Unit 4 Flashcards
Operational management
What is the operations function?
The operations function of a business is responsible for the actual production of goods and services.
- It involves managing the process of transforming inputs into outputs.
What is operations management?
- Converts resources and labour (inputs) into goods and services (outputs) = added value
- In simple terms, the physical requirements necessary to produce a good/service.
Explain the important concept of added value in the operations process
This means that the value of the final output (product or service) will be greater than the value of all the imputed inputs added together.
- Adding value enables a profit to be made and is likely to be an operational target.
What is the importance of operations for a business?
Effectively managing operations allows a business to:
- Meet the demand for its products and services.
- Add value to its products.
- Control costs of production.
- Guarantee the right level of quality and service.
- Adapt to the needs of customers.
- Enable a business to meet its ethical &/or environmental objectives.
What are the 4 factors of production?
- Land
- Labour
- Capital
- Entrepreneurship
What is the transformation process?
The conversion of a firm’s inputs into outputs that reach the customer and adds value. Can be categorised as:
- Manufacture - the physical creation of products (e.g. cars)
- Transport - the movement of materials or customers (e.g. taxi service)
- Supply - change in ownership of goods (e.g. in retailing)
- Service - the treatment of customers or the storage of materials (e.g. hospital wards, warehouses)
What are operational objectives?
Targets that a business sets in order to produce goods or services in the most efficient way in a given period of time.
What are the key operational objectives?
- Reduced unit costs (reduce the cost of making each unit)
- Quality targets (better products, fewer complaints or lower returns)
- Speed of response & flexibility (shorter lead time, ability to adapt)
- Added value (process of increasing worth of resources by modifying them)
- Ethical &/or environmental objectives (no exploitation of workers, reduced pollution, etc.)
- Dependability (reliability, consistent quality)
What must the operational objectives be?
SMART
- They can be used to evaluate the overall performance of the operations function (department).
- Must also fit with the overall corporate objectives.
Explain reduced unit costs as an operational objective
Target set to control the cost of each individual good or service supplied (unit cost or cost of one unit or cost per unit). This may support a strategy of cost minimisation.
- The business with the lowest unit cost is in a strong position to be able to compete by being able to offer the lowest price or make the highest profit margin.
- However, costs must not be reduced to the point where other objectives are compromised, e.g. quality.
How can the operational objective of reduced unit costs be achieved?
- Renegotiate fixed costs / variable costs.
- Increase scale: economies of scale.
Explain quality targets as an operational objective
Minimum acceptable standards in terms of quality of raw materials, processes, output and customer service to match customers’ expectations.
- If a business can develop a reputation for high quality it may be able to create a competitive advantage and charge a premium price.
- Helps reduce waste and the cost of reworking faulty products.
- Can be achieved through recalls, etc.
Explain speed of response and flexibility as an operational objective
The speed with which customers’ needs are met and the ability to tailor the goods to meet individual needs, i.e. matching supply to demand.
- This includes the ability of a business to respond to changes in the market and consumer wants (flexibility).
- A business will use this in order to differentiate itself from others and gain a competitive advantage.
- Can be achieved by meeting delivery agreements.
Explain added value as an operational objective
The ability to ensure that the value of the output is higher than the sum of the value of all the inputs, i.e. the value of the finished output over and above the cost of achieving it.
- Operation can add value through the production process to ensure a quality finished product.
Explain ethical &/or environmental objectives as an operational objective
Meeting targets to minimise any detrimental effects of the operations of the business on the environment.
- This will include targets set to reduce its negative impact upon the environment or increase its positive influence.
- These targets may be turned into quantifiable objectives for the business to measure their performance against, e.g. to reduce carbon emissions by a give percentage by a certain date.
What do operational objectives link closely with?
- Corporate objectives
- HRM objectives
- Financial objectives
- Marketing objectives
- Efficiency and productivity
- Capacity management
What are the internal influences on operational objectives?
- Finance: the availability of finance will determine the extent of any operational decision making, e.g. investment in new production technology.
- Marketing: it is likely that the marketing function will determine both what has to be produced and the quantities, so the operations department will have to liaise closely with marketing department.
- Human resources: the skills of the workforce determine both what can be produced and its quality.
List the external influences on operational objectives
- Political or legal influences
- Economic influences
- Technological influences
- Competitive influences
Explain political or legal influences on operational objectives (external influence)
- Businesses will always have to be aware of the legal environment and potential changes in legislation from the government.
- This is illustrated by the greater awareness in recent years of health and safety and environmental issues, which has brought increasing amounts of legislation.
Explain economic influences on operational objectives (external influence)
- The operations function needs to be both prepared for and responsive to changes in the economy, as demand will fluctuate according to the stage of the economic cycle.
- In addition, due to the global nature of the economy, resources can be sourced from anywhere in the world and it is possible to undertake production from anywhere, both factors that may be considered by the operations function.
Define economic cycle
The economic cycle is the natural fluctuation of the economy between periods of expansion (growth) and contraction (recession).
Explain technological influences on operational objectives (external influence)
- Technology has had a significant impact on the operations function in terms of both production and the way consumers purchase goods and services.
- The introduction of computer-aided design (CAD) and computer-aided manufacture (CAM) has resulted in speedier innovation and production, and better quality.
- The use of comparison and review sites means that consumers are more aware and demanding in terms of price, quality and customer service.
- Newspapers can be read online and books, films and music can simply be downloaded by consumers.
- There are apps for almost any purpose, and the growth of social media has influenced operational objectives.
Explain competitive influences on operational objectives (external influence)
- Markets have become increasingly competitive, with competition both at home and from overseas.
- As a result, there is increasing pressure on businesses in terms of costs, quality and price.
- Added to this is a greater awareness among consumers, resulting in increasing pressure on the operations function to play its part in maintaining consumer loyalty.
What is operations data?
Quantifiable information that will allow a business to measure performance and help inform decision-making on how best to improve operational performance.
