Select your language

Suggested languages for you:
Log In Start studying!
StudySmarter - The all-in-one study app.
4.8 • +11k Ratings
More than 3 Million Downloads
Free

All-in-one learning app

  • Flashcards
  • NotesNotes
  • ExplanationsExplanations
  • Study Planner
  • Textbook solutions
Start studying

Operational Management

Save Save
Print Print
Edit Edit
Sign up to use all features for free. Sign up now
X
Illustration You have already viewed an explanation Register now and access this and thousands of further explanations for free

Want to get better grades?

Nope, I’m not ready yet

Get free, full access to:

  • Flashcards
  • Notes
  • Explanations
  • Study Planner
  • Textbook solutions
Business Studies

Operations are an essential function of a business. Operations include the process of converting a wide variety of inputs into finished outputs of goods and services that are ready to be used by the end consumer. Turning raw inputs into finished goods involve many different tasks like scheduling, budgeting, capacity design, layout design, and keeping up to date with the inventory. These tasks are all operational responsibilities within the business. Let's take a look at how all these tasks come together and provide the basis for operations management.

Operational management meaning

Operational management involves the oversight of all tasks related to achieving the highest possible level of operational efficiency.

The meaning of operations management is based on how the individual business defines it. For some businesses, this might be creating a final product out of raw materials and for others, like a social networking site, it might be the process of bringing people closer together. For some, the operational processes can either be labour intensive or capital intensive.

Nevertheless, operations management can be defined and analysed through the 4V model which includes:

  • The volume of output,

  • The variety of output,

  • The visibility of production,

  • The variability of demand.

Goals of operational management

There are multiple goals businesses aim to meet through operations management. The main objectives include:

  1. Improving customer service to increase brand loyalty, word-of-mouth promotion and efficiency.

  2. Allow for effective quality management and notice quality issues before they reach the customer.

  3. Work effectively with suppliers and optimise supplier relationships.

  4. Improve capacity utilisation to optimise maximum capacity and reduce costs.

Functions of operations management

Through operations management, businesses can evaluate their operational performance.

Operational performance can be defined as the extent to which a business is able to turn outputs into inputs as efficiently as possible.

Operational performance can be evaluated through operational metrics.

Improving operational performance can be done by the operations management process of setting clear goals, analysing performance, making decisions based on the analysis, and evaluating future actions to take. Let's take a look at those steps

Setting goals

In order to improve operational performance, a company has to set operational objectives. This is important because it allows the company to see whether it has met the set targets and evaluate what it should do differently in the future if these targets are not met. These objectives, like all other business objectives, should be achievable and measurable. The main operational goals include:

  • Setting cost targets like lowering unit costs.

  • Setting quality targets like increasing customer loyalty.

  • Setting response targets like increasing capacity utilisation.

  • Improving flexibility like reducing delivery time.

  • Improving dependability, like improving brand loyalty.

  • Setting environmental targets like lowering emission rates.

Analysing operational performance

Operational analysis includes assessing how the operations function is performing in relation to set targets.

In other words, it's an analysis of how efficiently the organisation turns inputs into outputs. The analysis process includes collecting data on current operational performance and transforming this raw data into useful information that management can use to make informed decisions.

The type of data, or operational metrics, that can be used for analysis include indicators like:

  • Average response time

  • Employee absenteeism

  • Employee satisfaction

  • Customer satisfaction

  • Number of product defects

  • Machine downtime rate

  • Lead conversion ratio

  • Operating profit margin

These rates are then used to evaluate how projects are performing and whether previous problems have been addressed sufficiently. Operations performance indicators also measure the overall efficiency of the entire production process.

Actions to take / decisions

Once the analysis is complete, there are a number of decisions operations managers have to make regarding the improvement of operational performance. Areas to consider include operations and production efficiency, quality management, and inventory and supply chain management.

Increasing efficiency and productivity

Operational efficiency measures the profitability of a company based on its operations.

Operational efficiency can be measured by comparing the profits earned by the company in relation to its operational costs. The goal here for operation managers is to maximise profits, whilst decreasing all costs associated with operating the business.

