3.4 Decision making to improve operational performance Flashcards
Operational objectives - LOW UNIT COSTS
Low unit costs –> business can offer lower prices which demonstrates a competitive advantages
Operational objectives - QUALITY
Quality operation has resources and systems in order to achieve quality targets consistently
The better the quality –> the more competitive the business will be –> so customers will keep on using it
Operational Objectives - ADDED VALUE
An increase in value that a business creates by undertaking the production process. Can be done through:
Strong brand - good reputation and quality
Customer service - attentive personal service, high quality
Product features - new developments e.g. new software update
Offering convenience - e.g. customers will pay more for next day delivery
Calculations of operations data - LABOUR PRODUCTIVITY
Measures output per employee
Labour productivity = total output / number of employees
Calculations of operations data - UNIT COSTS (average costs)
Measures cost per unit
Unit costs = total costs / total output
Calculations of operations of data - CAPACITY UTILISATION
CAPACITY UTILISATION - measures existing output as a % of the maximum possible output
capacity utilisation = existing output / maximum possible output x 100
Importance of capacity
Useful measure of productive efficiency –> (measures whether there are unused or idle resources in the business)
High capacity utilisation reduced unit costs –> competitiveness
HOWEVER, high capacity utilisation can have negative impacts:
- negative effect on quality –> production is rushed
- employees suffer –> lots of workload + stress, de-motivating
- loss of sales –> unable to meet sudden increases in demand
Importance of efficiency and labour productivity
Efficiency is measured by the inputs used to generate outputs
A more efficient business will produce lower unit costs than competitors –> so business can either make a higher profit per unit sold (if unit costs stays the same price as a competitor) or the business can offer customers a lower price than competitors –> still making a good profit
Improving efficiency through using capacity efficiently
Low capacity utilisation = inefficiency, SO a manager could:
- improve marketing to boost sales e.g. through promotion
- reducing its capacity / downsizing
If the demand is high for the existing capacity, a business will:
- outsource to other producers that may do things differently
- find a way to reduce demand in the short-term –> price increase
Improving efficiency through increasing labour productivity
Another way to increase efficiency is through is to improve labour productivity and this can be done by:
Investment in more training – e.g. on-the-job training
Improve motivation
More or better capital equipment
Better quality raw materials –> reduces wasted & rejected products
Difficulties of increasing efficiency and labour productivity
Increasing labour productivity may lead to a decrease in quality –> leads to customer dissatisfaction & sales may fall
If demand for product doesn’t increase by productivity does –> fewer employees will be required –> this means higher levels of productivity may lead to staff being made redundant so employees may resist labour productivity as they want to keep their jobs
Employees may demand higher pay for higher productivity –> if pay rise is too high it may offset any efficiency gains from higher productivity so business won’t have benefitted.
Lean production
Occurs when managers reduce waste and therefore operations become more efficient
Being lean aims to reduce waste by…
Improving quality –> reduces the number of products that might need to be reworked, thrown away or fixed
Reducing amount of inventory held –> reduces costs of protecting and storing products –> reduces risk of stock going out of date or not being sold
Just in Time production leads to as close as zero stock being held
Advantages of lean production
Improved product quality
Sustainability –> less waste
Increased profitability - because greater efficiency –> less waste –> reduced unit costs –> better quality –> profitability
Disadvantages of lean production
Businesses can be more vulnerable if they use JIT –> a disruption to JIT will lead to a halt in operations
Investment in training for employees to keep increase their skills, engagement and the quality of their work
Just in Time
Ordering in the exact amount of supplies only when they are needed
Benefits of JIT
Lower stock holding –> reduction in storage space –> saves money on rent & insurance costs
Less likely of stock becoming obsolete, or out of date
Drawbacks of JIT
Little room for mistakes as minimal stock is kept for re-working faulty products
If there is a disruption to suppliers –> leads to a halt in production
Optimal mix of resources - LABOUR INTENSIVE
Labour intensive production relies on physical work from employees
E.g. - hairdressing, coal mining etc.
Advantages of labour intensive
Customised products are easier to make
Less expensive machinery costs
Humans can use their own initiative and problem solve
Disadvantages of labour intensive
Quality of products can vary due to expertise / skill of the worker
Skilled workers take time and money to train
Skilled workers will be paid more than unskilled workers
Optimal mix of resources - CAPITAL INTENSIVE
Capital intensive production relies mainly on machinery
E.g. - car manufacturing
Advantages of capital intensive
Less employee wages and costs
Quality can be standardised, the same every time
Machines can work continuously, 24/7
Disadvantages of capital intensive
More difficult to customise orders
Breakdowns in production can be costly
Initial set up costs of machinery are high
Impact of technology on operational efficiency
More flexible when meeting customer needs –> technology can track customer behaviour more effectively e.g. providing personalised products
Reduces costs because there are less errors with technology
HOWEVER…
New technology is expensive
More money spent on training employees on how use it
Technology may make some employees redundant
Importance of Quality
Quality is measured by the extent to which an operation meets its customer requirements –> customers want ‘value for money’
Quality is important for a businesses success as good quality ensures:
- Customer loyalty –> & recommend product to others
- Strong brand reputation for quality
- Value for money –> allows premium price & more price inelastic
- Fewer returns and replacements lead to reduced costs
Methods of improving quality
Using market research to meet customer needs
Careful selection of suppliers
Training employees to make sure their work is acceptable
Investment in technology
Quality Assurance
An approach that aims to achieve quality by organising every process to get the product ‘right first time’ –> prevent mistakes –> ‘zero defect’ approach.
Advantages of Quality Assurance
Less wastage so costs are reduced & re-working of faulty products at every stage too
Helps improve employee motivation as they have more ownership and recognition for their work
With all staff responsible for quality, this can help the firm gain marketing advantages arising from its consistent level of quality
Disadvantages of Quality Assurance
Can be very costly due to regular checks being made so often
Regular checks can slow down production –> lower productivity
Quality Control
Checks the quality of completed products for faults at every stage
Advantages of Quality Control
Inspection prevents faulty products reaching the customer
Inspectors may be better placed to find widespread problems across an organisation.
Disadvantages of Quality Control
Individuals aren’t encouraged to take responsibility for the quality of their own work.
Rejected product is expensive for a firm as it has incurred the full costs of production but can’t be sold as the manufacturer does not want its name associated with substandard product
If defect levels are very high, the company’s profitability will suffer unless steps are taken to tackle the root causes of the failures.
Benefits of improving quality
Managers can feel comfortable that they can meet set targets –> allows the business to be competitive
Improved quality helps brand image, leads to customer satisfaction & loyalty –> perhaps leading to good word-of-mouth
Difficulties of improving quality
Employees may:
- see improving quality as extra work and don’t understand why they should work more if they aren’t being paid more
- may believe the business is already doing well enough therefore resist it and may even see it as a criticism
Business may:
- have to invest in training
- possibly change suppliers
- have to develop a culture where quality assurance & control is consistently implemented
Consequences of poor quality
Poor quality is a course of competitive disadvantage
Loss customers –> may spread negative reviews
Cost of replacements, refunds & reworking a product
Damages brand reputation
Ways & value of improving FLEXIBILITY
Mass customisation - producing on a large scale while still enabling individual customer preferences to be met
Greater flexibility may lead to more customer satisfaction BUT will be more expensive to produce many different versions of a product
Managing supply to match demand - OUTSOURCING
Outsource - when a business uses an outside supplier
Outsourcing production to other businesses to meet high level orders
Managing supply to match demand - TEMPS & PART-TIME EMPLOYEES
Employing a flexible workforce through temps and part-time
Flexible contracts –> managers are able to move staff to when they are needed and increase hours to meet any sudden demands
Managers may also use temps & part-time so they can increase or decrease the work-force as required
Managing supply to match demand - TEMPS & PART-TIME EMPLOYEES
Employing a flexible workforce through temps and part-time
Flexible contracts –> managers are able to move staff to when they are needed and increase hours to meet any sudden demands
Managers may also use temps & part-time so they can increase or decrease the work-force as required
Managing supply to match demand - PRODUCING TO ORDER
Occurs when a business only produces when the actual order is placed rather than producing items and hoping they will sell
This reduces any risk of being left with unsold stock but requires a flexible production process
Influences on amount of inventory held
Need to satisfy demand –> e.g. seasonal demand & failure to have goods available for sale is very costly
Need to manage working capital –> holding stock ties up cash in working capital & opportunity cost (money invested in inventory could have been used for something else)
Risk of stock losing value –> longer the stocks are held the more risk of it becoming obsolete or out of date
Inventory Control - STOCK CONTROL CHART
Overall aim of stock control charts is to maintain stock so that the total costs of holding stock is minimised
Stock control charts - LEAD TIME
Amount of time between placing the order and receiving the stock
Measured in days, weeks or months
Determines when an order has to be placed in order to arrive on time to prevent stock falling below the buffer (safety) stock level
Stock control charts - RE-ORDER LEVELS
Acts as a trigger point, so that when stock falls to this level, the next supplier order should be placed
Depends on buffer inventory, the rate at which materials are used up and the lead time too
Stock control charts - RE-ORDER QUANTITIES
The amount a manager orders of a particular item
Depends on factors such as cost, and ease of storage
Stock control charts - BUFFER LEVEL (safety level)
Minimum amount of stock a business wants to hold
Buffer inventory is held to ensure production can continue in an emergency and that customers can continue to be supplied
Amount of buffer inventory depends on how difficult & expensive it is to store
Factors affecting when & how much stock to re-order
Lead time from suppliers –> 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 & quantity
Demand for the product –> Higher demand normally means higher re-order levels
Influence on choice of suppliers
Costs of materials and quality –> managers want value for money
Dependability –> managers want supplies to arrive as & when they are ordered to arrive, BUT this may increase costs
Ethical considerations –> businesses are held responsible for the behaviour of their suppliers
Supply Chain
Refers to all the providers of resources at different stages of operations process
Effective management of supply chain
Effective management ensures:
Right suppliers arrive on time
Fair price is paid for the items
Products are produced ethically
Value of Outsourcing - ADVANTAGES
Enables the business to make use of specialist skills and services –> leads to a better quality of work provided more efficiently
Can increase the capacity of the business
