Unit 4 - Operational Management Flashcards
What is the operations function of a business?
- Responsible for the production of a good or service
- Managing the process of transforming inputs into outputs
What are operational objectives?
- Added value
- Environmental objectives
- Quality
- Speed of response
- Flexibility
- Costs
What are examples of environmental objectives?
- Minimising waste and packaging
- Sustainability
- Pollution control
What are examples of quality objectives?
- Better products
- Greater reliability
- Lower waste and returns
- Fewer complaints
What are examples of speed of response and flexibility objectives?
- Enhanced reputation and sales, increasing profit
What are examples of costs objectives?
Reduced unit costs:
- Greater capacity utilisation
- Improved productivity
- Better supplier terms
What must operational objectives be?
SMART and fit with the overall corporate objectives
What can SMART operational objectives be used for?
To evaluate and judge overall performance of operations management
What are the external influences on operational objectives?
- Political
- Legal
- Economic
- Technological
- Competition
What are the internal influences on operational objectives?
- Finance
- Marketing
- Human resources
What is capacity?
Maximum output of a business at a moment in time
What is capacity utilisation?
Measures the existing output over a given period as a percentage of maximum output
What is the formula for capacity utilisation?
Capacity utilisation = ( actual output in time period / maximum possible output per period ) x 100
If a business has a maximum capacity of 10,000 units and is producing 7,500 units, what is its capacity utilisation?
capacity utilisation = ( 7,500 / 10,000 ) x 100
capacity utilisation = 75%
What is labour productivity?
The amount of output per employee
What is the formula for labour productivity?
Labour productivity = output per time period / number of employees
If a business producing 7,500 units and employed 75 workers, what would be labour productivity be?
Labour productivity = 7,500 / 75 = 100 units per worker
What are unit costs (average costs)?
Cost of producing one unit
What is the formula for unit costs?
Unit costs = total costs / total output
If a business was producing 7,500 units with total costs of £150,000, what would the unit costs be?
Unit costs = 150,000 / 7,500 = £20
What will happen to productivity if the same level of output can be achieved with fewer employees?
Productivity will rise
What will happen to productivity if more workers are employed but output doesn’t increase?
Productivity will fall
What will happen to productivity and unit costs if capacity utilisation increases with no change in number of employees?
Productivity rises
Unit costs fall
What will happen to productivity and unit costs if capacity utilisation decreases with no change in number of employees?
Productivity falls
Unit costs rise
What is the importance of capacity?
As unit costs decline as capacity utilisation increases, it is important that a business does not have too much excess capacity
What is excess capacity?
Occurs where actual production falls below the maximum potential production
What excess capacity would there be if operating at 60% capacity utilisation, and what would this mean?
- 40% excess capacity
- means that resources (factory space, equipment and possible labour) are not being used efficiently
What are the benefits of working at maximum capacity?
- average unit cost falls
- profits increase
- less wastage of resources
- employees more busy and motivated
- there are opportunities for employee bonuses (profit sharing or overtime)
- more competitive due to reduced costs
- most stakeholders will view the business favourably
What are the drawbacks of working at maximum capacity?
- little or no opportunity for maintenance
- could lead to breakdowns
- additional orders impossible to meet, or will require overtime = extra costs
- pressure on employees
- increased level of absence
- little or no time for in house training
- quality could be affected
- may not meet customer orders/expectations
What is capacity under-utilisation?
When a business’ output is below the maximum (also known as excess capacity)
What is capacity over-utilisation?
When a business’ output is above the maximum possible
How can a business improve capacity utilisation?
- reduce excess capacity
- increase usage of its product
- outsourcing
- redeployment
What might a business do to overcome situations of excess capacity?
- Increase sales
- e.g. marketing campaign, extension strategy
- Reduce capacity
- however once done, cannot be reversed
- Alternative uses
- alternative use for the capacity (new products or leasing to other businesses)
What might a business do to overcome situations of lack of capacity?
- Outsourcing
- transferring portions of work to outside businesses
- Investment
- investment into permanent establishment of new capacity (should only be undertaken if high capacity expected in the future)
- Reducing demand
- increasing price
- dynamic pricing (highly flexible prices for products based on demand at the time)
What is the importance of efficiency and labour productivity?
Increased labour productivity = reduced unit costs of production = more competitive on price
Increased labour productivity = increased efficiency = less waste of resources = profit
How can you increase efficiency and labour productivity?
- investment in technology
- could improve both quality and reliability of product = greater output from fewer employees
- improvements in training and motivation
- improve skills of the workforce = greater output
- job redesign
- may be executed in such a way to improve overall performance of the employee
- reduction in the labour force
- automatically improves productivity if same level of output can be maintained
- through technology or better training
What are the difficulties in increasing efficiency and labour productivity?
