OPERATIONS STRATEGIES
A LOOK AT THE SYLLABUS
PERFORMANCE OBJECTIVES

What do we consider to be the key areas of
interest when considering our operations
success?
PERFORMANCE OBJECTIVES
Objective
Description
Quality
Quality is a measure of excellence or a state of
being free from defects, deficiencies, and significant variations
Speed
How quickly does production take and how quickly can it respond to
changes in demand?
Dependability
How uniform, consistent and reliable a businesses products are.
Flexibility
How quickly operations processes can adjust to changes in the
market?
Customisation
Refers to creation of individualised products to meet the specific
needs of customers
Cost
Minimisation of expenses so that the operations function can be
completed as cheaply as possible.
PERFORMANCE OBJECTIVES
Qantas Sales Depend Foreign
Customers Calling
COME UP WITH SOME KPIS FOR EACH
Objective
Examples of KPIs
Quality
- Number of defects in production
- Amount of warranty returns processed.
- Awards won.
Speed
- Output per hour/day/week
- lead times (time between order and delivery)
Dependability
- How uniform/identical the products are
Flexibility
- Variation in the output on a daily basis (can you tolerate volatile
orders?)
Customisation
- Number of unique orders processed.
Cost
- Total production costs
- Costs per unit of output
- Staff overtime wages level
- Total staff efficiency
STRATEGY 1: OUTSOURCING
Outsourcing is the use of external providers to
perform non-core business activities on your
behalf in exchange for a fee.
 Usually this is done because they can do the
tasks required at a lower cost than you can.

WHAT TYPES OF THINGS CAN BE OUTSOURCED?
Accounting
 IT
 manufacturing
 Legal advice
 Pretty much anything nowadays

OUTSOURCING VIDEO

http://www.youtube.com/watch?v=rYaZ57Bn4
pQ
OUTSOURCING – PROS AND CONS (P.91)
Advantages
Disadvantages
- Potential cost savings
- Superior quality available from the
outsourcer because this work represents
their core competency.
- Reduced employment on-costs
(superannuation, workers compensation
insurance).
- increased accountability over the area
that has been outsourced.
- Access to skills/qualifications that are
outside the realm of the current staff.
-By outsourcing non-core elements of the
business, it can better focus on its core
duties and drive improvements.
- Service Level Agreements (SLAs) can
provide compensation to your firm if the
quality of work is poor.
- Loss of control over the outsourced
process.
- loss of ability in the outsourced area
within the company. (i.e. Once you
outsource your IT systems, you will never
be able to reintegrate them back into the
company without great expense and time).
Loss of corporate memory
- Organisational resistance to change from
employees
- Payback period and costs: The first few
years of outsourcing may be more
expensive as you have to also consider the
redundancy payments due to original
workers no longer needed.
- Privacy breaches may occur because
customer information is stored in another
providers property.
OPERATIONS STRATEGIES 2: INVENTORY
MANAGEMENT

Inventory Management refers to the amount of
stock that a business has on hand at any
particular point in time. (raw materials, work-in
progress and finished goods).
ADVANTAGES OF HOLDING STOCK?
Consumer demand can be met immediately.
Less chance they will leave the premises and
buy from somewhere else.
 Reduces lead times between order and delivery
of product
 Making purchases in bulk can reduce the cost
price per item. These big purchases need to be
warehouses somewhere, hence stock is
accumulated.

DISADVANTAGES OF HOLDING STOCK?
Numerous costs including : leasing the facility,
insurance, theft and handling expenses,
security costs, obsolescence (if can’t be sold),
 Stock represents cash tied up and not earning
any interest.

