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Production/operations management

What is Production?

Production is the act of creating goods and services able to satisfy consumer wants and
needs
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e
...

Production combines factors of production (land, labour, capital and enterprise) in
different proportions to produce finished goods & services
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Productivity is the output measured against the inputs used to create it
...

Productivity can either mean using fewer inputs to produce the same output or using the
same inputs to produce more output
...
g
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

Using more productive resources e
...
purchasing new modern machines or training
employees
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g
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

Motivating workers to work harder e
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offering bonuses, job rotation & job
enrichment
...




Lowers costs per unit i
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average cost of production
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

Higher wages for workers increases motivation
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Productivity is a measure of the quantity of output in relation to the input of
resources
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Methods of production
Job Production


Job production involves producing single product at a time
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

Businesses which use a Job production produce each time a unique, non-standard
goods that are made to order
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Disadvantages

Advantages
* Product is according to

* Short production runs raise unit

customers specifications
...


* Multipurpose machinery is

* Specialist equipment and skill

combined with skilled versatile

labour might be needed which

labour
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* There is no finished goods

* Costs are higher because it is

stock
...


* Workers are motivated as they * Production often takes a long
carry out the variety of tasks
...


* Most suitable for personal
services
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Batch Production
It involves manufacture of different versions of the same basic product in batches or sets
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Unlike Job production there is a repetition of production
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on different settings
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more job satisfaction
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more
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identical products
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Once work has been completed on one operation, the job moves on to the next without
stopping
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Examples of flow production include production of Coca-Cola cans, chocolate bar
manufacture, mass production of cars, cameras, televisions, packaged foods and drinks
etc
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are achieved
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demand
...


little training may be required
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result in low average cost which means low * Cost of setting up production line is
prices for customers
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* No need to move goods from one part of * If one machine breaks down, then the
the factory to another, so time is saved

whole production line will have to be
halted
...


The size of the market: Job or batch production are usually made for local or niche
markets while flow production is tailored for international or mass markets
...


The size of the business: small businesses are more likely to use job or batch
production while large businesses with large scale production uses flow production
method
...

It is an integrated approach to design, technology, components and materials
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

The parts that go into finished product arrive just in time to be put together or
make a final product, rather than being stored in a warehouse
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

Strict quality control with zero defects
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

Excellent relationship with suppliers and subcontractors
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

Reduced work in progress
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

Increased equipment utilization
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Cell Production
In cell production, or cellular manufacturing workers are organized into multi-skilled
teams
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Each cell is made up of several teams who deliver finished items on to the next cell in the
production process
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Kaizen (Continuous Improvement of productivity)
Kaizen is Japanese for improvement
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By improving the standardized activities and processes, Kaizen aims to eliminate waste
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To be most effective kaizen must operate with three principles in place:


consider the process and the results (not results-only) so that actions to
achieve effects are surfaced;



systemic thinking of the whole process and not just that immediately in
view (i
...
big picture, not solely the narrow view) in order to avoid creating
problems elsewhere in the process; and

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

a learning, non-judgmental, non-blaming (because blaming is wasteful)
approach and intent will allow the re-examination of the assumptions that resulted
in the current process
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Therefore, Kaizen methodology includes making changes and monitoring
results, then adjusting
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Problems due to Overstocking





More stock more wastage
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High storage costs
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Problems due to Stock out (total depletion of stock)



Customers demand could not be met leading to business losses
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Stock control charts

Depletion of stocks as a result of usage or sales is represented by the sloping lines
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The steeper the gradient, the faster the depletion
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But there is a gap between the order being made and the delivery of supplies, this time
gap is known as the lead time
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Maintaining a balanced stock level is important
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The following decision need to be taken when managing the stock levels through a stock
control chart:





The
The
The
The

size of the buffer stock
maximum level of stock to be held
reorder quantity
reorder level

Improvements in technology
Use of technology in a manufacturing firm:


Automation: Equipment in the production process is controlled by a computer
...




CAD (computer aided design): Used for designing 3-D objects
...




CIM (computer integrated manufacture): CAD and CAM are used together
...


