4. Decision Making to Improve Operational Performance
Operational Objectives
Key types of operational objectives include:
Costs
Unit costs
Fixed costs (break-even analysis)
Productivity/efficiency
Quality
Scrap/defective output minimisation
Customer service improvement
Customer returns reduction
Speed/Flexibility
Labour productivity enhancement
Capacity utilisation maximisation
Order lead times reduction
Dependability
Downtime (production) reduction
Maintenance costs minimisation
Reputation for quality enhancement
Environmental
Waste management improvement
Recycling programs implementation
Carbon emissions reduction
Added Value
Gross profit maximisation
Gross profit margin improvement
Unit cost reduction to increase value
Influences on Operational Objectives
Influences on Operational Objectives:
Internal Influences
Corporate Objectives:
Alignment of operational objectives (e.g., increased production capacity) with corporate objectives (e.g., lowest unit costs) is critical.
Finance:
Operational decisions involving investment and costs are directly affected by the financial position of the business (profitability, cash flow, liquidity).
Human Resources:
The quality and capacity of the workforce significantly affect operational objectives, especially in service businesses; productivity targets are influenced by training and automation investments.
Marketing:
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.
External Influences
Economic Environment:
Impacts capacity utilisation and productivity; changes in interest rates affect costs.
Competitor Efficiency and Flexibility:
More efficient or higher-quality competitors pressure operations to deliver comparable performance.
Technological Change:
Especially significant in markets with short product life cycles, rapid innovation, and costly production processes.
Legal and Environmental Change:
Increased regulation and legislation pose new challenges for operational objectives.
Labour Productivity
Definition:
Labour productivity is the volume of output (units) or value (\text{Labour Productivity} = \frac{\text{Output in period (units)}}{\text{Number of employees at work}}\text{Unit Costs} = \frac{\text{Total production costs in period (£)}}{\text{Total output in period (units)}}\text{Economies of Scale} = \frac{\text{Total production costs in period (£)}}{\text{Total output in period (units)}}\text{Capacity Utilisation} = \frac{\text{Actual level of output (units)}}{\text{Maximum possible output (units)}} \times 100$$
Efficiency and Productivity
Refer to labour productivity information above
Lean Production
Definition:
Approaches to management that focus on cutting out waste, whilst ensuring quality
Lean Production in Summary:
Doing the simple things well
Doing things better
Involving employees in the continuous process of improvement
As a result, avoiding waste, thereby reducing costs
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
Main Methods of Lean Production:
Time-based management
Simultaneous engineering
Just-in-time production (JIT)
Cell production
Kaizen (Continuous improvement)
Effective Lean Production Requires:
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
Time-Based Management:
An approach that recognises the importance of time and seeks to reduce wasted time in production processes.
Requirements:
Flexible production methods (able to change products quickly).
Trained employees (multi-skilled staff).
Trust between workers and managers.
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)
Cell Production:
A form of team working where production processes are split into cells. Each cell is responsible for a complete unit of work
Potential benefits of cell production:
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
Just-In-Time (JIT):
JIT aims to ensure that inputs arrive only when needed for production
How JIT works:
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
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
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
Kaizen:
Kaizen (or ‘Continuous improvement’) is an approach of constantly introducing small incremental changes in a business to improve quality and/or efficiency
How Kaizen works:
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
Operations Resource Mix
What is the optimal mix of resources for operations?
