Wait, let me tell you, this article is more specifically about operations management in manufacturing. In the first part, you will find me briefly discussing the definition of operations management, its importance, and its responsibilities. The next section is about production methods, lean manufacturing, and quality management. Organizing production, selecting production location, and planning production are the next topics. The last three sections discuss research and development, crisis management, and contingency planning.
What is operations management?
Operations management is about how the company’s activities in converting inputs into products or services are carried out efficiently and effectively. In a broader definition, it is about production and procurement, inventory, and logistics.
For service companies, operations management typically includes office management or other areas where services are provided.
It deals and is responsible for producing the right goods and services in the right quality and quantity efficiently and effectively for the manufacturer. It ensures adequate resources are available for production and maintains high production, output quality, and efficiency levels.
A company’s operations are determined by several factors, including market needs, company finances, and human resource capabilities.
Guide to Business and Management
Why is operations management important?
Effective operations management is important to ensure company resources such as employees are allocated optimally to get maximum results.
Next, it deals with getting inputs, designing production systems, selecting production methods, controlling quality, and managing inventory according to designed standards and procedures. Thus, the production process is efficient in producing quality output. It avoids unnecessary costs and increases customer satisfaction because the product is not defective.
Operations management responsibilities
Production is about processing inputs into outputs. Inputs or also known as factors of production, include land, labor, capital, and entrepreneurship. And, within a company, operations management is responsible for the “5M”:
- Materials – the input stream and related information.
- Men – personnel working in the operating system.
- Machinery – the technology, machinery, and equipment used in making products or services.
- Money – asset utilization and financing, including capital expenditures.
- Methods – design and production procedures.
Operations management makes decisions and manages aspects such as production methods, production design, production plans, quality control systems, and research and development.
Sustainability management. Operations management must be aligned with the company’s overall objectives and strategies, including those regarding sustainability. It must also implement ethical practices for ecological, social, and economic sustainability. That is by, for example, choosing production technologies and designs to reduce waste and adopt ethical employment practices.
There are various production methods. Each has implications for quality, differentiation, production costs, and production volume. Which is more appropriate? It depends on factors such as the market size being addressed, technological trends, availability of resources, relative and substitute costs, product diversity, and company goals and strategies.
Labor-intensive – operations rely more on manpower. Thus, labor costs contribute more significantly to production costs than capital costs.
- Capital-intensive production makes it possible to offer personalized products.
- But, it may have more problems with human resource management, as it is more difficult to control than capital goods such as equipment and machinery.
Capital intensive – operations rely more on capital goods than labor. Thus, the cost of capital has a higher proportion than the cost of labor to the total cost.
- The company requires large initial capital investment for machinery, plant, and equipment. It is usually found to produce standardized products where their demand is significant enough to justify the capital investment. Because the product is relatively homogeneous, the company generates low-profit margins.
- To increase profits, companies strive to achieve economies of scale as quickly as possible to lower unit costs. Therefore, the company needs more demand to achieve it, usually through mass promotion.
Job production is a production method in which a company produces a one-time item specifically designed for a customer. The company makes the product when there is an order and is unique for each customer. This method is usually applied to produce one-off or unique items such as violins.
This method provides more flexibility, relatively simple, high quality, uniqueness, and better customization according to customer requirements. However, it is also expensive, labor-intensive, time-consuming, has long working capital cycles, and low economies of scale.
Batch production is a method for producing a limited number of identical outputs. Each item in the batch goes through one stage of production before moving on to the next stage. It allows the company to change or modify the product during the manufacturing process if necessary.
Methods are usually used to produce various products. It is used when demand is higher and more regular.
- Batch production provides several advantages such as technical and purchasing economies of scale, more standardized machines, and specialization. In addition, the company can diversify the risk because it produces various products. The company has more flexibility because each batch can be changed to meet the customer’s desire.
- However, the production system is more complex. Company money is also tied up in work-in-process because orders cannot be shipped until the entire batch has been completed.
Flow production is a production system in which all the different operations required are performed sequentially, one after another. Thus, it produces goods in a continuous flow. It is usually applied to mass production with standard products, for example, magazines, newspapers, and automobiles. Also known as mass production, continuous production, or line production.
