3.4 - Operations Flashcards
What are the features of operation in a business?
- responsible for actual production of goods/services
- managing the process of converting inputs into outputs that meet the needs of customers
- getting the right goods/services to the customer
- helps to measure the efficiency with which this is achieved
What are the features of costs in a business?
A business needs to keep costs low to be competitive with other stores
What is quality as an operational objective?
Concerned with satisfying and exceeding customer needs
How is quality measured?
- customer satisfaction ratings
- customer complaints
- product returns
- wastage rates
- punctuality
What is speed of response as an operational objective?
The time it takes for the customer to receive a product or service
Product flexibility
the ability to switch production from one product to another
Volume flexibility
the ability to change the level of output according to changes in customer demand
Mixed flexibility
The ability to adapt to provide alternate versions of particular goods or services
Delivery flexibility
the ability to adapt quickly to changes in the timing and volume of deliveries to customers
dependability for services?
the consistency of quality or the punctuality of delivery
dependability for products?
measured in terms of whether the product is durable, long-lasting and unlikely to breakdown
what is adding value as an operational objective?
the process of increasing the worth of resources by modifying them, it is the difference between the price of a finished product/service and the cost of the input involved making it
how can distribution and retailing add value?
brining the product within easier reach of the customer
how can marketing add value?
creating a USP based on image and branding
why are environmental objectives becoming increasingly important?
- many businesses recognise they have a duty of care for the environment
- stakeholders have an expectation that businesses will demonstrate a positive attitude in terms of the environment
- many environmental objectives will allow the business to save costs
What are all the operational objectives?
- operation
- costs
- quality
- speed of response
- flexibility
- dependability
- adding value
- environmental objectives
What are the INTERNAL influences on operational objectives and decisions?
- corporate objectives
- finance
- human resources
- resources available
- nature of the product
What are the EXTERNAL influences on operational objectives and decisions?
- market factors
- competitor’s actions and performance
- technological change
- economic factors
- political factors
- legal factors
- environmental factors
- suppliers
How does corporate objectives influence operational objectives and decision?
the operations department must ensure that its objectives and decisions are consistent with the corporate objectives of the business
How does finance influence operational objectives and decision?
they rely on considerable expenditure on capital equipment or R&D and sufficient finance to implement decisions
How does HR influence operational objectives and decision?
the skills, training and motivation of a business’ HR will have a major impact on operational objectives. If there are weaknesses in HR, less ambitious objectives will need to be set and effective decisions made
How does ‘resources available’ influence operational objectives and decision?
if the business is well resources with equipment and well-known brands, then it is easier to produce high quality products cost effectively
How does ‘nature of the product’ influence operational objectives and decision?
some products are suited to mass production, while others require individual methods of production. The impact of the product on the environment will also depend on the nature of the product.
How do market factors influence operational objectives and decision?
if demand changes, the business may need to modify its production levels. If sales are declining, it may introduce new products
How does ‘competitor’s actions and performance’ influence operational objectives and decision?
if a competitor has a successful new product a business may introduce its own new product
How does technological change influence operational objectives and decision?
Technology can affect a business’ costs, the quality of its products, and levels of productivity within the business. These factors are key performance targets for operations management and therefore is, arguably, the most important factor. Decisions on methods used can also be modified if technology changes
How do economic factors influence operational objectives and decision?
Interest rates are one economic factor that has a major impact on operations management objectives and decisions. The effectiveness of operations management is dependant on capital investment, and if interest rates increase, this can hinder the success of operations management in two different ways.
How can interest rates hinder the success of operations management?
