Business Section 4 Operations Management

Production

Production

The provision of a product/service to satisfy consumer wants and needs

What should a business do to be competitive?

Combine inputs efficiently to make best use of resources at disposal to keep costs low and increase profits

Labour-intensive

Where production relies more heavily on labour relative to capital

Capital-intensive

Where production relies more heavily on capital relative to labour

Operations department

Takes inputs and changes into outputs for customer use

Operations Manager

Responsible for making sure raw materials are provided and made into finished goods/services

Factory/Shop Manager

Responsible for quantity and quality of products off production line + maintenance of production line

Purchasing Manager

Responsible for providing materials, components equipment required for production

Research and Development Manager

Responsible for design and testing of new production processes and products

Productivity definition

Output measured against inputs used to create it, measures efficiency

Productivity formula

output / quantity of input

Labour productivity

output (over given time) / number of employees

Productivity can be raised by

Using fewer inputs to produce same output, using same inputs to produce higher level of output

Ways to increase productivity (6)

Improve inventory control to reduce waste, automation, improve training to increase employee efficiency, motivate employees more effectively, introduce new technology, improved quality control/assurance reduces waste

Benefits of increased productivity (4)

Reduces inputs needed for same output level, lower average cost, fewer workers may be needed - possibly lower wage costs, higher wages might be paid to workers increasing motivation

What is on the x axis of a stock control chart?

Time

What is on the y axis of a stock control chart?

Inventory levels

What name is given to time taken for ordered good to arrive?

Lead time

What 3 lines are shown on a stock control chart (top to bottom)?

Maximum inventory level, reorder level, buffer inventory level

Lean production

Techniques businesses use to cut down waste

Types of waste (7)

Overproduction, waiting, transportation, unnecessary inventory, motion, over-processing, defects

Benefits of lean production (7)

Less storage of raw materials/components, quicker production, no need to repair defects/provide replacement services, better use of equipment, cutting out some processes speeds up production, less money tied up in inventories, improved health and safety leading to less time off work

Types of lean production

Kaizen, just-in-time inventory control, cell production

Kaizen

Small groups of workers meet regularly to discuss problems and solutions. Reorganises factory floor to improve flow of production floor will be open and marked with colour-coded lines

Kaizen advantages (3)

Increases productivity, reduced amount of space needed, improved layout may allow jobs to be combined freeing employees for other tasks

Just-in-time inventory control

Reducing/eliminating need to hold inventories of raw materials/unsold inventories of finished product by delivering raw materials/components just in time and finishing products just in time to be delivered

Just-in-time inventory control advantages (3)

Reduces costs of holding inventory, warehouse space not needed reducing costs, better cash flow (finished product sold quickly, money comes back)

Cell production

Production line divided into separate self-contained units/cells, each making an identifiable part of the finished product

Cell production advantages (2)

Improved morale of employees and makes them more efficient by making them feel valued - higher efficiency, less likelihood of strikes/disruption

Job production

Single product made at a time

Job production advantages (4)

Most suitable for personal services or one-off products, product meets exact requirements of customer, workers often have more varied jobs - increases motivation - higher job satisfaction, flexible - higher prices can be charged

Job production disadvantages (5)

Skilled labour often used - increased costs, costs are higher because often labour intensive, production often takes a long time, products specially made to order - errors can be expensive to correct, materials may have to be specially purchased increasing costs

Batch production

Quantity of one product is made then a quantity of another items will be produced

Batch production advantages (4)

Flexible, gives variety to workers' jobs, allows variety to products which would otherwise be identical, production may not be hugely affected if machinery breaks down

Batch production disadvantages (3)

Can be expensive as semi-finished products will need moving to next production stage, machines have to be reset between batches - delay - output lost, warehouse space needed for inventories of raw materials/components and finished batches of goods

Flow production

Large quantities of a product are produced in a continuous process

Flow production advantages (7)

High output of a standardised product, costs of making each item are kept low, easy for capital-intensive production methods to be used reducing labour costs and increasing efficiency - allows workers to specialise in specific repeated tasks: business may require unskilled workers - low training - low costs, may benefit from purchasing economies of scale, low average costs therefore low prices - usually means high sales, automated production lines can operate 24 hours a day, no need to move goods from one part of factory to other - time saved

Flow production disadvantages (4)

Boring for workers - low job satisfaction - lack of employee motivation, significant storage requirements (unless JIT used), capital costs of setting up production can be high, one machine breaks down whole production line halted

Factors affecting production method choice (4)

Nature of product, size of market, nature of demand, size of business

Automation

Few people needed to ensure smooth running, rest machines

Mechanisation

Production is done by machines but operated by people

CAD (computer-aided design)

Computer software that draws items being designed more quickly and allows to be rotated. Used to design new products or re-style existing.

