Unit 4 operation management lecture ppt

 Unit -4 Operation Management
4.1 & 4.3 Chapter15- Production of Goods &
Services/ Chapter 17 Achieving Quality
What is meant by
production?
Production is the provision of
a product to satisfy wants
and needs. The process
involves businesses adding
value to their products. E.g.
The production process of
matches involve cutting wood
into matchsticks, putting
phosphorus ends on them
and packaging them to sell.

Productivity
Productivity is the outputs measured against the inputs used
to create it. This is measured by:
If a worker makes more products in the same amount of
time, his productivity increases. Firms aim to be
productively efficient to be able to make more profits and
compete against their competitors.

 Benefits of increasing efficiency and how to
increase it
All businesses will try to increase productivity because this
usually reduces average costs-the cost of producing each
unit of output.
 How to improve labour productivity ?
 Increasing output with the same number of workers
 Keeping output at the same level but with fewer workers.
 Ways of increasing productivity
o Improving the skill level of workers
o Improving the motivation of workers
o Introducing more automation and more or better
technology
o Improving the quality of management decisions
o Improving relationship between employer and employee

 Inventories
The stock of raw materials, work-in-progress and finished
goods held by a business.
Why business hold inventories ?
 Raw materials and components- these are needed as
inputs for the production process
 Work-in-progress- that is part-finished goods that have not
yet completed the production process
 Finished goods- ready to be sold or sent out to customers.
 Holding inventories adds to a business`s costs, such as :
 Warehousing costs- the business will need to rent or
purchase a warehouse to store the inventories.
 Handling costs- inventories need to be moved into and out
of the warehouse.
 Shrinkage costs- damaged, lost or stolen inventories will
need to be replaced.
 Insurance costs- these will cover the cost of losses from
shrinkage.

 Obsolesce costs- the business may not be able to sell out-
of-date goods
 Opportunity cost- working capital is `tied-up’ in
inventories which could be used more profitably by the
business.
 If holding inventories is costly, then why do businesses
hold them ?
 The production process needs raw-material or components. If
these are not available when required then the process must stop.
Workers and machinery will stand idle and will be a loss of output.
 If the business does not have finished goods in stock, then
customer's 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-term and long-term profitability of the business.
 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.

 Methods of production
Job production
Goods are made individually, by
one person.
Goods are usually specialized, no
two goods are the same. Usually
made to order.
 Advantages
 The product meets exact requirements of the
customer.
 The workers have more varied jobs.
 More job satisfaction for workers.
 Disadvantages
 Skilled labour is needed.
 Slower and more expensive than other methods of
production.
 Usually labour intensive.

Batch production
is a technique used in
manufacturing, in which the
object in question is created
stage by stage over a series of
workstations, and different
batches of products are made.
OR Products are made in batches
according to order.
 Advantages
 It is flexible. You can easily change from making one product to
another.
 Still gives some variety to workers jobs.
 Production is not too affected by machinery breakdown.
 Disadvantages
o Expensive to move products around the workplace.
o Storage space will be needed to store raw materials. Expensive.

Flow production( Mass
Production)
 Large quantities of a product
are produced in a continuous
process.
 Uses specialization.
 Benefits from economies of
scale.
 Is capital intensive.
 Advantages
 Low costs. Low prices. High sales.
 Increased efficiency.
 Little training is needed.
 Goods are produced quickly and cheaply.
 Goods do not need to be moved around like batch
production. Saves time.
 Quality is high and standardized

 Disadvantages
o Boring for the workers. Little job satisfaction.
o Needs a lot of capital to set up.
o If one machine breaks down then the whole production
process stops.
Which type of production should be used?
The type of production that should be used varies with how
the product is demanded:
 Job production: Unique and individual service is
required.
 Batch production: Demand is higher but products will
not be sold in large quantities. Batches are made to
orders.
 Flow production: Demand for the product is high and
steady.

