Business Management Unit 5 - Operations Management

Batch Production

involves producing a set of identical products. Work on each batch is fully completed before production switches to another batch. It is used where the level of demand for a product os frequent and steady.

Capital intensive

means that the manufacturing or provision of a product relies heavily on machinery and equipment, such as automated production systems. Hence, the cost of capital accounts for a significant proportion of a firm's overall production costs.

Cell production

is a method of production that organizes workers into independent 'cells' with each team comprising of multi-skilled staff who have responsibility and autonomy in completing a whole unit of work in the production process.

Flow production

is a form of mass production whereby different operations are continuously and progressively carried out in sequence.

Job production

is a method of production that involves the production of a unique or one-off job. The job is entirely completed by one person (such as a tailor) or by a team of people (such as architects).

Line production

is a form of flow production whereby a product is assembled in various stages along a conveyer belt (or assembly line) until a finished product is made.

Mass production

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

Productivity

measures the level of labour and/or capital efficiency of a business by comparing its level of inputs with the level of its output.

Production process

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

Purchasing

is the buying of raw materials, components and/or equipment. Large firms often centralize this function to allow them to negotiate better prices with suppliers to gain purchasing economies of scale.

Specialistation

means the division of a large task or project into smaller tasks that allow individuals to concentrate on an area of expertise. It is an essential part of mass production.

Standardisation

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

Apportioning costs

(or apportionment) is the method of allocating indirect and fixed costs to different profit centers, i.e. full costing or absorption costing.

Average cost

is the amount that a firm spends on producing one unit of output. It is calculated by dividing the total costs of production by the quantity produced.

Average revenue

is found by diving a firm's total revenue by its level of output. It is the same as the price charged since average revenue is the amount of money received for each unit sold.

Contribution

is the difference between sales revenues and total variable costs. The difference contributes towards the payment of fixed costs. Once all costs (fixed and variable) are covered, profit is earned.

Contribution analysis

is a management tool that helps managers to identify areas of their business that are relatively profitable and areas that might need more attention.

Contribution per unit

is found by dividing the contribution of a firm by its sales level (or using the formula: Price minus Average Variable Cost). It is the contribution made by selling a single unit of a product.

Cost centres

are clearly identifiable autonomous parts of an organization for which costs can be attributed.

Direct costs

are costs that are directly linked to the production of a specific product.

Fixed costs

are the costs that do not vary with the level of output. They exist even if there is not output, such as the cost of rent, management salaries and interest repayments on bank loans.

Indirect costs

(or overheads) are costs which do not directly link to the production or sale of a specific product. Examples include rent, cleaning staff wages and lighting.

Profit centres

are clearly identifiable autonomous divisions of an organization for which both costs and revenues can be worked out.

Revenue

is the money that a business collects from the sale of its goods and services. It is calculated by multiplying the unit price of each product by the quantity sold.

Semi-variable costs

are costs that have an element of both fixed costs and variable costs, e.g. power and electricity or salaried staff who also earn commission.

Variable costs

are costs that change in proportion to the level of output, such as raw materials and piece-rate earnings of production workers.

Break-even chart

is the name given to the graph that shows a firm's costs, revenues and profits (or losses) 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, i.e. where TC = TR.

Break-even quantity

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

Unit contribution

is the difference between the selling of price of a product and its variable costs of production. The surplus goes towards paying fixed costs.

Safety Margin

is the difference between a firm's level of demand and its break-even quantity. A positive margin means the firm can decrease output (sales) by that amount without making a loss. A negative margin means that the firm is making a loss.

Profit

is the positive difference between a product's revenue and its costs at each level of output. On a break-even chart, profit can be seen to the right of the break-even quantity.

Special order decisions

are unique and/or unusual orders for which a customer will pay a price that differs from the norm.

Benchmarking

is the process of identifying best practice in an industry, in relation to products, processes and operations. It sets the standards for firs to emulate.

Computer-aided design

(CAD) is the process of using dedicated computer hardware and software in the design process, such as three-dimensional designs of a product.

Computer-aided manufacturing

(CAM) is the process of using sophisticated machinery and equipment in the production process.

International Standards Organization

(ISO) is the most prominent global organization for quality assurance. Founded in 1947, the ISO is made up of representatives from approximately 160 countries.

ISO 9000

is the most widely recognized standard for quality management. It is endorsed by the ISO to firms that use quality management systems to meet the needs of customers.

Kaizen

is the Japanese term for 'continuous improvement'. It is a philosophy followed by those who strive for a total quality culture.

Lean production

refers to the approach used to eliminate waste (muda) in an organization. As a result, these organizations benefit from higher productivity and lower costs.

Muda

is the Japanese term for 'wastage'. Businesses that strive to achieve lean production tackle the causes of wastage, such as time wasting, overproduction, defected products and stockpiling.

Quality

means that a good or service must be fit for its purpose by meeting or exceeding the expectations of the consumer.

Quality assurance

refers to the methods used by a business to reassure customers about the quality of its products by meeting certain quality standards such as the ISO 9000.

Quality circles

are groups of workers that meet on a regular basis to identify problems related to quality assurance, to consider alternative solutions to the identified problems, and to make feasible recommendations.

Quality control

is the traditional way of quality management that involves checking and reviewing work processes. This is usually carried out by quality controllers and inspectors.

Total quality culture

(TQC) is a philosophy that embeds quality in all aspects of business activity, with every employee accustomed to being responsible for quality assurance.

Total quality management

(TQM) is the process that attempts to encourage all employees to make quality assurance paramount to the various functions (production, finance, marketing and HRM) of an organization.

Zero defects

is the objective of producing each and every product without any mistakes or imperfections, thereby eliminating waste and reworking time (the time taken to correct faults).

Enterprise zones

(or assisted areas) are regions identified by the government to be suffering from relatively high unemployment and low incomes, so are in need of regeneration through financial assistance.

Weight-gaining industries

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

Weight-losing industries

are industries that need to locate near the source of raw materials because they are heavier, and hence more costly, to transport than the final product.

Clustering

means that a business locates near other organizations that operate in similar or complementary markets.

Footloose organization

refers to a business that does not acquire any cost-reducing advantages from locating in a particular location. Therefore, the firm can locate in almost any location.

Industrial inertia

describes the reluctance to relocate due to the inconvenience of moving. Managers who hold this perception feel that the potential inconveniences and costs of relocation outweigh the benefits.

Infrastructure

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

Location

refers to the geographical position of a business. The location is a crucial one, and will depend on both quantitative and qualitative factors.

Sunk costs

are costs that cannot be recovered if the business collapses, e.g. license and accountancy fees.

Buffer stock

refers to the minimum stock level held by a business in case there are any unexpected occurrences, such as late deliveries of components or a sudden increase in demand for the firm's product.

Capacity ulilisation

measures the existing level of output of a firm as a proportion of its potential output.

Cost-benefit analysis

is a financial decision making tool. It compares the financial costs of a decision with the quantitative benefits of that decision.

Just-in-case

(JIC) is the traditional stock management system that maintains buffer stocks incase there are any emergencies (such as delayed delivery of stocks) or supply and demand fluctuations.

Just-in-time

(JIT) is a stock control system whereby materials and components are scheduled to arrive precisely when they are needed in the production process.

Lead time

measures the duration between placing an order and receiving it. The longer the lead time, the higher buffers stocks tend to be.

Make-or-buy decision

refers to a situation where a firm has to decide between manufacturing a product and purchasing it from a supplier.