Topic 4 - Operations Flashcards
Capacity
the capacity of a business is a measure of how much output it can achieve in a given period
Capacity Utilisation
the proportion (percentage) of a business’ capacity that is actually being used over a specific period
Capacity Utilisation Formula
actual level of output/ maximum possible output x 100
Why is capacity utilisation important?
- it is a useful measure of productive efficiency
- higher utilisation can reduce unit costs
- a business aims to produce as close to full capacity as possible in order to minimise unit costs
- a high level of capacity utilisation is required if a business has a high break-even output due to significant fixed costs of production
Dangers of operating at low capacity utilisation
- higher unit costs
- less likely to reach breakeven output
Dangers of operating at high capacity utilisation
- negative effect on quality, production is rushed, less time for quality control
- employees suffer
- loss of sales, less able to meet sudden increases in demand
Why Labour Productivity is important?
- labour costs are usually a significant part of total costs
- in order to remain competitive, a business needs to keep its unit costs down
Factors influencing Labour productivity
- extent and quality of fixed assets (e.g. equipment, IT systems)
- skills, ability and motivation of the workforce
- extent to which the workforce is trained and supported
- external factors (e.g. reliability of suppliers)
Labour Productivity Formula
output per period (units)/ number of employees at work
How to improve Labour Productivity
- measure performance and set targets
- streamline production processes
- invest in employee training
- improve working conditions
Potential problems when trying to increase Labour Productivity
- potential for employee resistance depending on the methods used (e.g. introduction of new technology)
- employees may demand higher pay for their improved productivity
Lean Production
an approach to management that focuses on cutting out waste, whilst ensuring quality. this approach can be applied to all aspect of a business, from design, through production to distribution
Examples of Waste in Business
- over production
- waiting time
- stocks
- defects
Effective lean production requires…
- good relations with suppliers
- committed, skilled and motivated employees
- a culture of quality assurance, continuous improvement and willingness to embrace change
- trust between management and employees
Time Based Management
a general approach that recognises the importance of time and seeks to reduce the level wasted time in the production processes of a business
Requirements for time-based management
- flexible product methods, able to change products quickly, can change production volumes
- trained employees
Simultaneous Engineering
an approach to project management that helps firms develop and launch new products more quickly. all parts of the project are planned together. everything is considered simultaneously rather than separately
Benefits of simultaneous engineering
- new product is brought to the marker much more quickly
- business may be able to charge a premium price that will give a better profit margin
- competitive advantage
- greater sense of involvement across business functions
Cell Production
a form of team working where production processes are split into cells. each cell is responsible for a complete unit of work
Benefits of cell production
- improve communication
- workers become multi-skilled and more adaptable
- greater employee motivation
- quality improvement as each cell has ‘ownership’ for quality on its area
Drawbacks of cell production
- culture has to embrace trust and participation
- allocation of work to cells has to be efficient so that employees have enough work, but not so much that they are unable to cope
Just-in-Time
JIT aims to ensure that inputs into the production only arrive when they are needed
JIT Advantages
- lower stock means a reduction in storage space which reduces costs
- less likelihood of stock perishing, becoming obsolete or out of date
JIT Disadvantages
- there is little room for mistakes as minimal stock is kept for re-working faulty product
- highly reliant on suppliers
- there is no spare finished product available to meet unexpected orders
Inventory
these are the raw materials, work-in-progress and finished goods held by a firm to enable production and meet customer demand
Three Main Types of Inventory
raw materials and components
work in progress
finished goods
Raw Materials and Components
- bought from suppliers
- used in production process
- e.g. parts for assembly or ingredients
Work in Progress
- semi or part finished production
- e.g. construction projects
Finished Goods
- completed products ready for sale or distribution
- e.g. products on supermarket shelves
Reasons to hold inventory
- enable production to take place
- satisfy customer needs
- precaution against delays from suppliers
- allow for efficient production
- allow for seasonal changes
- provide a buffer between production processes
The costs of holding inventory
- cost of storage
- interest cost
- obsolescent risk
- stock out costs
Inventory Control Chart
the overall objective of inventory control is to maintain inventory levels that the total costs of holding inventories is minimised
Example of Inventory Control Chart
(Look at book)
Key Parts of an Inventory Chart
Maximum Level
Reorder Level
Lead Time
Minimum Inventory Level
Buffer Stock
Maximum Level
max level of inventory a business can or wants to hold
Reorder Level
acts as a trigger point, so that when inventory falls to this level, the next supplier order should be placed
Lead Time
amount of time between placing the order and receiving the inventory
Minimum Inventory Level
minimum amount of product the business would want to hold in stock
Buffer Stock
an amount of inventory held as a contingency in case of unexpected orders so that orders can be met and in case of any delays from suppliers
Advantages of Low Inventory Levels
- lower inventory holding costs (e.g. storage)
- lower risk of inventory obsolescence
Advantages of High Inventory Levels
- no delays
- potential for lower init costs by ordering in bulk
- better able to handle unexpected changes in demand or need of higher output
Unit Costs Formula
total production costs in period (£)/ total output in period (units)
Economies of Scale
these arise when unit costs fall as output increases
Internal Economies of Scale
buying economies - buying in greater economies usually results in a lower price
technical - use of specialist equipment to boost productivity
marketing
network
financial
External Economies of Scale
- arise from the industry as a whole
- often associated with particular geographic areas
Capital Intensive
production relies on using capital resources
e.g. car manufacturing
Benefits of Capital Intensity
- greater opportunities for economies of scale
- potential for significantly better productivity
- better quality and speed
- low labour costs
Drawbacks of Capital Intensity
- significant investment
- potential for loss competitiveness due to obsolescence
- may generate resistance to change from labour force
Labour Intensive
production relies on using labour resources
e.g. hairdressing, hotels and restaurants
Benefits of Labour Intensity
- unit costs may stil be low in low-wage locations
- labour is flexible resource
- labour at the heart of the production process can help continuous improvement
Drawbacks of Labour Intensity
- greater risk of problems with employee/ employer relationship
- potentially high costs of labour turnover
Measures of Quality
- reliability
- cost of ownership
- brand image
- market reputation
Why is quality important in business?
- markets are highly competitive customers are more demanding and knowledgeable
- if a business can develop a reputation for high quality, then it may be able to create an advantage over its competitors
Quality Control
the process of inspecting products to ensure that they meet the required quality standards
Problems with Quality Inspection
- costly
- often at the end of the production process
- inconsistent inspections
Quality Assurance
the process that ensure production quality meets the requirements of customers
focus on processes
Total Quality Management
a management philosophy committed to a focus on continuous improvements of product and services with the involvement of the entire workforce
Advantages of TQM
- puts customer at heart of production process
- motivational since the workers feel more involved and are making decisions
- less wasteful than throwing out defective finished products
- eliminates cost of inspection
Disadvantages of TQM
- requires strong leadership - often missing in business
- disruption and costs may outweigh benefits
Kaizen
- another kind of quality assurance
- based on culture of continuous improvement
- encourages employees to engage fully with finding ways to improve quality processes
Supplier
a business or individual that provides goods and services to another business
Importance of Suppliers
- for a business to meet the needs and wants of customers it needs an effective supply chain
- suppliers are closely linked to product quality
- suppliers determine many of the costs of a business
- for businesses to use lean production techniques, effective relationships with key suppliers are essential
What makes an effective supplier?
- price
- quality
- reliability
- communication
- capacity
- financially secure
