COURSE MANUAL

C4: Operations Management

Introduction and Module 1

Open University of Mauritius

Reduit
MAURITIUS
Copyright
© Commonwealth of Learning, 2011

All rights reserved. No part of this course may be reproduced in any form by any means
without prior permission in writing from:

Commonwealth of Learning
1055 West Hastings Street
Suite 1200
Vancouver, BC V6E 2E9
CANADA

Email: [email protected]

Open University of Mauritius

Reduit
MAURITIUS
Fax: +230 464 8854
Tel +230 403 8200
E-mail: [email protected]
Website: www.open.ac.mu
March 2013
Acknowledgements
The Commonwealth of Learning (COL) wishes to thank those below for their contribution to
the development of this course:

Course author David Gardiner

Gardiner Consulting Group
Operations Management Consultants
Christchurch, New Zealand

Course content specialist: Olga Kaminer, PhD

Professor, Supply Chain/Logistics/Operations Management
Faculty of Business
Sheridan Institute of Technology and Advanced Learning,
Canada

Subject matter experts: Fook Suan Chong

Wawasan Open University, Malaysia

Maurice Fletcher
University College of the Caribbean, Jamaica

Araba Intsiful
Kwame Nkrumah University of Science and Technology,
Ghana

S. A. D. Senanayake
Open University of Sri Lanka, Sri Lanka

Educational designers: Symbiont Ltd.

Paraparaumu, New Zealand

Course editor: Symbiont Ltd.

Paraparaumu, New Zealand

Course formatting: Kathryn Romanow

Commonwealth of Learning

COL would also like to thank the many other people who have contributed to the writing of
this course.
 Contents

Contents
About this course manual 1 
How this course manual is structured ................................................................................ 1 
Course overview 3 
Welcome to C4: Operations Management ........................................................................ 3 
C4: Operations Management — is this course for you?.................................................... 3 
Course outcomes ............................................................................................................... 4 
Timeframe ......................................................................................................................... 4 
Study skills ........................................................................................................................ 4 
Getting around this course manual 6 
Margin icons ...................................................................................................................... 6 
Module 1 7 
Introduction ....................................................................................................................... 7 
Unit 1 8 
Strategy and competitiveness ............................................................................................ 8 
Activity 1.1 ...................................................................................................................... 22 
Unit summary 23 
References 24 
Readings for further study 25 
Unit 2 26 
The nature and role of operations management............................................................... 26 
Activity 1.2 ...................................................................................................................... 35 
Activity 1.3 ...................................................................................................................... 39 
Activity 1.4 ...................................................................................................................... 42 
Unit summary 42 
References 43 
Readings for further study 43 
Activity feedback............................................................................................................. 44 

e
 C4: Operations Management

About this course manual

How this course manual is

structured
The course overview
The course overview gives you a general introduction to the course.
Information contained in the course overview will help you
determine:
• If the course is suitable for you
• What you will already need to know
• What you can expect from the course
• How much time you will need to invest to complete the
course.

The overview also provides guidance on:

• Study skills
• Where to get help
• Course assignments and assessments
• Activity icons
• Units.

We strongly recommend that you read the overview carefully before

starting your study.

The course content

This course consists of four modules. Each module is broken down
into units. Each unit comprises:
• An introduction to the unit content
• Unit objectives
• New terminology
• Core content of the unit with a variety of learning activities
• A unit summary
• An end-of-unit self-assessment
• Answers to the unit activities are at the end of each module.

1
Resou
urces
Forr those interested in learrning more on this subjbject, we pro
ovide
youu with a list of additionaal resourcess at the end of each moodule;
thesse may be books,
b articlles or web sites.
s

2
 C4: Operations Management

Course overview

Welcome to C4: Operations

Management
This course examines the requirements for the operations function
of an organisation and how that function can create customer value
through effective processes in both product and service-based
organisations. The emphasis is on strategic process inter-
relationships and infrastructural requirements.
The role of operations management in production and service
organisations is recognised and a variety of models are formulated
to improve a firm’s production processes and service delivery.
The supply chain management process is developed to improve the
competitive position of the entire supply chain.

C4: Operations Management— is

this course for you?
This course is intended for people who will manage the operations
function of a firm, and/or people who will interact with the
operations management function, and/or people who will have a
general management role and need to know how the operations
function should be designed, monitored, controlled and improved.
Students should have a basic understanding of quantitative
analysis. The mathematics introduced in this course is not complex.
However, some concepts require an understanding of regression
analysis, normal distributions and spreadsheets.

3
Course ovverview

Courrse outccomes
Upoon completiion of C4: Operations
O M
Managemen
nt you will be
b able
to:
• Discusss operationss strategy annd customerr requiremeents and
demonsstrate how operations
o m
managemen nt can be useed to
improvve the compeetitive posittion of a firm m.
• Summaarise deman nd managem ment and forrecasting.
Outcomes • Describbe capacity managemennt and balannce aggregaate
demandd with capaccity.
• Illustraate the basicc requiremennts for proccess design
(including continu uous operatioons, repetitiive operatioons,
batch operations
o an nd job shopp operationss).
• Discusss process im mprovementt and the concepts of leean
thinking.
• Explainn product deesign and quuality manaagement techniques,
includinng six sigmma quality annd process ccapability.
• Outlinee the role off inventory managemen
m nt.
• Describbe supply ch hain managgement and ssupply issuees,
includinng supply chain
c dynammics.
• Identifyy basic projeect managem ment techniiques.
• Undersstand the rolle of perform mance measurement in n
operatioons manageement.

Timeeframe
Thiss course willl take approximately 120
1 hours of study timee.

How long?

Study skillss
As an
a adult leaarner your ap pproach to learning
l will be differeent to
thatt from your school dayss: you will choose
c whaat you want to
studdy, you willl have profeessional andd/or personaal motivationn for
doinng so and yoou will mosst likely be fitting
f yourr study activ
vities
S
Study skills arouund other prrofessional or domesticc responsibiilities.

4
 C4: Operations Management

Essentially you will be taking control of your learning

environment. As a consequence, you will need to consider
performance issues related to time management, goal setting, stress
management and so on. Perhaps you will also need to reacquaint
yourself in areas such as essay planning, coping with exams and
using the Web as a learning resource.
Your most significant considerations will be time and space, that
isthe time you dedicate to your learning and the environment in
which you engage in that learning.
We recommend that you take time now — before starting your self-
study — to familiarise yourself with these issues. There are a
number of excellent resources on the Web. A few suggested links
are:
• http://www.how-to-study.com/
The “How to study” website is dedicated to study skills
resources. You will find links to study preparation (a list of nine
essentials for a good study place), taking notes, strategies for
reading text books, using reference sources, test anxiety.
• http://www.ucc.vt.edu/stdyhlp.html
This is the website of the Virginia Tech, Division of Student
Affairs. Under “Cook Counseling Center” you will find links to
time scheduling (including a “where does time go?” link), a
study skill checklist, basic concentration techniques, control of
the study environment, note taking, how to read essays for
analysis, memory skills (“remembering”).
• http://www.howtostudy.org/resources.php
Another “How to study” website with useful links to time
management, efficient reading, questioning/listening/observing
skills, getting the most out of doing (“hands-on” learning),
memory building, tips for staying motivated, developing a
learning plan.
The above links are our suggestions to start you on your way. At
the time of writing, these Web links were active. If you want to
look for more go to www.google.com and type “self-study basics”,
“self-study tips”, “self-study skills” or similar.

5
Getting arround this cou
urse manual

Gettting arround this course manu

ual
Eacch unit has a small num mber of activvities scatterred through
hout the
unitt. You shouuld work thrrough each activity
a withhout lookinng at the
t activity feedback as
actiivity solutioon which folllows. Use the
reasssurance thaat you have understoodd the activityy.

Marg
gin icon
ns
Whhile workingg through th his course boook you willl notice thee
freqquent use off margin ico ons. These icons
i serve to “signposst” a
partticular piecee of text, a new
n task orr change in aactivity; theey have
been included to t help you to find youur way arounnd this courrse
mannual.
A complete
c icoon set is sho
own below. We suggest you familiiarise
youurself with thhe icons and their meaning beforee starting yo
our
studdy.

Activity Assesssment Assignment Casee study

O
Outcomes Read
ding Reflection Studyy skills

Summary Terminology Time Tip

T

6
 C4: Operations Management

Module 1

Introduction
This module introduces the subject of operations management by
explaining strategy and competitive advantage and then examining
how the operations function can make significant contributions to
the organisation with an understanding of how the organisation
competes.
Upon completion of this module you will be able to:
• Explain what is meant by strategy, strategic capability and
competitive advantage.
• Define operations management and understand the
importance of operations management.
Outcomes • Define the customer and recognise the basic requirements of
the customer.
• Describe the transformation process.
• Distinguish between products and services.

