A-levels Business Studies - Unit 4, Notes

Unit 4: OPERATONS MANAGEMENT DECISIONS 20: Introducing operations Management  Operation Management is PRODUCTION MANGEMENT  Operations Management is concerned with the use of resources – land, labor, capital – to provide goods and services that will satisfy the demands identified by the market research department.  The Basic Job of the Operations Management Department is to take care of:  Efficiency of Production – keeping costs low  Good Quality  Flexibility – easily adaptable to new better methods of work  The aim of the Production process is to ADD VALUE to the raw materials, so that the final product can be sold at a profit.  Value Analysis:  It is a way of making sure that the most value is added to the product. It is a triangle, with the three basic points being:  Appearance  Performance/Quality  Economy of Manufacture  If the correct balance of the three can be achieved, the best product can be made and thus the highest profit can be earned.  Productivity: It is a measure of the outputs to the inputs  Labor productivity  (Output per Worker) = (Total output in a given period) / (Average workers in that period)  Capital Productivity  (Output per Capital Input) = (Total Output in given time) / (Capital Employed)  How to Improve Productivity  Train staff to increase skills level  Employ technology  Improve employee motivation  Better management  Increasing productivity does not necessarily mean that the business will be successful. E.g. Labor Productivity can be increased by firing staff as well.  Production methods:  Job Production  Batch Production  Flow Production  Advanced/Specialized Production Methods

 Mass Customization – This process uses the latest technology combined with a multi-skilled work force to make a range of varied customized products.  Cell Production – Further Development of Flow Production. In this rather than using a production line, the production is divided into cells that are independent units that finish a specific phase of the process completely  Location Decisions  Quantitative Factors affecting Location Decisions  Site Cost  Regional Incentives  Transportation Costs  Labor Costs  Revenue Generation  Qualitative Factors influencing the Location Decision  Infrastructure  Environmental and Planning Considerations – Laws, Environmental Groups, Residential Area  Management’s Preference  Clustering – Being present where the rest of the companies in the industry are based as this place is likely to attract the customers  International Location Decisions  Exchange Rates  Trade Barriers  Ethical Considerations  Political, Legal and Language Considerations  Labor and Capital Intensity  Labor intensive industries employ a high number of people to do the job and there is little do no involvement to machinery  Slow  Can’t be effectively Used in Mass Production  Capital intensive production uses a high value of capital, i.e. Machinery.  High Fixed Costs  Production Methods – Making the Choice  Size of the Market  The Larger the market the more the production method will be batch or flow; otherwise job will be suitable.  The Amount of Capital Available  This will decide whether or not the expensive Flow Production system can be put in action or not  Availability of other Resources

 E.g. Large-scale Flow production requires a large supply of relatively cheap unskilled workers and a lager flat area etc. while Job production requires skilled crafts people. 21: Costs, Break-even and Costing Methods Costs of Production  Direct Costs  Labor  Material  Overheads  Indirect Costs  Fixed Costs  Variable Costs  Semi-Variable Costs  Marginal Costs  Break-Even Analysis  The Graphical Method [Book]  The Equation Method  F.C + V.C (Q) = S.P (Q)  Margin of Safety – the difference between the revenue earned at the break-even point and the current level of production  Uses  Marketing Decisions – effect of price changes on the break-even  Operations Management Decisions – whether or not new equipment with lower VC should be bought  Location Decisions – Effects of FC and VC on the respective break-evens  Costing Methods – help the managers in deciding whether or not production should be stopped, stepped up or switched to newer better methods.  Cost Centers – area of responsibility to which the costs can be charged, e.g. assembly department  Profit Centers – a section of the business in which both the costs and the profits can be easily identified. E.g. a branch of a chain of shops  Uses of Profit and Cost Centers:  Mangers can have targets towards these centers, like reducing cost  Individual performance of everyone involved in the center can be evaluated  Helps in making future decisions  Overheads  Production  Selling and Distribution  Administration 

