3.4 - Operations: Decision Making To Improve Operational Performance

Question 1

Operations management

Answer 1

The management of processes, activities and decisions relating to the way goods and services are produced and delivered

Question 2

Key types of operational objectives

Answer 2

• cost and volume
• quality
• efficiency and flexibility
• environmental

Question 3

Cost and volume objectives

Answer 3

• businesses need to ensure that operations are cost-effective
• traditional measure is ‘unit cost’ = total costs / total units
• businesses in the same industry face similar cost structures, but vary in terms of productivity, efficiency and scale of production
• businesses with lower unit costs are in much better positions to compete and offer both lower prices and make higher profit margins

Question 4

Examples of cost and volume objectives

Answer 4

• productivity and efficiency
• number of items to produce
• unit cost per item
• contribution per unit

Question 5

Why do businesses need quality?

Answer 5

Markers are more competitive and customers are more knowledgeable, demanding, prepared to complain about quality and able to share information about the poor quality

If a business can develop a reputation for high quality, the it may be able to create an advantage over it competitors

Question 6

Possible quality objectives

Answer 6

• scrap / defect rates
• reliability
• customer satisfaction
• number of customer complaints
• customer loyalty
• percentage of in time delivery
• number of products returned

Question 7

Efficiency and flexibility objectives

Answer 7

• closely linked to cost targets
• looks at how effectively the assets of the business are being utilised
• measure how responsive the business can be to short term or unexpected changes in demand
• efficiency and flexibility are key determinants of unit cost

Question 8

Examples of efficiency

Answer 8

• labour productivity
• output per time period
  -capacity utilisation
• order lead times
• speed of response

Question 9

Flexibility objectives

Answer 9

• able to switch production form one product to another
• volume flexibility: change volume produced to meet demand
• mix flexibility: provide a range of alternative versions
• delivery flexibility: adapt to changes in time / volume of customer deliveries

Question 10

Dependability of a product

Answer 10

A product durable, long lasting and less likely to break down

Question 11

Environmental objectives

Answer 11

• increasingly important focus of operational objectives
• businesses face more stringent environmental legislation
• customers increasingly base buying decisions on firms who priority is environmental responsibility

Question 12

Examples of environmental objectives

Answer 12

• use of energy efficiently
• proportion of production or packaging that is recycled
• compliance with waste disposal and proportion to landfill
• supplies of raw materials from sustainable sources

Question 13

Value added

Answer 13

The process of increasing the worth of resources by modifying them

Question 14

Value added calculation

Answer 14

Sales revenue - cost of bought in materials components and services

Question 15

Internal influences on operational objectives : corporate objectives

Answer 15

Corporate objectives are the most important internal influence.
An operations objective (e.g. higher production capacity) should not conflict with a corporate objective (e.g. lowest unit costs)

Question 16

Internal influences on operational objectives : finance

Answer 16

Operations decisions often involve significant investment and cost The financial position of the business (profitability, cash flow, liquidity) directly affects the choices available

Question 17

Internal influences on operational objectives : Human Resources

Answer 17

For a services business in particular, the quality and capacity of the workforce is a key factor in affecting operational objectives.
Targets for productivity, for example, will be affected by the investment in training and the effectiveness of workforce planning

Question 18

Internal influences on operational objectives : marketing issues

Answer 18

The nature of the product determines the operational set-up.

Regular changes to the marketing mix – particularly product may place strains on operations, particularly if production is relatively inflexible.

Question 19

External influences on operational objectives : economic environment

Answer 19

Sudden or short-term changes in demand impact on capacity utilisation, productivity etc.

Changes in interest rates impact on the cost of financing capital investment in operations.

Question 20

External influences on operational objectives : competitor efficiency flexibility

Answer 20

Quicker, more efficient or better quality competitors will place pressure on operations to deliver at least comparable performance

Question 21

External influences on operational objectives : technological change

Answer 21

Also very significant – especially in markets where product life cycles are short, innovation is rife and production processes are costly.

Question 22

External influences on operational objectives : legal and environmental change

Answer 22

Greater regulation and legislation of the environment places new challenges for operations objectives.

Question 23

Unit cost formula

Answer 23

Total production cost in period (£) / total output in periods (units)

Question 24

Economies of scale

Answer 24

Economies of scale arise when unit costs fall as output increases

Question 25

What is the difference between internal and external economies of scale?

Answer 25

Internal arise from the increased output of the business itself however, external occur within an industry.

Question 26

Internal economies of scale : buying economies

Answer 26

Buying in greater quantities usually results in a lower price (bulk-buying)

Question 27

Internal economies of scale : technical

Answer 27

Use of specialist equipment or processes to boost productivity

Question 28

Internal economies of scale : marketing

Answer 28

Spreading a fixed marketing spend over a larger range of products, marketing and customers

Question 29

Internal economies of scale : network

Answer 29

Adding extra customers or users to a network that is already established

Question 30

Internal economies of scale : financial

Answer 30

Larger firms benefit from access to more and cheaper finance

Question 31

External economies of scale

Answer 31

- arise from the industry as a whole - often associated with particular geographical areas

Question 32

What is labour intensity versus capital intensity ?

Answer 32

Labour intensive production relies on using labour resources compared to capital intensive production relies on using capital resources

Question 33

Examples of labour intensity industries

Answer 33

- food processing - hotels and restaurants - fruit farming - hairdressing - coal mining

Question 34

Implications of labour intensity on unit costs

Answer 34

- labour costs are higher than capital costs - costs are mainly variable = lower breakeven output - firms benefit from access to sources of low-cost labour

Question 35

Implications of capital intensity on unit costs

Answer 35

- capital costs higher than labour costs - costs are mainly fixed = higher breakeven output - firms benefit from the access to low cost, long term financing

Question 36

Benefits of capital intensity

Answer 36

- greater opportunities for economies of scale - potential for significantly better productivity - better quality and speed - lower labour costs

Question 37

Drawbacks of capital intensity

Answer 37

- significant investment - potential for loss competitiveness due to obsolescence - may generate resistance to change from labour force

Question 38

Benefits of labour intensity

Answer 38

- unit costs may still be low in low-wage locations - labour is a flexible resource through multi-skilling and training - labour at the heart of the production process and can help continuous improvement

Question 39

Drawbacks of labour intensity

Answer 39

- greater risk of problems with employee/employer relationship - potentially high costs of labour turnover - need for continuous investment in training