unit 4 business

operations management definition

management concerned with the use of resources to provide output in forms of goods and services

goals of operation management

• use resources in the most cost efficient way to increase productivity

• produce required output to meet consumer demand

• meet quality standards expected by consumers

Production definition

process of converting inputs such as land,labour, capital,enterprise into outputs : finished goods, services and components

Productivity definition + formula

measure of efficiency of inputs used in the production process especially labour and capital

formula for labout productivity = total output / # of employees

how to increase productivity

• improve education, qualification and skills of employees

• improve motivation of employees

• introduce better technology + automation in production

• improve quality of management decisions

inventories definition

stocks of raw materials, work in progress and finished goods held by a business

benefits of keeping inventories

• production and workers would stop if raw materials and components were missing

• no finished goods on stock → customer demand cannot be met → loss of current + future sales

• no economies of scale if inventories are not bought in large quantaties

disadvantages of keeping inventories

• warehouse costs - need to buy or rent a warehouse were inventories are stored

• handling costs - workers to move inventories in/out of the warehouse

• shrinkage costs + insurance - after some inventories get lost, damaged ot stolen

• obsolence - when not able to sell all finished goods inventories

• opportunity costs - capital tied up → cannot be used more profitably by the business

lean production defenition

production of goods + services with minimum waste of resources so efficiency increases

why does waste happen in production

• production flaws

• overproduction

• factors of production not used efficiently(waiting)

• transporting goods too much

• high level of inventories

• Increase average costs → decrease productivity → decrease competitiveness, sales + profit

lean production methods result in

• improved quality + faster delivery to market

• production resources are not wasted

• cost of holding inventories removed

• decrease average costs → higher profit per unit or allows lower price → increase competitiveness + sales

Just in time lead production

definition - system where no inventories are held by business : (raw materials delivered when needed + finished goods transported to customers immediately)

• Needs -

• need to have fast + reliable supplier to deliver on time in good quality

• need to have flexible capital + workforce to switch among products quickly

Kaizen lean production

approach which gives employees opportunity to make suggestions on how to improve quality or productivity

workers do the tasks every day → might know how to improve productivity better than managers. (e.g repositioning machines by function to save walking time)

job production description

production of items one at a time

highly skilled workers and/or unique resources needed

e.g designer clothes, tailored suit, customised cake

job production benefits

• unique , high quality goods → can charge higher price

• workers motivated + take pride in their work

job production disadvantages

• skilled workers used instead of machinery → higher prices

• Production can take a long time and be expensive if unique resources are needed

• economies of scale are not possible

Batch production description

production of goods in batches

each batch goes through one stage of production before moving to the next one

e.g bakery

batch production advantages

• larger number of goods is made → lower units costs

• materials can be bought in bulk → economies of scale

• some variety + choice to customers

• flexibility - can quickly change based on demand

batch production disadvantages

• job tasks can be repetitive → employees less motivated

• risk of higher warehouse/storage costs until goods are sold

flow production description

produce large quantities of same/similar goods using a continuously moving process

also known as mass production

high degree of automation → less skilled workers

flow production advantages

• capital intensive → lower labour costs

• materials can be bought in bulk = economies of scale

• many goods are produced

flow production disadvantages

• very large capital investment needed at first

• job tasks repetitive → decreased motivation in workers

• one part of the machines breaks down → whole process is stopped

• high amount of all types of inventories held → high costs

• hard to change machines → inflexible production

computer aided design (CAD) vs computer aided machinery (CAM)

• computer aided design - allow to show design + test features → changes can be made quickly → no need to rebuild prototype → cut costs. (e.g. 3D design on computers, 3D printing, etc.)

• computer aided machinery - computers control machinery in production

use of technology in production advantages for businesses

• reduce cost + time to design product

• reduce cost of production (labour costs)

• improves quality + reduces waste

use of technology in production disadvantages for businesses

• can be very expensive

• training employees on how to use new technology might be needed

• risk of need to change technologies often due to rapidly changing environment

use of technology in production advantages for consumers

• lower prices

• higher quality goods

• products with more features

use of technology in production disadvantages for consumers

• products can be out of date quickly

• faulty products can be expensive to repair

use of technology in production advantages for employees

• makes repetitive tasks for employees easier

• work is generally easier

• new job opportunities for workers in technology

use of technology in production disadvantages for employees

• technology reduces need for employees. Less qualified employees → higher risk of redundancy

• smaller workforce → lower chance of promotion

• work can be made less interesting

fixed vs variable vs total costs

fixed - costs that do not change with output e.g factory rent

variable - costs that change in direct proportion to output

total - all fixed + variable costs of producing the total output ATCxQ / VC+FC

scale of operations definition

maximum output that can be achieved using the available resources.

economies of scale definition

reduction in average costs as a result of increasing the scale of operations

diseconomies of scale definition

factors that cause average costs to rise as the scale of operation increases

types of economies of scale

• purchasing economies - bulk buying → cheaper to deliver one large order → lower costs

• technical economies - mass production lines + computer systems → higher productivity → lower costs. affordable by big firms

• financial economies - lower interest rates from banks to large established firms. Selling shres in publicly held business.