- it can increase costs by increasing the interest paid on loans, therefore reducing profitability. As a result, the introduction of new machinery may be delayed, reducing the efficiency of production
- it may reduce sales levels as people cannot afford loans. This will mean lower output and so some targets, such as low unit costs, will be harder to achieve because bulk-buying opportunities have been reduced
How do political factors influence operational objectives and decision?
minimising production costs: this can cause conflict with politicians, who may disagree with the methods used to reduce costs, especially if this involves exploitation of workers or unsafe working conditions
How do legal factors influence operational objectives and decision?
the potential for health and safety risks, the operations management function is heavily controlled by legislation
How do environmental factors influence operational objectives and decision?
as a result of environmental legislation and pressures, firms are now much more closely controlled in terms of the products they make, the raw materials they use, and the processes in their factories
How do suppliers influence operational objectives and decision?
most businesses work closely with suppliers to ensure flexibility, high quality and relatively low-unit cost materials. A supplier that delivers these three factors can help a business to achieve its operations management targets and to compete effectively with rivals
What does analysing operational performance mean?
measuring how the business is performing in relation to its operation objectives
ways to measure operational performance
- labour productivity
- unit costs
- capacity
- capacity utilisation
What is labour productivity?
the amount a worker produces over a given time
why is labour productivity important?
- usually a significant part of total costs
- business efficiency and profitability are closely linked to productive use of labour
- in order to remain competitive, a business needs to keep its unit costs down
how to calculate labour productivity
labour productivity = output in period ( units ) / no. of employees at work
How to calculate labour cost
labour costs per unit = labour costs / output (units)
What happens to labour productivity when there is a higher output per employee?
It increases
What happens to labour productivity when there is a lower output per employee?
It decreases
Factors influencing labour productivity
- extent and quality of fixed assets ( e.g equipment, IT systems)
- skills, ability and motivation of the workforce
- methods of production organisation
- extent to which the workforce is trained and supported (e.g working environment)
- external factors (e.g reliability of suppliers)
How can a business increase labour productivity?
- introducing new technology to speed up the production process
- modifying the production process so that is operates more efficiently
- recruiting workers with better qualifications and motivation
- implementing new approaches to improve workers’ motivation
- providing better training for the workforce
- improving the flexibility of operations so that less time is wasted
Potential problems of increased labour productivity
- potential ‘trade-off’ with quality
- potential for employee resistance (e.g introduction of new technology)
- employees may demand higher pay for their improved productivity
Fixed costs
costs that do not vary with the level of output / production e.g rent, salary, insurance costs.
Variable costs
costs that vary directly with the level of output / production e.g raw materials, packaging, delivery costs
Total costs calculation
fixed costs + variable costs
unit costs
the average production cost per unit
how to control unit costs
- change suppliers
- use cheaper resources / materials
- improve the production process
- reducing waste
capacity
the maximum total level of output at production that a business can produce in a given time period.
the ideal capacity will depend on
- the level of demand for a product
- flexibility of production lines
- seasonability of demand/output
- implications of failure to meet demand
- opportunities for sub-contracted or outsourced production
- availability of staff and resources
Capacity utilisation
this measures the extent to which a business is using its production potential
it is the % of total capacity that is actually being achieved in a given period
capacity utilisation calculation
capacity utilisation = (actual level of output / maximum possible output) x 100
what does higher capacity mean
the more resources that are being fully utilised
Low capacity utilisation may be a concern because…
- suggests relatively low demand
- likely high cost per unit because the fixed costs are not being spread over many units. This means a high fixed cost per unit which may result in low profit margins
What is bad if if capacity utilisation is 100%
No scope for maintenance or repair. The business may also find that it cannot respond to sudden orders or deal with emergency situations.
When can capacity change?
- when a machine is having maintenance problems (reduced)
- labour; by working more production shifts/overtime, capacity can be increased
- seasonal or unexpected changes in demand (easter eggs in Nov & Dec before shipping to shop after Christmas)
The costs of capacity are…
- equipment; production line
- facilities; building rent, insurance
- labour; wages & salaries involved in production or delivering a service
How can a business work at more than 100% capacity utilisation
- increasing workforce hours (extra shifts, encourage overtime : temp. staff)
- sub-contract some production activities (assembly of components)
- reduce time spent maintaining production equipment
Problems working at high capacity
- negative effect on quality (production is rushed. less time for quality control)
- employees suffer (added workloads & stress, de-motivating if sustained for too long)
- loss of sales (less able to meet sudden or unexpected increases in demand, production equipment may require repair
Lean production
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.
