Operations management
Production of goods and services
Productivity is the outputs measured against the inputs used; labor productivity = output ÷ number of employees. There are a number of ways to increase productivity. These include:
Benefits of increasing efficiency/productivity:
As the employee becomes more experienced, they will become more efficient, therefore the amount of output will increase.
- Improving the layout of the machines in a factory to reduce wasted time and therefore increase efficiency
- Improving labor skills by training workers so they have more productive techniques of working
- Introducing automation
Benefits of increasing efficiency/productivity:
- Increased output relative to the inputs required
- Lower costs per unit
- Fewer workers may be needed, possibly leading to lower wage costs
- High wager for workers increases motivation
As the employee becomes more experienced, they will become more efficient, therefore the amount of output will increase.
Why businesses hold inventories
Inventory levels have to be carefully controlled to ensure that there is always enough inventory to satisfy demand. Inventories can take various forms, including raw materials, components, partly finished goods, or finished products ready for delivery. Even spare parts for machinery can be included. When inventories reach a certain point, they will be reordered to bring inventories back to the maximum level again. The business must reorder before inventories get too low to allow time for the goods to be delivered. If inventory levels get too low they might actually run out if there is an unexpectedly high demand for the goods. If too high a level of inventory is held then this costs a lot of money, the business has bought the goods but they are not being used and the money could be put to better use. The buffer inventory level is the inventory held to deal with uncertainty in customer demand and deliveries of supplies. Lean production is a term used for those techniques used by business to cut down on waste and therefore increase efficiency, for example, by reducing the time it takes for a product to be developed and become available for sale.
Inventory levels have to be carefully controlled to ensure that there is always enough inventory to satisfy demand. Inventories can take various forms, including raw materials, components, partly finished goods, or finished products ready for delivery. Even spare parts for machinery can be included. When inventories reach a certain point, they will be reordered to bring inventories back to the maximum level again. The business must reorder before inventories get too low to allow time for the goods to be delivered. If inventory levels get too low they might actually run out if there is an unexpectedly high demand for the goods. If too high a level of inventory is held then this costs a lot of money, the business has bought the goods but they are not being used and the money could be put to better use. The buffer inventory level is the inventory held to deal with uncertainty in customer demand and deliveries of supplies. Lean production is a term used for those techniques used by business to cut down on waste and therefore increase efficiency, for example, by reducing the time it takes for a product to be developed and become available for sale.
Types of waste
- overproduction - producing goods before they have been ordered by customers. This results in high storage costs and possible damage to goods whilst in storage.
- waiting - when the goods are not moving or being processed in any way then waste is occurring
- transportation - moving goods around unnecessarily causes waste and is not adding value to the product. Goods may also be damaged when they are being moved around
- unnecessary inventory - if there is too much inventory then this takes up space, may get in the way of production and costs money.
- motion - any actions, including bending or stretching movements of the body of the employee wastes time. It may also be a health and safety risk for the employees. This also applies to the movement of machines which may not be necessary.
- over-processing - if complex machinery is being used to perform simple tasks then this is wasteful. Some activities in producing the goods may not be necessary if the design of the product is poor.
- defects - any faults require the goods being fixed and time can be wasted inspecting the products.
Benefits of lean production
Costs are saved through:
Costs are saved through:
- less storage of raw materials or components
- quicker production of goods or services
- no need to repair defects or provide a replacement service for a dissatisfied customer
- better use of equipment
- cutting out some processes which speeds up production
- less money tied up in inventories
- improved health and safety leading to less time off work due to injury
Methods of lean production
- Kaizen
- just-in-time inventory control
- cell production
Kaizen
Continuous improvement through improving efficiencies. Kaizen eliminates waste, for example, by getting rid of piles of inventory or reducing the amount of time taken for workers to walk between jobs so that they can eliminate unnecessary movements. When Kaizen is introduced, the factory floor is reorganized by repositioning machines tightly together in cells, in order to improve the flow of production through the factory. The flow will be open and marked with color-coded lines which map of the flow of materials through the production process.
Continuous improvement through improving efficiencies. Kaizen eliminates waste, for example, by getting rid of piles of inventory or reducing the amount of time taken for workers to walk between jobs so that they can eliminate unnecessary movements. When Kaizen is introduced, the factory floor is reorganized by repositioning machines tightly together in cells, in order to improve the flow of production through the factory. The flow will be open and marked with color-coded lines which map of the flow of materials through the production process.
