7 Operations and Life Cycle

Sudhanshu Joshi

Learning Objectives:

The Learning objectives of the module are to address the following questions:

Understanding what is an Operation Management?
To know the importance of Operational Management.
To know about various concepts of Operational Management.
To know the concept of product/ Service life cycle.

1. Introduction

Operation can be seen as one of many functions e.g. marketing, finance, personnel etc. within the organization. The operation function is that part of the organization which is devoted to the production and delivery of goods and services. This means all organizations undertake operations activities because every organization produces goods and/or services. Operation Management means administration of all business practices in a way to achieve organizations goal more efficiently and effectively. It is the process of management of business operations optimally in order to maximize the business profit and minimize the cost. Operations management refers to the management of the production system that transforms inputs into finished goods and services. Operations management seeks to increase the quality and efficiency of the firm.

1.1. Various Concepts of Operations Management:

A. Quality: Quality simply means the fulfilment of the customers’ expectations. For example, reliable goods and services can fulfil the customers’ expectations.

B. Efficiency: Efficiency simply means produce the required amount of output with a given level of input.

C. Responsiveness to Customers: It means actions taken to respond to customer needs. Firm can react quickly and correctly to customer needs as they arise. Core services: Customers want are products that are made correctly, customized to their needs, delivered on time, and priced competitively. These are commonly summarized as the classic performance objectives of the operations function: quality, flexibility, speed and price (or cost of production).

D. Value added Services: simply make the external customer’s life easier or, in the case of internal customers, help them to better carry out their particular function.

Value added factory services can be classified into four broad categories: information, problem solving, sales support and field support

Information: is the ability to furnish crticial data on product performance, process parameters, and cost to internal groups (such as R&D) and to external customers, who then use the data to improve their own operations or products. For example, Hewlett-Packard’s Fort Collins quality department provides quality data sheets and videotapes documenting actual product testing and field quality performance to field sales and service personnel.
Problem Solving is the ability to help internal and external groups, solve problem, especially in quality, for example, Raritan Corporation, a metal rod fabricator, sends factory workers out with salespeople to troubleshoot quality problems. Those factory workers then return to the factory and join with shop-floor personnel on remedial efforts.
Sales support is the ability to enhance sales and marketing efforts by demonstrating the technology, equipment, or production systems the compny is tryng ti sell,

Historical Summary of OM

YEAR	CONCEPT	TOOL	ORIGINATOR
1910	Principles of scientific management Industrial psychology Moving assembling line Economic lot size	Formalized time study and work- study concepts Motion Study Activity Scheduling Chart EOQ applied to inventory control	Frederick W Taylor (United States) Frank and Lillian Gilbert (United States) Henry Ford and Henry L Gantt (United States) F.W. Harris (United States)
1930a	Quality Control Hawthorne Studies of Worker Motivation	Sampling inspection and Statistical Tables for quality control.	Walter Shewhart, H.F. Dodge,and H.G. Ro
		Activity sampling for work analysis
1940s	Multidisciplinary team approaches to complex system problems	Simplex method of linera programming	Operation research groups (England) and George and Dantzig (United State)
1950-60s	Extensive development of operations research tools	Simulation, waiting-line theory, decision theory, mathematical programming, project scheduling techniques of PERT and CPM	Many researches in the United States and Western Europe
1970s	Widespread use of Computer in Business	Shop Scheduling, inventory control, forecasting, Project Management, MRP	Led by Computer Manufac

Definition

Strategic sourcing: The development and management of supplier relationships to acquire goods and services in a way that aids in achieving the immediate needs of a business.

Bullwhip effect the variability in demand is magnified as we move from the customer to the producer in the supply chain.

Functional products Staples that people buy in a wide range of retail outlets, such as grocery stores and gas stations.

Innovative products Products such as fashionable clothes and personal computers that typically have a life cycle of just a few months.

Outsourcing Moving some of a firm’s internal activities and decision responsibility to outside providers.

Logistics Management functions that support the complete cycle of material flow: from the purchase and internal control of production materials; to the planning and control of work-in-process; to the purchasing, shipping, and distribution of the finished product.

Inventory turnover and weeks of supply Measures of supply chain efficiency that are mathematically the inverse of one another.

