Bm Handbook Operations

Higher Business Management

Business Decision Areas I:

Operations

Operations The role and importance of operations in organisations Operating systems ‘An Operating System is a configuration of resources combined for the provision of goods and services.’ Ray Wild, Essentials of Production and Operations Management (2nd edn.) Access to raw materials, machines and workers does not guarantee that you will obtain the outcomes you require – organisation is essential. Procedures must be established which control and direct what is done, whom it is done by and when. This is known as an operating system . All operating systems have three distinct phases: INPUTS

PROCESS

OUTPUTS

Raw Materials + Labour

Using different amounts of different resources in order to produce a different end product

The actual goods or services for sale

Operations management ‘Operations Management is concerned with the efficient conversion of an organisation’s resources into the goods or services that it has been set up to provide.’ Howard Barnett, Operations Management This can be subdivided in three key areas: (a) (b) (c)

The purchase and storage of raw materials; The production and storage of finished goods; The distribution of the finished goods.

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STAGE 1 – INPUT This concerns the purchasing of materials that normally is the responsibility of the Purchasing Department. The quantity of stock ordered depends upon: LIST A A the stock of materials currently available B the duration of time which will elapse between this order and any future orders C the amount of raw materials likely to be required during the period D the storage space available and cost of storage Once these issues have been considered it is possible to identify those suppliers which offer the best terms. When making this decision the following should be taken into account. LIST B Choosing supplier: 1. PRICE

2. QUALITY 3. AVAILABILITY

4. LOCATION OF SUPPLIER

Lowest price? Discounts for regular customers or bulk orders? Credit terms? Acceptable for needs? Consistently available? Dependable source of supply? Reliability of deliveries? Confident in supplier? Additional charges for delivery/insurance?

It is unlikely that one single supplier will offer all of these benefits. Consequently, when purchasing materials, decisions must be taken about the quantity required (LIST A) and from whom (LIST B). Getting the correct ‘MIX’ for the organisation in terms of how much and from whom is essential. This is known as the PURCHASING MIX. STUDY QUESTIONS 1. Explain the importance of Operations in organisations 2. Describe the IPO process 3. Describe the elements of the Purchasing Mix

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Memorandum To:

Business Management Students

From:

Mr McGowan

Date:

Today’s

Subject:

Sourcing Task

You’re a buyer for HGS Ltd and there are 10 items needed for the company. You’re task is to source the items at the lowest possible cost. You can use the Internet to research and find the cheapest possible prices BUT for the appropriate features and quantity of the items. You will need to keep a record (hyperlinks are good enough) of where the deal was and obviously the price. The team with the lowest total wins. You must have an entry for every item or you are disqualified!

SOURCE LIST ITEM 1 GB Memory Stick Wireless ergonomic keyboard Microsoft Office 2007 Headphones with Microphones Duplex Colour Printer i-book Computer Chair ID Badges Mousemats with Corporate Logo Webcam

QUANTITY SUPPLIER

COST

(inc. delivery)

3 40 School License 20 1 1 40 60 40 2 TOTAL

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Stock control In any organisation the control of stock is essential. Stock is an expensive item to an organisation – sometimes accounting for as much as 30% of the total assets held. Any stock management system will try to balance the needs of the production department with the costs of holding stocks. The 3 main categories of stock within an organisation are: • raw materials and components for the product or process; • work in progress; • finished stock. Issuing stock This should only be done on the production of an authorised requisition card . Monitoring stock levels This can be done in a variety of ways: (a)

by recording (manually, using a bin card system );

(b)

by using a database or spreadsheet , changes in stock are recorded as they take place, giving a running balance total which should be accurate at any point in time and reduces the need for physical stock counting prior to reordering. Many such systems now allow automatic re-ordering when reorder level is reached, with no need for operator input.

A physical stock count (stock taking) MUST be carried out at least once per year in order to provide closing stock figures for the Final Accounts.

STOCK LEVELS (raw materials, work-in-progress, finished goods) Effect of too much or too little stock Too much stock (Overstocking) •

Storage, insurance, lighting and handling costs will all be high if too much stock is held.

•

Large stock levels will occupy space in the premises. There may be more productive ways of using this space, such as improving the layout of the factory.

•

The opportunity cost will be high. Money tied up in stocks could be used to buy fixed assets, for example.

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• •

Large stock levels might result in unsold stock. If there is an unexpected change in demand, the firm may be left with stocks that cannot sell. Very large stocks might result in an increase in theft by employees.

Too little stock (Understocking) •

The business may not be able to cope with unexpected increases in demand if its stocks are too low. This might result in lost customers if they are let down too often.

•

If deliveries are delayed the firm may run out of stock and have to halt production. This might lead to idle labour and machinery while the firm waits for delivery.

•

The firm is less able to cope with unexpected shortages of materials. Again, this could result in lost production.

•

A firm which holds very low stocks may have to place more orders. This will raise total ordering costs.

STORAGE OF STOCK Design and Layout of Warehouse – ground level, dry etc. Centralised Storage of Stock Advantages include: 

improved security from loss or theft as it tends to be carefully controlled by specialist staff.



specialist staff maintain stocks by following agreed procedures for its control – only issued when ‘authorised’.

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

central stock of components or materials may cost less to hold than many small ‘on-site’ supplies.



improved efficiency in stock handling and management

Disadvantages include: 

Time wasting going to and from branches



Cost of specialist stock staff



Cost of having specific or dedicated warehouse

Decentralised Storage of Stock Advantages include: 

1 stock is always ‘at hand’ when required



2 orders of new stocks reflect actual production usage rather than a standard amount irrespective of needs



3 speedier turnover of a small quantity of stock reduces the likelihood of its deterioration or decay

Disadvantages include: 

Less rigid control and supervision: more chance of pilfering



Takes up more physical space in actual production areas

Shoppers 'facing empty shelves' Supermarkets are failing to get some basic products such as milk, bread and butter on the shelves, a study by the Grocer magazine suggests. The Grocer tested the availability of 33 basic goods and found twice as many were out of stock as six months ago. Analysts said that supermarkets "had taken their eye off the ball" and were focusing more on reducing waste and packaging than getting items in stock. Tesco said availability was high and queried The Grocer's study methods.

Mystery shoppers found empty spaces on shelves

Mystery shopper The Grocer used mystery shoppers to check price and availability of 33 items - picked to

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reflect an average consumer's shopping basket - in different branches each week. Six supermarket groups were tested: Tesco, Sainsbury's, Asda, Morrisons, Waitrose and Somerfield.

The number of out of stock items has doubled in all the supermarkets...there seems to be a bit of a problem here Gaelle Walker, The Grocer magazine

During the 26 weeks from 17 June to 9 December Somerfield recorded 48 occasions when one of the 33 items was out of stock. This was the worst performance of the six major supermarkets groups tested. Sainsbury's, Waitrose and Tesco performed very similarly to one another; while the best two supermarkets for availability were Asda and Morrisons. But overall, the number of items out of stock was much higher than for the previous sixmonth period. According to Gaelle Walker, reporter for the Grocer, supermarkets were failing in "basic shop keeping". "The number of out of stock items has doubled in all the supermarkets... there seems to be a bit of a problem here. "Analysts I spoke to believe the supermarkets have taken their eye of the ball; become distracted by side issues such as reducing waste and packaging," she said.

