3.4 Decision making to improve operational performance

Question 1

Operational objectives - LOW UNIT COSTS

Answer 1

Low unit costs –> business can offer lower prices which demonstrates a competitive advantages

Question 2

Operational objectives - QUALITY

Answer 2

Quality operation has resources and systems in order to achieve quality targets consistently

The better the quality –> the more competitive the business will be –> so customers will keep on using it

Question 3

Operational Objectives - ADDED VALUE

Answer 3

An increase in value that a business creates by undertaking the production process. Can be done through:

Strong brand - good reputation and quality

Customer service - attentive personal service, high quality

Product features - new developments e.g. new software update

Offering convenience - e.g. customers will pay more for next day delivery

Question 4

Calculations of operations data - LABOUR PRODUCTIVITY

Answer 4

Measures output per employee

Labour productivity = total output / number of employees

Question 5

Calculations of operations data - UNIT COSTS (average costs)

Answer 5

Measures cost per unit

Unit costs = total costs / total output

Question 6

Calculations of operations of data - CAPACITY UTILISATION

Answer 6

CAPACITY UTILISATION - measures existing output as a % of the maximum possible output

capacity utilisation = existing output / maximum possible output x 100

Question 7

Importance of capacity

Answer 7

Useful measure of productive efficiency –> (measures whether there are unused or idle resources in the business)

High capacity utilisation reduced unit costs –> competitiveness

HOWEVER, high capacity utilisation can have negative impacts:
- negative effect on quality –> production is rushed
- employees suffer –> lots of workload + stress, de-motivating
- loss of sales –> unable to meet sudden increases in demand

Question 8

Importance of efficiency and labour productivity

Answer 8

Efficiency is measured by the inputs used to generate outputs

A more efficient business will produce lower unit costs than competitors –> so business can either make a higher profit per unit sold (if unit costs stays the same price as a competitor) or the business can offer customers a lower price than competitors –> still making a good profit

Question 9

Improving efficiency through using capacity efficiently

Answer 9

Low capacity utilisation = inefficiency, SO a manager could:
- improve marketing to boost sales e.g. through promotion
- reducing its capacity / downsizing

If the demand is high for the existing capacity, a business will:
- outsource to other producers that may do things differently
- find a way to reduce demand in the short-term –> price increase

Question 10

Improving efficiency through increasing labour productivity

Answer 10

Another way to increase efficiency is through is to improve labour productivity and this can be done by:

Investment in more training – e.g. on-the-job training
Improve motivation
More or better capital equipment
Better quality raw materials –> reduces wasted & rejected products

Question 11

Difficulties of increasing efficiency and labour productivity

Answer 11

Increasing labour productivity may lead to a decrease in quality –> leads to customer dissatisfaction & sales may fall

If demand for product doesn’t increase by productivity does –> fewer employees will be required –> this means higher levels of productivity may lead to staff being made redundant so employees may resist labour productivity as they want to keep their jobs

Employees may demand higher pay for higher productivity –> if pay rise is too high it may offset any efficiency gains from higher productivity so business won’t have benefitted.

Question 12

Lean production

Answer 12

Occurs when managers reduce waste and therefore operations become more efficient

Question 13

Being lean aims to reduce waste by…

Answer 13

Improving quality –> reduces the number of products that might need to be reworked, thrown away or fixed

Reducing amount of inventory held –> reduces costs of protecting and storing products –> reduces risk of stock going out of date or not being sold

Just in Time production leads to as close as zero stock being held

Question 14

Advantages of lean production

Answer 14

Improved product quality

Sustainability –> less waste

Increased profitability - because greater efficiency –> less waste –> reduced unit costs –> better quality –> profitability

Question 15

Disadvantages of lean production

Answer 15

Businesses can be more vulnerable if they use JIT –> a disruption to JIT will lead to a halt in operations

Investment in training for employees to keep increase their skills, engagement and the quality of their work

