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Strategic Operations Management. Introduction to Operations Management. Design, Operation, and Improvement of the Systems that create and deliver Primary Product & Service combination.
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Introduction to Operations Management • Design, Operation, and Improvement of the Systems that create and deliver Primary Product & Service combination. • The Design, Operation & Improvement of Internal & External Systems, Resources, and Technologies that create & deliver primary Product & Service Combinations.
Contd. • The Design , Operation, and Improvement of Internal & External Systems ,Resources and Technologies that create Product & Service combinations in any type of Organization. • Operations Management has a strategic contribution in supporting the needs of Customers & Consumers.
Types of Products • Table 1.2 –page 11 of the Text Book • Type of Products and /or Services has implications for Operations Management and Operations Strategy. • Most Goods contain Service elements and some Services contain Tangible Goods. • Figure 1.1 The Goods and Services Continuum
Contd. • Services constitutes largest economic Sector in many economies. • More than 50 % in many countries including India. • Value additions to the core corporate offerings through Services. • Modern Corporations offer Consumer Demand –Driven fuller Market Packages –Consumer Focused combinations of Goods, Services, Support, Self service, and Knowledge.
Contd. • This movement is termed as Servitization of Business. • Powerful new feature of Total Market Strategy leading to new relationship between Companies & consumers.
Types of Operation and Flexibility needed • Organizations undertake many diverse activities in providing different types of Product & Service. • They will have numerous Suppliers & Customers. • They are complex entities. • There will be many different types of operations—both in individual firms and across different industries.
Contd.. • E.g., Aluminium smelting is markedly different to a Call Centre or dealing with Insurance Claims . • One way of classifying would be to equate operations to the activities taken and the degree of Flexibility sought. • Flexibility can be examined from the view points of three particular issues: Stimuli for greater variety, various classifications of Flexibility and measurement of Flexibility.
Contd. • The stimuli for Greater Flexibility: Flexibility in Operations Systems is as a response to the need fro Variety and its attendant Uncertainty. Flexibility in OS -- is demand driven Uncertainty --- a supply dilemma
Consumer Demand for Variety • Consumer tastes have altered and continues to alter radically. • Have become more & more difficult to meet or satisfy. • Consumer purchases are more a reflection of life style or fashion statement rather than satisfaction of a basic need. • To this has to be added the complexity of instantaneous ,electronic, worldwide communication.
Contd.. • Information explosion in the electronic media has educated average shopper beyond any level seen to date. • Changing demand patterns push organization to be agile and react more speedily to meet these changing demands. • At the same time avoid penalties associated with volatile demand.
Contd.. • “For Sale “ seasons are becoming much shorter • Styles are becoming volatile; unique and customized goods are of increasing importance • If a firm is further away from the point of sale and indication of demand preference , harder it becomes to react in an effective &efficient manner.
Demand Uncertainty • Modern organizations are ill equipped to deal with demand uncertainty. • At the beginning of 20th Century, manufacturing was characterized by an emphasis on mass markets, high volume, and use of interchangeable parts. • When the principles of scientific Management were adopted , it produced new era of Industrial Power that was eagerly exploited by the likes fo Henry Ford.
Contd… • For utmost efficiency in any factory: work was divided into smallest possible components; assign the tasks to specialists; appoint managers to supervise and make decisions workers to concentrate on manual tasks ; variations reduced to a minimum; all inputs and outputs standardized to reduce defects;
Contd… • control exercised thru rigid hierarchy-channeling communication in the form of exception reports upward and directives downward; • Performance measured by cost,scale,experience, and length of production run; and employ forecasting systems in order to anticipate any possible changes.
Contd.. • In 1974, Wickham Skinner proposed the idea that manufacturers must learn to focus their plants ( or even Depts. Within the plants) on a limited range of technologies, volumes, markets/d products and that strategies, tactics and services should all be arranged to support that focus. • Factories that succeeds in focusing its activities will outperform one that does not.
Contd. • Costs would be lower than in unfocused operations due to experience curve and scale benefits; consequently focus provides competitive advantage. • But, low cost and flexibility are not compatible. • Market demands greater variety and diversification and the focused factories come under strain, often alleviated only at the expense of high inventory levels.
Contd… • In 1980s, it became apparent that organizations operating in this focused manner were unable to cope with one particular demand: “Variety”. • Fundamental and radical new methods of organization and management were needed, once the demand for diversity reached a critical level. • Hence the search for new “Operations strategy”
Organization Response to Changing Consumer Demand • Environment requires businesses to seek greater product and process variations--- (flexibility) thru agility and responsiveness. • Possible rejection of Fordist principles of mass production and move towards mass customization. • Mass customization can be achieved once an entire supply net work with all various firms is integrated and data openly shared allowing visibility at all stages.
