Operational Processes: Strategies for Effective Product and Service Delivery, Study notes of Food Science and Technology

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Operations Management

Chapter

6.1 Overview of operations management

Operations Management Operations management (OM) is any business function responsible for managing the process of making goods and services.

Operations Strategy The total pattern of decisions which shape the long-term capabilities of any type of operations and their contribution to the overall strategy, through the reconciliation of market requirements with operations resources. ( Definition: Slack and Lewis)

Operations management (OM) is any business function responsible for managing the process of making goods and services and without it there would be no products or services to sell to customers. It is any management function responsible for planning, controlling and coordinating the necessary inputs (resources) such as technology, information, people, equipment, inventory etc. and managing the transformational processes of ‘making goods or services’. Organisations heavily rely upon operational processes to produce effective products and efficiently deliver them on time and customers receiving services relative to buying goods, will often participate more extensively in the creation and delivery of services ‘more visibly’ seeing operations being performed.

Operational management has a major impact on the cost of producing products or services and how well the products and services are produced and delivered. Operational functions (departments) are the transformational processes required to convert business inputs (resources) in ways that add value (utility) for customers, therefore higher customer willingness to pay and profit margin. Operations management is critical to gaining competitive advantage (‘order winners’) for an organisation.

Examples of operational functions within an organisation

∑ Merchandising ‘where retail occurs, bricks or clicks’ e.g. store outlets or websites. ∑ Manufacturing, production or processing e.g. physical manufacturing and assembly. ∑ Customer support e.g. customer call centres, customer service and after sales service, customer complaints and warranty (repair) departments. ∑ Warehousing, logistics and transport e.g. storage, transport and inventory control.

The four Vs of operations strategy

According to Slack, Chambers and Johnston the goal of any organisation is to make the most effective use of its operations while ensuring that its customers are satisfied with the quality, cost, availability and quantity of goods or services. The four Vs of operations according to them can help all types of organisation make the most effective use of their operations. Organisations can make more effective use of their resources (inputs) to make products or services (output) in a number of ways;

∑ Volume e.g. this dimension is key to organisations like McDonalds, where uniformity, standardisation, automation and routine are key to achieving high volumes (mass production) of output and therefore low cost per unit. This

6.2 Porter’s value chain analysis

A value chain is ‘the sequence of business activities by which in the perspective of the end user, value is added to the products or services produced by an organisation’. (CIMA).

Value chain analysis (VCA) is a position audit tool which examines the current and ‘internal’ position of an organisation. It is ideal tool to examine holistically the operational processes of an organisation. According to Professor Michael Porter, an organisation receives resources (inputs) from its environment and converts (processes) these into products or services (outputs), in doing so it creates ‘added value’ (margin or profit) for the organisation and its customers.

Porter grouped nine business processes or activities of an organisation into what he called the value chain activities classified as either primary or secondary activities. Each activity incurs cost but in combination with other activities will provide customer satisfaction and added value. Profit margin is the value created when combining activities.

∑ Primary activities are processes or activities directly involved in the provision of the good or service the organisation makes or provides e.g. inbound logistics, operations, outbound logistics, marketing/sales and after sales service ∑ Secondary or support activities support the primary activities by providing necessary support and resources, but are not directly involved in the provision of the good or service the organisation makes or provides e.g. infrastructure, human resource management (HRM), technology and procurement ∑ Activities are business processes the organisation manages in order to ‘add value’ e.g. the product or service should be worth more than its cost of the individual parts or resources required to make it, allowing profit margin to be earned.

Infrastructure

HRM

Technology

Procurement

Inbound Logistics

Operations Outbound Logistics

Marketing & Sales

After Sales Service

Primary Activities

Margin

Margin

SecondaryActivities

Inbound logistics

Business processes that receive, handle and store inputs (resources) e.g. warehousing, inventory control and inbound transport.

Operations

Business processes which are ‘transformational’ and convert inputs to outputs e.g. staff, materials, machines, equipment etc. used to assemble the final product or service.

