section 4: operations management Flashcards
production
the process of converting inputs such as land, labour and capital into saleable goods, for example shoes and cellphones
productivity
a measure of the efficiency of inputs used in the production process, especially labour and capital
labour productivity formula
labour productivity= total output/number of production employees
level of production
number of units produced in a given period of time
how to improve labour productivity
- increasing output with the same number of employees:
- improving the skill level of employees
- improving the motivation of employees
- introducing more automation and more or better technology
- improving quality of management decisions - keeping output at the same level but with fewer employees
inventories
the stock of raw materials, work-in-progress and finished goods held by a business
why businesses hold inventories
- raw materials are needed as inputs for the production process
- always have enough supplies
- protected against instability
- can respond to rise in demand
- if the business does not have finished goods in stock then customers’ orders cannot be met and the business will lose sales
- businesses often benefit from economies of scale when they buy inventories in large quantities because they receive a discount from the supplier
holding inventories adds to a business’s costs such as:
- warehousing costs
- handling costs
- shrinkage costs
- insurance costs
- obsolescence
- opportunity cost
lean production
the production of goods and services with the minimum waste of resources
target of lean production
reduce waste, lower costs per unit, increase competitiveness, increase profits
main sources of waste
- production defects
- high levels of inventories
- overproduction
- idle resources
- transporting goods
just-in-time inventory control
raw materials and components arrive from suppliers just as they are needed by the production process
kaizen
continuous improvement through the elimination of waste; small improvements leading to significant benefits
main methods of production
job production, batch production, flow production
job production
the production of items one at a time, most suitable for one-off products & personal services
job production pros
▪ the product meets the exact requirement of the customer
▪ workers will have more varied jobs as each order is different, improving morale
▪ very flexible method of production
job production cons
▪ Costs are higher, as it is usually labour-intensive
▪ Production often takes a long time
▪ Since they are made to order, any errors may be expensive to fix
▪ Materials may have to be specially purchased for different orders, which is expensive
batch production
the production of similar goods in batches. Each batch passes from one stage before moving to the next
batch production pros
▪ Variety for consumers & choice
▪ Cost saving can be achieved if materials bought in bulk
▪ A firm can handle unexpected orders better
batch production cons
▪ Take time for machines to be reset between production batches which delays production
▪ Finished goods will need to be stored which increases costs
▪ Less motivated employees, work become repetitive
flow production
the production of very large quantities of identical goods using a continuously moving process
flow production pros
▪ Costs are low in the long run and so prices can be kept low
▪ Can benefit from economies of scale in purchasing
▪ Automated production lines can run 24/7, and produced quickly and cheaply
▪ Capital-intensive production
flow production cons
▪ Large investment in technology (high capital cost)
▪ High levels of raw materials and finished goods need to be held in inventory- this is expensive
▪ If one machinery breaks down, entire production will be affected
▪ Very repetitive job, employees not motivated
capital intensive
production process that uses a high quantity of capital equipment comparers with labour input
how tech has changed production methods
- computer-aided design (CAD)
- computer-aided manufacturing (CAM)
- computer-integrated manufacturing (CIM)
technology pros
business:
- reduces costs and time taken to design new products
- increases productivity
- reduces costs of production
- improves quality and reduces waste
consumers:
- better quality products
- lower prices
- products with more features are easier to develop and produce
employees:
- technology completes simple and repetitive tasks that employees find boring
- the work is easier with the aid of technology
- a business that uses the latest technology is likely to be more successful so provides job security
fixed costs
costs that do not change with output
variable costs
costs that change in direct proportion to output
total cost
all the variable and fixed costs of producing the total output
average costs
the cost of producing a single unit of output
revenue formula
selling price x quantity
variable costs formula
variable cost per unit x quantity
total costs formula
fixed costs + variable costs
average costs formula
total costs/total output
economies of scale
the reduction in average costs as a result of increasing the scale of operations
different economies of scale
financial economies: better lending terms (lower interest rates)
managerial economies: greater specialisation ( more roles, bigger hierarchy)
marketing economies: market spending spreads over more products
purchasing economies: negotiate better prices
technical economies: specialist equipment to boost productivity
diseconomies of scale
factors that cause average costs to rise as the scale of operations increases
causes of diseconomies of scale
poor communication, lack of commitment from employees, weak coordination
break-even
the level of output where revenue equals total costs; the business is making neither profit nor loss
break-even analysis
a business technique that shows the relationship between revenue, costs and volume of output/sales
break-even analysis is used to calculate
- how many units it needs to sell before it starts to make profit
- the effect on profit of increasing or decreasing the price of a product
- the effect on profits of an increase or decrease in business costs
break-even analysis pros
- Easy to construct and interpret
▪ Useful information about the output that must be sold to cover all costs
▪ Can show the effect of a decision to change costs or revenues
▪ Can help with other important business decisions such as the location and relocation of a business
break-even analysis cons
▪ it is assumed that all costs and revenues can be represented by straight lines
▪ It is not easy to separate costs into fixed and variable
▪ The charts assume that all output is sold – they do not allow for inventories and the costs of holding these
margin of safety
the difference between the current level of output and break-even output
a measure of the amount by which sales can fall before losses are made
break-even point formula
fixed costs/ (selling price per unit - variable costs per unit)
margin of safety formula
actual output- break-even output
quality
ensuring a good or service that meets the needs and requirements of its consumer
quality standards
the minimum standard of production or service acceptable to consumers
importance of quality
- develops strong brand image
- gain and retain customers= customer loyalty
- reduces costs, customer complaints and returns
- premium pricing
- attracts more middlemen
- lengthens the product life cycle
quality control
checking the quality of goods through inspection
problems of quality control by inspection
▪ The cost of the inspectors
▪ The work may be repetitive = de-motivated inspectors
▪ Usually at the end of the production
process, so it is potentially too late
▪ May take responsibility for quality away
from workers
benefits of quality control
▪ Prevents faulty goods and services being sold
▪ Not disruptive to production-workers, given that inspectors do the checking
▪ Improved reputation for quality (improved brand image) may increase sales
quality assurance
a system of setting agreed standards for every stage of production
quality assurance makes sure that
▪ Quality standards are set for each stage of the production process
▪ Raw materials, components and other resources meet required standard
▪ Use of technology, minimising quality issues e.g., using CAD/CAM to reduce human error
▪ Employees know they have responsibility for ensuring quality of their own work
benefits of quality assurance
▪ Team-work
▪ Early detection minimises wastage & defected products
▪ Less time spent by inspectors= decreasing this cost
▪ Businesses with quality assurance systems can easier obtain industry quality awards such as ISO 9000
cons of quality assurance
▪ Time consuming to run & train staff
▪ Cost training staff
infrastructure
the basic facilities, services, and installations needed for a business to function. e,g water, power
quantitative factors of location decisions
- cost of site
- availability and cost of labour
- transport costs
- gov. incentives
qualitative factors of location decisions
- size of site
- legal controls
- quality of infrastructure
- ethics
government incentives
usually finance such as interest-free loans or grants provided to a business to help when locating in a country or an area of a country
why business relocate operations
- growth
- locate production closer to market
- reduce production costs
pros of relocating
- lower labour costs
- access to global markets
- avoiding barriers to trade
cons of relocating
- cultural differences
- communication problems
- different legal controls
