Unit 4: Operations management Flashcards
What are the factors of production?
- Land - natural resources (raw materials, land for factories).
- Labour - human effort.
- Capital - Machinery, tools and money used in production.
- Enterprise - entrepreneurial ability to combine resources effectively.
Define intellectual capital
The intangible capital of a business that includes human capital (well-trained & skilled employees), structural capital (databases & information systems) and relational capital (good links with suppliers and customers).
Define transformational process
An activity or group of activities that transforms one or more inputs, adds value to them, and produces output for customers.
How can operations managers increase added value?
By managing:
- Efficiency of production - keeping costs low.
- Quality - the goods or services must be suitable for the purpose intended.
- Flexibility & innovation - the need to develop and adapt to new processes and products.
What are the factors affecting the amount of Value Added?
- Design of the product (does it have quality features that allow for a higher price to be charged?)
- The efficiency of operations - by reducing waste, the operations department will increase the value added by the production process.
- Branding to encourage consumers to pay more for the product than the cost of the inputs.
What are the contributions of operations of adding value?
- Reducing production costs through increased efficiency.
- Producing quality goods that meet customer expectations.
- Ensuring production is flexible so that changing consumer tastes can be satisfied.
Define productivity
The ratio of outputs to inputs during production (e.g. output per worker per time per sec).
Define level of production
The number of units produced during a time period.
Define production
The process that transforms inputs into outputs.
How to measure Labour Productivity?
Labour productivity (no. of units per worker) =
Total output in a given time period / Total workers employed
How to raise productivity? (4 ways)
- Improve the training of employees to raise skill level - Higher skilled employees will be more productive. Can be expensive and time consuming.
- Improve worker Motivation - The use of financial and non-financial motivators can encourage workers to work more efficiently.
- Purchase new technological equipment - A high cost investment with potential long term increase in productivity. High-cost investment will only be worthwhile if high output levels are maintained. Job losses? Worker security?
- More effective management - Think of the impact of ineffective stock management systems, poor scheduling.
Define efficiency
Producing output at the highest ratio of output to input.
Define effectiveness
Meeting the objectives of the business by using inputs productively to meet customers’ needs.
Define sustainability of operations
Business operations that can be maintained in the long term, for example, by protecting the environment and not damaging the quality of life for future generations.
Benefits of increasing sustainability
- Reducing energy use can reduce energy costs.
- Making recyclable products reduces the cost of waste disposal.
- Reducing the use of plastic and non-biodegradable materials will attract more demand from green consumers.
- Reducing waste from operation reduces production costs.
Limitations and costs of increasing sustainability
- Increasing sustainability requires capital investment.
- Development of recyclable products is expensive/time-consuming.
- Supplies from sustainable sources is expensive.
- Recycled materials need to be cleaned/processed before use.
Define labour intensive
Involving a high level of labour input compared with capital equipment.
Define capital intensive
Involving a high quantity of capital equipment compared with labour input.
Advantages & Limitations of labour intensive production
Advantages:
- Interesting and varied work.
- Low machine costs.
- One-off designs meet customer requirements such as exclusive furniture.
Limitations:
- Low output levels.
- Skilled, high paid workers required.
- Product quality depends greatly on skill/experience of each worker.
Advantages & Limitations of capital intensive production
Advantages:
- Economies of scale.
- Consistent quality.
- Low unit costs of production.
- The ability to supply the mass market (meet demand).
Limitations:
- High fixed costs.
- Cost of financing equipment.
- High maintenance costs & needing skilled workers for repairs.
Define job production
The production of a one-off item specially designed for the customer.
Define batch production
The production of a limited number of identical products - each item in the batch passes through one stage of production before passing on to the next.
Define flow production
The production of items in a continually moving process.
Define mass customisation
The use of flexible computer aided technology on production lines to make products that meet individual customers’ requirements for customized products.
Job production - Advantages + Disadvantages
- Single one-off items.
- Highly skilled workforce.
Advantages:
- Allows for specialist projects or jobs, w/ high added value.
- Higher motivation of workers.
Disadvantages:
- High unit production costs.
- Time-consuming.
- Wide range of tools & equipment needed.
Batch production - Advantages + Disadvantages
- A group of identical products pass through each stage together.
- Labour + machines must be flexible to switch batches.
Advantages:
- Economies of scale.
- Faster production w/ lower unit costs.
- Flexibility in design of product in each batch.
Disadvantages:
- High lvls of inventory at each production process.
- Unit costs higher than flow production.
Flow production - Advantages + Disadvantages
- Mass production of standardized products.
- Specialized, expensive capital equipment.
- High demand.
Advantages:
- Low unit costs due to constant working of machines.
- High labour productivity and economies of scale.
Disadvantages:
- Inflexible - difficult & time-consuming to switch from one type of product to another.
- Expensive to set up flow-line machinery.
Mass customization - Advantages + Disadvantages
- Flow production of products w/ standardized components but also customized differences.
- Many common components.
- Flexible & multi-skilled workers.
- Flexible equipment allows variations in the product.