Outbound logistics

Business processes which deliver the final product (output) when it leaves the organisation e.g. outbound storage and transportation of goods to the customer or another third party intermediary within the supply chain.

Marketing & Sales

Business process of researching customer needs, targeting specific customers, selling to them and designing an effective marketing strategy for the organisations products and services.

After sales service

Business processes that support the product or service (output) when it has left the organisation e.g. departments that deal with product returns, customer complaints, after sales training and product support.

Procurement

Business processes to manage and negotiate the acquisition of resources (inputs) for the other activities e.g. components, raw materials and equipment. Ensures resources required are in the right place at the right time and right cost e.g. purchasing departments.

Technology development

Business processes required for innovation, product design and testing or the invention of new products and processes e.g. product design or research and development (R&D) departments.

Human resource management (HRM)

Business process to procure and look after the organisations most valued asset ‘its staff’ e.g. staff recruitment, selection, training, development, retention and reward. Staff are a vital requirement for all activities.

Infrastructure

Business processes to support the whole of the value chain but not belonging to any of the other eight categories of activity above e.g. head office, legal, finance, IT, buildings maintenance, quality control, staff canteen.

Benefits of BPR

¸ Competitive advantage e.g. cost, lead time, efficiency. ¸ Added value to customers e.g. quality and satisfaction. ¸ Reduction in staff headcount and paper flow when automating. ¸ Improvement in staff morale and motivation when using new technology. ¸ Regular projects keep pace with new technology and change.

The stages in a BPR exercise

1. Identify processes to be re-engineered e.g. those suitable for innovation
2. Understand, break down and analyse the process
3. Identify ‘change levers’ e.g. look at new or existing technology to improve it
4. Rationalise or eliminate process if it does not add value
5. Redesign process to operate in the most efficient cost effective way
6. Reassemble, implement process and manage change
7. Monitor and review to ensure the expected benefits are realised

Process innovation

Process innovation is more transformational or ‘step change’ for an organisation, process innovation is radical change or large scale change to the operations or processes of an organisation. Often this type of change involves major restructuring, reorganisation and cultural change often necessary, perhaps a completely new way of thinking. A good example would be e-commerce first introduced by an organisation as an entirely new medium for selling its products or services.

Examples of process innovation

∑ Henry Ford’s first use of the mass production line within the car industry. ∑ Lithography method used to manufacture microchips within the computer industry. ∑ Internet, barcodes and scanners within the retail industry.

BPR contrasted with process innovation

BPR fundamentally redesigns existing business processes.

∑ Identifies and analyses existing processes to innovate. ∑ Rationalises or eliminates if it does not add value. ∑ Redesigns and reassembles existing processes to operate efficiently and effectively.

Process innovation takes a process view of an organisation, as does BPR, but with the application of transformational innovation to a process, it creates an entirely new processes and therefore considered more radical than BPR.

∑ Creates new processes ∑ May involve cultural change and major restructuring ∑ Greater chance of adding value

6.4 Process mapping

Process design is the activity of determining workflow, equipment and other resource needs, for a process (activity) to work effectively. Good process design typically uses flowcharting as a tool for a process to be improved, it is normally a good idea to first illustrate the process in order to undertand it, communicate this to others ‘visually’ and then work on its improvement. Process mapping is the use of flow charts or diagrams e.g. arrows, symbols and shapes in order to facilitate the understanding of a process. It is a tool which assists with good process design. Each symbol in a process map is used to demonstrate the flow of a process from start to finish. There are many other flowchart symbols that can also be used, but more importantly flow charts will help to communicate understanding of a process.

∑ Oval shapes or elongated circles signify the start or termination of a process.

∑ Rectangles signify processes, instructions or actions.

∑ Diamonds show decisions that need to be made.

Benefits of process mapping

¸ Management understanding of processes better when mapping is used. ¸ Supports other tools such as benchmarking, business process re-engineering and lean management (or waste elimination) to achieve dramatic improvements in customer satisfaction or cost reduction. ¸ Worker understanding of where their roles and responsibilities are linked within a process and how this integrates with other processes. ¸ Diagrammatically can highlight process inefficiencies or lack of value and help focus on where improvement is needed. ¸ Can be used for structured ‘walk through’ testing to confirm logic of a process. ¸ Can be used to set up prototype designs for new processes. ¸ Step-by-step flow without being overwhelmed by the bigger picture.

