Operations

Operations is one of the four HSC topics, each worth about a quarter of the course. It can appear in all four sections of the exam: multiple choice, short answers, the business report and as one of the two extended-response choices. The syllabus focus is strategies for effective operations management in large businesses.

• Role of operations management: its strategic role (cost leadership and good or service differentiation), goods and services in different industries, and interdependence with the other key business functions.
• Influences: globalisation, technology, quality expectations, cost-based competition, government policies, legal regulation, environmental sustainability, and corporate social responsibility (legal compliance versus ethical responsibility).
• Operations processes: inputs, transformation processes and outputs.
• Operations strategies: performance objectives, new product or service design, supply chain management, outsourcing, technology, inventory management, quality management, overcoming resistance to change, and global factors.

Operations management is the planning, organising and controlling of the processes that turn inputs into the goods and services a business sells. In a manufacturer it is the factory; in a bank it is everything that delivers a loan or a transaction.

Strategic role

Operations helps a business gain a competitive advantage in one of two ways:

• Cost leadership: becoming the lowest-cost producer in the industry, so the business can charge lower prices or earn higher margins. Strategies include economies of scale, automation, lean production and global sourcing. Discount retailers and budget airlines are classic examples.
• Good or service differentiation: making the product distinctive (better quality, design, features, speed or service) so customers value it more and will pay a higher price. Premium car makers and boutique hotels compete this way.

Most businesses lean towards one but must still control costs and meet a basic quality standard.

Goods and services

Goods are tangible and can be stored. Services are intangible, usually produced and consumed at the same time, and cannot be stockpiled (an empty cinema seat tonight is lost forever). Many industries mix both: a restaurant serves food (a good) and table service. Service operations depend heavily on staff and on managing demand through bookings and rosters.

Interdependence

Operations relies on the other key business functions, and they rely on it:

• Marketing tells operations what customers want, in what quantities and when; operations must deliver the promised quality.
• Finance funds equipment, materials and wages and sets budgets; operations is usually the biggest cost centre, so its efficiency drives profit and cash flow.
• Human resources recruits, trains and rewards the people operations needs; changes such as automation affect jobs and require retraining.

In an exam, show the link in both directions and give an example.

• Globalisation: access to global suppliers and markets, but also competition from producers in low-wage countries.
• Technology: automation, robotics, computer-aided design and manufacturing, warehouse and inventory software, online ordering. It can cut costs and improve quality, speed and flexibility, but needs capital and new skills.
• Quality expectations: customers expect consistent quality and will switch if they don't get it, especially with online reviews.
• Cost-based competition: pressure to cut costs because competitors can sell more cheaply.
• Government policies: tariffs, subsidies, industry assistance, tax incentives for investment, infrastructure.
• Legal regulation: work health and safety, environmental protection, product safety, consumer law and employment law all shape how products can be made.
• Environmental sustainability: reducing waste, emissions, water and energy use; designing products for reuse or recycling.
• Corporate social responsibility (CSR): a business's responsibilities to society beyond making a profit.

Legal compliance versus ethical responsibility

Legal compliance is doing what the law requires, such as meeting the limits in an environmental licence. Ethical responsibility is doing more than the law requires because the community expects it, such as auditing overseas suppliers for fair labour conditions or cutting emissions well below the legal limit. A useful test: if the business stopped doing it, would it be breaking the law? If not, the action is ethical responsibility.

Every operation can be modelled as inputs → transformation processes → outputs.

Inputs

• Transformed resources are changed by the process: materials (timber, flour, steel), information (a customer's order, a tax return) and customers themselves (a patient, a hair-salon client).
• Transforming resources do the changing: human resources (the workers and managers) and facilities (buildings, machinery, equipment and technology).

Transformation processes

The nature of a transformation process is described by the 4 Vs:

High volume and low variety usually mean low unit costs and standardised, automated processes. High variety, variation or visibility usually raise costs because the operation needs flexible staff and equipment, and customer-facing skills.

Sequencing, scheduling and other process decisions

Sequencing is the order in which tasks must be done; scheduling is when each starts and finishes. Two tools:

• Gantt chart: a bar chart of tasks against time. Easy to read, good for monitoring progress.
• Critical path analysis (CPA): a network of activities and their dependencies. The critical path is the longest path from start to finish; its length is the minimum project time. Activities off the critical path have slack (float).

Worked example. A café renovation has activities J (2 days), K (4 days, after J), L (3 days, after J) and M (1 day, after K and L). Paths: J–K–M $=2+4+1=7$ days; J–L–M $=2+3+1=6$ days. The critical path is J–K–M (7 days), and L has 1 day of slack. If L runs 3 days late, J–L–M becomes 9 days, so the project is delayed by $9-7=2$ days (the delay minus the slack).

Other process decisions: technology used; task design (what each worker does); process layout (process layout groups similar machines together, product layout arranges equipment in a line in the order of production, and fixed-position layout brings resources to a product that cannot move, such as a building or ship).

