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« Ozodi Osuji Lectures #24: Introduction to Marketing | Main | To Professor Akpan with Thanks »

November 09, 2005

Ozodi Osuji Lectures #25: Introduction to Business Operations

by Ozodi Thomas Osuji (Seatle, Washington) --- So far, we have talked about the types of businesses, how businesses are financed and how the products of businesses are marketed (sold). Now let us focus on what most people call the most technical aspect of business, the operations of business on a day to day basis.

Businesses exist to do something, operations or productions management tell us how they go about doing what they exist to do on the day to day basis. Since there are different types of businesses and different businesses do different things, it follows that their operations would be somewhat different. Be that as it may, there are commonalities in what businesses do, day to day.

What engineering and manufacturing firms do daily is different from what banks do on a day to day basis. Nevertheless, operations/productions managers perform related tasks. Let us look at some of these tasks in a cursory manner. The reader who is interested in productions management must take courses in it. It also helps if he has a technical degree in a line of business where he wants to produce something. Obviously, a person with engineering degree would work in the productions of electricity, a person with degree in finance and banking would work in banking operations, a person with marketing degree would work in a retailing, and a person with a doctorate degree would work in producing knowledge (teaching students at a university). Productions management requires technical education in the area one wants to produce and manage something.

We shall make this lecture realistic and not merely academic, by using examples from the real world. Consider a retail store. What goes on in a retail store? First of all, there must be space for the store to store its goods in. Some one must design that space and or rent one that suits retail operations. Not all buildings are suitable for selling merchandise. The store must be designed in a specific manner.

Immediately engineering and architecture comes to mind. Engineers and architects design the buildings and floor plans of stores, factories and offices. In doing their design, they must take into consideration what my old business studies adviser at UCLA, Professor Louis Davis, used to call sociotechnical systems.

Buildings, machines etc must be designed to accommodate production technology, as well as human needs. It is not an either or design but both. The machines must be such that they efficiently manufacture what the business man wants to manufacture and must also accommodate human needs. Human beings are biological and psychological organisms. They operate best in certain environments. The famous Hawthorn electrical power plant experiment in the 1920s teaches us that workers productivity is affected by the ambience of their environment. Seeming minor issues as the color of the paint on the wall of an office and or factory affects the psychology of workers and that in turn affects their productivity.

You walk into a room and it is painted red and that reminds you of blood in an accident scene, so you feel uptight and, if you are tense your efficiency is reduced. Such things as lightening in an office, whether there are plants in the office etc affect workers morale and productivity. Socio-technical systems attempts to design machines, office space etc in such a manner that both machines and human needs are served.

The design of machines and the technology for producing what the business exists to produce is obviously the realm of technicians. Engineers and architects design office buildings, stores for retailing, factory buildings etc. We, therefore, need not dwell on this technical subject other than to say that the design must be such that production is optimized.

If the equipment for producing what you want to produce is not good enough or is old and dated, obviously, you must modernize it. Every factory, equipment has a life span when it is able to do what it is designed to do. A typical car may run well for ten years, after which the wear and tear on its parts makes it break down. The same goes for machines for producing goods, and the same goes for office space and the equipments in offices (computers generally last less than three years before they are outdated and must be discarded and or updated).


Production requires bringing in raw materials and transforming them into finished products. You bring in raw materials and add labor and operations to them and produce new products. The new products are then shipped out to be sold. So where is the raw material for producing the business products going to come from?

Consider refineries. They exist to transform crude oil into the gasoline (and other petroleum derived products) that motorist use in driving their cars. Where is oil to be found and obtained? In the USA, oil is mostly found in the South (Texas, California, Louisiana, Oklahoma etc and in the frigid north, Alaska). Given where the raw material, crude oil, is found, where should refineries be built? Should they be built close to the source of raw materials or should those raw materials be shipped somewhere that production cost could be cheaper, close to the consumers of the final product, the market?

Many of the refineries in the USA are located in the Golf states, and in California and Alaska. These states have the added advantage in that imported crude oil is off loaded in their sea ports and piped to the various refineries where they are refined and then shipped inlands.

It should also be noted that the southern USA is the poorest part of the country. Labor cost is relatively cheap in the south. This means that refineries would have less labor cost than if they had manufactured their oil in high labor costing areas like the Seattle area (a place with the highest concentration of university educated persons in the country, hence it tends to have high tech industries like Microsoft, Boeing, Cancer research facilities etc.)

In Nigeria, most of the oil is obtained in the Nigeria Delta region. We have refineries in the Delta region, Port Harcourt and Warri. We also have refineries in the North.

It would seem to make economic strategic sense to spread refineries to the North, so as to avoid concentrating the source of oil in one area. For example, suppose all the refineries are in Ijawland and Ijaw youths go on rampage and destroy them all; if there are no refineries in the hinterland, Nigeria would immediately go into an economic crisis. Thus, whoever had the foresight to build oil refineries in the North seem to have thinking going on in his brain? Thinking is a rare phenomenon in Nigeria; Nigerian policy planners do not seem to have the ability to think at all; thinking is not their cup of tea. Our leaders exist to chop and grow fat tummies and die from cardiovascular diseases but not to do anything substantial for their people.

