Chapter 6 - Operations Management

Question 1

What is Operations Management

Answer 1

Management of on-going, recurring cycles in a business to produce value for stakeholders.
Overseeing, designing and redesigning tasks for production of goods/services.

Question 2

Factors of production

Answer 2

It is an economic term to describe various components involved in the production of goods or services to generate economic profit. These include all processes that are employed to convert resources from the input state (starting point), to the final output state (ending point).

Question 3

Categories of factor of production

Answer 3

Land, labour, capital, and entrepreneurship

Question 4

Land

Answer 4

Land, in economic terms, is anything in the universe that is not created by humans. This definition includes the air, water, vegetation, minerals or any other
natural resource apart from the surface of the earth. These elements are classified as natural forces or opportunities not created by humans. All tangible goods depend entirely on natural forces as they are produced from raw materials that come from nature. Land plays the role of a passive factor in production in that it needs humans to apply other factors to produce something from the natural resources.

Question 5

Labour

Answer 5

Labour, in economic terms, is described as all human effort used in production. It consists of all technical expertise, marketing expertise and physical contributions of employees in the production of goods or services. It covers all work done by labourers and workers at every level in any organisation with the exception of the entrepreneur as he/she is considered a separate entity. Economists term labour as everything people do to convert natural opportunities into items to satisfy human needs using their mental or physical capabilities.

Question 6

Capital

Answer 6

Capital is defined as all drivers or physical entities used to produce goods or services. It has several meanings and dimensions. Commonly used meanings are:

Financial capital: the capital required to operate, support and expand a business

Fixed capital: goods used in the production of other goods, such as machinery, factories, equipment, buildings and computers

Working capital: inventories of stock for finished or unfinished goods or services that can be used in the short term to make finished customer goods

Intellectual capital: knowledge, process engagement, collaboration and time quality. This is developed in businesses overtime

Social capital: the stock of trusts, shared values, mutual understanding and socially held knowledge.

Question 7

Entrepreneurship

Answer 7

Entrepreneurs combine the otherfactors of production, being land, labour, and capital, with the objective of making profits. Entrepreneurs are the central planners of how these other factors can be combined for the maximum benefit of all involved to produce new goods or services. In most cases, entrepreneurs are the
only risk takers. On the other hand, they are then also the people who receive all the rewards in a business.
The process that the entrepreneur uses to combine the factors of production into outputs (products or services) ready for the market is called the
transformation process. This process is present in all sectors of business and applies to both service and production businesses.

Question 8

Productivity

Answer 8

Productivity is defined as the method of measuring the efficiency of the production process. Statistically, this is defined as the economic measure of output per unit of input. It can also be described as what is produced per unit versus what is required to produce it. According to Krause, Hadfield & Tyler (2007), input is defined in terms of labour and capital. Output, on the other hand,
typically measures revenue and other product components, such as business inventories and return capital. Productivity thus measures how resources can be managed to complete tasks on time and within quality.

There are two methods for increasing productivity: increasing and decreasing input. Where both the inputs and the outputs are increasing, the outputs should be increasing faster than the inputs.

Question 9

Competitiveness

Answer 9

Competitiveness is the ability of a business to perform well enough in relation to businesses locally and globally in the same market. Productivity can be used to objectively measure progress on strategic decisions, such as those around corporate planning and organisational improvements by comparing a business’s productivity with its competitors. Indeed, productivity and competitiveness are
interrelated and this relationship is of importance to private enterprise. Competitiveness has become a key driver for productivity since industrialisation.
Different businesses continually devise new methods and innovative technologies to increase their productivity. Today it is an accepted fact that
human and social capital blended with competition has a significant impact on the growth of productivity.

Question 10

Labour productivity

Answer 10

=Units produced/Labour hours

Question 11

Multifactor productivity

Answer 11

=Value of output/Value of labour 1 Value of land

Question 12

Total productivity

Answer 12

=Total units produced/total units of inputs

Question 13

Productivity index

Answer 13

=Productivity of current year/Productivity of previous year

Question 14

Processes and procedures

Answer 14

Processes and procedures are the set of related and structured activities leading to the production of specific products or services for a particular customer or set of customers. These activities are often made visual as a sequence of interrelated activities using flow charts. Considerations for the processes and procedures need to be included in the business plan, including the impact of not adhering to the
planned performance standards. Different innovations in processes and procedures are implemented to improve operations management in businesses.
These improvements can be experienced in organisational efficiency, effectiveness, internal control and compliance. Such improvements need to
feature in the business plan to indicate the competitiveness of the business and the differentiation to its competitors.

