Business UNIT 4 - Operations

Question 1

what is the importance of setting operational objectives?

Answer 1

• The operations function of a business is the ‘engine room’ of the business, and like all engine, performance can and should be measured
• All business operations of whatever size and complexity should have objectives se

Question 2

what are the ways of measuring quality?

Answer 2

Scrap/defect rates – a measure of poor quality

Reliability – how often something goes wrong; average lifetime use Customer satisfaction – measured by customer research

Number/incidences of customer complaints

Customer loyalty – percentage of repeat business

Question 3

what are speed of response and flexibility targets (objectives)

Answer 3

Labour productivity – output per employee, units produced per production line, sales per shop

Output per time period – potential output per week on a normal shift basis, potential output assuming certain levels of capacity utilisation

Capacity utilisation – the proportion of potential output actually being achieved

Order lead times – the time taken between receiving and processing an order

Question 4

how can operations of a business add value?

Answer 4

• Added value is equivalent to the increase in value that a business creates by undertaking the production process
• Adding value is the difference between the price of the finished product/service and the cost of the inputs involved in making it

Question 5

what is labour productivity and how is it measured?

Answer 5

Labour Productivity = this measures the level of output achieved with a given number of employees (how efficient the workforce is). -

formula= total output / number of employees

• The higher the number the better as it means there is a higher and more efficient rate of production per employee

Question 6

what are the unit costs and how are they measured?

Answer 6

Unit Costs (average costs) = this measures the costs of producing ONE unit/product of output

• formula= total costs (fixed costs + variable costs) / total output
• The lower the number the better as it will give you more profit (higher profit margins

– revenue is the same). Also, if you have lower costs, then businesses tend to lower prices to gain more sales. If firms were to lower the price at the same level that they lower costs, they maintain the same level of profit.

Question 7

what is capacity utilisation? How is it measured?

Answer 7

Capacity Utilisation = the percentage of total capacity that is being achieved in a given period

• Formula= actual level of output / maximum level of output x 100
• This higher to percentage to better as it means the business is using their capacity to the best of its ability. When a business is operating at less than 100% capacity, it has ‘spare capacity’

Question 8

How do businesses increase efficiency and labour productivity?

Answer 8

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

Question 9

what is cost minimisation?

Answer 9

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.

Question 10

what is economies of scale?

Answer 10

unit costs fall as output increases

Question 11

give me the different types of economies of scale and explain each

Answer 11

Technical – large-scale businesses can afford to invest in expensive and specialist capital machinery

• Specialist – 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
• Purchasing – 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- Marketing – 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
• Financial – 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
• Managerial – this is a form of division of labour – large-scale manufacturers employ specialists to supervise production systems, manage marketing systems and oversee human resources

Question 12

what is lean production?

Answer 12

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.

Question 13

what are the key aspects of lean production?

Answer 13

cell production, kaizen and time based managment

Question 14

what are advantages and disadvantages of lean production?

Answer 14

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

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

Question 15

What are the problems with operating at a higher capacity?

Answer 15

low quality, added workload for employees and loss of sales as they cant meet demand

Question 15

what is the difference between labour intensive and capital intensive

Answer 15

labour intensive- requires workers rather than machines

capital intensive- requires machines rather than workers

Question 16

what are some examples of technology which help to improve opperational efficiency?

Answer 16

Robots, communication, stock control charts and automation

Question 16

what is quality?

Answer 16

Quality = a measure of the worth of a product, for example its durability, reliability, or reputation

Question 17

what can quality help a business to gain?

Answer 17

Gain a competitive advantage, add brand loyalty and improve reputation and usually increase selling prices

Question 18

what is quality control?

Answer 18

Quality Control = the process of inspecting products to ensure they meet the required quality standards (check the product at the end for any mistakes)

• At its simplest, quality control is achieved through inspection.For example, in a manufacturing business, trained inspectors examine samples of work-in-progress and finished goods to ensure standards are being met.
• For businesses that rely on a continuous process, the use of statistical process control (“SPC”) is common. SPC is the continuous monitoring and charting of a process while it is operating. Data collected is analysed to warn when the process is exceeding predetermined limits

Question 19

what are the benefits and drawbacks of quality control?

Answer 19

• With quality control, inspection is intended to prevent faulty products reaching the customer. This approach means having specially trained inspectors, rather than every individual being responsible for his or her own work.
• Furthermore, it is thought that inspectors may be better placed to find widespread problems across an organisation.

Disadvantages of quality control:
- Individuals are not necessarily encouraged to take responsibility for the quality of their own work.

• Rejected product is expensive for a firm as it has incurred the full costs of production but cannot be sold as the manufacturer does not want its name associated with substandard product. Some rejected product can be re-worked, but in many industries it has to be scrapped – either way rejects incur more costs,
• A quality control approach can be highly effective at preventing defective products from reaching the customer. However, if defect levels are very high, the company’s profitability will suffer unless steps are takento tackle the root causes of the failures

Question 20

what is quality assurance?

Answer 20

Quality Assurance = the processes that ensure production quality meets the requirements of customers (continuation of checking at each stage of production)

Question 21

what are the advantages of quality assurance?

Answer 21

Advantages of quality assurance:- Costs are reduced because there is less wastage and re-working of faulty products as the product is checked at every stage

• It can help improve worker motivation as workers have more ownership and recognition for their work (see Herzberg)
• It can help break down ‘us and them’ barriers between workers and managers as it eliminates the feeling of being checked up on

Question 22

What is total quality management?

