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Operations strategy
Operations strategy includes all activities
involved in the production of a good Quality Flexibility
or the provision of a service. It also
includes all the influences on operations
strategies. Specific decisions will have
to be made about what and how the
business produces. Operations strategies
will support the businesss strategy to Competitive
Speed Cost
achieve its strategic objectives and will advantage
have to be coordinated with marketing
strategies, finance strategies and human
resources strategy. An effective operations
strategy will give a business a competitive
advantage in the marketplace.
Dependability Customisation
BITE
BUSINESS
An example of a custom-designed
service is iTunes Genius, which is a
feature of iTunes from Apple Inc. This
service not only creates a music playlist
based on a users own music library, it
also automatically finds music from the
iTunes online store that it thinks the user
will probably like based on the existing
playlists, previous pattern of purchases
and the purchases of similar shoppers.
The operations function will be its costs forecasts to actual costs. In this way
own cost centre in a business and, within cost variations can be easily identified.
this, costs will be allocated to different Investigation will reveal the reasons why
parts of the operations process such as some costs have exceeded expectations. In
raw materials, maintenance costs, power, order to keep total operational costs within
inventory and waste. Inventory costs may the objectives, cost savings may need to be
be calculated using a variety of methods found elsewhere in the business.
such as LIFO and FIFO, however total Costs can be categorised into five areas:
inventory costs will include transport s fixed do not change as output changes
(cartage) and warehousing. An operations and therefore cannot be lowered, such
manager will use budgets and compare as the cost of the factory building or the
lease for office space
Table 4.1 Performance objectives of different businesses s semi-fixed parts are fixed and parts
are variable; for example, power bills
Objective Business example may be split into standard charges and
Quality An airline that has all its aircraft arrive and depart on excess power charges
schedule, friendly, helpful staff, entertainment and s variable do change as output changes;
tasty meals for example, raw materials
Speed A car manufacturer that reduces the lead time s direct are directly related to
between when a customer orders a new vehicle and production or supply of service (cost of
when it is delivered goods sold)
s indirect sometimes called overheads
Dependability A retailer who always has items in stock and keeps the
same opening and closing times
and indirectly related to output such as
salaries of administration staff.
Flexibility A construction company that can increase the number An important objective for costs involves
of houses it can build in response to an increase in
the break-even point. Break-even analysis
demand during an economic upswing
is to determine the point at which a
Customisation A restaurant that can change menus and prepare business starts to make a profit. A business
meals to suit individual customers that can reduce its costs can lower the
Cost A soft drink bottler that can produce bottles of soft break-even point so that it can start making
drink at the lowest cost per unit a profit sooner in the business life cycle
without having to change prices.
Manufacturer
Customer
Distributor/
Supplier
warehousing
Figure 4.5 Management issues in supply chain management will cover day-to-day operations
through to the long-term strategic goals of the business.
Advantages Disadvantages
The business to which the service is outsourced s Breakdowns in the business outsourced to
to has: will affect the entire operations
s Access to a specialist knowledge and expertise s Loss of control over quality, reliability and
because the function is their core business even costs
s More efficient methods s Loss of control may be exaggerated with the
s Specialist knowledge of relevant laws and business being located in another country
regulations (cultural incompatibility)
s Better access to IT, technology and the most s Possibility that a competitor outsources to
suitable equipment the same business, which may eliminate a
competitive advantage and even expose the
s Experience at solving complex problems
business to rivals discovering commercial secrets
s Lower costs as the contracted business can
s Slower lead times and response to changes
achieve better economies of scale, which can
in the market
be passed on
s Poorer relationship with stakeholders such as
s Increased speed and quality of outputs
the community and redundant employees
Holding stock
Holding stock is also known as just-in-
case (JIC) or buffer stock. This is where a
business holds a certain level of stock as
a reserve to cover interruptions to supply
or an unexpected increase in demand. The
advantage for cash flow is that stock is
ordered at regular intervals, which reduces
the pressure on the business to have a
higher amount of cash readily available.
Purchases can be planned so that working
capital is managed more efficiently. There
is usually a certain pattern to sales over
the year with predictable changes. For
example, more stock will be ordered prior
to Christmas for a toy store and less during
January and February. Holding stock also
suits suppliers who need a longer lead
time. This is the time it takes between
when a supplier is notified and stock is
Figure 4.7 Storage of inventory inside a warehouse. actually delivered.
First in, first out (FIFO) assumes that the s reduces costs of storage and securing
first stock that has been purchased is the stock
oldest and will be sold first. FIFO is more s increases the liquidity of working capital
appropriate for perishable items such as as less cash is tied up as stock
food and drink. Imagine a supermarket s reduces the chance of stock becoming
where the oldest stock that has to be obsolete and unsellable
sold before it reaches its use-by date will s reduces the chance of perishable stock
be placed at the front of the shelf and spoiling (e.g. fresh fruit)
new stock will be placed behind, ready s less warehouse space allows more room
to replace it as it sells. Using FIFO, the for other activities
business assumes that the first goods s less time is spent on checking products
sold are the oldest and the most recently as without extra work in progress stock,
acquired items remain in inventory on the production process must get it right
the balance sheet. The impact of this cost the first time.
accounting method is that closing stock However, as supply is outsourced there
on the balance sheet has a higher value, is a further disadvantage that if a supplier
increasing the value of current assets. experiences a problem and stock is not
Cost of goods sold will be lower and delivered on time, the entire production
income higher than if the LIFO method schedule is disrupted.
was used. Overall, JIT gives a business more
flexibility to respond to changing market
and other external influences that can
JIT affect sales. However, a business must have
The aim of just-in-time (JIT) inventory reliable and dependable suppliers who can
management is to hold as minimal stock respond to the businesss inventory needs
as possible and only bring in stock from quickly.
suppliers as required. Only the exact
number is delivered at a specific time.
This not only reduces the impact on Quality management
working capital with liquidity locked up
Quality has a number of different ideas.
as inventory, but should improve the
For a consumer it can mean that the
efficiency of the whole operations process.
product provided by a business:
This system requires suppliers to have
excellent inventory management and s lasts a long time; it is durable
delivery systems to send out stock as soon s is free from any defects
as it is ordered. Sophisticated scheduling s does everything that advertising claims.
software to plan production is used to order For a customer-focused business,
the correct stock. Information is exchanged quality also means that each and every
with suppliers and customers through EDI good made or provided by the business
(electronic data interchange) to help is consistent in its quality. For service-
ensure all information is correct. based businesses quality will be measured
in terms of satisfactory customer service.
Global recall
In 2010 Toyota recalled over 400 000 units of its 2010 model Prius and Lexus hybrids
globally. The recall was prompted by customer complaints about slipping brakes while being
driven on bumpy roads. Even though there were only 111 cases reported globally, Toyota
was very prompt to alert customers. Toyota calculated that repairs to fix the problem
would take around 40 minutes per car, which required a software upgrade to the cars
on-board computer brake management system. Only 2378 Prius cars in Australia were
potentially affected and repairs were at no cost to the owners. Through this approach
Toyota has proven that it is a company committed to quality, which is considered a lifeline
of the business. Unfortunately, a much more serious problem occurred in late 2009 and
2010 in the USA where a number of motor vehicle accidents and deaths could have been
caused by a faulty accelerator pedal sticking causing sudden unintended acceleration. Nearly
4 million Toyotas of various models had to be recalled. This problem, thankfully, did not
occur in Australia. News clips and stories related to this issue can be found on YouTube.
Figure 4.12 The driving forces for change must outweigh the resisting forces.
Bigger can mean cheaper but only up to the business. These trends refer to both
a certain point. Diseconomies of scale will the macroeconomic environment and
occur, causing costs to rise. Inefficiencies those specific to the industry the business
are caused by overly complex operations, operates in. By continuously monitoring
loss of direction and control by operations the global environment the business has
managers. In very large, geographically an informed basis for making strategic
dispersed organisations even with instant business planning decisions with respect
1 Used by other businesses in the next stage of manufacturing as an input for further processing.
2 The development of programmable devices built to complete repetitive tasks.
3 Obtains goods in bulk from lots of suppliers and then make these goods available in smaller
quantities, most often to retailers.
Multiple-choice questions
1 Which inventory control system would minimise warehousing costs?
(A) Just-in-time
(B) Just-for-now
(C) Bulk purchasing
(D) Longest lead time
2 Which of the following best defines operations strategy?
(A) How the business will employ its production capabilities to reach its strategic operations
objectives
(B) How a business makes goods and supplies services
(C) How a business uses market research to produce goods that customers desire
(D) The amount of capital or labour used to produce
3 Which of the following is a disadvantage of upgrading technology?
(A) Better quality and employees with new skills
(B) Lower operations costs in the short term
(C) Disruption to the operations process
(D) More effective communication
4 What is an operational advantage of a business vertically integrating?
(A) The business has better quality control over its inputs
(B) The business can earn revenue from the business it has purchased
(C) The business can distribute its products to more countries
(D) The business will have a global supply chain
Short-answer questions
1 Describe the nature of the performance objectives of operations strategy.
2 Explain how a business can gain a competitive advantage with operations strategy.
3 Explain the difference between quality control, quality assurance and quality improvement.
4 Analyse the impacts of the global environment on operations strategies.
5 Assess the use of technology to improve the operations of service-based businesses.
Extended-response question
Outline the methods of quality management and explain its role in operations management.