Introduction to Operation & production Management

Editor's Notes

• #19: Operations in the organization The operations function is central to the organization because it produces the goods and services which are its reason for existing, but it is not the only function. It is, however, one of the three core functions of any organization. These are: ● the marketing (including sales) function – which is responsible for communicating the organization’s products and services to its markets in order to generate customer requests for service; Operations management Operations function Operations managers Three core functions ●● the product/service development function – which is responsible for creating new and modified products and services in order to generate future customer requests for service; ● the operations function – which is responsible for fulfilling customer requests for service through the production and delivery of products and services. In addition, there are the support functions which enable the core functions to operate effectively. These include, for example: ● the accounting and finance function – which provides the information to help economic decision-making and manages the financial resources of the organization; ● the human resources function – which recruits and develops the organization’s staff as well as looking after their welfare. Remember that different organizations will call their various functions by different names and will have a different set of support functions. Almost all organizations, however, will have the three core functions, because all organizations have a fundamental need to sell their services, satisfy their customers and create the means to satisfy customers in the future. Table 1.1 shows the activities of the three core functions for a sample of organizations. In practice, there is not always a clear division between the three core functions or between core and support functions. This leads to some confusion over where the boundaries of the operations function should be drawn. In this book we use a relatively broad definition of operations. We treat much of the product/service development, technical and information systems activities and some of the human resource, marketing, and accounting and finance activities as coming within the sphere of operations management. We view the operations function as comprising all the activities necessary for the day-to-day fulfilment of customer requests. This includes sourcing products and services from suppliers and transporting products and services to customers. Working effectively with the other parts of the organization is one of the most important responsibilities of operations management. It is a fundamental of modern management that functional boundaries should not hinder efficient internal processes. Figure 1.1 illustrates some of the relationships between operations and some other functions in terms of the flow of information between them. Although it is not comprehensive, it gives an idea of the nature of each relationship. However, note that the support functions have a different relationship with operations than operations has with the other core functions. Operations management’s responsibility to support functions is primarily to make sure that they understand operations’ needs and help them to satisfy these needs. The relationship with the other two core functions is more equal – less of ‘this is what we want’ and more ‘this is
• #26: A lean organization understands customer value and focuses its key processes to continuously increase it. The ultimate goal is to provide perfect value to the customer through a perfect value creation process that has zero waste. Lean for Production and ServicesA popular misconception is that lean is suited only for manufacturing. Not true. Lean applies in every business and every process. It is not a tactic or a cost reduction program, but a way of thinking and acting for an entire organization.
• #30: The input–transformation–output process All operations produce products and services by changing inputs into outputs using an ‘input-transformation-output’ process. Figure 1.3 shows this general transformation process model. Put simply, operations are processes that take in a set of input resources which are used to transform something, or are transformed themselves, into outputs of products and services. And although all operations conform to this general input–transformation–output model, they differ in the nature of their specific inputs and outputs. For example, if you stand far enough away from a hospital or a car plant, they might look very similar, but move closer and clear differences do start to emerge. One is a manufacturing operation producing ‘products’, and the other is a service operation producing ‘services’ that change the physiological or psychological condition of patients. What is inside each operation will also be different. The motor vehicle plant contains metal-forming machinery and assembly processes, whereas the hospital contains diagnostic, care and therapeutic processes. Perhaps the most important difference between the two operations, however, is the nature of their inputs. The vehicle plant transforms steel, plastic, cloth, tyres and other materials into vehicles. The hospital transforms the customers themselves. The patients form part of the input to, and the output from, the operation. This has important implications for how the operation needs to be managed. Inputs to the process One set of inputs to any operation’s processes are transformed resources. These are the resources that are treated, transformed or converted in the process. They are usually a mixture of the following: ● Materials – operations which process materials could do so to transform their physical properties (shape or composition, for example). Most manufacturing operations are like this. Other operations process materials to change their location (parcel delivery companies, for example). Some, like retail operations, do so to change the possession of the materials. Finally, some operations store materials, such as in warehouses. ● Information – operations which process information could do so to transform their informational properties (that is the purpose or form of the information); accountants do this. Some change the possession of the information, for example market research companies sell information. Some store the information, for example archives and libraries. Finally, some operations, such as telecommunication companies, change the location of the information. ● Customers – operations which process customers might change their physical properties in a similar way to materials processors: for example, hairdressers or cosmetic surgeons. Some store (or more politely accommodate) customers: hotels, for example. Airlines, mass rapid transport systems and bus companies transform the location of their customers, while hospitals transform their physiological state. Some are concerned with transforming their psychological state, for example most entertainment services such as music, theatre, television, radio and theme parks. Often one of these is dominant in an operation. For example, a bank devotes part of its energies to producing printed statements of accounts for its customers. In doing so, it is processing inputs of material but no one would claim that a bank is a printer. The bank is also concerned with processing inputs of customers. It gives them advice regarding their financial affairs, cashes their cheques, deposits their cash, and has direct contact with them. However, most of the bank’s activities are concerned with processing inputs of information about its customers’ financial affairs. As customers, we may be unhappy with badly printed statements and we may be unhappy if we are not treated appropriately in the bank. But if the bank makes errors in our financial transactions, we suffer in a far more fundamental way. Table 1.3 gives examples of operations with their dominant transformed resources. The other set of inputs to any operations process are transforming resources. These are the resources which act upon the transformed resources. There are two types which form the ‘building blocks’ of all operations: ● facilities – the buildings, equipment, plant and process technology of the operation; ● staff – the people who operate, maintain, plan and manage the operation. (Note that we use the term ‘staff ’ to describe all the people in the operation, at any level.) The exact nature of both facilities and staff will differ between operations. To a five-star hotel, its facilities consist mainly of ‘low-tech’ buildings, furniture and fittings. To a nuclearpowered aircraft carrier, its facilities are ‘high-tech’ nuclear generators and sophisticated electronic equipment. Staff will also differ between operations. Most staff employed in a factory assembling domestic refrigerators may not need a very high level of technical skill. In contrast, most staff employed by an accounting company are, hopefully, highly skilled in their own particular ‘technical’ skill (accounting). Yet although skills vary, all staff can make a contribution. An assembly worker who consistently misassembles refrigerators will dissatisfy customers and increase costs just as surely as an accountant who cannot add up. The balance between facilities and staff also varies. A computer chip manufacturing company, such as Intel, will have significant investment in physical facilities. A single chip fabrication plant can cost in excess of $4 billion, so operations managers will spend a lot of their time managing their facilities. Conversely, a management consultancy firm depends largely on the quality of its staff. Here operations management is largely concerned with the development and deployment of consultant skills and knowledge. Outputs from the process Although products and services are different, the distinction can be subtle. Perhaps the most obvious difference is in their respective tangibility. Products are usually tangible. You can physically touch a television set or a newspaper. Services are usually intangible. You cannot touch consultancy advice or a haircut (although you can often see or feel the results of these services). Also, services may have a shorter stored life. Products can usually be stored, at least for a time. The life of a service is often much shorter. For example, the service of ‘accommodation in a hotel room for tonight’ will perish if it is not sold before tonight – accommodation in the same room tomorrow is a different service. Most operations produce both products and services Some operations produce just products and others just services, but most operations produce a mixture of the two. Figure 1.4 shows a number of operations (including some described as examples in this chapter) positioned in a spectrum from ‘pure’ product producers to ‘pure’ service producers. Crude oil producers are concerned almost exclusively with the product which comes from their oil wells. So are aluminium smelters, but they might also produce some services such as technical advice. Services produced in these circumstances are called facilitating services. To an even greater extent, machine tool manufacturers produce facilitating services such as technical advice and applications engineering. The services produced by a restaurant are an essential part of what the customer is paying for. It is both a manufacturing operation which produces meals and a provider of service in the advice, ambience and service of the food. An information systems provider may produce software ‘products’, but primarily it is providing a service to its customers, with facilitating products. Certainly, a management consultancy, although it produces reports and documents, would see itself primarily as a service provider. Finally, pure services produce no products, a psychotherapy clinic, for example. Of the short cases and examples in this chapter, Acme Whistles is primarily a product producer, although it can give advice or it can even design products for individual customers. Pret A Manger both manufactures and serves its sandwiches to customers. IKEA subcontracts the manufacturing of its products before selling them, and also offers some design services. It therefore has an even higher service content.