 Finance  Unit Cost = (Total Cos of Production) / (number of Units Produced)  Full Costing  In this method the costs are allocated to their respective Cost Centers  Then the overheads are apportioned on the basis of, e.g. area of the department, labor employed etc.  Then the total cost of each department is calculated  Good for pricing Decisions  Marginal or Contribution Costing  Marginal Cost in the cost of producing one more unit  The contribution of a product is the revenue gained from selling a product less its marginal (direct) cost  How Contribution or Marginal Cost helps in making Decisions  Make or buy decisions  Offer large contract at below full price 22: Improving Operational Efficiency: 1 Capacity, Scale of Operation and Work Study Capacity Utilization = (Current Output) / (Max Capacity) *100  High Capacity Utilization means that the FC will be recovered better and more revenue can be earned  Disadvantages  The staff may fee overloaded  Regular customers will not be able to make special orders  Machinery will be working flat out and there will more chances of breakdowns  Excess Capacity – Options for utilization of this space  Excess Capacity in the Short-Term  The Business may try to increase sales by diversifying the market, such as entering a overseas market  The company can continue to produce at full capacity and stock up  Or the company can look for other item that might be produced using the same equipment  Excess Capacity in the Long-Term  Rationalize Existing Operation and cut capacity by closing factories/offices  R&D into new products  Long-Term Capacity Shortage  Use sub-contractor or outsourcing of supplies, components or even finished goods  Capital investment into the expansion of the production facility  Business Expansion – Increasing the Scale of Operations  Economies of Scale 

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 Purchasing Economies  Technical Economies  Financial Economies – bank are more will to give loan, the company has the option of floating shares  Marketing Economies  Managerial Economies  Diseconomies of Scale – Long Chain of Command  Communication Issues  Alienation of the Workers  Coordinating the Business  Avoiding Diseconomies of Scale  MBO  Decentralization  Reduce Diversification Work Study – Improving Labor Efficiency  It involves;  Method Study – to find the most effective way to do a job  Work measurement – recording the output levels using different methods and so setting a standard time for each task  Problems in WS  Workforce Resistance – It is seen as individual inspection and also that ultimately may result in redundancies  Accurate Measurement of Tasks

23: Improving Operational Efficiency: 2 Stock Management; Lean Production Why is Stock Management Necessary?  To avoid having a situation where there are insufficient stocks to meet the demand  Out-of-date stock may be held by the company if proper stock rotation systems are not applied  Stock wastages might go unnoticed  Very high levels of stock will keep cash tied up, and also increase the stock-holding costs  Poor management of stock purchasing can lead to late deliveries  Stockholding Cost  Opportunity Cost  Storage Cost  Risk of Wastage and Obsolescence  Cost of Holding Inadequate Stock  Lost Sales  Idle Production Resources  Special urgent orders can be expensive  Small ordering quantities will mean that the company will have to give up on bulk discounts 

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Controlling Stock Levels – A Graphical Approach

 Buffer Stocks: These are minimum stocks that are to be held at all times  Max Stock Levels  Re-order Quantity  Lead Time: The time between ordering the stock and the time when it is delivered  Re-order Stock Level: This is the quantity of Stick that will trigger the order to be placed with the supplier  JIT (Just-in-Time) Stock Management  Order the stock when needed  In order to have JIT the following are needed  Excellent relations with the supplier  Multi-Skilled production staff  Equipment has to be flexible  Accurate demands and forecast have to be made  Latest equipment will make JIT more suitable  Excellent employee-employer relations a necessary  Quality has to be maintained  Lean Production  Lean production approach suggests that the prime objective should be to produce the highest quality output in the fewest possible resources. It suggests cutting on the complexities, costs and time that does not add value for the customer.  Lean Production can be achieved by:  Simultaneous Engineering  This is a method of developing new products simultaneously and not one after the other

Flexible Specialism  Lean production suggests that instead of making the same product for many years, the product should evolve with the technological advances  To do this a company need to have:  Flexible employment contract for non-core workers  Flexible and adaptive machinery  Flexible and multi-skilled workers  Kaizen – Continuous Improvement  Kaizen suggests that the work methods/practices should be improved continuously rather than making some changes after a while  Also the it follows Theory Y of management. It suggests that the workers know more about how to improve production methods than the managers, so the workers need to be given to opportunity to suggest newer better ways to do the job.  Conditions necessary for Kaizen are:  Management Culture should follow Theory Y  Team working  Empowerment of the Workers  All the Staff has to be Involved  Appropriateness of JIT and Lean Production for Businesses  Whether the above mentioned techniques of improving operation efficiency are suitable for a business depend on the following:  Finances  Capital Costs  High cost of stock for JIT  Management of Change  If change is being brought into the company, then it is very important that the change is monitored carefully or there can be other problems that can further hinder the operations of the business  Lean Production is Not Suitable when  Forecasting the demand is hard  Production process is very expensive to start up after a break  If firms use it as a devise for making redundancies  Business depend on customer services as their unique selling point  Cost of technology is too high 

24: Improving Operational Efficiency: 3 Quality Issues; Operational Planning  Quality – A high-quality product is one that best fulfills the particular needs of the consumers at a price that they are willing to pay.  Importance  Customer Loyalty