- increased costs
- but may be covered once greater sales
- quality
- must ensure increased labour productivity does not come at the expense of quality
- resistance of employees
What is lean production?
Refers to using as few resources as possible in production
What are the methods of lean production?
- Just-in-time (JIT)
- Just-in-case (JIC)
- Job, batch, flow
- Division of labour
- Cell production
- Kaizen
- Kanban
What is JIT production?
- Producing the exact amount of product needed, at the exact time customers need it
What are the benefits of JIT production?
- Cash is not tied up in stock
- helps maintain healthy cash flow
- ideal for smaller businesses
- helps maintain healthy cash flow
- Stock will be fresh
- especially important with perishable goods
- reduced waste
- Greater flexibility for response to changes in demand
What are the drawbacks of JIT production?
- Unforeseen circumstances can cause late deliveries
- potential to run out of stock
- Limited opportunity to benefit from economies of scale as not necessarily buying in bulk
- Initial problems may drive away customers
- Need to wait for more stock to arrive if business has run out
- potential sales lost in that time
What is JIC production?
Stock control method involving producing enough stock with buffer/excess stock in place (more than needed)
What are the benefits of JIC production?
- Never run out of stock
- Able to meet unexpected surges in demand
- Benefit from economies of scale as buying in bulk
What are the drawbacks of JIC production?
- Higher storage costs
- Ties up cash which could’ve been used elsewhere
- Stock can perish/go out of date
- increased waste
- If demand falls, there will be a waste of stock
- May have to sell at discounted rate if stock doesn’t sell
What is job production?
Give an example
- Concentrates on producing one product from start to finish
- Once one product has been made, another can start production
- Highly specialised
- Very labour intensive
Example- tailor made suits
What are the advantages of job production?
- High quality product
- Can customise orders
- High profit margins for bespoke products
What are the disadvantages of job production?
- Highly skilled staff required
- increased costs
- High production costs
- Production time may be longer
- Investment in machinery may be higher as specialist equipment may be needed
What is batch production?
Give examples
- Involves making a set quantity of identical products
- The quantity is known as ‘batch’
Examples- food products
- clothing in different sizes and designs
What are the advantages of batch production?
- Allows flexible production
- Part finished goods can be stored and completed later
What are the disadvantages of batch production?
- Making many small batches can be expensive and time consuming
- May be additional costs and delays in preparing equipment if production runs are different
What is flow production?
Give examples
- Continuous production
- Enables a product to be created in a series of stages on an assembly line
- Large number of the same goods are produced continuously
Examples- bottling plant
- car assembly plant
What are the advantages of flow production?
- Economies of scale can be achieved
- Automated assembly lines save time and money
- Quality systems can be built into the production at each stage (see quality assurance)
What are the disadvantages of flow production?
- Standardised product is produced
- High initial set up costs of automated assembly lines
- Workers may not be motivated
- as work is boring and repetitive
What is division of labour?
The assignment of different parts of production to different workers in order to improve efficiency
What are the advantages of division of labour?
- Workers become specialised at their task, improving efficiency
- Increased output
- Less waste
What are the disadvantages of division of labour?
- Workers may become bored
- Over reliance on workers
- if a worker isn’t there and no one else can do their job, production may come to a halt
What is cell production?
Where workers are organised into teams to carry out a specific part of production
What is kaizen and kanban production?
Methods that promote identifying waste in the production process, and finding ways to eliminate them
- Continuous improvement
What is the definition of labour intensive?
Operations process involving a high proportion of employees
What is the definition of capital intensive?
Operations process involving a high proportion of capital equipment, automation and robotics
When might a capital intensive approach to manufacturing be used?
- In countries where labour is expensive
- Some businesses such as oil refineries and chemical plants are likely to be capital intensive due to their very nature
When might a labour intensive approach to manufacturing be used?
- In countries where labour is relatively cheap
- Some businesses such as hotels and restaurants are more likely to be labour intensive
What developments in technology might affect production?
- More advanced computer systems
- e.g. automated stock control
- Internet
- enhance ability to communicate, promote and sell
- Computer-aided manufacture (CAM)
- robots used as integral part of production process
- Computer-aided design (CAD)
- can be linked to CAM
- easier to design new products
- can be used to estimate cost of newly designed products
What are the benefits of new/updated technology?
- Reduces unit costs
- Premium prices for high-technology products
- Consistent quality guaranteed using CAM
- Using technology efficiently may enable employees to work more efficiently
- May allow access to new markets
- Can reduce waste
What are the disadvantages of new/updated technology?
