• Strategic role of operations management – cost leadership, goods/service

differentiation.

The Role of Operations Management

Operation refers to the business processes that involves transformation or production. The
creation of goods and the provision of services by businesses. The transformation of inputs
into outputs or products to be sold. This involves:
• Planning activities.
• Purchasing inputs.
• Managing inventory.
• Selecting and implementing manufacturing processes.
• Developing strategies to gain a sustainable competitive advantage.

Operations - Transformation of inputs into outputs

The Strategic Role of Management

A strategic decision is one that affects the business in the long term. The strategic goals are
to improve:
• Productivity.
• Efficiency.
• Quality of outputs.

Therefore, all strategic decisions will focus on lower costs to an industry benchmark through
efficiency and producing a good or service that is different to and competitive against rivals
in the market.

There are 2 types of strategies that are commonly used by businesses to gain and maintain
a competitive advantage. These are:
• Cost leadership.
• Product differentiation.

Cost leadership

A cost leadership strategy is where a business aims to be the lowest cost manufacturer and
most competitive within its industry. The products are the basic, no-frills (Coles label- Home
brand) ALDI type with fewer features, perhaps lower quality and using low-cost packaging.

Low costs can be achieved through:

• Economies of scale in production and distribution. Economies of Scale occur when a
business becomes large enough to benefit from its size. Improves negotiation for better
supply rates and take advantage of better technologies.

• Access to cheaper raw materials – Global sourcing (e.g. Importing from markets in
China/South-East Asia where production costs much lower than Australia).

• Exclusive access to a large source of low cost inputs.

• Distributing the product using dealers who work with lower profit margins. (e.g. Coles
and Woolworths attempt to achieve low price with slogans such as ‘everyday low
prices.’).

The issues that operation mangers need to be aware are:

• Competitors can use the same strategy and can achieve even lower costs.

• Customers do not perceive the business’s product to be equal to its competitors

because competitors offer better technology, features and service. (Cost and quality
interaction).

• Developments in technology change consumer preferences – Innovation.

• Consumers may even feel that these types of ‘throwaway are not environmentally
sustainable.

• A strong competitor uses aggressive marketing with heavily discounted prices.

Case Studies:
• IKEA achieves significant economies of scale through flat packs, increased
transportation and storage costs due to smaller size. This means competitive
advantage can be provided through cheaper sales.

• Myer went through cost leadership transformation in 2006 by introducing 8 international

distribution centres→ invested in IT which cut costs by 50% by 09.

• Jet Star is an established low-cost airline in Australia. However, this low cost requires a
quality sacrifice, as in 2010 it was found to have the greatest number of late flights of
any domestic Australian airline. Additionally, Tiger Airways is infamous for poor service,
which is again an example of sacrificing quality for cost.

• Sony and Panasonic invest large amounts of money in research and development,
which leads to the creation of innovative products of a greater quality, and as such
these products attract a higher price to cover the cost of R&D incurred in their design.

Strategies for Product Distribution

Other Strategies Include:

o Buying in Bulk.
o Standardised Products.
o High volume and automated production systems.

Case Study - Qantas

• Staff make up 26% of costs
• Fuel 25%.
• Maintenance 20%.

• Qantas management has targeted $1.5 billion cost reductions by 2015 → through:
Economies of scale through bargaining power with fuel, being a member of the
Oneworld Alliance→ features 12 of the world's leading airlines and engages in separate
bilateral agreements with British Airways, American Airways, and Japan Airways to
save costs.

• Technology through online booking/check in.

• Waste Minimisation → Qantas reduced its waste by 21% in 2011 through
recycling, energy efficient materials x in 2010→ Qantas diverted its waste to a
Trigeneration waste treatment facility in Sydney → 99.8% of waste is now recycled.

Product differentiation

Product differentiation means distinguishing goods/services that is different to its

competitors. Product differentiation can help a business establish a competitive advantage
which leads to profit maximisation. It may be achieved through:

• Better quality than competitors.

• Faster delivery.
• Varying time spent on a service.
• Vary augmented features.
• Custom designed products.
• Location of operations.
• More features and applications = More utility & appeal.
• Cross-Branding – Adding value to products by offering added benefits from a cross-
branding arrangement e.g. Woolworth accumulating points to reduce petrol costs.

Product Differentiation: Goods

• Varying the actual product features (e.g. Leather seats for motor vehicles).

• Varying any augmented features – Refers to any add-ons or additional benefits (e.g.
when purchasing an SLR camera, consumers have the options to buy different lenses).

• Varying product quality – Low-quality model = very affordable price, Increasing quality
= higher price.

Product Differentiation: Services

• Varying the amount of time spent on a service.

• Varying the level of expertise brought to a service.
• Varying the qualifications and experience of the service provider.
• Varying the quality of material/technology.

A differentiated product can command a higher premium price in the market as customers
are attracted to the product and build up brand loyalty.

Case Study – Apple

• Apple’s IPod: At the time of the iPod’s introduction, most competitors were pursuing a
cost-leadership strategy and the prices of mp4 players were falling rapidly as
manufacturers incorporated a raft of cost-saving strategies. Apple incorporated
attributes such as a cool design and intuitive technology. The strategy was responsible
for Apple’s spectacular growth during the early 2000s.

Case Study – Aldi

• Aldi uses product differentiation, by selling unusual goods such as computers, chairs,
gazebos, and other wholesale goods in comparison to other supermarkets who only
sells fresh food.
Goods and services in different industries

Operations processes will vary for goods depending on whether they are standardized or
customized goods. Standardized goods are mass produced, uniform in quality and meet a
predetermined level of quality. (E.g. A Big Mac will be the same in Sydney as in Paris. Apple
products will be the same worldwide despite local pricing.)

Customized goods are those that varied to the need of customers, and are produced with a
market focus rather than a production focus. (E.g. McDonalds customise their products
throughout the world. Norway sells Mclaks (salmon), Chile uses an avocado paste as its
sauce, Hong Kong uses rice burgers, Canada has lobster dinners and Germany sells is
burgers with beer.)

Perishable Goods require high standard of quality, safety and cleanliness, very short lead
times and efficient distribution and packaging.

Non-perishable Goods are more durable than perishable goods and processes need to
manage all aspects of quality, from sourcing production and distribution to effective inventory
managements and being highly responsive to market demand. Operations processes will
vary for goods and services depending on whether they are standardized or customized.

Manufacturing outputs:
• Physical, tangible.
• Can be reused.
• More capital intensive (machinery).
• Can be stored.
• Hard to modify once manufactured. (e.g. Cars, Bikes).

Services outputs:
• Intangible.
• Can only be used by customer once.
• More labour intensive.
• More interaction with customers.
• Easier to change and customise.

There are some similarities, they both:

• Use technology.
• Must make predictions.
• Deal with customers and suppliers.
• Make decisions about capacity (level of inventory).

Case Study – Kmart (Retail Industry)

• Kmart provides a ‘shopping experience’ and customers have expectations about the
service they are purchasing. They expect the products they are purchasing to be in
good condition, the surroundings to be clean and pleasant and - most importantly - a
high level of customer service. In addition, they expect goods to be available when they
want them and to have access to the shops when they want to shop.

Case Study – Ford Motor Company (Manufacturing Industry)

• There is a good component, the car, and a service component, the after sales aspects
of maintenance and warranty. When the business purchases products such as engines
or brakes from its suppliers, Ford expects the parts to be manufactured to the
specifications it gave to the suppliers. This determines the reliability its customers
 expect from Ford. Ford customers also expect the car will be well designed and be
available when they want it.

Interdependence of operations and the business

• Specialisation – Where the business is separated into different functions, each of which
is highly skilled at its specific task or role.

• Interdependence – where the different parts of a business must rely on each other to
perform their task or role.

There will be a constant flow of information between operations and the other key business
functions: marketing, human resources, and finance.

Operations → Finance
• Operations relies on finance to provide funds/capitals to transform into output e.g.
Restaurant using money to purchase raw materials (inputs) and transform into dishes.

• Finance relies on operations to make goods and provide services that contribute to
sales and therefore profits. Finance also create budgets to provides funds to allocate to
key business areas, purchase inputs, equipment, and repairs.