What is lean production in a nutshell…
- doing the simple things well
- doing things better
- involving employee in the continuous process of improvement and as a result, avoiding waste and therefore reducing costs
Why do businesses need to cut out waste
waste = cost
Examples of waste in a business
- over-production
- waiting time
- transport
- stocks
- motion
- defects
How is over-production waste in a business
making more than needed; leads to excess inventories which may then become unsavable
How is waiting time waste in a business
equipment and people standing idle waiting for a production process to be completed or resources to arrive
How is transport waste in a business
moving resources (people, materials) around unnecessarily
How is stocks waste in a business
often held as an acceptable buffer, but should not be excessive
How is motion waste in a business
a worker who appears busy but is not actually adding any value
How is defects waste in a business
output that does not reach the required quality standard - often a significant cost to an uncompetitive business
Effective lean production requires…
- good relations with suppliers
- committed, skilled and motivated employees
- a culture of quality assurance; continuous improvement & willingness to embrace change
- trust between management and employees
Methods of lean production …
- just in time production (JIT)
- cell production
- time based management
- simultaneous engineering
Just in time production
JIT aims to ensure that inputs into the production process only arrive when they are needed
How does JIT work?
- based on a ‘pull’ system of production, customer orders determine what is produced
- requires complex production scheduling - achieved using specialist software to connect production dept with suppliers
- requires close co-operation with high quality suppliers
Advantages of JIT production
- lower stock holding means a reduction in storage space which saves rent and insurance costs
- as stock is only obtained when it is needed, less working capital is tied up in stock
- less likelihood of stock perishing, becoming obsolete or out of date
- less time spent on checking and re-working production as the emphasis is on getting the work right first time
Disadvantages of JIT production
- there is little room for mistake as minimal stock is kept for re-working faulty products
- production is highly reliant on suppliers and if stock is not delivered on time, the whole production schedule can be delayed
- there is no spare finished product available to meet unexpected orders, because all products is made to meet actual orders
- a need for complex, specialist stock items
Cell production
a form of team-working where production processes are split into cells. Each cell is responsible for a complete unit of work
Advantages of cell production
- closeness of cell members should improve communication
- workers become multi-skilled and more adaptable to the needs of the business
- greater employee motivation, from variety of work, team-working and responsibility
- quality improvements as each cell has ‘ownership’ for quality on its area
Drawbacks of cell production
- without a culture of trust, workers can feel they are being pushed for greater output with no respite
- business may have to invest in new materials handling and ordering systems
- machinery may not be used as intensively as in traditional flow production
- some small scale production lines may not yield enough savings to make a switch cell production worthwhile
- allocation of work to cells has to be efficient so that employees have enough work, but not so much that they are unable to cope
Time based management
a general approach that recognises the importance of time and seeks to reduce the level of wasted time in the production processes of a business
advantages of time based management
- quicker response times (reduced lead times) to meet changing market and customer needs
- faster new product development
- reduction in waste, therefore greater efficiency
Requirements of time based management
- flexible production methods (able to change products quickly, can change production volumes/runs)
- trained employees (multi-skilled staff, trust between workers and managers)
Simultaneous engineering
an approach to project management that helps firms develop and launch new products more quickly. All parts of the project are planned together. Everything is considered simultaneously (together, in parallel) rather than separately (in series)
Advantages of simultaneous engineering
- new product is brought to the market much more quickly
- business may be able to change a premium price that will give a better profit margin and help recoup R&D costs
- a greater sense of involvement across business functions improves staff commitment to the project
- can be a source of competitive advantage (first mover advantage) for the firm if it can get a reliable new product into the same market and build brand loyalty before its competitors
Quality
a product or service is of good quality if it meets the needs & expectations of the customer
Typical customer needs and expectations are:
- performance (fit for purpose)
- appearance
- availability & delivery
- reliability / durability
- price/value for money
What is a sub-standard product / service
When it fails to meet the customer’s needs and expectations
Why is quality so important?
