Business 5.6

Question 1

Advantages of local supply chains

Answer 1

• Greater control on logistics, ethical practices and quality management that are increasingly important as consumers demand transparency. Thus, less risk for the business as they’re meeting standards.
• Lower transport costs; tariffs, fuel prices and carbon emission taxes.
• Local–social and global–ecological benefits, networking and connecting with the local communities.

Question 2

Disadvantages of local supply chains

Answer 2

• Higher production costs; inability of producing large quantities and, therefore, lacks EoS.
• Less choices of suitable suppliers especially for remote business locations.

Question 3

Advantages of global supply chains

Answer 3

• Greater choice of suppliers, some with greater selection of materials.
• Lower costs of production, lower worker wages as there are fewer regulations.

Question 4

Disadvantages of global supply chains

Answer 4

• Greater risk, geopolitical tensions, natural disasters in other areas of the globe. Hence, why reshoring is a growing trend.
• Lack of transparency and control, concerns of ethics and the environment cannot be monitored as it is further out.
• Less sustainable.

Question 5

What is JIT production

Answer 5

Just-in-time (JIT)productionis the principle of placing smaller, regular orders for resources, which are delivered just in time for them to be used, thus, reducing storage costs and waste.

Question 6

What is JIC production

Answer 6

Just-in-case (JIC) production is an operations management strategy where a business holds relatively large levels of buffer stocks so that a business can continue to operate when faced with an unforeseen event.

Question 7

Advantage of JIT production

Answer 7

• Improved cash flow and reduces cost, money not spent on inventory can be allocated for other operations.
• Improved operations, employees work more carefully with available stocks.
• Increased capacity as there is no inventory.
• Can quickly respond to consumer demands.

Question 8

Disadvantages of JIT production

Answer 8

• Greater risk, geopolitical tensions, natural disasters in other areas of the globe.
• Reduced resilience, cannot quickly adapt to external environment.
• Reduced of EoS possibility.
• Dependent of producers.

Question 9

Advantages of JIC production

Answer 9

• Resilience, can cope better with disruption in supply chains. Which also makes it easier to meet increasing demands and maintain satisfied customers.
• Benefits EoS.
• Less risk as there is less exposure to changes in the external environment, e.g. unreliable suppliers, economic downturn, etc.

Question 10

Disadvantages of JIC production

Answer 10

• Less working capital, less cash available as they are spent for stocking causing a reduced liquidity.
• Higher storage costs because of all the stage needs.
• Waste of stock and resources as large amounts are stored and then thrown away.
• Risk of goods perishing.

Question 11

What is a Stock control chart

Answer 11

Stock control chart is a simple way to monitor inventory levels to better control costs as it helps track when stocks are sold and delivered.

Question 12

main parts of stock control chart

Answer 12

Main parts include:

• Maximum stock level
• Buffer stock level: minimum amount of stock a business wants to hold, for emergencies.
• Lead time: The time between the stock being reordered and being delivered.
• Reorder level: The level of stock that indicates that a new stock order should be made in order to prevent stock depletion.
• Reorder quantity: Amount of stock ordered from supplier.

Question 13

what is capacity utilisation

Answer 13

Capacity utilisation is a measure of the extent to which a business is using its productive capacity, expressed as a percent.

Question 14

explain high capacity utilization and why its good and bad

Answer 14

High capacity utilisation means that a company is using its resources efficiently. This should reduce average costs and hopefully increase profits. The downside of a company having an extremely high capacity utilisation rate is that workers and/or machines will be working flat out. This can raise stress levels of staff and leave little time for maintenance, either of which can lead to a drop in quality. If a business is regularly operating at an extremely high capacity utilisation rate, this may be an indication to the business that they need to expand, adding additional capacity.

Question 15

what is defect rate

Answer 15

Defect rate is a risk that product defects may occur from overworking workers and capitals to produce more.

Question 16

why is it important to consider defect rate

Answer 16

This is important to consider because if a percentage of defects roams the market, it will likely cause:

• Harm to customers and damaged reputation is business prolongs this (Hence, why it’s also important for business to consider suppliers)
• Need to recall defects, which is expensive and lowers profits
• Possibly costly legal action if business remains negligent.

Question 17

What is productivity rate

Answer 17

measures the average efficiency of production and is expressed as a ratio of output to inputs within the production process.

Question 18

What is labour productivity

Answer 18

Labour productivitymeasures the output per worker over a defined period of time.

Question 19

what is capital productivity

Answer 19

Capital productivitymeasures how efficiently a business utilises its capital (such as machinery or other fixed assets) to generate output.

Question 20

What is operating leverage

Answer 20

Operating leverage is the measure of a company’s fixed costs relative to total costs.

This is important because:

Question 21

Why is operating leverage important

Answer 21

Operating leverage is the measure of a company’s fixed costs relative to total costs.

This is important because:

• Estimate possible challenges towards becoming economically sustainable
• How much increase or decrease in sales revenue will affect profits

High OL means large fixed cost sums that may be allocated for investment.

→ R&D, physical capital or marketing.

→ R&D in pharmaceutical industry as there’s great need to product vaccine with production plants.

Low OL means the opposite and this is the case, usually, because large portion of costs will be from the product sold to customers in stores. Lower risks as well because there are not a lot of fixed costs to pay off.

→ Global large retailers

Question 22

Why do businesses consider Cost to buy and cost to make

Answer 22

Because they need to know the cost of production inhouse and outsourced for comparison of the most optimal decision.

Question 23

Advantage of cost to buy/make decisins

Answer 23

• Outsourcing is often more cost-effective than producing in-house.
• Can concentrate on improving overall efficiency/competitiveness in main areas.
• Fluctuations in demand can be easily dealt with by outsourced provider.

Question 24

Disadvantage of cost to buy decisions

Answer 24

• Quality of externally produced goods may not organisation’s standards.
• Disruptions in supply chains can have subsequent significant impact on organisation’s operations.
• Long-term costs associated with CTB can offset initial savings, lead to higher overall expenses.

Question 25

Factors affecting make or buy decisions

Answer 25

Quantitative

• Total and average costs
• Defect rates
• Productivity rates
• Capacity utilisation rates.
• Profitability.
• Capital expenditure.

Qualitative

• Quality management.
• Reputation and public relations (connections to outsourcing from unethical suppliers)
• Changing demand.
• Supply chain reliability and lead times.
• Specialisation.

Question 26

What is cost to buy

Answer 26

Cost to buy (CTB)is the total cost of subcontracting production to a supplier.

Question 27

Reasons for cost to buy

Answer 27

Reasons to buy:

• Specialisation and expertise.
• Low costs due to EoS.
• Lower fixed costs. Business may not want to invest in large scale capital, e.g. for a factory, if they’re uncertain. So outsourcing is a smart decision here.

Question 28

What is cost to make

Answer 28

Cost to make (CTM)refers to the total cost of production if manufacturing is kept inhouse.

Question 29

Reasons to cost to make:

Answer 29

• Quality and cost control through vertical integration, under the consideration that the business owns multiple stages of the supply chain.
• Protecting intellectual property (IP). Nothing has to be shared with a third party that may run the risk of copycat brands and, thus, damaging brand image.
• Meeting global and local responsibilities, great consideration especially for social enterprises.