UNIT 4 Concepts PDF

4.1 Production of goods and services A. The meaning of production: - Production is an added value process which transformation of resources into finished goods or services - The operation management goal is to ensure the production process is efficient, cost effective and meet q...

4.1 Production of goods and services A. The meaning of production: - Production is an added value process which transformation of resources into finished goods or services - The operation management goal is to ensure the production process is efficient, cost effective and meet quality standards 1. Production and productivity: - Production: the act of adding value to the factors of production to create goods and service - Productivity: the measure of efficiency that calculates the amount of outputs produced per unit of input. It calculates the efficient of using resources a. Improve productivity - Business can reduce cost by: + Increasing output produce at the same level of inputs + Maintain the level of output using fewer inputs - Cutting cost will lower the final price to the consumers, or maintain the same final price and enjoy a higher profit margin - Ways to increase productivity: + Improve worker training and motivation + Improve quality and stock management + Improve technology and automate production b. Benefits of increased productivity - Average cost per unit formula: total cost / number of units - Maximum efficiency is when business achieve their lowest cost per unit - Business with high level of productivity will be more competitive Produce more products with the same level of Reduced costs and reduce final price resources Train staff Undercut competitor’s price Introduce financial incentives Gain market share Maintain machinery Improve brand recognition Improve working practices Increase profit Invest in ways to improve productivity - Business hold inventories to ensures a steady supply of products, allowing you to serve customers promptly and avoid costly stockouts B. Lean production 1. Lean production: - Lean production involve the minimisation of resources in the production process + Less time is required because the production process is designed to maximize its efficiency + Fewer materials are required as lean production focus on reducing waste + Less labor is use as lean production typically use capital intensive + Less storage space is required as just in time stock control is use  + Only trusted suppliers can work closely with the business - Using lean production will lead to business competitive advantages + Lowers the production cost as lean production have achieved minimum wastage stage + Better quality output as the result of careful management of production and supplier reliability - Lean production use strategies such as Just In Time (JIT) stock control and Kaizen a. Just In Time stock control - The process in which materials are not stored onsite but order and deliver just in time for production - This process require careful coordination to ensure components are deliver on time + Require developing close relationship with suppliers + Suppliers need to be in close proximity Advantages of Disadvantages of Just In Time stock management Just In Time stock management Minimized stock holding cost Cannot gain discounts from buying in bulk economies of scale Develope close working relationships with a small Reduce the flexibility to respond to unexpected number of trusted suppliers increase in demand Improve cash flow as money is not tied up with Administrative costs related to increase in stock ordering Unused storage space is available for productive Unreliable suppliers (late/poor quality delivery) use can quickly halt production Encouraging teamwork resulting in improve Organizational structure undergoes a significant motivation level change and require production controls b. Kaizen: Continuous improvement - Kaizen include continuous steps to improve productivity through elimination of all types of waste in the production process + Small, ongoing changes instead of significant one-off improvements + Production process is continuously reviewed to ensure that the business can achieve the desired positive results on productivity + Require a long-term management commitment to change - Elements of Kaizen commonly include: + Zero defects in manufacturing + High level of automation + High level of cooperation between workers and management - Involving staff training and computer inventory management can reduce wastage as fewer errors are made 2. Benefits of lean production - Right first time approach + Aims for zero defects in outputs + Identifies and solves arising problems  + Prevent rather than fix errors - Flexibility + Multiskilled staff and team working + Flexible management style - Minimum wastage + Remove process that do not contribute to added value + Consume as little as possible - Effective supply chain management + Develop excellent relationships with suppliers + Minimal number of supplier - Continuous improvement + Ongoing, small steps + All staffs involve into the decision making process - 7 wastes eliminated in lean production: + Transportation: unnecessary movements of materials + Inventory: Excess material, work in process or finished goods + Motion: unnecessary movement of people or equipment + Waiting: delays or idle time in the production process + Overproduction: producing more than what is required + Overprocessing: using more resources than needed + Defects: products that do not meet requirements C. Main production methods 1. Different types of production processes: - The method of production will depends on three factors: + The level of outputs require + The nature of the product + Whether the product is standerdised or customised + The level of automation use in production Method Explanation Advantages Disadvantages Job production Manufacturers produce - High quality product - Slow production one product at a time as - Motivated and highly - High labour cost ordered by the skilled workers customers - Can produce customised products Flow production Continuous production - Low unit cost due to - Customisation is of standardised products, economies of scale difficult usually on a production - Rapid production - Capital equipment can line Usually highly automated be expensive to (capital intensive) purchase Batch production Groups of the same - Workers can specialise - Require careful product are produced as - Production can take coordination to avoid a batch place as soon as the shortage previous batch is running - Money is tied up in out stock - Complete product need to be stored 2. To recommend appropriate production method: - Small scale business will use batch or job production because thye lacj of resources for flow production - Large scale business will likely use flow production