Question 15

Steps for P&P

Answer 15

The first measure of competence in the arena of processes and procedures is the extent to which expected outputs are being generated. This is termed
effectiveness.

The second factor is efficiency. Efficiency takes into account quality as well as whether the requirements of the end-customer were met within the allotted
time.

In addition, in order to maintain consistency in production costs, well-structured processes and procedures should maintain effective internal control
over aspects such as human resource costs, purchase rates and supply chains throughout the year.

Last, processes and procedures must also ensure that the business’s operations comply with statutes and policies relevant to the industry pertaining to the
business

Question 16

Summary of P&P

Answer 16

In summary, procedures and processes form a structured, measurable set of activities designed to produce a specific output. The focus is on how the work should be done and not just on the product perspective of what should be done.
Most procedures and processes are cross-functional and interrelated and thus require documentation to make them easy to understand and apply. Operational
processes and procedures can be documented in operational checklists, the standard operating procedures (SOP), changeover procedures and equipment operation guides (People and Processes, 2011).

Question 17

Documentation of P&P

Answer 17

They ensure that all activities are undertaken using a standardised approach to ensure consistency.
They prevent organisational failures taking place due to lack of documented operational processes and procedures. Documented processes and procedures form the basis of orientation and training for new operators by providing them with knowledge about how to make safer, proper and efficient use of equipment.

Question 18

Can be documentated

Answer 18

Operational checklists
SOP
Changeover procedures
Equipment operation guides

Question 19

Summary of documentation

Answer 19

The ultimate goal of documented operational processes and procedures is to ensure that best practices are fully explained to employees to reduce the chance of failures. They also give management the opportunity to devise an integrated approach to harmonise interactions between maintenance methods and operations. Management as a whole will then drive the reliability and capacity improvements. Another advantage of having a predefined set of processes and
procedures is the ability to easily update the documentation when policies change
(Kamauff, 2009).

Question 20

Customer service

Answer 20

Customer support is defined as the customer services offered to help customers make more cost-effective decisions and to use products correctly. This support can be offered with the planning, installation, troubleshooting, training, maintenance, disposal or upgrade of the product. Businesses selling technology
items such as televisions, computers, mobile phones and software products may call customer service technical support.

Question 21

Customer feedback

Answer 21

Customer feedback is another way of providing customer service. Different businesses use different ways of obtaining feedback from their customers.
Customer feedback can be taken at different times relative to the purchase such as during the purchase or after a few months. Technology has made it easy to get the feedback from customers with many businesses using online surveys to get customer feedback. Businesses use this to evaluate their operations by focussing on the key areas where improvement is possible.

Question 22

Automated services

Answer 22

Nowadays customer service can also be provided by automated means. Many businesses offer customer service on their web sites. Others use automated
interactive voice response systems (IVRS) to provide customer service. The main advantage of automated customer service is that the organisation can provide this as a 24-hour, seven-days-a-week service.

Question 23

Purchasing activities

Answer 23

Purchasing activities are significant part in operations management as they ensure the factors of production are present for the transformation process.
Purchasing includes activities like identifying and evaluating vendors, selecting products, placing orders and resolving issues related to the receipt of the products and services.

These activities make businesses differentiate between the two categories of materials purchased for production: direct and indirect materials. Direct materials physically become the part of the final product. Indirect materials are materials
are used to manufacture the goods or services. According to Krause, Handfield & Tyler (2007),
purchasing activities are specifically responsible for inbound flows into businesses.

Question 24

Sourcing supplies

Answer 24

Sourcing of suppliers depends on a number of factors:
Assessing current spending
Assessing the supply market
Analysing total costs
Identifying potential new suppliers
Making buying decisions using current demand and supply situation
Negotiating with suppliers
Tracking results continuously.

Question 25

Sourcing supplies continued

Answer 25

Suppliers should be selected not only for the short-term savings they may offer, but also on their ability to sustain cost savings over the longer term (five or more
years). Using suppliers lowers risks and helps to balance prices.