- Can be a drain on an organisation’s capital
- difficult to raise funds
- Requires training of the existing workforce and or recruitment of new employees
- significant costs
- Introduction of new technology may be met with opposition from employees, especially if job security is threatened
What is the importance of quality?
- provides USP
- reason to buy product
- enables higher prices
- increased sales
- enhance reputation and brand loyalty
What is quality control?
refers to checking a product at the end of the production process
What are the advantages of using quality control?
- less risk of faulty products going to customers
- fewer returns and good reputation
- increased brand loyalty and customer retention
- fewer returns and good reputation
What are the disadvantages of using quality control?
- too late to correct errors
- products have to be destroyed
- increased waste
- wastes money and resources
- increased costs
- cost of quality inspectors
What is quality assurance?
checking a product at each stage of production
What are the advantages of using quality assurance?
- leads to zero defects
- don’t waste money
- customers are assured of good quality
- encouraged repeat purchases and loyalty
- not paying for inspectors as employees check for quality
- motivate employees
What are the disadvantages of using quality assurance?
- takes time to introduce
- cost of training staff to check quality
- employees may not want the extra responsibility
- customer perceptions of quality are changing
- quality can slip if there is no incentive to outperform rivals
What are the benefits of improving quality?
- enhanced reputation
- increased brand loyalty
- competitive advantage (USP)
- increased revenue due to higher sales and possibly higher selling price
- greater flexibility in terms of price
What are the disadvantages of improving quality?
- increased costs (training staff, administration of system, equipment)
- employees may be resistant to change
- may demand higher pay due to increased responsibility
What are the consequences of poor quality?
- cost of scrapping or fixing products
- additional costs if goods are returned for replacement or repair
- could damage business’ reputation
What is the definition of inventory?
the stock a business holds in the form of raw materials, components, work in progress and finished goods
What is the definition of supply chain?
A series of activities involved in taking initial resources to providing the final product
Why is it important that a business is able to match supply to demand?
Problems will arise if there are insufficient supplies to match demand or if there is too much supply
- not enough supply
- miss out on orders
- lose future orders due to lack of dependability
- too much supply
- costs of storing the excess
- may have to sell at a reduced price
How would a business overcome theses problems?
- Manage demand
- Manage supply
How would a business manage demand?
- increasing/decreasing prices
- increasing/reducing advertising
- sales promotions
How would a business manage supply?
- flexible workforce
- multi-skilled workforce, part-time workers, workers on zero-hour contracts
- increase capacity
- produce to order
- mass customisation has enabled more businesses to do this
- outsourcing
What is the definition of mass customisation?
The production of custom-tailored goods or services to meet customers’ diverse and changing needs
What is the definition of outsourcing?
The subcontracting of non-core activities of an organisation in order to free up cash, time, personnel and facilities
- concentrate on other areas in which it has competitive advantage
What are the factors that influence the amount of inventory held?
- nature of the product
- may be perishable goods
- nature of production
- JIT means lower levels of stock are held
- nature of demand
- may be seasonal
- opportunity cost
- money tied up in stock could’ve been used more efficiently
What might a business use to manage inventory/stock efficiently?
Inventory/Stock control chart
What are the key features of an inventory/stock control chart?
- buffer level of inventory
- reorder level
- lead time
- maximum stock level
- reorder quantity
What is the buffer level of inventory?
The minimum amount of inventory held, designed to cover for emergencies such as late arrival of inventory
What is the reorder level?
The level of inventory at which a new order is placed
What is the lead time?
The time between an order of stock being made and its arrival in the business
What is the maximum stock level?
The highest amount of inventory a business is able to hold
What is the reorder quantity?
The amount ordered
What influences the choice of suppliers?
- dependability
- flexibility
- quality
- price and payment
- ethics
How could a business manage the supply chain effectively?
- need to consider the long term vs short term arrangements
- deciding what can be outsourced
- vertical integration (taking over the supply chain)
- awareness of potential problems
- long lead times
- choosing a sufficient level of buffer stock
- computer errors when reordering
- coordination with other functional areas
- marketing, finance, human resources
What is the value of managing the supply chain effectively?
The business is likely to gain customer loyalty and maximise revenue, and therefore profit
What are the benefits of outsourcing?
- enables quicker response to increased demand
- greater dependability for customers during periods of increased demand
- lower cost
- particularly in cases of temporary increases in demand
What are the drawbacks of outsourcing?
- quality may suffer
- reliability of supplies not guaranteed
- likely to be more costly than producing in-house
What is outsourcing dependent on?
The relationship between the two companies
