4. Decision Making to Improve Operational Performance

What are types of operational objectives?

• Costs

• Quality

• Speed/flexibility

• Dependability

• Environmental

• Added value

What are costs objectives?

• Unit costs

• Fixed costs (break-even analysis)

• Productivity/efficiency

What are quality objectives?

• Scrap/defective output minimisation

• Customer service improvement

• Customer returns reduction

What are speed/flexibility objectives?

• Labour productivity enhancement

• Capacity utilisation maximisation

• Order lead times reduction

What are dependability objectives?

• Downtime (production) reduction

• Maintenance costs minimisation

• Reputation for quality enhancement

What are environmental objectives?

• Downtime (production) reduction

• Maintenance costs minimisation

• Reputation for quality enhancement

What are added value objectives?

• Gross profit maximisation

• Gross profit margin improvement

• Unit cost reduction to increase value

What are types of influences on operational objectives?

• Internal

• External

What are types of internal objectives?

• Corporate objectives

• Finance

• Human resources

• Marketing

What are corporate objectives?

Alignment of operational objectives (e.g., increased production capacity) with corporate objectives (e.g., lowest unit costs) is critical

What are finance objectives?

Operational decisions involving investment and costs are directly affected by the financial position of the business (profitability, cash flow, liquidity).

What are HR objectives?

The quality and capacity of the workforce significantly affect operational objectives, especially in service businesses; productivity targets are influenced by training and automation investments.

What are marketing objectives?

The nature of the product determines the operational setup; changes to the marketing mix, particularly the product element, can strain operations if production is inflexible.

What are types of external objectives?

• Economic environment

• Competitor efficiency and flexibility

• Technological change

• Legal and environmental change

What are economic environment objectives?

Impacts capacity utilisation and productivity; changes in interest rates affect costs.

What are competitor efficiency and flexibility objectives?

More efficient or higher-quality competitors pressure operations to deliver comparable performance.

What are technological objectives?

Especially significant in markets with short product life cycles, rapid innovation, and costly production processes.

What are legal and environmental objectives?

Increased regulation and legislation pose new challenges for operational objectives.

What is labour productivity?

Labour productivity is the volume of output (units) or value ($$) produced per employee.

What is the importance of labour productivity?

• Labour costs are a significant part of total costs.

• Business efficiency and profitability are linked to productive labour use.

• Businesses need to keep unit costs down to remain competitive.

What factors influence labour productivity?

• Extent and quality of fixed assets (equipment, IT systems).

• Skills, ability, and motivation of the workforce.

• Methods of production organisation.

• Training and support provided to the workforce (working environment).

• External factors (reliability of suppliers).

What is the calculation for labour productivity?

\text{Labour Productivity} = \frac{\text{Output in period (units)}}{\text{Number of employees at work}}

How can a business improve labour productivity?

• Measure performance and set targets.

• Streamline production processes.

• Invest in capital equipment (automation + computerisation).

• Invest in employee training.

• Improve working conditions.

What are potential problems when trying to increase labour productivity?

• Potential ‘trade-off’ with quality- higher output must still be of the right quality

• Potential for employee resistance- depending on the methods used (e.g introduction of new technology)

• Employees may demand higher pay for their improved productivity (negates impact on labour costs per unit)

What are unit costs?

• Unit cost measures the average cost per unit produced over a specific period (e.g., month, year).

• Sensitive to operational scale and the relationship between fixed and variable costs.

What is the calculation for unit costs?

\text{Unit Costs} = \frac{\text{Total production costs in period (£)}}{\text{Total output in period (units)}}

What are economies of scale?

They occur when unit costs decrease as output increases.

What is the equation for economies of scale?

\text{Economies of Scale} = \frac{\text{Total production costs in period (£)}}{\text{Total output in period (units)}}

What are economies of scale?

• Arise from increased output of the business itself.

  • Buying Economies: Bulk buying results in lower prices.

  • Technical: Use of specialist equipment boosts productivity.

  • Marketing: Spreading fixed marketing spend over a larger range.

  • Network: Adding extra customers.

  • Financial: Larger firms have access to more and cheaper finance.

What is purchasing or bulk buying?

• A purchasing economy of scale is the benefit that a business receives from purchasing large volumes of a good

• The supplier is incentivised to offer a discount as the scale of the purchase is substantial

• The lower costs allow a business to either lower their selling prices to consumers (increasing competitiveness) or maximise their profits (benefiting shareholders)

What are financial economies of scale?

