4. Operation Management

Question 1

Managing resources effectively to produce goods and services

Answer 1

The operations department in a firm overlooks the production process. They must:

• Use the resources in a cost-effective and efficient manner
• Manage inventory effectively
• Produce the required output to meet customer demands
• Meet the quality standards expected by customers

Question 2

Difference between production and productivity

Answer 2

• Production is the effective management of resources in producing goods and services.
• Productivity Is the output measured against the inputs used to create it.

Question 3

How can productivity be measured

Answer 3

Productivity = output/ quantity of input

Question 4

How can labour productivity be measured

Answer 4

Labour productivity = Output (over a given period of Tim)/ Number of employees.

Question 5

Ways to increase productivity:

Answer 5

• Improving labour skills by training them so they work more productively and waste lesser resources
• Introducing automation (using machinery and IT equipment to control production) so that production is faster and error-free
• Improve employee motivation so that they will be willing to produce more and efficiently so.
• Improved quality control and assurance systems to ensure that there are no wastage of resources

Question 6

Inventory Management

Answer 6

• Holding inventories allows a business to maintain production and satisfy customer demands quickly.
• Buffer inventory level: The inventory held to deal with uncertainty in customer demand and deliveries of supplies.

Question 7

Lean Production

Answer 7

techniques used by a business to cut down in waste and therefore increase efficiency

Question 8

Wastage that can occur in a firm:

Answer 8

• Overproduction– producing goods before they have been ordered by customers. This results in too much output and so high inventory costs
• Waiting– when goods are not being moved or processed in any way, then waste is occurring
• Transportation-moving goods around unnecessarily is simply wasting time. They also risk damage during movement
• Unnecessary inventory-too much inventory takes up valuable space and incurs cost
• Defects– any fault in equipment can halt production and waste valuable time. Goods can also turn out to be faulty and need to be fixed- taking up more money and time

Question 9

Avoiding such wastage, a firm can benefit in many ways

Answer 9

• Less storage of raw materials, components and finished goods- less money and time tied up in inventory
• Quicker production of goods and services
• No need to repair faulty goods- leads to good customer satisfaction
• Ultimately, costs will lower, which helps reduce prices, making the business more competitive and earn higher profits as well

Question 10

How lean production is implemented

Answer 10

• Kaizen: Continuous improvement through the elimination of waste
• Just-in-time: Reducing or virtually eliminating the need to hold inventories of raw materials or unsold inventories of finished product.
• Cell Production: the production line is divided into separate, self-contained units each making a part of the finished good. This works because it improves worker morale when they are put into teams and concentrate on one part alone

Question 11

Benefits of using Kaizen

Answer 11

• Increased productivity
• Reduced amount of space needed for production
• Improved factory layout may allow some jobs to be combined, so freeing up employees to do other jobs in the factory

Question 12

Benefits of using JIT

Answer 12

• Reduces cost of holding inventory
• Warehouse space is not needed any more, so more space is available for other uses
• Finished goods are immediately sold off, so cash flows in quickly

Question 13

Methods of Production

Answer 13

• Job production: Where a single product is made at a time
• Batch production: Where a quantity of one product is made, then a quantity of another item will be produced.
• Flow production: Where large quantities of a product are produced in a continuous process, Sometime referred to as mass production.

Question 14

Advantages and disadvantages of job production

Answer 14

Advantages:

• Most suitable for one-off products and personal services
• The product meets the exact requirement of the customer
• Workers will have more varied jobs as each order is different, improving morale
• Very flexible method of production

Disadvantages:

• Skilled labour will often be required which is expensive
• Costs are higher for job production firms because they are usually labour-intensive
• Production often takes a long time

Question 15

Advantages and disadvantages of batch production

Answer 15

Advantages:

• Flexible way of working- production can be easily switched between products
• Gives some variety to workers
• More variety means more consumer choice
• Even if one product’s machinery breaks down, other products can still be made

Disadvantages:

• Can be expensive since finished and semi-finished goods will need moving about
• Machines have to be reset between production batches which delays production
• Lots of raw materials will be needed for different product batches, which can be expensive.

Question 16

Advantages and disadvantages of flow production

Answer 16

Advantages:

• There is a high output of standardized (identical) products
• Costs are low in the long run and so prices can be kept low
• Can benefit from economies of scale in purchasing
• Goods are produced quickly and cheaply

Disadvantages:
-A very boring system for the workers, leads to low job satisfaction and motivation
-Lots of raw materials and finished goods need to be held in inventory- this is expensive
-Capital cost of setting up the flow line is very high
If one machinery breaks down, entire production will be affected

Question 17

Factors that affect which production method to use:

Answer 17

The nature of the product: Whether it is a personal, customized-to-order product, in which case job production will be used. If it is a standard product, then flow production will be used

The size of the market: For a large market, flow production will be required. Small local and niche markets may make use of batch and flow production. Goods that are highly demanded but not in very large quantities, batch production is most suitable.

