1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

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

8. 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

9. 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

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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

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

29. 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

30. 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

31. 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

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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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

42. 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

43. 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

44. 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

45. 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

46. 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

47. 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