3.4 operational decisions

Question 1

Operations management

Answer 1

is a function of business concerned with the transformation of resources
(inputs) into the goods and services used by both the end consumer and other businesses.

Question 2

cost targets

Answer 2

many firms aim to cut costs, especially if they compete on price. Depending on the type business they can cut its
fixed costs or variable costs. E.g.:
§ Firm might restructure to remove a layer of management
§ Costs of an individual product can be reduced
§ Relocate to a cheaper place however sales may be reduced due to unpopularity
§ Reduce no of workers – may lead to lower motivation, pressure on remaining staff
§ Lower unit costs, could compromise on quality
§ Reduce salaries- anger, resentment, lower levels of motivation
§ Cheaper suppliers, negotiation, Reduce packaging costs

Question 3

quality targets

Answer 3

Quality: Quality operations mean that a business consistently meets or exceeds their key quality targets, playing a crucial
role in ensuring high levels of customer satisfaction.
§ Those features of a product or service that allow it to satisfy (or delight) customers’
Likely to involve maintaining or improving levels quality. E.g. reduce number of complaints/ refund, aim to ensure 95%
products last 5 years or longer

Question 4

How is quality measured?

Answer 4

§ Customer satisfaction ratings
§ Surveys , customer complaints
§ Speed of service (punctuality)
§ Number of returning customers – brand loyalty
§ % of waste or defects

Question 5

How to ensure quality:

Answer 5

§ Quality control (TQM, Kaizen)
§ Quality assurance

Question 6

Kaizen, outsourcing, TQM

Answer 6

An attitude to quality where the aims are zero defects
and total customer satisfaction.
Everyone is responsible for ensuring high quality
standards

Question 7

Disadvantages of maintaining quality:

Answer 7

§ Expensive
§ Time consuming- constant training, monitoring
§ Focusing too much on quality can falter other areas
§ Demoralising- repetitive
§ Increased pressure hierarchy

Question 8

Efficiency objectives:

Answer 8

aims to make better use of resources – reduces costs and increase profits. May mean increasing
capacity utilisation (increasing output) so it’s closer to the maximum amount a firm can produce. This could mean taking
steps to improve labour and capital productivity.

Question 9

Innovation –

Answer 9

businesses can set their research and development department innovation targets e.g. an objective to
produce an electric car that fully charges in 10 mins. These objectives can be hard to achieve as unexpected problems
often occur

Question 10

Flexibility-

Answer 10

-must be able to react to what customers want.
-e.g. prod = volume doesn’t exceed demand or vice versa.

• work force is flexible by employing people on zero hour contracts

Question 11

Speed of response-

Answer 11

customers perceive a direct correlation between speed and the value of your product or service.
-speed operation ^ important.

• do it by decreasing the production time of a product,
  decreasing waiting time for customers
• getting new products to market more quickly.
  -objectives are closely related
  to the company’s efficiency objectives

Question 12

Dependability-

Answer 12

customers need to be able to depend on a business and businesses need to be able to depend on their
suppliers. E.g. if a store always has items in stock then customers are more likely to shop there, even if the products are
more expensive. A reliable business can often charge more for its goods and services
§ Amazon state delivery dates for their products and keep customers informed if that date changes using email – this
ensures that their reputation is maintained with customers.

Question 13

Environmental objectives:

Answer 13

pressures from customers and gov can lead to setting these
§ Ensuring their operational side doesn’t harm the environment is important- especially for their corporate social
responsibility reports
Objectives: Wider Ethical Considerations
§ Reducing waste, materials
§ Reducing carbon footprint
§ Increase recycling
§ Achieving self-sufficiency in energy use.
How can they act ‘ethically?’
§ Recycle/Promote protecting the environment
§ Use Fairtrade
§ Reduce their use of plastic
§ Use renewable resources
§ Pay workers fairly
§ Source materials in a positive manner i.e. reduce rainforest destruction

Question 14

Added value is a key operational objective for any business

Answer 14

Businesses transform raw materials into finished products to sell. Adding value will usually increase profits

