Operations Strategy

2.	Operations Strategy
	2.1.	What is Strategy? Strategic decisions can be classified as those decisions which make major long term changes to the resource base of the organisation in response to external factors such as markets, customers and competitors. Thus strategic decisions occur as a result of an evaluation of the external and internal environment. The external evaluation may reveal market opportunities or threats from competitors. The evaluation of the internal environment may reveal limitations in capabilities relative to competitors. Strategy is seen as complex in nature due to a high degree of uncertainty in future consequences arriving from decisions, integration is required of all aspects and functional areas of business and major change may have to be implemented as a consequence of strategic choices made. Operations strategy is concerned with both what the operation has to do in order to meet current and future challenges and also is concerned with the long-term development of its operations resources and processes so that they can provide the basis for a sustainable advantage (Slack and Lewis, 2011)
	2.2.	Levels of Strategy Strategy can be seen to exist at three main levels within the organisation. At the highest or corporate level the strategy provides very general long-range guidance for the whole organisation, often expressed as a statement of its mission. The mission statement describes in general terms what key decision-makers want the company to accomplish and what kind of company they want it to become. Thus the mission focuses the organisation on specific market areas and the basis on which it must compete. The second level of strategy is termed a business strategy and may be for the organisation or at the strategic business unit level in larger diversified companies. There the concern is with the products and services that should be offered in the market defined at the corporate level. The third level of strategy is termed the operational or functional strategy were the functions of the business (e.g. operations, marketing, finance) make long-range plans which support the business strategy. Since the operations function is responsible in large part for the delivery of the product/service it has a major responsibility for business strategy formulation and implementation. This model implies a ‘top-down’ approach to strategy formulation in which corporate goals are communicated down to business and then functional areas. Although there has always been interaction within this hierarchy in both directions in this model the role of functional areas such as operations in setting the framework for how a company can compete is being recognised. The increasing importance of operations strategy development is discussed in the following section
	2.3.	The Role of Operations in Strategy Development The operations function plays an important role in the formulation and delivery of the organisation’s strategy. Market conditions have changed from a mass production era with an emphasis on high volume, low cost production to an environment demanding performance on measures such as quality and speed of delivery as well as cost. In addition the rapid pace of change in markets means the basis of how the organisation will compete may change quickly over time The traditional approach to strategy development has been for senior managers to establish corporate objectives, develop a strategy for meeting these objectives and then to acquire resources necessary to implement the chosen strategy. This approach is intended to ensure that resources are directed efficiently at the areas identified as ‘strategically’ important from the strategic analysis. The approach is based on the firm’s ability to forecast future market conditions and thus identify gaps between future market needs and organisational capability. However in dynamic markets the ability to forecast far enough into the future in order to build a competitive advantage will be limited. Also this approach has led to an emphasis on relatively short-term objectives and a lack of emphasis on ‘behavioural’ factors such as performance evaluation systems and selection and development of the work-force. The idea is that in dynamic market conditions the strategic plan should indicate the general direction that the organisation should follow based on the capabilities and values it possesses.
	2.4.	Operations Competitive Priorities Operations should focus on specific capabilities that give it a competitive edge which may be termed competitive priorities. Four operations priorities or measures of these capabilities can be termed cost, time, quality and flexibility
		2.4.1.	Cost The time delay or speed of operation can be measured as the time between a customer request for a product/service and then receiving that product/service. Speed is an important factor to the customer in making a choice about which organisation to use. The concept of P:D ratios (Shingo, 1989) compares the demand time D (from customer request to receipt of goods/services) to the total throughput time P of the purchase, make and delivery stages. Thus in a make-tostock system D is basically the delivery time, but for a customer-to-order system the customer demand time is equal to the purchase, make and delivery stages (P). In this case the speed of the internal processes of purchase and make will directly effect the delivery time experienced by the customer. Thus the advantage of speed is that it can either be used to reduce the amount of speculative activity and keep the delivery time constant or for the same amount of speculative activity it can reduce overall delivery lead time. Thus in competitive terms speed can be used to both reduce costs (making to inaccurate forecasts) and reduce delivery time (better customer service).
		2.4.2.	Time The time delay or speed of operation can be measured as the time between a customer request for a product/service and then receiving that product/service. Speed is an important factor to the customer in making a choice about which organisation to use. The concept of P:D ratios (Shingo, 1989) compares the demand time D (from customer request to receipt of goods/services) to the total throughput time P of the purchase, make and delivery stages. Thus in a make-tostock system D is basically the delivery time, but for a customer-to-order system the customer demand time is equal to the purchase, make and delivery stages (P). In this case the speed of the internal processes of purchase and make will directly effect the delivery time experienced by the customer. Thus the advantage of speed is that it can either be used to reduce the amount of speculative activity and keep the delivery time constant or for the same amount of speculative activity it can reduce overall delivery lead time. Thus in competitive terms speed can be used to both reduce costs (making to inaccurate forecasts) and reduce delivery time (better customer service)
		2.4.3.	Quality covers both the quality of the product/service itself and the quality of the process that delivers the product/service. Quality can be measured by the ‘cost of quality’ model were costs are categorised as either the cost of achieving good quality (the cost of quality assurance) or the cost of poor quality products (the costs of not conforming to specifications). The advantages of good quality on competitiveness include increased dependability, reduced costs and improved customer service
		2.4.4.	Flexibility There are a number of areas in which flexibility can be demonstrated. For example it can mean the ability to offer a wide variety of products/services to the customer and to be able to change these products/services quickly. Flexibility is needed so the organisation can adapt to changing customer needs in terms of product range and varying demand and to cope with capacity shortfalls due to equipment breakdown or component shortage. Types of flexibility include product flexibility which is the ability to be able to quickly act in response to changing customer needs with new product/service designs and volume flexibility which is the ability to be able to decrease or increase output in response to changes in demand. Volume flexibility may be needed for seasonal changes in demand as services may have to react to demand changes minute by minute.

