The finance function

and Operations

BSCI121: Study unit 03

Chapter 9
Learning outcomes

On completion of this study unit, you should be able to:

• Discuss the main roles of operations;
• Understand and discuss the relationship of interaction between the finance function
and operations; and
• Demonstrate how the finance function helps manage operations through key
performance indicators.
 Role of operations
• Operational processes
Introduction • Product and services
• Supply chains
Operations and other core
business functions

Core functions
• Operations: production of goods and services and delivery
to the customers
• Marketing and sales: Identifying customer’s needs and
communicating information about the organisation’s products
and services
• Product and service development: designing new
products

Support functions
• Finance,
• Human resources and
• IT
Operations management
Operations management is concerned with the transformation of ‘inputs’ into ‘outputs’ that meet the needs of the
customer.

Transforming resources – those that are used to perform

the transformation process

Transformed resources – those that are transformed in some way

by the operation to produce the goods or services that are its
outputs
Class Activity:

Think about the production of a cell

phone
Give examples of the following:
• Transformed inputs:
• Transforming inputs:
• Transformation process:
• Outputs:
 Class Activity:

Think about the Hospital?

Give examples of the following:
• Transformed inputs:
• Transforming inputs:
• Transformation process:
• Outputs:
Method of analysing the
differences between
transformational
processes
 Examples of the Four Vs in Different Industries

Example 1: Fast Food Restaurant Example 3: Hospital Emergency Room

•Volume: High (large quantities of standardised products). •Volume: High (fluctuating patient arrivals).
•Variety: High (diverse medical conditions and emergencies).
•Variety: Low (limited menu options).
•Variation: High (unpredictable patient arrival times and severity
•Variation: Moderate (fluctuating demand based on time of of cases).
day and week). •Visibility: High (direct patient interaction, focus on patient
•Visibility: High (direct customer interaction). experience).

Example 2: Automotive Manufacturing Example 4: Online Retail

•Volume: High (large number of orders).
•Volume: High (mass production of vehicles).
•Variety: High (wide range of products).
•Variety: Moderate (different models, options, and
•Variation: High (fluctuating demand based on trends, seasons,
customisations). and promotions).
•Variation: Moderate (seasonal demand, economic cycles). •Visibility: High (direct customer interaction through online
•Visibility: Low (limited direct customer interaction, focus platforms, focus on customer reviews and feedback).
on supply chain efficiency).
Efficient operational
processes

• The transformation process needs to be as

efficient as possible
• Increases profitability
• Maximizing output from input;
• Reducing waste
• Favourable from a corporate social
responsibility point of view
The value chain
‘a sequence of business activities by which, in the perspective of the end-user, value is added to the products or services produced by an entity’ (CIMA, 2005)

Planning, finance, QC,

management

Recruiting, training and

rewarding

Related to product design

and improvement
Provide purchased inputs, HR, IT
and infrastructure to support Purchase of resource inputs
primary activities.

After-sales
Receiving, Storing of Inform, persuade
Convert
and enable
handling, resources to outputs and
customers to buy
storage outputs. distribution product

Directly related to production, sales, marketing, delivery and services

 The value chain
Primary Activities
These activities directly involve the creation and delivery of a product or service.
• Inbound Logistics: Receiving, storing, and handling raw materials.
• Operations: Transforming inputs into finished products or services.
• Outbound Logistics: Storing and distributing finished products to customers.
• Marketing and Sales: Identifying customer needs, promoting products, and facilitating
purchases.
• Service: Providing support and after-sales service to customers.

Support Activities
These activities support the primary activities and help the organisation function efficiently.
• Firm Infrastructure: Management, planning, finance, accounting, legal, and
government affairs.
• Human Resource Management: Recruiting, hiring, training, developing, and
compensating employees.
• Technology Development: Research and development, process automation, and
information systems.
• Procurement: Acquiring raw materials, supplies, and equipment inputs.
 Porter’s Value Chain: Example of a
Fast-Food Restaurant - McDonald's
Primary Activities
• Inbound Logistics: McDonald's sources raw materials like beef, potatoes, and buns from various
suppliers. They have strict quality control measures to ensure consistency.
• Operations: The core operation involves preparing and cooking food items according to standardised
recipes and maintaining cleanliness and hygiene.
• Outbound Logistics: Finished products are delivered to customers through the restaurant's counter
or drive-thru. McDonald's also manages its distribution network for supplies.
• Marketing and Sales: Extensive advertising, promotions, and branding create a strong brand image.
The focus is on consistent product offerings and value pricing.
• Service: Fast and efficient customer service is crucial. McDonald’s emphasises order accuracy,
cleanliness, and friendly staff.

Support Activities
• Firm Infrastructure: McDonald's has a strong franchise model, efficient supply chain management,
and financial stability.
• Human Resource Management: Hiring, training, and managing a large workforce is essential for
consistent service.
• Technology Development: McDonald's invests in technology for order taking, inventory
management, and customer experience enhancement.
• Procurement: Efficient procurement of raw materials and supplies is vital for cost control and
product quality.
Process Design
Improvement of processes helps with:
• Reduce costs
• Expansion and entering a new market
• Offer better products or service
• Opportunities offered by technology
• Execution of new strategy

Process map for purchase of equipment

Step 1 Step 2 Step 3 Step 4 Step 5

Step 1 Step 2 Step 3 Step 4 Step 5

• Get approval from the • Notify and invite • Review tenders • Invite selected • Select the best
board to put out a potentially interested submitted from suppliers to give a supplier offering,
tender for the suppliers of the suppliers and presentation taking into account
purchase of a machinery that a eliminate unsuitable showcasing the the cost and other
specialist new factory tender process is suppliers benefits of their factors.
under way machinery
 Product and service
development