§ Achieved by either increasing the selling price of the product or by reducing the costs of the raw materials.
§ Adding value= the difference between the selling price of the finished good or service and the direct cost of the
inputs involved in making it
Customers will pay more for a better quality product but increasing the value can be done if a business is environmentally
friendly, offers a quick speed of response and is dependable then it can justify charging a higher selling price that its
competitors

§ Charging a higher price
§ A point of difference from the competition
§ Protecting from competitors trying to steal customers by charging lower prices
§ Focusing a business more closely on its target market segment

Question 15

Branding-

Answer 15

provides a business with a means of differentiating their good or service.
Added value is the difference between sales revenue and the direct costs of satisfying that demand - i.e. the value (that is
effectively added to the cost of the inputs into production)
Profit is the difference between sales revenue and ALL costs of a business. It includes costs (overheads) not directly
related to the production process (e.g. admin, marketing

Question 16

Internal and external factors influencing operational objectives

Answer 16

rtnnnn

Question 17

Operational objectives affect method of production:

Answer 17

§ Job production- Production of one off items by skilled
workers
§ Flow production- Mass production on a continuous
production line with division of labour
§ Batch production- Production of small batches of
identical items
§ Cell production- production divided into sets of tasks,
each completed by a work group
§ Lean production- streamlined production with waste at a
minimum
§ A business that’s trying to improve quality – job or cell
production
§ Batch or flow- efficiency, dependability and speed of
response obj
§ Lean production – help environmental and efficiency
whilst ensuring high quality

Question 18

Capacity utilisation

Answer 18

Capacity is the maximum output with the Resources currently available. Capacity effectively places a physical limit upon the
quantity of goods that a business is able to manufacture at a given time
§ The capacity of an organisation is the maximum output that it can produce in a given period without buying more
fixed assets- machinery, factory space
§ Capacity depends on the number of employees and how skills they are
§ Depends on the tech they have
§ The kind of production process
§ Amount of investment
§ Firms seek to achieve high levels of capacity utilisation as this results in lower costs which can increase their
competitiveness in the market
How can it be Improved- reduce prices, marketing
100% capacity utilisation- increases costs

Question 19

90% capacity utilisation is better than 100% capacity utilisation

Answer 19

High capacity utilisation is better than low capacity utilisation. However 100% capacity utilisation has drawbacks:
§ Businesses have to consider all their operational objectives when they plan their capacity usage. Cost isn’t the only
thing to think about- might not be possible to operate at 100% capacity and keep quality levels high
§ The business may have to turn away potential customers because it can’t increase output any more
§ There’s no downtime – machines on all the time. If a machine breaks down it’ll cause delays as work piles up waiting
for it to be fixed. There’s no time for equipment maintenance which can reduce the life of machinery
§ There’s no margin of error. Everything has to be perfect first time which causes stress to managers. Mistakes are
more likely when everyone working flat out
§ The business can’t temporarily increase output for seasonal demand or one off orders
§ If output is greater than demand there’ll be surplus stock hanging about waiting to be sold. It’s not good to have
valuable working capital tied up in stock

Question 20

Firms with high capacity utilisation can increase their capacity

Answer 20

§ Firms operating at close to 100% can increase capacity to match demand.
§ Businesses can increase capacity by using their facilities for more of the working week. They can have staff working
in 2 or 3 shifts a day, weekends and bank holidays
§ Businesses can buy more machines (and staff needed to operate them)
§ Businesses can increase their staff levels in the long term by recruiting new permanent staff. In the s/r they can
employ temporary staff, part time staff or get staff to work overtime
§ Increasing productivity- reorganising production by reallocating staff tot eh busiest areas and they can increase
employee motivation
§ If the rise in demand is temporary then business might choose to subcontract work:
§ Subcontracting or outsourcing is when a business uses another firm to do some work on its behalf e.g. a
manufacturer of detergent might make detergent for a supermarket and package it with the supermarkets own label
§ Companies can subcontract work to other businesses in busy periods. This means thy can meet unexpected increases
in demand without increasing their own capacity and having the costs of extra staff and facilities all year round

