unit 4: operations management

Question 1

Production (key points)

Answer 1

• Provision of a product or service to satisfy customers wants or needs. Process involves firms adding value to a product.
• Value added is the difference between the cost of inputs (raw materials or components) and the final selling price

Question 2

Productivity (key points)

Answer 2

The output measured against the inputs used to create it.

Productivity can be measured by: Output (over a given time period) / number of employees

Businesses want to become more efficient with production, this means that the amount of output produced per worker employee will rise and costs of production will fall.

Question 3

Lean production (key points)

Answer 3

increasing speed, reducing waste, reducing distance

Question 4

Flow production (key points)

Answer 4

• Ongoing production of products in large quantities.
• Product moves continuously through production process
• Time taken on each task must be evenly distributed

Question 5

Batch production (key points)

Answer 5

Large quantities of a product that may vary slightly.

• Similar items are produced together
• Each batch goes though one stage of production before moving onto the next stage
• Concentrate skills
• Achieve better use of equipment and so produce good quality products more economically than manufacturing them individually

Question 6

flow production (pros/cons)

Answer 6

+ Cost per unit of production reduced through improved work and material flow
+ Suitable for manufacturers of large quantities
+ Capital intensive meaning it can work constantly
+ Less need for training and skills

• Very long setup time and reliant on high machinery
• High raw materials and finished sticks unless lean production used
• Goods are mass produced – less differentiation for the customer
• Production is shut down if flow is stopped

Question 7

Batch production (pros/cons)

Answer 7

+ Cost saving can be achieved by buying in bulk
+ Stull allows customers some choice
+ Products can be worked on by specialist staff or equipment at each stage
+ Allows a firm to handle unexpected orders

• Takes time to switch production of one batch to another
• Requires the business to maintain higher stocks of raw materials and work-in-progress
• Takes may becoming boring or repetitive – reducing motivation
• Size of batch dependent on capacity allocated

Question 8

Job production (key points)

Answer 8

Produces items from scratch – involving one individual, often bespoke to the customer.

• One off or small number of items produced
• Undertaken by small, specialist businesses
• Made to customer specifications

Question 9

Job production (pros and cons)

Answer 9

+ Customer requirements and changes can be handled
+ Associated with higher quality products
+ Employees can be better motivated – more job satisfaction
+ A flexible production method

• Individual cost of one unit may be high
• Often labour-intensive = high labour costs
• Requires close consultation with the client
• Usually reliant on high skills

Question 10

Just in time production (JIT):

Answer 10

Constantly getting supplies, therefore not paying for storage.
Limited buffer stocks
Regular re-orders
Low max inventory level
Requires organisation + planning

Question 11

Just in case production (JIC):

Answer 11

Have a buffer stock
Storage costs are higher
Delivery is less regular
Less likely to disappoint customers

Question 12

Definition of start-up costs

Answer 12

incurred before the business can start to operate, such as a deposit on rented property.

Question 13

Definition of operating costs

Answer 13

sometimes called expenses, refers to money spent on a regular basis, once a business is up and running. For example electricity.

Question 14

Definition of fixed costs

Answer 14

Fixed costs: a charge that is not relative to the output of a business e.g rent/mortgage, tax and rates, staff salaries, insurance, advertising.

Question 15

Definition of variable costs

Answer 15

direct costs associated with the production of a product or service e.g raw materials, energy costs, wages.

Question 16

Calculations of variable costs:

Answer 16

Variable costs of each product x number produced

Question 17

Break even analysis (key points):

Answer 17

FC/(SP - VC)

• The point where total costs (F+V) meets total revenue
• Expressed as a value in units
• Allows business to monitor how many sales they need to make before they enter profit
• Business’ aim to reduce the break even point

Question 18

Break even analysis (pros and cons)

Answer 18

Strengths of break even analysis:

• Focus entrepreneur on how long it will take before a start-up reachers profitability
• Helps entrepreneur understand the level of risk involved in a stat-up
• Illustrates the importance of a start-up keeping fixed costs down to a minimum
• Calculations are quick and easy

Limitations of break-even analysis:

• Unrealistic assumptions – products are not sold at the same price at different levels of output; fixed costs do vary when output changes
• Most businesses sell more than one product, so break-even for the business becomes harder to calculate.

Question 19

Economies of scale:

Answer 19

Purchasing economies: These allow businesses to buy in large purchases so that they get bulk purchases at low prices.

Financial economies: Large businesses can take advantage of financial discounts. Such as easier credit or the availability of loans from banks.

Managerial economies:
Businesses can take advantage of being able to afford specialist workers.

Technical economies: Technical equipment can be bought as it is used frequently, this can help to cut production costs and reduce waste. It may also mean that less labour is needed.

Marketing economies: The cost of promotion is low because of the large quantities that are being sold.