Cost of goods sold The annual cost for a company to produce the goods or services provided to customers.

Average aggregate inventory value The total value of all items held in inventory for the firm, valued at cost

Weeks of supply A measure of how many weeks’ worth of inventory is in the system at a particular point in time.

Mass customization The ability of a company to deliver highly customized products and services to different customers around the world.

Process postponement Delay of the process step that differentiates a product to as late in the supply chain as possible.

Functional products include the staples that people buy in a wide range of retail outlets, such as grocery stores and gas stations. Because such products satisfy basic needs, which do not change much over time, they have stable, predictable demand and long life cycles. But their stability invites competition, which often leads to low profit margins. Specific criteria suggested by Fisher for identifying functional products include the following: product life cycle of more than two years, contribution margin of 5 to 20 percent, only 10 to 20 product variations, an average forecast error at time of production of only 10 percent, and a lead time for make-to- order products of from six months to one year

To avoid low margins, many companies introduce innovations in fashion or technology to give customers an additional reason to buy their products. Fashionable clothes and personal computers are good examples. Although innovation can enable a company to achieve higher profit margins, the very newness of the innovative products makes demand for them unpredictable. These innovative products typically have a life cycle of just a few months. Imitators quickly erode the competitive advantage that innovative products enjoy, and companies are forced to introduce a steady stream of newer innovations. The short life cycles and the great variety typical of these products further increase unpredictability.

Demand Characteristics
FUNCTIONAL	INNOVATIVE
Low demand uncertainity	High demand uncertainity
More predictable demand	Difficult to forecast
Stable demand	Variable demand
Long product life	Short selling season
Low inventory cost	High inventory cost
Low profit margin	High profit margin
Low product variety	High product variety

Higher volume	Low volume
Low stockout cost	High stockout cost
Low obsolescence	High obsolescence

Supply Characteristics
STABLE	EVOLVING
Less breakdowns	Vulnerable to breakdowns
Stable and higher yields	Variable and lower yields
Less quality problems	Potential quality problems
More supply sources	Limited supply sources
Reliable suppliers	Unreliable suppliers
Less process changes	More process changes
Less capacity constraints	Potential capacity constrained
Easier to change over	Difficult to change over
Flexible	Inflexible
Dependable lead times	Variable lead time

Hau Lee’s Uncertainty Framework—Examples and Types of Supply Chain Needed

Supply Uncertainty		DEMAND UNCERTAINTY
		LOW (FUNCTIONAL PRODUCTS)	HIGH (INNOVATIVE PRODUCTS)
	LOW (STABLE PROCESS)	Grocery, basic apparel, food, oil and gas Efficient Supply Chain	Fashion apparel, computers,
	HIGH (EVOLVING PROCESS)	Hydroelectric power, some food produce Risk-Hedging Supply Chain

1.2. Manufacturing and Service Operations

We can classify organizations into two broad categories namely manufacturing and service. Manufacturing organizations produce physical, tangible items which can be stored as inventory before delivery to the customer. Service organizations produce intangible items that cannot be produced ahead of time. One of the key developments in operations is the increasing importance of service operations as service industry accounts for an increasing proportion of the output of industrialized economies.

Difference between Services and Goods:

The main difference between services and goods are as follows:

A. Services are intangible and non-durable whereas goods are tangible and durable.

B. Services can’t require inventory management whereas inventory management is an important part of goods.

C. Services required high customer contact whereas goods required low customer contact as compared to services.

D. Services are labour intensive whereas goods are capital intensive.

2. The Systems View of Operations Management:

A system is a group of interrelated items in which no item studied in isolation and each item will act in the same way as it would in the system. A system has many subsystems and it is a part of a larger system. The system’s boundary defines what is inside the system and what is outside. The outside environment of a system affects the behavior of a system at high level. A system’s inputs are the physical objects of information that enter it from the environment and its outputs are the same which leave it for the environment.

Operations system activities can be classified as input, transformation process and output. Operations management transforms inputs into outputs that provide added value to customers. It does not matter whether the organization is for profit company, a non-profit organization or a government agency; all organizations must strive to maximize the quality of their transformation processes to meet customer needs. Following figure summarizes the transformation process.

