Nearly all businesses have two fundamental ways of increasing profits - increasing revenue by selling more products or services and reducing operational costs.
While finding ways to generate sales is often considered to be the more appealing aspect of running a business, reducing costs through strategic operations management can be just as important.
Given that businesses can lose 20% to 30% in annual revenue due to organizational inefficiencies, there's something to be said about running a tight ship and finding ways to save money where possible. It's precisely for this reason that operations management is essential to any company's ability to stay profitable.
Operations management is the multi-disciplinary administration of best practices to ensure the business achieves optimal levels of productivity and efficiency in the use of company resources.
The scope of operations management is largely concentrated on planning, organizing, and supervising the conversion of materials and labor (also known as inputs) into products and services (outputs) in the most optimal way possible.
Operations managers are directly responsible for managing business operations processes (which includes design, planning, and performance improvement) and operations strategy. Admittedly, an operations manager's role can vary from company to company, but it often centers on 3 primary areas-
- Human Resource Management (HRM) - Any organization needs people. A company employs staff members to perform the work necessary to create products or provide support to those who do.
- Asset Management - Assets, in this case, refer to the buildings, facilities, machinery, equipment, and stock - things directly and indirectly involved in operating the company.
- Cost Management/Reduction - A large percentage of the cost of producing goods and services is made up of the cost of procuring raw materials, keeping products in stock (i.e., inventory carrying costs), and delivering products to customers. Operations management seeks to drive down these costs by making business processes more efficient.
While there is no single accepted operations management methodology, most schools of thought will agree that its definition rests on the following foundations.
- Planning and Design - A big part of operations and project management is forecasting, planning, and designing processes based on current and future conditions.
- Processes - Repeatable processes are at the heart of producing and manufacturing goods and services.
- Cost Management - Product development costs such as materials, labor, and equipment account for a major portion of a company's operating expenses. The management professional must control these costs carefully.
- Efficiency - At some point, every organization will suffer from bottlenecks in production and unoptimized processes. Operations managers must troubleshoot these inefficiencies and work to improve them.
- Quality Control - Continuous quality assurance is integral to maintaining high customer satisfaction levels. Without it, the company will lose customer demand for its products and services.
- Technology - Research and development (R&D) are at the heart of these foundations. Leveraging technology allows organizations to beat competitors to the punch.
- Continuous Improvement - Organizations must constantly work to improve their processes and find new and more efficient ways of doing things, whether it's by hiring new people, using updated technology, or creating new product lines and phasing out poor-performing items.
- Profitability - Bringing these foundations together leads to a strong bottom line, better cash flow, and better margins.
With today's businesses becoming more complex than ever, it should come as no surprise that different organizations have different approaches to operations management.
The sheer breadth of departments and processes that fall under operations - from finance and human resources to inventory management - has given birth to a wide range of operations management methodologies. Here are four of the most popular examples.
1. Six Sigma
Six Sigma is a methodology that focuses on manufacturing processes and reducing defect rates. Pioneered by corporations like Motorola and GE, the idea behind Six Sigma is that traditional organizations operate at a 2 to 3 sigma level - equivalent to 66,800 to 308,000 defects per million opportunities. The goal is to achieve Six Sigma, which means having no more than 3.4 inefficiencies for every million opportunities.
There are plenty of tools for achieving Six Sigma process capability, but the DMAIC cycle is arguably the most popular for its distillation of manufacturing processes into 5 steps-
- Define - This involves identifying the underlying issue of a given manufacturing process. Operations managers must then decide how to improve the process and what improvement goals to set.
- Measure - This entails measuring a process's performance as-is to establish a baseline with the right metrics.
- Analysis - This involves understanding why the manufacturing process is underperforming.
- Improvement - Once the underlying causes of underperforming processes or business practices have been identified, operations managers can proceed to find potential solutions.
- Control - At this stage, improvements are implemented systematically and measured to compare new process performance with the old.
2. Business Process Management (BPM)
Business process management (BPM) is an operations management methodology that involves continual analysis, improvement, and automation of processes. BPM, however, isn't just a one-time effort but rather a methodology the organizations have to live by. Meaning, operations managers must make the conscious effort to constantly monitor areas for potential improvement.
Like Six Sigma, the BPM methodology follows a cycle of stages, which, again, can vary between organizations. The most accepted lifecycle is comprised of the following 5 stages.
- Business Process Design - All companies have processes, but not all of them will have this outlined on paper. The design stage of BPM involves understanding how a process works, where it starts, and where it ends.