• Finance relies on operations to effectively allocate resources to reduce costs and

maximize profitability.

• The finance manager will create budgets and make funds available to purchase inputs,
equipment, repairs.

Operations → Marketing
• Market research identifies the nature of goods consumers’ desire and marketing
strategies encourage purchases and operation must supply a product that consists the
features and quality consumers demand as well as reliably distributing this product to
the market.

Operations → Human Resources

• Human resources discuss training and development needs and will ensure that enough
employees with the appropriate skills.

• Operations identifies the skills needed to produce the goods and services demanded
by consumers.

• Provide suitable staff based on operations requirements.

• Industrial relations.

Influences: globalization, technology, quality expectations, cost-based competition,

government policies, legal regulation, environmental sustainability.

Globalization is a process that is leading to the development of a single world market.

Globalization gives consumers the opportunity to purchase products from the business that
provides the most value for money. Globalization has created many opportunities for
Australian businesses to expand overseas. First, there is the opportunity to reduce costs
through establishing a global supply chain. Second, access to a global market to sell the
outputs of operations.

• Globalization is defined as the integration and interdependence of the economies of

different countries, creating a global economy.

• Integration refers to the joining together of different economies through trade,

technology, deregulation, and global businesses.

The reasons for the global web of operations are to drive costs down and exploit the
competitive advantage each region has to offer.

• Increased global market due to deregulation (lower cost of communication & transport).

• Global Labour Market → increased flow of skills allowing companies to hire people from
overseas. (E.g. Managing Director of David Jones is recruited by Dubai to launch new
shopping centres).

• Outsourcing is a practice used by different companies to reduce costs by transferring

portions of work to outside suppliers in low cost countries such as China, Bangladesh,
and India rather than completing it internally, companies are able to outsource due to
globalization and thus achieve competitive advantage. (Strategic role of Cost
Leadership)

Case Study – Jetstar

• Jetstar employing staff based in Singapore and have a maintenance centre based in
Singapore.

Inputs: Source Cheaper inputs from overseas – HR & Raw Materials and source exclusive
inputs.

Transformation: Outsource manufacturing.

Output: Sell overseas and expand operations.

Supply chain management and the global web

• Supply Chain - Refers to the range of suppliers a business has and the nature of its
relationship with suppliers.

• Global Web – Refers to the network of suppliers a business has chosen on the basis
of lowest overall cost

Different currencies
• A depreciation of the Australian dollar (AUD) against the currency of the country
inputs are being sourced from will lead to rising costs
• Businesses use hedging. This is any strategy used by a business to reduce financial
risk. This is to eliminate the risks from the value of currency appreciating and
depreciating.
• Global businesses use transaction exposure. This is entering into contracts to
buy and sell foreign exchange to purchase inputs from businesses in other
countries.
 • Subsidiary - A business that is owned by the global corporation that supplies
inputs. Hedging uses subsidiaries so that all transactions are in the same
currency.

• Special contracts between global businesses called derivatives are used.

Trade agreements

• A bilateral trade agreement is an agreement between two countries to reduce barriers

to trade and promote economic integration. Multilateral trade agreements are
between more than two nations.

• Regionalism has been occurring very recently. This is the classification of the world’s
region based on their geography and economic links.

• There have been regions forming economic alliances, e.g. Europe, the North American
Free Trade Alliance, or NAFTA, members (Mexico, United States, and Canada) and
the South- East Asian nations (including China).

• Trading blocs- A group of nations that have formed a trade alliance by signing a
multilateral trade agreement. Countries in trading blocs have less restrictions so,
businesses trade with countries in the same bloc.

By using large-scale operations model businesses can share costs and reduce the expense
of developing, producing and distributing products to the global market.

Global consumers

• Globalization enables higher incomes and many parts of the world have a rapidly
growing middle class who wish to buy goods and services that improve their quality of
life.

• Products will have to be differentiated in some aspect to suit the different culture of the
local market.

• Market research is needed to inspect the language, religion, and ethics.

Cultures

• It is advisable for global businesses use local experts that can help prevent issues
caused by cultural clashes and communication problems.

Technology

Technology is the knowledge of how things are done. If businesses do not respond to
progresses in technology could result in failure. (E.g. Nokia – Failure to respond to changes,
unable to compete with Apple and Samsung).

Adopting the new technologies, such as the extensive use of robots in car manufacturing,
may not make a business more competitive if the technology is widely adopted but it
prevents the loss of competitiveness. (E.g. Qantas – Purchased A380 to allow the business
to transport customers at lower cost).
• Technologies such as smart phones and the internet are drivers of globalization,
enabling service-based businesses to penetrate global markets with the international
distribution of information.

• Strategies to acquire technology include a joint venture or strategic alliance with

another business or simply purchasing businesses that have the desired technology.

• Technology can result in the development of new methods of production or new

equipment that helps businesses perform functions more quickly and often at a lower
cost.

Inputs – Source advanced machinery to be used in the production process.

Transformation –

Output – produce higher quantity and better-quality outputs.

When making decisions about technology, factors need to consider:

• The speed of change taking place.
• The technology that competitors use.
• The finances available for a change.
• How long it will take to introduce.

Robotics

Robotics refers to the development of robots, which are programmable machines that have
sensors that can detect changes in their environment. Use of robotics increases productivity
and reduces costs.

Benefits of Robots:
• Don’t need breaks.
• Are more precise.
• Have no emotions.
• Need to be paid.

CAD & CAM

• Computer-aided design (CAD) is computer technology that allows architects,

engineers, and designers to create and edit and modify three dimensional designs
using a computer. The designs can be created based on the specifications or special
conditions set by each client’s requirements.

• The blueprints can be sent around the world and viewed with ease.

• It allows designs to be looked at from various angles and provides a more

effective visual presentation.

• Computer-aided manufacture (CAM) Computer technology that directly links the

design process to the manufacturing process using computers.

• This process provides electronic links for exchanging data, which results in time
being saved and fewer mistakes being made.
 • With CAM software, the computer can be set to control large sections of
production with greater efficiency, fewer errors and fewer staff. → This is
improved from the past where manual machines are engineered depending on the
design the producer wanted.

Quality Expectations

Quality expectations are an important influence on most operations functions. Quality, could
best be defined as meeting, or exceeding, a customer’s expectations.
Service:

• Customer will have expectations regarding the:

• Professionalism of the service provider – Cleanliness/layout of facilities.

• Reliability – How efficient is the service provider.

• Level of Customisation - Quality of input → Standardized or customized different

price points provide different level of service, more expensive = more customized
(E.g. Toni and Guy VS Just Cuts, LV VS Target).

Goods:

• Customers will have certain expectations regarding the:

• Durability – How long the product lasts given a reasonable amount of use.
• Reliability – How long the product functions without needing maintenance or
repairs.
• Fit for purpose – How well the product does all the things advertising claims.

• Operations must be organized to maximize quality and customer satisfaction.

Inputs – Source better quality raw materials.

Transformation –

Output – Higher quality outputs.

Cost based competition

Cost-based competition is a low-cost strategy concerned with driving down the costs of
warehousing and transportation, and spreading overhead costs. → Best possible value of
money by reducing costs of: Warehousing and transportation.

• A business can gain a price advantage over its competitors by using operational
strategies that lower costs. In this way the business can reduce its prices lower than its
rivals. Cost advantages can be obtained by:
• Outsourcing.

• Using cheaper inputs.

• Lowering quality of products.

 • Reducing warehousing costs using distribution centres which substantially
reduces overhead costs (Rent, staff, fixtures, electricity) Overhead costs are the
ongoing costs of a business such as rent on premises, electricity, and wages.

• Cost-based competition is a strategy to reduce costs whist still maintaining quality →

best value for the money, it will attract more customers and therefore achieving the
competitive advantage.

Case Study
• Kmart is now opening 24 hours to spread its overhead costs over higher inventory
turnover.

• Woolworths’ managers re-engineered its warehouses and transportation logistics to

reduce costs by billions of dollars and as a result were able to offer a shopping
experience that induced many Coles’ customers to switch to Woolworths.

Government policies

Government policies can be an important influence on the operations function in a business.

