om lit final

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`INTRODUCTION

An organization‟s operations function is concerned with getting things done; producing goods and/or

services for customers.

Organizations are social arrangements which pursue collective goals, control their own performances and

have a boundary separating them from their environment. An organization consists of several

departments. Each department has distinct roles and responsibilities but they all work towards achieving

the same goals and objectives. For example, the Human Resource department is responsible for managing

the human resources of the organization and the Finance department deals with the financial issues. And

one of the most important departments of an organization is the Operations department.

Operation department is one which deals with the production of goods or providing the services that

consumers buy.

Global view of operations

There are many reasons why a domestic business operation will decide to change to some form of

international operation.

Reasons to globalize

Reduce costs (labour, taxes, tariffs, etc.)

Improve supply chain

Provide better goods and services

Understand markets

Learn to improve operations

Attract and retain global talent

Operations management

Operation Management refers to all those chain of activities that convert inputs in the form of resources

into output that usually take the form of goods and services. It helps to establish the level of quality as a

product is manufactured or as a service is provided and it is responsible for the largest part of the

company‟s human and capital assets.

Tangible

Reasons

Intangible

Reasons

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Furthermore, operations management determines to a great extent the ability of a company to have

sufficient products available to meet delivery commitments. As a whole, we can say that operations

management has as important influence on the cost, quality and availability of the company‟s goods and

services. Thus capabilities of operations must be fully evaluated when performing operational strategies.

OPERATIONS AND STRATEGY

Strategy

Strategy is an organization‟s action plan to achieve the mission. Each functional area has a strategy for

achieving its mission and for helping the organization reach the overall mission. These strategies exploit

opportunities and strengths, neutralize threats, and avoid weaknesses.

Firms achieve missions in 3 conceptual ways (Michael E.Porter: 2001):

(1) Differentiation

(2) Cost leadership

(3) Response

This means operation managers are called on to deliver goods and services that are

i. Better, or at least different

ii. Cheaper, and

iii. More responsive

Operations managers translate these strategic concepts into tangible tasks to be accomplished. Any one or

combination of these 3 strategic concepts can generate a system that has a unique advantage over

competitors.

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STRATEGIC OM DECISIONS

Differentiation, low cost, and response can be achieved when managers make effective decision in ten

areas of OM. These are collectively known as operations decisions. The 10 decisions of OM that support

missions and implement strategies follow:

Operations decisions Services

Services Design Is not tangible. A new range of product attributes- a

smile.

Quality Many subjective quality standards.

Process and Quality Design Customer may be directly involved in the process.

Location Selection May need to be near customer.

Layout Design Can enhance product as well as production.

Human Resources and Job Design Direct workforce usually needs to be able to

interact well with customer.

Labour standards vary depending on customer

requirements.

Inventory Most services cannot be stored, so other ways must

be found to accommodate changes in demand.

Scheduling Often concerned with meeting the customer‟s

immediate schedule with human resources.

Maintenance Maintenance is often “repair” and takes place at the

customer‟s site.

ACHIEVING COMPETITIVE ADVANTAGE THROUGH OPERATIONS

Competitive advantage implies the creation of a system that has unique advantage over competitors. This

idea is to create customer value in an efficient and sustainable way.

Competing on differentiation

Differentiation is concerned with providing uniqueness. A firm‟s opportunities for creating uniqueness

are not located within a particular function or activity but can arise in virtually everything that the firm

does. Moreover, because most products include some service, and most service include some products,

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the opportunities for creating this uniqueness are limited only by imagination. Indeed, differentiation

should be thought of as going beyond both physical characteristics and service attributes to encompass

everything about service that influences the value that the customers derive from it. Therefore, effective

operation managers assist in defining everything about a service that will influence the potential value to

the customer. Such services can manifest themselves through convenience (location of distribution

centres or stores), training, product delivery and installation, or repair and maintenance services.

In the service sector, one option for extending products differentiation is through an experience.

Differentiation by experience in services is a manifestation of the growing „experience economy‟ (James

H.Gilmore: 1999).

Competing on cost

Identifying the optimum size (and investment) allows firms to spread overhead costs, providing a cost

advantage. It includes transportation of goods, reduced warehousing costs and direct shipment from

manufacturers resulting in high inventory turnover rand made it a low-cost leader.

