to fewer complaints, satisfied customers, increase reputation and revenues → also reduces wastage
Qantas → planes must be clean + tidy, staff and website are user friendly Quality of Design
This extends to how well a product is made or a service is delivered
Design determines the inputs and how the transformation processes will be arranged → a high-‐quality will involve costly materials and care/presentation of the good
This normally leads to a higher price → Mercedes Benz competes on quality
Quality of Conformance
Quality of conformance -‐ is the focus on how well the product meets the standard of a prescribed design with certain specifications
How consistently do the products achieve compliance with the desired specifications? → High quality needs high specs whilst low quality needs low design specs
Quality of Service
Reliability of the service, how well the service meets the needs of customers and how efficient it is
Speed Speed -‐ refers to the time it takes for the production and operations processes to respond to changes in market demand
- Requires that changes in input levels and processing times are responsive to changes in demand
As an objective → speed aims to satisfy the customers' demands ASAP - Reduced wait times - Shorter lead times - Faster processing times
WANT TO HAVE SMOOTH INTERNAL COMMUNICATIONS AND REDUCE: • Technical Bottlenecks -‐ concerned with a structural issue within
the firm e.g. unable to take big orders • Procedural Bottlenecks -‐ are issues that can be overcome with
training Jetstar closes check-‐in 30 mins before departure → achieves speed and dependability Qantas increased speed through on-‐line check in and Q Bag Tags
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Dependability or Reliability
Dependability -‐ refers to how consistent and reliable a business's products are → how long they last → ability to meet customers' demands on time
Measured through warranty claims or number of complaints Dependability can save time, money and increase efficiency Qantas → measured through on-‐time departures/arrivals → has suffered recently through industrial disputes and mechanical failures in 2011
Flexibility or Adaptability
Flexibility -‐ refers to how quickly operations processes can adjust to changes in the market → changing products offered, mix or volume
Can be achieved by increasing the capacity of production → purchasing of technologies that increase flexibility/capacity
E.g. how quick could firms reduce their production during GFC? Due to seasonal changes (school holidays/special events), Qantas
must operate flexibly → Jetstar does this well through its variable baggage/catering options
Customisation Mass Customisation -‐ is a process that allows a standard, mass-‐produced item to be personally modified to specific customer requirements → increasingly common today
- Dell Computers offer various levels of memory/functionality in their mass produced laptops
Because of customer orientation, operations processes are likely to move towards customisation → variation of features
Full customisation (products are created after an individual order) is costly for firms → tailored suit
Qantas is a member of the Oneworld Alliance → offers services to more than 680 destinations → also customises through Jetstar being advertised as a no frills alternative and offering different classes of seating (economy, business and first class)
Cost Cost -‐ refers to the minimisation of expenses so that operations processes are conducted as cheaply as possible
The achievement of all the above performance objectives will help minimise cost!
This can be reduced through achieving cost leadership → economies of scale, bulk buying, new technology, cheaper raw materials etc..
Minimising wastage is crucial → reduce supplier costs, manage inventory, maximise flexibility and effective distribution methods
Note: Each of the KPI's should be allocated specific targets or goals!!
New Product or Service Design and Development
Products
• The approaches to product design and development include: 1. The preferences and desires of consumers determine which products are
designed and developed 2. Changes in innovation and technology enable new appealing products to be
made with greater functionality
The Steps Involved:
• Must consider: - Quality -‐ attributes and features - Supply Chain Management -‐ where? what? how much? timing? - Capacity Management -‐ may require new resources or technology - Cost -‐ dependent on inputs, time and energy
• Product Utility -‐ is the usefulness and value that a product has from the consumer's point of view
• Apple's continued success is because they understand the power of product design and development. Apple has established a reputation as a company that produces extraordinary products that grab the attention and loyalty of customers
Services
• Services can either be customised (lawyer/doctor) or standardised (shelf packer at Coles)
• When designing, both the explicit and implicit aspects need to be addressed - Explicit Service -‐ tangible aspect of the service (time, expertise, skill and effort) - Implicit Service -‐ intangible aspect (psychological wellbeing -‐ feeling of being
looked after) • Sometimes goods may be required to deliver services -‐ e.g. a doctor using a bandaid
or a tutor using a textbook → this must be considered when designing/developing a service
• Qantas is set to launch 2 new airlines in Asia in 2012 → one premium and one low cost carrier named Jetstar Japan → aims to take advantage of growth in Asian aviation
HSC STUDY BUDDY 25
Supply Chain Management
• Supply Chain Management (SCM) -‐ involves integrating and managing the flow of supplies throughout the inputs, transformation processes (throughput and value adding) and outputs in order to best meet the needs of customers
• Influenced by what is sold and what is returned → involves both sourcing (supply) as well as logistics and distribution
Sourcing
Sourcing -‐ refers to the purchasing of inputs for the transformation processes → drawn from a range of suppliers
Global Sourcing -‐ creates benefits (cost minimisation, access to new
