3.4.3 Making operational decisions to improve performance: increasing efficiency and productivity Flashcards
Why is capacity an important concept?
It is often used as a measure of productive efficiency
Average production costs tend to fall as output rises – so higher capacity utilisation can reduce unit costs, making a business more competitive
So firms usually aim to produce as close to full capacity (100% utilisation) as possible
What happens to the fixed costs if capacity increases?
increasing capacity often results in higher fixed costs
Why does measuring and monitoring labour productivity matter?
- Labour costs are usually a significant part of total costs
- Business efficiency and profitability closely linked to productive use of labour
- In order to remain competitive, a business needs to keep its unit costs down
Give ways for a business improve its labour productivity
- Measure performance and set targets
- Streamline production processes
- Invest in capital equipment (automation + computerisation)
- Invest in employee training
- Make the workplace conducive to productive effort
- Training – e.g. on-the-job training that allows an employee to improve skills required to work more productively
- Improved motivation – more motivated employees tend to produce greater output for the same effort than de-motivated ones
- More or better capital equipment (this links with the topic of automation)
- Better quality raw materials (reduces amount of time wasted on rejected products)
- Improved organisation of production – e.g. less wastage
Give ways to improve efficiency
- Improve land fertility
- Use renewable or recyclable materials
- Increase training and education
- Increase scale of production
- Use a optimal mix of output
- Invest more in capital equipment
Define cost minimisation.
a financial strategy that aims to achieve the most cost-effective way of delivering goods and services to the require level of quality
Define economies of scale
these arise when unit costs fall as output increases
State the types of economies of scale.
- Technical
- Specialist
- Purchasing
- Marketing
- Financial
- Managerial
Define technical economies of scale
large-scale businesses can afford to invest in expensive and specialist capital machinery
Define specialist economies of scale
larger businesses split complex production processes into separate tasks to boost productivity – by specialising in certain tasks or processes, the workforce is able to produce more output in the same time
Define purchasing economies of scale
reduced costs for larger businesses in buying inputs, such as raw materials and parts, or of borrowing money because of a larger discount given to a larger purchase than smaller businesses can make
Define marketing economies of scale
a large firm can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discounted prices if it has sufficient negotiation power in the market
Define financial economies of scale
larger firms are usually rated by the financial markets to be more ‘credit worthy’ and have access to credit facilities, with favourable rates of borrowing – in contrast, smaller firms often face higher rates of interest on overdrafts and loans
Define managerial economies of scale
This is a form of division of labour – large-scale manufacturers employ specialists to supervise production systems, manage marketing systems and oversee human resources
Explain what lean production is
an approach to management that focuses on cutting out waste, whilst ensuring quality. This approach can be applied to all aspects of a business – from design, through production to distribution. Lean production aims to cut costs by making the business more efficient and responsive to market needs.
