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Operations Management

MMS I Semester 1.4 Operations Management

What is Operations Management :


Operations management is an area of management concerned with overseeing, designing, and redesigning business operations in the production of goods and/or services.

It involves the responsibility of ensuring that business operations are efficient in terms of using as little resources as needed, and effective in terms of meeting customer requirements.

It is concerned with managing the process that converts inputs (in the forms of materials, labor, and energy) into outputs (in the form of goods and/or services).



Operations management aims to increase the content of value-added activities in any given process.

Fundamentally, these value-adding creative activities should be aligned with market opportunity (through marketing) for optimal enterprise performance.

Operations management is the field concerned with managing and directing the physical and/or technical functions of a firm or organization, particularly those relating to development, production, and manufacturing.

The systematic direction and control of the processes that transform inputs into finished goods and services. The inputs are transformed at operations into outputs.



In other words Operations Management deals with all activities involved with designing, producing and delivering a product.

Operations as a Transformation Process

Inputs Transformation Output

Where does it fit in an organization?Operations is one functional area, supporting corporate strategy and exchanging information with the marketing, finance and human resources areas.

The Production System


Operations Strategy In some ways the very term ‘operation strategy’ sounds like a

contradiction in terms. Operations is, after all, about the day-to-day creation and delivery

of products and services. So how can it be strategic? In fact, the issue is one of distinguishing between two words

which are similar but have different meanings. These are operations and operational. Operations refers to those

parts of the business which are concerned with producing products and services.

Operational is the opposite of strategic in the sense that it means ‘short-term’ and ‘limited in its influence’.

Other functions of the business such as marketing or finance have both strategic and operational activities.


Operations Strategy For example, marketing strategy covers the overall long-term

approach to how the organisation wants to position itself in its markets. The operational side of marketing refers to the day by day tactics of how to manage things like advertising, pricing, and so on.

It is just the same with operations. Operations strategy looks at the long-term issues of how to manage the

resources which produce products and services. The more operational subject of operations management looks at the

more detailed and ‘shop floor’ issues of designing, planning and controlling, and improving the resources which produce products and services.


Operations Strategy – Content & Process The content of operations strategy is concerned with the specific

decisions which shape and develop the long-term direction of the operation.

Think of content as the building blocks of an operations strategy.

The process of operations strategy refers to the procedures which are used to formulate operations strategies. It is the way we go about the activity of devising strategy.

Think of operations strategy content as what the organisation is deciding to do and process as how the organisation has made that decision.


Operations Strategy – Top-down versus bottom-up perspectives

One view of operations strategy (the more traditional one) is operations strategy is one of several functional strategies which are governed by decisions taken at the top of the organisational tree.

According to this ‘top-down’ approach, overall business strategy sets the general direction of the organisation, this is then interpreted by the different functional areas of the company (marketing, finance, operations, etc.) in their functional strategies.

By contrast, the ‘bottom-up’ view of operations strategy is to see strategic decision making as an accumulation of practical experiences.

After all, organisations would find it difficult to ‘invent’ strategies in a total vacuum. Their ideas are formed from their previous experience of dealing with customers, suppliers and their own processes.

This is the idea behind emergent strategies. These are strategic ideas which emerge over time as an organisation begins to understand the realities of their situation.


Operations Strategy – Top-down versus bottom-up perspectives

When thinking about top-down versus bottom-up perspectives of operations strategy, remember that they are not ‘rival’ ideas.

In reality we can see both top-down and bottom-up influences on strategy making.

What is important to remember is that the pure ‘top-down’ view of operations strategy is simplistic in the sense that it does not recognise the importance of learning through experience.


Operations Strategy – Market requirements versus operations resources


The market requirements perspective starts from the commonsense notion that any operations strategy should reflect what the organisation is trying to do in its markets.

Companies compete in different ways, some may compete primarily on cost, others on the excellence of their products or services, others on high levels of customer service, others on customising their products and services to individual customer needs, and so on.

The operations function therefore must respond to this by providing the capabilities which allow it perform in an appropriate manner to satisfy the requirements of its market.

