Business Studies - Operations

Business Studies - Operations

ROLE OF OPERATIONS
STRATEGIC ROLE OF OPERATIONS MANAGEMENT 1.1

OPERATIONS: refers to the business processes that involve the conversion of inputs, both
transformed and transforming, into final goods and services known as outputs through the
transformation process.
STRATEGIC: means ‘affecting all key business operations’ whereby operations managers contribute
to the strategic (long-term) direction and plans of the business.

During the operations process, businesses undergo transformation which not only converts the inputs
into outputs, but also involves the creation of value. This value adding process refers to the creation of
extra or added value as the inputs are transformed into outputs. To become a cost and product leader
in the competitive marketplace, operations managers focus on achieving two main strategic roles:
• Cost leadership
• Product differentiation

COST LEADERSHIP: involves businesses aiming to have the lowest possible costs or be the most
price-competitive in the market. To reduce costs businesses can; exploit economies of scale, produce
standardised goods, engage in supplier rationalised and outsource materials and labour.

PRODUCT DIFFERENTIATION: businesses distinguishing their products from its competitors. For
tangible products can be done through augmenting the product features, varying qualities, and
additional benefits. For intangible products it can be achieved by a level of expertise, amount of time
preforming the service or the qualifications of the service provider.

GOODS AND/OR SERICES IN DIFFERENT INDUSTRIES 1.2

STANDARDISED GOODS: are mass produced, usually on an assembly line where they are uniform
in quality and meet a predetermined level of quality. There is a high focus on production.

CUSTOMISED GOODS: are goods that are tailored to the needs and wants of the customer. There is
a high focus on producing consumer-centric goods.

When goods are perishable, there needs to be a high level of operational processes integrated,
specifically with the evolution of fast-moving consumer groups (FMCG). This includes high
standards of quality and safety, short lead times and appropriate packaging and storage processes.
Operations managers still need to watch non-perishable items to manage their quality management
processes such as quality control and inventory management systems such as JIT.

INTERDEPENDANCE WITH KEY BUSINESS FUNCTIONS 1.3

INTERDEPENDANCE: also known as cross-coordination, is the mutual dependence the key business
functions have on one another, meaning each function relies on another to preform to their full
productive capacity.

OPERATIONS INTERDEPENDANCE
FINANCE
The operations function relies on the finance function to ensure there are adequate funds to carry out
transformation processes, and to summarise financial transactions to reflect the true value of the
business. As the operations function is the aspect that produces, finance relies on it to produce the
products that generate sales and provided funds for the other functions. If the costs incurred in
production are minimised, the cost of each goods sold is reduced, which increases sales and
maximises profitability. By focusing on quality, operations managers can provide high quality and
durable products, thus resulting in products that can be sold at high prices via price skimming to
increase revenue.
MARKETING
Operations managers are reliant on marketing managers to identify and meet the needs and wants of
customers though marketing research. Marketers adopt the marketing concept, allowing them to
successfully fulfill customers inherent desires while simultaneously achieving the businesses’ social,
environmental, and economic goals. This allows the business to effectively and direct and manifest all
its policies, plans, and operations integrally into the business in a bid to achieve customer satisfaction.
Through the transformation process, the operations function produces the business’ product offering,
which has been designed by marketing, and without this, the business would simply not exist.
HUMAN
RESOURCES
For operations to produce goods and services, it is imperative for human resources to effectively deal
with employees and their employment issues to generate business success. Human resources
management deals with employment resourcing, engaging in activities of acquisition, development,
maintenance, and separation. Effective human resources are vital to the success of the business as
employees are the most valuable assets to the business. However, the constantly changing business
environment poses a challenge for human resources management due to the complexity of
communications and increased reliance on technology. Thus, the operations function decision to
outsource and acquire leading-edge technology directly influences the nature of the workplace and the
skills required to effectively carry out the human resources function.

INFLUENCES OF OPERATIONS

GLOBALISATION 2.1
GLOBALISATION: refers to the removal of trade barriers between nations. It is characterised by an
increasing integration between national economies, as well as a high degree of transfer of capital,
labour, financial resources, technology, and ideas.
The rise of globalisation has been significantly beneficial to operations management of businesses
worldwide, allowing them to modify and implement new transformation processes to suit the
changing global market. To meet the needs and wants of consumers worldwide, businesses must
integrate operations processes such as; integrating product designs that meet the needs of global
customers, choosing the location for manufacturing facilities, deciding on the quality management
logistics and assessing quality management logistics.