Advantages:
- Combines low unit costs w/ flexibility to meet customers’ individual requirements.
Disadvantages:
- Expensive product re-design may be needed to allow key components to be switched to allow variety.
- Expensive flexible capital equipment.
Factors influencing production method used?
- Size of market
- The capital available
- Other resources
- Customers demand products adapted to specified requirements.
What are problems from changing from job to batch production?
- The cost of equipment needed to handle large numbers in each batch may be high.
- Additional working capital is needed to finance WIT inventory.
- A risk of worker demotivation (less need of their craft skills).
What are problems from changing from job & batch to flow production?
- Cost of capital equipment too high.
- Employee training needs to be flexible & multi-skilled. If not, workers take on one boring repetitive task and become demotivated.
- Accurate estimates of future demand needed to ensure output matches demand.
Define inventory
Materials and goods held by a business and required to allow for the production of products and their supply to the customer.
What are the reasons for holding inventory?
- Raw materials & components - held in storage until used in production process, the business can meet increases in demand by increasing the rate of production quickly.
- Work-In-Progress - (Converting raw materials into finished goods) Depends on length of time needed to complete production and on method of production.
- Finished goods - Goods held in storage until sold/dispatched to customer. Can be displayed to potential customers and increase chances of sales. Held to cope with sudden unpredicted increases in demand (seasonal goods or products for festivals).
Problems of ineffective inventory management?
- Insufficient inventories does not meet unforeseen changes in demand.
- Out-of-date obsolete inventories held if effective rotation system isn’t used (eg: fresh foods).
- Inventory wastage may occur due to mishandling or incorrect storage conditions.
- High inventory lvls have high storage costs.
- Poor management of supply purchasing function leads to late deliveries, low discounts from suppliers or a delivery too large for warehouses to cope with.
Costs of holding inventories?
- Opportunity cost: The more the inventories use, the higher the capital used to finance, then the greater the opportunity cost. During times of high interest rates, opportunity costs of holding inventories increases.
- Storage costs - Inventories held in warehouses require special conditions. Employees are needed to guard and transport goods. Insurance/security of inventories may be included.
- Risk of wastage & obsolescence - if inventories not used/sold, a risk of being outdated. This lowers their value and be sold for a lower price.
Benefits of holding inventories?
- Reduces risk of lost sales - high inventories gives customers more choice.
- Allows for continuous production - the cost of lost output/wasted resources can be avoided by holding inventories.
- Avoids the need for special orders from suppliers - there would be extra costs from suppliers if an urgent order is made.
- Large orders of new suppliers reduce costs - business benefits from bulk discounts as transport costs are lower due to fewer deliveries being made.
Define economic order quantity
The optimum or least cost quantity of stock to re-order taking into account delivery costs and stock-holding costs.
What are features of an inventory control chart?
- Buffer inventories - the greater the uncertainty abt delivery times/production lvls, the higher th buffer will be.
- Maximum inventory level.
- Re-order quantity - influenced by EOQ.
- Lead time - The longer this is, the higher the re-order inventory lvl.
- Re-order level - Depends how long it takes suppliers to deliver new supplies & rate of usage of inventories.
Define buffer inventory
Minimum inventory level that should be held to ensure that continuous production is possible should delivery delays occur or output increase.
Define re-order quantity
Number of units ordered each time.
Define lead time
The time between ordering new supplies and their delivery.
Define re-order level
The level of inventory that triggers a new order to be sent to suppliers.
Define supply chain
The network of all the businesses and activities involved in creating a product for sale, starting with the delivery of raw materials and finishing with the delivery of the finished product.
Define supply chain management
Handling the entire production flow of a product (from raw materials to finished product) to minimize costs but improve customer service.
How does supply chain management aim to reduce the time period to convert raw materials into finished goods?
- Establishing excellent communications with supplier companies (ensures right quantity & quality are received when needed).
- Improving transport systems (reduces time).
- Speeding up new product development to improve business competition.
- Minimizing waste in production.
Benefits of effective supply chain management
- Improves customer service - customers receive products more quickly/on time w/ appropriate quality.
- Reduces operation costs - Production costs are also cut as time is saved in converting raw materials into finished products.
- Improves profitability - Happens by reducing wasted time and improving inventory management and creating a low cost efficient supply chain.
Define just-in-time (JIT) inventory management
Aims to avoid holding inventories by requiring supplies to arrive just as they are needed in production and completed products are produced to order.
Define just-in-case (JIC) inventory management
Aims to reduce the risk of running out of inventory to the minimum by holding high buffer inventory levels.
Advantages of JIT approach
- Capital invested in inventory & opportunity cost of holding inventory is reduced.
- Costs of storage & inventory holding are reduced.
- Less chances of inventories becoming outdated/obsolete.
- The multi-skilled & adaptable staff required for JIT to work may have increased motivation.
Disadvantages of JIT approach
- Failure to receive supplies/materials on time leads to expensive production delays.
- Delivery costs increase as frequent small deliveries is a key feature of JIT.
- Reduction in bulk discounts offered by suppliers as each order is small.
