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HSC

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Operations Notes



Role of Operations Management

Operations - refers to the business processes that generally involve transformation/


production of inputs into finished G/S
- Involves processes that transform and add value to business inputs in the
creation of outputs
o Known as the Production Function
Transformation - conversion of inputs (resources) into outputs (G/S)
Value Adding - creation of extra or added value as inputs are transformed into
outputs
Lean Production - is minimising waste in operations i.e. becoming more efficient
by lowering costs, reducing errors and defects and minimising underuse of labour
The growth of the Fairtrade movement is a direct result of consumers advocating for
operations processes in production and supply to integrate notions of a fair price,
decent working conditions and local sustainability
Customers want firms to integrate environmental awareness strategies and demand
ecologically sustainable products they also want businesses to reflect the changes
in consumer preferences over time
Qantas operations has had to respond to recent challenges of:
- Terrorism
- Increasing fuel prices
- Volcanic eruptions
- Global economic downturns
- Competing success of low-cost rival airlines (tried to counter this with Jetstar)

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Goods Services

Strategic Role of Operations Management

Each business function has a strategic component affecting all key business areas
strategic role of operations involves operations managers contributing to the
strategic direction or plan of the business LONG TERM
Generally the overarching goal of a business is to maximise profits operations
function is a COST CENTRE (attracts cost but does not bring about income)
- Therefore a strategic aspect of operations management is reducing costs

Cost Leadership

There are several different sources of operational costs input, processing,


transformation and costs of shipment
Cost Leadership - involves aiming to have the lowest costs or to be the most price-
competitive on the market attract buyers and hence reaches profit maximisation
- This is an intrinsic aspect of strategic operations management lowering
costs is crucial!! must be done WITHOUT reducing QUALITY!
This allows a business to achieve;
o Economies of scale lowest cost per unit of input (technology)
o Increased efficiencies through improved use of technology/machinery
o Cost savings created through purchasing in bulk
o Spreading fixed costs over larger output reduces costs.
Myer went through cost leadership transformation in 2006 by introducing 8
international distribution centres invested in IT which cut costs by 50% by 09

Strategies for Cost Leadership


Control other
Costs --> Reseach
and Development
+ Markecng

Economies of
Scale

Control
Produccon Costs
--> Labour, raw
materials and
overheads
(equipment)

Technology --> up
to date

Other Strategies Include:


- Buying in Bulk
- Standardised Products
- High volume and automated production systems
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
o In 2010 Qantas diverted its waste to a Trigeneration waste
treatment facility in Sydney 99.8% of waste is now recycled

Good/Service Differentiation
Goods Only

Services Only

Tangible
Can be stored
Output produced before consumption

Intangible
Cannot be stored
Production and consumption
simultaneously
High customer contact
Cannot be transported
Quality difficult to examine

Low customer contact


Can be transported
Quality easy to examine

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From an operations perspective, a strategic approach assesses the different options


and determines which ones can be undertaken with a cost leadership focus
Cross branding - adds value to the products by offering consumers added benefits
from cross-branding arrangements e.g. Coles/Shell alliance differentiation from
an external factor
Product Differentiation - means distinguishing products (G/S) from its competitors
STRATEGIES BELOW

Goods
Varying product features/design - colour,
ingredients
Angus Burger - 100% Angus Beef
Varying product quality - price/quality
interaction
Maccas Angus positioned as a premium
product
Varying any augmented features - add-
ons or additional benefits associated
with goods
Reversing camera for Toyota Rav4 Wheel
Drive

Services
Varying amount of time spent on a
service
Prior tutoring offering free workshops
Varying the qualifications/experience of
the service provider - level of
specialisation affects the quality
Varying the quality of technology used in
delivery - i.e. quality of phone networks,
internet service etc

Goods and/or Services in Different Industries


Goods

Standardised Goods - those that are mass produced uniform in quality


production focus NOT customer orientated focus Big Mac - economies of scale
Customised Goods - varied according to the needs of customers market focus
rather than production focus tailored suits
The layout of operational processes will vary depending on the level of product
differentiation
- The choice of process selection is strategic as it requires a high degree of
cross-functional interaction and coordination
- All 4 key business functions need to work together to achieve the operations
outcome
Goods can be both perishable (foods) and non-perishable (cars, electronics,
furniture, clothes) operations processes will vary between sectors

Perishable
High standards of quality, safety and
cleanliness in all operating processes
Short lead times and distribution that is
quick and effective
Appropriate robust packaging and cold
storage processes both through
production and distribution

Non-perishable
Manage all aspects of quality in the
process from sourcing through to
production and distribution
Implement effective inventory
management strategies and be highly
responsive to market demand in order
to NOT over produce

Intermediate Goods - finished goods at one stage of production may be reused to


finish other products for different businesses







Services
Services can also be standardised and customised
- fast-food industry aims to standardise service
- Differs from professional services that are customised (legal/medical
services)
Self-service - means encouraging the customer to take the initiative to help
themselves shown through self-service checkouts in Coles/Woolworths
- Online booking for travel industry lowers costs + increase efficiency

Interdependence With Other Key Business Functions

Although a business can separate key business functions into departments that
perform their distinct roles the functions are interdependent relies on the
coordination of others to perform effectively cross-coordination!

