4. Operations management Flashcards
Types of production
Job production
Flow production
Batch production
Job production definition
Where items are made individually and is customisable to the customers wants
Job production advantages
Motivated
High quality, good satisfaction
Can charge higher prices
Job production disadvantages
Job production disadvantages
Flow production advantages
Automated machines saves some time
Runs 24/7
Consistent shared quality (no errors)
Low labour skills needed
Flow production disadvantages
Demotivated, repetitive, high labour turnover
Not flexible
If one machine breaks the whole thing breaks down
Also expensive hard to replace this machine
Batch production advantages
Very similar same quality
Flexible production
Quicker production, producing multiple items at once,
Low costs, bulk materials and labor are more affordable
Batch production disadvantages
Large stock of raw materials needs to be kept, high storage cost
Low motivation repetitive
Idle time, it due to machinery changeovers
Errors can be costly. An undetected quality error can ruin a whole batch
Batch production definition
When one product is made in groups simultaneously
Flow production definition
Continuous mass production in an assembly line
What is productivity
Measurement of how efficiently resources are combined and ultized for an maximum output
Labour productivity definition and equation
The average output of each employees
Output/number of workers
How can productivity be increased
Motivation
Better equipment (automation)
Better training
Better inventory control (less waste)
Production
The process of making products
What is quality
A product is of good quality if it meets the need and expectation
Quality control
Traditional method of checking quality, a sample of product are checked at the end of the production by a trained specialist
Quality assurance
When the employees check for mistakes throughout the production process
Quality control advantages
Good quality products
Specialist trained inspectors
Less training, as inspectors look for faults
Quality control disadvantages
Wastage is high
Takes longer and more money
Doesn’t stop workers from taking responsibility of errors
Inspector wages
Quality assurance Advantages
Better relationships with workers
Workers are more motivated
No time and money wasted on faulty products
Quality assurance disadvantages
Slows down production
More money to train staff
Time consuming to train staff
Why is quality important
Establishes a brand image
Builds brand loyalty
Maintains good reputation
Increases sales
Attracts new customers
TQM (total quality management)
The continuous improvement of products and process by focusing on quality at each and every stage
Advantages of TQM
Quality is built into every part of the production
Eliminates all faults and error before the customer receives the product
Less customer complaints
Reduced costs as there is less wastage
Disadvantages TQM
It is expensive to train all the employees to check and improve the product and processes
Relies on every employee following the TQM ideology
Lean production
a production methodology focused on eliminating waste,
Kaizen
Seeks to constantly to introduce small incremental changes from workers to improve efficiency and quality
Kaizen advantages
Lower labour turnover
Workers will empowered
Increase motivation
Improves teamwork
Kaizen disadvantages
Difficult to change employees culture
Depends of open communication
Takes time to adjust
Workers expecting rewards by encouraging ideas
Just in time (JIT)
Minimum amount of stock of raw materials and finished goods are held by the business to reduce waste in a business
Just in case (JIC)
The business hold buffers stock of raw materials/finished goods just in case there is a problem or a sudden increase in demand
JIT advantages
Minimum amount of stocks
- less costs
- less wastage
- less storage costs
JIT disadvantages
Not be able to meet increased demand
Relays on a strong relationship of the suppliers
More frequent deliveries, transport costs
JIC advantages
Never run out of stock
Doesn’t need strong relationships
Can meet unexpected demand
JIC disadvantages
More wastage
Extra storage cost
Money is tied up in stock
Buffer inventory level
When you keep more inventory than you need to help meet increased demand
Factors influencing location decision
Retailers
Where suppliers are
Where competitors are
Costs/rent
Amenities, malls
Proximity to market, where customers are
Access to labour, where employees are
Transport links
Factors influencing location decision
Manufacturing businesses
Access to labour
Availability of raw materials
Availability Of fresh water and power
Rent
Near transportation system
Factors to consider when deciding in which country to locate operations
New market overseas
Cheaper or new sources of material
Types of labour and wages costs
Rent and tax
Availability of government grants (when governments give certain perks to business such as low costs to be in their country and helps their economy)
Trade and tariffs barriers
Types of business costs