- It can also be used to assess areas of underperformance and to assess potential problems or inefficiencies.
Define output
Output is the number of units (products) produced during a period of time.
- E.g. a car manufacturer may have an output of 12 cars per day or 4,300 cars per year.
Define resources
Means what is needed to make a product (material, labour, machines, £, etc.)
What are the key operational performance measures?
- Labour productivity
- Unit cost
- Capacity utilisation
What is labour productivity?
A measure of how efficient the workforce is in transforming inputs into outputs, i.e. output per worker in a given time period.
How to calculate: labour productivity
Total output / no. of employees
- The answer is usually expressed in terms of number of units produced per worker.
Define unit cost
The unit cost measures the average cost per unit produced, as measured over a particular time period (e.g. month, year).
- Sometimes referred to as the ‘average cost of production’.
How to calculate: unit cost
Total costs / total output
- The answer is expressed as £ per unit.
What is capacity?
The maximum total level of output that a business can produce in a given time period.
- Capacity is therefore a measure of potential output. Not every business will be able to operate to full potential and sometimes businesses will find demand so high that it does not have sufficient capacity.
- It will depend on the number of machines/robots and staff.
- It might also depend on the number of tables you have (restaurants), how many running machines there are, how many hairdressing chairs, etc.
Why is capacity important?
How capacity is managed has a direct effect on the performance of a business.
- In order for a business to be able to meet demand from customers, it needs to have the capacity to do so.
- Having capacity enables orders to be met and revenues generated.
- However a lack of capacity can have a damaging effect on business performance. E.g. a restaurant will lose sales if customers turn away seeing all the tables full; a factory may lose an order if it is not able to produce the volume required for a possible order.
- This means that capacity determines a business’ ability to satisfy customers’ demand.
What is capacity utilisation?
Measures the extent to which capacity is used during a specific period.
- The percentage of a firm’s total possible production level that is being reached.
- E.g. 95% capacity utilisation for a machine which can make 100 widgets a day means that it is making 95 widgets out of a possible 100 every day.
How to calculate: capacity utilisation
(Actual output) / (maximum output) x 100
- Expressed as a percentage.
Factors affecting labour productivity
- Quality of equipment or machines used.
- Training given to staff.
- Skills and motivation of staff.
- Method of production (by hand or by robots)
- Reliability of suppliers
Using labour productivity to make decisions: what issues can calculating the change in labour productivity highlight?
- Training needs?
- Recruitment mistakes?
- Problems with machines?
- Coordination problems?
How can unit cost data help to make decisions?
Unit cost data can be used to decide:
- Which products to produce (whether a product may be too expensive to produce or may be unprofitable)?
- Where to produce? Production costs may be different in different countries.
- Which suppliers to use (some suppliers may be cheaper than others). Cost of suppliers affect variable costs and the unit cost.
- How much output (how many products) to produce: the more units are produced with the same resources, the lower the unit cost is. This is the principle of economies of scale.
How can capacity utilisation data help to make decisions?
Capacity utilisation data can be used to decide:
- If it is the correct capacity level to meet demand and profit targets.
- If the business should increase capacity to meet rising demand OR
- If the business should downsize (to retrench) to avoid excess capacity and costs.
- Targets for output to achieve the optimum unit cost and enable the business to achieve economies of scale.
What is the importance of capacity utilisation? - problems with over/under-capacity utilisation
Very important to operational efficiency. Unit costs decline as capacity utilisation increases, so it is therefore important that a business does not have too much spare or excess capacity.
- Operating at 60% capacity utilisation results in 40% spare or excess capacity, which means that resources in terms of factory space, equipment and possibly labour are not being used efficiently.
- Operating at maximum capacity, however, would create its own problems as this would reduce flexibility in terms of new orders. It might also put undue pressure on workers and machinery if proper maintenance could not be undertaken.
- Therefore important a business operates at an optimal level of capacity, i.e. as close to 100% as possible, while leaving sufficient spare capacity to cope with new orders. In a growing market this would need to be planned carefully.
Define excess capacity
Excess capacity occurs where actual production falls below maximum potential production.
E.g. capacity utilisation = 75%, so there is 25% excess capacity.
Define economies of scale
Economies of scale are the cost advantages that a business can exploit by expanding their scale of production.
- The effect of economies of scale is to reduce the average (unit) costs of production.
- Arise when unit cost fall as output increases.
- “Economies” means ‘savings’ and “scales” means ‘size’.
How are economies of scale achieved (in terms of fixed and variable costs)
- Fixed costs are spread over more units.
- Variable costs are lower due to bulk buying.
What are the different types of economies of scale? (specific ways that economies of scale can be achieved)
- Bulk-buying
- Technical economies of scale
- Specialisation of the workforce
- Marketing economies of scale
- Managerial economies of scale
What is bulk buying?
The purchase by one organisation of large quantities of a product or raw material.
- Often results in a lower price because of their market power and because it is cheaper to deal with one customer and the deliveries can be on a larger scale.
What is technical economies of scale?
Large-scale businesses can afford to invest in expensive and specialist capital machinery.
- E.g. a supermarket chain such as Tesco or Sainsbury’s can invest in technology that improves stock control.
- It might not, however, be viable or cost-efficient for a small corner shop to buy this technology.
What is specialisation of the workforce?
Larger businesses split complex production processes into separate tasks to boost productivity.
- By specialising in certain tasks or processes, the workforce is able to produce more output in the same amount of time.
- Division of labour (workers have narrower range of tasks).
- Workers become more skilled and quicker in that particular task.
What is marketing economies of scale?
A large business can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discounted prices if it has sufficient negotiation power in the market - purchasing economies.
- A good example is the major grocery retailers who use their buying power when purchasing supplies from farmers and other suppliers.
What is managerial economies of scale?
Large-scale manufacturers employ specialists to supervise production systems, manage marketing systems and oversee human resources.
