Operations Management

By
Adeel ur Rehman
Faculty Member- IQRA University
Introduction
• Both the structure and the scope of an operation’s supply network are
decisions that shape how the operation interacts with its markets, its
suppliers, in fact with the world in general
• No operation exists in isolation. All operations are part of a larger and
interconnected network of operations. This is called the operation’s
supply network
• It will include the operation’s suppliers and customers, as well as
suppliers’ suppliers and customers’ customers, and so on
• At a strategic level, operations managers are involved in deciding how
much of the network it should own. This is called the scope of the
operation
• They are also concerned with the shape and form of their network. This
is called the structure of the network
Operations Scope And Structure
Learning Objective
• Supply network design and capacity planning
• Supply network design
• Supply network configuration
• Operations location decisions
• Fundamental issues in capacity planning for
the supply network
Supply Networks
• A supply network is an interconnection of
organizations that relate to each other through
upstream and downstream linkages between the
different processes and activities that produce value
in the form of products and services to the ultimate
consumer
• In other words, a supply network is the means of
setting an operation in the context of all the other
operations with which it interacts, some of which
are its suppliers and its customers
Supply Networks
• Suppliers that directly supply the operation are often
called first-tier suppliers
• Second-tier suppliers supply them; however, Similarly,
‘first-tier’ customers are the main customer group for the
operation. These in turn supply ‘second-tier’ customers,
although again the operation may at times supply second-
tier customers directly like in case of second-tier
customers
• The suppliers and customers who have direct contact with
an operations are called its immediate supply network
Two-way Flow Through The Network
• Materials, parts, information, ideas and sometimes
people all flow through the network of customer–
supplier relationships formed by all these operations
(Forward Flow)
• But also along with the forward flow of transformed
resources (materials, information and customers) in
the network, each customer– supplier linkage will
feed back orders and information (Reverse Flow) So
flow is a two-way process with items flowing one
way and information flowing the other
It Is Important To Consider The Whole Supply
Network
• It helps an understanding of competitiveness
• It helps identify significant links in the network
• It helps focus on long-term issues
The Scope & Structure Of An Operation’s
Supply Network
• The scope of an operation’s activities within the
network is determined by two decisions
 The extent and nature of the operation’s vertical
integration
 The nature and degree of outsourcing it engages in
• The structure of an operation’s supply network is
determined by three sets of decisions
How should the network be configured?
The long-term capacity decision
The location decision?
Vertical Integration
• The scope of an operation’s supply network
determines the extent that an operation does
things itself and the extent that it will rely on
other operations to do things for it.
• This is often referred to as ‘vertical integration’
when it is ownership of whole operations that
are being decided, or ‘outsourcing’ when
individual activities are being considered
An Organization's Vertical Integration
Strategy
• The direction of any integration (backward or ‘upstream’ vertical
integration) or (forward or ‘downstream’ vertical integration)
• Backward vertical integration, by allowing an organization to take
control of its suppliers.
• Forward vertical integration, on the other hand, takes an organization
closer to its markets
• The balance among the vertically integrated stages – This is not strictly
about the ownership of the network. It refers to the amount of the
capacity at each stage in the network that is devoted to supplying the
next stage
• So a totally balanced network relationship is one where one stage
produces only for the next stage in the network and totally satisfies its
requirements.
Advantages & Disadvantages Of Vertical
Integration
Advantages
• It secures dependable access to supply or markets
• It may reduce costs
• Vertical integration also reduces the ‘transaction
costs’ of dealing with suppliers and customers.
Transaction costs are expenses, other than price,
which are incurred in the process of buying and
selling
• It may help to improve product or service quality
 Advantages and disadvantages of vertical
integration
Disadvantages
• It creates an internal monopoly. Internal supply is
less subject to the normal competitive forces
that keep operations motivated to improve
• You can’t exploit economies of scale
• It results in loss of flexibility
• It cuts you off from innovation
• It distracts you from core activities (loss of focus)
Outsourcing
• Outsourcing is also known as the ‘do-or-buy’
decision
• Although most companies have always
outsourced some of their activities, a larger
proportion of direct activities are now bought
from suppliers
• Also many indirect and administrative processes
are now outsourced. This is often referred to as
Business Process Outsourcing (BPO)
Operation’s Performance Objective
Performance Make Buy (Outsourced)
Objective
Quality •Easy to track Quality Issues •Market Expertise
•Danger of Complacency •Difficulty in
communication
Speed •Through synchronized schedules •Can built pressure on third
party to accelerate

