COURSE MANUAL

C4: Operations Management

MCP1604
Introduction and Module 1

The Open University of Sri-Lanka

Faculty of Humanities and Social Sciences
Department of management Studies
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: info@[Link]

The Open University of Sri Lanka

Faculty of Humanities and Social Sciences
Department of Management Studies
NawalaFax:
Nugegoda
+94 112(10250),
881408
E-mail: pio@[Link]
Sri Lanka
Website:
[Link]: +94
[Link]
112 881327/255
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

ArabaIntsiful
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
Need help?.........................................................................................................................6
Assignments.......................................................................................................................7
Assessments.......................................................................................................................8
Getting around this course manual 9
Margin icons......................................................................................................................9
Module 1 10
Introduction......................................................................................................................10
Unit 1
Strategy and competitiveness..........................................................................................11
Activity 1.1......................................................................................................................25
Unit summary 26
References 27
Readings for further study 28
Unit 2
The nature and role of operations management...............................................................29
Activity 1.2......................................................................................................................38
Activity 1.3......................................................................................................................42
Activity 1.4......................................................................................................................45
Unit summary 45
References 46
Readings for further study 46
Activity feedback.............................................................................................................47
 C4: Operations Management-MCP1604

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
Resources
For those interested in learning more on this subject, we provide
you with a list of additional resources at the end of each module;
these may be books, articles or web sites.

Your comments
After completing Operations Management we would appreciate it if
you would take a few moments to give us your feedback on any
aspect of this course. Your feedback might include comments on:
 Course content and structure
 Course reading materials and resources
 Course assignments
 Course assessments
 Course duration
 Course support (assigned tutors, technical help, etc.).
Your constructive feedback will help us to improve and enhance
this course.

2
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 outcomes
Upon completion of C4: Operations Management you will be able
to:
 Discuss operations strategy and customer requirements and
demonstrate how operations management can be used to
improve the competitive position of a firm.
 Summarise demand management and forecasting.
Outcomes  Describe capacity management and balance aggregate
demand with capacity.
 Illustrate the basic requirements for process design
(including continuous operations, repetitive operations,
batch operations and job shop operations).
 Discuss process improvement and the concepts of lean
thinking.
 Explain product design and quality management techniques,
including six sigma quality and process capability.
 Outline the role of inventory management.
 Describe supply chain management and supply issues,
including supply chain dynamics.
 Identify basic project management techniques.
 Understand the role of performance measurement in
operations management.

Timeframe
This course will take approximately 120 hours of study time.

How long?

Study skills
As an adult learner your approach to learning will be different to
that from your school days: you will choose what you want to
study, you will have professional and/or personal motivation for
doing so and you will most likely be fitting your study activities
Study skills around other professional or domestic responsibilities.

4
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:

 [Link]

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.

 [Link]

This is the website of the Virginia Tech, Division of Student

Affairs. Under “Cook CounselingCenter” 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”).

 [Link]

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 [Link] and type “self-study basics”,
“self-study tips”, “self-study skills” or similar.

5
Need help?
Is there a course web site address?
What is the course instructor's name? Where can they be located
(office location and hours, telephone/fax number, email address)?
Help
Is there a teaching assistant for routine enquiries? Where can they
be located (office location and hours, telephone/fax number, email
address)?
Is there a librarian/research assistant available? Where can they be
located (office location and hours, telephone/fax number, email
address)?
Is there a learners' resource centre? Where is it located? What are
the opening hours, telephone number, who is the resource centre
manager, what is the manager's email address)?
Who do learners contact for technical issues (computer problems,
website accessand so on.)

6
Assignments
There are two assignments in this course. The first is at the end of
Module 2 and the second at the end of Module 3.

Assignments Assignment 1
Due date:
Value: 35 per cent
Modules covered: 1 and 2
Format: Three questions

Assignment 2
Due date:
Value: 35 per cent
Modules covered: 3
Format: Four questions

Assessments
This course has a final exam.
Value: 30 per cent
Assessments Modules covered: All
Time allocated: 3 hours
Format: Answer any six questions from eight.