Five stages of product and service development

1. Consider customer needs: Product and service must

meet the needs of the customer
2. Concept screening: The idea is vetted against certain
criteria before progressing to the design and development
stage
3. Design process: The product and service are designed
using processes. (includes building prototype)
4. Time to market: Time to get the design ready
5. Product testing: Final testing ensures that the product
works as intended and that customers like it.
 Product Development Stages: The iPod Example
1. Consider the Customer Needs
• Problem Identification: Apple recognised that consumers wanted 4. Time-to-Market
to carry and listen to their music collections portably.
• Speed to Market: Apple prioritised a rapid product launch to
• Target Market: The initial target market was young, tech-savvy capitalise on market interest.
consumers who valued convenience and personal music taste.
• Supply Chain Optimization: They established efficient supply
chain processes to ensure timely production and distribution.
2. Concept Screening
• Feasibility Assessment: Apple evaluated the technical feasibility 5. Product Testing
of creating a portable music player with sufficient storage capacity
and battery life. • Usability Testing: Apple conducted tests to evaluate the iPod's
ease of use and user experience.
• Market Potential: They assessed the potential market size and
growth for such a product. • Beta Testing: A limited number of consumers were given iPods
to test before the official launch.
• Competitive Analysis: Apple analysed existing portable music
players to identify potential gaps in the market. • Quality Assurance: Rigorous testing was conducted to identify
and address any product defects.

3. Design Process
• Product Design: Apple's design team created a sleek, portable
device with user-friendly controls.
• Prototyping: Multiple prototypes were developed to test different
designs, user interfaces, and functionalities.
• Engineering: Apple engineers worked on developing the necessary
hardware and software components.
 Support for the purchasing (Procurement)

Links
team

between
• Credit terms: Finance can liaise between purchasing and suppliers to
help negotiate favourable credit terms

finance and • Price: Finance can help support profit margins by advising on the
maximum prices that should be paid.

Operations • Payment: Purchasing will approve the payment, and finance will
process the payments

• Data capture: Data, such as supplier and order details, are captured by
purchasing and then passed to the finance team

• Inventory: Finance and purchasing teams will liaise over the inventory
levels

• Budgets: Finance will discuss costs when preparing the budget

 Support for the production (Operations)

Links team

between • Cost measurement, allocation and absorption

finance and • Budgets

Operations • Cost and Quality

• Inventory
Supply chain management

Supply chain management is concerned with the

flow of goods and services through the supply
chain. Ultimately, the goal is to contribute to the
customer satisfaction.

Source:blog.procureport.com
Business partnering

Finance Function Examples of assistance

Assembly of information • Management accounts

• KPIs
• Monitoring performance of supply chains

Analysis for insights • Depth of information behind management accounting variances

• Quality and operational processes improvements

Advising to influence • Reporting for decision-making

• Effective communication of insights provided
• Objective overview of performance

Apply for impact • Strategic plans and budgets to guide the future direction of the function
• Control systems to manage business and operational risks
 key performance indicators (KPIs)

Key Performance Indicator Role in supporting operations

Operating Expense Ratio (OPEX) This KPI compares expenses to revenue. It indicates the ability of the operation’s function to manage its
costs in relation to revenue.

Capacity Utilisation Rate This KPI compares the actual capacity of the operation’s function to its maximum possible capacity.

Process Downtime Level This KPI measures the proportion of time that a process was actually running compared to what was
planned.

Machine Downtime Level This KPI measures the proportion of time that a machine was actually running compared to what was
planned

Order Fulfilment Cycle Time This KPI measures the total time taken from the customer ordering a product to when it was delivered to the
customer.

Inventory Shrinkage Rate This KPI measures the percentage of inventory lost between when it was produced and when it was sold.

Rework Level This KPI measures the amount of rework required following a process.
 Examples of KPIs and Their Role in Supporting
Operations

Role in Supporting
KPI Operations Example
A manufacturing company aims to reduce its OPEX ratio from
Operating Expense 40% to 35% by optimizing energy consumption and reducing
Ratio Measures cost efficiency overhead costs.
A production facility targets a capacity utilization rate of 90% by
Capacity Utilization implementing production scheduling tools and reducing machine
Rate Measures asset utilization breakdowns.
Process Downtime A call center aims to reduce process downtime by 20% through
Level Identifies process bottlenecks process mapping and automation.
Machine Downtime Measures equipment A factory implements predictive maintenance to reduce machine
Level reliability downtime by 15%.
Measures customer An e-commerce company strives to reduce order fulfillment cycle
Order Fulfillment satisfaction and operational time by 2 days through improved inventory management and
Cycle Time efficiency faster shipping.
Inventory Shrinkage Measures supply chain A retail store implements inventory tracking technology to reduce
Rate efficiency and loss prevention inventory shrinkage by 10%.
Measures process quality A manufacturing plant reduces rework by 30% through improved
Rework Level and efficiency quality control and employee training.
 Transport costs
Quality costs (warranties)
Warehouse costs and inventory management
Target costs
Supply chain costs per unit sold

Other Percentage wastage rate

Percentage defect/error rate

KPIs to Percentage product returns

Percentage reuse/recycling of returns
Consider: Percentage customer orders fulfilled
Percentage on-time delivery rate
Delivery times
Asset utilisation rate
Labour utilisation rate
Queues and waiting times
Class Activity

Choose one of the following companies: Apple,

Tesla, or Nike. Identify 5 key performance
indicators (KPIs) that are crucial for the
company's success. For each KPI, explain why
it is important and how it can be measured.
Remember to refer
to your textbook:

Chapter 9