We have our own, very sophisticated stock control measurements and availability is much better than the picture painted by the Grocer study Tesco spokesman

But a spokesman for Tesco, the UK's biggest supermarket chain, told BBC News that there was no link between reducing waste and availability. "I fail to see how environmental measures have any effect whatsoever. "What I do know is that the Grocer sample of 33 products is small and that it only takes one store to be down on the items, because say of a rush or seasonal factors, to skew the figures. "We have our own, very-sophisticated stock control measurements and availability is much better than the picture painted by the Grocer study."

STUDY QUESTIONS 1. Describe the 3 types of stock used in business 2. Why is stock control important? 3. Label and draw the Stock Reorder diagram 4. Discuss the effects of over and understocking 5. Explain the benefits of having a centralised stock system 6. Justify moving to a computerised stock control system

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Just-in-Time Manufacturing Originated in Japan during the 1960s and involves keeping stock levels to a minimum. Stocks arrive just-in-time to satisfy production needs. Raw materials are not purchased until they are required and finished goods are not produced unless firm orders have been received. To be successful JIT techniques depend upon the reliability of an organisation’s suppliers, access to a supply of highly skilled workers and good quality control procedures.

Advantages • It improves cash flow since money is not tied up in stocks

Disadvantages • A lot of faith is placed in the reliability and flexibility of suppliers • Increased ordering and admin costs

•

The system reduces waste, obsolete and damaged stock.

•

More factory space is made available for productive use.

•

Advantages of bulk buying lost

•

The costs of stock holding are reduced significantly.

•

Vulnerable to a break in supply and machinery breakdowns

•

Links with and the control of suppliers are improved.

•

Difficult to cope with sharp increase in demand

•

Possible loss of reputation if customers are let down by late deliveries

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What is Kanban? A system of continuous supply of components, parts and supplies, such that workers have what they need, where they need it, when they need it. The word Kan means "card" in Japanese and the word "ban" means "signal". So Kanban refers to "signal cards". What are signal cards? Here's how Kanban works: Let's say one of the components needed to make widgets is a 42" stem-bolt and it arrives on pallets. There are 100 stem-bolts on a pallet. When the pallet is empty, the person assembling the widgets takes a card that was attached to the pallet and sends it to the stem-bolt manufacturing area. Another pallet of stem-bolts is then manufactured and sent to the widget assembler. A new pallet of stem-bolts is not made until a card is received. This is Kanban, in it's simplest form.

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The triumph of lean production On the assembly line at Toyota's giant plant, Laura Wilshire is not happy. There is something wrong with a seatbelt fitting on the Camry she is working on. Laura pulls a cord, stopping the production line - and prompting her five fellow workers on trim line three to crowd Toyota workers talk about their round.

experience on the assembly line

They soon see why it is not screwed in properly and fix the problem.

GLOBALISATION SERIES

"I don't like to let something like that go," she says. "That's really important for people who buy our cars." Workers at the Toyota plant in Georgetown, Kentucky, pull the cord 2,000 times a week - and their care is what makes Toyota one of the most reliable, and most desired, brands in the US. In contrast, workers at Ford's brand-new truck plant in Dearborn, Michigan, pull the cord only twice a week - the legacy of generations of mistrust between shop-floor workers and managers. Lean production Pulling the cord, called "andan", is part of Toyota's "lean" production system, which means that it has been able to produce cars much more cheaply, Our philosophy is to and to a higher quality, than its US rivals. In 1998, it took Ford and GM 50% more hours to make a car than Toyota - and the difference was so great that GM did not make a profit on any of its cars.

think globally but act locally

Jim Press, President, Toyota North America

Now GM is attempting to emulate Toyota by introducing a global manufacturing system of its own and has been closing the productivity gap. GM's new manufacturing system is vital to its survival, says the man in charge of implementing it worldwide, Gary Cowger.

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LEAN PRODUCTION GLOSSARY

GM aims, like Toyota, to produce the same car by the same method in any of its production plants around the world. "Looking at the new plants, you wouldn't know if you were in Lansing, Michigan, Russelheim, Germany or Shanghai," says Mr Cowger, GM's global vice-president for manufacturing and labor. GM is also eliminating national boundaries in its development process. Instead, it is planning to design plants flexibly around a single type of vehicle, such as a small car, medium car or truck (SUV). And it is also integrating the design of the car and the manufacturing process to gain efficiencies. GM's global design centres will be dotted around the world: Korea (Daewoo) for small cars; Germany (Opel) for mid-size cars; Australia (Holden) for full-size cars, and Michigan for full size trucks and SUVs. Each plant can quickly change the specifications of the models it produces to adopt to local conditions, although it shares a common platform, including engines and transmissions, across the range. This combination of global manufacturing and design standards with local production is the key to the future, according to Mr Cowger. Catching up GM's new manufacturing system is part of a fundamental reorganisation of the giant company, introduced in 2004, which is already paying dividends in its North American manufacturing operations.

'Just-in-time': System of delivering parts to the assembly line in a continuous flow, rather than stockpiling large volumes at the plant Continuous improvement Process of analysing problems and solving them on a daily basis Personal responsibility Each worker on a production line is given responsibility for each process he carries out Flexible production: Several different models can be produced on the same assembly line Design for manufacture: Making the components of a car easy to fit together on the assembly line

GM now has five of the top 10 most productive US assembly plants, according to Harbour Consulting, and has substantially closed the productivity gap with Toyota. We are putting cost In 2006, Toyota could build an average car with just 29 hours' labour, while it took GM workers 33 hours - a big improvement from 1998. Mr Cowger says it has been tough, but already 90% of the 178 GM plants in 33 countries have adopted the new system.

pressures on our suppliers, but costs are critical to our survival, and we are facing the same pressures as they are Gary Cowger, GM global vicepresident for manufacturing and labor

However, the improvement in productivity in North America crucial to GM's future - has also come through ruthless restructuring.

GM is cutting its US output by one-third and has cut its US blue-collar workforce by 80% since 1985, according to the Center for Automotive Research. GM once produced one of every two cars sold in the US. Now it is down to one in four.

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According to GM boss Rick Wagoner, who has taken charge of North American operations, the company has already saved $9bn in costs. Supplier relationships

SUPPLIER BANKRUPTCIES

Another key part of the new production is the relationship with parts suppliers, who typically provide 85% of the parts that make up a car. Ensuring good-quality parts, delivered on time, is one of the keys to both reliability and efficiency. Missing a key component can bring the assembly line to a halt. Toyota pioneered the "just-in-time" manufacturing system, in which suppliers send parts daily - or several times a day and are notified electronically when the assembly line is running out. More than 400 trucks a day come in and out of Toyota's Georgetown plant, with a separate logistics company organising the shipments from Toyota's 300 suppliers - most located in neighbouring states within half a day's drive of the plant. Toyota aims to build long-term relationships with its suppliers, many of whom it has taken a stake in, and says it now produces 80% of its parts within North America. GM has had a more difficult recent history with its suppliers, having spun off its parts subsidiary, Delphi, several years ago.

