What you need to know

Operations is the business function that transforms inputs into the goods and services a business sells. Its strategic role is to give the business a competitive advantage through either cost leadership (producing at the lowest cost in the industry, usually through economies of scale, standardisation and efficient technology) or differentiation (making the product distinct through quality, features, speed or customisation). Operations is interdependent with the other key functions: marketing tells operations what customers want and in what quantity, finance sets the budget for equipment and inventory, and human resources supplies trained staff. Businesses that produce goods usually have more standardised, capital-intensive operations; service businesses are typically labour-intensive and the customer is often present during production.

• Globalisation: global sourcing of inputs and global markets for outputs; more competition and longer supply chains.
• Technology: automation, robotics, computer-aided design and manufacturing (CAD/CAM) and data analytics improve speed, quality and cost.
• Quality expectations: customers expect reliability, durability and fitness for purpose.
• Cost-based competition: pressure to lower costs through economies of scale and lean production.
• Government policies and legal regulation: work health and safety, environmental rules, consumer law (enforced by the ACCC), trade policy.
• Environmental sustainability and corporate social responsibility (CSR): reducing waste, energy use and emissions, and treating suppliers' workers fairly.

The operations process

Other key strategies include new product or service design and development (driven by customer research and by technology), supply chain management (logistics, e-commerce and global sourcing to get inputs at the right time, cost and quality), outsourcing (contracting a function such as cleaning, IT or manufacturing to an external provider to cut costs and access expertise, at the risk of lower control), technology (choosing between leading-edge technology, which is new and can give a first-mover advantage but is costly and unproven, and established technology, which is cheaper and reliable), inventory management (holding stock allows quick delivery but ties up cash and risks obsolescence; just-in-time (JIT) minimises stock by ordering only as needed; FIFO and LIFO are methods of valuing stock that is used) and global factors such as economies of scale, scanning and learning from overseas competitors, and research and development.

Check yourself

1. Name the two generic strategies through which operations can create competitive advantage.
2. Classify each as a transformed or transforming resource: steel sheet; a welder; a customer waiting for a haircut.
3. A project has paths of 5 days, 9 days and 7 days. How long will the project take?
4. What is the main advantage and the main risk of just-in-time inventory management?
5. Which quality approach aims to prevent defects by building standards into every stage of production?
6. Give one advantage and one disadvantage of outsourcing a business function.

Answers: 1. Cost leadership and differentiation. 2. Steel sheet: transformed; welder: transforming; customer: transformed. 3. 9 days (the longest path is the critical path). 4. Advantage: lower holding costs and less cash tied up in stock; risk: a supply disruption stops production because there is no buffer stock. 5. Quality assurance. 6. Advantage: lower costs or access to specialist expertise; disadvantage: less control over quality, confidentiality or timing.