operation Performance & Operation stategy

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Operation & production Management

Transcript of operation Performance & Operation stategy

  • 1. OPERATIONS & PRODUCTION MANAGEMENT Lecture 2

2. Operations performance and Operations Strategy Introduction The quality objective The speed objective The dependability objective The flexibility objective The cost objective The top-down and bottom-up perspectives The market requirements and operations resources perspectives The process of operations strategy 3. EXAMPLE Operations management can have a very significant impact on a businesss financial performance. Even when compared with the contribution of other parts of the business, the contribution of operations can be dramatic. Consider the following example. Kandy Kitchens currently produce 5,000 units a year. The company is considering three options for boosting its earnings. Option 1 involves organizing a sales campaign that would involve spending an extra a100,000 in purchasing extra market information. It is estimated that sales would rise by 30 per cent. Option 2 involves reducing operating expenses by 20 per cent through forming improvement teams that will eliminate waste in the firms operations. Option 3 involves investing a70,000 in more flexible machinery that will allow the company to respond faster to customer orders and therefore charge 10 per cent extra for this speedy service. Table 2.2 illustrates the effect of these three options. 4. ANALYSIS OF EXAMPLE Option 1:Increasing sales volume by 30 per cent certainly improves the companys sales revenue, but operating expenses also increase. Nevertheless, earnings before investment and tax (EBIT) rise to a1,000,000. Option 2 :But reducing operating expenses by 20 per cent is even more effective, increasing EBIT to a1,200,000. Furthermore, it requires no investment to achieve this. Option 3 :The third option involves improving customer service by responding more rapidly to customer orders. The extra price this will command improves EBIT to a1,000,000 but requires an investment of a70,000. Note how options 2 and 3 involve operations management in changing the way the company operates. Note also how, potentially, reducing operating costs and improving customer service can equal and even exceed the benefits that come from improving sales volume. 5. The stakeholder perspective on operations performance 6. Operations can contribute to competitiveness 7. Top managements performance objectives for operations Of all stakeholder groups, it is the organizations top management who can have the most immediate impact on its performance. They represent the interests of the owners (or trustees, or electorate, etc.) and therefore are the direct custodians of the organizations basic purpose. They also have responsibility for translating the broad objectives of the organization into a more tangible form. So what should they expect from their operations function. Broadly they should expect all their operations managers to contribute to the success of the organization by using its resources effectively. To do this it must be creative, innovative and energetic in improving its processes, products and services. In more detail, effective operations management can give five types of advantage to the business: 8. OM five types of advantage to the business It can reduce the costs of producing products and services, and being efficient. It can achieve customer satisfaction through good quality and service. It can reduce the risk of operational failure, because well designed and well run operations should be less likely to fail, and if they do they should be able to recover faster and with less disruption (this is called resilience). It can reduce the amount of investment (sometimes called capital employed) that is necessary to produce the required type and quantity of products and services by increasing the effective capacity of the operation and by being innovative in how it uses its physical resources. It can provide the basis for future innovation by learning from its experience of operating its processes, so building a solid base of operations skills, knowledge and capability within the business. 9. The Five Operations Performance Objectives 1. Quality: You would want to do things right; that is, you would not want to make mistakes, and would want to satisfy your customers by providing error-free goods and services which are fit for their purpose. This is giving a quality advantage. 2. Speed : You would want to do things fast, minimizing the time between a customer asking for goods or services and the customer receiving them in full, thus increasing the availability of your goods and services and giving a speed advantage. 3. Dependability: You would want to do things on time, so as to keep the delivery promises you have made. If the operation can do this, it is giving a dependability advantage. 4. Flexibility: You would want to be able to change what you do; that is, being able to vary or adapt the operations activities to cope with unexpected circumstances or to give customers individual treatment. Being able to change far enough and fast enough to meet customer requirements gives a flexibility advantage. 5. Cost: You would want to do things cheaply; that is, produce goods and services at a cost which enables them to be priced appropriately for the market while still allowing for a return to the organization; or, in a not-for-profit organization, give good value to the taxpayers or whoever is funding the operation. When the organization is managing to do this, it is giving a cost advantage. 10. The Quality Objective Quality is consistent conformance to customers expectations Quality is the most visible part of what an operation does It is something that A customer finds relatively easy to judge about the operation It is clearly A major influence on customer satisfaction or dissatisfaction A customer perception of high-quality products and services means customer satisfaction And therefore the likelihood that the customer will return. 11. Quality Inside The Operation Quality reduces costs. The fewer mistakes made by each process in the operation, the less time will be needed to correct the mistakes and the less confusion and irritation will be spread. Quality increases dependability. Increased costs are not the only consequence of poor quality. At the supermarket it could also mean that goods run out on the supermarket shelves with a resulting loss of revenue to the operation and irritation to the external customers. 12. The Speed Objective 13. The Speed Objective Inside the operation, speed is also important. Fast response to external customers is greatly helped in: decision-making and speedy movement of materials and information inside the operation. 14. Speed inside the operation Speed reduces inventories. Speed reduces risks. Forecasting tomorrows events is far less of a risk than forecasting next years. The further ahead companies forecast, the more likely they are to get it wrong. The faster the throughput time of a process the later forecasting can be left. 15. The dependability objective 16. Dependability inside the operation Dependability saves time Dependability saves money. Dependability gives stability 17. The flexibility objective 18. The flexibility objective Product/service flexibility the operations ability to introduce new or modified products and services; Mix flexibility the operations ability to produce a wide range or mix of products and services; Volume flexibility the operations ability to change its level of output or activity to Produce different quantities or volumes of products and services over time; Delivery flexibility the operations ability to change the timing of the delivery of its services or products. 19. Flexibility inside the operation Flexibility speeds up response. Flexibility saves time. Flexibility maintains dependability. 20. Low cost is a universally attractive objective Productivity Single-factor productivity Multi-factor productivity 21. Single-factor productivity Often partial measures of input or output are used so that comparisons can be made. in the automobile industry productivity is sometimes measured in terms of the number of cars produced per year per employee. This is called a single-factor measure of productivity. Single-factor productivity=Output from the operation One input to the operation 22. The cost objective Productivity is the ratio of what is produced by an operation to what is required to produce it. The measure that is most frequently used to indicate how successful an operation is at doing this is productivity. Output from operations Input to operations 23. Multi-factor productivity Total factor productivity is the measure that includes all input factors. Multi-factor productivity = Output from the operation All inputs to the operation 24. Improving productivity to reduce the cost of its inputs while maintaining the level of its outputs reducing the costs of some or all of its transformed and transforming resource inputs. cutting out waste 25. Cost reduction through internal effectiveness High-quality operations do not waste time or effort having to re-do things, nor are their internal customers inconvenienced by flawed service. Fast operations reduce the level of in-process inventory between and within processes, as well as reducing administrative overheads. Dependable operations do not spring any unwelcome surprises on their internal customers. They can be relied on to deliver exactly as planned. This eliminates wasteful disruption and allows the other micro-operations to operate efficiently. Flexible operations adapt to changing circumstances quickly and without disrupting the rest of the operation. Flexible micro- operations can also change over between tasks quickly and without wasting time and capacity. 26. External effect of five performance objectives 27. Worked example Slap.com is an Internet retail