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Role of Operations
Management
Operations management is the core of a business and it is this aspect that makes it such an
exciting subject to study. Operations management is concerned with those business activities
that plan, schedule and control the business inputs that are transformed into finished goods and
services. Operations management is all about managing customer satisfaction. It is the aspect of
the business concerned with meeting customer needs.
Price
Competing business 2
flexibility
What
Competing business 4
customers
want
Quality
speed
The Winner? The business that
is able to consistently provide the
product in terms of:
price,
quality,
speed,
flexibility
Competing business 3
Literacy Development
Operations comes from the Latin word operari and means work. The word
operations has a number of meanings apart from this very specific business
meaning. Find another meaning and illustrate it in a sketch or a sentence.
Typically the strategy
follows the steps
outlined below:
2 Be as good as competitors The strategic role of operations management is to allocate resources in such a way that it helps
3 Be the best in the industry
4 Redefine the industrys
expectations
to achieve the businesss goals in a dynamic and often turbulent environment. The key aspect of
strategy is that the managers of a business are trying to achieve business goals in an environment
where competitors are trying to beat them and the managers of the business have no control
over the actions of competitors and other factors in the external environment.
Case Study
Using an Australian business to explain the strategic role of operations
management: Kmart
When Guy Russo was appointed CEO of Kmart, his first challenge was to correct
the worst problems the ailing retailer was experiencing. The most immediate
challenge was to refurbish the stores so that they were clean and tidy, the dcor
was attractive and appropriate, the stock on the shelves was in good condition,
and employees were always courteous, friendly and helpful. Big W had already
achieved these things and this was the main reason customers were attracted to
Big W. Russo quickly corrected the worst problems and set about being as good
as Kmarts competitors.
Being as good as Kmarts competitors involved a range of challenges. The first
was the introduction of new goods for sale and ensuring that a wide range of
goods were stocked on the shelves. Russo reduced the number of goods, such as
hardware and electronics, and improved the range of apparel. He also improved
employee training to ensure staff were competent in all aspects of the stores
operation and could quickly move from task to task. This enabled the store
manager to match the number of customers at the checkouts at any particular
time with checkout operators and minimise queuing time by customers.
The next step in Russos strategy is for Kmart to be the best in the industry. The
focus of this strategy is staff training to ensure all employees deliver the highest
RedPeg Publishing HSC Business Studies
Using each letter in the grid once per word, find as many words of at least four letters as you
can, always using the central letter. (No proper nouns.)
Score: 30 Good; 42 Very good; 54 or more Excellent
E T R
O A P
O N I
The nine letter word is:
Cost leadership
Cost leadership is a strategy that aims to create a competitive advantage by having the lowest cost
of manufacturing the good or delivering the service in the industry. A competitive advantage
is the ability to do something the customer regards as important, better than your competitors.
The goal of a cost-leadership strategy is to be the best business in the industry by having the
lowest cost of operations in the industry.
Case Study
Using a global business to illustrate cost leadership in a tertiary
business: Walmart
Walmart is the largest retailer in the world. In the year ended January 2010
Walmart sold goods and services to customers to a value of US$408 billion. The
business made a net profit of US$14.3 billion. All this from a small discount store
Sam Walton started on July 2, 1962.
Sam Walton decided it would be better to make a $2 profit on each of a specific
good where 100 were sold each day, rather than a higher $5 profit on sales of only
10 of the particular good in a day. In the first instance he made a total profit on
that good of $200. In the second instance the higher profit would have yielded a
total of only $50.
Sam was the first to use a phrase widely copied today. The phrase was every day
low prices. Sam offered Walmart customers a wide variety of high quality, branded
and unbranded goods at the lowest possible prices.
Walmarts advertising described every day low prices in these terms:
Because you work hard for every dollar, you deserve the lowest price we can offer
every time you make a purchase. You deserve our Every Day Low Prices.
Sam Walton also realised that, if he could get goods from the manufacturers at
the lowest possible prices and cut the operating expenses in his stores, he could
make life very difficult for his competitors - Sears Roebuck and Company, Woolco
and Kmart.