Monitoring, control and improvement: setting standards, measuring actual performance (for example output per hour or defect rates), comparing and correcting, and continually improving.

Outputs

Outputs are the finished goods and services. Two output issues are in the syllabus:

• Customer service: meeting customer needs before, during and after the sale.
• Warranties: a promise to repair or replace faulty goods. Under the Australian Consumer Law, consumer guarantees apply automatically regardless of any warranty the business offers.

Performance objectives

Operations managers aim for quality, speed, dependability, flexibility, customisation and cost. They involve trade-offs: maximum flexibility and customisation usually raise cost. Dependability (doing things on time as promised) is different from speed (doing things quickly).

New product or service design and development

Designing products that customers want and that can be made efficiently. Good design reduces production costs, defects and waste, and supports differentiation.

Supply chain management

The supply chain is the network of suppliers, producers and distributors that brings a product to the customer. Strategies:

• Logistics: managing the movement and storage of materials and finished goods (transport, warehousing, distribution centres).
• E-commerce: online ordering and payment, connecting suppliers and customers electronically.
• Global sourcing: buying inputs from the best suppliers anywhere in the world. Cheaper or better inputs, but longer lead times and exposure to disruptions, exchange rates and ethical risks.

Relying on a single supplier is risky; many businesses keep a second supplier to improve dependability.

Outsourcing

Contracting an outside provider to do an activity, such as manufacturing components, IT or customer support. Advantages: lower costs, access to expertise and technology, focus on core activities. Disadvantages: less control over quality, communication problems, risk to reputation, job losses, and dependence on the provider.

Technology

Leading-edge technology is the newest available: potentially a strong competitive advantage, but expensive and unproven. Established technology is proven and cheaper, but rivals have it too.

Inventory management

Holding stock has advantages (meeting unexpected demand, avoiding stoppages, bulk-buying discounts) and disadvantages (storage, insurance, security and obsolescence costs; cash tied up).

• FIFO (first in, first out): the oldest stock is assumed to be sold first.
• LIFO (last in, first out): the newest stock is assumed to be sold first. When costs are rising, LIFO gives a higher cost of goods sold and a lower profit than FIFO. (Australian accounting standards (AASB 102 Inventories) do not permit LIFO in financial reports, but the comparison is examined.)
• Just-in-time (JIT): inputs arrive just as they are needed, so little stock is held. It cuts holding costs and frees cash, but needs very reliable suppliers; a late delivery can halt production.

Quality management

• Quality control: inspecting outputs (or samples) to detect and remove defects. Reactive.
• Quality assurance: a system of checks built into processes so standards are met, often certified to an external standard such as ISO 9001. Preventive.
• Quality improvement: an ongoing commitment to do better, for example total quality management (TQM), which involves every employee in continuous improvement, and benchmarking against best practice.

Overcoming resistance to change

Change in operations (new equipment, automation, new layouts) meets resistance from:

• Financial costs: purchasing new equipment, redundancy payments, retraining, reorganising the plant layout.
• Inertia: people's preference for familiar ways of working and fear of the unknown.

Managers reduce resistance through early communication, consultation, involving staff in implementation, training, incentives and support for any staff who lose their jobs.

Global factors

• Global sourcing: see above.
• Economies of scale: lower cost per unit from producing for global markets.
• Scanning and learning: studying world best practice and adopting it.
• Research and development: creating new products and processes; global businesses can spread R&D costs across many markets.

• Mixing up transformed and transforming resources. Transform-ed resources are changed; transform-ing resources do the changing.
• Calling any 'green' action legal compliance. Ask whether the law actually requires it.
• Treating speed and dependability as the same objective.
• In CPA, taking the shortest path as the project time, or forgetting slack when working out a delay.
• Listing JIT advantages when asked for disadvantages (and the reverse).
• Writing about operations in general instead of the business in the stimulus.

• Command verbs: _outline_ (sketch in general terms), _explain_ (show cause and effect, how or why), _distinguish_ (show the differences), _analyse_ (identify components and the relationships between them), _evaluate_ (make a judgement based on criteria, with evidence).
• Short answers: marks usually go to identifying a point, then developing it with a reason, effect or example. A 4-mark 'explain two' question usually means two points, each well explained.
• Business report: use the data in the case in every finding, then make specific, justified recommendations under headings. Link operations problems to finance (inventory and cash) and HR (staff consultation, training).
• Extended response: state a clear judgement in your introduction, then support it in every paragraph with a contemporary business example. A strong operations case study (a manufacturer or a service business you have studied) is essential.

• Marketing: product design, quality and delivery promises; warranties and consumer guarantees.
• Finance: capital for technology, inventory and working capital, cost control, the matching principle for funding equipment.
• Human resources: job design, training for new technology, WHS, redundancy and resistance to change.