Operations Management - Productivity Flashcards
Define productivity
Productivity is a measurement of the efficiency with which a business turns production
inputs into output. Both labour and capital productivity can be measured
labour productivity = output / no employees
capital productivity = output / capital employed
Advantages of high productivity
☑ increased economies of scale
☑ increased competitiveness
☑ spreading the fixed costs over higher output
☑ lower unit costs
☑ performance bonuses to employees – motivation.
How to improve productivity
- Making technological improvements - replacing labour with machinery, robots.
- Replacing labour with machinery.
- Developing a multi-skilled workforce through training – use quality circles.
- Improve the motivation of the workforce – both financial and non-financial rewards.
- Reducing absenteeism.
- Redesigning production processes – changing the layout of the factory or office.
- Job enrichment, job rotation, etc.
- Adapt management styles – appoint better management.
- Adopting a ‘Kaizen’ approach. TQM/lean production methods to enhance productivity.
- Employ management consultants to suggest ways of improving the running of the business.
- Delayering and empowerment.
- Benchmarking (must be develop to productivity).
Disadvantages of low productivity
-Reduced Profitability and Increased Costs
-Lower Morale and Employee Engagement
-Decreased Work Quality and Customer Satisfaction
-Overall Impact on Business Growth
Define capacity utilisation
The use that a business makes of its resources.
Actual output / Max possible output x 100
Advantages of operating at full capacity
+ Average costs minimised – fixed cost spread – helps raise profits.
+ Employees may feel more secure in their jobs – motivation raised.
+ Improves company image – busy business may encourage customers to place orders
Disadvantages of operating at full capacity
- Possible fall in quality – strain on resources if over-worked.
- Pressure on staff – too much overtime for employees may lead to stress, tiredness – absences and accidents may result.
- Machinery may be overworked and break down if insufficient time put aside for maintenance.
- Lack of flexibility – orders may be lost if no capacity available to accommodate new customers.
Measuring spare capacity
To measure spare capacity, we look at output as a percentage of total capacity. If the level of spare capacity is significant (i.e. large enough to be of concern), then this underutilisation of factors of production can have major effects on businesses.
Problems of spare capacity
- Demotivation of staff. Overtime is probably not available, bonuses will be limited and there may be a threat of redundancy.
- Increased costs to the business. Businesses may be forced to make workers redundant and redundancy payments will have to be made. Also, management time will need to be spent on reorganisation.
- Reduced profits. This will limit capital for investment and research and development,
causing a reduction in long-term
competitiveness. - Lack of return on investment capital. Producer goods will continue to depreciate, even though they are not being used to
full capacity. Technology will move on, putting pressure on businesses to replace fixed assets that otherwise have plenty of productive potential.
How to resolve problems of spare capacity
- subcontracting
- rationalisation
- increasing the use of assets.
Because of the short-term expense of solving problems of spare capacity, businesses often try to ride out this type of situation in the
expectation that the market in which they operate will recover and demand will increase.
Define subcontracting
Getting someone else to produce the goods for you. By using subcontractors there is a reduction in risk to the business.
Evaluate subcontracting
+ Reduction in capital investment required. If the business is not making the goods, it does not have
to buy the machines to make the goods, lease the factory space or employ and train the workers.
- Lack of control – especially with regard to quality.
- If there are a limited number of potential subcontractors, then prices of the goods can become
prohibitively high – reducing profitability. - There can be delays in delivery, leading to customer dissatisfaction.
Define rationalisation
Concentrating on core products or services and disposing of those products or services when they
are not seen as profitable or necessary to the business’
long-term success
Evaluate rationalisation
+ Allows management to concentrate and focus upon the business strengths.
- Lost customers – risk that customers will be lost. Some customers, especially business customers, who bought into the business’s whole package of products, may be less loyal when ‘one-stop shopping’ is not now
available. - Writing down (reducing) the book value of assets.
- Rationalisation also implies redundancy costs.