Lean production is a type of production that focuses on reducing waste - anything that does not add value for the customer. Lean production can be used to decrease costs and make the operational process more efficient.

Production efficiency measures how effectively inputs are being converted into outputs.

It can be measured by either the output of an employee (ie output per hour), by the output of machinery or by the unit cost of a finished product. This measurement is important because it helps management understand whether the production process is optimised or whether there are areas of operation in which the company could improve efficiency. For example, production efficiency can be increased by investing in new (more efficient) technology, which increases a machine's output per hour.

Improving quality

Improving quality is another important factor in operations management. Key indicators of quality include reliability, functionality, consistency, and the durability of a product. The role of quality control is to make sure that all products follow a certain production process and meet the standards set by the company and expected by end consumers. Methods of quality control include total quality management (TQM), which assures that there are no product defects; quality assurance which makes sure all stages of the production process lead to high-quality products; in addition to those regulations set by the government. These processes ensure the safety of both employees and customers.

Managing inventory and supply chains

Effective management of inventory and supply chains also leads to more efficient operations. The main goal of optimal operations is to match the supply of products to customer demand. This can be achieved by outsourcing, using part-time employees or producing to order.

Just in time (JIT) is a form of lean production that can be used as an inventory management tool. JIT is a type of pull production - where production only starts when it is necessary. Instead of producing the maximum amount of a product, production waits for a signal, such as an order, before starting the production of the product.

This means that costs can be decreased, as overproduction and waiting time is also decreased, increasing production efficiency and overall operational performance.

Operational Management - Key takeaways

  • The operations function of a business includes the process of converting a wide variety of inputs into finished outputs of goods and services that are ready to be used by the end consumer.
  • Operations management involves the oversight of all tasks related to achieving the highest possible level of operational efficiency.
  • Operations management can be defined and analysed through the 4V model.
  • The goals of operations management include improving customer service, effective quality management, optimising supplier relationships and improving capacity utilisation.
  • Operational objectives can include cost targets, quality targets or environmental targets.
  • Operational analysis includes assessing how the operations function is performing in relation to set targets.
  • Operational metrics that can be used for analysis include measurements like average response time, number of product defects per batch or average employee absenteeism.
  • Operational efficiency measures the profitability of a company based on its operations.
  • Production efficiency measures how effectively inputs are being converted into outputs.
  • Lean production is a type of production that focuses on reducing waste - anything that does not add value for the customer.
  • Lean production is used to improve operational performance.
  • Just in time (JIT) is a form of lean production. JIT is a form of inventory management - where production only starts when it is necessary.

Frequently Asked Questions about Operational Management

Operations management includes the organisation and decision-making behind converting physical resources and labor into products and services in the most efficient way possible, to maximise profitability

The activities and goals of operations management include: improving customer service; allowing for effective quality management; optimising supplier relationships; and improving capacity utilisation.

An operations manager has to set goals, analyse operational performance and make a number of decisions regarding the improvement of operational performance.

The purpose of operations management is to improve the operations function of the business. The goal of operations managers can range from improving customer service and brand loyalty to improving capacity utilisation and reducing costs.

This depends on the individual business, however, operations management can be defined and analysed through the 4V model which includes:


  • The volume of output, 

  • The variety of output,

  • The visibility of production,

  • The variability of demand.

Final Operational Management Quiz

Question

What is operational efficiency?

Show answer

Answer

Operational efficiency measures the profitability of a company based on its operations.

Show question

Question

What is operations management?


Show answer

Answer

Operations management involves the oversight of all tasks related to achieving the highest possible level of operational efficiency.

Show question

Question

What is production efficiency?


Show answer

Answer

Production efficiency measures how effectively inputs are being converted into outputs.

Show question

Question

Name an example of how businesses can improve their operational performance. 


Show answer

Answer

Lean production.

Show question

Question

Lean production focuses on: 

Show answer

Answer

Reducing waste

Show question

Question

How does waste impact a business? 


Show answer

Answer

Waste increases operational costs and decreases efficiency.