Question 21

Ancillary revenue-

Answer 21

Ancillary revenue is the revenue generated from goods or services that differ from or enhance the main
services or product lines of a company. Ancillary income is defined as the revenue generated that’s not from a company’s
core products and services.
§ People go purchase merchandise, increases revenue

Question 22

Benefits of full capacity utilisation:

Answer 22

§ Low unit costs- fixed costs spread out over more units
§ Higher profits- greater economies of scale, can drop selling price to increase demand
§ Increased competitiveness
§ Staff job security
§ Attract new investment
Whilst 100 capacity utilisation is ideal it doesn’t allow a business to accept any additional orders- no spare capacity
§ Provide staff training- all staff busy working
§ Repair or service machinery – all being used
§ 90% capacity utilisation more realistic and sustainable

Question 23

Under – utilisation is inefficient and increases unit costs

Answer 23

Low capacity utilisation is under- utilisation- inefficient as is means a business is not getting use out of machines and
facilities that have been paid for
1. Under - utilisation increases costs because it causes fixed costs to be spread over fewer units of output, so unit
costs increase
2. Higher capacity utilisation means an increase in the number of units output without increasing the fixed costs – so
total costs are spread over more units

Question 24

Firms deal with under- utilisation 2 ways:

Answer 24

§ Sometimes firms have too much capacity and not enough demand- under-utilisation. they’ll first try to increase
demand but if that doesn’t work they need to reduce capacity
§ Businesses can stimulate demand by changing the marketing mix; price, promotion, place, product
§ Can fill spare capacity by subcontracting work for other firms

Question 25

Rationalisation:

Answer 25

the process of ‘shrinking’ or reducing the operational size of a business. This can be achieved through
the sale of under-utilised assets so that means the remaining assets actually work more efficiently increasing the capacity
utilisation figure as the same is being produced with fewer resources.
§ If a business can’t increase demand for their product they need to reduce their capacity by closing part of their
production facilities- rationalisation or downsizing
§ Businesses can reduce capacity in the s/t by stopping overtime or reducing the length of the working week
allocating staff to other work and by not renewing temp contracts
§ Also by not replacing staff as they retire (natural wastage) making staff redundant and by selling off factories or
equipment

Question 26

LT vs ST operations

Answer 26

§ The key to long term success is planning capacity changes to match long term changes in demand.
§ Market research to help predict future demand, but not 100% certain. Always risk
§ Short term changes in capacity utilisation provide flexibility. Firms should be flexible and temporarily increase existing
capacity utilisation if an increase in demand isn’t expected to continue long term e.g. with seasonal goods, goods
heading towards decline in their life cycle and one off special orders.
§ Long term solutions end up giving lower unit costs- as long as predictions of demand turn out to be true.

Question 27

managing capacity capacity and risk

Answer 27

rtnnn

Question 28

Increasing labour productivity influences efficiency:

Answer 28

Increasing productivity- improves efficiency. If the same number of workers are producing more units of output in the same
amount of time- unit costs will be lower
Improving worker motivation, training, new technology-
§ can increase the speed

Question 29

additional important info regarding effciency productivit

Answer 29

rtnnn

Question 30

Methods to improve efficiency and productivity:

Answer 30

Lean production is an efficient form of production that keeps waste (time, resources) to a minimum, seeks the elimination
of waste from the production process.
§ Inefficient production methods increase costs, so lean production can save businesses a lot of £
§ Can use lean production to meet some of their operational objectives reducing waste will have positive impacts on
costs, value added and the environment
§ Waste is defined as anything that does not add value to a product.
Lean production methods include just in time, time based management and kaizen

Question 31

The importance of efficiency:

Answer 31

§ Managers are constantly striving to find ways of reducing a firm’s costs and making them more efficient and
competitive.
§ By getting more output from the same level of input, a firm is able to reduce their unit costs, which allows them to
reduce prices or invest their higher profits back into the business.
§ More efficiently managed= more competitive

Question 32

Just in Time (JIT)