Contd… • A supply/demand system that is fully visible provides the basis for flexibility and responsiveness to real-time demand. • Fig.1.2 shows the evolution of such a supply/demand system. • Stage I depicts situation for most goods and services sectors at the turn of the last century in USA. It is still existing in India in my opinion. • In this situation, participants considered themselves as separate & autonomous industries with no influence, reliance, or interconnection with each other.
Contd… • In stage II, effect of interdependence and supply chain is born. Industries still remain manufacturing and product driven. • In stage III, depicts current situation at least theoretically; with EDI – electronic data interchange beginning to form an interface between industries in a pipeline responding to a consumer pull.
Contd… • In the light of the changing business environment described above , a fourth more radical and advance stage is needed for successful competition and necessary flexibility. • Fig.1.3 shows stage IV , termed as “Cluster of Value”. • The consumer group is nucleus of activity, dictating and driving all demand preferences for variety.
Contd… • The entities circling(sales processes, operations processes, supplier processes) are closely linked and responding by providing value in the exact format required. • Consumer groups are constantly changing over time and organizations are involved in many different simultaneous clusters of value at any given point . • This type of structure and interaction is necessary in response to growing demand variety, including the move to mass customization of services and goods.
The Classification of Flexibility • Operations flexibility and the activities that comprise it can be witnessed at three levels in an organization –whether provides good or services or both: • 1.At an inter or intra organization level. A strategic choice : both the firm and its supply and demand systems are concerned with the ability to offer a particular level of flexibility in its product and service combinations.
Contd… • 2. At an operations level: whether in a distinct operations function or through out the organization, are the operations activities are capable of sufficient product and service flexibility. • 3.At an individual , resource, process, and structure level. Is each of these is sufficiently flexible to match variety of tasks required to support levels 1 & 2 ?
Contd… • Strategic nature of flexibility applies at a total supply and demand systems and organization level (1 & 2 above). • Thus, conceptually we can think of flexibility as being both an external and internal response to the value demanded by the consumer/customer.
External Response to Customer Value Demand • Product & Service combination flexibility Ability to introduce and modify products & service combinations according to demand variety. • Mix flexibility. An ability to change the range of product & service combinations being produced over a given time period. • Volume flexibility. Being able to change the level of an operation output over time.
Contd… • Logistics flexibility. An ability to provide flexibility that determines when ,where and how a product or service is provided. • Monetary flexibility. A flexibility over when , where, and how payment is made for the necessary goods and services (including interest rates, instalments , etc….). • Contact flexibility. The degree of direct contact with customers and the influence this has upon value and customer satisfaction.
Contd… • Flexibility requires a firm’s internal and external boundaries to be redrawn . Five more types of flexibilities were added by experts : • Functional Flexibility. Redeployment of workers as the product and production tasks require. • Numerical flexibility. The capacity to make changes in employment levels to match demand.
Contd… • Financial flexibility .Pay and other employment costs reflecting the objectives of numerical and functional flexibility. • Temporal flexibility. Flexibility in timing work arrangements to match demand needs. • Technological flexibility. The flexibility of process technology to be used for multiple purposes.
Contd… • Given the importance of flexibility, it seems advisable that an organization devises methods to ascertain the level it requires. • However, flexibility is a concept that is difficult to quantify and operationalize—to a degree , each business must assess its individual impact in terms of the general benefits and costs it brings.
Types of Operations Revisited • Types of operation needed in each of the external and internal response to customer value demands and the environmental influences necessitating their adoption can be seen in Tables 1.3, & 1.4. • Various flexibility categories will have direct impact on the types of operations involved and their organization. • Firms specializing in highly customized customer flexibility will also have high internal flexibility. It will be complex in nature with much variety and change. • The markets are likely to be complex ,competitive, and fast moving.This type of business is highly contingent upon its environment.
Contd… • The styles of operation and organization will vary between organizational sub units. The degree of differentiation in operations will alter according to the nature of Industry and its environment. • There are other types of operations/industry where requirement of flexibility is at a low level. • The products would be standard and very little change is offered. Demand over time is steady and relatively easier to forecast. • Firms can specialize in higher volume operations to take advantage of economies of scale and experience curve benefits.
Conclusion • In chapter 1 we have described the contribution of operations management to the study of business, management and organizational theory. • Definitions have been provided that will, hopefully, help the reader to gain a clear impression of the discipline. • The chapter has also discussed the types of product services combinations now supplied by most commercial organizations. • A link has been made between operations and flexibility often required in a modern enterprise • Case study-- Clipper Navigation Inc. – an introduction to operations management.(www.victoriaclipper.com)
Chapter2 • Frameworks for the analysis of Operations Management
Intro… • Analyzing any operational activity is not an easy task. • A number of techniques are there. We discuss three of the influential approaches to understand of their utility and as their drawbacks. • They are: Value adding, Systems Theory, and complex adaptive systems.