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Interdependence - refers to the mutual dependence that the key functions have on
each other each must work towards common goals and depends on the support
of others

Tasks Within the Key Business Functions


Operations Operations and operations management has direct links to all other key
business functions they all exist because of operations the process of
making a good
Marketing Marketing connects the operations function directly with customers
marketing allows for effective analysis of target markets to know what type
of products to produce to work towards the strategic goal of profit
maximisation
Finance
The business will be based on budgets and operations can only work
effectively by obtaining funds from finance finance will make their budgets
based on expenses provided by operations and other business functions.
They also carefully monitor the inputs and outputs of operations
through working capital management where there are controls on
current assets/liabilities. monitor marketing through cash
flow/profitability management and cost/revenue controls
Human
Most of the employment generally stems from operations key link
Resources between HR. Retaining employees is pivotal to the effectiveness of
operations management developing employees allows for more efficient
processes and economies of scale. recruitment of staff - pilots/baggage
handlers for Qantas

Influences on Operations Management

Main Influences on Operations Management


Globalisation

Globalisation - The process of globalisation has led to increasing


integration between economies transfer of skills, labour,
resources, technology and capital
- Deregulation of financial markets
This has provided a source of cost-saving opportunities for
operations can choose appropriate means of outsourcing their
operations to different countries allows them to adapt to changing
business environments
- Use of manufacturing plants for production means that firms
can achieve massive economies of scale advantages because
supply of raw materials are cheaper and easier
o Optus call centres in Philippines
o Apple IPAD in China - low cost & mass production
BUT can be a threat as big TNCs now can dominate and
monopolise the market if they become too powerful
Supply Chain - refers to the range of suppliers a business has and the
relationship with those suppliers needs a reliable supply chain that
is responsive to changes in demand COST LEADERSHIP
Integration of a range of suppliers leads to a global production web
strategy operations structured around global production facilities
supply of cheap labour, government incentives for TNCs (e.g.
China 1980s), lower tax rates etc minimises costs
Imitator - creates similar products to those that currently exist
Angry Angus at Burger King imitates Maccas Angus Burger
- Reverse Engineering - a process of taking a competitor's
product and making a cheaper version using different materials
Hot Dollar makes cheaper products by doing this

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Technology

Quality
Expectations

Cost-Based
Competition

Innovations may make a technological breakthrough that allows for a


leap in the quality of life and opportunities for consumers affects
operations processes by differentiating products and making them
new on the market
- Supply chain is shaped around innovation APPLE
Globalisation led to Qantas establishing subsidiary carriers in Asia to
becomes more cost competitive
- More than 70% of Qantas assets are geared to the global
market
- But did lead to industrial tensions in 2011
Technologies such as mobile phones/computers have enhanced
communication processes allowing for greater operations efficiency
and a competitive advantage self service checkouts in Woolworths
Technology assists with organisation, planning and decision making
and are the centre of operational processes manufacturing, quality
management and all aspects of inventory management
HOWEVER it means staff need to constantly be trained can be
costly for businesses in short-term but in long-term leads to greater
efficiencies, economies of scale and profits
Need to consider:
- Technology by competitors
- Cost of fitting
- Staffing implications
- Whether to use CAD/CAM technology
Qantas newer planes (airbus A380) able to carry more passengers
and use less fuel than the 747 Qantas spends $300 million annually on
training
Expectation of quality is a significant influence on operations how
well designed, made and functional goods are
Quality impacts on the reputation of a business and a poor quality
could damage the strategic goal of profit maximisation
Therefore operations must follow particular standards
Qantas new generation check-in, new Q Bag Tags, in-flight
entertainment + newer planes
Goods
Services
Quality of design the materials Professionalism of the service
used and the level of innovation
provider cleanliness/layout of
facilities
Fitness for purpose
Reliability of the service-provider
efficiency
Durability - reliability or how
Level of customisation
long-lasting it is
Cost-based competition - derived from determining the breakeven
point and then applying strategies to create cost advantages over
competitors
- can use reverse engineering

Reducing fixed and variable costs is a way to maximise profits do


this without impacting on QUALITY relates to applying a cost
leadership approach
Qantas outsourcing operations, reform to HR practices, online
bookings
Government
Political decisions affect business regulations which can affect
Policies
operations management
- Government policy is a notable source of change and a
significant influence on business operations
o e.g. Emissions Trading Scheme has changed the
processes of operations in Australia + GST has
increased the prices of products
Policies such as taxation rights, quotas, OHS etc all impact on
business operations environmental/employment regulations
- E.g. reduced protection levels
This can also lead to new business opportunities
Qantas Deregulation and carbon tax ($20 per tonne of carbon dioxide)
has placed pressure on operations to minimise costs
Fair Work Act 2009 has increased union bargaining power
which potentially has increased Qantas' operating costs
Legal
Compliance Costs - are the expenses associated with meeting the
Regulation
requirements of legal regulations i.e. auditors reports etc
The process of operations is associated with the use of labour,
technology, finance and the laws regulating these must be obeyed
E.g. OHS, Fair Work Act, anti-discrimination laws, environmental
protection and taxation
Compliance with Work Health and Safety Act 2012 (Cth) and the
Competition and Consumer Act 2010 (Cth) is crucial
Qantas was fined $20 million by ACCC in 2008 for illegally increasing
their freight charges with other airlines
- Subject to regulatory control of the Civil Aviation Authority
- Under the Qantas Sale Act 1992 Federal Government
restricts foreign investment to 49%, which decreases Qantas'
access to equity capital
Environmental Associated with intergenerational equity to ensure that
Sustainability
operations are shaped around practices that don't damage the
environment for future generations
- Sustainable use of renewable resources
- Reduction in the use of non-renewable resources
Therefore operations need to implement a long-term sustainable
view of resource management into business planning carbon tax
has ensured businesses pursue this by reducing their carbon
footprint reduce160 million tonnes/year by 2020
Qantas environmentally sensitive aircrafts (Boeing 787 and Airbus
A380), Trigeneration wastage recycling facility in Sydney in 2010 + fuel
conservation

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Corporate Social Responsibility

Corporate Social Responsibility (CSR) - refers to open and accountable business


practises based on respect for people, community, society and the broader
environment
- More than just complying with laws and regulations not simply profit
minded but community minded with social expectations/responsibility
o Involves the company's vision, ethics and values the way products
are manufactured, marketed, priced and distributed
- Operations managers need to focus on the quality of their management with
people and processes treated ethically and fairly
- Production of environmentally friendly products Green Carry Bags at Coles
- Qantas Reconciliation Action Plan focuses on employing Indigenous
Australians
o Donated $2 million to charity in 2011
o Scheme for customers to pay extra to offset their carbon dioxide
emissions offset 240,000 tonnes of carbon in 2011

