3.4 DECISION MAKING TO IMPROVE OPERATIONAL PERFORMANCE Flashcards
Define ‘excess capacity’
Where a firm is producing at a lower scale of output than it has been designed for.
Define ‘unit costs’
Average cost of producing one unit of the product
A measure of cost-effectiveness
Describe what lower unit costs would mean for a business
Means a business is in a stronger position to be able to compete by being able to offer lower prices, allowing higher profit margins and making the products more attractive.
Ways of measuring quality
- Scrap/defect rates
- Reliability
- Customer satisfaction
- Number of customer complaints
- Customer loyalty
- Quality assurance / control
What are efficiency and flexibility targets
How responsive the business can be in short term or unexpected changes in demand
Suggest environmental objectives
- Use of renewable energy
- Recycled materials
- Compliance with waste disposal regulations (Apple buying back old phones)
- Reduce waste and emissions
Define ‘labour productivity’
How much each employee produces
Overall measure of the productivity of the workforce
Why is labour productivity important?
Higher LP = Lower UC/LC
Labour costs are a significant cost of a business
To remain competitive, a business must keep unit costs down, by keeping labour productivity high
Equation for labour productivity
Output per period (units) / No. employees at work
Equation for labour cost per unit
Labour costs (£) / Output (units)
Factors influencing labour productivity (Internal)
- Extent / quality of fixed assets
- Motivation of workforce (Supervision - Mayo?)
- Methods of production (machinery)
- Training and skills of workforce
- Employee’s workload
Factors influencing labour productivity (External)
- Reliability of suppliers
Suggest ways to improve labour productivity
- MOTIVATE EMPLOYEES
- Measure performance
- Set targets
- Invest in employee training
- Robotics / new technology
- Improve working conditions
- Improving flexibility
Problems when increasing labour productivity
- Employee resistance, don’t want to be replaced by automation
- Employees may demand higher pay
- ‘Trade-off’ with quality, RUSHING
- Initial costs of improving the labour productivity
- May conflict with other objectives
Define ‘quality’
Ability of a product to meet customer expectations
BARE IN MIND: different customers will have different perceptions of quality
Suggest some aspects of ‘quality’
Performance, appearance, availability, reliability, durability, value
CUSTOMER SUPPORT
Note: quality not always about the product
Define ‘sub-standard’
Doesn’t meet the customer needs
Define ‘intangible’
Not able to be touched / hard to measure
Define ‘tangible’
Physical / easy to measure
What service may a business use to build their reputation on quality? (Context)
TripAdvisor
Suggest the circulation of customer satisfaction
- Customer satisfaction
- Repeat purchase
- Lower marketing costs
- Higher customer loyalty
BACK UP
Suggest the link between quality and competition
At a similar price, higher quality product more likely to win - over competition
Give an example of a business that values high price and high quality (context)
Waitrose
Give an example of a business that values low price and low quality (context)
ALDI
Costs of offering poor quality
- Competitive disadvantage (bad reputation)
- Costs of remaking
- Costs of refunds
- Wasted materials
- Lost customers / loyalty
- Need for greater controls and checks
Examples of poor quality
- Product fails
- Product doesn’t perform as promised
- Product delivered late
- Poor instructions
- Unresponsive customer service
Contextual example of the consequence of poor quality
Dell recalls 4m laptops due to faulty battery
COST $400M
Define ‘quality control’
- Checking and reviewing the output, just before its delivered
- Takes defects out
Disadvantages of quality control
HIGH WASTE LEVELS
- Can be costly
- At end could be too late
- Takes responsibility away from operatives
- Done by inspectors, not workers
- Requires sampling
Advantages of quality control
- Minimize disruption of production (quick as not start-stop)
- Consistency to quality
- Common problems can be identified
- Efficient: robotic system
Define ‘quality assurance’
CHECKS PRODUCT AT EACH STAGE
- Based on process
- Builds in quality
- PROCESS
Define ‘TQM’
- Continual process of detecting and reducing or eliminating errors in manufacturing
- CONTINUOUS IMPROVEMENTS
- Whole workforce involved
- Aims to make managing quality the responsibility of all employees in a business to create a ‘culture of quality’ and gain a competitive advantage.
