Business Topic 4 Flashcards
What role does the operations function play in a business, and why is it important to measure its performance?
The operations function is the “engine-room” of the business, responsible for driving production and service delivery. Its performance is critical because it directly impacts cost-effectiveness, quality, and customer satisfaction. Measuring performance ensures that the business operates efficiently, meets objectives, and remains competitive.
Why are cost and volume targets critical for a business’s operations?
Cost and volume targets are essential because they help ensure operations are cost-effective. Achieving lower unit costs allows a business to compete by offering lower prices or achieving higher profit margins at standard industry prices. These targets contribute to productivity, efficiency, and profitability.
What is “unit cost,” and why is it a significant measure in business operations?
Unit cost is the average cost of producing one unit of a product. It is significant because it reflects a business’s cost-effectiveness. Businesses with lower unit costs can price competitively or secure higher profit margins, gaining an advantage over competitors in the same industry.
What are some common objectives businesses set for cost and volume in operations?
Common objectives include:
Productivity & efficiency: Measured by output per employee or per week.
Unit costs per item: Keeping production costs low.
Contribution per unit: The profit contribution of each product.
Production volume: Specified number of items to produce within a set timeframe.
Why are quality targets crucial in business operations, and what are some ways to measure them?
Quality targets are vital because they ensure products and services meet or exceed customer expectations, which drives satisfaction and loyalty. Methods to measure quality include:
Scrap/defect rates.
Reliability metrics like average lifetime use.
Customer satisfaction surveys.
Incidence of customer complaints.
Rates of customer loyalty or repeat business.
What are efficiency and flexibility targets, and why are they important?
Efficiency and flexibility targets measure how effectively a business uses its assets and how quickly it adapts to changes in demand. These are crucial for managing costs and maintaining competitiveness. Examples include:
Labour productivity (output per employee).
Output per time period (e.g., units per week).
Capacity utilisation (percentage of potential output achieved).
Order lead times (time taken to process orders).
Define ‘capacity utilisation’ and explain its significance in operations.
Capacity utilisation measures the proportion of a business’s potential output that is actually being achieved. It is significant because higher capacity utilisation typically reduces unit costs and indicates efficient use of resources, contributing to better financial performance.
What are environmental targets in business operations, and why are they becoming more important?
Environmental targets aim to reduce the environmental impact of operations. They are increasingly important due to stricter legislation and growing consumer demand for environmentally responsible businesses. Common targets include:
Reducing energy use.
Increasing the proportion of recycled materials.
Compliance with waste disposal regulations.
Sourcing raw materials sustainably.
How does achieving environmental targets benefit a business?
Meeting environmental targets can enhance a business’s reputation, attract environmentally conscious consumers, ensure compliance with legal requirements, and potentially reduce costs through resource efficiency. It demonstrates corporate social responsibility and supports long-term sustainability.
What is the relationship between efficiency, flexibility, and unit costs in operations?
Efficiency and flexibility are key drivers of unit costs. High efficiency (e.g., greater output per employee or machine) lowers production costs, while flexibility ensures the business can adapt to demand changes without incurring excessive costs, both contributing to reduced unit costs.
What are the two main types of influences on operational objectives?
Internal and external influences
How do corporate objectives influence operational objectives?
Operational objectives must align with and support corporate goals.
Why is the financial position of a business important for operational decisions?
It determines the resources available for investments in operations.
How do human resources affect operational objectives?
Workforce quality and planning impact productivity and efficiency targets.
In what way do marketing issues influence operations?
Changes in products or marketing mix affect production setup and flexibility.
How does the economic environment influence operational objectives?
It affects demand, capacity utilisation, and financing costs.
How do competitors influence a business’s operational objectives?
Efficient competitors push businesses to match or improve performance.
Why is technological change significant for operational objectives?
It drives innovation and can require updates to production processes.
How do legal changes influence operational objectives?
They require compliance with regulations, such as waste management laws
Why are environmental changes an important influence?
They push businesses to adopt sustainable practices and reduce environmental impact.
