8 Key Functions of Operations Management
Operations management plays a critical role in the business world as the backbone of business efficiency. Properly performing the functions of operations management in both product- and service-based organizations is a necessity for businesses in a competitive environment.
- Service-Based Organizations
In service-based organizations, the operations management team plans, coordinates, and controls the processes, costs, and resources the organization needs to meet customer demand. As customer demands change with the times, operation management teams must put continuous improvement strategies in place to keep customers happy and competitors at bay. - Product-Based Organizations
In product-based organizations, such as manufacturing, the functions of operations management teams include overseeing daily business operations. This includes supply chain management, inventory storage, stock levels, project workflows, safety protocols, training new employees, and carrying out the production process itself.Ideally, operations management teams should adhere to standard operations management principles. This is to optimize the scheduling, production planning, inventory control, procurement, and quality control processes within their organizations, thus best fulfilling the functions of operations management. In addition to process management, they also employ continuous improvement initiatives to best utilize operations research and process improvement.In either case, operations management holds the key to cost control, process efficiency, and quality. Learning about the functions of operations management can help companies streamline their day-to-day operations and their long-term strategy.
What Is Operations Management?
Operations management is the process that businesses use to enhance their efficiency to the highest possible level. The functions of operations management involve developing an overall plan for producing and delivering goods and services and executing that plan. Operations management also covers supply chain and inventory management, as well as quality control.
Operations management teams ensure that their company optimizes resource utilization. Using leading-edge management software, the latest technology, and lean manufacturing best practices, the team encourages innovative ideas, fosters greater productivity, and focuses on the bottom line in both the short and long term.
The Key Functions of Operations Management
To better understand operations management in a lean manufacturing environment, it helps to break it down into its core functions.
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Global Strategy
Strategic management looks at the global supply chain and assesses how well it achieves the organization’s business objectives. Operations strategy looks at high-level performance metrics and key performance indicators (KPIs), including:
- Customer satisfaction: Is the supply chain providing products and services that consumers are satisfied with?
- Market share: Do consumers choose these products and services over those produced by the competition?
- Profitability: Is the organization able to deliver these goods profitably?
Global operations managers then utilize business analytics to assess the performance of the remaining seven functions of operations management and determine if they are helping the organization achieve these goals.
Business strategies at the global level vary, but they may focus on sales targets, how to make better use of human resources, or how to find the best way to optimize their use of raw materials with less waste and more revenue.
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Supply Chain Management
Essentially, it is part of the key functions of operations management to ensure that the supply chain is properly configured. From purchasing raw materials to producing and selling the products, these tasks must occur in the correct order to ensure that every aspect of the supply chain functions properly. Doing so will prevent delays and lead to faster production and sales.
IT operations management, which involves managing the production systems within the context of the organization’s IT infrastructure, is another critical component of supply chain coordination and operations management.
Business operations managers oversee the integration and optimization of management systems like enterprise resource planning (ERP), manufacturing execution systems (MES), and manufacturing resource planning (MRP). They ensure that these information systems work well together and support critical business processes.
Inventory control plays a major role in supply chain management. Operations management teams use a variety of methods to optimize their inventory levels. Here’s a look at these methods:
- ABC analysis: This inventory control strategy lumps inventory into three categories, labeled “A,” “B,” and “C.” Items in the “A” category bring in 70% to 80% of the company’s revenue. Therefore, operations management teams must put most of their efforts into managing these items. “B” items generate 15% to 20% of the company’s revenue, while “C” items contribute only the remaining portion of revenue but comprise over 50% of the inventory. Prioritizing the top revenue-generating items ensures that these items are always in stock.
- Economic order quantity (EOQ): This method utilizes a mathematical formula to find the ideal amount of items to purchase to meet customer demand and minimize inventory costs.
- First-in, first-out (FIFO): This method, used primarily among industries that make perishable products, follows the flow of inventory from the shop floor to sales. It calculates the cost of goods sold with the oldest items’ price and the ending inventory with the newest items’ cost.
- Just-in-time (JIT): One of the top efficiency trends in the business world, this system aligns orders for parts and raw materials from vendors with production schedules. This method reduces inventory costs since companies receive only the parts and materials they need for current production, ideally slashing storage costs. Additionally, if customers cancel their orders, the company won’t have excess inventory on hand.
- Last-in, first-out (LIFO): Companies that adopt a LIFO inventory strategy sell newer items before older items, so they use newer items’ cost to calculate the cost of goods and the older items’ cost to calculate the ending inventory. This approach helps businesses that frequently encounter price fluctuations. In inflationary times, using the LIFO approach lowers profit during the year, thereby lowering their taxes.
- Real-time tracking: Another leading-edge inventory control strategy, real-time tracking empowers operations management teams to monitor stock levels throughout their company’s warehouses and sales channels. As soon as a customer places an order or the company receives new inventory, the on-hand quantity updates in real time to provide a timely and accurate count.
Vendor-managed inventory: Companies that use this method of inventory control outsource inventory management to their suppliers. Technically, the vendor owns the inventory even after it enters the company’s warehouse. Vendors use digital communication links to know when an item sells, allowing them to replenish items as needed. Smaller companies with a limited staff are likely to benefit from this arrangement.
