Business Handout 6

• Explain what is meant by added value and what's the formula

  enhancing the gap between the production cost and the selling price

  added value = selling price of product - cost of production
• explain ways in increasing added value

  purchasing cheaper raw materials, cheaper suppliers, economies of scale buying in bulk

  improve machinery, train workforce so fewer mistakes made

  increase selling price

  invest in branding

  offer additional services e.g. telephone helpline, free delivery
• what are the benefits and drawbacks of added value

  can charge higher prices leads to higher profit margins, unique selling point differentiating products from competitors, can create brand loyalty if product is high quality or offers better services

  higher prices leads to high expectations which business may not achieve, customer dissatisfaction, lost sales, investment and time results in short term costs
• define job, batch and flow production

  job involves producing one single product at a time, meets specific requirements, e.g. wedding dress

  batch involves producing a group of items at one time, undergoes one stage of process before moving onto next stage

  flow involves items being moved from one stage of production straight on to the next in continuous sequence
• what are the benefits and drawbacks of job production

  meets specific requirements of customers, very flexible can choose material, style etc. can charge higher price for product

  very expensive due to it being labour intensive, requiring high skills, business relies on small high value orders as they cant produce large quantities at one time
• explain what is meant by productivity and efficiency

  efficiency is how well resources e.g. raw materials, labour can be used to produce a product or service

  productivity is a measurement of efficiency in which a business turns production inputs into output
• what is the formula for labour productivity

  labour productivity = output / number of employees
• how can productivity be increased

  increase investment in modern equipment, less mistakes

  train employees can improve motivation links to motivational theorist Herzberg

  workplace reorganisation managers can organise work well effectively managing the staff and resources
• explain the concept of capacity utilisation and formula

  capacity is the total output produced with existed resources

  capacity utilisation is the extent to which the maximum capacity of the firm is being used

  always calculated as a percentage

  capacity utilisation = (current output/maximum possible output)x100

  Unit cost = total cost / output a business can lower its unit costs when its capacity utilisation rises, due to fixed costs being more spread out
• what are some problems of spare capacity

  demotivation of staff because less overtime available, limited bonuses workers may become redundant which could incur high costs, management time needed to spent on reorganisation

  reduced profits, limit capital for investment and R and D
• how to solve problems of spare capacity

  subcontracting of production to other business, getting someone else to produce goods for you, dont need to buy machinery or train workers, however lack of control on quality

  rationalisation - reducing staff, selling off unused assets, trimming product ranges, closing stores facotires, dissatisfied customers

  leasing out spare capacity, looking for market niches

  redeployment if too many resources in one part of business deploy to another part

  increasing sales, making use of the 4 marketing mix
• what are the benefits and drawbacks of operating at full capacity

  unit costs minimised, fixed costs more spread out over maximum number of units, employees more motivated as they are likely to be challenged and boredom shouldnt occur, increased job security, business perceived as succesful, making optimum use of production

  any further orders may be rejected and go to competiitors, possible fall in quality, machine maintenance can be diffucult to meet order, may need to be replaced more often, pressure and stress on employees results in absenteeism and mistakes
• what is meant by economies of scale

  the reduction in unit costs of production as output of business increases

  internal economies of scale - reduction in unit costs as a result of increasing internal efficienes within the business

  external economies of scale reductions in cost which benefit a whole industry not just an indivudal business
• what are the 6 internal economies of scale

  technological - large scale production businesses use advanced machinery, mass production techniques, afford to invest in R and D for new technology

  purchasing - buying in bulk, high bargaining power, obtain discounts and lower prices

  financial - large businesses easier to convince lenders, raise money at low interest rates

  managerial - greater potential for managers to speicalise in tasks

  marketing - cost of advert is spread across all their stores

  risk bearing - spread risk over number of stores
• what are the 3 external economies of scale

  supplier - attracted to area where business is growing, just in time

  educational - local colleges set up training schemes, reduces training, benefit from having a large pool of skilled workers to recruit from

  financial - banks providing services
• what are the reasons for diseconomies of scale

  coordination issues - difficult for person at top to control business effectively as business expands,

  communication issues - increase in errors due to mis understood instructions, as organisation grows and levels of hierarchy increase

  motivation issues - less contact with employees and management, leading to employees feeling theyre voice isnt heard

  increased price of resources - increased demand for labour and best employees may be harder to recruit, land and materials all become expensive as industry grows
• what are problems that small firms face

  lack of resources makes it difficult to compete with larger businesses

  harder to obtain finance too risky

  lack of expertise in certain areas

  not having finance to invest in R and D

  promoting to right market

  cash flow issues
• how do small firms survive

  small businesses dont want to grow as its increased stress

  survive on a relatively low cost structure e.g. no stock, operate from home

  niche markets, customer loyalty

  government grants and advice

  increase in small businesses needed e.g. hairdressers, personal trainers

  adapt quickly and satisfy customer needs

  skills gained from previous jobs

  some consumers like to purchase specialist unique products which large businesses may be unable to do
• explain CAD and CAM technology