What is an example of an internal influence interacting with an external influence?
A corporate sustainability goal aligning with new environmental legislation
Why is it important for a business to make effective use of its assets?
To maximise returns on expensive production investments like factories and machinery.
What is productivity in a business context?
Productivity measures the relationship between production inputs and outputs.
How can productivity be measured?
Through output per worker, hour, machine, or unit costs.
What does a falling unit cost ratio indicate?
It shows that efficiency is improving.
Why is achieving high productivity important for competitiveness?
It enables a business to produce lower-cost goods than competitors.
How does high productivity affect profit margins?
It increases profit per unit or allows for competitive pricing while maintaining profits.
What are some methods to improve productivity through workforce development?
Providing training to enhance employee skills.
How does employee motivation impact productivity?
Motivated employees produce more output with the same effort.
How can capital investment improve productivity?
By upgrading or adding better equipment and automation.
How do better raw materials improve productivity?
They reduce wastage and the time spent handling rejected products.
What role does production organisation play in productivity?
Improved organisation reduces waste and optimises output.
What is cost minimisation in a business context?
A strategy to deliver goods and services cost-effectively while maintaining required quality.
Is cost minimisation about reducing quality?
No, it focuses on meeting customer needs without compromising quality.
Name two industries where cost minimisation is highly emphasised.
Low-cost airlines (e.g., Ryanair, EasyJet) and discount retailers (e.g., Lidl, Aldi).
How does cost minimisation theoretically affect profits and cash flow?
It should increase profits and improve cash flow if done without harming revenue or quality.
Why might businesses neglect cost minimisation during economic booms?
Growth and expansion often lead to increased cost structures viewed as “investments.”
What often prompts businesses to focus on cost reduction?
Economic downturns or recessions, such as in 2008/09.
Name two common methods for reducing costs in established businesses.
Eliminating waste and outsourcing non-core activities.
What does the acronym KISS stand for, and how does it relate to cost minimisation?
“Keep it simple, stupid,” used to simplify processes and procedures.
How can negotiating with suppliers help in cost minimisation?
It allows businesses to secure better pricing and reduce expenses.
Why might pruning product ranges be beneficial in cost minimisation?
It eliminates unprofitable items, simplifying operations and reducing costs.
What is a potential danger of over-aggressive cost minimisation?
It might harm quality or customer service and reduce employee morale.
How can insufficient capacity from cost cutting become a problem?
The business might struggle to meet unexpected increases in demand.
Why is communication important during cost reduction efforts?
Poorly communicated changes can disrupt or annoy other departments.
Give an example of an aggressive control over overheads.
Banning first-class travel unless absolutely essential.
What is a key principle to keep in mind when minimising costs?
Ensure actions do not negatively impact quality, customer service, or long-term goals.
What are economies of scale?
Cost advantages achieved by increasing the scale of production, resulting in lower average costs.
What are the two main types of economies of scale
Internal and external economies of scale.
What are internal economies of scale?
Cost savings within a business as it grows, such as purchasing, managerial, technical, and marketing economies.
How do purchasing economies reduce costs?
By negotiating better prices with suppliers for bulk purchases.
What are managerial economies?
Cost savings achieved by employing specialist managers who bring expertise and efficiency.
How do technical economies benefit a business?
By allowing investment in advanced technology and machinery, increasing efficiency and reducing costs.
What are marketing economies?
Spreading marketing costs over a larger output, lowering the average cost per unit.
What are external economies of scale?
Cost savings arising from the growth of the industry or geographic clusters outside the business.
How does a geographic cluster create external economies of scale?
By reducing transportation costs and increasing efficiency through proximity to suppliers and related businesses.
What are industry-wide economies?
Cost advantages from the development of specialized labor and ancillary industries as an industry grows.
What are diseconomies of scale?
Increased costs and inefficiencies that arise when a business becomes too large.
How does poor communication lead to diseconomies of scale?
By making coordination harder, leading to inefficiencies and increased costs.
