Operations
Higher Business Management
BM Unit 2 - LO2 2
To introduce OPERATIONS MANAGEMENT sometimes called PRODUCTION to pupils
You should be able to:
•Understand what operation is.
•Why operations is important
•Review IPO
• Understand operations management
•Describe factors that effect production systems
What is it? Operations Management is
concerned with the way in which organisations produce goods and services.
It transforms inputs into outputs. It could be described as the core
activity of a business, as it actually produces the goods and services for sale.
Why is it important? Operations is vital to any organisation
as making products and producing services to sell is vital to an organisation’s objectives of making a profit and generating wealth
Companies like Arnold Clark and Stagecoach have Operations Managers who oversee the day to day running of the business
Operations/Production
Three distinct phases
Inputs Process Outputs
Inputs
Raw materials
Labour
Process
Converting raw materials into something useful
Use of machinery and other processes
Assembly
Output
The finished product! Packaging Storage Distribution Transport
Operations Management Planning Production Purchasing Warehousing and Storage (included
stock control) DistributionNote that each of these interact with
other functional areas of a business!
Production Planning Vital to the success of an organisation. Plan a production system that will most
efficiently produce the goods for output. Ideally, planning should be at a
constant level. This rarely happens, due to changes in
demand, machine breakdown, etc. Realistically, production will vary from
day to day or week to week.
Manufacturing Production Systems
First task is to decide on the layout of the factory.
Splitting production into different jobs is called Division of Labour.
A successful system needs a flow of stock from one job to another to avoid shortages and bottlenecks.
Factors Affecting Production Systems -
Nature of the product Market Size Quantity to be produced Resources available Labour Capital Availability of technology
BM Unit 2 - LO2 13
To introduce the PURCHASING MIX to pupils
You should be able to:
•Describe the purchasing mix
The Purchasing Mix – Pg 9
This is often the highest expense that a firm will incur and therefore many large organisations have a specialist department dealing only with the purchasing of raw materials and stock control.
The Purchasing Mix cont . .
Business organisations must:- “obtain the best quality
materials, at the lowest cost, delivered in the correct quantities at the correct time”.
The Purchasing Mix cont ….
Decisions on how many raw materials to purchase will depend on The stock of raw materials currently
available. Duration of time elapsing between orders. Amount of raw materials likely to be
required during this time. Storage space available it its cost.
Purchasing Mix cont . . .
Other factors to consider include Normal spoilage levels. Buffer stock Available finance
Decision to be made on which supplier to use?
Who offers best terms? Consider also quality, quantity, time,
dependability, price and location.
BM Unit 2 - LO2 18
To introduce types of production methods
You should be able to:
•Identify and describe types of production systems along with an ability to describe the advantages and disadvantages of the types
Methods of Production
Intermediate II and Higher Business Management
Production Methods Pg 4 Core Notes
Copyright: Photolibrary Group
Whilst all output can be classed as production, different production methods may be more appropriate for different products or services.
Agriculture tends to be very land intensive – efficiency could be measured in terms of output per acre/hectare
Production Methods
Copyright: iStock.com
As technology and analysis of production methodology has improved, methods have changed dramatically – what used to be labour intensive production methods are now capital intensive
Production Methods
California Oil is Source of Wealth and FearCopyright: iStock.com
Bottle production lineCopyright: Photolibrary Group
The choice of production method and the factor inputs depends on such things as:
• the nature of the product
• factor costs
• the scale of production
Production Decisions
Which method? Type of Product
One-Off Order?
Mass Market product?
Batch?
Market size and Segment
Factor Costs – Land, Labour and
Capital
Complexity of design
Methods of Production
Job Production
Batch Production
Flow Production
MASS PRODUCTION IN LARGE FACTORY
Production Methods Job Production – One-off production - each
item might have particular specifications Flow Production – suitable for mass
market products that are identical Batch Production – each stage of the
production process has an operation completed on it before moving on to the next stage – allows modifications to be made to products that otherwise are the same
Job Production
A house built to your own design
A custom-built boat A piece of artwork A hand-turned wooden bowl
Job Production Advantages:-
Customers demands can be exactly met.
A high price may be charged.
Specifications can be changed even if production has started.
Workers motivated as variety of skills required.
Disadvantages:- Expensive due to
skills required. High R&D,
transport and admin costs.
Variety of equipment and tools required.
Lengthy lead times.
Batch Production
A number of similar products (repeated jobs)
The same house repeated on a building site
Bakery produce - each batch may differ slightly
Batch Production Advantages
Batches can be changed to meet specific customer requirements.
Reduced need for highly skilled staff.
Machinery can be relatively standardised.
Disadvantages Machines/workers may
sit idle between stages. Expensive machinery
may be required due to less skilled staff.
Stock levels may be high. Staff may be less
motivated due to repeating the same task in batches.
If batches are small, costs will be high.
Flow Production
Mass production of almost identical products
Cars Washing machines
Flow Production Advantages
Costs spread over a large number of goods.
