Increasing Efficiency Flashcards
Define efficiency
This looks at the inputs are used to generate outputs. A business is more efficient if it uses less inputs to reduce the output the result of being more efficient is that unit cost full thus allowing price cut.
Benefits of high efficiency
Maximise production and thus satisfy the needs of more consumers
few inputs and needed to produce a given level of output – reduces unit cost
lower unit cost enable a competitive advantage. Businesses can lower prices and still maintain profit margin on its products
cost savings from greater efficiency can be used to improve quality of the products.
How can you increase efficiency?
Increase the demand by: extra promotions, cutting price, launching new products
Cut capacity by: making redundancies, move to smaller premises (only if sure demand won’t increase again
What is rationalisation?
Reorganising to boost efficiency
What are the options of rationalisation?
Cut working hours, make redundancies, close the factory, lease out factory space, sell off machinery, redeployed staff to other jobs
Why is having a higher capacity utilisation vital?
Lower unit cost
Assets are used more fully increasing
Fixed cost per unit or lower
Higher level of capacity utilisation is required if a business has a heartbreak even output due to significant fixed cost of production
Case studies on capacity
January 2023: hospitality industries responding to a wide range of external threats, including rising energy costs and staff shortage
Capacity is cut by restriction open hours, closing for more days of the week
Apple: one year major products larger higher demand next year refinement could mean lower demand and capacity utilisation for suppliers
What happens when you increase labour productivity?
If labour productivity increases then the result is lower unit costs due to the costs of labour staying the same but are spread over a greater output as each worker is producing more which lowers unit costs.
What are ways to increase labour productivity?
-involve/engage workers i.e. increase motivation
-Improve training
-use more technology to help employee work faster -change reward system to provide incentives
-change organisation of jobs for the flow is improved unless time wasted
-better management (they must fit and organise flow of the job)
What are the problems with increasing labour productivity?
-if work is rushed– quality may suffer (could be the quality of products or quality of the service given to customers)
-if demand doesn’t increase then less workers will be needed and employees may resist methods to increase productivity if they think they’ll lose their job
-less workers needed if the method being used to improve productivity is the introduction of technology – lead to redundancies – workers resist attempt to increase productivity
-employees may demand higher pay
-training technology etc to improve productivity can be costly
Define capital intensive
The weight of resources used in operations is biased towards capital equipment rather than labour
Where is capital intensive often found ?
It is often found in manufacturing where automation and robotics allow mass production with minimal staff. However, the service sector is becoming more capital intensive for example online banking.
Advantages of capital intensive?
-Large volumes – lower unit cost
-Faster production with higher productivity
-Uniform product with less chance of defects (no human error)
Disadvantages of capital intensive
– Costly to repair and there’s a high initial cost
– Workers may resist implementation (fear of job losses)
– Less flexibility if demand (can’t get rid of machines like you can staff)
Define labour intensive
The weight of resources used in operations is biased towards labour rather than capital equipment
When is labour intensive often found ?
Is often found in the service sector where interaction with customers is important. However, due to e-commerce there is some sway towards capital intensity.
Advantages of labour intensive
-if the demand falls it is easier to get rid of staff
– Staff are multiskilled
– Unit cost may still be low in low wage locations
– Workers can make suggestions for improvement
Disadvantages of labour intensive
-customer, some motivation incentives, wages, recruitment
– Human error could be issues of quality
– May not provide as high a volume
– Possibility of human error
– Greater risk of problems with employee/employer relationships
-potentially high costs of labour turnover
-need to continue with investment in training
What does the best / optimal combination depend on ?
-The process for example high value, repetitive task can be done by machines -What firms can afford
Why can labour intensive manufacturing help add value?
Flexibility
Customisation
Willing to pay premium pricing – adding value
This is not true for capital – makes same products