• As a business grows in scale so it acquires more assets

• Assets can be used as security against any kind of financial borrowing. This reduces the risk for the lender

• With a lower level of risk, lenders are prepared to offer larger businesses more money and a much more favourable lending rate than smaller firms

What are technical economies of scale?

• To enable growth, a business is more likely to increase levels of production and productivity by making greater use of capital equipment

• The automation of production lines offers cost savings as more can be produced with less waste and greater efficiency than using human capital

• Drawbacks of this approach include job losses, lower staff motivation and the high initial cost of investment in equipment

What are marketing economies of scale?

• Increasing growth brings with it the need for additional marketing and promotion campaigns

• An increased scale of production means that marketing costs are now spread out over more units of output, therefore reducing the average costs of marketing

What are managerial economies of scale?

• As a sole trader, a business owner would be expected to carry out all tasks to keep the business afloat

• The business owner would be responsible for marketing, production, sales, finance, HR and logistics

• As the business grows in size, so the levels of hierarchy within the business increase and they employ specialists (experts) in each field e.g. HR manager, sales manager etc

• The specialists make fewer mistakes and this means lower costs which brings about managerial economies of scale

What are external economies of scale?

Occur within an industry where all competitors benefit often associated with particular geographic areas

What are external economies of scale?

• Having many specialist suppliers close by

• Access to research and development facilities

• The pool of skilled labour to choose from

What are diseconomies of scale?

They occur when a business grows so large that the costs per unit increase i.e. difficulties of managing a larger workforce

What are diseconomies of scale?

• Poor communication

• Lack of motivation

How is poor communication a diseconomies of scale?

• There are more layers in the hierarchy that can distort a message and wider spans of control for managers. This may result in workers having less clear instructions from management about what they are supposed to do and when.

• In addition, there may be more written forms of communication (e.g. newsletters, notice boards, e-mails) and fewer face-to-face meetings, which can result in less feedback and therefore less effective communication.

How is lack of motivation a diseconomies of scale?

• Workers can often feel more isolated and less appreciated in a larger business and so their loyalty and motivation may diminish. It is harder for managers to stay in day-to-day contact with workers and build up a good team environment and sense of belonging.

• This can lead to lower employee motivation with damaging consequences for output and quality.

• The main result of poor employee motivation is falling productivity levels and an increase in average labour costs per unit.

What are possible solutions for diseconomies of scale?

• Delegation of decision-making (empowerment)

• Making jobs more interesting (job enrichment)

• Splitting employees into teams (teamworking)

How can loss of direction and co-ordination be a diseconomies of scale?

• It is harder to ensure that all workers are working for the same overall goal as the business grows. It is more difficult for managers to supervise their subordinates and check that everyone is working together effectively, as the spans of control have widened.

• A manager may be forced to delegate more tasks, which while often motivating for his subordinates, leaves the manager less in control.

What is capacity?

It is a measure of how much output it can achieve in a given period

How is capacity a dynamic concept?

• Capacity can change: e.g. when a machine is undergoing maintenance, capacity is reduced

• Capacity is linked to labour: e.g. by working more production shifts, capacity can be increased

• Capacity needs to take account of seasonal or unexpected changes in demand: e.g. Chocolate factories need the capacity to make Easter Eggs in November and December before shipping them to shops after Christmas

Why does capacity utilisation matter?

• Measures productive efficiency by indicating idle resources.

• Higher utilisation reduces average production costs.

• Businesses aim for close to 100% utilisation to minimise unit costs.

• High utilisation is required if a business has a high break-even output due to significant fixed costs of production

What are costs of capacity?

• Equipment: e.g production line

• Facilities: e.g building rent, insurance

• Labour: Wages and salaries of employees involved in production or delivering a service

Why do most businesses operate below capacity?

• Lower than expected market demand: A change in customer tastes

• A loss of market share: Competitors gain customers

• Seasonal variations in demand: Weather changes lead to lower demand

• Recent increase in capacity: A new production line has been added

• Maintenance and repair programmes: Capacity is temporarily unavailable

What is the evaluation of dangers of operating at low capacity utilisation?

