Unit 5 Operations Management

operations management

planning, organizing, co-ordinating, and controlling all activities related to changing inputs into outputs.

capital-intensive production

operations processes that have a high proportion of capital cost compared to the costs of labour or land

labour-intensive production

operations processes that have a high proportion of labour costs compared to the costs of capital/land.

how does value added impact on marketing function

• goods/services are produced based on market research to meet wants and needs

• needs to be promoted to existing/potential customers

• product needs to be distributed through appropriate channels

• suitable pricing method

how does value added impact on finance function

• costs of different operations methods

• funding is needed for lean production and research and development

• production managers must be held accountable for their expenditure and budgets

how does value added impact on HR function

• production workers need to be trained to work productively

• supervisors and quality controllers may need to be hired

• crisis management team might need to be formed

• operations managers are responsible for collaborating with managers from other departments to meet organizational objectives

production

the manufacture or output of a good or service

4 operations methods

• job

• batch

• mass (flow)

• mass customization

job production

production of a special/customized product suited to specific requirements of an individual of a customer

batch production

batch production is an operations method that involves identical good being made in sets or batches

mass (flow) production

focuses on large-scale production techniques for mass-market goods

mass customization

combines benefits of mass production with job production

lean production

focuses on less wastage and greater efficiency

7 sources of waste

• defective products

• over production

• stockpiling (Excessive inventories)

• unnecessary transportation

• over processing

• waiting time

• excess movement by the worker

greater efficiency can be gained through:

• staff training and development

• higher levels of staff motivation

• be technologically advanced

methods of lean production

• continuous improvement

• just in time (JIT)

Continuous improvement

involves making continuous small and incremental progress to improve productivity and efficiency

just in time (JIT)

stock control system that removes the need to have buffer stocks (large quantities of stock held as back-up inventory)

cradle-to-cradle design and manufacturing

production techniques that are waste-free and can be efficiently recycled

• all material inputs must be technical or biological to avoid waste.

quality control

involves quality controllers examining a sample of products systematically

quality assurance

agreeing to and meeting quality standards at all stages of production to prevent mistakes.

methods of managing quality

• quality circle

• benchmarking

• Total quality management

quality circle

• preventing defects from rising in the first place

• group of employees who meet to identify/examine/solve problems related to their work to improve overall quality and productivity.

benchmarking

making internal and external comparisons of predetermined criteria to meet/exceed the benchmarks

total quality management

management approach that aims to involve every employee in the quality assurance process

benefits of lean production and TQM

• fulfilling needs/wants of customers

• improving customer perception on the business

• improving employees’ motivation

• gaining competitive advantage over rivals

• lowering production costs = higher profitability

industrial inertia

when a business continues to stay in the same location even when there’s no financial advantage for doing so

bulk-reducing industries

industries that convert large quantities of raw materials into smaller, more valuable products, reducing overall volume and transportation costs.

• located near the source of raw materials

bulk-gaining industries

industries that produce larger, heavier products from smaller inputs, increasing overall volume and transportation costs.

• located near customers

compare outsourcing and offshoring

• outsourcing: hiring a third-party to do non-essential tasks to ensure cost effectiveness and good quality

• offshoring: relocating business processes/production to another country to reduce costs.

advantages and disadvantages of outsourcing

+

• business concentrates more on core processes

• benefits from specialized services of outsourced partner

• good customer service from subcontractor attracts new potential customers + strengthens brand loyalty

-

• potential conflict with subcontractors

• possible quality issues

• costs for monitoring/maintaining relationships with subcontractor

advantages and disadvantages of offshoring

+

• focus on core purpose

• labour laws may be more flexible overseas

• employee costs can be lower

• lower operational costs, leading to higher profit margins

-

• often criticized as unethical

• cultural issues and concerns

• overseas operations may lead to challenges in quality control

• could lose some control over worker if based overseas

insourcing

firm’s use of its own resources to fulfil a certain role, function, or task

reshoring

bringing back production/other businesses functions into the home country from an overseas location

break even

when a business sells enough goods/services to cover all costs of production without making a profit or loss.

contribution per unit

amount of money business earns from selling each unit of output after deducting variable costs.

• contribution per unit = P - AVC

break-even quantity (BEQ)

amount of sales/output required to break even

• break even = fixed costs divided selling price - variable costs per unit

total contribution

the total amount of money a business earns from sales after variable costs are deducted, contributing to covering fixed costs.

• firm breaks even when total contribution is equal fixed costs

break-even analysis

visual tool that enables managers to interpret the relationship between fixed, variable costs, price, revenues, and profits.

MOS (margin of safety)

difference between a firm’s sales volume and its break-even quantity

break-even point (BEP)

total sales revenue (TR) = total costs of production (TC)

target profit

desired/expected profit

target profit quantity

sales quantity needed to reach firm’s target profit

• fixed cost + target profit divided price - variable cost per unit

target price

amount charged to customers to reach break-even

• average fixed cost + average variable cost

• (average fixed cost divided output) + average variable cost

buffer stock

additional stock kept for unforeseen events

limitations of break-even analysis

• assumes costs and revenues are static

• prices and costs are assumed to be constant

• it’s sometimes hard to classify certain costs as being fixed or variable only

• not suitable for multi-product businesses

• effectiveness of analysis depends on accuracy of the data

• ignores qualitative issues

supply chain process

management process of overseeing the logistics from the manufacturing stage to the finished product being delivered to the consumer - happens locally and globally.

JIT and JIC

• JIT: holds raw materials only when needed

• JIC: designed to have a reserve stock level (buffer stock) for unexpected problems/events

stock control charts

tool to monitor/control the level of inventory held by a business

lead time

length of time taken between a firm ordering new stock and receiving it for production

reorder quantity

volume of the order to replenish stocks

usage rate

speed at which stocks are consumed in production process

capacity utilization rate

measures the extent to which a firm is operating at its maximum potential level

• (actual output x productive capacity) x 100

defect rate

measures number of faulty items as a percentage of total output

• (defective items divided total output) x 100

equation for labour productivity

output per period divided number of employees at work

capital productivity

how efficient are non-current assets generating output

• total output divided capital input

productivity rate

(total output divided total input) x 100

operative leverage

how an increase in firm’s sales volume will affect its operating profit

• (sales - variable costs) divided profits

make or buy decision

Comparing CTM and CTB

how to calculated CTB AND CTM

CTB: price x quantity

CTM: fixed costs + variables

crisis management

response taken in the event of an actual crisis occuring

contingency planinng

development of predetermined strategies to deal with a crisis

Fundamental factors affecting the effectiveness of crisis management

• transparency

• communication

• speed

• control

incremental innovation

adjusting and improving something that already exists

disruptive innovation

creating new product or process, creating a new market

data analytics

analyzing, developing, and transforming data to extract useful information

database

computerized collection of data that’s stored and organized

cybercrime

any crimes conducted through the internet or digitally.

cybersecurity

management process of protecting organization’s internet-connected systems

examples of critical infrastructures

• artificial neural networks (ANN)

• data centres

• cloud computing

ANN

aspect of computing systems that stimulate how the human brain processes data and information

data centres

physical facilities that store large amounts of data

cloud computing

delivery of computing resources/services via internet

internet of things

network of interconnected devices and appliances over the internet

big data

large and complex sets of data that are generated by business activity

5 Vs that differentiate big data from traditional data

• volume: large amount

• velocity: speed at which its generated

• variety: different types of data

• veracity: quality of data

• value: potential benefit

digital taylorism

use of management information systems to monitor employees to increase operational efficiency