Answer 22

a specific approach to quality assurance that aims to develop a quality culture throughout the firm

Question 23

what is quality benchmarking?

Answer 23

a general approach to business improvement based on best practice in the industry, or in another similar industry. Benchmarking enables a business to identify where it falls short of current best practice anddetermine what action is needed to either match or exceed best practice. Done properly, benchmarking can provide a useful quality improvement target for a business.

Question 24

what is kaizen?

Answer 24

an approach of constantly introducing small incremental changes in a business in order to improve quality and/or efficiency. This approach assumes that employees are the best people to identify room for improvements, since they see the processes in action all the time. A firm that uses this approach therefore has to have a culture that encourages and rewards employees for their contribution to the process.

Question 25

what are the consequences of poor quality?

Answer 25

lower profits, more waste, bad reputation

Question 26

what is mass customisation?

Answer 26

offering individually tailored goods and services to customers on a large scale- Collaborative customisation – when the needs of a customer are understood and followed as part of the manufacturing process (Example = houses are uniquely designed by architects)

Adaptive customisation – a basic product is made for customers who then customise it to their needs (Example = the Nike ID trainers which you can personalise)

• Transparent customisation – customers are provided with unique offerings without being told they are customised (Example = hotels may look at their bookings and add small features to the room to please the customer and ensure they return)
• Cosmetic customisation – products are offered in different formations to entice different customer (Example = coke names on bottles)

Question 27

what are advantages and disadvantages of mass customisation?

Answer 27

advantages- low unit costs due to scale of production

low unit costs combined with personalised product leads to a higher added value

Disadvantages- There may be challenges if a customer was to return a customised product back: This would be bad for the business as it would be hard to process and they may have to produce a whole new product which may take quite a while as they are all tailor made

• Many businesses may struggle with supply chains as the systems of suppliers are designed and optimised for producing a prearranged amount of products, rather than catering for an unforeseen demand This could be hard for a business as they need to be able to gain a strong bond with their suppliers sothat they can get the best deals. It may also be hard to organise a set amount of supplies

Question 28

what is made to order?

Answer 28

Made to Order = an approach to production where the production of an item begins only after a confirmed customerorder is received.

• By using mass customisation techniques, it is possible to include a customer’s specific requirements into the product.

-Example = most restaurants match demand with supply by using produce to order. You order what you’d like from the menu and the production process begins! As a restaurant customer you might make some specific requests about your food which can be incorporated into production. Alternatively, in a fast-food environment, you pick a standard product from the menu.

Question 29

advantanges and disadvantages of made to order

Answer 29

advantages of made to order:

• Lower levels of finished goods in inventory = lower inventory holding costs & less risk of obsolescence
• Greater customer satisfaction = customers get what they want

Disadvantages of made to order:
- Capacity to produce to order may be limited; although mass customisation is automated, it doesn’t work for all products- It may be difficult to handle sudden or unexpected increases in demand

Question 30

what are part time workers?

Answer 30

a form of employment with less than 20 hours per week

Question 31

advantages and disadvantages of part time workers

Answer 31

Advantages of part time workers:

• Only have to pay workers when the demand is high, rather than having surplus staff when demand, and therefore production, is low
• When hiring from agencies, you will find the workers with the right qualifications and skills required for the job and the firm in general
• Productivity may be increased as staff are more motivated if they have hours to suit them and their work-life balance. Workers will feel more valued and therefore will be more loyal to the firm

Disadvantages of part time workers:

• There will be an increase in costs as agencies often charge high prices for their workers
• Temporary workers could be less motivated and they may not get the hours to suit them and firms will drop them quickly if they don’t need them. This will then decrease productivity and thus could have a knock on effect on the firms reputation if they aren’t efficient enough
• Retention of staff may be low and staff turnover will be high

Question 32

What is outsourcing?

Answer 32

Outsourcing = when a business sub-contracts a process, such as design or manufacturing, to another business

Question 33

Advantages and disadvantages of outsourcing?

Answer 33

advantages- business can react to change quicker if they access to other firms

Outsourcing allows the business to focus on its core business instead of getting involved in activities that would be less competent.

Disadvantages- It comes at a cost that needs to be evaluated. The outsourcer will also want to make a profit so it is likely thatit will be more expensive to subcontract or outsource production.

• It may require you to be more confidential information to a supplier such as details of its methods. This couldlead to firm loses its competitive advantage if the supplier steals its ideas

Question 34

advantages of high inventory levels

Answer 34

increased customer satisfaction, supplier price discounts, customer demands are met properly

Question 35

advantages of low inventory levels

Answer 35

more useable cash, low cash flow problems, more useable cash

Question 36

key terms from a stock control chart

Answer 36

Stock control charts:

Maximum Level = the maximum level of stock a business can or wants to holdRe-
order Level = this acts as a trigger point, so that when stock falls to this level, the next supplier order should be placed

• = buffer stock + the number of resources used during the lead time

Lead Time = the amount of time between placing the order and receiving the stockMinimum

Stock Level = the minimum amount of product the business would want to hold in stock.

Buffer Stock = an amount of stock held as a contingency in case of unexpected orders so that such orders can be met and in case of any delays from suppliers