     

  

Operations Management

 

1.	Introduction
	1.1.	What is Operations Management? Operations Management is the activity of managing the resources which produce and deliver goods and services (Slack et al., 2010). Operations can be seen as one of many functions (e.g. marketing, finance, personnel) within the organisation. The operations function can be described as that part of the organisation devoted to the production or delivery of goods and services. This means all organisations undertake operations activities because every organisation produces goods and/or services.
	1.2.	Manufacturing and Service Operations Organisations can be classified in two broad categories as either manufacturing or service. Manufacturing organisations produce physical, tangible items which can be stored as inventory before delivery to the customer. Service organisations produce intangible items that cannot be produced ahead of time. One of the key developments in operations is the increasing importance of service operations as service industry accounts for an increasing proportion of the output of industrialised economies. Service operations management is the term that is used to cover the activities, decisions and responsibilities of operations managers in service organisations (Johnston and Clark, 2008). Some of the main implications of the differences between manufacturing and services for operations management are now discussed. Because a service cannot be stored its production and consumption will occur at the same time that implies that the producer of the service will come into contact with the customer. In fact the customer will be involved to a greater or lesser extent in the actual delivery of the operation. For instance a supermarket requires the customer to choose and transport the goods around the store and queue at an appropriate checkout till. However it should not be assumed that all employees in a service operation have to deal directly with a customer. For the supermarket example, the checkout till is an example of high customer contact, but stores personnel may not have to deal directly with the customer at all. This distinction in services is denoted by ‘back office’ tasks which add value to the inputs of the service operation (e.g. stocktaking) and ‘front office’ tasks which deal with the customer both as an input and output of the operation. Because services are intangible then it follows that they cannot have a store of finished goods. Manufacturing operations will often compensate for fluctuations in demand by fulfilling demand from finished goods inventory produced during a slack period. This option is not open to service operations and they must focus on trying to alter the demand pattern to meet capacity by such strategies as discounting the price of the service during periods of low demand. Because the output of a service is intangible it is more difficult to assess performance by such measures as productivity or output. For example a manufacturer can simply count the volume of output of its product range, but an administration service for example will have more difficulty in measuring the productivity of their employees. The quality of a service will be judged by the process of delivering that service as well as the quality of any tangible goods that are involved. This leads to the problem that it is more difficult to measure the quality of service delivery than the quality of manufactured goods. In reality most operations systems produce a mixture of goods and services. Most goods have some supporting service element (e.g. a maintenance facility), called a facilitating service, while many services will have supporting goods (e.g. a management consultancy report), termed a facilitating good.
	1.3.	The Systems View of Operations Management A system is a group of interrelated items in which no item studied in isolation will act in the same way as it would in the system. A system is divided into a series of parts or subsystems, and any system is a part of a larger system. The system’s boundary defines what is inside the system and what is outside. A system’s environment is everything outside the system boundary that may have an impact on the behaviour of the system. A system’s inputs are the physical objects of information that enter it from the environment and its outputs are the same which leave it for the environment The activities in an operations system can be classified as input, transformation process and output. The input activity involves two categories of resources. Transforming resources are the elements that act on, or carry out, the transformation process on other elements. These include such elements as labour, equipment/plant and energy. The nature and mix of these resources will differ between operations. The transformed resources are the elements which give the operations system its purpose or goal. The operations system is concerned with converting the transformed resources from inputs into outputs in the form of goods and services. There are three main types of transformed resource of materials which can be transformed either physically (e.g. manufacturing), by location (e.g. transportation), by ownership (e.g. retail) or by storage (e.g. warehousing), information which can be transformed by property (e.g. accountants), by possession (e.g. market research), by storage (e.g. libraries), or by location (e.g. telecommunications) and customers they can be transformed either physically (hairdresser), by storage (e.g. hotels), by location (e.g. airlines), by physiological state (e.g. hospitals), or by psychological state (e.g. entertainment). Two types of transforming resources are facilities (e.g. building and equipment) and staff (all the people involved in the operations process). The sub-systems of a firm