3.4.3 - Making operational decisions to improve performance: increasing efficiency and productivity Flashcards
What is capacity?
The maximum output of a business at a moment in time given its resources.
What is efficiency? What does it mean if something has high efficiency?
- The number of inputs used to generate output.
- Fewer inputs are used to produce a given input.
What is labour productivity?
The amount of output per employee.
What is lean production?
Where managers reduce waste so operations become more efficient.
What is the optimum resource mix?
The combination of capital and human resources which allows for the greatest efficiency.
How can managers increase their capacity?
- employ more staff
- acquire more land/infrastructure
- buy more equipment
What is the optimal capacity a business should be operating at? What does it mean if a business has too much spare capacity?
90-95% - if a business has too much spare capacity then resources are wasted, this increases the unit costs as the fixed costs are not spread over as many units.
Why is it best to operate at high capacity in most situations?
The unit costs of the business are lower.
How might a business try to improve capacity utilisation (increase efficiency)?
- Increase employee training
- Increase employee motivation (e.g financial incentives)
- Reduce capacity through rationalising (downsizing)
- Improve marketing to increase demand for sales.
What are the problems with operating at high capacity?
- Negative effect on quality (production is rushed and there is less time for quality control)
- Employees suffer due to high stress environment
- Loss of sales (unable to respond to rises in demand)
Why is a high productive efficiency important?
- businesses will produce lower cost goods than competitors (higher profit per unit sold)
- businesses can offer customer a lower price than competitors
- investing in production equipment and factories is expensive so a business needs to maximise the return on these fixed costs.
What might a manager do if capacity utilisation is too high for the existing capacity of the business?
- Outsource to other producers or upscale processes (buy more equipment and infrastructure)
- Find a way to reduce demand in the short term (e.g increase price)
- Employ more staff.
What happens to business efficiency as labour productivity is increased? Is this the same for unit costs?
The business efficiency increases with labour productivity. However, the higher the labour productivity the lower the unit costs.
Why can it be difficult for managers to increase efficiency by improving productivity?
- Employee resistance may increase if productivity improves as they fear redundancy
- Employees may demand higher pay if they are producing more
- Employee motivation may decrease if new technology causes redundancies
- Training can be expensive.
What is lean production?
When managers reduce waste so operations become more efficient.
What is JIT (just in time) production?
Where inputs into the production process arrive only when they are needed.
What are the benefits of JIT?
- Reduction in storage space, saving rent and insurance costs
- Less working capital is tied up in stock so can be diverted.
- Reduced risk of damage or theft of stock.
- Reduces was as only stock that is needed is ordered.
What are the disadvantages of JIT (just in time) production?
- Production is highly reliant on suppliers being reliable (lack of control).
- Businesses may struggle to meet unexpected surges in demand.
- Complex specialist stock systems are required (high expense)
What is JIC (just-in-case) production?
Producing or purchasing stock with excess (buffer stock) in place.
What are the benefits of JIC (just-in-case) production?
- Increases the level of customer satisfaction as product is almost always available
- Reduce the chance of running out of stock
- Benefit from
economies of scale.
What are the disadvantages of JIC (just-in-case) production?
- Buffer stock space requires more storage space at more cost to the business
- Products kept in stock are at risk of being damaged or stolen.
- High amounts of cash tied up in stock (this could be diverted elsewhere)
- Increases the chances of having to sell off stock at a discount (incurring a loss)
What is kaizen?
A technique used to improve efficiency by making small but frequent improvements to the production line.
What impact does kaizen have on employees?
Kaizen requires staff involvement so employees are empowered to give their opinions and ideas, this can help to motivate them.