technology and resources) and challenges (cost of logistics, storage, distribution, complexity of legal systems and language barriers)
Recent Trends in SCM are: Supplier rationalisation -‐ involves a business assessing the
number/diversity of its suppliers and reducing it towards the least amount
- Less contracting, less wastage and improved timeliness Backwards Vertical Integration -‐ purchasing of suppliers → guarantees
supply for the transformation processes since the supplier is owned by the business → Billabong purchased online sports website Swell.com to move into online retailing options
o Qantas has its own catering division which supplies all its meals and its own travel agencies → Qantas Holidays and Jetset
Cost Minimisation -‐ use of offshore suppliers → access to low-‐cost resources/inputs
Flexible/Responsive Supply Chain Processes -‐ 'lean' processes is one that minimises waste, continually lowers costs or improves processes/speed
Billabong has 403 different suppliers→ requires sophisticated supply chain management Qantas has employed cabin staff in Asia at lower-‐wages and engine maintenance is carried out in Malaysia on a cost benefit basis
E-Commerce
E-‐Commerce -‐ involves buying and selling G/S via the internet → relevant to forms of sourcing
Internet has played a central role to SCM → source inputs quickly, efficiently and at low costs
E-‐Procurement -‐ is the use of on-‐line systems to manage supply automatically through B2B
B2B -‐ direct access from one business to another allowing the supplier to access the needs of the buyer and meet them in a timely manner
B2C -‐ selling of G/S to consumers over the internet → e.g. agoda.com sells accommodation to travellers on behalf of hotels
- Stock levels must be managed well Logistics Logistics -‐ broad term referring to distribution and includes:
- Transportation, use of storage, warehousing, distribution centres, materials handling and packaging
Distribution -‐ refers to the ways of getting the G/S to the customer Need to consider the modes (forms) of transport → bike, truck, van,
train, plane, ship Storage may be short or long term → may need particular characteristics
such as a refrigerator Warehouses are a place for holding inventories → can be expensive but
can be useful as a storage point for durable items Distribution centres are short-‐term storage to minimise the time it takes
to supply stock to retail outlets Final aspect of logistics involves materials handling and packaging →
dangerous/fragile goods need to be handled with care Logistics ensure that Qantas has all the physical inputs needed in the right place at the right time (pilots, cabin crew, baggage handling) for the operations process (flights) to take place undisrupted and hence at optimum efficiency
1. Producer to Customer 2. Producer to retailer to customer 3. Producer to wholesaler to retailer to
customer 4. Producer to agent to wholesaler to
retailer to customer
HSC STUDY BUDDY 27
Outsourcing -‐ Advantages and Disadvantages
• Outsourcing -‐ involves the use of external providers to perform business activities - Finance and accounting outsourcing - Knowledge process outsourcing - Legal process outsourcing - Human Resource outsourcing
• Qantas outsources nearly all of its IT operations and some call centre operations + maintenance in Malaysia
• There are 4 outsourcing options: 1. Shared Services Centres (SSC) -‐ in-‐house outsourcing options that performs
work for multiple subsidiaries (cleaner) 2. Fee-‐for-‐service -‐ low-‐risk short-‐term strategy that involves engaging a
supplier for fixed services at a pre-‐determined price → allows the firm to 'test' the market prior to making a change
3. Joint Ventures -‐ The provider provides services to multiple companies → WNS Global Services provides ticketing to 26 airlines
4. Build-‐operate-‐transfer -‐ the relocation of services to a new offshore location is then transferred to an independent vendor that the company contracts
Advantages Disadvantages Simplification -‐ reducing number of activities performed within the business
Huge start-‐up costs
Efficiency and cost savings -‐ cheap resources and specialised businesses → KPI of speed
Communication and language barriers can cause misunderstandings
Improvements to quality of process due to operational expertise
Loss of control of standards and information security
o Virgin Blue check-‐in issue Sept 2010 $20 million lost -‐ 400 flights disrupted 50,000 passengers
Increased processes capability -‐ access to improved technologies and skilled labour
Loss of customer face-‐face contact
Access to new skills Security and confidentiality issues Strategic benefits
- getting around trade barriers - benefit of expertise - trading in different time zones - innovative solutions
Resistance to change from employees concerned about their jobs and de skilling - Can attract negative publicity and lead to
a loss of sales
Flexibility of business to choose its suppliers Possibility of the sourced firm becoming insolvent and ceasing operations
Less managerial control Industrial problems resulted from Qantas down-‐sizing as an outcome of outsourcing → this damaged the reputation and image of Qantas in 2011
Technology -‐ Leading Edge, Established
• The application of technology helps a business create a competitive advantage → efficiencies, productivity gains and a capacity to improve operations processes
• Technology improves inputs, transformations processes and outputs
Leading Edge Technology
Leading Edge Technology -‐ is the most advanced and innovative technology at a point in time → e.g. Nanotechnology
- Helps businesses create products more quickly and to higher standards with less waste → competitive advantage
- Allows operations to be more effective - Generally very expensive → short-‐term loss of productivity with training
staff to use technology → but useful (usually) in long-‐term - There is a lack of competent technical support since product is new Yarra Precision Engineering used a combination of innovative CAD/CAM to create more intricate component designs → cost was $5.5 million but the breakeven point is within 24 months → beneficial!