Value Adding • Essentially related to how well the organization matches products & services to the identified needs of its chosen customers. • Michael Porter (1985) comments: “ In competitive terms, value is the amount buyers are willing to pay for what a firm provides them. Value is measured by total revenue, a reflection of the price a firm’s product commands and the units it can sell. A firm is profitable if the value it commands exceed the costs involved in creating the product. Creating value for buyers that exceeds the cost of doing so is the goal of any generic strategy.”
Contd…. • Value chain analysis can be used to describe the activities within and around the organization and relate them to the competitive strength of the firm( its ability to provide value for money products & services). • Approach rests upon need to identify separate organizational activities and assess their value added.
Contd… • Let us understand the value adding activities. • There are activities termed as Primary Activities and Secondary Activities. • Primary Activities , as name itself suggests , are directly involved in creating/producing the product & services. Secondary obviously support the primary activities.
Contd… Primary Activities: • Inbound logistics ( receiving, storing and distributing the inputs to an organization) • Operations( transforming inputs into outputs). • Outbound logistics(storing and distribution & delivery of product &service combinations). • Marketing and Sales(means by which consumers are made aware of and can purchase products & services). • Services(activities that enhance the value of the product or service)
Contd… Support Activities Support Activities: • Procurement(process of acquiring resource inputs to all primary activities). • Technology development ( all activities have a technology—including know how and knowledge , whether concerned directly connected with products & services or processes). • Human resource management ( activities involved in recruitment , managing, training, developing and rewarding people). • Infrastructure( systems of planning, finance, quality assurance/control, information management, etc..).
Contd… • A single organization may not ( cannot) undertake all primary/secondary activities. • Firms increasingly rely on others in their supply network. • Thus, one must think of value as being at a system level. Value creation takes place at the level of supply system . Wider process needs to be analyzed and understood. Here, the linkages are important as a source of competitive advantage.
Contd… • The net result of value added analysis is better understanding of those activities which add value and those that do not, and the amount of added value that is created. • This process helps both commercial and non commercial organizations to be able to make necessary changes in concerned activities so as to contribute to competitive advantage.
Systems Theory • In the first half of last century it was believed that in every complex system the behavior of the whole can be understood entirely from the property of the parts. • 20th century science had to accept that properties of the parts can only be understood from the organization as a whole—the context was equally important. • The systemic context is the property of the whole and is destroyed when a system is dissected into isolated elements.
Contd… • Thus, we have a nesting of systems and sub systems at different levels of complexity. • Each level will also exhibit an emergent property not visible at lower levels—the whole is worth more than the sum of the parts
Complex Adaptive Systems • At this stage , it is important to appreciate the fact that organizations , their operations, and their supply networks are highly complex and often far from easy to understand. • The behavior is non linear .In other words , behavior is never repeated exactly and cannot be extrapolated or forecast with high degree of accuracy. • This factor makes analysis ( using systems theory or value adding) all the more difficult.)
Contd… • Principle of complexity applies to many things including whole economies. • Complex systems consist of many agents acting in parallel, without hierarchical control, in multiple layers of structure. • Complex systems to a degree self – developing or –making in their ability to self organize ; to self –refer and to display emergent behavior( whole is more than just a sum of parts).
Contd… • Four Principles which apply to complex theory:: • Complex adaptive systems cannot exist in a state of equilibrium. Any CAS requires variety to cope up with external sources of change-bounded instability. • CAS have capacity fro self organization and emerging complexity. • CAS tend to move towards the edge of chaos. It is in this region that new forms can emerge . • CAS are characterized by weak cause & effect linkages. Small and isolated changes in one variable can cause huge and unpredictable changes in another.
Contd… • Alternatively, large changes may have little effect .A disproportionate response to changes in the independent variable is seen. • The important lesson in this section is the contention that organizations , their operations, supply networks, supply chains, and information flows are dynamic systems.
Conclusion • Three different perspectives have thus far been discussed to help our understanding of the operational process. • Value adding is an important approach as it forces us to think about the value a customer or consumer seeks from the operational system. • Systems theory or thinking emphasizes contextual thinking and net works or relationships embedded in larger networks---relationships being primary. • Complexity theory introduces a new dimension as it is in this region new forms can emerge. Four principle which apply to complex theory explains the weak cause and effect linkages. • Case study—The Taiwan retail market—frameworks for analysis of operations management.