SUPPLY CHAIN: refers to the range of suppliers a business has, and the nature of its relationship
with those suppliers.

GLOBAL WEB: refers to the network of suppliers, a business has chosen based on lowest overall
cost, lowest risk, maximum certainty of quality and the timing of supplies.

The development of globalisation has also had a significant impact on supply chain management and
the evolution of the global web. Businesses need to ensure that they engage with a predictable and
reliable supply chain that is responsive to changes in demand. This involves engaging in effective
sourcing processes to ensure the business can minimise their operational costs across a range of
suppliers to ensure smooth production.

TECHNOLOGY 2.2
TECHNOLOGY: is defined as the design, construction, and/or application of innovative devices,
methods, and machinery upon operations processes.

The evolution of technology has enabled people to communicate more easily and improve the
smoothness of operations processes. Technology can be integrated with a range of processes that
characterise operations alongside a range of devices that enable processes and applications to occur. It
has enabled businesses to introduce new and innovative production methods which increase speed,
reduce costs, and increase quality.

QUALITY EXPECTATIONS 2.3

QUALITY EXPECTATIONS: is a specific reference to how well-designed, well-made, and functional
goods are, and the degree of competence with which services are organised and delivered.

People have an inherent belief in what quality standards should be and they will determine whether a
business has met their expectations. The expectations people have had of businesses will determine
the way products, are designed, created, and delivered to customers. Therefore, operations must
follow standards or prescribed levels of excellence.
Quality expectations for goods and services may be goods (durability, quality of design and fitness for
purpose) meanwhile services (level of customisation, reliability of the service provider and the
professionalism of the service provider).

COST-BASED COMPETITON 2.4

COST-BASED COMPETITON: is derived from determining break-even points and then applying
strategies to create a cost advantage over competitors.

FIXED COSTS: are those costs that do not change regardless of the level of business activities.

VARIABLE COSTS: are those that vary in direct relationship to the level of business activity.

Cost based competition can significantly shape the operations process. By bringing a cost leadership
approach to operations, it allows businesses to focus on reducing costs to a minimum while
maintaining profits.

GOVERNMENT POLICIES 2.5

As businesses operate in a political-legal environment, political decisions and constraints directly
affect the business’ operations management regardless of if it is implemented by local, state, or federal
government. The evolving nature of government policies make it imperative for business to be aware
of and account for changes in policies to ensure the business is complying with the correct regulations
to reduce compliance costs.

LEGAL REGULATIONS 2.6

The aim of legal regulations is to ensure business comply and follow the law, allowing them to
operate in a fair and ethical matter. When a business fails to follow the legal regulations, they are
encountered with compliance costs, which are expenses associated with meeting the requirements of
legal regulations.
• Work Health and Safety 2011 (Cth)
• Fair Work Act 2009 (Cth)

ENVIRONMENTAL SUSTAINABILITY 2.7

ENVIRONMENTAL SUSTAINABILITY: means that operations should be shaped around practices
that consumer resources today without compromising access to resources for future generations.
There are two main aspects of environmental sustainability: sustainable use of renewable resources
and the reduction in use of non-renewable.

CORPORATE SOCIAL RESPONSIBILITES 2.8

CORPORATE SOCIAL RESPONSIBILITY (CSR): refers to the open and accountable business
actions that are based on respect for people, society, and the broader environment.
CSR involves more than businesses just complying with the laws and regulations. It demonstrates the
business value more than just financial gains and profit maximisation, and in fact reflects a range of
community concerns and societal expectations. This is also known as the triple bottom line.

The difference between legal compliance and ethical responsibility is that the legal obligations require
the business to follow the law. In contrast, ethical responsibility describes meeting legal obligations
and following the ‘spirit’ of the law while demonstrating their values beyond money.

OPERATIONS PROCESS

INPUTS 3.1
INPUTS: are the resources used in the transformation (production) process.

TRANSFORMED RESOURCES: are those inputs changed or converted in the operations process.
They consider the resources that give the operations its purpose or goal to achieve.