Established Technology
Established technology -‐ is the technology that has been developed and is widely used → e.g. computers, software, mobile phones etc..
- Help achieve basic standards for productivity and speed - Due to the universal availability of established technologies, they may not
necessarily result in a competitive advantage → BUT → the absence of their use will result in competitive DISadvantage
o Use of Bar-‐coding, IT and robotics are common today
Inventory Management
• Inventory/Stock -‐ refers to the amount of raw materials, work-‐in-‐progress and finished goods that a business has on hand at any point in time
• Inventory management strategies have a huge impact on transformations processes • Stock represents the difference between what is supplied to the business as inputs
and what leaves as outputs
Advantages of holding stock Disadvantages of holding stock - Consumer demand can be met when
there is stock available - The costs associated with holding stock
→ includes storage charges, spoilage, insurance, theft and handling expenses
- Reduces lead times between order + delivery
- The costs associated with holding stock in warehouses can be as high as 30% of the value of the stock
- Stocks give the opportunity for a business to generate immediate revenue
- The invested capital, labour and energy cannot be used elsewhere
- Stocks are an asset and add value to current assets on balance sheet
- The cost of obsolescence → occurs when stock remains unsold
- Making products in bulk allows economies of scale and reduces costs
- Older stock can be sold at reduced prices and encourage cash flow
HSC STUDY BUDDY 29
Inventory Valuation Methods
• Inventory valuation methods allow people to see the VALUE OF UNSOLD STOCK and the VALUE OF SOLD STOCK→ to determine COGS, gross profit and closing inventory level on balance sheet
• At the end of an accounting period, it is important to determine the value of unsold stock → methods of valuation affect the calculation of COGS, gross profit and inventory
Last- In -First- Out (LIFO)
Last-‐In-‐First-‐Out (LIFO) -‐ assumes that the last goods that were purchased by the business are the first goods sold
- Unit sold is the last cost the was incurred and the stock left on the shelf is the older stock that was bought first
IMPACT Prices used to calculate COGS/Gross profit are the more recent prices and
more closely reflect their economic value but: - High Inflation -‐ (inflation has already kicked in and brings up price!)