Mapping processes can be complex, long winded and awkward and getting everyone to agree with what a new process ‘should be like’ may take many redrafts. Microsoft Visio is an example of a ready-to-use software package for process mapping, which can be used to minimise work effort for professionally designing process maps.

study of past (historical) performance e.g. high low method, time series, regression analysis, or scatter graphs. The major limitation of these methods is that past performance may not be a good indication of the future. ∑ Market test methods could include consumer trials and testing of new products or product features for consumers to give their direct and often qualitative opinions and feedback to ascertain likely popularity. Testing provides valuable assistance in determining future ‘potential’ for customer demand, providing the research is not flawed or poorly designed. ∑ Queuing theory e.g. a mathematical study of the formation of waiting lines or queues (electronic or physical), for when customer ‘arrivals’ occur at random intervals. The theory can produce several performance measures e.g. average waiting times, or expected number of customers at certain times. Queuing theory is generally considered a branch of operations management because the results can be used to plan for resources needed to provide a product or service. Examples include software intelligent agents to monitor call centre phone activity or direct (or CCTV) monitoring of physical customer queues in a supermarket. Often viewed as too mathematically restrictive to be able to model all real world situations exactly on it.

Queuing theory enables a series of performance measures to be monitored.

¸ Performance measures can be calculated to help improve operations. Ratios such as average waiting times can be monitored for the impact on customer satisfaction. ¸ Expected number of customers can be determined in advance for more effective staff and resource planning. ¸ Can be used to respond to variations in demand for products or services e.g. marketing promotion can help 'smooth' peaks and troughs in demand. ¸ Internal benchmarking e.g. ratios of different sales outlets compared to identify where improvement in customer throughput is required.

Factors that influence capacity

∑ Resources available e.g. quantity of labour and skills, quantity of machines and times available. ‘Bottlenecks’ restrict an organisations resource capacity to supply. Flexibility from staff and other resources can help achieve quicker lead times. ∑ Physical space e.g. maximum seating in a stadium or restaurant, or maximum production space to manufacture goods. ∑ Efficiency and waste e.g. time taken to convert inputs (resources) into the product or service (output). The minimisation of staff idle time (or other resources) and wastage levels from inputs is vital to maximise efficiency, increase throughput and reduce cost. ∑ Lead time (responsiveness) e.g. high set up time for production or long production cycles can make supply very unresponsive (inelastic) to changes in customer demand.

6.6 Achieving workforce flexibility

Types of staff flexibility

∑ Functional flexibility^ (task flexibility or^ ‘multi-skilled’^ employees) is achieved by breaking down traditional occupational boundaries and specialisation. Manufacturing workers for example may be required to take on other indirect tasks such as quality control, cleaning of work area, routine machine maintenance and learn new production processes and skills. This enables staff (or their skills) to be used more flexibly by being moved around the organisation in order to save cost or cover absenteeism. Functional flexibility can be achieved by staff secondments, training and job rotation to learn new skills. ∑ Financial flexibility^ is achieved by using performance related pay systems e.g. staff paid per unit of product they make or sell, this helps achieve better cash-flow management when production is slack. Financial flexibility converts staff cost from fixed to variable therefore supporting better cash-flow management. ∑ Numerical flexibility^ enables a firm to rapidly adjust the number of staff it has to changing levels of customer demand. This can be achieved by reducing permanent full-time staff and recruiting instead more subcontractors, temps or part-time workers. ∑ Temporal flexibility^ can be achieved by varying the time of day or days in the week an employee is willing to work e.g. time off in lieu after working longer shifts to accommodate a surge in demand, or covering for other staff shifts at a moment’s notice. It can be achieved by staff contract terms or culturally accepted by staff. ∑ Location flexibility^ is to do with the^ ‘geographical mobility’^ of the organisations staff such as the ability to move staff between offices, branches or outlets within other parts of the country and even internationally. It can be achieved by staff contract terms or culturally accepted by staff.

