2.4 Operations management links to other functional areas
2.4.1 Corporate strategy and the business plan
The business plan arguably is the most important document and directional tool for a business. The business plan usually is made up of the following three layers.
The strategic plan. This plan typically looks three to five years into the future. It normally is reviewed annually, and sometimes quarterly, depending on market conditions. The plan, from an operations view, is to project plant and equipment needs and corresponding funding requirements.
The annual operating plan (AOP). The AOP is the financial direction for the company and typically projects 12 months into the future. This normally is the link to the top management sales and operations planning process. Lists of assumptions usually are documented and support the logic of the AOP. It typically is fixed or locked for measurement purposes, but often undergoes quarterly updates.
Business imperatives. This list of objectives takes the strategic plan and the AOP and outlines specific goals and priorities to ensure they are executed as planned, if possible.
2.4.2 Operations and enterprise economics
Enterprise economics refers to the financial influences on spending and investment in new product development and capital spending and improvement in enterprise operation. From a supply chain perspective, these same influences can impact the functionality of product flow and data streams.
.1 Value creation
Value creation is taking raw materials or knowledge and converting it into a product or service that has more value to the customer than the original material or data. Value is created using transformational processes. (See section 2.1.1.)
.2 Financial accounting
Profit is the most significant measure of business success. Financial accounting is the scorekeeping process of determining the success or failure rate of a business. With information collected in real time in many cases, data typically is compiled and summaries distributed on a monthly basis, though some organizations do this more frequently. Following are some terms and considerations involved in financial accounting.
Income/expense. Income is revenue less expenses. Revenue is the gross currency value coming in from the sales of goods and services and expenses are all the costs of doing business.
Cost of goods sold. Cost of goods sold, otherwise known as cost of sales, consists of three elements: direct labor, direct material, and overhead. Overhead refers to indirect expenses from support materials and activities, such as process engineering, materials management, and production-wearable items.
Gross margin. Gross margin is the balance after cost of goods sold is subtracted from revenue.
Balance sheet. The balance sheet is a statement of financial position, based on the accounting equation of assets being equal to liabilities plus owners’ equity.
Return on assets. Return on assets is a financial measure comparing wealth created from a project or investment to the assets required to make that wealth.
Inventory turns. The inventory turns calculation is one popular measurement of inventory management. It is a comparison calculation between existing inventory and the expected annual usage. It can be calculated on a specific stock-keeping unit by volume, but is more frequently done at the aggregate inventory level calculated on the basis of value. Inventory normally is an asset on the balance sheet. Some companies use the inverse of inventory turns, resulting in an indication of the amount of time it would take for current inventory to run out, often expressed as days or weeks of supply or days inventory forward.
Capital asset management. Capital assets refers to large property such as land, machinery, buildings, and other equipment. Capital asset management is the planning and control of the use of these assets. This can lead to the sales of unused assets or marketing plans to increase demand for other assets, which would improve utilization.
Cash management. Cash is the lifeblood of an operation. It enables employees as well as raw material and service providers to be paid. Managing cash is making sure the amount of cash flow coming in is greater than or equal to the cash flow going out. This adjustment leverage can come anywhere from holding payment on accounts payable to delaying purchases. It can also be adjusted with revenue impact activities such as discounts for quick payment of invoices and discounting to generate quick sales or collection of accounts receivable.
3 Break-even analysis
Break-even analysis is the comparison of revenues and expenses of both fixed and variable costs in order to identify the point at which revenues cover all expenses. When comparing the costs associated with different production methods, as in manual versus automation, the volume where the cost is the same is referred to as the point of indifference. Break-even analysis finds the break-even point, which is the volume at which revenues exceed total costs.
.4 Best operating level (BOL)
BOL is the capacity for which a process was designed and thus the volume of output at which average unit cost is minimized. Full theoretical capacity often is not sustainable for long periods. The BOL can be a complex trade-off between the allocation of fixed overhead costs and the cost of overtime, equipment wear, defect rates, and more. (See section 2.1.6.)