Low-cost leadership entails achieving maximum value as defined by your customer. It requires examining

each of the 10 operations management decisions in a relentless effort to drive down costs while meeting

customer expectations of value. A low-cost strategy does not imply low value or low quality. (Franz

Colruyt: 2003)

Competing on response

Response refers to set of values related to rapid, flexible and reliable performance.

Response is often thought of as:

(1) Flexible response, but it also refers to reliable and quick response. Indeed, we define response as

including the entire range of values related to timely product development and delivery, as well as

reliable scheduling and flexible performance. Flexible response may be thought of as the ability

to match changes in a marketplace where design, innovations and volumes fluctuate substantially.

(2) Reliability of scheduling

(3) Quickness

According to Professor Richard D‟Aveni, author of hyper competition,

“In the future, there will be just 2 kinds of firms: those who disrupt their markets and those who do not

survive the assaults”

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PERFORMANCE OBJECTIVES

Strategy in a business organization is essentially about how the organization seeks to survive and prosper

within its environment over the long-term. The decisions and actions taken within its operations have a

direct impact on the basis on which an organization is able to do this. The way in which an organization

secures, deploys and utilizes its resources will determine the extent to which it can successfully pursue

specific performance objectives.

Performance objectives are cascaded through the organization and are translated into the measurable

terms that become part of the operating goals for production related as well as service related department

and their managers. There are five basic performance objectives which apply to all types of operation.

Slack et al. (2004) argue that there are five operations performance objectives.

(1) Quality

According to Schroeder, quality is an objective means the quality of the product or service as

perceived by the customer. Quality is the value of the product, its prestige, and its perceived

usefulness. This definition includes not only conformance to specifications, but the design of

the product as well. Typical quality measures include customer satisfaction as measured by

surveys or consumer tests, the amount of rework or scrap created as part of the production

process, and measures of warranty or return of the product. Quality, of course, should be

measured relative to the competition and can be an important point of differentiation.

There are two dimensions of quality:

External

Internal

External quality

External quality is an important aspect of customer satisfaction or dissatisfaction (Slack: 1993).

It involves making sure that product or services meet the requirements of the customers.

Internal quality

According to Chambers, good quality does not only mean achieving customer satisfaction but

also to achieve high performance design. High performance design means that the operation

function will be designed to focus on aspects of quality such as superior features, high durability

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and excellent customer service. The organization should also engage in process quality. It deals

with designing a process to produce error-free products or delivering the service this includes

focusing on equipment, workers, materials and every other aspect of the operation to make sure

it works the way it is supposed to. Furthermore, process quality also includes some features that

are desirable in delivering efficient and effective services. These features are:

Skilled workers

Motivation of pride of workmanship

Effective communication of standards or jobs requirements

Quality inside the operation will also help to reduce cost (Harland: 1993). The fewer the

mistakes each micro operation or unit makes in the operation, the less time it will need to spend

correcting these mistakes and the less confusion and irritation will be spread. Also quality helps

too increase dependability (Harrison: 1993).

Each operation has different meaning of quality.

Inside a supermarket, quality may means:

Goods are in good condition

Cost

Speed Dependability

Flexibility

Quality

Error-free

products and

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The store is clean and tidy

Décor is attractive and appropriate

Staff are courteous, friendly and helpful

(2) Speed

Speed refers to the elapsed time between customers requesting for products and services and

receiving them. Speedy delivery of goods or services is essential in an organisation as the faster

customers can have the product or the service, the more likely they are to buy it, or the more they

will pay for it, or the more benefit they will receive. (Nigel Slack, 1995; Stuart Chambers:1998)

Speed is one of the most important competitive priorities today. Organizations are competing to

deliver high-quality products or services in as short time as possible. Customers do not want to

wait and organisations that can meet their need for fast service are becoming leaders in the

industries.

Making time a competitive priority means to focus on time-related issues such as rapid delivery

and on-time delivery. On-time delivery refers to how quickly and order is received and on-time

delivery refers to how often deliveries are made on time.

Speed for supermarkets means:

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Dependability saves time

Dependability saves money: ineffective use of time will consulate extra cost

Dependability gives stability: the disruption caused to operations by a lack of

dependability goes beyond time and cost. It affects the „quality‟ of the operation‟s time. If

everything in an operation is always perfectly dependable, a level of trust will have built

up between the different parts of operation. There will be no „surprises‟ and everything

will be predictable. Under such circumstances, each part of the operation can concentrate

on improving its own area of responsibility without having its attention continually

diverted by a lack of dependable service from other parts.

The features that manufacturing operations might provide and its applicability to service

operations is shown below:

Applicability to service operations

Effective scheduling system yes

Low equipment failure yes

Low absenteeism, turnover, no strikes yes

High inventory investment may be

Cost

Speed

Depend-

ability

Quality

Flexibility

Faster customer

response

Error-free products

and services

On-time

deliveries

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Commitment of personnel to perform as required yes

For a supermarket, dependability could mean:

Predictability of opening hours

Proportion of goods out of stock kept to a minimum

Keeping to reasonable queuing time

Constant availability of parking

(4) Flexibility

A company‟s environment changes rapidly, including customer needs and expectations, the

ability to readily accommodate these changes can be a winning strategy. Flexibility means to

be able to change the operation in some way. This may refer to changing what the operation

does, how it is doing it, or when it is doing it. (Nigel Slack, Stuart Chambers: 1995)

According to Richard Schoenberger (1998), there are 4 types of flexibility:

1) Product/service flexibility:

The operation‟s ability to introduce new or modified products and services

2) Mix flexibility:

The operation‟s ability to produce a wide range or mix of products and services

3)

Volume flexibility:

The operation‟s ability to change its level of output or activity to produce different quantities

of volumes of products and services over time

4) Delivery flexibility

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The operation‟s ability to change the timing of the delivery of its services or products

Externally, the different flexibility allows an operation to fit its products and services to its

customers in some way.

Mix flexibility allows an operation to produce a wide variety of products and services for

its customers to choose from.

Product/service flexibility allows it to develop new products and services incorporating

new ideas which customers may find attractive.

Volume and delivery flexibility allow the operation to adjust its output levels and its

delivery procedures in order to cope with unexpected changes in how many products and

services customer want, or when they want them, or where they want them.

Internally, flexibility helps to speed up response (being able to give a fast service often

depends on the operation being flexible), and also saves time (adapt quickly) and maintains

dependability (helps to keep the operation on schedule when unexpected events disrupt the

operation‟s plans).

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Companies that compete, based on flexibility often cannot compete based on speed because it

generally requires more time to produce as a customized product. Also flexible companies

typically do not compete, based on cost because it may take more resources to customize the

product.

However, flexible companies can offer greater customer service and can meet unique

customer requirements. To carry out this strategy, flexible organizations tend to have more

general-purpose equipment that can be used to produce different kinds of products. Also,

workers inflexible organizations tend to have higher skill levels and can perform many

different tasks in order to meet customer needs. (Robert Johnson, Christine Harland: 1995)

The following conditions need to be present in an organization for it to be flexible (Dale

McConkey: 1988):

Dependable, rapid supplies

Reserve capacity

Multi-skilled workers who can be shifted

Effective control of work flow

Versatile processing equipment

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Low set-up time and cost

Integration of design and production

For supermarkets:

Product/service productivity means introduction of new goods or promotion

Mix flexibility means a wide range of goods stored

Volume flexibility refer to the ability to adjust the number of customers served

Delivery flexibility is the ability to obtain out-of-stock items (very occasionally)

(5) COST

According to Alan Harrison (1998), cost is the last objective to be covered, although not

because it is the least important. To companies which compete directly on price, cost will

clearly be their major operations objective. The lower the cost of producing their goods and

services, the lower can be the price to their customers. Even those companies which do not

compete on price will be interested in keeping costs low. Every euro or dollar removed from

an operation‟s cost base is a further euro or dollar added to its profits. Not surprisingly, low

cost is a universally attractive objective. Note that a low cost strategy can result in a higher

profit margin, even at a competitive price. Also, low cost does not imply low quality.