7
Getting around this course manual
Each unit has a small number of activities scattered throughout the
unit. You should work through each activity without looking at the
activity solution which follows. Use the activity feedback as
reassurance that you have understood the activity.

Margin icons
While working through this course book you will notice the
frequent use of margin icons. These icons serve to “signpost” a
particular piece of text, a new task or change in activity; they have
been included to help you to find your way around this course
manual.
A complete icon set is shown below. We suggest you familiarise
yourself with the icons and their meaning before starting your
study.

Activity Assessment Assignment Case study

Outcomes Reading Reflection Study skills

Summary Terminology Time Tip

Module 1

Introduction
This module introduces the subject of operations management by
explaining strategy and competitive advantage and then examining

8
 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.

9
Unit 1

Strategy and competitiveness

Introduction
Strategy should be the starting point for any course on business or
public administration. It is at the very core of any organisation and
it does not matter whether that organisation is in the manufacturing
sector, a service provider, a not-for-profit organisation or a
government department. If it exists, then it must have a purpose. If
it has a purpose, then it must have a strategy outlining how it
intends to achieve that purpose.
Every decision made within an organisation should be consistent
with the overall strategy for that organisation. Therefore, before we
examine the operations function within an organisation we need to
appreciate and understand the strategic role of operations.
This unit focuses on competitiveness and provides a broad
framework for the study of the operations of business. It provides
the fundamentals of general management and strategic
management theories, tools and techniques. Moreover, the role of
providing value in terms of customer satisfaction through
understanding and meeting their requirements is key to defining the
strategic direction of the business. The operations function is at the
core of the business and the primary mechanism that creates the
product or service. It is imperative that business strategy,
operations strategy and value creation are viewed together since
they cannot be separated.
Strategy and competitiveness are important for profit-based
companies but are equally important for not-for-profit
organisations and government departments since these entities have
limited funding (revenue) and this has to be spent (expenses) in
such a way as to maximise the benefits obtained.
This unit begins by investigating strategy and relating that to
strategic capability. This leads to a discussion on the concept of
core competence and the concept of qualifiers and order winners.
We look at the levels within the organisation that strategic thinking
can be carried out, the role of each level of the strategic plan and
how these plans fit together. This will include explanations of the
terminology used in strategy.
Strategy will then be explored in a variety of contexts that are
differentiated by size, orientation (service and manufacturing) and
financial goals (profit and not for profit). We go on to study

10
 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
order for the firm to “qualify” for the business.

11
 Strategy A set of broad statements that set 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.
Terminology sourced from Gardiner (2010).

Strategy
The concepts of strategy originated in the military where generals
would manoeuvre troops and weapons into position before battle
commenced and during the battle hoping to be better-positioned
than the enemy and secure a victory.
In the military sense, the starting point is to ensure you have the
right resources ready for action at the right places with the overall
objective of winning the battle and eventually the war.
Michael Porter, in the 1980s, developed the five forces model as a
framework for analysing the structure of industry.
He based the model on five competitive forces that he claimed
erode long-term industry average profitability. The five forces
model explains the sustainability of profits against bargaining
power and against direct and indirect competition.
The five forces model developed by Porter (1979) to shape
business strategy are:
 Entry barriers to the market from other organisations.
Barriers such as size, proprietary products and processes,
and brand identity.
 Determinants of supplier power, such as differentiation,
substitution and cost.
 Determinants of buyer power, such as volume, substitutes,
incentives and buyer information.
 Availability of substitute products.
 Existing competitors.
Porter advocated that the formation of strategy is an analytical
process based on a clearly defined position in the market. He
supported this by analysis rather than prescription. His generic
ideas have been widely accepted by management and academics as
the foundation for competitive strategy. Academics, in particular,
have used his models as the foundation for empirical testing.
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.