Advantages of economies of scale
- Lower unit costs: business can offer customers a reduced price (to increase sales) or keep price the same and see better profit margin.
- Creates barriers to entry: deterring other businesses from entering the market
How to calculate: labour cost per unit
Wage of one worker / labour productivity
What are the methods of increasing efficiency and labour productivity?
- Invest in technology
- Improvements in training and motivation
- Job redesign
- Introduce new reward systems for meeting targets
- Improve recruitment process
- Task specialisation
- Introduce better management
- Use better quality machinery
- Recruit staff with better skills
- Pay better wages
- Reduction in the labour forve
How can investing in technology increase efficiency and labour productivity?
New or better quality machinery or robots can speed up production and reduce human error.
- This may both improve the quality and reliability of a product and result in greater output from fewer employees.
How can improvements in training and motivation increase efficiency and labour productivity?
The aim is to improve the skills of the workforce, which is likely to lead to greater output.
- In addition, employees are likely to feel valued and more involved in the process which could lead to greater motivation and further improvements in both quality and output.
How can job redesign increase efficiency and labour productivity?
This involves changing the content of a job in terms of duties and responsibilities to make it more interesting.
- May be executed in such a way as to improve the overall performance of the employee in question.
- This should lead to greater employee engagement, motivation and an increase in productivity.
How can introducing reward systems for meeting targets increase efficiency and labour productivity?
Improve pay to retain hard working staff.
- Set productivity targets and pay bonuses to employees reaching these targets.
How can improving the recruitment process increase efficiency and labour productivity?
Review the recruitment process to assess that successful candidates have the required skills and are able to meet production targets.
How can task specialisation increase efficiency and labour productivity?
When employees repeat the same tasks day in and day out, they develop a proficiency which makes them faster and more accurate leading to increased productivity with fewer mistakes.
How can introducing better management increase efficiency and labour productivity?
Improve supervision and leadership of the workforce: appoint managers with the right leadership style for the workforce to maximise productivity.
- (remember the Tannenbaum and Schmidt’s Continuum)
How can a reduction in the labour force increase efficiency and labour productivity?
A reduction of the labour force will automatically improve productivity if the same level of output can be maintained.
- This might be achieved through investment in technology or better training.
Difficulties of increasing efficiency and labour productivity
May work in the short-term. However:
- High levels of output can cause stress and burnout -> increased labour turnover.
- A focus on output can compromise quality, customer service and creativity.
- Costly mistakes are also more likely to occur leading to product returns and complaints: could damage reputation.
- Resistance of employees
- High costs
How can increasing efficiency and labour productivity cause high costs for a business?
Any improvement in labour productivity is likely to come with a cost.
- New technology is expensive, and workers who have been trained and acquired new skills may demand higher pay.
- HOWEVER, improvements in productivity may lead to greater competitiveness and greater sales, which in the long-term may more than cover the original costs.
How can increasing efficiency and labour productivity impact quality?
When looking to improve labour productivity, a business needs to make sure this is not achieved at the expense of quality.
- This can be the case when workers are encouraged to produce more through financial incentives, e.g. working on a piece-rate system.
How can increasing efficiency and labour productivity cause resistance from employees?
Sometimes employees can be resistant to change, especially where job losses are concerned and job security is threatened.
- The introduction of technology into the production process often brings with it job losses, and a business would need to consider carefully how it is introduced.
What is the link between capacity utilisation and unit cost?
The higher the capacity utilisation is (closer to 100%) the lower the unit cost becomes as the business achieve maximum efficiency.
What is under-utilisation?
Occurs when a business’ resources are not being used at or close to full capacity, i.e. capacity utilisation is low.
- Resources are not being made to work effectively for the business resulting in high unit costs: unit costs will be higher than necessary due to assets being paid for but not used.
- E.g. machinery out of use or workers with little to do.
What is over-utilisation?
Occurs when a business is operating above full capacity, i.e. its resources are being made to work to an excessive level.
- This will mean the business is ‘sweating its assets’ i.e. they are being made to work harder for the business resulting in lower unit costs.
Define over-production
Producing too many goods.
Benefits of constantly operating at high capacity utilisation
- Lowest unit cost.
- Highest level of profitability (if all the products are sold)
- Maximum use of resources and highest level of efficiency.
Drawbacks of constantly operating at high capacity utilisation
- Loss of flexibility (may not be able to accept new orders or increased orders)
- Strain on machines.
- No time for maintenance or repairs.
- Possible quality issues.
- Risk of missing delivery deadlines.
Actions a business could take to address under-capacity (under-utilisation)
- Increase promotions to increase sales (reduce price, increase social media advertising, use sponsoring, etc.)
- Find ways of reducing the unit cost (to reduce the price): redesign the product, change the production process, etc.
- Sub-contract in work from another business.
- Downsize or retrench (close down part of the factory) to reduce capacity - only advisable if low level capacity is expected to continue far into the future.
Actions a business could take to address over-capacity (over-utilisation)
- Introduce overtime, a new shift (night shift) or employ more staff on temporary contracts.
- Use dynamic pricing to reduce demand when it is too high (has enabled businesses e.g. airlines and hotels to control level of demand more effectively.
- Find new markets (new segments or new markets abroad)
- Sub-contract out production to another business (outsource)
- Expand (bigger factory, more machines and more staff) - should only be undertaken if high levels of demand are expected to continue well into the future.
What is dynamic pricing?
A pricing strategy where businesses set highly flexible prices for products or services based on the market demand at a particular time.
What is lean production?
Lean production includes practices that reduce waste in the operational process.
- A Japanese approach to increase efficiency, effectiveness and productivity.
- It is all about getting more from less.
- Aims to maximise value (added value), improve productivity and minimise waste (in terms of time, space and inventory - stock).
List the 8 waste targets by lean production
D - defects (faulty products)
O - over production
W - waiting (for processes to finish)
N - not using human potential
T - transportation (product/materials)
I - inventory (stock holding)
M - motion (of people)
E - excess of processes (doesn’t add value)
What are the key features of lean production?