MATERIALS: are the basic elements used in the production process and consist of two different
types: raw materials and intermediate goods. Raw materials are the essential substances in their
uncompressed state whereas, intermediate goods are manufactured and used in further manufacturing.

INFORMATION: is the knowledge gained from research, investigation, and instruction which results
in an increase in understanding. Information acts as a transformed resource when it is used to inform
how inputs are used, where they are drawn from, and which suppliers are available. It can come from
the external sources such as market reports or internal sources such as key performance indicators
(KPI).

CUSTOMERS: become transformed resources when their choices shape the inputs used in the
transformation process. The customer acts as the input and their desires act as transformed resources.
Specifically, it is crucial for businesses to engage in customer orientation at the beginning of the
production process to fulfill the needs and interests of their customers.

TRANSFORMING RESOURCES: are those inputs that carry out the transformation process. They
enable the change and value adding to occur in the transformation process.

HUMAN RESOURCES: are people with skills and knowledge required to carry out the operations
functions. The effectiveness to which human resources carry out their work duties and responsibilities
can determine the success with which transformation and value adding occur. A well-considered job
design, appropriate training, flexible work practices, and open communication will assist in
maximising operational efficiency, business performance, and the business’ capacity to achieve its
objective.

FACILTIES: refers to the plant and machinery used in the operations process. Plant and machinery act
as a significant difference to a business and its capacity to transform. The facilities can determine the
nature of the operations environment.

TRANSFORMATION PROCESSES 3.2

TRANSFORMATION PROCESS: is the conversion of inputs (resources) into outputs (goods and
services). A manufacturer transforms inputs into tangible products, which may be automated or
mechanised. On the other hand, a service organisation transforms inputs into tangible products
through the interaction with customers.

VOLUME: refers to how much of a product is made. The ability of a business to respond to changes
in volume is crucial to managing lead times, ensuring the order can be fulfilled from the moment it is
made. This is also known as volume flexibility, which refers to how quickly transformation processes
can adjust to changes in demand.

VARIETY: refers to the mix of goods and services delivered through the transformation process. The
greater variety of goods and services, the more the operations process needs to cater for this variation.
This is also known as the mix flexibility which is the mix of products of services delivered through
the transformation process.

VARIATION IN DEMAND: refers to the change in demand for goods and services out of time. Due
to the fluctuations in volumes, an increase or decrease in demand will require altering the amounts of
inputs such as labour, energy and resources needed to meet demand. Businesses try to forecast
demand, specifically annual and seasonal factors, so adjustments can be anticipated, and they can act
accordingly.

VISIBILITY (CUSTOMER CONTACT): refers to how much of the transformation process directly
involves the customer. Service industries have high visibility whereas manufacturing industries have
low visibility. Businesses with high visibility will usually produce heterogeneous goods whereas
businesses with low visibility will produce homogenous goods.

SEQUENCING: the order in which activities in the operations process occur.

SCHEDULING: the length of time activities taken within the operations process.

GANTT CHART: type of bar chart/graph that shows both the scheduled and completed work over a
specific amount of time. It is often used in planning and tracking a project as it allows managers to
schedule the activities of individual employees or a team of employees. Gantt charts are commonly
used for any process that has several steps and involves several activities that need to be performed.
The advantages of gantt charts include; forces the manager to plan the steps needed to complete a task
within a specific time frame and also makes it a lot easier to monitor and control the operations
process by comparing actual performance against planned performance and taking corrective action
where needed.

CRITICAL PATH ANALYSIS: refers to a scheduling method or technique that shows what tasks need
to be done and how long they take and the order in which tasks should be completed.

Technology involves the use of machinery and systems that enable businesses to undertake the
transformation process in the most efficient manner. The main forms of technology used by
businesses include office technology (computers, EFTPOS), manufacturing technology (robotics,
CAD, CAM) and leading edge technology (artificial intelligence, addictive manufacturing).

TASK DESIGN: involves classifying job activities in ways that make it easy for an employee to
successfully perform and complete the task. It highlights the interdependence with human resources
throughout the application of job analysis, job description and person specification.
Businesses may also conduct a skills audit which is a formal process used to determine the present
level of skilling and any skill shortfalls that need to be made up through recruitment or training.