Dura: October 2006 Dana: February 2006 Delphi: September 2005 Meridian: April 2005 Tower: February 2005 Valeo: January 2002 Federal Mogul: December 2001 source: CAR

GM says its supplier relationships are critical and it needs to bring them into its global manufacturing system. But it also admits that, with the company losing billions, it is squeezing the suppliers to lower their prices. "We are putting cost pressures on our suppliers, but costs are critical to our survival, and we are facing the same pressures as they are," says Mr Cowger. As a result, many suppliers like Delphi plan to shift much of their production out of the US, to Mexico or East Asia, where labour costs are lower. According to Stephen D'Arcy of PricewaterhouseCoopers, China will eventually become the preferred location for most suppliers - once they can meet local needs. Many US-based suppliers went bankrupt in the past few years, including Delphi. Closer to the consumer One of the key advantages of the new "lean production" system is that it allows companies to get closer to consumer needs.

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MODEL CHANGES

Toyota's North American President, Jim Press, says the key to their success is that they are customer-focused - and that requires quick reactions when consumer tastes changes. "I think being nimble is really important. As the market grows and shifts so quickly, you have got to be able to respond and anticipate where things are going," he says. Toyota says it can now develop a new model in 18 months, compared to the three years it takes GM.

Models in 1955: 25 Average model run: 62 months

And its flexible manufacturing system and the company's cooperative culture means that "we roll our sleeves up and go to work and get the job done", says Mr Press. Toyota also has a close relationship between the dealers who sell its cars and its plants.

Models in 2005: 325 Average model run: 25 months source: The Machine that Changed the World

The production run is adjusted at the Georgetown plant, and extra Saturday working is added, only when computerised orders from the dealer network show it is needed. And individual buyers can alter what they want in their car - changing the paint colour or specifications - right on the production line, by notifying their dealers. GM is also aiming at reducing the product cycle time - the length of time it takes from designing a new car to actually putting it on the road. And by using a global design system, it can use existing Opel designs for its Saturn model in the US, or Holden (Australia) models for its new Pontiac G8. And if GM has made strides in cutting costs, it perhaps still has some way to go before it starts making enough of the right kind of cars. "Their problem is on the demand side," says Garel Rhys of Cardiff University. "For too long, they took they eye off the ball, and they are now being caught out by changing consumer tastes. "And there is still a problem of perception. Although their quality has improved, consumers don't yet recognise it, and Japanese cars can command a $5,000 quality premium in the marketplace." Culture change At a deeper level, the question is whether GM and Ford - the companies that perfected mass production -can fundamentally change their culture to the new lean production system. "I hope they make it - but I am not optimistic they all will be able to," says James Womack, an expert who has advised many global companies, from Tesco to Boeing, on the advantages of lean production.

The new boss of Ford introduced lean production at Boeing

Mr Womack says it has to be something that is inculcated in all the company's workers, from

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the bosses to those on the factory floor. "This is not Japanese companies vs American companies, it is smart Japanese companies vs smart American companies," he says. "GM has caught up on assembly plants, but Toyota is still ahead on suppliers, product development and a problem-solving approach to issues. "For too long, managers at US car companies were in denial about their problems." Toyota, for its part, says it does have a worldwide company culture that transcends Japan, according to Jim Press. "I think we have a hybrid system where we take the best of every culture and distil that into a system that really works effectively in every country where we do business - and the ability to transplant that system throughout other countries is the key to growing globally. "Our philosophy is to think globally, but act locally." Toyota's only worry appears to be whether, as it expands so fast, it can maintain that culture - and its quality - intact. Toyota's President, Katsuaki Watanabe, recently said in a newspaper interview that he didn't care if Toyota became the biggest car company or not. "What is important is to be number one in quality."

STUDY QUESTIONS 1. Describe lean production 2. Discuss the advantages and disadvantages of lean production 3. Explain the key role suppliers play in lean production 4. What is Kaizen? 5. In your opinion, what do you think the future of the car industry will be like?

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Production - Types of Production Method Definition In our introduction to production and operations management ("POM") we suggested that there are several different methods of handling the conversion or production process - Job, Batch, Flow and Group. This revision note explains these methods in more detail. Introduction The various methods of production are not associated with a particular volume of production. Similarly, several methods may be used at different stages of the overall production process.

Job Production With Job production, the complete task is handled by a single worker or group of workers. Jobs can be small-scale/low technology as well as complex/high technology. Low technology jobs: here the organisation of production is extremely simply, with the required skills and equipment easily obtainable. This method enables customer's specific requirements to be included, often as the job progresses. Examples include: hairdressers; tailoring High technology jobs: high technology jobs involve much greater complexity - and therefore present greater management challenge. The important ingredient in hightechnology job production is project management, or project control. The essential features of good project control for a job are: - Clear definitions of objectives - how should the job progress (milestones, dates, stages) - Decision-making process - how are decisions taking about the needs of each process in the job, labour and other resources Examples of high technology / complex jobs: film production; large construction projects (e.g. the Millennium Dome) Advantages  Easy to organise production  Can customise orders  ‘one-off’ orders can be accommodated  Workers involved in entire production process from start to finish

Higher BM Handbook: Operations

Disadvantages  Production costs likely to be high  Production time may be longer  Investment in machinery may be higher as specialist equipment may be needed

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As businesses grow and production volumes increase, it is not unusual to see the production process organised so that "Batch methods" can be used.

Batch Production Batch methods require that the work for any task is divided into parts or operations. Each operation is completed through the whole batch before the next operation is performed. By using the batch method, it is possible to achieve specialisation of labour. Capital expenditure can also be kept lower although careful planning is required to ensure that production equipment is not idle. The main aims of the batch method are, therefore, to: - Concentrate skills (specialisation) - Achieve high equipment utilisation This technique is probably the most commonly used method for organising manufacture. A good example is the production of electronic instruments. Batch methods are not without their problems. There is a high probability of poor work flow, particularly if the batches are not of the optimal size or if there is a significant difference in productivity by each operation in the process. Batch methods often result in the build up of significant "work in progress" or stocks (i.e. completed batches waiting for their turn to be worked on in the next operation). Advantages  Allows flexible production  Stocks of part-finished goods can be held and completed later  Workers can specialise

Disadvantages  Production runs of small batches can be expensive to produce  If production runs are different there may be extra costs and time delays in setting up different equipment  Repetitive work for employees

Flow Production Flow methods are similar to batch methods - except that the problem of rest/idle production/batch queuing is eliminated. Flow has been defined as a "method of production organisation where the task is worked on continuously or where the processing of material is continuous and progressive," The aims of flow methods are:

