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Operations Management as Vital Component for Successful Business

Operations management as vital component for successful business


Operations Management is the study of managing the process in order to produce goods and services. Independently of whether we are talking about small business or corporate, managing operations remains vital in order for the enterprise to function effectively. Production industry would of course consist of much more complicated process of managing operations, because it involves design and creation of the product, its development, followed by distribution and coordinating several product lines if applies. One of the very important parts of the operations management is effectiveness and efficiency of the production process, measurement of which requires a lot of calculations and analysis of external and internal activities.

In different units of the organization different levels of controls are required (if any at all). For example, Marketing Division would be focused on controlling dramatically different activities than those of a Production Division. Operations Management requires high level control and analysis, otherwise the organization would cease to exist. In order to have production efficiency and effectiveness on high level Top Management would need to make production strategy (that would have to correspond to the demand estimates from the Marketing department), plan the production, control the quality of the goods produced, gather reports from Middle Level Management, etc.

Basically in order to be successful, in managing the operations of the company top management can use the technique when they determine production's inputs (labor cost, material cost, capital intensity) in order to predict production's outputs (Ferdows).

One of the huge discussions today in the Operations management is outsourcing production. Outsourcing – is "an inevitable development of the industry, a simple function of the market and the way economics develop" (Sijbrands). BMW produces cars for the US market in south Africa, Nike makes its shoes in Bangladesh, an so on. Huge companies are trying to do everything possible to cut production costs, and make their product cheaper then those of the competitors. Reasons of the companies for outsourcing different activities is that companies want to focus one thing, either design, or producing a brand, or customer relations. Everyday there are less and less companies that can manage do everything for one product, starting from design, finishing with distribution to the end customer, without using help from the side. The smart outsourcing strategy can become competitive advantage of the company (Ferdows). Outsourcing becomes very popular in the countries of the third world as well, and is spreading very rapidly. It is considered vital part of the successful production organization and is one of the main components of operations management.

On the other hand there are risks and minuses as far as outsourcing is concerned. "Some companies want more control and direct interaction with employees" says Rick Hubbard, Cleveland-based global director of Watson Wyatt Worldwide's technology solutions practice (Sammer). It is also very important for a lot of companies that are seeking an outsourcing partner to find the one, which would be able to add benefit to their product, which is not easy. Other companies just want to have their specific needs met.

Whether a company should outsource also depends on the industry in which it is working. HR outsourcing becomes more and more popular with time. It is much easier for a lot of big companies to outsource health care, pension and even some times salary procedures to other companies, rather than keep it in-house (Bendor-Samuel). It is important though to make sure that non-core functions are being outsourced. HR function is not primary function of the company, but it is extremely important, because the success and loyalty of the employees depends on how well is HR function and process structured in the company. Outsourcing non-core functions allows the company to cut cost, save time and money, and as a result gives an opportunity to concentrate on the quality of product or service – the core.

In financial industry outsourcing is concerned with slightly different issues. Industry convergence and regulations are additional concerns together with the cost reduction. There is a distinction made by the financial service providers when considering outsourcing as an option. The distinction is particularly made between "commoditized activities (like transaction processing), which are perceived as suitable for outsourcing" (Sijbrands), and the competencies that are considered to be core, and thus, preferably to be kept in-house. Still, the outsourcing companies manage to actually provide the services that are considered to be core, and despite all the commonly held believes, succeed in majority of cases.

We have just discussed the importance of outsourcing and the varieties of its application. Let us also notice how important it is to cutting production and other costs that companies face. Cutting costs by various methods, including outsourcing, is very good because it allows consumers to have competitive products on the market, cheaper and produced on high-quality level. It is necessary to mention thought, that it is not always good to cut costs in the corporation, especially Manufacturer. Let us look at the example of Krispy Kreme doughnut, which was held in trust by Beatrice Foods of Chicago in 70's, we can make one very important conclusion essential for the prosperity of each enterprise – to keep the product popular on the market, the company needs to define what exactly is the primary reason for people to buy this product, what is it's value (McGraw - Hill Irwin). When Beatrice removed some secret ingredients from the doughnuts, which made them so special, in order to cut overall costs, it caused the immediate reaction on the market. People did not like the doughnuts anymore, and top management of the company became very irritated by Beatrice's decisions. The situation would not have changed unless Beatrice did not decide to sell Krispy Kreme, and Joseph McAlleer (worker of the company) did not take the situation under control. The management of the company understood that people bought their product for its value and its taste, and it was not necessary to make a product cheaper as long as quality stays the same. So, another conclusion contributed to the Operations Management by this case study, is that making cheaper decisions, does not always mean making better decisions, and this rule applies to whatever business you are involved in.

An important contribution to the Operations Management and Manufacturing is made by BCTIM (Boeing Center for Technology, Information and Manufacturing). This organization aims to make the flow of information about technology, manufacturing, etc. as easy as possible, and they also work on educational opportunities in these industries. One of the recent conferences they held if February, 2006 discussed a make-to-stock manufacturing system, how uncertainty on the market demand works together with competitive issue. They also designed a Model, with the linear correlation of demand with the price of the supplier and competitor, and quadratic function of inventory and production costs (Adida).