The flexible firm model proposed by John Atkinson, divides employees into three categories: core, peripheral and external labour. The shamrock organisation proposed by Charles Handy, divides employees into three categories: core, contractual and flexible labour. Both models explain how organisations can achieve greater flexibility.

The “flexible firm”

The concept of the “flexible firm” was proposed by John Atkinson, he recognised that organisations will require greater flexibility if they are to adapt swiftly and meet the ever evolving market and competitive challenges they face. Greater workforce flexibility maybe required due to uncertain market conditions or seasonal changes in demand, this helps achieve greater cost-effectiveness for the organisation. The “flexible firm” model suggests that we can design flexible staff arrangements to proactively meet business needs. For example more numerical flexibility can be achieved by the use of peripheral workers (part- time or temporary staff) or external labour (freelancers, sub-contractors, or self-employed). Core workers (full-time permanent employees) are not as easy to reduce in number when business contraction is required however can provide greater functional flexibility.

6.7 Capacity planning and control

Capacity planning and control is about how an organisation responds to variations in demand for its products in order to balance capacity (supply) with demand by its customers.

Level capacity strategy

The organisation manufactures (produces or makes) its products at a ‘constant rate’ of output, ignoring any fluctuation in customer demand levels. This means ‘stockpiling’ during periods when customer demand is low and then the running down of inventory levels to fulfil customer demand during peak times e.g. when demand outstrips capacity.

¸ Full utilisation of operational resources at all times. ¸ Efficient mass production levels can be held at a constant rate. ¸ Lowers average unit cost of products e.g. mass production drives down cost. High risk of stock obsolescence if customer preferences or needs change. High cost in service industries when assets are under-utilised e.g. idle in off-peak.

Chase demand strategies

The opposite to a level capacity strategy. The organisation continually ‘chases’ customer demand and extends or contracts its supply (output or capacity) to match existing customer demand levels e.g. a Just In Time (JIT) system, or ‘pull demand strategy’. This strategy will require flexible utilisation of operational resources e.g. constant adjustment to resource and workforce capacity using methods such as ‘quick hiring and then lay-offs’ using part-time and casual labour, or the use of overtime working from permanent staff during moments of ‘peak demand’.

¸ Flexible utilisation of resources for better economies of scope e.g. cost savings by utilising the ‘same staff or machines’ to make a ‘variety’ or ‘variation’ of products. ¸ Minimisation of inventory levels e.g. aim of JIT is ‘stockless production’, so materials or finished goods are ordered or made only when there is a customer order, less cash-flow is tied up within inventory when resources are under-utilised. Over reliance on flexible staff during ‘peak’ periods of time e.g. overtime, temps or sub-contractors can hinder responsiveness to surges in customer demand. High risk of disruption given the organisation does not store inventory, so it may fail to deliver on time and respond to surges in customer demand.

Demand management strategies

The aim of this strategy is to influence customer demand levels, in order to match demand closer to the organisations most ‘efficient’ operating capacity. It is a strategy to ‘smooth out’ customer demand during ‘peak’ and ‘off peak’ periods. Continual adjustments are made to the ‘marketing mix’ of products to influence demand levels such as product pricing adjustment or promotional activities to help 'smooth' demand peaks and troughs.

¸ Helps maintain full capacity to avoid layoffs or under-utilised resources. ¸ Maintains a constant level of production and activity for greater cost efficiency. Not always effective e.g. promotion to encourage demand ‘off peak’ may not work. Offer of price discounts during ‘off peak’ periods can financially harm profitability. Surges in customer demand during ‘peak’ periods can harm customer satisfaction.

Outsourcing

Another way an organisation can respond to variations in demand for its products is by

using subcontracting or outsourcing for operational work performed in order to meet temporary fluctuations in demand. But this is not always a possible strategy and can work

out more expensive as a long-term strategy.