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- Improved work & material flow - Reduced need for labour skills - Added value / completed work faster Flow methods mean that as work on a task at a particular stage is complete, it must be passed directly to the next stage for processing without waiting for the remaining tasks in the "batch". When it arrives at the next stage, work must start immediately on the next process. In order for the flow to be smooth, the times that each task requires on each stage must be of equal length and there should be no movement off the flow production line. In theory, therefore, any fault or error at a particular stage can halt the entire process. In order that flow methods can work well, several requirements must be met: (1) There must be substantially constant demand If demand is unpredictable or irregular, then the flow production line can lead to a substantial build up of stocks and possibility storage difficulties. Many businesses using flow methods get round this problem by "building for stock" - i.e. keeping the flow line working during quiet periods of demand so that output can be produced efficiently. (2) The product and/or production tasks must be standardised Flow methods are inflexible - they cannot deal effectively with variations in the product (although some "variety" can be accomplished through applying different finishes, decorations etc at the end of the production line). (3) Materials used in production must be to specification and delivered on time Since the flow production line is working continuously, it is not a good idea to use materials that vary in style, form or quality. Similarly, if the required materials are not available, then the whole production line will come to a close - with potentially serious cost consequences. (4) Each operation in the production flow must be carefully defined - and recorded in detail (5) The output from each stage of the flow must conform to quality standards Since the output from each stage moves forward continuously, there is no room for sub-standard output to be "re-worked" (compare this with job or batch production where it is possible to compensate for a lack of quality by doing some extra work on the job or the batch before it is completed). The achievement of a successful production flow line requires considerable planning, particularly in ensuring that the correct production materials are delivered on time and that operations in the flow are of equal duration. Common examples where flow methods are used are the manufacture of motor cars, chocolates and televisions.

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Advantages  Economies of scale  Automated production lines save time and money  Quality systems can be built into the production

Disadvantages  Standard product produced (opposite of customised)  High set-up costs of automated lines  Repetitive and boring work  Long production runs may produce more than is needed

STUDY QUESTIONS The three main types of operation are: 

Job production



Batch production



Flow production

(a) Identify a product that Toyota would use in their organisation that would be made by each of the three different methods of production. (b) Say what key features of each type of operation method make it most suitable for the production of that particular product. (c) What factors will affect the choice of operation method used by an organisation? (d) Young Burberry Ltd. is bringing out a new line of synthetic hats. They will have a variety of designs, colours and sizes. Which method of production would you advise that they use? Give reasons for your choice of production method.

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The production game Making dice The aim of this activity is to look at some of issues related to different ways of Producing goods The class will be divided into three teams. Each group is to operate as a factory, producing paper dice. The aim is for each group to produce as many dice as possible in 25 minutes. Each dice must meet the rigorous quality standards, which are set by the customer's buyers. Each team must decide how they can best ensure their dice are of an appropriate quality. You will have 10 minutes planning time to organise your production. Every team must report back on their performance at the end of the production time to the rest of the class so make sure someone takes notes, you might want to think about the following: • • • •

How well you worked together as a team What things went well What things didn’t go well How could you have prevented any of the problems you encountered

You need to appoint a group leader and a production manager The Group Leader will have overall control of the group and be responsible for making sure that all team members are following instructions The Production Manager is responsible for buying all resources and selling the final dice and maintaining a running total of costs and final income Higher BM Handbook: Operations

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Dice game instructions sheet You will need the following resource to produce the dice: A dice template – use to cut out the dice shape on the paper provided Resource 1 2 3 4 5

Scissors Glue Paper (per sheet) Ruler Pencil

Cost £7 £7 £2 £5 £5

Resources can be purchased at any time either during or before production. No other resources apart from the items you have bought can be used. The objective of each team is to make as much money as possible; you will do this by selling all the dice you have completed for £20 Rules • Only completed dice can be sold • Rejected dice have a scrap value of £5.00 • Any paper not used can be resold back to the supplier for £1.00 Job production group Team one will produce dice one person per a dice working individually with each person completing all stages in production before they move on to the next dice all dice should be produced exactly as the template. The purchasing manager will be responsible for buying the resource and recording the investment on the sheet provided Batch production group This group need to work on one aspect of the production at a time; no one can complete other parts of the production until the batch is complete. For example everyone in the group produces two templates and then everyone in the group marks the dice with the dots then folds etc. The team should decide how many dice they are going to produce before starting production The flow production group This group should split the task into individual processes with specialist workers involved at each stage (decide who is best at doing what) this should resemble a production line where someone marks out the template then passes on the paper to be cut, this person then passes on the template to be marked up etc.

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The decline of Detroit Globalisation has been a powerful force that has accelerated change in the world economy over the past half-century. It has affected the fate of companies as much as countries. And nowhere has been the The Big Three are facing change more dramatic than in their greatest challenge ever the US car industry. in their entire postwar history

28,000 workers lost their jobs when GM closed Buick City in Flint

Fifty years ago, American car companies dominated the Professor Garel Rhys, Cardiff world, especially the mighty University GM, the world's biggest industrial company, many of whose factories were based in Flint, Michigan, 40 miles north of Detroit. GM in decline For the grandparents of Claire McClinton, who made the journey from the poverty of the rural south to Michigan just after World War II, it was like arriving in another world. GLOBALISATION SERIES

"None of their children ever went hungry, we all had a good education, we had good jobs, and owned our own home. We thought we were living the American dream," she told the BBC. Claire's whole family followed in their footsteps and became "Flintsones," working for GM - and so did Claire. They were loyal members of the autoworkers union, the UAW, which won increasing benefits for its members, with average wages of more than $50,000 plus overtime. "We respected the union then," she said. "We believed it was the union that had delivered us the American dream." GM WORKER'S VIEW

In the 1950s the Detroit area had the highest median income, and highest rate of home ownership, of any major US city. But times are very different now. GM, under pressure from its competitors, is no longer making money in the American car market - and it has been closing plants all across Flint. Now there are only 6,000 GM workers in Flint, compared to 100,000 at the peak, and the town and workers are suffering.

We thought we were living the American Dream Claire McClinton, third generation GM autoworker, Flint, Michigan

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"Flint has the highest rate of unemployment, poverty and homelessness in Michigan," Claire told me. She works in a shelter feeding the poor, and would like her union to get more involved in the community. And she is not sure how much longer she will have a job - and if she retires, whether she will have any benefits. GM has already told the unions it wants to cut the generous retirement and health care benefits it promised its workers in the halcyon days of success. The company does plan to build more car plants in the future - but in emerging markets like China and India, not in the United States. Toyota rising But 400 miles south of Flint, another group of car workers are feeling very different. They work in Toyota's huge Camry factory in Georgetown, Kentucky, and receive, by their standards, generous pay and benefits. Toyota is the fastest-growing car company in the United States, and it is building a new factory every year to keep up with demand. And it is set to overtake GM this year as the world's largest car company by sales.

Toyota builds 500,000 cars a year at its vast Kentucky plant TOYOTA WORKER'S VIEW

For Laura Wilshire, from Ashland, Kentucky , life is good. "This is the top notch job in the area," she told the BBC. She doubled her salary when she joined Toyota, and the company provides a good health care plan for her family, including dental coverage for her two children. And she says that Toyota has also helped to provide better schools for her children by putting money into the town's budget.