related to specific business disciplines are termed the functional areas of a business. The three main functional areas in a business are the operations, marketing and finance functions. The marketing function works to find and create demand for the company’s goods and services by understanding customer needs and developing new markets. The need for marketing and operations to work closely together is particularly important as the marketing function will provide the forecast of demand from which operations can plan sufficient capacity in order to deliver goods and services on time. The finance function is responsible for the obtaining and controlling of funds and covering decisions such as investment in equipment and price-volume decisions. Other functions which play a supporting role in the organisation include the personnel function which will play a role on the recruitment and labour relations, the research and development function which generates and investigates the potential of new ideas and the information technology department which supplies and co-ordinates the computer-based information needs of the organisation. The relationship between functions can be seen as a number of sub-systems within the system called the ‘organisation’. Thus each function (e.g. marketing) can be treated using the same input/process/output transformation model as the operations function. In other words each function within the organisation can be treated as performing an operations activity, as they are transforming inputs into outputs. This implies every part of the organisation is involved in the operations activity (to an external or internal customer) and thus the theory of operations covered in this book is relevant to them. When operations is cited as a function in itself however it is referring to the part of the organisation which provides goods and services for external customers. The operations function itself is involved in all parts of the firm and thus has a major impact on the competitive position of the organisation. The traditional view of the operations sub-system is that it is one function within a linear sequence of processes and is thus ‘buffered’ from the actions of the marketplace. Thus both physical stocks and allocation of responsibility within functions outside of operations are used to protect the operations system from the external environment. For example the R&D function will carry responsibility for the development of new product ideas which are then ‘passed on’ to the operations function and the purchasing function will take responsibility for the sourcing of materials and bought-in services. Physical buffers include stocks of materials before and after the operations function to ensure stability of supply and ability to meet fluctuating demand respectively. The idea behind this model is that the operations function can concentrate solely on transforming inputs of raw materials into goods and services without the need to consider the external environment outside of the organisational system. The disadvantage of this model includes the slowness of response to changes in the environment as they are transmitted through various connected functions and the inability of operations to develop in response to the needs of customers. In fact the operations function is critical in meeting customer needs and is deeply involved in the performance of the organisation. For example the parameters under which a product/service can be marketed is directly consequent on inputs from the operations functions such as flexibility affecting the product range available. Thus instead of being seen as simply a ‘black box’ which takes raw materials and transforms then into a product/service, the operations function should be seen as critical to the marketing position and competitive advantage of the organisation. The need for operations to improve performance across a number of attributes (e.g. quality, delivery, cost) means that competitive improvements will require long-term commitment and thus a strategic view of operations. The approach requires a commitment to quality improvement and then an improvement in other competitive factors that together will lead to a reduction in cost. This contrasts with the direct approach to cost reduction of cutting the labour force or ‘downsizing’. Apart from failing to tackle the underlying problems and increase performance across the competitive factors, this approach is limited by the fact that direct labour costs typically account for a small proportion of overall costs.
	1.4.	The Process View of Organisations Recently there has been a move away from considering business as a set of discrete functional areas towards a view of the organisation as consisting of sets of processes which link together in order to meet customer needs. Processes can be related in one functional area (e.g. production), but could relate to cross-functional activities (e.g. fulfilling customer orders or even occur in all functional areas (e.g. planning activities). In functional terms the processes would be situated in areas such as operations, marketing and finance, but from the customer’s view the value they gain is dependant on the performance if the set of linked processes involved in the delivery of the product/service. The term ‘value added’ is used to denote the amount of value a process creates for its internal or external customer. The set of processes used to create value for a customer is often called the value chain. The value chain includes primary processes that directly create the value the customer perceives and support processes that assist the primary process in adding value. The key issue is that the configuration of the value chain should be aligned with the particular way the organisation provides value to the customer.