Unit 4-Decision making to improve operational performance (4.2) Flashcards
What does being efficient as possible mean?
Controlling costs when making goods or services.
What factors can you use to measure the efficiency of a business?
Labour productivity
Unit costs
Capacity
Capacity utilisation
Define ‘labour intensive’
When labour costs outweigh capital costs of a business
When the business has spent more on (investing in) people to complete their goods or services than the capital (money) they have invested in it.
Give some examples of labour intensive businesses.
Morgan cars
Wedding cake manufacturers
Define labour productivity
The amount (volume) of output that is obtained from each employee.
Which types of firm is labour productivity especially a measure of efficiency for?
Those which have a labour intensive production process.
Formula for labour productivity.
Output per period/ Number of employees in that period
What does adding wage costs to unit costs allow operations manager to do?
Calculate in money terms how much in wages each unit costs to produce.
This can aid in decision making.
What can labour productivity be influenced by?
Quality (and extent) of machinery
Skills, motivation and ability of workforce
The methods of production used
Reliability of raw material and suppliers
What 5 factors can help increase productivity?
- Increasing the number of hours worked
- Training to employ output
- Investment in equipment and technology
- Changing the way the work is done
- Motivating employees
Compare labour productivity with wage cost per unit.
The higher the labour productivity, the lower the wage cost per unit.
Define unit costs.
The cost of producing one unit of output.
Unit costs are more important in large businesses.
False.
Unit costs are equally as important if you are a large or small business.
Give an example of what a unit cost is.
How much would it cost you to produce one cupcake?
Formula for unit costs.
Total costs (£) /Units of output (in volume)
Formula for total costs.
Fixed costs + variable costs
What are fixed costs (FC)?
Costs that do not change no matter how many units you make
What are variable costs (VC)?
Costs that change when output changes
Give examples of fixed costs (FC).
Salary
Rent
Insurance
Telephone
Give examples of variable costs (VC).
Wages
Raw materials
Distribution
What is distribution?
the activity of both selling and delivering products and services from manufacturer to customer
What are unit costs also known as?
Average cost (AC)
Average total cost (ATC)
When competition is based on price, what it is vital to achieve?
Lowest unit costs
All businesses compete purely on price.
True or false.
False.
Not all businesses compete purely on price.
What are the 4 things unit costs are influenced by?
- How many units a business can make with its resources
- How efficient the workforce is at producing the goods
- How efficient the machinery (fixed assets) are at producing the goods
- How easily variable costs can be controlled
Define capacity.
The maximum total level of output or production that a business can produce in a given time period.
If a company is producing at maximum total level of output, what is this called?
Producing at full capacity
Working at full capacity is not always a good thing.
True or false.
True
Define capacity utilisation.
The percentage of a firm’s total possible production level that is being reached
What does a 95% capacity utilisation for a machine which can make 100 products a day mean?
It is making 95 products out of a possible 100 every day.
Formula for capacity utilisation.
(Capacity output per annum (or month)/ maximum possible output per annum (or month)) x 100
A company is working at 84% capacity. What is the 16% remaining called?
Spare capacity
What does spare capacity allow a business to plan?
Maintenance time.
When is maintenance time especially important?
If the machine or tools are very high value to the firm
What percentage do most people realise is the best for capacity utilisation?
90% or above
What does every point below 100% in capacity utilisation show?
Resources are not being used and therefore high fixed costs per unit are produced
List the 1st 3 causes of spare capacity with examples.
- New competitors or new products entering the market (Google Nexus and iPad) mean a fall in demand for existing products
- Fall in demand for the product due to changes in taste or fashion (McDonald’s vs healthy options)
- Unsuccessful marketing
List the last 3 cause of spare capacity with examples.
- Seasonal demand (hotels)
- Over-investment in fixed assets (Channel Tunnel)
- A merger or takeover leading to duplication of resources (high street banks merging)
Advantages of spare capcity.
- More time for maintenance and repair
- Improvements can be planned in
- Less pressure on employees
- Can cope with sudden increase in demand – especially in a fast moving industry
Disadvantages of spare capacity.
- Higher proportion of fixed costs per unit
- Higher unit costs lead to lower profits, therefore lower sales volume
- Negative image of being unsuccessful
- With less work employees become bored or demoralised
What is the aim of an operations manager?
Use as few resources as possible to produce a given output, but conversely they are also seeking to maintain a given level of quality.
Why is productivity a vital measure to help operations managers make decisions?
The higher the productivity, the more units each worker (or machine) makes.
Formula for profit.
Sales revenue - (fixed costs + variable costs)
What are the 3 things a business can do to increase profit?
- Increase revenue
- Reduce fixed costs
- Reduce variable costs
Evaluate how easy it is to increase profits by increasing revenue.
Can be hard to do and costs money to market products.
Evaluate how easy it is to increase profits by reducing fixed costs.
Can be hard and can reduce your capacity
Evaluate how easy it is to increase profits by reducing variable costs.
Easiest to do.
Decrease unit costs by increasing capacity utilisation
What does a business need to ensure before increasing capacity?
There is future demand and available finance for the products.
What do businesses risk if they are not efficient as possible?
Wasting money and resources
What should being efficient lower?
Costs
What should being efficient raise?
Profit margins