• Higher unity costs- impact on competitiveness

• Less likely to reach breakeven output

• Capital tied up in under-utilised assets

What is the evaluation of the problems of working at high capacity?

• Negative effect on quality (possibly):

  • Production is rushed

  • Less time for quality control

• Employees suffer:

  • Added workloads and stress

  • De-motivating if sustained for too

• Loss of sales:

  • Less able to meet sudden or unexpected increases in demand

  • Production equipment may require repair

What is capacity utilisation?

The proportion (%) of a business’ capacity actually used over a period.

What is the equation for capacity utilisation?

\text{Capacity Utilisation} = \frac{\text{Actual level of output (units)}}{\text{Maximum possible output (units)}} \times 100

What is lean production?

Approaches to management that focus on cutting out waste, whilst ensuring quality

What is a summary of lean production?

• Doing the simple things well

• Doing things better

• Involving employees in the continuous process of improvement

• As a result, avoiding waste, thereby reducing costs

What are examples of waste in business?

• Over-production: Making more than is needed- leads to excess stocks

• Waiting time: Equipment and people standing idle waiting for the production process to be completed or resources to arrive

• Stocks: Often held as an acceptable buffer, but should not be excessive

• Defects: Output that does not reach the required quality standard- often a significant cost to an uncompetitive business

What are main methods of lean production?

• Time-based management

• Simultaneous engineering

• Just-in-time production (JIT)

• Cell production

• Kaizen (Continuous improvement)

What does effective lean production require?

• Good relations with suppliers

• Committed, skilled and motivated employees

• A culture of quality assurance; continuous improvement and willingness to embrace change

• Trust between management and employees

What is time-based management?

An approach that recognises the importance of time and seeks to reduce wasted time in production processes.

What are requirements of time-based management?

• Flexible production methods (able to change products quickly).

• Trained employees (multi-skilled staff).

• Trust between workers and managers.

What is simultaneous engineering?

An approach to project management that helps firms develop and launch new products more quickly. All parts of the project are planned together. Everything is considered simultaneously (together, in parallel) rather than separately (in series)

What is cell production?

A form of team working where production processes are split into cells. Each cell is responsible for a complete unit of work

What are potential benefits of cell productions?

• The closeness of cell members should improve communication

• Workers become multi-skilled and more adaptable to the needs of the business

• Greater employee motivation, from variety of work, team working and responsibility

• Quality improvements as each cell has ‘ownership’ for quality in its area

What is Just in time production?

JIT aims to ensure that inputs arrive only when needed for production

How does just in time production work?

• Based on a ‘pull’ system of production- customer orders determine what is produced

• Requires complex production scheduling- achieved using specialist software to connect production with suppliers

• Supplies are delivered to production only when needed

• Requires close cooperation with reliable suppliers

What are the benefits of JIT?

• Lower stock holding means a reduction in storage space which saves rent and insurance costs

• As stock is only obtained when it is needed, less working capital is tied up in stock

• Less likelihood of stock perishing, becoming obsolete or out-of-date

• Less time is spent on checking and reworking production as the emphasis is on getting the work right the first time

What are disadvantages of JIT?

• There is little room for mistakes as minimal stock is kept for re-working faulty product

• Production is highly reliant on suppliers and if stock is not delivered on time, the whole production schedule can be delayed

• There is no spare finished product available to meet unexpected orders because all product is made to meet actual orders

• A need for complex, specialist stock systems

What is Kaizen?

Kaizen (or ‘Continuous improvement’) is an approach of constantly introducing small incremental changes in a business to improve quality and/or efficiency

How does Kaizen work?

• As ideas come from employees, they are less likely to be radically different and probably easier to implement

• Small improvements are less likely to require major capital investment than major process changes

• The culture- all employees should continually look for ways to improve their performance

• Kaizen encourages employees to take ownership of their work, which can help reinforce teamwork and improve motivation

What is the optimal resource mix?

• Labour intensive processes

• Capital-intensive processes

• Capital and labour intensive

What are labour intensive processes?

• Labour costs are higher than capital costs

• Costs are mainly variable

• Labour supply (quantity and quality) and cost are key issues

What are examples of labour intensive processes?

• Hotels and restaurants

• Fruit farming/picking

• Hairdressing and other personal services

What are capital intensive processes?