PROCESS LAYOUT: is the arrangement of machines and equipment in which they are grouped
together by the function or process they perform. In process production, each product has a different
sequence of production, and the production is intermittent, meaning it moves from one department to
another. When devising the process layout, the business may consider the following options: product
layout (where equipment is arranged in relation to the sequence of tasks performed in the
manufacturing of a product), fixed position layout (an operational arrangement in which employees
and equipment come to the product) and office layout (where the desk areas are designed in a manner
that allows for smooth workflow by employees).

MONITORING: is the process of measuring actual performance against planned performance. The
monitoring process involves measuring all aspects of operations such as inputs and outputs while
being arranged around the needs of key performances indicators (KPI’s). By implementing KPI’s,
businesses can measure how their actual performance is going against their predetermined targets.
Common KPI’s include lead time, defect rates, warranty claims, and maintenance costs.

CONTROL: is when KPI’s are assessed against predetermined targets and corrective action is taken if
required. It is important to ensure businesses exercise strict control over the transformation goods
meaning that they set challenging but reasonable targets to ensure their products are out of the highest
and determine whether corrective actions need to be taken.

IMPROVEMENT: refers to the systematic reduction of inefficiencies and wastage, poor work
processes, and the elimination of any bottlenecks. A bottleneck occurs in the transformation process it
slows down the overall processing speed and creates an impediment, leading to a backlog of
incomplete processed products.

OUTPUTS 3.3
OUTPUTS: the result of a business’ effort which are the goods and services that are delivered or
provided to the customer. An operations manager must link their transformation processes to the
operational activities performed, ensuring that their outputs are responsive to customer demands.

CUSTOMER SERVICE: how well a business meets and exceeds the expectations of customers in all
aspects of its operations. Operations processes require a review if: products are defective, businesses
do not meet quality expectations, wait, and lead times are too long, there is a high rate of returns for
the product and there is a high amount of warranty claims.

WARRANTIES: the promises made by a business that they will correct all defects in the goods they
produce or the services they deliver. By assessing warranty claims, businesses can adjust and augment
their transformation process to become more effective and increase their dependability. Warranties are
covered under the Australian Consumer Law (ACL).

OPERATIONS STRATEGIES
PERFORMANCE OBJECTIVES 4.1
PERFORMANCE OBJECTIVES: are goals that relate to aspects of the transformation process. They
represent targets that the business wishes to obtain to become more efficient, productive, and
profitable.

QUALITY: is specific reference to how well-designed, well-made, and functional goods are, and the
degree of competence with which services are organised and delivered. Quality is often determined by
customer expectations, which inform what production standards must be applied. The three main
quality performance objectives are quality of design, quality of conformance, and quality of service.

SPEED: the amount of time taken for the production and operations process to respond to changes in
market demand. Speed requires changes in input levels and processing times to successfully respond
to demand. Therefore, speed aims to satisfy customer demands as quickly as possible through reduced
wait times, shorter leas times, and faster processing times.
DEPENDABILITY: how consistent and reliable a business’ products are. In terms of goods, durability
refers to how long the products can be used before they fail and is measured through the amount of
warranty claims made. In terms of services, durability is the consistency of service and its reliability
and is measured through the number of complaints received.

FLEXIBILTY: how quickly the operations process can adjust to changes in the market. Time and
flexibility are related because a faster processing time will result in a greater likelihood that processes
can be adjusted quickly.

CUSTOMISATION: the creation of individualised products to meet specific customer needs. Services
are generally customised however aspects of services can be standardised. Variations in the product
features are colours, size and functionality offer higher levels of differentiation in comparison to its
competitors.

COST: the minimisation of expenses so that the operations processes are conducted as cheaply as
possible. New technologies are used by businesses to lower costs, use inputs better and minimise
wastage. Businesses will seek to reduce supplier costs, manage inventories, manage flexibility, and
find distribution methods that are time and cost effective.