Advantages of ‘TQM’
- Less wasteful
- Eliminates cost of inspection
- Motivational, workers feel more involved in decisions
Disadvantages of ‘TQM’
- Strong leadership needed
- Substantial investment in training + support = disruption
Define ‘Kaizen’
Type of quality assurance
Continuous improvement
Gradually improving productivity by involving all employees
Advantages of ‘Kaizen’
- Encourages employees to engage fully with finding ways to improve quality
- Employees take ownership (all employees looking for small improvements)
- Eliminates faults and waste
- Teamwork
Define ‘capacity utilisation’
% of a business’ total possible production level that is being reached
Define ‘capacity’
- Measure of how much output can potentially be achieved in a given period
- MAXIMUM LEVEL OF OUTPUT
- DYNAMIC
Equation for ‘capacity utilisation’
Actual output (units) / Maximum output (units)
(x100)
Define ‘dynamic’
Changes / is a variable
Why is ‘capacity utilisation’ important?
- Higher utilisation can reduce unit costs
Why do most businesses operate below capacity?
- Lower than expected market demand
- A loss of market share
- Seasonal variations in demand
Dangers of operative at low capacity
- Higher unit costs, impacts on competitiveness
- Less likely to get breakeven output
- Capacity tied up in under-utilized assets - wasted
Problems with working at high capacity
- Negative effect on quality - rushed
- Employees suffer, more workload and stress
How can production efficiency be measured?
- Output per worker
- Output per time period
- Output per machine
- Unit costs (falling ratio would mean efficiency was improving)
How would unit costs show a fall in production efficiency?
Falling ratio would mean efficiency was improving
Why is high productivity important?
- Lower costs goods than competitors, high profit per unit sold
- Investing in production assets is expensive, needs to maximize the return it makes on these assets
How can productivity be improved?
- Training
- Improved motivation
- More/better capital equipment
- Better quality raw materials to begin with
- Improved organization of production = less waste
Define ‘lean production’
WASTE = COSTLY
- Approach to management that focuses on cutting out waste whilst ensuring quality
Advantages of ‘lean production’
- Involves employees in the improvement process, improves motivation and productivity
- Improves efficiency
- Reduces waste = reducing costs
Disadvantages of ‘lean production’
- Little room for error
- Can lead to delivery inconsistencies as it takes longer
Examples of waste
- Over production
- Waiting time - whilst idle
- Stock (out of date)
- Defects, not up to standard
Main methods of ‘lean production’
- Time based management
- Simultaneous engineering
- Just in time
- Cell production
- Kaizen
- Critical path analysis
Explain effective lean production
- Good relations with suppliers
- Committed, skilled motivated employees
- Involving employees
- Culture of quality assurance
- Trust
- Doing the simple things well
Define ‘time-based management’
Recognizes importance of time
Seeks to reduce levels of wasted time in production
What is required for ‘time-based managements’
- Flexible production methods
- Trained employees
Define ‘simultaneous engineering’
- Part of the time-based management approach.
- Helps firms develop and launch new products more quickly.
- All parts of the project are planned together, everything considered simultaneously
Define ‘cell production’
- Form of team working
- Flow production line split into a number of self-contained units.
- Allows job enrichment
Define ‘flow production’
- Continuous production
- Continuous movement of items through the production process
Benefits of ‘cell production’
- Improve communication
- Multi-skilled workers developed
- Motivation for employees
Define ‘just-in-time’ production
- Inputs only arrive when/as they are needed
- ‘Pull system’ of production
Advantages of ‘just-in-time’
- Lower stock holding, saves warehouse space
- Less working capital tied up in stock
- Stock won’t go out of date, supplier’s responsibility until needed
- Less time spent checking
Disadvantages of ‘just-in-time’
- Close corporation with suppliers needs to be built overtime
- Little room for mistake
- RELIANT on suppliers
- A need for complex stock systems, costly
- No spare finished product available to meet unexpected orders, all product is made to meet actual orders
Define a ‘push system’
Produce goods based on the best projections of what the market wants
Define a ‘pull system’
Production of goods is initiated by the person or organization who consumes that good.