• #33: The volume dimension Let us take a familiar example. The epitome of high-volume hamburger production is McDonald’s, which serves millions of burgers around the world every day. Volume has important implications for the way McDonald’s operations are organized. The first thing you notice is the repeatability of the tasks people are doing and the systematization of the work where standard procedures are set down specifying how each part of the job should be carried out. Also, because tasks are systematized and repeated, it is worthwhile developing specialized fryers and ovens. All this gives low unit costs. Now consider a small local cafeteria serving a few ‘short-order’ dishes. The range of items on the menu may be similar to the larger operation, but the volume will be far lower, so the repetition will also be far lower and the number of staff will be lower (possibly only one person) and therefore individual staff are likely to perform a wider range of tasks. This may be more rewarding for the staff, but less open to systematization. Also it is less feasible to invest in specialized equipment. So the cost per burger served is likely to be higher (even if the price is comparable). The variety dimension A taxi company offers a high-variety service. It is prepared to pick you up from almost anywhere and drop you off almost anywhere. To offer this variety it must be relatively flexible. Drivers must have a good knowledge of the area, and communication between the base and the taxis must be effective. However, the cost per kilometre travelled will be higher for a taxi than for a less customized form of transport such as a bus service. Although both provide the same basic service (transportation), the taxi service has a high variety of routes and times to offer its customers, while the bus service has a few well-defined routes, with a set schedule. If all goes to schedule, little, if any, flexibility is required from the operation. All is standardized and regular, which results in relatively low costs compared with using a taxi for the same journey. The variation dimension Consider the demand pattern for a successful summer holiday resort hotel. Not surprisingly, more customers want to stay in summer vacation times than in the middle of winter. At the height of ‘the season’ the hotel could be full to its capacity. Off-season demand, however, could be a small fraction of its capacity. Such a marked variation in demand means that the operation must change its capacity in some way, for example, by hiring extra staff for the summer. The hotel must try to predict the likely level of demand. If it gets this wrong, it could result in too much or too little capacity. Also, recruitment costs, overtime costs and under-utilization of its rooms all have the effect of increasing the hotel’s costs operation compared with a hotel of a similar standard with level demand. A hotel which has relatively level demand can plan its activities well in advance. Staff can be scheduled, food can be bought and rooms can be cleaned in a routine and predictable manner. This results in a high utilization of resources and unit costs which are likely to be lower than those in hotels with a highly variable demand pattern. The visibility dimension Visibility is a slightly more difficult dimension of operations to envisage. It refers to how much of the operation’s activities its customers experience, or how much the operation is exposed to its customers. Generally, customer-processing operations are more exposed to their customers than material- or information-processing operations. But even customerprocessing operations have some choice as to how visible they wish their operations to be. For example, a retailer could operate as a high-visibility ‘bricks and mortar’, or a lower-visibility web-based operation. In the ‘bricks and mortar’, high-visibility operation, customers will directly experience most of its ‘value-adding’ activities. Customers will have a relatively short waiting tolerance, and may walk out if not served in a reasonable time. Customers’ perceptions, rather than objective criteria, will also be important. If they perceive that a member of the operation’s staff is discourteous to them, they are likely to be dissatisfied (even if the staff member meant no discourtesy), so high-visibility operations require staff with good customer contact skills. Customers could also request goods which clearly would not be sold in such a shop, but because the customers are actually in the operation they can ask what they like! This is called high received variety. This makes it difficult for high-visibility operations to achieve high productivity of resources, so they tend to be relatively high-cost operations. Conversely, a web-based retailer, while not a pure low-contact operation, has far lower visibility. Behind its web site it can be more ‘factory-like’. The time lag between the order being placed and the items ordered by the customer being retrieved and dispatched does not have to be minutes as in the shop, but can be hours or even days. This allows the tasks of finding the items, packing and dispatching them to be standardized by staff who need few customer contact skills. Also, there can be relatively high staff utilization. The web-based organization can also centralize its operation