- markets are highly competitive
- customers are more : - knowledgeable and demanding, prepared to complain about poor quality, able to share information about poor quality
- a reputation for high quality means a competitive advantage
Quality is not just about the product - it includes the whole customer experience. What is the customer experience?
1 ) buying process
2 ) product reliability
3 ) cost of ownership
4 ) after-sales service
Types of quality management
- quality control (based on inspection, takes defects out)
- quality assurance (based on processes, builds quality in)
What is quality control
- traditional way of managing quality
- involves checking and reviewing product
- focuses on detection rather than prevention
- usually requires sampling
- spots and removes sub-standard products
- costly
- focus on outputs
- targeted at production activities
Inspection tends to be carried out at 3 main points during the production process, which are …
1) when raw materials are received prior to entering production
2) whilst products are going through the production process
3) when products are finished and before being dispatched to customers
Advantages of Quality Control
- sub-standard products are spotted before they reach customer
- minimises disruption to the production process
- applies a consistent standard to quality
Problems of Quality Control
- costly
- often at the end of the production process - too late
- inconsistent inspections
- may not be compatible with modern production systems
- done by inspectors rather than employees themselves
Quality Assurance
the processes that ensure production quality meets the requirements of customers
Aim of quality assurance
to design the production process in such way as to minimise the chances that output will be sub-standard
If the quality assurance process is well-controlled then…
quality will be built in
If the quality assurance process is reliable then…
there is less need to inspect output (quality control)
What is involved in quality assurance
- focuses on processes
- achieved by improving production processes
- emphasises the customer
- targeted at the whole business
- quality is built into the product
What is Total Quality Management (TQM)
(an approach to quality assurance)
A management philosophy committed to a focus on continuous improvements of product and services with the involvement of the entire workforce
Features of TQM
- essentially an ‘attitude’
- the whole business understands the need for quality and seeks to achieve it
- everyone in the workforce is concerned with quality at every stage of the production process
- quality is ensured by workers and not inspectors
Advantages of TQM
- puts the customer at the heart of the production process
- motivational as workers feel more involved in decision- making
- less wasteful than throwing out defective finished products
- eliminates the cost of inspection
Disadvantages of TQM
- requires strong leadership
- substantial investment in training and support (but the return on investment may take time)
- may become bureaucratic
- disruption and costs may outweigh benefits
What is Kaizen
(another approach to quality assurance)
- based on concept/culture of continuous improvement
- encourages employees to engage fully with finding ways to improve quality process.
Flexibility
The ability of an organisation to change its operations in some way e.g product, volume, delivery, mix
Flexibility can be achieved through:
- design of production lines
- maintaining high levels of spare capacity
- having a flexible workforce
mix flexibility requires a combination of all of these
Mix flexibility
Provision of a wide range of alternative versions of the same basic product.
Growing demand for mix flexibility means…
it has led to the growth of mass customisation
Mass customisation
(offering individually tailored goods or services to customers on a large scale)
Mass customisation features
- ‘pull’ methods of production
- a customer chooses a particular version of a product, which then leads to the manufacture of that product, meeting the specific needs of that customers
Types of mass customisation
- collaborative customisation
- adaptive customisation
- transparent customisation
- cosmetic customisation
What is collaborative customisation
Businesses work together with customers to develop a product that meets their specific needs (e.g Dell)
What is adaptive customisation
A standardised product that can be adapted by the customer based on their individual needs
What is transparent customisation
Unique products are provided to each customer based on their individual needs
What is cosmetic customisation?