- Just in Time (JIT) production
- Kaizen
- Cell production
- Time-based management
What is just-in-time (JIT) production as a method of lean production?
JIT aims to ensure that inputs (raw materials, components, parts, etc.) into the production process only arrive when they are needed to increase efficiency and decrease waste.
- Make what’s needed when it’s needed.
- Aims for zero stock: of raw materials or components and of finished goods.
Trust in supplier
What are the main costs of holding stock?
- Cost of storage: cost of warehousing, staff to manage the stock, insurance, etc.
- Financial cost: paying for stock could mean having to borrow money and pay interest.
- Risk of the stock perishing or becoming obsolescent (out of date).
What is just-in-case (JIC) production?
Make all we can just in case (traditional method).
- Produce first
- Stock finished products
- Try to sell the products
- Potential waste of storage and products that customers may not want.
Just-in-time (JIT) manufacturing approach
- Get an order first.
- Only order what is needed and when it’s needed.
- Dispatch goods as soon as they are produced.
- Only produce what has been ordered and sold.
- No waste of unwanted goods.
What are the 3 key elements to the just in time system?
- Produce to order or Pull production (not waste of unwanted goods).
- Stocks are delivered only when needed (no storage of parts).
- Finished products are dispatched quickly (not stock of finished goods).
What is the difference between ‘pull’ and ‘push’ production?
Pull production: only produce IF there is an order - JIT.
vs
Push production: producing first and then trying to sell the stock - JIC.
Advantages of using just-in-time (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 stocks.
- Less likelihood of stock perishing, getting damaged, becoming obsolete or out of date - reduced waste.
- Less time spent on checking and reworking production as the emphasis is on getting the work right first time.
- Greater flexibility in terms of responsiveness to changes in taste or fashion.
- Improved motivation due to greater involvement of the workforce in the process.
Limitations of using just-in-time (JIT)
- There is little room for mistakes as minimal stock is kept for re-working faulty products.
- Production is highly reliant on suppliers delivering on-time supplies that are of the required quality and being flexible: any transport problems due to weather, congestion or industrial action could halt production meaning the whole production schedule can be delayed. Any mistake in deliveries or if supplies are not of the expected quality, production deadlines may be affected.
- May require smaller, frequent orders of varying size, which may not qualify for ‘bulk discounts’.
- 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.
Advantages and disadvantages of using just-in-case (JIC)
ADVANTAGES:
- Economies of scale (buy in bulk, decreased transport costs)
- If suppliers fail to deliver: not detrimental as production can still go on - less risk.
- Able to react to unexpected changes in demand: spare stock - able to sell more when demand is unexpectedly high.
DISADVANTAGES:
- Storage costs
- Risk of waste
What is Kaizen?
A Japanese concept of ‘continuous improvement’ or constantly making small incremental changes to increase efficiency.
- Staff are empowered to suggest changes that could lead to a reduction in waste.
- Employees are the best people to identify room for improvement.
- Method of lean production.
Culture - bottom-up
What is cell production?
A form of team working where production processes are split into cells or teams.
- Each cell/team is responsible for a complete unit of work.
- Each cell/team is set a production target and responsibility for suggesting improvement (Kaizen).
- Method of lean production.
Multi-skilled labour
What is time-based management?
A general approach that recognises the importance of time and seeks to reduce the level of wasted time in the production process.
What are the ways of reducing waste in the production process?
- Designing the work areas within a business so that employees are close together and in close proximity to the resources they require (cell production & time-based management).
- Designing production facilities to minimise movement.
- Using effective stock control systems.
- Adopting quality assurance techniques to minimise defaults and eliminate wastage of rejects or need for rework (TQM and Kaizen).
- Designing products and services to meet the exact needs of customers (JIT production).
- Using a range of forecasting techniques to predict future demand and match production levels accordingly.
What is ‘first mover advantage’?
Being the first to enter a new market
- gaining a competitive advantage over rivals
- being able to charge a premium price and use a price skimming strategy
- leading to higher revenues and profits over time.
What are the 4 factors of production?
- Land: physical land and natural resources, e.g. oil or precious metals.
- Labour: the workers employed by a business.
- Capital: the machines and equipment used to produce goods.
- Enterprise: the skill of combining the other factors of production.
The requirements for these resources will vary depending on the nature of the business and what it can afford.
- What might be an optimal mix for one business might be different from another even though they are operating in the same industry.
What is labour intensive production?
Production relies on using labour resources (more workers than machinery).
- Highly specialist, personal, high level of skills required.
- Many service-based businesses operate this way.
- However in countries with lower wages, labour-intensive methods of production are common.
Pros and cons of using labour intensive production
PROS:
- People are flexible and can be retrained.
- Cheaper for small-scale production.
- Cheap when labour costs are low.
- Workers can show ‘enterprise’.
CONS:
- Some people can be hard to manage.
- Unreliable and get sick.
- Entitles to breaks and holidays.
- Wage increases mean labour becomes more costly.
What is capital intensive production?
Production relies on using capital resources (more machinery than people), e.g. machines, robots, computers, etc.
- Mass production, standardisation and efficient production.
- Larger firms tend to be more capital intensive than smaller firms.
- Rising labour costs is driving a shift to capital intensive production.
Pros and cons of capital intensive production
PROS:
- Can be cheaper in the long-run.
- More precise and consistent.
- Does not need breaks or holidays or sleep.
- More obedient.
CONS:
- High set-up costs.
- Often only suited to one task and lack flexibility.
- Breakdowns can lead to delays.
- Demotivated workforce from machine takeover.
When is it appropriate to use labour intensive production?
- Insufficient funds to invest in technology.
- If a business is offering a service requiring high level of customer service.
- If a business operates in a niche market and needs to be highly differentiated from competitors.
- Product that is tailored made, bespoke, made or adapted to each customer or is a one-off.
- Produces on a small scale.