• #69: Love it or hate it, IKEA is the most successful furniture retailer ever. With 276 stores in 36 countries, it has managed to develop its own special way of selling furniture. The stores’ layout means customers often spend two hours in the store – far longer than in rival furniture retailers. IKEA’s philosophy goes back to the original business, started in the 1950s in Sweden by Ingvar Kamprad. He built a showroom on the outskirts of Stockholm where land was cheap and simply displayed suppliers’ furniture as it would be in a domestic setting. Increasing sales soon allowed IKEA to start ordering its own self-designed products from local manufacturers. But it was innovation in its operations that dramatically reduced its selling costs. These included the idea of selling furniture as self-assembly flat packs (which reduced production and transport costs) and its ‘showroom–warehouse’ concept which required customers to pick the furniture up themselves from the warehouse (which reduced retailing costs). Both of these operating principles are still the basis of IKEA’s retail operations process today. Stores are designed to facilitate the smooth flow of customers, from parking, moving through the store itself, to ordering and picking up goods. At the entrance to each store large notice-boards provide advice to shoppers. For young children, there is a supervised children’s play area, a small cinema, and a parent and baby room so parents can leave their children in the supervised play area for a time. Parents are recalled via the loudspeaker system if the child has any problems. IKEA ‘allow customers to make up their minds in their own time’ but ‘information points’ have staff who can help. All furniture carries a ticket with a code number which indicates its location in the warehouse. (For larger items customers go to the information desks for assistance.) There is also an area where smaller items are displayed, and can be picked directly. Customers then pass through the warehouse where they pick up the items viewed in the showroom. Finally, customers pay at the checkouts, where a ramped conveyor belt moves purchases up to the checkout staff. The exit area has service points and a loading area that allows customers to bring their cars from the car park and load their purchases. Behind the public face of IKEA’s huge stores is a complex worldwide network of suppliers, 1,300 direct suppliers, about 10,000 sub-suppliers, wholesale and transport operations include 26 Distribution Centres. This supply network is vitally important to IKEA. From purchasing raw materials, right through to finished products arriving in its customers’ homes, IKEA relies on close partnerships with its suppliers to achieve both ongoing supply efficiency and new product development. However, IKEA closely controls all supply and development activities from IKEA’s home town of Älmhult in Sweden. But success brings its own problems and some customers became increasingly frustrated with overcrowding and long waiting times. In response IKEA in the UK launched a £150 m programme to ‘design out’ the bottlenecks. The changes included: ● Clearly marked in-store short cuts allowing customers who just want to visit one area, to avoid having to go through all the preceding areas. ● Express checkout tills for customers with a bag only rather than a trolley. ● Extra ‘help staff’ at key points to help customers. ● Redesign of the car parks, making them easier to navigate. ● Dropping the ban on taking trolleys out to the car parks for loading (originally implemented to stop vehicles being damaged). ● A new warehouse system to stop popular product lines running out during the day. ● More children’s play areas. IKEA spokeswoman Nicki Craddock said: ‘We know people love our products but hate our shopping experience. We are being told that by customers every day, so we can’t afford not to make changes. We realized a lot of people took offence at being herded like sheep on the long route around stores. Now if you know what you are looking for and just want to get in, grab it and get out, you can.’