Operations Management
A. Analysis of the Book Concepts
1. Application of the Theory of Constraints
As I had been working for financial institutions for the past 15 years, I am going to discuss the problems that are typical for banking industry.
In 2007, the Capital One Bank jettisoned its mortgage platform in respond to the mortgage crisis pressures. However, investors were pressed too proving the main concept of theory of constraints: when one element of the system is improved, the other is in the constraint. The main constraints in this situation are the lack of financial resources required to stay in the market. The Bank stopped to pay out dividends – a common strategy used by many companies and organizations experiencing hard times. However, this approach could create another constraint – inability to compete in the dividend market. If the situation were stable, the Bank could lose many investors because of not being able to pay our competitive dividends. It could make a negative impact on the Bank capital. This solution can be considered from another point of view – ethical impact on the stakeholders. Thus, this solution cannot be considered the best approach in this situation.
2. Supply Chain Management
Supply chain management analysis is designed to identify bottlenecks in supply chain management and to develop a strategy to eliminate or mitigate the risks that are typical for an organization in a particular situation (Kamauff, 2010).
The Bank of America had been operating for a long time in the saturated market. It offers a lot of various innovative banking products to its customers. However, further growth of the financial institution is impossible without expansion to emerging markets.
One of the opportunities for the Bank is to integrate into global supply chain using products design for small and medium businesses. The Bank managers estimated that the value can be created if the Bank offers its services in the emerging markets, such as China, Japan, and Latin America. Offering Internet banking, proximity transactions, mobile banking, online intra-banking is not costly to foreign customers will result in increase in revenue because the main competitive advantages of the Bank are connected with innovative technologies local banks cannot offer to their customers.
In addition, locating offices in the emerging markets offer another opportunity to create value. This opportunity is called on outsourcing when an organization redistributes its functions to another place where the cost for the services is lower. For example, hiring Chinese managers can offer an opportunity for cost reduction because of lower salaries level in comparison to the level of salaries that is common in the US banking sphere.
B. Analysis of the Article Concepts
1. Asset Allocation
The case of the Bank of America is an example of how an organization was exposed to one of the financial risks – a default. The case concerns the issue of asset allocation.
As the Bank expanded in internal market through acquisition of other financial institutions, it soon became too large to effectively manage its assets. Therefore, it started to use accounting rules to increase its earnings. Also, the Bank started to charge the clients with additional fees. However, the performance can only be improved artificially in this way. The actual performance is unsatisfactory. In addition, charging additional fees decreased customers’ loyalty. As a result, the Bank started to lose its competitive advantage – being the nation-wide financial institution.
One of the advantages of enterprise risk management is that it is used not only to increase revenues or reduce cost. It also can help develop new or correct current strategy. Obviously, the Bank should change dramatically change its strategy because the previous one does not create value anymore (Casualty Actuarial Society, 2003).
Evaluation of the proposed strategies resulted in a strategic choice to integrate horizontally because small banks are more flexible and less bureaucratic. The Bank should focus on customer needs rather than charging them with additional fees making basement for increase in revenue. Recently, business success depends on communication more than on improvement of performance indicators.
2. Risk Assessment
The case of the Capital One Bank relates risk assessment issue. The Bank embarked on ERM before the competitors managed to do it. It is crucially important in the risk assessment process to identify and fix the issues before they constitute a serious problem for an organization. The Bank is one of the largest banks in the US which specializes in credit cards, home and auto loans. The Bank faced the problem related loans portfolio. As well as many other banks, in 2007 the Bank was involved in crisis of subprime mortgage financial crisis. Before the crisis the Bank conducted a comprehensive assessment of the risks related the structure of loan portfolio. Assessment of the risks helped the Bank focus on performance and manage distressed loans effectively. The risks were assessed with the help of complex methodology which included analysis of hazard, financial, operational, and strategic issues. The risk were rated and prioritized according to the rating, namely: strategic, adaptation, manageable, and usual. Taking into account the risks analysis mitigation and exploitation strategies were outlined. The risks mitigation strategy included risk management, audit, and legal functions. A health plan involved participation of all functional and operational departments. The objective of analysis of loans portfolio was to rate loans according to standardized loans rating system to take steps to mitigate or eliminate possible financial risks.
In comparison to its competitors, the Capital One Bank resolved the issues caused by the mortgage crisis and destabilization in the county at a relatively low cost. However, it received financial support from the US government as well as other financial institutions.
. C. Key Points from the Book
1. Operations Strategy
There were five concepts described in the book chosen for the discussion. Among them operations strategy, theory of constraints, lean manufacturing, supply chain management, inventory management, and corporate social responsibility (Kamauff, 2010).