Answer 32

Just in time production aims to reduce waste of materials and products by having as little stock as possible ideally, all
raw materials come in one door are made into products and go straight out another door – all just in time for delivery to
customers
This should help to minimise stock levels and reduce costs.
JIT is based on very efficient stock control. Kanban is the JIT system of triggering repeat orders. When staff reach
coloured Kanban cards towards the end of a batch of components and there’s no need for lots of stock. The supply of
components is linked directly to the demand for components and there’s no need for lots of stock.
JIT cannot be implement in isolation; relies upon reliable machinery, use of Kanban systems to pull orders through,
establish clear quality standards, kaizen and TQM methods

Question 33

+ve and dis JIT

Answer 33

+ve
Improves cash flow as money isn’t tied up in stock
Elimination of waste- keeps ingredients fresh
Less inventory being held
Lower Costs and Improved Liquidity
Ability to respond to changes in demand
Greater flexibility
Increased employee motivation
Reduced lead time
Reduces fixed costs of rent/electricity
Prevents over production

-ve
Loss of Economies of Scale
More frequent deliveries to manage
Heavily reliant upon suppliers- reliable as there isn’t much
stock of raw materials to keep production going. Need to
have a good relationship
Training costs
Management time required
Not suitable for every type of good
Expensive to implement
Reduces flexibility/ ability to meet increases in demand
No stock means suppliers can’t be supplied during production strikes
Harder to manage- hard to predict demand

Question 34

JIC

Answer 34

A method whereby products are ordered and held by a business in their warehouse/stock room to be used/sold at some
point in the future.

Question 35

+ve and -ve jic

Answer 35

+ve
Increases the level of customer satisfaction
Benefit from bulk-buying – purchasing economies of scale,
decreases unit cost
Reduce the chance of running out of stock
Increases flexibility
Meet unexpected demand

-ve
Buffer stock space requires more storage space - more cost to the business

High amounts of cash tied up in stock. Decrease in cash flow

Products kept in stock for a long period of time may lose their freshness/ trends/ tastes

Increases the chances of having to sell off stock at a discount

Expensive, rent
Messy stock room- difficult to find things

Question 36

Increasing efficiency and productivity technology

Answer 36

§ Robotic engineering- using robots as part of the manufacturing process. Robots can reduce staffing costs
§ Computer technology- could be product development, business communication. Finance departments depend
heavily on IT systems

Robots can replace humans:
- For tasks which are boring, repetitive, dangerous
- Factories and production plants use automated pickers to take goods from the production line and pack them into
boxes. – cheaper and faster instead of humans
- Robots – demotivating factor

Question 37

Developments in IT can make companies more efficient

Answer 37

§ Computer aided design (CAD) - uses computers to design new products, make alterations. CAD produces 3D mock
ups – useful for marketing. Designs are more accurate- human error is eliminated. The lower costs of designs as a
result of no need for physical prototypes- speeds up development process- products to market faster
§ Computer aided manufacturing (CAM) – uses computers to make a product, involves robots or computer
numerically controlled (CNC) machines. Numbers provide all the commands needed e.g. which direction to move,
how fast. CAM often combined with CAD – products are digitally designed and the design data fed straight into the
production machined. (CAD/CAM)
§ 3D printing can be used to produce a prototype from a CAD. Much cheaper than CAD/CAM
§ Computers make stock control easier- easy to monitor stock info. In retail Electronic Point of sale (EPOS) rely on
barcodes to record which products are being purchased- stocks can me re-ordered automatically. Electronic data
interchange – used to automate share sales info with a supplier- having a good stock control system makes it easier
for companies to move to a JIT supply system
§ Spread sheets are very useful in marketing and finance e.g. marketing- calculate the impact of potential changes
in expenditure or sales- decision making easier
§ Email- fast and efficient method of communicating, advertise cheaply

Question 38

-ve and +ve of tech to improve efficencey

Answer 38

+ve
Increased productivity and quality- machines are often quicker and more accurate than humans
Reduced waste through more effective production methods

More effective and efficient delivery of goods and services
to the customer

More effective marketing campaigns that target the right
customers

Reduced administrative and financial costs

Better communications both internally and externally

-ve
Initial costs of tech are high
Tech requires maintenance and constant updating in order
to stay current- £££

Tech requires maintenance and constant updating in order
to stay current- £££

Some tech might replace manual work, leading to staff
redundancies.