to meet high demand for the product - There are several factors that will influence the business decision as to which type of production they will use: + The level of demand: high demand may justify the use of flow production + The nature of the target market: price sensitive market will often require standardised, high volum product; while high quality, customised product will require job production + The nature of the product: it may only possible to produce certain products using job production (sport stadium) + The comparative costs of labour and capital: large firms might lower cost of production by invest in automation; cheap labour allows labour intensive production methods which allows the use of job production or batch production + The nature of the firm: small firms might lack fund to invest in flow production + New technologies: at technologies become cheaper, smaller firms can afford equipment previously inaccessible to them and increase the level of flow production + The goals for the business: firms seek to maximise market growth and profitablility may invest in flow production + Government policies: the government might stimulates growth by offering subsied and tax breaks for investment in technology D. Impact of technology on production - New technologies have been implemented on the production process - Examples: Computer aid design, computer aid manufacturing, computer intergrated manufacturing, 3D manufacturers - Advantages of using technology in production: + Saves money + Products produce more quickly + Reduces the need for labour 4.2 Costs, scale of production and break-even analysis A. Different types of costs - Fixed costs: the cost that do not change as the level of output change - Variable costs: the cost that directly change with the outputs - Total costs: total cost is the sum of fixed costs and variable costs - Average total costs: as the firm grows, it is able to increase its scale of outputs generating efficiencies that lower its average total costs of production - Economies of scale: when a increase in the scale of outputs results in lower cost per unit - Diseconomies of scale: when a increase in the scale of outputs results in hight cost per unit 1. Cost calculations: - Total costs (TC) = total fixed costs (TFC) + total variable costs (TVC) - Total variable costs (TVC) = variable costs (VC) x quanity 2. Using cost data to make decisions:  - Set prices + Cost in very important in determination of selling prices + They are crucial part of making and increasing profit - Used to make production decisions: + If the cost of producing a product is higher than the revenue it generates, the business will make a loss + The business need to choose to whether continue production or not - Analyse local decisions + Because property rental can be a substancial montly cost, a business must weuight up the cost of a location against other important factors - Analyse and reduce costs + Cost data can help business identify if the costs are too high + Business must increase profit by reducing costs + Business can reduce fixed costs by relocating, lowers salaries, seek low prices suppliers + Business can reduce variable costs by sourcing cheaper materials, buying raw materials in bulk B. Economies of scale - Economies of scale: As the business grows, it is able to increase its scale of outputs which generates effieciencies that lowers the average costs of production - Types of economies of scale Types of economies of scale Explaination Purchasing economy When a large firm buy raw materials in greater vlumes and receive bulk purchase discounts, which provides cost advantages towards smaller business Managerial economy - When large firms employ specialist managers who are more efficient at certain taks - This might attract the best talent from other businesses increasing competitive advantage Marketing economy - When a large firms spread across the cost of advertising over a large number of sales - Firms reuse the markeing materials in different geographical regions which lowers average costs Financial economy - Banks are more willingly to lend to large business as they present less risks - Business will be charged at a lower rate of interest on their borrowings Technical economy - When firm is able to use machinery at a higher level of capacity due to increasing output - This spreads the cost of the machine over more units C. Diseconomies of scale  - When a firm continues increasing its scale of output, it will reach a point where its average costs will start to increase - Types of diseconomies of scale: Types of diseconomies of scale Explaination Poor communication - As business increase in size, more managers and employees will join the business - Communication becomes slower and mistakes may be made, worsen effieciency Poor coordination - Time consuming decision-making may make it harder to coordinate workers and physical resources - The chain of command is likely to lenghthen, limiting interaction with employees Lack of commitment from employees - As the business grows workers might feel less valued as their interactions with management is limited - Workers might become demotivated leading to a fall in output which can increase average costs D. Break-even charts - Break even analysis is a financial took use to determine the number of units a business must sell to reac the point where the expense and revenue equals - Break-even analysis help businesses to understand the minimum level of sales they need to achieve in order to cover up the costs and help managers informed about pricing and production volume E. Break-even calculations - Break-even point in units = fixed cost / (selling price - variable cost) - Break-even point value = break-even point in units x selling price F. Limitation of break-even analysis - Break even analysis is less usefule where businesses produce more than one product - The accuracy of break even analysis relies upon the quality of the data use in calculations - Break even analysis assumes every output is sold - Break even charts cannot be easily amended when conditions change - Revenue and total costs do not always have a linear relationship  4.3 Achieving quality production A. The importance of quality - Quality considers the characteristics and features of a product that satisfy the needs of customers - Reasons why business need to maintain level of quality: + Attract and retain loyal customers + Reduce wastages and returns from unsatisfied customers + Lower defects lowering business costs allowing lower selling prices to better compete with rival + High quality and be use in promotional activities and provide a unique selling point for business in competitive market; improve business reputation, eases expansion into new markets - Business risks when quality is not maintained: + Losing