Define a ‘working capital’
Difference between:
Company’s current assets
and
Current liabilities
Suggest types of technology used in operations
- Robots / automation
- Stock control systems
- Communications - mobile technology
How does technology help a business operate?
- Reduces chance of human error
- Makes decision making more efficient
- Security of data
- Market research
- Market mapping
etc etc etc
Reasons for stock holding
- Satisfy customer demand
- Precaution against supplier delays
- Allow seasonal change
- Buffer stock
What is the purpose of a stock control chart?
Maintain stock levels so total costs of holding stocks is minimized.
Holding stock costs money
Define ‘lead time’ (Stock Control Charts)
Time between suppliers receiving their order and delivering it to you
Define ‘re-order level’ (Stock Control Charts)
The level of inventory at which new stock is ordered
TRIGGER POINT
Define ‘minimum level’ (Stock Control Charts)
Minimum amount of product the business would want to hold in stock
Define ‘maximum level’ (Stock Control Charts)
Max level of stock a business can or wants to hold
Define ‘buffer stock’ (Stock Control Charts)
An amount of stock held just in case of unexpected orders so that orders can be met just in case of any delays from suppliers.
Axis on a stock control chart
Y = Stock Held
X = Time
Factor affecting lead time
- How long it takes for the supplier to deliver
How would a high lead time affect re-order level?
Need a higher re-order level
How would a stock-out (running out) affect re-order level?
Need high re-order level & quantity
How would demand affect re-order level?
Higher demand normally means higher re-order levels
Definition of ‘outsourcing’
Delegation of one or more business processes to an external provider
To a business specialized in tasks and can do it better and cheaper
Main reason for outsourcing
Way of reducing costs
How will outsourcing improve quality?
The supplier of the outsourcing will be more specialised in the specific field
Incr
Disadvantages of outsourcing
- Supplier will have other customers to focus on
- Lack of flexibility, fixed contract
- Loss of some control
- Potential security risks
- Reduces quality control
Why would a business use In-House rather than outsourcing
- Easier communication
- May be a small fix so no outsourcing required
- Easier to ensure and trace problems
- Business has 100% control, less risk
What makes an effective supplier?
- Fair price
- Quality
- Reliability (e.g. delivery times)
- Communication
- Financially secure
- Sustainable capacity available
Define a ‘strategic supplier’
- Business can’t succeed without maintaining an effective supplier relationship
- Supplies goods difficult to get anywhere else
Define a ‘commodity supplier’
- Provides goods that can be easily bought elsewhere
- Aren’t hugely important to a business
Ways to choose a supplier
- Word of mouth
- Exhibitions / events
- Trade websites
- Directories
- Advertising
Key contents of a service agreement with a supplier
- What
- When
- How much it will cost
- Disputes
- Termination (when the contract ends)
Key contents of a service agreement with a supplier
- What
- When
- How much it will cost
- Disputes
- Termination (when the contract ends)
Define ‘trade credit’
Where a business receives goods from supplier and pays later
Disadvantage of using trade credit
- Can damage the relationship with suppliers if left too long
- Opportunity cost of discounts
Define ‘operational objectives’
Any part of a business that is involved in developing a product ready for customer use
Responsible for taking resources – such as raw materials and business’ workforce – and using them to create finished goods or services
Ensures the business produces the ‘right’ goods for its customers
Advantages of outsourcing
- Saves time
- Reduces costs
- Expertise: reduces risk of doing the job badly
- Increased efficiency
Advantages of setting ‘operational objectives’
- Acts as a focus for decision making
- Provides benchmark against which success or failure can be measured
- Improves co-ordination
- Improves efficiency
Examples of ‘operational objectives’
- Costs
- Quality
- Dependability
- Added value
- Flexibility
- Speed of response
Advantage of having low unit costs
Enables a business to either keep the price low or enjoy a higher profit margin by keeping prices at their same level
Equation for ‘unit costs’
Total costs / Units of Output
(COST PER ITEM)
Contextual example of unit costs
From maintaining low unit costs, Aldi have gained 6.9% market share and gain customers from the other big stores such as Tesco
This is all down to having these low unit costs, they can make their prices lower so it seems more appealing to customers
How would a business achieve low unit costs?