Government policies impacting on the operations function include regulation, subsidies and
grants, and taxes and tariffs that encourage or discourage aspects of operations or ways the
operation functions are conducted.

• There has been a gradual reduction in ‘protection’ of Australian businesses forcing

them to be more efficient in their operations and reduce costs.

• Competition Policy – Monetary and non-monetary incentives for businesses to

encourage businesses to become more efficient.

• It’s a government policy to encourage businesses to adopt ‘green’ and environmentally

friendly operating methods.

• Input – Government provides subsidies for use of recyclable material and

therefore businesses will source recyclable materials (E.g. Solar panels of
renewable energy).

• Transformation – Reducing reliance on non-renewable energy (E.g. Carbon tax).

• Output – Distribution of products (E.g. Aldi uses biodegradable plastic bag).

• Local Zoning and Lock out laws (E.g. Pubs and bars are not to operate at certain
times).

Legal regulation

Legal regulations are the laws that regulate the way things can be done. Legal regulations
are so important because of the potentially dangerous aspects associated with the use of
equipment.

• The aim of government regulation of business is to promote safety and fair business
conduct. Many of the regulatory requirements exist at a local, state, and federal level.
• It is the legal responsibility of the operations manager to be aware of the all laws
relevant to the operations function and ensure that the business complies with them.
(E.g. National Minimum Wage and WH&S).

Impact of legislation
Area of regulation Legislation Legal obligations and
implications
Workplace safety • Occupational Health and Employers must make sure
Safety Act 1991 (Cth) that employees are provided
with a good working
environment.

Hazardous material
• Occupational Health and Training, warning signs and
Safety Act 1991 (Cth). safety precautions to
prevent injury. Safe
• Dangerous Goods measures to transport
(Road and Rail hazardous and dangerous
Transport) Act 2008 goods.
(NSW).

Environmental protection Federal Environment Operations must ensure

Protection and Biodiversity hazardous waste, fuels and
Conservation Act 1999 chemicals do not enter the
(EPBC Act). environment.

Environmental sustainability

Environmental sustainability is concerned with air, water, waste and environmentally

sustainable products and operations practices.

• Ecological sustainability refers to the development and use of methods of

production that allow resources to be used by producers today without limiting the
ability of future generations to satisfy their needs and wants. (e.g. Renewable
energy, recycling).

• Increased awareness in contemporary society (E.g. Adidas created shoes from

ocean waste – turned plastic pollution to high performance products).

• Aims to reduce carbon footprint, waste, and pollution in the operation process (E.g.
Aldi uses biodegradable plastic bags/Woolworth encourages customers to bring own
reusable bags).

• Consumers need to be aware of the cost and disposal of excessive packaging.

• Society will have a positive attitude towards businesses that are environmentally
friendly and good corporate citizens.

• Increased cost for business, positive social impact = increased sales (e.g. Toyota
Prius, ethanol E10 Fuel, recyclable packaging, and eco-friendly fluorescent bulbs).
Carbon footprint= refers to the amount of carbon produced and entering the environment
from operation processes → (E.g. Reduce 160 million tonnes/year by 2020 Qantas
→ environmentally sensitive aircrafts Boeing 787 and Airbus A380, Trigeneration wastage
recycling facility in Sydney in 2010 + fuel conservation).

Case Studies:
• Orica Limited is a large Australian-based global business employing some 15 000
people. Its main products relate to mining and infrastructure equipment. They aim to
meet the needs of customers and the community in a sustainable manner for the
benefits of future generations.

The Orica environmental sustainability strategy is based on the following key objectives:

• Carbon neutral - no net generation of greenhouse gases to the atmosphere.

• Water neutral - no net consumption of potable water.

• Zero waste - no net generation of waste to landfill and innovative ways to prevent,
reduce, reuse, and recycle by-product streams.

• Environmentally friendly operations, products and services that have no unintended

consequences to the environment and the community.’

The business has already reduced greenhouse gases by 51% in 2010 and this exceeded
their target by 35%.

• Adidas – Creating shoes with plastic waste collected from the ocean

• WorldStrides – An educational tour company in North QLD that provides tour activities
that assists environmental conservation including calculations of carbon footprint from
tours and plant trees accordingly to offset impact.

Corporate Social Responsibility (CSR)

Corporate social responsibility refers the relationship between business and the broad
society and the way this relationship is perceived and managed.

• CSR is how success and profitability is determined by how well it considers the
interests of employees, consumers, and the community.

• Ensures that business activities benefit the society (e.g. reducing pollution, resource
management that promotes sustainability, and economic sensitivity to local
communities).

• There’s usually a cost associated with CSR however, business receive benefits in the
form of enhanced reputation (Goodwill) and consumer acceptance. (e.g. supporting
disadvantaged groups - Qantas Reconciliation Action Plan→ focuses on employing
Indigenous Australians).

• This is an extension of the triple bottom line. (financial, social, and environmental
evaluation).

• Other social responsibilities are:

• Human rights.
 • Corruption.
• Labour standards.
• Social Responsibility.

Case Study – Tom’s Shoes

• Blake Mycoskie created TOMS Shoes, a company that would match every pair of
shoes purchased with a new pair of shoes for a child in need. Since 2006 Tom’s
footwear has given over 60 million pair of shoes to children in need.

• TOMS Eyewear helped restore sight to over 400,000 people in need. By providing
prescription glasses, medical treatment and/or sight-saving surgery with each purchase
of eyewear. As well as supporting sustainable community-based eye care programs,
the creation of professional jobs (often for young women) and helps provide basic eye
care training to local health volunteers and teachers.

• TOMS Bag was founded to help provide training for skilled birth attendants and
distribute birth kits containing items that help a woman safely deliver her baby. As of
2016, TOMS have supported safe birth services for over 25,000 mothers.

The difference between legal compliance and ethical responsibility

Ethical Responsibility refers to the business decisions that is not only legally correct but also
morally correct. Many businesses publish a code of conduct. This code will cover issues
such as:
o Supporting charities and local community organisations
o Consulting the community prior to implementing a significant change to the
business
o Promoting human and civil rights both in Australia and overseas.

• For operations, Ethical responsibility will be concerned with:

o Minimising harm to the environment
o Reducing waste, recycling, and reusing
o Producing value-for-money, quality products
o Improved customer service.

• Legal Compliance refers minimum requirements set out by the laws will impact
the operations strategies used. (Prescribed standard of behaviour) For
example:
• Operations cannot release more than a legal maximum amount of pollution
• Products must meet minimum standards for quality and safety for consumers
• Products created by Operations must perform as they are promoted to
• Employees must have a safe working environment (e.g. no dangerous
machinery, or unsafe procedures).

Legal compliance refers to the legal responsibility business and individuals must obey the
law. Legal responsibility is the BARE MINIMUM whilst Ethical responsibility is what
businesses do EXTRA to increase goodwill. (e.g. ANZ Bank’s mentoring scheme to
encourage young indigenous people into the workforce)

Case Studies
The Body Shop
• Staff are given 2 days paid leave to develop community projects
• Low staff turnover suggests high level of employee satisfaction
• Sponsoring local community projects
Coca Cola
• demonstrates corporate social responsibility in regard to environmental sustainability
through its extensive water recycling program, which has significantly reduced
water wastage at the company’s production facilities in Australia and around the world.
Woolworth
• In response to the $50 million cost of lost trolleys every year, Woolworths launched a
tracking system for its lost trolleys, which also has the environmental benefits of
removing abandoned trolleys from waterways and bushland

• Environmental Sustainability and Social Responsibility

Environmental sustainability is the ability to maintain the qualities that are valued in the
physical environment. Generally concerned with energy efficiency and climate change,
water, and waste management.

• By pursuing environmentally sustainable goals a business will be contributing to a

better quality of life for society.

• Waste Management is a broad term that refers to the collection, transport,

processing, and recycling of waste materials. The focus of waste management
strategies is the reduction of landfill waste. (E.g. BMW AG design their cars to
ensure that as much as possible of the car can be built from recycled materials
and as much as possible of the car can be recycled. More than 80% of a modern
BMW can be recycled.).

• Negative Externalities.