Show question

Question

Why is excess stock disadvantageous for a business?


Show answer

Answer

Excess stock increases costs, as it costs money to store goods.

Show question

Question

What does lean production try to eliminate? 


Show answer

Answer

Overproduction, excess stock, waiting time and faulty products.

Show question

Question

What is a defective product?


Show answer

Answer

A product that does not reach the promised level of quality.

Show question

Question

What is pull production?


Show answer

Answer

'Pull' is a method of production where the production of a product only starts when it is necessary (when the product has been ordered).

Show question

Question

What are the advantages of just in time production? 


Show answer

Answer

The advantage of just in time production is that it eliminates waste. This means that costs can be decreased, as overproduction and waiting time is also decreased, increasing production efficiency and overall operational performance.

Show question

Question

Name two types of operational objectives. 


Show answer

Answer

  • Cost targets

  • Quality targets

Show question

Question

Name an example of a cost target. 


Show answer

Answer

A cost target could be lowering unit costs, increasing the output of production and labor productivity.

Show question

Question

Quality targets can be measured by: 

Show answer

Answer

Defect rates

Show question

Question

How can technological change impact operational performance?


Show answer

Answer

Technological change can lead to new, more efficient production technologies. This can be beneficial for the company if they adopt the new technology and can increase production or cut their long-term costs of production.

Show question

Question

What is inventory?

Show answer

Answer

Inventory is the stock of goods by a company.

Show question

Question

What is not a type of inventory?


Show answer

Answer

Machine to produce the products

Show question

Question

Why do companies store inventory? 


Show answer

Answer

Suppliers typically offer discounts to companies who buy their products in bulk. By ordering a larger quantity, the company can benefit from a better buying cost. This transfers to lower prices and helps the company to gain a competitive advantage in the market.

Show question

Question

What happens if the company keeps too much stock?


Show answer

Answer

Excessive storage costs.

Show question

Question

What is working capital?


Show answer

Answer

Working capital is the money used to pay for short-term expenses (within a year) such as inventory, short-term debts, and day-to-day operations.

Show question

Question

How does customer demand affect the level of inventory? 


Show answer

Answer

  • The demand can be unexpected or seasonal

  • Unfulfillment of the demand can cost the company dearly. 

Show question

Question

How inventory can lose value?

Show answer

Answer

The longer a product stays in inventory, the higher the risk of it not being sold. Also, there’s the risk of perishable inventory which may spoil quickly and require replacement.

Show question

Question

What are some types of inventory costs?


Show answer

Answer

ordering costs, storage costs, and shortage costs.

Show question

Question

What are the shortage costs?  


Show answer

Answer

Shortage costs may come from the loss of customers who choose to make their purchases elsewhere, loss of sales for orders not fulfilled, and overnight shipping to acquire inventory not in stock.

Show question

Question

What are ordering costs?

Show answer

Answer

Ordering costs are costs for procuring raw materials, which include the cost of purchase and the cost of inbound logistics.

Show question

Question

How to minimize ordering costs?

Show answer

Answer

To minimize the ordering costs, companies often employ the technique of EOQ (Economic Order Quantity) to place the optimal order that incurs the lowest cost. 

Show question

Question

What are storage costs?

Show answer

Answer

Storage costs are the costs for storing and maintaining raw materials and goods.

Show question

Question

What is outsourcing?

Show answer

Answer

 Inventory is the stock of goods by a company.

Show question

Question

What are the objectives of outsourcing?


Show answer

Answer

Save costs

Show question

Question

How does outsourcing save costs for the company? 


Show answer

Answer

Companies can save costs by hiring cheap labor or utilizing capacity, technology, equipment from the outsourced company.

Show question

Question

What does onshoring mean?


Show answer

Answer

The act of hiring a third-party provider from your own country

Show question

Question

What does offshoring mean?


Show answer

Answer

The act of hiring a third-party provider from abroad

Show question

Question

What are the disadvantages of offshoring? 


Show answer

Answer

 language, culture, time zones, poor quality, lack of technology and infrastructure.