12
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
the physical and mental attributes? What allows them to be behind
you and you to be in front?
In business today, an organisation does not have to be in front, but
it does need to know where it is relative to the competition and the
reasons it is in that position. It needs to know what it has to do to

13
 hold its place, what it has to do to improve its position and which
organisation is biting at its ankles and trying to relegate it into the
pack.
Johnson, Scholes and Whittington (2008, p. 3) present a view of
strategy that encapsulates these thoughts:
“Strategy is the direction and scope of an organisation over the
long term which achieves advantage in a changing environment
through its configuration of resources and competences with the
aim of fulfilling stakeholder expectations.”
This looks at the long-term direction of the firm as it attempts to
achieve some form of advantage. The scope of a firm’s activities
and the concept of strategic fit which tries to match resources and
activities are important. The available resources should be stretched
and this may require some major resource changes. All decisions,
not just operational ones, are affected by values and expectations.
Strategy decisions are usually made in situations of uncertainty.
Technology will probably be the biggest driver of future change for
business, but it is also the source of the most uncertainty since
people do not know exactly what will happen and when. They can
speculate, but they do not know the exact outcomes.
Most organisations are aware of the need to use a team approach in
which the various functions work together to achieve joint
outcomes. This requires functional integration.
Multinational firms and conglomerates find that strategic decisions
are complex. With so much change in the world, it is extremely
difficult for large firms, especially, to formulate a strategy that can
add value and be successful in all areas at the same time.
Modern firms do not operate in isolation. They need access to good
suppliers and they need a list of good customers. They may have to
manage and change relationships and networks outside their
organisation.

Strategic planning
Strategic planning is the process of determining the strategic plan
which includes long-term goals, policies and plans for an
organisation.
Henry Mintzberg, in the early 1990s, provided his definitions for
strategy. These are known as Mintzberg's 5 Ps for strategy and help
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

14
 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.
Mintzberg (1994) suggested that strategic planning has impeded
strategic thinking and he advocated that the term strategic

15
 planningshould be discontinued. Strategic planning failed because
it is not the same as strategic thinking.
He claimed that strategic planning uses analysis by breaking a goal
down into logical steps, designing how those steps should be
implemented and articulating the anticipated outcome of each step.
In contrast, strategic thinking is all about synthesis involving
intuition and creativity to form an integrated perspective, or a
vision, of where the organisation should be heading. The outcome
of strategic thinking is an integrated perspective, a not-too-
precisely articulated vision of direction that must be free to appear
at any time and at any place in the organisation.
Strategy-making should be a learning process. Formal systems can
never internalise, comprehend, or synthesise hard information. The
conclusion is that planning is not a learning process.

Strategic capability
When an organisation wants to be competitive it has to ensure that
it has the resources and the capability to be successful. It has to
fully understand the business and social environment in which it
operates and to position itself relative to that environment. This is
the strategic fit of the firm. It describes how well the firm fits into
the environment. This positioning statement accepts the business
conditions as an accepted fact and endeavours to provide adequate
resources to effectively compete in that given market. While this
approach is necessary for survival, it is also a very conservative
approach since the current business conditions are known and it
just requires the firm to match the need with adequate resources.
The firm should be prepared to change in order to keep up when
the market changes. The firm has to recognise that the market has
changed and it needs the ability to execute the required changes
inside the firm, otherwise the firm backtracks and may not survive.
For many years Kodak dominated the wet film industry but with
digital cameras in wide use throughout the world the use of wet
film has almost disappeared.
Sometimes, a firm may have a vision for the future that requires a
radically different set of resources and processes than those
currently being used in the market. This is particularly so for new
and different companies such as Virgin Blue (airline), Dell Inc.
(computers) and Zara (clothing). These firms have stretched their
resources to change the rules of engagement.
The available resources are the full set of resources that are
available to the firm. These may be split into inadequate, threshold
or unique resources (Johnson et al., 2008, p. 118).

16
 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.

