23. The nature of operations

Question 1

Contribution of operations to added value

Answer 1

Operations managers can increase added value by effectively managing:
* efficiency of production: keeping costs as low as possible will help to give competitive advantage
* quality: the goods or services must be suitable for the purpose intended
* flexibility and innovation: the need to develop and adapt to new processes and new products is increasingly important in today’s dynamic business environment.

Operations managers aim to produce goods and services of the required quality, in the required quantity, at the time needed, in the most cost-effective way.

Question 2

Importance of productivity

Answer 2

Productivity is important because it is one of the main factors that determine the competitiveness of a
business. Raising the level of productivity will reduce the average cost of making each unit of output. This
lower cost might allow the business to reduce prices to customers.

Question 3

Difference between productivity and levle of production

Answer 3

The level of production is an absolute measure of the quantity of output that a firm produces in a given period of time. Productivity is a relative measure and is concerned with how efficiently inputs are converted into outputs.

Question 4

How to raise productivity?

Answer 4

• Improve the training of employees to raise skill levels: Employees with higher skill levels and more flexible skills should be more productive. However, training can be expensive and timeconsuming, and highly qualified workers could leave to join another business.

* Improve worker motivation: Using appropriate financial and non-financial methods of motivation should encourage employees to work more efficiently. Non-financial methods in particular could be used as they will not increase labour costs. Therefore, any resulting increase in labour productivity will lead to lower average costs of production.

• Purchase technologically advanced equipment: Modern machinery – from office computers to robot-controlled production machines – should allow increased output with fewer workers. High-cost investment will only be worthwhile if high output levels can be maintained. In addition, workers may need to be retrained and there may be genuine fear about lost jobs and reduced security of employment.
• More effective management: Ineffective management can reduce the overall productivity of a
  business. Failure to purchase the correct materials, poor maintenance schedules for machines or
  demotivating methods of employee management are just some examples of this. More efficient
  operations and people management could go a long way towards improving productivity levels.

Question 5

Evaluation of rising productivity

Answer 5

• If the product is unpopular with consumers, it may not sell profitably no matter how efficiently it is made.
• Greater effort from workers to increase productivity could lead to demands for higher wages. This will lead to higher costs, which may cancel out the impact of productivity gains.
• Workers may resist measures to raise productivity. A 20% increase in labour productivity may lead to job losses if sales do not increase too. There could be industrial disputes.
• The quality of the management determines the success of a policy to increase productivity. If the culture of management is to involve the workforce and seek their views, then productivity improvements are likely to be greater and accepted by workers.
• There is a difference between efficiency, as measured by productivity, and effectiveness.

Question 6

The importance of efficiency and effectiveness

Answer 6

A distinction needs to be made between these two terms. Efficiency is measured by productivity, but effectiveness is rather different. Effectiveness is achieved only if the customer’s needs are met.

Effectiveness means meeting objectives other than just being efficient in operations. It means meeting customers’ needs profitably – and being efficient in production is only one part of this. For the long-term future of any business, satisfying customers’ needs profitably is much more important than just producing at the lowest possible unit cost. Effectiveness is about not wasting inputs and putting them to productive use to achieve the objectives of the business

Question 7

The importance of sustainability of operations

Answer 7

Sustainability is one of the key business issues of the twenty-first century. Growing global concern about pollution and climate change has put pressure on businesses to clean up their operations. Businesses are becoming increasingly focused on achieving sustainability of operations.

They can do this in a number of ways, by:
* reducing energy use and carbon emissions
* reducing the use of plastic and other non biodegradable materials
* using recycled materials
* manufacturing products that are recyclable

Question 8

Why are business making operations more sustainable?

Answer 8

• Businesses must comply with stricer laws on environmental issues.
• Pressure-groups activity exposes the most environmentally damaging businesses
• Business need to fulfil senior managers’ commitment on corporate responcibility
• Sustainable operations gain positive publicity, which is good for public relations
• More sales are likely as consumers prefer greener and more sustainable products.

Question 9

Labour intensive
* Benefits and limitaions

Answer 9

Labour intensive production is still commonly used in small businesses that produce specialist, customised products to meet particular customers, needs. The advantages include:
* interesting and varied work
* low machine costs
* one-off designs meet customer requirements such as exclusive furniture.

However, the limitations of labour intensive production include:
* low output levels
* skilled, high-paid workers required
* product quality depends greatly on the skill and experience of each worker

Question 10

Captial intensive

Answer 10

The advantages of capital-intensive production are:
* economies of scale
* consistent quality
* low unit costs of production
* the ability to supply the mass market.

Capital intensity brings its own limitations, including:
* high fixed costs
* cost of financing the equipment
* high maintenance costs and the need for skilled workers to do repairs
* the quick pace of technological change, which can make the latest production equipment and computer systems obsolete and relatively inefficient.

Question 11

Evaluation of capital and labour intensive production

Answer 11

Many industries that supply mass-produced goods are capital intensive. This is because of the nature of the production process involved. Electricity generation or aluminium smelting can only be economically undertaken by using large and expensive capital intensive plants. Other businesses decide to be capital intensive even though labour intensive production is still possible

These limitations of capital intensive production are unlikely to slow the trend towards this approach. However, for as long as consumers are prepared to pay for traditional craft-made goods that create a sense of distinction, then labour intensive methods will remain profitable for businesses in certain industries.