• Businesses have an Australian SAM Sustainability Index. This measure determines

the performance of Australian companies in terms of their environmental sustainability
and social responsibility. (How an Australian business is ranked in this index will
generally tell you how good they are at promoting sustainable practices and being
socially responsible).

• A good public image will encourage long-term profitability.

Social responsibility is the way business practices impact, in a positive way, on the society in
which the business operates. Socially responsible business practices are expensive to
implement in the short-term (e.g. renewable energy thorough solar panels) but there will be
long term advantages. (E.g. Billabong voluntarily measures its carbon emissions using the
National Greenhouse and Energy Reporting Act 2007 and adopts energy efficient practices
by using LED systems which use less power in retail outlets).

Operations Processes

Operations processes are the activities involved in the transformation of inputs into
outputs. This may also be referred to as the production system or operations system.

Transformation – Refers to the conversion of inputs (resources) into outputs (goods and
services) (e.g. Sony takes plastic, metal, glass, and electronic parts and transform them
through design, manufacturing and assembly into numerous electronic products).

• Each activity adds value so that the output has a greater value than the cost of inputs.
• When assessing the performance of the operations functions the manager determines
how effectively the business makes and assembles raw materials and components
into finished goods and services, distributes to wholesalers, retailers, and customers,
and provides after-sales customer service.

• A manufacturer using machinery, robots, and computers to transforms inputs into

outputs (tangible products).

• A service organisation uses labour-tensive methods to transforms inputs into outputs

(intangible products).

• Some approaches are:

• “Top down” approach- the operations business function interprets and aims to
play its role in achieving the business objectives.

Systems management approach- focuses on integrating operations with the other key
functions to create sustainable competitive advantage.

Inputs
• The inputs in an operation system are the:
• Physical raw materials.
• Skills/knowledge.
• Creativity or knowledge to produce skills or products.

• Intangible inputs- time and money.

• The Outputs are the inputs converted into goods and services.

• Inputs can be classified as:

• Materials- raw materials, parts and components, power and energy supplies.
• People- labour, managers, engineers.
• Physical- factory and office buildings, land, office equipment.

Transformed Resources (Materials, information, and customer)

• Transformed resources are the inputs that are changed or converted into something
else as component or a finished good or service.

• Businesses use a combination of transformed resources (materials, information and

customer). (E.g. Qantas uses fuel, information, and customers.) Information is gained,
and customers are taken to their destination.

The types of transformed resources are:

• Materials are the basic components, parts, and supplies (gas & electricity) used up in
operations. (Raw Materials and intermediate goods).

• Physically – Manufacturing.

• Location – Transportation.

• Ownership – Retail selling or wholesaling.

 • Storage – Warehousing or keeping it store on business premises.

• Supplies are different to raw ingredients.

• All materials can be considered current assets that are constantly flowing in and
out of the business and not kept for longer than 12 months.

• Information is stored in files, in computer programs and in databases. This information

is used to make plans, execute operations, and keep controls over materials inputs.
(E.g. about how to produce, technical knowledge).

• Information comes from the analysis of the performance of the operations system.
Examples of information include the work schedules such as critical path analysis
diagrams, architectural designs, customer orders, engineering plans and quality
analysis reports.

• Information- Refers to the knowledge gained from research, investigation, and

instruction, which result in an increase in understanding. Can be internal or
external (E.g. Qantas discontinued services to Ballina Airport and replaced it with
Jetstar since it was no longer seen as a business segment of the transport
market).

• Property – Accountants managing numbers.

• Possessions – Market research conducted by an organisation or employees.

• Storage – Databases and libraries.

• Location – Telecommunication hubs.

• Customers become transformed resources when their choices shape inputs.

Consumer’s orientation provides a starting point to production process. They can be
transformed:

• Physically – Hairdressers or personal trainers.

• Storage – Hotels and hostels.

• Location – Airlines and trains.

• Physiological state – Surgery in a hospital or gym.

• Phycological state – Entertainment (e.g. Music, reading a book, movies).

• Customers:

• Feel value has been added to their lives after seeing films or going to holidays.

Customer relationship management (CRM) refers to the systems that businesses use
to maintain customer contacts.
Transforming resources (Human resources, facilities)

• These are the resources that remain in the business and are applied to the inputs to
change them to add value. (Resources that do the transforming) They are the
resources that assist in the value adding.

Human Resources

• People are the greatest asset to any business.

• This is because the skill, knowledge, capabilities, and labour of people is applied to
materials to convert them into goods and services.

• The human resources function to provide the business with suitably qualified, skilled,
and experienced employees.

• More ‘qualified’, hard-working and disciplined the employees are the easier it is to
determine the success with which transformation (E.g. Qantas baggage handlers,
specialised pilots, cleaners).

Facilities

• These are the buildings, land, equipment, and technology the business used in
operations. They are non-current assets.

Facilities house the operations, storing equipment and the materials. (e.g. Qantas terminal
buildings, aircrafts, computers, maintenance facilities).

Transformation Processes

The transformation processes are those activities that determine how value will be added.
These processes can add value in four ways:

• Physical altering of the physical inputs or the changes that happen to people.

• Production method using a combination of labour, equipment & technology.

• Type of production method: Job, Batch, Flow.

• Transportation of goods or services, e.g. having them delivered to a more convenient

location.

• Protection and safety from the environment; for example, protecting assets.

• Inspection by giving customers a better understanding of the good or service.

Influences – Volume, Variety, Variation, and Visibility

There are four dimensions of operations, referred to as the 4Vs, (Volume, Variety,
Visibility, Variation). The influence that is most important depends on the type of
production.

• Production methods:
 • Job- suits those products and service that require customer requests. It is a highly
flexible system but with low output. E.g. designer homes and cars. Costs per unit
are high.

• Batch- products are made in batches or groups. E.g. bakery. Suits businesses
that have variations.

• Flow- involves a continuous flow of inputs and outputs. It is often associated with
assembly lines. Products have little variation. E.g. Fuel refineries. Costs per unit
are low.
Volume

Volume is the most effective way to ensure low costs is to make a large amount of the same
thing (creating economies of scale to lower unit cost.).

• Volume is the actual number of products or services produced by the operation.

• Mass Market → High volume of products, use of conveyer belts.

• Niche Market → Low volume of products due to customisation, might use

separate work stations.

• Determines right amount to produce by monitoring sales.

• A business using mass production will produce a high volume with a high degree of
process repetition. (e.g. McDonalds producing fast food on a high volume in a uniform
production line).

• A business with customization and low production will allow for lots of stoppages and
adjustments. (e.g. A five-star restaurant will product at a low volume).

• When volume is the largest factor, there will be lots of capital facilities and technology,
but less labour. Assembly lines using convey or belts will be common and organized.

Case Study – Domino’s Pizza

• Standard procedures increase efficiency + tasks are repeated + Specialised equipment
ensures efficiency in the production process. Every task has been carefully analysed to
ensure it is carried out in the most cost-effective way. Highly specialised equipment
such as continuous operation ovens has been developed. The high cost of this
specialised equipment is spread with output so, the greater the volume, the lower the
cost of each unit.

Variety

Variety (also known as Mix Visibility) refers to the number of different models and variations
offered in the products or services – range of goods and services.

• A business producing a high- volume product with low variety will be capital intensive.
(e.g. Low variety= car factory with small variations. High variety= financial advice.).

• Mix Visibility – Refers to the mix of products made, or services delivered through the
information process.
Case Study – Doltone House
• Doltone House caters different events including weddings, business conferences,
birthdays etc. Therefore, variation is required in entertainment, food, services, and
music.

Variation in demand

Variation in demand refers to the amount of a product customer desires.

• Variation can change according to time of day, season, holidays, and time of year. (E.g.
Lodge at Thredbo → winter is peak season and there is high demand whereas summer
is off-peak season and there is a decrease in demand, as demand increases changes
need to be made to the transformation process such as hiring more staff).

• When there are steady levels with no variation, there will be high volume and capital
costs. (E.g. Low variation= bread and milk. High variation = ice cream factory).

• A there is an increase in demand will require increased inputs from suppliers, increase
HR, and increase use of technology.

• All businesses will try to forecast demand so that adjustments could be anticipated.