When is it appropriate to use capital intensive production?
- Produces standardised product targeting mass market.
- Very competitive market where competitors use capital intensive production methods.
- Produced on a very large scale a product with a long product life cycle.
- Produces in a country where labour costs are high, e.g. UK.
- Cost of technology is becoming affordable.
- Operates in a market where there is a shortage of skilled labour and where wages are high.
- Sufficient finances to purchase technology.
Define technology
Technology is the use of tools, machinery and computers to help produce a good or a service.
- Technology is changing quickly and affects how businesses produce goods and services as well as the products themselves.
What are the technological developments that may affect production?
- More advanced computer systems, e.g. enabling automated stock control systems and electronic data interchange - electronic point of sale (EPOS)
- The internet, which enhances a business’ ability to promote and sell products and its ability to communicate with customers, fulfilment with orders.
- Computer-aided design (CAD) where manufacturers use software to design products.
- Computer-aided manufacturing (CAM) where manufacturers use robots in the production process.
Explain robotics in terms of development in technology affecting businesses
Robotics in the production process speed up production and reduce human error.
- Robots for picking, packaging and shipping.
Explain cloud storage of information in terms of development in technology affecting businesses
Cloud storage of information, apps such as Zoom, use of portable equipment such as tablets and mobile phones have enabled employees to work from anywhere to speed up decision making and problem solving.
- In the office, at home, in a different country or on the move.
Explain online ordering and payment systems in terms of development in technology affecting businesses
Online ordering and payment systems link in with stock management systems to improve efficiency in logistics.
- These processes also allow for greater customisation for the customer.
How does the design of technology (e.g. CAD & CAM) benefit the production process?
- Using computer-aided design (CAD) and manufacturing (CAM) speeds up the design of goods.
- CAD/CAM also makes it easier to alter designs.
- Thus increases efficiency / reduces unit cost, improves quality, adds value and innovates.
How does stock or inventory management (e.g. computerised reordering - EPOS or Electronic Point Of Sale) benefit the production process?
- Instant reordering system when stock levels fall below a certain level.
- This helps to support Just-in-Time.
- Thus increases efficiency.
How does capital for production and fulfilment (e.g. robotics and automation) benefit the production process?
- Helps a business utilise capital intensive production.
- Consistent quality = less waste.
- Allows an increase in production scale leading to economies of scale: decreases average unit cost = increased efficiency.
- Robotics and automation for fulfilment, e.g Amazon - benefits e-commerce business.
What are the key drawbacks of introducing technology in the production process?
- Resistance (e.g. from employees): its introduction may be met with opposition from employees, especially if job security is threatened. This may lead to industrial relations problems.
- Can be a drain on an organisation’s capital. Firms may experience difficulty in raising the funds required to install high-technology equipment or to research a new product.
- Labour replaced by capital: demotivating for labour? = decreases productivity
- It almost inevitably requires training of the existing workforce on how to use new machines and perhaps recruitment of new employees. Both actions can create considerable costs.
Overall benefits of new and updated technology in the production process
- Reduces unit cost for production, enhancing the competitiveness of the business concerned. E.g. allows publishers to send books electronically to be printed overseas, where costs are lower.
- For high-technology products, such as games consoles, it offers the opportunity to charge a premium price until the competition catches up - price skimming.
- A consistent standard of quality can be guaranteed by using CAM.
- Using technology efficiently may enable
What is quality?
The ability of a good or service to satisfy consumers’ wants and needs, e.g. meeting expectations.
- The extent to which a product or service meets its customers’ requirements.
- ‘Fit for purpose’
- Achieving the desired quality has a number of benefits for a business, but quality is a subjective concept: what one customer considers high quality, another may consider low quality.
- Can be tangible or intangible.
What are the aspects of product quality?
- Quality of design
- Quality of conformance
- Reliability
- Safety
- Proper storage
What are customers’ expectations of tangible quality? - perceptible by touch
- It isn’t faulty / damaged
- It functions (works)
- It matches description
- It is reliable
- It is safe
- It can be repaired if necessary
What are customers’ expectations of intangible quality? - something that exists but that cannot be touched
- Good customer service (advice and behaviour).
- After sales service available if necessary.
- Brand image / reputation, e.g. brand name.
How is quality measured?
- Product returns
- Warranty claims
- Production rejects
- Customer ratings
- Customer surveys
- Customer complaints
- Repeat customers
What are the benefits of quality?
- Quality is a sign that business processes are under control.
- It can be used as a competitive advantage by creating a USP.
- Good quality can improve brand image, which can increase success of new product launches.
- Encourages customer loyalty and retention, making customers less sensitive to price fluctuations.
- Produces a positive word-of-mouth.
- Allows a premium price to be charged.
- Increases profit margin (if costs are kept under control)
- Increases sales.
- More retailers will stock the product.
Features of poor quality
- Product fails, e.g. a breakdown or unexpected wear and tear.
- Product does not perform as promised or what the customer thought was promised.
- Product is delivered late.
- Poor instructions/directions for use making the product difficult or frustrating.
- Unresponsive customer service.
Consequences of poor quality
- Lost customers (expensive to replace - and they may tell others about their bad experience, producing negative word-of-mouth).
- Cost of reworking or remaking a product.
- Wasted materials.
- Can damage brand reputation: competitive disadvantage.
- Further costs will occur if goods are returned for repair or need to be replaced under warranty.
- If products need recalling this can be extremely expensive
- There may be legal costs if customers sue the company.
List the methods of improving quality
- Quality control
- Quality assurance
- Quality circles
- Total quality management (TQM)
- Kaizen
What is quality control? - brief description
Quality control is where finished products are checked by inspectors at the end of the production process to see if they meet the set standard acceptable to both the business and customer before it is delivered to a customer.
What is involved in quality control?
- Primarily focus on detecting defects before they reach the customer - ‘detection and rejection’ process.
- Assumes errors are unavoidable so only checks goods at the end of the production line.