THEREFORE → LIFO overstates COGS, understates profits and minimises taxes and undervalues inventory in balance sheet
First-In-First-Out (FIFO)
First-‐In-‐First-‐Out (FIFO) -‐ assumes that the first goods that were purchased by the business are the first goods sold
- Unit sold is the first cost that was incurred and the stock that is left on the shelf is the newer stock that was bought last
- Products are bar coded and date coded to assist with inventory management → when goods have a 'use by' or perishable date o E.g. Milk at Coles and Woolworths
IMPACT Prices used to calculate COGS and gross profit are the older prices so that:
- High Inflation -‐ (inflation only kicks in AFTER!) THEREFORE → FIFO understates COGS, overstates profits and maximises taxes and overvalues inventory in the balance sheet
Weighted Average Cost (WAC)
Weighted Average Cost (WAC) -‐ uses the average cost of the inventory purchased to calculate the COGS, gross profit and inventory valuation
- Neither LIFO nor FIFO is better → businesses report different profit/inventory levels during price changes
- Footnotes to the financial statement disclose the inventory valuation method used
Just-In-Time (JIT)
Just-‐In-‐Time (JIT) -‐ ensures that the exact amount of material inputs arrive only as they are needed in the operations process
This allows a 'lean' production method with minimal waste → makes only enough products to meet demand
- Saves money -‐ no expensive holding and insurance costs HOWEVER -‐ requires very flexible operations function with flexible
processing/supply chain management Toyota uses JIT and ensures parts arrive 2 hours before they are needed
Quality Management
• Quality Management -‐ refers to the processes that a business undertakes to ensure consistency, reliability, safety and fitness of purpose of product
• 'Quality' -‐ the degree of excellence of a product → tensions between cost and quality
Qantas has always been marketed as a high quality, perfect safety record, full service airline and commanded premium fares. On the other hand, Jetstar has traded quality for price and been marketed as a no frills low cost airline. During 2011 Qantas' marketing plan has taken a battering with mechanical breakdowns and the sudden shutdown of all services has had serious consequences on customer satisfaction and perception
• There are 3 quality approaches: 1. Quality control -‐ inspection, measurement and intervention 2. Quality Assurance -‐ application of international quality standards 3. Quality Improvement -‐ total quality management and continuous
improvement
Quality Control
Quality Control -‐ involves the use of inspections at various points in the production process to check for problems and defects
Includes a range of 'tests' designed to assess the quality of products/processes against standards → encourages improvement E.g. "This call may be monitored for quality or training purposes" Programmed inspections are constantly carried out on Qantas to ensure they meet specific standards
Quality Assurance
Quality Assurance -‐ involves the use of a system to ensure that set standards are achieved in production
- Measurement against pre-‐determined quality standards Quality Assurance standards are developed internationally → since
global production webs should match a degree of quality ISO 9000 series of quality → businesses comply to enhance their
competitiveness Quality Improvement
Continuous Improvement -‐ is an ongoing commitment to improving a business's G/S → making them more efficient/effective
- Achieved through innovation → encouraged today through flatter management structures and staff suggestions
Kaizen -‐ Japanese for improvement → emphasises continuous improvement in all areas of a business Total Quality Management -‐ quality becomes a commitment and responsibility of every employee of the business → STRATEGIC
- Involves 4 elements: 1. Benchmarking 2. Employee Empowerment 3. Customer Orientation 4. Continuous Improvement
Motorola developed the Six Sigma quality management approach in the 1980s → aims to achieve 3.4 defective parts per 1 million units
HSC STUDY BUDDY 31
Overcoming Resistance To Change
• All businesses are subject to change from the internal and external environment - External (most common) -‐ legislation, economic conditions, social changes,
technological etc - Internal -‐ initiative of staff, application of technology and innovation
• Resistance to change -‐ is the perception that a change will threaten an individual or group → can be a major obstacle to the realisation of operations goals → overcoming this resistance is a necessary aspect of change management
- Change can often be resisted as it causes uncertainty and risk • Resistance to change arises from 2 sources:
1. Financial 2. Psychological (inertia) - Managers must put in place strategies to overcome this resistance
Factors such as September 11 terrorist attacks 2001, SARS epidemic 2003, rapid increase in fuel costs and emergence of low-‐cost carriers have prompted change within Qantas
Financial Costs and Resistance to Change
Purchasing New Equipment
A major cost with change is the investment in plant/equipment → machinery and technology is expensive
Businesses try to recuperate costs through the value-‐adding in transformation processes
New Equipment improves operations through: Improved processing flexibility Improved processing speeds and shorter lead times More consistency in production Higher quality Reduced wastage
Qantas is planning to spend $22 billion between 2011-‐18 on new aircraft Also, has spent $300 million since 2006 on upgrading its engineering facilities Note: Managers may either purchase or lease the equipment → BALANCE!
