2.4 - Resource Management

What are the 4 methods of production?

Job production Batch production Flow production Cell production

What does job production involve?

The production of a single product at a time

Describe the key features of job production

One-off or small number of items produced Normally made to customers specifications e.g. wedding cake Often undertaken by small, specialist businesses

Advantages of job production

Quality is high because workers are skilled Workers are well motivated because work is varied Products can be custom made Production is easy to organise

Disadvantages of job production

High labour costs due to skilled workers Production may be slow - long lead times A wide range of specialist tools may be needed Generally an expensive method of production

What does batch production involve?

Completing one operation at a time on all units before performing the next

Describe the key features of batch production

Similar items are produced together Each batch goes through one stage of production process before moving onto next stage The products made in each batch are identical but there can be variations between batches Production can be done using machinery which lowers unit cost and finished off by hand

What are the aims of batch production?

Concentrate skills Achieve better use of equipment and so produce good quality products more economically than manufacturing them individually

Advantages of batch production

Workers are likely to specialise in one process Unit costs are lower because output is higher Production is flexible since different orders can be met More use of machinery is made

Disadvantages of batch production

More complex machinery may be needed Careful planning and co-ordination is needed Less motivation because workers specialise If batches are small costs will be high Money may be tied up in work-in-progress

What is flow production also known as?

Mass production

Describe the key features of flow production

Associated with making high volumes of the same product Products tend to be standardised (all the same) Product moves continuously through production process When one task is finished the next task must start immediately Time taken on each task must be the same Production process uses large amounts of machinery and specialist equipment meaning less need for human labour which lowers unit costs

Advantages of flow production

Very low unit costs due to economies of scale Output can be produced very quickly Modern plant and machines can allow some flexibility Production speed can vary according to demand

Disadvantages of flow production

Products may be too standardised Huge set up costs before production Worker motivation can be very low - repetitive tasks Breaks in production can be very expensive

What does cell production involve?

Producing a family of products in a small self-contained unit (a cell) within a factory

Describe the key features of cell production

Work is organised into teams who work together in a cell Each cell is given responsibility of doing a part of production process as product moves through assembly line Cell production often leads to improved productivity due to increased motivation (team spirit and added responsibility) and specialisation

Advantages of cell production

Less floor space used because cells use less space than a production line Product flexibility is improved meaning a degree of personalisation can be achieved which results in higher added value More motivated workforce as team work is used

Disadvantage of cell production

High level of training is required to ensure the cells are able to perform more specialised tasks

What factors does choosing the right method of production depend on?

Target market - do customers demand product options? Technology - can some or all production be automated? Resources - does the business have finance & people to be able to use flow production? Standards - what quality is required?

What are the 3 approaches to assessing how efficiently a business operates?

Productivity Unit costs Non-productive 'idle' resources

What are some examples of non-productive 'idle' resources?

When employees are often left with nothing to do When machines are only used for part of available times

What is too many idle resources a common sign of?

Inefficiency in production

Define productivity

Output in relation to units of input in a given time period

Which factors influence productivity of machinery?

Age of machinery and maintenance Training of operatives Quality of inputs Hours used v.s. down time Efficiency of programming Unforeseen events e.g. power cuts

What does labour productivity measure?

Output per worker

How is labour productivity measured?

Labour productivity = total output / number of employees

What factors is labour productivity influenced by?

Training and skills of the workforce Motivation Complexity of the product

What does increasing labour productivity do to costs?

Lowers labour cost per unit and hence unit cost

How can labour productivity be increased?

Training Increasing motivation Implement new technology Better working practises Improved recruitment and selection

What are the difficulties in increasing labour productivity?

Stress and demotivation May impact negatively on quality and customer satisfaction which may damage long term reputation and increase waste, effecting unit cost Employees may feel exploited as working harder for the same pay, may work with unions to negotiate higher wages

What does operational efficiency involve?

Maximising the output achieved from given inputs including machinery, materials and people Making the best possible use of all a business's resources for the lowest cost

How can efficiency be improved?

Increasing labour productivity Using technology Choosing the optimal resource mix, labour v.s. capital intensive

What does operations management involve?

Combining the four factors of production or resource inputs: land, labour, capital, enterprise Firms will attempt to minimise the cost of using these resources whilst maximising the quality of the product and the customer service The optimal resource mix is the best way of combining the factors of production in order to meet these requirements within financial constraints

What are unit costs a key indicator of?