Standardised products are marketed to different customers in different ways e.g packing (baked beans -heinz)
Factors required for mass customisation
- a market in which customers value variety and individuality and are therefore prepared to pay a premium price
- quick responsiveness to market changes so that products can be quickly adapted to changing customer needs
- the ability to provide customisation through flexible operations
- scope for mass efficiency / economies of scale to ensure cost-effective operations
Benefits of mass customisation for business
- cost reduction
- higher revenue
- greater customer loyalty
- competitive advantage
- improved understanding of customers’ wants
- greater protection from market changes
- improved workforce motivation
- higher profits
How is ‘cost reduction’ a benefit of mass customisation for a business
The use of ‘pull’ methodology means there is less waste because business do not need to keep stocks of products. Instead the products are manufactured and then provided directly to the customer.
How is ‘higher revenue’ a benefit of mass customisation for a business
Customisation meets consumer needs more closely and therefore should lead to greater demand and/or higher prices for products overall.
How is ‘greater customer loyalty’ a benefit of mass customisation for a business
If customers are highly satisfied, they tend to be more loyal and provide the business with repeat orders.
How is ‘competitive advantage’ a benefit of mass customisation for a business
Customisation provides a unique selling point and therefore gives a business a competitive advantage.
How is ‘improved understanding of customers’ wants’ a benefit of mass customisation for a business
Although mass customisation relies on a good understanding of customer wants, it also improves a businesses’ understanding of those wants. Data on transactions provide a record of the customer’s preferences.
How is ‘greater protection from market changes’ a benefit of mass customisation for a business
Mass production makes a business vulnerable to changes in tastes because production methods are geared towards a limited range of products. The flexibility offered by mass customisation means that it is probable that methods of production can be adapted to meet any market changes.
How is ‘improved workforce motivation’ a benefit of mass customisation for a business
Customisation provides variety for workers and should lead to a more contented and motivated workforce.
How is ‘higher profits’ a benefit of mass customisation for a business
Increased profit margins arise from the combination of significant increases in price and slight increases in unit costs. However, profit may also arise because mass customisation often allows the producer to deal directly with the end-user and so that the profit of the middleman (usually a retailer) is now taken by the producer.
Difficulties of mass customisation …
- requirement for sophisticated information systems
- greater expense in terms of IT, capital equipment and staff training
- problems with rejected products
- unsuitable supply chains
How is ‘requirement for sophisticated information systems’ a difficulty of mass customisation for a business?
The management systems required to record and analyse data are complex, mass customisation requires a large capital input. This can make the business vulnerable if mass customisation does not succeed.
How is ‘greater expense in terms of IT, capital equipment and staff training’ a difficulty of mass customisation for a business?
These expenses are likely to be higher and despite higher prices paid by customers, the end result may be no change in profit margins.
How is ‘problems with rejected products’ a difficulty of mass customisation for a business?
If the customer rejects a customised product, it will be more difficult for the business to sell it to another customer. This is because the product has been devised to meet the specific needs of one customer. This can increase wastage costs.
How is ‘unsuitable supply chains’ a difficulty of mass customisation for a business?
Mass customisation requires flexbility from suppliers. This can be an obstacle as flexibility adds costs for the supplier, who may prefer to sell standard items in bulk. The producer will probably need to pay higher prices for these components.
Producing to order
A strategy in which a business only manufactures a product once an order for that product has been received from a customer. It is often known as build to order (BTO) or make to order (MTO).
Build to order
- Often adopt a modular approach to manufacturing
- There is a fixed basic element of the product, alongside elements of the product that can be customised.
Advantages of producing to order…
- ability to supply a product that meets a customer’s exact specification
- reduced costs of holding inventory
- potential for higher prices
- production planning is easier
- targeting markets
How is ‘ability to supply a product that meets a customer’s exact specification’ an advantage of producing to order
Increasing customer satisfaction, brand loyalty and gives business USP.