7
Unit 1

Unitt 1

Strattegy and
d comp
petitiven
ness
Introduction
Straategy shouldd be the starrting point for
f any courrse on busin ness or
pubblic adminisstration. It iss at the veryy core of anyy organisatiion and
it dooes not mattter whetherr that organiisation is inn the manufaacturing
secttor, a servicce provider, a not-for-profit organiisation or a
govvernment deepartment. If it exists, thhen it must have a purp pose. If
it haas a purposee, then it muust have a strategy
s outllining how it
inteends to achieve that purrpose.
Eveery decisionn made with hin an organnisation shouuld be consistent
withh the overalll strategy for
fo that orgaanisation. Thherefore, beefore we
exaamine the opperations fu unction withhin an organnisation we need
n to
apppreciate and understand d the strategic role of opperations.
This unit focusses on comp petitiveness and providdes a broad
frammework for the study of o the operattions of bussiness. It pro
ovides
the fundamentaals of generral managem ment and strrategic
mannagement thheories, toolls and technniques. Morreover, the roler of
provviding value in terms of o customer satisfactionn through
undderstanding and meeting their requuirements is key to defiining the
straategic directtion of the business.
b Thhe operationns function isi at the
coree of the bussiness and thhe primary mechanism
m that createss the
prodduct or servvice. It is im
mperative that business strategy,
opeerations strategy and vaalue creationn are viewedd together since
s
theyy cannot be separated.
Straategy and coompetitiven
ness are impportant for pprofit-based
d
com
mpanies but are equally y important for not-for--profit
orgaanisations and
a governm ment departm ments sincee these entitties have
limiited fundingg (revenue) and this haas to be spennt (expensess) in
suchh a way as to
t maximisee the benefiits obtained.
This unit beginns by investigating strattegy and rellating that to t
straategic capabbility. This leads
l to a diiscussion onn the concep pt of
coree competence and the concept
c of qualifiers
q annd order win nners.
We look at the levels with hin the organnisation thaat strategic thinking
t
cann be carried out, the rolee of each levvel of the sttrategic plann and
howw these planns fit togetheer. This willl include exxplanations of the
termminology ussed in strateegy.
Straategy will thhen be explo
ored in a vaariety of conntexts that are
a
diffferentiated by
b size, orieentation (serrvice and m
manufacturin ng) and
finaancial goals (profit and
d not for proofit). We go on to study y

8
 C4: Operations Management

strategic decisions and introduce some ideas on competitive

capability.

Upon completion of this unit you will be able to:

• Explain what is meant by strategy and strategic capability.
• Explain the concept of core competence.
• Distinguish between order winners and qualifiers.
• Explain how strategy exists at different levels in
Outcomes organisations.
• Explain the nature of competitive advantage.
• Make strategic decisions for an organisation.
• Explain operations strategy and explain the linkage with
business strategy.
• Explain competitive capability.

Core competence A bundle of skills that enable a firm to provide

the greatest level of value to its customers in a
way that is difficult for competitors to emulate
Terminology
and that provides for future growth. Core
competences are embodied in the skills of the
workers and in the organisation. They are
developed through collective learning,
communication and commitment to work
across levels and functions in the organisation
and with customers and suppliers.

Competitive The advantage a company has over its rivals in

advantage attracting customers and defending against
competitors. Sources of advantage may
include factors such as technology, human
skills and brand name.

Order winner A competitive characteristic that differentiates

the products or services of one firm from
another and causes a firm’s customers to
choose the firm’s goods or services over those
of its competitors. Order winners usually focus
on one (rarely more than two) of the following
strategic initiatives — price/cost, delivery
speed, delivery reliability, product design,
flexibility, after-market service and image.

Qualifier A competitive characteristic that a firm must

exhibit to be a viable competitor in the market.
The set of characteristics must be present in

9
Unit 1

orderr for the firm

m to “qualify
fy” for the business.
b

Straategy A set of broad sttatements thhat set the diirection

for th
he organisation to take. It specifiess how to
satisffy customerss, how to grrow the bussiness,
how to t compete in its enviroonment, how w to
manaage the orgaanisation, hoow to develo op
capab bilities within the businness and how
w to
achieve financiall objectivess.
Term
minology souurced from G
Gardiner (2
2010).

Strateegy
Thee concepts of
o strategy originated
o inn the militarry where geenerals
wouuld manoeuuvre troops and
a weaponns into posittion before battle
b
com
mmenced annd during th he battle hopping to be better-positio oned
thann the enemyy and securee a victory.
In thhe military sense, the starting
s poinnt is to ensuure you havee the
righht resourcess ready for action
a at thee right placees with the overall
o
objeective of wiinning the battle
b and evventually thhe war.
Micchael Porterr, in the 198
80s, developped the five forces mod
del as a
fram
mework for analysing thet structuree of industryy.
He based the model
m on fiv
ve competitiive forces thhat he claim
med
erodde long-term
m industry average
a proofitability. T
The five forcces
moddel explainss the sustain
nability of profits
p againnst bargaininng
pow
wer and agaiinst direct and
a indirect competition.
Thee five forcess model dev
veloped by Porter
P (19799) to shape
business strateggy are:
• Entry barriers
b he market frrom other organisations.
to th
Barriers such as sizze, propriettary productts and proceesses,
and braand identity.
• Determminants of su upplier powwer, such as differentiattion,
substituution and coost.
• Determminants of bu uyer power,, such as voolume, substtitutes,
incentivves and buy yer informattion.
• Availabbility of subbstitute prodducts.
• Existing competito ors.
Porrter advocateed that the formation
f o strategy iss an analyticcal
of
proccess based on
o a clearly y defined poosition in thee market. He
H
supported this by analysis rather thann prescriptioon. His geneeric
ideaas have beenn widely acccepted by managemen
m nt and acadeemics as
the foundation for compettitive strateggy. Academ mics, in partiicular,
havve used his models
m as th
he foundatioon for empiirical testing
g.

10
 C4: Operations Management

Often used with the five forces model, Porter developed the value
chain as a structure to capture the linkage between organisational
activities that create value for the customer and profit for the firm.

The diagram above shows the value chain developed by Porter

(1986, p. 24).
Strategy is a set of broad statements that set the direction for an
organisation to take. It specifies how to satisfy customers, how to
grow the business, how to compete in its environment, how to
manage the organisation, how to develop capabilities within the
business and how to achieve financial objectives.
The ultimate purpose of any organisation is to exist and to provide
value to its stakeholders. If that organisation wants to provide
added value, then it has to outperform its competitors. Some
organisations, such as government departments, do not have
“competitors” as such, but they are still expected to provide added
value by spending resources to achieve better outcomes.
When considering your competitors, you need to know who is in
front of you, and why, and who is behind you, and why. When you
observe the competitor in front, you should know why they are in
front. Are they better than you? Are they faster? Have they trained
harder? Do they have better physical and mental attributes? What
allows them to be in front of you and you to be behind them?
Also, when you look back and observe the competitor behind, you
should know why they are behind. Are they not as good as you?
Are they slower? Have they not trained as much? Do they not have

11
Unit 1

the physical annd mental atttributes? What

W allows them to be behind
youu and you too be in frontt?
In business
b todday, an orgaanisation does not havee to be in fro ont, but
it dooes need to know wherre it is relatiive to the coompetition anda the
reassons it is in that positio
on. It needs to know whhat it has to do to
w it has to do to impprove its poosition and which
holdd its place, what w
orgaanisation is biting at itss ankles andd trying to rrelegate it in
nto the
pack.
Johhnson, Scholles and Whiittington (20008, p. 3) ppresent a vieew of
straategy that enncapsulates these thougghts:
“Strrategy is thee direction and
a scope ofo an organisation over the
longg term whicch achieves advantage in i a changinng environm
ment
throough its connfiguration of
o resourcess and compeetences with
h the
aim
m of fulfillinng stakeholdder expectattions.”
This looks at thhe long-termm direction of the firm as it attemp pts to
achhieve some form
f of adv
vantage. Thee scope of a firm’s activ vities
andd the conceppt of strategiic fit whichh tries to match resourcees and
actiivities are im
mportant. Thhe availablee resources should be stretched
s
andd this may reequire somee major resoource changges. All deciisions,
not just operatiional ones, are affectedd by values and expectaations.
Straategy decisiions are usuually made ini situationss of uncertaiinty.
Tecchnology wiill probably y be the bigggest driver oof future change for
business, but itt is also the source of thhe most unccertainty sinnce
peoople do not know
k exactlly what willl happen annd when. Th hey can
specculate, but they
t do not know the exact
e outcommes.
Most organisattions are awware of the need
n to use a team apprroach in
whiich the varioous function
ns work toggether to achhieve joint
outccomes. Thiss requires fu
unctional inntegration.
Muultinational firms
f and coonglomeratees find that strategic deecisions
are complex. WithW so mucch change inn the world,, it is extrem mely
diffficult for larrge firms, esspecially, too formulate a strategy that
t can
addd value and be b successfuful in all areeas at the sam
me time.
Modern firms dod not operate in isolattion. They nneed access to good
suppliers and thhey need a list of goodd customers.. They may have to
mannage and chhange relatio
onships andd networks ooutside theirr
orgaanisation.