Bulk discounts Huge quantities can be
produced. Automation often used
which reduces chance of human error.
Machinery can work 24/7
Disadvantages Huge set up costs. Individual customer
requirements cannot be met.
Equipment may be inflexible.
Worker motivation can be low because of the repetitive nature of the job.
Breakdowns can be very costly.
Sample questions1 Describe methods of production that an
organisation could use? 3 marks
2 Outline the factors that need to be considered when deciding upon the most suitable method of production? 2 marks
Give a brief description or overview of what you are talking about.
Provide a detailed description: give more detail than you would in an outline and use examples where you can.
Solution to question 1 Job production could be used whereby a one
off, unique product is made to the requirements and specification given by the customer. (1 mark)
Batch production involves a number of identical (or nearly) products being made at any one time and then the equipment could be changed or cleaned to produce an entirely different batch of products. (1 mark)
Flow production involves a product being built as it moves along an assembly line. As the product moves along the assembly line, parts are added until it is completed. (1 mark)
Solution to question 2The factors that need to be considered whendeciding on the most appropriate type of production to be used are:
The type and nature of the product Amount of the product to be
manufactured/produced Methods of measuring and ensuring quality Methods of distribution Stock control management system Resources and technology available
Any of the above would be worth one mark
BM Unit 2 - LO2 35
To introduce Quality and quality systems
You should be able to:
•Describe quality and concepts
•Describe measures of quality
•Describe quality symbols
•Describe quality systems
Quality Core notes p6-8
Higher Business Management
Quality - A Definition
Those features of a product or service that allow it to satisfy customers’ requirements
Two different concepts …
Quality Control – assumes a degree of waste when an organisation has a quality checking system at the end of the manufacturing process
Quality Assurance – assumes that the waste caused by quality control can be prevented. Quality is checked at every stage of the manufacturing process.
Quality Control
‘Bolting the door after the horse has gone’
Leads to waste and scrap (as many as 25% of goods not meeting requirements)
Can be very “costly”
Quality Assurance
Making sure the horse cannot bolt – closing the stable door
Getting it right first time All aspects of the
business including the commitment of the workforce
Measuring Quality – How to?
Tangible – (touch) Appearance/Taste Reliability Durability Functions Suitability After sales service Maintenance
Intangible (not able to touch)
Image and brand (‘street cred’)
Reputation Exclusivity Hype created
Quality Symbols
Quality Systems
Total quality management Benchmarking Quality circles
Total Quality Management (TQM)New Term = Quality Management (QM)
The aim of TQM is to produce a perfect product each time.
It is therefore essential that quality is evident at every stage of the production process.
If properly implemented, wastage can be reduced to approx 3%.
Right first time Consistent, clear
message on quality Staff commitment
to ongoing improvement
Partnership with suppliers
Educate and train staff
Supervisors encourage and help
Eliminate fear of failure
Departments integrate and share problems
Set clear, achievable goals
Help employees to take pride in their work
Train and educate Establish a
structure and culture to support these aims
Total Quality Management (TQM/QM)
Features of TQM/QM
Commitment to customer needs Close links with the supply chain Personal responsibility by employees Company-wide policy for all staff Emphasis on teamwork Clear measures of “quality” Information gathering to support these
measures Well-used 2-way communication systems
Benchmarking - A Definition
Benchmarking is the process of setting competitive standards, based on the achievements of other firms, against which an organisation will monitor its progress.
Benchmarking tends to focus on the “best in class” companies, but for specific functions a company may compare itself to an organisation in a different industry.
Types of Benchmarks
Internal - comparison with a function within the organisation
External - comparison with other organisations
Competitive - direct comparison with a competitor
Generic - comparing general business activities (eg recruitment)
Customer - contrasting the level of fulfillment of customer expectation
Quality Circles
Production workers know more about the production process than “managers”
Workers are motivated by being involved and consulted about production problems (empowerment)
BM Unit 2 - LO2 50
To introduce STOCK and stock control
You should be able to:
Stock pg 12 onwards
Intermediate II and Higher Business Management
What is stock?
Raw Materials Work in Progress Finished Goods
Why hold Stock?
Having stock enables goods to be available for immediate use in production or for delivery to customers.
It enables customer demands to be met.
It allows bulk buying to take place so that discounts can be received.
Too much stock can lead to . . High storage and insurance costs. High security costs. Large amount of space taken up
storing the stock. Money tied up when it could be used
more profitably elsewhere. Stock left for too long can deteriorate
or become out-dated Possibility of theft by employees.
Too little stock can lead to . . Business not being able to cope with
unexpected changes in demand. If deliveries are delayed, stock may run
out. Loss of revenue and custom if unable to
deliver on time. Gain bad reputation. Rush order for stock may have to be
placed therefore losing out on discounts
So you can see that . . .
Stock control, sometimes called Inventory Management is very
important!
Ideally an organisation should operate with as little stock as possible, but this is not always ideal.
There has to be a balance between the cost of holding stock and the cost of lost production and sales.
But, a continuous supply of stock is required for efficient production.