- Business Process Modeling - Modeling is where a process's steps are written down on paper, usually in the form of a workflow diagram for simpler processes.
- Business Process Analysis - Next, process workflow is analyzed to identify if each step is optimized to create value. In many cases, steps can be automated with software for optimal efficiency.
- Business Process Monitoring - This involves tracking whether improvements to a process are generating positive changes.
- Business Process Optimization - In the modern context, optimization usually refers to automating processes for efficiency and to remove redundancy.
3. Business Process Reengineering (BPR)
In many instances, improving a process isn't the most efficient action a company can take. Business process reengineering (BPR) offers what can be a smarter alternative - rebuilding the process from the ground up.
In nearly all cases, this methodology involves using technology to make fundamental changes to a process. Ford's reengineering of their accounts payable department to cut costs offers a textbook example.
In the 1980s, the American automaker realized its accounts payable department was staffed by 500 people. In contrast, Mazda, a partner company, only had five people working in the same department. Ford embarked on a BPR initiative to optimize accounts payable by first analyzing the existing system.
It found that-
- When Ford's purchasing department processed a purchase order, accounts payable received a copy.
- When material control received goods/supplies, it sent accounts payable a copy of the delivery document.
- Vendors also sent an invoice to accounts payable. It thus fell to accounts payable to ensure the consistency of these three separate documents before issuing payments.
Unsurprisingly, this process was extremely labor-intensive. Ford would later reengineer this process by creating an online database to make it easier to process these different documents.
4. Supply Chain Management
Supply chain management is a major aspect of modern operations management. Many of today's businesses work with networks of suppliers, distributors, and retailers from different parts of the world, making it more challenging than ever to procure and deliver supplies, goods, and information between the entities that make up this supply chain.
The importance of supply chains means that disruptions caused by adverse weather, cybersecurity attacks, and transport problems could have disastrous results. According to a 2018 BCI report, 62% of companies said disruption to their supply chain had serious financial costs.
Supply chain management ensures that every touchpoint that a product or service goes through, from production and manufacturing to shipment and retail, is as efficient as possible.
Implementing an operations management strategy typically follows a three-stage sequence that goes as follows-
Phase 1- Operations Systems Planning
Phase one involves planning the 5 aspects of a company's operations systems-
- Outputs - Planning the company's products or services requires conducting market research to determine product-market fit, competitors, and optimal pricing.
- Capacity - After determining what products or services to produce, operations managers must specify how many of these outputs will be produced and how often.
- Facilities - Next, operations managers need to plan the facilities needed to support their production and manufacturing activities.
- Job Descriptions and Workforce - Operations managers must also determine the size of their production workforce. They must also decide what skills to look for in employees and what their responsibilities and roles will be.
- Workflows - The last step of operations systems planning is creating a system of tasks, processes, and chain of responsibilities necessary to produce the company's outputs.
Phase 2- Production Planning
The second phase is focused on planning the specific details of production, supply chain management, and quality control.
- Production - The conversion of inputs (materials and labor) into outputs (products and services) requires the operations manager to determine the necessary equipment, materials, and tasks to expedite production.
- Timing - Scheduling is a critical activity that ensures the company's operations systems have the right resources, people, and facilities at all times.
- Supply Chain and Inventory Management - As mentioned earlier, supply chain activities are a major component of a company's operations. A related operations function is inventory management, which requires striking a balance between keeping a sufficient number of products in stock and not incurring unnecessary inventory carrying costs from warehouse storage and wastage.
- Quality Control - Operations managers must have a clear system of maintaining optimal levels of input and production to ensure that products and services meet a high quality standard.
Phase 3- Productivity Management
The last phase of implementing an operations management strategy has to do with managing productivity in the organization. In the context of operations management, productivity is defined as the ratio between output volume and input volumes. Simply put, productivity refers to the efficiency by which resources like capital and labor are being used to produce products and services.
Many manufacturing companies measure productivity using the metric output per hour,' which looks at the number of units produced relative to an hour. This figure is calculated by dividing the number of units produced by the total number of employee hours within a certain timeframe.
For example, suppose an operations manager wants to calculate the total productivity of all employees in the company during January.
- The first step is to look at the number of units produced that month - for example, assume a company had an output of 50,000 units.
- Next, look at the total number of labor hours - assume it's 5,000 hours.
- This means the company's employees produced 10 units per hour in January (50,000 units divided 5,000 labor hours).
It is not an exaggeration to say that much of any organization's success and competitive advantage depends on effective operations management. To compete in volatile markets and provide customers with products and services in the most efficient way possible, businesses need a strategic approach to managing their operations processes.
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