Fixed costs - cost that have to be paid whether the business is making sales or and do not vary with the number of items made eg: rent
Variable costs - costs that which vary with the number of items made eg: raw materials
Total costs - the fixed costs and the total costs combined
Economies of scales definition
Factors that lead to lower average costs as a business increases in size
Diseconomies of scale definition
Factors that lead to disadvantages as a business increases in size
Examples of economies of scales
Purchasing economies (Buying in bulk)
Financial economies, (easier to access to finance)
Managerial economies (High quality managers)
Technical economies (Machinery automation)
Marketing economies (marketing cost less)
Examples of diseconomies of scale
Unmotivated workforces
Ineffective communication
Weak co-ordination through layers of decision making
Break even output
The quantity that must be sold for total revenue to equal the total costs
Break even charts
Graphs to show how revenue and costs change with sales, shows how many sales is needed for revenue to equal total costs (this is called to break even point)
Y axis - measures the money amounts (cost and revenue)
X axis - the number of units sold
Fixed costs is always a straight line as they do not vary
Total cost starts at the fixed cost line and is diagonal because the variable costs vary
Margin of safety definition and equation
The amount of sales that exceed to break even point
Current sales - break even point = margin of safety
Revenue definition and equation
The businesses income from sales during a period of time
Total revenue = quantity sold x price
Advantages and disadvantages of a break even chart
Easy to plan and predict the future and how we can grow from this
Can redraw multiple scenarios and analyse which one is the best
Can show the margin of safety
Break even charts are produced to assume that all products made are sold (not always the case)
Fixed cost only remain the same if the scale of production does not change (it might)
Break even charts only shows break even point there are many other aspects that impact a business
Break even formula
Total fixed costs / contribution per unit
(Remember the unit is units sold eg: 200 units sold)
Contribution formula
Selling price - variable costs
Using cost data to make decisions
selling prices, needs to cover costs
is it worth it?, deciding whether to stop production or continue
## deciding on the best location
Diseconomies of Scale.
Rising average costs when a firm becomes too big.
Economies of Scale.
Falling average costs due to expansion.
External Economies of Scale.
The cost benefits that all firms in the industry can enjoy when the industry expands.
Internal Economies of Scale.
The cost benefits that an individual firm can enjoy when it expands.
Scale.
The size of a business.
Batch Production.
A method, which involves completing one operation at a time on all units before performing the next.
Flow Production.
Large-scale production of a standard product, where each operation on a unit is performed continuously one after the other, usually on a production line.
Job Production.
A method of production, which involves employing all factors to complete one unit of output at a time.
Process Production.
A form of flow production where materials pass through a plant where a series of processes are carried out in order to change the product.
Downsizing.
The process of reducing capacity, usually by laying off staff.
Outsourcing.
The contracting out of work to other businesses that night otherwise have been performed within the organisation.
Productivity.
The amount of output produced in relation to the resources used.
Work Study.
A process, which identifies the best possible way to carry out a task by looking closely at the way a job is done.
Cell Production.
Involves producing a ‘family of products’ in a small self-contained unit (a cell) within a factory.
Just-In-Time Manufacturing (JIT).
A production technique, which is highly responsive to customer orders and uses very little stock holding.
Kaizen.
A Japanese term, which means continuous improvement.
Lead Time.
The time between receiving an order and making a delivery.
Lean Production.
An approach to production aimed at reducing the quantity of resources used.
Multi-Skilling.
Where workers are trained in more than one skill, which enables them to do a range of jobs.
Computer Aided Design (CAD).
The use of computers to design products.
Computer Aided Manufacturing (CAM).
Where compters link and control the design and production of goods in manufacturing.
Computer Integrated Manufacturing (CIM).
The use of computers to control the entire production process.
Computer Numerically Controlled Machines (CNCs).
Machines, which carry out the instructions fed by computers.
E-Commerce.
The trading of goods and services electronically.
E-Tailing.
Ordering goods online and taking delivery at home.
Quality.
Features of a product that allow it to satisfy customers’ needs.
Quality Control.
Making sure that the quality of a product meets specified quality standards.
Quality Assurance.