In some ways this is a ‘translation’ task because the techniques and language used by marketing managers to understand the requirements of markets are different to the language and techniques used by operations managers to manage their productive resources.



Different ways of competing imply different competitive factors and therefore different performance objectives.

•The first product group is a range of standard electronic medical equipment which is sold ‘off the shelf’ direct to hospitals and clinics. •The second product group is a wider range of electronic measuring devices which are sold to original equipment manufacturers who incorporate them in their own products. These electronic measuring devices often have to be customized to individual customer requirements.



The analysis of the two product groups shows that they have very different competitive factors.

Therefore different performance objectives are required from the manufacturing operation.

Such very different competitive needs could possibly require two separate operations – one for each product group – each focused on its own objectives and devoted to providing the things which are important in its particular markets.

Competitive advantage


A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices.

Competitive advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors. These attributes can include access to natural resources, such as high grade

ores or inexpensive power, or access to highly trained and skilled personnel human resources. New technologies such as robotics and information technology either to be included as a part of the product, or to assist making it.

Competitive advantage is the ability to stay ahead of present or potential competition, thus superior performance reached through competitive advantage will ensure market leadership. Also it provides the understanding that resources held by a firm and the business strategy will have a profound impact on generating competitive advantage.



Michael Porter suggested four "generic" business strategies that could be adopted in order to gain competitive advantage. The four strategies relate to the extent to which the scope of a businesses' activities are narrow versus broad and the extent to which a business seeks to differentiate its products.



The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry.



Strategy - Differentiation This strategy involves selecting one or more criteria used by

buyers in a market - and then positioning the business uniquely to meet those criteria.

This strategy is usually associated with charging a premium price for the product - often to reflect the higher production costs and extra value-added features provided for the consumer.

Differentiation is about charging a premium price that more than covers the additional production costs, and about giving customers clear reasons to prefer the product over other, less differentiated products.

Example of Differentiation Strategy: Mercedes Cars



Strategy - Cost Leadership With this strategy, the objective is to become the lowest-cost

producer in the industry. Many (perhaps all) market segments in the industry are supplied

with the emphasis placed on minimising costs. If the achieved selling price can at least equal (or near)the average

for the market, then the lowest-cost producer will (in theory) enjoy the best profits.

This strategy is usually associated with large-scale businesses offering "standard" products with relatively little differentiation that are perfectly acceptable to the majority of customers.

Occasionally, a low-cost leader will also discount its product to maximise sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share.

Examples of Cost Leadership: Indian IT Companies



Strategy - Differentiation Focus In the differentiation focus strategy, a business aims to

differentiate within just one or a small number of target market segments.

The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers.

The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants - in other words that there is a valid basis for differentiation - and that existing competitor products are not meeting those needs and wants.

Examples of Differentiation Focus: any successful niche retailers; (e.g. Mainland China)



Strategy - Cost Focus Here a business seeks a lower-cost advantage in just one or a

small number of market segments. The product will be basic - perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers. Such products are often called "me-too's".

Examples of Cost Focus: Many smaller retailers featuring own-label or discounted label products.

Time based Competition


The widespread use of just-in-time production (JIT) and other advanced manufacturing techniques has been credited with providing such improvements as decreased inventories, set-up times, downtime and workspace.

These decreases have yielded increases in inventory turns, equipment utilization, labor utilization, and ultimately, profit.

Simply stated, this means that finished goods are produced and delivered just in time to be sold, subassemblies just in time to be assembled into finished goods, fabricated parts just in time to go into subassemblies and raw materials just in time to be transformed into fabricated parts.

In effect, consumption of time has been reduced. Some firms have reduced the consumption of time, not only in the production

area, but also throughout the system. Firms that manage this have gone beyond JIT and its competitive advantages.

They have an advantage in time-based competition.



JIT was the first manifestation of time-based competition. Time-based competition is the extension of JIT into every facet of the product

delivery cycle, from research and development through marketing and distribution of the final product.