Strateegic plann
ning
Straategic plannning is the process
p of deetermining the strategic plan
whiich includess long-term goals, policcies and plaans for an
orgaanisation.
Hennry Mintzbeerg, in the early 1990s, provided hhis definitionns for
straategy. Thesee are known
n as Mintzbeerg's 5 Ps foor strategy and
a help

12
 C4: Operations Management

us to really understand what strategy is all about (Mintzberg &

Quinn, 1992, pp. 12-19).
• Plan. Strategy is a plan, a consciously intended course of
action, or a guideline to approach a business situation. This
assumes that strategies are made in advance and that they
are developed consciously and purposefully. Plans are
intended strategy. In other words, an organisation develops
a plan of what target (or goal) it intends to achieve and how
it is to achieve it. For example, a bus company is formed
with two buses and has a schedule covering peak-hour
traffic on weekdays. It plans to expand to six buses after 12
months and have a full service from 6am to 9pm on all
weekdays.
• Ploy. A strategy can also be a ploy, or a specific
manoeuvre, intended to outwit a competitor.
• Pattern. Strategy is a pattern, or a consistency of
behaviour, whether or not it is intended. Patterns are a
realised strategy and can be divided into deliberate
strategies and emergent strategies. Deliberate strategies are
realised when previous intentions existed. Emergent
strategies develop in the absence of intentions, or despite
them. Following on from the bus company example (in
Plan, above), the company may find that its service is very
well patronised so bring forward the planned expansion and
extend it to weekends as well.
• Position. Strategy is a position. Strategy becomes the
mediating force, or “match”, between an organisation and
the environment. In other words, the strategy assumes an
intermediate position between where the organisation wants
to go and where the environment expects the organisation to
operate. As an example, a restaurant may source all its meat
and vegetables from locally grown organic supplies. This
may be more expensive, but satisfies a growing sector of
customers.
• Perspective. Strategy is a perspective shared by members
of an organisation, through their intentions and/or by their
actions. It is an ingrained way of perceiving the world.
Defining strategy as a plan is not sufficient; we also need a
definition that encompasses the resulting behaviour. The concepts
of strategy as a plan and as a pattern can be quite independent of
each other: plans may go unrealised, while patterns may appear
without preconception. Using the bus company example (in Plan,
above), the company may find that customers shy away from the
service because of unreliable schedules. This may force the
company to abandon its expansion plans.

13
Unit 1

Minntzberg (19994) suggested that strattegic planniing has impeded

straategic thinkiing and he advocated
a thhat the term
m strategic planning
p
should be discoontinued. Sttrategic plannning failedd because it is not
the same as strrategic thinkking.
He claimed thaat strategic planning
p usses analysis by breakingg a goal
wn into logical steps, deesigning hoow those steeps should be
dow b
impplemented and
a articulatting the antiicipated outtcome of eacch step.
In contrast,
c straategic thinkking is all abbout synthessis involvin
ng
intuuition and crreativity to form an inttegrated perrspective, orr a
visiion, of wherre the organ nisation shouuld be headding. The ou utcome
of strategic
s thinnking is an integrated perspective,
p , a not-too-
preccisely articuulated visionn of directioon that must be free to appear
at any
a time andd at any placce in the orgganisation.
Straategy-makinng should be a learningg process. Formal systeems can
nevver internalisse, comprehhend, or synnthesise harrd information. The
connclusion is thhat planning
g is not a leearning proccess.

Strateegic capability
Whhen an organnisation wan nts to be commpetitive itt has to ensuure that
it haas the resouurces and thhe capabilityy to be succeessful. It haas to
fully understannd the busin ness and soccial environm ment in whiich it
opeerates and too position itself relativee to that envvironment. This
T is
the strategic fitt of the firm
m. It describees how welll the firm fiits into
the environmennt. This possitioning staatement acceepts the bussiness
connditions as ana accepted fact and endeavours too provide ad dequate
resoources to efffectively coompete in thhat given maarket. While this
appproach is neccessary for survival, it is also a veery conservaative
appproach sincee the currentt business conditions
c arre known an nd it
justt requires thhe firm to match
m the neeed with adeequate resou urces.
Thee firm shoulld be preparred to changge in order tto keep up when
w
the market chaanges. The firm
f has to recognise
r thhat the mark
ket has
chaanged and it needs the ability
a to exxecute the reequired channges
insiide the firm, otherwise the firm baacktracks annd may not survive.
s
Forr many years Kodak do ominated thee wet film inndustry but with
digiital camerass in wide usse throughouut the worldd the use off wet
film
m has almost disappeareed.
Sommetimes, a firm
f may haave a visionn for the futuure that requ uires a
radiically differrent set of reesources annd processess than those
currrently beingg used in thee market. Thhis is particcularly so foor new
andd different companies su uch as Virggin Blue (airrline), Dell Inc.
(commputers) annd Zara (clo othing). Theese firms havve stretched d their
resoources to chhange the ru ules of engaggement.
Thee available resources
r arre the full seet of resourcces that are
avaailable to thee firm. Thesse may be spplit into inaadequate, thrreshold
or unique
u resouurces (Johnson et al., 2008,
2 p. 1188).

14
 C4: Operations Management

In the diagram above (Gardiner, 2010, p. 8 adapted from Johnson et

al., 2008), the drivers of strategic capability include inadequate
resources, threshold resources and unique resources.
Inadequate resources can be found in organisations that have not
managed to maintain the pace. Their customers demand something
different and they do not have the resources to deliver. It could be
the resources that they are using are just getting old or do not have
the technological capability their customers demand. It should be
obvious that these resources need repositioning so that they can
deliver value to customers, or the organisation fails.
Threshold resources are needed to just exist in a market. They
support the minimum level customers will accept and allow the
organisation to stay in business.
Unique resources critically underpin competitive advantage and
sustain the ability to provide value. They are better than their
competitors and are difficult to imitate. They allow the firm to
exploit other opportunities and to create new opportunities.

Core competence
The concept of core competence was developed by Prahalad and
Hamel (1990). They developed business strategy by starting inside
the firm to see what characteristics made the firm different from the
competition. They advocated that a firm would compete
successfully if it had available resources that were not available to
the competition.
Core competence is a bundle of skills that enable a firm to provide
the greatest level of value to its customers in a way that is difficult
for competitors to emulate and that provides for future growth.
Core competences are embodied in the skills of the workers and in
the organisation. They are developed through collective learning,
communication and commitment to work across levels and
functions in the organisation, and with the customers and suppliers.

15
Unit 1

Corre competennce is develo oped througgh process iimprovemen nt. For

exaample, a corre competennce could bee the capabiility of a firm
m to co-
ordiinate and haarmonise diiverse produuction skillss and multipple
techhnologies.
Prahhalad and Hamel
H (1990
0) used the small size oof Honda en
ngines
as an
a example. Honda exp ploited this core
c compeetence to dev
velop a
variiety of quality productss from lawnnmowers annd snowblow wers to
mottorcycles, cars and truccks.
A core
c compettence has thrree definingg characteristics:
• It proviides potential access too a wide varriety of mark
kets.
• It increases perceivved customer benefits.
• It is harrd for comp
petitors to im
mitate.
Whhen the custoomer receiv ves a better product,
p bettter service,, more
innoovation, a laarger range from whichh to choose,, more flexiibility
andd/or more reeliable deliv
very, then thhe firm enjoyys success. Under
thesse circumstaances a custtomer placees value on tthe fact thatt the
custtomer’s prooblems are being
b solvedd and the suupplier is ussing
resoources to soolve these prroblems.
It iss often difficcult to isolaate specific things
t that m
make a diffference
but the firm is still successsful. In this case it mayy be a bundlle of
skillls and technnologies thaat underpin the ability tto meet critiical
succcess factorss.
Thee differentiaating compeetence, or buundle of com mpetences, must be
robuust and shouuld be difficcult for com
mpetitors to imitate. Ab bove all,
coree competence should provide
p oppoortunities foor the firm, not
limiitations.

Comp
petitive ad
dvantage
Com mpetitive addvantage is the advantaage a compaany has oveer its
rivaals in attractting custom
mers and deffending agaiinst compettitors.
Souurces of advvantage may y include facctors such aas technolog
gy,
humman skills annd brand naame.
Whhen a firm iss able to devvelop and deeliver a prooduct or serv vice and
satisfy customeers at a lower cost, a faaster rate annd in a shortter time
thann its compettitors, then it has a com
mpetitive addvantage.

Qualiffiers and order win

nners
Terrry Hill (19993) proposed the conceept of qualiffiers and ord
der
winnners.
A qualifier
q is a competitivve characterristic that a ffirm must exhibit
e
to be
b a viable competitor
c in
i the markeet. The set oof characterristics
musst be presennt in order for
fo the firm to
t “qualify”” for the bussiness. It
is used
u to screeen a productt or service as a candiddate for purcchase

16
 C4: Operations Management

and must be present or the product or service is not even

considered.
As an example, consider walking into a vehicle franchise wanting
to buy a new car. You might have made a mental (or written) list of
the criteria you consider essential. You might be looking for a car
that can comfortably seat all the family, has a small fuel-efficient
engine, runs on diesel fuel, is coloured blue, is a recognised brand,
has good local service representation and costs less than a given
amount of money. You can then look at the products that meet that
list of requirements. All the products that meet that list qualify for
your order since they all exhibit the qualifying dimensions.
However, an order winner is a competitive characteristic that
differentiates the products or services of one firm from another and
causes a firm’s customers to choose the firm’s goods or services
over those of its competitors. Order winners usually focus on one
(rarely more than two) of the following strategic initiatives —
price/cost, delivery speed, delivery reliability, product design,
flexibility, after-market service and image.
Examples of order winners and qualifiers are:
• price
• delivery reliability
• delivery speed
• quality
• volume flexibility
• design, including product range, lead times and design
leadership
• distribution
• marketing and sales
• brand name and image
• colour range
• being an existing supplier
• technical liaison and support
• after-sales support.
Clearly, order winners and qualifiers are both market-specific and
time-specific.