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Operations Management
Examining a business’s operations involves considering all activities needed to turn raw materials or human efforts into a product or service that the company can sell to customers. This key function of operations management includes production scheduling, production planning and control, capacity planning, assembly line configuration, materials management, and logistics planning.
An operation manager always looks for ways to make operations run more smoothly by eliminating bottlenecks. They often utilize management science techniques—such as Six Sigma, Agile, and Kanban—to drive gains in day-to-day process efficiency.
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Forecasting
Forecasting involves predicting the future demand for a product. Marketing and sales operations are key components in the forecasting process, as planned marketing promotions and sales initiatives can significantly impact product demand.
Forecasting has a direct impact on production and is crucial to a business’s success. Too many products, and a company will be left with storage costs and potential waste; too little, and it won’t be able to meet customer demand.
Fortunately, today’s AI-powered forecasting solutions leave “educated guesses” in the dust. These powerful tools can analyze a wealth of internal and external variables to produce accurate forecasts, allowing teams to better fulfill the functions of operations management.
Moreover, these forecasting tools can connect to supply chain management solutions to create an integrated supply chain. Integrated supply chains align all the steps and components in the manufacturing process, providing higher visibility throughout. With this information at hand, operations management teams can make more effective decisions, collaborate with other teams, and facilitate better communication with vendors and customers.
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Strategic Planning
Strategic planning involves setting an organization’s long-term goals. By sketching out all the intermediary steps that will help the organization achieve those objectives, operations teams can set detailed operational plans to carry out those steps.
Modifying standard operating procedures to follow that strategy is often necessary, especially with today’s rapidly changing business environment. As new opportunities emerge, operations teams need to adapt quickly to integrate them into the long-term plan.
Long-term strategic planning helps align day-to-day operations with overall company objectives. To better carry out the functions of operations management, teams must keep those objectives in mind as they formulate their strategy.
To flesh out the details, today’s operations personnel must depend on AI-driven forecasting models to factor in a broad spectrum of variables that could affect performance. Teams should set SMART (specific, measurable, achievable, relevant, and time-bound) key performance indicators to measure the organization’s progress toward meeting those goals.
Digital tools, such as ERP or MRP systems, can streamline the strategic planning process considerably. These tools can help teams perform the key functions of operations management more effectively.
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Finance
Focusing on the financial side of operations management is essential, not only for the company’s bottom line but also for ensuring that its products adhere to strict standards. The delicate balancing act between creating a good or service that delights the customer and earning a healthy profit is an essential part of the function of operations management.
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Product Design and Optimization
Operations management teams must also pay attention to product design. Staying on the leading edge of market trends while maintaining product quality and durability can ensure that the company enjoys long-term success with its customers.
Designs that can adapt easily to customer preferences help companies do precisely that. A cell phone case manufacturer, for instance, could create a design that works equally well with both leather and plant-based plastics, pleasing both eco-conscious vegans and luxury customers.
Workflow design, too, factors into the operations management team’s workload. Creating workflows that balance resource usage with more efficient time usage can save the company time and money.
Utilizing tools that have emerged from the digital transformation movement—such as automation, digital twinning, and predictive technology—can help operations personnel create more efficient workflows.
Predictive tools can suggest changes in the functions of operations management that could better optimize workflow efficiency. Digital twinning, another benefit of modern technology, enables operations managers to simulate an environment to see how those changes might impact production without the hassle of making physical changes. Automating some steps could be a key component of the optimization process.
Lean manufacturing principles can help teams better perform the functions of operations management. By creating product designs that eliminate waste and reflect high-quality construction, they will deliver maximum value to their customers. Adding Agile frameworks to the design process can improve product and workflow design by incorporating input from all stakeholders and time-saving processes.
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Quality Management
Efficient quality management requires operations management teams to ensure consistency at every step, eliminating defects and the errors that cause them. Prioritizing proactive quality control practices helps prevent design issues before they happen. In contrast to reactive quality control practices that correct defects after they occur, a proactive approach drives efficiency up and costs down.
Implementing total quality management (TQM) practices, too, can enhance product design and employee engagement. TQM encourages all company employees to contribute ideas to improve product and workflow design, leading to more efficient, customer-pleasing results.
Integrating Six Sigma principles with the design process also enhances customer satisfaction by incorporating quality and preventing waste from the beginning. Using simulations and customer input to guide the team, operations teams can deliver a stellar product to their customers.
The Importance of Operations Management
Poor operations management leads to inefficiencies, customer dissatisfaction, and higher costs. Failing to carry out the essential functions of operations management can land a company in the red both in the short and long term.
In contrast, an operations management team that focuses on continuous improvement is as critical for organizational success as is technical execution. With that focus, operational planning teams will align day-to-day processes with long-term strategic goals, maintain a competitive edge, and improve customer satisfaction with top-quality products.
On the financial side, effective operations management teams can increase efficiency, reduce waste and errors, and control costs. Having the finest tools and best-equipped teams to manage the company’s operational planning is essential for success in the long run.
Conclusion
To paraphrase leadership expert John C. Maxwell, a company’s success rises and falls on its operations management team’s leadership. For this reason, understanding how this team should function can help organizations enhance their operational efficiency, customer satisfaction, and therefore, their outcomes.
Top operations teams monitor production quantities, streamline supply chain coordination, ensure product excellence, and implement cost-cutting measures without any loss in quality. Spearheading collaboration with both employees and customers, they build trust from both ends of the business.