Table of Contents:
Operations Management (OM)
The management of productive resources to gain competitive advantage. The operations management process is all about designing the process so that you can deliver the good or service as efficiently, quickly, and with as much quality as possible. But, beware, a focus just on efficiency goes agains the priciples of building a "triple-A supply chain".
How "Operations" is useful for strategy:
(1) long term = strategy decisions, where a company focuses on the long term effectiveness (rather than on efficiency).
In the long term, decisions made here will effect the constraints that you will face in the future (limiting the medium and short term decisions)
- where should you place your factory?
- what products should you make?
- how big should the factory be?
- how much extra capacity should you maintain?
- should you outsource?
(2) medium term = tactical decisions
(3) short term = planning and control (less strategy involved here).
Why operations managment is important
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operations can be a source of company success (as with Toyota, Dell, Zara), or a source of its failure.
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For mergers and acquisitions to be a success, you need synergies in operatoins. It is essential for success of the merger that the new enterprise be made efficient. Combining operations is much more difficult, and important than the legal and financial merger itself. Processes must be shared.
- Companies generally spend most of their money (and most of their people) on operations of a company.
It might not be glamerous, but operations are essential to making money.
How "operations" helps measuring the success of a company:
From a financial perspective, the goal of a firm is to increase profits. But, how do you measure the success of a firm financially? The standard way to measure financial success of a firm is often found in accounting and finance, and focuses on the following:
1. Net income
3. Cash flows
By measuring and comparing these factors to other comparable companies, you can get a general bill of health of the company. but how do you measure the business operations to see if they are working together to optimize the productivity of the firm?
1. Throughput
2. Inventory
In order to achieve the financial objectives of Net Income, ROI and positive cash flows, you need to assure that the operations of the firm focus on maximizing throughput, minimizing the inventory and minimizing operating expenses.
see also: balanced scorecard
Operations as a "Cheap" way to improve profitability
Compared with most of the other ways that you can stimulate growht (such as investing in new technology, making advertising campaigns, or buying other companies), the improvements in operations efficiency are cheaper, and easier to impliment.
Concepts key to Operations management:
1. efficiency: doing something for the lowest posible cost (time and money). Doing the same thing with the smallest amount of resources.
2. effectiveness: doing the right thing. creating the most value for the company.
3. value: quality / price
More concepts:
1. Supply chain managment
2. TQM - total quality managment (see our discussion on the Honda-way for quality management)
3. BPR - business process reengineering
4. JIT - Just in time delivery / maunfacturing
5. ERP - enterprise resource planning systems
6. CRM
Trends in Operations Management
1. smart tags, RFID - use wireless microchips to track products in real time. (example: Wal-Mart & their vendors). The advantage is that these tags allow companies to track the location of products in the supply chain anywhere in the world.
2. specialization and outsourcing, which might lead to a lesser role for vertically integrated companies, and more for specialized companies.
3. short production cycles
4. global markets.
5. integrated information systems
Importance of Operational excellence for services marketing
It is interesting that the link between "Marketing" and "Operations" is closest in "services marketing". Why? Because of the way in which services are "simultaneously produced and consumed". In comparison to product manufacturers that can produce, store, ship and then deliver...a services marketing role will make the service new at the same time as they are delivering it. For this reason (lack of time between production and sales), it is essential that a services marketing operation delivers 100% quality the first time. While this might be easy in a small operation, it is increasingly difficult as the company reaches economies of scale. The challenge is to design the operating procedures so that the same level of high quality is delivered each and every time a customer is serviced. For this reason, the link between marketing and operations gets even closer in services.
Other operations issues to consider in services marketing:
1. How much capacity will you plan for? In services this issue is critical because of the nature of demand of the services industry. As compared to the manufacturing industry where extra goods can be produced in slow times (inventory) to sell to consumers when demand picks up.... in services marketing, there is no way to store inventory (an airline seat not used today can not be sold tomorrow). So, for this reason, the capacity planning issues are even more critical for services marketing than they are for manufacturing. This investment decision is complicated and should not be taken lightly.
2. Location selection issues are even more critical for services marketing. When making a capacity investment decision for services, you will need to locate your investment in fixed assets near to the location of your expected customers. The opposite of manufacturing occurs in services, where you first need to distribute your capacity, and then later you need to produce your product (service). For example, a company will first need to distribute hotel room capacity to all of the locations that consumers might want to sleep, and then they will need to sell the services. Or, a telephone service provider will need to first invest to have transmission capacity distributed to each neighborhood before they can offer the services. On the contrary, a manufacturing company will first produce the product and will worry later about how to distribute it to consumers (storing it as inventory, and selling it at a later date).
3. Services marketing needs to be ready for high volatility of demand for their services. Rush hour at lunch time for example. So, peak capacity will spike much higher than for manufacturing. So, services marketing operations needs to plan for this. Also, the amount of time it takes to service one customer varies from customer to customer...whereas a manufacturing operation can precisely plan how much time they will spend on each product produced. This extra variability makes it more difficult to plan for capacity requirements of services industries. As a result, many services industries plan the capacity in short horizons; ie scheduling the level of support staff needed to staff an event only at the last minute, calling up extra temp workers as needed
4. Capacity utilization directly effects the perceived service quality. In industries such as concerts... a full sold out stadium makes the whole experience better for each individual consumer, but other services industries such as airlines... a full capacity used (a completely full plane) makes other customers uncomfortable...and decreases the level of experiece of each customer.
Companies we are highlighting: Models of supply chain excellence:
Progressive Insurance
Between 1991 and 202, Progressive grew sevenfold from $1.3 billion to almost $9.5 billion in sales. But they did this without innovating new products, without entering growing markets, and without much advertising.
The key to Progressive's success was keeping their "combined ratio" down to approximately 96%, which means that they were profitable not only on their investments, but also on their underwriting activities. Through excellent Operations managemnt, the company was able to improve efficiency and stay profitable when other companies were not. How did they increase efficiency? They cut the cycle time for people who have claims, which reduced the number of people that switched companies due to unsatisfactory service. This cut costs. Since they take approximately 100,000 claims per day, Progressive was saving money by cutting the cycle time (less car rentals, less unhappy customers, etc). They also used the internet to quote competitors rates so that customers could easliy compare prices.
see more: Insurance industry
Operations in the Organization chart
Operations as a "functional field" in a company,
Like Marketing, and Finance, OM is a functional field with clear lines of reporting in the company. When thinking about OM, there are three general levels to consider:
The boss
It is essential that someone in the company be responsible for operations. Highly recommend having COO...chief operating officer who is repsonsible for all operations of the company. Companies might have 100's of improvement projects going on at the same time (six sigma, lean manufacturing, JIT, supply chain, etc), but you need one person to coordinate all activities, and make grand strategy decisions. As was seen with Zara, it is possible for a company to be inefficient on the small scale, but very efficient in the overall picture. As the old saying goes: "penny wise, pound foolish"....you dont want to be efficient in all of your details, but inefficient in the overall picture. To help coordinate this, you need someone seeing the whole picture, and making strategy decisions.
Different structures
Manufacturing and Services companies typically structure their operations departments differently. Manufacturig companies typically group all of their operations activities to produce products in just one department, whereas the service companies spread the operations functions throughout the orgainization.
The principlal reason that service companies scatter the operations functions is in order to respond faster to the customers. They typically orgainze into cross functional teams in order to focus more on the customer, and to make the work environment for employees more stimulating (often a requirement of service industry professionals).
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