Dependability •Less •High

Flexibility •The observation of change is •Can provide due to

high but response time is low specialty

Cost •May be low but difficult to •Have high economies of

achieve economy of scale scale and learning curve
Outsourcing Vs Offshoring
• Two supply network strategies that are often confused
are those of outsourcing and offshoring
• Outsourcing means deciding to buy-in products or
services rather than perform the activities in-house
• Offshoring means obtaining products and services
from operations that are based outside one’s own
country
• Of course, one may both outsource and offshore
• Offshoring to a lower cost region of the world is usually
done to reduce an operation’s overall costs
Configuration Of Supply Network
• Globalization is termed where products, raw
materials, money, technology and ideas move
(relatively) smoothly across national boundaries
• Another trend in some supply networks is that
of companies within a network bypassing
customers or suppliers to make contact directly
with customers’ customers or suppliers’
suppliers. ‘Cutting out the middle men’ in this
way is called Disintermediation
Co-opetition
• One approach to thinking about supply
networks sees any business as being
surrounded by four types of players: suppliers,
customers, competitors and complementors
• All the players in the network, whether they
are customers, suppliers, competitors or
complementors, can be both friends and
enemies at different times. The term used to
capture this idea is ‘co-opetition
The Idea Of The ‘Business Ecosystem
• An idea that is closely related to that of co-opetition in
supply networks is that of the ‘business ecosystem’
• An economic community supported by a foundation of
interacting organizations and individuals—the organisms of
the business world. The economic community produces
goods and services of value to customers, who are
themselves members of the ecosystem
• The terminology and metaphors used to describe business
ecosystems are obviously based on that used to describe
‘natural’ biological systems, where elements in the
‘ecosystem’ affect and are affected by the others
Describing Supply Networks – Dyads And
Triads
• There are many operations, all interacting in different ways, to
produce end products and service
• To understand them better, supply network academics and
professionals often choose to focus on the individual interaction
between two specific operations in the network. This is called a
‘dyadic’ (simply meaning ‘two’) interaction, or dyadic
relationship, and the two operations are referred to as a ‘dyad’
• However, more recently, and certainly when examining service
supply networks, many authorities make the point that dyads do
not reflect the real essence of a supply network. Rather, they say,
it is triads, not dyads, that are the basic elements of a supply
network
How Much Capacity Should Operations Plan
To Have?
• Most organizations have decisions to make
about how big (in terms of capacity) they want
to be
• All types of operation exhibit economy of scale
effects where operating costs reduce as the
scale of capacity increases.
• Diseconomies of scale increase operating costs
above a certain level of capacity resulting in a
minimum cost level of capacity.
Being Small May Have Advantages
• They allow businesses to locate near to ‘hot spots’ that
can tap into local knowledge networks
• Often larger companies centralize their research and
development efforts, so losing touch with where
innovative ideas are generated
• Taking advantage of the potential for human resource
development, by allowing staff a greater degree of local
autonomy
• Exploring radically new technologies by acting in the same
way as a smaller more entrepreneurial rival development.
The Timing Of Capacity Change
• Changing the capacity of any operation in a supply network is
not just a matter of deciding on its optimum capacity
• In deciding when new capacity is to be introduced the
company can mix three strategies
• Lead Demand Case (Introduce capacity when demand
exceeds existing infrastructure)
• Lag Demand Case (Introduce Capacity well above demand)
• Capacity is introduced to sometimes lead and sometimes lag
demand, but inventory built up during the ‘lead’ times is used
to help meet demand during the ‘lag’ times. This is called
‘smoothing with inventory
Problem
• A specialist graphics company is investing in a new
machine which enables it to make high-quality prints for
its clients. Demand for these prints is forecast to be
around 100,000 units in year 1 and 220,000 units in year
2. The maximum capacity of each machine the company
will buy to process these prints is 100,000 units per year.
They have a fixed cost of €200,000 per year and a
variable cost of processing of €1 per unit. The company
believe they will be able to charge €4 per unit for
producing the prints. What profit are they likely to make
in the first and second years?
Problem
• Year 1 demand = 100,000 units; therefore the company will need
one machine
Cost of producing prints = fixed cost for one machine +
variable cost * 100,000
= € 200,000 + (€ 1 * 100,000)
= € 300,000
Revenue = demand * price
= 100,000 * € 4
= € 400,000
Therefore profit = € 400,000 - € 300,000
= € 100,000
Problem
Year 2 demand = 220,000; therefore the company will need three
machines
Cost of manufacturing = fixed cost for three machines + variable cost *
220,000
= (3 * € 200,000) + (€ 1 * 220,000)
= € 820,000
Revenue = demand * price
= 220,000 * € 4
= € 880,000
Therefore profit = € 880,000 - € 820,000 = € 60,000
Note : the profit in the second year will be lower because of the extra
fixed costs associated with the investment in the two extra machines.
Where Should Operations Be Located?
• The location of each operation in a supply network is both
a key element in defining its structure, and also will have an
impact on how the network operates in practice
• Poor location of any operation in a supply network can
have a significant impact, not just on their profits, but also
those of others in the network
• Location decisions will usually have an effect on an
operation’s costs as well as its ability to serve its customers
(and therefore its revenues)
• In addition, location decisions, once taken, are difficult to
undo
Why Relocate?
• It is usually for one or both of two reasons –
changes in demand or changes in supply
• Changes in demand If customer demand shifts
it may prompt a change in location
• Changes in supply The other stimulus for
relocation is changes in the cost, or
availability, of the supply of inputs to the
operation
Evaluating potential changes in location

• An operation should only change its location if

the benefits of moving outweigh the costs of
operating in the new location plus the cost of
the move itself
Set location evaluation criteria
• Capital requirements
• Market factors
• Cost factors
• Future flexibility
• Risk factors