The flow production depends on the division of labor and specialization. The company divides the production process into specific tasks and assembly lines. At each assembly station, workers perform the same routine tasks, enabling them to do them more quickly over time. Companies can also rely on automation technology with the help of robots and machines.
- This production system allows the company to significantly reduce production costs due to high economies of scale. Products are standardized, so processing is faster without the need for system reprogramming.
- But, flow production is not flexible and can cause boredom among workers due to doing monotonous tasks and jobs. In addition, because of the high dependence between parts in the production system, it disrupts the whole system when one stops.
Cell production is a production system in which the production flow is divided into several teams/cells. Each is responsible for the target to be completed and works independently but depends on each other to achieve the target. Also called cell manufacturing.
- Cell production provides some autonomy in decision-making in each cell. It also encourages a greater sense of responsibility and accountability within the team. Improved quality standards and higher motivation are other advantages.
- However, tensions and conflicts between teams can arise and interfere with the achievement of targets. Output may also be lower than mass production.
Lean producton is a production process by streamlining operations and processes to reduce waste and maximize productivity. The company set up a range of manufacturing technologies to reduce setup time and to improve scheduling. It aims to minimize wasted resources and improve quality control at every stage. Also known as flexible manufacturing technology or lean manufacturing.
Waste is not only related to output but also materials, time, energy, and human labor. Minimizing waste is done by removing unnecessary and non-value-adding processes.
Lean manufacturing relies on continuous improvement, flexibility, quality control, and reliable supply chain management integrated into the system.
Lean manufacturing applies the following principles or methods:
- Just-in-time (JIT)
Kaizen is a term for continuous improvement. It involves forming small teams to drive continuous improvement in system productivity and effectiveness. The team identified the changes and improvements needed to establish a steady stream of small improvements.
The Kaizen principle encourages everyone to take many small steps to improve the system before problems arise. Improvement is not done episodically but continuously. It involves everyone and encourages employees to bring issues to management easily without bureaucracy and without communication barriers.
Just-in-time (JIT) is an inventory system designed to save on inventory holding costs. Instead of holding the high stock as in just-in-case, this system relies on prompt delivery. In other words, it doesn’t need buffer stock. Raw materials and components arrive at the manufacturing plant just as they are needed to enter the production process.
- This method minimizes inventory costs, reduces waste, and improves supplier relationships. In addition, businesses are becoming more responsive to fluctuations in customer demand.
- However, the company must ensure reliable external suppliers. Otherwise, the system crashes. JIT also relies on advanced technology and the commitment of workers. In addition, the company also bears higher administrative costs due to ordering more frequently.
Kanban is a production approach where timely stock control is applied to pull inventory into production when needed. And because of that, it is part of the Just-in-time system.
The company records the supply and use of spare parts and builds very close relationships with suppliers. As a result, companies can build a reliable scheduling system to align inventory levels with consumption in the production system.
- Kanban reduces wastage, improves system flow, and increases flexibility in production.
- But, it also requires perfection; there is no room for error. If the demand fluctuates significantly, it can cause problems because the system cannot accommodate it. In addition, it is difficult to overcome in case of quality problems or defects because there is no buffer stock.
Andon is a visual system showing production status and notifies about quality or processing issues. For example, when a worker changes the signboard to red, it indicates a problem has occurred.
- Andon provides alerts in real-time, allowing for immediate corrective action. It is usually used when personnel are far from each other or handling many different machines.
- But, to run it successfully, the company relies on responsible operators. They also need the training to use the Andon system.
Cradle to cradle
Cradle to cradle is a design and manufacturing approach seeking to eliminate waste. It requires meticulous thinking and designing any product design by considering the entire product cycle. Companies have to rethink every step of production to ensure nothing is wasted and components are completely biodegradable and non-toxic.
Firms involve inputs and outputs as nutrition:
- Technical nutrients – can be recycled without losing quality.
- Biological nutrients – can be consumed or composted.
