Unit 5 - Business operations Flashcards
Economies of scale
Cost benefits that a firm gets with growth that reduces average unit cost
Types of Internal economies of scale
- Purchasing economies
- Marketing economies
- Technical economies
- Financial economies
- Managerial economies
- Risk-bearing economies
Purchasing economies
Large firms can buy resources from a supplier in bulk to get a discount - reducing average unit cost
Marketing economies
Large firms can advertise with fixed money, then costs can be used otherwise - reducing average unit cost
Technical economies
Large firms can use the latest technology, improving efficiency - reducing average unit cost
Financial economies
Large firms have more sources of money e.g. selling shares or putting pressure on banks for loans at lower interest rates - reducing average unit cost
Managerial economies
Large firms can afford specialist managers that can improve efficiency - reducing average unit cost
Risk-bearing economies
Large firms can have wider product ranges with different markets - reduces risk for a business
Types of external economies of scale
- Skilled labor
- Infrastructure
- Ancillary and commercial services
- Cooperation
Skilled labor
Build-up of labor skills and work experiences lowers training costs - reducing average unit cost
Infrastructure
In case of a particular industry dominating a region, infrastructure can be shaped to its needs
Ancillary and commercial services
Established industries encourage ancillary suppliers to set up close by which can let both businesses benefit
Cooperation
Large firms located closely can cooperate with each other so both can gain
Diseconomies of scale
The disadvantages to large growth in a business , causing average unit cost to rise
Types of diseconomies of scale
- Bureaucracy
- Labor relations
- Control and coordination
Bureaucracy
Large businesses have too many resources being used in administration, spend too much time doing paperwork, decision making is slow and resources are wasted - increasing average unit cost
Labor relations
With larger firms relations between workers can deteriorate, management can fail, workers can become demotivated, conflicts can happen and resources can be wasted solving them - increasing average unit cost
Control and coordination
Very large businesses can be difficult to control and coordinate, many employees over the world makes running organizations demanding and raises cost
Other limits to growth in a business
- Lack of finance
- Nature of the market
- Lack of managerial skills
- Lack of motivation
Lack of finance
Some businesses can’t grow because they don’t have the capital needed
Nature of the market
Some markets are too small for large companies
Lack of managerial skills
Some businesses can’t grow since owner’s don’t have the skills to run large operations
Lack of motivation
Some owners might not want to grow their business and keep it small
Production
The conversion of raw materials into goods and services
Productivity
The measure of output in relation to the input
Methods of production
- Job production
- Batch production
- Flow production
Job production
Employing all factors to complete one unit of output at a time, specialized to the customer e.g. a wedding dress
Advantages of job production
- Most suitable for personal services or one-off products
- Workers often have varied jobs
- More varied work increases motivation and job satisfaction
- Flexible and used for high quality goods and services - often expensive
Disadvantages of job production
- Skilled labor often used - raises costs
- Costs are higher since it is labor intensive - more human labor than machines
- Products are specially made to order - errors can be expensive
- Material may be specially purchased - higher costs
Batch production
Similar products are made in batches and certain numbers of products are used
Advantages of batch production
- Flexible way of working and production - can be easily changed
- Variety to worker’s jobs
- Allows a variety of products - gives consumers a choice
- Production may not be affected to any great extent if machinery breaks down
Disadvantages of batch production
- Can be expensive
- Machines have to be reset between production batches - output is lost
- Warehouse space will be needed for inventory of raw materials and finished products - can be expensive
Flow production
Large quantities of standardized products produced in a continuous process - can be known as mass production
Advantages of flow production
- High output of standardized product
- Costs of making products are low - prices are low
- Capital intensive - reduces labor cost + increases efficiency
- Capital intensive - allows workers specialize in specific repeated tasks - requires workers of any level - little training needed
Disadvantages of flow production
- Very boring system for workers - little job satisfaction and lack of motivation
- Significant storage requirements - costs of storing raw materials and products is very high
- Capital costs of setting up can be high
- Once machine breaks - whole production line has to be halted
Labor intensive
More human labor used than machinery
Capital intensive
More machinery used than human labor
Productivity formula
Productivity = Output ÷ Quantity of input
Labor productivity formula
Labor productivity = Output (over a given period of time_ ÷ Number of employees
Capital productivity formula
Capital productivity = Total output ÷ Capital employed
