UNIT 4 BUSINESS

UNIT 4:

Chapter 23: The Nature of Operations

(AS Level 4.1 – Operations Management)

23.1 The Production (Transformational) Process

Definition of Operations Management

Operations management involves using inputs (factors of production) efficiently to produce goods and services. It focuses on managing resources such as land, labour, and capital to maximize output and add value.

Factors of Production (Inputs)

1. Land: Physical space for production, raw materials, and natural resources used in operations.

2. Labour: Workforce involved in production—manual and skilled workers who contribute to the output.

3. Capital: Tools, machinery, equipment, and financial resources required for production.

4. Enterprise: The decision-making skills and risk-taking abilities of entrepreneurs to organize and manage production.

The Transformational Process (Production Process)

The production process involves converting inputs into outputs while adding value. This applies to both:

• Manufacturing businesses (e.g., producing cars, electronics)

• Service businesses (e.g., banking, retail, consulting)

Operations managers aim to maximize efficiency, maintain quality, and ensure flexibility to respond to market demands.

How Operations Contribute to Added Value

Operations management increases added value by:

• Reducing production costs through efficiency improvements.

• Ensuring quality to meet customer expectations.

• Increasing flexibility & innovation to adapt to market trends.

Added value depends on:

1. Product Design – Must be cost-effective while still appearing high-quality.

2. Efficiency of Operations – Reducing waste, increasing productivity, and lowering unit costs.

3. Branding – Strong branding encourages customers to pay more than the cost of inputs (e.g., luxury brands).

23.2 Efficiency, Effectiveness, Productivity, and Sustainability

1. Productivity vs. Production

• Production = Total output produced by a business.

• Productivity = Efficiency of production (measuring output per unit of input).

• Higher productivity → Lower average costs per unit → Higher competitiveness.

2. Measuring Productivity

Labour Productivity Formula:

Labour Productivity=Total Output in a Time PeriodNumber of Workers Employed\text{Labour Productivity} = \frac{\text{Total Output in a Time Period}}{\text{Number of Workers Employed}}Labour Productivity=Number of Workers EmployedTotal Output in a Time Period​

• Higher productivity = More output per worker = Lower labour cost per unit.

3. How to Improve Productivity

✅ Improve employee training – Skilled workers are more efficient.
✅ Enhance worker motivation – Financial (bonuses) & non-financial incentives (job enrichment).
✅ Invest in modern technology – Automation reduces reliance on labour and increases efficiency.
✅ Effective management – Better decision-making, resource allocation, and process improvements.

4. Challenges in Raising Productivity

❌ Unpopular products won’t sell, no matter how efficiently they’re made.
❌ Workers may demand higher wages if productivity increases.
❌ Potential job losses from automation → Labour unions may resist change.
❌ Poor management can reduce gains, as demotivated workers won’t perform efficiently.

5. Efficiency vs. Effectiveness

• Efficiency = Producing at the lowest possible cost with minimal waste.

• Effectiveness = Meeting customer demands and ensuring long-term business success.

• Example: A company may efficiently produce bicycles but fail to be effective if customers no longer want that model.

6. Importance of Sustainability in Operations

Sustainability = Ensuring operations don’t harm the environment or deplete resources for future generations.

✅ Ways to Improve Sustainability:

• Reduce energy consumption & carbon emissions.

• Use recyclable materials & minimize waste.

• Reduce plastic & non-biodegradable materials.

23.3 Labour-Intensive vs. Capital-Intensive Operations

Businesses choose between labour-intensive and capital-intensive production methods based on:

1. Nature of the product – Custom-made products need skilled labour.

2. Cost of labour vs. capital – If labour is expensive, automation might be preferred.

3. Business size & financial capability – Larger firms can afford capital investment.

1. Labour-Intensive Production

• Relies on human workers rather than machinery.

• Common in small businesses & specialist/customised products.

✅ Advantages:

• More flexible – Can adapt to changing demands.

• Unique, high-quality products.

• Lower capital costs – No expensive machinery required.

❌ Disadvantages:

• Higher wage costs.

• Lower output levels – Takes longer to complete tasks.

• Quality variations – Depends on worker skill & experience.

2. Capital-Intensive Production

• Relies on machinery & automation rather than human labour.

• Used in mass production industries (e.g., car manufacturing, power plants).

✅ Advantages:

• Lower unit costs – Economies of scale reduce costs.

• Consistent quality – Machines ensure standardization.

• Higher productivity – Large quantities produced quickly.

❌ Disadvantages:

• High initial investment – Machines are expensive.

• High maintenance costs.

• Less flexibility – Harder to adjust production quickly.

23.4 Production Methods

Businesses use different methods based on market size, costs, and flexibility needs.

1. Job Production

• Producing unique, one-off items (e.g., custom furniture, wedding dresses).

