Business studies - resource management - 2.4

Job production

Making one off items to suit each customers individual requirements

Benefits:

• Charge higher price

• More motivating for staff (more interesting)

Drawbacks

• High cost per unit

• Finding highly skilled staff can be hard, High staff pay

Batch production

Making a group of identical products simultaneously rather than one at a time

Benefits:

• Allows variation in the product being made (different consumer needs can be met)

• Faster than job production as making a batch of identical products speeds up production

Drawbacks:

• More costly to set up than job production due to machinery

• Cost per unit will still be higher than job production due to machinery being adjusted within batches

Mass/flow production

Continuous production of a single standardised product, usually relying on automation

Benefits:

• Economies of scale

• Increased automation (allows consistency in products)

Drawbacks:

• High initial cost of machinery

• Products need to be identical - no tailoring, lower prices

Cell production

Involves workers being organised into multi skill teams, each completing a part of the production process

Benefits:

• More efficient, as workers share skills

• More motivation, as workers work in a team

Drawbacks:

• Costs are high as its reliant on people rather than automation

• Production volume isn’t as high as mass production.

Where Job production is most effective

• When every customer needs something unique e.g wedding dress

• When there are low labour costs (e.g suits tailor in Bangkok)

• When tailor making something adds real value, e.g shoes for a marathon runner

Where batch production is most effective

• When production has to be split into chunks (shoes in different sizes etc)

• When labour costs are high enough to mean job production is too costly

• When a firm wants to limit availability of an item

Where mass/flow production is effective

• When there is consistent, high demand for a product (e.g sun newspaper)

• When there are higher labour costs

• When efficiency allows prices low enough to boost sales on an item

Cell production

• When there is need for flexibility, but also high production volumes

• When labour has alot to contribute to ideas and efficiency

• When a degree of uniqueness adds value to the customer

Productivity

It is a measure of efficiency on the production process. Usually measured as output per worker per time period

Total output/ number of workers

Factors influencing productivity

• Quality and age of machinery

• Worker skills and experience

• level of employee motivation

Productivity and competitiveness

Increased productivity means increased competitiveness, because the more productive workers are, the lower the unit costs. This is because the labour cost involved in making each unit falls as the worker works faster. If a worker is paid £10 an hour, and makes £10 worth of units an hour, unit cost is £1, so if the worker works twice as fast unit costs would be 50p.

This cut in costs can result in lower prices while maintaining profit margins.

Efficiency

The ability of a business to use its production resources as cost effectively as possible

Factors affecting efficiency

• Quality/age of machinery

  • Fewer breakdowns

  • Newer machinery may produce without variation

• Worker experience/skills

  • Skilled staff likely to make fewer mistakes

  • More experienced workers can spot problems leading to faults

• Employee motivation

  • Motivated staff will be careful not to make errors and will lose less concentration

Labour intensive production

A production process heacily relies on human input with little use of automation

Labour intensive production characteristics

• Labour costs form a high proportion of total costs

• Managing labour costs become critical, perhaps forcing a firm to move to lower-wage countries, or spend heavily on motivational methods

• It offers far greater scope for tailoring products for customers needs’ therefore resulting in higher prices

Capital intensive production

Using high levels of automation, reducing the role of humans as much as possible

Capital intensive production characteristics

• High initial costs due to machinery

• Low running costs

• Offers little flexibility in product variation

Capacity

Term used to describe maximum possible output of a business

Capacity utilisation

• The proportion of maximum capacity being used by the business

• Capacity utilisation = (current output/maximum possible output) x 100

• Shown as a percentage

Issues with under utilisation of capacity

• Higher fixed costs:

  • (e.g) Max capacity is 5,000

  • Total fixed costs is £10,000

  • At max utilisation(5k), FC per unit is £2

  • At under utilisation (2.5k), FC per unit is £4

• Leads to fears of job security among staff, damaging motivation

• Cause poor morale among managers

• Poor reputation for the business, especially service - think of an empty restaurant

Problems with over utilisation of capacity

• Firm may be unable to accept new orders, turning away customers to rivals

• Little/no time to carry out maintenance on machines/ training staff

• The ideal level of capacity is close to 100%, without staying at 100% for too long

Ways to improve capacity utilisation

• Increase current output

  • Use marketing methods to boost sales volume through ads

  • Could use the capacity to make products for other businesses

• Reduce max capacity

  • Sell off assets

  • Lay off staff

Stock/ inventory

The name given to materials, partially made products and finished goods owned by a business which have not been sold

5 features of a stock control diagram

• Maximum stock level

• Buffer/ minimum stock level

• Re order level

• Re order quantity

• Lead time/delivery time

Maximum stock level

Is affected by:

• Amount of space available

• Stock-holding policy

Minimum/ buffer stock level

The amount of stock the business aims to always have available

Re order level

The amount at which a new order for stock is triggered

Re order quantity

The amount of stock ordered each time an order is placed.