17
 Core competence is developed through process improvement. For
example, a core competence could be the capability of a firm to co-
ordinate and harmonise diverse production skills and multiple
technologies.
Prahalad and Hamel (1990) used the small size of Honda engines
as an example. Honda exploited this core competence to develop a
variety of quality products from lawnmowers and snowblowers to
motorcycles, cars and trucks.
A core competence has three defining characteristics:
 It provides potential access to a wide variety of markets.
 It increases perceived customer benefits.
 It is hard for competitors to imitate.
When the customer receives a better product, better service, more
innovation, a larger range from which to choose, more flexibility
and/or more reliable delivery, then the firm enjoys success. Under
these circumstances a customer places value on the fact that the
customer’s problems are being solved and the supplier is using
resources to solve these problems.
It is often difficult to isolate specific things that make a difference
but the firm is still successful. In this case it may be a bundle of
skills and technologies that underpin the ability to meet critical
success factors.
The differentiating competence, or bundle of competences, must be
robust and should be difficult for competitors to imitate. Above all,
core competence should provide opportunities for the firm, not
limitations.

Competitive advantage
Competitive advantage is the advantage a company has over its
rivals in attracting customers and defending against competitors.
Sources of advantage may include factors such as technology,
human skills and brand name.
When a firm is able to develop and deliver a product or service and
satisfy customers at a lower cost, a faster rate and in a shorter time
than its competitors, then it has a competitive advantage.

Qualifiers and order winners

Terry Hill (1993) proposed the concept of qualifiers and order
winners.
A qualifier is a competitive characteristic that a firm must exhibit
to be a viable competitor in the market. The set of characteristics
must be present in order for the firm to “qualify” for the business. It
is used to screen a product or service as a candidate for purchase

18
 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

19
 products and each timeframe at a corporate level, then the
organisation can develop functional-specific plans.
Marketing defines product functions and features, promotion
policies, pricing algorithms, product positioning, distribution
methods, advertising practices, brand awareness, channel
structures, service levels, image requirements and sponsorship
policies.
Finance and accounting define accounts receivable processes
(debtors), accounts payable processes (creditors), cost of capital,
levels of working capital, financial control methods, lines of credit,
currency hedging methods and timings, and relationships with
financial institutions.
New product and service development defines research direction,
simultaneous engineering methods, technology platforms, time to
market, criteria for selection and methods of production
development and introduction.
Operations management defines the location, physical layout,
products to produce, processes to use, process improvement
initiatives, quality processes, work systems, purchasing systems,
whether outsourcing and/or out-partnering is used, degree of
vertical integration, scheduling systems and inventory philosophies.

Operations strategy
Operations strategy is the pattern of decisions and actions that
shape the long-term vision, objectives and capabilities of the
operation and its contribution to overall strategy. It is the way
operations resources are developed over the long term to create
sustainable competitive advantage for the business (Slack,
Chambers, Johnston & Betts, 2006).
An organisation needs an appreciation of the part the operations
function plays, how this fits into the corporate strategy, and the
unique capabilities the operations function can provide to support
and influence overall strategic goals. The operations function
should give the company its competitive advantage, such as low
cost, flexibility or high quality. The scope of decisions should be
long term and investments should be made in capital resources and
in the workforce.
Service organisations follow a similar process for their operations
strategy development. The positioning of a service strategy
depends largely on intangible service characteristics rather than
tangible product characteristics.
A customer-driven perspective is required for operations strategy,
whether it is for production or service organisations. This requires
the process design and process improvement activities to be

20
 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.