Advantages of Kaizen
- increased productivity
- reduced amount of space needed for the production process
- work-in-progress is reduced
- improved layout of the factory floor may allow some jobs to be combined, thereby freeing up employees to carry out some other job in the factory
Just-in-time inventory control
A production method that involves reducing or virtually eliminating the ned to hold inventories of raw materials or unsold inventories of the finished product. Supplies arrive just at the time they are needed.
A production method that involves reducing or virtually eliminating the ned to hold inventories of raw materials or unsold inventories of the finished product. Supplies arrive just at the time they are needed.
Advantages of just-in-time inventory control
- Reduces the costs of holding inventory
- Warehouse space is not needed, reducing costs
- Finished product is sold quickly and so money will come back tot he business more quickly, helping its cash flow
Cell production
The production line is divided into separate, self-contained units, each making an identifiable part of the finished product, instead of having a flow or mass production line. This method of production improves the morale of the employees and makes them work harder so they become more efficient. The employees feel more valued and are less likely to strike or cause disruption.
The production line is divided into separate, self-contained units, each making an identifiable part of the finished product, instead of having a flow or mass production line. This method of production improves the morale of the employees and makes them work harder so they become more efficient. The employees feel more valued and are less likely to strike or cause disruption.
- Job production is where a single product is made at a time.
- Batch production is where a quantity of one product is made, then a quantity of another item will be produced.
- Flow production is where large quantities of a product are produced in a continuous process. It is sometimes referred to as mass production.
Factors affecting which method of production to use
- The nature of the product - if it is a fairly unique product or an individual service is required, job production will be used. If the product can be mass produced using an automated production line then flow production will be used.
- The size of the market - If demand is higher and more products can be sold but not in very large quantities, batch production will be used. The product will be produced in a certain quantity to meet the particular order. Small local markets or niche markets will be served by businesses using job or batch production. International markets are served by businesses using flow production.
- The nature of demand - If there is a large and fairly steady demand for the product, such as soap, it becomes economic to set up a production line and continuously produce the product (flow production). If demand is less frequent, such as for furniture, then production may be more likely to be job or batch production.
- The size of the business. If the business is small and does not have the access to large amounts of capital then it will not produce on a large scale using automated production lines. Only large businesses can operate on this scale. Small businesses are more likely to use job or batch production methods.
How technology has changed production methods
- Automation is where the equipment used in the factory is controlled by a computer to carry out mechanical processes, such as paint spraying on a car assembly line. The production line will consist mainly of machines and only a few people will be needed to ensure that everything proceeds smoothly.
- Mechanization is where the production is done by machines but operated by people, for example, a printing pres. Robots are machines that are programmed to do tasks, and are particularly useful for unpleasant, dangerous and difficult jobs. They are quick, very accurate and work non-stop.
- CAD (computer aided design) is a computer software that draws items being designed more quickly and allows them to be rotated to see the item from all sides instead of having to draw it several times. It is used to design new products or to re-style existing products. It is particularly useful for detailed technical drawings.
- CAM (computer aided manufacturing)is where computers monitor the production process and control machines or robots on the factory floor. For example, on the production line a car plant computers will control the robots that spot-weld the car body together root he robots that spray paint the car.
- CIM (computer integrated manufacturing) is the total integration of CAD and CAM. The computers that design the products are linked directly to the computers that aid the manufacturing process.
- EPOS (electronic point of sale) is used at checkouts where the operator scans the barcode of each item individually. The price and description of the item is displayed on the checkout minor and printed on the till receipt. The inventory record is automatically changed to show one item has been sold and if inventory is low then more inventory can be automatically ordered.
- EFTPOS (electronic funds transfer at point of sale) is where the electronic cash register is connected to the retailer’s main computer and also to banks all over a wide area computer network. The shopper’s card will be swiped at the till and the bank information will automatically be read from the card. The money will be directly debited form the customer’s account after they have signed for the debit to be made or have entered their pin number. A receipt will be printed as confirmation that the payment has gone out of the customer’s account.
The advantages of new technology
- Productivity is greater as new production methods are used.
- Greater job satisfaction stimulates workers, as routine and boring jobs are now done by machines.
- The types of jobs have changed as more skilled workers are needed to use the new technology. Businesses must offer training to existing workers in the use of new technology. The workers are more motivated and therefore improve the quality of their work.
- Better quality products are produced owing to better production methods and better quality control.
- More accurate consumer demand results from computers being used to monitor inventory levels.
- Quicker communication and reduced paperwork, owing to computers lead to increased profitability.