Question 39

Capital intensive manufacturing involves the greater use of machinery instead of workers.

Answer 39

§ The higher cost related to the use of machinery relates to the initial cost of investment (e.g. purchase of the
equipment), training of staff and subsequent maintenance and servicing.

The high cost might act as a barrier to entry to smaller firms who cannot afford this level of investment
§ Larger firms tend to be more capital intensive than smaller companies e.g. Morgan motor company makes a
small number of hand built sports cars using lots of labour whereas BMW uses more robots and machinery.
§ A rise in the cost of labour -cause companies to switch to a capital intensive method of production

Question 40

+ve and -ve of cap intensive manu

Answer 40

Advantages
Cheaper than manual labour in the l/t
Machinery is often more precise than human workers,
may lead to more consistent quality levels
Machinery is able to work 24/7
Easier to manage than people

-ve
High set up and investment costs
Machines are usually only suited to one task- inflexible

If it breaks down – long delays, reduces output
(dependency is high)

The fear of being replaced by a machine can cause workers motivation to decrease

Question 41

Labour intensive firm

Answer 41

Uses more workers than machinery e.g. NHS. Locations where labour is cheap (china) - labour intensive methods are
common

Question 42

+ve and -ve of labour intensitivity

Answer 42

+ve
People are flexible and can be retrained
Cheaper for small scale production
Labour intensive methods are cheaper where low cost
labour is available e.g. china and India
Workers can solve any problems that arise during
production and suggest ways to improve quality

-ve
Wage increases means that the cost of labour can increase
over time
Labour costs as % of turnover are high

People can be unreliable- sick

People can’t work without breaks or holidays

Harder to manage people than machine

Question 43

Businesses need to have the right mix of people,

Answer 43

people, machines and materials
§ Should try to optimise resources to meet objectives
§ Strike the balance between labour and capital intensity at each stage of production
§ Depends on number of suitably skilled labour
§ Limited by finances

Question 44

Improving Quality
Quality is

Answer 44

very important- poor quality leads to customer dissatisfaction and a bad reputation for the business
Producing high quality products allows for premium pricing and gives workers pride in their work, increase morale and
motivation.

Question 45

quality Allows the business to reduce

Answer 45

costs- increase revenue:
§ Less raw materials and less worker and machinery time get used up by mistakes
§ Don’t need as much marketing and promotional material to persuade shops to stock high quality goods
§ Don’t need to discount prices to sell damaged stock
§ Quality- USP
§ Improve brand image and reputation
§ Quality goods and services make it easy to keep existing customers and attract new customers

Question 46

Drawbacks of high quality -

Answer 46

can be difficult to improve quality efficiently for businesses
§ There is a limit to how much quality can be improved- trying to make everything 100% perfect= costly and time
consuming
§ If a company outsources some of its work it can be difficult to make sure the outsourced work is of same quality

Question 47

Quality control:

Answer 47

§ Checking goods as you make them or when they arrive from suppliers to see if anything is wrong with them. It’s
often done by specially trained quality inspectors

Assumes that errors are unavoidable
Detects errors and puts them right

Quality control inspectors check other people’s work and are responsible for quality

Question 48

Quality Assurance:

Answer 48

§ Introducing measures into the production process to try to ensure things don’t go wrong in the first place. It
assumes you can prevent errors from being made in the first place, rather than eliminating faulty goods once
they’ve been made

Assumes that errors are avoidable
Prevent errors and aims to get it right the first time

Employees check their own work. Workers are responsible for passing on good quality work to the next stage of the production process.

