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Iryna McDonald describes how an organisation can optimise its performance by structuring resources along four operational dimensions.
Students often associate the concept of operations with manufacturing alone, but the processes that transform a set of inputs into outputs are also integral to service industries. To compete successfully, organisations need to understand their markets and how they can best serve customers needs, which in turn depends on how they organise the delivery of their services. So its essential to structure employees activities and even to design facilities in a way that aids the efficiency and effectiveness of the business and ensures that its approach to operations is aligned with the overall corporate strategy. Operations management is mainly concerned with how resources are used to produce goods or services. Depending on the nature of the organisation, the transformed resources could be materials, information or even customers. For example, changing the physical properties of a metal is a fundamental part of car manufacturing; information processing is one of the business practices of a marketing company; and customer processing could be achieved by a beauty treatment. In addition, a company needs to have facilities, such as buildings and equipment, as well as people who maintain, plan and manage the operations. The balance between facilities and staffing can vary according to the nature of the business. Take the case of Ikea, a chain of stores that specialises in selling furniture and household goods. Its business model requires the company to have large premises, because most of the items it sells are quite bulky. But, instead of occupying city-centre locations where land is expensive, Ikea uses sites on the outskirts of towns. Customers are required to assemble the furniture themselves, thereby helping the company to offer value for money. Fast-food retailer Pret A Manger believes that the secret of success is to focus continually on quality not only in food but in every aspect of its operations. The firm goes to some length to ensure that all its produce is fresh and free of additives. Every shop receives ingredients first thing every morning and food is prepared throughout the day on the premises. Pret A Manger relies heavily on its people, too: the quality of its customer service compared with that of other fast-food outlets allows it to charge premium prices. It is evident from these examples that the firms operations are similar in that they transform input resources into output products and services, but they do differ in a number of dimensions namely: volume, variety, variation in demand and visibility. n The volume dimension involves the systematisation of work, whereby standard processes are set out in an operations manual. The implication of such structuring is that it gives a lower unit cost, since fixed overheads such as rent are spread over a large number of products. n The variety dimension requires an organisation to be flexible and match its services to customers needs. For retailers aiming to keep up with changing fashions it is essential to have both well-established supplier contacts and skilled staff who can enact changes promptly. n The variation dimension considers how demand patterns and seasonality influence sales volumes. Staff may be overstretched in high season and the shops feel crowded, whereas low season gives rise to opportunity costs. Capacity planning is essential, therefore, for optimising turnover. n The visibility dimension concerns how much of a companys operations are exposed to the customer. For example, a retailer may decide to open a shop or to sell its products online depending on the level of customer contact necessary to clinch the deal. Companies are using technology to achieve higher volumes while preserving the accuracy, precision and repeatability of their processes. Many car manufacturers use automated assembly lines on which robots work together. Wide-area networks and web technology allow all branches of a company to access, say, a customer database held on a central server. Electronic point of sale (Epos) and barcoding technology speed up operations, automated check-outs allow retailers to establish how many products are on the shelves and ID chips help to track the movement of items. Ikea has a bespoke distribution system that calculates the optimum routes for delivery drivers and records the customers signatures to prove receipt. All information is transferred to a central system for efficient processing, which leads to significant cost savings from smaller stock holdings. But technologies differ in the flexibility and economies they can deliver. For example, economies of scale usually associated with mass production may be less relevant when a company adopts a just-in-time (JIT) approach and seeks economies of scope through smaller machines that can handle a range of products. The high degree of dependency between each stage of the JIT manufacturing process exposes problems quickly, which are

OrganisatiOnal ManagEMEnt and infOrMatiOn systEMs

Pret A Manger believes the secret of success is to focus on quality not only in food but in every aspect of operations
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financial management

PAPER P4

solved by staff on the shopfloor rather than by a central administration. No stock is held, because overproduction unnecessarily ties up funds, increases machine and labour waiting times and leads to the multiple handling of surpluses. Despite the complexities of using JIT, many companies see it as a way to differentiate themselves by being flexible in meeting demand. While it is often impossible to use such pull control to its fullest extent, it has been widely adopted in service industries. Pret A Mangers policy is to make a smaller volume of sandwiches directly in a branch, reflecting the preferences of local customers. If a product sells out, a notice is placed on the shelf reminding people that it could be made promptly on request. This helps to reduce losses of perishable stock. Although JIT helps companies to handle the variety aspect of operations, it does present problems in the variation dimension. Capacity utilisation often decreases because any stoppage will affect subsequent stages of the production process. For example, a delay in receiving goods from the supplier will lead to a hold-up in processing. The general aim should be to reconcile the supply of a product or service with the level of demand. Almost all goods have some demand seasonality for example, woollen knitwear is

more likely to be sold in the winter so a manufacturer needs to be careful in choosing from the three following options available for handling such variations. The first, capacity planning, requires the same number of staff and equipment to be deployed throughout the year, with finished goods being transferred to inventory in anticipation of future demand. A company with a chase demand plan will vary the number of employees or amount of resources it uses to reflect fluctuations in demand. It is usually adopted by operations that cannot store their output eg, call centres. And a demand management plan aims to shift demand from peak times to quieter periods by using customer incentives. In practice, most organisations use a mixture of the three approaches. For example, Ikea stores have a large warehouse where items await collection; over the busy Christmas period opening hours are extended to accommodate more customers; and price reductions are used to shift products that have gone out of fashion. Another consideration in servicing customers needs is the degree to which a companys operations are visible. Although more face-to-face interactions with customers provide a deeper understanding of their specific requirements, they are also costly.

For example, Yo! Sushi restaurants are famous for their unusual layout: the chefs and equipment are located in the centre of the restaurant and, once a meal is ready, it is placed on a conveyor belt separating the cooking and dining areas. The company uses this unique process design to make the experience of eating out more exciting, having recognised that its customers enjoy seeing how their food is made and are prepared to pay a premium for that. To address the high costs of customer contact, other companies may use a mix of high- and low-visibility operations, such as selling products online as well as in store. In deciding how to structure the companys operations it is essential to strike the right balance among the requirements of the four dimensions. Management accountants need to assess the costs and benefits associated with each option. For an organisation aiming to keep its costs down, for example, high volume and low variety, variation and visibility would constitute the optimal structure. But, whichever combination is chosen, the companys resources need to be organised accordingly. Iryna McDonald is a tutor specialising in management level papers at FTC Kaplan.

P4 further reading

B Perry, Organisational Management and Information Systems CIMA Official Learning System (2008 edition), CIMA Publishing, 2007.

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