21
 Competing on time
An organisation may elect to compete purely on time. This
involves a short delivery time, which is the elapsed time between
receiving a customer’s order and filling it. Firms can shorten
delivery lead times by storing inventory or having excess capacity.
It also involves on-time delivery, which measures the frequency
with which delivery-time promises are met. Organisations measure
on-time delivery as the percentage of orders shipped when
promised.
On-time delivery requires the product or service to be delivered at
the first customer-requested delivery time. Firms may convince
themselves that they are meeting delivery promises by shipping
goods out the door on or before the delivery promise date and time.
However, the customer does not see it this way. Customers want
the product or service and they will measure on-time delivery as
being the actual time the product is delivered to their location.
International courier companies use parcel-tracking technology to
identify the exact location of all their deliveries and they promise
delivery on time. Their technology reduces the chance of losing a
parcel or misdirecting it.
Another aspect of competing on time is product development speed
which measures how quickly a new product is introduced. This
includes the elapsed time from idea generation through to final
design and production. Getting a new product to market first gives
a firm an edge and this is difficult to overtake in a rapidly changing
business environment.
Competing on flexibility
An organisation may elect to compete purely on flexibility.
Flexibility allows a firm to change volumes or products quickly to
suit customer requirements. This is also referred to as
customisation, which is the ability to accommodate the unique
needs of each customer and changing product designs. Products are
tailored to individual preferences. Customisation implies that the
operating system must be flexible to handle specific customer
needs and changes in designs. Volume flexibility is the ability to
accelerate the rate of production quickly to handle large
fluctuations in demand. The time between peaks may be years as in
the construction industry, months as with a ski resort, or hours as
with a postal sorting firm.
Dell computers is a good example of competing on flexibility.
When a customer orders a Dell computer, the actual computer does
not physically exist. Dell has the manufacturing capability to
assemble exactly what the customer wants and ship it to them
within a few days. The company has this flexibility by pricing the
configurations in favour of the components it can deliver. If a

22
 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.

23
Activity 1.1
Work through the following questions. You may need to go back
and re-read the unit to help you.
1. What are the reasons for formulating and implementing an
Activity operations strategy?
2. How would you determine whether a company had an
operations strategy or not? What specific questions would you
ask and what information would you gather?
3. Find an example of an operation in your local community that
has been successful in simultaneously improving quality,
reducing throughput time, improving on-time deliveries and
reducing costs. How has this operation been able to achieve
these seemingly conflicting results?
4. Who defines the value of a product or service?

24
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.

25
References
Gardiner, D. (2010). Operations management for business
excellence (2nd ed.). Auckland, New Zealand: Pearson
Education.
Hill, T. (1993). Manufacturing strategy: The strategic management
of the manufacturing function (2nd ed.). London, England:
Macmillan.
Johnson, G., Scholes, K.,& Whittington, R. (2008). Exploring
corporate strategy (8th ed.). Harlow, England: Pearson
Education.
Kaplan, R. S. & Norton, D. P. (2008, January–February). Mastering
the management system. Harvard Business Review, 62–77.
Mintzberg, H. (1994, January–February). The rise and fall of
strategic planning. Harvard Business Review, 72(1), 107–
114.
Mintzberg, H. & Quinn J. B. (1992). The strategy process (2nd ed.).
Englewood Cliffs, NJ: Prentice Hall.
Porter, M. E. (1979, March–April). How competitive forces shape
strategy. Harvard Business Review, 57(2), 137–145.
Porter, M. E. (1986). Competition in global industries. Boston, MA:
Harvard Business School Press.
Prahalad C. K. & Hamel, G. (1990, May–June). The core
competence of the corporation. Harvard Business Review,
68(3), 79–91.
Slack, N., Chambers, S., Johnston, R., & Betts, A. (2006).
Operations and process management: Principles and
practice for strategic impact. Harlow, England: Pearson
Education.

26
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.

27
Unit 2

The nature and role of operations

management
Introduction
The operations function within an organisation is required to make
a number of important decisions as part of its normal processes.
These decisions are structural, such as where to locate and how big
the facility should be, infrastructural decisions such as how should
planning be performed and how should quality be determined, and
integration decisions such as how all these actions and processes
are tied together.
This unit defines operations management as the effective
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.
For an organisation to do this, they need a detailed understanding
of the customer and how they can meet the needs of the customer.
To achieve this, the organisation will use a process that takes inputs
and transforms them into outputs.
The modern view of operations does not distinguish between
products and services. They are different in context but, as far as
operations management is concerned, they should be treated the
same. There will be occasions when a clear distinction is required
but, in general, the theories and concepts within the whole
operations management framework apply equally to production
industries and services. One of the challenges in today’s market is
to take proven concepts from production and apply them to
services.
This unit starts by distinguishing between structural, infrastructural
and integration decisions within the operations function. This is
aimed at setting out a framework for defining the function of
operations management. Of prime concern to operations (indeed
the whole organisation) is the customer and the needs of the
customer so we include the definition of the customer and the
definition of value. This is followed by a discussion on the
transformation process. When you understand exactly what the
transformation process entails, you have a good foundation for
studying operations management.