To develop this competitive priority, the operations function must focus primarily on cutting

costs in the system, such as cost of labour, materials and facilities. Companies that compete

based on cost study their operations system carefully to eliminate all waste. They might offer

extra training to employees to maximize their productivity and minimize scrap. Also, they might

invest in automation in order to increase productivity. Generally, companies that compete based

on cost offer a narrow range of products and products features, allow for little customization, and

have an operation‟s process that is designed to be efficient as possible (Robert Johnson: 1995)

The ways in which operations management can influence cost will depend largely on where the

operation costs are incurred. Put simply, the operation will spend its money on:

staff costs (the money spent on employing people)

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facilities, technology and equipment costs ( the money spent on buying, caring for,

operating and replacing the operations „hardware‟)

material costs ( the money spent on the materials consumed or transformed in the

operation)

Although comparing the cost structure of different operations is not always straightforward and

depends on how costs are categorized, a general point can be made, that is, supermarket‟s costs

are dominated by the cost of buying its supplies. In spite of its high „material‟ costs, however, an

individual supermarket can do little if anything to affect the cost of goods it sells. All purchasing

decisions will probably be made at company headquarters. The individual supermarkets will be

more concerned with the utilization of its main asset, the building itself and its staff (Nigel Slack:

1998)

The features that manufacturing operations might provide and its applicability to service

operations is shown below:

Applicability to service operations

Low overhead yes

Special-purpose equipment and facilities yes

High utilization of capacity yes

Close control of materials may be

High productivity yes

Low wage rates yes

However, cost is affected by the other performance objectives. So far we have described the

meaning and effects of quality, speed, dependability and flexibility for the operations function. In

doing so, we have distinguished between the value of each performance objective to external

customers and inside the operation, to internal customers (Stuart Chambers: 1995).

Each of the various performance objectives has several internal effects but all of them affect

cost.

High quality operations do not waste time or effort having to re- do things, nor are their

internal customers inconvenienced by flawed service.

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Fast operations reduce the level of in-process inventory between micro operations as well

as reducing administrative overheads.

Dependable operations do not spring any unwelcome surprises on their internal

customers. They can be relied on to delivery exactly as planned. This eliminates wasteful

disruption and allow to other micro operations to operate efficiently.

Flexible operations adapt to changing circumstances quickly and without disrupting the

rest of the operation. Flexible micro operations can also change over between tasks

quickly and without wasting time and capacity.

Inside the organization, therefore, one important way to improve cost performance is to improve

the performance of the other operations objectives.

For a supermarket, cost could mean:

Bought-in materials and services

Staff costs

Technology and facilities cost

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Excelling at one or more of these operations performance objectives can enable an organization to

pursue a business strategy based on a corresponding competitive factor. These relationships are

outlined in the table below:

N . . .

However, it is important to note that the success of any particular business strategy depends not only on

the ability of operations to achieve excellence in the appropriate performance objectives, but crucially on

customers valuing the chosen competitive factors on which the business strategy is based. Matching

operations excellence to customer requirements lies at the heart of any operations based strategy.

Basic customer wants

Customers have 6 general requirements:

(1) High levels of quality

From the customer‟s standpoint, quality has multiple dimensions.

(2) A high degree of flexibility

Customers admire a provider‟s ability to react easily to shifting requirements and irregular arrival

patterns.

(3) High level of service

Subjective measures of customer service include humanity in service delivery; objective measures can

include having a required item in stock.

(4) Low costs

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External customers are price conscious; internal customers are concerned when they see costly wastes.

(5) Quick response

Customers want delay-free service and quick response to changing requirements. The provider aims to

satisfy by shortening cycle times and introducing attractive new goods.

(6) Little or no variability

Customers expect consistency; the ideal is zero deviation from targeted to expected results.

It is unlikely that any single organization can excel simultaneously at all of the five operations

performance objectives. Trying to do so is likely to lead to confusion if operations managers pursue

different objectives at different times. This lack of clarity is likely to lead to suboptimal performance and

result in a failure to excel in any of the operations performance objectives. Consequently, organizations

need to choose which performance objectives they will give priority to. This may result in having to

‘trade-off’ less than excellent performance in one aspect of operations in order to achieve excellence in

another.

