CIMA E1 Official Learning System - Enterprise Operations Aug 2009

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LEARNING OUTCOMES

Operations Management, which includes management of quality, accounts for 20 per

cent of the overall syllabus. This chapter addresses operations as a functional area of

business, explains the relationship of operations management to other aspects of the

organisation’s operations and describes relevant tools and techniques. By completing

this chapter, including the exercises and questions you should be able to:

䉴 Explain the shift from price-based to relational procurement and operations

䉴 Explain the relationship of operations and supply management to the competitive-

ness of the ﬁ rm

䉴 Explain the particular issues surrounding operations management in services

䉴 Explain the importance of sustainability in operations management

䉴 Apply contemporary thinking in quality management

䉴 Explain process design

䉴 Apply tools and concepts of lean management

䉴 Illustrate a plan for the implementation of a quality programme

䉴 Describe ways to manage relationships with suppliers.

During the eighteenth century the UK experienced dramatic change through what became

known as the industrial revolution. It was during this period that the economy was trans-

formed from agricultural to industrial and population migrated to towns from the coun-

tryside. Key features of the newly formed organisations included:

●

the introduction of machines used to mass produce items,

●

effective means of warehousing stocks of raw and ﬁ nished products, and

●

effective distribution of ﬁ nished products.

Operations

Management

STUDY MATERIAL E1

OPERATIONS MANAGEMENT

F. W. Taylor and others developed work measurement and applied ‘scientiﬁ c’ methods

to production from the 1890s onwards. These studies clearly showed that the productivity

of organisations depended both on the technology available and how the effective man-

agement of key resources were managed. ‘Good’ management constituted an application

of knowledge and skills of a ‘scientiﬁ c’ nature, rather than intuition and guesswork. This

thinking laid the foundations for the study of an area later referred to as operations man-

agement. At its simplest operations management tries to ensure that organisations are run

as efﬁ ciently as possible.

Brown et al. (2001) point out that all organisations have an operations function whether

it is explicitly called that or not. Galloway (1998: 2) described operations as ‘those activi-

ties concerned with the acquisition of raw materials, their conversion into ﬁ nished product

and the supply of that ﬁ nished product to the customer’.

Most contemporary thinkers would broaden this deﬁ nition as ‘what the company does’

so involving service as well as manufacturing organisations. McDonald (2008) explains:

Operations management is mainly concerned with how resources are used to produce goods or services.

Depending on the nature of the organisation, the transformed resources could be materials, information or

even customers. For example, changing the physical properties of a metal is a fundamental part of car manu-

facturing; information processing is one of the business practices of a marketing company; and customer

processing could be achieved by a beauty treatment. In addition, a company needs to have facilities, such as

buildings and equipment, as well as people who maintain, plan and manage operations.

Using this thinking examples of operations are provided in Table 3.1.

Exercise 3.1

Develop a similar analysis for your organisation.

As operations turn various kinds of inputs into useful outputs, organisations can be

viewed as ‘transformers’ by taking either raw materials, money, people, machine time, etc.

and then either manufacturing, assembling or packing, etc. to produce goods or services.

Operations management is concerned with the planning, direction and control of the

vital operations that link the business of the organisation with the needs and wants of the

organisation’s customers. It is important to emphasise, that ‘products’ can be either goods

or services, and ‘operations’ are the processes by which either of these are produced.

Table 3.1 Examples of operations

Organisation Operations function Operation

McDonalds Kitchen and serving staff Selling fast food

Vauxhall/Opel Production lines Making cars

Dell Computers Production lines, internet Making and selling computers

Real Madrid Football coaches, training facilities Playing football

Schools Teachers Teaching children

Note: Much of this thinking originated in manufacturing ﬁ rms but, increas-

ingly it is seen as relevant to all types of organisation. There will be times within

this chapter that the word ‘product’ is used within the context of operations manage-

ment. This may signify services as well as products.