 Stock control
Stock control is important so that a business will not run out of stock
and be unable to satisfy demands. When stock levels get to a certain
point, more goods need to be reordered for the stock level to reach
its maximum again. If more goods are not reordered, stocks could run
out because of an unexpected surge in demand. However, keeping a
lot of stock costs money, so the level of stock in a company should
always be balanced. The following graph demonstrates how stock can
be controlled:

 Lean production
Focuses on cutting down waste, increasing efficiency. It tries
to reduce the time taken to produce a product and transport
it the selling point.
Includes the following methods:
 Kaizen.
 JIT production.
 Cell production.
 Kanban.
 Kaizen
Continuous improvement through the elimination of waste.
Ideas of workers.
Regular meetings of workers to discuss how to increase
efficiency.

 The advantages of Kaizen:
 Increased productivity.
 Reduced amount of space needed for the production
process.
 Work-in-progress is reduced.
 Improved layout of the factory floor may combine jobs
of some employees, freeing others to do other things.
 Just-in-time production(JIT) Inventory control
Eliminating the need to hold stocks.
Goods are delivered to the selling point just when they
are needed.
JIT production needs:
 Reliable suppliers.
 Efficient system of
0rdering raw materials.

 Cell production
 Production line is divided into cells.
 Each cell makes an identifiable part of the finished
product.
 Boosts morale.
 Kanban
o A system of ordering used with JIT production.
o Operates with two component bins.
 When one is emptied, production begins to fill it.
 The other one is then left to be emptied.
 The first one is filled up when the second one is
emptied.

 How technology has changed production
methods
Here are some things that technology does in the
production process:
 Automation: Equipment in the production process is
controlled by a computer.
 Mechanisation: Tasks are done by machines operated
by people.
 CAD (computer aided design): Used for designing 3-D
objects.
 CAM (computer aided manufacture): Computers
control machines in the production process.
 CIM (computer integrated manufacture): CAD and CAM
are used together. The computer that uses CAD is
directly linked with the one that controls the
production process.

 Here are some things that technology does in
shops:
 EPOS (electronic point of sale): When products' bar
codes are scanned and the information is printed out
on a receipt. Data is also sent to a computer to keep
track of stocks.
 EFTPOS (electronic fund transfer at point of sale):
When the cash register is connected to the retailer's
main computer and banks. The customer's credit/debit
card is swiped and the money is debited from the
customer's bank account. A receipt is printed out to
confirm the transaction.

 The advantages of new technology
 Increased productivity.
 Boring jobs done by machines. Boosts motivation.
 Training is needed to operate new machines. Workers
become more skilled.
 Better quality.
 Better stock control.
 Quicker communication and reduced paperwork.
 Info is available faster, resulting in faster decision
making (for managers).
 The disadvantages of new technology
 Unemployment
 Expensive
o To invest in new technology.
o To replace outdated technology.
 Employees are unhappy with changes in the workplace.

 Quality control ( Part of Chapter 17 pg.229)
There are three ways to control quality:
 Quality control
o Involves checking and removing faulty products at the
end of the production process.
o Wastes a lot of money.
 Read pg.232 for Problems of quality control by inspection
 Quality assurance
 Involves inspecting during and at the end of
production.
 Aim to
o Stop faults from happening.
o Set a quality standard that all products have to
achieve.
 Need team working and responsibility.
 Read pg.232 for the Benefits of quality assurance

 Total quality management (TQM)
 Encourages everyone to concentrate on quality.
 Quality is the main aim for all staff.
 Products need to satisfy all customer need.
 The importance of quality to all businesses
 Quality is important to businesses because it helps
them to:
 Develop aa Strong brand image
 Keep customers and attract new customers
 Reduce costs, customer complaints and returns
 Change a premium price
 Encourage wholesalers and retailers to stock the
product
 Lengthen product life cycle
End of Chapter 15+17 together