The concept of trade-off in operations objectives was first proposed many years ago by Skinner (1969).

He argued that operations could not be „all things to all people‟. What was needed was to identify a single

goal or „task‟ for operations; a clear set of competitive priorities to act as the objective. The task would

then act as the criterion against which all decisions and actions in operations could be judged.

Quality

Flexibility

Service

Costs

Response times

Variability

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The ‘sandcone’ model of operations excellence

The ‘sandcone’ model of operations excellence

Ferdows and de Meyer (1990) argue that certain operational capabilities enhance one another, enabling

operations excellence to be built in a cumulative fashion. In their „sandcone‟ model of operations

excellence (see Figure 2.1), they maintain that there is an ideal sequence in which operational capabilities

should be developed. The starting point, the base of the sandcone is excellence in quality. On this should

be built excellence in dependability, then flexibility (which they take to include speed), then cost. They

emphasize that efforts to further enhance quality should continue whilst commencing efforts to build

dependability. Similarly, actions on quality and dependability need to continue whilst building flexibility.

Finally efforts to reduce costs take place alongside continuing efforts to improve quality, dependability

and flexibility. They claim that operational capabilities developed in this way are more likely to endure

than individual capabilities developed at the expense of others.

STRATEGIC IMPORTANCE OF LAYOUT

Layout is one of the key decisions that determine the long – run efficiency of operations. Layout has

numerous strategic implications because it establishes an organization‟s competitive priorities in regard to

capacity, processes, flexibility, and cost, as well as quality of work life, customer contact and image. An

effective layout can help an organization achieve a strategy that supports differentiation, low cost orresponse. The objective of layouts strategy is to develop an economic layout that will meet the firm‟s

competitive requirements. In all cases, layout design must consider how to achieve:

(1) Higher utilization of space, equipment and people

(2) Improve flow of information, materials or people

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(3) Improved employee morale and safer working condition

(4) Improved customer/client interaction

(5) Flexibility (whatever the layout is now, it will need to change)

Retail layout

Retail layout refers to an approach that addresses flow, allocates space, and response to customer

behavior. Retail layouts are based on the idea that sales and profitability vary directly with customer

exposure to products. Thus, most retail operations managers try to expose customers to as many products

as possible. Studies do show that the greater the rate of exposure, the greater the sales and the higher the

return on investment. The operations manager can alter both with the overall arrangement of the store and

the allocation of space to various products within that arrangement.

Five ideas are helpful for determining the overall arrangement of many stores:

1. Locate the high-draw items around the periphery of the store. Thus, we tend to find dairy

products on one side of a supermarket and bread and bakery products on another.

2. Use prominent locations for high-impulse and high-margin items such as house wares, beauty

aids and shampoos.

3. Distribute what are known in the trade as „power items‟ – items that may dominate a purchasing

trip – to both side of an aisle, and disperse them to increase the viewing of other items.

4. Use end-aisle locations because they have a very high exposure rate.

5. Convey the mission of the store by carefully selecting the position of the lead-off department. For

instance, if prepared foods are part of the mission, position the bakery and deli up front to appeal

to convenience-oriented customers.

An additional, and somewhat controversial, issue in retail layout is called slotting.

Slotting fees are fees that manufacturers pay to get their goods on the shelf in a retail store or

supermarket chain.

Example

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SERVICESCAPES

Servicescape refers to the physical surroundings in which a service takes place, and how they affect

customers and employees.

Although the main objective of retail layout is to maximize profit though product exposure, there are

other aspects of the service the managers consider. The term servicescape describes the physical

surrounding in which the service is delivered and how the surroundings have a humanistic on customers

and employees (A. Toms and J.R. McColl-Kennedy: 2003).

To provide a good service layout, a firm must consider these 3 elements:

1. Ambient conditions, which are background characteristics such as lighting, sound, smell and

temperature. All these affect workers and customers and can affect how much is spent and how

long a person stays in the building.

2. Spatial layout and functionality, which involve customer circulation path planning, aisle

characteristics (such as width, direction, angle, shelf spacing), and product grouping.

3. Signs, symbols and artifacts, which are characteristics of building design that carry social

significance (such as carpeted areas of a department store that encourage shoppers to slow down

and browse).