Difference Between Legal Compliance and Ethical Responsibility

Legal compliance involves strictly observing the laws and adhering to all minimum
standards
Ethical responsibility goes further than that they follow it by their own intentions
and it is the 'spirit' and 'culture' of the business it is about what is morally right.
- Acts with integrity and honestly to community standards
Firms must legally comply with;
- Labour laws - Fair Work Act
- Environmental and public health compliance
- Business licensing rules
- Taxation
- Trade practices
- Intellectual property laws
- Financial and accounting regulations
- Human rights
To be ethical:
- Code of ethics
- Corporate culture change
- Role model appropriate behaviour
This requires a lot of compliance costs therefore many businesses opt for the
lowest levels of compliance that is permissible BUT NOT RECCOMMENDED - can
damage a firms' reputation
The Body Shop gives staff two days paid leave a year devoted to community projects
leads to content staff who enjoy their work benefits the business

Outsourcing, Compliance and Business Behaviour

Outsourcing allows outside specialists to undertake key business functions can be


onshore and offshore
This allows firms to take advantage of regulatory differences between nations and
cut costs e.g. minimum wage, lower taxes and weaker environmental
This raises ethical issues concerning business behaviour

Ethical Responsibility

Involves businesses going beyond the law and taking into account broader social,
community and environmental concerns however with differing laws between
nations it is hard to determine whether a business is ethical or not
Therefore, businesses may follow guidelines set by international bodies e.g.
International Labour Organisation (ILO)

Environmental Sustainability and Social Responsibility

Environmental sustainability comes from balancing economic concerns with


environmental concerns
Social Responsibility - concerned with the business interacting in a positive way in
terms of its operations with the local community and improving the quality of life of
community members
Many businesses and governments have adopted policies of conservation, recycling
and restoration ecological sustainability requires businesses to evaluate the full
environmental effects of their operations
Growing consumer expectation of 'green' products is changing management
practises in Australia adopting greenhouse reduction measures and developing
long-term sustainable strategies
CSR is about going 'above and beyond' making a profit and obeying the law
This leads to a positive business reputation and can actually enhance profits
therefore short-term increase in costs but the long-term is beneficial!!!
- E.g. Renewable energy through solar power
- 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

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Operations Processes

Operations Processes - refers to the input transformation output process

Inputs

Inputs - are the resources used in the transformation (production) process

Common Direct Inputs


Labour
Energy
Raw
Materials
Machinery
and
Technology

Human Effort physical + mental


Electricity/fuels converted into heat, movement, light and sound
Wood, agricultural products, natural resources, minerals, water, fossil fuels
etc.. i.e. anything in an unprocessed state
Machinery is used to process raw materials and to design/make products
integrated with technologies to perform complex tasks
o Capital-labour substitution - when machinery and technology
replace labour makes labour redundant in short-term long-
term they acquire new skills

Input Classification

Transformed Resources (materials, information, customers)

Transformed Resources - are those inputs that are changed or converted in the
operations process

Materials

Materials - basic elements raw materials and intermediate goods


- Raw Materials - unprocessed state Qantas - Fossil Fuel
- Intermediate Goods - used in further processing food ingredients
Information Information - is the knowledge gained from research increases
understanding and can influence behaviour or decision making
- i.e. used to make informed decisions about how inputs are used
which suppliers to use etc
External Information - comes from statistics from industry bodies
ABS, Census, media reports etc
Internal Information - comes from within the business gathered from
financial reports, KPI's (lead times, inventory turnover rates and
production data measures efficiency/effectiveness of business
performance) used as an input when it informs process
improvements
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
Customers Customers become transformed resources when their choices shape
inputs consumer orientation their desires and preferences act as a
transformed resource
Customer Relationship Management - refers to ways that businesses
maintain customer contact identifies changes in consumer tastes
- An example of marketing interdependence
Qantas customers transformed by having their location changed

Transforming Resources (human resources/facilities)

Transforming Resources - are those inputs that carry out the transformation process
enables change and value adding to occur

Human
Well qualified, disciplined + hard working staff can bring great productivity
Resources
and are valuable inputs operate on machinery that makes G/S
Effectiveness of HR can determine the success of transformation and value
adding ensuring staff motivation remains high
This can improve the performance of operations processes good job
design, training, flexible work practices and good communication
Qantas cleaners, baggage handlers + pilots
Facilities Facilities - refer to the plant (factory or office) and machinery used in the
operations processes efficient plant design is crucial
Ultimately determines the firms capacity to transform nature of the
operations environment achieves the core function - producing output.
Facilities which integrate modern technologies, well designed and are
labour friendly will promote productive operations
Qantas terminal buildings, aircraft, computers, maintenance facilities

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Transformation Processes

Transformation - is the conversion of inputs (resources) into outputs (G/S)


- Implies physical changes AND the conversion of resources into services
- Transformation process differs between manufacturing businesses and service
businesses
o Operations processes of manufacturer - tends to be highly
automated/mechanised tangible!
o Services rely highly on interaction with customers processes are labour-
intensive intangible!
Value adding is a critical part of this process can give a product greater usefulness
or increase overall utility to consumers they pay more revenue

