strategic role of operations management - cost leadership
Strategic role: cost management through cost leadership
- Involves aiming to have lowest costs or be most price comp / flexible (increase sales) in market → both increase profit
- E.g. Kmart, IKEA, Aldi, JetStar, WALMART
Costs associated w/ ops:
- Labour: e.g. (full time or part time employee etc)
- Input costs: (raw materials, equip, land etc)
- Actual processing costs: (scheduling, machinery maintenance etc)
- Inventory costs: (storage, insurance, thefts)
- QM costs: (sampling (producing extra), warranty claims, returns)
Ways to become a CL:
- EOS - producing a product on mass (mass production) therefore decreases cost per unit price
E.g. goods - buying inputs in bulk/ services - use of improved tech + machinery therefore decrease time + costs
- Lean production - no wastage through inputs / time (short lead times - customer waits) / use of machinery
- Quality control (check each item) - set standards, high expectations = decrease returns / refunds / warranties, increase rep / reliability, saves money
- Standardised products - mass production / all goods similar: mass customisation - still produces on mass but with some indiv difs e.g. apple iphone
- SCM: global inputs → cheaper inputs, spread risk
strategic role of operations management - product/ service differentiation
- strategy to help distinguish products to help increase customer differences to increase sales –> increase profit
- However, product differentiation occurs in ops therefore strategic role to increase profit by increasing sales
Differentiation of goods:
→ Varying quality (low + high) - can be done by making a low-quality model = very affordable + then increasing qual (will be reflected in higher price) e.g. Qantas (high qual), Jetstar (low qual) - owned by same ppl - Some (b)’s have dif ranges e.g. Woolworths (basic then luxury)
→ Vary features - generally, goods come in one basic variety + then in other varieties of increasing complexity + options. e.g. shoes: sport shoes, fancy shoes, tech like apple
→ Additional features (add-ons) - e.g. food (add bacon, eggs etc), cars (add leather seats etc), accommodation (add pool, view etc)
Differentiation of services:
→ Vary amount of time - e.g. massage = 30min or 1hr, cleaning service
→ Level of expertise - e.g. tutors (uni, teacher, marker), doctors - generally can charge more, affects qual
→ Actual qualifs - highly qualified + experienced service providers can affect qual of service provided e.g. architect or draftsman, childcare
→ Qual of tech - e.g. restaurant - apps or normal order - affect qual - e.g denim jean store - (b) could examine g/s dif as currently (b)’s product
range is limited to denim products –> could dif their products + add non-denim
items + clothing accessories = potentially increase customer base, attracting
customers who are interested in non-denim items = may increase sales + profits
strategic role of operations management - IKEA
- are cost leaders in their industry
Strategies used: - Standardised products (economies of scale) - customised - wardrobes
- High qual control - testing / high standards therefore low returns
- Self service checkouts therefore reduce labour costs / decrease time
- Flat packs - reduce storage = reduces costs, decrease lead times
- Storage, self-service, logistics → customer-based
- Global supply chain
- Quality (low-medium)
strategic role of operations management - cost and quality
- direct r/s b/w cost + qual
- Cost + qual usually have a close, positive r/s in the ops of a (b)
- As the qual of a product increases, usually, the cost of producing it also increases, as it requires
more expensive inputs and/or more time to produce –> an implication of this = these products tend to have higher prices as (b)’s pass higher costs onto consumers - e.g. flights on low-cost budget airlines e.g. Jetstar = cheaper to produce than flights on full-service flights e.g. those sold by QANTAS
Jetstar is less flexible + has fewer ‘extras’ e.g. food, entertainment –> therefore provides a lower qual product = usually sold at a lower price - Services: increase qual → through tech, expertise/ experience of employees, time therefore increase costs → increase price to consumer
Strategic role - in general
- strategic role of ops management ensures the ops function effectively
contributes to the achievement of goals + strategic direction of (b) - (b) could examine g/s differentiation or cost leadership as currently the (b)…
- Ops management involves being a cost leader + differentiating the (b) from competitors
Goods and/ or services in different industries
- Ops will vary depending on whether (b) is producing standardised or customised g/s + in what industry
- Standardised goods = mass produced + uniform in qual
- Customised goods vary according to needs of customer = produced w/ a market focus (what does customer want)
- choice of process selection is strategic as it requires a high degree of cross-functional interaction + coordination b/w the KBF’s
GOODS; Perishable vs non-perishable - Op processes will vary greatly for perishable (e.g. foods) + non-perish items
Ops for PERISHABLE items = need to integrate following; - High standard of qual, safety + cleanliness (e.g. rockmelons, berries)
- Very short lead times + quick distribution
- Appropriate + robust packaging + cold storage processes
Ops for NON-PERISHABLE items; - Manage all aspects from sourcing to distribution
- Implement effective inventory control (manage stock, goods)
- Be highly responsive to market changes / demand - flexible (PROACTIVE NOT REACTIVE)
SERVICES - can be standardised and/or customised e.g. GP + specialist
- Standardisation can minimise costs = can be mass produced w/o variation + EOS can be achieved e.g. fast food, iphone
- Self service: means encouraging the customers to take the initiative to help themselves = customisation e.g. financial sector, travel (airline tickets)
Interdependence w/ other KBF’s
Operations ←→ Marketing
- Develops market research to determine product consumers need/ want e.g. the features, design = operations will produce product
- M sells product made in op to consumer
- need to work synonymously to acheiev goals of (b) = decrease costs (ops), increase sales (marketing)
- Cost leader = (b) can have price flexibility → can have low prices + still make profit
Operations ←→ Finance
- Finance provides source of funds (money) for production e.g. to update tech (leases)
Operations ←→ HR
- Selection of employees - skills/expertise = used in ops
- Maintenance - increase motivation → increase production (ops) → increase sales → increase profit –> increase customer service
- Training - in equip/ tech → increased confidence / motivation etc
- Can reduce accidents / faulty products / returns therefore reduce wastage → increase efficiency