- Reduce fixed costs
- Reduce variable costs per unit
Ways of measuring quality
- Customer satisfaction ratings
- Customer complaints
- Level of product return
- Scrap rate: number of items rejected during production process
- Punctuality (of deliveries)
Define ‘scrap rate’
Number of items rejected during production process
Can judge if production is effective/working
Equation for ‘punctuality’
Deliveries on time / Total deliveries
(x100)
Advantages of high labour productivity
- Increase output without affecting costs
- Reduce costs without affecting output
Customer’s perspective of quality may be influenced by…
- Price
- Brand
- Customer service / impression made
Ways to express quality (product)
- Aesthetics
- Features
- Core / actual aspects
- Performance
- Tangible / intangible aspects
Ways to express quality (service)
- Friendliness of staff
- Speed of service
- Efficiency of service
- Staff knowledge
- Cleanliness of facilities
- Appearance of environment
Advantages of ‘quality assurance’
- Positive effect on staff morale: gives them more responsibility, motivating
- Lower wastage levels: faults identified earlier
- Confidence in product performance: achieves certification and total assurance
Disadvantages of ‘quality assurance’
- Relies on commitment / motivation of employees
- Additional training costs
- Training takes time
- Production process may take longer / be delayed = longer lead time for buyers
- Accreditation for quality assurance does not ensure 100% quality
Example of Quality Assurance System
Total Quality Management (TQM)
ISO9000
Define ‘ISO9000’
Family of quality management systems - set of standards that helps organizations ensure they meet customer needs
Set of internationally recognized standards
Lays out best practices, guidelines, and a standard vocabulary for quality management systems.
Dissect ‘ISO9000’
- Clear quality targets
- System to achieve targets
- System to measure results
- Resources to take correct actions
Chain
Define ‘Total Quality Management’
- Sees quality as the responsibility of all employees
- Each employee is a link in the chain and treats the next link as if they were an external customer
- Employees will only pass the product on if correct
- Philosophy of get it right first time
Why is quality important?
- Can help achieve lower unit costs (less waste)
- Positive image to customers: reputation
- USP (Unique selling points)
- Helps make pricing decisions
- Improved competitiveness
Define being ‘competitive’
Having a competitive advantage over other competitors
Examples of waste in a business
- Over-production: leads to excess stock
- Waiting time: idleness
- Transport: fuel
- Stocks: buffers stock- could go out of date
- Motion: a worker who appears busy but isn’t adding any value
- Defects: output that doesn’t reach required quality standards
Define ‘Critical path analysis’
Identifies tasks which must be completed on time for the whole project to be completed on time. It also identifies which tasks can be delayed if resources need to be reallocated to catch up on missed or overrunning tasks.