Case Study – Qantas

• Qantas experiences peak periods during school holidays and special events such as
the London 2012 Olympic Games or the World Cup however, Qantas struggles with
unpredictable events such as the June 2011 Christchurch Earthquakes, Thailand
Floods, or the Japanese Tsunami which all resulted in sharp falls in sales.

Visibility (Customer Contact)

Visibility refers to the nature and amount of customer contact.

• Operations will also be influenced by the degree to which customers can see the
operations in action (Direct or Indirect). (e.g. Subway has a high level of visibility whilst
a supplement company that produces a muscle gaining pill would have very low
visibility and therefore may need to adopt marketing strategies that compensate for the
lack of visibility).

• The greater the visibility, the more customers are willing to wait → More engaged in a
process.

• Direct Contact – Customer feedback through surveys, interviews, warranty claims,

letters, and blogs.

• Indirect Contact – Review of sales data that gives an indication of customer

preferences and market share data through observation of people’s decision-making
processes and customer reviews.

• Service-based businesses will have a high level of visibility. Speed of operations will
also be important as customers usually have a much lower tolerance for waiting. (e.g.
High visibility= restaurant. Low visibility= beef producer).

• Online – Operates more like a factory, less customer contact, business can centralise
its operation in low-cost areas and the operation process is rather standardised VS
 Store – Provides a ‘shopping experience’ with customer service, high visibility
operations are often associated with high costs and high costs in training. (e.g.
Athlete’s foot Vs www.shoes.com).

Case Study – Coles

• Coles have rearranged their staffing rosters to have bakers operating during peak
shopping periods to reinforce the idea of products being made fresh.

Scheduling and Sequencing

Sequencing refers to the ORDER in which operational activities occur whilst Scheduling
refers to the length of TIME and WHEN will the activities occur. (Consider as form of task
analysis).

• Scheduling and sequencing tools are used to identify all steps in the operations
process and organise them into the most efficient order to complete. It will need
information like.

• What activities are used.

• When activities will occur.
• Which activities are related.
• What resources will be used.
• Length of time to complete an activity.

• Task analysis- The breakdown of exactly how the manufacture of a good or activities
to provide a service is to be accomplished. Task analysis are done to investigate how
long it takes for each activity to provide a good or service.

• There are two main tools: Gantt Chart and Critical Path Analysis.

Case Study – Qantas

• Qantas uses Sabre Air Flight Suite Systems (a complex scheduling software) which
automates its flight scheduling which ensures that there is adequate time for cleaning,
catering, and engineering support before arrival and take off.

Gantt charts

Gantt Chart is a type of bar chart that shows both the scheduled and complete work over a
period of time, often used in planning and tracking projects.

Gantt Charts record number of activities as a bar on a chart showing start to finish but will
not show the relationship between each of the tasks.
Advantages:
• Dates can be set for the completion of tasks.
• Schedules simple tasks (e.g. completing an assignment or building a dam).
• It allows the business to compare the actual progress to the original expected progress.
• Visual representation of the job & efficiently communicates the progress to employees.

Disadvantages:
o Complex jobs are more difficult to illustrate on a Gantt Chart.
o Does not show the relationship between each task.
o Technique can only be used for simple jobs/activities.

Critical path analysis

A critical path analysis (CPA) is an appropriate scheduling tool for use in an operation that
involves a series of repeated tasks.

• Appropriate for complex tasks i.e. housing project.

• It is a flow diagram that shows the interrelationship of tasks.
• The critical path time period is the longest path taken to complete the whole project.

Each number indicates how many weeks it takes to complete each stage/task.

Technology, task design and process layout

Technology

Technology refers to the application of science or knowledge that enables people to do new
things or perform established tasks in better ways.

• A key input into the operations process.

Types of technologies:

• Computer-aided design CAD.

• Computer-aided manufacturing CAM.
• Information processing technology IT.
• Automated guided vehicles AGV • Networked information technology such as WAN.
• The internet.
• Robotics refers to the design and construction of machines that automate a task.
• Flexible manufacturing systems FMS.
• Process Technology – Machines and devices used to transform inputs into outputs.

• Product Technology – The innovation or product that the business produces.

Technology can give the business more flexibility as it:

• Allows the business to respond to changes in the market more easily, e.g.
changing volumes and variations.

• Allows the business to apply software modelling programs (e.g. CAD & CAM, the
internet and wireless communication to the process.) which speeds up the
operations process.

• Flexible manufacturing systems- integrated approach to using technology (e.g. Telstra

has a competitive advantage (product differentiation) through the better technology and
network coverage it offers to its customers).

• Communicate and capture data using internet and computers.

• Competitive advantage can be achieved when firms keep updated with the latest
technology.

Advantages Disadvantages

• Cost efficient • Limited customisation

• Increase efficiency • Reduces variety of jobs
• Reduces chances of error • Can be costly to implement
• Less time

Case Study – Coca Cola

• Operations process at Coca-Cola’s canning line at their Northmead factory. Process
technology is used to unload and wash the empty cans, fill, and seal the cans, quality
check and load the cans into boxes before the boxes are stacked. The central
computer, with the aid of programmable logic centres on each of the processing
machines, instructs the operation of the process. People are there to supervise and
maintain the machines. This technology adopted by Coca Cola is a form of robotics.

Task Design

Task design involves classifying job activities that makes it easy for an employee to
successfully perform and complete the task. (How the task is completed).

• Each individual task is analysed and broken down into separate steps and allocated to
machines and employees with the appropriate skills, knowledge, and capabilities. (e.g.
McDonalds designed every task – standardised process which ensures efficiency).

• Allocating the transformed and transforming resources.

• Task design allows ongoing analysis and adjustments in each activity to ensure
continuous improvement in productivity.
Steps involved in the task design process:
Task Design → Job Description → Person specification → Recruitment → Selection

• Skills Audit – Is a formal process used to determine the present level of skills and any
skill shortfalls that need to be made up either through recruitment or training.

Process Layout

• Plant Layout refers to the arrangement of all machinery, equipment, and staff within
the facility. (Either an office or factory).

• Facilities layout planning- The physical layout of the business’s factory or office.

• Make the operations as effective as possible.

• Process layout is where all the machinery is arranged by what they do; that is, the
functions used to make the good or provide the service. The product/service moves
from department to department depending on what transformation is needed. Layout
needs to follow task design. (e.g. In hospitals, areas are dedicated to particular types of
medical care, such as maternity wards and intensive care units).

• Overall layout needs to improve efficiency.

• Product layout – Equipment arranged according to the sequence of tasks performed

in manufacturing a product. Product layouts are used for assembly line manufacturing
of large volumes of goods with few variations. (e.g. Assembly of motor vehicle or
production of televisions).

• Product Production (Mass Production) – Characterised by the manufacturing of high

volume of constant quality goods.

Fixed position layout: Where a product remains in one location due to its weight and
employees and equipment come to the product. (e.g. Large-scale projects such as the
construction of buildings, aircraft).

Monitoring, Control, and Improvement

• Monitoring – Refers to the process of measuring actual performance against planned

performance.

• Monitoring: collecting information about the performance of operations process. These

include:
• Quality.
• Speed.
• Dependability.
• Flexibility.
• Customisation.
• Costs.

• Data needs to be collected about:

• Operation costs.
• Waste from operations.
• Defects.
 • Speed of manufacturing.

• The purpose of monitoring and control is to ensure the operations process runs
efficiently and effectively, producing the goods and services it was designed to do.

• Control- A function that aims at keeping the business’s actual performance as close as
possible to what was planned by making adjustments to the operation process
(Planned performance VS Actual performance and implement controls to improve the
production process).

• Control occurs when Key Performance Indicators (KPIs) are assessed against
predetermined targets and corrective action is taken if required.

• Improvement- Refers to the systematic reduction of inefficiencies and wastages, poor

work processes and the elimination of any bottlenecks.

• It is the function that suggests that adjustments and readjustment may need to be
made to day-to-day activities in the short term and even the entire operations
process in the long term.

• Improving operations is a key strategic goal. There can be improvements in the

following areas:

• Quality- by getting it right the first time and having defect-free products and error-
free services.

• Speed- by increasing speed of production and delivery of services.

• Dependability- by being on time with a reliable operations system, and

employees.