The Influence of Volume, Variety, Variation in Demand and Visibility


(customer contact) THE 4 V's
Volume

Variety

Variation
in
Demand

Volume - refers to how many G/S are produced


- Firms with high volume are likely to produce standardised products
- Firms with low volume will tend to produce customised products
Lead Times - the time it takes for an order to be fulfilled from the moment
it is made
Volume Flexibility - refers to how elastic the transformation process is to
adjusting to changes in demand
- This is crucial is managing lead times
- If businesses cannot quickly adjust to changes in demand - they
can overproduce wastage and increased inventory costs
o If they under-produce loss in sales!!!
Refers to how many different types of G/S are produced by the business
Mix Flexibility - the mix of G/S delivered through the transformation
process
- The greater the variety the more operations processes required
Increase in demand will require increased inputs from: suppliers, HR,
energy use, machinery and technology
- Capacity constraints within the firm inflexible labour, suppliers,
machinery, energy/power may harm the goals

Decreased demand will also require the same operational flexibility as


staff may need to have their hours reduced, production may need to slow
down and supplier contracts may need to be down-sized
THEREFORE - forecasting fluctuations in demand is crucial so that
adjustments can be anticipated so the firm can act accordingly e.g.
Christmas peak periods and other seasonal changes (heaters in winter)
Qantas experiences peak periods during school holidays and special events
such as the London 2012 Olympic Games or the World Cup
BUT - 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 Service businesses would have higher visibility than manufacturing
(customer Customer contact/feedback directly affects transformational processes
contact)
their preferences shape what businesses make
Direct - surveys, interviews, warranty claims, blogs etc
Indirect - review of sales data, market share data and observation of
customer decision-making processes
Since Qantas is a service experiences high visibility (continuous customer
contact)

Sequencing and Scheduling

Sequencing - refers to the order in which activities in the operations process occur
Scheduling - refers to the length of time activities take within the operations process
- They assist in structuring and ordering the transformation process!
- With careful sequencing and scheduling costs of operations can be minimum

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

Gantt Charts
Gantt Chart - is a bar chart that
shows both the scheduled and
completed work over a period of
time used in planning and
tracking projects
- Outlines activities that need to be
performed, the order to be
performed and how long they are
expected to take
Advantages
1. Forces a manager to plan the
steps needed to complete a
task and specify time
required

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2. Make it easy to monitor actual progress against planned activities

Critical Path Analysis

Critical Path Analysis - is a scheduling technique that shows what tasks need to be
done, how long they take and what order is necessary in a sequence
- Some tasks need to be completed before others can begin
Therefore, a manager can see what needs to be done and allows the timing of tasks
to be considered a business can see in what order activities need to be done
Gives the firm a sense of direction and organisation to operations processes,
provides overall coordination and ultimately a means of control
Critical path is the shortest length of time to complete all tasks necessary shortest
time possible to complete the operations process
In this case, the shortest path is:

(1) day
Quality
Test
Materials

+(15)days
+(1) day
+(2) days +(1) day
Make
Paint
Final
Quality
Components Components Assembly Test
Product

+(1) day
Dispatch

=21 DAYS


Technology
Business technology involves the use of machinery and systems that enable
businesses to undertake the transformation process more effectively and efficiently
Firms need to acquire up-to-date technology to compete speeds up processes and
enables fuller utilisation of resources more cost-effective operations processes
Initial capital cost of technology is quite high businesses may decide to lease it
(tax deductible)
- May lead to the displacement of workers or new costs involved with training

Qantas technology such as online check-in/booking and electronic bag tags have
increased productivity and have replaced human capital
Office
People have begun to telecommute emails checked from home,
Technology
Skype meetings, paperless trading
Manufacturing These include robotics on assembly lines - efficient and minimise
Technology
waste
- Don't demand higher wages/working conditions favourably
better than labour
Computer-aided design (CAD)- allows firms to create products from
inputs on computers useful in transformation processes
- Generates 3D pictures which assists the designer to visualise
the product
- Also can allow users to modify materials used in order to
change the cost of production
Computer-aided manufacturing (CAM)- allows manufacturing
process to become computer controlled factory's etc..

Task Design

Task Design - involves classifying job activities in ways that make it easy for an
employee to successfully perform and complete the task
- Overlaps the employment functions of job analysis, job description and person
specification
- An example of the interdependence between HRM and operations

Task Design Job Description Person Specification Recruitment Selection


Skills Audit - process used to determine the present level of skilling and any skill
shortfalls that need to be made up either through recruitment or training

Plant (Factory/Office) Layout

Plant Layout - is the arrangement of equipment, machinery and staff within the
facility has a huge impact on efficiency of operations
Must conform with legal regulations (OHS), adequate stock levels, space and lighting

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Process Layout

Process Layout (functional layout) - arrangement of machines so that they are


grouped with equipment by the functions they perform
- Typical of hospitals different areas of care

Qantas is one of the few airlines in the world that own their own terminals A MAJOR
EXPENSE for Qantas
Intermittent Process Production - deals with high-variety, low-volume production
Production Each product has a different sequence of production that is intermittent
i.e. moving from one department to another
Involves team based works through 'work cells'
Product
Product layout - where the equipment arrangement matches the
Layout
sequence of tasks performed in manufacturing a product
Here an assembly line is common
Fixed
Fixed Position Layout - is where a product remains in one location due
Position
to its weight/bulk
Layout
Project Production - deals with layouts for big activities i.e.
construction of bridges every stage of production is in one area
Office
Workstations - common in service based sectors
Layout
Needs to have smooth workflow provide space for breaks


Monitoring, Control and Improvement

All operations processes should be monitored for their effectiveness


transformational processes should be controlled and improved

Monitoring

Control

Monitoring - process of measuring actual against planned


performance
Involves measuring supply chain management and the use of inputs
through to transformational processes and outputs
- KPI's lead times, inventory turnover, warranty claims, defects
Gives managers a chance to measure how the business is going!!!
Control - comparing with what was intended to happen and actually
happened assessing the performance
If there is a discrepancy changes and improvements can be made
Strict controls are crucial - setting challenging but reasonable
performance targets
Control requires managers to take corrective action make changes
to the transformation process or redesign facilities layouts to correct
problems