• Each product is individually completed before moving to the next.

✅ Advantages:

• High quality – Skilled workers create customised products.

• Customer satisfaction – Unique designs meet customer needs.

• Motivating for workers – More involvement in the process.

❌ Disadvantages:

• Expensive – Skilled labour and special materials increase costs.

• Time-consuming – Longer production time.

• High costs per unit – No economies of scale.

2. Batch Production

• Producing a group of identical products together (e.g., bakery, school uniforms).

✅ Advantages:

• Economies of scale – Reduces unit costs.

• Variety in production – Different batches can be made.

• More efficient than job production.

❌ Disadvantages:

• High inventory costs – Need to store batches.

• Machines require cleaning & resetting between batches.

• Work can be repetitive & boring.

3. Flow Production (Mass Production)

• Continuous production of identical products (e.g., Coca-Cola, cars).

✅ Advantages:

• Very low unit costs due to economies of scale.

• Highly automated → Reduces labour costs.

• Consistent quality.

❌ Disadvantages:

• High initial investment in machines.

• Inflexible – Hard to change designs quickly.

• Demotivating for workers due to repetitive tasks.

4. Mass Customisation

• Combines mass production with product variation (e.g., Dell laptops, Mini Cooper cars).

• Uses advanced technology to produce customised versions of standard products.

✅ Advantages:

• Low unit costs with product variety.

• Meets customer preferences better than flow production.

❌ Disadvantages:

• Expensive machinery & skilled workers required.

• Suppliers must provide varied components.

Choosing the Right Production Method

Factors to consider:
✅ Market size – Large demand → Flow production; niche market → Job production.
✅ Capital investment – Flow production requires high investment.
✅ Labour vs. automation – If labour is cheap, job/batch production is viable.
✅ Customer demand for customisation – Use mass customisation if needed.

Chapter 24: Inventory Management

(AS Level 4.2 – Operations Management)

24.1 The Purpose of Inventory Management

What is Inventory?

Inventory refers to stock or materials that a business holds to support production or sales. It includes:

1. Raw materials – Components or inputs required for production.

2. Work-in-progress (WIP) – Partially completed goods still in the production process.

3. Finished goods – Completed products ready for sale or distribution.

Why is Inventory Management Important?

Efficient inventory management ensures that:
✅ Production runs smoothly without disruptions due to material shortages.
✅ Customer demand is met with available finished goods.
✅ Costs are minimized by avoiding excessive storage and wastage.
✅ Cash flow is managed effectively, preventing unnecessary spending on unused stock.

24.2 The Costs of Holding Inventory

While inventory is necessary, holding too much stock has disadvantages:

1. Storage Costs

• Warehousing, refrigeration, security, and insurance increase fixed costs.

• More inventory = more space = higher expenses.

2. Risk of Obsolescence & Wastage

• Unsold inventory can become outdated or damaged (e.g., perishable food, fashion trends, or tech products).

• Risk of theft or spoilage increases with excess stock.

3. Working Capital Tied Up

• Money spent on inventory cannot be used elsewhere (e.g., marketing, new equipment).

• Reduces financial flexibility for the business.

4. Risk of Demand Changes

• Consumer preferences may shift, making excess stock unsellable or requiring discounts.

• Example: A clothing retailer stocks heavy winter coats, but an unexpectedly warm winter reduces demand.

5. Opportunity Cost

• Funds used for excess inventory could be invested in new products, business expansion, or R&D.

24.3 Just-in-Case (JIC) vs. Just-in-Time (JIT) Inventory Management

1. Just-in-Case (JIC) Inventory Management

• Involves holding extra inventory to avoid running out of stock.

• Acts as a buffer in case of supply chain disruptions, unexpected demand spikes, or delays.

✅ Advantages of JIC:

• Ensures continuous production and sales availability.

• Bulk buying discounts reduce costs.

• Protects against supplier delays.

❌ Disadvantages of JIC:

• High storage costs.

• Capital is tied up in unsold stock.

• Risk of obsolescence (e.g., perishable goods may expire).

2. Just-in-Time (JIT) Inventory Management

• Stock is ordered only when needed, reducing holding costs.

• Supplies arrive "just in time" for production or sales.

• Used by lean manufacturing businesses (e.g., Toyota).

✅ Advantages of JIT:

• Lower storage costs.

• Minimizes waste – Less risk of obsolete or expired inventory.

• Improves cash flow as money isn’t tied up in stock.

❌ Disadvantages of JIT:

• No buffer stock – Risk of delays if suppliers fail to deliver on time.

• Higher supplier dependency – Business must rely on efficient logistics.

• Requires accurate demand forecasting – Miscalculations can lead to stock shortages.

