How Operations Management Enhances Corporate Profitability

"Operations management" is a technical term for a simple concept -- the way a company produces goods and services and delivers them to customers. If your company makes sausage, for example, it is operations management that determines how you get your ingredients, how you turn them into sausage, what you do with the sausage while you're waiting to sell it and how you get that sausage to your customer. Because it lies at the very core of what every company does, operations management is directly tied to corporate profitability.

Your marketing efforts might entice consumers to try your product or service once, but if they don't have a pleasant experience, they may never try it a second time. Even loyal and repeat customers can become former customers if your offerings aren't consistent in quality. Losing existing customers and failing to convert tryouts into customers will cost you revenue, and when the top line (revenue) shrinks, so does the bottom line (profit). Effective operations management includes strong quality control to protect and expand the customer base that generates revenue.

Central to operations management is the drive for efficiency. You want to make resources go as far as possible -- that is, generate as much revenue as possible -- without compromising quality enough to put off customers. Say you run a pizza parlor, and you're using one big can of sauce for every 10 pizzas. If you can stretch that to 11 pizzas per can without customers noticing or caring that they're getting less sauce, you'll have cut your sauce expenses by 10 percent without losing revenue. That cost savings goes directly to profit. Efficiency in the use of raw materials, labor, supplies and other production "inputs" means more revenue-generating output and more profit for each dollar you spend.

Say you own a shoe store, and you order 100 pairs of a particular basketball shoe for $20 apiece. The shoe turns out to be a hot seller, and your entire stock is gone in a day. You order more, but they won't be in for a week. Until then, you have to turn customers away. Now imagine that the shoe isn't popular at all, and the pairs sit unsold. Each situation is a costly failure of operations management. Underestimating demand means missing out on revenue. Overestimating demand means you may never recoup your expenses. Both reduce profit. Inventory management of some kind is a concern for all companies. Retailers and wholesalers manage products flowing in and out. Manufacturers manage raw materials coming in and finished goods going out. Even pure service industries have "inventory" to manage; think about a law firm with 100 lawyers and not enough clients to fill their hours or an airline with too many, or not enough, empty seats.

Logistics is about managing the flow of "stuff": how you get goods and services from suppliers; how you deliver your own goods and services to customers; and how you store things in between. It's a place to save money by doing such things as carefully tracking your needs for transportation; coordinating production schedules with customer ordering trends; and drawing up delivery routes that hit all your distribution points with the fewest miles of driving. It's also a place to lose money by, say, renting more warehouse capacity than you need; shipping items individually rather than in bulk; or hiring a cut-rate carrier whose late deliveries and shoddy service drive away customers. Smart logistics gets you more service for your money, which enhances corporate profitability.