A method of working for business that takes into account customers’’ wants when standardising quality. It often involves guaranteeing that quality standards are met.
Total Quality Management (TQM).
A managerial approach, which focuses on quality and aims to improve the effectiveness, flexibility and competitiveness of the business.

What does production mean?
The process of converting inputs such as land, labour and capital into saleable goods, for example shows and cell phones. Enterprise is the idea –> plays a part in production.
What is productivity?
How a business measures it’s efficiency
How do you calculate productivity?
total output/ factor of production (total input)
What are some ways to improve productivity?
Improving layout of factory so production becomes faster and more efficient
Training workers so they can be more productive
employee motivation
Using automation
What are the benefits of increase productivity?
Lower cost per unit
Less employees needed (reduce labour cost)
Reduces overall costs.
What can a firm hold in its inventory?
raw materials
goods that are not completed yet (a.k.a work-in-progress)
finished unsold goods.
Why are finished good held in inventory?
Finished good stocks are kept so that any unexpected rise in demand is fulfilled.
Why do businesses hold inventory (stock)?
Businesses keep stocks for a variety of reasons:
- factories keep raw material inventory to make sure there are enough materials for production
- a shop might hold stock to ensure that products are available to customers.
Why is it a disadvantages of holding inventory to a business?
Warehousing costs - need somewhere to store it
Handling costs - someone needs to move it in and out
shrinkage costs - might get damaged, lost or stolen
Insurance costs - have to pay monthly or yearly fee so losses are covered
obsolescence - might not sell so out-of-date-goods
opportunity costs - money tied up could be making profit somewhere else
How do you calculate labour productivity?
total output in a given time period/ total workers employed
What is the difference between production and productivity?
Production: Turning inputs into outputs
productivity: Output per worker in a given period of time
Why should a business hold inventory?
production process will have to stop if you run out
Struggles to meet customer orders without it - leads to loss of sales
Economies of scale - buy stock in bulk and suppliers with give discounts
What are the problems with holding inventory?
Notes from book
What is buffer stock/ safety stock?
inventory to deal with sudden customer demands for a product or in case supplies doesn’t get delivered on time.
What is lean production?
Lean production refers to the various techniques a firm can adopt to reduce wastage and increase efficiency/productivity. Also reduces costs.
What are 5 common wastes in businesses? What do they mean?
Overproduction – Producing too many products which then costs the business money to keep the product in storage. (and may get damaged/expires etc..)
Waiting – Goods not being processed
Transporting – Materials being moved around the factory inefficiently
Over-processing – e.g. using advanced machine to do simple tasks
Defects- production of faulty products which can’t be sold.
What are the benefits of lean production?
less storage of raw materials, components and finished goods- less money and time tied up in inventory
quicker production of goods and services
no need to repair faulty goods- leads to good customer satisfaction
ultimately, costs will lower, which helps reduce prices, making the business more competitive and earn higher profits as well
What are the 3 common lean production techniques?
Kaizen
Just In Time production
Cell production
What is kaizen?
Kaizen means continuous improvement by eliminating waste. it’s a Japanese term meaning ‘continuous improvement’.
How does Kaizen work?
- It aims to increase efficiency and reduce wastage by getting workers to get together in small groups and discuss problems and suggest solutions.
- Since they’re the ones directly involved in production they will know best to identify issues.
- When kaizen is implemented, the factory floor, for example, is rearranged by re-positioning machinery and equipment so that production can flow smoothly through the factory in the least possible time.
benefits of Kaizen:
increased productivity
reduced amount of space needed for production
improved factory layout may allow some jobs to be combined, so freeing up employees to do other jobs in the factory
What is just in time production?
This techniques eliminates the need to hold any kind of inventory by ensuring that supplies arrive just in time they are needed for production.
What are some disadvantages of just in time?
The firm will need very reliable suppliers and an efficient system for reordering supplies.
What are the advantages of just in time?
reduces the cost of holding inventory
Warehouse space is not needed any more, so more space is available for other uses
Finished goods are immediately sold off, so cash flows in quickly
What is cell production?
the production line is divided into separate, self-contained units each making a part of the finished good.