Long-term goals for processes and people affect supplier choice, as does changing technology.
Another important challenge when sourcing suppliers is to integrate the buyer’s requirements into the supplies. Suppliers must be able to match the
quality of an organisation’s products. The buying strategy of an organisation also affects decisions such as whether to purchase, rent, or lease.

Sourcing suppliers is often defined as having three stages, namely:
Finding the money
Getting the money
Keeping the money

Question 26

Value chain

Answer 26

A value chain is a concept in business management. It is the chain of activities for any company operating in a particular industry (Cousins & Menguc, 2006).
Value chains work at the business unit level in a company, not at divisional or corporate unit level. A manufacturing product and/or service pass through all levels of the value chain, gaining value as they pass through each level. The complete value
chain is the sum of all the independent values assigned to each activity. This should not be confused with the cost at each level of activity.
Michael Porter’s value chain is explained in more depth in the remainder of this section.

Question 27

Requirements of VC

Answer 27

Important requirements of a value chain are information technology investment, leadership, job adaptability and flexibility, collaboration, coordination, employee capability and attitude.

Question 28

Activities in a VC

Answer 28

Value chains are categorised as activities adding value to an organisation at different levels. Value chains can contain primary activities such as company
operations, logistics, sales, marketing, services and outbound logistics. They can also contain supporting activities such as research and development,
infrastructure management and human resources management (Coyle, Langley, Gibson, Novack & Bardi, 2008).

Question 29

Value chains at industry level

Answer 29

At industry level, the value chain is the representation of different procedures and processes involved in manufacturing goods and/or providing services. The value chain is associated with the entire process from the procurement of raw materials to the delivery of the product. Link value is assigned to each activity. The sum of these link values for the industry is called the value chain at the industry level.

Question 30

Significance of VC

Answer 30

Value chains are at the forefront of management thinking due to the power analytics capability for strategic planning. The value chain is not bound to the
individual company but rather applies at industry level to serve the entire distribution network. There are several types of value chains such as value stream
and cross-function processes which were popular in the early 1990s.

Question 31

Value system

Answer 31

Michael Porter has given the name value system to a huge, networked value chain (Coyle et al., 2008).The term ‘value system’ is used for a value chain that
includes the suppliers, the business itself, the distribution channels and the buyers.

Question 32

Value chain reference models

Answer 32

Value chain groups have developed value chain reference models. These models are used to provide an open-source dictionary for value chain management. They are treated as a reference for product development, customer relationships and
supply networks. Value chain reference models help to provide guidelines for design, modelling and measurement of business activities through specified plans.

Question 33

Systems and technology

Answer 33

In businesses, internal reporting was historically prepared manually at set intervals using information from the accounting system and additional statistics.
This resulted in partial and delayed information about management performance. Initially data was separated and classified according to the requirements of the
organisation. Later, as a mass of data was accumulated, it was sifted so that only essential data was stored.

Question 34

Automation

Answer 34

Automation is the proper use of information technology and control systems to reduce the need for human labour in the production and manufacturing of goods
or services. In the increasing scope of industrialisation, automation is a step beyond mechanisation. Mechanisation provides human operators with machines to help them complete physical tasks. Automation, on the other hand, significantly decreases the need for thinking and human sensory input altogether. Automation plays an increasingly important role in the world economy and humanity’s daily experience (Linton, Klassen & Jayaraman, 2007).

Question 35

Main categories of automation

Answer 35

Proactive support automation minimises downtime and enables 24x7 (24 hours a day, 7 days a week) availability.

Pre-emptive support automation utilises the information that is obtained from
systems, such as database queries and log files.

Self-support automation enables the business to provide online tools and libraries for self-help.

Assisted support automation consists of applications or other tools enabling the business to remotely access the customer’s desktop for support.

Question 36

Automation continued

Answer 36

Automation has had a noticeable impact on a wide range of industries outside the manufacturing sector. For example, telephone operators have widely been
replaced by automated telephone switchboards and answering machines. Automated systems have also sped up and increased accuracy in medical processes, such as the primary screening used in electrocardiography and radiography, as well as in the laboratory analysis of human sera, cells, genes, and tissues. Automated teller machines (ATMs) have reduced the need for bank visits to draw cash or carry out transactions. Automation has led to the recent shift in the world economy from industry-based jobs to service-based jobs.