Improvement Achieved through the reduction of inefficiencies, wastage , poor work


processes and elimination of any bottlenecks

Improvements in time, process flows, quality, cost and efficiency is critical


Continuous improvement - an ongoing commitment to achieving perfection
important to business culture

Outputs

Output - refers to the end result of the business efforts - the G/S that is provided or
delivered to the customer
Should always be responsive to customer demands issues of quality, efficiency
and flexibility must be balanced against the resources and strategic plan of the
business
Customer service and warranties imply that the inputs and transformations processes
are subject to scrutiny as the outputs will be assessed by customers

Customer
Service

Since customer focus always shapes operations processes inputs,


transformations processes and outputs are all aimed at exceeding
customer expectations = customer service!
Is an example of the interdependence with marketing!
If this is negative operations processes need review
Customers are the life-blood of a firm without customers = no
business
One dissatisfied customer tells 11 others FUNDAMENTAL
Qantas Closed Loop Feedback Program enables direct feedback from 11,000
frequent flyers annually
Warranties The effectiveness of operations can be accessed through warranty claims
Warranty - a guarantee that faulty products will be repaired or replaced
- Can be implied - acceptable standards - fit for purpose
- Can also be expressed - which expire after a time period
Operations need to trace the source of the fault in manufacturing and
rectify it warranty claims can lead to improved transformation
processes
Mazda 3 defect detected in LED panel replaced components to rectify
faults major cost for the firm
Note: ALL OPERATIONS SHOULD BE MONITORED AGAINST KPI's FOR THEIR EFFECTIVENESS

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Operations Strategies

Performance Objectives



Quality -
Being RIGHT -
meecng
customer
expectacons

Dependability
- Being On
Time

Speed - Being
FAST

Flexibility -
being ABLE TO
CHANGE

Customisacon
- being able to
prodivde
MORE
OPTIONS




THIS ALL LEADS TO AN INCREASE IN COMPETITIVENESS

Cost - Being
PRODUCTIVE
(cost
leadership)

Performance Objectives (contd)

Performance Objectives - are goals that relate to particular aspects of the


transformation processes
- These objectives/targets will be set so that the business can become more
efficient, productive and profitable
- Can be viewed as Key Performance Indicators (KPI's)

Quality

Speed

Quality is often determined by consumer expectations which inform


the production processes of the business
High quality will lead to fewer complaints, satisfied customers,
increase reputation and revenues also reduces wastage
Qantas planes must be clean + tidy, staff and website are user friendly
Quality of
This extends to how well a product is made or a
Design
service is delivered
Design determines the inputs and how the
transformation processes will be arranged a
high-quality will involve costly materials and
care/presentation of the good
This normally leads to a higher price Mercedes
Benz competes on quality
Quality of
Quality of conformance - is the focus on how well
Conformance
the product meets the standard of a prescribed
design with certain specifications
How consistently do the products achieve
compliance with the desired specifications?
High quality needs high specs whilst low quality
needs low design specs
Quality of
Reliability of the service, how well the service
Service
meets the needs of customers and how efficient it
is

Speed - refers to the time it takes for the production and operations
processes to respond to changes in market demand
- Requires that changes in input levels and processing times
are responsive to changes in demand
As an objective speed aims to satisfy the customers' demands ASAP
- Reduced wait times
- Shorter lead times
- Faster processing times
WANT TO HAVE SMOOTH INTERNAL COMMUNICATIONS AND REDUCE:
Technical Bottlenecks - concerned with a structural issue within
the firm e.g. unable to take big orders
Procedural Bottlenecks - are issues that can be overcome with
training
Jetstar closes check-in 30 mins before departure achieves speed and
dependability
Qantas increased speed through on-line check in and Q Bag Tags

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Dependability Dependability - refers to how consistent and reliable a business's


or Reliability
products are how long they last ability to meet customers'
demands on time
Measured through warranty claims or number of complaints
Dependability can save time, money and increase efficiency
Qantas measured through on-time departures/arrivals has suffered
recently through industrial disputes and mechanical failures in 2011
Flexibility or Flexibility - refers to how quickly operations processes can adjust to
Adaptability
changes in the market changing products offered, mix or volume
Can be achieved by increasing the capacity of production
purchasing of technologies that increase flexibility/capacity
E.g. how quick could firms reduce their production during GFC?
Due to seasonal changes (school holidays/special events), Qantas
must operate flexibly Jetstar does this well through its variable
baggage/catering options
Customisation Mass Customisation - is a process that allows a standard, mass-
produced item to be personally modified to specific customer
requirements increasingly common today
- Dell Computers offer various levels of memory/functionality in
their mass produced laptops
Because of customer orientation, operations processes are likely to
move towards customisation variation of features
Full customisation (products are created after an individual order) is
costly for firms tailored suit
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
(economy, business and first class)
Cost
Cost - refers to the minimisation of expenses so that operations
processes are conducted as cheaply as possible
The achievement of all the above performance objectives will help
minimise cost!
This can be reduced through achieving cost leadership economies
of scale, bulk buying, new technology, cheaper raw materials etc..
Minimising wastage is crucial reduce supplier costs, manage
inventory, maximise flexibility and effective distribution methods
Note: Each of the KPI's should be allocated specific targets or goals!!