Figure 1: Example of Transformation Process

3. Operations as a Key Functional Areas:

Operation management is one of the important functional areas of any kind of business. It influences other functional areas of business at high level. In other

Figure 2: Interlinkage between various functions

Organization typically begins their yearly plan with the marketing function making an estimate of the next year’s sales. This input forms the basis for production planning in the operations area of business. Procurement planning is done on the basis of the production plans and all these factors lead to a certain estimate of the fund requirements. This forms an important input for the finance function. The human resource management function influences the productivity capacity as the availability of labour depends upon it. The actual production of goods and services influences the marketing activities to be undertaken and the quantity and timing of available funds from sales. Such interactions are common in most organizations.

Operations Functions and its Linkages:

Figure 3: Linkage between various layers

4. Services as a part of Operational Management:

The service sector played a very important role in the development of country. It encompasses a wide spectrum of activities in every country. In last five years the growth of the service sector in India has been very significant. Although services are often classified separately from manufacturing in a macroeconomic sense, from the perspective of operational management. From the operational management perspective the notion of a pure product and pure service is just two ends of the spectrum. In reality a vast majority of operations share a continuum of services and products. Therefore most of the principles and tools and techniques of operational management apply to both these sectors.

Responsibilities of Operational Management:

The responsibilities of operational management are as under:

It provides overall management of the ongoing production operations including inventory management, equipment maintenance, shipping and quality control.
It is the responsibility of operational management to assist in creation of efficient processes of various business operations through hands on development and training.
Analysis of all recoded data and checks the quality of different business processes.
Ensure the security of peoples involved in production process.
Provide necessary equipments to workers so that they can do their assigned task more effectively and efficiently.
Comply with the Act respecting occupational health and safety, as well as the other laws and regulations regarding health and safety.

Priorities for Operational Management:

Following are some priorities which operational management needs to consider.

(i) Acquire capabilities to tolerate product proliferation:

Every organization needs to understand customer needs and incorporate them into new product initiatives. In order to satisfy the expectations of customers, organizations needs to change their process accordingly.

(ii) Relate operation system to customer/market:

Before choosing a particular operation system an organization needs to consider the demand of their valuable customers. In other words, choices related to manufacturing and services cannot be made on the basis of internal conveniences but instead customer be central to the demand. If customer has difficulty in using the product then it should be rectified.

(iii) Develop system and procedures that promote learning:

Continuous improvement is very important for the organization. These improvements do not take place in isolation but because of continuous learning by the employees in an organization.

5. Operational Strategy

The process by which key business operations decisions are made is known as operational strategy. These key business decisions are consistent with the overall strategic objectives of the firm. A firm’s operational strategy is affected by several factors. So, before making any operational decisions the firms need to consider such factors. The factors which needs to be consider are as under:

(i) The competitive dynamics will change due to several factors. On account of this the expectations of the customer also change. The firms need to analyze competitive dynamics before making any operational strategy.

(ii) Organizations need a structural approach to scan the market and made operational strategy as per the requirements. Moreover they also need a mechanism to chalk out a plan for responding to these changes in the most effective way.

(iii) With the changes in the market place the competitive priorities for an organization must also change. Organization need to tune their operations to match with the competitive priorities. It is important for organizations to develop the capability to devise optimum strategies for operational management and revisit the strategy formulation exercise whenever there is a requirement of change.

6. Product Life Cycle:

Every product has its own life and it goes through a cycle. Product life cycle is the cycle through which every product goes through from introduction to withdrawal or eventual demise. Different products have different life cycles and it depends upon the characteristics of the product. Following figure shown product life cycle for most products:

Figure 1: Stages of Product Life Cycle

Under product life cycle we are trying to find out answers of some questions such as when it was introduced; when it was getting rapid acceptance; when it was on the peak of its position; when it started falling from the peak; and when it disappeared. Product passes through certain stages during its life span.

No product is capable to satisfy needs and wants of consumers for an unlimited period of time. The sales and profits of the product are differing over time. The life of product can be determined by its capacity to meet market expectations. The existence of a product depends upon its capability to satisfy its customer requirements.

