Topic 4 Flashcards
What is operations management
what is it concerned with
- Refers to the administration of business practices to create the highest level of efficiency possible within an organisation
- concerned with converting materials and labour into goods and services as efficiently as possible to maximise the profit of an organisation
examples of key operational objectives (4)
- added value
- cost
- volume (capacity)
- time
why is it valuable for a business to set clear operational
objectives
-what can it help a company achieve
-operations decisions and objectives will …
-helps what between functional areas
what can be reviewed and assessed
-how does it help staff
- it can help a company achieve its overall corporate objectives
- operations decisions and objectives will become focused in meeting these functional targets
- helps coordination between functional areas
- performance can be reviewed and assessed
- motivates staff to meet objectives
what are the 4 internal influences on operational objectives
- nature of product
- availability of resources
- other departments/ functional areas can be impacted because of what one department does
- overall company objectives
what are the 5 external influences on operational objectives
- competitors performance- setting operations targets in response to rivals actions
- market conditions- trends, economy
- demand for product (do we need to increase production)
- changing customer needs
- new technology
what is labour productivity (3)
- a measure of efficiency
- it measures the output of a firm in relation to labour inputs
- output per worker in a certain time
what is efficiency concerned with
- productivity
- energy
- pollution
- producing as quickly as possible (productivity)
- with the least possible amount of energy
- causing the lowest possible pollution
formula for labour productivity
output per period (time)
__________________
number of employees
how can a business increase labour productivity
- investment
- improve the ability of …
- motivation
- extra …
- increase investment in modern equipment/ technology
- improve the ability/ skills of those at work (training, education)
- improve employee motivation
- add extra workers or machines
problems with increasing productivity
- workers producing more
- what may cause productive workers to suffer from
- costs associated with the business
- encouraging workers to provide more by offering bonuses and incentives for increased output could mean quality suffers
- more productive workers may result in redundancies and lower morale
- new technology is very expensive
what will businesses base their decisions about labour productivity on (2)
value added and efficiency
a key measurement of operational performance is …
unit cost
unit cost formula
total costs
________
number of
units
higher output per employee …
lower labour costs per unit (cheaper to make more)
higher productivity …
reduces labour costs
what is unit cost AKA
average cost and cost per unit
what is capacity utilisation
a measure of the extent to which the productive capacity of a business is being used. It can be defined as ‘The percentage of total capacity that is actually being achieved in a given period’
capacity utilisation formula
actual level of output
_________________
X 100
max possible output
what dies the max level of capacity depend on (3)
the quantity of:
- buildings
- machinery
- labour however costs go up if these are not used
what is capacity utilisation often a measure of
productive efficiency
what falls as output rises
average production costs tend to fall as output rises- so higher utilisation reduces unit costs, making a business more competitive
what is the ideal level of capacity utilisation
-close to 100%
-
having a capacity utilisation close to 100%, spreads …
what does this boost
fixed costs as thinly as possible, boosting profit margins
if you have 100% capacity utilisation …
you can’t have more capacity
concerns with operating at 100% capacity (2)
- if demand further rises you will have to tun customers away (rivals will benefit)
- you will struggle to service machinery and train or retrain staff
what maybe is an ideal level of capacity utilisation
90%
why do businesses operate at less than 100% capacity utilisation- demand (3)
lower demand:
- general reduction in overall market demand
- loss of market share- capacity will fall (if new companies arrive etc)
- seasonal variations in demand
why do businesses operate at less than 100% capacity utilisation- (5)
- increase in capacity
- technology
- slack
- seasonal
- inefficiency
- increase in capacity not yet matched by increased demand (making more but there not being a high demand)
- possibly new technology
- provide some ‘slack’- extra stock
- seasonal changes in demand
- inefficiency e.g. being less competitive
how could a firm with high capacity utilisation increase their capacity (4)
- facilities resources
- machines/ staff
- productivity
- sub…
possible strategies:
- use facilities/ resources, more days/ times during working week
- buy more machines/ hire more staff
- increase productivity of workers and machines
- subcontracting (hire a company to do some work for you)
what are the 2 ways to get towards full capacity utilisation or deal with under utilisation
- increase demand
- cut capacity
what are the 2 ways to get towards full capacity utilisation or deal with under utilisation
increase demand (4 ways on how to)
-extra promotional spending
-price cutting
-reposition products (STP)
-launch new products
-
what are the 2 ways to get towards full capacity utilisation or deal with under utilisation
cut capacity (3)
- staff
- premises
- underlying cause
- make staff redundant- however, motivation may suffer, trade unions may not be happy
- move to a smaller premises
- overall the best option to use depends on the underlying cause of the low capacity utilisation
what does rationalisation mean
reorganising a business to increase efficiency. This often implies cutting capacity to increase the percentage of utilisation- means ‘get rid off’
what can labour intensive production provide
- opportunity for …
- what will some people demand
an opportunity for small firms as they are able to charge high prices for premium goods and services
-some people will demand will always be able to afford unique products (job production- goods are tailored to their needs)
what are the problems of labour intensive production (2)
- labour costs are a high proportion of total costs (however you can reduce wages, outsource or make workers more productive to solve this problem)
- management focuses on the cost of labour (possibly switch production to low cost countries)