ENTERPRISE OPERATIONS

OPERATIONS MANAGEMENT

Although all organisational operations have similar transforming properties there are

organisational differences according to volume, variety, variation and visibility (McDonald,

2008):

●

volume, the degree to which the organisation can standardise work, the greater the stand-

ardisation the lower the unit cost

●

variety, the degree of ﬂ exibility required to match services with customer demands (e.g.

most prominently in the fashion industry)

●

variation, how seasonal demand for products presents issues of capacity management for

the particular organisation

●

visibility, the exposure of operations to the customer which will vary from encounters

with the customer online to personal discussions in an ofﬁ ce or shop.

3.1 Shifting perspectives

It is clear from this brief introduction that operations and the development of an associ-

ated strategy is of vital importance to any organisation. For many enlightened contem-

porary organisations effective operations is viewed as a strategically signiﬁ cant issue and a

vital means of gaining a competitive advantage. This section explains the shift from price-

based operations to relational procurement and operations and emphasises supply chain

management as a strategic process. (Price-based operations grew from the mass production

methods of the industrial revolution whereby economies of scale allowed unit costs to be

driven down.)

3.1.1 Procurement and operations

Recently purchasing has become a strategic issue for ﬁ rms as techniques such as just-in-

time (JIT) operations have taken root in a diversity of industries (initially from successes

in motor manufacturing). JIT purchasing involves a system whereby ‘material purchases

are contracted so that the receipt and usage of material, to the maximum extent possible,

coincide’ (CIMA, 2005). Put simply the stock of raw materials is reduced to near-zero lev-

els. Financial savings are easily apparent as is the requirement to foster an effective working

relationship with suppliers.

The purchasing department has always been responsible for the majority of some com-

pany’s expenditure. (Most manufacturing ﬁ rms spend more than 60% of total expenditure

on purchasing.) Some of the large buyers, for example in the automobile companies, have

become highly sophisticated materials managers and fully integrate design and purchas-

ing especially as JIT requires exact speciﬁ cations and materials handling to achieve low

inventory levels. Purchasing experts are also now involved with the design and develop-

ment department with the responsibility of ﬁ nding suppliers for materials that are to the

speciﬁ cations required by designers.

Manufacturers are increasingly recognising that buying is as important as selling, and

that excellent selling cannot make up for a mediocre buying speciﬁ cation. Savings from

economies of scale can be gained by centralising procurement to include not along raw

materials but also supplies and capital equipment for ofﬁ ces (e.g. computers, cars, tele-

phone systems, ofﬁ ce furniture, paper and other stationery items, etc.).

Those responsible for purchasing discuss prices, discounts, delivery lead times and speci-

ﬁ cations with suppliers, chase late deliveries and sanction payments. They monitor quality,

STUDY MATERIAL E1

OPERATIONS MANAGEMENT

seek out competitive sources and maximise quantity discount opportunities where several

sources are buying from the same supplier.

Gargan (2004) underlines the crucial signiﬁ cance of an organisation’s procurement

operation by reporting that improved purchasing has saved the UK government more than

£1.6 billion on an annual spend of £15 billion, and that in the manufacturing industry,

each 5% reduction of purchasing costs increases proﬁ tability by 35% on average.

3.1.2 Strategic issues

Rudzki (2006) makes a case for strategic purchasing and seees it as a lever to world class

performance:

During the last 20 years, procurement departments around the world have adopted some new and very pow-

erful processes and tools. Done well, advanced procurement and supply management can trigger a com-

pounding positive effect on a company’s lifeblood–its return on invested capital.

If you could reduce your product development cycle time by 50 per cent and beat competitors to market,

while also reducing costs, would that be meaningful to your business? For most companies, that would be

a huge plus. That is why world-class competitors involve their procurement group and other internal func-

tions, plus suppliers, in an aligned effort to increase competitive advantage………….

Rudzki (2006) also draws attention to more than 30 critical factors that produce excep-

tional supply management performance, categorised under the headings of:

●

procurement strategy

●

objectives

●

leadership

●

optimised organisation

●

best practices

●

innovation and technology.

Purchasing deals with day-to-day buying of goods and services, ensuring they conform

to the quality demanded, are priced appropriately and delivered to a suitable time scale.

Supply by comparison involves strategic considerations including planning and implement-

ing a strategy and managing the overall supply process.