.5 Cost accounting
Cost accounting is the process of keeping track of all costs of building products, labor, material, overhead, and variances. Activity-based costing (ABC) is cost accounting using actual costs rather than standard costs with variances. ABC accounting requires touch points throughout the process to pick up actual costs as they happen.
Cost analysis and control is done within cost accounting to assure the best overall financial results. Consideration of how operations management decisions regarding the location and valuation of products and services affect financial interests such as taxes and tariffs helps ensure the best financial benefit for the firm. There is also sufficient decision-making freedom in accounting practices that the impact of purely financial decisions, such as the method for valuing inventory or depreciating capital, should be understood fully to ensure such decisions benefit the firm.
Marketing’s responsibility is to affect customer behavior and grow the business. There are two common ways to grow a business: attracting new customers, and convincing existing customers to buy more. Marketing is involved in both areas, affecting customer behavior through promotions, pricing, distribution channels, and product design, and they are strongly involved in new product and service innovation.
2.4.4 Human resources
Human resources is responsible for the human component of company assets. High-potential employees can create higher levels of value to the company through investments in human capital. This includes investments in skills, knowledge, and availability. Following are some concepts involved in human resources.
Team building. Team building is the act of getting groups of people working together in sync by building on the interaction of different skills of team members, thus making the teams more effective within the company.
Training. Training is an important function of human resources, as people are provided with the instruction to perform job tasks. Training properly explains to people the transactions and processes they will use.
Education. Education is the “why” and the “what” of learning, where training is the “how to.” In inventory accuracy classes, for example, education would describe why it is worth the effort to maintain accurate inventory balances, while training only explains how to perform the transactions.
Development. The goal of investments in human capital is employee development. Investments in education and training result in employees who are more prepared to solve problems, lead projects and people, and generally bring value to the company. Development prepares employees for their next positions and is critical to succession planning for the firm’s sustainability and for long-term employee loyalty.
Empowerment. Empowerment relates to workers having authority, such as to stop a production line if there is a quality problem or to give a customer an on-the-spot refund if service was not satisfactory. Through empowerment, employees become involved and take ownership of their processes.
Rewards. Rewards refer to mechanisms designed to motivate workers to work efficiently. Approaches include piece rate and group incentive programs, and mechanisms for public recognition of outstanding performance.
2.4.5 Organizational development and managing change
Organizational development means carrying out a strategy to build high levels of effectiveness of an organization through proper accountability, improved levels of skill and knowledge, and strong communication of corporate objectives. Agents of change aid in overcoming resistance to new methods and assisting in implementation to facilitate organizational growth.
Dimensions of change. As markets, technology, cultures, and customer expectations change, so does business. Change happens on many levels and includes employee expectations, management roles, technology improvements, and customer expectations. Change happens earlier in the cycle when leaders recognize the need faster.
Drivers and obstacles. Drivers are forces that lead people to change, such as a financial crisis, a champion or trailblazer leading others, technology that shifts a market toward different designs in products, and laws such as ecology-supporting legislation. Obstacles to change are always present. They include cultural norms, lack of training, lack of leadership, and more physical obstacles such as lack of resources.
Overcoming resistance. Overcoming resistance is a function of communication and education. If a good idea is not accepted, it generally is because people do not consider it a good idea. Employee involvement should begin early in the planning of the new state to aid in overcoming resistance.
Human behavior and motivation. Humans are interested in identifying their personal gain or loss as it pertains to requested or required actions. The level, direction, and persistence of effort people are willing to expend is related to the expected rewards and punishments for their actions. The importance placed on a personal con-sequence is based on the individual’s needs and can range from money for food to personal growth and development. Therefore, people are more likely to be motivated to solve problems when they are rewarded for trying; these rewards are not necessarily financial. Recognition, personal growth, and satisfaction can be the best motivators.