4:Operations Management

• Production-The process of converting inputs such as land, labour and capital into saleable goods, for example shoes and cellphones
• Operations management involves managing business resources (known as inputs) so as to produce finished goods, services and components (known as output) that can be sold to other businesses or customers.
• Operations management must:

  1. Use resources in the most-cost effective way
  2. Produce the required output to meet consumer demand
  3. Meet the quality standard expected by consumers
• Productivity- A measure of the efficiency of inputs used in the Production process, especially labour and capital
• The productivity of labour(workers) is measured as follows:


  $Labour productivity+$$Total output/ Number of production workers$
• The difference between production and productivity is production involves changing input to output and can be measured by the number of units produced in a given period of time (level of production)

  Productivity is a measure of how efficiently the inputs are changed into output (number of units produced for every unit of input
• A business can improve labour productivity by:

  1: Increasing output with the same number of workers.

  2. Keeping output at the same level but with fewer workers
• Increasing total output with the same number of workers means that on average, each worker needs to produce a greater output.

  • This means they need to be more productive. Increasing the productivity could be achieved by:

  1. Improving the skill level of workers
  2. Improving the motivation of workers
  3. Introducing more automation and more or better technology
  4. Improving the quality of management decisions
• The main reason for improving productivity is to reduce unit costs, so the increase in output must be greater than the increase in costs.
• Businesses hold inventories of:

  • RAW MATERIALS AND COMPONENTS- These are needed as inputs for the production process
  • WORK-IN PROGRESS- This is part-finished goods that have not yet completed the production process
  • Finished goods ready to be sold or sent out to customers
• Inventories- The stock of raw materials, work in progress and finished goods held by a business
• Holding inventories adds to a business's costs, such as:

  1. WAREHOUSING COSTS- The business will need to rent or purchase a warehouse to store the inventories
  2. HANDLING COSTS- Inventories need to be moved in and out of the warehouse
  3. SHRINKAGE COSTS- Damaged, lost or stolen inventories will need to be replaced
  4. INSURANCE COSTS- These will cover the cost of losses from shrinkage
  5. OPPORTUNITY COST- Working capital is 'tied up' in inventories which could be used more profitably by the business.
• Businesses hold inventories because:

  1. The production process needs raw materials or components.

  • If these are not available when required then the process must stop.
  • This will lead to workers and machinery standing idle and eventually a loss of output.
• Businesses hold inventories because:

  2. If the business does not have finished goods in stock, then customers' orders cannot be met and the business will lose sales.

  • This could result in the loss of current and future sales, affecting both the short and long-term profitability of the business.
• Businesses hold inventories because:

  3. Businesses often benefit from economies of scale when they buy inventories in large quantities because they receive a discount from the supplier.

  • The supplier may not offer discounts for smaller quantities
• Improving productivity can be used to reduce the final cost of producing each unit of output.

  • This can be used to reduce the final cost of the product
  • This can also be used to make the business more competitive
• The main sources of waste in business are:

  1. Production defects
  2. High inventories
  3. Over Production
  4. Idle resources
  5. Transporting goods
• Lean production- The production of goods and services with the minimum waste of resources.
• Benefits of lean production:

  1. New products can be brought to the market more quickly
  2. Quality is improved
  3. Wastage of time and other resources is reduced or eliminated
  4. Cost of holding inventories is eliminated
  5. Unit costs are reduced.

  • This will increase the profit made on each unit sold or enable a business to reduce its prices and be more competitive, increasing sales, revenue and profits
• Just-in-time(JIT) inventory control is a lean production technique where no inventories are held by the business.

  • Raw materials and components arrive from suppliers just as they are needed by the production process.
  • As soon as the finished goods leave the production process, they are delivered to the customer
• An advantage of Just-In-Time inventory control is:

  • It reduces business costs by removing the costs of holding inventories.