Question 49

Quality assurance can be more motivating that Quality control:

Answer 49

§ QA is more modern.
§ Empowering employees to self-check the quality of their work can be highly motivating.
§ Training is important for quality assurance. Workers have to be trained to produce good quality products and
services. New – induction training. Experienced – retrained
§ Aim of quality assurance- create a culture of zero defects
§ Workers must be motivated and committed to qualify for quality assurance schemes to work
§ Both methods have drawbacks – QA can result in products in being ‘acceptable’, not of a high standard

Question 50

Total Quality Management (TQM) assures

Answer 50

commitment to quality
§ TQM means the whole workforce is committed to quality improvement. Every department focuses on quality in order
to improve overall quality of the products and services
§ Every employee has to try and satisfy customers and co-workers- customers need to be happy with products or
services they are being sold

Question 51

+ve of tqm

Answer 51

Advantages:
§ Because all employees are involved with improving
quality, TQM can help motivation and team
coordination skills
§ TQM boosts a company’s reputation for providing
quality services or products
§ TQM usually leaders to fewer faulty products being
made- creates less waste- less returns so can keep
revenue levels high as they won’t have to issue
refunds

Question 52

Kaizen and +-ve

Answer 52

Kaizen - is a lean production method that means employees should be improving their work slightly all the time,
instead of just making one –off improvements
§ Employees are encouraged to question why a problem has occurred
§ Employees at the bottom of the hierarchy have to be given some control over decision making

Advantages:
§ Kaizen helps workers feel involved in quality
assurance, cheap to introduce
§ Reduces waste
§ Improves motivation as everyone is working
towards one goal
§ Helps workers feel involved

Disadvantages:
§ It makes small changes over time, not
great for businesses who need to
urgently improve quality
§ Needs the firms to be able to commit
in the long term

Question 53

Quality circles:

Answer 53

§ Meet at regular intervals to discuss quality control issues
§ They use the knowledge of employees from various departments and all levels of the organisation
§ Aim to identify and solve specific quality problems that arise
§ Great way to get staff involved and can lead to increased motivation and productivity

Question 54

why It’s very costly to hold lots of stock

Answer 54

§ Storage costs- rent, heating, lighting, refrigeration, security
§ Wastage costs- costs of costs of throwing away useless stock. Stock gets physically damaged and can go out of
fashion
§ The opportunity cost- cost of investing money in stock instead of elsewhere. Capital tied up in stock is
unproductive and could be used more productively

Businesses that use flow production need a large stock of raw materials, batch production lead to large stocks of work in
progress. Job production – often no stock of finished goods to be stored and cell production usually relies on JIT stock
control

Question 55

components of stock and their definitions

Answer 55

§ Max level of stock- max physical limit of stock a business can hold due to storage space, costs etc
§ A business needs a min level of stock- won’t run out of raw mat or finished goods (buffer stock)
§ The amount of buffer stock- spare stock - depends on the storage space available, the kind of product, rate at
which stocks are used up and lead time
§ The lead time – time for goods to arrive after ordering them from the supplier. The longer the time – more buffer
stocks you need to hold- customer demand suddenly increased – wouldn’t want to wait a long time for stocks
§ The re-order quantity- amount the company orders from its supplier. The stock level at which this re-order is
placed is called the re-order level

Question 56

Managing supply chains:

Answer 56

§ A supply chain consists of the group of firms that are involved in all the various processes
required to make a finished product or service available to the customer
§ The chain begins with the provider of raw materials and ends with - firm that sells the
finished product
§ Typically includes suppliers, manufacturers, distributers and retailers
§ All these members need to be dependable and flexible. Businesses need to be flexible on the
time taken to supply goods and the volume of goods they supply. They can utilise a flexible
workforce or use outsourcing to manage sudden changes in demand
§ A supplier than can offer faster response times than competitors is more likely to gain the
contract., this might be achieved- maintain a range of delivery contracts to suit businesses
needs

Question 57

Benefits to a business adding value include:

Answer 57

§ Charging a higher price
§ A point of difference from the competition
§ Protecting from competitors trying to steal customers by charging lower prices
§ Focusing a business more closely on its target market segment