5. Business operations

Economies of scale

Financial advantage of producing in large quantities

Diseconomies of scale

Rising average costs when a firm becomes too big

Fixed costs (overhead)

The cost of the item will not change even though the output changes

Variable costs

Will increase if output increases

Total cost

Fixed cost + variable cost

Internal economies of scale

as a business grows in scale, cost will fall

Purchasing economies

large businesses that buy lots of resources to get cheaper rates

Marketing economies

when marketing costs can be spread over a large number of products, lowering average cost per unit

Technical economies

investing in advanced machinery and technology, which makes production more efficient

Financial economies

when large businesses can get better financial deals as they can sell shares

Managerial economies

large businesses can hire specialist to improve efficiency

Risk bearing economies

Large businesses have a wide variety of products to reduce risk

External economies of scale

Shared by a number of businesses in the same industry in an area

Skilled labour

Has access to skilled workers in a concentrated area

Infrastructure

Access to well developed facilities

Cooperation

When businesses can share resources and work together in certain industry or region

Bureaucracy

When administrative costs increase and reduce efficiency

Labour relations

When expansion can lead to poor relationships between managers and workers

Control and cooperation

Too big to control and need to add more supervision which leads to an increase in costs

Production

The process of converting raw materials into finished goods

4 factors of production

1. Capital

2. Enterprise

3. Land

4. Labour

Job production

Completing on unit of output from start to finish before starting another

Advantages- Job production

• High quality

• Workers are motivated

• Easy to organise

Disadvantages- Job production

• High labour cost

• Slow production

• Specialist tools are needed

Batch production

Completing one unit on all units before starting the next

Advantages- Batch production

• Workers can specialise in one process

• Low unit costs as high output

• Production is flexible

Disadvantages- Batch production

• More complex machinery is needed

• Less motivation due to specialisation

Flow production

large scale production of a product performed continuously on a production line

Advantages – flow production

• Low unit costs-economies of scale

• Fast output

Disadvantages-flow production

• products are standardised

• High set up costs

Labour intensive

using more labour than machinery

Advantages- labour intensive

• More flexibility

• Creativity

Disadvantages-labour intensive

• salary costs

• Mistakes

Capital intensive

using more machine machinery than labour

Advantages- capital intensive

• Less mistakes

• Can work 24/7

Disadvantages- capital intensive

• Set up costs

• Maintenance

• Not flexible

Division of labour

when workers specialise in different tasks and skills

Specialisation

when businesses produce a limited range of products

Labour productivity

total output/ number of workers

Capital productivity

total output/capital employed

Increasing labour productivity

• Provide training

• Job rotation

• Promotion

• Bonuses

Increasing capital productivity

• Downsizing- Getting rid of unprofitable divisions and laying off workers

• Relocating- May reduce costs on rent, transport, and wages

• Outsourcing- Work done is given to specialists who do the job at a lower cost

Productivity

Amount of output produced with a given amount of resources

Lean production

Aimed at reducing quantity of resources and minimising waste

Advantages of lean production

• Increases productivity

• Reduces costs

• Reduces number of defective products

• Improves reliability + speeds up product design

Just in time production

Highly responsive to customer orders and uses little stock holders

Advantages- Just in time production

• Improves cash flow

• No waste

• No stock holding costs

Disadvantages- Just in time production

• High ordering and administrative costs

• Advantages of bulk buying is lost

• Hard to cope with changes in demand

Kaizen

Taking continuous steps to improve productivity, quality, efficiency, and reduce waste

Requirements of Kaizen

• A long-term cultural and management commitment to change

• Workers must be actively involved in making improvements

• Ongoing training and development is needed

Benefits of reducing waste

• Competitiveness

• Lower costs

• Better customer service

• Environmental benefits

Technology in the primary sector

• Use of machines like tractors, harvesters, and feeding systems

• The use of chemicals and pesticides

• Use of drills in mining improves health and safety of workers

Technology in the secondary sector

• Robot

• Computer edit designs (CAD)

• Computer aid manufacturing (CAM)

Technology in the tertiary sector

• Finance- ATM, online banking

• Retail- EPOS (electronic point-of-sale)

• Marketing-websites, Internet

Costs of technology in production

• High set up and purchase

• Technological breakdown

• Job losses

Benefits of technology in production

• New products- More choices

• Less waste

• High productivity- Lower costs

Quality

Feature of a product that satisfy customers

Importance of quality

• Increased competition

• Government legislation

• Health and Safety

• Faulty products

Quality control

Ensuring products meet quality standards after production

Advantages- Quality control

• Less training

• Eliminates faults

Disadvantages- Quality control

• Increased costs if product is scrapped

• Does not specify reason and location of products

Quality assurance

Improving quality throughout the production process

Advantages-Quality assurance

• Fewer customer complaints

• Eliminates faults

Disadvantages- Quality assurance

• Expensive to train employees

• Relies on employees following instructions and standards

Total quality management (TQM)

Organisation wide effort to improve quality of products

Advantages- TQM

• Quality is improved in all aspects

• No inefficiency

• Improves communication and problem solving

Disadvantages- TQM

• High training and implementation costs

• Requires commitment