Unit 4 - Operations Flashcards
Inventory
The goods or stock a business holds
Inventory control
Management of levels of raw materials, work in progress and finished goods in order to reduce storage costs while still meeting customer demand
Advantages of high inventory
- meet customer demand
- sudden increases in demand can be dealt with quickly and efficiently
-companies can benefit from bulk buying - Production lines won’t be halted due to raw material shortages
Advantages of low inventory levels
- reduced costs
- opportunity cost is low
- perishable product waste and problems of products going out of date are minimised
Buffer inventory level
Minimum level of inventory held
Lead time
How long the supplier takes to supply
Inventory wastage
A measure of the loss of inventory within a business
Inventory wastage is caused by …. (5)
- raw materials being wasted during storage and production
- defects in production
- theft
- damage to inventories
- absolescence (going out of date / fashion)
Inventory rotation
Using the old inventory before new inventory to make sure that inventory wastage is kept to a minimum
Influences on the choice of supplier (6)
- prices
- payment loans
- quality
- capacity
- reliability
- flexibility
Supply management
The organisation of activities to create value for the customer and profit for the businesses involved in supplying the products
Corporate aims (5)
- low costs
- speed of response
- flexibility
- environmental objective
- added value
Piece rate
Payment based on number of items each worker produces
+ and - of piece rate
+ increases productivity
- expense of quality
- output may be influenced by workers needs rather than customer demand
Commission
A sum of money paid to an employee upon completion of a task, usually selling a certain amount of goods or services. Can be laid as a percentage of sales of as a flat rate based on sales volume
+ and - of commission
+ incentive to encourage employees to work hard and increase productivity
+ high performing sales people can earn large amounts in accordance with effort and ability
- no reliable income
- resentment
- Dishonesty
Salary schemes
A basic rate payment system where employees are paid on an annual salary
+ and - of salary schemes
+ simple and cheap to administer
+ security provided may motivate
- payment for input rather than output
Performance related pay
System that rewards individual employees based on an assessment of their individual performance and usually measured against pre agreed objectives
+ and - of performance related pay
+ higher employee motivation
+ more efficient use of company resources
+ clearer goals
- competitive atmosphere
- focus in short term goals and indivisible performance rather than teamwork
- goals may be unachievable
Operations management
The process that uses the resources of an organisation to produce the right goods or services for the customer
Adding value
The process of increasing the worth of resources by modifying them
Adding value equation
SALES REVENUE - THE COST OF BOUGHT MATERIALS/COMPONENTS/SERVICES
Product flexibility
Being able to switch production from one product to another
Volume flexibility
Being able to change the level of output of a product in accordance with customer demand
Operational objectives (5)
- costs
- quality
- speed of response
- flexibility
- environment
Unit costs equation
TOTAL COSTS / TOTAL OUTPUT
The more output you make, the BLANK the unit costs due to BLANK the fixed costs
lower, spreading
Labour productivity equation
TOTAL OUTPUT / NO. OF EMPLOYEES
Efficiency
Output (production) is maximised from a given level of inputs
Increasing labour productivity can be achieved by… (4)
- improving motivation
- training
- better management
- introducing better/ new technologies
Difficulties in increasing labour productivity (3)
- increased output may reduce quality due to staff stress on large work load
- resistant staff
- staff demanding higher pay
Greater efficiency may allow a business to… (4)
- pay higher wages to workers
- offer low prices / improve quality for consumers
- spend more money on the local environment
- increase overall profits for shareholders
Capacity utilisation
How much of our capacity we are utilising
Benefits of reaching high capacity (90-95%) (7)
- average unit costs will fall
- benefits from economies of scale
- profits increase
- more competitive due to lower costs
- opportunities for bonus payments for staff leading to increased labour productivity
- shareholders dividends
- stakeholder benefit
Problems with reaching full capacity (3)
- unable to accept new orders and produce them
- little opportunity for maintenance of machinery
- employees may feel under pressure and become demotivated so quality may decrease
What can a business do if capacity is not used highly ( e.g. 60%) (4)
- increase sales
- improve marketing