Question 16

Just in Time

Answer 16

Ordering in the exact amount of supplies only when they are needed

Question 17

Benefits of JIT

Answer 17

Lower stock holding –> reduction in storage space –> saves money on rent & insurance costs

Less likely of stock becoming obsolete, or out of date

Question 18

Drawbacks of JIT

Answer 18

Little room for mistakes as minimal stock is kept for re-working faulty products

If there is a disruption to suppliers –> leads to a halt in production

Question 19

Optimal mix of resources - LABOUR INTENSIVE

Answer 19

Labour intensive production relies on physical work from employees

E.g. - hairdressing, coal mining etc.

Question 20

Advantages of labour intensive

Answer 20

Customised products are easier to make

Less expensive machinery costs

Humans can use their own initiative and problem solve

Question 21

Disadvantages of labour intensive

Answer 21

Quality of products can vary due to expertise / skill of the worker

Skilled workers take time and money to train

Skilled workers will be paid more than unskilled workers

Question 22

Optimal mix of resources - CAPITAL INTENSIVE

Answer 22

Capital intensive production relies mainly on machinery

E.g. - car manufacturing

Question 23

Advantages of capital intensive

Answer 23

Less employee wages and costs

Quality can be standardised, the same every time

Machines can work continuously, 24/7

Question 24

Disadvantages of capital intensive

Answer 24

More difficult to customise orders

Breakdowns in production can be costly

Initial set up costs of machinery are high

Question 25

Impact of technology on operational efficiency

Answer 25

More flexible when meeting customer needs --> technology can track customer behaviour more effectively e.g. providing personalised products Reduces costs because there are less errors with technology HOWEVER... New technology is expensive More money spent on training employees on how use it Technology may make some employees redundant

Question 26

Importance of Quality

Answer 26

Quality is measured by the extent to which an operation meets its customer requirements --> customers want 'value for money' Quality is important for a businesses success as good quality ensures: - Customer loyalty --> & recommend product to others - Strong brand reputation for quality - Value for money --> allows premium price & more price inelastic - Fewer returns and replacements lead to reduced costs

Question 27

Methods of improving quality

Answer 27

Using market research to meet customer needs Careful selection of suppliers Training employees to make sure their work is acceptable Investment in technology

Question 28

Quality Assurance

Answer 28

An approach that aims to achieve quality by organising every process to get the product 'right first time' --> prevent mistakes --> 'zero defect' approach.

Question 29

Advantages of Quality Assurance

Answer 29

Less wastage so costs are reduced & re-working of faulty products at every stage too Helps improve employee motivation as they have more ownership and recognition for their work With all staff responsible for quality, this can help the firm gain marketing advantages arising from its consistent level of quality

Question 30

Disadvantages of Quality Assurance

Answer 30

Can be very costly due to regular checks being made so often Regular checks can slow down production --> lower productivity

Question 31

Quality Control

Answer 31

Checks the quality of completed products for faults at every stage

Question 32

Advantages of Quality Control

Answer 32

Inspection prevents faulty products reaching the customer Inspectors may be better placed to find widespread problems across an organisation.

Question 33

Disadvantages of Quality Control

Answer 33

Individuals aren't encouraged to take responsibility for the quality of their own work. Rejected product is expensive for a firm as it has incurred the full costs of production but can't be sold as the manufacturer does not want its name associated with substandard product If defect levels are very high, the company's profitability will suffer unless steps are taken to tackle the root causes of the failures.