New Product or Service Design and Development


Products

The approaches to product design and development include:


1. The preferences and desires of consumers determine which products are
designed and developed
2. Changes in innovation and technology enable new appealing products to be
made with greater functionality

The Steps Involved:

Must consider:
- Quality - attributes and features
- Supply Chain Management - where? what? how much? timing?
- Capacity Management - may require new resources or technology
- Cost - dependent on inputs, time and energy
Product Utility - is the usefulness and value that a product has from the consumer's
point of view
Apple's continued success is because they understand the power of product design
and development. Apple has established a reputation as a company that produces
extraordinary products that grab the attention and loyalty of customers

Services

Services can either be customised (lawyer/doctor) or standardised (shelf packer at


Coles)
When designing, both the explicit and implicit aspects need to be addressed
- Explicit Service - tangible aspect of the service (time, expertise, skill and effort)
- Implicit Service - intangible aspect (psychological wellbeing - feeling of being
looked after)
Sometimes goods may be required to deliver services - e.g. a doctor using a bandaid
or a tutor using a textbook this must be considered when designing/developing a
service
Qantas is set to launch 2 new airlines in Asia in 2012 one premium and one low
cost carrier named Jetstar Japan aims to take advantage of growth in Asian
aviation

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Supply Chain Management

Supply Chain Management (SCM) - involves integrating and managing the flow of
supplies throughout the inputs, transformation processes (throughput and value
adding) and outputs in order to best meet the needs of customers
Influenced by what is sold and what is returned involves both sourcing (supply) as
well as logistics and distribution


Sourcing







Sourcing - refers to the purchasing of inputs for the transformation


processes drawn from a range of suppliers










Global Sourcing - creates benefits (cost minimisation, access to new
technology and resources) and challenges (cost of logistics, storage,
distribution, complexity of legal systems and language barriers)
Recent Trends in SCM are:
Supplier rationalisation - involves a business assessing the
number/diversity of its suppliers and reducing it towards the least
amount
- Less contracting, less wastage and improved timeliness
Backwards Vertical Integration - purchasing of suppliers guarantees
supply for the transformation processes since the supplier is owned by
the business Billabong purchased online sports website Swell.com to
move into online retailing options
o Qantas has its own catering division which supplies all its
meals and its own travel agencies Qantas Holidays and
Jetset

E-
Commerce

Logistics

Cost Minimisation - use of offshore suppliers access to low-cost


resources/inputs
Flexible/Responsive Supply Chain Processes - 'lean' processes is one
that minimises waste, continually lowers costs or improves
processes/speed
Billabong has 403 different suppliers requires sophisticated supply chain
management
Qantas has employed cabin staff in Asia at lower-wages and engine
maintenance is carried out in Malaysia on a cost benefit basis
E-Commerce - involves buying and selling G/S via the internet
relevant to forms of sourcing
Internet has played a central role to SCM source inputs quickly,
efficiently and at low costs
E-Procurement - is the use of on-line systems to manage supply
automatically through B2B
B2B - direct access from one business to another allowing the supplier to
access the needs of the buyer and meet them in a timely manner
B2C - selling of G/S to consumers over the internet e.g. agoda.com
sells accommodation to travellers on behalf of hotels
- Stock levels must be managed well
Logistics - broad term referring to distribution and includes:
- Transportation, use of storage, warehousing, distribution
centres, materials handling and packaging
Distribution - refers to the ways of getting the G/S to the customer

1. Producer to Customer

2. Producer to retailer to customer

3. Producer to wholesaler to retailer to

customer

4. Producer to agent to wholesaler to

retailer to customer

Need to consider the modes (forms) of transport bike, truck, van,
train, plane, ship
Storage may be short or long term may need particular characteristics
such as a refrigerator
Warehouses are a place for holding inventories can be expensive but
can be useful as a storage point for durable items
Distribution centres are short-term storage to minimise the time it takes
to supply stock to retail outlets
Final aspect of logistics involves materials handling and packaging
dangerous/fragile goods need to be handled with care
Logistics ensure that Qantas has all the physical inputs needed in the right
place at the right time (pilots, cabin crew, baggage handling) for the
operations process (flights) to take place undisrupted and hence at optimum
efficiency

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Outsourcing - Advantages and Disadvantages

Outsourcing - involves the use of external providers to perform business activities


- Finance and accounting outsourcing
- Knowledge process outsourcing
- Legal process outsourcing
- Human Resource outsourcing
Qantas outsources nearly all of its IT operations and some call centre operations +
maintenance in Malaysia
There are 4 outsourcing options:
1. Shared Services Centres (SSC) - in-house outsourcing options that performs
work for multiple subsidiaries (cleaner)
2. Fee-for-service - low-risk short-term strategy that involves engaging a
supplier for fixed services at a pre-determined price allows the firm to
'test' the market prior to making a change
3. Joint Ventures - The provider provides services to multiple companies
WNS Global Services provides ticketing to 26 airlines
4. Build-operate-transfer - the relocation of services to a new offshore location
is then transferred to an independent vendor that the company contracts

Advantages
Simplification - reducing number of activities
performed within the business
Efficiency and cost savings - cheap resources
and specialised businesses KPI of speed
Improvements to quality of process due to
operational expertise

Disadvantages
Huge start-up costs
Communication and language barriers can
cause misunderstandings
Loss of control of standards and information
security
o Virgin Blue check-in issue Sept
2010 $20 million lost - 400
flights disrupted 50,000
passengers
Loss of customer face-face contact

Increased processes capability - access to


improved technologies and skilled labour
Access to new skills
Strategic benefits
- getting around trade barriers
- benefit of expertise
- trading in different time zones
- innovative solutions
Flexibility of business to choose its suppliers

Security and confidentiality issues


Resistance to change from employees
concerned about their jobs and de skilling
- Can attract negative publicity and lead to
a loss of sales

Possibility of the sourced firm becoming


insolvent and ceasing operations

Less managerial control
Industrial problems resulted from Qantas down-sizing as an outcome of outsourcing this
damaged the reputation and image of Qantas in 2011

Technology - Leading Edge, Established

The application of technology helps a business create a competitive advantage


efficiencies, productivity gains and a capacity to improve operations processes
Technology improves inputs, transformations processes and outputs

