IB Business Management HL - Unit 5 Operations Management

Factors of production

Factors of production

The resources needed to produce a good or service, namely land, labour, capital and enterprise.

Operations management (or production)

concerned with providing the right goods and services in the right quantities and at the right quality level in a cost-effective and timely manner.

production process (or the transformation process)

refers to the method of turning factor inputs into outputs by adding value in a cost-effective way.

Productivity

a measure of a firm’s operational efficiency level, calculating the rate at which inputs (factors of production) are transformed into outputs (good and services).

Sustainability

the practice of enabling production and consumption of goods and services for the people of today without compromising the needs of future generations.

Value added

occurs during the production process when the value of output is greater than the costs of production. Firms earn profit if value added exists in the production process.

Batch Production

involves producing a set of identical products. Work on each batch is fully completed before production switches to another batch.

Capital Intensive

means that the manufacturing or provision of a product relies heavily on machinery and equipment, such as automated production systems.

Flow Production

form of mass production that uses continuous and progressive processes, carried out in sequence.
When one task is completed, the next stage of production starts immediately.

Mass Customisation

an operations method that uses flexible manufacturing systems to mass produce products that meet individual consumer needs and wants.

Mass Production

large-scale manufacturing of a homogeneous (standardized) product. Unit costs of production are relatively low when using mass production methods.

Job Production

involves the manufacturing of a unique product or one-off job.

The job can be completed by one person (such as a tailor) or by a team of people (such as architects and engineers).

Labour Intensive

means that production relies heavily on labour inputs, so the cost of labour accounts for the largest proportion of a firm’s overall production costs. It is most apparent in the provision of personalized services.

Standardisation

means producing an identical or homogeneous product in large quantities, such as printing a particular magazine, book or newspaper.

Assisted areas (or enterprise zones)

regions identified by governments to experience relatively high unemployment and low incomes, so are in need of regeneration through financial assistance.

Bulk-increasing or weight-gaining industries

involved with products that increase in weight during the production process, so need to be located near their customers in order to reduce costs.

Clustering

Means that a business is located near other organizations that operate in similar or complementary markets.

Footloose Organisation

A business that does not gain any cost-reducing advantages from locating in a particular location.
Hence, the firm can be located in almost any location.

Government incentives

financial enticements offered by the state to businesses to locate in a particular area or region, perhaps due to high unemployment.

Industrial inertia

describes the reluctance to relocate due to the inconvenience of moving even when the competitive advantages for the location no longer existed.

Infrastructure

term used to describe the transportation, communication and support networks in a certain area.

Insourcing

the use of an organization’s own people and resources to accomplish a certain function or task which would otherwise have been outsourced.

Location

refers to the geographical position of a business, i.e., where it is sited.

Offshoring

an extension of outsourcing, which involves relocating business functions and processes overseas.

Outsourcing (or subcontracting)

the practice of transferring internal business activities to an external organization in order to reduce costs and increase productivity.

Break-even analysis

a decision-making tool used to calculate the level of sales needed to cover all costs of production.

Any sales beyond the break-even point generate a positive safety margin and hence profit for the business.

Reshoring

the reverse of offshoring, i.e., the transfer of business operations back to their country of origin

Subcontractors

outsourced firms that undertake non-core activities for an organization. They are used for their expertise and the cost advantages they bring such as accountancy services

Break-even chart

a diagrammatic representation of a firm’s costs, revenues and profits (or loss) at various levels of output

Break-even point

refers to the position on a break-even chart where the total cost line intersects the total revenue line.

This is shown at the point where TC = TR.

Break-even quantity

refers to the level of output that generates neither profit nor loss. It is shown along the x-axis on a break-even chart.

Contribution

refers to the sum of money that remains aſter all direct or variable costs have been deducted from the sales revenue of a product.

Contribution per unit (or unit contribution)

the difference between the selling price of a product and its variable costs of production, i.e., P - AVC.

Loss

exists when the firm’s total costs exceed its total revenues (TC > TR). This occurs at all levels of output or sales below the break-even quantity.

Margin of Safety

the difference between a firm’s actual sales quantity and its break-even quantity. A positive safety margin means the firm can reduce output (or sales volume) by that amount without making a loss.

Profit

the positive difference between a firm’s total revenue and its total costs.

Profit is shown in a break-even chart at all levels of output beyond the break-even quantity.

Target Price

the price set by a firm in order to reach break-even or a certain target profit

Target Profit

the amount of surplus a firm intends to achieve, based on price and cost data. It is calculated by deducting total costs from expected sales revenues.

Target profit output

the sales volume or level of output required to achieve the target profit that business managers expect to achieve by the end of a given time period.

Total Contribution

the unit contribution (P – AVC) multiplied by the quantity of sales (Q).

Hence, total contribution = (P – AVC) × Q.