3.4.3 Making operational decisions to improve performance: increasing efficiency and productivity Flashcards
Why is capacity an important concept?
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
What happens to the fixed costs if capacity increases?
increasing capacity often results in higher fixed costs
Why does measuring and monitoring labour productivity matter?
- 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
Give ways for a business improve its labour productivity
- 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
- Training – e.g. on-the-job training that allows an employee to improve skills required to work more productively
- Improved motivation – more motivated employees tend to produce greater output for the same effort than de-motivated ones
- More or better capital equipment (this links with the topic of automation)
- Better quality raw materials (reduces amount of time wasted on rejected products)
- Improved organisation of production – e.g. less wastage
Give ways to improve efficiency
- 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
Define cost minimisation.
a financial strategy that aims to achieve the most cost-effective way of delivering goods and services to the require level of quality
Define economies of scale
these arise when unit costs fall as output increases
State the types of economies of scale.
- Technical
- Specialist
- Purchasing
- Marketing
- Financial
- Managerial
Define technical economies of scale
large-scale businesses can afford to invest in expensive and specialist capital machinery
Define specialist economies of scale
larger businesses split complex production processes into separate tasks to boost productivity – by specialising in certain tasks or processes, the workforce is able to produce more output in the same time
Define purchasing economies of scale
reduced costs for larger businesses in buying inputs, such as raw materials and parts, or of borrowing money because of a larger discount given to a larger purchase than smaller businesses can make
Define marketing economies of scale
a large firm can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discounted prices if it has sufficient negotiation power in the market
Define financial economies of scale
larger firms are usually rated by the financial markets to be more ‘credit worthy’ and have access to credit facilities, with favourable rates of borrowing – in contrast, smaller firms often face higher rates of interest on overdrafts and loans
Define managerial economies of scale
This is a form of division of labour – large-scale manufacturers employ specialists to supervise production systems, manage marketing systems and oversee human resources
Explain what lean production is
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.
What does lean production involve?
Cutting out or minimise activities that do not add value to the production process, such as holding of stock, repairing faulty product and unnecessary movement of people and product around the business.
Less waste therefore means lower costs, which is an essential part of any business being competitive
What are examples of waste in the production process?
- Over-production: making more than is needed – leads to excess stocks
- Waiting time: equipment and people standing idle waiting for a production process to be completed or resources to arrive
- Transport: moving resources (people, materials) around unnecessarily
- Stocks: often held as an acceptable buffer, but should not be excessive
- Motion: a worker who appears busy but is not actually adding any value
- Defects: output that does not reach the required quality standard – often a significant cost to an uncompetitive business
What are key aspects of lean production?
Time based management
Simultaneous engineering
Just in time production (JIT)
Cell production
Kaizen (Continuous improvement)
Quality improvement and management
What are advantages of lean production?
- 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
What are disadvantages of lean production?
- 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
What are factors influencing how productive the workforce is?
- Extent and quality of fixed assets (e.g. equipment, IT systems)
- Skills, ability and motivation of the workforce
- Methods of production organisation
- External factors (e.g. reliability of suppliers)
What two factor inputs do the production operations of any business?
- Labour – management, employees (full-time, part-time, temporary)
- Capital – plant and machinery, IT systems, buildings, vehicles, offices
What is the difference between labour-intensive and capital-intensive production?
Labour-intensive production relies mainly on labour
Capital-intensive production relies mainly on capital
Describe labour intensive operations
Labour costs higher than capital costs
Costs are mainly variable in nature = lower breakeven output
Firms benefit from access to sources of low-cost labour
Describe capital intensive operations
Capital costs higher than labour costs
Costs are mainly fixed in nature = higher breakeven output
Firms benefit from access to low-cost, long-term financing
How can business operate at higher than 100%
- 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
What are the problems of operating at a higher capacity?
- Negative effect on quality (possibly)
- Employees suffer
- Loss of sales
How does operating at a higher capacity bring a negative effect on quality?
Production is rushed
Less time for quality control
How does operating at a higher capacity bring a negative effect on quality?
- Production is rushed
- Less time for quality control
How does operating at a higher capacity mean employees suffer?
- Added workloads & stress
- De-motivating if sustained for too long
How does operating at a higher capacity bring about a loss of sales?
- Less able to meet sudden or unexpected increases in demand
- Production equipment may require repair
What are types of technology?
- Robots
- Stock control/sales order fulfilment programmes
- Automation
- Design software systems
- Communications