This is the top notch job in the area Laura Wilshire, Toyota worker, Georgetown, Kentucky

She says more is expected of workers at Toyota than her previous job in a convenience store, but she doesn't mind taking responsibility. "If a seatbelt isn't right, I stop the line until it is fixed - that is an important issue as it could affect people's safety." Toyota encourages workers to take personal responsibility for defects, and to work together to fix them. That attitude has given them a well-deserved reputation for quality and reliability - and the Camry has been the best-selling car in America for the last ten years.

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Toyota has no trouble hiring the right sort of workers - 100,000 people applied for the 3,000 jobs when the plant opened in 1990. Laura says she feels sad when she reads in the papers about what is happening to autoworkers in places like Flint. Dominance to decline Now, according to Professor Garel Rhys of Cardiff University, the US Big Three are facing their greatest challenge ever in their entire postwar history. What has led to the decline of US car manufacturers in their home market? While it was inevitable they would eventually lose their monopoly position, their failure to adapt their production methods and meet changing consumer tastes has accelerated their decline. In 1955, the world looked like a very different place. Four out of every five cars in the world were made in the US, half of them by GM.

Flint, Michigan, GM's production centre, was once a thriving community

No other car companies had the capital or the know-how to enter the global car business. GM's main US rival, Ford, was half its size. The largest foreign carmaker, VW, was little bigger than GM's own German subsidiary, Opel and only had one model - the VW Beetle. And Toyota was not even on the horizon. It made 23,000 cars in 1955 in Japan, compared to 4 million manufactured by GM in the US. Innovation and experiment But the near-monopoly conditions in the American market bred complacency - and the assumption that the American lead in technology and marketing was unassailable. According to Stephen D'Arcy, head of Global Automotive Practice at PriceWaterhouse Coopers, in the long run "the US monopoly was an unsustainable anomoly." Ford and GM dominated the US auto

industry in the l960s In the 1950s and 1960s, US firms failed to innovate in the design of cars, preferring to make money by increasing the size and weight of their vehicles by adding extras like air conditioning, power steering, and fancy sound systems.

It was left to European manufacturers to develop disc brakes, rack-and-pinion steering, aircooled and diesel engines. And the mass production system discouraged innovation because it was so expensive to introduce fundamentally new models. Meanwhile, Toyota was also making a virtue of adversity, changing its production system to become leaner and more efficient than its rivals.

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Oil crisis It was the oil crisis in the 1970s that first illuminated the problems of US automakers. For the first time, smaller cars were the rage, and US consumers found that cars like the Toyota Corolla were an attractive alternative to big American cars.

Lean production: It is easy to say you will do it, but harder to actually implement it James Womack, author, The Machine that Changed the World

Imports of Japanese cars soared in the 1980s, to the chagrin of the US companies and the unions alike, taking nearly onequarter of the US market. And when the companies pressured the US government into limiting imports from Japan, Toyota and Nissan started building car plants in the US. By 2005, these Japanese "transplants" were producing 4 million cars a years, one-quarter of US output, and more than GM. The Japanese located their plants in low-wage, non-union areas of the US and brought new, more flexible production methods as well. As a result, they could make money on smaller cars and change models more frequently. The US car companies tried and failed to design a competitive small car. They also experimented with Japanese production methods but neither seemed to do the trick and close the quality gap. According to James Womack, author of the influential book The Machine that Changed the World, it was easy for everyone to say they accepted lean production, but much harder to actually implement it. The SUV craze If the 1980s was a decade of fear, the 1990s represented a false dawn. With oil back at $18 a barrel, the US companies thought they had the answer to the Japanese threat - the SUV (Sports Utility Vehicle). As light trucks, SUVs were protected by a 25% import tariff and also escaped government rules laid down to boost fuel efficiency. SUV sales soared from one to four million with 60% of the Big Three's sales - and nearly all of their profits - coming from SUVs. The SUVs transformed the fortunes of Chrysler, dominating with its Voyager minivan and Jeep Grand Cherokee, and Ford which had the best-selling SUV, the Ford Explorer.

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Abandoning cars proved a costly mistake for Detroit when it became clear in recent years that environmental concerns were here to stay. Last year,the price of gasoline in the US reached a record $3 per gallon in most states. As a result, SUV sales slumped, and the sale of smaller vehicles rose. At this year's Detroit Auto Show, Ford and GM made it clear that they were taking the environment seriously, and produced electric-powered concept cars. But these cars are years, if not decades, away from reaching the public, while Toyota is already rolling out its hybrid electric-petrol engine across its entire range. Downsizing lessons In 2006, both Ford and GM finally accepted they would never dominate the US car market as in the past. They both announced huge downsizing programmes, cutting 70,000 jobs between them. And Chrysler - now owned by German firm Daimler - also announced its own downsizing programme and is effectively up for sale.

Detroit still puts on a glitzy image at the annual motor show

There is real doubt in the industry that all three can survive. GM hopes to survive as a global car company which increasingly operates outside the US. And Ford may survive by selling some of its more profitable European subsidiaries. But even if they manage this, it is sad end to what was once a central element in the American industrial dream. GLOBAL CAR COMPANIES COMPARED Sales Sales Profit Market Workforce (volume) ($bn) ($bn) value ($bn) GM

8.3m

192

-10.9 20

335,000

Toyota

8.2m

176

12.5

285,000

Daimler/Chrsyler 4.8m

185

-1.7* 65

382,000

Ford

6.6m

153

-12.7 16 *

300,000

Volkswagen

5.2m

118

5.2

344,000

208

43

*2006 (Chrysler only) Source: PriceWaterhouseCoopers, 2005

STUDY QUESTIONS 1. What factors contributed to the decline of the American Car Industry? 2. What External Factors are mentioned in the article? Higher BM Handbook: Operations

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3. What role did the Oil Crisis of the 1970s play in the changes of fortunes? 4. Discuss the effect of Downsizing 5. What do the Car companies see as the future for their products? 6. If you were in charge of GM, what would you be aiming to do?

What is Quality? Consumers, faced with many goods at similar prices, now think about quality when making choices. Consumers are more aware. Magazines such as Which? Contain reports on the quality of certain products. Consumers also have more disposable income and higher expectations than ever before. Quality may be seen as subjective. Quality could be described as the features of a product or service that allow it to satisfy customers. Eg a family buying a television may consider the following features: • • • • • • •

Reliability and durability Special features Suitability + value for money Parts Repairs After sales service Physical appearance

They may also consider features such as: • •

The image of product The reputation of manufacturer

For the producer the aim is to ensure customer satisfaction and reduce the return of faulty goods. Organisations now recognise the importance of the view of the customer in the setting of quality definitions. Legislation and competition have also forced firms to improve the quality of their products.