competitive advantage and customers to other brands who offer a better quality goods/services + Experiencing higher costs due to having replace faulty or defect goods + Gaining poor brand recognition as customers spead poor revies about the business to others - Customers perceptions of quality are influenced by several factors: + Look good and are sold by a reputable company + Are reliable and durable + Are safe and fit with purpose + Receive good customer service, including after sales service - Some countries provide laws protects consumers from faulty goods or services that can potentially harming customers and the brand recognition B. Quality control - A traditional method of checking quality at the end of production process using quality inspectors to find faults because it is not possible to achieve perfection in every stages of production Benefits Drawbacks Specialists in quality control check standards Rejecting finished goods is a significant waste of resources Outputs is very likely to fit the purpose before the The cause of defects is ignored so problems might customer receives it continue Little staff training is required as the quality is High costs of scrapping or reworking products check by quality inspectors, not the staffs themselves C. Quality assurance - Quality assurance involves employees checking quality standards throughout the production process - This aims to achieve quality by organising every process to get the product right at the first time and prevent mistakes happening  - Total Quality Management is a specific approach to quality assurance that aims to denvelop a quality culture throughout the firm - TQM is the continuous improvement at every stage of production to try for zero defects Benefits Drawbacks Identify issues early, allowing reworking instead Staffs training and skilled workforce is required, of reject substandard products which might increase labour cost Identify the cause of defects and prevent future Reworking migh lengthen the time period of quality issues production Fewer business complaints maintain business All workders must be fully committed to reputation maintaining quality standards Omprove work place motivation as workers have Focus on quality might decrease labour output more ownership and recognition in their work 4.4 Location decisions A. Location decision - Location is the site from which a business decides to operates - A business might look for a new location when it first sets or the existing location no longer meet the needs - The business may look to locate its site in their home country or abroad - Choosing a good location can generate positive impact for the business: + Enhance reputation + Access skilled labour + Remain competitive + Reduce costs + Attract customers B. Location needs for manufacturing businesses: Factor Explaination Proximity to key supplies - Businesses that need to process fresh materials quickly might locate close to their source - Business adopt lean production techniques might locate close to their key suppliers to reduce lead time Proximity to main customers - Business selling perishable goods may locate close to the target market to ensure products are at their peak - Manufacturers to heavy or difficult to transfer goods might locate near to their end market to reduce transportation costs Availability of workers - Business that required skilled workers might choose the location where skilled workers are available - Hi-technology business might want to locate in areas where competitors operate to take advantage of the concentration of skilled workers  - Research-focused business might locate near to university Financial incentives - Governments might set up grants or low cost loans for business to set up in areas with high-unemployment - Low business rates may encourage manufacturers to expand in particular regions Transport Good transport links provied by major roads and efficient rail links are particularly important for effective logistic networks Power/water supply Factories require a steady and reliable supply of power and water C. Factors to consider relocating for a business - A multinational company is a business that operates in more than one country - Globalisation means that firms can consider establishing production locations worldwide rather than in just one country Factors Explaination Trade barriers Relocating will bring many advantages, such as reduce protectionist measures Eg. Chinese companies relocating into countries with trade arguments with EU and US to circumvents restrictions Financial icentives Governments may offer incentives to locate in their countries as they bring in investment opportunities, foreign currencies and job opportunities Eg. Grants, low-interest business loans, tax break Access cheaper or more skilled workers — Lower taxation Some countries tax business and their employees at very low rate Alternative sources of raw material Some countries provide cheaper resources of raw materials Access to new markets - Many business choose to locate near to their customers in another country to reduce transportation and distribution costs - This is very important when the market in home country is saturated or external factors (such as laws) in the home country may have made the business unviable to grow  D. The role of legal controls on production location decisions - Regulation is the process of enforcing laws and ensuring that businesses abide by them. - Governments and local authorities can incentivize businesses to locate in particular areas by offering grants or reduced tax rates, or businesses may be deterred from locating in certain areas due to strict bylaws - The presence or absence of laws can affect a business's choice of location in two ways: A, Less economically denveloped countries: - Less economically denveloped countries often have fewer laws and less enforcement of their existing laws, which likely to attract new businesses - Businesses enjoy lower costs as they need to meet fewer legal requirements - Labour can be paid very low as no minimum wage exist - Employees and customers have less opportunity to pursue legal actions B, More economically denveloped countries: - Developed countries with extensive laws can attract businesses who desire to locate in region with: good infrastructure, highly skilled labour, high standards of living Measures used by local governments to influence local decisions Method Explaination Planning - Regulations limit the operations of businesses in certain locations regulations - Planning permission has to be agreed and granted before the business can build or extend a site Governments grants - Grants and subsides encourage business to set up and expand in areas of high or subsides unemployment, underdenveloped regions or regions that suffer industrial decline