NEW PRODUCT OR SERVICE DESIGN AND DEVELOPMENT 4.2

For businesses to attain a sustainable competitive advantage, businesses must design, develop, launch
and sell new innovative products. There are two main approaches to product design and development:
• CONSUMER APPROACH: consumer preferences are identified by market
research which determines which products are then designed and developed.
• CHANGES IN INNOVATION AND TECHNOLOGY: enables businesses to
use new and appealing products via leading edge technologies to provide greater
functionality.
SUPPLY CHAIN MANAGEMENT 4.3
SUPPLY CHAIN MANAGEMENT (SCM): involves integrating and managing the flow of supplies
through the inputs, transformation process (throughput and value adding), and outputs to best meet the
needs of customers. Three key aspects are: logistics, e-commerce, and sourcing (including global
sourcing).

LOGISTICS: is a term broadly referring to distribution but includes transportation (including

transportation modes), the use of storage, warehousing and distribution centres, materials handling,
and packaging. The main issues to consider when devising a business’ logistics include:
• DISTRIBUTION: the way of getting the goods and services to the customer.
• TRANSPORTATION: the physical movement of inventories.
• STORAGE: finding a secure place to hold the stock until it is required.
• WAREHOUSING: using warehoused to store, protect and distribute stock.
• MATERIALS HANDLEING: must apply standards when moving goods,
especially if the goods are dangerous and hazardous.

E-COMMERCE: involves the buying and selling of goods and services via the internet. There are two
types of e-commerce:
• B2B (BUSINESS TO BUSINES): direct access from one business to another,
allowing the supplier to assess the needs of a buyer and efficiently meet them.
• B2C (BUSINESS TO CONSUMER): selling of goods and services over the
internet, with payment usually by credit card.

GLOBAL SOURCING
• SOURCING: refer to the purchasing of inputs for the transformation process.
Factors influencing the choice of sources of suppliers include:
 • Cost of supplier.
• Consumer demand.
• Quality of inputs required.
• Flexibility and timeliness of supply.
• GLOBAL SOURCING: is a broad term that refers to businesses purchasing
supplies or services without being constrained by location.

OUTSOURCING 4.4
OUTSOURCING: involves the use of externals providers to perform tasks and businesses activities. It
is based on the theory that by specialising in a particular function, it will lead to lower costs and
greater efficiency which in turn, contributes in achieving the strategic role of cost leadership.

If a business decides to outsource, there are a number of factors that must be considered. These
include which geographical location is favoured, which vendor or supplier is used and the details of
the outsourcing contract, length of contract and the key performance indicators.

However, outsourcing globally will provide benefits to the business in forms of lower cost and
increased efficiency.

TECHNOLOGY 4.5
TECHNOLOGY is the equipment available and used by businesses to perform functions in order to
produce their goods and services. It becomes the role of the operations manager to constantly scan the
business environment to investigate any new or innovative technologies that could benefit the
business in terms of reduced costs and greater efficiency.

LEADING EDGE TECHNOLOGY is the technology that is the most advanced or innovative at any
point in time.

ESTABLISHED TECHNOLOGY is the technology that has been developed and widely used, being
simply accepted without question.

INVENTORY MANAGEMENT 4.6

INVENTORY OR STOCK refers to the amount of raw materials, work-in progress and finished goods
that a business has or had at any particular point in time.

ADVANTAGES OF HOLDING STOCK

DISADVANTAGES OF HOLDING STOCK
• Able to better meet consumer demand.
• Alternative products can be offered if a particular item runs out.
• Reduces lead times between orders and delivery.
• High costs associated with holding such as storage and handling expenses.
• Invested capital, labour and energy could be used somewhere else.
• Cost of obsolescence if stock remains unsold.

LIFO (last in first out) is a method pricing inventory that assumes the last goods purchases are also
the first goods sold and therefore, the cost of each unit is the last recorded.

FIFO (first in first out) is a method of pricing inventory that assumes the first goods purchased are
also the first goods sold and therefore, the cost of each unit is the first cost recorded.

JIT (just in time) is an inventory management approach which ensures that the exact amount of
material inputs arrive only as they are needed in the operations process.

QUALITY MANAGEMENT 4.7

QUALITY MANAGEMENT refers to the processes that a business undertakes to ensure consistency,
reliability, safety, and fitness of purpose of products.

QUALITY CONTROL involves the use of inspections at various touchpoints in the production
process to check for problems, errors, and defects. These important elements used in the quality
control processes are feed forward controls, concurrent controls, and feedback controls.