 4.2 Chapter 16: Business costs Scale
of Production and break-even
analysis

 Business costs
All business activity involves some kind of cost. Managers need to
think about because:
 Whether costs are lower than revenues or not. Whether a
business will make a profit or not.
 To compare costs at different locations.
 To help set prices.
There are two main types of costs, fixed and variable costs. Here
are some types of costs:
 Fixed costs = stay the same regardless of the amount of
output. They are there regardless of whether a business
has made a profit or not. Also known as overheads.
 Variable costs = varies with the amount of goods produced.
They can be classified as direct costs (directly related to a
product).
 Total costs = fixed + variable costs

 Break-even charts, comparing costs
with revenue

 Uses of break-even charts
There are other benefits from the break-even chart other
than identifying the breakeven point and the maximum
profit. However, they are not all reliable so there are some
disadvantages as well:
 Advantages:
 The expected profit or loss can be
calculated at any level of output.
 The impacts of business decisions can be
seen by redrawing the graph.
 The breakeven chart show the safety
margin which is the amount by which
sales exceed the breakeven point.

 Disadvantages:
 The graph assumes that all goods produced
are sold.
 Fixed costs will change if the scale of
production is changed.
 Only focuses on the breakeven point.
Completely ignores other aspects of
production.
 Does not take into account discounts or
increased wages, etc. and other things that
vary with time.

 Break-even point: the calculation method.
It is possible to calculate the breakeven point with
ought having to draw the graph. We need two
formulas to achieve this:
Selling Price - Variable Costs = Contribution
Break-even point =
Total fixed Costs/Contribution

 Business costs: other definitions
There are other types of costs to be analysed that is split
from fixed and variable costs:
 Direct costs: costs that are directly related to the
production of a particular product.
 Marginal costs: how much costs will increase
when a business decides to produce one more
unit.
 Indirect costs: costs not directly related to the
product. They are often termed overheads.
 Average cost per unit: total cost of
production/total output

 Economies and Diseconomies of scale:
 Economies of scale: are factors that lead to a reduction in
average costs that are obtained by growth of a business. There
are five economies of scale:
 Purchasing economies: Larger capital means you get
discounts when buying bulk.
 Marketing: More money for advertising and own
transportation, cutting costs.
 Financial: Easier to borrow money from banks with lower
interest rates.
 Managerial: Larger businesses can now afford specialist
managers in all departments, increasing efficiency.
 Technical: They can now buy specialised and latest
equipment to cut overall production costs.

 However, there are diseconomies of scale which
increases average costs when a business grows:
 Poor communication: It is more difficult to
communicate in larger firms since there are so
many people a message has to pass through. The
managers might loose contact to customers and
make wrong decisions.
 Demotivation/Low morale: People work in large
businesses with thousands of workers do not get
much attention. They feel they are not needed this
decreases morale and in turn efficiency.
 Slower decision making: More people have to agree
with a decision and communication difficulties also
make decision making slower as well.

Average cost curve showing economies and
diseconomies of scale

 Budgets and forecasts: looking ahead
Business also needs to think ahead about the problems and
opportunities that may arise in the future. There are things to try to
forecast such as:
 sales or consumer demands.
 exchange rates appreciation or depreciation.
 wage increases.
 There are some forecasting methods:
 Past sales could be used to calculate the trend, which could
then be extended into the future.
 Create a line of best fit for past sales and extend it for the
future.
 Panel consensus: asking a panel of experts for their opinion
on what is going to happen in the future.
 Market research.

 Budgets:"Budgets are plans for the future containing
numerical and financial targets". Better managers will create
many budgets for costs, planned revenue and profit and
combine them into one single plan called the master budget.
 Here are the advantages of budgets:
 They set objectives for managers and workers to work
towards, increasing their motivation.
 They can be used to see how well a business is doing by
comparing the budget with the result in the process of
variance analysis. The variance is the difference between
the budget and the result.
 If workers get a say in choosing the objectives for a budget,
the objectives would be more realistic since they are the
ones that are going to do it and it also gives them better
motivation.
 Helps control the business and its allocation of
resources/money.