  computer aided design refers to the designs of the products e.g. designing cars and bridges

  computer aided manufacture is using computers/machinery in production of goods/services, CAM is used to manufacture products, highly efficient fast and cheap way to produce small quantities of a wide range of products
• what are the 3 types of technology

  robotics - machines that undertake tasks originally done by humans, speeds up production makes fewer mistakes, carry out boring and repetitive tasks e.g. car factories

  information technology - use of websites, apps, emails, digital media, to store and communicate business information to staff and customers

  automation technology - using robots to carry out repetitive tasks e.g. self checkouts at supermarkets
• what are the positive impacts of technology

  lower costs of production - produce goods quickly and efficiently lowering unit costs, reduce number of workers required, reduce wage costs, can be passed on to consumers in form of lower prices

  improved quality - high customer service as they benefit from quicker service e.g. online, more precise and accurate then human labour

  reduced waste - time being saved, fewer raw materials needed as less wastage due to human error

  improved productivity
• what are the negative impacts of technology

  resistance to change, always need to keep up with latest models incurring high costs, redundancies, job insecurity

  costly to purchase, if broke down can delay orders, damage reputation

  exisiting products become obsolete, invest in research and devlopmetn and become first to launch new ideas/technologies

  customer expectations constantly revision,new products to meet consumer demand
• explain what is meant by quality

  meeting the needs and expectations of customers e.g. appearance, delivery, value, peformance, a product that is fit for purpose and meets customers requirements
• what is meant by quality control

  involves inspecting a sample of goods produced at the end of the production process to ensure that they meet required quality standards

  inspection is carried out by a specialist, reduces risk of a faulty product reaching customer, problems can be identified and actions taken

  waste levels can be high as faults only found at end of process
• what is meant by quality assurance

  seeks to gurantee all stages in the production process meet required standards ensures high quality and final product satisfys customers

  less waste from scrapping faulty goods at end of process, better quality products increases reputation

  relies on commitment of all staff, increased training costs lacked productivty, takes a lot of time
• what is meant by total quality management TQM

  method designed to prevent errors, business is organised so that the manufacturing process is investigated at every stage
• what is meant by quality chains and quality circles

  quality chains is based on a process which involves treating the next person in the production process as a customer meeting their needs

  quality circles is when employees of different levels of the firm come together to discuss and solve problems in production
• what is meant by empowerment, monitoring and teamwork

  empowerment gives workers control over tasks assuming the view that motivated employees are more commitied to ensuring quality in their work

  monitoring is checking the standards at each link in the chain

  teamwork is using cells of production and a team approach for products and services
• what is meant by zero defects

  attempting to achieve perfect product quality, time after time
• what is meant by benchmarking

  a process that involves measuring the peformance of your business against a competitor in the same market, gives better understanding of business peformance, find out the differences
• what are the benefits of using TQM

  focus clearly on needs of customer

  achieve quality in all aspects of the business

  critically anaylse all processes to remove waste

  errors can be identified and corrected before entire product needs to be scrapped
• what are the limitations of using TQM

  increased training and development costs

  only work if their is commitment from whole organisation

  stress is placed on process not product
• explain what is meant by lean production

  involves using a range of practices to reduce waste and to improve productivity and quality

  aims to use less of everything including space, materials, stocks, labour, capital and time
• what is meant by Kaizen

  organisational structure is switched so groups of workers usually at bottom of hierarchy meet regularaly with managers to discuss improvements on workplace and how to carry out job roles more efficiently, approach focues on continuous improvement, eliminating waste, taking zero defects
• what is meant by just in time

  when stock is arrived so its ready to be used straight in the production process rather than ordering it early and storing it, reduces waste through reducing costs of holding stock, limits the waste created by materials becoming obsolete or out of date or damaged
• what is meant by cell production

  when production is divided into a smaller number of teams, where employees are grouped together in related tasks allowing team working and job enrichment, team members are given number of roles allows job rotation
• what is meant by time based management

  focusing on time as the key resource, speed of development, delivery, prioritising the task that takes longest to complete, so production is completed as quickly as possible, using critical path anaylsis
• what are the benefits and limitations of Kaizen

  ideas come from workers themselves, feel more involved part of the team, instead of using R and D ideas coming from existing workforce encouraging creativity, helps encourage workers to take ownership of their work, help reinforce team working, encouraging motivation

  however requires complete employee and management involvement , very difficult to change organisations mindset
• what are the benefits and limitations of just in time

  improves cash flow since money isnt tied up on stocks, reduces waste, obsolete and damaged stock, factory space is made up for productive use, links with suppliers are improved

  production is reliant on suppliers can be delayed due to weather,can be difficult to cope with increased demand
• explain the importance of purchasing and working with suppliers

  buying of materials, components, machinery and equipment

  purchasing department must work with suppliers in order to obtain best quality materials at lowest price and quickest delivery time

  ordering correct amount of stock at competitive priceso they dont run out or order too much so it gets damaged

  ensure old stock is used up first to prevent wastage

  ensure stocks deelivered at right time correct location

  reliable suppliers chosen and good relations kept with them