JIC vs. JIT: Choosing the Right Approach

• Unpredictable demand? → JIC (e.g., fashion industry, supermarkets).

• Reliable suppliers & stable demand? → JIT (e.g., car manufacturing, fast food chains).

24.4 Economic Order Quantity (EOQ) and Inventory Control Techniques

1. Economic Order Quantity (EOQ)

• EOQ is the optimal order quantity that minimizes total inventory costs.

• Balances ordering costs (bulk discounts) with holding costs (storage expenses).

• Businesses use EOQ formulas to determine when and how much to order.

2. Inventory Control Charts

Used to track stock levels and avoid shortages. Key concepts:
📍 Maximum inventory level – The highest amount of stock that can be held.
📍 Reorder level – The stock level at which a new order must be placed.
📍 Lead time – The time between placing and receiving an order.
📍 Buffer stock – Safety stock held to prevent shortages.
📍 Minimum stock level – The lowest acceptable inventory level before reordering.

3. Stock Rotation (FIFO & LIFO)

• FIFO (First In, First Out): Older stock is used/sold first (common in perishable goods).

• LIFO (Last In, First Out): Newest stock is used/sold first (used in industries like mining).

24.5 Supplier Management & Technology in Inventory Control

1. Importance of Choosing the Right Supplier

A good supplier should:
✅ Provide high-quality materials consistently.
✅ Offer reliable and timely delivery.
✅ Be cost-efficient while maintaining quality.
✅ Be flexible to meet changing demand.

2. Technology in Inventory Management

• Barcoding & Scanners: Automates stock tracking, reducing human errors.

• Enterprise Resource Planning (ERP): Integrates inventory data with sales & production planning.

• RFID Tags: Track inventory movement in real-time.

• AI & Predictive Analytics: Helps forecast demand more accurately.

24.6 Inventory Management Evaluation

Advantages of Efficient Inventory Management:

✅ Reduces costs (less storage, waste, and obsolete stock).
✅ Improves cash flow (less money tied up in inventory).
✅ Ensures smooth production by preventing material shortages.
✅ Increases customer satisfaction (products are always available).

Risks of Poor Inventory Management:

❌ Stock shortages → Lost sales & dissatisfied customers.
❌ Excess stock → Increased costs & risk of obsolescence.
❌ Supply chain disruptions → Production halts if suppliers fail to deliver.
❌ Inefficient warehouse management → Wasted space and higher costs.

Conclusion: Finding the Right Balance

• Businesses must choose between JIC and JIT based on demand patterns, supplier reliability, and industry type.

• Technology plays a crucial role in improving inventory tracking and forecasting.

• Good supplier relationships ensure reliability and cost efficiency.

Summary Table: JIC vs. JIT

Key Formulas to Remember

1⃣ Labour Productivity:

Labour Productivity=Total Output in a Time PeriodNumber of Employees\text{Labour Productivity} = \frac{\text{Total Output in a Time Period}}{\text{Number of Employees}}Labour Productivity=Number of EmployeesTotal Output in a Time Period​

2⃣ Economic Order Quantity (EOQ) Formula:

EOQ=2DSHEOQ = \sqrt{\frac{2DS}{H}}EOQ=H2DS​​

Where:

• D = Demand (units per year)

• S = Ordering cost per order

• H = Holding cost per unit per year

Final Thoughts

• Effective inventory management is key to cost savings and customer satisfaction.

• Technology enhances efficiency with automated tracking and demand forecasting.

Chapter 25: Capacity Utilisation and Outsourcing

(AS Level 4.3 – Operations Management)

25.1 Understanding Capacity and Capacity Utilisation

What is Capacity?

• Capacity refers to the maximum output level a business can achieve with its existing resources (machinery, labor, and materials).

• It is measured in units of output per period (e.g., cars per month, calls handled per hour).

• Businesses aim to balance demand and production capacity to avoid inefficiencies.

What is Capacity Utilisation?

• Capacity Utilisation measures how much of the total capacity is actually being used.

• It is calculated using the formula:

Capacity Utilisation=(Current Output LevelMaximum Possible Output)×100\text{Capacity Utilisation} = \left( \frac{\text{Current Output Level}}{\text{Maximum Possible Output}} \right) \times 100Capacity Utilisation=(Maximum Possible OutputCurrent Output Level​)×100

✅ High capacity utilisation means the business is producing close to its maximum potential.
❌ Low capacity utilisation indicates underused resources, leading to inefficiency.

25.2 The Importance of Capacity Utilisation

Why is Capacity Utilisation Important?

1. Impacts Average Costs:

   • Higher utilisation → Lower fixed costs per unit.

   • Lower utilisation → Higher costs as fixed costs are spread over fewer units.

2. Affects Business Competitiveness:

   • Efficient businesses can offer lower prices and stay competitive.