What does CAD stand for?

computer-aided design

CAM (computer-aided manufacture)

Computers monitor production process and control machines/robots on factory floor

What does CAM stand for?

computer-aided manufacture

CIM (computer-integrated manufacturing)

Total integration of CAD and CAM

What does CIM stand for?

computer-integrated manufacturing

EPOS (electronic point of sale)

Used in checkouts where barcode is scanned. Price and description displayed on monitor and printed on receipt, inventory record changed, inventory automatically ordered at reorder point

What does EPOS stand for?

electronic point of sale

EFTPOS (electronic funds transfer at point of sale)

Electronic cash register connected to retailer's main computer and banks, shopper's card swiped and bank information automatically read and money debited from customer's account after signed/entered PIN, confirmation receipt printed

What does EFTPOS stand for?

electronic funds transfer at point of sale

Contactless payment

contactless device has antenna that transmits information about purchase when touched against contactless terminal

Advantages of new technology (7)

Greater productivity - more efficient production methods - reduced average cost, greater job satisfaction - routine jobs done by machines, workers more motivated - training in use of technology - more efficient, more accurate production - better quality products, quicker communication - reduced paperwork - increased profitability, greater information available to managers through IT - quicker and better decision making, new high tech products introduced - new products made available

Disadvantages of new technology (4)

Unemployment could rise, expensive to invest in - increases risk - large quantities must be sold to cover, employees could be unhappy with changes in work practices, changing constantly: often becomes quickly outdated, must be replaced to remain competitive

Fixed costs

Do not vary in the short-term with number of items sold/produced

Variable costs

Vary directly with number of items sold/produced

Why are costs helpful? (2)

Help managers make decisions on setting prices, deciding whether to continue/stop production. deciding on best location; needed to calculate profits and loss

Average cost formula

total cost (in time period) / output (in time period)

Economies of scale definition

Factors that lead to a reduction in average costs as a business increases in size

Types of economies of scale and definitions (5)

Purchasing - discounts for buying in bulk, reduces unit cost of each item bought. Marketing - Transport, advertising. Financial - lower interest rates. Managerial - specialist in all departments. Technical - specialists and latest equipment

Diseconomies of scale

Factors that lead to an increase in average costs as a business grows beyond a certain size

Types of diseconomies of scale (3)

Poor communication, lack of commitment from employees, slower decision making/weak coordination

Break-even level of output

The quantity that must be sold/produced for total revenue to equal total costs

Break-even charts

Graphs which show how costs and revenues of a business change with sales and the level of sales business must make to break even

Revenue

Income during given time period from sales

What is on the x axis in a break-even chart?

units of production

What is on the y axis in a break-even chart?

costs and revenue ($)

What 4 lines are shown on a break-even chart from top to bottom?

Sales revenue, total costs, variable costs, fixed costs

The break-even point is where:

total costs = sales revenue

Advantages of break-even charts (3)

Managers able to read is profit/loss at any level of output, redrawing graph shows impact of business decisions, shows margin of safety

Margin of safety

The amount by which sales exceed break-even point

Disadvantages of break-even charts (4)

Assumes all produce is actually sold, fixed costs only remain constant if scale of production stays constant, only concentrates on break-even, straight line assumption

Contribution formula

selling price - variable cost

Break-even point =

total fixed costs / contribution per unit

Quality

Producing good/service which meets customer expectations

Quality helps: (5)

brand image, brand loyalty, good reputation, increase sales, attract new customers

Consequences of quality not ensured: (3)

Customers lost to competitors, replacements/repeats, bad reputation through word of mouth

Quality control

Checking quality at end of production process

Quality control advantages (2)

Tries to eliminate faults before customer receives product/service, less training required as inspectors employed

Quality control disadvantages (3)

Expensive - inspectors paid, does not identify why faults occurred - difficult to solve problem, high costs if products scrapped/reworked or service repeated

Quality assurance

Checking quality throughout production process by employees

Quality assurance advantages (3)

Tries to eliminate faults at all stages of production, fewer customer complaints, reduced costs as products do not have to be scrapped/reworked or services repeated

Quality assurance disadvantages (2)

Expensive to train employees, relies on employees being committed to maintaining standards

Total Quality Management

Continuous improvement of products and processes by focusing on quality at each and every stage of production

Total Quality Management advantages (5)

Quality becomes central and important to employees, eliminates faults/errors before customer receives as it has right first time approach, no customer complaints - better brand image, reduces costs as products not scrapped/reworked or services repeated, waste removed - efficiency increases

Total Quality Management disadvantages (2)

Expensive to train all employees, relies on employees following TQM ideology and accepting responsibility for quality

Factors affecting location of a manufacturing business (11)

Market, external economies of scale, power, government influence, production methods, climate, owner personal preference, availability of labour, transport and communication, raw materials/components, water supply

Factors affecting location of a service sector business (7)

Climate, rent/taxes, near to other business, customers - direct, not required - availability of labour, technology, owner personal preference

Factors affecting location of retailing businesses (13)

Type of shoppers, number of shoppers, availability of suitable vacant shop, shops nearby - competitors, attract shoppers, gap in the market? - legislation, rent/taxes, security, delivery vehicles access, customer parking availability/nearby

Factors that influence decision to locate in different country (6)

New market overseas, cheaper/new source of materials, lower rent/taxes, difficulties with labour force and wage costs, government grants and other incentives, trade and tariff barriers

Why do governments influence location decisions? (2)

To encourage businesses to set up and expand in areas of high unemployment, to discourage firms from locating in overcrowded areas/sites noted for natural beauty

Measures used by governments to influence location decisions (2)

Planning regulations - legally restrict business activities that can be undertaken in certain areas, government grants/subsidies (as finance or advantages e.g. low rent)