Business Topic 5

Operations Management

Operations Management

Concerned with producing right goods/services in the right quality and quantity in a cost-effective and time-efficient manner

Dictated by a company’s finances, HR capabilities, and market needs

Value must be added during production to ensure profit

Production - process of transforming inputs into outputs

Four factors of production/inputs - land, labour, capital and enterprise

5M’s - materials, manpower, macines, money, and management.

Aspects of operations management

Production methods

Size, scope, and timing of production

Production planning

Quality control systems

New products and innovation

Sustainability management

Practice of maintaining ecological, social and economic sustainability

Operations should also deal with stakeholder interests

Helps reduce costs by reducing waste

Essentially calls for operations to be ethical (reduce wastage for teh enviorment, carefully consider economic implications in production processes, have ethical labour practices)

Job production

Creating a product from start to finish that is tailor made to meet customer requirements. Likely small firms.

Job production Advantages

High quality and uniqueness

High motivation of workers

More flexibility

Job production Disadvantages

Labour intensive and expensive

Time consuming

Long working-capital cycle

Minimal economies of scale

Batch production

Producing limited number of identical products at a time. Usually used when level of demand is not clear and the business produces a range of products.

Batch production Advantages

Technical and purchasing economies of scale

Specialisation - better quality and productivity

Variety - reduce risks of producing single product

Batch production disadvantages

Infexibility - can’t stop once started

Storage costs

Boredom - reduced motivation

Flow/line/mass production

Continous production process of standardized products. Usually interchangeable. Capital intensive.

Flow - sequence of steps to create

Line - product is assembled in various stages

Mass - manufacturing large amounts

Flow/line/mass production advantages

High production scale at low cost due to economies of scale

Initial high costs spread over high volume of units

Standardized quality

Low cost for workers

Flow/line/mass production disadvantages

Low motivation

Breakdowns cause major delays

Inflexible - no reworking or customazation

High initial set-up,running and replacement costs

Requires effective storage

Cell production

Modern adaptation of assembly line. Parts of production are delegated to teams or cells for completion. Any member of team can contribute to the task. Cells work independently but rely on eachother to achieve targets.

Cell production advantages

certain degree of autonomy in decision making

Improved standards of quality (sense accountability and responsibility)

Higher levels of motivation

Specialization

Cell production disadvantages

Output may be lower

Higher chances for intra-and intergroup tension and conflict

Capital intensive and initiate and sustain

Labour intensive

Greater proportion of labout cost tan capital cost

Job production and service sector often labout intensive

Offers personalised service but may have more HR issues

Capital intensive

High proportion of capital costs compared to labout cost

Leads to increases levels of output and productivity

Needs sufficient demant to justify capital investment

Homogenous products; may have no USP

Standardisation means low profit margins and high fixed costs

Quantitative factors in choosing locatino of production

Availability, suitability, and cost of land

Availability, quilty and cost of labour

Proximity and access to raw materials

Distance between raw materials and factory, factory to retail stores

Government incentives and limitations

Feasibility of e-commerce

Qualitative factors of choosing a location of production

Management preferences

Local knowledge

Infrastructure - transportation networks, communication networks, support networks

Political stability and economic factors

Government restrictions and regulations

ethical issues

Comparative shopping/clustering

Relocation

Moving production to a different location. May be necessary due to higher rents or more attractive locations available

Relocation disadvantages

Relocation costs

Lower morale of workforce

loss of geographically immobile workers

Potential need to find new customers and suppliers

Loss of connection with local community

possible damage to corporate image

Redundancy payments to employees

Location and business activity

HR - employees, local labour, wages by rivals, employees relocating

Marketing - different customers, availability of product

Production - resources, suppliers, competitors, quality

Finance - costs of land, licenses, regulations

Outsourcing/subcontracting

Transferring internal business activities to an external business/firm. Same as outsourcing in HR except in production perspective.

Reasons for oursourcing

Activities are not of great importance

Business lacks specific skills

To cut costs

Outsourcing advantages

High quality standards

Competitive prices

reduce labour costs

business can focus on core activities

improves workforce flexibility

Outsourcing disdavantages

Redundancies

affects morale

rquires careful monitoring of subcontractors

Presence of unethical practices (can lead to stained brand image/reputation)

Difficulty in quality management

Cutting corners

Offshoring

Extension of outsourcing

Relocation of business activities/processes abroad

Reduce costs but may affect quality of output

Same as offshoring in HR except in production perspective

Insourcing

Performing an otherwise cintracted work internally. May involve bringing specialists in or training employees.

Insourcing advantages

Greater control over business functions

May be cheaper overall (assuming business has the capacity)

employees may be empowered

Boosts local economy

Insourcing disadvantages

Requires investment in either training or equipment

Employees may be overworked

Less focus on core business activities

Contribution per unit

How much each unit is contributing to cover fixed costs and lead to profits.

Contribution per unit Formula

Contribution pre unit = Price per unit - variable cost per unit

Total contribution formula

Total contribution = contribution per unit * number of uits sold

Total contribution = total revenue - total variable cost

Total profit formula

Total profit = Total contribution - total fixed cost

Break even

the pooint where total revenues equal to total costs

Break even output formula

Break even output = FC/(P-AVC)

Margin of Safety

Is the difference between the actual current output level and the break-even output to determine the company’s position relative to the break-even point

Margin of Safety formula

Margin of Safety = current output - break-even output

Targeted Profit output

The quantity needed to be sold in order to achieve a targeted amount of profit

Targeted profit output formula

Qt = (FC + target profit)/ contribution per unit

Target Price

The price that should be determined in order to achieve a desired amount of profit from selling a determined level of output

Break-even revenue

The amount that is needed to be generated from sales of goods or services to cover your fixed and variable costs (total costs)

Break-even revenue formula

Break-even revenue = (FC/contribution per unit)*price per unit