- Quality inspectors measure or test every product, samples from each batch, or random samples as appropriate to the kind of product produced.
- Faulty products are either reworked or thrown away.
How is quality control used for services?
- Methods like customer satisfaction surveys and mystery shoppers are used to assess quality.
- Internal staff may also be involved in the assessment.
Benefits of quality control
- Prevents defective goods from reaching customers, therefore less defects leading to less refunds, which improves reputation over time which boosts long term sales.
- Less impact to production process as QC checks occur after the product is finished.
Disadvantages to quality control
- Incurred costs (for inspectors, surveys, mystery shoppers, etc.)
- Defects still may occur (representing waste) even if caught as the checks occur after product is produced.
- Lacks the potential motivational benefits that quality assurance may have.
What is quality assurance?
The checking of a good or service at each stage of its production, e.g. as it travels along a production line.
- Aims to avoid mistakes by getting the product right first time (‘zero defect production’ approach).
- Maintaining target quality by giving attention to detail at EVERY stage of the process.
- Employees check their own work and are responsible for the quality they pass onto the next person.
- Requires teamwork and staff engagement.
Advantages of quality assurance
- Lower defects: mechanisms put in place to ensure the entire operations process meets the required standards.
- Reduced costs: fewer defects means lower production costs, allowing for competitive pricing.
- Improved reputation: consistent quality builds a strong reputation and drives long-term sales growth.
- Increased motivation: involving employees in the design and implementation of QA processes can increase their motivation and engagement.
Disadvantages of quality assurance
- Cost: designing and implementing QA systems, including training employees, requires investment.
- Slower production: following checklists and procedures can slow down production process.
- Potential resistance: some employees may resist the added responsibilities and changes associated with QA implementation.
What are the key methods of quality assurance?
- Kaizen
- Total quality management (TQM)
- Quality circles
What are quality circles?
Quality circles (quality control meetings) is a group of workers who meet regularly to identify, analyse, solve quality issues and suggest ways of improving quality.
- It is a part of the TQM approach.
- Group of employees at different levels and from different departments.
- Can be motivational to get employees involved but unrealistic suggestions might be made.
- Management not usually keen to listen to ‘floor’ staff.
What is kaizen?
Kaizen is a Japanese business philosophy system of continuous improvement, where all employees are encouraged to suggest and identify possible improvements in the production process to improve quality.
- Requires the use of quality circles or meetings when staff have an opportunity to discuss problems and potential solutions.
- Such a system requires a culture of participation and involvement.
- Very cheap to introduce.
- Employees at all levels given decision-making power.
- Long term initiative.
What is total quality management (TQM)?
An attitude towards quality assurance in which each employee is responsible for checking their own quality.
- The idea of ‘quality’ is a core value of the business.
- Seeks the commitment of all employees to the highest quality standards with an individual and collective responsibility for maintaining high quality standards.
- By including checks throughout the process, it aims for zero defects in order to reduce waste.
How does TQM aim for zero defects?
- Quality of supplies and components is constantly monitored.
- Workers at each stage of production are effectively ‘customers’ of the previous production stage. They expect work in progress to be high quality and reject sub-quality products.
- By checking throughout all processes, customer satisfaction is guaranteed.
Characteristics of TQM
- A focus on customer needs
- Continuous improvement
- Employee involvement and empowerment
- Managing suppliers
TQM seeks the commitment of all employees to the highest quality standards. As a result, it minimises the time and money spent on quality by preventing quality problems.
What is the core meaning of “total” in total quality management (TQM)?
Emphasises the involvement of all employees and partners in the continuous improvement process.
- This comprehensive approach targets waste reduction and defect elimination across the entire organisation.
What is the core meaning of “quality” in total quality management (TQM)?
TQM strives to improve quality for all customers, both internal (the next person in the production process) and external (the end consumer).
- This focus fosters a culture of quality at each step.
What is the core meaning of “management” in total quality management (TQM)?
Management plays a crucial role in initiating and supporting TQM.
- They must set targets, provide necessary training and funding (for both labour and capital investments like new technologies), and importantly trust their employees to implement the TQM philosophy effectively.
Pros of total quality management (TQM)
- Improved product quality: the core aim of TQM leads to higher quality products, directly impacting customer satisfaction.
- Increased customer satisfaction and loyalty: higher quality products foster customer loyalty, leading to repeat business, increased sales, and potential for higher pricing due to reduced price sensitivity.
- Increased employee motivation: TQM empowers employees by involving them in improvement initiatives, creating a sense of ownership and contribution.
Cons of total quality management (TQM)
- High initial costs: implementing TQM culture requires investment in training, new technologies, and process overhauls, which can be substantial.
- Lengthy implementation time: building a strong TQM culture can take years (5-10yrs), posing a challenge for businesses needing rapid improvements.
- Potential employee resistance: significant changes can encounter resistance from employees accustomed to existing processes, which can lead to demotivation and reduced productivity.
What are the difficulties of improving quality?
- The business has to bear the cost of training for staff, administration of the system and any equipment that might be needed.
- Employees can be resistant to change, and convincing them that change is necessary might prove a stumbling block. They might demand higher pay due to the increased responsibility.
Other ways to improve quality
- Outsourcing
- Improved training
- Better staff/recruitment
- Higher quality suppliers
Define inventory
Inventory is the stock a business holds in the form of raw materials & components, work-in-progress and finished goods.
What is a supply chain and what does it encompass?
The supply chain consists of the group of firms that are involved in all the various processes required to make a finished product or service available to the customer. It encompasses 3 areas:
- the supply of materials to the manufacturer
- the manufacturing process
- the distribution of the finished goods to the consumer
Improving operational performance through managing inventory
A business can improve its operational performance if it manages its inventory (stocks) efficiently in order to meet customers’ needs.
What is the importance of managing supply and demand? - what can be the problems
- With too little supply, a business will not only miss out on orders and revenue but may also lose future orders due to lack of ability to meet demand.
