The management of processes, activities and decisions relating to the way goods and services are produced and delivered.
The Transformation Process
Inputs ---> Transformation Process ---> Outputs
The transformation process describes what happens within the business. It is where value is added to products to create outputs that can then be sold to customers.
Cost and Volume Objectives
Operations need to be cost effective. A traditional measure of cost effectiveness is "unit costs"
- Unit Costs = Total Costs / Total Units
Businesses in the same industry face similar cost structures, but each varies in terms of productivity, efficiency and scale of production. The business with the lowest unit costs is in a strong position to be able to compete by:
- Offering the lowest price, OR
- Making the highest profit margin.
Cost and Volume Example Objectives:
- Productivity and efficiency
- Unit costs per item
- Contribution per unit
- Number of items to be produced (in a given time frame).
Businesses face a hard challenge when it comes to quality. Markets are more competitive and customers are knowledgable, demanding, prepared to complain, and are able to share information about quality more widely with the use of social media.
If a business is able to create for itself a good reputation in terms of quality, they may be able to create an advantage over its competitors.
Quality Example Objectives:
- Scrap and defect rates which measure poor quality
- The reliability of products such as failure rates and average lifetime
- Using customer research to deliver customer satisfaction
- Monitoring the incidence of customer complaints
- Looking at customer loyalty such as how often they return to the business
- The percentage of on time deliveries
Efficiency and Flexibility Objectives
These are closely linked to cost targets and look at how effectively the assets of the business are being utilised. They also measure how responsive the business is to short term or unexpect changes in market demand. These objectives are key determinants of unit costs.
Efficiency and Flexibility Example Objectives
- Labour Productivity: Output per employee; Units produced per production line; Sales per shop.
- Output per Time Period: Potential output per week; Potential output assuming certain levels of capacity utilisation.
- Capacity Utilisation: Proportion of potential output actually being achieved.
- Order Lead Times: The time taken between receiving and processing an order.
These are becoming an increasingly important focus on operational objectives as businesses face more stringent environmental legislation. Customers frequently base their buying decisions on how seriously firms take their environmental responsiblity.
Environmental Example Objectives:
- How efficiently energy is being used
- Proportion of production or packaging materials being recycled
- Compliance with waste disposal regulations and the proportion of waste going to landfill
- Supplying raw materials from sustainable sources
Innovation is about putting a new idea or approach into action. It is commonly described as "the commercially successful expoloitation of ideas".
Invention: The formulation of new ideas for products or processes, for example, bicycles.
Innovtion: The practical application of new inventions into marketable products or services, for example, developing bicycles to match the needs of users such as special, high performance bicycles for olympic cyclists.
Types of Innovation:
Product Innovation: Launching new or improved products and services onto the market. This is the innovation companies such as Apple and Dyson use.
Process Innovation: Finding better or more efficient ways of producing existing products or delivering existing services. This is the innovations companies such as Microsoft and Google use.
Benefits of Product Innovation
A business will have the "first mover advantage" which can include some of the following:
- Higher prices and profitability
- Added value
- Opportunity for businesses to build early customer loyalty
- An enhanced reputation as an innovative company
- Improved public relations such as news coverage
- An increase in market share
Benefits of Process Innovation
- Reduced costs
- Improved quality
- More responsive customer service
- Greater flexibility
- Higher profits
Internal Influences on Operational Objectives
These influences come from within the business.
- Corportate objectives
- Human Resources
- Marketing Issues
These will be explained in detail over the next few cards.
Corporate Objectives Influences
These are the most important internal influence on operational objectives. An operational objective should not conflict with corporate objectives.
Operational objective: Higher production capacity
Corportation objective: Lowest unit costs
Operations decisions involve significant investment and costs. The financial position of the business, such as the cash flow and profitability, directly affects the choices available.
Human Resources Influences
The quality and capacity of the workforce is a key factor in affecting operational objectives, especially in a services business. For example, productivity targets will be affected by investment in training and the effectiveness of workforce planning.
Marketing Issues Influences
The nature of products determines the operational set up. Regular changes to the marketing mix may place strains on operations, especially if production is inflexible.
External Influences on Operational Objectives
These influences come from outside the business and include:
- Economic environment
- Competitor efficiency flexibility
- Technological change
- Legal and environmental change
These will be explained in detail over the next few cards.
Economic Environment Influences
These are vital for operations as sudden or short term changes in demand impact on capacity utilisation and productivity. Interest rate changes impact on the costs of financing capital investment in operations.
Competitor Efficiency Flexibility Influences
Having quicker, more efficient, or better quality competitors will place pressure on operations to deliver a lesser comparable performance.
Technological Change Influences
Very significant in markets where product life cycles are very short, innovation is rife, or where production processes are costly. Businesses have to be able to keep up with this change otherwise they may lose their competitiveness and reputation.
Legal and Environmental Change Influences
Greater regulation and environmental legislation means operations objectives face new challenges to be able to comply.