Labour Intensive Processes:
Key features:
Labour costs are higher than capital costs
Costs are mainly variable
Labour supply (quantity and quality) and cost are key issues
Examples:
Hotels and restaurants
Fruit farming/picking
Hairdressing and other personal services
Capital-Intensive Processes:
Key features:
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
Examples:
Oil extraction and refining
Car manufacturing
Pharmaceutical production
Capital and Labour Intensive:
The production operations of any business combine two-factor inputs:
Labour – i.e. management, employees (full-time, part-time, temporary etc)
Capital – i.e. plant & machinery, IT systems, buildings, vehicles, offices
Labour intensive:
Food processing (e.g. ready meals)
Hotels & restaurants
Fruit farming/picking
Hairdressing & other personal services
Coal mining
Capital intensive
Oil extraction & refining
Car manufacturing
Web hosting
Intensive arable farming
Transport (airports, railways etc)
The main features of each category can also be summarised as follows:
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
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
Quality Control Explained
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
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
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
Some 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
Quality Management
Poor quality is a reason for competitive disadvantage
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
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 poor quality damages competitiveness:
Financial costs (e.g. compensation)
Lost customer loyalty
Damaged business reputation
Need for greater controls and checks
Competitors take advantage
Quality Assurance Explained
Two main approaches to quality management:
Quality control:
Based on inspection
Takes defects out
Quality assurance:
Based on processes
Builds quality in
Quality assurance:
The processes that ensure production quality meet the requirements of customers
The aim: design the way a product or service is produced or delivered to minimise the chances that output will be sub-standard
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)
Quality assurance:
Focus on processes
Achieved by improving production processes
Targeted at the whole business
Emphasises the customer
Quality is built into the product
Quality control:
Focus on outputs
Achieved by sampling and checking (inspection)
Targeted at production activities
Emphasises required standards
Defective products are inspected out
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
Total Quality Management (TQM)
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
Advantages of TQM:
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
Disadvantages of TQM:
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
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
Inventory Management
Three main types of stock:
Raw materials and components
Work in progress
Finished goods
Why do we use Stock Control Charts?
The overall objective of stock control is to maintain stock levels so that the total costs of holding stocks are minimised
Key parts of a Stock Control Chart:
Maximum level: Max level of stock a business can or wants to hold
Re-order level: Acts as a trigger point, so that when the stock falls to this level, the next supplier order should be placed
Lead time: Amount of time between placing the order and receiving the stock
Minimum stock level: The business would want to hold a minimum amount of product in stock. Assuming the minimum stock level is more than zero, this is known as buffer stock
Factors affecting when/how much stock to re-order:
Lead time from the supplier
How long it takes for the supplier to deliver the order
Higher lead times may require a higher re-order level
Implications of running out (stock-outs)
If stock-outs are very damaging, then have a high re-order level and quantity
Demand for the product
Higher demand normally means higher re-order levels
Advantages of low stock levels:
Lower stock holding costs (e.g. storage)
Lower risk of stock obsolescence
Less capital (cash) tied up in working capital- can be used elsewhere in the business
Consistent with operating ‘lean’
Advantages of high stock levels:
Production fully supplied- no delays
Potential for lower unit costs by ordering in bulk/high quantities
Better able to handle unexpected changes in demand or need for higher output
Less likelihood of ‘stock-outs’
Stocks and Stock Management
What are Stocks?
Stocks represent the raw materials, work-in-progress and finished goods held by a firm to enable production and meet customer demand
Three main types of stock:
Raw materials and components
Bought from suppliers
Used in the production process
E.g. parts for assembly or ingredients
Work in progress
Semi or part-finished production
E.g. construction projects
Finished goods
Completed projects ready for sale or distribution
E.g. products on supermarket shelves; goods in Amazon warehouses
Key reasons to hold stock:
Enable production to take place
Satisfy customer demand
Precaution against delays from suppliers
Allow efficient production
Allow for seasonal changes
Provide a buffer between production processes
Main influences on the amount of stock held:
Need to satisfy demand
Failure to have goods available for sale is very costly
Demand may be seasonal or unpredictable
Need to manage working capital
Holding stocks ties up cash in working capital
There is an opportunity cost associated with stockholding
Risk of stock losing
The longer stocks are held, the greater the risk that they cannot be used or sold
The costs of holding stocks:
Cost of storage: More stocks require large storage space and possibly extra employees and equipment to control and handle them
Interest costs: Holding stocks means tying up capital (cash) on which the business may be paying interest
Obsolescence risk: The longer stocks are held, the greater the risk that they will become obsolete ( not capable of being sold)
Stock out costs:
A stock out happens if a business runs out of stock. This can result in:
Lost sales and customer goodwill
Cost of production stoppages or delays
Extra costs of urgent, replacement orders