- Too much supply will mean extra costs of holding the excess, potential damage of the stock becoming obsolete or being damaged and a business may have to sell the goods at a reduced price.
What type of industry can matching supply with demand be a particular problem for?
A business operating in a seasonal industry, but it can also affect other businesses.
- In order to overcome these problems, a business might try to manage demand or to manage the supply more efficiently.
What are the ways a business can manage demand?
- Increase or reduce prices (use dynamic pricing)
- Increase or reduce promotions including sales promotions and advertising.
Examples of businesses managing demand
- Hotels and airlines
- Center Parcs: charging significantly higher prices in the school holidays and having more promotions during term times. As a result, it has a capacity utilisation of over 90%.
What are the ways a business can manage supplies?
- Employ flexible workforce: can be achieved through use of a multi-skilled workforce, employing part-time workers or workers on zero-hours contracts. This enables a business to increase or decrease the amount produced by simply varying the size of the workforce or number of hours worked.
- Increase or decrease capacity: if the market a business is operating in is growing and further increases in demand are likely, it makes sense to invest in further capacity in order to satisfy growing demand.
- Produce to order (just-in-time rather than just-in-case)
- Sub-contract out (outsourcing): when another business is contracted to produce the extra goods required in order to satisfy the demand.
Managing working capital
- Holding inventories ties up the cash of the business in working capital once suppliers have been paid.
- There is an opportunity cost associated with inventory holding: that cash might be able to be used for better purposes.
Define stock-out
Failure to have goods available for sale, which is costly.
What is outsourcing?
Outsourcing (or subcontracting) is when a business contracts out some activities to other businesses rather than doing them in-house.
- Businesses can outsource manufacturing to deal with increased demand, but may also outsource other functional areas (such as recruitment and IT) to businesses that specialise in those areas.
Benefits of sub-contracting out (outsourcing)
- Specialisation and quality: higher quality output as the external provider specialises in the specific business process. Particularly advantageous if the process is not a core competency of the business.
- Lower costs: can reduce labour costs, overhead expenses (rent) and capital investment (e.g. machinery purchases for component production). These cost savings can translate to lower prices (potentially increasing demand & sales) or higher profit margins.
- Economies of scale: external providers likely perform the same business process for multiple clients. This high volume reduces their average unit cost, leading to lower costs for contracting business.
- Enables a business to focus on its core competency (what the business is best at doing) - minimising distractions and maximising efficiency by outsourcing non-core functions.
Drawbacks of sub-contracting out (outsourcing)
- Loss of control: relinquishing direct control over its execution. Can result in provider only meeting minimum contractual requirements, hindering innovation and product improvement.
- Ethical concerns: external provider becomes part of supply chain, and their ethical practices can impact the contracting business’ reputation, e.g. fast fashion industry outsourcing can negatively affect brand image and market capitalisation.
- Over-reliance and supplier power: becoming overly dependent on external provider can grant them significant supplier power. This increased leverage can lead to higher prices and higher costs in long-term (Porter’s 5 Forces).
What is flexibility?
Refers to the ability of a business to meet a customer’s requirements.
- May involve flexibility in terms of numbers ordered, i.e. the ability to vary production levels in order to cope with variations in the size of order.
- Flexibility is likely to lead to greater customer satisfaction and act as a competitive advantage.
How can flexibility be shown with mass customisation?
Flexibility may also involve variations in specification, known as mass customisation, which means tailoring goods to specific customer requirements.
- E.g. in the car industry a customer cam choose the colour, paint, trim, seating material, accessories, etc.
- This information is then sent to the factory and the car is produced.
How can a business improve its supply flexibility?
- Have spare capacity.
- Be able to offer varied order sizes (no order too small or too large).
- Offer flexible lead times.
- Offer customisation.
What is speed of response and dependability?
Speed of response refers to how quickly a business fulfils an order, and dependability refers to its punctuality or whether it fulfils the order on time.
- Responding in this way can result in a competitive advantage as it will lead to greater customer satisfaction and therefore loyalty.
- Such a response, however, relies on there being good communication and relationships with suppliers.
What are two ways that the term ‘dependability’ can be used as? (*typical mistake in exams)
- For punctuality.
- In relation to reliability and durability.
It is important to identify the correct context when responding to a question.
How can a business improve its speed of response by managing its supply?
- Have flexible workforce (part-time & zero hour contracts)
- Produce/purchase to order (pull production / JIT)
- Use digital technologies to organise and monitor distribution/shipping.
What is the overall objective of inventory control?
To maintain inventory levels so that the total cost of holding inventories is minimised while not running out.
What are the 3 types of stock a business holds?
- Finished goods: completed products ready for sale or distribution, e.g. products on supermarket shelves.
- Work-in-progress: semi or part-finished production, e.g. construction projects.
- Raw materials & components: bought from suppliers. Used in production process, e.g. parts for assembly or ingredients.
What are the influences on the amount of inventory held?
- Nature of product: would be foolish to hold large stocks of perishable goods.
- Nature of production: a JIT method means lower levels of stock are held.
- Nature of demand: seasonal products may require high level of stock to be held than those with regular demand.
- Opportunity cost: any money tied up in stock represents an opportunity cost and could be better used elsewhere in the business.
- Finances
- Warehouse space
What is a tool that a business can use to help control its stock levels to best meet its operational objectives?
Inventory control chart
What is an inventory control chart/diagram?
A graphical representation of the flow of inventory (stock) within a business.
- It is used by management to control and monitor the flow of inventory to meet demand.
Name the key features of an inventory control chart
- Buffer level of inventory
- Reorder level
- Lead time
- Maximum stock level
- Reorder quantity
Define buffer level of inventory (inventory control chart)
The minimum amount of inventory a business wants to hold, designed to cover for emergencies such as late arrival of inventory.
Define reorder level (inventory control chart)
The level of inventory at which a new order is placed.
- This will depend on the buffer stock level and the lead time.