Even quality, while still critical to success, is not the competitive advantage it once was in many industries. Manufacturing firms then have three strategic options: seek coexistence, retreat in the face of competitors, or attack (directly or indirectly).

It has been said that strategy is and always has been a moving target. For some firms who choose to attack, this target has moved to speed and time-based competition.

The term time-based competition came into use with its appearance in a 1988 Harvard Business Review article entitled "Time-The Next Source of Competitive Advantage" by George Stalk, Jr.



Time-based competition is a broad-based competitive strategy which emphasizes time as the major factor for achieving and maintaining a sustainable competitive advantage.

It seeks to compress the time required to propose, develop, manufacture, market and deliver its products.

In order to do this, the firm must change its current processes and alter the decision structures used to design, produce and deliver to the customer.

Time-based competition appears in two different forms: fast to market and fast to produce.

Time based Competition- “fast to

market”


Firms that compete with to-market speed emphasize reductions in design lead-time.

In other words, the firm has the ability to minimize the time it takes to develop new products or make rapid design changes.

Products fifty percent over budget but introduced on time have been found to generate higher profit levels than products brought to market within budget but six months late.

Also, this form allows firms to gain a market edge by being able to consistently introduce more new products or large numbers of product improvements / variations faster than its competitors, thereby dominating the market.

Sun Microsystems achieved leadership in engineering workstations by reducing (by fifty percent compared to competitors) the time required to design and introduce new systems.

Additionally, these firms are now moving further along the learning curve than the competition. Both factors ultimately increase barriers to entry by competitors.

Time based Competition- “Fast-to-product”


Fast-to-product firms emphasize speed in responding to customer demands for existing products.

Firms competing in this area focus on lead-time reduction throughout the system, from the time the customer places an order until the customer ultimately receives the product.

This includes the ability to reduce the time it takes to manufacture products (throughput time) as well as the ability to reduce the time between taking a customer's order and actually delivering the product (delivery speed).

These reductions in lead-time are usually accompanied by significant reductions in inventory levels. As with JIT, there is less rework, fewer supervisors, lower carrying costs, less overhead, and so forth, as well as enhanced quality and on-time delivery performance.

Some customers, known as impatient customers, place a great deal of value on reduced lead-time. These customers are willing to pay a premium to get their goods and services quickly. This combination of lower costs and higher revenues contributes significantly to an improved corporate performance.



While product development cycle time, new product introduction, production lead time, and delivery speed all contribute to improved business performance, not all contribute equally.

A study found that the most consistent predictor of business performance was new product introduction. The second best predictor was product development cycle time.

While production lead time and delivery speed were found to be related to business performance (respectively, in order of contribution), their relationship to business performance was not as significant as the other two factors.

Some firms have traced the complete order entry process only to find that it took longer to complete the paperwork than it did to manufacture the product.

One major manufacturer compressed its manufacturing processes but still took months to convert a customer order into an approved order for manufacture.



Time reductions resulting from JIT success are worth much less when orders sit at the retailer for weeks, float in the mail for a week, sit at the distributor for a week, float in the mail for another week and then begin the now shortened transformation process at the factory.

Paperwork is subject to the same delays. When paperwork moves in batches (similar to manufacturing), several days of delay can develop while the order sits in a stack awaiting enough volume for the batch to move on to the next stage in processing.

Time-based competitors begin by eliminating all unnecessary paperwork. Incoming mail is categorized as fast or slow track, allowing the fast track orders to be

handled immediately. Also, some firms structure the paperwork process so that transactions are handled one at

a time, eliminating the delay caused from batch movement. A door manufacturer managed to refine its process to the point that it could price and

schedule 95 percent of incoming orders during the initial customer call.



Frequently, when delays occur, the delay time is made up at the end of the product cycle.

Obviously, the last place to make up for lost time is at the distribution and transportation stage (similar to the way a delayed airline flight might make up for delayed take-offs and manage to still land on time).

If time can be reduced in these emergency situations, why not reduce it permanently and reap the benefits of time-based competition?

Time based competition