- produce different products with same resources
- reduce capacity ( redundancies, shorter working week, downsizing)
Capacity shortage
When a firms capacity isn’t large enough to deal with the level of demand for its product
Ways of increasing capacity (4)
- building or extending factories or plants
- ask staff to work overtime or longer hours
- recruit more staff
- outsource or subcontract
Capacity
Measure the maximum it can produce given its existing resources
Economies of scale
Cost advantages reaped by companies when production becomes efficient as costs are spread over a larger number of goods. As the scales of production increases, the unit costs decreases
Managerial economies of scale
Employ the best managers with specialist skills
Purchasing economies of scale
Buying in bulk
Technical economies of scales
Afford to buy better and advanced machinery
Marketing economies of scales
Large firms can afford expensive media that reach more customer and can complete more market research
Financial economies of scale
Large firms can borrow at lower rate as they are considered safer
How do economies of scale create barriers to entry
If a market has significant economies of scales that haven been exploited by the existing firms to a large extent, new entrants are deterred
Lean production
The aim to reduce waste throughout the organisation
Just in Time production
Ordering supplies only when we need them and holding as close to zero stock as possible
Benefits of JiT
- motivated workforce
- multi skilling and flexibility
- reduced waste
- greater variety of goods
Difficulties of JiT
- fewer opportunities for bulk buying
- halting of production if the supplier fails to deliver
- difficulties meeting spikes in demand
JiT success depends on… (3)
- excellent communication
- flexibility from suppliers and employees
- infrastructure
Automation
The use of machinery to replace Human Resources
Capital intensive production
Businesses requiring a larger amount of capital (machinery) relative to labour
Advantages of capital intensive (3)
- machines can work continuously 24/7
- quality can be standardised
- more cost effective if larger quantities are produced
Disadvantages of capital intensive
- Initial set up costs of machinery are high
- breakdowns in production can be costly and cause delays
- inflexible
Kaizen
Continuous improvement
Quality
Measured by the extent to which an operation meets its customer requirements
Quality assurance
Any systematic process of determining whether a product of service meets specified requirements (quality checked by staff for defects down production line )
+ and - of quality assurance
+ ensures product isn’t faulty
+ stops customer complaints
+ gives better customer satisfaction
- time consuming
- costs a lot to train staff
Quality control
How a company measures product quality and improves if it needs be (checked by inspectors at the end of the line)
+ and - of quality control
+ reduces chance of poor quality products reaching end users
+ inspectors (qualified) looks for faults so less employees need to be trained
- faults only found at the end of line
- high wastage costs
- reworking faults costs time and money
- waste resources, time and raw materials
Benefits of quality
- customer satisfaction
- higher productivity
- reputation improved
- increased innovation
Difficulties of improving quality
- costly
- difficult to agree
Producing to order
A strategy in which a business only manufactures a product once an order has been received from a customer
Advantages of producing to order
- ability to supple a product that meets a customers exact specification
- reduces costs in holding inventory
- potential for higher prices
- production planning is easier
- targeting markets
Disadvantages of producing to order
- fluctuations in production levels overtime
- Higher costs due to inefficient capacity utilisation
- inability to take advantage of sudden interest in a product
- difficult to plan
Quality circles
An approach to quality management whereby groups of employees meet regularity to identify potential improvements and resolve quality issues
Labour intensive production
When products are mainly produced by human workers
+ and - of labour intensive
+ customised and personally made products are easier to make
+ less expensive machinery costs
+ humans can use initiative to solve problems
- quality of products can vary
- skilled workers take time and money to train
- unbalanced pay
Outsourcing
The transfer of activities, which were previously conducted in house, to a third party outside the business
+ and - of outsourcing
+ react to changes in demand more quickly
+ outsourcing providers may be more specialised and therefore more efficient
+ lets the firm concentrate on their core business
- quality of product is no longer under the firms control
- outsource provider may want profits so therefore may be more expensive