- The information that is available to managers is much great grand this results in better and quicker decision making.
- New products are introduced as new methods of production are introduced. The market and tastes of the consumer have changed.
The disadvantages of new technology
- Unemployment rises as machines/computers replace people on the factory floor and in offices.
- It inexpensive to invest in, which also increases the risks and large quantities of products need to be sold to cover the cost of purchasing the equipment.
- Employees are unhappy with the changes in their work practices when new technology is introduced.
- new technology is changing al the time and will often become outdated quite quickly and need to be replaced if the business is to remain competitive.
Business costs
All business activities involve costs of some sort. Comparisons can be made to deduce:
- wether the business will make a profit or loss
- helps the owner make the best decision for his business
- helps the owner decide what prices he should charge for his goods
Fixed and variable costs
- Fixed costs are costs which do not vary with the number of items sold or produced and must be paid whether business is making sales or not
- Variable costs are costs which vary directly with the number of items sold or produced
Total and average cost
The total costs of a business are the fixed costs added to the variable costs. This figure can be compared with sales revenue to calculate the profit made or lost. The average cost per unit can also be calculated from the total cost figure.
The total costs of a business are the fixed costs added to the variable costs. This figure can be compared with sales revenue to calculate the profit made or lost. The average cost per unit can also be calculated from the total cost figure.
Break-even analysis
What is a break-even chart?
An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point. This is the amount that revenues can fall while still staying above the break-even point. Break-even level of output/sales indicates to the owner or manager of a business minimum level of output that must be sold so total costs are covered. Profit is not bring made and not being lost at the break even point.
An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point. This is the amount that revenues can fall while still staying above the break-even point. Break-even level of output/sales indicates to the owner or manager of a business minimum level of output that must be sold so total costs are covered. Profit is not bring made and not being lost at the break even point.
Advantages of break-even charts
- Managers able to read off from graph the expected profit or loss to be made at any level of output.
- Different situations can be displayed using the breakeven chart
Disadvantages of break-even charts
- Break even charts assume that all goods produced are actually sold - not all possibilities are shown e.g. the buildup of inventories if goods are not sold
- Fixed costs only remain constant if scale of production doesn't change, and an increase in output would require more equipment which means a larger fixed cost
- Break even charts solely focus on the break even point of production but there are many other aspects of the operations of a business which needs to be analyzed
- Break even charts assume that costs and revenues can be drawn with straight lines - often not the case: they often change in steepness of the slope depending on the amount of money spent e.g. a steeper slope if more money was given
Achieving quality production
Why is quality important for businesses?
- establishes a brand image
- builds brand loyalty
- will maintain a good reputation
- will help to increase sales
- attracts new customers
Quality control
Quality means to produce a good or a service which meets customer expectations. Remember that quality does not only mean producing a high-quality good or service.
Quality control is the checking for quality at the end of the production process, whether it is the production of a product or service.
Advantages include:
Quality means to produce a good or a service which meets customer expectations. Remember that quality does not only mean producing a high-quality good or service.
Quality control is the checking for quality at the end of the production process, whether it is the production of a product or service.
Advantages include:
- tries to eliminate faults or errors before the customer receives the product or service
- less training required for the workers
- expensive as employees need to be paid to check the product or service
- identifies the fault but doesn’t find why the fault has occurred and therefore is difficult to remove the problem
- increased costs if products have to be scrapped or reworked or service repeated
Quality assurance
Quality assurance is the checking for the quality standards throughout the production process, whether it is the production of a product or service. The business will make sure quality standards are set and then it will apply these quality standards throughout the business. The purpose of quality assurance is to make sure that the customer is satisfied,with the aim of achieving greater sales, increased added value and increased profits. To implement a quality assurance system, several aspects of production must be included. Attention must be paid to the design of the product, the components and materials used, delivery schedules, after-sales service and quality control procedures. The workforce must support the use of this system or it will not be effective.
Advantages include:
Quality assurance is the checking for the quality standards throughout the production process, whether it is the production of a product or service. The business will make sure quality standards are set and then it will apply these quality standards throughout the business. The purpose of quality assurance is to make sure that the customer is satisfied,with the aim of achieving greater sales, increased added value and increased profits. To implement a quality assurance system, several aspects of production must be included. Attention must be paid to the design of the product, the components and materials used, delivery schedules, after-sales service and quality control procedures. The workforce must support the use of this system or it will not be effective.