Strategic decisions
At the corporate level, an organisation must have a clear
understanding of the environment in which it decides to participate
both now and in the future. When this is in place, the functional
strategies (marketing, finance, new product development,
production and so on) can be developed. The overall agreement and
understanding is essential. When each function understands the
order winners and qualifiers for each market and each range of

17
Unit 1

prodducts and each timefraame at a corpporate levell, then the

orgaanisation caan develop functional-s
f specific planns.
Marrketing defiines productt functions and features, promotio on
poliicies, pricinng algorithm
ms, product positioning
p , distributio
on
metthods, adverrtising practtices, brandd awareness, channel
struuctures, servvice levels, image
i requiirements annd sponsorsh hip
poliicies.
Finaance and acccounting deefine accouunts receivabble processees
(debbtors), accoounts payablle processess (creditors)), cost of caapital,
leveels of workiing capital, financial coontrol methoods, lines of credit,
currrency hedgiing methodss and timinggs, and relattionships with
w
finaancial instituutions.
Neww product and
a service developmen
d nt defines reesearch direection,
sim
multaneous engineering
e methods, teechnology pplatforms, tiime to
marrket, criteriaa for selection and methhods of production
devvelopment and introducction.
Opeerations management defines
d the location,
l phhysical layouut,
prodducts to prooduce, proceesses to usee, process im mprovementt
initiiatives, quaality processses, work syystems, purcchasing systtems,
wheether outsouurcing and/o or out-partnnering is useed, degree of
o
verttical integraation, sched
duling system ms and inveentory philo osophies.

Operaations straategy
Opeerations straategy is the pattern of decisions
d annd actions th
hat
shappe the long--term visionn, objectives and capabbilities of th
he
opeeration and its
i contributtion to overrall strategy. It is the way
opeerations resoources are developed
d ovver the longg term to creeate
susttainable commpetitive addvantage forr the busineess (Slack,
Chaambers, Johhnston & Beetts, 2006).
An organisatioon needs an appreciation of the parrt the operattions
funcction plays,, how this fiits into the corporate
c sttrategy, and
d the
uniqque capabilities the opeerations funnction can pprovide to su upport
andd influence overall
o strattegic goals. The operatiions functio
on
should give thee company its i competittive advantaage, such ass low
costt, flexibilityy or high qu
uality. The scope
s of deccisions shou
uld be
longg term and investments
i s should be made in cappital resourrces and
in thhe workforcce.
Servvice organissations follo
ow a similaar process foor their operrations
straategy develoopment. Thee positioninng of a serviice strategy
deppends largelyy on intangiible servicee characterisstics rather than
t
tanggible producct characterristics.
A customer-dri
c iven perspeective is requuired for opperations strrategy,
wheether it is foor productioon or servicee organisations. This reequires
the process dessign and pro ocess improovement actiivities to bee

18
 C4: Operations Management

oriented to satisfying the customer. This, in turn, means

understanding exactly what the customer wants and developing
processes that can deliver exactly that. Operating advantages are
related to each of the organisation’s processes and an organisation
gains an advantage by outperforming competitors in one or more of
these processes.
Competitive advantage is gained from core competencies, by an
understanding of the business processes and by developing
competitive capability.

Competitive capability
Competing on cost
An organisation may elect to compete purely on cost. It could
achieve this by lowering prices to increase demand for products
and services. However, this approach also reduces profit margins if
the product or service cannot be produced at a lower cost.
Cost advantage can be gained by adopting lean thinking and cutting
the cost of non-value-adding activities in the value chain. This may
require extra investment in automation, a streamlining of
procedures, additional training and development, and usually
results in a narrower range of products or services.
A “no frills” airline competes on cost by reducing fares for the base
service — travel with no checked bags, no free food and just music
entertainment. A customer can get a very cheap fare if the travel
portion is all they want. If, however, the customer wants more than
that they can pay extra for checked bags, food and drinks and video
on demand.
Competing on quality
An organisation may elect to compete purely on quality. Two
aspects of quality have to be considered: high performance design,
which includes superior features, close tolerances and greater
durability, and consistent quality, which measures the frequency
with which the product meets design specifications.
Customers want products that consistently conform to the
specifications they contracted for, have come to expect, or saw
advertised. An organisation can achieve product differentiation by
developing expertise in product quality and process quality. The
aim is to provide superior performance products that meet the
specifications and are reliable.
Car companies such as Toyota and BMW compete on quality, since
the concepts of quality feature at the top of their priority lists. Note
that both these companies will argue that they compete on other
issues and not solely on quality.

19
Unit 1

Com
mpeting on time
t
An organisatioon may electt to competee purely on time. This
invoolves a shorrt delivery time,
t which is the elapssed time bettween
receeiving a cusstomer’s ordder and fillinng it. Firmss can shorten
deliivery lead tiimes by storring inventoory or havinng excess caapacity.
It allso involvess on-time deelivery, whiich measurees the frequency
withh which dellivery-time promises arre met. Orgaanisations measure
m
on-ttime deliverry as the peercentage off orders shippped when
prom mised.
On--time deliveery requires the product or service to be delivered at
mer-requesteed delivery time. Firmss may conviince
the first custom
them
mselves thaat they are meeting
m deliivery promises by shipp ping
gooods out of thhe door on or
o before thee delivery ppromise datee and
timee. Howeverr, the custom mer does noot see it this way. Custo omers
wannt the produuct or servicce and they will
w measurre on-time delivery
d
as being
b the acctual time th
he product iss delivered to their locaation.
Inteernational coourier comp panies use parcel-track
p king technology to
idenntify the exaact locationn of all theirr deliveries aand they pro
omise
deliivery on tim
me. Their tecchnology reeduces the cchance of lo osing a
parccel or misdiirecting it.
Anoother aspectt of competiing on timee is product developmen nt speed
whiich measurees how quickly a new product
p is inntroduced. This
T
inclludes the elaapsed time from idea generation
g thhrough to fiinal
desiign and production. Geetting a new w product to market firsst gives
a firrm an edge and this is difficult
d to overtake in a rapidly ch hanging
business enviroonment.
mpeting on flexibility
Com f
An organisatioon may electt to competee purely on flexibility.
Flexxibility alloows a firm to
o change voolumes or prroducts quicckly to
suitt customer requirement
r ts. This is allso referredd to as
custtomisation, which is th he ability to accommoddate the uniq que
needs of each customer
c an
nd changingg product deesigns. Prod ducts are
tailoored to indiividual prefe
ferences. Cuustomisationn implies that the
opeerating systeem must be flexible to handle
h speccific custom
mer
needs and channges in designs. Volum me flexibilityy is the ability to
acceelerate the rate
r of prod duction quicckly to handdle large
flucctuations in demand. Th he time betw ween peakss may be yeaars as in
the constructioon industry, months as with w a ski reesort, or hou urs as
withh a postal soorting firm.
Delll computerss is a good example
e of competing on flexibiliity.
Whhen a custommer orders a Dell compputer, the acttual computter does
not physically exist. Dell has
h the mannufacturing capability to t
asseemble exacttly what thee customer wants
w and ship it to theem
withhin a few daays. The company has this flexibillity by priciing the
connfigurations in favour of
o the compoonents it cann deliver. Iff a

20
 C4: Operations Management

component (memory, hard drive, or screen) is in short supply Dell

will offer that component at a higher price and customers will be
encouraged to choose another component at a lower price and the
alternative may be at a higher specification, which is even better.
Competing on service
Most competitive capabilities overlap and it is often difficult to
precisely identify a particular capability and to quantify the effect it
is having on performance. When competing on service, an
organisation has a combination of all these competitive capabilities.
Each of these competitive capabilities has been presented
separately. Clearly an organisation may select more than one
competitive priority. For a particular organisation, it is a trade-off
between the resources needed to develop the capability and the
benefits to be obtained by possessing that capability. Additionally,
a competitor may force an organisation to adopt another capability
or even abandon an existing capability.
It is a very dynamic world.

Linking strategy with operations

Kaplan and Norton (2008) maintain it is imperative that the
business strategy statement is translated into specific objectives that
have to be achieved. Then the operational plans have to be
developed to show the processes and resources that will be used to
execute that business strategy. The organisation should learn from
the experience and modify its business strategy.
The learning is based on performance review and performance
measurement. The earlier strategy development has a level of
expectation and the performance measurement records the
achievement against the expectation. When a performance gap
occurs, a learning process must take place to explain why and to
adjust targets for future achievement. The learning and review
process is at the strategic and the operational level.
The organisation has to adapt to a changing external environment.
New technologies, new and changing competitors, new ideas,
opportunities and threats all play significant parts in the process.
It is an on-going cycle of developing, translating, planning,
learning and correcting.

21
Unit 1

Activvity 1.1
Work through the t followin ng questions. You mayy need to go
o back
andd re-read thee unit to help
p you.
1. t reasons for formulaating and im
What are the mplementing
g an
Activity operationss strategy?
2. How woulld you deterrmine whethher a compaany had an
operationss strategy orr not? What specific quuestions wou
uld you
ask and whhat informaation would you gather??
3. Find an exxample of ann operation in your locaal communiity that
has been suuccessful in
n simultaneoously improoving qualitty,
reducing thhroughput time,
t improvving on-timme deliveriess and
reducing costs.
c How has
h this opeeration beenn able to ach
hieve
these seem
mingly confllicting resullts?
4. Who definnes the valuee of a produuct or servicce?

