UNIT 4- Operations Flashcards
Operations management
+key types of operational objectives
The management of processes, activities, and decisions relating to the way goods and services are produced and delivered
Cost and volume, quality, efficiency and flexibility, environmental
Cost and volume objectives
+examples
Traditional measure of cost-effectiveness is unit costs (total costs divided by total units)
As 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 margins at the average industry price
Productivity and efficiency for example units per week or employee, unit costs per item, contribution per unit, number of items to produce per time period or pad machine et cetera
Quality objectives
Our requirement for a reputation of high-quality can give a competitive advantage over competitors
Potential objectives are rejection of defect rates, reliability how often something goes wrong and average lifetime use, customer satisfaction, number or incidents of customer complaints, customer loyalty, percentage of on time delivery
Efficiency and flexibility objectives
Looks at how effectively the assets of the business are being utilised – return on capital employed (how much money you’re putting in versus getting out)
Also measure how responsive the business can be to short-term or unexpected changes in demand
Example examples include labour productivity for example output per employee, units produced per production line, sales by shop
Output per time period, capacity utilisation, order lead times
Environmental objectives
Use of energy efficiently, proportion of production or packaging materials that are recycled, compliance with the waste disposal regulations/proportion of waste to landfill, supplies of raw materials from sustainable sources
The transformation process
Operations management runs the transformation process
- What happens inside the business where value is added to inputs to create outputs
Unit costs and efficiency
+formula
Average cost per unit= total production cost in a given period (£) /
Total output in period (units)
Lower unit costs will enable the firm to reduce their prices and be more competitive or they can enjoy higher profit margins. The decision they make may depend on the price elasticity of demand if it is inelastic or reduction in price will increase overall revenue.
Economies of scale
+ the difference between internal and external economies of scale
Economies of scale arise when unit costs fall as output increase
Internal economies of scale arise from the increased output of the business itself whereas external economies of scale occur within the industry and involve changes outside of the business and affect all competitors in an industry
The six internal economies of scale
Managerial economies of scale aware larger firms can afford specialists with more experience who are therefore efficient and reduce unit costs
Technical economies of scale is the use of specialist equipment or processes to boost productivity for example machines robotics and IT
Purchasing economies are buying in greater quantities which usually results in a lower price per unit or bulk buying
Marketing economies of scale are the spreading of fixed marketing spent over a larger range of products, markets and customers
Network economies of scale are they adding of extra customers or users to a next work that is already established for example mobile phones or Netflix?
Financial economies of scale are where larger firms benefit from access to more and cheaper finance as they pose less risk so are more likely to get investments at lower interest rates
Examples of external economies of scale
+ agglomeration economies
University research department helping fund research
Transport networks lower logistics costs
Relocation of suppliers to the centre of production
Influx of human capital – highly skilled workers
A commotion economies a occur when businesses in similar industries tend to cluster together and attract an influx of skilled talent which provides human capital to expand businesses
Diseconomies of scale
A occur when average costs rise as a business gets too big usually occurring due to coordination or communication problems as well as alienation or demotivation of staff as they feel more detached from the company
Capacity
The capacity of the business is a measure of how much output it can achieve in a given period it is very dynamic for example when a machine is having maintenance capacity is reduced and is also heavily linked to labour
It also needs to take account of seasonality or unexpected changes in demand for example, chocolate factories making Easter eggs and ice cream factories during the summer
Capacity utilisation
+formula
Capacity utilisation is the proportion or percentage of a businesses capacity that is actually being used over a specific period and is expressed as a percentage
- The key costs of capacity are usually equipment facilities and labour
( wages are weekly variable costs and salaries are fixed monthly/yearly costs)
Capacity utilisation = actual level of output/maximum possible output x100
Why most businesses operate below capacity
+the dangers
Methods of increasing capacity
+ dangers
Lower than expected market demand, loss of market share, seasonal variations and demand, recent increase in capacity, maintenance and repair
Higher unit costs which directly impact competitiveness, less likely to reach break even output, capital tied up and under utilised assets
Can increase capacity by increasing workforce hours through extra shifts, encouraging overtime and utilising temporary staff , can subcontract some production activities and reduce time spent maintaining production equipment
However this can negatively affect quality as production is rushed and there is less time for quality control, can lead to added workload and stress on employees demotivating them, potential loss of sales due to an inability to meet sudden or unexpected increases in demand
Labour productivity
+why it matters
+ factors influencing it
Labour productivity ( output per worker) = output per period (units) / no of employees at work
Labour productivity is usually a significant part of total costs
Business efficiency and profitability are also closely linked with the productive use of labour and in order to remain competitive a business needs to keep its units costs down
Factors influencing labour productivity are the extent and quality of fixed assets, skills, ability and management of the workforce, effectiveness of the production process and organisation of workflow, extent to to which workforce is trained and supported and external factors such as the reliability of suppliers
Ways to improve labour productivity
+ potential problems when trying to increase it
