Business Management - Topic 5

What is operations management?

The process of transforming resources/inputs into outputs by adding value (design, plan, direct, and improve the production of goods and services)

How is operations and marketing interrelated?

Marketing does research to discover needs, business will produce the necessary products to meet those needs, production methods chosen by operations will affect quality and USP, exclusively produced vs. mass produced products will be marketed differently

How is operations and HR interrelated?

HR recruits, trains, and motivates employees, operations need to decide on production methods (capital intensive or labor intensive) which influences how many employees are needed, what training is necessary, HR plans these trainings, hires the employees, and creates contingency plans for operational crises

How is operations and finance interrelated?

Finance ensures funds are in place to meet the needs of production, cost reductions could lead to inefficiencies and low quality

What is job production?

Creating an individual product from start to finish, the product is tailor-made to meet specific needs of a customer (one-off items like buildings, wedding dresses, movies, haircuts, and music instruments)

Why would job production be necessary?

Customers have a very specific requirement or there is a small number of customers and capital intensive labor is too expensive

What are advantages of job production?

• Quality of production is high

• Highly motivated employees as they enjoy their job and can use their expertise and skills

• Products can be sold for higher prices due to unique specifications

• Flexibility in designs and specifications allows for product to be adapted to customer needs, can improve relationships

What are disadvantages of job production?

• Very labor-intensive, costs are high

• Low production quantities so less EoS

• Requires highly skilled workers

• Time consuming

• Long working capital cycle can cause cash flow problems, customers may pay a deposit and pay the rest after product is complete

What is batch production?

Producing similar items in groups, each batch is completed before moving to the next (Nike shoe made by sizes, bakery making batches of different flavored cookies )

When would batch production be used?

Amount of demand for a certain product in the market is unclear so batches are made to analyze the demand or business has a range of similar products that meet slightlydifferent consumer needs

What are advantages of batch production?

• EoS from producing in larger quantities

• Specialized employees for each batch can increase productivity

• Tends to be an automated process with some employees

• Wider product portfolio may increase sales and lower risks

• Some flexibility allows each batch to be adjusted to meet a range of customer needs/expectations

What are disadvantages of batch production?

• Inflexible once production starts

• Storage costs may be high because of increased stock, work-in-progress, and resources for each batch

• Repetitive work can lower motivation and lead to boredom

• High production costs due to many machine parts and settings for each batch

What is mass production?

Manufacturing large amounts of a standardized product on an assembly line (ball bearings, phones, Legos, paper clips, pins, toothpicks)

What is flow production?

A type of mass production that keeps going forever, even more automated with even less workers, runs 24/7 to maximize output and eliminate waste

Why would mass or flow production be used?

Company is large, demand for products is high, product is standardized

What are advantages of mass/flow production?

• Large-scale production due to use of machinery

• Standardized quality

• EoS due to high production quantities

• EoS through capital-intensive (tech EoS) methods

• Lower labor costs as employees are only at certain stations to fix, maintain, and assist machines

What are disadvantages of mass/flow production?

• Low motivation due to boredom

• Set-up, running, replacement, and storage costs are high due to captial-intensive production and a lot of held stock

• Breakdowns in machines can cause major delays

• Very little flexibility

What is mass customization?

Producing large quantities of goods through mass production but products can be tailored to a customer’s exact preferences (customizable shoes, cars with different colors, wheels, seats, etc.)

Why would mass customization be used?

EoS needed due to intense competition in the industry or the company wants to sell products which are adapted to customer specifications at a relatively lower price

What are types of mass customization?

• Collaborative customiziation: close interactions between customer and business to adapt mass-produced products according to customer specifications

• Adaptive customization: customers choose from pre-set customizations provided by the business

• Cosmetic customization: changes to the face of the product, usually packaging, to suit customer needs

• Transparent customization: personalized items are recommended to the customer based on their online data

What are advantages of mass customization?

• Customers have some variety of options so businesses can target a larger customer base

• Business maintains EoS of mass production due to large volumes and capital-intensive production

• Business can charge a higher price due to customization

What are disadvantages of mass customization?

• Hard to resell returned customized products

• Higher costs due to a wider variety of stock and equipment needed

• Customized products take longer to produce and can result in supply chain problems

What needs to be considered when choosing an appropriate operation method?

• Relative costs of labor and capital

• Size of market

• Corporate objectives (tailor for customers, provide large variety, provide high quality, produce in large quantity)

• Capital vs. labor-intensive production

What are the benefit of labor-intensive operations?

Can offer more personalized services/customized goods

What are the benefits of capital-intensive operations?

Higher level of output, standardization in products

What is efficiency?

How well a business can transform physical, human, and financial inputs into outputs

What is waste/muda?

Any part of the production process that doesn’t add value

When is a business more efficient?

