There are many elements to effective operations management, from initial planning and process design, through to integration with other organisational departments. This chapter outlines the fundamentals of operations management, examines the details of planning and control and explores aspects of quality management.
Operations management is essentially the organisation of resources, such as raw material, people, or equipment to either manufacture or deliver a product or service. Whilst there are similar responsibilities and activities undertaken by operations managers irrespective of the type of organisation involved, every company is likely to have adapted their processes to meet the specific needs of their own products, services and customer base. There are four distinct advantages associated with effective operations management:
- A reduction in costs and overheads due to increased efficiency.
- An increase in turnover (or revenue) due to increased customer satisfaction and improved product quality.
- Reduced capital expenditure or investment due to improved efficiency.
- Improved innovation through incremental process improvements. Subsequent innovation can improve business growth and profitability.
(Johnston, Clark & Shulver, 2012)
Operations management can be considered a function of the organisation, concerned with the production of products and services for delivering to customers or end users. It can also be seen as an activity of the organisation, concerned with the physical transformation of inputs into outputs.
Operations are fundamentally concerned with the transformation of inputs (such as raw materials, equipment, staff and information) to outputs. Tangible resources are considered to be transforming resources, and intangible resources are considered to be transformed resources. It is normally the case that organisations will use a combination of resources and they will undergo different transformation processes depending upon what it is that an organisation produces. However, what is common is that organisations control unique transformation process to generate inherently valuable outputs which help a business to be distinctive within a competitive marketplace. The outputs can be tangible (such as mining) or intangible (such as counselling services), but generally businesses deliver a mix of the two (e.g. selling goods requires a level of customer service and engagement).
Organisations also undertake a series of internal transformation processes in the overall delivery of their products and services as they progress through the business. This introduces the concept of both internal and external customers - for example the production line and the inventory department will have an internal customer/supplier relationship. Although it is tempting for organisations to assume that internal customers and suppliers are less important, such attitudes can undermine output quality.
Within process design there are essentially four core characteristics:
- Volume. The physical number of units or items produced. This could be high-volume (e.g. fast-food restaurant) or low-volume (e.g. an artist working to individual commissions).
- Variety. The flexibility in the overall process. Variety can increase costs, but can also increase operational options.
- Variation. The changes in demand patterns over a defined period. If an organisation understands these variations this can refine forecasting and planning efficiency.
- Visibility. The extent to which end users or customers have visibility of the overall delivery process.
The combination of these characteristics will determine how to design the most efficient organisational processes. Ultimately, operations managers will make trade-off decisions around these factors (e.g. being able to produce more items, but sustaining a narrower product range).
Unless operations managers can quantify (measure) what is happening within their departments, then it is difficult to identify areas for improvement. Performance measures can be used to design more efficient processes considering factors such as speed, quality, dependability, flexibility and cost. Trade-off decisions between these areas will also be required and these should be shaped by overall corporate strategy, mission, vision and values.
There are a range of processes which an organisation might wish to adopt, which will be shaped by the core characteristics of the product/service (volume, variety, variation and visibility) and the subsequent performance measures adopted. These can be:
- One-off or project processes. Highly specialised and involving considerable resources and cost, generally low-volume and high variety.
- Job processes. Short production runs with a high degree of individual variation.
- Batch processes. Less variation and longer production runs.
- Mass processes. Large volumes, little or no variety.
- Continuous (or flow) processes. Pure production such as mining or oil refining.
Having determined an appropriate design for a process, operations managers must then give consideration to planning and controlling elements such as inventory, any capacity constraints and volume variability as well as opportunities to increase efficiency. Operations managers also need to consider how they interact with other parts of the organisation, such as the onward supply chain.
Inventory management is the management of stock in all of its various forms and is more often associated with manufacturing organisations. Inventory has both advantages and disadvantages for an operations manager. It provides a cushion against uncertainty, providing the ability to cover unexpected order variations or the stock needed to rectify mistakes (often called ‘safety stocks’). However, inventory takes up valuable space and introduces cost implications such as warehousing capabilities and administration/control effort. Also the longer stock is held the more likely it is to become outdated or obsolete or just damaged/unusable due to the storage methods used.
Inventory planning and control compensates for the differences in timing between the supply of products and services and the demand for them (Slack, Brandon-Jones, Johnston & Betts, 2012). Organisations must acquire stock in advance of selling it, and even with the most accurate forecasting and planning techniques there is still usually a delay between acquiring stock, transforming it into outputs and then selling them on. Fluctuations in demand from customers and the marketplace can complicate this process. The challenge is to therefore hold the optimum level of inventory i.e. minimum stocks giving the maximum business benefit.
There are five types of inventory:
- Buffer or safety inventory. This protects against unanticipated fluctuations in demand in order to protect an organisation’s ability to continually satisfy customer demands.
- Cycle inventory. This is used when a single production line manufactures different products but can only do so one at a time. To support batch production of each distinct product, the necessary raw materials are components are held ready to support the move to the new cycle.
- Decoupling inventory. When a company runs separate but simultaneous manufacturing processes to produce component parts for finished goods, decoupling inventory is used. This allows each element of the production line to call for the raw materials or parts it needs without having to wait for other elements of the process to be completed.
- Anticipation inventory. This includes manufacturing products in advance to prepare for periods of peak demand, particularly if it would be impossible to produce the stock required in a shorter time-frame. This also reduces costs and increases efficiency due to higher/ more continuous production runs.