How does cell production make the work more efficient?
This works because it improves worker morale when they are put into teams and concentrate on one part alone.
What are the three methods of production?
job production
batch production
flow production
What is job production?
Each product is different and made to specific instructions by the consumer. e.g. tailor made suits, customisable birthday/wedding cakes
What are the advantages of job production?
very flexible method of production
Workers have more varied job (They won’t become bored)
Higher price can be charged for product
Product meets requirements of the customer
What are the disadvantages of job production?
Skilled labour will often be required which is expensive
Costs are higher for job production firms because they are usually labour-intensive
Production often takes a long time
Since they are made to order, any errors may be expensive to fix
Materials may have to be specially purchased for different orders, which is expensive
What is batch production?
Similar products are made in batches or blocks. A small quantity of one product is made, then a small quantity of another. Eg: cookies, building houses of the same design etc.
what are the advantages of batch production?
Gives more variety of jobs to workers
Production can be easily changed from one product to another
Gives consumers a variety of products (e.g. many colour shirts)
What are the disadvantages of batch production?
Expensive to produce goods
Can be expensive since finished and semi-finished goods will need moving about
Machines have to be reset when changing from one batch to another which slows down production (e.g. change colour of shirts from white to green dye)
Warehouse space is needed to store products
What is flow production (mass production)?
large quantities of products are produced in a continuous process on the production line. Eg: a soft drinks factory.
what are the disadvantages of flow production?
Very boring for workers (same product over and over)
Starting costs are high (expensive machines, big factory etc…)
If a machine breaks down the whole production line may stop
Expensive storage costs as they are lots of products
What are the advantages of flow production?
Goods are produced quickly and cheaply (economies of scale)
Increased efficiency through use of machinery
Less labour is needed (machines do the work)
Automated production line means production can operate overnight
What situations affect which method of production you use? Give examples
The nature of the product – Unique products will require job production.
Size of the market – Products with small number of customers mean job or batch production is used. Products with large amount of consumers = flow production should be used.
The nature of demand – Small and infrequent demand by customers means job or batch production will be used.
The size of the business – Small businesses tend to operate using job and batch production while large business may use flow production.
What are some examples of technology production?
Automation
Mechanisation
CAD (computer aided designing)
CAM (computer aided manufacturing)
Electronic point of sale
Electronic funds transfer at point of sale (EFTPOS)
What is automation?
equipment used in the factory is controlled by computers to carry out mechanical processes, such as spray painting a car body.
What is mechanisation?
production is done by machines but is operated by people
What is CAD?
(computer aided designing): a computer software that draws items being designed more quickly and allows them to be rotated, zoomed in and viewed from all angles.
What is CAM?
(computer aided manufacturing): computers monitor the production process and controls machines and robots-similar to automation
What is electronic point of sale?
used at checkouts/tills where operator scans the bar-code of each item bought by the customer individually. The item details and price appear on screen and are printed in the receipt. They can also automatically update and reorder stock as items are bought.
What is EFTPOS?
(electronic funds transfer at point-of-sale): the electronic cash register at the till will be connected to the retailer’s main computer and different banks. When the customer swipes the debit card at the till, information is read by the scanner and an amount is withdrawn from the customer’s bank account (after the PIN is entered).
What are the advantages of using technology in production?
Greater productivity
Greater job satisfaction among workers as boring, routine jobs are done by machines
Better quality products
Quicker communication and less paperwork
More accurate demand levels are forecast since computer monitor inventory levels
New products can be introduced as new production methods are introduced
What are the disadvantages of using technology in production?
Higher unemployment as machines replace human labour
Technology is expensive
Technology becomes outdated very quickly and may needs to be upgraded often
What are the three different types of costs?
fixed costs
variable costs
total costs
average costs
what are fixed costs?
Fixed Costs are costs that do not vary with output produced or sold in the short run. They are incurred even when the output is 0 and will remain the same in the short run. In the long-run they may change. Also known as overhead costs
What are variable costs?
Variable Costs are costs that directly vary with the output produced or sold. E.g.: material costs and wage rates that are only paid according to the output produced.
