Managing control processes: operations management Chapter 13 Managing control processes: operations management Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Learning objectives After studying this chapter, you should be able to: Define organisational control, and describe the four steps of the control process Identify the main output controls, and discuss their advantages and disadvantages as means of coordinating and motivating employees Identify the main behaviour controls, and discuss their advantages and disadvantages as means of coordinating and motivating employees Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Learning objectives (cont.) Explain the role of operations management in achieving superior quality, efficiency and responsiveness to customers Describe what customers want, and explain why it is so important for managers to be responsive to their needs Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Organisational control Managers monitor and regulate how efficiently and effectively an organisation and its members are performing the activities necessary to achieve organisational goals Keeping an organisation on track, anticipating events, changing the organisation to respond to opportunities and threats Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Organisational control (cont.) Managers must monitor and evaluate Is the firm efficiently converting inputs into outputs? Are units of inputs and outputs measured accurately? Is product quality improving? Is the firm’s quality competitive with other firms? Are employees responsive to customers? Are customers satisfied with the services offered? Are our managers innovative in outlook? Does the control system encourage risk-taking? Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Control systems Formal, target-setting, monitoring, evaluation and feedback systems that provide managers with information about how well the organisation’s strategy and structure are working A good control system should be flexible so managers can respond as needed provide accurate information about the organisation provide information in a timely manner Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Three types of control Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Types of control Feedforward controls Concurrent controls Used in the input stage of the process Managers can anticipate problems before they arise Managers can give rigorous specifications to suppliers to avoid quality problems with inputs Concurrent controls Give immediate feedback on how inputs are converted into outputs Allows managers to correct problems as they arise Managers can see that a machine is becoming out of alignment and fix it Concurrent control at heart of total quality management Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Types of control (cont.) Feedback controls At the output stage provide after-the-fact information managers can use in the future Customers’ reactions to products are used to take corrective action in the future Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Control process steps Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

The control process 1. Establish standards, goals or targets against which performance is to be evaluated Managers at each organisational level need to set their own standards Standards must be consistent with the organisation’s strategy (i.e. for a low-cost strategy, standards should be focused closely on reducing costs) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

The control process (cont.) 2. Measure actual performance Managers can measure outputs resulting from worker behaviour or they can measure the behaviour themselves The more non-routine or complex the task, the harder it is to measure performance or output, causing managers to measure an employee’s behaviour (e.g. that an employee comes to work on time) rather than the employee’s output Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

The control process (cont.) 3. Compare actual performance against chosen standards Managers must decide if performance actually deviates; often, several problems combine creating low performance 4. Evaluate result and take corrective action if standards are not met Standards may have been set too high or too low Workers may need additional training or equipment. This step is often hard since the environment is constantly changing Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Organisational control systems Two key organisational control systems used to pursue efficiency, quality, innovation and customer responsiveness 1. Output (performance) control that includes financial measures organisational goals operating budgets 2. Behaviour control that includes direct supervision management by objectives bureaucratic control (rules and standard operating procedures: SOPs) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Output control Financial measures of performance Profit ratios Measures of how efficiently managers convert resources into profits—return on investment (ROI) most commonly used Liquidity ratios Measures of how well managers protect resources to meet short-term debt—current and quick ratios Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Output control (cont.) Leverage ratios Activity ratios Measures of how much debt is used to finance operations—debt-to-asset and times-covered ratios. ‘Highly leveraged’ means more debt than equity Activity ratios Measures of how efficiently managers are creating value from assets—inventory turnover, days sales outstanding ratios Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Four measures of financial performance 1. Profit ratios: Return on investment = Gross profit margin = Net profit before taxes Total assets Sales revenues – cost of goods sold Sales revenues 2. Liquidity ratios: Current ratio = Quick ratio = Current assets Current liabilities Current assets – inventory (Continued) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Four measures of financial performance (cont.) 3. Leverage ratios: Debt-to-assets ratio = Times covered ratio = Total debt Total assets Profit before interest and taxes Total interest charges 4. Activity ratios: Inventory turnover = Days sales outstanding = Cost of goods sold Inventory Accounts receivable Total sales 300 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Output control Organisational goals Each division within the firm is given specific goals that must be met in order to attain overall organisational goals Goals should be specific and difficult, but not impossible, to achieve (stretch goals) Goal setting and establishing output controls are management skills that are developed over time Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Organisation-wide goal setting Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Output control Operating budgets Blueprints state how managers intend to allocate and use the resources they control to attain organisational goals effectively and efficiently Each division is evaluated on its own budgets for cost, revenue or profit Managers are evaluated by how well they meet goals for controlling costs, generating revenues or maximising profits while staying within their budgets Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Problems with output control Managers must create output standards that motivate at all levels They must be careful not to create short-term goals that motivate managers to ignore the future If standards are set too high, workers may engage unethical behaviours to attain them Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Behaviour control Direct supervision Managers who directly manage can teach, reward, lead by example and take corrective action as needed Can be very expensive since only a few workers can be personally managed by one manager and many managers are needed Close supervision demotivates workers who desire less scrutiny and more autonomy, causing them to avoid responsibility Direct supervision is difficult to do effectively in complex job settings Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Management by objectives (MBO) A goal-setting process in which managers and subordinates negotiate specific goals and objectives for the subordinate to achieve and then periodically evaluate their attainment of those goals Specific goals are set at each level of the firm Goal-setting is participatory with manager and worker Periodic reviews of subordinates’ progress toward goals are held (pay raises and promotions are tied to goal attainment) Teams are also measured in this way with goals and performance measured for the team Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Bureaucratic control Control through a system of rules and standard operating procedures (SOPs) that shapes the behaviour of divisions, functions and individuals Rules and SOPs tell the worker what to do (standardised actions) so outcomes are predictable There is still a need for output control to correct mistakes Bureaucratic control is best used for routine problems in stable environments Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Bureaucratic control (cont.) Problems with bureaucratic control Rules easier to make than discarding them, leading to bureaucratic ‘red tape’ and slowing organisational reaction times to problems Firms become too standardised and lose flexibility to learn, create new ideas and solve new problems Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Operations management and competitive advantage The management of any aspect of the production system that transforms inputs into finished goods and services Production system That system that an organisation uses to acquire inputs, convert inputs into outputs and dispose of the outputs (goods and/or services) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Purpose of operations management Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Improving responsiveness to customers Organisational outputs consumed by customers ALL organisations have customers Without customers, organisations cease to exist Managers must find and promote strategies to meet customer needs Organisations must define their business in terms of the customer’s needs being satisfied, NOT in terms of goods or services produced Measure how the business is performing at an emotional level Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

