Unit 4 - Decision -making to improve operational performance

Question 1

Define the ECONOMIC CYCLE

Answer 1

The economic cycle is the natural fluctuation of the economy between periods of expansion (growth) and contraction (recession).

Question 2

Define the term ‘added value’.

Answer 2

Added value is an amount added to the value of a product or service, equal to the difference between its cost and the amount received when it is sold.

Question 3

Briefly explain how the functional areas of marketing and finance may influence operational decision-making.

Answer 3

Operations needs to liaise with marketing as it will make forecasts from market research as to what and how much should be produced. It will also be necessary to liaise with finance as this function will determine budgets and the availability of finance for capital investment, e.g into technology.

Question 4

Define CAPACITY UTILISATION

Answer 4

Capacity utilisation measures the extent to which a business uses its production potential. It bis usually expressed as a percentage.

Question 5

Define LABOUR PRODUCTIVITY

Answer 5

Labour productivity measures the output per worker in a given time period.

Question 6

Define UNIT COST

Answer 6

Unit cost is the cost of producing one unit (item) of a good or service.

Question 7

Distinguish between capacity and capacity utilisation

Answer 7

Capacity refers to the maximum (total) amount a business can produce in a set time period.
Capacity utilisation is a measure of the proportion of total capacity that is being used inc that time period.

Question 8

A business has a maximum capacity of 25,000 units and currently produces 20,000 units with 75 employees. Total costs of production are £1m. Calculate capacity utilisation, labour productivity and unit costs of production.

Answer 8

Capacity utilisation = (output/maximum output) x 100

(20,000/25,000) x 100 =80%

Labour productivity = output/number of employees

20,000/75 = 266.66 units per employee

Unit costs of production = total costs of production/number of employees

£1m/25,000 = £40

Question 9

Explain why unit costs of production will decline when capacity utilisation and labour productivity increase.

Answer 9

Unit costs of production will decline when capacity utilisation and productivity increase in the short term only - variable costs will increase and the fixed costs will be spread across more units of output.

Question 10

Define EXCESS CAPACITY

Answer 10

Excess capacity occurs where actual production falls below maximum potential production.

Question 11

Briefly outline two advantages and two disadvantages of JIT production.

Answer 11

Two advantages of JIT production are lower costs due to the reduced need for storage space and lower wastage as there is less likelihood of products being damaged or going out of fashion.

Two disadvantages are: production may be halted if stock fails to arrive on time due to weather or other problems; and may also be higher due to missing out on bulk purchase discounts.

Question 12

Define Just-in-time management (JIT)

Answer 12

Just-in-time management (JIT) is an inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed for production.

Question 13

Draw up a table to show the benefits and drawbacks of investing in improving labour productivity.

Answer 13

Benefits Drawbacks

If achieved by                  Resistance of employees
introduction of 
technology, quality 
and reliability may
improve.

Job redesign and Cost
training may improve
motivation

                                      Quality may fall, e.g. if piece rate    
                                      is used

Question 14

Define CAPITAL INTENSIVE

Answer 14

Capital intensive describes those businesses requiring a large amount of capital relative to labour.

Question 15

Define LABOUR INTENSIVE

Answer 15

Labour intensive describes those businesses requiring a large proportion of labour relative to capital.

Question 16

Explain the likely benefits to a company manufacturing in the UK of a capital-intensive approach to production.

Answer 16

A capital-intensive approach to production puts a greater emphasis on capital than labour in production. This will benefit a UK manufacturing business as labour is expensive in the UK, so such an approach will help reduce overall costs of production and increase competitiveness.

Question 17

Define QUALITY ASSURANCE

Answer 17

Quality assurance is a system for ensuring the desired level of quality in the development, production and delivery of products or services.

Question 18

Distinguish between a situation of excess production capacity and a lack of production capacity.

Answer 18

Excess production capacity occurs when a business is producing below maximum capacity.

A lack of production capacity occurs when demands greater than the maximum capacity level.

Question 19

Briefly explain two methods of improving capacity utilisation.