How is ‘reduced costs of holding inventory’ an advantage of producing to order
If every unit of output is planned for a particular customer then there will be no need to hold any inventory of finished goods. Saving costs e.g rental payments and potential losses through pilferage and damage
How is ‘potential for higher prices’ an advantage of producing to order
Customers likely to pay higher prices for a product exactly suited to their needs. If the production method enables producing to order to be comparable in costs to mass production, then the business should improve its profit margin.
How is ‘production planning is easier’ an advantage of producing to order
No need to employ staff to forecast demand, to plan production schedules. Less need for sales staff whose job is to persuade people to buy products already made.
How is ‘targeting markets’ an advantage of producing to order
BTO allows to modify basic products to target a mass market with the basic products and niche markets through modifications
Disadvantages of producing to order
- considerable fluctuations in production levels over-time
- higher costs
- uncertainty about production levels can make it difficult to plan
- inability to take advantage of sudden interest in a product
- uncertainty about production levels can make it difficult to plan
How is ‘considerable fluctuations in production levels over-time’ a disadvantage
Can prove to be more inefficient than a production schedule that spreads output more evenly throughout the year, because the latter will tend to use capital equipment and permanent labour much more cost-effectively.
How is ‘higher costs’ a disadvantage
Inefficient capacity utilisation will result from fluctuations arising from BTO leading to higher fixed costs per unit.
How is ‘uncertainty about production levels can make it difficult to plan’ a disadvantage
The level of flexibility required for BTO places pressure on suppliers, managers and employees.
How is ‘inability to take advantage of sudden interest in a product’ a disadvantage
PTO there isn’t inventory held. If there is unexpected demand for a product it will be impossible to quickly meet demand. So, sales may be lost.
How is ‘uncertainty about production levels can make it difficult to plan’ a disadvantage
The level of flexibility required to BTO places pressure on suppliers.
Factors to consider when deciding on whether to PTO
- value compared to a standardised product
- willingness of customers for waiting of customisation
- nature of product & cost (high skills, increased labour costs)
- cost of holding inventory
- cost of ‘stock outs’
Why is ‘costs of holding inventory’ a factor to consider when deciding on whether to PTO
- BTO is cheaper because products are mass produced
- However more expensive products due to holding inventory (refrigeration - lose their value)
Why is ‘cost of stock-outs’ a factor to consider when deciding on whether to PTO
A stockout is a situation in which a business has no stock or inventory with which to meet a customer’s request. This often leads to the loss of a potential sale and possibly a loss of goodwill.
For BTO, customer do not expect the product to be held as inventory as they are asking the business to provide a product with their exact specifications.
Part-time workers
Permanent employees who work a limited number of hours, such as 15 hours per week, in comparison to full-time employees, who are likely to work between 37 + 40 hours per week.
Temporary workers
People whose employment is subject to a time limit, such as six months from the date of appointment or until the completion of a certain project.
Advantages of the use of temporary and part-time workers.
- lowers cost where full-time cover is unnecessary
- builds flexibility, responding to changes in demand more easily
- if part-time work suits employees, increases motivation and productivity, absenteeism and stress decreases
- creates a wider pool of candidates to recruit
- enable a firm to retain valued employees, such as mothers who want part-time hours
The disadvantage of employing part-time and temp. staff
- higher staffing costs due to fees paid to agencies (temp. staff)
- extra training and administrative costs
- some workers might also be less loyal to the business, particularly temp. contracts
Outsourcing
The transfer of activities, which were previously conducted in-house, to a third party outside of the business. In most businesses, tasks such as catering and cleaning have been transferred and are outsourced.
Sub-contracting
When another business takes an assigned task or part from another business under a contract
Why outsource?