- Reputation of business depends on external factors (reliability of suppliers/traffic delays).
Advantages of JIC approach
- Little chance of running out of inventory.
- Less need for accurate sales forecasting than with JIT.
- Economies of scales from large orders of suppliers.
Disadvantages of JIC approach
- High capital cost of finance invested in inventories.
- High storage, insurance and other costs are associated with inventory holdings.
- Inventories could lose value if fashion/technology changes while they are being held.
What are the conditions for JIT to operate successfully?
- Excellent supplier relationships - prepared to deliver supplies at short notice.
- Production employees must be multi-skilled and flexible - Workers must be able to switch to making different items at short notice so no excess supplies of one product is made.
- Equipment and machinery must be flexible - Modern, computer controlled equipment is flexible to quickly switch to making one type of product to the next. Small batches of each item is produced to a minimum requirement. Thus, JIT is more suitable for larger and more financed-firms.
- Accurate demand forecasts - these can be converted into production schedules.
- IT equipment needed for JIT - Automatic and immediate ordering can take place when it is recorded that more components will shortly be required.
- Excellent employee-employer relationships - no strike deal w/ major trade unions.
- QUALITY must be everyone’s priority - essential that each component/product must be made right the 1st time.
Why is it that JIT may not be suitable to all businesses?
- There are limits to the use of JIT, like increased costs due to delayed supplies that exceed the cost of holding buffer inventories.
- Smaller firms not able to finance expensive IT systems needed to operate JIT.
- Global inflation makes holding inventories of raw materials more beneficial. May be cheaper to buy a larger quantity now than smaller ones in future when prices are rising.
- Tertiary sector businesses (hotels/hairdressers) may hold buffer inventories to avoid running out.
Define capacity utilisation
The proportion of maximum output capacity currently being achieved.
Rate of CU = Current output level/maximum output level x 100
Define outsourcing
Using another business (a third party) to undertake a part of the production process rather than doing it within the business using the firm’s own employees.
Define maximum capacity
The highest level of sustained output that can be achieved.
Advantages at working on full capacity
- Unit costs will be lower which increases profits.
- Increased job security & pride for employees.
Disadvantages at working on full capacity
- Employees feel under pressure due to workload, this raises stress levels and reduces productivity (lost output).
- Regular customers have to wait a long time for their orders or be put in a waiting list.
- Machinery working constantly - insufficient time for maintenance & repairs.
Define excess capacity
When current levels of output are less than the full-capacity output of a business (spare capacity).
How to improve capacity utilisation in the short-term?
- Maintaining high output levels.
- Adopting a more flexible production system, allowing other products to be made to be sold at other times of the year.
- Flexible employment contracts (workers work fewer hours which reduces their morale/motivation).
Define rationalisation
Reducing capacity by closing factories/production units.
Advantages & disadvantages of Rationalisation?
Advantages:
- Reduces overheads.
- Higher capacity utilisation form remaining production units.
Disadvantages:
- Redundancy payments.
- Reduced job security.
- Risk of industrial action.
Advantages & disadvantages of R&D of new products
Advantages:
- Increased competition.
- New products may prevent rationalisation & associated problems.
Disadvantages:
- Expensive.
- Too long to prevent cutbacks in capacity & rationalisation.
Define capacity shortage
When demand for a business’s products exceeds production capacity.
Advantages & disadvantages using subcontractors or outsourcing of supplies/components/finished goods (to reduce long-term capacity shortages)
Advantages:
- No major capital investment is required.
- Quick to arrange.
- Greater flexibility than expansion of facilities.
Disadvantages:
- Less control over quality of output.
- Adds to administration & transport costs
- Uncertainty over time/reliability of delivery times.
Advantages & disadvantages of investing capital in the expansion of production facilities (to reduce long-term capacity shortages)
Advantages:
- Increases capacity over long-term.
- Business is in control of quality & delivery times.
- The new facilities use latest equipment and methods.
Disadvantages:
- Capital cost is high.
- Problems with raising capital.
- Increases total capacity (a problem if demand fall for a long period).
What are reasons/advantages for outsourcing?
- Reduction & control of operating costs - cheaper to buy in specialist services when needed.
- Increased flexibility - Removing departments and buying in services when needed. Additional capacity can be obtained from outsourcing.
- Improved company focus - Main objectives of the business is being focused on.
- Access to quality service or resources - aren’t available internally.
- Freeing up internal sources - for use in other areas
Drawbacks to outsourcing?
- Loss of jobs within the business - decreased motivation & job security of employees. Due to redundancies, the business experiences bad publicity.
- Quality issues - Difficult to check on them, so a contract w/ minimum service level is needed. May have to send employees for quality control.
- Customer resistance - they may object dealing w/ overseas foreign operators (they doubt quality & reliability).
- Security - risk.
- CSR - Business is less able to ensure if CSR standards are publicly towards workers or the environment.
Define business process outsourcing (BPO)
A form of outsourcing that uses specialist contractors to take responsibility for certain business functions, such as HR and finance.