• Capital costs are higher than labour costs

• Costs are mainly fixed (including depreciation)

• Significant investment is often required (e.g automation) but with longer-term benefits on unit costs

What are examples of capital intensive processes?

• Oil extraction and refining

• Car manufacturing

• Pharmaceutical production

What are types of production operations?

• Labour

• Capital

What is labour operations?

i.e. management, employees (full-time, part-time, temporary etc)

What is capital operations?

i.e. plant & machinery, IT systems, buildings, vehicles, offices

What are examples of labour intensive processes?

• Food processing (e.g. ready meals)

• Hotels & restaurants

• Fruit farming/picking

• Hairdressing & other personal services

• Coal mining

What are examples of capital intensive processes?

• Oil extraction & refining

• Car manufacturing

• Web hosting

• Intensive arable farming

• Transport (airports, railways etc)

What are the main features of labour-intensive operations?

• Labour costs higher than capital costs

• Costs are mainly variable in nature = lower breakeven output

• Firms benefit from access to sources of low-cost labour

What are the main features of capital-intensive operations?

• Capital costs higher than labour costs

• Costs are mainly fixed in nature = higher breakeven output

• Firms benefit from access to low-cost, long-term financing

What is quality control?

The process of inspecting products to ensure that they meet the required quality standards, mainly about ‘detecting’ defective output- rather than preventing it

• Usually requires sampling, spots and removes sub-standard output and it can be very costly

What is quality control and inspection?

• When raw materials are received before entering production

• Whilst products are going through the production process

• When products are finished- takes place before products are dispatched to customers

What are business benefits of quality control?

• Sub-standard output is spotted before it reaches the customer

• Minimise disruption to production

• Applies a consistent standard of quality

What are problems with quality inspection?

• Costly

• Often at the end of the production process- i.e potentially too late

• Inconsistent inspections

• Often not compatible with modern production systems

• Done by inspectors rather than workers themselves

What are examples of poor quality?

• Product fails- e.g. a breakdown or unexpected wear and tear

• The product does not perform as promised

• The product is delivered late

• Poor instructions/directions for use

• Unresponsive customer service

What is the cost of poor quality?

• Cost of reworking or remaking products

• Costs of replacements or refunds

• Wasted materials

• Lost customers (expensive to replace- and they may tell others about their bad experience)

How can poor quality damages competitiveness?

• Financial costs (e.g. compensation)

• Lost customer loyalty

• Damaged business reputation

• Need for greater controls and checks

• Competitors take advantage

What is quality control?

• Based on inspection

• Takes defects out

What is quality assurance?

• Based on processes

• Builds quality in

What is quality assurance?

The processes that ensure production quality meet the requirements of customers

What is the aim of quality assurance?

Design the way a product or service is produced or delivered to minimise the chances that output will be sub-standard

What is the focus of quality assurance is on the product design/development stage?

• If the production process is well controlled- then quality will be ‘built-in’

• If the production process is reliable- there is less need to inspect production output (quality control)

What are the features of quality assurance?

• Focus on processes

• Achieved by improving production processes

• Targeted at the whole business

• Emphasises the customer

• Quality is built into the product

What are the features of quality control?

• Focus on outputs

• Achieved by sampling and checking (inspection)

• Targeted at production activities

• Emphasises required standards

• Defective products are inspected out

What is the approach to quality assurance?

A management philosophy committed to a focus on continuous improvements of products and services with the involvement of the entire workforce

What is total quality management?

• TQM is essentially an ‘attitude’

• The whole business understands the need for quality and seeks to achieve it

• Everyone in the workforce is concerned with quality at every stage of the production process

• Workers but not inspectors ensure quality

What are advantages of total quality management?

• Puts the customer at the heart of the production process

• Motivational since workers feel more involved and are making decisions

• Less wasteful than throwing out defective finished products

• Eliminates cost of inspection

What are disadvantages of total quality management?

• Requires strong leadership- often missing in a business

• Substantial investment in training and support- but return on investment not immediate

• May become bureaucratic

• Disruption and cost may outweigh the benefits

What is Kaizen?

• Another kind of quality assurance

• Based on the concept/culture of continuous improvement

• Encourages employees to engage fully with finding ways to improve quality processes

What are types of stock?

• Raw materials and components

• Work in progress

• Finished goods

Why are stock control charts be used?

The overall objective of stock control is to maintain stock levels so that the total costs of holding stocks are minimised