Operations strategy depends on many factors, such as organizational culture, history, and structure, that the typical for a particular organization. Therefore, operations strategy is unique. It requires detailed examination of organizational circumstances. An experience of similar organizations cannot be applicable in each particular case (Kamauff, 2010).
The general approach includes the following steps: assessment of the current strategy, definition of goals and objectives of new operations strategy, operations environment analysis, analysis of internal operations, identification of alternative operations strategies, evaluation of the alternative strategies, detailed elaboration of chosen strategy, strategy implementation (Kamauff, 2010).
Assessment of the current strategy is necessary to reveal the current issues in operations management. Inputs are identified on this stage of the new operations strategy formulation. Definition of the purposes of the new strategy is important for identification of desired outcomes and changes that should be made to obtain this result. Operations environment and internal operations analyses are carried out to obtain a detailed picture of the problem. Identification of alternatives is necessary to have an idea of possible solutions of the problem. Evaluation of the alternatives will help identify their benefits, disadvantages and applicability to the current situation. Detailed elaboration of the new operations strategy is important to assess the risks connected with implementation of the strategy and consistence with the goals set. The final stage is strategy implementation when the new operations strategy is tested in practice.
2. Theory of Constraints
The second key concept of the book is a concept of organizational constraints. The theory of constraints is widely used in operations management. The methodology of this theory is focused on achievement of efficient management of materials targeting continuous improvement. The theory is based on the following assumptions: every company has its interdependent links having potential for growth which cannot be realized because of one weak link; every company has at least one constraint (bottleneck). The main goal of a company is to maximize throughput (rate of revenue generation) rather than output (production volume) aiming to increase net income. Distinction between constraint and non-constraint resources leads to wrong decisions (Kamauff, 2010).
One way to reduce throughput time is to review processes in the plant. The solutions for the problem could be found by identification of bottlenecks constraining throughput. The solutions maybe connected with balancing production with regard to the time of constraint or arranging the plant around the most significant constraint. In the case of having inadequate output there is an opportunity to use this approach to remove other bottlenecks that may appear in the operations process (Kamauff, 2010).
There are several main principles of the theory of constraints, namely: manufacturing system cannot be flexible and constraint cannot move around; manufacturing system depends on the cycle time spent on a particular work station; a constraint can move around a flexible cell of manufacturing process. Another feature of the theory is that it is designed to treat the problem outcomes rather than resolve the initial problem (Kamauff, 2010).
3. Lean Manufacturing
Lean manufacturing is the process of continuous reduction or elimination of waste in manufacturing, customer service, design, and distribution. It is based on increasing efficiency and removal wasteful steps that do not add value. Therefore it can be constantly improved. Lean manufacturing philosophy is that despite of good process management, waste occurs. The basic assumption is that customer are not willing to pay for waste, i.e. extra costs for keeping large inventories or defects. Thus, to create value the company must reduce waste to the limit or eliminate it. Waste in lean production is associated with overproduction, defects, lag time, ineffective transportation or inventory management, over-processing, and ineffective motion between tasks (Kamauff, 2010).
Lean manufacturing process consists of three stages. The first stage is to identify waste. Value Stream Map is a tool of waste identification that analyzes the processes flow. The second stage is to analyze waste and find the cause of it. For analysis of waste Root Cause Analysis, Brainstorming, and Cause and Effect Diagrams are used. For example, the reason of breaking down a machine could be a mechanical problem or low qualification of operators. Root Cause Analysis could help identify the root of the problem. The third stage is to make improvement plan to fix the issue creating efficiency (Kamauff, 2010).
4. Supply Chain Management
Supply chain management (SCM) is a system of control over the process of information, finances, and material moving from supplier to manufacturer or from wholesaler to consumer. It involves coordination and integration these flows inside and outside the companies. The main goal of effective supply chain management is reduction of inventory on the assumption that products are in demand and are available. One of the main solutions for effective SCM is innovative software system (Kamauff, 2010).
An effective SCM is aimed to manage three main flows – product, information, and finances flow. The flow of information is associated with orders transmission and updates of delivery status. Financial flows are connected with payments schedules, credit terms, and consignment (Kamauff, 2010).
SCM control systems are designed to plan (an effective way to execute an order) and to execute applications (management of materials and goods). Planning applications are mostly internal systems while executions application involves several parties. SCM systems allow improving time of marketing products, reduce costs, manage and efficiently plan consumption of available resources (Kamauff, 2010).
SCM is crucially important in the conditions of highly competitive environment in the global market. Currently, SCM is a part of many core processes in the company, such as customer service management, procurement, product development, manufacturing flow process, distribution, outsourcing, performance and warehousing management. Today SCM tend to be more sustainable, i.e. adhere to the requirements of environmental and social policy.