 All in all, budgeting is useful for:
 reviewing past activities.
 controlling current business activity - following
objectives.
 planning for the future.

4.4 Chapter 18: Location decisions

Location of industry
The location of a business is considered when it starts-up or
when its present location is unsatisfactory. The business's
objectives as well as the conditions of the environment
change, so the business may need to look for a new location
once in a while.
There are many factors that affect the location of
businesses, and these factors are different for each business
sector. We'll take a look at them below.
 Factors affecting the location of a manufacturing
business
 Production methods and location decisions
 Small scale: transport and location of suppliers are less
important.
 Large scale: transport and location of suppliers are
more important.

 Market
 Need to be near to transport perishable goods.
 Need to be near to cut transportation expenses.
Raw materials/components
 Need to be near to transport perishable goods.
 Need to be near to cut transportation expenses.
 External economies of scale
 How good nearby businesses are.
 For maintenance of equipment.
 For training workers, etc…

 Availability of labour
 Wages of the labourers.
 How skilled they are.
 Government influence
 Grants/subsidies.
 Restrictions on dumping, etc…
 Transport and communication
 To be able to transport product easily.
 Power
 Need a reliable source of power to operate effectively.
 Water supply
 A lot of water is needed in the production process (e.g.
cooling, cleaning)
 Cost of water.
 Personal preferences of the owners
 May locate in areas that:
o They come from.

o They like.
o Pleasant weather, etc…
 Climate
 E.g. to reduce heating costs in a warmer climate.
 Some climates are required to produce certain items.
 Factors affecting the location of a retailing
business
Shoppers
 Do shoppers go there?
 What kind of shoppers go there?
 Nearby shops
 Competitors.
 Mass market.
 Gap in the market.

 Customer parking available/nearby
 Convenience for the customer.
 Availability of suitable vacant premises
 Goods sites (e.g. in shopping centres) are in short
supply.
 Rent/taxes
 The more popular the site, the more expensive.
 Access for delivery vehicles
 For delivering goods.
 Security
 If the area is insecure
o Goods will be stolen.
o Insurance will be reluctant to insure the shop.
 Legislation
 Laws restricting the trade of goods in certain areas.

 Factors that influence a business to relocate
either at home or abroad
 The present site is not large enough for expansion.
o If a business simply prefers to expand elsewhere, the
factors affecting location will have to be considered.
 Raw materials run out.
o One alternative is to import raw materials from
elsewhere.
o Important for mining industries.
 Difficulties with the labour force
o Wages are too high.
o Need skilled labour.
 Rents/taxes rising.
 New markets open up overseas.
o Cuts transport costs.
o Bypass trade barriers.

Government grants
o To attract businesses to locate in development areas.
o To attract foreign investment.
To bypass trade barriers
o Tariffs
o Quotas
 Factors affecting the location of a service sector
business
 Customers
 Whether customers require:
 Direct contact.
o Is it convenient for customers to go the business?
o Will the service arrive at customers' houses in time?
 No direct contact needed.
o Mail
o Internet

Personal preference of owners
 Near their homes.
Technology
 Technology allows businesses to locate in cheaper
sites.
o Telephone.
o Internet.
o Transport.
 No need to be near customers.
 Availability of labour
 Need to locate to sites where skilled labourers
live.
o Labourers may relocate to be near the business.
Climate
 Important for tourism.

 Near to other businesses
 Businesses that supply or repair machinery to
others need to be near them to respond quickly.
 Post office/banks need to be in busy areas for the
convenience of customers. That is, being near
malls, shops, etc…
 Rent/taxes
 If the business does not need direct contact with
the customer, then it could locate in cheaper
areas.
End of Chapter 18 and Unit 4

Unit 4 operation management lecture ppt

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