In the days of Globalization, when Nike company produces right shoe in Bangladesh and left – somewhere in Korea, when McDonald's can be found in any country of the world, talking about manufacturing and operations management is impossible without mentioning China. Look at anything around you - toys, clothes, furniture, the chance that it was actually produced in China is much bigger than anywhere else in the world. Being the major supplier to most developing worlds, China is in its way a catalyst of the economic growth of these emerging markets. There are different views as to the future of this country, it can be one of the biggest economies by 2030 (Tse) or it can collapse so abruptly, that nobody would be able to react. Mass Manufacturing and Productions in China is an interesting phenomenon, which is not a simplistic to analyze or predict. The cheap production force and human resources, ability to attract and keep top executives from all over the world, spending irrational sums of money for research and development, and thus being number ONE in innovation, "High-quality management, and transparent governance style" (Tse) are the reasons of China's constant economic growth and significant yearly rise in GDP.

A lot of people in the world tend to have the stereotype that whatever product it is, if it is Chinese, it is of bad quality. It is not always true. Even though Chinese production is much cheaper due to the cheap work force, Chinese entrepreneurs still know the value of the quality and even if they cut on it, it is due only to desire to cut costs on specific products, and to make them quicker (Tse). Taking that into account we could easily assume that if China can actually produce the products for world known companies, they can as well switch to creating their brand names, that would become extremely known and used throughout the world. Of course, that would take time, because any brand needs to earn consumer trust, but that is an option and a possibility, which can not and should not be ignored, especially considering the number of engineer graduates from Chinese universities and their potential for innovation.

In contrast to positive growth of Chinese Industrial Manufacturing Industry, in United States it has slightly fallen during the first quarter of 2006 (LaFond). The decrease of 7.88% is considered to be a result of Automotive Industry, in particular by Ford and General Motors. The number of closed plants, and layoffs by these two companies had their influence (even though not too crucial, but still significant) on the industry. The situation was even more complicated by two major tire suppliers - Delphi and Collins & Aikman.

The growing huge Chinese market and excellent long term opportunities for investment, can not be ignored by the United States. Chinese-US relationship and access to Chinese market by American business became a topic of a conference "China: The Land of Opportunity for American Businesses" held in April, 2006 (Lyn Van Benschoten). David Dempsey, Managing Director, Bentley Associates was the first speaker during the conference. He mentioned the difficulty of fund gathering for investments into China, as a result of Chinese banks being too focused of political criteria when giving credits. He also mentioned "intellectual property issues and local and Provincial bureaucracy" as being some of the risk once considering investments. Knowing the cultural differences between the two countries, I would mention the mentality differences as being some of the major risks as well. Every time, when starting a business or investing in a different culture, a businessman has to make sure he considers cultural gaps, and adapts to the rules of the accepting country.

One more interesting case to discuss is the "Coffee Wars" in the article Wharton web-page. Coffee, like a cigarette is an ideal product, it cost very cheap to make, and you can sell it much more expensively because humans get addicted to it. The article discusses the strategies take by the Coffey companies such as Sturbucks and Dunkin Donuts. Starbucks by this time own 600 coffee shops, making $6.4 billion per year (Wharton). Dunkin Donuts within last few years have tried to come up with as many new drink as possible. Even McDonald's is afraid to loose its customers to Sturbuck's, so they decided to make some addition to their Coffey menu, instead of focusing on their core product – the food. Taking this three famous names, brands, we come to the conclusion that each one of them has their own category of customers. Their operations are managed in a specific way, which allows to concentrate only on specific group of customers. For example, McDonalds might be preferred by price-sensitive customer, Donuts – by convenience-sensitive customer, and Sturbuck's – by customers for which quality is the primary criteria. Only thinking about how important for coffee consumers is the actual ritual of drinking Coffee, is fascinating. The certain coffee culture has been created, and it allows this industry not only to exist, but to grow as well, because most of the customers drink Coffey, every day, 7 days per week, and sometimes even several times per day! And here we see the importance of operations. How to position a product, how to bring it to the customer, which group of customers to target. It is obvious that Dunkin Donuts and Starbuck's have very different targeting approach. Even at the simple example, Starbuck's with it's fancy internal design is more of a place where people come, relax, and hang out on those couches. Dunkin Donuts on the other hand is something much more quicker: come, drive through, buy a cup of Coffee, and leave.

