Chapter 1 Operations and Productivity
Production = The creation of goods and services.
Operations Management = Activities that relate to the creation of goods and services
through the transformation
of inputs to outputs.
All organisations perform three functions to create goods and services:
Marketing: generates demand;
Production/operations: creates the product;
Finance/accounting: tracks how well the organisation is doing, pays the bills, and collects
money.
Supply chain = A global network of organisations and activities that supplies a firm with
goods and services. Only with
collaborations between all members of the supply chain can efficiency and
customer satisfaction be
maximised.
We study OM for four reasons:
To learn how people organise themselves for productive enterprise;
To learn how goods and services are produced;
To understand what operations managers do;
Because OM is a costly part of an organisation.
There are ten OM strategic decisions that are required of operations managers. About 40% of
all jobs are in OM. Operations managers possess job titles such as plant manager, quality
manager and more:
Design of goods and services; Managing quality and statistical process control;
Process and capacity strategies; Location strategies;
Layout strategies; Human resources, job design and work measurement;
Supply chain management; Inventory management;
Planning and scheduling; Maintenance.
Significant events in modern OM can be classified into the following six eras: early concepts;
scientific management; mass production; lean production; mass customisation and
globalisation.
Services = Economic activities that typically produce an intangible product (such as
education, entertainment,
lodging, government, financial, and health services). Almost all services and
almost all goods are a
mixture of a service and a tangible product.
Service sector = The segment of the economy that includes trade, financial, lodging,
education, legal, medical, and other
professional occupations.
Productivity = The ratio of outputs (goods, services) divided by one or more inputs
(labour, capital).
It’s the operations manager’s job to enhance this ratio of outputs and inputs.
Improving
productivity means improving efficiency.
Single factor productivity indicates the ratio of goods and services produced
(outputs) to one resource (input).
Multifactor productivity indicates the ratio of goods and services produced
(outputs) to many or all resources (inputs).
It’s hard to measure productivity, due to changes in quality, external elements
and the precise units of measure. Productivity measurement is even more
difficult in the service sector, where the end product can be hard to define.
FORMULAS P.46(60)
,Knowledge society = A society in which much of the labor force has migrated from
manual work to knowledge work.
Productivity increases are dependent on the following three productivity variables:
Labour: contributes about 10% of the annual increase. Improvement in the contribution of
labour to productivity is the result of a healthier, better-educated and better-nourished
labour force.
Capital: contributes about 38% of the annual increase. Capital investment is often a
necessary, but seldom a sufficient, ingredient in the battle for increased productivity.
Management: contributes about 52% of the annual increase. Management is responsible
for ensuring that labour and capital are effectively used to increase productivity.
Productivity of the service sector has proven difficult to improve because service-sector work
is typically labour intensive; frequently focused on unique individual attributes or desires;
often an intellectual task performed by professionals; often difficult to mechanise and
automate; often difficult to evaluate for quality.
Identifying ethical and socially responsible responses while developing sustainable
processes that are also effective and efficient productive systems is not easy. Managers are
also challenged to develop and produce safe, high-quality green products; train, retain, and
motivate employees in a safe workplace; and honour stakeholder commitments. An
operations manager is confronted with ever-changing issues, like:
Globalisation; Supply-chain partnering;
Sustainability; Rapid product development;
Mass customisation; Lean operations.
Stakeholders = Those with a vested interest in an organisation, including customers,
distributors, suppliers, owners,
lenders, employees, and community members.
Chapter 2 Operations Strategy in a Global Environment
Globalisation = Increasing economic integrations and interdependence of countries. There
are six main
reasons as to why domestic businesses should change to international
operations:
Improve the supply chain: the supply chain can often be improved by locating
facilities in countries where unique resources are available.
Reduce costs and exchange rate risk : reduce risk regarding changing
currencies.
o Operational hedging: maintaining capacity in different countries and
shifting production levels among those countries as costs and exchange
rates change.
o Maquiladoras: Mexican factories located along the U.S.-Mexico border
that receive preferential tariff treatment.
Understand markets: international firms inevitably learn about opportunities
for new products and services. Life cycles of products can be extended in
other countries, as they are in a different stage of their product life cycle
there.
Improve operations: learning does not take place in isolation: collaborations.
Attract and retain global talent: recruit and retain good employees.
An effective operations management effort must have a mission, so it knows where it is
going, and a strategy, so it knows how to get there. Firms achieve missions in either
differentiation (better), cost leadership (cheaper) or responsiveness. A good strategy provides
a competitive advantage.
Differentiation = Distinguishing the offerings of an organisation in a way that the customer
perceives as adding
value. Experience differentiation engages a customer with a product
, through imaginative use
of the five senses: experience the product.
Low-cost leadership = Achieving maximum value, as perceived by the customer.
Response = A set of values related to rapid, flexible, and reliable performance.
Prior to establishing and attempting to implement a strategy, alternative perspectives may
be used:
Resources view: a method that managers use to evaluate the resources at their disposal
and manage or alter them to achieve competitive advantage;
Value-chain analysis: a way to identify those elements in the product/service chain that
uniquely add value;
Five forces model: a method of analysing the five forces in the competitive environment.
These are: immediate rivals, potential entrants, customers, suppliers, and substitute
products.
SWOT analysis = A method of determining internal strengths and weaknesses and
external opportunities and
threats. When implementing a strategy, the idea is to maximise
opportunities and minimise
threats in the environment, while maximising the advantages and
minimising the weaknesses.
Analyse the environment, determine the corporate mission and form a
strategy.
Key success factors = Activities or factors that are key to achieving competitive
advantage.
Core competencies = A set of skills, talents, and capabilities in which a firm is particularly
strong.
Activity map = A graphical link of competitive advantages, KSFs, and supporting
activities.
By focusing on enhancing your core competence and KSFs with a supporting set of activities,
the necessary activities can be grouped into an organisational structure. The operations
manager’s job is to implement an OM strategy, provide competitive advantage, and increase
productivity.
Outsourcing = Transferring a firm’s activities that have traditionally been internal
to external suppliers.
Outsourcing adds complexity and risk to the supply chain, however, it’s
expanding due to
increased technological expertise; more reliable and cheaper
transportation; and the rapid
development of deployment of advancements in telecommunications and
computers.
The theory of comparative advantage is a theory which states that countries benefit from
specialising in (and exporting) goods and services in which they have relative advantage, and
they benefit from importing goods and services in which they have a relative disadvantage.
This is the motivation for international outsourcing. However, the substantial risk of
outsourcing requires managers to invest in the effort to make sure they do it right. Potential
risks of outsourcing include:
A drop in quality or customer service;
Political backlash that results from outsourcing to foreign countries;
Negative impact on employees;
Potential future competition;
Increased logistics and inventory costs.
The most common reason given for outsourcing failure is that the decision was made without
sufficient understanding and analysis.
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