22
 C4: Operations Management

Unit summary
This unit began by identifying the origins of strategy in the military
and discussed the work of Michael Porter and his five forces
model. Henry Mintzberg developed the five Ps for strategy and this
Summary provided an interesting perspective on the topic.
Strategy was defined as a set of broad statements that sets the
direction for the organisation to take. It specifies how to satisfy
customers, how to grow the business, how to compete in its
environment, how to manage the organisation, how to develop
capabilities within the business and how to achieve financial
objectives.
This led directly to the concepts of strategic capability, core
competence and qualifiers, and order winners. An organisation
needs to have or obtain the capability to deliver on its strategic
intent and it achieves this ideal by developing core competences
which allow the organisation to be better than competitors. When
an organisation knows what characteristics make up the set of
qualifiers and order winners, it can develop processes to deliver
those characteristics.
The corporate strategy has to be disseminated to all functions and
to all levels within the organisation. We were particularly interested
in the operations function and how the operations function is
required to develop processes to contribute to the achievement of
the overall strategic goals.
An organisation can elect to compete on the basis of cost, quality,
time, flexibility or on any combination of all of these competitive
capabilities.
The final section in this unit discussed the learning that must take
place when executing the strategic initiatives. The organisation
should learn from the experience and modify the business strategy
accordingly. It is an on-going cycle of developing, translating,
planning, learning and correcting.

23
Referencees

Refeerencees
Gardiner, D. (2010). Operations
O managemment for business
excellennce (2nd ed.).
e Aucklland, New Zealand: Pearson
Educatiion.
Hilll, T. (1993).. Manufactu
uring strateegy: The strrategic management
of the manufacturi
m ing functionn (2nd ed.).. London, England:
E
Macmilllan.
Johnnson, G., Scholes, K.,&
K Whittiington, R. (2008). Exploring
Ex
corporaate strategyy (8th ed.)). Harlow, England: Pearson
Educatiion.
Kapplan, R. S. & Norton, D.
D P. (2008, January–Feebruary). Mastering
M
the mannagement syystem. Harvvard Busineess Review, 62–77.
Minntzberg, H. (1994, Jaanuary–Febrruary). Thee rise and fall of
strategicc planning.. Harvard Business
B Review, 72(1
1), 107–
114.
Minntzberg, H. & Quinn J. B. (1992). The strategy
gy process (2
2nd ed.).
Englewwood Cliffs, NJ: Prenticce Hall.
Portter, M. E. (1979,
( Marcch–April). How
H compeetitive forcees shape
strategyy. Harvard Business
B Reeview, 57(2)), 137–145.
Portter, M. E. (11986). Comp
petition in global
g indusstries. Boston, MA:
Harvardd Business School
S Presss.
Prahhalad C. K.K & Ham mel, G. (11990, Mayy–June). Th he core
competeence of thee corporatioon. Harvardd Business Review,
68(3), 79–91.
7
Slacck, N., Chhambers, S.,S Johnstonn, R., & Betts, A. (2006).
Operatiions and process managemen
m t: Principlles and
practicee for strateegic impacct. Harlow, England: Pearson
Educatiion. 

24
 C4: Operations Management

Readings for further study

Fitzsimmons, J. A.& Fitzsimmons, M. J. (2008). Service
management: Operations, strategy, and information
technology (6th ed.). New York, NY: McGraw-Hill Irwin.
Reading Gardiner, D. (2010). Operations management for business
excellence (2nd ed.) (pp. 1–38).Auckland, New Zealand:
Pearson Education.
Heizer, J.& Render, B. (2010). Operations management (10th ed.).
Upper Saddle River, NJ: Prentice Hall.
Hill, A.& Hill, T. (2009). Manufacturing operations strategy (3rd
ed.). Basingstoke, England: Palgrave MacMillan.
Kaplan, R. S.& Norton, D. P. (2009). The execution premium:
Linking strategy to operations for competitive advantage.
Boston, MA: Harvard Business Press.
Johnson, G., Scholes, K., & Whittington, R. (2008). Exploring
corporate strategy (8th ed.). Harlow, England: Pearson
Education.
Mintzberg, H. (2007). Tracking strategies toward a general theory.
Oxford, England: Oxford University Press.
Prahalad, C. K.& Hamel, G. (1990, May-June). The core
competence of the corporation. Harvard Business Review,
68(3), 79–93.
Raturi, A.& Evans, J. R. (2005). Principles of operations
management. Mason, OH: Thomson South Western.
Slack, N.& Lewis, M. (2008). Operations strategy (2nd ed.).
Harlow, England: Financial Times Prentice-Hall.
Womack, J.& Jones, D. T. (2005, March–April). Lean
consumption. Harvard Business Review, 83(3), 58–68.

25
Unit 2

Unitt 2

The nature
n a rolee of opeerations
and
manaagemen nt
Introduction
Thee operationss function within
w an orgganisation is required to make
a nuumber of immportant deccisions as paart of its noormal processses.
Theese decisionns are structu ural, such as
a where to llocate and how
h big
the facility shoould be, infrrastructural decisions suuch as how should
plannning be peerformed and d how shouuld quality bbe determineed, and
inteegration deccisions suchh as how all these actionns and processes
are tied togetheer.
This unit definnes operationns managem ment as the effective
mannagement of all the activities for creating,
c impplementing,, and
impproving valuue-adding processes
p thaat transform
m resource inputs,
suchh as raw maaterials, tech
hnologies and
a labour, iinto output goods
g
andd services thhat meet the needs of cuustomers.
Forr an organisaation to do this,
t they neeed a detailed understaanding
of thhe customer and how they
t can meeet the needds of the cusstomer.
To achieve thiss, the organnisation will use a proceess that takees inputs
andd transformss them into outputs.
o
Thee modern viiew of operaations does not distinguuish betweeen
prodducts and seervices. Theey are differrent in conttext but, as far
f as
opeerations mannagement iss concerned, they shoulld be treated d the
me. There will be occasions when a clear distinction is req
sam quired
but,, in general,, the theoriees and conceepts within the whole
opeerations mannagement frramework apply a equallly to producction
induustries and services. On ne of the chhallenges in today’s maarket is
to taake proven concepts frrom producttion and appply them to
servvices.
This unit startss by distinguuishing betw ween structuural, infrastrructural
andd integrationn decisions within
w the operations
o fu
function. Th his is
aim
med at setting out a fram mework for defining thee function of o
opeerations mannagement. Of O prime concern to opperations (in ndeed
the whole orgaanisation) is the custom mer and the nneeds of thee
custtomer so wee include th he definitionn of the custtomer and th he
defiinition of vaalue. This iss followed by
b a discusssion on the
trannsformationn process. When
W you unnderstand exxactly what the
trannsformationn process enttails, you haave a good foundation for
studdying operaations manag gement.

26
 C4: Operations Management

This unit investigates the customer experience paradigm and

concludes with a short history of operations management.
Upon completion of this unit you will be able to:
• Define operations management.
• Define the customer and recognise the basic requirements of
the customer.
• Distinguish between structural, infrastructural and
Outcomes integration decisions in operations.
• Describe the transformation process.
• Understand the importance of operations management.
• Distinguish between products and services.
• Explain the role of operations management within the
context of the whole organisation and the customer
experience paradigm.
• Definethe primary activities associated with operations
management.
• Trace the history of operations.

Customer Customer is the next process or where the

work goes next. This view can lead to internal
and external customers, but the concept of
Terminology
satisfying the customer can only be fully
implemented when considering the customer
as the next process.

Operations Operations management is the effective

management management of all the activities for creating,
implementing and improving value-adding
processes that transform resource inputs, such
as raw materials, technologies and labour, into
output goods and services that meet the needs
of customers.

Product Product is any good or service produced for

sale, exchange or internal use.

Service Service is an activity or a series of activities to

produce an intangible perishable experience
usually involving the customer as a
participant. Examples include repair, trade,
commercial and infrastructure services such as
transport, retail, communications, finance, real
estate and personal services such as health,
education, research, recreation, arts,
restaurants, hotels, barber, beauty and laundry.

27
Unit 2

Traansformatioon Transsformation process

p is thhe process of
o
proocess conveerting inputts into outpuuts. The inputs
couldd be materiaals, customeers, labour, energy,
e
comp ponents, ideas, machinees or requireements.
The outputs
o coulld be finisheed productss,
satisffied customeers, unsatisffied custom
mers,
comp ponents, subbassemblies, developed d ideas
or dev veloped conncepts.
Term
minology souurced from G
Gardiner (2
2010).

Operaations maanagemen
nt
Opeerations management iss defined ass the effectivve managem ment of
all the
t activitiees for creatin
ng, implemeenting and iimproving value-
v
addding processses that tran
nsform resouurce inputs, such as raww
matterials, technnologies an
nd labour, innto output ggoods and seervices
thatt meet the needs
n of customers.
Opeerations management iss the managgement of thhe direct ressources
requuired to prooduce the gooods and serrvices proviided by an
orgaanisation. Itt focuses on
n the functioon of providding the pro
oduct or
servvice.
Thee aim is to produce
p speccified produucts and serrvices on schedule
at minimal
m cost. Most organisations have
h additioonal performmance
meaasurements including volume
v of output, costss, utilisation
n,
quaality, producct reliability
y, delivery inn full, on-time and in
speccification (D
DIFOTIS), return on innvestment aand flexibilitty of
prodduct and voolume chang ge.