QUALITY ASSURANCE involves a system to ensure set standards are achieved in production.

Two fundamental aspects that constitute quality improvement are continuous improvement (ongoing
commitment to improving a business’ goods and services) and total quality management (focuses on
managing the total business to deliver quality to its customers).

OVERCOMING RESISTANCE TO CHANGE 4.8

Resistance to change arises from two principle sources within a business: financial and psychological.
FINANCIAL RESISTANCE TO CHANGE
PURCHASING NEW EQUIPMENT:
• This is a major cost to business due to the initial high capital costs.
• Prior to investing in new equipment, businesses must conduct a cost-benefit
analysis to determine whether leasing would be a more suitable choice of financing.
• Advantages of purchasing new equipment include:
• Improved processing flexibility
• Increased consistency in production
• Reduced wastage and losses from failure
REDUNDANCY PAYMENTS:
• Redundancy is the loss if work arising from job skills that are no longer
needed or relevant to the workplace.
• A significant cost to the business is the payment of redundancy payouts which
are given when employees are forced out of work due their skills no longer being needed.
• Redundancy payments can be substantial due to the cumulative effect which
is when many employees are made redundant at the same time.
• The value of the redundancy payment depends on:
• Length of employment within the business
• The level of pay the employee is on prior to being made redundant.
• The amount of unused leave the employee has accumulated
Any outstanding wages.

RETRAINING:
• These costs arise from change that causes a reorganisation of the business'
internal hierarchy or from the acquisition of technology.
• New job roles or technology within the business may change and alter the
way tasks are completed.
• in which employees need to acquire additional skills through training.

REORGANISING PLANT LAYOUT:

• The plant layout within the business is organised around the need of the
product and the transformation process.
• Major changes within the business may require an extensive reorganisation of
the plant layout within the facility.
• There are high costs associated with reorganising the plant layout such as
transporting, placing, and bringing power to new equipment as well as testing new equipment.

PSYCHOLOGICAL RESISTANCE TO CHANGE

INERTIA: describes a psychological resistance to change. It is a feeling of uncertainty as well as a
fear of the unknown that occurs when change manifests within the business and causes people to
resist.

CHANGE MANAGEMENT STRATEGIES

CHANGE AGENT: is someone who initiates change or facilitates the change within the business.
The steps involved in the change management process include:
• Identifying the source of change and assessing whether there is a need to
accommodate change through adjustments to business processes.
• Lowering resistance to change through communicating with employees.
• Using change agents.
• Applying change models such as Kurt Lewin's unfreeze-change-refreeze
model or Kotter's 8 step change model.

GLOBAL FACTORS
GLOBAL SOURCING: refers to businesses purchasing supplies or services without being
constrained by location. This operations strategy enables businesses to source from low cost
economies which presents significant cost advantages due to relaxed labour laws.
Advantages of global sourcing.
• Cost advantages
• Access to new technologies
• Advantage of expertise and labour specialisation
• Access to unique resources
Disadvantages of global sourcing
• Possible relocation of operations
• Increased cost of logistics, storage, and distribution
• Managing regulatory differences between nations.

ECONOMIES OF SCALE: are the cost advantages that can be gained by producing on a larger scale,
allowing businesses to lower their per unit input costs. The need to sell to global markets becomes a
decision based on cost advantages. As the scale of production increases, the costs per unit falls, which
also creates the potential for profitability to arise. Additional, economies of scale can arise in
marketing through global branding and advertising, through using one promotional mix
internationally, which in turn creates significant cost advantages.

SCANNING AND LEARNING: Businesses seek to continuously improve their operations and ability
to learn. They are able to improve their learning through management journals, industry associations,
and forums, as well as from other staff Who have worked in different business industries. This
diversity of experience enables businesses to learn how to handle different issues with flexibility and
detailed insight. However, a central focus of scanning and learning is kaizen, which is a Japanese
philosophy that entrenches continuous improvement within a business.

RESEARCH AND DEVELOPMENT assists businesses to create leading edge technologies in order
to deliver innovative solutions. Recently, the government has encouraged the use of research and
development, specifically within small businesses, and have provided tax incentives and grants to
encourage it. Most importantly, the central aspect of research and development is to ascertain what
customers need and want to meet their needs.