Define lead time (inventory control chart)
The time between an order being made and its arrival in the business.
Define maximum stock level (inventory control chart)
The highest amount of inventory a business is able to hold.
Define reorder quantity (inventory control chart)
The amount of stock a business orders from its suppliers.
What issues must a business consider when using inventory control charts?
- Unexpected changes in demand.
- Long lead times which make inventory planning more difficult.
- Suppliers who fail to deliver on time.
- Choosing the right buffer stock level can affect efficiency and cash flow.
- Human or computer error when re-ordering stock (wrong quantity ordered or at the wrong time).
What are the costs of holding inventory?
- Cost of storage
- Interest costs
- Obsolescence risk (out of date)
- Stock out costs (costs of running out of stock)
How is cost of storage a drawback of holding inventory?
More inventories require large storage space and possibly extra employees and equipment to control and handle them.
- This is why some businesses want to be able to match supply to demand whenever possible (JIT rather than JIC).
How are interest costs a drawback of holding inventory?
Holding inventories means tying up capital (cash) on which the business may be paying interest.
How is obsolescence risk a drawback of holding inventory?
The longer inventories are held, the greater the risk is that they will become obsolete (i.e. unusable or not capable of being sold).
How are stock out costs a drawback of holding inventory?
Happens if a business runs out of inventory. This can result in:
- Lost sales & customer goodwill
- Cost of production stoppages or delays
- Extra costs of urgent, replacement orders.
What are the advantages of holding low levels of inventory?
- Less cash tied up in stocks which can be used elsewhere in the business (improved cash flow).
- Consistent with the lean production approach.
- Lower risk of the stock becoming damaged or obsolete (out of date).
- Lower stock holding costs (e.g. warehousing space, stock monitoring, stock handling, breakages, theft, etc.)
What are the advantages of holding high levels of inventory?
- Less likelihood of experiencing stock-outs.
- Better able to handle unexpected increase in demand or need for higher level of output.
- Potential for lower unit costs by ordering in bulk (high quantities) and benefitting from economies of scale.
How does the supply chain link with flexibility, speed of response and dependability?
- All links in the chain need to be dependable as unreliability will cause shortages on the shelf or low quality, reflecting badly on the company selling the products.
- Suppliers offering a faster response than competitors will most likely get the contracts.
- Businesses need to be flexible on both time and volume. They can utilise a flexible workforce or outsource.
What may effective management of the supply chain involve?
- Supplier strategy such as long-term vs short-term agreements (a short-term agreement with a supplier may enable the business to switch easily to a cheaper supplier. However a long-term agreement may guarantee and secure supplies against changes in the market or even against an increase in prices).
- Agreeing contracts with suppliers to cover level of service.
- Deciding on whether the business will do the process itself or outsource it to a supplier.
- Deciding on how much control the business wants to have on the supply chain.
List the influences on the choice of supplier a business chooses
- Price
- Quality
- Reliability
- Flexibility
- Capacity
- Payment terms
- Ethics
- Location
- Return policy
How can a supplier’s price affect the business?
- Business’ costs
- Business’ unit cost
- The price charge to customers
- The profit margin
- The competitiveness of the business
How can a supplier’s quality affect the business?
- Business’ own quality
- Business’ reputation
- Business’ efficiency (low quality suppliers could create waste or delay)
How can a supplier’s reliability affect the business?
- Business’ reputation
- Business’ efficiency (wrong or late delivery could delay production/sales)
- Level of buffer stock help (minimum level of stock held)
- Re-ordering level
How can a supplier’s flexibility affect the business?
- Business’ ability to change order size or specifications (mass-customisation)
- Business’ ability to accept ‘non-standard’ orders (‘one-off’ or unusual orders)
How can a supplier’s capacity affect the business?
- Ability to supply large quantities
- Business’ costs (large quantities can lead to bulk discounts)
How can a supplier’s payment terms affect the business?
- Payment form: by cash, cheque, bank transfer, monthly instalments or foreign currency.
- Availability of trade credit (option to pay later)
- The cost of credit: does the supplier charge interest for credit?
How can a supplier’s ethics affect the business?
- Does the supplier operate in a socially responsible manner? e.g. adheres to Fair Trade, pays staff the minimum wage, etc.
- Business’ reputation
How can a supplier’s location affect the business?
- Affects transport costs
- Ability to set up JIT
How can a supplier’s return policy affect the business?
- How easy is it to return or exchange goods?
- Are refunds given?
- How long does it take to get a refund?
- Affects the business’ own flexibility towards its customers.
- Affects the business’ cash flow.
What type of businesses cannot choose their supplier?
- Water company (monopoly)
- If the business is a franchisee (must buy from franchisor)
What is a strategically crucial supplier?
Some suppliers are strategically crucial to a business, e.g. car manufacturers rely on specialised car component suppliers (these suppliers are essentially crucial in a JIT system).
What are ‘commodity suppliers’?
They provide goods or services that can easily be bought elsewhere and which are not hugely important to the business.
Benefits of having multiple suppliers
- To ensure backup if one supplier fails to deliver on time or the right quality.
- To be able to increase size order (one supplier may not be able to supply the required supplies for an increase in output).
- To be able to compare suppliers’ quality, prices, punctuality, reliability, payment terms, etc.
- To prevent being dependent on one supplier. Without competition, a supplier will have no incentive to remain competitive and could decide to increase prices or become complacent in terms of innovation, punctuality, reliability, etc. With only one suppler, a business loses its bargaining power.
Improving the supply chain: how to manage it effectively and efficiently
- Only purchase supplies when needed.
- Understand the difference between strategic and non-strategic suppliers, then work towards building strong relationships with the strategic ones.
- Limit the number of sources but do not limit too much.
- Have an alternative supply source in contingency.
- Have good communication and relations with suppliers.
- Need to also have coordination with other functional areas - marketing, finance and human resources.
- Requires an understanding of the external environment and how this might impact on both supply and demand.