Benefits of effective time management (‘time-based management’)
- Quicker response times (reduced lead time) to meet changing market and customer needs
- Faster new product development
- Reduction in waste, therefore more efficient
Benefits of ‘simultaneous engineering’
- New products brought to the market quicker
- Business able to charge premium prices
- Less likelihood of a need to modify the product later due to unforeseen problems
- A greater sense of involvement across business functions improves staff commitment to the project
- Source of competitive advantage
Disadvantages of ‘simultaneous engineering’
- Complex to manage
- Communication is critical: relies on everyone working together
- Room for mistakes is small as it impacts all the departments or disciplines involved
Disadvantages of ‘cell production’
- Workers may feel pushed
- Businesses may need to invest in new materials and ordering systems suitable for cell production
- May not allow a firm to use machinery as intensively as in traditional flow production
- Recruitment and training must support this approach of production
Define ‘internal economies of scale’
As a business grows in size and increases its level of output, cost per unit will fall
Explain ‘purchasing’ (internal economies of scale)
Becomes cheaper for larger businesses to produce a unit of output when they grow and expand
As can purchase all of their stock and raw materials in bulks
Because they are conducting large orders with suppliers, may get discounts
Explain ‘marketing’ (internal economies of scale)
- As a business grows/expands, it can spill its marketing costs over more units of production
- Purchasing advertising space in large quantities and can therefore get discounts
Explain ‘technical’ (internal economies of scale)
Larger businesses can afford to invest in greater mechanisation, more up-to-date machinery, which can prodduce more products in given time (more productive)
This drives down unit costs
Explain ‘managerial’ (internal economies of scale)
When a business is smaller, it may not be able to invest in much specialisation
As a business increases its scale of operations, as it produces in larger quantity, it becomes more sustainable for the business to recruit specialist managers
Explain ‘financial’ (internal economies of scale)
As a business expands/grows, they have more access to sources of finance.
They can obtain bank loans with better interest, becomes more of a valuable client to banks.
Define ‘external economies of scale’
As a business grows in size and increases its level of output, cost per unit will fall
All organisations in the industry benefit from a reduction in costs, not just one firm
Business-enhancing factors that occur outside a company but within the same industry
Examples of ‘external economies of scale’
- Having many specialist suppliers close-by
- Access to R&D facilities
- Pool of skilled labour close-by
Define ‘mass customisation’
A.K.A. build-to-order
Marketing and manufacturing technique that combines flexibility and personalisation to custom-make products with the low unit costs associated with mass production.
Define ‘collaborative customisation’
Identifying the range of needs of your customers and then offering them products which match these needs.
So, you collaborate through research and dialogue with customers to figure out the areas where variation is most desired
Define ‘adaptive customisation’
Create standard goods or services that can easily be tailored, modified or reconfigured to suit each customer’s needs
Define ‘transparent customisation’
Provide individual customers with unique goods or services without letting them know explicitly that those products have been customised for them
Define ‘cosmetic customisation’
Present a standard product differently to different customers.
Appropriate when customers use a product the same way and differ only in how they want it presented
Packaged specially for each customer
Benefits of ‘mass customisation’
- Quick: efficient production process from start to finish
- Lower inventory being HELD (cash flow benefit)
- Higher customer retention since products have options and are tailored to personal tastes
- High added value: low unit costs combined with personalised product
- Can charge premium price
- USP
- Builds brand strength
Drawbacks of ‘mass customisation’
- Initial costs: it takes a lot of capital and time to build a factory equipped with specialized machinery
- Less flexibility: factory managers can’t walk up to machine and ask it to stop
Contextual examples of mass customisation
Ran mass customisation for 5/6 years then stopped, then relaunched it as Levi’sCurveID as they learnt the marketing lessons of mass customisation
NIKE-ID
AWD-IT
What does a business need to make ‘mass customisation’ work?
- A lean / efficient supply chain. Close integration with suppliers
- Effective use of digital technology
- Flexible production capacity
- High degree of automation
Define ‘producing-to-order’
Approach to production where the production of an item begins only after a confirmed customer order is received
Benefits of ‘producing-to-order’
- Lower levels of finished goods in inventory = lower inventory holding costs, less risk of obsolescence
- Greater customer satisfaction = customers get what they want
Define ‘obsolescence’
No longer used / outdated
Drawbacks of ‘producing-to-order’
- Irregular sales. It is difficult to determine when demand may arise for a particular customised product
- Lengthy delivery time: since production starts as soon as order is received, product reaches the customer after some time
Define ‘pull systems of production’
Lean manufacturing strategy used to reduce waste in the production process.