When more products are produced with the same or less resources or when quality, speed, and results increase and costs decrease

What are parts of muda?

• Over-processing/when the business adds more features or functions to a product than necessary

• Delays in production, delivery, and inefficient movement around the production facility

• Sub-standard and defective output that will need to be re-worked

• Waste of energy (lights, A/C, utilities) by leaving them on when not needed

• Under or overproduction

Why is it important to reduce muda?

Reducing waste reduces costs, less waste means greater efficiency, more waste results in resources lost which can harm people and the planet

What is lean production?

The process of streamlining operations and processes to reduce waste and achieve greater efficiency which can lead to improved quality and reduced costs

What are the principles of lean production?

• Waste minimization/removal of processes that don’t add value

• Aim for no defects by identifying and resolving problems at the source (quality control)

• Flexibility, resources are adaptable to the changing needs of the business

• Continuous improvement to quality and efficiency in small steps (Kaizen)

• Develop and maintain good professional working relationships in the supply chain

What is Kaizen?

Philosophy of making small and continuous improvement to increase efficiency and productivity

How is Kaizen implemented?

Small groups of employees are formed with the purpose of identifying changes and improvements to products, processes, and procedures

Can be motivating for employees as they are helping to improve the system

Why does Kaizen work?

• Change is easier to manage in small, continuous improvements

• People tend to be resistant to big changes

• Focusing on quality often saves costs

• Motivating for employees as they can contribute regardless of rank

What are the benefits of Kaizen?

• Diversity of ideas from employees to make the best decision

• Employees have a greater understanding of problems than managers and directors

• Staff involvement improves motivation

What are the limitations of Kaizen?

• Meetings and evaluations takes up, can reduce productivity

• Staff may demand for higher wages due to increased responsibility

What is just-in-time (JIT) production?

Minimizing costs by reducing and eliminating stock as the absolute minimum levels of stock is held and finished goods are delivered as soon as they are done

The business places smaller, more frequent orders that are delivered just in time for use

What are the benefits of JIT production?

• Reduces costs by reducing stock held, money can be used for other operations

• Employees are more careful due to limited stock

• Free space can be used for production

• Successful JIT production means the business has good relationships with suppliers

• Improves cash flow

• Can reduce break-even point

• Can be more flexible in times of changing demand

What are limitations of JIT?

• Reduced purchasing EoS

• Risk of delay is critical if supply chain breaks down

• May be hard to adapt to changes in environment

• Not suitable for business with seasonal demand

• Huge reliance on external suppliers

• Stock must be good quality

• Relies on sophisticated technology

What is cradle-to-cradle (C2C) design and manufacturing?

A sustainable production model based on processes that benefit the environment (make products more durable, use recyclable material, choose less polluting production methods)

What is the opposite of cradle-to-cradle?

Cradle-to-grave (single use products that end up in land fills)

What is quality?

Characteristics of a product or service that meets customer needs and expectations

Good quality mans the product fulfill its purpose and meets customer expectations

How can customers percieve quality?

• Physical appearance and design

• Image and reputation of business

• Reliability

• Durability

• Fit for purpose

• Safety features

• Customer service

• After-sales service

What is quality management?

Controlling business activities to ensure products are fit for a purpose

What are 4 reasons why quality may be a priority for a business?

• Increasing consumer awareness (ratings, reviews)

• Increased competition

• Government legislation makes certain quality standards mandatory

• Increased customer income, customers can pay for higher quality

What is quality control?

The traditional approach to quality by inspecting, testing, and sampling the quality of completed work (reactive approach)

What are the advantages of quality control?

• Cheaper, need to hire a few QC inspectors than train every employee

• Prevents faults from reaching customers if not done in samples, safeguards reputation

• Widespread issues and problems across the organization can be identified by inspectors

What are disadvantages of quality control?

• Expensive to fix mistakes since products are complete

• Root problem isn’t fixed

• Lack of accountability for substandard work for individuals

• Waste of resources if problem can’t be fixed

What is quality assurance?

Process of assuring customers that everything is done “right first time”, prevents defects by checking the quality throughout production (proactive approach)

What are advantages of quality assurance?

• Improves staff morale as QA includes employee participation and ownership of their work

• New ideas for improving quality can be prevented from all employees

• Breaks down the”them and us” culture as there is less rivalry between producers and testers

• Less wastage as products are checked at every stage

What are disadvantages of quality assurance?

• Time, energy, and training needed to nurture a total quality culture in the organization

• Costs of implementing changes to establish the culture is high

What is a quality circle?

A small group of people taken from every department who meet regularly to discuss potential improvements to product quality

Members volunteer or are picked by senior managers. They also execute and manage solutions to quality issues

What are benefits of using a quality circle to manage quality?