Question 34

Benefits of improving quality

Answer 34

Managers can feel comfortable that they can meet set targets --> allows the business to be competitive Improved quality helps brand image, leads to customer satisfaction & loyalty --> perhaps leading to good word-of-mouth

Question 35

Difficulties of improving quality

Answer 35

Employees may: - see improving quality as extra work and don't understand why they should work more if they aren't being paid more - may believe the business is already doing well enough therefore resist it and may even see it as a criticism Business may: - have to invest in training - possibly change suppliers - have to develop a culture where quality assurance & control is consistently implemented

Question 36

Consequences of poor quality

Answer 36

Poor quality is a course of competitive disadvantage Loss customers --> may spread negative reviews Cost of replacements, refunds & reworking a product Damages brand reputation

Question 37

Ways & value of improving FLEXIBILITY

Answer 37

Mass customisation - producing on a large scale while still enabling individual customer preferences to be met Greater flexibility may lead to more customer satisfaction BUT will be more expensive to produce many different versions of a product

Question 38

Managing supply to match demand - OUTSOURCING

Answer 38

Outsource - when a business uses an outside supplier Outsourcing production to other businesses to meet high level orders

Question 39

Managing supply to match demand - TEMPS & PART-TIME EMPLOYEES

Answer 39

Employing a flexible workforce through temps and part-time Flexible contracts --> managers are able to move staff to when they are needed and increase hours to meet any sudden demands Managers may also use temps & part-time so they can increase or decrease the work-force as required

Question 40

Managing supply to match demand - TEMPS & PART-TIME EMPLOYEES

Answer 40

Employing a flexible workforce through temps and part-time Flexible contracts --> managers are able to move staff to when they are needed and increase hours to meet any sudden demands Managers may also use temps & part-time so they can increase or decrease the work-force as required

Question 41

Managing supply to match demand - PRODUCING TO ORDER

Answer 41

Occurs when a business only produces when the actual order is placed rather than producing items and hoping they will sell This reduces any risk of being left with unsold stock but requires a flexible production process

Question 42

Influences on amount of inventory held

Answer 42

Need to satisfy demand --> e.g. seasonal demand & failure to have goods available for sale is very costly Need to manage working capital --> holding stock ties up cash in working capital & opportunity cost (money invested in inventory could have been used for something else) Risk of stock losing value --> longer the stocks are held the more risk of it becoming obsolete or out of date

Question 43

Inventory Control - STOCK CONTROL CHART

Answer 43

Overall aim of stock control charts is to maintain stock so that the total costs of holding stock is minimised

Question 44

Stock control charts - LEAD TIME

Answer 44

Amount of time between placing the order and receiving the stock Measured in days, weeks or months Determines when an order has to be placed in order to arrive on time to prevent stock falling below the buffer (safety) stock level

Question 45

Stock control charts - RE-ORDER LEVELS

Answer 45

Acts as a trigger point, so that when stock falls to this level, the next supplier order should be placed Depends on buffer inventory, the rate at which materials are used up and the lead time too

Question 46

Stock control charts - RE-ORDER QUANTITIES

Answer 46

The amount a manager orders of a particular item Depends on factors such as cost, and ease of storage

Question 47

Stock control charts - BUFFER LEVEL (safety level)

Answer 47

Minimum amount of stock a business wants to hold Buffer inventory is held to ensure production can continue in an emergency and that customers can continue to be supplied Amount of buffer inventory depends on how difficult & expensive it is to store

Question 48

Factors affecting when & how much stock to re-order

Answer 48

Lead time from suppliers --> Higher lead times may require a higher re-order level Implications of running out (stock-outs) --> If stock-outs are very damaging, then have a high re-order level & quantity Demand for the product --> Higher demand normally means higher re-order levels

Question 49

Influence on choice of suppliers

Answer 49

Costs of materials and quality --> managers want value for money Dependability --> managers want supplies to arrive as & when they are ordered to arrive, BUT this may increase costs Ethical considerations --> businesses are held responsible for the behaviour of their suppliers

Question 50

Supply Chain

Answer 50

Refers to all the providers of resources at different stages of operations process

Question 51

Effective management of supply chain

Answer 51

Effective management ensures: Right suppliers arrive on time Fair price is paid for the items Products are produced ethically

Question 52

Value of Outsourcing - ADVANTAGES

Answer 52

Enables the business to make use of specialist skills and services --> leads to a better quality of work provided more efficiently Can increase the capacity of the business