Topic 1 - Operations

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Text of Topic 1 - Operations



Operations refers to the business processes that involve transformation or, more generally, production. It is a term that applies both to the manufacturing and services sector. In manufacturing, operations refers to the processes involved in turning raw materials and resources into outputs of finished goods or products. Transformation is the conversion of inputs (resources) into outputs (goods and services). Apart from transformation, operations involves the creation of value by businesses. Value adding is the creation of extra or added value as inputs are transformed into outputs. Operations processes are broad and include aspects of all of the following activities undertaken in business:

The production of goods and services Production controls and associated quality controls on processes. Included in this are input management and capacity (volume of output) decisions. Inventory controls Supply chain management Logistics and distribution Management decision making in terms of operational processes

Operations is informed by the business drive to maximise profits and also by the needs of consumers. Minimising waste is an operations management approach designed to eliminate waste. Minimising waste, also called lean production, aims to eliminate waste at every stage of production. It involves analysing each stage of the production process, detecting where inefficiencies are and correcting them. The growth of the Fairtrade movement is a direct result of consumers advocating for operations processes in production and supply to integrate notions of a fair price, decent working conditions and local sustainability. In terms of a manufacturing enterprise, businesses will continually seek to minimise production costs so that the retail prices for consumers are as reasonable as possible. As consumers seek innovative goods, businesses will create innovative goods.

Strategic role of operations management cost leadership, good/service differentiation

Operations management is an essential key business function that overlaps with the other business functions such as marketing, finance and human resources management (HRM). There are several different sources of operations costs in business. There are input costs, processing or transformation costs and the costs of getting products to markets. Cost leadership involves aiming to have the lowest costs or to be the most price-competitive in the market. A key aspect to cost leadership is that although trading with the lowest cost, the overall business should still be profitable. Economies of scale refer to cost advantages that can be created because of an increase in the scale of business operations. Typically the cost savings come from being able to purchase lower cost per unit of input and from efficiencies created through improved use of technology and machinery. Product differentiation means distinguishing products (goods or services) in some way from its competitors. Sources of differentiation in goods include:

varying the actual product features varying product quality varying any augmented features

Sources of differentiation in services include:

varying the amount of time spent on a service varying the level of expertise brought to a service varying the qualifications and experience of the service provider varying the quality of materials/technology used in service delivery

For both goods and services, differentiation can be created from cross branding or strategic alliances.

Goods and/or services in different industries

Goods and services are produced differently. Goods may be standardised or customised. Standardised goods are those that are mass produced, usually on an assembly line. Standardised goods are uniform in quality and meet a predetermined level of quality. These are generally produced with a production focus. Customised goods are those that are varied according to the needs of customers. These goods are produced with a market focus rather than a production focus. Goods may be perishable e.g. food or non-perishable e.g. household/business goods such as motor vehicles, furniture and computer-base technologies. The character of the goods will shape the nature of the operations processes. Intermediate goods have gone through one set of operational processes then become inputs into further processing. Services vary according to whether they are highly specialised or more customised. Self-service means encouraging the customers to take the initiative to help themselves.

Interdependence with other key business functions

The range of typical business functions is operations, marketing, finance and human resources. Interdependence refers to the mutual dependence that the key functions have on one another. This means that the various business functions work best when they work together. In most businesses, closely related tasks are grouped together for example, sales and marketing, finance and administration, and operations and research and development. Marketing is about meeting the needs and wants of consumers through provision of products (both goods and services) at prices that the market is prepared to pay. Reports such as income statements, which determine the amount of money the business has earned after its expenses have been paid, are very useful to managers and other stakeholders. The function of human resources is to deal with the people the business employs and the issues arising from their employment.


Globalisation, technology, quality expectations, cost-based competition, government policies, legal regulations, environmental sustainability


Globalisation refers to the removal of barriers of trade between nations. Globalisation is characterised by an increasing integration between national economies and a high degree of transfer of capital, labour, intellectual capital and ideas, financial resources and technology. Global consumers seek global brands and tend to seek standardised products. This significantly affects the operations function, which is then structured around a series of global production facilities. Supply chain refers to the range of suppliers a business has and the nature of its relationship with those suppliers. For large global businesses the integration of the range of suppliers creates a network sometimes called the global web. Global web refers to the network of suppliers a business has chosen on the basis of lowest overall cost, lowest risk and maximum certainty in quality and timing of supplies. There are two alternative approaches to the supply chain, depending whether a business is an imitator or whether it is an innovator: reverse engineering and innovation. Reverse engineering is a process that involves a business taking the product of a competitor that has already been released into the market. This product is then taken apart to see how it is made. The imitating business then tries to make their own version of the product from the component parts, but does so using different materials and at a lower cost. Innovation occurs when the business creates novel (new) products, and in doing so leads the market.


Technology plays a very important role in the application of the operations function of business. Technology may be defined as the design, construction and/or application of innovative devices, methods and machinery upon operations processes. Such technologies such as mobile phones and computers enable people to communicate more easily and enable improved processes. In this way, technology can be seen to be both a range of devices as well as a range of enabling processes. Technologies can be applied to, and integrated with, the range of processes that characterise the operations function in business. At an administrative level, technologies can assist with organisation, planning and decision making and are in control of operational processes. At a processing level, technologies are used in manufacturing, logistics and distribution, quality management, all aspects of inventory management, supply chain management and sourcing.

Quality expectations

Quality may be understood to be a specific reference to how well designed, made and functional goods are, and the degree of competence with which services are organised and delivered. The International Standards Organisation (ISO) defines quality as being the totality of features and characteristics of products (goods) and services that bears its ability to satisfy stated or implied needs. People have an inherent belief in what the quality standards should be for products (goods and services) and their personal level of satisfaction with their experience of the product will indicate whether the quality has met with expectations or not. The expectations that people have of businesses determine the way that products are designed, created and delivered to customers. Quality expectations with goods include:

Quality of design the concept, accounting customer needs, nature of materials and innovative design (minimising waste) Fitness for purpose how well the products does what it is designed to do and its usability Durability how reliable/long lasting the product is and how easily it can be repaired and maintained, including after-sales such as warranty

Quality expectations with services include:

Professionalism of the service provider the cleanliness and layout of facilities and courtesy of staff (taking care in dialogue and interactions) Reliability of the service-provider how efficiently the service is performed and overall levels of competence Levels of customisation how well the particular needs of the customer are fulfilled by the service provider through the applicati