Efficiency and productivity

What are unit costs crucial for to a business?

The profitability and competitiveness

What does unit cost measure?

The average cost per unit produced, as measured over a particular time period

When will unit costs vary?

Over time and as the scale of a business' operation changes Unit costs are particularly sensitive to the effect of significant operational scale and to the relationship between fixed and variable costs

Is efficiency and productivity the same thing?

No Productivity is output per worker and it ignores problems such as waste An efficient worker is one who produced as much as possible for the least cost The most efficient production level is the one at which total unit costs are as low as possible

How is unit cost calculated?

Unit cost = total production costs in period (£) / total output in period (units)

Define economies of scale

The effect of unit costs falling as output rises

Where does internal economies of scale arise from?

The growth of the business itself

What are examples of internal economies of scale?

Technical economies of scale Specialisation of the workforce Marketing economies of scale Managerial economies of scale

Describe what technical economies of scale is

Large-scale businesses can afford to invest in expensive and specialist capital machinery

Describe what specialisation of the workforce is

Larger businesses split complex production processes into separate tasks to boost productivity By specialising in certain tasks or processes, the workforce is able to produce more output in the same time

Describe what marketing economies of scale is

A large business can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discounted prices if it has sufficient negotiation in the market

Describe what managerial economies of scale is

Large-scale manufacturers employ specialists to supervise production systems, manage marketing systems and oversee human resources

Where do external economies of scale occur?

Within an industry

What are examples of external economies of scale?

Development of research and development facilities in local universities that several businesses in an area can benefit from Spending by a local authority on improving the transport network for a local town or city Relocation of component suppliers and other businesses close to the main centre of manufacturing are also an external cost saving

What is the difference between labour-intensive and capital-intensive businesses?

A labour-intensive business has a relatively high proportion of its costs related to the employment of people A capital-intensive business has relatively low labour costs, but high costs arising from the extensive use of equipment

What are the key implications for unit costs of labour intensity?

Labour costs are higher than capital costs Costs are mainly variable = lower breakeven output Firms benefit from access to sources of low-cost labour

What are the key implications for unit costs of capital intensity?

Capital costs are higher than labour costs Costs are mainly fixed = higher breakeven output Firms benefit from access to low-cost, long-term financing

Benefits of labour intensity

Unit costs may still be low in low-wage locations Labour is a flexible resource - through multi-skilling and training Labour at the heart of the production process - can help continuous improvement

Benefits of capital intensity

Greater opportunities for economies of scale Potential for significantly better productivity Better quality & speed (depending on product) Lower labour costs

Drawbacks of labour intensity

Greater risk of problems with employee/employer relationship Potentially high costs of labour turnover Need for continuous investment in training

Drawbacks of capital intensity

Significant investment Potential for loss of competitiveness due to obsolescence May generate resistance to change from labour force

What is capacity?

A measure of how much output a business can achieve in a given period - therefore it is a measure of potential output

Why is capacity important?

How capacity is managed has a direct effect on the performance of a business In order for a business to be able to meet demand from customers, it needs to have the capacity to do so, having capacity enables orders to be met and revenues generated However, a lack of capacity can have a damaging effect on business performance

What are the key costs of capacity?

Equipment e.g. production line Facilities e.g. building rent, insurance Labour e.g. wages and salaries of employees involved in production or delivering a service

What does capacity utilisation measure?

The extent to which capacity is used during a specific period

How is capacity utilisation calculated?

Capacity utilisation = actual output / potential output x 100

Why is capacity utilisation an important concept?

Useful measure of productive efficiency since it measures whether there are idle resources in the business Average production costs tend to fall as output rises so higher utilisation can reduce unit costs making a business more competitive Businesses usually aim to produce as close to full capacity (100% utilisation) as possible in order to minimise unit costs A high level of capacity utilisation is required if a business has a high break-even output due to significant fixed costs of production

What are some reasons why business operate below full capacity?

Lower than expected market demand A loss of market share Seasonal variations in demand Recent increase in capacity Maintenance and repair programmes

What do consistently low levels of capacity utilisation lead to?

Indicates potentially serious issues especially if production costs are mainly fixed and the business has a high break-even output Results in the business having higher unit costs than other competitors that may result in the business being less competitive

Drawbacks of high capacity

Less time for productive equipment and facilities to be maintained and repaired, which may increase the likelihood that they break down in the future Employees involved in production are put under greater stress and pressure which can be counter-productive since they become demotivated and there would be an increase in absenteeism Customer service may deteriorate if customers have to wait longer to be served or to receive their product A business is less likely to be able to respond to sudden or unexpected increases in demand

How can a business operate at higher than 100% normal capacity if it finds itself with excess demand?