One way of assessing whether supply chain management is being approached strategi-

cally is by applying Reck and Long’s (1988) strategic positioning tool. This identiﬁ es the

purchasing stage an organisation has reached on a continuum as described in Table 3.2.

Cousins’ (2000) strategic supply wheel depicts the corporate supply strategy at the hub

of a wheel and underlines the need for an integrated approach to supply strategy involving

a balancing of all ﬁ ve ‘spokes’ in the wheel, namely:

●

Organisational structure affects interactions with the rest of the organisation and the way

in which control is exercised, the three main options are centralised, decentralised or

some combination (a hybrid).

●

Relationships with suppliers and their nature impact on the strategic success of the organ-

isation. These relationships may be based on driving deals on price and can be quite

adversarial. Alternatively, they may be more collaborative where there is a joint quest

to reduce costs and a sharing of technology and innovations (known as ‘partnership

sourcing’).

●

Cost/beneﬁ t analysis is at the heart of rational decisions over the most appropriate strate-

gic approach to follow.

ENTERPRISE OPERATIONS

OPERATIONS MANAGEMENT

●

Appropriate skills and competencies are vital in order to implement a chosen strategy.

Long-term relationships with suppliers might (for instance) lead to a need to re-orientate

and train key personnel.

●

Performance measures, both internal and external aligned with the strategy are necessary

for monitoring and control.

From a strategic point of view cohesion between these ﬁ ve elements needs to be

achieved, and each factor should be supportive of the other.

Exercise 3.2

What potential performance measures can be used to assess suppliers?

Solution

●

Capability

●

Delivery performance

●

Price competitiveness

●

Quality (defect rates)

●

Timeliness (which will vary dependent upon the value and volume of the item pur-

chased, e.g. a piece of computer hardware versus nuts and bolts).

Sourcing strategies refer to the way an organisation organises its supply process and

clearly these have strategic implications. There are four main sourcing options:

1. Single. The buyer chooses one source of supply. This may be because of a scarcity of

suppliers and under these circumstances the supplier is potentially powerful. One

advantage of this option is that it is easier to develop a relationship with a single

supplier.

2. Multiple. The buyer chooses several source of supply. Suppliers are rendered less power-

ful and prices can be driven down as a result. This is a traditional price-based strategy

but it may not be conducive to good working relationships, or developing meaningful

supplier relationships.

3. Delegated. The buyer chooses one (ﬁ rst tier) supplier who is responsible for the delivery

of for example a complete sub assembly. Using the example of car manufacture, rather

than deal with several suppliers to complete a dashboard one ﬁ rst tier supplier would

assume this responsibility and deliver a completed dashboard through dealing with a

range of other suppliers. This approach allows for a collaborative partnership approach

Table 3.2 Reck and Long’s strategic positioning

Passive Purchasing acts on requests from other departments, some departments may

get involved in the detail.

Independent A more professional approach to purchasing including enhanced IT and

communication.

Supportive Purchasing is corporately recognised as essential. The function provides timely

information about price and availability.

Integrative Purchasing is integral to competitive strategies and management gets involved

in strategy development.

STUDY MATERIAL E1

OPERATIONS MANAGEMENT

to develop including in some cases ‘open book’ accounting where savings are shared

between both parties. One downside is of course that the ﬁ rst tier supplier becomes

powerful so the supplier partners must be chosen with great care.

4. Parallel. A complicated approach that involves mixing all three approaches in order to

maximise the beneﬁ ts of each.

Operations is no different from other functional areas in that it can be approached from

a strategic viewpoint. Brown et al. (2001: 39) stress the signiﬁ cance of this thinking as

follows:

Operations capabilities are at the heart of the success of companies such as Dell, Nokia and Sony . . .

Although other areas such as marketing and human resource (HR) management are also important, even

with the best marketing or HR plans in the world, without operations capabilities an organisation will

ﬂ ounder because it cannot deliver on its promises to customers. Organisations can no longer compete on

a single dimension such as low cost, high quality, or delivery, but must provide all of these (and more!)

simultaneously.