what is good about labour intensive production
- flexible
- low financial barriers
- highly flexible- makes it possible for a small firm to compete with competition from large ones- however, if business gets too big, labour costs are too expensive and it may be useful to consider using machines as reduces unit costs
- low financial barriers to entry- it is cheap to start up production
problems with capital intensive production (3what )
- costs
- financial barriers
- inflexible
- large % of total costs are tied up in the fixed costs of purchasing and operating machinery (expensive)
- high financial barriers to entry- hard for new firms to enter and compete (good thing)
- can be inflexible- difficult to switch products or to tailor products to individual customers as you are making one product on a grand scale with specially adapted machines
what is good about cost intensive production
-you may be able to produce in high cost countries (after paying for machines and not paying for labour= workers)
what 3 targets do operations managers focus on
- quality targets
- capacity utilisation targets
- unit cost targets (linked to productivity)
what will the optimum mix of resources (humans- labour and capital) to achieve these targets- what does it depend on (3)
- it depends on the type of business
- competitors
- size and type of market you are competing in and working with
recap of examples of operational objectives (5)
- costs
- quality
- speed of response and flexibility
- dependability
- added value
to analyse operations performance we can use data linked to productivity and efficiency including … (4)
- labour productivity
- unit costs (average costs)
- capacity
- capacity utilisation
formula for labour productivity
amount of units
____________
number of staff
formula for labour cost per unit
units
_____
X staff
earnings
what does lean production aim to do
cut costs by making the business more efficient and responsive to market needs
what 3 things does the lean approach involve
-what would be the result of doing these 3 things
- doing simple things well
- doing things better
- involving employees in the continuous process of improvement
and as a result … reducing waste
why is lean production very important to become or remain competitive
because waste = costs
What is a supply chain
The supply chain is the complete sequence if stages involved in transforming raw materials into finished goods and getting them into the hands of customers
Supply chain management involves a business …?
Managing its relations with its suppliers. This will have an impact on costs, quality, speed on response and flexibility
What are the 7 influences on the choice of suppliers
- cost
- quality
- reliability
- frequency (how often will they need to deliver?)
- flexibility (can they cope with varying orders?) (do they have a short lead time?)
- payment terms (credit?)
- location
What are the 2 approaches of managing a supply chain efficiently
- be in a position of power: tell suppliers what what you want on your terms, threaten to go elsewhere if you don’t get what you want
- build long term positive relationships with suppliers: work together on new product development, strong relationships allow flexibility, sharing info can improve efficiency
How can effective supply chain management improve competitiveness? (2)
- providing BETTER QUALITY products which may differentiate it from competitors
- stocking the right products in store, not running out and providing more choice and benefits for customers
Matching supply to demand
Many factors can cause sales levels (demand) to fluctuate including:
- fashion
- temperature and weather(seasonal demand)
- marketing activity
- competitors actions
Advantages of matching production to sales (3)
- minimal inventory (stock) levels- so little cash is tied up
- no risk of overproduction (no unsold stock if sales are disappointing
- products are freshly made so quality is good
Advantages of having a constant production level (3)
- stable production so factory usage is high (lower fixed costs per unit)
- workers fully utilised year round so labour costs per unit are kept low
- enter peak seasons with high buffer stock, so customers will be supplied
What are the other 3 ways ti match supply to demand
- outsourcing or subcontracting
- hiring temporary and part time staff
- producing to order (including mass customisation)
Too much inventory can lead to … (5)
- opportunity costs- you can’t use that money elsewhere as your cash is tied up in stock
- cash flow problems
- increased storage stocks
- increased finance costs (may need to get a loan or overdraft)
- increased stock wastage
Holding too little inventory could mean … (3)
- lost orders- if not enough goods to sell- customers may go to competition
- worker downtime
- loss of the firms reputation and any goodwill it has built up
What 5 things do we need to remember about buffer stock
- need spare stock
- re-order level
- re-order quantity
- lead time
- must never run out of stock
What is buffer stock AKA
Just in case stock- a minimum level of stock (spare stock)
What does the amount of buffer stock depend on (4)
- The storage space available
- the kind of product (e.g. is it perishable like food)
- the rate at which stocks are used up
- lead time
What does lead time mean
The time it takes goods to arrive after ordering them from the supplier
The longer the lead time …
The more buffer stock you need to hold
What is the re-order level formula
Lead time (in days) X average daily usage + buffer stock level
Advantages of JIT (5)
- lower stock
- obtained when needed
- perishing
- avoids …
- less time …
- lower stock holding means a reduction in storage space which saves rent and insurance costs
- as stock is only obtained when it is needed, less working capital is tied up in stock
- there is less likelihood of stock perishing, become obsolete or out of date
- avoids the build-up of unsold finished product that can occur with sudden changes in demand
- less time is spent on checking and re-working the product of others as the emphasis is on getting the work right first time
Disadvantages of JIT
- mistakes
- reliant on suppliers
- bulk buying
- no spare products
- there is little room for mistakes as minimal stock is kept for re-working faulty product
- production is very reliant on suppliers and if stock is not delivered on time, the whole production schedule can be delayed
- lack of bulk buying can mean higher unit costs- lack of economies of scale
- there is no spare finished product available to meet unexpected orders, because all product is made to meet actual orders- however, JIT is a very responsive method of production