28
 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.

29
 Transformation Transformation process is the process of
process converting inputs into outputs. The inputs
could be materials, customers, labour, energy,
components, ideas, machines or requirements.
The outputs could be finished products,
satisfied customers, unsatisfied customers,
components, subassemblies, developed ideas
or developed concepts.
Terminology sourced from Gardiner (2010).

Operations management
Operations management is defined as the effective 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.
Operations management is the management of the direct resources
required to produce the goods and services provided by an
organisation. It focuses on the function of providing the product or
service.
The aim is to produce specified products and services on schedule
at minimal cost. Most organisations have additional performance
measurements including volume of output, costs, utilisation,
quality, product reliability, delivery in full, on-time and in
specification (DIFOTIS), return on investment and flexibility of
product and volume change.

The customer
The objectives of operations management should be viewed from
the customer's point of view. When the customer is defined as the
next process, or where the work goes next, it becomes obvious that
the customer can be internal to the firm as well as external.
Regardless of the type of business, all customers generally have
these six basic requirements (Knod&Schonberger, 2001, p. 17):
 higher level of quality
 higher degree of flexibility
 higher level of service
 lower cost
 less time or quicker response
 less variability.
The customer should determine the quality of the required output.
When the customer demands a higher level of quality, the supplier
has to understand exactly what the customer wants, when they want

30
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.

31
Structural decisions in operations
In the previous unit we established a strategy for the organisation
and extended that by developing a strategy for the operations
function. When the operations strategy has been developed and
fully understood by the management team, then the operations
manager can make the required structural decisions. The categories
of structural decisions include capacity, facilities, process
technology, vertical integration and supplier relations.
Be aware that the operations manager can make structural decisions
without the help of an operations strategy but this is likely to lead
to an undesirable outcome.
Capacity
Capacity decisions determine how much can be produced and in
what time. An organisation should pre-determine how many
products or how much service it has to produce and then make sure
it has sufficient capacity to deliver those quantities. A company can
obtain capacity before it is needed, at the same time as it is needed,
or after it is needed. There is no correct time to increase capacity
(or decrease capacity) as this depends on a number of factors such
as cost, the competitive advantage that the extra capacity will
provide to the organisation and the capacity available to
competitors in the same industry.
An organisation is exposed to significant risk when basing capacity
decisions on predicted growth, especially if the expected growth
does not materialise. On the other hand, it can provide significant
market opportunities and production capability allowing the
organisation to respond quickly to market demands. Capacity that
is increased after the need has been established allows the
organisation to fully utilise its current capacity and the capacity
decisions carry less risk.
Facilities
When an organisation starts, and when it changes, it needs a facility
in which to operate. Decisions on where that will be located and
what will be produced relate to the number, size, location and
specific nature of facilities. Location, for example, is important for
service organisations that do not produce a tangible product. Banks,
motels and fast-food restaurants cannot easily operate unless they
are near customers. Manufacturers whose products are very bulky
or heavy must consider location and transport logistics.
Facility decisions are key determinants of a firm’s ability to
compete on the basis of cost and delivery.
Process technology
Process technology decisions determine how products and services
will be produced in order to meet demand. The operations manager

32
 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.
Salaries and wages paid to employees have a direct effect on cost,
especially for service organisations.