Can increase later productivity through motivation for example pay and communication, good working conditions, investment and employee training, investment in capital equipment, streamline production process, measurements of performance and set target
Potential problems when trying to increase labour productivity as a potential trade off with quality, potential for employee resistance depending on the matter of used, employees may demand higher pay for their improved productivity which could turn the gate any impact on labour costs per unit
Labour intensive
+examples
+ implications on unit costs
+ advantages and disadvantages
Labour intensive is where production relies on using labour resources for example food processing, hotels and restaurants, fruit farming, hairdressing, coal mining
Labour costs tend to be higher than capital costs, however the costs are mainly variable which tends to lower the breakeven output
Firms benefit from this if they can access sources of low-cost labour
Advantages – unit costs may still be low in low rage locations, it is a flexible resource through multi skilling and training, labour being at the heart of the production process can help continuous improvement
Disadvantages – greater risk of problems with employee employer relationships, potentially high costs of labour turnover through recruitment et cetera, need for continuous investment and training
Capital intensive production
+examples
+ implications on unit costs
+ advantages and disadvantages
relies on using capital resources for example oil extraction, call manufacturing, web hosting, intensive arable farming, transport infrastructure
Capital costs tend to be higher than labour costs and the costs are mainly fixed which means a higher breakeven output
Firms can benefit if they have access to low-cost long-term financing
Advantages – efficient and quick with great quality, greater opportunities for economies of scale, lower labour costs, potential for significantly better productivity
Disadvantages – may generate resistance to change from labour force, significant investment, potential for loss of competitiveness due to obsoletion – the machinery becoming out of date
Quality
+ tangible and intangible measures of quality
+ benefits of quality
A productive services of good quality if it meets the needs and expectations of the customer
Tangible- reliability, functions and features, support levels and standards, cost of ownership for example repairs
Intangible – brand image, exclusiveness, market reputation
Customer satisfaction, repeat purchases, customer recommendation, lower market costs, higher customer loyalty
Quality provides a company with a key advantage over its competitors as it allows it to differentiate his product from the competition
Companies such as Waitrose, Disney, Starbucks, BMW and Apple
Customer experience and customer service
+examples of businesses using low prices and high quality
The customer experience, including the buying process, product reliability, after sales service and cost of ownership
Customer service and quality particularly in service focused businesses such as restaurants
Premier Inn, Nando’s, Aldi, IKEA
Examples of poor quality
+implications
+measures of quality
Product fails, product doesn’t perform as promised, product is delivered late, pour instructions/direction of use, unresponsive customer service service
Lack of return customers, loss of customers, cost of working or remaking a product, cost of replacement/refunds, wasted materials, competitive advantage for competitors
Methods of improving quality
Quality control is the checking of a good or service before it is delivered to a customer for example at the end of a process for example a head chef expects a meal on a plate before it leaves the kitchen
advantages – quality can be monitored, stops faulty products reaching the customer, common problems can be identified, inspector takes responsibility
disadvantages – takes responsibility away from operatives, expires specialist/additional personnel, problems only identified at the end of the process, waste levels may be High
Quality assurance is the checking of a product or service at each stage of its production for example as it travels along a production line
advantages - spot any faults earlier saving resources from being wasted, motivates workers who are responsible for ensuring quality standards are met, aims to achieve an objective of no defect, enhances the reputation of the business as there is less chance of faulty goods reaching the end customer
disadvantages – requires staff training and high levels of staff commitment, can slow down the production process and labour productivity leading to higher unit costs, made demotivate workers who feel under pressure
Inventory management
Definition of industry
Factors affecting the amount of inventory held by a company
Inventory is the raw materials, work in progress, and finished goods held by a firm to enable production and meet customer demand
Holding inventory enables production to take place, satisfy customer demand, precaution against delays from suppliers, allows efficient production, allows for seasonal changes
The amount of inventory held depends on the companies
- need to satisfy demand as it can be costly if goods are not available however demand may be seasonal or unpredictable
- need to manage working capital as holding inventory ties up cash in working capital money spent on day-to-day running of the business however there is an opportunity cost associated with inventory holding
- Risk of inventory losing value/becoming obsolete
the cost of holding inventories
cost of storage- require large storing space and equipment to control and handle them
interest costs- tied up capital could mean paying interest
obsolescence risk- unusable due to damage or lost demand and incapable of being sold
stock out costs- if a business runs out of stock it could lose sales and customer good will as well as costs in urgent replacement orders and in production stopping or delays
Inventory control charts
+purpose
on paper
to maintain inventory levels so that the total costs of holding inventories is minimised
factory affecting when + how much inventory to reorder
- lead time from supplier
-Extent of implications of running out of stock, if it’s like amazon where it promises fast delivery, it may have a greater impact - demand for the product
advantage of low and high inventory levels
Low inventory levels-
lower inventory holding costs,
Inventory control chart
+purpose
on paper
to maintain inventory levels to that the total costs of holding inventories is minimised
factors affecting when and how much inventory to reorder
lead time from the supplier, implications of running out (if it is a company such as amazon and relies on