What are some examples of fixed costs?
rents such as office space or land,
insurance
employee salaries
advertising
design and development
software
How can fixed costs per product be lowered?
Fixed cost per product can be lowered by making more products.
What are some examples of variable costs?
Materials used to produce product
wages of production worker
bought in stock
What is total costs?
Fixed cost and variable costs are combined
What are the two formulas to calculate total costs?
total costs = variable costs + fixed costs
total costs = average costs * output
How do you calculate average costs?
Average cost per product = Total cost / Number of products produced
What can business do with this cost data? What are some examples?
A business can use these cost data to make different decisions.
e.g.
- setting prices
- deciding whether to stop production
- deciding on the best location
How do average costs per unit help set prices?
if the average cost of one unit is $3, then the price would be set at $4 to make a profit of $1 on each unit
How do the total costs help when deciding whether to stop production?
if the total cost exceeds the total revenue, a loss is being made, and so the production might be stopped
How do costs help deciding the location?
locations with the cheaper costs will be chosen
As output increases, a firm’s average cost …
decreases
what are economies of scale?
Your average costs lower as you increase your production
What are the five different types of economies?
purchasing
marketing
financial
technical
managerial
purchasing economies?
For large output, a large amount of components have to be bought. This will give them some bulk-buying discounts that reduce costs
marketing economies?
Buying own vehicle to distribute product
Advertising costs can be spread over a large number of products.
Financial economies?
Large firms able to negotiate cheaper finance deals (e.g. lower bank loans because banks view large businesses as less risky)
Managerial economies?
Large businesses can afford to hire specialists to work for them. This increases efficiency.
technical economies?
Use of specialist machinery to produce large quantities of products. (Small businesses cannot afford this)
What is diseconomies of scale?
Diseconomies of scale are the factors that lead to an increase the average costs of a business as it grows beyond a certain size.
What are the diseconomies of scale?
poor communication
demotivation of workers (low morale)
Poor control (slow decision making)
How is poor communication an example of diseconomies of scale?
when a business grows large, more departments and managers and employees will be added and communication can get difficult.
Messages may be inaccurate and slow to receive, leading to lower efficiency and higher average costs in the business.
How is poor control (slow decision making) an example of diseconomies of scale?
As a business grows larger, its chain of command will get longer.
Communication will get very slow and so any decision-making will also take time
since all employees and departments may need to be consulted with.
How is demotivation of workers an example of diseconomies of scale?
How is demotivation of workers an example of diseconomies of scale?
when there are lots of workers in the business and they have non-contact with their senior managers
the workers may feel unimportant and not valued by management.
This would lead to inefficiency and higher average costs.
How are business avoiding diseconomies from arising?
Businesses are now dividing themselves into small units that can control themselves and communicate more effectively, to avoid any diseconomies from arising.
What is the break-even level of output?
Break-even level of output is the output that needs to be produced and sold in order to start making a profit.
the break-even output is where
output at which total revenue = total costs (neither a profit nor loss is made, all costs are covered).
How can you find out a businesses break-even output?
A break-even chart can be drawn
Have does a break-even chart show?
Shows the costs and revenues of a business across different levels of output and the output needed to break even.
Where is the breaking point calculated?
Now the break-even point can be calculated at the point where total revenue and total cost equals
What is the formula for the break-even level of output?
Total fixed costs/ selling price - variable costs (per unit)(contribution)
What is the margin of safety?
Tells a firm the amount sales can fall before the break-even point (BEP) is reached and the business makes no profit
do businesses want their margin of safety to be high or low?
As high as possible
What are the advantages of break-even charts?
Enables managers to see the level of production/sales needed to break even
Allows managers to read off expected profit/loss for different levels of sales
Impacts of business decisions can be seen (e.g. See effects of lowering variable costs)
Break even chart shows safety margin
What are the limitation of break even charts?
Assumes that all costs and revenue can e shown in straight lines i.e. won’t change
Not easy to separate costs into fixed and variable costs
Assumes all output is sold, doesn’t take into account holding inventory
What is contribution (formula)?
Selling price – Variable cost per unit (this is the value added/contributed to the product when sold)