• Flexibility- through having processes that are able to change.

• Cost improvements- by being efficient and productive to offer more value.

Monitoring, Control, and Improvement

• Monitoring – Refers to the process of measuring actual performance against planned
performance.
• Monitoring: collecting information about the performance of operations process. These
include:
• quality
• speed
• dependability
• flexibility
• customisation
• costs
• Data needs to be collected about:
• Operation costs
• Waste from operations
• Defects
• Speed of manufacturing
• The purpose of monitoring and control is to ensure the operations process runs
efficiently and effectively, producing the goods and services it was designed to do.
• Control- A function that aims at keeping the business’s actual performance as close as
possible to what was planned by making adjustments to the operation process
(Planned performance VS Actual performance and implement controls to improve the
production process)

• Control occurs when Key Performance Indicators (KPIs) are assessed against
predetermined targets and corrective action is taken if required

• Improvement- Refers to the systematic reduction of inefficiencies and wastages, poor

work processes and the elimination of any bottlenecks.

• It is the function that suggests that adjustments and readjustment may need to be
made to day-to-day activities in the short term and even the entire operations
process in the long term.

• Improving operations is a key strategic goal. There can be improvements in the

following areas:
• Quality- by getting it right the first time and having defect-free products and error-
free services
• Speed- by increasing speed of production and delivery of services
• Dependability- by being on time with a reliable operations system, and
employees
• Flexibility- through having processes that are able to change
• Cost improvements- by being efficient and productive to offer more value

Outputs

• Outputs are the final products or services that a business offers to customers. They
may be the final services or educated people (education).

• E.g. In banking the outputs are home loans and investments. Outputs in education
are socially responsible and employable young adults.

Customer service

• Customer service refers to how well a business meets and exceeds the expectations
of customers in all aspects of its operations.

• Customer service is a service provided to customers before, during and after a

purchase. Customer service is an intangible output that requires extensive contact
with customers.

• If a customer expresses dissatisfaction with a product on account of being defective,

not meeting quality expectations, finds wait times/lead times too long or returns the
product or makes a warranty claim, the operations processes need review.

• Good customer service will increase consumer satisfaction.

• Customer service features include: handling customer returns, answering questions

and following up customer enquiries.
Three Main Methods of delivering customer service:

• By telephone or internet (e.g. telemarketing, surveys, opinion polls, web chat,

emails).

• In person.

• Via written communication.

Warranties → Written guarantee.

• A warranty is an assurance that a business stands by the quality claims of the

products they make and provide to the market.

• It is a good way to assess the effectiveness of operations processes.

• An assessment of warranty claims can help a business to adjust transformations

processes so that they become more effective.

• Under Australian law, all goods must: have a level of quality, be suitable for the job,
match the promotion and be free from defects.

Businesses must comply with the Fair-Trading Act 1987 (NSW), Competition and
Consumer Act 2010 (Cth).

Operation strategy

Operations strategy include:

• The activities involved in the production of a goods and supply of services.
• Specific decisions about what and how the business produces goods and supplies
services.
• The influences on operations strategies must be considered by operations managers.

Performance objectives

Performance objectives are the key areas of focus for Operations and therefore part of a
business’s competitive strategy. Quality, speed, dependability, flexibility, customisation, and
cost are the main performance objectives.

• QUALITY – Having the highest quality goods and services. Good quality prevents costs
by product recalls and repairs. Dimensions to quality are:

• Performance- does it do what’s claimed.

• Durability- does it last?

• Aesthetics- does it look good?

• Serviceability- is it convenient to repair.

 • If high quality levels can be maintained, will lead to reduced costs and increased
customer satisfaction. → Achieved through low defect rates and efficient waste
management.

Quality of Conformance is the focus on how well the product meets the standard of a
prescribed design with certain specifications.

Case Study:
• Crumpler sources the highest quality inputs and ensures high quality production
processes to maximise the quality and dependability of its bags.

• SPEED – Refers to the time it takes for the production and the operations processes to
respond to changes in market demand. This relates to productivity.

• Productivity is output divided by input and is sometimes measured in output per

unit of time.

• CAD and CAM can increase the speed without compromising quality.

• A risk of increasing the speed of operations is that quality may suffer.

Case Study:
• Both Jetstar and Virgin Blue have strict policies when passenger check-in ceases,
insisting that all passengers on domestic flights are checked in at least 30mins before
departure. This is an attempt to achieve speed and dependability.

• DEPENADBILITY – Refers to how consistent and reliable a business’s products are.

Measured by warranty claims.

• Highly durable product is a dependable product and perishable products can also
be dependable if they are consistent and predictable standard.

• There is also dependability in delivery or supply – how well can the business always fill
orders and distribute to markets.

• Dependability, flexibility, and reliability can be achieved through meeting schedules and
deadlines. This will minimise disruption to the supply chain and help meet customer
expectations.

Case Study:
• Crumpler bags come with the “Til Death Do Us Part warranty”, which means that
dependability is key otherwise the business would be issuing too many replacement
bags to remain profitable.

• FLEXIBILITY – Refers to how quickly operations processes can adjust to changes in

the market. (e.g. Changes in market demand can cause pressure on capacity).

• Being more flexible than competitors and being able to make changes to operations.

• Businesses need to match the increase in demand and avoid a stock-out where
the business runs out of inventory.

• examples of flexibility: new products, flexibility in service and delivery, range of

products.
Case Study:
• Due to seasonal changes (school holidays/special events), Qantas must
operate flexibly → Jetstar does this well through its variable baggage/catering options

• CUSTOMISATION – Refers to the creation of individualised products to meet the

specific needs of customers.

• Mass customisation= a process that allows a standard, mass produced item to be

personally modified to specific customer requirements.

• Custom designers can usually command a premium price. This helps raise customer
satisfaction and increase sale in mass markets.

Case Study:
• Qantas is a member of the Oneworld Alliance → offers services to more than 680
destinations → also customises through Jetstar being advertised as a no-frills
alternative and offering different classes of seating at different price points (economy,
business and first class).

• COST – Refers to the minimisation of expenses so that operations processes are

conducted as cheaply as possible. (lower than competitors).

• A key measure of costs is using efficiency ratios and average costs. (e.g. Aldi
focus on the objective of cost in their operations management).

• An important objective for costs involves the break-even point. Used to determine
the point at which business starts to make a profit.

Operating expense 100

• Operating Expense Ratio = 𝑠𝑎𝑙𝑒𝑠
∗ 1 .

𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑠
• Average Costs = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠
.

• Costs can be categorized as:

• Fixed- do not change as output changes.
• Semi fixed- parts are fixed and parts are variable.
• Direct- are directly related to production.
• Variable- do change as output changes.
• Indirect- sometimes called overheads, (e.g. salaries of administration staff.).

• Reducing costs can be achieved through:

• Controlling labour, raw materials, inventory, and capital asset costs.
• This helps maintain competitive prices and increase future profits.

New product or service design and development.

Product design and development

• New products must be developed for a business to maintain competitive advantage.

• New product design is a lengthy, expensive process and few products make it to final
production from the large number that may be initially developed.
• Many businesses do not have the financial resources, knowledge, or time.

• However, a business may supply their own version of a competitor’s new product and
avoid the expense and risk of product development.

• New products can result from businesses conducting market research → Finding
consumer wants and designing products to meet the needs. Or develop products that
they think consumers will like and buy. (e.g. Apple and UberX).

• The new product development process is as below:

• Concept development- Many ideas are discussed and assessed.

• Cost benefit analysis- Economic analysis to determine if the product is worth

pursing.

• Production design- Engineers design the product, work through technical

difficulties, and create features.

• Product testing- Feedback from testing and market research.

• Product Utility – Defined as the usefulness and value that a product has from a
customer’s point of view.

Case Studies:
APPLE
• Apple’s products arise from changes and innovation in technology that enables
appealing new products to be made using advanced technology.

• Maintains complete control over the design and development of both software and
hardware.

• Innovate continuously as means of establishing their brand (e.g. iPhone 3Gs – iPhone
X) by improving the quality and range of products over time.

Skype
• Offers consumers free, superior quality computer to computer audio communications
call worldwide.