  Limitation of JIT inventory control:

  • For it to be successful it must also remove the costs of not holding inventories, so the business needs to already have an excellent relationship and good communication with suppliers
  • Raw materials and components have to be delivered on time and be of required quantity and quality
  • Workers and machinery must be flexible to switch from one product to another at short notice.
• Kaizen (continuous improvement) is a lean production technique that gives all workers the opportunity to make suggestions about how to improve quality or productivity.
• advantage of Kaizen approach:

  • Workers are doing tasks every day and so they may know better than managers on how to change the production process to make it more efficient
  • The changes suggested by individual workers may be small, but all of these small improvements can lead to big improvements in efficiency.

  Limitations of the Kaizen approach:

  •  Training staff to adapt to new changes could be expensive and very demanding
  • Takes a long time to see a big change
• Job production- The production of items one at a time- One is completed before one is started

  • Job production usually requires highly skilled workers and specialised equipment
• Benefits of Job production:

  1. Unique, high quality products are made
  2. Workers are often more motivated and take pride in their work
• Limitation of Job production:

  1. Uses skilled labour rather than machinery, so selling prices are usually higher
  2. Production can take a long time and can be expensive if special materials and tools are required
  3. Economies of scale are not possible resulting in a more expensive product.
• Batch production- The production of goods in batches. Each batch passes through one stage of production before moving on to the next stage.

  A good example is baking bread in a bakery.
• Benefits of Batch production:

  1. Since larger numbers are made, unit costs are lower
  2. Offers the customer some variety and choice
  3. Materials can be bought in bulk, so they are cheaper
• Limitations of Batch Production:

  1. Workers are often less motivated because the work becomes repetitive
  2. Goods have to be stored until they are sold, which is expensive
• Flow production- The production of very large quantities of identical goods using a continuously moving process.

  • At each stage of production additional features are added until the product reaches its finished state.
  • It is used where an output of identical standardised products is required to meet high consumer demand for example chocolate
  • It is also known as mass production.
• Benefits of Flow production:

  1. More capital intensive(uses high quantity of capital equipment compared with labour) than job or batch production, which lowers the labour cost
  2. Materials can be purchased in large quantities so it is often cheaper due to bulk-buying economies of scale.
  3. Large number of goods are produced
• Limitations of flow production:

  1. Requires very large capital investment in production line technology
  2. Workers are not very motivated since their work is repetitive
  3. If one part of the production process breaks down, the whole production process will have to stop until it is repaired.
  4. It is not a very flexible method as production lines are difficult to change.
  5. High levels of raw material, work in progress and finished goods inventories are held which increases business costs.
• Firms choose their method of production based on factors such as :

  1. The amounts they are likely to sell
  2. The product they are making
  3. The cost of production
  4. The variety of goods expected by customers.

  The most appropriate method of production depends on:

  1. The size of the market
  2. The type of good being made
• Advantages of new technology to a BUSINESS:

  1. Reduces the cost and time taken to design new products
  2. Increases productivity
  3. Reduces costs of production
  4. Improves quality and reduces waste
• Disadvantages of new technology to a business:

  1. Can be very expensive
  2. When technology is rapidly changing it will need to be changed often if the business is to remain competitive
  3. May need to spend money training workers how to use the technology which increases costs
• Advantages of new technology to CONSUMERS:

  1. Better quality products
  2. Lower prices
  3. Products with more features are easier to develop and produce
• Disadvantages of new technology to CONSUMERS:

  1. Products may become out-of-date more quickly
  2. When the product develops a fault it can be expensive to repair.
• Advantages of new technology to WORKERS:

  1. Technology completes simple and repetitive tasks that workers often find boring
  2. The work is easier with the aid of technology
  3. A business that uses the latest technology is likely to become more successful, so provides job security.
• Disadvantages of new technology to WORKERS:

  1. Technology often reduces the need for workers, resulting in redundancy
  2. Technology could make the work less interesting
  3. A smaller workforce reduces opportunities for promotion
  4. The development and manufacture of new technology products provides less employment opportunities
• Costs are classified by:

  1. Fixed costs
  2. Variable costs
  3. Total costs
  4. Average costs.