Leading
Leading Edge Technology - is the most advanced and innovative
Edge
technology at a point in time e.g. Nanotechnology
Technology - Helps businesses create products more quickly and to higher standards
with less waste competitive advantage
- Allows operations to be more effective
- Generally very expensive short-term loss of productivity with training
staff to use technology but useful (usually) in long-term
- There is a lack of competent technical support since product is new
Yarra Precision Engineering used a combination of innovative CAD/CAM to
create more intricate component designs cost was $5.5 million but the
breakeven point is within 24 months beneficial!
Established Established technology - is the technology that has been developed and
Technology
is widely used e.g. computers, software, mobile phones etc..
- Help achieve basic standards for productivity and speed
- Due to the universal availability of established technologies, they may not
necessarily result in a competitive advantage BUT the absence of
their use will result in competitive DISadvantage
o Use of Bar-coding, IT and robotics are common today

Inventory Management

Inventory/Stock - refers to the amount of raw materials, work-in-progress and


finished goods that a business has on hand at any point in time
Inventory management strategies have a huge impact on transformations processes
Stock represents the difference between what is supplied to the business as inputs
and what leaves as outputs

Advantages of holding stock


- Consumer demand can be met when
there is stock available

- Reduces lead times between order +


delivery

- Stocks give the opportunity for a


business to generate immediate revenue
- Stocks are an asset and add value to
current assets on balance sheet
- Making products in bulk allows
economies of scale and reduces costs
- Older stock can be sold at reduced prices
and encourage cash flow

Disadvantages of holding stock


The costs associated with holding stock
includes storage charges, spoilage,
insurance, theft and handling expenses
The costs associated with holding stock
in warehouses can be as high as 30% of
the value of the stock
The invested capital, labour and energy
cannot be used elsewhere
The cost of obsolescence occurs when
stock remains unsold

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Inventory Valuation Methods

Inventory valuation methods allow people to see the VALUE OF UNSOLD STOCK and
the VALUE OF SOLD STOCK to determine COGS, gross profit and closing inventory
level on balance sheet
At the end of an accounting period, it is important to determine the value of unsold
stock methods of valuation affect the calculation of COGS, gross profit and
inventory

Last- In - Last-In-First-Out (LIFO) - assumes that the last goods that were purchased
First- Out
by the business are the first goods sold
(LIFO)
- Unit sold is the last cost the was incurred and the stock left on the
shelf is the older stock that was bought first

IMPACT

Prices used to calculate COGS/Gross profit are the more recent prices and
more closely reflect their economic value but:
- High Inflation - (inflation has already kicked in and brings up price!)
THEREFORE LIFO overstates COGS, understates profits and
minimises taxes and undervalues inventory in balance sheet
First-In-
First-In-First-Out (FIFO) - assumes that the first goods that were purchased
First-Out
by the business are the first goods sold
(FIFO)
- Unit sold is the first cost that was incurred and the stock that is left
on the shelf is the newer stock that was bought last
- Products are bar coded and date coded to assist with inventory
management when goods have a 'use by' or perishable date
o E.g. Milk at Coles and Woolworths

IMPACT

Prices used to calculate COGS and gross profit are the older prices so that:
- High Inflation - (inflation only kicks in AFTER!) THEREFORE FIFO
understates COGS, overstates profits and maximises taxes and
overvalues inventory in the balance sheet
Weighted Weighted Average Cost (WAC) - uses the average cost of the inventory
Average
purchased to calculate the COGS, gross profit and inventory valuation
Cost
- Neither LIFO nor FIFO is better businesses report different
(WAC)
profit/inventory levels during price changes
- Footnotes to the financial statement disclose the inventory
valuation method used
Just-In-
Just-In-Time (JIT) - ensures that the exact amount of material inputs arrive
Time
only as they are needed in the operations process
(JIT)
This allows a 'lean' production method with minimal waste makes only
enough products to meet demand
- Saves money - no expensive holding and insurance costs
HOWEVER - requires very flexible operations function with flexible
processing/supply chain management
Toyota uses JIT and ensures parts arrive 2 hours before they are needed

Quality Management

Quality Management - refers to the processes that a business undertakes to ensure


consistency, reliability, safety and fitness of purpose of product
'Quality' - the degree of excellence of a product tensions between cost and quality

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

There are 3 quality approaches:


1. Quality control - inspection, measurement and intervention
2. Quality Assurance - application of international quality standards
3. Quality Improvement - total quality management and continuous
improvement

Quality
Control

Quality Control - involves the use of inspections at various points in


the production process to check for problems and defects
Includes a range of 'tests' designed to assess the quality of
products/processes against standards encourages improvement
E.g. "This call may be monitored for quality or training purposes"
Programmed inspections are constantly carried out on Qantas to
ensure they meet specific standards
Quality
Quality Assurance - involves the use of a system to ensure that set
Assurance
standards are achieved in production
- Measurement against pre-determined quality standards
Quality Assurance standards are developed internationally since
global production webs should match a degree of quality
ISO 9000 series of quality businesses comply to enhance their
competitiveness
Quality
Continuous Improvement - is an ongoing commitment to improving a
Improvement
business's G/S making them more efficient/effective
- Achieved through innovation encouraged today through
flatter management structures and staff suggestions
Kaizen - Japanese for improvement emphasises continuous
improvement in all areas of a business
Total Quality Management - quality becomes a commitment and
responsibility of every employee of the business STRATEGIC
- Involves 4 elements:
1. Benchmarking
2. Employee Empowerment
3. Customer Orientation
4. Continuous Improvement
Motorola developed the Six Sigma quality management approach in the
1980s aims to achieve 3.4 defective parts per 1 million units

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Overcoming Resistance To Change

All businesses are subject to change from the internal and external environment
- External (most common) - legislation, economic conditions, social changes,
technological etc
- Internal - initiative of staff, application of technology and innovation
Resistance to change - is the perception that a change will threaten an individual or
group can be a major obstacle to the realisation of operations goals
overcoming this resistance is a necessary aspect of change management
- Change can often be resisted as it causes uncertainty and risk
Resistance to change arises from 2 sources:
1. Financial
2. Psychological (inertia)
- Managers must put in place strategies to overcome this resistance