• marketing economies - marketing costs distributed over larger production → lower unit costs

• managerial economies - large companies can hire specialized managers who can operate more efficiently than general managers

why diseconomies of scale happen

• communication problems - large number of messages + long chain of command + less feedback from employees → delays + poorer decisions

• workers feel alienated - big company → hard to make personal relationships with all workers + use of machines → demotivation of workers

• poor coordination + slow decision making - many departments → challenging coordination → hard to make fast + good decisions

why do economies and diseconomies of scale matter?

• businesses try to operate at the point where average costs are lowest

• diseconomies of scale often prevent the business from dominating in the market (except natural monopoly)

• transition from economy to diseconomy of scale is different for each business

Break even point defenition

level of output where total revenues = total costs. business is making no profit or loss

what is break even analysis used for?

• calculate how many products need to be sold to make a profit

• calculate effect on profit when increasing / decreasing price( including elasticity of demand)

• calculate effect on profit when increasing / decreasing business costs

break even point formula

Q = FC/P-AVC

Quantity = fixed costs / price - average costs

break even analysis advantages

• easy to construct + interpret

• gives info about when profit starts being made

• gives info about how various sales quantities affect margin of safety + profitability

• can show effect of decision to change costs or prices

• can help with decisions on the location / relocation of the business

Break even analysis disadvantages

• Assumes that all costs and revenues are represented with straight lines

• assumes that all output is sold ( does not include inventories + related costs)

quality product vs quality standards

quality product - a product that meets the quality requirements of its consumers

quality standards - minimum standards of production or services acceptable to consumers

design standards vs process quality standards definition definition

design standards - to create the best possible product wanted by consumers

process quality standards - to create the best possible product wanted by consumers at lowest possible costs

why is quality important

• develop brand image - trust for quality → easier to launch a new product

• keep + attract customers - quality builds customer loyalty → easier to convince customers to buy again

• reduce customer complaints + returns → reduces chance of customers returning products and/or making faulty products

• lengthen product life cycle - quality will keep being needed by customers → longer life cycle especially at maturity stage

• charge higher price for product - quality convinces customers to pay a higher price → increases profitability of product

• encourages wholesalers + retailers to stock up on the product - they know the product will get sold

quality control vs quality assurance

quality control - checking the quality of goods through inspection

quality assurance - system of setting agreed standards for every stage of production ( quality standards agreed for every stage of production, raw materials + components of production have to be of a certain standard before they go into the production process, employees responsible for the quality of their work, products designed to minimize quality issues)

quality control advantages

• less training required for workers ( done by inspector) → training costs saved

• errors eliminated before good reaches customer

quality control disadvantages

• time consuming + costly - impossible to check every single product → risk of faulty product reaching customer

• work can be repetitive → demotivation → inspection done poorly

• Wasted resources if the fault is found/done at the end of the production process

• employees are not responsible for quality → might not work efficiently

Quality assurance advantages

• encourages teamwork + motivation

• easy to get quality industry awards → improve brand image → higher profit

• reduces costs of wasted resources

quality assurance disadvantages

• expensive to train employees to check the quality of their work at every stage of production

• relies on employees being committed to maintaining the standard set

factors affecting location of manufacturing business

• location of raw materials - bulk reducing production → lower transportation costs if next to where raw materials are found

• Location of market → bulk gaining production → location near the market reduces costs + needed for perishable items

• production method - job - location far from resources is ok as less supplies need to be imported. Flow - factory near resources is needed to cut transportation costs

• availability + price of labour - need to be located where most needed workers live

• government intervention - regulations on what the land can be used for, high unemployment

• infrastructure + external economies of scale - close to suppliers if supply is needed fast. Close to roads, airports, harbors, etc.

factors affecting location of services

• location of customers - site near customers where quick personal response is needed. (e.g supermarket, restaurant). Where personal response is not needed - can be further away (e.g call center) Microlocation within shopping mall : where your target customer usually go

• Rent - if not a lot of customers needed it is better to be in the outskirts of the city where rent is lower

• location of suppliers + competitors - near suppliers so there is a quick supply if needed. Be in a cluster of similar businesses to attract target market

• Availability + price of labour - need to be located where most needed workers live

• availability of suitable premises - if suitable property is unavilable e.g too small parking. need to look elsewhere

• security + legal controls - high crime rate → higher risk of theft + insurence costly orr unavailable. Laws can restrict sale or marketing of some goods. e.g. gambling, cigarettes

• Climate - tourism only in specific slimate regions

factors to consider when picking a country where to set up a business

• proximity to new markets - if sales abroad rise is it more reasonable to set up business there rather than pay transportation costs

• Cheaper/new resources - easier to obtain natural resources and transport them if factory + processing is nearby

• labour force + wages - better to be in a country with lower labour costs for more profit. a country region which offers plenty right type of applicants

• rents + taxes - countries regions with lower corporation tax/ rent

• legal controls + government incentives - grants subsidies, lower taxes, other incentives given by the government

• Trade/tariff barriers - setting up a business in a given country can bypass tariffs or quotas set by the government. (e.g japanese car factories in europe)

why not relocate to another country

• cultural differences - in market → same product does not need to be as popular in another country, in workplace → communication styles or problem solving styles can differ

• communication problems - language barriers, distance between HQ and branch

• ethical issues - how to explain redundancies of workers at home, accused of exploiting workers in developing countries

• quality issues - quality control can be more difficult