Operational decisions 3.4 Flashcards
(23 cards)
Unit cost Definition and Formula
Total cost incurred by a business to produce, store, and sell one unit of a product or service
Unit Cost = Total Cost / Number of Units Produced
Economies of scale
Refers to the cost advantages a business experiences as it increases its level of production
As output rises, the average cost per unit typically falls
There are two types of economies of scale ( Internal and External)
Internal :
Technical - Using more efficient equipment or production methods
Managerial - Hiring specialist managers increases efficiency
Purchasing - Buying in bulk reduces unit cost
Financial - Larger firms often gets loans at lower interest rates
Marketing - Spreading advertising costs over more units
External :
Industry growth leads to shared services, skilled labour pool, or improved infrastructure
Internal economies of scale - Cost saving that arise within the business as it grows in size due to improved efficiency, bulk buying, or specialisation
External economies of scale - Cost saving that occurs outside the business, resulting in growth of the industry or external environment, such as improved infrastructure, supplier networks, or skilled local workforce
Labour Intensive
High proportion of total costs comes from human labour rather than capital (machinery or equipment) relying heavily on manual work to produce goods or services
PRO:
Lower capital costs - requires less investment in expensive machinery, making it easier for smaller businesses to operate
Flexibility - Human workers can adapt to different tasks more easily than machines
Job creation - Reduces unemployment by providing more opportunities for workers
CON:
Higher long-term costs - Labour can be more expensive over time due to wages, training or sick leave
Lower efficiency - Humans are generally slower and more prone to error compared to automated systems which reduce productivity
Scalability issues - Harder to quickly scale up production
Capital Intensive
Method of production where high proportion of total costs comes from capital (machinery,tools, and technology) rather than human labour, relying on heavy automation and equipment to produce goods and services
PRO:
Higher productivity and efficiency - Machines operate continuously and often produce goods faster and more accurately than human workers
Lower long-term costs - Initial investment is high, businesses can save money in the long run through reduced labour costs and fewer errors
Consistency and quality - Automation reduces human error, leading to more uniform and higher quality output
CON:
Higher initial investment - requires significant capital to purchase and maintain advanced machinery and technology
Inflexibility - Machines designed for specific tasks and may not adapt well to changes in product design or demand
Risk of redundancy - May lead to job losses as fewer workers are needed which can create negative social and economic impacts
Capacity Definition
Refers to maximum output that an organisation, system, or production process can produce within a given time frame, typically measured in units of product, service, or work. It reflects the highest level of activity or production that can be achieved with the available resources
Capacity Utilisation Definition
Refers to the percentage of an organisation’s total production capacity that is actually being used over a specific period of time. It measures how efficiently a business is utilising its resources such as labour, equipment, and space to produce goods or services
High capacity utilisation indicates efficient use of resources which typically leads to lower unit costs
Lower capacity utilisation indicates underused resources which may result in higher costs per unit and potential inefficiencies
Capacity Formula - Capacity utilisation = Actual output / Maximum possible output
Dangers of operating at low capacity
Higher unit cost - Production levels low means fixed costs such as rent are spread across fewer units which increases the cost per unit that reduces profitability
Inefficient resource use - Resources are not being used optimally which can lead to waste and inefficiency
Impacts profitability - Business isn’t generating enough revenue to cover its fixed costs and achieve desirable profit margins
Potential loss of competitive advantage - competitors with higher capacity who operate at a higher capacity may benefit for economies of scale, offering products at ower prices, having more resources to invest in innovation which could erode the market position of the business operating at low capacity
Negative impact on employee morale - Operating at low capacity may indicate a lack of demand or inefficiency leading to uncertainty among employees, decreasing motivation
Cash flow issues - If production is low, revenue generated is limited resulting in poor cash floe hindering the business’s ability to reinvest in the business or pay of debts
Why businesses can’t work at 100% Capacity
Maintenance and Downtime - Machinery and equipment require regular maintenance to stay in good working condition this can be costly for a business and create financial constraints
If a business doesn’t there can be breakdowns and inefficiencies
Fluctuating demand - Operating at 100% all the time can result in overproduction, leading to excess inventory and higher storage costs
Supply chain limitations - Consistent supply of raw materials are required however if there are delays in delivery, quality issues, or scarcity of resources can prevent a company operating at 100% capacity