The process of strategy formulation including external and internal scanning and the gen-

eration and choice of strategies applies equally to this area. Operations must be central to

the development of an overall corporate strategy.

Brown et al. (2001) include six items that as a minimum should be addressed as part of

the operations strategy:

1 the capability required by the organisation,

2 the range and location of operations,

3 investment in technology, both product and process,

4 strategic buyer–supplier relationships,

5 new products or services, and

6 the organisational structure of operations.

Another term often used to describe the fundamental changes required in operations man-

agement is ‘world-class manufacturing’ which is generally concerned with achieving signiﬁ -

cant improvements in quality, lead times, ﬂ exibility and customer satisfaction. By making

these improvements, an organisation might realistically become globally competitive. The

concept and practice of world-class manufacturing is wide ranging and the term is not always

used consistently. However, the core features of most approaches to world-class manufac-

turing include a strong customer focus which ensures that customer requirements are fully

understood and can be satisﬁ ed with short lead time and ﬂ exibility to respond to changing

customer requirements. This represents a signiﬁ cant shift from price-based operations.

3.2 Operations and organisational

competitiveness

This section explains the relationship of operations and supply management to the com-

petitiveness of the ﬁ rm.

3.2.1 Operations strategy and the organisation

Two well known management models are presented here in order to illustrate the signiﬁ -

cance of operations to an organisation.

ENTERPRISE OPERATIONS

OPERATIONS MANAGEMENT

‘Operations’ is a term covering the central core of an organisation. Famously this central

core has been used as a springboard for the development of theory by academics such as

Henry Mintzberg (1983) who referred to it as ‘the operating core’. Mintzberg suggested

that it is useful to view organisations as being made up of ﬁ ve parts (Figure 3.1). It is

important that organisations consider the relative balance of these elements in order to

achieve their organisational goals and secure optimal competitiveness.

The operating core consists of those people who perform the work of rendering the serv-

ices or producing products. In a small organisation this operating core may represent nearly

all of the organisation, but larger organisations will require more complex arrangements.

There will be a requirement to formulate and implement strategy so that the organisa-

tion serves its mission in an effective way. This is the role of the strategic apex which may

in some circumstances also be responsible for linking the organisation to the needs of

those who own or control it. The middle line represents the hierarchy of authority from

senior managers to ﬁ rst-line supervisors linking the strategic apex to the operating core.

As an organisation continues to grow and develop it is likely to include within its struc-

ture specialist staff outside the central line positions (i.e. strategic apex, middle line and

operating core). Specialist staff are placed into two categories by Mintzberg. The technos-

tructure is concerned with co-ordinating work by standardising work processes, outputs and

skills, and will be made up of people such as management accountants, work–study engi-

neers, HR managers, etc. Support staff exist to provide assistance to the organisation outside

its operating work ﬂ ow. Examples would be catering services, legal advice and press relations.

Clearly operations management is focussed upon the operating core and specialists who

form part of the technostructure.

Exercise 3.3

Many organisations are now actively seeking ﬂ atter hierarchies, better quality and ways of

contracting out of non-core activities. What are the implications of these developments for

the ﬁ ve basic parts of the organisation identiﬁ ed by Mintzberg?

Operating core

Middle

line

Support staff

Strategic apex

Technostructure

Figure 3.1 Five basic parts of the organisation

From Structures in Fives: Designing Effective Organisations by H. Mintzberg. Reprinted by

permission of Pearson Education Inc., Upper Saddle River, NJ.

STUDY MATERIAL E1

OPERATIONS MANAGEMENT

Solution

A clearer focus on the core activity and hence further importance attached to operations

management.

Economist Michael Porter (1985) ﬁ rst explained the organisation as a business system,

which he described as a value chain as it represented a sequence of value-creating activi-

ties. Whereas Mintzberg’s ‘organagram’ diagram represents a static description of a vertical

organisation the value chain is more of a process (Figure 3.2).

Porter depicted the ‘line’ departments linked horizontally together in a chain of sequen-

tially-interdependent activities – from supply sources, to goods-inward inspection, operations

(the ‘transformation process’) then distribution, storage and sales. Organisations structure

these activities differently to cope with their particular external environments. Typically

departments or divisions are created to interact with speciﬁ c sectors of the environment. Five

primary activities are directly concerned with the creation or delivery of a product:

●

Inbound logistics refer to receipt, storage, and distribution. They include material han-

dling, stock control, etc.

