IBDP Business Management: Operations Management

Cons of job production

- time-consuming
- smaller scale so fewer economies of scale
- irregular orders; delays between payment and receival of product
- labour intensive

Cons of mass customization

- higher operating costs due to integration of methods
- inefficiency in integration leads to wastage of resources

Pros of outsourcing

- business can focus on its core activities
- high-quality work (executed by specialists)
- reduces labour costs of the organisation
- workforce flexibility increases

Cons of insourcing

- managers reluctant to relocate workers
- relocation costs
- lower morale and greater uncertainty among workers
- loss of skilled and loyal workers

Cons of offshoring

- profits sent to host nation
- subject to changes in business and external environment
- quality management issues

Bulk increasing/reducing industries

Involved with products that increase/reduce in weight during production

increasing: located near customers to reduce costs
reducing: located near the source of raw materials

Footlose organisation

A business that does not gain any cost-saving advantages from locating at a particular location

Define sustainability in the context of operations management

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

Limitations of break-even analysis

- cost functions assumed to be linear: ignores effect of economies of scale; fixed costs vary with level of output
- sales revenue assumed to be linear: ignores discounts given for bulk buying; fluctuations in demand
- assumes all output sold: neglects storage costs and clearance discounts
- not suited for business operating in a dynamic environment: expensive to continuously create new charts
- not suited for businesses with wide product portfolios
- GIGO principle (garbage in, garbage out): chart made with inaccurate data leads to inaccurate interpretation
- other qualitative and quantitative factors ignored hence inflexible

Define break even point/quantity

BEP: Position of a break-even chart where the total costs line intersects the total revenue line.

BEQ: The level of output that generates neither profit nor loss.

Define target price/profit/profit output

Price: The price set by a firm in order to break-even or a certain target profit

Profit: The amount of surplus that a firm intends to achieve based on price and cost data

Profit output: Sales revenue required to achieve the target profit that business managers wish to achieve by the end of a given time period

Job Production

Production of one-off, unique products to meet customer needs and wants

Pros of job production

- high quality (employs skilled labour)
- unique and interesting work (motivating factor)
- variety of products can be made based on demand, creating a USP
- flexible in nature, hence increasing customer loyalty and satisfaction

Batch production

Producing a set of identical products in batches

Pros of batch production

- wider product portfolio enables spreading of risks
- wider consumer base catered to
- specialization

Cons of batch production

- storage costs increase drastically
- high level of start-up capital for machinery; maintenance costs
- repetitive tasks can lead to monotony and low motivation
- inflexible

Mass production

Large scale manufacturing of a homogenous product

Flow production

Mass production of homogenous goods continuously in sequence

Pros of mass production

- large volume = high economies of scale: bulk buying (purchasing), technological
- lower unit costs reduces long run average costs; higher profit margin
- high efficiency and low wastage due to use of specialised machinery

Cons of mass production

- high start-up costs
- very monotonous = lower motivation
- lesser range of products
- inflexible due to continuous production

Mass customization

Combination of job, batch and flow production to create flexible operations and manufacturing systems that cater to customer wants and needs

Pros of mass customization

- very flexible
- low unit costs
- combined benefits of each production type

How to choose a production method?

1. Business aims and objectives
2. Ethical aspects
3. Market size
4. Relative cost of labour and capital

What is "location"?

The geographical position of a business

What is outsourcing?

Transferring internal business activities to an external organisation to reduce costs and increase productivity

Cons of outsourcing

- more expensive
- lesser control over quality of output; chances of corners being cut
- higher admin costs to coordinate outsourcing
- unethical practices conducted by outsourced organisation affects host organisation's reputation (e.g. Apple and Chinese workers strike)

Insourcing

Using the organisation's own people and resources to carry out a certain task which would have otherwise been outsourced

Pros of insourcing

- cost-effective
- more supervision over quality of output; better quality control
- job enrichment/rotation/enlargement for workers increases motivation (in most cases)

Define offshoring

Extension of outsourcing: relocating business functions and processes overseas

Pros of offshoring

- cheaper land and labour (e.g. India, Bangladesh)
- latest manufacturing technology = high quality output
- possibility of freedom from protectionist policies such as import tax
- job opportunities in host country; workers get paid relatively higher

Industrial inertia

The reluctance of managers to relocate workers simply due to inconvenience despite no cost saving benefits

Clustering

Businesses locate near other organisations that operate in similar or complementary markets

Reshoring

Transfer of business activities back to the original country; opposite of offshoring

Reasons for reshoring of a business

- high transport costs
- unethical practices in offshoring
- support from domestic (home country) government

Sunk costs: costs and logistical efforts that arise due to the efforts to bring back production during reshoring

Define productivity

The measure of a firm's operational ability to convert inputs (factors of production) into outputs (goods and services)

Define value added

Value is added during the production process when the value of the output produced is greater than the costs of production

What is break-even analysis?

A quantitative tool used to determine the level of sales (volume) that must be made in order to earn a profit.

What is a break-even chart?

A diagrammatic representation of how total costs and total revenue change with increasing levels of production

What are the benefits of break-even analysis?

- to judge the financial viability of launching a product
- to predict the expected level of profits or the time taken to gain a profit
- simple to interpret

What are assisted areas?

Regions identified by governments to experience relatively high unemployment and low incomes, so are in need of regeneration through financial assistance

Define margin of safety

The difference between a firm's actual sales volume and its break-even quantity; a measure of the firm's security or certainty in being profitable

Define contribution per unit

The difference between the selling price and the variable costs of production of a product

Define contribution

Sum of money that remains after all direct or variable costs have been deducted from the revenue of a product