The nature of demand: If there is a fair and steady demand for the product, it would be more suitable to run a production line for the product. For less frequent demand, batch and job will be appropriate.

The size of the business: Small firms with little capital access will not produce using large automated production lines, but will use batch and job production.

Question 18

Advantages and disadvantages of technology in production

Answer 18

Advantages:

• Greater productivity
• Greater job satisfaction among workers as boring, routine jobs are done by machines
• Better quality products
• New products can be introduced as new production methods are introduced

Disadvantages:

• Unemployment rises as machines and computers replace human labour
• Expensive to set up
• New technology quickly becomes outdated and frequent updating of systems will be needed- this is expensive and time-consuming.

Question 19

Fixed costs

Answer 19

costs that do not vary with output produced or sold in the short run. They are incurred even when the output is 0 and will remain the same in the short run. In the long-run they may change. Also known as overhead costs.

Question 20

Variable costs

Answer 20

Cost which vary directly with the number of items sold or produced.

Question 21

Total costs

Answer 21

• TOTAL COST = TOTAL FIXED COSTS + TOTAL VARIABLE COSTS
• TOTAL COST = AVERAGE COST * OUTPUT
• AVERAGE COST (unit cost) = TOTAL COST/ TOTAL OUTPUT

Question 22

Economies of scale

Answer 22

The factors that lead to a reduction in average costs as a business increases in size.

Question 23

Types of economic of scale

Answer 23

• Purchasing economies: For large output, a large amount of components have to be bought. This will give them some bulk-buying discounts that reduce costs
• Marketing economies: Larger businesses will be able to afford its own vehicles to distribute goods and advertise on paper and TV. They can cut down on marketing labour costs. The advertising rates costs also do not rise as much as the size of the advertisement ordered by the business. Average costs will thus reduce.
• Technical economies: Large businesses can afford to buy large machinery such as a flow production line that can produce a large output and reduce average costs.
• Managerial economies: Large businesses may be able to afford to hire specialist managers who are very efficient and can reduce the business’ costs.

Question 24

Diseconomies of scale

Answer 24

Diseconomies of scale are the factors that lead to an increase the average costs of a business as it grows beyond a certain size.

Question 25

Types of diseconomies of scale

Answer 25

• Poor communication: as a business grows large, more departments and managers and employees will be added and communication can get difficult. Messages may be inaccurate and slow to receive, leading to lower efficiency and higher average costs in the business.
• Low morale: when there are lots of workers in the business and they have non-contact with their senior managers, the workers may feel unimportant and not valued by management. This would lead to inefficiency and higher average costs.
• Slow decision-making: As a business grows larger, its chain of command will get longer. Communication will get very slow and so any decision-making will also take time, since all employees and departments may need to be consulted with.

Question 26

Break-even

Answer 26

Break-even level of output is the output that needs to be produced and sold in order to start making a profit. So, the break-even output is the output at which total revenue equals total costs

Question 27

break-even point

Answer 27

can be calculated at the point where total revenue and total cost equals

Question 28

Advantages of break-even charts:

Answer 28

• Managers can look at the graph to find out the profit or loss at each level of output
• Managers can change the costs and revenues and redraw the graph to see how that would affect profit and loss, for example, if the selling price is increased or variable cost is reduced.
• The break-even chart can also help calculate the safety margin- the amount by which sales exceed break-even point.
• Margin of Safety (units) = Units being produced and sold – Break-even output

Question 29

Limitations of break-even charts:

Answer 29

• They are constructed assuming that all units being produced are sold. In practice, there are always inventory of finished goods. Not everything produced is sold off.
• Fixed costs may not always be fixed if the scale of production changes. If more output is to be produced, an additional factory or machinery may be needed that increases fixed costs.
• Break-even charts assume that costs can always be drawn using straight lines. Costs may increase or decrease due to various reasons. If more output is produced, workers may be given an overtime wage that increases the variable cost per unit and cause the variable cost line to steep upwards.

Question 30

Contribution

Answer 30

Break-even level of production =Total fixed costs/ Contribution per unit

Contribution = Selling price – Variable cost per unit (this is the value added/contributed to the product when sold)

Question 31

Quality

Answer 31

means to produce a good or service which meets customer expectations.