• Improved motivation as the employees who are part of the quality circle are engaged

• Increase involvement can reduce mistakes, improves quality

• Less quality inspectors are needed and less waste will reduce costs

What are limitations of using a quality circle to manage quality?

• Takes time away from other tasks

• Additional training costs

• Only works in democratic leadership or flatter organizational structures

• Employees may not enjoy this form of empowerment

What is benchmarking?

Comparison of products, operations, processes, and financial data with others in the industry, especially market leaders (inter-firm benchmarking), or with past performances of the business (historical benchmarking)

What are benefits of benchmarking?

• Reduces performance gap with rivals

• Simple way to determine quality rather than guessing

• Informs company on competitor actions and customer needs

• Improves quality by using examples and experiences of others, competitive advantage and reduce costs

• Identifies which company has the best process or result and can replicate them

What are limitations of benchmarking?

• Time consuming, expensive to collect relevant and up to date benchmarks

• Replicating ideas and processes doesn’t create a USP

• Processes may not work

• Restrains creative and innovative thinking when relying on idas of others

• Must select the right benchmark for their goal

What is total quality management (TQM)?

A process that requires the dedication of everyone in the org to commit to achieving quality standards, a culture of focusing on quality that is embedded throughout the whole company

What are the fundamental principles of TQM?

• Focus on customers

• Commitment by employees

• Kaizen

• Engagement in the process

• Strategic and systematic approach

• Data utilization

• Communication

What are benefits of TQM?

• Improved motivation from empowered employees

• Reduces or eliminates waste, lowers production costs

• Improved corporate image when reputation is associated with TQM

• Competitive advantage due to customer-focused production process (TQM views quality from the perspective of the consumer rather than the producer)

What are limitations of TQM?

• Cost of implementation and maintenance is high

• Bureaucracy (lots of rules and regs) can hamper the TQM process

• Staff training and development is necessary and can be expensive

• TQM only works if there is full commitment by all employees

• Time lag between implementation and results can take years and may upset shareholders

• Only works if everyone is aligned

How can get approved national or international quality awards?

Apply for an inspection and evaluation of their product’s quality and quality assurance process to show certain quality standards are met

Why would a business want to get national/international quality awards?

• Can use stamp of approval in promotional material

• Some companies only use accredited suppliers

• Promote quality awareness within the organization

• Motivates workforce, recognizes quality achievements

• Attracts high caliber employees

Why would a business not want to get national/international quality awards?

It is a long and expensive process that requires the business to produce comprehensive evidence of quality processes

What are types of quality symbols or logos?

• CE Mark: EU award for products that meet health and safety standards

• ASQ Award: American Society for Quality, dedicated to the promotion and advancement of quality in the US

• BSI Kitemark: British Standards Institutions, responsible for setting quality standards in the UK

• NSF: international organization that certifies products and services meet high standards of public health

What is location?

The geographical position of a business, where the business is positioned or sited

What are quantitative reason for choosing a location?

• Availability, sustainability, and cost of land

  • City centers are expensive as demand is high

  • Inexpensive land is attractive but may not fit firm’s purpose

• Availability, suitability, and cost of labor

  • Affects level of wages paid

  • Supply and quality of labor varies in different areas

  • Mass producing businesses may locate in highly populated countries with low labor costs

  • May want to be closer to customers like retail or service industries

• Proximity and access to raw materials

  • Bulk-reducing industries will locate near sources of raw materials that are heaver and more costly to transport than the final product

• Government incentives and limitations

  • May offer financial incentives to make a business more likely to locate in an enterprise zone (region that are granted special status by a government to encourage development and economic growth)

• Feasibility of e-commerce

  • Businesses that must have physical stores will want to be in an area where customers can purchase items easily

What are qualitative reasons for choosing a location?

• Local knowledge

  • Less risky in familiar areas, market knowledge and experience make it easier to run a business

• Management preference for location

• Infrastructure availability

• Political and economic stability

• Government restrictions and regulations that may make it easier or harder to run a business

• Ethical issues (eg. business with a lot of noise pollution shouldn’t locate themselves in quiet residential areas)

• Comparison shopping (clustering)

  • Locating near other businesses that are in related or similar markets (eg. Akihabara for anime, Garment District in NYC)

What is outsourcing/subcontracting?

Transferring business functions to an external firm within the same country

Eg. Bank with HQ in Sydney outsources customer services to a call center in Perth

What is outsourcing typically used for?

Recruitment of employees, cleaners, call centers, accounting, ICT maintanance, customer service

What is offshoring?

Transferring business functions to a different country

Eg. Bank in Sydney offshored their banking maintenance to an ICT firm in India

What is offshore outsourcing?

An extension of outsourcing where business functions are transferred to an external firm overseas

What is insourcing?

