Unit 4 Flashcards
Key Types of Operational Objectives
-COSTS (unit costs/fixed C /productivity)
-QUALITY (customer service)
-SPEED FLEXIBILITY (labour p/capacityU/lead times)
-DEPENDABILITY (maintenance costs)
-ENVIRONMENTAL (waste management, recycling)
-ADDED VALUE (gross profit/unit costs)
What is Labour Productivity?
Labour productivity is concerned with the volume of output (units) or value produced by each employee
Why Labour Productivity Matters
-In order to remain competitive, a business needs to keep its unit costs down
-Business efficiency and profitability are closely linked to productive use of labour
-labour costs are a significant part of total costs
Factors Influencing Labour Productivity
-Extent to which the workforce is trained and supported
-Skills, ability and motivation of the workforce
-Extent and quality of fixed assets (e.g. equipment, IT systems)
Calculating Labour Productivity
Output in period (units)
—————————————-
Number of employees at work
Ways to Improve Labour Productivity
-Invest in employee training
-Improve working conditions
-Invest in capital equipment (automation + computerisation)
Potential Problems When Trying to
Increase Labour Productivity
-Employees may demand higher pay for their improved productivity
-Potential for employee resistance - depending on the methods used (e.g. introduction of new technology)
Economies of Scale
Economies of scale arise when unit costs fall as output increases
Average cost per unit calculation
Total production costs in period (£)
————————————————-
Total output in period (units)
Internal v External Economies of Scale
Internal
-Arise from the increased output of the business itself
External
-Occur within an industry: i.e. all competitors benefit
What is 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 (units)
———————————————- × 100
Maximum Possible Output (units)
Why Capacity Utilisation Matters
-Average production costs tend to fall as output rises - so higher utilisation can reduce unit costs, making a business more competitive
-Businesses usually aim to produce as close to full capacity (100% utilisation) 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
The Costs of Capacity
• Equipment: e.g. production line
• Facilities: e.g. building rent, insurance
• Labour: wages and salaries of employees involved in production or delivering a service
Why Most Businesses Operate Below
Capacity
-Lower than expected market demand
(A change in customer tastes)
-A loss of market share
(Competitors gain customers)
-Seasonal variations in demand
(Weather changes lead to lower demand)
-Recent increase in capacity
(A new production line has been added)
-Maintenance and repair programmes
(Capacity is temporarily unavailable)
Dangers of Operating at Low Capacity Utilisation
• Higher unit costs - impact on competitiveness
• Less likely to reach breakeven output
• Capital tied up in under-utilised assets
Problems Working at High Capacity
-Negative effect on quality
(Production is rushed Less time for quality control)
-Employees suffer
(Added workloads & stress, De-motivating if sustained for too long)
-Loss of sales
(Less able to meet sudden or unexpected increases in demand)
What is Lean Production?
Approaches to management that focus on cutting out waste, whilst ensuring quality
Lean Production in Summary
• Doing the simple things well
• Doing things better
• Involving employees in the continuous process of improvement …and as a result, avoiding waste, thereby reducing costs
Examples of Waste in Business
-Over-production
(Making more than is needed - leads to excess stocks)
-Waiting time
(Equipment and people standing idle waiting for a production process to be completed or resources to arrive)
-Stocks
(Often held as an acceptable buffer, but should not be excessive)
-Defects
(Output that does not reach the required quality standard - often a significant cost to an uncompetitive business)
Effective lean production requires…
• Good relations with suppliers
• Committed, skilled and motivated employees
• Trust between management and employees
Time-based Management
An general approach that recognises the importance of time and seeks to reduce the level of wasted time in the production processes of a business
Requirements for time-based management
• Flexible production methods
-Able to change products quickly
-Can change production volumes / runs
• Trained employees
-Multi-skilled staff
- Trust between workers and managers
Just-In-Time (JIT)
Just-in-time (“JIT”) aims to ensure that inputs into the production process only arrive when they are needed
How JIT Works
• Based on a “pull” system of production - customer orders determine what is produced
• Requires complex production scheduling - achieved using specialist software to connect production with suppliers
• Supplies delivered to production only when needed
• Requires close cooperation with reliable suppliers
Benefits of JIT
-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
-Less likelihood of stock perishing, becoming obsolete or out of date
-Less time spent on checking and reworking production as the emphasis is on getting the work right first time
Drawbacks of JIT
-There is little room for mistakes as minimal stock is kept for re-working faulty product
-Production is highly reliant on suppliers and if stock is not delivered on time, the whole production schedule can be delayed
-There is no spare finished product available to meet unexpected orders, because all product is made to meet actual orders
-A need for complex, specialist stock systems
Kaizen
Kaizen (or ‘continuous improvement) is an approach of constantly introducing small incremental changes in a business in order to improve quality and/or efficiency
LABOUR INTENSIVE PROCESSES
KEY FEATURES
• Labour costs higher than capital costs
• Costs are mainly variable
• Labour supply (quantity & quality) and cost are key issues
E.g hotels/restaurants
CAPITAL INTENSIVE PROCESSES
KEY FEATURES
• Capital costs higher than labour costs
•Costs are mainly fixed (including depreciation)
• Significant investment often required (e.g. automation)
but with longer-term benefits on unit costs
E.g Oil extraction & refining/Car manufacturing
What Do We Mean by Quality?