●

Operations convert these inputs into the ﬁ nal product.

●

Outbound logistics involves the distribution to consumers. (For example, if sales take

place in stores, checkout tills are important. For on-line sales, assembling and transport-

ing customer orders are also included.)

●

Marketing and sales is the mechanism whereby the customer is made aware of the

product.

●

Service can include installation, training and spares. This would also include customer

enquiry/returns/complaints desk and maintenance of an organisation’s web page.

Operations management is directly concerned with four of these ﬁ ve primary activities.

(Marketing and sales are dealt with separately within this Learning System.) Support activ-

ities help to improve the efﬁ ciency and effectiveness of all primary activities, speciﬁ cally:

●

Procurement processes at all stages including product purchases.

●

Technology development including ‘know-how’.

●

Human resource management embracing all primary activities and covers recruitment,

selection, training, development and reward policies, etc.

●

Infrastructure or systems, structures and routines.

Operations management is directly concerned with procurement and elements of tech-

nology and infrastructure. Arising from this thinking Table 3.3 illustrates some key issues

associated with operations management within a ﬁ ctional organisation.

Firm infrastructure

Technology development

Human resource management

Procurement

Inbound

logistics

Outbound

logistics

Marketing

and sales

Service

MARGIN

Operations

Figure 3.2 Porter’s value chain. Reprinted with the permission of The Free Press,

a division of Simon & Schuster Adult Publishing Group, from Competitive Advantage:

ENTERPRISE OPERATIONS

OPERATIONS MANAGEMENT

3.2.2 The supply chain

The implications of the value chain and the wider value system have encouraged organi-

sations to consider supply chain partnerships as part of a wider value system. The value

system extends to suppliers, distributors and customers’ own value chains. Competitive

advantage through linkages between the organisation and its value system components can

be achieved by examining supplier speciﬁ cations, common merchandising, applying total

quality management principles or by collaborating with other organisations in the form of

strategic alliances or joint ventures.

Porter uses the concept of the value system to describe the position of the ﬁ rm rela-

tive to the ﬁ rms upstream and downstream of it. Figure 3.3 shows the ﬁ rm at a point in

the value system between suppliers and customers. The supply chain and the organisations

that are partners within it is considered in more detail later in this chapter.

3.3 Operations and service organisations

The new approaches to operations management and quality discussed in this chapter have

been most widely applied in manufacturing ﬁ rms. However, modern advanced econo-

mies are now dominated by service organisations and future economic growth also depend

heavily on this sector. For service organisations to maintain their competitive advantage

they need to embrace management philosophies and techniques that have proven success-

ful in other sectors. Service industries however have certain distinguishing features that

may make it difﬁ cult to reduce costs and increase quality.

Table 3.3 Example operations management: issues

Purchasing activity capable of buying the raw material, components, tools and equipment necessary for

efﬁ cient high-quality minimum-cost manufacture.

The provision of economic and efﬁ cient storage of consumable goods, raw materials and components for

further fabrication. Records capable of ensuring that quantities held in stock are within the predetermined

budgets.

Production engineering capability to plan manufacturing methods, use of tools, design of machine tools,

assembly, ﬁ xtures, etc.

Production control department with the capability of translating customer orders and stockists’ requirements

into orders in the factory.

The organisation and operation of the manufacturing department and assembly department. Economical

and competitive cost of manufacture.

Quality control department with the capability of ensuring adequate quality commensurate with cost, by

inspection at various stages of manufacture and assembly and ‘bench testing’ of ﬁ nal products.

The efﬁ ciency of the company’s facilities, plant, buildings, tools, etc.

Supplier’s

value chain

Firm’s

value chain

Competitor’s

value chain

Channel’s

value chain

Customer’s

value chain

Figure 3.3 Porter’s value system. Reprinted with the permission of The Free Press,

a division of Simon & Schuster Adult Publishing Group, from Competitive Advantage: