Operational Performance Flashcards
Operational Objectives
Reduced Unit cost
Quality targets
Speed of response &flexibility
Dependability
Environmental Objectives
How to Reduce Unit cost
Greater Capacity Utilisation
Improve productivity
Better supplier terms
*cost affect what is charged to consumer
How to measure quality targets
Better products
greater reliability
Lower wastage
lower returns
Fewer complaints
*reduce production time and cost , goods are ready for dispatch to customers soon
How to measure environmental objectives
Minimise packaging and waste
Sustainability and pollution control
Environmental objectives have implications
Businesses will need to change their supplies or material - replenishable
adopt processes that are more energy-efficient
staff will need appropriate training to ensure policies are achieved
Added value
The process of turning materials into finished products must make the selling price > costs. the profit will be reinvested into business
External Influence on Operational Objectives
Level of Demand
Technology influences
Level of Competition
Level of Demand
attempt to predict sales volume and any fluctuation to ensure consumers’ expectation are met
Technology influence
has resulted in speedier innovation and production, and better quality . use of review sites means consumers are more aware and demanding in terms of price and quality
Level of Competition
Increasing pressure on business in terms of cost and price. added to this is greater awareness among consumers, increasing pressure on operations to maintain customer loyalty.
*firms with no competition will be complacent and competition will increase your market share and change your objectives
Internal influences
Availability of Finance
Marketing - determine both what has to be priced and the quantities
HR- skills of the workforce determine the quality
most important factor in operation
Effective management - staff to have a clear understanding of what the business is attempting, objectives communicated effectively to everyone
Labour Productivity
measure of output per worker in a given time period
output per time period/num of employees
Capacity Utilisation
actual production of business in a given time period as % of max capacity
Actual output in time / max possible output per period
Unit cost
Cost of producing one unit of output
Total cost / Units of output
Importance of productivity and capacity utilisation
Labor costs per unit will fall - assuming the wage rate is the same. likely to be in a better competitive position
increasing productivity - the firm increases its competitiveness. sells products at lower price or keep prices high and keep a high profit margin
interpretation of operation decisions in terms of productivity
if the same level of output can be achieved with
fewer employees, productivity will rise; but if more workers are employed
without increasing output, productivity will fall.
How to increase efficiency and labour productivity
Increase investment in technology - improve quality and reliability of product and result in greater output from fewer employees
Improvements in training - improve skills of the workforce lead to greater output. produce more and make fewer mistakes. however, this could be of waste as employees will go to another firm with new skills.
Improve motivation- changing the content of job in terms of responsibilities will boost performance
Exam tip
It is important to recognize
that improvement in
productivity should come
without any reduction in
quality or dependability of
service.
why might employees be concerned about moves to increase productivity?
if business operates in static market , higher productivity means fewer jobs
Importance of capacity
unit cost declines as capacity utilization increases. therefore important for Businesses to not have much spare or excess capacity
operating in 60% results in resources in terms of labor not used effectively
but operating at 100% reduces flexibility in terms of new orders
Evaluation in efficiency and labour productivity
Higher production contributes to better performance but needs to be accompanied with having demand , added value , producing a good quality product. could increase profit margins and in mass market , a cost advantage will make all the difference
Benefits of labour Productivity
Lean production is about getting more from less
1) creates high levels of labor productivity - use less labor
2) requires less stock - less space and capital equipment: cost advantage
3) substantial marketing advantages- results in fewer marketing defects, improved quality and reliability of consumers
drawbacks of Lean production
No back up : if disaster strikes
Relies on efficient high quality suppliers
JIT( just in time approach)
Aims to minimize the costs of holding stocks of raw materials, components, and finished products.
Production starts only once a customer has placed an order with producer
Summary of JIT approach
No buffer stock of any type is held
production is to order
Stock is ordered when it is needed
zero defects are essential no stock safety net exists
pros and cons of JIT
improves firms Liquidity
cost of holding stocks reduced
stock space can be converted into a more productive use
Improved motivation due to greater involvement of the workforce in the process
*any break in supply causes immediate problems for the purchaser
The cost of processing orders increases
trust and running out of stock of suppliers
TIme-based Management
shorten the production to reduce cost and improve the level of satisfaction. must invest in capital, machines making one model
training is a priority because staff must be skilled
Benefits
reduce lead and set-up times - productivity improves
lower stock holding costs - make firms more responsive to changes in the market with short lead times
achieve first mover advantage if you can get your new production out before rivals in market
Why are lean producers likely to have
higher-than-average profit margins?
Their production methods save costs by cutting out waste,
while adding value by customising products to match
exact tastes
Risk of 100% capacity utilisation
if demand rises further, you will have to turn it
away, enabling your competitors to benefit
Labour intensive
labour forms a high proportion of the total cost
advantage of highly flexible, making it possible for small firms to operate successfully without direct competition
good in low-cost countries
Capital intensive
large % of its total costs are tied up in the fixed cost of machinery
produce in high costs labour country
3 main targets focused on by operation
Quality targets - have no more than 1 in 100 customers refund
Capacity utilization targets
Unit cost - keeping average per unit at 1.99 and selling prices below 2.99
choose the degree of automation(intensive) then choose the level of capacity utilization
Difficulties of increasing labour productivity
Costs - new tech is expensive and trained employees will demand higher pay but in the long term would cover the original costs from greater sales
Quality - production not achieved at the expense of quality
Resistance of employees - intro to tech would results in job losses
Utilise capacity efficiently
increase sales - a new marketing campaign
reduce capacity - rationalize production and sell off some capacity if low capacity utilization - it cannot be reversed
If demand is too high with lack of capacity :
outsource- transfer portion of work to outside suppliers
investment - permanent expansion but who would wait for 18 months
reduce demand - increase prices
Benefits of new and updated tech
reduces the unit cost of production and waste - enhances competitiveness
high tech products - charge premium price until competition catches up
enable employees to work more efficiently
allow access to new markets - internet
costs of new and updated tech
Drain on the organization’s capital. experience difficulty in raising funds to install high-equipment
requires training of the existing workforce and perhaps recruitment of new employees
introduction met with opposition if job security is threatened
How does capacity utilisation have an
impact on average costs?
High utilisation spreads the fixed costs per unit thinly, bringing
the average (total) costs down
Importance of quality
Tip-off in intense competition in customers mind when deciding
provide USP and give consumers a reason to buy the product
Allow businesses to charge higher prices
enable a business to increase sales
Enhance reputation and brand loyalty
Consequence of Good Quality
generate high level of repeat purchase and longer product life cycle
Brand building
allow premium pricing
make products easier to place
Consequence of poor quality
cost of scrapping or reworking procuts
additional cost if goods are returned for replacement
costs resulting from damage to business operation
Total Quality Management
TQM instills a culture of quality throughout an organisation. places collective responsibility for maintaining high-quality standards.
focuses on continuous improvement - managing supplies. minimize time and money spent on quality by preventing quality problems.
Quality control
Based on Inspection. produce as much units as possible and quality control inspectors check that the output meets acceptable standards.
Quality assurance
ensure the desired level of quality in the process of developing products and services. responsibility to all to make sure that each stage meets required standards therefore making them engaged and motivated
Difficulties in improving quality
The business has to bear cost of training for staff, equipment that might be needed
employees might demand higher pay after resisting change due to increased responsibility
need the whole-hearted commitment staff for high-quality
Inventory
Stock a business holds in the form of raw materials, work in progress, and finished goods
Supply chain
The whole process of getting a good to the consumer
Encompasses 3 areas :
supply of materials to manufacture
manufacturing process
distribution of finished goods to consumers
Importance of Flexibility
refers to the ability of a business to meet consumers’ requirements. may involve variations in production level and specification. This specification is known as mass customization - tailoring goods to specific customer requirements. info is sent to the factory - greater customer satisfaction and competitive advantage
Problems of having too much supply or little supply
problems for businesses that operate in a seasonal industry
Too little supply: Businesses will miss out on lucrative orders but will lose future orders due to a lack of dependability
Too much supply: incur cost of holding excess, a business may be faced with selling goods at reduced price
How to influence demand through
Increasing/reducing prices
Increasing/reducing ads
sales promo
Managing supply
Flexible workforce- Through the use of a multi-skilled workforce, part-time workers, or workers on 0-hour contracts. reducing fixed costs on quiet times.
Increase capacity
produce to order - introduction to mass customization has helped this approach
Outsourcing -when another business is contracted to produce extra goods requirement freeing up cash and time concentration on other areas
Influences on the amount of inventory held
Nature of products - foolish to hold large stocks of perishable goods
Nature of production - JIT production means that lower levels of stock are held
Nature of demands - Seasonal products require a higher level of stock than those that have regular demand
Opportunity cost - money tied up in stock represents opportunity cost and is better used anywhere in business
Inventory control chart
Buffer level of inventory: the minimum amount of inventory held,
designed to cover for emergencies such as late arrival of inventory.
✚ Reorder level: the level of inventory at which a new order is placed.
✚ Lead time: the time between an order being made and its arrival in the
business.
✚ Maximum stock level: the highest amount of inventory a business is able
to hold.
✚ Reorder quantity: the amount ordered.
Influence on the choice of suppliers
Dependability. Is the supplier reliable and able to deliver on time?
✚ Flexibility. Is the supplier able to respond efficiently to changes in
demand?
✚ Quality. Is the supplier able to produce at a consistent and reliable
standard?
✚ Price and payment terms. Are the prices charged and payment terms (such
as credit terms) competitive?
✚ Ethics. Does the supplier operate in a socially responsible manner? This
might be of particular importance when dealing with overseas suppliers.
Manage supply chain effectively
if a business aims to have the right good in the right place at the right time then able to gain customer loyalty and maximize revenue
this needs coordination with functional areas and suppliers . needs an understanding of the external environment and how this affects both supply and demand
benefit of outsourcing
Enable quicker response to an increase in demand
Greater dependability for customers during periods of increased demand
Free up space and time for workers - focus on the best areas for competitive advantage
Drawbacks of outsourcing
contractors won’t understand ethos of business and relation with consumers so quality may suffer
Reliability of supplies isn’t guaranteed
likely to be more costly than producing in-house
