NSW HSC Business Studies

What operations management does

Operations management is the management of the processes that turn inputs into the goods and services a business sells. Every business has an operations function, whether it makes bicycles, cuts hair, runs a hospital or lends money. It is the part of the business that creates the product the customer pays for, so the quality, cost and speed of what a business sells are set largely by how well its operations are managed.

The topic is studied through large businesses, which have separate departments, high volumes, complex supply arrangements and often operations in more than one country. A small business may have one person doing production, selling and bookkeeping; a large business has to coordinate hundreds of people and many sites, and that is why operations needs deliberate management.

Goods and services

A good is a tangible product that can be stored, such as a car, a loaf of bread or a mobile phone. A service is intangible and is usually produced and consumed at the same time, such as a haircut, a flight or financial advice. Most businesses sell a mixture: a restaurant sells food (a good) and table service (a service), and a car dealer sells vehicles and servicing.

The difference changes how operations are managed:

Industries

Businesses are grouped by what they do. The primary industries extract or grow raw materials (farming, mining, fishing). The secondary industries manufacture and build, turning raw materials into finished goods. The tertiary industries provide services such as retail, banking, education, health, tourism and transport. Australia's economy is dominated by tertiary industries, so most Australian businesses are service businesses.

Operations management in a tertiary business has particular features. The output is intangible, so it cannot be inspected before it reaches the customer. The customer is often present and takes part in the process, so staff behaviour, training and the physical setting matter a great deal. Demand is often uneven (a restaurant is busy on Saturday night and quiet on Tuesday), and because the service cannot be stored, a business must match staffing and capacity to expected demand. Quality is measured by things such as waiting time, accuracy, friendliness and customer satisfaction scores rather than by the number of defects.

The strategic role of operations

Operations is a strategic function because decisions made there decide how the business competes. Two broad strategies are used.

Cost leadership

A business pursuing cost leadership aims to have the lowest costs in its industry, so that it can charge lower prices than competitors or earn higher margins at the same price. The operations function supports this by producing large volumes to gain economies of scale, standardising the product, reducing waste, negotiating low prices from suppliers, using technology to cut labour per unit and keeping inventory low. A supermarket chain that buys in huge volumes and runs highly standardised stores is a typical example.

Good or service differentiation

A business pursuing differentiation offers something customers see as different from, and better than, rivals' offerings, which lets it charge a higher price. Operations supports this by giving attention to quality, design, customisation and reliability. A tailor who makes suits to measure, or an airline that competes on service and comfort, is differentiating. Costs per unit are usually higher, so the price premium has to be larger than the extra cost.

The two strategies pull in different directions. Pushing costs down tends to limit variety and customisation, and pushing quality up tends to raise costs. A business has to decide where it sits, and the operations strategy follows from that decision. This is why a cost-leadership business and a differentiating business in the same industry can run very different operations.

Operations and competitive advantage

A competitive advantage is something a business does better than its competitors that customers value and that is difficult to copy. Operations can create one through lower unit costs, faster delivery, more reliable quality, greater flexibility to meet individual orders, or a better design process that brings new products to market sooner. An advantage lasts only while competitors cannot match it, so a business sustains it by continuing to improve processes and by protecting what is distinctive, such as a patented process, a supplier relationship or staff skills.

Interdependence with other business functions

The four key functions of a business are operations, marketing, finance and human resources. They depend on one another, and decisions in one affect all the others.

• Operations and marketing: marketing researches what customers want and forecasts demand, and operations must be able to produce that quantity at the quality and price promised. A promotion that doubles orders will fail if production cannot cope. In the other direction, operations tells marketing what can be made and when.
• Operations and finance: finance provides the funds for equipment, inventory and expansion and sets the budgets operations works within. Operations produces the cost data finance uses to set prices and measure profit, and decisions such as holding more inventory tie up cash.
• Operations and human resources: human resources recruits, trains and rewards the staff who carry out the processes. The skills and number of staff set what operations can do, and changes in processes such as new technology need retraining or may lead to redundancies.

A business that treats the functions as separate departments with separate goals tends to produce conflict, for example when marketing promises delivery dates operations cannot meet. Coordinating them through shared objectives and communication lets the business pursue one strategy.