33
 Quality
Quality systems have a significant effect on cost and delivery lead
time. Processes designed and improved with quality as the driver
help to reduce the cost of production and the time it takes reduce.
The money spent to improve the process capability is usually more
than offset by the reduction in scrap, rework and other on-going
costs.
Production planning and inventory control
Production planning decisions relate to what will be produced,
when and how it will be produced as well as the quantity. These all
affect cost, quality, delivery and flexibility.
New product and service development
New product and service development decisions affect the cost of
bringing a new product or service to market. Design decisions
affect ongoing production costs and have a long-term effect on
flexibility. New product and service development decisions usually
have a positive effect on quality, since quality improvement is one
of the main drivers for introducing new products and services.
Performance measurement and reward
Performance measurement and reward decisions have a significant
effect on cost since most reward systems are monetary.
Organisation systems
The structure of the organisation will have an effect on flexibility
and time. An organisation may find decisions are not being made
quickly enough to be competitive and reporting line processes may
inhibit flexibility. The organisational culture may affect line and
staff relationships, thus adding to cost, quality and flexibility
priorities.

Integration decisions in operations

All structural and infrastructural decisions need to be integrated.
The categories of integration decisions include communication,
alignment, and linkage systems.
Communication
Operations, human resources, and marketing have to communicate
among themselves so they are all aware of changes in schedules,
supplier deliveries, customer requirements, customer preferences
and agreements that have been made. One function, for example,
may agree to a process concession and, without any communication
advising the change, another function may wait for the original
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.

34
 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,
instructions and care leaflets. In order to make the furniture, the
manufacturer uses labour inputs, machine inputs, energy inputs,
management inputs and the transformation will take place in a
factory building located on some land. The quality, availability and

35
 cost of these inputs will have a defining influence on the actual
output of the transformation process.
In a service industry the major inputs would usually be people who
are interfacing with customers.

The diagram above (Gardiner 2010, p. 25) illustrates the

transformation process with inputs such as workers, managers,
equipment, facilities, materials, services, land and energy and with
the outputs being products and services and the overall objective of
maximising customer value.

36
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

The following table of service organisations has been completed

37
 for ‘Air transport’. Complete the table for a computer centre, a
restaurant, a hospital and a bank.

Organisation Inputs Transformation Outputs

process

Air transport Airport Reserving Passengers with

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

Computing
centre

Restaurant

Hospital

Banking and
finance

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

38
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

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 of mind. The product is definitely intangible. The intangible nature
of services makes it difficult to assess the quality of the output.
You might attend a concert and be thoroughly entertained and
enjoy the experience. However, another person might attend the
same concert and not enjoy the experience. Was that a good service
or not? Who knows? Quality is determined after the fact.
Service customers are usually involved while the service is being
produced and delivered. In fact, the customer is in most cases an
active participant. Patients enter a medical centre and request
attention. They are physically present and the medical examination
is performed on them personally. Any required medicines are
prescribed just for them. This customer presence has a significant
bearing on the quality of output as the customer can make
comments during service delivery. The service provider can change
the delivery process and satisfy the customer.
Services usually cannot be stored and this means that they require a
close match between the rates of supply and demand. Services need
to cope with peaks in the demands for transport, accommodation,
medical services, ticketing, banking and call centres. Everyone, it
seems, wants to travel during peak periods; everyone, it seems,
wants to eat at the same time; everyone, it seems, is sick and
requires immediate attention at the same time. This puts added
pressure on the service provider to introduce innovative ideas to
smooth out the peaks and lows. Especially with fixed capacity
services, such as airlines and hotels, the service is perishable. An
empty airline seat on a plane that has just taken off cannot generate
any income. The opportunity is lost. Likewise an empty hotel room
for a night generates no income. Last week’s empty hotel rooms
will never generate any income. In fact they could even contribute
to a loss if the overheads are not covered.

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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

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 unsuccessful, they simply try again and tell their friends how close
they were to scoring a cheap fare.
Each experience is aimed at the next encounter and success is
measured in terms of customer purchasing patterns, loyalty, and
engagement behaviours that are generated by the unique nature of
the experience, the knowledge, the novel aspects, the memories and
the sheer entertainment that provokes customer emotions,
sensations, imagination, feelings and perceptions.
Social networking plays a significant role in creating loyal
communities and fans. The customers’ enthusiasm promotes the
brand by word-of-mouth.