Looking at the main issues and hot topics in the Operations Management topic is impossible without stopping at Total Quality Management as an important, I would say, even vital part for successful and efficient Operations Management. "Total Quality is a description of the culture, attitude and organization of a company that aims to provide, and continue to provide, its customers with products and services that satisfy their needs" (Stark). This approach originated in Japan in 1950's, and gradually spread to the West by 1980's as being "an art of management" (Stark). There is a lot of skepticism about TQM, as well as god performance indicator is big and famous companies. The best way to make TQM approach work is to pay high attention to the training of Top Executives of the company, those people who are mostly involved in the development of innovative products, and of course, those responsible for communication with clients and customers. The TQM is about "customer-driven quality, top management leadership and commitment, continuous improvement, fast response, actions based on facts, employee participation, and a TQM culture" (Stark). Satisfying customers in the highest possible level is important to every business. We can not ignore the fact that most of the sales of the companies are from return customers, and that is why making customers happy is a key to keeping business alive.

TQM has to be highly paid attention to by Top Management, failure to do that is one of the major reasons for failure of this approach. It has become a style of life of the corporation, and not only a mean to achieve some set goal. Lack of commitment and individual involvement from top executives fails to prove that continuous improvement of the organization can actually be successful.

Normally TQM implementation would be faced with resistance in the organization. For employees TQM means more reports, analysis, and data collection. On the other hand, the same employees will have broader scope of responsibility, and more authority will be delegate to them, which in turn might cause resistance from the management, since they will have less power as a result. One of the possibilities to fight this resistance, and solve these problems, is using force field analysis (Brager & Holloway, 1992). This technique can be useful in analysis the level to which organization changed. It involves creating a force that will control, support and maintain the process of change going, making sure that nothing disrupts this process, and eliminate those factor that do cause some sort of distortion.

The other way to fight resistance is to unite employees by using various Leadership methods. A good Leader has to show people that they all have a common goal, motivate them to achieve that goal, and give the employees necessary skills to complete the task. Creating the atmosphere of a team cooperation would destroy the uncertainty in the employee's minds as to the necessity of the new approach, and prove them, that if decision was taken by top executives it is worth completing.

Operations Management involves so many issues as well as deep philosophical thoughts as to various approaches, that it makes it hard to discuss all of that. There are always successful and not successful strategies for operations management and manufacturing, there is always something new that is developed, and there are old known methods that have been used for decades. Innovation in approaches is still very valuable for any organization.

In order to Succeed in designing something new in Operations Management, it is necessary to forget everything old. Unless your brain is free from "how it is right to do something", he will use all his capacity to come up with something new!

Human beings tend to work better in well organized and processed environment. Nobody feels secure and comfortable when in the company there is uncertainty and instability. The normal process of operation in a daily life as well as at work is trying to make everything work better, quicker, and more effectively. Dynamic process makes people feel much better, and if the dynamic process is absent there is no one else to blame rather than ourselves. The goal of Operations Management and Manufacturing is to make this process as smooth as possible, thus, to make sure that people working in this process put their effectiveness to maximum, increasing the profitability of the overall operations of the company.

We have looked at the main topics in the Science of Operations Management. We have discussed some case studies, which were good and bad examples of managing operations in different industries. We mentioned Japan and China as being two countries with huge influence of using Operations Management on the world! One, and the main conclusion – is that Operations Management as a theory and a practice is a an engine of the business everywhere in the world.




Works Cited

Adida, Eloide. Dynamic Pricing and Inventory Control: Uncertainty and Competition
http://bctim.wustl.edu/topics/topics.cfm?categories_id=33&searchid=13
Bendor-Samuel, Peter. CEO, Everest Group. Market Momentum in Managing Manpower. http://www.outsourcing-journal.com/jul1999-insight.html
Brager, G. & Holloway, S. (1992). "Assessing the Prospects for Organizational Change: The Uses of Force Field Analysis." Administration in Social Work. 16(3/4), 15¬28
Ferdows, Kasra. POMS Chronicle. http://www.poms.org/POMSChronicle/Vol13No1.pdf
LaFond, Anita. Slight Drop in 2006 U.S. Industrial Manufacturing Industry Spending in First Quarter. April 28, 2006. http://www.mhhe.com/omc/news-frames.htm
Lyn Van Benschoten, Andrea. Conference on American Business in China Held in NJ. http://www.mhhe.com/omc/news-frames.htm
McGraw - Hill Irwin. If a Little Cost Cutting Is Good, Then Can a Little More Be Bad?
http://www.mhhe.com/omc/MelNewslttrNo1.PDF
Sammer, Joanne. A Customized Approach To Benefits Outsourcing
http://www.businessfinancemag.com/magazine/archives/article.html?articleID=14225
Sijbrands, Simon. Partner KPMG Dutch. Beyond Transaction Processing: Is Outsourcing Right for Financial Services Industry? http://www.us.kpmg.com/microsite/attachments/frontiers_in_finance/FIF_April03_Beyond%20trstn.pdf
Stark, John. A Few Words About TQM. http://www.johnstark.com/fwtqm.html
Tse ,Edward. China's Five Surprises.
http://www.strategy-business.com/press/article/05401?pg=0
Wharton. The Coffee Wars Heat Up: New Strategies to Jolt the Caffeine-Conscious Consumer http://knowledge.wharton.upenn.edu/index.cfm?fa=viewArticle&id=1448
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Posted by: Jeffrey J. Thomson

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