Unit 4: Operations Management

15. Production of goods and services

Production: the process of converting inputs (land, capital, labour) into saleable goods 

Operation management: managing business resources throughout the production process to make finished products 

Goal of operations management:

• Use resources cost-effectively

• Produce required output to meet consumers' demand

• Meet the quality standards expected by customers 

Productivity: measure of how efficiently inputs are changed into outputs (no. of units produced in a period of time)

Labour productivity (units per person)  = Total output ÷ No. of production employees (labour)

Increase productivity→ reduce cost of producing each unit of output

Methods of improving productivity: 

• Increase skill level, motivation  of employees

⇒ Increase output with same no. of employees/keep same output with less employees

• Utilising quality automatioin, tech

• Make quality management decisions

⇒ use resources more wisely

Inventories: the stock of raw materials and finished goods held by a business

• Warehousing costs

• Handling costs (to move inventories)

• Shrinkage cost (damaged inventories have to be replaced)

• Obsolescence (out-of-date products may not be able to sell)

• Opportunity cost (resources could be used more profitably)

→ meet customer’s demand more quickly, always have raw materials 

Lean production: the production of goods and services with minimum waste of resources

(increase productivity, lower cost/waste → maiximise profit)

Techniques to achieve lean production

Just-in-time production (JIT): raw materials are bought (from suppliers) just as the production process needs them → 

no inventories held need meticulous planning to avoid waste and able to meet consumer’s demand

⇒ usually used by businesses that produce made-to-order products

Kaizen (continuous improvement):

Empower employees to make suggestions on how to improve productivity and production (first-hand experience)

→ increase motivation and productivity

Methods of production

• Job production: a production where a single product is worked on until completion (usually used to produce exclusive/unique items)

⇒ product price will be set very high

- time-consuming → decrease output

- demotivating (have to work on the same production repeatedly) 

• Batch production: a production where a group of products is worked on one stage at a time until completion, all the products are similar but can be slightly unique (e.g. breadmaking)

- limited quality control

- limited innovation (repetitive)

- materials are bought in bulk → utilise economies of scale

• Flow production: a production where products are made in vast quantities using a continuously moving process (all items are identical)

- relies on each member to work effectively

- automated 

- specialisation

- limited innovation

Computer-aided manufacturing (CAM): computers control the machinery and equipments used in the production process (reduce need for labour → lower production costs)

Using technology…

Business: 

• Reduce costs, time, increase productivity

• Can be expensive

Costumer:

• Higher quality, lower price

• Products may be outdated

Employees:

• Simplify work

• Can reduce the need for employees

• Work can become repetitive

16. Costs, scale of production and break-even analysis

Fixed cost: do not change with output (e.g. rent)

Variable cost: changes in direct proportion to the output (e.g. raw materials)

Total cost: all variable and fixed costs needed to produce the total output

Economies of scale: the reduction in average costs as a result of increasing the scale of production

Types of economies of scale

Financial economies: banks prefer to lend money to larger businesses (less risky) → easier access to capital (at lower rate of interest)

Managerial economies: large businesses → hire specialists in specific fields → increase productivity

Marketing economies: increase output → marketing does not necessarily increase proportionally → average marketing costs decrease as scale of operations increases

Purchasing economies (bulk-buying economies): large businesses buy raw materials in large quantities (in bulk) → suppliers will likely offer discounts

Technical economies: large businesses will use high-level machinery → increase productivity 

Diseconomies of scale: factors that cause average costs to rise as the scale of production increases

Cause of diseconomies of scale: 

• Poor communication, work coordination  (poor decision making, misunderstandings, objectives may not align,...)

• Lack of commitment from employees (demotivated → decrease in productivity)

Break-even: the level of output where a business is making neither a loss nor profit (where the revenue=costs)

Break-even analysis (shows the relationship between revenue and costs) is used to:

• How many units are needed to sell before the revenue is greater than the costs

• The effects altering the price of a product has on a business

→ provide valuable predictions about the business (forecast can also be unreliable)

Margin of safety: the amount by which sales exceed the break-even point

Total sales - break-even point = margin of safety

17. Achieving quality production

Quality: ensure that the good or service meets the need and requirements of consumers

Quality standard: the minimum standard for production or service acceptable to consumers

• Design standards: help businesses create the best possible product for consumer

• Process quality standards: help businesses create products at the lowest cost

Combine both → lower costs while maximising profit 

Quality ensures:

• Strong brand image (business has a good reputation)

• Customer loyalty, attract new customers

• Product pricing (customer prepared to pay higher prices)

• Attract wholesaler and retailer (recoginise quality product → want to stock up product)

• Lengthen product life cycle 

Quality control: checking the quality of product through inspection

Limitations:

• Costly, time-consuming

• Work can be demotivating

Quality assurance: setting standards for every part of the production process

Ensures:

• Raw materials are up to standard

• Every process minimises errors/issues

• All employees are responsible

• Problems/defects are found early on

18. Location decision

Factors in choosing a location:

• Cost of site

• Labour cost (average wage of employee in the area)

• Transportation costs (distance of location between suppliers, accessibility of location to consumers)

• Market potential

• Government incentive (gov could provide financial incentives for a business to locate in a specific area)

• Legal controls (need permission from gov)

Sometimes factories might not be allowed to locate in areas near civilians (avoid pollution)

A business might want to move to another country to:

• New customer base (new demographic)

• Reduce production costs

• Reduce labour costs

• Increase market share 

• Access to global markets 

Limitations:

• Foreign customer base → have to carry out market research → costly and time-consuming 

• Foreign workforce → might be difficult to motivate workforce and ensure employee retention

• Different laws → can place limitations on the business’s production process