Business - Operations (Unit 4)

Operational Management

The process of managing resources and production activities to ensure goods or services are produced efficiently, on time, and to the required quality.

Examples of what operational management includes

- Planning production

- Quality control

- Improving efficiency

- Inventory and stock management

Operational objectives

specific, focused targets of the operations management function within an organisation

Why set objectives

To motivate, To lead to better decision making and for the greater coordination of resources

7 operational objectives

- Cost and Volume

- Quality

- Speed of response

- Flexibility

- Dependability

- Environmental objectives

- Added value

Cost and Volume

- Operations must be cost effective, so firms with the lowest unit cost are in a strong position over the market - Focus on Unit cost and productivity/ efficiency.

Quality

- The features of a product that allow it to satisfy customers. A reputation for quality becomes a USP - Focus on reducing scrap rates, improving reliability, developing customer loyalty and reducing complaints.

OTIF (Quality)

ON TIME and IN FULL - Measures how well a business meets customer delivery expectations - It is the % of customer orders that are delivered ON TIME and IN FULL.

Speed of Response

- Being a reliable and dependable supplier gives significant competitive advantage. SOR increases customer satisfaction and brand image, and can be achieved through a focus on stock management systems whilst streamlining the delivery process.

Flexibility

- Flexibility targets look at how effectively the assets of a business are being utilised and how responsive it is to short term changes - May have to adjust output levels, increase production without delays or scale down production if necessary.

Dependability

- Dependability relates to business' being able to keep promises E.G next day delivery - Focus on reducing product failure rate, on-time delivery rates, and increasing production reliability. Dependability can improve customer satisfaction, build trust and reputation as well as reduce costs.

Environmental Objectives

A positive attitude towards the environment gives a business a good reputation and helps attract staff - Focus on use of energy and reducing carbon footprint as well as supplying sustainable raw materials. Can improve brand image, meet legal requirements and attract customers and potential investors

Added Value

- Increasing the worth of products so the business can charge premium prices to improve profit margins and competitiveness - Focus on product design and innovation as well as offering customisation and personalisation. Can increase profits and support premium pricing.

Added value (Formula)

Selling price - cost of materials = added value 'mark-up'

Internal influences on operations objectives

- Business resources = Availability of staff etc...

- Finance = Budgets

- Business culture = Focus on innovation?

- Staff skills and expertise

- Management style = Can influence quality, output or innovation.

External influences on operational objectives

- Market demand = High/ low means change to production

- Competition = Create pressure

- Economic factors = Inflation, interest rates tec..

- Technological change = Faster and cheaper production

- Legal/ regulatory factors = Health & safety, environmental laws etc...

- Suppliers = Reliability and costs influence schedules

Economies of Scale

When an increase in the scale of production leads to reductions in average total costs.

Purchasing economies

Buying in bulk reduces the cost per unit of raw materials

Marketing economies

Advertising costs are spread across more units, reducing average cost per product

Technical economies

Using more efficient machinery or production techniques reduces costs

Managerial economies

The employment of specialist managers improves efficiency and decision making

Financial economies

Bigger firms can borrow at lower interest rates and access cheaper finance

Specialisation economies

Workers or machines focusing on specific tasks become more skilled and productive

R&D economies

Costs of innovation are spread over a large output reducing cost per unit

Social and welfare economies

Providing benefits like training, health and childcare improves productivity

Diseconomies of scale

As a business grows, many problems arise within its structure. Eventually, average unit costs begin to rise as output continues to rise.

Coordination diseconomies

This occurs due to a loss of control by management as the firm becomes more complex. Less control means staff are less likely to follow policies, which become more rigid as a firm grows, making it inflexible to changes in demand.

Communication diseconomies

Too many levels in a hierarchy can reduce the effectiveness of communication. Messages may become distorted, potentially resulting in standardised messages which make employees feel disvalued.

Motivation diseconomies

Bigger firm means more difficult to assess the needs of individuals. It also means there is less time for reward and recognition.

Other DEOS

- Technical

- Excessive bureaucracy

- Staff problems

- Less Flexibility

Capacity

Maximum total level of output or production that a business can produce in a given period

Capacity utilisation

The % of a firm's total possible production level that is being reached.

Under-utilisation of capacity

When a firm's output is below the maximum possible. Optimum is around 90%, so anything below that is a waste of resources and money.

Capacity shortage

When a firm's capacity is not large enough to deal with the level of demand for its products.

Capacity factors

- Flexibility of production line

- Demand

- Seasonality of output

- Seasonality of demand

- Implications of failure to meet demand

- Subcontracted production

Advantages of under-utilisation of capacity

- Time for maintenance

- Less pressure on employees

- Cope with sudden changes in demand

Disadvantages of under-utilisation of capacity

- Higher fixed costs per unit

- Employees feel bored and demoralised

- Negative image (unsuccessful)

Overcoming a capacity shortage

- Extend premises

- Offer overtime or extend hours

- Hire new staff

- Outsource

High capacity

Optimum capacity is around 90%, operating closer to 100% leaves little capacity spare.

Benefits of high capacity

- Lower average costs

- Higher profit margins

- Improved efficiency and competitiveness

Drawbacks of high capacity

- Burnout (staff & machinery)

- Diseconomies of scale

- Potential CSR issues

Subcontracting

When a firm asks another business to make all or part of its product.