 Longer Product Life Cycle  Less Promotions Costs  A Premium Price may be charged  Quality Control Techniques  Stages of Effective Quality Control  Prevention – the quality of the product is high enough to completely meet the requirements of the customers  Inspection – requires a team of people to look for the problem  Because of its very nature it is negative in culture, as it can easily cause resentment  Can be tedious  Checking may only take place at specific points. So there may be things that are missed or there may be too many areas so that it is uneconomical to cover all of them  It will take the responsibility of looking after quality from the workers. As now it becomes the job of the inspectors  Correction and Improvement  Quality Assurance – the areas that the quality assurance department will cover are  Product design  Quality of Input  Production Quality  Delivery Systems  Customer Care  TQM  It is a philosophy that quality is everyone’s responsibility, in the business  The aim is to make all workers at all levels that the quality of the work is very important  Also the workers are to be empowered to check the quality at each stage  TQM uses a concept called the INTERNAL CUSTOMER  The Internal Customer is the next department to which the good are being transferred  So each department is working hard, aiming to satisfy the next department  These departmental chains are also knows as quality circles  TQM looks to reduce the cost by allowing the workers to get rid of the faulty products as soon as they are discovered  TQM will only be effective if everyone in the firm is committed to the idea  TQM cannot work well in a management run on the basis of Theory X  Benchmarking

 Best Practice Benchmarking – it involves the business identifying the best firms in the industry and then comparing the performance standards, including quality, of those businesses with their own.  Stages:  Identifying the aspects of the Business to be Benchmarked  Measure Performance in Those Areas  Identify the Firms that are Considered to be The BEST  Use Competitive Data from the BEST Firms to Establish the Main Weakness of the Business  Set Standards for Improvement  Change Processes to Achieve the Set Standards  Re-measurement  Evaluation  Advantages  Easier and faster than doing things by a full internal analysis  The greatest significance is identified by the customer so there is more chance of success  Improves international competitiveness  Encourages good crossover of ideas between industries  Involvement of workforce will lead to better ideas and improvement in motivation  Disadvantages  The process I highly dependent on obtaining up-to-date correct data  Copying ideas will lead to bad practices  The costs put in researching may not be recovered if benchmarking does not work  Quality Circles  It is based on staff involvement in improving quality  It uses small groups of employees to discuss the quality issues  The overall aim is to discuss and investigate the quality problems and present them with a solution to the management  Quality Issues – Evaluation  It is not an option – but is a huge necessity  It has huge costs but it pays off very well if employed carefully and effectively  Planning Operations  Resources are expensive and so the most efficient firms will always aim to use their resources as intensively as possible and avoid wasted time and idle assets  Network Analysis – indicates the shortest possible time in which a project can be completed

 The activities that must be completed to achieve this shortest time make up what is known as Critical Path.  The process of using network analysis involves the following steps  Identify the objective of the project  Put the tasks that make up a project in the right sequence and draw a diagram  Add durations of each activity  Identify the critical path-those activities that must be finished in time to finish the whole project in time  Use the network as a control tool when problems occur during the project

Using Network Analysis  E.g. the objective is to see if a new machine can be installed and the staff trained to operate it within three weeks.  A network diagram uses the following notation  An arrow indicates each activity  An activity takes up time and resources  A node (circle) indicated the end of each activity  The activities involved in the project and the estimated time for each activity are:  Strip out old machine (A) – 3 days  Order new machine and await arrival (B) – 1 Day  Prepare site for new machine (C) – 2 Days  Assemble new machine (D) – 2 days  Install new machine (E) – 1 week  Demonstrate to workers (F) – 2 Days  Obtain necessary Raw Materials (G) – 1 Day  Trial test run (H) – 3 Days 

 The activities that are not path of the Critical Path have some extra time to finish. This is termed as float time.

Example form book  Earliest Start Time – this is the earliest possible time an activity can begin. All the preceding activities have to be taken into account and then the EST can be figured out  Latest Finish Time – This is the time when the job can be completed without affecting the total duration of the CP.  Dummy Activities – it is not strictly an activity. It shows a logical dependency of an activity on others.  Advantages of Network Analysis (CPA)  Allows the business to calculate the delivery date etc. accurately.  Calculating the EST tells the Operations Manager when the necessary resources are needed to be ready  Makes following JIT easier  Calculating LST will mean that some complex process can be given some extra time to finish in a better manner  If there is a delay in a critical activity, the operations manager can see what activities can be speeded up to still be able to finish the project in time 