Labour constraints - Labour laws prevent workers working all the time preventing businesses from running at full capacity 24/7
Seasonal variations - Operating at 100% capacity during off-peak times can result in wasted resources, whereas leaving room for flexibility during peak seasons can be more efficient
Lean Production Definition
Systematic approach to production that aims to minimise waste and maximise efficiency by using fewer resources to produce high-quality products. It focuses on eliminating anything that doesn’t add value to the production process, thereby improving profitability and reducing costs
Examples of waste: Overproduction, delays in transports, extra processing, holding to much inventory stock, defects
Wastes in a business - Over-production, wasting time, stocks, motion, defects, waiting time
Methods of Lean production
Just in time and Just in case
JIT
Production and inventory strategy where materials and components are produced or ordered only when needed in the production process, minimising inventory levels
Its goal is to reduce waste, improve efficiency, and lower costs by ensuring each part is available exactly when required for production, rather than storing large quantities of stock
PRO: Reduced inventory costs from storage, lower waste, improved cash flow as there is capita; to be invested in other areas of the businesses, increased efficiency due to streamlined production process reducing idle time, quality control
CON: Higher dependency on suppliers, limited flexibility , vulnerable to sudden surge in demand, risk of supply chain disruption through transportation
JIC
Inventory management strategy where businesses keep larger inventories of raw materials, components, and finished products on hand, in case of unexpected demand spikes or supply chain disruptions.
It ensures that production can continue smoothly even when foreseen issues arise
PRO: Buffer against supply chain disruptions, ability to meet sudden demands, reduced risk of stockouts, supplier flexibility, economies of scale
CON: Higher inventory costs, risk of over stocking, lower efficiency, cash flow issues, waste and spoilage
Quality Definition
Refers to the degree to which a product or service meets or exceeds customer expectations and satisfies defined standards or requirements
It involves the durability and consistency of a good or service
Importance of Quality for a business - Competitive advantage, customer satisfaction, brand reputation, cost efficiency
Impact of Poor Quality- customer dissatisfaction, damage to brand reputation, increased costs, loss of market share
Quality management Definition
Refers to the coordinated activities and processes that are implemented within an organisation to ensure that its products or services consistently meet or exceed customer expectations, regulatory standards, and industry requirements
PRO: Improved customer satisfaction, cost reduction through preventing defects, enhanced brand reputation, increased operational efficiency, competitive advantage
CON: Initial implementation costs, resource intensive, time-consuming, potential overhead
Two types of approaches - Quality control and Quality assurance
Quality control
Process of monitoring and inspecting the production process to ensure that products meet the required standards
Quality assurance
Systematic activities that provide confidence that quality requirements will be met. It focuses on preventing defects through process management and improvements
Supplier definition
Individual or organisation that provides goods, services, or raw materials to another business or entity. Suppliers ensure businesses have necessary resources to produce products or deliver services
They ensure consistent supply of materials, cost efficient through bulk purchasing and establishing relationship with suppliers can lead to better deals, discounts, or favourable payment terms, reduced lead time
Supply chain definition
Network of organisations, activities, resources, and processes involved in the production and distribution of goods and services from raw materials stage to the final consumer
Suppliers - Manufacturers - Transportation - Retailers and Distributors - Consumers
Effective supplier - Price, quality, communication, reliability, capacity, stability
Strategic Vs Commodity suppliers
Strategic suppliers provide goods and services that have a significant impact on the company’s competitive advantage, product differentiation, and long term goal.
They have long-term partnerships, high involvement and collaboration, customisation products, less suppliers
Commodity suppliers provide goods or services that are standardized and can be easily substituted with products from other suppliers.
They are selected based on price and availability rather than collaboration or long term relationships
They have short term relationships, price sensitive, more suppliers
Outsourcing
Business practice of delegating certain business processes or operations to external companies rather than handling the internally
It focussed on their strengths, reduce costs, and allows access to specialised expertise
Kaizen
Means continuous improvement of process, products, or services within a business. It encourages small,, incremental changes over time, with the goal of improving efficiency, reducing waste, and enhancing the quality of outputs
Jidoka
Principle in Toyota Production system which refers to automation with a human touch and focuses on empowering workers and machines to stop production when a defect is detected, ensuring quality at every step
REMEMBER TO CHECK
Capacity utilisation math questions
Unit cost math questions