Components used in the manufacturing process are only replaced once they have been consumed
Define ‘push systems of production’
Production happens based on demand forecast.
Products are pushed through the channel from production up to the retailers.
Benefits of having temporary workers
- Saving costs: less procrastination
- Flexibility
- Quick recruitment process
Drawbacks of having temporary workers
- Lack of job security
- Is training worth it for the short term?
- Can they be trusted? Committed to the business?
Advantages of ‘outsourcing’
- Increased efficiency
- Better expertise, more reliable
- Faster and better service
Define ‘sub-contracting’
PARTLY OUTSOURCING!
Practice of assigning or outsourcing part of the obligation and tasks under a contract to another party
Influences on choice of suppliers
- Price
- Payment terms: generous credit to help cash flow?
- Quality
- Capacity: is the supplier able to produce enough to meet demand
- Reliability
- Flexibility
Advantages of having buffer inventory/stock
- Can meet customer demand
- Quickly respond to an increase in demand
- Continue with production even if a problem with inventory deliveries
Disadvantages of having buffer inventory/stock
- Money tied up in holding inventory
- Costs associated with inventory holding
Disadvantages of having buffer inventory/stock
- Money tied up in holding inventory
- Costs associated with inventory holding
Define ‘diseconomies of scale’
Disadvantage suffered as a result of a business increasing the scale of its operations that leads to a rise in unit costs
Examples of operational analysis
- Capacity utilisation
- Fixed costs
- Variable costs
- Unit costs
- Age and condition of any machinery
- Process used
4 Factors of Production
- Land
- Labour
- Capital
- Entrepreneurial skill
^^ The entrepreneur generates an idea an uses skill to bring the other factors together to form an enterprise
Contextual example of outsourcing
INDIAN CALL CENTRES
Why does the cost per unit fall as the output increase? (Economies of Scale)
- Costs being spread out over a large number of units
How is ‘Economies of Scale’ and ‘Diseconomies of Scale’ shown on a graph?
Describe the axis too.
A ‘U’ shape
Y = Average Cost per Unit
X = Quantity of Output
What are the five forms of ‘internal economies of scale’ ?
- Buying economies
- Technical
- Marketing
- Network
- Financial
Define ‘buying economies’ (‘internal economies of scale’)
Buying in greater quantities results in a lower price (bulk-buying)
Define ‘technical’ (‘internal economies of scale’)
Use of specialist equipment or processes to boost productivity
Define ‘marketing’ (‘internal economies of scale’)
Spreading a fixed marketing spend over a larger range of products, markets and customers (utilising it)
Define ‘network’ (‘internal economies of scale’)
Adding extra customers/users to a network that is already established
Define ‘financial’ (‘internal economies of scale’)
Larger firms benefit from access to more and cheaper finance
Why may diseconomies of scale occur?
- Poor communication (span of control too wide / bigger chain of command)
- Lack of motivation
- Loss of direction and coordination
Define ‘automation’
Replacing labour with technology in the manufacturing process.
Define ‘Computer Aided Design’ (CAD)
Using computer generated images to design/test new products
Define ‘Computer Aided Manufacturing’ (CAM)
Using computer technology to plan and control the manufacturing process
Define ‘Electronic Point of Scale’ (EPOS)
Laser scanning technology using bar codes, linked to a database that is automatically updated at the point of sale, when a sale is made. EPOS will help planning by updating sales records and stock levels.
Problems / threats of using new technology
- Higher costs in short term
- Dynamic, always 1 step behind
- Can become obsolete very quickly
- Knowledge being inaccurate of what to buy
- Damages person-to-person customer service, frustrating the customer.
Contextual example of a business using modern technology
BAE Systems.
3D printing / automation
(used to product military equipment but diversified themselves, reference to Ansoff)