Demand management strategies further explained

As an illustration, a car manufacturer in times of ‘over capacity’ could attempt to stimulate more demand from customers during these times e.g. cash back offers, 0% finance deals, discounted price reductions, more attractive warranties, free insurance and aggressive advertising. During times of ‘under capacity’ they could attempt to stimulate less customer demand e.g. ‘order next year’s model today’, reduction in advertising expenditure and waiting lists, however this can make the organisation appear to be ignoring its customer needs and lead to customer dissatisfaction during such times.

A service organisation like Thomas Cook, the holiday operator, often slashes holiday resort prices during the winter season to encourage customers to switch the time they go on holiday, they also offer ‘early bird’ discounts to encourage customers to book earlier before peak season. Service organisations too can have the effect of dissatisfying customer’s e.g. high prices charged during school (‘peak season’) holidays when attempting to discourage customer demand.

Another issue with services and capacity management is that services are not physical goods and therefore cannot be stored; they are labour intensive to deliver and have instant perishability. It is therefore less likely that service organisations would use a level demand strategy especially if demand levels are volatile.

6.8 The concept of sustainability in operations management

Sustainability within operations management is about preserving natural resources for future generations e.g. minimisation of carbon footprint. A fully sustainable operation is one that has a zero impact or positive impact on the ecological environment. Organisations in recent decades have begun to consider how their operations affects the environment and future generations and are beginning to acknowledge new practices of doing business in a way that balances economic and environmental needs for better sustainability. The field of operations management has a vital role to play in the long-term sustainability of our economy.

Sustainability is a business ethical responsibility concerning the organisations duties or responsibilities towards the wider environment, community or society as a whole. Being socially irresponsible can create a bad image through the adverse public image and media coverage it can cause e.g. BP Deep Water Horizon oil spill.

Practices for better sustainability

∑ Reduction in the production of toxic substances, carbon emissions and other greenhouse gasses (GHGs) from the organisations activities. ∑ Reduced reliance on fossil fuel such as petroleum and other non-renewable energy. ∑ Use of natural, renewable and biodegradable materials e.g. naturally reabsorbed into the ecosystem. ∑ Redesigning packaging and products to use less material or energy. ∑ Reducing energy and pollution from transportation, logistics and manufacturing.

The organisations ‘environmental footprint’ or environmental impact is determined by the amount of depleted raw materials and non-renewable resources it consumes to make its products as well as the quantity of waste and emissions it generates in this process. The life cycle of a product should take into consideration not just the raw materials it consumes in its production, but all other manufacturing processes, distribution and transportation caused by the products existence, right through to its final disposal. It is important to consider sustainability not just within the organsiation but throughout its entire supply chain.

To produce 1 ounce of gold creates 30 tonnes of toxic waste because of the compound ‘cyanide’ used in the process for extracting gold. 1 ounce of gold will make a wedding ring.

Bennett and James ‘dimensions or areas for environmental responsibility’

∑ Production e.g. minimising waste and carbon emissions. ∑ Environmental auditing e.g. to comply with legislation and take a more proactive stance towards sustainability by reporting and being transparent about it. ∑ Ecological approach e.g. minimising waste throughout entire value and supply chain. ∑ Quality e.g. set targets to reduce environment waste and emissions. ∑ Accounting e.g. account for ‘social costs’ to society or third parties within decision making such as carbon footprint from the organisations activities. ∑ Economic e.g. internal economic charges for any ‘social cost’ created by divisions or departments to discourage pollution and carbon emissions.

ISO 14001 is an international standard for “Environmental Management Systems” and offers internationally recognised environmental certification. To gain accreditation a documented and structured approach must be adopted for setting environmental targets and monitoring systems implemented to ensure environmental management systems are effective e.g. meeting targets for the minimisation of energy consumption, waste and emissions.