Product life cycle help us to know the relationship between sales volume and profits. Product life cycle can be defined as the study of relationship between sales volume and profits in relation to time through entire span of the products life.

According to Philip Kotler, “The product life cycle is an attempt to recognize distinct stages in sales history of the product”.

6.1. Stages of Product Life Cycle:

Product life cycle comprises of four stages namely, introduction, growth, maturity, and declining stage. Each stage of product life cycle has its own characteristics and these characteristics can be characterized in terms of sales volume, amount of profits, level of promotional efforts and expenses, and degree of competition. Firms need to made unique marketing strategy for each stage of product life cycle.

Introduction Stage:

Introduction stage starts when a newly developed product launched to the market and it is available first time for consumers in the market. Consumers are not aware about the product, or they may not have general opinion and experience about the product.

In this stage, heavy marketing activity and product promotion takes place. The product is put into limited outlets in a few channels for distribution. Sales take off slowly in this stage. The need is to create awareness, not profits.

In the very initial stage, there is loss or negligible profit. During this period, the direct competition is very low. Company has produced the product in limited quantity because he faced selling problems in this stage. Price is normally high to recover or offset the cost of development, production, and marketing with minimum sales. However, the price factor depends upon company business strategy. Under this stage sales of the product rise gradually.

Characteristics of Introduction Stage:

The introduction stage of product life cycle has following characteristics:

(I) In introduction stage a lot of money is required for selling and promotional activities to increase awareness of customers about the product.

(II) Due to high development, production, and marketing costs the price of the product in this initial stage is kept high. However, it depends upon the business strategy of the firm.

(III) The technical and production problems has to be tackled by the marketing and operational experts.

(IV) At this very initial stage the sale of the product is very low and it increases at a lower rate.

(V) During the introduction stage of the product, company suffers from losses or it has negligible profit. In other words, it is a situation of no profit, no loss.

(VI) The level of competition is very low under this stage.

Growth Stage:

This is the stage of rapid market acceptance. The product gets positive response from market because customers have to be aware about the product. This stage is marked by a rapid climb in sales. Sales rise at the increasing rate. Under this stage, seller shifts his promotional attempts from “try-my-brand” to “buy-my-brand”.

Company tries to develop effective distribution network so that no problems faced by the customers. Due to rise in profits, numbers of competitors are high. As some buyers are price-sensitive, to attract such kind of buyers of the product price may be reduced at a right time to. Company continues its marketing efforts, its selling and promotional efforts to educate and convince the market and meet competition.

Characteristics of Growth Stage:

The main characteristics of growth stage are as under:

(I) As a result of consumer acceptance of the products sales increase rapidly under this stage.

(II) Due to high sales company earn high level of profits.

(III) Due to attractive profits many competitors have to be evolved and enter into the market.

(IV) The level of competition is very high because many competitors are present in the market.

(V) To attract more consumers companies tend to reduce the product price.

(VI) Company develops and widened their distribution network.

(VII) To remove the identified defects in the product company made necessary primary changes in the product.

(VIII) Company enters the new segments and new channels are selected.

Maturity Stage:

This stage is marked with slow down of sales growth. The sales of the product continue to rise but at decreasing rate. Under this stage, many competitors have entered into the market and existing products face high level of competition. In this stage, the sales curve of the firm is pushed downward. During this stage, for certain period of time, sales remain stable. This level is called the saturation stage. Profits of the firm decline gradually. Normally, this stage lasts longer and marketers face formidable challenges.

Under this stage, sales grow at slowing rates and finally stabilize. In this stage, products get differentiated, price wars and sales promotion become common and a few weaker players exit from the market due to non-survival.

The maturity stage may be divided into three phases namely, growth maturity; stable maturity and decline maturity. During growth maturity, sales growth rate is high. In stable maturity phase, sales of the firm remain stable. Stable maturity phase is also known as saturation stage. During decline maturity phase, sales of the firm start to decline.

Under growth stage marginal producers are forced to drop out the products. To sustain in the market, firms modify their products and change their marketing strategy.

Characteristics of Maturity Stage:

The main characteristics of maturity stage are as under:

(I) Under maturity stage the sale of the product increase at decreasing rate.

(II) Profits of the firm start to be declined.

