2.3: making operational decisions

• business operations


  ngoing, recurring activities involved in the running of a business for the purpose of producing value for the stakeholders
• what does business operations depend on?

  the type of product being produced
• job production


  producing a one-off item specially designed for the customer
• job production advantages


  - higher added value with high quality and personalisation

  - customer satisfaction

  - employee motivation as they are involved in every stage of production
• job production disadvantages


  - higher costs per unit and production cost

  - need for skilled workers needing training and careful management

  - slow to meet customer orders

  - less productive than batch/flow production
• batch production


  a manufacturing operation that produces goods in large batches in standard lot sizes and involves completing one operation at a time on all units before performing the next
• batch production advantages


  - cost savings can be achieved by buying raw materials in bulk

  - goods produced in large quantities reduces costs per unit

  - still allows customers some choice as products can be worked on by specialist staff or equipment at each stage

  - allows a firm to handle unexpected orders

  - 24/7 production process with automation
• batch production disadvantages


  - loss of uniqueness

  - demotivation of workforce due to repetitive work

  - expensive initial set up due to automation

  - machinery may need to be reset

  - need to keep stocks of raw materials

  - breakdown in one lines affects the whole process
• flow production


  large-scale production of a standard product, where each operation on a unit is performed continuously one after the other, usually on a production line
• flow production advantages


  - low costs per unit due to economies of scale

  - production speed can very according to demand

  - output can be produced very quickly with automation allowing for 24/7 production process

  - raw materials being purchased in bulk reduces overall costs

  - consistent quality with goods being identical
• flow production disadvantages

  - automation makes it expensive to set up and maintain

  - if machinery breaks down then the whole production process will come to a halt and fixing it is costly

  - poor worker motivation due to work being repetitive

  - lack of flexibility

  - lack of personalisation
• stock


  the raw materials, components and finished products stored by a business
• what could running out of stock result in?

  - lost potential sales

  - disappointed customers
• what causes stock to run out?

  - unexpectedly high demand

  - products that are hard to store (e.g. food or larger items)
• what could too much stock result in?

  - higher fixed costs associated with storage

  - products reaching the end of their lifecycle before they manage to get sold

  - businesses will low demand failing

  - businesses not enough leftover cash to cover monthly bills
• what causes too much stock?

  - demand falling

  - too many products being produced at once
• how does cost impact stock management?

  - holding too much stock means higher storage costs (as having/running a warehouse is a fixed cost) and possibly more wastage (due to items being perishable or going out of fashion)

  - if too much cash is 'tied up' in stock, there is less cash to cover outflows, hence negatively affecting cash flow
• how does reputation impact stock management?

  - if products are delivered late (or raw materials delay production), then this can fail t meet customer needs and damage their brand image

  - empty shelves would mean lost sales and a lack of repeat purchases
• how does customer satisfaction impact stock management?


  - stock that goes out of fashion will not meet needs and is then difficult to sell

  - businesses may discount the process of products they are struggling to sell to encourage sales
• logistics


  those activities that focus on getting the right amount of the right products to the right place at the right time at the lowest possible cost
• stock control methods


  involve managing inventory to ensure the right amount of stock is available at the right time, minimizing costs and preventing stock outs

  - just-in-case and just-in-time
• just-in-case


  relies upon storing large quantities of raw materials and/or finished products, meaning that stock needs to be replenished (less frequently and in larger batches) in advance before levels become too low - this methods makes significant use of a warehouse or a smaller stockroom
• just-in-case advantages


  - can use economies of scale to reduce costs by bulk buying stock and receiving a discount

  - less likely to run out of stock, damage the brand with empty shelves and disappoint customers

  - buffer stock protects against unexpectedly high demand
• just-in-case disadvantages


  - increased fixed costs due to the need for a warehouse

  - certain types of businesses (e.g. fashion) will require lots of stock for different sizes/colours

  - perishable goods (e.g. food) cannot be stored for long and could go out-of-date, causing wastage

  - cash will be 'tied up' in stock, negatively impacting cash flow as there is less cash to cover outflows

  - if the lead time is too long, this stock could run out and if lead time is too short, then the warehouse may be too small
• lead time


  time interval between ordering and receiving the order
• just-in-time (JIT)


  where a business does not store much stock or for very long - this relies on regular deliveries to bring only what is immediately needed for production or sale, meaning a good relationship or close proximity with suppliers would be needed as deliveries will be smaller and more frequent
• just-in-time advantages


  - lower fixed costs by removing the need for a warehouse

  - perishable goods (e.g. foods) will be less likely to go out-of-date

  - cash is not 'tied up' in stock and can improve cash flow by being used to pay for outflows

  - unsold stock is at less of a risk of going out of fashion
• just-in-time disadvantages


  - unable to reduce costs using economies of scale as they cannot bulk buy stock and receive a discount

  - higher risk of stock running out if there is an unexpected increase in demand (unsold stock would be sold cheaply)

  - delivery delays or poor relationships with suppliers can make the lead time longer (or could run out of stock completely)

  - choice of location is limited since proximity to suppliers needs to be considered
• economies of scale


  factors that cause a producer's average cost per unit to fall as output rises
• supplier


  a business which sells (or supplies) products to another business
• what should be be considered when choosing a supplier?

  - quality: this needs to be high as faulty goods and/or materials cost more money to replace and damage the brand's image

  - delivery: where the supplies need to be brought to the business on time (this supports an effective stock management system)

  - availability: this means a supplier is needed who can cope with small orders to very large order at different times

  - cost: the means finding the cheaper supplier, giving the business lower variable costs and higher profit margins

  - trust: this covered areas such as obtaining credit, where the supplier allows payment up to 60 days after delivery (also trust that the supplier can be relied upon for all of the above)
• procurement


  the action of obtaining the correct supplies from the right supplier
• what can strong procurement result in?

  - increased productivity (if production is faster, its costs will be lower)

  - better reputation for the business

  - high customer satisfaction (as the product the the right quality, the right price and delivered at the right time)
• quality


  the ability of a product or service to satisfy the needs and expectations of customers and should also reflect the price paid by the customer
• quality control


  ensuring that products meet the minimum standards by testing sample products after they have been made
• quality control advantages


  - quality can be monitored

  - stoped faulty products from reaching customers

  - common problems can be identified
• quality control disadvantages


  - reduced responsibility of workers can reduce workforce motivation

  - high wastage levels

  - problems only identified at the end of the production process
• quality assurance


  Ensuring that quality is produced and delivered at every stage of the production process, often through making quality the responsibility of every worker
• quality assurance advantages


  - staff is given more responsibility, which could motivate them

  - lower wastage levels

  - inspection throughout the process
• quality assurance disadvantages


  - additional training costs

  - relies on commitment of all employees

  - time consuming