Question 32

Quality is important because it:

Answer 32

• Establishes a brand image
• Builds brand loyalty
• Maintains good reputation
• Increase sales
• Attract new customers

Question 33

f there is no quality, the firm will

Answer 33

• Lose customers to other brands
• Have to replace faulty products and repeat poor service, increasing costs
• Bad reputation leading to low sales and profits

Question 34

Quality Control

Answer 34

checking for quality at the end of the production process

Question 35

Advantages and disadvantages of quality control

Answer 35

Advantages:

• Eliminates the fault or defect before the customer receives it, so better customer satisfaction
• Not much training required for conducting this quality check

Disadvantages:

• Still expensive to hire employees to check for quality
• Quality control may find faults and errors but doesn’t find out why the fault has occurred, so the it’s difficult to solve the problem
• If product has to be replaced and reworked, then it is very expensive for the firm

Question 36

Quality Assurance

Answer 36

checking for quality throughout the production process of a good or service.

Question 37

Advantages and disadvantages of Quality assurance

Answer 37

Advantages:

• Eliminates the fault or defect before the customer receives it, so better customer satisfaction
• Since each stage of production is checked for quality, faults and errors can be easily identified and solved
• Products don’t have to be scrapped or reworked as often, so less expensive than quality control

Disadvantages:

• Expensive to carry out since quality checks have to be carried throughout the entire process, which will require manpower and appropriate technology at every stage.
• The firm will have to ensure that every employee follows quality standards consistently and prudently, and knows how to address quality issues.

Question 38

Total Quality Management (TQM)

Answer 38

Continuous improvement of products and production processes by focusing on quality at each stage of production

Question 39

Advantages and disadvantages of TQM

Answer 39

Advantages:
-Quality is built into every part of the production process and becomes central to the workers principles
-Eliminates all faults before the product gets to the final customer
-No customer complaints and so improved brand image
products don’t have to be scrapped or reworked, so lesser costs
-Waste is removed and efficiency is improved

Disadvantages:

• Expensive to train employees all employees
• Relies on all employees following TQM– how well are they motivated to follow the procedures?

Question 40

How can customers be assured of the quality of a product or service?

Answer 40

They can look for a quality mark on the product like ISO (International Organization for Standardization). The business with these quality marks would have followed certain quality procedures to keep the quality mark. For services, a good reputation and positive customer reviews are good indicators of the service’s quality.

Question 41

Factors that affect the location decisions of a manufacturing firm:

Answer 41

• Market: if the product is a consumer good and perishable, the factories need to be close to the markets to sell out quickly before it perishes.
• Raw Materials/Components: the factories may need to be located close to where raw materials can be acquired, especially if the raw material is to be processed while still fresh, like fruits for fruit juice.
• Transport & Communication infrastructure: the factories need to be located near areas where there are good road/rail/port/air transport systems. If goods are to be exported, it needs to be set up near ports.
• Government Influence: the government sometimes gives incentives and grants to firms that set up in low-development, rural and high-unemployment areas. There may also be govt. rules and restrictions in setting up, e.g.: in some areas of great natural beauty. The business needs to consider these.

Question 42

Factors that affect the location decisions of a service-sector firm:

Answer 42

• Customers: service-sector businesses that have direct contact with customers need to locate in customer-accessible and convenient places. Eg; restaurants, hairdressers, post offices etc.
• Technology: today, with increasing use of IT to shop and make payments, customers do not need direct access to services and proximity to the market/customer is not a very important factor in location decisions. They locate away from customers in places where there are low rent and wage rates. Eg: banks
• Availability of labour: if large number of workers are required in the firm, then it will need to locate close to residential areas. If they want certain types of worker skills, they will need to locate in places where such skilled workers can be found. However, with work-from-home and technology, this is not that big of a factor nowadays.
• Climate: tourism services need to be located in places of good climate.
• Owner’s personal preferences
• Rent/taxes

Question 43

Factors that affect the location decisions of a retailing firm:

Answer 43

• Shoppers: retailers need to be located in areas where shoppers frequent, like malls, to attract as many customers as possible.
• Nearby shops: being located to other shops that are visited regularly will also attract attention of customers into the shop. Being near competitors also helps keep an eye on competition and snatch away customers.
• Rent/taxes: rents and taxes on the locations need to be affordable.
• Security: high rates of crime and theft can happen in shops. Shopping complexes with security guards will thus be preferred by firms.

Question 44

Why businesses locate in different countries?

Answer 44

• New markets overseas.
• Cheaper or new raw materials available in other countries.
• Cheaper and/or skilled workers are available overseas.
• Availability of government grants and other incentives
• Avoid trade barriers and tariffs: when exporting goods to other countries, there will be some tariffs, rules and regulations to get by. in order to avoid this, firms start operating in the country itself, since there is no exporting/importing involved now.

Question 45

The role of legal controls on location decisions

Answer 45

• To encourage businesses to set up and expand in areas of high unemployment and under-development. Grants and subsidies can be given to businesses that set up in such areas.
• To discourage firms from setting in areas of that are overcrowded or renowned for natural beauty. Planning restrictions can be put into place to do so.