In conclusion, which approach is chosen depends on:
* the nature of the product and its brand image
* the relative cost of labour and capital
* business size and access to finance.

Question 12

Job production

Answer 12

• This is normally used for the production of single, one-off products.
• These products may be small or large and are often unique.
• Examples of job production would be a specially designed wedding ring.
• In order to be called job production, each individual product has to be completed before the next product is started. Thus, at any one time, there is only one product being made.
• Job production is often expensive. It can take a long time to complete each unit.
• It is usually labour intensive. The labour force also needs to be highly skilled and this is not always easy to achieve.

Question 13

Batch production

Answer 13

• Batch production involves the production of identical products in groups.
• Feature of batch production is that every unit in the batch goes through each production stage before the whole batch moves on to the next production stage.
• Batch production allows firms to use division of labour.
• It enables some economies of scale if the batch is large enough.

Limitations:
* batch production tends to have high levels of work-in-progress inventory at each stage of the production process.
* The work may well be boring and demotivating for the workers.
* If batches are small, then unit costs are likely to remain high.
* There is often a need to clean and adjust machinery after each batch has passed through.

Question 14

Flow production

Answer 14

• With this method individual products move from stage to stage of the production process without waiting for any other products.
• Flow production systems are capable of producing large quantities of output in a relatively short time.
• It suits industries where the demand for the product is high and consistent.
• It also suits the production of large numbers of a standardised item.

Benefits:
* Labour costs are low because much of the process is mechanised.
* There is little physical handling of the products.
* The constant output rate should make the planning of inputs relatively simple. This makes inventory control easier and minimises inventory levels.
* Quality tends to be consistent and high. It is easy to check the quality of products at various points throughout the process.

Disadvantages
* high initial set-up cost of high-technology production line equipment.
* This cost cannot be justified if demand is low.
* In addition, the work involved tends to be boring, demotivating and repetitive.

Question 15

Mass customisation

Answer 15

• This is now the most important production method in industries where customers demand competitive prices and product variations or customisation.
• The process combines advanced flexible computercontrolled technology and multi-skilled workers.
• It uses production lines to make a range of products with variations at high volume. This allows the business to move away from the mass-marketing approach with
  high output of identical products.
• Instead, focused or differentiated marketing can be used, which allows for higher added value.
• By changing just a few of the key components – but keeping the rest the same – low unit costs are maintained with greater product choice.

Requirements:
* advanced and flexible capital equipment
* skilled and well-trained workers to operate this machinery
* product designs that have many standardised parts but some interchangeable ones
* suppliers able to supply variations on parts and components.

Question 16

Choosing between operation methods

Answer 16

Size of market:
If the market is very small (e.g. designer clothes), job production is likely to be used. Flow production is most efficient when the market for similar or identical products is large and consistent throughout the year. If mass production is used in this way, then mass-marketing methods have to be adopted to sell the high output levels. Even in a market for mass-produced items, such as cars, there are market niches. These allow smaller manufacturers to survive by making one-off products. If the market demands a large number of units, but at different times of the year (for example, textbooks at the start of the academic year), then batch production might be most appropriate.

The capital available: A purpose-built flow production line is difficult and expensive to construct. Small firms are unlikely to be able to afford this type of investment and are more likely to use job or batch production.

Other resources: Large-scale flow production often requires a supply of relatively unskilled workers and a large, flat area of land. Job production needs skilled craftspeople. If any of these resources are
unavailable, or limited in supply, then the production method may have to be adapted to suit the available resources, depending on market size.

Customers demand products adapted to specific requirements:
If firms want the cost advantages of high volumes combined with the ability to make slightly different products for different markets, then mass customisation is most appropriate. Technology gives businesses the flexibility to produce a variety of models from one basic design and production process.

Question 17

Problems of changing operations methods

Answer 17

Businesses may need to change the method used to produce goods and services. This might be because of increasing demand, leading to a need to increase output. It could also result from an increase in labour costs for skilled job production employees, making a switch to a more capital-intensive flow production method more economic.

The problems that result from changing from job to batch production include:
* The cost of equipment needed to handle large numbers in each batch may be too high.
* Additional working capital is needed to finance work-in-progress inventory.
* There is a risk of worker demotivation as there is less need for an individual’s craft skills.

The problems that result from changing from job or batch to flow production include:
* The cost of capital equipment needed for flow production may be too high.
* Employee training needs to be flexible and multi-skilled. If this approach is not adopted, then workers may end up on one boring repetitive task and become demotivated.
* Accurate estimates of future demand are needed to ensure that output matches demand.

Question 18

Evaluation of operations methods

Answer 18

The traditional differences between these operations methods are becoming much less obvious. Many complex products, such as computers and industrial engines, can be adapted to meet different consumers’ wide range of requirements. The flexibility offered by technology to large businesses could put at risk the survival of small firms that exploit small market niches with hand-built or specialised products. However, there is always likely to be a demand from increasingly wealthy consumers for original and specialist products. So, small firms with non-mass-production methods will still thrive in these market segments.