HUMAN RESOURCES STRATEGY

The objective of human resource strategy is to manage labour and design jobs so people are effectively

and efficiently utilize. As we focus on human resource strategy, we want to ensure that people:

1. Are efficiently utilizing with the constraints of other operations management decisions.

2. Have a reasonable quality of work life in an atmosphere of mutual commitment and trust.

Because so many services involve direct interaction with the customer, the human resource issues of

recruiting and training can be particularly important ingredients in service processes. Additionally, a

committed workforce that exhibits flexibility when schedules are made and is crossed-trained to fill in

when the process requires less than a full-time person, can have a tremendous impact on overall process

performance.

JOB DESIGN

Job design specifies the task that constitutes a job for an individual or a group.

Job expansion

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In recent years, there has been an effort to improve the quality of work life by moving from labour

specialization towards more varied job design. Driving this effort is the theory that variety make the job

“better” and that the employee therefore enjoys a higher quality of life. This flexibility thus benefits the

employee and the organization. We modified jobs in a variety of ways.

In the first approach is job enlargement, which occurs when we add task requiring similar skill to an

existing job. Example

Job rotation is a version of job enlargement that occurs when the employee is allowed to move from one

specialized job to another. Variety has been added to the employee‟s perspective of job.

Another approach is job enrichment, which adds planning and control to the job.

SERVICE PROCESS DESIGN

Interaction with the customer often affects process performance adversely. But a service, by its very

nature, implies some interaction and customization is needed. Recognizing customer‟s unique desires tend

to play havoc with a process, the more the manager designs the process to accommodate the special

requirements, the more effective and efficient the process will be.

Mass Service Professional Service

Service Factory Service Shop

Commercial

banking

Retailing

Bouti ue

Full-service

stockbroker

Private banking

General-purpose lawfirms

Law ClinicsLimited-service

stockbroker

Warehouse and

catalog stores

Airlines

Specialized

hospitals

Fast food

restaurants

Hos itals

Fine-dining

restaurants

No-frills airlines

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MANAGING DEMAND

Even with good forecasting and facilities built to that forecast, there may be a poor match between the

actual demand that occurs and available capacity. A poor match may mean demand exceed capacity, or

capacity exceeds demand.

Tactics for managing capacity to demand

Various tactics for matching capacity to demand exists. Internal changes include adjusting the process to a

given volume through:

1) Making staffing changes (increasing or decreasing the number of employees)

2) Adjusting equipment and processes, which might include purchasing additional machinery or

selling out or leasing existing equipment

3) Improving methods to increase throughput

Queuing Costs

Operations managers must recognize the trade-offs that take place between two costs: the cost of

providing good service and the cost of customer or machine waiting time. Managers want queues that are

short enough so that customers do not become unhappy and either leave without buying or buy and never

return. However, managers may be willing to allow some waiting if it is balanced by a significant savings

in service cost.

One means of evaluating a service facility is to look at total expected cost. Total cost is the sum of

expected service costs plus expected waiting costs.

Service costs increase as a firm attempts to raise its level of service. Managers in some service centres can

vary capacity by having standby personnel and machines that they can assign to specific service stations

to prevent or shorten excessively long lines.

As the level of service improve, however, the cost of time spent waiting in lines decreases. Waiting costs

may reflect lost productivity of workers while tools or machines await repairs or may simply be an

estimate of the cost of customers lost because of poor service and long queues.

Fig D.5-pg 749

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CONTROL OF SERVICE INVENTORIES

Management of service inventories deserves special consideration. For instance, extensive inventory is

held in retail businesses, making inventory management crucial and often a factor in a manager‟s

advancement. Moreover, inventory that is in transit, or idles in the warehouse, is lost value. Similarly,

inventory damaged or stolen prior to sale is a lost.

Successful retail operations require very good store-level control with accurate inventory in its proper

location. one recent study found that consumers and clerks could not find 16% of the items at one of the

U.S‟s largest retailers- not because the items were out of stock but because they were displaced (in a

backroom, a storage area, or on the wrong aisle). By the researchers estimates, major retailers, lose 10%

to 25% of overall profits due to poor or inaccurate inventory records (A.Raman:2001).

om lit final

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