5. Inventory Management
Inventory control is aimed at manage activities connected with maintenance of optimum volume of stored inventory. The main goal of effective inventory management is to provide customers with required products at a minimum cost. It is one of the most important functions of the organization determining financial health and the health of the balance sheet. For many companies inventory management is a crucial point since ineffective management contributes to losses and business failures. Managing inventory is a difficult task since it is dynamic and requires constant evaluation of the factors of internal and external environment. Most of the organizations engaged in manufacturing or sales hold inventory in different forms, i.e. complete and incomplete inventory and stored materials. Inventory of all types has economic value and is accounted in the assets part of a balance sheet of a company (Kamauff, 2010).
Inventory may occur at various stages and at various departments of the enterprise. It can be kept in the form of raw materials, semi-finished goods or finished goods. Defective products and scrap form inventory since they are accounted in the balance sheet.
Effective inventory management analysis includes several activities, namely: calculation of the costs associated with inventory, inventory reduction, monitoring inventory, maintenance of inventory, keeping track of inventory, protecting inventory, and keeping score of inventory use. Most of the companies have specialized department that exercise control of inventory meaning monitoring, control and review of inventory (Kamauff, 2010).
D. Key Points from the Article
1. Types of Risks
It is important to identify and assess the risks an organization is exposed. Managers of an organization must analyze which risks are the most typical for the organization and develop an appropriate risk management program. Risks are divided into four groups, namely: hazard, financial, operational, and strategic. Hazard risks are associated with the following contingencies: force majeure circumstances connected with uncontrollable natural phenomena; work-related injuries; customers’ and visitors’ injuries and products recall. The first group of the risks may cause significant loss of revenue, but are out of human control. The second and the third group of risks could be predicted. Particular attention should be paid to the first group of hazard risks by the organizations which are located in potentially dangerous areas, such as territories that are impacted by floods, tornadoes, fire, etc. The risks of injury are typical for manufacturing companies using heavy machinery (Casualty Actuarial Society, 2003).
Financial risks are the risks that are associated with price and exchange rate fluctuations, credits, liquidity, inflation, and hedging. The companies running international business are exposed to financial risks. The risks may be connected with buying materials from foreign supplier, asset valuation connected with inflation processes, defaults, opportunity cost, cash flow and other (Casualty Actuarial Society, 2003).
Operational risks may arise from the activities conducted by the company, i.e. basic business activities (product, human resources, capacities, supply chain management, efficiency, etc.); empowerment (leadership, attitude to changes), technology, business reporting (accounting rules, budgeting, planning, taxation, etc.) (Casualty Actuarial Society, 2003).
Strategic risks are associated with market conjuncture, competition, regulatory issues, reputation, resources availability, demographic trends, consumer preferences, and technological innovations (Casualty Actuarial Society, 2003).
Any company can be exposed to operational and strategic risks. It is a matter of crucial importance for a good leader to identify the most typical risks for the organization and predict potential threat.
2. Risk Assessment Steps
Risk management is an important part of managing activity. Risk management plan consist of detailed analysis of the risks typical for a particular organization. The risk management process consists of six steps as follows: context establishment, risks identification, analysis and quantitative risks assessment, risks integration, risks integration, prioritization of risks, risks treatment and exploitation, monitoring and review (Casualty Actuarial Society, 2003).
Context establishment consists of assessment of internal, external, and risk management context. It also includes assessment of the interests of the stakeholders and communication policies. SWOT analysis is a good tool for assessment of internal and external factors influencing the activity of the company (Casualty Actuarial Society, 2003).
Risks identification includes documentation of events and conditions representing material threats to the organization. A variety of methods can be used for risks identification, to name a few: internal auditing, surveys, brainstorming, etc (Casualty Actuarial Society, 2003).
Analysis and quantitative assessment involves risk examination and creating probability distribution. The methods can be quantitative (sensitivity analysis, simulations) and qualitative (scenario analysis). The outcomes of this section of the risks assessment represent input for the next steps – integration and prioritization of risks.
Risk integration involves complex risk assessment, correlation, and portfolio effects. This step also includes assessment of the risks effect on key performance indicators.
Risks prioritization includes determination of the contribution of each risk in the risks assessment portfolio. Prioritization of risks helps identify the most typical risks that constitute threat for the company under the circumstances that occur (Casualty Actuarial Society, 2003).
Treatment of risks encompasses development of a strategy to eliminate or mitigate prioritized risks. For example, insurance can be a good risk treatment for hazard risk management.
Monitoring and review includes monitoring of risk environment and revision of management strategies. The company can be exposed to different risks in different periods of time. Continuous reviews help manage cyclicality of the risks (Casualty Actuarial Society, 2003).
References
Casualty Actuarial Society. (2003). Overview of enterprise risk management. Enterprise Risk Management Committee, 15(2), 1-62.
Kamauff, J. W. (2010). Manager's guide to operations management. New York: McGraw-Hill.