Unlike his competitors, Sam Walton always shared the lower prices he received
from his suppliers with his customers. Walmarts products were usually 20%
cheaper than his competitors.
Sam Walton understood the importance of volume in generating profits and
lowering costs. By cutting your price, you can boost your sales to a point where
you earn far more at the cheaper retail price than you would have by selling the
item at the higher price. In retailer language, you can lower your mark-up but earn
more because of the increased volume, Sam explained.
Image 1.1
Walmart in Wanda
Shopping District
Nanning, China
With vendor-managed
inventory the inventory
on Walmart shelves is
managed by the supplier,
who automatically replaces
items sold
In the years that followed, Walmart relentlessly pursued a policy of reducing costs
and offering prices to their customers lower than Walmarts competitors. In the
1980s Walmart grew rapidly by using information technology innovations such
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THINK, INK, PAIR , SHARE
Which Australian retailers use the phrases value for money and every day low
prices in their store advertising? Do you think there are dangers in a business
such as Walmart being so efficient that no other business can compete with it?
Try and put Sam Waltons basic philosophy into your own words. Do you think the
managers of Kmart Australia are trying to implement a cost-leadership strategy?
Discuss all these ideas with your learning partner.
HOMETHINK
Remember Kmart USA
and Kmart Australia have
no connection except the
name
Case Study
9
There is an ambiguity or
double meaning in the
slogan: Change you can see.
The word change can refer
to the physical appearance
of the stores or it can refer
to the money you receive
back when you pay.
10
Businesses that succeed with a cost-leadership strategy must have access to a great deal of
capital. This is because highly efficient manufacturing facilities with high levels of the latest
technology can provide an effective barrier to entry to competitors. Capital can also be used
to create very efficient distribution channels that make it difficult for competitors to match
prices. Woolworths, for example, used this strategy during the 1990s. Woolworths managers
spent more than a billion dollars restructuring their warehouses and distribution systems with
the very latest in logistics technology and were consequently able to put enormous pressure on
Coles. From 1995 to 2007 Coles lost market share to Woolworths.
Good/service differentiation
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Literacy Development
Obviously differentiation comes from the word different. Brainstorm examples
with your family of how differentiation impacts on your daily life, such as fruit,
vehicles, and television channels.
Because operations management is all about manufacturing goods and delivering services, it can
be helpful at the outset to broaden our understanding of the nature of goods and services.
Is this pineapple a good or a service?
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13
Another way to look at the difference between a good and a service is by placing the product
on a scale that sees the difference as a continuum. Would you agree with the placing of these
products?
Service
tooth extraction
air-line ticket
fast food
newspaper
computer
television
farming
mining coal
Good
Can you see why it is better to talk about products and services rather than goods and services?
The reason, of course, is that most products consist of good and service components such
as a warranty. The difference between goods and services is difficult to define and it is not
particularly useful to make the distinction. Indeed, it is not particularly useful to make a
distinction between a product and service. In the past it was easy to define products as tangible
and services as intangible. But what about a computer program purchased as a disc and the same
program downloaded from the internet. One product is tangible and the other intangible. It is
the same product!
Different industries provide very different goods and services. Kmart, for example, is typical
of the retail industry. Kmart provides a service that could be called a shopping experience.
Customers have expectations about the service they are purchasing. They expect the products
they are purchasing to be in good condition, the surroundings to be clean and pleasant and
- most importantly - a high level of customer service. In addition, they expect goods to be
available when they want them and to have access to the shops when they want to shop.
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Railcorp also provides a service and is typical of an industry that involves the movement of
people. When customers purchase a ticket to
go from one destination to another, they also
have a set of expectations about the service
they are purchasing. They expect the trains to
be clean and a reasonable degree of customer
service but, most of all, they expect the trains
to be reliable and run to the timetable. They
also expect the timetable to make trains
available when they want to travel.