The cu
ustomer
Thee objectives of operatio
ons managem ment shouldd be viewed d from
the customer's point of vieew. When thhe customerr is defined as the
nexxt process, or
o where thee work goes next, it beccomes obvio ous that
the customer can be internnal to the firrm as well aas external.
Reggardless of the
t type of business,
b alll customerss generally have
h
thesse six basic requiremen
nts (Knod & Schonbergger, 2001, p. p 17):
• higher level
l of quaality
• higher degree
d of fllexibility
• higher level
l of servvice
• lower cost
c
• less tim
me or quickeer response
• less varriability.
Thee customer should
s deterrmine the quality
q of thee required output.
o
Whhen the custoomer deman nds a higherr level of quuality, the su
upplier
has to understaand exactly what the cuustomer wannts, when th hey want

28
 C4: Operations Management

it, how they want it and why they want it, and then deliver exactly
that.
Over time customers change their behaviours, preferences, styles,
ideas, desires, wants, needs and relationships. Therefore, the
supplier needs to understand these changes and have the capability
to react to whatever volume or product is required.
Customers demand higher levels of service. However, this is often
very hard to determine, especially with the merger of products with
service. Nevertheless, suppliers are expected to truly understand the
customer with objective and subjective measures.
Customers always want lower costs. However, it is not just the
price that needs to be lowered; it is the total cost to the customer.
Some organisations, especially in information and communications
technology, refer to this as the cost of ownership.
Customers want their products and services delivered in less time.
This requires shorter cycle times, shorter delivery times and faster
service response. The real measure is consistency of performance
and this requires less variability. In other words, the output from
one occasion is expected to be the same as the output from the next.
A clear distinction needs to be made between customer and
consumer. The consumer is the person at the end of the supply
chain that benefits from the product or service. All the way through
the supply chain we have supplier-customer relationships.
Most people will think of the customer as the person who buys the
product or service. The payment for products and services may
occur at any point in the supply chain or at the end. Essentially, the
payment recognises a change of ownership for a product or the
completion of the service. The final person who pays for the
product or service is called the end customer or final customer or
consumer.
In a service environment, such as a hospital, all the employees
work together. No money is changing hands. The admission staff,
surgical teams, nursing staff, kitchen staff, orderlies, pharmacists,
radiologists, maintenance staff and administration staff perform
various aspects of the required job. A patient may be moved from
admissions to a ward, from the ward to the operating theatre for an
operation, from the operating theatre to recovery and from recovery
back to the ward before being allowed to go home. There is a
customer and a supplier relationship at each step. At each step,
each health professional expectshigher levels of quality, higher
degrees of flexibility, higher levels of service, lower costs, shorter
lead times and less variability.

29
Unit 2

Structtural deciisions in operations

In thhe previouss unit we esttablished a strategy forr the organissation
andd extended thhat by deveeloping a strrategy for thhe operationns
funcction. Whenn the operattions strateggy has been developed and
fully understoood by the management team, then the operatio ons
mannager can make
m the req
quired structtural decisioons. The cattegories
of structural
s deecisions incllude capacity, facilitiess, process
techhnology, veertical integrration and supplier relaations.
Be aware that the
t operatio ons managerr can make structural decisions
d
withhout the hellp of an opeerations straategy but thiis is likely to
t lead
to an
a undesirabble outcomee.
Cap
pacity
Cappacity decisions determ mine how muuch can be pproduced an nd in
whaat time. An organisatio on should prre-determinee how many y
prodducts or how w much serrvice it has tot produce aand then maake sure
it haas sufficiennt capacity to
o deliver thhose quantitiies. A comp pany can
obtaain capacityy before it iss needed, att the same tiime as it is needed,
n
or after
a it is needed. Theree is no correect time to increase cap pacity
(or decrease caapacity) as this
t dependss on a numbber of factorrs such
as cost,
c the com mpetitive ad
dvantage thaat the extra capacity wiill
provvide to the organisation
o n and the caapacity avaiilable to
commpetitors in the same in ndustry.
An organisatioon is exposed to significcant risk whhen basing capacity
c
decisions on prredicted gro owth, especiially if the eexpected gro owth
doees not materrialise. On th he other hannd, it can prrovide signiificant
marrket opportuunities and production
p capability aallowing thee
orgaanisation too respond qu uickly to maarket demannds. Capacity that
is inncreased aftter the needd has been established aallows the
orgaanisation too fully utilise its currentt capacity aand the capaacity
decisions carryy less risk.
Faccilities
Whhen an organnisation starrts, and wheen it changees, it needs a facility
in which
w to opeerate. Decissions on whhere that willl be locatedd and
whaat will be prroduced relaate to the nuumber, size,, location an nd
speccific nature of facilitiess. Location,, for examplle, is imporrtant for
servvice organissations that do not prodduce a tangiible productt. Banks,
mottels and fastt-food restaaurants cannnot easily opperate unlesss they
are near custom mers. Manufacturers whhose produccts are very y bulky
or heavy
h must consider location and transport
t logistics.
Faccility decisioons are key determinannts of a firm
m’s ability to
o
com
mpete on thee basis of co ost and delivvery.

30
 C4: Operations Management

Process technology
Process technology decisions determine how products and services
will be produced in order to meet demand. The operations manager
needs to consider the appropriate way to produce the product or
service, given the cost, quality, delivery patterns, degree of
flexibility and response time necessary to accomplish strategic
objectives. Variables such as volume, lot sizes, degree of customer
interaction and the amount of customisation/standardisation
required are influenced by the choice of process technology.
Process technology decisions seek to bring about improvements in
the competitive capabilities of cost, quality and flexibility and will
have a significant influence on costs.
Vertical integration and supplier relations
Vertical integration decisions deal with the portion of the product
or service an organisation will produce itself compared with the
portion it will purchase and the extent to which it will market,
distribute and sell the product.
Backward integration is the vertical integration of suppliers and has
significant impact on the supply base, cost and quality. Cost is
influenced by vertical integration decisions because of the
influence that suppliers’ prices have on material costs.
Organisations seek to increase their control of raw material and
purchased item quality through backward integration.
Forward integration is the extent that the organisation links with
customers.

Infrastructural decisions in operations

Infrastructural decisions can be made simultaneously with the
structural decisions, but in a practical sense would more than likely
follow the structural ones. In general the infrastructural decisions
cover the supporting mechanisms and philosophies relating to
operations.
The categories of infrastructural decisions include human
resources, quality, production planning and inventory control, new
product and service development, performance measurement and
reward, and organisation systems.
Human resources
Human resources should be directed towards maintaining
customers and enhancing customer experiences and include the
selection, training, education, retention and rewarding of
employees. The choices made have a significant effect on cost,
quality and the customer experience. The skill level and experience
of the workforce has an effect on quality, time and flexibility.

31
Unit 2

Salaaries and wages paid to o employeess have a dirrect effect on

n cost,
espeecially for service
s orgaanisations.
Quaality
Quaality system
ms have a siggnificant eff
ffect on costt and deliverry lead
timee. Processess designed and
a improved with quaality as the driver
d
helpp to reduce the cost of production
p and the tim
me it takes reeduce.
Thee money speent to impro ove the proccess capabillity is usuallly more
thann offset by the
t reductio on in scrap, rework andd other on-g going
costts.
Production plan
nning and in
nventory con
ntrol
Production plaanning decissions relate to what willl be producced,
wheen and how it will be produced
p as well as the quantity. These
T all
affeect cost, quaality, delivery and flexiibility.
New
w product an
nd service development
d t
New w product and
a service developmen
d nt decisionss affect the cost
c of
brinnging a neww product orr service to market.
m Dessign decisioons
affeect ongoing production n costs and have
h a long--term effectt on
flexxibility. New
w product and service developmen
d nt decisions usually
havve a positivee effect on quality,
q sincce quality im
mprovementt is one
of thhe main driivers for intrroducing neew productss and services.
Perfformance measurement
m t and reward
d
Perfformance measuremen
m nt and rewarrd decisionss have a sign
nificant
effeect on cost since
s most reward
r systeems are monetary.
Org
ganisation syystems
Thee structure ofo the organ ffect on flexibility
nisation willl have an eff
andd time. An organisation
o n may find decisions
d aree not being made
quicckly enoughh to be com mpetitive andd reporting lline processses may
inhiibit flexibiliity. The org
ganisational culture mayy affect linee and
stafff relationshhips, thus ad
dding to cosst, quality annd flexibilitty
prioorities.