- Pipeline inventory. This is used when inventory must be called-off in stages because of insufficient storage space at the point of sale. It is particularly popular in retail environments where it is better for retail stores to have their physical locations given over to selling space.
To aid inventory managers in developing optimum inventory holding, a number of tools and techniques can be used. Mathematical/statistical approaches such as Economic Order Quantity (EOQ) or Economic Batch Quantity (EBQ) can be included within planning and forecasting models to simplify inventory management processes and increase visibility/traceability. However such models have the greatest utility when demand is relatively consistent as both EOQ and EBQ make assumptions about minimum safety stock levels.
As technology has improved dramatically, there has been a proliferation of management information software and hardware which can be used to help plan inventory and operations. Such systems monitor the overall needs of different organisational departments to ensure the availability of inventory as and when required, checking this against availability of finished goods for sale. The most sophisticated systems are also able to identify bottlenecks in supply and demand, supporting the adjustment of production schedules and inventory reduction. However, whilst such information systems are likely to be of considerable help in planning and process management, it is always important to interpret their output in relation to external circumstances and incorporate the tacit knowledge (i.e. skills and experience) of relevant staff.
Organisations function as part of a wider or longer supply chain. It is therefore important for operations managers to work closely with supply chain managers as their activities will shape inventory requirements. The supply chain is the end to end management and oversight of a product from the procurement of raw materials to the end delivery to the customer. Supply chains can be very straightforward or exceptionally complex, depending upon the nature of the product and the links of the chain itself.
Every organisation within the overall supply chain will have their own operational processes and procedures, and it is therefore helpful if operations managers understand the impact of their decision-making on both upstream and downstream operations. Although every organisation operates independently, supply chains should be designed to operate fluidly and coherently so that the necessary raw materials or products are available when required in the right location and the right quantity so that they can be used by the next organisation in the chain.
Organisations should, wherever possible, ensure that they are delivering their end product in such a way that it increases the overall efficiency of the supply chain as a whole. Increasingly, organisations are beginning to work together to increase their overall efficiency, for example considering how changing packaging can reduce the amount of waste and also increase the amount of products which can be shipped at the same time. Technology is also playing an increasing role as organisations form supply chain relationships, sharing information to manage demand.
In an ideal environment the supply chain should be designed to deliver its products precisely at the time they are required for the next stage in the supply chain process. This might include dropping off raw materials immediately before they are needed for the next batch production, or replenishing retail stock just before a store opens. This Just-In-Time (JIT) strategy seeks to increase efficiency and reduce waste, making the overall process of operations ‘Lean’.
‘Lean’ refers to the practice of systematically stripping out waste from any process to increase efficiency. There are trade-offs with such processes, as if the process becomes too lean it can be exposed to risk of failure.
Organisations must consider the quality of their products and services, taking into account the costs and associated resource issues involved. This should also include understanding the position of any competitors as quality can form a critical element of competitive advantage and differentiation. It is therefore important to have processes and procedures in place that monitor and measure quality outputs across the internal and external supply chain. Both long-term and short-term issues should be considered, as accepting poorer quality standards in the short-term to minimise production and inspection costs could increase downstream rectification efforts/costs and ultimately reduce end sales if consumers are not satisfied.
Ideally, organisations should strive to ensure that they perpetually monitor and improve the quality of their products, reflecting both customer value expectations and changes in the wider business environment. Deming (1981) produced a Plan-Do-Check-Act cycle to foster a culture of continuous improvement. In doing so, incremental quality improvements continually refine operations management approaches ensuring that they reflect current (and not historical or perceived) output requirements.
This chapter has provided an overview of operations management, explaining the techniques used to plan, monitor, and control operations. The overarching theme of effective operations management is the ability to accurately identify the specific needs of the organisation and make appropriate trade-off decisions in terms of process design and inventory management. In doing so, these solutions must be effectively integrated with other elements of the business and the external supply chain to maximise operational efficiency.
Deming, W. E. (1981). Improvement of quality and productivity through action by management. National Productivity Review, 1(1), pp. 12-22.
Johnston, R., Clark, G., Shulver, M. (2012). Service Operations Management: Improving Service Delivery, 4th Edition, London: Pearson.
Slack, N., Brandon-Jones, A., Johnston, R., Betts, A. (2012). Operations and process management, principles and practice for strategic impact, 3rd Edition, London: FT Prentice Hall.
Brown, S., Bessant, J., Lamming, R., Jones, P. (2012). Strategic Operations Management, 3rd Edition, London: Routledge.
Chaffey, D. (2009). E-Business and E-Commerce Management: Strategy, Implementation and Practice, 4th Edition, London: FT Prentice Hall.
Fullerton, R. R., Kennedy, F. A., Widener, S. K. (2014). Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7), pp. 414-428.
Inman, R. A. Sale, R. S., Green Jr, K. W., Whitten, D. (2011). Agile manufacturing: relation to JIT, operational performance and firm performance. Journal of Operations Management, 29(4), pp. 343-355.
Microsoft. (2005) RFID and the Supply Chain [Online], Available: http://msdn.microsoft.com/en-us/library/ms954628.aspx [11 October].
Parker, D.W. (2012). Service operations management: The total experience. Sydney: Edward Elgar Publishing.
Cite This Module
To export a reference to this article please select a referencing style below: