Seminar 1: Introduction to Operations, Operations Strategy

Soh Yu Hong Jonathan

What is operations management?

OM deals with the design, operation and improvement of the production system that create the
firms primary products or services.
Operations include any process that accepts inputs and use resources to transform these inputs
into valuable outputs- strategic (next 20 years), tactical (next 1 or 2 years) and operational (now)
decisions.
All physical products used and all services used was created/impacted by operations.

Importance of OM

Bottom line and profitability of every business are affected by how well it manages its operations,
be it a manufacturing or service organisation.
Improving and streamlining and business processes and operations can have a significant impact
to the shareholder value.
Good operations can contribute to the top line (corporate sales/revenue).

Challenges facing OM

Product proliferation (variety: customers may not always see the difference)
Decreasing profit margins
Short product life cycles (new products produced quickly)
Long supply chains- coordination issues
Continuous new product launches to meet market place requirements
Being on top of innovation curve

OM in the organisation

Marketing: generates sales revenue from product and service outputs

Finance: acquires financial resources and capital for inputs
Operations: translates materials and service into outputs
Support functions: accounting, info systems, engineering, HR.

Operations strategy

Involves configuring and developing business processes that will enable the firm to produce and
deliver the products specified by the business strategy
Internal processes and interfaces between inputs and output markets (means by which
operations implements corporate strategy & helps build a customer driven firm)

4 perspectives on operations strategy

Top down: what business wants operations to do

Mkt reqt: what the market position requires operations to do
Bottom up: what day-to-day experiences suggests operations should do
Operation resource: what operation resources can do

Competitive priorities

Cost
o Low cost: process must be designed and operated to make them efficient (eg Costco)
Quality
o Top quality: may require a high level of customer contact and may require superior
product features (eg Ferrari)
o Consistent quality: processes designed and monitored to reduce errors and prevent
defects (eg Mcdonalds)
Time

Seminar 1: Introduction to Operations, Operations Strategy

Soh Yu Hong Jonathan

Delivery speed: design processes to reduce lead time (eg Dell)

On-time delivery: planning processes to increase percent of customer orders shipped
when promised (eg United Parcel Service)
o Development speed: cross-functional integration and involvement of critical external
suppliers (eg Li & Fung)
Flexibility
o Customisation: low volume, close customer contact and easily configured (eg Ritz
Carlton)
o Variety: capable of larger volumes than processes supporting customization (eg
Amazon)
o Flexibility: processes must be designed for excess capacity (eg UPS)
o
o

Benefits of excelling at four objectives

Cost: min cost, max value (internal). Min price, highest value (external)
Quality: error free processes (internal). Error-free products and services (external)
Speed: Fast throughput (movement of inputs and outputs through a production process)
(internal). Quick delivery (external)
Flexibility: ability to change (internal). Frequent new products, maximum choice (external)

Efficient frontier view of trade-offs

X axis: cost efficiency. Y axis: variety

Improvements can be made through focus on increasing variety, increasing cost efficiency or
overcoming trade-offs between variety and cost efficiency
All performance objectives, to some extent, trade-off against each other

Order winners and qualifiers

Order winner: increasing focus increases sales (eg cost, quality)

Order qualifier increasing focus has little increase in sales (eg features of product). If
achievement of competitive priority falls below the threshold, there will be zero sales.

Breakeven analysis

F: fixed cost, constant regardless of changes in levels of output

c: variable cost per unit, varies directly with volume of output
p: price per unit
Q: quantity
Choose quantity that costs the least

Breakeven formula:
Make or buy decisions

Finds quantity for which the total costs for two alternatives are equal
Same price: Cost of making= Fm + cmQ. Cost of buying= Fb + cbQ.
Different price: Cost of making= pmQ (Fm + cmQ). Cost of buying= pbQ- (Fb + cbQ).
If cost of making < cost buying then make!
If expected demand > Q then make. Expected demand < Q then buy.

Formula: Q = (Fm-Fb)/(cb-cm)