• Occurred through the development of computer software and new information

technology allowing rapid communication through the internet.

Service design and development

• Service differ from goods as they are intangible in nature and cannot be sensed in a
physical manner.

• Immediate consumption, people experience services in which they pay for.

• Requires labour intensive production.

• When developing services must consider:

• Explicit Service – Intangible aspect of the service provided, such as the
application of time, expertise, effort, and skills.
 • Implicit Service – Intangible aspect of the service, including the psychological
wellbeing that comes with the provision of the service.

Supply Chain management – logistics, e-commerce, global sourcing

Supply Chain Management (SCM)

The supply chain management involves integrating and managing flows of supplies
throughout the inputs, transformation process (value adding) and outputs to best meet the
needs of customers.

• It is the linkages between businesses and companies that enable firms to conduct
business (e.g. Supply chain links farmers, miners, manufacturers and service providers
to their suppliers and customers).

• It Involves the coordination of all these businesses so that inputs and outputs are
delivered in the quickest, most dependable, and cost-effective manner.

• Supply chain can be complex, especially for large public companies in terms of
transactions, geographic scope of markets, manufacturing etc.

• Lead time is the time it takes for a supplier to provide its customer with the goods
ordered.

Main strategies for managing a supply chain:

• Sourcing, including global sourcing – Refers to where and how raw materials (inputs)
are purchased and used in operations (Transformation process).

• Logistics – Refers to the distribution of final goods and services and may include
transportation, warehousing, storage and material handling and packaging.

• E-commerce – Refers to business conducting business over the internet as it is low

cost, high volume and therefore efficient.

Logistics

• Logistics involves the transport of physical raw materials, inputs, and the distribution
of finished goods to markets.

• The goal is to achieve an efficient steady flow of material through the supply chain.

• Tasks in logistics include:

• Inventory management – warehousing, storage, distribution centres.
• Purchasing inputs – Transportation.
• Planning and scheduling.
• Materials handling and packaging.

• Transport logistics - The organisation of the physical movement of goods from their
point of origin to their destination. The route, method and speed of transportation are all
factors to consider when delivering materials, inputs or final goods to their user when
they are required.
The role of logisticians is to ensure that operations have the right item at the right
quantity at the right time at the right place.

E-commerce

• Electronic commerce – or e-commerce – is a part of e-business.

• E-commerce -is the use of the internet to both buy and sell goods and services.

• E tailing- businesses that only use a virtual store and sell their goods and services
through a website.

• Electronic data interchange (EDI) - Use of computers, barcodes and scanner

systems to monitor individual stock items and keep accurate records of inventory
levels. EDI is used to have real time conversations with suppliers.

• Dependent on reliable technology and communications including website design and

Electronic Funds Transfer (EFT).

• Inventory management can be improved also with e-commerce – it can be set up so

that an email to a supplier is automatically generated when inventory levels are getting
close to buffer stock levels.

Global outsourcing

• Outsourcing is the process of having suppliers provide goods and services that were
previously produced internally. (Opposite of vertical integration where business controls
all stages of its operation).

• Global sourcing is where a business seeks to find the most cost-efficient location for
manufacturing a product.

• There may be an additional incentive of low rates of tax to encourage global businesses.

• Advantages
• More efficient methods of production (e.g. Many Australian companies offshored
manufacturing activities to China including clothing and homeware production).

• Better access to IT, technology, and equipment.

• lower labour costs (e.g. Bangladesh, India, China, Mexico).

• Increased speed and quality of outputs.

• E.g. Banks such as Westpac and airlines such as Qantas have outsourced their
telephone call centres and maintenance services.

• Disadvantages
• Breakdowns in the business outsourced to will affect the entire operations.

• Loss of control over quality, reliability and even costs therefore less customer
satisfaction.
 • Loss of local employment.

• Difficulties may be involved in re-negotiating outsourcing contracts.

• Slower lead times and response to changes in the market.

• Relationship breakdown with stakeholders e.g. redundant employee.

Businesses may:
• Buy inputs- importing its inputs from an overseas supplier that specialises in providing
that inputs.

• Advantages: There are lower costs by selecting cheapest supplier, no need to

invest in a factory.

• Disadvantages: less control over quality, design and cannot protect technological
innovations

• Make inputs (vertically integrate)- taking over a business and producing its own inputs.

• Advantages: lower costs through economies of scale, able to protect innovations.

Outsourcing – Advantages and Disadvantages

Forms of outsourcing:

• Captive or in-house (e.g. BHP Billiton onshore).

• Non-captive (Outsourced to third parties through the market) external vendors (e.g.
British Airways (UK) using WNS Global Services (India) or General Motors using AT&T
America).
 Advantages Disadvantages

Simplification by reducing the number of Payback periods and costs.

activities performed within the business.

Efficiency and cost savings with access to Communication and language –

cheaper labour costs, regulatory Cultural/language differences can result in
differences, and skilled labour. a misalignment between the business and
outsource vendor. There may also be
misunderstanding about agreed service
levels and what KPI are acceptable.

Increased Accountability through the use of Loss of control of standards and

service level agreements. information security – Recent issues have
occurred where a Chinese toys
manufacturer for Mattel Brand did not
adhere to design specifications outlined in
the Service Level Agreement (SLA).

Access to resources/skills lacking within the Hierarchies.

business.

Capacity to focus on core business – allows Organisational change and redesign –

for innovation, sustainable vision etc. Outsourcing may be accompanied by a
high level of business change and
organisational redesign.

Strategic Benefits:
Loss of corporate memory and
• Outsourcing to get around trade vulnerability – Where key knowledge of
barriers. processes and solutions is lost due to over-
• Use of a vendor that outsources from reliance on outsourcing provider.
others within the same industry which
brings expertise.
• Trading in different time zones gets
the work done at a faster rate.

External business managing the task. Information Technology – cost and time
associated with adapting to IT. This can be
a significant financial disadvantage to the
business.

Technology

• Technology is the equipment and knowledge that are available to help businesses
perform certain functions or make products.

• The broad aims of implementing technology are to:

• To remove geographical barriers.
• To find cost and time savings.
• Perform established tasks in new and better ways.

Factors such as the ones below need to take into consideration:

• The speed of change taking place
• The finances available for a change

Types of technology:

• Leading edge – Refers to most innovative/advanced technology at any point in time.

(e.g. Nanotechnology) It can help businesses to:

• Create more products quickly and to higher standards.

• Reduce waste.
• Operate more effectively.

• Established – Refers to any technological application where the cost, performance,

and servicing is readily available. (e.g. CAD, CAM, POS machine).

Advantages Disadvantages

The technology has operated successfully It is not always compatible with systems of
for a number of years. It is widely accepted other business
and used.

Transactions are paperless, and data is May not be up to date which can lower the
stored electronically. business’s efficiency

Buying, selling, ordering is completed

simultaneously which saves time.

Inventory management

Inventory refers to the total amount of raw materials, work-in-progress and finished goods a
business holds at any particular point in time. Stock is the product either in partial or full
transformation.

Inventory Management refers to the systems and processes that identify the quantity of
goods and materials to be ordered and the timing of their delivery.

Inventory management aims:

• To have enough stock available as it is needed but not too much.
• To identify stock that is not selling well.

• Businesses monitor and control inventory levels so that they:

• Do not accumulate dead stock.
• Identify and sell slow-moving stock.

• Management takes into account such factors as:

• Cartage and freight costs.
• Perishability or life span of the product.
• Seasonal patterns in demand.

• An operations manager will consider the following questions:

• At what stage of the life cycle is the business at?
• At what stage is the product life cycle at?
 • What is the trend in the size of the market – growing or shrinking?

Holding stock

• Holding stock - where a business holds a certain level of stock as a reserve to cover
interruptions to supply or an unexpected increase in demand. Advantages are:

• Stock is ready to use.

• No need to rely on suppliers.
• Opportunity for discounts.
• Reduces lead times between order and delivery.
• Stocks are an asset which adds value to the business.
• Allows the business to buy in bulk to achieve economies of scale.

Disadvantages are:

• There is also the risk that inventory may become obsolescent. (Out of date).
• Cost of holding stock (storage, warehousing, spoilage, labour).
• Invested capital, labour and energy can be used elsewhere.