Integrration deccisions in
n operatio
ons
All structural and
a infrastru uctural decisions need tto be integrrated.
Thee categories of integratiion decisionns include ccommunicattion,
aliggnment, andd linkage sysstems.
Com
mmunication
n
Opeerations, huuman resourrces, and maarketing havve to comm municate
amoong themsellves so they y are all awaare of changges in sched
dules,
supplier deliveeries, custom
mer requiremments, custoomer preferrences
andd agreements that have been made.. One functiion, for exam mple,
mayy agree to a process con ncession annd, without aany commu unication
advvising the chhange, anoth
her functionn may wait ffor the origiinal

32
 C4: Operations Management

arrangement to eventuate. A customer may accept a slightly

different product specification and receives a pricing concession.
This needs to be communicated to all affected parties.
Alignment
Alignment refers to the degree of integration relative to the depth
of the customer experience. The depth of the customer experience
may increase as a result of marketing and/or the actions of staff at
the point of delivery. This, in turn, generates the need for
significant effort to be given to collaboration and co-ordination
across business functions that are involved in designing and
delivering experiences.
Linkage
Service delivery systems that enhance the customer experience
require strong linkages between the classical traditional operations
decisions, such as capacity planning, scheduling, quality,
technology choice and the allocation of particular staff members,
and the point of delivery of the customer experience. At the point
of delivery of the customer experience, spontaneous decisions are
made that cannot reasonably be reconciled against a traditional
planning system. The timeframe is too short. It is all happening
now.

The transformation process

The transformation process lies at the very foundation of operations
management. The entire operations management function strives to
find value-adding processes that take inputs and transform them
into outputs. The transformation process aims to maximise the
value added and reduce the cost added to the product or service
delivered to the customer.
The transformation process adds value by making the product more
readily available, by providing a faster service, by providing
customers with additional relevant information, and/or by
customising the product to the customer’s specific needs.
The process can reduce the cost to the customer by eliminating
unnecessary steps.
The transformation can either be production (goods producing) or
service (service providing). Examples of transformations include:
manufacturing, distributing, transporting, retailing, farming,
mining, refining, providing healthcare, educating, entertaining,
providing tourist facilities, cooking, providing accommodation,
repairing and assembling.
For example, a furniture manufacturer would have raw material
inputs including wood, fabric, fasteners, glue, packaging materials,

33
Unit 2

insttructions and care leafleets. In orderr to make thhe furniture, the

mannufacturer uses
u labour inputs, macchine inputss, energy inp puts,
mannagement innputs and th he transform
mation will ttake place inna
facttory buildinng located on n some landd. The qualiity, availabiility and
costt of these innputs will haave a definiing influencce on the acttual
outpput of the trransformatioon process.
In a service inddustry the major
m inputss would usually be peop
ple who
are interfacing with custommers.

Thee diagram abbove (Gardiiner 2010, p. p 25) illustrrates the

trannsformationn process wiith inputs suuch as workkers, manageers,
equuipment, faccilities, mateerials, servicces, land annd energy an
nd with
the outputs beiing productss and servicces and the ooverall objeective of
maxximising cuustomer valu ue.

34
 C4: Operations Management

Activity1.2
The following table of production organisations has been
completed for “Electrical appliances”. Complete the table for a
bakery, a clothing manufacturer, a packaging company and a
dairy products company.
Activity
The inputs use nouns; the transformations use verbs; and the
outputs use nouns. This simple definition of language helps to
visualise the process.

Organisation Inputs Transformation Outputs

process

Electrical Raw materials Fabricating Finished goods

appliances such as stereos,
Components Assembling
TVs, DVDs,
Printed circuit Inserting household
boards components in appliances
PCB delivered to
Insertion
warehouses and
machines Packaging
retail stores
People skills Distributing

Bakery

Clothing

Packaging

Dairy
products

35
Unit 2

Thee following table of serv vice organisations has been completed

for ‘Air transpoort’. Compllete the tablee for a compputer centree, a
resttaurant, a hoospital and a bank.

Org
ganisation Inputs Transfo
ormation Outputs
process
s

Air transport Airport Reserving Passengers with

w
infrastructure passeng
gers reservations for
f
travel
Reservation Scheduling flights
system Passengers safely
s
Scheduling crews
on board aircrraft
Aircraft
ng-in
Checkin
Passengers feed and
Flight crews passeng
gers
watered durin
ng flight
Cabin crews Maintain ning
Passengers and
a
aircraft and
a
Ground staff luggage safely
equipme ent
delivered to
Fuel
Cleaning and destination
Food provisioning
Freight carried and
aircraft
delivered
Preparin
ng meals

Computing      
cen
ntre

Restaurant      

Hospital      

Bannking and      
fina
ance

Activity feedbaack can be found

f at thee end of thiss module.

36
 C4: Operations Management

Products and services

In the past it was quite easy to differentiate between a
manufacturing company and a service organisation. Manufacturing
companies start with raw materials and after a number of processes
produce a product that could be sold to a customer. Service
industries provide a service. That distinction is very simplistic.
Today, however, manufacturing and services are intertwined to
such an extent that it is difficult to find a manufacturing company
that does not provide some elements of service and, likewise, it is
difficult to find a service firm that does not make something.
So we can start the discussion on products and services by defining
a product as any good or service produced for sale, exchange or
internal use.
Products are things and can be touched, seen, kicked or destroyed.
Products can be made and the quality of the production process can
be measured quantitatively.
The final customer (or consumer) of a product becomes involved
after the product has been made. A telephone, for example, is
manufactured in a factory, sent to a distributor, then to a retailer
and then sold to a final customer before the customer starts to use
or consume it. The customer has very little input while the product
is being made. They may interact with the retail salesperson but
their specific voice will not be heard during the production process.
Products can be stored for subsequent use. This allows the
manufacturer to make in advance of requirements and to supply a
quantity that is different from the quantity demanded. This has
implications in forecasting demand, capacity management and
production scheduling. The production activities can be separated
from the customer demand activities.
A service is an activity or a series of activities to produce an
intangible perishable experience, usually involving the final
customer as a participant. Service examples include commercial
services such as retail, restaurants, communications, finance, and
real estate and infrastructure services such as transport, and
personal services such as health, education, research, recreation,
arts, hotels, barber shops, beauty and laundry.
Services are intangible. Often, especially with pure services, the
output is an idea as in architectural design, advertising, product
design and promotion. Some services such as insurance, banking
and investments will refer to their outputs as products but they
cannot be physically touched. When you insure your house and
contents against fire and theft what have you got to show for it?
You might have a piece of paper and hopefully you will have peace

37
Unit 2

of mind.
m The product
p is deefinitely intangible. Thhe intangiblee nature
of services
s makkes it difficuult to assesss the qualityy of the outp
put.
Youu might atteend a concerrt and be thoroughly enntertained and a
enjooy the experrience. How wever, anothher person m might attend d the
sam
me concert and
a not enjo oy the experrience. Was that a good d service
or not?
n Who knnows? Quallity is determ mined afterr the fact.
Servvice custommers are usu ually involveed while thee service is being
prodduced and delivered.
d Inn fact, the customer
c is iin most cases an
actiive participaant. Patientss enter a meedical centree and request
atteention. Theyy are physiccally presentt and the meedical exam mination
is performed
p onn them perssonally. Anyy required m medicines are
a
presscribed just for them. This
T custom mer presencee has a signiificant
beaaring on the quality of output
o as thee customer can make
commments duriing service delivery.
d Thhe service pprovider can
n change
the delivery process and satisfy the cuustomer.
Servvices usuallly cannot bee stored andd this meanss that they require
r a
closse match beetween the rates
r of suppply and demmand. Servicces need
to cope
c with peeaks in the demands
d for transport, accommod dation,
meddical servicees, ticketing
g, banking anda call cenntres. Everyo one, it
seemms, wants too travel durring peak peeriods; everyyone, it seems,
wannts to eat at the same timme; everyonne, it seemss, is sick andd
requuires immeddiate attentiion at the saame time. TThis puts addded
presssure on thee service proovider to inntroduce innnovative ideas to
smoooth out thee peaks and lows. Especcially with ffixed capaccity
servvices, such as
a airlines and
a hotels, the t service iis perishable. An
emppty airline seat
s on a plaane that has just taken ooff cannot generate
g
anyy income. Thhe opportun nity is lost. Likewise
L ann empty hottel room
for a night generates no in ncome. Lastt week’s em mpty hotel roooms
willl never geneerate any in
ncome. In faact they could even con ntribute
to a loss if the overheads are
a not coveered.

38
 C4: Operations Management

Activity1.3
We have discussed the differences between products and services.
Think about your experiences with products and services and
prepare a list of similarities between products and services.
Activity Products and services are similar in the following ways:

Activity feedback can be found at the end of this module.

Customer experience paradigm

More and more customers want an emotional involvement with the
service delivery. Organisations that recognise this emotional
involvement and who present their service to allow this, find their
customers keep coming back and they spend more and they bring
their friends along as well. Experience-centric describes a service
for which the customer experience is at the core of the service
offering. The customer has emotional connections that are
engendered through engaging and compelling activities and
delivered in memorable and meaningful ways (Voss, Roth &
Chase, 2008).
The perceived value of the service now includes experience factors
which may start at the initial point of interaction. As an example,
consider going on-line and making an airline reservation during a
super promotion. On this occasion the airline is offering a limited
number of good seats for $1. Potential customers queue in
anticipation and have Web pages pre-activated so that as soon as
the availability is announced the customers are ready to pounce. If
they are successful, they brag about it to theirfriends. If they are

39
Unit 2

unsuccessful, they
t simply try again annd tell theirr friends how
w close
theyy were to sccoring a cheeap fare.
Eacch experiencce is aimed at the next encounter aand success is
meaasured in terrms of custoomer purchhasing patterrns, loyalty,, and
enggagement beehaviours thhat are generated by thee unique natture of
the experience,, the knowleedge, the noovel aspectss, the memo ories and
the sheer enterttainment th
hat provokess customer eemotions,
sensations, imaagination, feeelings and perceptionss.
Soccial networkking plays a significantt role in creaating loyal
com
mmunities and fans. Th he customerss’ enthusiassm promotes the
brannd by word-of-mouth.