Redundancy Payout
Redundancy -‐ is defined as a loss of work arising from job skills that are no longer required or relevant to the workplace
The main cost is the redundancy payout -‐ money paid to employees when they are forced out of work → value depends on:
Length of employment Level of pay the employee was on Amount of unused leave the employee was entitled Any outstanding wages
Qantas avoids this cost with a new strategy on casual employment Cumulative redundancy costs can be quite high → particularly when
capital replaces labour -‐ capital-‐labour substitution
Retraining Retraining costs arise from change that causes a reorganisation of
business hierarchy or from new technology Job roles may change requiring new skills Purchase of technology requires training on new software Qantas → new reservation system, annual security training, engineering and maintenance for new aircrafts are examples of training
Reorganising Plant Layout
Plant -‐ refers to the facilities in which the machinery is arranged Major changes such as re-‐engineering systems often require extensive
reorganisation of the plant → MAJOR COSTS Transporting/placing the new equipment Transferring old machinery and testing new equipment Temporary losses of productivity with new training etc
In long-‐term → these costs should translate into greater efficiencies and profits
Jetstar is replacing Boeing 717s with Airbus A380s → new heavy maintenance becomes necessary
Psychological Resistance To Change (Inertia)
• Inertia -‐ is a term that describes a psychological resistance to change - Fear of the unknown or feelings of uncertainty - "If its not broke -‐ why fix it?" → people don't like to move away from their
comfort zones • If people do not adapt to change due to inertia → may lead to financial effects since
there is less efficiency/profits etc → leads to a competitive DISadvantage
Managing Change Effectively
• Change is constant and in small ways → business processes are continually being refined and adapted over time
- Even though change is continuous, sometimes major change can act as a discontinuity
• Successful managers must anticipate and adjust to changing circumstances rather than being passively swept along or being caught unprepared
- Must be PROACTIVE -‐ initiate change themselves - NOT REACTIVE -‐ those who wait for change to occur and then respond to it
• Changes must: - Occur at a steady pace so they can be integrated into the business - Be evaluated thoroughly to assess their overall impact → poorly managed
changes result in employee resistance, tension and lost productivity - Be introduced into the workplace culture
HSC STUDY BUDDY 33
Change Management Strategies
• Adapting to change through overcoming the financial and psychological resistance can help a business achieve a competitive advantage: 1. Identification of change -‐ the business must assess whether there is a need to
accommodate change through adjustments to business processes → e.g. if the existing plant or staff will be affected
2. Setting Achievable Goals -‐ Goals must be SMART: Specific Measurable Achievable Realistic Timely
3. Creating A Culture of Change -‐ acceptance of change is crucial → this can be done by lowering the resistance to change → the business must communicate with employees about the need for change and get support for the change → if employees are NOT informed about why, this may cause resistance and lower workplace morale
4. Using Change Agents -‐ this is somebody who initiates change or facilitates the change process → staff should be included in the process of creating change and setting goals
It may be necessary to apply change models such as Kurt Lewins unfreeze/change/refreeze model OR John Kotter's eight-‐step model to help manage change effectively
1. Idencficacon of Change
2. Seung Achievable
Goals
3. Creacng a Culture of Change
4. Using Change Agents
Global Factors
Global Sourcing
Global sourcing -‐ involves the sourcing of any business operations that gives the business cost advantages
- Is a broad term that refers to businesses purchasing supplies without being constrained by location o Allows the business to find suppliers who have lower prices,
higher quality products and more advanced technology This may lead to advantages of expertise and labour specialisation HOWEVER -‐ may increase costs of logistics, storage and distribution
→ also increases the complexity of operations processes Additionally, financial risks can arise due to exchange rate fluctuations Contractual concerns arise from language, cultural and legal
complications due to misunderstandings Qantas has employed cabin staff in Asia and pilots from New Zealand due to lower wage costs. Also, they have announced their intentions to establish low-‐cost carriers based in Asia to reduce production costs
Economies of Scale
Expanding into global markets can allow the business to achieve economies of scale, because the scale of production increases → this leads to a decrease in per unit costs → can increase profits!!
Product lifecycles are extended → greater value added on production Economies of scale arises from producing high volumes due to capital
investment and the improved use of technologies Many TNCS achieve economies of scale in marketing due to global
branding and global advertising → e.g. McDonalds Can also be created in HR through global training and development The aim to achieve economies of scale by having maintenance carried out in Asia has resulted in industrial dispute and action in 2011 because jobs were being 'exported' which threatened job security
Scanning and Learning
All businesses can benefit from scanning the global environment and learning from the best practise of businesses around the world
Kaizen -‐ Japanese for improvement → emphasises continuous improvement in all areas of a business
Diversity of experience can help businesses to learn how to handle any issues with flexibility and insight
Research and Development (R&D)
R&D can make a huge difference to the level of innovation, quality and competitive advantage of a business
R&D helps businesses to create leading edge technologies and create innovative products/solutions
Governments encourage R&D through taxation incentives and grants Central aspect to R&D is ascertaining what consumers want and
creating these products or developing them CSL Ltd and 3M are one of the biggest R&D spenders in the world R&D in Qantas aims to develop newer and efficient aircraft → done by
HSC STUDY BUDDY 35
Boeing (in USA) and Airbus (in Europe)
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