Benefits of sustainable practices

¸ Competitive performance can be improved by the organisation by differentiating itself relative to the competition on the basis of sustainability. M&S launched “Plan A" in January 2007, there is no “Plan B”, setting out commitments with the ultimate goal of becoming the world's most sustainable major retailer. This in itself drew huge publicity to the brand and reputation of M&S. ¸ Socially responsible (‘green’) customers often are willing to pay premium prices, which can be a big boost to sales revenue and profits. ¸ Green investors can bolster up the share price of more sustainable organisations e.g. recycling or renewable energy companies. ¸ Sustainable business practices can reduce cost and play a valuable role when supporting ‘lean production’ or waste elimination as a principle.

Example 6.

Identify FIVE examples where waste elimination principles can be applied to a service organisation such as a hairdresser and also for a manufacturer, such as one that makes household electrical products.

Total productive maintenance (TPM)

TPM aims to shorten lead times in production by ensuring production and maintenance staff work closer together. Machine operators and assembly workers are empowered and trained to undertake routine servicing, fault diagnosis and maintenance of their own operating machinery in order to speed up throughput or potential hold ups in production flow due to machine down time. Total productive maintenance (TPM) is a concept to improve productivity of the organisations equipment and contribute towards a leaner production system.

Benefits of TPM

¸ Less equipment downtime and major stoppages in production therefore greater efficiency of production flow. ¸ A better understanding by production workers of the performance of their equipment and machines therefore can diagnose and rectify problems quicker. ¸ Less reworks, scrap and wastage levels through better maintenance of machines and equipment. ¸ More effective teamwork and job rotation can help to improve flexibility for who can respond to routine problems. ¸ Increased enthusiasm and motivation of the workforce e.g. job enrichment due to new skills and challenges. ¸ Improved service to customers by reducing lead times and improving the quality of products made.

Just in time

The JIT philosophy requires that products should only be produced if there is an internal or external customer waiting for them. It aims ideally for zero stock e.g. raw materials delivered immediately at the time they are needed, no build up of work-in-progress within the production cycle and finished goods only produced when there is a customer waiting for them. This means cash is not tied up unnecessarily within raw material, work-in-progress or finished goods, allowing more effective cash flow management for the organisation. JIT is an example of a chase demand strategy for balancing capacity (supply) and demand.

Characteristics of JIT

1. Closer relationships with suppliers maintained.
2. Smaller and more frequent deliveries to plan and administrate.
3. Higher quality machines with regular maintenance to avoid delays.
4. Involvement and training of staff to maintain flexibility and diversity of skills.

Total quality management (TQM)

TQM is the process of embracing a quality conscious philosophy or culture within an organisation, aiming towards standards of near perfection and continuous improvement.

Characteristics of TQM

1. Get it right first time as an organisational philosophy.
2. Continuous improvement aims towards zero defects, idle time and wastage.
3. Quality assurance procedures and systems for the prevention of poor quality.
4. Organisational culture developed that ‘quality is everyone’s concern’.
5. Participation and teamwork encouraged for continuous improvement.

Layout and flow

Layout and flow is about how production processes and inventory movement is designed within operations management. Layout and flow has an impact on how materials, components, work-in-progress and finished goods travel through a manufacturing or service operation. The main advantages of good layout and flow is the minimisation of distance travelled for inventory, better maintenance of the quality of production flow and minimisation of wastage, it can also save money by reducing physical space required.

Focus factories (product layouts)

Focus factories are organised into smaller standalone factories with each team responsible for making a complete product (or small range of products). This enables product expertise to be developed, reduces movement of raw material and work-in-progress, reduces customer waiting times and speeds up production. Traditional factories produced many products for many customers in many markets, but focus factories ‘focus’ on a limited and more manageable set of products or markets. The manufacturing operations of most multi-national car manufacturers are built around this principle.

Dedicated cell production (cellular manufacturing or process layouts)

Workers and machines are organised into manufacturing cells to undertake common and standardised processes e.g. just milling, or just grinding, or just assembly, in order to make a common set of family parts or components for the final products. Reorganisation of production into ‘cells’ with dedicated teams can enhance efficiency and synergise worker skills and knowledge, Cellular manufacturing supports lean production by lowering cost because of the similarities in processing different products and therefore the specialisation and standardisation of processes can achieve better economies of scope.