- reduce capacity utilisation problems
- reduce supply to match a fall in demand by reducing the amount of work that it outsources
Advantages of outsourcing
- businesses are able to react to changes in demand more quickly if they have access to a number of other firm’s production plans
- outsourcing providers may be more specialised and therefore more efficient in a particular activity
- lets a firm focus on its core business and helps it to avoid becoming involved in activities in which it is less competent
- a non-standard order can be outsourced so that the business profits from the order but suffers no disruption to its normal production
Disadvantages of outsourcing
- quality is no longer directly under the firm’s own control. An unreliable outsourcing provider may negatively influence the reputation of a business
- excessive outsourcing erodes a company’s operations base and its ability to initiate research and make changes
- the cost of outsourcing should be evaluated. The outsourced producer also wants to make a profit, so it is possible that it will be more expensive to subcontract or outsource production rather than produce in-house.
- may require firm to give confidential info to supplier, details of its methods. This may mean the firm loses its competitive advantage if the supplier steals its ideas
Factors influencing decisions to outsource
- available capacity
- expertise
- quality independence
- nature of demand
- cost
- level of risk
- impact on profit
Why is ‘available capacity’ a factor influencing decision to outsource
High levels of spare capacity = more inclined to produce in-house.
Shortage of capacity means it becomes a much more financially viable solution
Why is ‘expertise’ a factor influencing decision to outsource
High expertise = reluctant to outsource as strengths will not be played
However, the company to which the work is being outsourced possesses better production skills, leading to more efficient production
Why is ‘quality considerations’ a factor influencing decision to outsource
selling a product on basis of quality means outsourcing is risky due to difficulty of the business to control the quality of products it sells.
A number of UK centres, have been re-shored (returned to UK) because of concerns relating to the quality of the service being provided by offshore providers (offshoring)
Why is ‘nature of demand’ a factor influencing decision to outsource
outsourcing arises because of the business’s need to protect itself from sudden fluctuations in demand. If demand is stable over a period of time, then a business may be more inclined to produce in-house rather than use outsourcing
Why is ‘cost’ a factor influencing decision to outsource
If production is not a core competency of a business, it could be outsourced. This is evident in the case of products that are offshored to countries that benefit from low costs, such as low wage levels and reduced rental payments for property.
Why is ‘level of risk’ a factor influencing decision to outsource
Outsourcing can increase risk, because of a loss of control over operations and a possible loss of know-how
Why is ‘impact on profit’ a factor influencing decision to outsource
Companies expect to make a profit. Therefore, a decision to outsource or subcontract may result in lower profits because another business is making profit from that particular element of production. Businesses should examine the financial implications of any decision to outsource, to ensure that it is not damaging the overall profitability of the business
Offshoring
Used to describe outsourcing/subcontracting when the activity being transferred takes place in a different country to the contracting company.
Types of stock …
1) raw materials and components
2) work in progress
3) finished goods
Raw materials and components stock
- brought from suppliers
- used in production process e.g parts for assembly or ingredients
Work in progress stock
Semi or part-finished products e.g construction process
Finished goods stock
Completed products ready for sale or distribution e.g products on supermarket shelves
Reasons why businesses manage inventory
- enable production to take place
- satisfy customer demand
- precaution against delays from suppliers
- allow efficient production
- allow for seasonal changes
- provide a buffer between production process
Influences on amount of stock held
- need to satisfy demand = failure to have goods available for sale is very costly, demand may be seasonal or unpredictable
- need to manage working capital = holding stock ties up cash in working capital, an opportunity cost associated with stock holding
- risk of stock losing value = longer stocks are held, the greater risk that they cannot be used or sold
Costs of holding stock
- cost of storage
- interest rates
- obsolescence risk
- stock out costs
Why is ‘cost of storage’ a cost of holding stock
More stocks require large storage space and possible extra employees and equipment to control and handle them
Why is ‘interest costs’ a cost of holding stock
Means tying up capital (cash) on which the business may be paying interest
Why is ‘obsolescence risk’ a cost of holding stock
The longer stocks are held, the greater is the risk that they will become obsolete (unusable or not capable of being sold)
Why are ‘stock out costs’ a cost of holding stock
It happens when a business runs out of stock. Resulting in:
- lost sales & customer goodwill
- cost of production stoppages or delays
- extra costs of urgent, replacement orders
Stock control charts
The overall objective of stock control is to maintain stock level so that the total cost of holding stock is minimised
Maximum Level on Stock Control Chart
Max level of stock a business can or wants to hold
Minimum Stock Level on Stock Control Chart
Minimum amount of product the business would want to hold in stock. Assuming the minimum stock level is more than zero, this is buffer stock.