Increase workforce hours - extra shifts, encourage overtime, employ temporary staff Sub-contract some production activities e.g. assembly of components Reduce time spent maintaining production equipment

How is capacity utilised efficiently with under utilisation?

Increase demand Downsize - sell off assets or rationalise the workforce Lease off spare capacity

How is capacity utilised efficiently with over utilisation?

Reduce demand Outsource parts of the business' operations Increase capacity by investing in more resources

What will the actions taken to utilise capacity efficiently depend upon?

Business objectives Whether the issue is seen as short term or long term Ease with which options could be implemented

Advantages of working at full capacity

Lower unit costs Efficient use of all resources (employees, machinery, factory/retail space) Gives employees a sense of job security to motivated to work harder Improved profitability as long as there is demand

Problems of working at full capacity

Puts a strain on all resources which can lead to more accidents and breakdowns Might have to turn away new orders No time for training or maintenance Maintaining quality can be an issue

What should a business do in order to maintain efficiency by maximising capacity utilisation?

Use its resources to their full potential even when demand falls

What is spare (excess) capacity?

Where actual output is less than capacity

What is excess demand?

Where demand for a business' products or services is greater than the business capacity

What is downtime?

Any period when machinery is not being used in production Some downtime is necessary for maintenance, but too much suggests incompetence

What is rationalisation?

Reorganising in order to increase efficiency This often implies cutting capacity to increase the percentage utilisation

What is subcontracting?

Where another business is used to perform or supply certain aspects of a firm's operations

What are stocks?

The raw materials, work-in-progress and finished goods held by a firm to enable production and meet customer demand

What are the 3 main categories of stock?

Raw materials & components Work in progress Finished goods

Describe raw materials & components

Bought from suppliers Used in production process E.g. parts for assembly or ingredients

Describe work in progress

Semi or part-finished production E.g. construction projects

Describe finished goods

Completed products ready for sale or distribution E.g. products on supermarket shelves; goods in the Amazon warehouses

Why do businesses hold stock?

Enable efficient production to take place Satisfy customer demand Precaution against delay from suppliers Allow for seasonal changes Provide a buffer between production processes

What are key parts of a business operating efficiently?

Stock management and control

Why is it crucial to manage stock carefully?

It often ties up a significant value of capital that could be used elsewhere in the business

Why is stock management much easier these days?

Due to widely available IT systems

What mistakes in stock can have significant damage on a business?

Stock-outs and having the wrong stock

What are the main influences on the quantity of stock held?

Need to satisfy demand Need to manage working capital Risk of stock losing value

What does the overall cost of stock need to take account of?

Cost of storage Interest costs Obsolescence risk Stock out costs

Describe the impact of cost of storage on the overall cost of stock

More stocks require large storage space and possibly extra employees and equipment to control and handle them

Describe the impact of interest costs on the overall cost of stock

Holding stocks means tying up capital on which the business may be paying interest

Describe the impact of obsolescence risk on the overall cost of stock

The longer stocks are held, the greater is the risk that they will become obsolete (unusable or not capable of being sold)

Describe the impact of stock out costs on the overall cost of stock

A stock out happens if a business runs out of stock which will result in lost sales & customer goodwill, cost of production stoppages or delay, extra cost of urgent replacement orders

Why can stock-out costs be particularly significant?

Results in lost sales that may instead go to a competitor as well as the potential loss of customer goodwill and loyalty

What is the overall objective of stock control?

To maintain stock levels so that the total costs of holding stocks is minimised

How does the need to satisfy demand influence the quantity of stock held?

Failure to have goods available for sale is very costly Demand may be seasonal or unpredictable

How does the need to manage working capital influence the quantity of stock held?

Holding stocks ties up cash in working capital Opportunity cost associated with stock holding

How does the risk of stock losing value influence the quantity of stock held?

The longer stocks are held, the greater risk that they cannot be used or sold

What are the key elements of a stock control chart?

Maximum stock level Re-order level Lead time Minimum stock level Buffer stock

What is maximum stock level?

Maximum level of stock a business can or wants to hold

What is re-order level?

Acts as a trigger point, so that when stock falls to this level, the next supplier order should be placed