(III) Due to declining profit marginal competitors leave the market.

(IV) Under this stage, firms given more emphasis to customer retention.

(V) To sustain in competitive market, product, market and marketing mix modifications are undertaken in this stage.

Decline Stage:

This is the last stage of product life cycle. Under this stage, sales of the product start declining. Profits also start erasing. There is a minimum profit or even a little loss. Under this stage, firms reduce their advertising and selling expenses in order to earn some profits. The declining stage is faced by only those products who survived in maturity stage.

In declining stage, sales of the product have to be dropped, as consumers may have changed, the product is no longer relevant or useful. During this stage, price wars continue, several products are withdrawn and cost control becomes the way out for most products.

As new products enter to the market with advanced technology and many new specifications, most products have to be obsolete. Customers don’t consider such obsolete products because everyone wants to get updated version of a product. So sales of the product start declining in this stage. New products start their own life cycle and replace old ones. A number of competitors withdraw from the market. Those who remain in the market prefer to drop smaller segments, make minor changes in products, and continue selling the products in profitable segments and channels. However, under this stage, management continues with the same product with expectation that sales improve when economy improves; marketing strategy is revised expecting that competitors will leave the market; or product is improved to attract new market segments.

It may be costly and risky for the firm to continue with the same products until and unless a strong reason exists for the same. Otherwise, later on it is difficult for the firm to manage selling and promotional efforts. If the product can’t survive and sustain in the highly competitive environment then it incur substantial loss to the firm. It is very difficult for the firm to recover such losses. Before dropping the product completely, marketer must check every possibility. If there is any possibility for the survival of the product in the market then firms will try to exist in the market with same product. The firms may make some changes in their product for survival.

Characteristics of Decline Stage:

Following are the main characteristics of declining stage of a product:

(I) During this stage, sales of the product decline rapidly.

(II) Profits fall more rapidly than sales in this stage.

(III) Firms made modifications in their product for survival.

(IV) Gradually, the company prefers to shift resources to new products.

(V) Due to loss or decline in sales of the product most of sellers withdraw from the market.

(VI) Promotional expenses are reduced to realize a little profit.

Significance of Product Life Cycle:

Product life cycle analysis plays a vital role for the survival of the product of a firm. If a company done PLC analysis properly, then it can know easily about the health of the product in relation to the market it serves. PLC analysis also helps companies to know about the current market trends. After knowing the current market trends, firms may made changes in their marketing strategy and also made changes in their products as per the requirements of the consumers. It will help firms to survive more efficiently and effectively in the target market.

Summary:

Operation Management: Operations management refers to the management of the production system that transforms inputs into finished goods and services. Operations management seeks to increase the quality and efficiency of the firm.

Operational Strategy: The process by which key business operations decisions are made is known as operational strategy.

Product Life Cycle: The product life cycle is an attempt to recognize distinct stages in sales history of the product.

Quality: Quality simply means the fulfillment of the customers’ expectations. System: A system is a group of interrelated items in which no item studied in isolation and each item will act in the same way as it would in the system.

Progress Check Point:

Question 1: What is operational management? Explain the impact of operational management on business strategy of an organization.

Question 2: What do you understand by operational strategy?

Question 3: What do you understand by product life cycle? Explain various stages of product life cycle.

Question 4: Explain the significance of product life cycle

Suggested Readings:

a) Immonen and Saaksvouri (2003): Product Life-Cycle Management. Springer-Verlag Berlin and Heidelberg GmbH &Co.

b) Stark (2016): Product Lifecycle Management: 21st Century Paradigm for Product Realisation (Decision Engineering). Springer.

c) Wilson (2014): A Comprehensive Guide to Project Management Schedule and Cost Control: Methods and Models for Managing the Project Life Cycle. Pearson FT Press

d) Chase and Aquilano (1991): Production and Operations Management: A Life Cycle Approach. McGraw-Hill Inc.

e) Stark (2010): Global Product: Strategy, Product Lifecycle Management and the Billion Customer Question (Decision Engineering). Springer

f) Oshri and Kotlarsky (2014): The Handbook of Global Outsourcing and Off shoring 3rd edition: The Definitive Guide to Strategy and Operations. Palgrave Macmillan.