What do customers want? Wants vary but some universal product/service attributes do exist that most customers want All things being equal, customers want a lower price a higher-quality product/service quick service good after-sales support and service products with more features products and services customised to user’s unique needs Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Other things are, however, NOT equal Customer wants raise price Demand for attributes conflicts with demand for low price There is a trade-off between price and attributes Organisational production systems limit level of responsiveness to customers Managers try and shift price/attribute curve to provide more attributes for same price or same attributes for a lesser price, or more attributes for a lesser price! Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

The price–attribute relationship Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Kroger’s price–attribute relationship in 1991 and 2001 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Designing production systems responsive to customers Managers try and design production systems to produce outputs with attributes customers desire Recently adopted operations management techniques (production systems) include Total quality management (TQM) Flexible manufacturing systems Just-in-time (JIT) inventory IT systems and IT technologies Managers must NOT, however, design production systems that are economically unsustainable Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Improving quality High-quality products are reliable, dependable and satisfying Quality applies to manufacturing and service sectors Higher-quality product shows responsiveness to customers High-quality products build ‘brand’ and reputation More can be charged for reputable, quality product Higher quality also increases efficiency, lowers operating costs and boosts profits Defective products and substandard services cost to fix Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Impact of increased quality on organisational performance Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Total quality management (TQM) Focuses on improving quality of products/services All functional activities to be directed to above goal Organisation-wide management programme Deming, Juran and Crosby develop TQM concept Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Ten steps to TQM Build commitment to quality Focus on the customer Find ways to measure quality Set goals and create incentives Solicit input from employees Identify defects and trace them to their source Introduce just-in-time inventory Work closely with suppliers Design for ease of manufacture Break down barriers between functions Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Improving efficiency Fewer inputs required to produce same output Efficiency measured in two ways Total factor productivity, i.e. how well resources such as labour, energy, capital, materials are used to produce output To compute total factor productivity all inputs must be converted to a common unit such as dollars Exact contribution of each input difficult to compute However, can focus on specific measure of efficiency known as partial productivity, to measure efficiency of an individual unit (labour, energy) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Other efficiency initiatives Facilities layout Grouping of equipment, workstations increase efficiency Flexible manufacturing Reduces set-up costs Increases labour’s ‘on task’ time Allows greater customisation of products Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Just-in-time (JIT) inventory and efficiency Savings come from Increasing inventory turnover Reducing inventory holding costs Freeing up capital Drawbacks to JIT Reduction of safety buffer in case of shortages Less ability/time lag to respond to increased demand Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Self-managed work teams (SMWT) and efficiency Typically 5 to 15 persons Produce an entire product, not just parts of it Members learn all tasks, move from job to job Members assume responsibility for work schedules, new hires, ordering materials Members feel more ‘empowered’ Supervisors eliminated, costs saved Flatter organisational structure Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Business process reengineering (BPR) and efficiency BPR: Fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical measures of performance including cost quality service speed All managers have responsibility to continuously improve and reengineer processes Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Operations management: issues Introduction of improved methods requires a shift in organisational culture New systems and processes not a panacea that fixes all ‘ills’ Significant challenge in introducing new ways of working Ethical implications also posed by new methods in terms of longer hours, greater effort or even reduction in employee numbers Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Summary Organisational control processes monitor efficiency and effectiveness Control consists of four steps Establishing standards Measuring actual performance Comparing performance against standards Evaluating results and correction if necessary Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Summary (cont.) Output control: main measures Financial measures Organisational goals Operating budgets Behaviour control shapes behaviour and includes Direct supervision Management by objectives (MBO) Bureaucratic control (rules and SOPs) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Summary (cont.) Operations management and competitive advantage Managers try to improve quality, efficiency, responsiveness Products designed with attributes wanted by customers Enhanced systems built to satisfy customer demands However, there are limits to organisational responsiveness Managers seek to improve quality TQM focuses on improving products and services Improving efficiency requires a range of continuing initiatives Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas