3.4 Decision Making to improve Operational performance

Question 1

Operations

Answer 1

The process if taking inputs and turning them into outputs

Question 2

Internal influences on operations:

Answer 2

Corporate objectives
Finance
Human resources
Marketing issues

Question 3

External influences on operations

Answer 3

Economic environment
Competitor efficiency flexibility
Technological change
Legal and environmental change

Question 4

Labour Productivity

Answer 4

This measures the level of output achieved with a given number of employees (how efficient the workforce is).
= total output / number of employees
The higher the number the better as it means there is a higher and more efficient rate of production per employee

Question 5

Unit Costs (average costs)

Answer 5

This measures the costs of producing ONE unit/product of output
= total costs (fixed costs + variable costs) / total output
The lower the number the better as it will give you more profit (higher profit margins – revenue is the same). Also, if you have lower costs, then businesses tend to lower prices to gain more sales. If firms were to lower the price at the same level that they lower costs, they maintain the same level of profit.

Question 6

Capacity Utilisation

Answer 6

The percentage of total capacity that is being achieved in a given period
= actual level of output / maximum level of output x 100
This higher to percentage to better as it means the business is using their capacity to the best of its ability. When a business is operating at less than 100% capacity, it has ‘spare capacity’

Question 7

Why capacity is an important concept:

Answer 7

It is often used as a measure of productive efficiency
Average production costs tend to fall as output rises – so higher capacity utilisation can reduce unit costs, making a business more competitive
So firms usually aim to produce as close to full capacity (100% utilisation) as possible

Question 8

Why measuring and monitoring labour productivity matters:

Answer 8

Labour costs are usually a significant part of total costs
Business efficiency and profitability closely linked to productive use of labour
In order to remain competitive, a business needs to keep its unit costs down

Question 9

How a business can improve its labour productivity:

Answer 9

Measure performance and set targets
Streamline production processes
Invest in capital equipment (automation + computerisation)
Invest in employee training
Make the workplace conducive to productive effort
Improved motivation – more motivated employees tend to produce greater output for the same effort than de-motivated ones
Better quality raw materials (reduces amount of time wasted on rejected products)
Improved organisation of production – e.g. less wastage

Question 10

How to improve efficiency:

Answer 10

Improve land fertility
Use renewable or recyclable materials
Increase training and education
Increase scale of production
Use a optimal mix of output
Invest more in capital equipment

Question 11

Cost Minimisation

Answer 11

A financial strategy that aims to achieve the most cost-effective way of delivering goods and services to the require level of quality.

Question 12

Economies of Scale

Answer 12

These arise when unit costs fall as output increases

Question 13

Lean Production

Answer 13

An approach to management that focuses on cutting out waste, whilst ensuring quality. This approach can be applied to all aspects of a business – from design, through production to distribution. Lean production aims to cut costs by making the business more efficient and responsive to market needs.

Question 14

Key aspects of lean production:

Answer 14

Time based management
Simultaneous engineering
Just in time production (JIT)
Cell production
Kaizen (Continuous improvement)
Quality improvement and management

Question 15

Advantages of lean production:

Answer 15

Lead times are cut
Damage, waste and loss of stocks/equipment are lowered
A greater focus on customer needs
Improved quality through the introduction of kaizen and quality circles
Lower costs and contribute to improved profits
Staff are more involved and potentially more motivated
Working environments are safer and cleaner

Question 16

Disadvantages of lean production:

Answer 16

The business may struggle to meet orders if their suppliers fail to deliver raw materials on time
The business is unlikely to ‘bulk buy’ its raw materials and, therefore, it may lose the benefit of achieving economies of scale
Buffer stocks are minimal and this may lead to the business having to reject customer orders requiring delivery immediately

Question 17

How to utilise capacity efficiently

Answer 17

To operate at higher than 100% moral capacity:
Increase workforce hours (e.g. extra shifts; encourage overtime; employ temporary staff)
Sub-contract some production activities (e.g. assembly of components)
Reduce time spent maintaining production equipment

Question 18

How to use technology to improve operational efficiency

Answer 18

Types of technology:
Robots
Stock control/sales order fulfilment programmes
Automation
Design software systems
Communications

Question 19

The importance of quality to a business:

Answer 19

Gaining a competitive advantage
Impact on sales volume
Impact on selling price
Cost reductions
Brand loyalty and reputation

Question 20

Quality Control

Answer 20

The process of inspecting products to ensure they meet the required quality standards (check the product at the end for any mistakes)

Question 21

Quality Assurance

Answer 21

The processes that ensure production quality meets the requirements of customers (continuation of checking at each stage of production)

Question 22

Total Quality Management (TQM)

Answer 22

a specific approach to quality assurance that aims to develop a quality culture throughout the firm. In TQM, organisations consist of ‘quality chains’ in which each person or team treats the receiver of their work as if they were an external customer and adopts a target of ‘right first time’ or zero defects.

Question 23

Quality Benchmarking

Answer 23

A general approach to business improvement based on best practice in the industry, or in another similar industry. Benchmarking enables a business to identify where it falls short of current best practice and determine what action is needed to either match or exceed best practice. Done properly, benchmarking can provide a useful quality improvement target for a business.

Question 24

Kaizen

Answer 24

An approach of constantly introducing small incremental changes in a business in order to improve quality and/or efficiency. This approach assumes that employees are the best people to identify room for improvements, since they see the processes in action all the time. A firm that uses this approach therefore has to have a culture that encourages and rewards employees for their contribution to the process.

Question 25

Mass Customisation

Answer 25

Offering individually tailored goods and services to customers on a large scale

Question 26

Made to Order

Answer 26

An approach to production where the production of an item begins only after a confirmed customer order is received.

Question 27

Outsourcing

Answer 27

When a business sub-contracts a process, such as design or manufacturing, to another business

Question 28

Advantages of outsourcing:

Answer 28

Businesses can react to change quicker if they have access to other firms.
Outsourcing can provide specialised workers that will be more efficient in their sector. E.g. a car manufacture will buy its tyres in from a firm such as Michelin because they know they know they will be better than if they make their own as they specialise in tyres.
Outsourcing allows the business to focus on its core business instead of getting involved in activities that would be less competent.
A non-typical order can be given to another provider instead so that the business benefits from the order but it does not disrupt its normal production.

Question 29

Disadvantages of outsourcing:

Answer 29

The quality of the service being provided is no longer under their own control. So an unreliable outsourcer may influence the reputation of the business in a negative way. E.g. customers will blame a supermarket if its own brand of products are poor quality even though it is not the supermarket that makes them.
It comes at a cost that needs to be evaluated. The outsourcer will also want to make a profit so it is likely that it will be more expensive to subcontract or outsource production.
It may require you to be more confidential information to a supplier such as details of its methods. This could lead to firm loses its competitive advantage if the supplier steals its ideas

Question 30

Advantages of high inventory levels:

Answer 30

Increased customer satisfaction
Supplier price discounts (economies of scale)
Production lines are not halted because of shortages of raw materials
Customer demands are met properly
Always stock in, in case of sudden increases of demand

Question 31

Advantages of low inventory levels:

Answer 31

Lower holding costs
Easier organisation
Reduce in waste and products becoming outdated
Security cost and pilferage are lower
More space
Less cash flow problems
More useable cash