Operations management (AS)

Operations management is the planning and control of the process that turns inputs into outputs of the right quality, quantity, cost and time.

4.1 The nature of operations

The operations process

Operations must be efficient (low cost), flexible (respond to changing demand) and deliver quality.

Production methods

The right method depends on volume, variety, cost, customer demand and technology. Mass customisation uses flexible technology to make individually varied products at flow-production cost.

Labour-intensive versus capital-intensive

Labour-intensive production relies on workers (a restaurant) and suits low volume, customised output. Capital-intensive production relies on machinery (a car plant) and gives high output and consistent quality at lower unit cost if volume is high. Technology and automation can cut cost and raise quality but needs investment and may cause redundancy.

Productivity and efficiency

Raise productivity by training, better equipment, motivation and better organisation. Higher productivity lowers unit cost and makes the firm more competitive.

Efficiency means using resources with little waste; lean production aims to cut waste of all kinds (time, materials, inventory) while keeping quality.

Efficiency, effectiveness and sustainability

Efficiency is using resources with little waste (doing things right); effectiveness is achieving the desired result (doing the right things). Sustainability means operating without harming the environment or using up resources for future generations. Measures include recycling and cutting waste, renewable energy, sustainable sourcing and less packaging: these can lower costs and improve reputation, but need investment and may raise costs in the short run. Operations adds value by turning inputs into outputs worth more than their cost, through quality, design, speed and service.

Changing production method (for example from batch to flow) is costly and disruptive: new machinery, retraining, temporary loss of output, redundancies and resistance from staff, and the market must be large enough to justify it.

4.2 Inventory management

Inventory (stock) consists of raw materials, work in progress and finished goods. Holding it costs storage, insurance, security and ties up cash, and goods may become obsolete or perish. Holding too little risks stock-outs and lost sales.

Inventory control

The buffer inventory is a minimum level kept to avoid running out. The re-order level is the stock level at which new orders are placed, set using lead time (time from order to delivery) and usage rate. Maximum stock is the highest level. In a stock control chart the inventory falls with use, a re-order is placed at the re-order level, and a delivery restores stock.

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A stock control chart with maximum stock, re-order level, buffer stock and lead time

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Just-in-time (JIT)

JIT is a system where materials arrive only when needed, so inventory is very low. Advantages: lower storage costs and waste, less cash tied up, less obsolescence. Disadvantages: reliable suppliers are essential, delays stop production, no buffer if demand jumps, and no bulk discounts on large orders.

Just-in-case keeps buffer stock for safety.

Lean production

Lean production includes JIT, kaizen (continuous improvement), cell production and quality circles, aiming to cut waste and cost while maintaining quality.

Supply chain management and Just-in-case

Supply chain management is co-ordinating everything from suppliers to customers (purchasing, inventory, transport) to cut cost and delay and keep quality. Just-in-case (JIC) holds large buffer stocks so production never stops: it gives security and quick response but has high storage costs, waste and tied-up cash. JIT has the opposite balance (see above); adopting it needs reliable suppliers, good forecasting and often a change of culture.

4.3 Capacity utilisation and outsourcing

Capacity is the maximum output a business can produce with its existing resources.

Dealing with over-capacity: boost demand (marketing, price cuts), sell or rationalise assets, rent out capacity, diversify. Dealing with under-capacity: overtime, extra shifts, subcontract, invest in more capacity.

Outsourcing

Outsourcing is contracting work to an external firm (payroll, IT, cleaning, manufacturing). Offshoring is moving operations abroad.

Many firms combine outsourcing with in-house work for activities that are core and give competitive advantage.