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Total Quality Management The main aim of Total Quality Management is to produce a perfect product or service every time in order to meet customer requirements. In the UK the system was first seen more than twenty years ago when the Ministry of Defence set out the specifications or standards that their suppliers had to meet before the Ministry would buy from them. Gradually over the years similar standards have evolved to cover a wide range of industries. Total Quality Management uses the principles of ‘Quality Assurance’ but takes a fundamentally different view of quality. The principle upon which this system operates is that in order to achieve ‘quality’, the requirements, specifications, and needs of the customer or client come above everything else. The culture shift must be made from ‘we know what quality is’ to ‘You tell us what you want and that will be our definition of quality’. Errors are costly for business. It is estimated that one-third of all effort of British business is wasted in correcting errors. TQM is a method designed to prevent errors, such as poor quality products from happening. The business is organised so that the manufacturing process is investigated at every stage. Every department, activity and individual is organised to take into account quality at all times. In practical terms TQM assumes that the next person with ‘ownership’ of the good, or the next person to use the good, are customers or clients – not simply the person who ends up purchasing the good for his/her own use. Quality is therefore essential at each and every step in the production of a good, or, for that matter, in the provision of a service, to which the same principles apply. For example, on the production line in a factory, the next person down the line from you is your customer or client . You must therefore ensure that when the part-assembled car leaves you to move on to the next worker, any work you have done on it is of the highest standard and quality – just as you will expect to receive the car parts from the worker in front of you. It is felt that, although it is initially costly to establish, TQM can achieve savings in the long run by reducing wastage to around 3%. This can make a considerable difference to an organisation.

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TQM requires: • the understanding that this is a core corporate philosophy focusing on the needs of the consumer; • a commitment by top management, and therefore the provision of the necessary resources; • that every member of the organisation be consulted and involved in setting standards ( every member of the organisation means just that, from the receptionist, office cleaner and store-man to top management); • a focus on teamwork and creative thinking to identify future improvements; • that it be viewed as a long-term concept; • a quality plan to be established which offers a structured, disciplined approach to quality; • emphasis to be placed on the collection and analysis of information; • employee training to be treated as essential; • a constant checking of performance (quality standards) by individuals; • a constant search for improvement;  focus on the total quality of output, in which case cost savings can be considerable. What are the features of TQM? Quality Chains – failure to meet the requirements in any part of the quality chain creates problems, such as delays in the next stage of production. Company policy and accountability – there will only be improvements in quality if there is company-wide quality policy. TQM must start from the top with the most senior executive and spread throughout the business to every employee. People must be totally committed and take ‘a pride in their job’. Control – consumer’s needs will only be satisfied if the business has control of the factors that affect a product’s quality. These may be human, administrative or technical factors. Monitoring the process – TQM relies on monitoring the business process to find possible improvements. Teamwork – TQM stresses that teamwork is the most effective way of solving problems. The main advantages are: • • • • •

A greater range of skills, knowledge and experience can be used to solve the problem Employee morale is often improved Problems across departments are better dealt with A greater variety of problems can be tackled Team ideas are more likely to be used than individual ones

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TQM strongly favours teamwork throughout the business. It builds trust and morale, improves communications and cooperation and develops interdependence. Many UK firms in the past have suffered due to lack of sharing of information and ideas.

Using TQM - TQM helps companies to: •

Focus clearly on the needs of customers and relationships between suppliers and customers

•

Achieve quality in all aspects of business, not just product or service quality

•

Critically analyse all processes to remove waste and inefficiencies

•

Find improvements and develop measures of performance

•

Develop a team approach to problems solving

•

Develop effective procedures for communication and acknowledgement of work

•

Continually review the processes to develop a strategy of constant improvement

Good design

Consistent method

Consistent equipment

Consistent materials

Satisfactory instructions

OPERATION AND CONTROL OF PROCESS

CONSISTENTLY SATISFIED CUSTOMER There are however, some problems: •

There will be training and development costs of the new system.

•

TQM will be only work if there is commitment from the entire business.

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•

There will be a great deal of bureaucracy and documents and regular audits are needed. This may be a problem for small firms.

•

Stress is placed on the process and not the product.

Costs of Quality Firms will want to monitor the costs of quality control carefully. All businesses are likely to face costs when trying to maintain or improve the quality of their products and services. •

The cost of designing and setting up a quality control system. This might include the time used to ‘think through’ a system and the training of staff to use it.

•

The cost of monitoring the system. This could be the salary of a supervisor or the cost of an electronic sensor.

•

There will be costs if products do not come up to standard. Faulty goods may have to be scrapped or reworked. Product failures might also result in claim against the company, bad publicity and a possible loss of goodwill.

•

The costs of improving the actual quality. This may be the cost of new machinery or training staff in new working practices.

•

If the whole quality system fails, there may be cost in setting it up again. Time may be needed to ‘rethink’ or adjust the system. Retraining might also be necessary.

STUDY 1. 2. 3. 4. 5.

QUESTIONS Describe the features of TQM What benefits does TQM bring to an organisation? What potential problems can arise from implementing TQM? Explain the costs associated with Quality Research 2 UK companies that implement TQM and find out the effect of TQM on their profitability.

The diagram below shows the ‘iceberg’ effects of quality failure costs – the failure costs above the water line and the more far reaching failures below the water line.

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Reworking, rechecking, query handling, waived fees, complaint handling

Waterline

Lost customers, staff overtime, lost repeat business, machine downtime, bad employee morale

Although quality control systems can be costly, it is argued that their benefits outweigh the costs. The actual quality of the product should be improved, so customers are more likely to purchase he product. Business costs may be cut if faults in products are identified before the product reaches the market. The costs of failure once the product has reached the market are likely to be much higher than those during manufacture.

W. Edwards Deming is the Godfather of the Japanese success story. He was an American whose ideas were laughed at in his native land, but when he went to help build the Japanese infrastructure in the late 1940s and 50s he transformed Japan. Find out more about Deming and his W. Edwards Deming views on Quality.

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“Quality is about reducing variation”. Discuss

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Car poll hails Japanese quality Japanese cars are the most reliable, the least polluting and the best to own, according to consumer group Which? Honda has won this year's Reliability Award, based on a Which? readers' survey of 100,000 cars, beating the Best Manufacturer Award-winner Toyota. The Green Award went to hybrid champion Toyota, ahead of runner-up BMW, which won the Road Testers' Award.

Honda Jazz is the most reliable car in the UK, Which? readers say

Some models by US marques Chevrolet, Chrysler and Dodge were criticised due to safety concerns. Volvo's safety image was let down by concerns about seatbelts, which enabled Ford Galaxy and Toyota Auris to jointly grab the Safety Award. Which? Car Awards 2007

Lexus won the Ownership Award ahead of Honda, though the Honda Jazz was this year's most reliable individual model. Safety-conscious car buyers should steer well clear of the Chrysler Voyager, a people carrier, the Dodge Caliber, a medium-sized car, and the Chevrolet Matiz, a rebadged small Daewoo, Which? said.