A product or service is of good quality if it meets the needs & expectations of the customer
Why Quality is so Important in Business
• Markets are highly competitive:
customers are more
-Knowledgeable & demanding
- Prepared to complain about poor quality
- Able to share information about poor quality (e.g. via email & social networking)
• If a business can develop a reputation for high quality, then it may be able to create an advantage over its competitors
Business Benefits of Greater Quality
-Customer satisfaction
-Higher customer loyalty
-Repeat Purchase
-Lower Marketing Costs
-Customer Recommendation
Two Main Approaches to Quality Management
Quality CONTROL
• Based on inspection
• Takes defects out
Quality ASSURANCE
• Based on processes
• Builds quality in
Definition: Quality Assurance
The processes that ensure production quality meets the requirements of customers
Quality Assurance v Quality Control
Kaizen
• Another kind of quality assurance
• Based on concept / culture of continuous improvement
• Encourages employees to engage fully with finding ways to improve quality processes
Definition of Quality Control
The process of inspecting products to ensure that they meet the required quality standards
Business Benefits of Quality Control
• Minimise disruption to production
• Applies a consistent standard to quality
Some Problems with Quality Inspection
• Costly
• Often at the end of the production process - i.e. potentially too late
• Inconsistent inspections
• Often not compatible with modern production systems
• Done by inspectors rather than workers themselves
Costs of Poor Quality
• Cost of reworking or remaking product
• Costs of replacements or refunds
• Wasted materials
• Lost customers (expensive to replace - and they may tell others about their bad experience)
How Poor Quality Damages Competitiveness
• Financial costs (e.g. compensation)
• Lost customer loyalty
• Damaged business reputation
• Need for greater controls and checks
• Competitors take advantage
What is Outsourcing?
Delegating one or more business processes to an external provider, who then owns, manages and administers the selected processes to an agreed standard
Benefits of Outsourcing
• Access specialist suppliers with greater capabilities and higher quality
•Reduce costs if outsourcing supplier is able to provide at lower cost (e.g. through economies of scale)
• Focuses the business on its core activities - where it can
“add value”
-Makes operations more flexible - e.g. easier to change capacity when needed
Drawbacks of Outsourcing
• Risk that outsourcing supplier will fail to meet quality standards or otherwise not deliver
• Potential loss of expertise from the business
• No guarantee that costs will be lower
What is Producing to Order?
Producing to order is an approach to production where the production of an item begins only after a customer order is received
Benefits and Drawbacks of Producing to Order
BENEFITS
-Lower levels of finished goods in
inventory = lower inventory
holding costs & less risk of obsolescence
-Greater customer satisfaction = customers get what they want
DRAWBACKS
Capacity to produce to order may be limited; although mass customisation is automated, it doesn’t work for all products
It may be difficult to handle sudden or unexpected increases in demand
What are Stocks?
Stocks represent the raw materials, work-in-progress and finished goods held by a firm to enable production and meet customer demand
3 main types:
-Raw Materials &Components
-Work in Progress
-Finished Goods
Key Reasons to Hold Stock
-Enable Production to Take Place
-Satisfy Customer Demand
-Precaution Against Delays from Suppliers
-Allow Efficient Production
-Allow for Seasonal Changes
-Provide a Buffer between Production
Processes
Main Influences on Amount of Stock Held
Need to satisfy demand
• Failure to have goods available for sale is very costly
• Demand may be seasonal or unpredictable
Need to manage working capital
• Holding stocks ties up cash in working capital
• There is an opportunity cost associated with stock holding
Risk of stock losing value
• Longer stocks are held, the greater risk that they cannot be used or sold
The Costs of Holding Stocks
Why Use Stock Control Charts?
The overall objective of stock control is to maintain stock levels to that the total costs of holding stocks is minimised
Key Parts of a Stock Control Chart
Example of stock control chart
Factors Affecting When / How
Much Stock to Re-order
Advantages of Low and High Stock Levels
Internal Influences on Operational Objectives
External Influences on Operational Objectives