LIFO (Last-in-first-out)

• Method of pricing inventory assumes that the last goods purchased are also the first
goods sold. Therefore, the cost of each unit sold is the last cost recorded.

• This method can be used for goods that have no use-by date such as machinery.

• Advantages: On the revenue statement, the newer, more expensive stock is sold,
making a higher cost of goods sold and lower profit. Thus, less tax.

FIFO (First-in-first-out)

• Method of pricing inventory assumes that the first good purchased are also the first
goods sold and therefore the cost of each unit sold is first recorded.

• This method is used for perishable items and oldest stock is moved first.

• Advantages: Cost of goods sold will be lower and income higher. Thus, stock costs
may be understated and profits overstated.

JIT (Just-in-time)

• Method of inventory management approach which ensures that the exact amount of
material inputs will arrive only as they are needed in the operations process.

• The aim is to hold as minimal stock as possible and only bring in stock from suppliers
as required.

• The advantages are:

• Reduces costs of storage.
• Increases the liquidity of working capital.
• Reduces the chance of stock becoming obsolete.
• Reduces the chance of perishable stock spoiling.
Case Study:
Ford
• The Ford Motor company pioneered the JIT inventory management system, although
Toyota is now recognised as the global leader in JIT inventory management.

Quality management

Quality management refers to those processes that a business undertakes to ensure

consistency, reliability, safety, and fitness of purpose.

• There are 3 approaches to quality management: quality control, quality assurance,

quality improvement.

Case Study:
Qantas
• Qantas has always been marketed as a high quality, perfect safety record, full service
airline and commanded premium fares. On the other hand, Jetstar has traded quality
for price and been marketed as a no frills low cost airline. During 2011 Qantas'
marketing plan has taken a battering with mechanical breakdowns and the sudden
shutdown of all services has had serious consequences on customer satisfaction and
perception.

Quality control

• Quality control involves the use of inspections at various point in the production
process to check for problems and defects.

• This takes place at 3 stages:

• Feed-forward- involves the use of careful planning, before production begins, in
order to prevent a problem occurring. (e.g. a restaurant checking the quality of
ingredients before starting to make dishes).

• Concurrent- used during work in progress; that is, during the manufacturing
process. (e.g. soft drink makers check the bottles and the level of liquid during
production.).

• feedback controls- checking the final product – after production or delivery of the
service is complete. (e.g. after cars have been made, they are checked for
defects.).

• Control involves establishing evaluation procedures and setting standards to measure

performance.

• Business may use benchmarking (the average industry performance).

Codes or practice (the minimum level of service that registered members of a profession
are expected to provide) are used by firms.

Quality assurance (QA)

Quality assurance involves the use of a system to set standards are achieved in
production.
• Quality circles are regular meetings of a group of employees from different sections of
the business to discuss issues arising in the workplace. Quality circles combined with
work teams are effective strategies to maintain quality issues.

Comparison of quality control and quality assurance

Quality control Quality assurance

After the event, one person reviews the No one individual is responsible for quality.
product.

A certain percentage of defects is allowed. No defects are allowed.

Assembly lines flow continuously unless Production process can be stopped.

there are repairs.

• AS/NZS ISO 9001 or 9002 and 9003 are examples of certificates. They are voluntary,
but businesses comply with these requirements to enhance domestic and international
competitiveness.

• As a ‘Quality Endorsed Company’ the certificate provides assurance that a quality

management system is used.

• 9003 – Covers service-based industries.

Case Study
Yakult
• Yakult’s quality management system (QMS) complies with the international standard
ISO 90001:2000. This means that Yakult meets the highest international food
manufacturing standards and all company procedures are documented and regularly
audited.

Quality improvement

The total quality management (TQM) approach to quality relies on continuous

improvement in all functional areas, not just operations. (Kaizen)

• The greatest success would be getting the process right the first time; that is, zero
defects as a performance objective.

• The concept of quality circles is relevant to TQM. The group tries to clearly identify any
problem areas and come up with possible solutions to those problems.

• Focus is on continuous small improvements in products/processes is more effective

than technological breakthrough.

• TQM reviews actions of competitions through benchmarking “world’s best practice” –

this refers to comparing the business’s performance that of the highest standards
globally.

• Improvements in quality can be measured using key performance indicators (KPIs).

Continuous Improvement is an ongoing commitment to improving a business’s goods and
services.

Overcoming resistance to change

Resistance to change arise from two principal sources:

• Financial.
• Psychological/emotional.

• Kurt Lewin developed the Force Field Analysis. This identified that businesses had
driving and restraining forces.
• Driving forces push people towards change.
• Restraining forces are those that hold the business back and resist change.

• Resisting forces are linked to costs and inertia. Costs may be associated with:

• Purchasing new equipment- Technology results in long term reductions in costs.

(e.g. Qantas is planning to spend $22 billion between 2011-18 on new aircraft
Also, has spent $300 million since 2006 on upgrading its engineering facilities).

• Redundancy payments for replaced employees - In Australia redundancy are

legally required if:
• There is an Award of Enterprise Agreement covering redundancy pay.
• The business is not a small business having more than 15 employees.
• The employee has worked full-time and has worked continuously for 12
months or more.

• Retraining costs to operate and manage new equipment and technology-

Due to changes in the business job roles can change resulting in the employees
needing new skills Without adequate training, the benefits of new equipment,
technology or new processes will not be fully realized.

• Changing the layout of the plant, factory, or office- bottlenecks need to be

avoided so the equipment needs to be placed appropriately.

• Inertia- Inertia refers to the psychological resistance to change. Change can

create risk and uncertainty; employees may resist change, higher workloads, loss
of familiar work environment. There may be fear about the financial future. This
will lower productivity.

The driving forces need to be understood:

• External driving forces include technology, demographics, attitudes, and the law.

• Retraining programs, work teams and a flatter management structure can reduce
resistance to change.

Change Management Strategies

Aspects of managing change include:

1. Identify the need for change (consider internal and external forces).
2. Lower resistance to change through communicating with employees and getting
widespread support for the change. Set achievable goals.

3. Create a culture of change. There may be a need to use change agents (internal or
external professionals).

4. If necessary, apply change models to facilitate the transition.

• Kurt Lewin’s unfreeze/refreeze model

Unfreeze – This process breaks down the forces supporting the existing system and
prepares the business for change.

Change – Implement new procedures whilst actively communicating with employees.

Refreezing – This requires managers to offer positive reinforcements to make sure the
change lasts.

• John Kotter’ eight step models

Global factors

Global factors that can influence business operations are the opportunity to source inputs
from cheaper sources overseas, to expand and achieve economies of scale, and develop
new products for an international market.

• Sourcing inputs - there is the opportunity to acquire less expensive but similar quality
inputs from other countries or a low-cost region (LCR) but there are other risks.

• A business may use a global web strategy to reduce operations costs. This is
sourcing inputs from cheaper countries and obtaining finance from countries with
lower interest.

• Factors or influences in global outsourcing are:

• Considerable time must be invested searching for and researching suppliers.
• Lack of experience in international transactions.
• Increased lead times.

• Economies of scale - The larger the size of the business operations the lower the
costs of producing each product until the business becomes too big. Costs as spread
over more units.

• Scanning and learning - scanning the global environment to identify and learn the
critical global trends that may impact on the business. For example:

• Changing consumer demands.

• New products and services developed in other countries.
• New manufacturing processes available.
• Technological innovations.

• Research and development - the creation of new products and the improvement of
existing ones.

• Advantages are that R&D can:

 • Extend the product cycle.
• Open up new markets internationally.
• Give the business a reputation.

• Problems include:
• It can consume valuable financial resources.
• It can be wasteful.
• There may be commercial conflict.

• STAGES of R&D are:

• IDEA- The first stage of this strategy is to discuss as many potential new
products as possible.

• Testing - The process of determining which product from all of the

suggestions should be pursued.

• Research- Market research is done to see consumer interests.

• Costing- Costs of the innovation are reviewed. Profitability is reviewed.

• Build a prototype- A prototype is made and evaluated.

• Launch- The product is launched and released.

• Review sales- The sales are reviewed.