3.4.3 - Making operational decisions to improve performance: increasing efficiency and productivity

Question 1

What is capacity?

Answer 1

The maximum output of a business at a moment in time given its resources.

Question 2

What is efficiency? What does it mean if something has high efficiency?

Answer 2

1. The number of inputs used to generate output.
2. Fewer inputs are used to produce a given input.

Question 3

What is labour productivity?

Answer 3

The amount of output per employee.

Question 4

What is lean production?

Answer 4

Where managers reduce waste so operations become more efficient.

Question 5

What is the optimum resource mix?

Answer 5

The combination of capital and human resources which allows for the greatest efficiency.

Question 6

How can managers increase their capacity?

Answer 6

• employ more staff
• acquire more land/infrastructure
• buy more equipment

Question 7

What is the optimal capacity a business should be operating at? What does it mean if a business has too much spare capacity?

Answer 7

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.

Question 8

Why is it best to operate at high capacity in most situations?

Answer 8

The unit costs of the business are lower.

Question 9

How might a business try to improve capacity utilisation (increase efficiency)?

Answer 9

• Increase employee training
• Increase employee motivation (e.g financial incentives)
• Reduce capacity through rationalising (downsizing)
• Improve marketing to increase demand for sales.

Question 10

What are the problems with operating at high capacity?

Answer 10

• 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)

Question 11

Why is a high productive efficiency important?

Answer 11

• 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.

Question 12

What might a manager do if capacity utilisation is too high for the existing capacity of the business?

Answer 12

• 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.

Question 13

What happens to business efficiency as labour productivity is increased? Is this the same for unit costs?

Answer 13

The business efficiency increases with labour productivity. However, the higher the labour productivity the lower the unit costs.

Question 14

Why can it be difficult for managers to increase efficiency by improving productivity?

Answer 14

• 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.

Question 15

What is lean production?

Answer 15

When managers reduce waste so operations become more efficient.

Question 16

What is JIT (just in time) production?

Answer 16

Where inputs into the production process arrive only when they are needed.

Question 17

What are the benefits of JIT?

Answer 17

1. Reduction in storage space, saving rent and insurance costs
2. Less working capital is tied up in stock so can be diverted.
3. Reduced risk of damage or theft of stock.
4. Reduces was as only stock that is needed is ordered.

Question 18

What are the disadvantages of JIT (just in time) production?

Answer 18

1. Production is highly reliant on suppliers being reliable (lack of control).
2. Businesses may struggle to meet unexpected surges in demand.
3. Complex specialist stock systems are required (high expense)

Question 19

What is JIC (just-in-case) production?

Answer 19

Producing or purchasing stock with excess (buffer stock) in place.

Question 20

What are the benefits of JIC (just-in-case) production?

Answer 20

1. Increases the level of customer satisfaction as product is almost always available
2. Reduce the chance of running out of stock
3. Benefit from
   economies of scale.

Question 21

What are the disadvantages of JIC (just-in-case) production?

Answer 21

1. Buffer stock space requires more storage space at more cost to the business
2. Products kept in stock are at risk of being damaged or stolen.
3. High amounts of cash tied up in stock (this could be diverted elsewhere)
4. Increases the chances of having to sell off stock at a discount (incurring a loss)

Question 22

What is kaizen?

Answer 22

A technique used to improve efficiency by making small but frequent improvements to the production line.

Question 23

What impact does kaizen have on employees?

Answer 23

Kaizen requires staff involvement so employees are empowered to give their opinions and ideas, this can help to motivate them.