Re-order Level on Stock Control Chart
Acts as a trigger point, so that when stock falls to this level, the next supplier order should be placed
Lead-time on Stock Control Chart
Amount of time between placing the order and receiving the stock
Factors affecting when/how much stock to re-order
1) Lead time from the supplier : delivery time, longer = higher re-order level
2) implications of running out : if stock-outs are very damaging, a high re-order level will be needed
3) demand for product : higher demand = higher re-order levels
Low-stock level advantages
- lower stock holding costs (e.g storage)
- lower risk of stock obsolescence
- less capital (cash) tied up in working capital - can be used elsewhere in the business
- consistent with operating “lean”
High-stock level advantages
- production fully supplied - no delays
- potential for lower-unit costs by ordering in bulk/high quantities
- better able to handle unexpected changes in demand or need for higher output
- less likelihood of ‘stock-outs’
Use of technology when managing stock levels
- Electronic point of sale (EPOS) scanners in stores help managers to keep better track of their inventory
- Marketing databases mean businesses can forecast sales levels more accuracy
- Communication links with suppliers have also improved making JIT more possible
Capital-intensive production
Methods of production that use a high level of capital equipment in comparison to other inputs, such as labour. A fully automated factory or a nuclear power station are examples of capital-intensive production
Labour-intensive production
Methods of production that use high level of labour in comparison to capital equipment. Many service industries, such as retailing, restaurants and call centres, use a large number of people in comparison to equipment
Influences on the choice of suppliers
- price
- payment terms
- quality
- capacity
- reliability
- flexibility
Why is ‘price’ an influence on the choice of suppliers
- value for money
- low prices = keep production costs down
- the price paid to suppliers will have a significant impact on the selling price of the finished product
Why is ‘payment terms’ an influence on the choice of suppliers
- most suppliers offer credit terms ( when the purchase is made, the actual payment for goods is delayed often by 28/30 days
- this fits with cash flow cycle meaning that the business has a chance to begin earning revenue from finished products before having to pay for materials supplied -> interest may be charged
Why is ‘quality’ an influence on the choice of suppliers
This will be important as it will affect the quality of finished goods and as well as the ability of the business to compete effectively within its market
Why is ‘capacity’ an influence on the choice of suppliers
The supplier must be able to supply the quantity or materials required. Failure = significant impact on a business’ production function
Why is ‘reliability’ an influence on the choice of suppliers
Unreliable supplier = whole production line coming to a halt. This is increasingly important with the move towards lean production methods and JIT stock management system.
Why is ‘flexibility’ an influence on the choice of suppliers
Businesses sometimes need to make significant changes to orders from suppliers e.g if there is a sudden change in demand for a product. Flexibility on the part of the supplier in this situation is important or they may risk losing the business as a customer.
Managing the supply chain
- the traditional approach was to buy large quantities from the supplier in order to get one lowest possible price.
- many organisations have moved away from this in favour of buying smaller quantities from a number of different suppliers
- more flexibility & competition between suppliers = improved quality. This has been in response to shifts in consumers’ priorities away from price and towards quality and flexibility
- many businesses require their suppliers to meet certain environmental or ethical standards
