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Operations Management



Nernesian (2000) asserts that operations management is all about transforming raw inputs in the form of labour, material, and capital into useful goods and services. While this is true, there are a whole lot of dimensions to the operations management arena where the manager has to make rational decisions in difficult circumstances, with limited, imperfect information. In organisations, such managers will have different titles, a store manager for a retailer, administrative managers within a hospital or distribution managers in a logistics company (Lowson 2002). The operations of an organization are all of the activities directly related to accomplishing the main purpose of the organization, whether it is producing some product or providing some service. In either case the operations system will provide the conversion of certain inputs, such as materials and labour, into certain outputs, either products or services. Thus, the operations function can be distinguished from the other main functional areas of an organization, such as marketing, finance, personnel, and accounting, which are no less vital for the firm’s success but which are less directly related to the organization’s day-to-day pursuit of its main business. Of course, all main functional areas of an organization are intricately entwined; all interact with and provide support for the others, and the boundaries are not always clear between them (Summers 1998), which makes the operations management function more delicate and complex, thus the need for making rational decisions as part of the day-to-day activities of the manager, given the available information that the organisation has at hand, which most of the times are limited and imperfect.



The value that is added by operations management is fundamental to most organisations (Lowson 2002), in that the specialty performs the traditional managerial functions that includes planning, organizing, directing, and controlling on the organisation’s operations. Operations managers include those with traditional line authority such as the chain of command from the Vice President of Operations down through supervisors and foremen, for example and those in staff positions that include production planning, inventory control, and quality control, for example. Staff personnel are responsible mainly for preparing recommendations regarding the planning, organizing, and control of operations, while line personnel have the actual authority to direct the operations. Managerial thought is critical to processes of strategy formulation, for example, which require managers to envision and prioritize future states that are appropriate and proper. Similarly, managerial thought is critical to environmental analysis, which requires managers to forecast and make predictions. These tasks all depend on individual cognitive capabilities and on cognitive processes such as attention, perception, reflection, and understanding (Hunt & Phillips 1992).

The operations management concept has revolutionised beyond just internal production or manufacturing. Now it encompasses other activities such as purchasing, distribution, product and process design, etc. Further, there will also be external managerial responsibilities at a supply network level, covering a number of interconnections between external firms (Lowson 2002). As Drejer, Blackmon & Voss (1998) point out, operations management differs from most other areas of management, in that it addresses both the physical and human elements of the organisation. With this change also come additional decision-making activities for the operations manager, which the person may or may not have been trained for. In addition to this paradigm, information needed to make rational decisions are often times limited and imperfect to an extent that managers must use what information that they have at hand in order to fully assume their responsibilities as managers. Decisions regarding process selection, network design, technology choice, product design, capacity & scale, supplier & customer relations, information flows, scheduling (how much, when, what) and inventory all lies in the hands of the operations manager.

It is apparent that if one is to show all of these informational flows on a diagram, it would be quite a mess. However, it is important to realize how one component of the system affects others. Also, by identifying some of the major components within a general operations system, it can be seen what some of the main problem areas are. These components are there because they are necessary to solve certain types of problems and keep the system running smoothly. In fact, it would be fairly easy to construct a course syllabus simply by looking at the components included in the following operations system diagram. It is also useful to consider the flows, or interactions, between the operations system and the other major subsystems of the overall organization. Here again we must be aware that decisions are not made in a vacuum, that what is decided in the marketing system, for example, has a great effect on the operations system. A typical operations system, which reflects the complexity of the workings of the operations management specialty, is illustrated below.

Click on the image to zoom in

Figure 1. Typical Organisational Operations[1]

Initially, to set up an operations system, operations managers need to decide the location of the system, the layout of the facilities, and the exact production process or method of providing service. Obviously, these decisions are not made in isolation but are quite dependent on each other. For example, the facility layout depends on the location decision if an existing building is purchased and the production layout must be designed to fit that building. On the other hand, if a new facility is built, it will certainly be built to the size and specifications needed to fit the desired facility layout. Similarly, the layout decision is intricately connected to the design of the production process itself. The mentioned considerations are part of the long-run decisions that managers have to face in the duration of assuming their responsibilities as operations head. There are also medium-run decisions to be made, like determining the needed capacity for machines, labour and materials throughout the next year. It takes time to hire and train new workers, and it also takes a certain amount of notice to lay off workers. Materials also need to be ordered ahead of time, and any new machines need to be ordered and put into operation over a period of time.

Short-run decisions, on the other hand, mostly involve inventory planning and control (Summers 1998). The reason for this concern is that the costs of inventory can be substantial, especially in large companies, and they can make a big difference in a company’s profitability. Besides these two glamour areas of short-run decision-making, there are also the equally necessary area of production scheduling and control. The main concern of most line managers is the day-to-day managing of people, materials, and equipment. As demands come in which are different from those forecast, a constant rejuggling of the schedule is necessary. Again, different types of systems experience this problem to different extents. The more repetitive, process-oriented systems will change their schedules only very slowly, while job shops need to adapt constantly to new orders. A special case in the area of production scheduling and control is the planning and control of large, one-time projects. For such projects as large construction projects or aerospace projects, accurate planning and tight control of materials, labour and overhead are necessary to prevent the cost overruns all managers dread.

The field of operations is complex in itself. If the complex interactions between decisions in this field and other areas also have to be taken into account, as is the case at the strategic level, an operations strategy becomes analytically very demanding indeed. Together with the mentioned lacks of knowledge that appear to exist in practice, this results in a lack of insight into the many interrelations between the various subsystems in organizations and the relations with the environment--and, consequently, a lack of coherence between policies for different parts of the organization. Voss (1990) notes that the process of manufacturing strategy development requires a high level of analytical skill, while Miller & Hayslip say that ‘piecing together the complex relationships required to attack new markets, products and processes can be a swift-paced, highly analytical/logical exercise’ (1989:24). Maruchek et al. found that there was a consensus among operations managers that ‘operation decisions made in isolation could result in sub-optimisation of corporate strategy’ (1990:116).

As such, researchers in the field agrees that examining operational decisions (potential value creators) using a dyadic economic value added analysis (EVA) will show simultaneously how process changes drive value in multiple firms (Lambert & Pohlen 2001). EVA has the advantage of providing a measure of wealth creation that aligns the goals of divisional or plant managers with the goals of the entire company (Brewer 1999). A dyadic EVA takes this a step further by measuring value creation across multiple companies and aligning management decisions with the objectives of the supply chain (Pohlen & Goldsby 2003). A value-based approach expands the analysis beyond a simple ‘cost-cost’ analysis by examining the effect on revenues, cost-of-goods sold, expenses, and assets. In many instances, a process change will affect activities in multiple companies. A dyadic analysis provides the capability to simultaneously determine the effect of any changes from the supplier's and customer's perspectives (Coleman & Pohlen 2005).

Successful operations management ultimately comes down to the ability to create more value than the competition. The configuration of firms, processes, and activities composing the supply chain drives value creation. Operations managers and senior executives confront the problem of determining the configuration yielding the greatest value for the end-user and each trading partner. They need to evaluate how the operational capabilities of each firm contribute to attaining supply chain objectives and the level of value created. The value of collaborative action must be measured and sold across each link to obtain trading partner buy-in and to align intra-firm performance with supply chain objectives. Despite the need to measure and align performance across multiple firms, most managers view performance from an internal perspective, or at best, how it is affected by their immediate upstream or downstream trading partners. Complexity and the interdependent nature of the supply chain make inter-firm performance measurement extremely difficult; however, firms that act first to apply inter-firm measures and align their performance with supply chain value objectives will achieve a sustainable advantage their competitors may be unable to emulate.

The important lesson of this subsection is the contention that organizations, their operations, supply networks, supply chains and material and information flows are dynamic systems. Cohen & Stewart (1994) use the terms ‘simplexity’ and ‘complicity’. Simplexity is the tendency of a single, simple system to generate highly complex behaviour. This leads to the more subtle concept of complicity, which is when two or more systems interact with mutual feedback that changes them both, leading to behaviour that is not present in either system on its own. As Levy (1994) phrased it:

‘By understanding industries as complex systems, managers can improve decision making and search for innovative solutions …. Chaos [complexity] theory is a promising framework that accounts for the dynamic evolution of industries and the complex interaction among industry actors. By conceptualizing industries as chaotic systems, a number of managerial implications can be developed. Long-term forecasting is almost impossible for chaotic systems, and dramatic change can occur unexpectedly; as a result, flexibility and adaptiveness are essential for organizations to survive. Nevertheless, chaotic systems exhibit a degree of order, enabling short-term forecasting to be undertaken and underlying patterns to be discerned. Chaos [complexity] theory also points to the importance of developing guidelines and decision rules to cope with complexity, and of searching for non-obvious and indirect means to achieving goals’.



            With the continuously tighter global market competition, companies are increasingly focusing on their operations to gain market leadership and thus increase profitability. In many organizations—and at many business schools—the boundaries between operations and other functional areas is rigid and nearly impenetrable. Yet as competition heats up and cost-cutting pressures mount, corporations are demanding that all functional areas in the organization work together to bring products and services to market quickly and cost-effectively. As business sharpens its focus on productivity and cost control, the future belongs to those companies that can integrate operations management theory and practice throughout their enterprise. Recent experience shows that even huge companies are feeling the need to be able to move quickly in the competitive arena. Decentralized organization structures can enhance the quality of such decisions, while also providing higher managers a greater opportunity to pursue strategic planning. Technological improvements in product design, resource planning software, and manufacturing itself also reduce the time it takes to institute strategic changes.

The field of operations management is complex, both in an organizational and in a technical sense. It is especially complex if one intends to exploit the full potential of integral optimization along the entire value chain from procurement to the final customer. Such a complex field requires sophisticated analysis with sound theoretical foundations. In practice, however, clever strategic analyses will only be successfully realized if they are embedded in a sound approach to the process of strategy formulation and implementation. In view of the many process-related shortcomings in present OS practice, it is essential that effective techniques are used to overcome these shortcomings. This, however, is not sufficient. In the long run the major challenge in developing a successful operations strategy may well lie in achieving a synergetic combination of both rigorous technical analysis and effective process facilitation. The high degree of internationalisation in operations management (increasingly, even for smaller firms) has certain implications for managers. An operations manager can become more valuable by developing the skills necessary for conducting business in various settings. These would include language skills and a certain amount of flexibility, understanding, and resourcefulness in dealing with different cultures, as well as more developed decision-making skills needed in handling difficult circumstances with limited, imperfect information.


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