The company tests every chemical or raw material used and the output to ensure they are safe for humans or the environment.
Cradle to cradle has several features:
- Relying on environmentally friendly materials
- Reusing materials
- Using renewable energy
- Using water efficiently
- Being socially responsible
Quality is about how well the product fulfills its purpose and meets user expectations. It affects the value perceived by customers, which in turn affects their satisfaction.
- Quality management deals with ensuring products conform to specifications and standards and at an appropriate cost. It consists of four components: quality planning, quality assurance, quality control, and quality improvement.
Quality is an important factor in satisfying customers. It gives the company a competitive advantage and supports a superior product image.
- Quality control – systematic monitoring to ensure the quality of the output conforms to specifications and standards. It requires several employees to routinely take, inspect and test samples of the final product.
- Quality assurance – the systematic maintenance and monitoring of various aspects of a product or production process. It aims to ensure each stage meets standards and maintains strict quality control and compliance with specifications, targets, and procedures. Thus, the output quality is guaranteed.
Total Quality Management
Total Quality Management (TQM) refers to an operational philosophy committed to improving the product’s quality and reliability. It aims to satisfy customers through continuous improvement of products. In addition, it helps companies to lower costs – by improving the efficiency of business processes – and improve quality.
TQM requires the dedication of all employees to be committed to achieving quality standards and minimizing waste and defects. It instills quality principles in every operation and business process.
- Zero defects mean a perfect product every time. It emphasizes error-free production.
A quality circle is a small group of staff tasked with solving problems and generating ideas to improve processes or products. They consist of employees from various departments. They meet regularly to discuss problems related to their work – for example, related to production systems – and then develop solutions.
Benchmarking compares internal performance or quality with industry best practices. It is essential in setting standards of excellence, quality targets, and continuous improvement. It may be about product performance, customer service, business processes, technology, communications, costs, or finances.
Companies identify benchmarked performance, find peer companies and their practices, collect data, map current performance gaps and set targets for future achievement.
In addition to between companies, benchmarking may also be applied for historical comparisons. Companies identify areas for improvement, compare them with established criteria, study gaps, and find improvement solutions.
Quality standards are a prerequisite for making quality products in a quality way. For example, it could be a national or international quality standard, for example, ISO 9000 for quality management systems.
Quality standards are important to promote and encourage quality awareness within the company. It also contributes to strengthening the company’s competitiveness in the market.
Choosing a location for business operations is important because it affects costs, affecting a company’s competitiveness. It considers qualitative and quantitative factors such as:
- Access to raw materials
- Access to quality or cheap labor
- Location costs such as land prices
- Proximity to market or intermediaries
- Local market knowledge
- Infrastructures such as transportation and communication networks
- Political stability and economic factors
- Government regulations and policies
- Ethical issues
Relocation – moving production to a different location. It may have to be due to high rents, a change in government policy, or to get cheap labor costs. Companies may relocate to other regions within the country, or they may relocate overseas.
Outsourcing is the practice of handing over some non-core work or activity to another party. These activities are considered less strategic and are not part of the company’s core business. Examples are payroll, call centers, or the production of materials or components. Also known as subcontracting.
- Outsourcing aims to save costs and focus resources and capabilities on the core business. Companies can reduce the workforce or streamline production processes. They may also get lower prices because partners usually specialize in outsourced work.
- However, the company became highly dependent on external suppliers. It can disrupt operations if partners are unable to perform work to contract or standards.
Offshoring refers to outsourcing to other parties abroad. For example, that may be for manufacturing or business support services such as accounting and call centers. This strategy aims to focus more on core competencies and save costs by outsourcing jobs to low-wage countries.
Reshoring is the opposite of offshoring. In offshoring, a domestic company outsources production or other business activities to another company overseas. Meanwhile, in reshoring, the company moves them back to their home country.
- For example, a Japanese auto company closed manufacturing facilities in other countries and opened new facilities in Japan. It is usually done when production costs become cheaper at home than abroad.
Insourcing performs or assigns contracted work to an internal department or business unit, not a third party. If done by an internal department, it might involve bringing in specialists or training employees.
- Insourcing allows companies to have greater control over business functions. It also allows for better employee empowerment.
- But, it makes the company less focused on the core business. It requires a large investment, for example, to train employees or purchase equipment. Lastly, it can also increase stress because more work has to be done by employees.
The supply chain is the network involved in delivering the product to the customer. Broadly speaking, it includes procuring inputs to delivering products to customers. It involves a variety of activities, individuals, organizations, resources, and technologies.
Supply chain processes include:
- Procurement – buying raw materials and components from suppliers.
- Inbound logistics – delivering raw materials and components to the company’s factories or warehouses.
- Inventory – manage the inventory of raw materials or final output.
- Production – raw materials and components enter the production process for conversion.
- Outbound logistics – deliver output to customers.
Value chain refers to the various activities or functions in which a company can add value. It is divided into two groups:
- Primary activities
- Support activities
Primary activities include:
- Inbound logistics – bringing materials or components from suppliers into production facilities or warehouses.
- Operations – processing inputs (materials and components) into outputs.
- Outbound logistics – delivering output to customers, including warehousing management for output.
- Marketing – selling products to target markets, including selecting markets, setting prices, managing distribution channels, and promoting products.
- Service – ensuring products are working at their best and maintaining long-term relationships, including after-sales service and customer complaint services.
Support activities include:
- Procurement – purchasing decisions from external parties for raw materials, components, equipment, machinery, and other items in business operations.
- Information technology – managing the flow of information within the company and with external parties, including equipment, hardware, and software.
- Human resource management – includes recruitment, training, development, compensation, layoffs, and industrial relations.
- Infrastructure – includes functions such as finance, law, and public relations.
Just-in-case (JIC) is an approach in inventory management by holding large amounts of inventory, both for raw materials and finished goods. It aims to anticipate if there are production problems or unexpected spikes in demand. Thus, the company ensures sufficient inventory to meet customer demand or consumption in the production process.
But, because it holds more stock than needed, the company’s inventory holding costs are high. That means tying up more money in inventory.
Stock control or inventory control is about carefully planning inventories to ensure they are available in sufficient quantity and at the right time.
- Too much inventory increases storage costs and other costs such as damage, obsolescence, and theft.
- However, too little inventory can also have fatal consequences such as disrupted production processes, non-optimal sales, and inefficiency of machinery and equipment.
- So, the company must manage its inventory at an optimal scale. It is influenced by several factors, including order quantity, product type, forecasting future demand levels, inventory costs, and delivery times.
In a manufacturer, inventory can be:
- Raw materials and components – inputs that will go into the production process. Factors to consider in managing their inventory include how reliable the supply is, how stable their prices are, how much is needed for the production process, and how big the demand is.
- Work in progress – the goods are on the production line and not yet finished. Increasing their inventory is one way to protect production if there are problems with other supplies.
- Finished goods – the output of the production process, which is waiting to be delivered to the customer. Factors to consider for keeping them more or less are orders received, future demand trends, and production facility output volumes.
- Consumables – items consumed during the production process or operation, such as fuel and stationery. Companies consider factors such as supply reliability, future prices, and stability to manage their inventory.
Inventory control chart
An inventory control chart or stock control chart is a tool to ensure sufficient inventory is available when needed. It consists of several parts:
- Lead time – the time it takes from the start of the process to its completion. For the procurement of raw materials, for example, it is the time between ordering and delivery.
- Buffer stocks – the minimum stock must be held, regardless of production conditions. It aims to ensure the process continues to run despite delays in delivery or increases in production levels due to sudden spikes in demand. Also known as the minimum stock level or reserve stock.
- Reorder quantity – how many business orders to return the inventory level to its maximum point.
- Reorder level – the inventory level at which the business reorders. It is equal to the minimum stock level plus the multiplication of lead time and demand per day.
- Maximum stock level – the highest inventory a business can hold. It varies between businesses, depending on the size of their operations.
Capacity utilization measures the extent to which a company utilizes existing resources. It is measured by dividing actual output by potential output (productive capacity).
Capacity utilization = Actual output / Potential output
- For example, a machine has a maximum capacity of 100 units. If the capacity utilization rate is 90%, then the realized output will be 90. Meanwhile, about 10% of the unused capacity (reserve).
- Ideally, the capacity utilization rate is 100%. But, this is difficult to achieve for several reasons: low demand, production disruptions, and outdated machinery.
The productivity rate measures the extent to which the company optimizes inputs to produce outputs. It shows production efficiency, i.e., how much output is obtained for each input used. We calculate it by dividing the total output by the total input used.
Productivity rate = Total output / Total input used
- Say input is labor. For example, suppose a company employs 100 workers and produces 1000 units of output. That means the labor productivity rate is 10 units per worker.
- There are several ways to increase productivity, including through training or motivation, by offering bonuses. In addition, innovation and application of more advanced technology is another way to improve it.
- High productivity means more profit for the company. Companies bear the same input costs but produce more output.
Producing internally or buying from outside?
Cost to make and cost to buy is quantitative analysis to decide whether it is better to buy goods or inputs from external parties or produce them internally.
- Cost to make (CTM) = Fixed cost + (Average variable cost x Quantity)
- Cost to buy (CTB) = Price x Quantity
Apart from the CTM and CTB analysis, the company also considers other qualitative factors such as control over goods (such as quality and delivery time), supplier competence and reliability, internal capabilities and resources, and the effect on company image.
Research and development
Research or research is the process of investigation to generate business ideas. Meanwhile, development is about transforming these ideas into something valuable or commercialized; it can be related to new products, new methods, or new materials. So, research and development are not limited to designing products but also about how products are made.
- Research and development become strategic amid intense competition and changing consumer needs and tastes. It brings new growth opportunities for the company. Other benefits include increased productivity, customer loyalty, and improved quality.
- However, research and development can also be expensive and time-consuming. It requires a skilled workforce and is open to innovation. In addition, the failure rate is also relatively high, and some may not be commercially viable.
Innovation is about creating something new. Innovation creates new intellectual assets and can be related to products, processes, positioning, and paradigms.
Product innovation – innovation by developing new products or improving existing products by adding superior attributes. So, it may be a radical or incremental innovation.
- Innovation increases a company’s opportunities to react to changing consumer tastes and needs. It also creates new growth opportunities by introducing new products to satisfy customer needs.
Process innovation – innovation about new ways of doing things, such as producing products and delivering them to customers.
- In production, for example, it can involve using new technology or production methods to make the production process more efficient or to ensure better quality.
Positioning innovation – innovation by changing perceptions about the product or process. For example, in the past, watches were used as time markers, but now they have become fashion and lifestyle accessories.
Paradigm innovation – innovation about the way we think. Switching to reading digital books from printed books is a great example. Our paradigm is changing, and reading does not have to carry printed books everywhere, just a smartphone. It is more practical and more mobile.
Innovation requires creative thinking. It can:
Adaptive creativity – thinking to produce something new by developing different scenarios or conditions for existing techniques or products. Adaptive creative thinkers seek to solve problems and refine current practice. For example, developing a new car edition with better features requires adaptive creativity.
Innovative creativity – thinking to create something new. While adaptive thinkers think about doing things better, innovative thinkers try to do things differently. If adding better features requires adaptive creativity, launching a self-driving car requires innovative creativity.
Crisis management is the systematic measure by the company in the event of a disaster, negative publicity, or other unforeseen events. It aims to minimize the loss or damage caused by those events to the company.
In this case, the company is reactive to a sudden negative event. They formulate the best response to the crisis to minimize the impact. It requires rapid action and control, effective communication, and transparency to stakeholders.
Crisis management is important because it minimizes losses to company finances, company image, and employee optimism.
Contingency planning is the company’s efforts to implement procedures to deal with crises, anticipating them through scenario planning. The company is proactive in responding to changes in the business environment by developing plans before a crisis or adverse event occurs. As a result, it reduces the risk and its impact on the company.
The company develops a crisis plan and details each possible scenario’s procedures, roles, and responsibilities. As the environment is constantly changing, companies should test and perhaps update it periodically.