Question 37

Office automation

Answer 37

Office automation refers to the use of computer software and hardware to digitally create, store, manipulate, collect and communicate data to complete basic tasks.
An office automation system comprises the activities of electronic transfer, raw data storage and management of electronic business information. Office automation also enables optimising and/or automating existing procedures.
The main strength of office automation is having a local area network (LAN). The LAN allows users to email and transmit data and voice all over a network. All
office functions, including filing, copying, dictation, typing, faxing, records management and switchboard operations fall into the category of office
automation. Office automation was very popular in the 1970s and 1980s due to the explosion in the use of desktop computers.

Question 38

Manufacturing automation

Answer 38

Manufacturing automation is the use of automation in producing things in factories. Most of the advantages of automation technology have affected
manufacturing processes with the biggest advantages of automation in manufacturing, being:
Reduced lead times
Higher consistency
Better quality
Reduced handling
Simplified production
Improved work flow
Better worker morale

Question 39

OM philosophies

Answer 39

There are many different management philosophies in current use today. Two such philosophies which pay specific attention to the operational side of the
business are Total Quality Management (TQM) and Six Sigma. This section explores each of these philosophies in further detail.

Question 40

Total quality management

Answer 40

TQM works on the principle that the quality of products or services offered and the processes required for their delivery are the responsibility of every individual
involved in the creation or consumption of these products or services. TQM focuses on the management and involvement of the suppliers, the workforce and the customers to meet or surpass customer expectations

Question 41

TQM practices

Answer 41

The nine common TQM practices are:
Process management
Cross-functional product design
Supplier quality management
Information management
Customer involvement and feedback
Strategic planning
Committed leadership
Employee involvement
Cross-functional training.

Question 42

Six sigma

Answer 42

The Six Sigma management strategy originated in early 1986 when Motorola ran a drive to reduce defects by minimising the variation in their production processes.
The primary aim of the Six Sigma approach is to achieve products that are free of defects. This is its core principle

Question 43

Differences between TQM and six sigma

Answer 43

The major difference between Six Sigma, regarded as a fresh concept, and TQM, a much older management strategy, is in approach. Six Sigma sets minimum
standards and requirements, while TQM aims for a better level of performance.

Question 44

Quality

Answer 44

Quality in business, manufacturing and engineering has a practical application in measuring the superiority or non-inferiority of products. Quality is a conditional,
perceptual and subjective characteristic: it can be assessed differently by different people depending on their thinking. A consumer’s focus is mainly on the
requirement quality of a product and on how the product compares to those of competitors. Producers measure conformance quality, the degree to which a
product or service was produced in the correct way.

Question 45

Techniques for improving quality

Answer 45

Various concepts and techniques can be applied to improve the quality of products and services. The most common of these are:
Quality assurance, being the prevention of defects. This would be achieved, for example, by implementing a quality management system.
Pre-emptive activities analysing defects and controls: effects analysis, failure mode and quality control. Known as verification and validation, quality
control covers the detection of defects most commonly linked to testing done using a quality management system.

Question 46

Quality systems

Answer 46

The concept of quality systems first appeared during the Industrial Revolution. Before the Industrial Revolution, goods were made by the same person or team of people handcrafting and altering products to meet quality criteria. In the Industrial Revolution, huge teams of people were for the first time brought
together to work on separate stages of production and services. A single person no longer worked on a product from start to finish. During the late nineteenth century, innovators like Henry Ford and Frederick
Winslow Taylor recognised the restrictions and limitations of methods and approaches used in mass production at that time. They subsequently changed the quality of products that were manufactured. Birland established quality departments to manage quality during production and to fix errors. Ford
concurrently stressed the need for standardising designs and components to safeguard the production of standard products. Product quality management was
made the sole responsibility of quality departments. They did so by assessing products produced to detect defects. Quality systems as a profession started with simple control, developed to engineering and eventually progressed to systems engineering. Quality control activities peaked during the 1950s, 1960s and 1970s. During the 1970s, quality engineering was developed. The 1990s saw quality systems engineering develop as an emergent field.