Short history of
o operatiions
Indu
ustrial revolution
Beffore the induustrial revollution all prroduction prrocesses weere
connducted in thhe home. Fo ood preparaation and proocessing weere
dommestic activiities. Transpport vehiclees such as trrailers, carriiages
andd other horsee-drawn veh hicles were largely fabrricated in a home
envvironment. The
T industriial revolutioon towards tthe end of th he 18th
cenntury signallled the birth
h of operatioons management with the t
chaange from coottage indusstries to facttory producction.
Scieentific manaagement
Fredderick W. Taylor
T developed his foour principlees of manag gement:
reseearch, standdardisation, control andd co-operatioon. His systtems
inclluded cost accounting,
a unit time sttudy, inventtory controll,
prodduction conntrol, planniing, output scheduling,
s functional
opeeration, stanndardised prrocedures, a mnemonic system of
classsification and
a means for f maintainning quality production n. He
disccovered thatt basic scienntific laws govern
g workk and that every
e
persson is differrent and theese differencces can be eexploited. He
H
intrroduced wagge incentivee plans and separate ressponsibilitiees for
worrkers and managers.
m
Hum
man relation
ns movemen
nt
Eltoon Mayo coonducted a number
n of experiments
e at the Haw
wthorne
plannt of Westerrn Electric in
i the 1920ss. He studieed the effectts of
grouup incentivees on produuctivity, soccial psycholoogy and woorker
perfformance.
Opeerations reseearch
Opeerations reseearch and management
m t science usses mathemaatical
moddels to solve operations problems such as perrsonnel and
prodduction schheduling, vehicle routinng and logistics, facilityy
locaation, capaccity planningg and facilitty design, qqueuing, inv
ventory
plannning and sttatistical qu
uality controol.

40
 C4: Operations Management

Just-in-time and lean production systems

Just-in-time and lean production systems were developed inside the
Toyota Motor Company just after the Second World War and
focused on total quality management, lean production, continuous
improvement of products and processes, the elimination of all
waste, flexible manufacturing systems and computer-aided
design/computer-aided manufacturing.
Recent developments
The use of electronic systems such as the Internet, the World Wide
Web, electronic commerce, business-to-business linkages and
business-to-customer linkages have generated significant change in
operations management. Significant development has occurred
with the management of supply chains especially global supply
chains. Additionally, the importance of service operations
management is being recognised.

41
Activvity 1.4
Work through the t followin ng questions. You mayy need to go
o back
andd re-read thee unit to help
p you.
1. Which is more
m importtant – infrasstructural orr structural or
Activity integrationn decisions?? Explain yoour answer.
2. What doess operations managemeent mean?
3. How is thee transformaation processs related too value?
4. Who definnes the valuee of a produuct or servicce?
5. How woulld you defin ne the custom mer perceivved value?

Unitt summ
mary
In thhis unit youu learned ho
ow to distingguish betweeen structuraal,
infrrastructural and integrattion decisioons in operaations. This was
folloowed by a definition
d of operationss managemeent. You
Summary recoognised the basic requirements of the customeer and how each
proccess should recognise these
t requirrements.
Funndamental too operationss managemeent is the traansformatioon
proccess and thiis was discu
ussed in relaation to a nuumber of
orgaanisations inn productio
on and servicces.
We distinguishhed between n products and
a servicess in case we have to
speccifically maake the distiinction, but bear in minnd, that for the
t most
partt, operationss managers treat them the
t same.
Thee role of opeerations man
nagement within
w the coontext of thee whole
orgaanisation was explained and we inntroduced thhe concept of
o the
custtomer experrience paraddigm.
Thee unit concluuded with a short history of operattions.

42
 C4: Operations Management

References
Gardiner, D. (2010). Operations management for business
excellence (2nd ed.). Auckland, New Zealand: Pearson
Education.
Knod, E. M. & Schonberger, R. J. (2001). Operations
management: Meeting customer demands (6th ed.).New
York, NY: McGraw Hill Irwin. 
Voss, C., Roth, A. V., & Chase, R. B. (2008). Experience, Service
operations strategy, and services as destinations:
Foundations and exploratory investigation. Production and
Operations Management, 17(3), 247–266.

Readings for further study

Beckman, S. L., & Rosenfield, D. B. (2008). Operations strategy:
Competing in the 21st century. Boston, MA: McGraw-
Hill/Irwin.
Reading Fitzsimmons, J. A.& Fitzsimmons, M. J. (2008). Service
management: Operations, strategy, and information
technology (6th ed.). New York, NY: McGraw-Hill Irwin.
Gardiner, D. (2010). Operations management for business
excellence (2nd ed.) (pp 1–38).Auckland, New Zealand:
Pearson Education.
Heizer, J.& Render, B. (2010). Operations management (10th ed.).
Upper Saddle River, NJ: Prentice Hall.
Voss, C., Roth, A. V., & Chase, R. B. (2008). Experience, service
operations strategy, and services as destinations:
Foundations and exploratory investigation. Production and
Operations Management, 17 (3), 247–266.

43
Activity feeedback

Activvity feed
dback
Acttivity 1.1 an
nd 1.4
All answers aree in the learrning materiial.

Acttivity 1.2
Commpare your answer to this
t completted table off production
n
orgaanisations.

Organisa
ation Inputs Transformatio
T on Ou
utputs
process
p

Electricall appliances Raw materials Fabricating

F Fin
nished goods such
s
as stereos, TVs, DVDs,
Componentts Assembling
A
houusehold applia
ances
Printed circuit boards Inserting comp
ponents delivered to
in PCB warehouses and retail
achines
Insertion ma
stores
Packaging
P
People skills
Distributing
D

Bakery Flour Mixing

M ingredients Bakkery items suc ch as
bunns, bread, mufffins,
Sugar Baking
B
bisccuits delivered
d to
Flavouringss Packaging
P warehouses and retail
stores
Packaging Distributing
D
Energy
People skills

Clothing Fabrics Laying

L fabric Range of garmen nts
succh as pants, shirts,
Threads Cutting
C fabric
dre
esses, coats
Findings (buuttons Sewing
S garme
ents delivered to retaiil
clips and cla
asps) outtlets
Packaging
P
Energy
Warehousing
W
People skills
Distributing
D

Packagin
ng Paper Preparing
P artw
work Pacckaging itemss such
as cases, cartons,
Plastic Printing
P
boxxes, packets to
o meet
Glue Guillotining
G cusstomer specific
cations
warehoused and d
Inks Slitting
S
delivered to prod
duction
Energy Packing
P faccilities

People skills Distributing

D

Dairy pro
oducts Milk Pasteurising
P Dairy products such as
milk, cream, yoghurt,

44
 C4: Operations Management

Flavourings Separating flavoured drinks

delivered to
Containers Mixing
supermarkets
Packaging Packing
Distributing

Compare your answer to the completed table of service

organisations.

Organisation Inputs Transformation Outputs

process

Air transport Airport infrastructure Reserving Passengers with

passengers reservations for travel
Reservation system
Scheduling flights Passengers safely on
Aircraft
board aircraft
Scheduling crews
Flight crews
Passengers fed and
Checking-in
Cabin crews watered during flight
passengers
Ground staff Passengers and
Maintaining aircraft
luggage safely
Fuel and equipment
delivered to destination
Food Cleaning and
Freight carried and
provisioning aircraft
delivered
Preparing meals

Computing centre Computing Updating records Information processed

equipment quickly and accurately
Maintaining security
for internal and/or
Stationery
Printing external customers
Energy
Enveloping
People
Distributing

Restaurant Kitchen and table Setting tables Guests enjoying

equipment ambience
Taking orders
Food Guests fed and
Preparing and
watered
Energy cooking food
An enjoyable
People Waiting at tables
experience
Wine and drinks Washing cutlery and
dishes
General cleaning

Hospital Medical supplies Operating Well patients

Drugs Nursing Long term patients
Doctors Dispensing drugs New babies
and medicines
Nurses Trained staff
Preparing meals
Other staff Dead people
Keeping records (unfortunately)

45
Activity feeedback

Food

Banking a
and finance Bank buildin
ngs Processing
P de
eposits Mooney safe and
and
a cheques ava
ailable when
Computers
req
quired
Investing money
Tellers
Saffe and profitab
ble
Providing
P loan
ns and
eller
Automatic te inve
estments
mortgages
m
machines (AATM)
Mo
oney well spen
nt

Acttivity 1.3
Products and service are similar
s in many
m ways.
• Use cusstomer satissfaction as a key measuure of effecttiveness.
• Have coommon measures of saatisfaction (for examplee, speed
and quaality).
• Requiree demand fo orecasting.
• Requiree product deesign and prrocess desiggn.
• Dependd on location and arranngement of rresources.
• Involvee purchase of
o materials, supplies aand services.
• Can be provided in n high or low
w volumes..
• Can be standard orr customisedd.
• Are subbject to auto
omation.
• Need ann operations strategy consistent w
with businesss
strategyy.
As seen from this list, products and seervices are very similaar. All
orgaanisations can
c benefit from
f improving their pprocesses. Itt does
not really matter whether an organisaation sees itsself as a
mannufacturer or
o a service provider.

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