Factors such as September 11 terrorist attacks 2001, SARS epidemic 2003, rapid increase in
fuel costs and emergence of low-cost carriers have prompted change within Qantas

Financial Costs and Resistance to Change


Purchasing
New
Equipment

Redundancy
Payout

A major cost with change is the investment in plant/equipment


machinery and technology is expensive
Businesses try to recuperate costs through the value-adding in
transformation processes
New Equipment improves operations through:
Improved processing flexibility
Improved processing speeds and shorter lead times
More consistency in production
Higher quality
Reduced wastage
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
Note: Managers may either purchase or lease the equipment BALANCE!
Redundancy - is defined as a loss of work arising from job skills that are
no longer required or relevant to the workplace
The main cost is the redundancy payout - money paid to employees
when they are forced out of work value depends on:
Length of employment
Level of pay the employee was on
Amount of unused leave the employee was entitled
Any outstanding wages
Qantas avoids this cost with a new strategy on casual employment
Cumulative redundancy costs can be quite high particularly when
capital replaces labour - capital-labour substitution


Retraining costs arise from change that causes a reorganisation of
business hierarchy or from new technology
Job roles may change requiring new skills
Purchase of technology requires training on new software
Qantas new reservation system, annual security training, engineering
and maintenance for new aircrafts are examples of training
Reorganising Plant - refers to the facilities in which the machinery is arranged
Plant Layout Major changes such as re-engineering systems often require extensive
reorganisation of the plant MAJOR COSTS
Transporting/placing the new equipment
Transferring old machinery and testing new equipment
Temporary losses of productivity with new training etc
In long-term these costs should translate into greater efficiencies
and profits
Jetstar is replacing Boeing 717s with Airbus A380s new heavy
maintenance becomes necessary

Retraining

Psychological Resistance To Change (Inertia)

Inertia - is a term that describes a psychological resistance to change


- Fear of the unknown or feelings of uncertainty
- "If its not broke - why fix it?" people don't like to move away from their
comfort zones
If people do not adapt to change due to inertia may lead to financial effects since
there is less efficiency/profits etc leads to a competitive DISadvantage

Managing Change Effectively

Change is constant and in small ways business processes are continually being
refined and adapted over time
- Even though change is continuous, sometimes major change can act as a
discontinuity
Successful managers must anticipate and adjust to changing circumstances rather
than being passively swept along or being caught unprepared
- Must be PROACTIVE - initiate change themselves
- NOT REACTIVE - those who wait for change to occur and then respond to it
Changes must:
- Occur at a steady pace so they can be integrated into the business
- Be evaluated thoroughly to assess their overall impact poorly managed
changes result in employee resistance, tension and lost productivity
- Be introduced into the workplace culture

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Change Management Strategies

Adapting to change through overcoming the financial and psychological resistance


can help a business achieve a competitive advantage:
1. Identification of change - the business must assess whether there is a need to
accommodate change through adjustments to business processes e.g. if the
existing plant or staff will be affected
2. Setting Achievable Goals - Goals must be SMART:
Specific
Measurable
Achievable
Realistic
Timely
3. Creating A Culture of Change - acceptance of change is crucial this can be
done by lowering the resistance to change the business must communicate
with employees about the need for change and get support for the change if
employees are NOT informed about why, this may cause resistance and lower
workplace morale
4. Using Change Agents - this is somebody who initiates change or facilitates the
change process staff should be included in the process of creating change and
setting goals

It may be necessary to apply change models such as Kurt Lewins unfreeze/change/refreeze


model OR John Kotter's eight-step model to help manage change effectively

1.
Idenccacon
of Change

2. Seung
Achievable
Goals

3. Creacng a
Culture of
Change

4. Using
Change
Agents


Global Factors
Global
Sourcing

Global sourcing - involves the sourcing of any business operations that


gives the business cost advantages
- Is a broad term that refers to businesses purchasing supplies
without being constrained by location
o Allows the business to find suppliers who have lower prices,
higher quality products and more advanced technology
This may lead to advantages of expertise and labour specialisation
HOWEVER - may increase costs of logistics, storage and distribution
also increases the complexity of operations processes
Additionally, financial risks can arise due to exchange rate fluctuations
Contractual concerns arise from language, cultural and legal
complications due to misunderstandings
Qantas has employed cabin staff in Asia and pilots from New Zealand due
to lower wage costs. Also, they have announced their intentions to
establish low-cost carriers based in Asia to reduce production costs
Economies of Expanding into global markets can allow the business to achieve
Scale
economies of scale, because the scale of production increases this
leads to a decrease in per unit costs can increase profits!!
Product lifecycles are extended greater value added on production
Economies of scale arises from producing high volumes due to capital
investment and the improved use of technologies
Many TNCS achieve economies of scale in marketing due to global
branding and global advertising e.g. McDonalds
Can also be created in HR through global training and development
The aim to achieve economies of scale by having maintenance carried out
in Asia has resulted in industrial dispute and action in 2011 because jobs
were being 'exported' which threatened job security
Scanning and All businesses can benefit from scanning the global environment and
Learning
learning from the best practise of businesses around the world
Kaizen - Japanese for improvement emphasises continuous
improvement in all areas of a business
Diversity of experience can help businesses to learn how to handle any
issues with flexibility and insight
Research
R&D can make a huge difference to the level of innovation, quality and
and
competitive advantage of a business
Development R&D helps businesses to create leading edge technologies and create
(R&D)
innovative products/solutions
Governments encourage R&D through taxation incentives and grants
Central aspect to R&D is ascertaining what consumers want and
creating these products or developing them
CSL Ltd and 3M are one of the biggest R&D spenders in the world
R&D in Qantas aims to develop newer and efficient aircraft done by

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Boeing (in USA) and Airbus (in Europe)