It is showed by the vertical jump on the diagram

Lead time/ delivery time

The time taken for stock to arrive.

It is the horizontal distance between the reorder level and the re order quantity line.

Reasons for buffer stocks for raw materials

• If delivery is delayed, buffer stocks allow production to continue

• If a batch of supply is faulty, buffer stocks allow production to continue

Reasons for buffer stocks for finished goods

• Helps ensure the business can always supply customers when they need a product, with the right size/colour

• Allows the firm to accept rush orders from customers

Effects of too much stock

• Opportunity cost

• Increased wastage

  • Stock can go off, or obsolete

• Increased storage costs

  • Keeping stock costs money, space and security

• Cash flow problems

  • Stock represents cash turned into stock, which hasnt turned into cash, can result in cash shortages

Effects of too little stock

• Lost customer

  • If a customer expects products immediately, and there’s nothing, they will be led to competitors

• Delays in production

  • Production stops if there is no stock to use, and only continues when the delivery arrives

• Loss of reputation

  • May occur if word of mouth gets around that the business struggles to maintain stock to meet customer needs

Just in time stock management

An approach to stock management that aims to eliminate buffer stock completely

• It eliminates costs from holding stock

• However production can halt due to lack of materials

Issues to consider for a firm using Just in time stock management

• Suppliers must be willing to deliver frequently (often multiple times a day)

• Deliveries must be reliable, missed deliveries leave the firm with no stock

• Suppliers may need to relocate close to the firm

• Smaller deliveries may lead to a loss of bulk-buying discounts

• Frequent delivieries increase pollution/congestion

What does just in time stock management increase importance for?

The relationship between suppliers and firms:

• Look for evidence in case studies on how well the firm gets on with its supplier to help decide whether it’d work well

Waste minimisation

It is the aspect of lean production that focuses on reducing waste in any business process, such as wasted time, materials or labour

• Less stock is held, meaning less likelihood of stock wastage

• Cash isn’t tied up in stock, which wastes it

• Removing buffer stocks helps identify problems in the production process

Lean production

A collective term for a range of Japanese techniques designed to eliminate waste from business processes

Just in time falls under this

Characteristics of Lean production

• More input from staff

• A focus on quality

• Few wasted resources(Just in time)

• Reducing wasted time

Competitive advantage from lean production

• High productivity, reducing labour cost per unit

• Less spaced used to hold stock, lower fixed costs

• Higher quality, giving reputational advantages

• Faster development of new products, allows firm to be first in the market with new ideas

Quality

Meeting (or exceeding) the requirements of customers

Importance of quality

• Ensure firms are meeting legal requirements to sell products, as well as ethical

• Effects costs - When a a product has defects, the business has used resources which have no use anymore, this affects efficiency, and reducing these defects cut costs

• Helps a business remain competitive, not just pricing, but rivals with higher quality will have more customer satisfaction

• Helps build a brand name, word of mouth publicity. It can work both positively and negatively

What techniques are used to ensure quality

• Quality assurance (QA)

• Quality control (QC)

• Total quality management (TQM)

Quality assurance (QA)

• When systems are used to prevent defects from occurring

• These systems can be checklists, or documentation

Pros of QA

• Lower defects, leading to lower waste, which leads to lower production costs, leading to Lower price, leading to increased competitiveness

• Less defects result in increased reputation

• Workers are more involved, which can increase motivation

Cons of QA

• Costs increase, because you need to design the process, and train workers on preventing these defects

• May slow down production process, leading to reduced productivity

• Workers may resist in being involved, and be more demotivated

Quality control (QC)

A system to ensure a final good or service meets a certain level of quality, It is identifying defects

Pros of QC

• Avoids selling goods with defects

  • Lower defects, means lower refunds, which increases reputation, boosting sales

• Checks occur after the product is produced, meaning there is less impact to the production process, which means increased productivity

Cons of Quality control

• Inspections, customer satisfaction surveys increase costs

• Checks occur after the good is produced, which doesn’t help prevent waste

Total quality management (TQM)

A process that aims to eliminate errors in the production process. the goal is zero defects

• Staff at all levels of the business are involved in assessing quality

• Quality is ingrained in the business’s culture

Pros of TQM

• Defects cost money, and this is inefficient

• TQM makes a firm more efficient reduing production costs

• Zero defects means customers receive a quality product, and this may enhance the brand and add more value to their products

Cons of TQM

• The initial costs of implementing it, training workers to identify defects increases costs

• Staff may command higher pay

• Not good for businesses where quality is critical

Quality circle

A group of staff who meet regularly to find quality improvements. Encourages improvements among the business

Competitive advantage from quality management

• Allows premium price to be charged

• Helps gain distribution, with retailers confident they won’t need to deal with returns/ refunds

• Created brand loyalty and repeat purchase

• Helps build brand reputation which can spread to other products in the company