IB Business Management HL - Unit 5 Operations Management

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Factors of production

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69 Terms

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Factors of production

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

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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.

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production process (or the transformation process)

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

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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).

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Sustainability

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

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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.

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Batch Production

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

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Capital Intensive

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

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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.

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Mass Customisation

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

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Mass Production

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

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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).

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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.

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Standardisation

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

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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.

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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.

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Clustering

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

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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.

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Government incentives

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

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Industrial inertia

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

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Infrastructure

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

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Insourcing

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

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Location

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

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Offshoring

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

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Outsourcing (or subcontracting)

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

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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.

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Reshoring

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

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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

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Break-even chart

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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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Target Price

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

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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.

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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.

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Total Contribution

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

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

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