Benefits of subcontracting

- Allows focus on core business

- Subcontractors can be specialised

- Respond to changes in demand

Drawbacks of subcontracting

- Quality not under direct control

- Subcontractor wants profit too, so can be expensive

- May require giveaway of confidential information

Rationalisation

A process by which a firm improves its efficiency by cutting the scale of operations.

Factors of production

CELL

Capital = machinery, tools etc...

Enterprise = Skills of entrepreneurs

Land = Natural resources

Labour = the workforce

Productivity

A measure of the overall production of a business, using the resources available to achieve maximum output.

Labour productivity

A measure of the output per worker

Advantages of high labour productivity

Lower labour cost per unit

Greater competitiveness

Higher profit margins

Increase output without increasing costs

Difficulties of improving labour productivity

Training is costly and time consuming

Costly to employ more staff

Financial motivation methods lose efficiency in long-term

Lean production

A management approach that aims to minimise waste and maximise efficiency by producing only what is needed and when.

Just in time production (element of Lean)

Items of stock arrive as and when needed, in only the quantities needed at the time.

Push - Pull comparison (JIT)

Traditional businesses 'push' the product through the production process but JIT businesses 'pull' the production through by the demand from customers.

Benefits of JIT

Lower costs - No stockpiling

Reduced waste - Arrive only when needed and in smaller quantities

Improved quality - Smaller deliveries so faults less likely

Drawbacks of JIT

High dependence on suppliers - Must be on-time

Risk of stock shortages - Potential of delays

Requires cultural shift - Not for all businesses

Kaizen

Eliminating waste and improving quality through continuous improvement in the form of small incremental changes.

Labour intensive

where production relies more heavily on labour relative to machinery

capital intensive

using more capital (machinery etc...) than labor in the production process

Examples of Technology to improve operational efficiency:

Automated stock control systems

Barcodes are used so firms know what comes in and out of the business, allowing up to date records and link goods to reorder systems.

- Can aid decision making by showing what goods do well and where.

CAD (Computer-Aided Design)

Use of computer systems to plan, operate and control production. E.G, 3D drawings that can be used to simulate testing and save costs hugely.

3D printing

Cheaply producing small or to scale prototypes from any digital design. Economies of scale no longer exist.

Robotics

The use of programmable machines to carry out production tasks automatically.

- Used in assembly, welding and quality control for example.

- Removes human errors and improves health and safety.

EDI

EDI = permanent link between PCs enabling specified types of data to be exchanged

- Can communicate with suppliers and monitor planning, control and operating.

ICT

Technological tools and resources used to transmit, store and create information. Sharing data through the use of the internet.

- Eliminates the need for high street stores and adds flexibility to operations

Quality

Providing what the customer wants at the right time, to the right standard of product and service. Poor quality can lead to a bad reputation and wastage.

Relationship between quality and demand

As quality rises, customer demands also change as they want more from a product or service.

Tangible measures of quality

Appearance

Durability

Reliability

Functions

Intangible measures of quality

Brand image

Exclusiveness

Benefits of improving quality

Competitive advantage

Increase in sales

Brand loyalty and reputation

Quality control

Improving quality by removing faults at the end. Checking only at the end of production

Quality assurance

Improving quality by building it into every stage of the production process. Getting it 'right first time'

Issues with quality control

- if one product is faulty the whole batch goes to waste

- does little to encourage individuals to improve the quality of their output.

Advantages of quality assurance

- Encourages individual to improve the quality of their own output

- cheap to use current staff rather than employing a specialised inspection team.

TQM (Total Quality Management)

A culture of quality that involves all employees of a firm aiming to remove all errors. Key philosophy includes a 'right first time' approach as well as building rapport with suppliers.

Benefits of TQM

Competitive advantage

Reduced defect rate

Reduced costs

THEREFORE LESS WASTAGE

Issues with TQM

Initial set up costs

Staffing issues (higher pay and more training)

Disruption to existing production

Other quality initiatives

1) Quality circles - employees who meet regularly to discuss issues and recommend changes

2) Zero Defects - A concept which aims to eliminate all errors focusing on prevention rather than inspection.

Competitive Advantage

The ability of a business to perform better than competitors by offering greater value for customers or operating at lower cost.

Managing the supply chain

The supply chain is the complete sequence of stages involved in getting raw materials into a finished good. Efficient management involves being tough with suppliers for lower costs and creating competition with suppliers to reach better deals.

Factors affecting choice of supplier

Cost

Quality

Reliability

Frequency

Flexibility

Payment terms

(Cont onto next cards)

Cost

- Lower supplier costs means reduced unit cost and rising gross profit.

Quality

High quality inputs reduce wastage and directly impacts the quality of the final goods. Cheap suppliers often relate to a lack of quality

Reliability

Just be able to deliver OTIF. This helps avoid delays and therefore shortages. Highly crucial for JIT businesses

Frequency

Frequent deliveries mean lower stock levels which lowers storage costs and unit costs.

Flexibility

Suppliers need to match the changing demand of businesses. Those with erratic demand need suppliers that can cope and deliver.

Payment terms

Use of credit to pay off bills. Generous terms improve cash flow and capital.