Reliability: Honda Best Manufacturer: Toyota Safety: Toyota Auris/Ford Galaxy Green: Toyota Ownership: Lexus Road Testers: BMW Wooden Spoon: Dodge/Jeep

The only serious non-Japanese contender for the Reliability Consumer group slates dodgy cars Award was Korea's Hyundai, which came joint third alongside five Japanese marques: Daihatsu, Lexus, Mazda, Subaru and Suzuki, with Mitsubishi following closely behind. Ford and Nissan also scored highly in the reliability stakes, though when considered at a group level they were both pulled down by their sister-marques. Renault, Nissan's partner, and Land Rover, which is owned by Ford Motor, were at the bottom of the reliability league table. STUDY QUESTIONS 1. How would you define quality? 2. What are the qualities you think customers want in a car? 3. What are the benefits to Japanese Car Manufacturers of this survey? 4. What advice would you give to the Car Makers near the bottom of the survey?

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Meeting Quality Requirements Monitoring and Controlling the Production Process As indicated earlier, the success of any organisation depends upon its ability to plan for the future and sets targets for achievement. However, plans – even good ones – do not guarantee success. Success requires organisations to achieve what was intended through the implementation, reviewing and monitoring of the plan. As in other areas of an organisation it is essential to monitor and control working practices as they relate to operating systems. In order to do so, it is necessary to study the work being carried out. Best practice benchmarking BPB is a technique used by some businesses to help them discover the ‘best’ methods of production available and adopt them. BPB involves: •

Finding out what makes the difference, in the customers eyes, between an ordinary supplier and an excellent supplier.

•

Setting standards for business operations based on the best practice that can be found.

•

Finding out how these best companies meet those standards.

•

Applying both competitors’ standards and their own to meet the new standards and, if possible, exceed them.

Drawbacks •

There may be resistance from the market leaders to provide their performance figures to be used by competitors.

•

Organisations must continue to benchmark their processes – even if they become industry leaders – as competitors will also be trying to produce better quality goods and thereby increase their market share.

Benchmarking is seen as a vital element in the success of an organisation in a global and highly competitive market. STUDY QUESTIONS 1. Explain the process of benchmarking 2. Discuss the advantages and disadvantages of benchmarking

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QUALITY CIRCLES Originally the idea of American business guru W. taken up in Japan after the Second World War.

Edwards Deming, the idea was

The idea was that the front-line production workers – the people who knew best about the product – would meet regularly with supervisors and managers (engineers and salespeople may also be involved) in order to discuss ways of improving work.

Production Worker

Production Worker

Circle Leader

Manager Supervisor

Production Worker

Production Worker Supervisor

Quality circles offer more responsibility to the production worker. They are more part of the decision-making process, which is called

empowerment.

Quality circles benefit management by giving employees a less formal opportunity to discuss what they think is going well or what can be improved on, thereby bringing the product on in terms of quality.

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The use of quality circles is a management approach that allows people to become more involved in decision-making. Small groups of workers (about 5-20) in the same area of production meet regularly to study and solve production problems. This allows the workforce the opportunity to directly improve the work they are doing. If quality circles are successful they will motivate the workforce, improve efficiency and raise profitability. Quality control circles are only likely to work if they have the support of both management and employees. Businesses have to want worker participation and involvement in decision-making, and set up a structure that supports this. Workers and their representatives also need to support the scheme. Employees must feel that their views within the circle are valued and make a contribution to decisions.

Payment systems The search for a way to motivate, reward and even control labour has led managers to devise a variety of payment systems.

Time-rate payment systems These are simple payment systems where the workforce receives a basic wage or salary. Workers are rewarded for the amount of time they spend at work, and for most workers in Britain this is the average working week of thirty-six hours. In addition, holidays with pay are usually included. The system is very common in many jobs from teachers to bank workers and shopkeepers. It provides a simple method of calculating payment for employees, whether they are paid hourly, weekly, or monthly. It also overcomes difficulties that might arise when trying to work out the exact value of an employee’s work, for example a doctor. From the employee’s point of view such a system guarantees income. Overtime There are instances where employers operate a time rate system, but also offer overtime payments when individuals work for more than their normal number of hours per week. Overtime payment systems are common in the construction industry, for example. Piece-rate payment systems In manufacturing industries the most common method of payment is some form of payment by results, or a productivity related scheme. In some instances this can simply be payment to the worker for each item he or she makes/produces. This system was very common in the soft fruit industry where workers would be paid by the weight of each basket of strawberries or raspberries they picked. It is also felt to offer the greatest incentives to employees to maximise their output – the more they produce the more they get paid. However, a system that only offers piece-rate payments may result in little or no income for employees, because of breakdowns in machinery or other unplanned stoppages.

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Piece rates plus a basic or fixed pay element To avoid the problems mentioned above, some employers calculate pay using a system made up of two elements. Firstly, they will pay a basic or fixed-rate wage calculated on a time rate basis, and then to this they will add a variable, piece-rate element, calculated on output. Commission payments When looking to establish payment systems for a sales force, it is very common to base this too on a flat-rate wage supplemented by some form of commission based on sales volume or value achieved. In some organisations the greatest part of the wage received by the sales force comes in the form of commission paid. This has led to complaints that such workers may use pressure tactics in order to achieve sales – and maintain their own income levels. Fringe benefits and non-financial payments This covers any payments other than wages and salaries that an employer might make. They include private medical insurance, subsidised meals, company cars or loan and mortgage facilities. Since the 1960s fringe benefits have increased in importance, particularly in the managerial and professional sectors. Bonuses Another common production payment system is one that operates with a flat rate of pay that is then supplemented by a bonus directly related to the output each worker, or group of workers, achieves. Such bonuses might be related to setting targets for: • • • • •

volume of output, quality standards achieved, reductions of wastage, improved machine use, reduction in the loss of working days through workplace accidents. (This last example is very common in the North Sea oil industry.)

Incentives to professionals It is generally accepted that professional employees, for example dentists, doctors and other health service specialists, receive a basic salary from their employing health authority, but can enhance this by undertaking private patient work for which they receive payment on an individual case basis. There has also been an increase in ‘no win no fee’ legal cases in recent years. Based on a system devised in the USA, and particularly common in civil law suits for damage claims, the client only pays the lawyer a fee if the outcome of the case is in his favour. The percentage rate of the fee will be set out and agreed before the legal action is started.

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Contract employment It is becoming more and more common for employers to hire staff on a contract basis. This may be for the completion of a job or project, for example the building of a new stretch of dual carriageway, or may be for a fixed time period of, say, one university academic year. The employer can make substantial savings using a contract basis for employment – it is unlikely that he will offer paid holidays, pay for days lost through sickness, maternity pay or a company pension scheme. From the employee’s point of view the rate of pay is often higher than for those on permanent contracts. But there is a high degree of uncertainty and risk of loss of income when the contract ends. Profit-sharing schemes Although not widespread in Britain, there has been a move in recent years for employers to use systems that include a share of pre-tax profits as part of the payment made to the workforce. Some employers feel that this system is likely to increase the commitment from the workforce, not only in terms of output, but also in overall terms to the organisation itself. However, others are less enthusiastic and feel that the relationship between daily output and annual profit-share payments is too remote to be an effective motivator. Employers will have several objectives that they want to achieve when devising payment systems for their employees. These include: • Motivation Many people believe that workers are motivated by money, and this is reflected in the number of employers who use performance related payment systems. • Cost As one of the objectives of the employer is to maximise profits he will wish to keep the cost of labour as low as possible. The procedures for calculating, recording and making payments to employees should also be cost effective. • Prestige Employers may want to have the reputation of being ‘good payers’ rather than ‘poor payers’. This improves their ability to recruit and retain workers, which, in the long term, is cost effective for the organisation.

Employees will also have a number of objectives that they want to be able to meet from the payment they receive. • Purchasing power The higher the wage the employee gets the more he can buy and the higher his standard of living will be. Workers will always try to win wage increases higher than the present (or expected) level of inflation – as this means that they will continue to be able to raise their standard of living.

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• Recognition and fairness Most employees like to have the value of their work recognised. Many see the level of their wage or salary as the main indicator of such recognition. They also want to see fairness between payments they receive and payments made to other workers doing similar work or holding similar qualifications. For example, the pay of nurses is often compared to that of teachers or the police. • How payments are made up Many workers are interested in the way in which their total remuneration is made up. For example, they might be very happy to settle for a lower annual salary provided that the employer is making a contribution into a pension fund on their behalf. Benefits such as a fully funded company car may be worth as much as £4,000 or £5,000 per year to the employee, although he/she will almost certainly have to pay more in tax. ACTIVITY For each of the Payment Systems create a T-chart like the one below and fill it in.

Advantages

Payment System Description Disadvantages

GROUP TASK You will be divided into small working groups as usual. Your task is to create a 5-minute presentation on one of the following topics: a) b) c) d)

Methods of Production Stock Control Quality Payment Methods

GROUP ROLES 1. Researcher 2. Recorder 3. Presenter

In your presentation use as many up-to-date examples from organisations as possible. Remember to evalutate your performance as a team! Higher BM Handbook: Operations

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The Choice of Distribution Channel An efficient channel of distribution will allow a business to make products available to consumers quickly, when required, and at a minimum distribution cost to the firm itself. Large firms often choose different channels for different products. There are many factors that can influence a business’ decision.

The Product The nature of the product itself will influence the type of distribution channel chosen. •

Perishable or fragile goods, such as fresh fruit, require direct channel of distribution, so half the time spend handling the product is reduced.

•

Technically complex goods also need a direct link between the producer and the consumer. This is so that any problems which arise from installation can be quickly dealt with, without the need to go through an intermediary.

•

Goods or services which are tailor made tend to have more direct channels so that the consumer’s needs can be passed to the producer.

•

Goods which are heavy or are packaged in non-standard shapes are likely to require a direct channel of distribution. If handling is difficult, the cost of distribution is likely to find rival brands on shop shelves.

•

Producers wishing to sell large quantities of low valued goods are likely to use a wholesaler. They will not want to keep stocks of low valued goods if they are receiving order for more highly priced goods. Selling through wholesalers will mean they can sell low valued products in bulk, as quickly as possible.

The Market Large and dispersed markets usually require intermediaries. Smaller, local markets can often use a system where consumers buy directly. This is also true of the size of an order, where smaller orders can be sent by a more direct channel of distribution. The market segment at which the product is aimed may influence the retail outlet at which the product is made available. For example, products aimed at travelling business people may be sold near to a railway station.

Legal Restrictions Legislation may influence the channel that can be used for particular product. Certain drugs, for example, can only be sold by pharmacists through a prescription.

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The Company Larger companies are often able to set up their own distribution networks. Physical Distribution Physical distribution is the movement of products from one place to another. It is an important part of the marketing process for 2 main reasons: •

Failure to deliver a product in the right quantities at the right place and at the right time can damage an effective marketing effort.

•

The cost of physical distribution can be high – in some cases higher than the cost of actually producing the product.

Two aspects of physical distribution are important to a business holding stocks and transporting products.

Holding Stocks Ideally a business would be able to guarantee every customer the product they wanted, whenever they wanted it. To do this a firm would have to hold huge amounts of stock. Holding excessive amounts of stock is very costly. Holding very low stock levels, however, could mean turning down orders. The solution is for a business to assess the level of stocks needed to maintain an agreed level of customer service. This often means holding enough stock to satisfy regular orders, but not enough to deal with sudden changes in demand.

Transporting Products This is concerned with how goods can be physically delivered to markets. Firms need to consider the relative costs and speed of transporting their goods by road, rail, sea or air. For example, aeroplanes are faster than ships when transporting exports for the UK. However, firms must decide whether this advantage outweighs the costs which result from using this mode of transport. There are times when the nature of a product dictates the transport. For example, an Orkney Islands based firm which sell freshly caught lobster to Paris restaurants has little choice but to fly the product to France. When transporting goods, firms must also consider possible damage to or deterioration of goods. Packaging may help to reduce damage and deterioration, for example, if vacuum packs are used. STUDY QUESTIONS 1. What is a Distribution Channel?

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2. Discuss the factors that influence the choice of Distribution channel

Operations – Additional Information

British Standards – a system for setting quality targets and monitor performance targets. There is no guarantee of quality and critics argue that it is a triumph of paper over performance. Indeed, a firm may hold a BS 5750 certificate for setting and achieving a low quality target! Investors in People (IIP) – a government standard for employee consultation and training that establishes a procedure for ‘relating training to your business plan’. In order to achieve the standard, assessors from IIP will ask: • Have goals been set for the business? • Have these been explained to the workers? • Have workers the right skills to meet those targets? ISO 9000 - ISO is a network of the national standards institutes of 148 countries, on the basis of one member per country, with a Central Secretariat in Geneva, Switzerland, that coordinates the system. Deming Prize – Japan’s top quality award, named after W. Edwards Deming, the world famous quality guru. Estabished in 1950 by the Japanese Union of Scientists and Engineers (JUSE). It’s main concern is the implementation of TQM in the firm. Previous winners include Kawasaki, Toyota and Fuji and Hitachi. Baldridge Award – America’s top quality award. It’s key factors are: customer focus and customer quality, continuous improvement, and leadership. Previous winners include Motorola, Boeing, AT&T and Federal Express.

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PAST PAPER QUESTIONS 1 Discuss the factors which must be considered when deciding on the most effective channel of distribution for a product. (7 marks) 2 A furniture manufacturer chooses to use the JOB method of production. Describe the advantages and disadvantages of this method over FLOW production for the furniture manufacturer. (6 marks) 3 Manufacturers have to transport goods to retailers. Describe the external factors which might result in transport difficulties. marks)

(4

4 The British Standards Institute (BSI) Kitemark is an indication of product quality (i) Name 2 other quality standards. (2 marks) (ii) Describe the benefits of a quality standard to both an organisation and its customers. (3 marks) 5 Describe the main factors which have to be taken into account by an organisation when choosing a method of production. (5 marks) 6 What steps can be taken in the manufacturing process to ensure a quality product is produced at all times? (10 marks) 7 Describe the factors influencing a purchasing manager’s choice of suitable suppliers of materials and services. (10 marks)

Higher BM Handbook: Operations

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