In making decisions as to where to locate factories, many economic factors are taken into consideration, including such things as location, cost of labor, location of raw materials, transportation of raw materials to factory site, markets for finished products etc. Again, this is not a technical paper, so suffice it to say that the productions management entails such things as deciding where factories are located and how those factories are constructed and run on a day to day basis.

Raw materials cost money. Businesses often do not have lots of money lying around. Therefore, decisions must be made as to how to buy raw materials. Do you purchase large quantities of raw materials and store them for future usage or do you import them little at a time? If you imported large quantities of raw materials and stored them, suppose something happened to them? Think of hurricane, even theft. What would then happen? You would have lost millions of dollars worth of inventory. Moreover, it costs money to store goods and protect them.

Would it not be nice to arrange with supplies of raw materials to just bring to you what you need on a weekly basis, so that you avoid the cost of buying large quantizes, avoid storage costs and avoid possible loss due to damage from man made or natural disasters? Think of the recent hurricane in New Orleans, if large quantities of crude oil were stored near refineries and the storage tanks were damaged and the oil wasted, think of the cost to the owners of the refineries. On the other hand, if the refineries contain only small quantizes of crude oil, enough to keep the refineries going on, for, say a month at a time, natural disaster would not produce enormous loss.

IN AND OUT. Raw materials come in and are used to produce products and the products are immediately shipped out to wholesalers and other distribution outlets. This is the ideal situation. You receive the right quantities of raw materials, use them to do production and immediately ship out your finished products to be sold. If you stored your products in your storage you run the risk of loosing them in fire and other disasters hence incurring unnecessary financial loss.

Businesses do not have the money to invest in large quantities of inventory, in this case, products, and have them lying around. If you produce something and immediately ship it out to wholesalers, those assume the cost of storing them. And if they are smart they immediately ship them to retailers, who immediately sell them.

This all sounds clean and nit. Unfortunately, life is not always that simple. Many factors affect what companies can or cannot do. Consider transportation. Is the transportation system in the country efficient? If you can count on trains bringing to your factory the raw materials that you need to produce your goods at any time you want it, you can afford the in and out inventory system. But suppose that you are in Nigeria where the trains run whenever they want to, and the roads are death traps, and you could not count that the raw materials you ordered would be there in a year’s time, what should you do? Order a lot and store them? If so, risk incurring the costs mentioned above?

In the former Soviet Union, the system of distribution of goods was so poor that farmers would harvest their products, say potatoes, and have no easy way of getting them to the markets, so that they rot in their barnyards. If the distribution methods are fine, the farm products immediately go to wholesalers, who immediately send them to retail outlets and no potatoes are allowed to rut in a farmer’s barnyard.

Consider a bank. You go into a bank to make a banking transaction. You deposit your money and or withdraw money from your already existing account. This requires your interfacing with the bank’s tellers. (Even in the age of ATM we still have to deal with human beings, tellers.) Perhaps, you went to a bank to borrow money. This requires your interfacing with the bank’s loan officers. Perhaps, you went to the bank to buy bonds (bonds the bank is selling on behalf of the local government) and this often requires your interfacing with the financial section of the bank (stockbrokers).

These are the typical operations of a bank. The bank’s operations manger is responsible for coordinating the activities of the line workers doing depositing, cashing, withdrawing, lending work etc. The operations manager is responsible for the money coming into the bank and the money going out of the bank.

Now consider a typical academic unit at a university. Its operations and productions management entails the professors teaching their subjects to their students and the chair persons of the various academic departments coordinating the professors’ actives. The chair of the department is a supervisor and supervises the activities of his colleagues, as well as the clerical staff of the department. The chair person, in turn, reports to the dean of his college. The dean reports to the Provost/vice president who coordinates all the academic colleges of the University. The provost (also called vice president, academic affairs) reports to the president of the University. Several other persons report to the president of the university, including the vice president of finance, vice president of human resources etc.

The salient point is that operations and productions management entails doing what the business exists to do, producing its products. The products are then sold by the marketing department. The production of the product is financed with money obtained by the finance department. The accounting department keeps records of how revenue comes in and out of the productions department.

The productions manager works with the marketing, financial, and human resources managers to make sure that they do what they are supposed to be doing in their business.

Consider a store manager. He must understand many things: who delivers the goods that he sales (his inventory), when do they do so? How does he take ownership of what they delivered? How are they stocked in the stores shelves: by his staff or the deliverer’s staff? What does he do with items that are not selling quickly, hence occupying store shelf space? Space has cost attached to it. How long should he permit a product to be on a shelf before he removes it as not demanded by the buyers? Shipping and handling issues. How to get customers into the store by reducing the price of certain products (while raising the price of others (You advertise that you are selling orange juice at rock bottom prices; that attracts people into the store. They buy dirt cheap orange juice but hopefully they also go to the produce and meat sections and buy vegetables and meat. You mark up the prices of vegetables and meat etc to cover the loss you took in reducing the priced of orange juice).

I will not go into detailed discussion of specific operations management in this lecture. The subject is fascinating and you ought to study it, if only for the heck of doing so.

Leaders, be they in business or in politics, ought to understand how businesses manage their productions department. A leader ought to have lots of knowledge of how his economy works and that includes what goes on in business operations.

Ozodi Thomas Osuji

Posted by Administrator at November 9, 2005 01:22 PM


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