Answer 19

Capacity utilisation may be improved by increasing sales or reducing the maximum capacity. Increasing sales might be achieved through better marketing or targeting new markets. Reducing capacity involves selling off unwanted production capacity but this should only be done if a business is sure that the capacity is no longer.

Question 20

Technology is a topic with links to many other areas of the specification. Divide a sheet of paper into four sections and label these as:
(i) marketing
(ii) finance
(iii) operations management and,
(iv) people in business.
In each of the four sections compile a list of the implications for that function of the business of a decision to use new technology in producing a product or in the product itself.

Answer 20

Some examples of the implications of a decision to use new technology:

(i) MARKETING - New production processes allowing lower prices or new products increasing sales.
(ii) FINANCE - Initial costs but possibly resulting in increased profits in the long term.
(iii) OPERATIONS MANAGEMENT - The use of technology may assist a business in meeting its quality targets.
(iv) PEOPLE IN BUSINESS - Production line technology may increase productivity.

Question 21

Define OUTSOURCING

Answer 21

Outsourcing is the transfer of production that was previously done in house to a third party

Question 22

Briefly explain the importance of quality to a business

Answer 22

Quality is important as it may provide a USP for a business. This could enhance its reputation with consumers and lead to word-of-mouth promotion.

Question 23

Explain one benefit to a business of introducing a system of quality assurance such as TQM.

Answer 23

Total quality management instils a culture of quality throughout the business. Quality issues should be spotted at an early stage as everyone is responsible, thereby reducing costs and wastage.

Question 24

Outline why poor quality is likely to result in increased costs for a business

Answer 24

Poor quality is likely to lead to increased costs as a result of wastage and the cost of replacing or repairing returned goods.

Question 25

Briefly outline how the nature of the product and the nature of demand might affect the level of inventory held.

Answer 25

If the product is perishable, less inventory will be held. If demand is seasonal, the level of inventory is likely to be higher than for products that have regular demand.

Question 26

Identify four key features of an inventory control chart.

Answer 26

Four key features of an inventory control chart are: a) Maximum inventory level b) Reorder level c) Buffer inventory level d) Lead time

Question 27

In what circumstances might payment terms be more important than flexibility when choosing a supplier?

Answer 27

Payment terms may be more important when a business has concerns over cash flow and a longer payment period may be beneficial.

Question 28

Briefly explain the benefits of mass customisation.

Answer 28

Mass customisation is the tailoring of goods to specific customer requirements. In other words, customers build their own products. This is likely to give a business a competitive advantage and greater customer satisfaction. For example, in the car industry customers can build their own vehicle in terms of colour, trim and accessories.

Question 29

How might a company offering skiing holidays use the marketing mix manage demand?

Answer 29

Demand is likely to be higher during school holidays, therefore prices can be higher during these periods and lower at other times. In addition, at the start and end of the season when snow is less reliable, prices are likely to be lower and there may be more promotions.

Question 30

Draw up a table to show the advantages and disadvantages of outsourcing.

Answer 30

ADVANTAGES OF OUTSOURCING: Respond quicker to increases in demand Dependability for consumers Lower costs as ado not have to invest in capacity DISADVANTAGES OF OUTSOURCING: Likely to be more expensive Quality may not be as good

Question 31

How is maximum capacity calculated?

Answer 31

actual output in time period/maximum possible output per period x 100

Question 32

How is labour productivity calculated?

Answer 32

Labour productivity = output per time period/number of employees

Question 33

How is unit cost calculated?

Answer 33

Total cost/Units of output

Question 34

Define DYNAMIC PRICING

Answer 34

Dynamic pricing is a pricing strategy where businesses set highly flexible prices for products or services based on the market demand at a particular time.

Question 35

Define TOTAL QUALITY MANAGEMENT (TQM)

Answer 35

Where there is a culture of quality throughout the organisation.

Question 36

Define INVENTORY

Answer 36

Inventory is the stock a business holds in the form of raw materials, components and work in progress.

Question 37

Define MASS CUSTOMISATION

Answer 37

Mass customisation is the production of custom-tailored goods or services to meet customers' diverse and changing needs.