The Ford Motor Company provides a product. The Ford factory is typical of goods and services
produced in the manufacturing industry. There is a
good component, the car, and a service component,
the after sales aspects of maintenance and warranty.
When the business purchases products such as
engines or brakes from its suppliers, Ford expects
the parts to be manufactured to the specifications it
gave to the suppliers. This determines the reliability
its customers expect from Ford. Ford customers also
expect the car will be well designed and be available
when they want it. Customers will also expect a degree
of customisation in terms of things like the colour of
the vehicle and accessories.
Businesses create goods and services in a process called production. Operations management
refers to the activities that transform inputs (raw materials, component parts, labour and so on)
into outputs of goods and services. All businesses do this. Sometimes adding value to inputs to
create a service is not so obvious. The reason a business exists is to produce goods and services.
However, just creating the product or service is not enough. The product or service has to
be sold. The specialist activities that design the product to meet the needs of customers and
generate the demand by pricing, promoting and distributing the product are just as important.
There is a clear interdependence between the operations function and the marketing function.
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Interdependent means
dependent on each other.
Finance is also important. Employees have to be paid. Raw materials and component parts must
be purchased. Bills for rent and electricity must be paid. The money from the sale of products or
services must be collected and records must be kept. This is the finance function. There is a clear
interdependence between the operations function, marketing function and finance function.
These are the three basic functions in a business and as a general rule the success of the business
is determined by how well they work together.
Market research guides new product development. The marketing function will design a
product that is competitive in the market place because it meets the needs of customers better
than competing products. The operations function works with the marketing function during
the development stage to determine the most efficient and effective design from the operations
function. The finance function works with both to ensure the money needed to develop and
manufacture the product is available and the appropriate financial systems for the sale and
collection of the money are in place.
Imagine you were Guy Russo, CEO of Kmart. Your company (Wesfarmers) has just purchased
a business that is declining because it no longer effectively meets the needs of customers as well
as Big W. You need to do three things. The first is to design a product (a shopping experience)
that is better than Big W. You give this task to the marketing function. The marketing function
develops a product based on wider aisles, refurbished stores and new merchandise with higher
profit margins, lower costs and high levels of customer service.
You give the task of creating this product to the operations function. The operations function
Getting Better Results
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At the outset, focus on your HSC. Carefully review the unit of work. Practise potential multiple
choice and short responses. Most importantly learn from business. Adopt the basic principles
the most successful businesses have adopted.
Russell and Taylor (2005) have set out the following principles for implementing a continuous
improvement effort:
1. Create a mind-set for improvement. Do not accept that the present way of doing things is
necessarily the best.
2. Try and try again. Dont seek immediate perfection but move to your goal by small
improvements, checking for mistakes as you progress.
3. Think. Get to the real cause of the problem. Ask why - five times.
4. Work in teams. Use the ideas from a number of people to brainstorm new ways.
5. Recognise that improvement knows no limits. Get in the habit of always looking for better
ways of doing things.
Memory work
Cost leadership that aims to create a competitive advantage by producing the good or
service at the lowest cost
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Demonstrate the interdependence of operations with the other key business functions
Operations management cannot exist in isolation from the other business functions of finance,
human resources and marketing. Obviously finance is required to pay employees and to ensure
inputs of raw materials and component parts are available when they are needed. Marketing is
the function of a business that works out what customers want and develops the goods/services
that will best meet customer needs in a competitive market place. For a business to operate
successfully, the best employees need to be selected, motivated and retained. None of these
functions can be sustained independently of the other functions.
5. Which of the following best describes the strategic goal of operations management in a
business like Kmart?
(a)
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(b)
(c)
(d)
Short responses
1. Outline the strategic role of operations management.
5 marks
2. Explain the difference between cost leadership and good/service differentiation. 10 marks
* An introductory sentence with the idea that there are two approaches to gaining a
competitive advantage and they are cost leadership and good/service differentiation
* Defines the terms cost leadership and good/service differentiation in the second sentence
* Mentions a couple of features of cost leadership
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