Show question

Question

What does nearshoring mean?


Show answer

Answer

The act of hiring a third-party provider in neighboring countries.

Show question

Question

What are some disadvantages of outsourcing?


Show answer

Answer

relationship complications, communication, lack of control, security risks, and ethical issues.

Show question

Question

What are security risks of outsourcing?

Show answer

Answer

- Loss of important data when exchanging information with third-party providers

- Risk of providers misuse or accidentally expose confidential information

Show question

Question

What are ethical issues of outsoucing?

Show answer

Answer

Exploitation of cheap labor: pay below minimum wage, hazardous working environment

Show question

Question

What are factors influencing the decision of outsourcing vs in-housing? 


Show answer

Answer

cost, quality, speed, and flexibility.

Show question

Question

How does quality affect the company's decision to outsource or produce the product in-house?

Show answer

Answer

Companies should complete the task on their own if it’s easier to manage quality and adjust problems that arise. On the other hand, if the third-party provider is equipped with better equipment and experience, it might be better to outsource.

Show question

Question

Name an example of outsourcing

Show answer

Answer

Google is a gigantic technology company whose business not only includes search engines but also extends to providing hardware and software solutions. To improve efficiency, they outsource non-core activities such as administration and IT work. For instance, a lot of development work, email support, and phone support are carried out by staff all over the world.

Show question

Question

What does nearshoring mean?

Show answer

Answer

Nearshoring means outsourcing from neighboring regions or countries. 


Show question

Question

What is the disadvantage of onshoring?

Show answer

Answer

The disadvantage is higher prices for task completion. For example, in countries like the USA or Western Europe, the living costs are relatively high, and companies would not be able to gain price competitiveness through domestic outsourcing.

Show question

Question

What do operational objectives define?

Show answer

Answer

 They define the task that needs to be accomplished in order to achieve goals.  


Show question

Question

How do operational objectives differ from strategic objectives?

Show answer

Answer

Operational goals vary from strategic goals and concentrate more on ‘how’ instead of ‘what’.


Show question

Question

What is the distinction between operational and strategic objectives?


Show answer

Answer

A major distinction between operational and strategic goals is the time duration, operational objectives are short-run and strategic objectives are long-run goals.


Show question

Question

What are operational and strategic objectives aligned with?


Show answer

Answer

Strategic goals are associated with mission and vision and operational goals are associated with strategic goals.

Show question

Question

Who is responsible for strategic and operational objectives?


Show answer

Answer

Strategic objectives are the responsibility of top managers and line managers for operational goals.

Show question

Question

What is the role of the operational objective if the strategic goal is to have cost-efficient production?

Show answer

Answer

Operational goals can be to ask the suppliers if they can reduce prices of raw materials, modify employee training in order to escalate efficiency, thorough assessment of the machinery to see if it is outdated or needs an upgrade.

Show question

Question

Why are operational objectives significant?


Show answer

Answer

They have a significant role to make sure that the business achieves its strategic goals.

Show question

Question

How is setting operational objectives beneficial for employees?

Show answer

Answer

Setting these goals especially will deliver guidance and direction to the workforce.

Show question

60%

of the users don't pass the Operational Management quiz! Will you pass the quiz?

Start Quiz

Discover the right content for your subjects

No need to cheat if you have everything you need to succeed! Packed into one app!

Study Plan

Be perfectly prepared on time with an individual plan.

Quizzes

Test your knowledge with gamified quizzes.

Flashcards

Create and find flashcards in record time.

Notes

Create beautiful notes faster than ever before.

Study Sets

Have all your study materials in one place.

Documents

Upload unlimited documents and save them online.

Study Analytics

Identify your study strength and weaknesses.

Weekly Goals

Set individual study goals and earn points reaching them.

Smart Reminders

Stop procrastinating with our study reminders.

Rewards

Earn points, unlock badges and level up while studying.

Magic Marker

Create flashcards in notes completely automatically.

Smart Formatting

Create the most beautiful study materials using our templates.

Sign up to highlight and take notes. It’s 100% free.