Advantages include:
- tries to eliminate faults or errors before the customer receives the product or service
- fewer customer complaints
- reduced costs if products do not have to be scrapped or reworked or service repeated
- expensive to train employees to check the product or service
- relies on employees following instructions of standards set
Total Quality Management
TQM is the continuous improvement of products and processes by focusing on quality at each stage of production.
Advantages include:
TQM is the continuous improvement of products and processes by focusing on quality at each stage of production.
Advantages include:
- quality is built into every part of the production of a product or service and becomes central to the ethos of all employees
- eliminates all faults or errors before the customer receives the product or service as t has a ‘right first time’ approach
- no customer complaints and so brand image is improved - leading to higher sales
- reduced costs as products do not have to be scrapped or reworked or service repeated
- waste is removed and efficiency increases
- expensive to train employees to check the product or service
- relies on employees following TQM ideology
Location decisions
Location of industry
Many businesses operate on a large scale and look at location on a world level, not just on a national or continental level. This is often termed globalization because firms plan many aspects of their business, such as location decisions, marketing and sales, on a global scale.
Many businesses operate on a large scale and look at location on a world level, not just on a national or continental level. This is often termed globalization because firms plan many aspects of their business, such as location decisions, marketing and sales, on a global scale.
Factors affecting the location of a manufacturing business
- Production methods - if job production is used, the business is likely to be on a small scale and so the influence of the nearness of components, for example, will be of less importance to the business than if flow production is used. If production is on a larger scale, the location of component suppliers might be of greater importance.
- Market - locating a factory near to the market is not very important, unless the product is perishable.
- Raw materials - it is cheaper to process raw materials near to the site of extraction rather than transporting them large distances.
- External economies of scale - support businesses will need to be nearby so they can respond quickly and work more effectively.
- Availability of labor - it may be easier and cheaper to recruit specialized employees in an area with people with the relevant skills. If unskilled workers are required, an area with high unemployment may be more suitable. Areas with a lower wage rate will also be advantageous to the business.
- Government influence - the government may want a business to locate in a particular area, and will offer state-funded grants to encourage the firm to move there.
- Power and water supply - a reliable supply of power and water will be needed
- Climate - may affect production
Factors affecting the location of a service sector business
- Personal preference of the owners - perhaps near to where owners or employees live.
- Technology - may allow a business to locate away from its customers to take advantage of cheaper rent.
- Availability of labor - if a business needs a large amount of employees, it will have to locate in a populated area, and if a specialized employee is required, the business may have to move to where this type of labor is found
- Climate - may affect the business if they are linked to tourism in some way.
- Near to other businesses - service firms serve the needs of larger businesses, and need to be able to respond quickly.
- Rent - they can locate on the outskirts of town to benefit from lower rent and taxes.
Locating in different countries
Many more businesses, other than multinationals, are considering moving to another country, either to expand their operations or sometimes to relocate entirely, many from developed countries to rapidly growing economies. A number of factors will affect whether a business decides to relocate to another country and which country to choose where to locate:
Many more businesses, other than multinationals, are considering moving to another country, either to expand their operations or sometimes to relocate entirely, many from developed countries to rapidly growing economies. A number of factors will affect whether a business decides to relocate to another country and which country to choose where to locate:
- New markets overseas - if a business sees an increase in sales overseas it may decide to relocate their manufacturing nearer to these markets rather than transport their products
- Cheaper or new sources of materials - a business may want or have to use an alternative supply of raw material; this could be cheaper
- Difficulties with the labor force and wage costs - if the business is located in a country with high wages, it may be more profitable to relocate overseas
- Rent/tax considerations - costs such as rent or taxes can keep increasing and can cause the business to relocate to another country where rents or taxes are lower
- Availability of government grants and other incentives - governments may want businesses to locate in their country to bring in investment and job opportunities, and may be willing to give grants or other incentives
- Trade and tariff barriers - tariffs or quotas may encourage businesses to relocate to countries where they do not have such restrictions
Legal controls on location decisions
Governments try to influence location decisions for two main reasons:
Two types of measures are often used by government to influence where firms locate:
Governments try to influence location decisions for two main reasons:
- to encourage businesses to set up and expand in areas of high unemployment
- to discourage firms from locating in overcrowded areas or on sites which have protected environments
Two types of measures are often used by government to influence where firms locate:
- Planning regulations will legally restrict the business activities that can be undertaken in certain areas.
- Many governments will provide grants or subsidies to businesses to encourage them to locate in underdeveloped parts of the country.