Use of a firm’s own people and resources to accomplish a certain function or task which would have otherwise been outsourced, bringing outsourced operations back

What is reshoring?

Bringing functions that were offshored back

What are advantages of outsourcing and offshoring?

• Improved quality output

• Reduced production and labor costs

• Allows the business to concentrate on core activities as non-core activities are outsourced

• Improved workforce flexibility with the use of part-time employees

What are disadvantages of outsourcing and offshoring?

• Sub-standard quality output may occur without close supervision

• Quality management can be difficult

• Time spent supervising quality of sub-contractors will increase

• Redundancies may occur, negatively impact staff motivation

• Historically negative associations with unethical practices (eg. child labor and dangerous working locations)

What is supply chain management (SCM)?

The sequence of activities from a production of a good or service to being delivered, the art of managing and controlling logistics so that it is efficient and cost effective to stay profitable

What are key functions of SCM?

Stock control, quality control, supplier networks, transportation

What are costs of holding stock?

• Expensive storage costs

• Wasteful if not sold

• Working capital cycle issues

• More insurance and security costs to protect loss and damage of stock

• Product can become obsolete

• Opportunity cost of space

What are costs of holding not enough stock?

• Can’t provide to customers immediately

• Loss of reputation or brand image

• No EoS from buying in bulk

• Can’t respond to sudden increase in demand

• No buffer stock in case of delays in supply chain

• Special orders can be difficult and expensive to produce

What is just-in-case (JIC) stock control?

Keeping more than enough stock to ensure that the necessary parts and products are available at all times

What are advantages of JIC?

• Business can meet sudden changes in demand

• Increased flexibility

• Can speed up production if necessary

• Benefit from EoS

• No wait for delivery of stock

What are disadvantages of JIC?

• Higher cost of storage

• Perishable stock can be wasted

• Greater chance of damage or theft

• Purchasing large volumes can be detrimental to cash flow

What is stockpiling?

Holding excess stock

What are stock-outs?

Holding insufficient stock

What are drawbacks of stockpiling?

• Storage costs

• Vulnerable to fires, damage, and theft

• Perishables may deteriorate

• Stock is illiquid

• Stock can become obsolete if demand changes

• Changing fashion and tastes of the market

What are drawbacks of stock-outs?

• Loss of sales and customers to rivals

• Halted production leading to inefficiencies

• Damaged corporate image

• Higher costs due to fixed costs still needing to be paid

What are the steps in creating a stock control chart?

1. x-axis is time and y-axis is stock level (units)

2. Draw maximum stock level line

3. Draw minimum stock level line, should be above 0

4. Identify buffer stock (JIC)

5. Draw re-order level line (amount of stock remaining where you order more so that you have enough time for delivery)

6. Draw stock quantity line (zig-zag line to show decrease in stock and when new stock arrives)

7. Label the lead time (how much time is needed for the order to be delivered)

8. Label re-order quantity (squiggly bracket on the left of the y-axis)

What factors influence the amount of stock held?

• Type of product sold

  • Fast-moving consumer goods (FMCGs) need more stock held due to high stock turnover

  • Consumer durables are purchased less frequently so less should be held

  • Consumer perishables must not be overstocked to avoid spoilage

• Forecasted level of demand

  • Peaks season requires more stock

  • Low season demand will have less sales so less stock held

• Longer lead times means larger volumes of stock would need to be reordered

• Cost of holding stock

  • Luxury goods are too expensive and risky to stockpile (high opportunity costs)

  • Low-cost FMCGs with high stock turn over will have a lower opportunity cost of holding stock

What is capacity utilization rate?

A measure of a firm’s output level as a percentage of its potential output, measures efficiency and the extent to which there are idle resources

What is the equation of capacity utilization rate?

Capacity utilization rate = actual output ÷ productive capacity x 100%

Higher the value the better

What is high capacity utilization important?

• Can help lower average costs for businesses with high fixed costs

• Businesses with low profit margin must sell a lot to be profitable

• High capacity utilization will help reach the BEP faster

• If extra costs of providing a particular product to 1 more customer is close to 0, high capacity utilization will mean a much greater profit

What are drawbacks of high capacity utilization?

• Minimal time for maintenance repairs

• Stress on workforce can result in problems with quality

• Not a substitute for growth as growth is limited by the maximum capacity

What is a defect?

When the quality of a particular product is unacceptable, it represents waste and inefficiency

What are 2 ways to calculate defect rate?

Defect rate if all products are tested = defective output ÷ total output x 100%

Defect rate if a sample of all products are tested = defective output ÷ number of units tested x 100%

What is productivity?

How well resources are used in the production process to generate outputs

What is capital productivity?

How well a firm uses its physical resources (machines)

How is capital productivity calculated?

Capital productivity = total output ÷ number of capital hours

What is labor productivity?

Efficiency of workforce