Short history of operations

Industrial revolution
Before the industrial revolution all production processes were
conducted in the home. Food preparation and processing were
domestic activities. Transport vehicles such as trailers, carriages
and other horse-drawn vehicles were largely fabricated in a home
environment. The industrial revolution towards the end of the 18th
century signalled the birth of operations management with the
change from cottage industries to factory production.
Scientific management
Frederick W. Taylor developed his four principles of management:
research, standardisation, control and co-operation. His systems
included cost accounting, unit time study, inventory control,
production control, planning, output scheduling, functional
operation, standardised procedures, a mnemonic system of
classification and means for maintaining quality production. He
discovered that basic scientific laws govern work and that every
person is different and these differences can be exploited. He
introduced wage incentive plans and separate responsibilities for
workers and managers.
Human relations movement
Elton Mayo conducted a number of experiments at the Hawthorne
plant of Western Electric in the 1920s. He studied the effects of
group incentives on productivity, social psychology and worker
performance.
Operations research
Operations research and management science uses mathematical
models to solve operations problems such as personnel and
production scheduling, vehicle routing and logistics, facility
location, capacity planning and facility design, queuing, inventory
planning and statistical quality control.

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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 WorldWide
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.

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Activity 1.4
Work through the following questions. You may need to go back
and re-read the unit to help you.
1. Which is more important – infrastructural or structural or
Activity integration decisions? Explain your answer.
2. What does operations management mean?
3. How is the transformation process related to value?
4. Who defines the value of a product or service?
5. How would you define the customer perceived value?

Unit summary
In this unit you learned how to distinguish between structural,
infrastructural and integration decisions in operations. This was
followed by a definition of operations management. You
Summary recognised the basic requirements of the customer and how each
process should recognise these requirements.
Fundamental to operations management is the transformation
process and this was discussed in relation to a number of
organisations in production and services.
We distinguished between products and services in case we have to
specifically make the distinction, but bear in mind, that for the most
part, operations managers treat them the same.
The role of operations management within the context of the whole
organisation was explained and we introduced the concept of the
customer experience paradigm.
The unit concluded with a short history of operations.

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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.

45
 Activity feedback

Activity feedback
Activity 1.1 and 1.4
All answers are in the learning material.

Activity 1.2
Compare your answer to this completed table of production
organisations.

Organisation Inputs Transformation Outputs

process

Electrical appliances Raw materials Fabricating Finished goods such

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

Bakery Flour Mixing ingredients Bakery items such as

buns, bread, muffins,
Sugar Baking
biscuits delivered to
Flavourings Packaging warehouses and retail
stores
Packaging Distributing
Energy
People skills

Clothing Fabrics Laying fabric Range of garments

such as pants, shirts,
Threads Cutting fabric
dresses, coats
Findings (buttons Sewing garments delivered to retail
clips and clasps) outlets
Packaging
Energy
Warehousing
People skills
Distributing

Packaging Paper Preparing artwork Packaging items such

as cases, cartons,
Plastic Printing
boxes, packets to meet
Glue Guillotining customer specifications
warehoused and
Inks Slitting
delivered to production
Energy Packing facilities

People skills Distributing

Dairy products Milk Pasteurising Dairy products such as

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 milk, cream, yoghurt,
flavoured drinks
Flavourings Separating
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

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 Activity feedback

Food Keeping records (unfortunately)

Banking and finance Bank buildings Processing deposits Money safe and
and cheques available when
Computers
required
Investing money
Tellers
Safe and profitable
Providing loans and
Automatic teller investments
mortgages
machines (ATM)
Money well spent

Activity 1.3
Products and service are similar in many ways.
 Use customer satisfaction as a key measure of effectiveness.
 Have common measures of satisfaction (for example, speed
and quality).
 Require demand forecasting.
 Require product design and process design.
 Depend on location and arrangement of resources.
 Involve purchase of materials, supplies and services.
 Can be provided in high or low volumes.
 Can be standard or customised.
 Are subject to automation.
 Need an operations strategy consistent with business
strategy.
As seen from this list, products and services are very similar. All
organisations can benefit from improving their processes. It does
not really matter whether an organisation sees itself as a
manufacturer or a service provider.

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