Ways to increase labor productivity
- Improve employee motivation
- Introduce new technology
- Improve inventory control
- Train staff to be more efficient
- Use machines instead of people (automation)
- Improved quality control / assurance reduces waste
Ways to increase capital productivity
- Downsizing - reducing unprofitable regions
- Relocation - moving to areas with cheaper rent or materials
- Outsourcing - giving work to specialists at lower costs
- Lean production - reducing resources used
Impacts of productivity improvement
- Financial impact - improves profitability
- Competitiveness - improved efficiency gains competitive edge and market share
- Workforce - have higher earnings and more interesting jobs or lose jobs
- Customers - benefit from lower costs and better service provision
Lean production
An approach to production aimed at reducing the quantitiy of resources used and hence reduce waste and increase efficiency
Effect of lean production
- Reduces costs
- Cuts lead times
- Reduces defective products
- improves reliability
- Speeds up product design
Just-in-time (JIT) production
Highly responsive to customer orders and uses very little stock holding e.g. a restaurant
Advantages of JIT
- Cash flow improved
- No waste, out-of-date or damaged stock
- Space is released
- No stock golding costs
- Stronger links with supplier
- Fewer suppliers
Disadvantages of JIT
- Higher ordering and administration costs
- Relies hugely on supplier’s reliability
- Advantages of bulk-buying may be lost
- Hard to cope with changes in demand
- Vulnerable to a break in supply
Types of wastage
- Overproduction - producing before orders
- Waiting
- Transportation - wastes time and risks product damage
- Unnecessary inventory - takes up space and incurs cost
- Motion - unnecessary moving of employees wastes time and cost
- Over-processing - complex machinery for simple tasks wastes time
- Defects - halts production and wastes time
Kaizen
Continuous improvements in small increments in the work space to reduce wastage and increase efficiency
Techniques for kaizen
- Standardization
- Team-working
- Empowerment
- Suggestion schemes
- Quality circles
- Multi-skilling
Technology and production in the secondary sector
- Robots - monitor and enhance efficiency 24/7
- Computer aided design (CAD) - design products and allow 3D drawing that can be altered quickly and cheaply
- Computer numerically controlled machines (CNCs) - carry out instructions from computers
- Computer aided manufacturing (CAM) - Computers link and control design and production in manufacturing
- Computer integrated manufacturing (CIM) - using computers for the entire production process
Technology and production in the tertiary sector
- Financial services - transactions carried out online or ATMs
- Marketing - market research
- Advertising - special effects + Internet
- Retailing - sales an be recorded
- Leisure industry - Tickets can be booked online
- Administration and communication - computers can process huge amounts of data
- E-commerce - buying and selling online
Quality
To produce a good or service which meets the customers expectations
Aspects of quality
- Physical appearance
- Reliability and durability
- Special features
- Suitability
- Repairs
- Customer service
Importance of quality
- Increased competition enforces quality
- Government legislation enforces quality
- Faulty products are costly, machine repairs expensive, late delivery and productivity can harm reputation
Traditional quality control
Making sure that quality of a product meets specified quality standards
Objectives for quality control
- Satisfy customer’s needs
- Operate in the way they should
- Can be produced cost effectively
- Can be repaired easily
- Meet safety standards set down by legislation and independent bodies
Quality assurance
Working methods that take into account customer’s wants when standardizing quality - involves guaranteeing quality standards are met
Total Quality Management (TQM)
Managerial approach that focuses on quality and aims to improve effectiveness, flexibility and competitiveness of the business
Features of TQM
- Quality chains - Every worker has to meet quality standards
- Everyone is involved - Every department accounts for quality
- Quality audits - Stats to monitor quality standards and reduce anomalies
- Teamwork - most effective for problem solving
- Customer focused - committed to customer’s needs and expectations
- Zero defects - zero defect policy
Advantages of TQM
- Focuses on customer’s needs
- Quality improved in all aspects of business
- Waste and inefficiencies removed
- Helps develop ways of measuring performance
- Improves communication and problem solving
Disadvantages of TQM
- High training and implementation costs
- Will only work if everyone is committed
- may be bureaucratic
- Focus is on process not products
Quality standards of British ISO 9000
- Identifies staff training needs
- Shows customers strive to improve quality
- Records and investigates quality failures and customer complaints
- Highlights products or design problems
- Ensures orders are consistently delivered on time
- Defines key roles, responsibilities ad authorities in a business
- Motivates staff to get things right the first time
- Examines and improves systems - lowers cost
Unique selling point (USP)
Features of a product that no similar products have letting a business put a unique price
