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To explain the role of operations management
To explain the role of operations management
'Role'
'Role'
This looks at the overall contribution of the operations function to the business
Historically...
Historically...
Operations went from being 'behind the scenes' to being something that is in the customers’ eyes. This is in response to consumer purchasing motivations such as:
•Minimising waste (lean production)
•Reflecting fair value for any labour used in the process
•Operating at low cost to maximise affordability
•Reflect changes in the needs of customers over time
•Being environmentally sustainable
Can you identify how IKEA or another business responds to ONE of these consumer purchasing motivations?
- strategic role of operations management- cost leadership, good/service differentiation
Strategic Role of Operations Management
Strategic Role of Operations Management
involves a long term approach to managing the operations process. This strategic role involves managing efficiency, quality and production of a good or service in a manner that improves business outcomes. The strategic role can often be achieved through a focus on cost leadership (lowest cost of production) or differentiation of goods and services (quality or features)
The overarching goal of a business is to maximise profits. This is done by focusing on the two main aspects of profit:
1.Minimising Costs
2.Increasing Revenue
Operations focuses on minimising costs as it is not as involved with increasing revenue.
Every business has a variety of costs in their operations function. This is dependent on the product/service they produce, though all will have some form of expenses in the following areas:
Input
Labor
Processing
Inventory
Quality Management
Input Costs
Input Costs
Input costs are those which are associated with the physical items used to transform a product or service. This considers the space and machinery used, with inputs such as:
•Facilities
•Land
•Resources
•Interest on investment
•Leases on machinery
•Installation and testing
Labor Costs
Labor Costs
Labour costs are those which involve the costs of hiring and employing staff to actually create a product/service. These include:
•Full-time and part-time employees
•Casual employees
•Subcontractors
•Overtime
•Recruitment and training
•Redundancy
•Rostering
Processing Costs
Processing Costs
Processing costs are dependent on the efficiency of production. This involves implementing and maintaining the process of production. Processing costs include:
•Machinery maintenance
•Electricity
•Scheduling
•Product design
•Template and tooling
•Prototyping
Inventory Costs
Inventory Costs
Inventory costs are those associated with the storage of goods/services. These involve both the storage and movement of finished and unfinished products.
•Back order
•Logistics and distribution
•Storage
•Inventory management
•Insurance
•Deterioration
•Shrinkage and theft
•Damaged goods
Quality Management Costs
Quality Management Costs
As quality management becomes a larger issue in operations, there are several costs the must be incurred. These include:
•Prevention of loss through quality planning and training
•Sampling and inspection of goods and processes
•Error and remediation through warranty claims, sales returns and complaints
•Machining errors, injury and machine downtime
- strategic role of operations management- cost leadership, good/service differentiation
Cost Leadership
Cost Leadership
a strategic decision of the business to compete based on the lowest average cost of production
When to use it
When to use it
When price is the best way to compete e.g. standardised products or no one is competing on price yet
Impact on operations management
Impact on operations management
The operations manager will need to focus attention on reducing the cost of production, and distribution of the goods. This means sourcing cheaper inputs, increasing efficiency in manufacturing process and reducing wastage.
Examples
Examples
ALDI, Apple, IKEA
Economies of Scale
Economies of Scale
•Low costs can be achieved through economies of scale in productions and distribution, access to cheaper raw materials or inventing an innovative method of production.
•Economies of scale – refers to cost advantages that can be created as a result of an increase in scale of business operations. Fixed costs are spread over a larger output to drop the total cost per unit.
•The business would have a small profit margin in each item sold, balanced by a high volume of sales to generate its profit.
•This strategy may not be sustainable in the long run unless the benefits can be maintained with effective marketing, finance and human resources strategies.
CASE STUDY EXAMPLES
How has apple reduced its operations costs?
Formed partnerships with manufacturers such as Foxconn and Pegatron in China
Costs of production including labour and materials are significantly lower in China than the USA, this is a major advantage of outsourcing operations
Foxconn is the largest contracts manufacturer (outsourcing partner) of electronics in the world. Economies of scale are achieved by Foxconn as its costs are reduced by manufacturing on such a large scale
"Another critical advantage for Apple was that China provided engineers at a scale the United States could not match. Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States.
In China, it took 15 days. "- New York Times, 22 January 2012
Read the article
Identify the different types of costs and how IKEA minimises them.
Then…write a paragraph to answer the following question
Explain the term cost leadership using a case study example
Upload to schoolbox
- strategic role of operations management- cost leadership, good/service differentiation
Good/Service Differentiation
Good/Service Differentiation
a strategic decision of the business to compete based on non price attributes of their product compared to competitors
•A second key strategy for Operations management is differentiation.
•Product Differentiation: having something about your good/service that makes it different to you competitors.
•This may focus on the product features, quality and/or add-ons
Goods
Goods
Features
Features
Does your product provide superior features to your competitors?
A decision to increase features offered with a product will increase the cost of production. (E.g. Mac vs PC).
Quality
Quality
Producing products of superior quality to distinguish yourself from the competition or sometimes you only want a cheap knock-off version of something.
Augmented features
Augmented features
This refers to add-ons or additional benefits associated with particular goods. In a car: GPS, self-parking
Services
Services
There are several different ways to differentiate a service, including:
•Time spent on service
•Level of expertise – If a person has a higher level of expertise then, as a service-provider, they can provide a more specialised service.
•Level of qualifications and work experience
•Amount of Materials, Equipment and Technology used affects quality of the service being used. A service which involves the transfer of information will be much more useful if it involves ICT in some way.
As a manager, the focus here is to decide the mix of the above factors to best meet customer needs
Cross Branding
Cross Branding
•Differentiation can be created from cross branding or strategic alliances. Cross branding is a strategy that involves selling two complementary products from different businesses.
•An example of this is Coles cross branding with Shell for Coles petrol
CASE STUDY EXAMPLES
Read article....
Identify the different ways IKEA uses differentiation
Then…write a paragraph to answer the following question
How does IKEA differentiate its products from other businesses?
Submit to schoolbox
EXTEND: Over to you!
EXTEND: Over to you!
Compare how differentiation varies between goods and services
Distinguish between economies of scale and cost leadership. Assess the importance of both for business efficiency.
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