3. Indicates Business Performance:

   • Consistently low utilisation may suggest declining demand or operational inefficiencies.

   • Too high utilisation can lead to overworked employees and machine breakdowns.

4. Helps in Decision-Making:

   • Low utilisation → Reduce capacity (e.g., close factories, downsize workforce).

   • High utilisation → Expand capacity (e.g., invest in new machinery, hire more workers).

25.3 Should a Business Operate at Full Capacity?

✅ Advantages of Operating at Full Capacity (100%)

• Maximizes efficiency → Lowest fixed costs per unit.

• Stronger competitive position → Business can price competitively.

• No idle resources → Ensures all machinery and labor are productive.

❌ Disadvantages of Full Capacity

• No flexibility to meet sudden demand increases → Customers may have to wait.

• Increased wear and tear on machinery → More maintenance needed.

• Higher risk of worker stress and burnout → Leads to lower motivation and quality issues.

🔹 Ideal Strategy: Businesses aim for 85-90% capacity utilisation, allowing flexibility while maintaining efficiency.

25.4 Dealing with Excess Capacity (Under-Utilisation)

Excess capacity occurs when a business is producing below its potential output level due to low demand.

Causes of Excess Capacity:

🔹 Seasonal demand changes – e.g., ice cream sales in winter.
🔹 Economic downturns – Lower consumer spending.
🔹 Loss of key customers – Reduced bulk orders.
🔹 Inefficient production processes – Poor planning or outdated machinery.

How to Manage Excess Capacity?

1. Increase Demand:

   • New marketing campaigns to attract customers.

   • Discounts and promotions to boost sales.

   • Expand into new markets (e.g., exporting products).

2. Reduce Capacity:

   • Close underperforming factories or stores.

   • Reduce workforce through layoffs or shorter workweeks.

   • Sell or lease unused production facilities.

3. Use Capacity for Other Purposes:

   • Diversify product range (e.g., a factory making summer clothes can produce winter clothing).

   • Rent out extra space/machinery to other businesses.

25.5 Dealing with Capacity Shortages (Over-Utilisation)

🔹 Over-utilisation occurs when demand exceeds production capacity, leading to bottlenecks and inefficiencies.

Causes of Capacity Shortages:

• Sudden demand spikes – e.g., viral marketing success.

• Machine breakdowns or staff shortages.

• Inefficient production processes limiting output.

How to Manage Capacity Shortages?

1. Increase Capacity:

   • Invest in new machinery or factories.

   • Hire more workers or add extra shifts.

   • Expand warehouse or production space.

2. Outsource Production:

   • Use third-party manufacturers to meet excess demand.

   • Partner with subcontractors to handle overflow.

3. Improve Efficiency:

   • Streamline production processes (e.g., reduce setup times).

   • Train employees to increase productivity.

25.6 Outsourcing: A Solution to Capacity Issues

What is Outsourcing?

Outsourcing means contracting external businesses to handle certain tasks instead of doing them in-house.
🔹 Example: Apple outsources iPhone manufacturing to Foxconn.

Why Businesses Outsource?

✅ Reduces costs – No need to invest in expensive equipment.
✅ Increases flexibility – Can scale up or down based on demand.
✅ Access to specialized expertise – Experts handle tasks more efficiently.
✅ Focus on core business functions – Lets companies concentrate on strategy and innovation.

Risks of Outsourcing:

❌ Less control over quality – Third-party suppliers may not meet company standards.
❌ Supplier dependency – Business becomes reliant on external firms.
❌ Security risks – Sharing business data with third parties may cause confidentiality issues.
❌ Higher long-term costs – Can become expensive if outsourcing fees rise.

25.7 Evaluating Capacity Decisions & Outsourcing

Factors to Consider When Expanding Capacity:

1. Market Demand: Will demand stay high long enough to justify expansion?

2. Financial Resources: Can the business afford new investments?

3. Production Efficiency: Can capacity be improved without expansion?

4. Technological Advancements: Will new machines replace the need for expansion?

When is Outsourcing the Best Option?

• Short-term demand spikes – A temporary increase in demand (e.g., seasonal goods).

• Lack of in-house expertise – Complex tasks requiring specialists (e.g., IT services).

• Cost advantages – If external providers offer lower costs than in-house production.

🔹 Outsourcing should be avoided if:

• It reduces control over quality.

• It increases long-term dependency on third parties.

• It leads to job losses and negative public image.

Summary Table: Over-Utilisation vs. Under-Utilisation

Final Thoughts

• Capacity utilisation affects cost efficiency and business competitiveness.

• Under-utilisation leads to wasted resources, while over-utilisation strains operations.

• Outsourcing provides flexibility but has risks like quality control issues.

• Businesses must find the right balance between in-house production and outsourcing for long-term success.