Stock levels by diagram
Time – months
Sales
Stock levels by diagram
Max level
Re-order level
Min level
Time – months
Sales
Buffer stocks
Re-order quantity
Lead time
Economic Stock Level
This is the lowest level of stock that ensures that production is not interrupted.
At the same time, it ensures that the organisation is not carrying too much stock.
Economic Stock Level is based on the following . . .
Minimum Stock Level Ensures that there
will always be stock for production, allowing for ordering and delivery times (known as lead time)
Re-order Stock Level When stock falls to this
level, new stock must be ordered to make sure that the organisation does not run out.
For example, if it takes a week for new stock to arrive, then the reorder level will be at the point where there is one week’s stock left (but more likely 10 days to allow time for delivery delays).
Computerised Stock Control
The computer automatically orders more stock when the stock falls to the re-order stock level.
One example is bar codes Bar Code Reader logs stock into and out of the
system. Physical checks should also be made from time
to time as discrepancies may occur. This system means that slow moving lines and
best sellers can easily be identified.
Storage of Stock Centralised
Held in one central place.
Improved security Specialist staff Costs may be less
with a one site location
Improved efficiency
Decentralised Stock located in the
different areas in which it is used.
Always “at hand” Speedier turnover of
a small quantity of stock reduces the likelihood of its deterioration or decay.
Just in Time (JIT) A Japanese approach to production – first
developed by Toyota. Involves keeping stock levels at a minimum. Works only if there is a very good relationship
between manufacturer and their suppliers. The stock is held by the supplier and is only
brought to the factory as and when it is needed.
Savings can be high as there are very little stock-holding costs.
H
Pros and Cons of JIT Capital not tied up in
stocks. Reduction in
warehouse costs. Good relationship
with suppliers. Reduce wastage. Increase in cash flow Reduction in stock-
holding costs
Danger of disruption due to non-arrival of stock.
Danger of lost sales. High dependence on
suppliers. Increased ordering. Increased transport
costs. Less chance of discounts
for buying in bulk.
H
Kanban
This is another Japanese system devised by Toyota. It uses markers (eg lights or flags), to order
movement of stocks between different stages of production.
For example, if a worker has to fit six steering wheels, a Kanban Card would be sent to the production team to order another 6 wheels. These would arrive just in time, before the worker ran out of steering wheels.
When Toyota opened up in the UK, they had to train suppliers in this process. Suppliers had to prove that they could deliver small quantities of high quality goods and short notice in order to be awarded contracts.
H
Factors to consider when choosing Supplier – copy down
Question type: Describe the type of features that Marks andSpencer’s would be looking for before choosing anew range of uniforms? If you were a Operations/Production manager You would think about:PRICE DESIGNDELIVERY COSTS DISCOUNTS AVAILABLECREDIT TERMS QUANTITYRELIABILTY AVAILABILITYLOCATION QUALITY
Transportation/External Problems – Copy down
What can cause transport problems? Reliability of suppliers – maybe unrealiable in terms of when they deliver. Location of suppliers – Overseas and could need planes or ships to
transport Weather – bad weather eg snow can affect transport routes due to unsafe
driving conditions Legislation – regarding the number of hours a driver can work and the
speed they drive at. Also the type of good transported eg hazardous chemicals
Industrial action/strikes – by distribution workers, including drivers can affect delivery
Breakdowns in transport method – this is something that cannot be pre-planned but does happen
Outsourcing Meaning – Companies/organisations can
sometimes get certain things done for the business by outside companies
eg Irn-Bru may get their cans made by a separate company
Ryanair may get their catering produced by separate company
Hospitals sometimes get their cleaning and catering done by outside companies
SOMETIMES REFERRED TO AS TENDERING/CONTRACTING OUT
Outsourcing continued… What advantages are there to this? Allows organisation to concentrate on its core activity
– meaning the main thing eg Irn-Bru the drink is the CORE activity
Specialists can be employed to undertake the tasks outsourced
Specialist businesses will have specialist equipment readily available
No need for training staff within YOUR organisation Specialists may produce costs cheaper Downsizing (making business smaller) becomes
possible
Outsourcing continued …… What would the disadvantages be? You have less control over the outsourced organisation
eg Irn-Bru would have to trust the company making the aluminium cans
Issues with regard to confidentiality may become a problem eg Information on Accounts may become knowledgeable to the public or rival companies
Problems with communication may occur between you and the outsourced organisation
The level of service provided may deteriorate due to parts of the work being outsourced eg Hospital cleaning services are constantly in the press for poor performance
Operations/Production Summary
Job Production Batch Production
Flow/Continuous production
Quality – meaning?
Quality control V Quality Assurance
Quality Systems
TQM or Quality Management
Benchmarking Quality circles Stock control features
Max Stock Min Stock Re-order level Re-order quantity
Lead time
Buffer Stocks JIT/Kanban system
Supplier decisions
Purchasing mix
Transportation problems
Outsourcing You should know and understand the above to be successful in Operations within your exam!
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