VALUING STOCK
A petrol station takes TWO
fuel deliveries per week.
Delivery 1] The cost they
paid was $1.45 per litre for
500,000 litres.
Delivery 2] The cost they
paid was $1.10 per litre for
200,000 litres
HOW THE HELL DO I CALCULATE MY PROFITABILTIY FOR THE
SALES I MAKE?!!??!!
VALUING STOCK
http://www.youtube.com/watch?v=ExNsFh0_
39s (LIFO vs FIFO)
INVENTORY VALUATION METHODS
Step 1) JB HIFI bought 3 X-boxes at the cost of $500 each in the first delivery.
THEN
Step 2) JB HIFI bought another 5 X-boxes at the cost of $400 each in the second
delivery.
STEP 3) A customer comes up and buys an X-box for $450 from you. How much
profit does JB-HIFI make?
LAST IN FIRST OUT (LIFO) METHOD
One method that can be used is called the LIFO method.
This method of valuing inventory assumes that the last batch order of goods are
also the first goods sold and therefore values the cost of this number of units sold
at the cost of the last batch purchased.
E.g. The last delivery of 5 X-boxes are assumed to be sold first, and as a result the
first 5 X-boxes sold will all be costed at $400 each.
The remaining 3 X-boxes will be costed at the previous cost price $500
Cost Price $ 500 each
Cost price = $400 each
FIRST IN FIRST OUT (FIFO) METHOD
Another method that can be used is called the FIFO method.
This method of valuing inventory assumes that first batch of goods purchased are
the first goods sold and therefore values the cost of this number of units sold at
the cost of the first batch purchased.
E.g. The first delivery of 3 X-boxes are assumed to be sold first, and as a result the
first 3 X-boxes sold will all be costed at $500 each.
The remaining 5 X-boxes will be costed at the previous cost price $400 each.
Cost Price $ 500 each
Cost price = $400 each
FIRST IN FIRST OUT (FIFO) METHOD
LIFO PROFITABILITY
FIFO PROFITABILITY
5 units sold at cost price of $400 each and
sale price of $450 each.
3 units sold at cost price of $500 each and
sale price of $450 each.
There is a total profit of $250
There is a total loss of $150
The last 3 units then sell at a cost of $500
each and sold at the sale price of $450
each.
The last 5 units then sell at a cost of $400
each and sold at the sale price of $450
each.
Therefore there is a total loss of $150.
Therefore there is a total profit of $250.
Cost Price $ 500 each
Overall profitability = $100
Overall Profitability = $100
SOME GENERAL CONCLUSIONS
• The overall profitability will be identical over a long enough time period.
• However, the different methods will produce different results in the short-term.
LIFO PROFITABILITY
FIFO PROFITABILITY
5 units sold at cost price of
$400 each and sale price of
$450 each.
3 units sold at cost price of
$500 each and sale price of
$450 each.
There is a total profit of $250
There is a total loss of $150
The last 3 units then sell at a
cost of $500 each and sold at
the sale price of $450 each.
The last 5 units then sell at a
cost of $400 each and sold at
the sale price of $450 each.
Therefore there is a total loss
of $150.
Therefore there is a total profit
of $250.
Overall profitability = $100
Overall Profitability = $100
Early on
there is
Big
difference in
profitability
Eventually it
sorts itself
out.
SOME GENERAL CONCLUSIONS
LIFO
FIFO
-Because the cost of goods tend to rise
throughout the year, the LIFO method
tends to overstate the cost and understand
the profit in the current period.
-- Because the cost of goods tend to rise
throughout the year, the FIFO method
tends to understate the cost and overstate
the profit in the current period.
- Most businesses use this because it
makes sense to try and sell your oldest
inventory first you are able to identify them
as older stock (especially if inventory can
perish).
- They also prefer this method because it
usually produces a higher profitability
result in the near term if we assume that
the goods become more expensive over
time.***
***Note: the opposite effect has happened in our example because the X-box falls
in price over time. It is an unusual circumstance.
JUST IN TIME – INVENTORY METHOD
An inventory management system that ensures
that the exact amount of material inputs will arrive
only as they are needed in the operations process.
 Benefits include

Easier to conduct stock take (less stock on hand)
 Retailers can display a wider range of products because
they do not have to stock as many duplicates
 Saves on all stock related expenses mentioned earlier
