Business Efficiency: Standardization & Average Costs

• Efficiency involves optimising the use of a business's resources such as materials, labour, and capital.
• Businesses often use costs as an indicator of efficiency, with minimized average costs signaling production efficiency.
• The average cost curve typically decreases, reaches a minimum, and then increases.
• In the example, average cost is minimized at an output of 500 units, with an average cost of £20 per unit where efficiency cannot be improved
• Producing only 200 units raises the average cost to £30, indicating less efficient resource use.

Factors Influencing Efficiency

• The efficiency of businesses is influenced by different factors.
• Reducing average costs directly leads to improved efficiency.

Standardization

• Standardization involves using uniform resources, activities, or products.
• Standardization applies to tools, components, equipment, procedures, and documents.
• Construction companies benefit from using the same kitchen and bathroom units in all apartments which allows for bulk purchases and simplified training.
• Standard components like nuts and bolts improve the overall efficiency.
• Standardization can reduce flexibility and make customisation and complex design more difficult.

Outsourcing

• Outsourcing involves entrusting business activities to external specialists.
• Businesses seek lower costs or increased flexibility by outsourcing tasks.
• For example, a call center outsourcing its staff catering improves efficiency and reduces costs.

Relocating

• Relocating involves moving the entire business to a new site with drastic measures can lower costs.
• Possible benefits of relocating include lower rents, wages, and improved transport links.
• Countries such as China, Thailand, and India offer substantially lower labour costs.

Downsizing

• Downsizing involves reducing capacity by laying off workers and closing unprofitable divisions.
• These can lead to cost savings, increased profit, a more focused operation, and the removal of inefficient business parts.
• Downsizing drawbacks include the loss of skills, experience, and knowledge from the workforce.

Delayering

• Delayering involves reducing staff, targeting managerial positions to flatten the organizational structure.
• Organizational charts are traditionally hierarchical with multiple management layers.
• In the late 1980s, organizational structures had an average of 7 layers, with some reaching 14, but by 2000, this was reduced to fewer than 5.
• Laying off expensive managers saves money but can improve communication by empowering staff

Investing in Technology

• Investing in new technology can improve efficiency.
• Some benefits include new machinery, quicker operations, better accuracy, ability to handle complex tasks, and work in extreme conditions.
• Information and communications technology is a very effective way to improve busines efficiency

Lean Production

• Lean Production is an approach developed by Toyota to minimize resource use in production which includes factory space, materials, stocks, suppliers, labor, capital and time.
• Benefits of lean production:
  • greater productivity
  • lower costs
  • shorter lead times and fewer faulty products
  • improved reliability
  • faster product design

Kaizen

• Kaizen is a Japanese term meaning continuous improvement.
• Workers are continuously finding new ways to improve quality, reduce waste, and increase efficiency.
• These individual improvements may be small, but add up over time.

Just-in-Time (JIT) Production

• This involves minimising or eliminating the amount of stock held by a business
• Results include reduced stock-holding costs.