Use of technology in a retail business:


EPOS (electronic point of sale): When products' bar codes are scanned and the
information is printed out on a receipt
...




EFTPOS (electronic fund transfer at point of sale): When the cash register is
connected to the retailer's main computer and banks
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A receipt is printed out to confirm the transaction
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

Boring jobs done by machines
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

Training is needed to operate new machines
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

Better quality
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

Quicker communication and reduced paperwork
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The disadvantages of new technology


Unemployment



Expensive
o
o



To invest in new technology
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Employees are unhappy with changes in the workplace
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Managers need to think about this because:


They need to check whether costs are lower than revenues or not in order to
determine if the business will make a profit or not
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

To help set prices for products or services
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Here are some types of
costs:


Fixed costs = stay the same regardless of the amount of output
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E
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rent & rates on
premises, heating & lighting, repayment of mortgage, interest charges on bank loans,
telephone bills, cleaning costs, leasing charges for machinery, salaries, insurance
charges, advertising costs etc
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e
...
Material cost,
wages, electricity to power machines & computers etc
...




Average cost per unit = Total costs
Total output

Economies of scale
Economies of scale are the cost advantages that a business can exploit by expanding
their scale of production
...

They include the following:
Technical economies of scale:
Large-scale businesses can afford to invest in expensive and specialist capital machinery
...
It might not, however, be viable or cost-efficient for a small
corner shop to buy this technology
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By specialising in certain tasks or processes, the workforce is able to produce
more output in the same time
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A good example would be the ability of the electricity
generators to negotiate lower prices when negotiating coal and gas supply contracts
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Financial economies of scale
Larger firms are usually rated by the financial markets to be more ‘credit worthy’ and have
access to credit facilities, with favourable rates of borrowing
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Businesses quoted on the stock
market can normally raise fresh money (i
...
extra financial capital) more cheaply through
the issue of shares
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Diseconomies of scale
Diseconomies of scale occur when a business grows so large that the average costs per
unit increase
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Poor communication
As the business expands communicating between different departments and along the
chain of command becomes more difficult
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This may result in
workers having less clear instructions from management about what they are supposed to
do when
...
g
...

Lack of motivation
Workers can often feel more isolated and less appreciated in a larger business and so their
loyalty and motivation may diminish
...
This
can lead to lower employee motivation with damaging consequences for output and
quality
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It is more difficult for managers to supervise their subordinates and check
that everyone is working together effectively, as the spans of control have widened
...


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Break-even charts, comparing costs with revenue
Business revenue – the total income received from the sale of goods and services
during a given period of time
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Break-even level of output – minimum level of output that must be sold to cover all
the total costs of production
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However, they are not all reliable so there are some
disadvantages as well
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The graph assumes that all goods

calculated at any level of output

o

produced are sold

The impacts of business decisions

2
...
Only focuses on the break-even
The break-even chart shows

point
...


break-even point (current output

o

o

minus break-even output)

Does not take into account discounts
or increased wages, etc
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We need
to formulas to achieve this:

Therefore:
1
...


3
...

Business costs: Other definitions
There are types of costs to be analysed that are 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
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Quality control
What is meant by the term ‘quality?’

Quality is about meeting the needs and expectations of customers
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Key aspects of quality for the customer include:


Good design – looks and style



Good functionality – it does the job well



Reliable – acceptable level of breakdowns or failure



Consistency



Durable – lasts as long as it should



Good after sales service



Value for money

Why quality is important to a growing business
Good quality helps determine a firm’s success in a number of ways:


Customer loyalty – they return, make repeat purchases and recommend the
product or service to others
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

Involves checking and removing faulty products at the end of the production
process
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

Quality inspectors measure or test every product, samples from each batch, or
random samples – as appropriate to the kind of product produced
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

The aim is to ensure that a product is manufactured, or a service is provided, to
meet the specifications which ensure customer needs are met
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Demerit: Workers are not necessarily encouraged to take responsibility for the quality of
their own work
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This
affects the firm’s profitability levels
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

Involves inspecting during and at the end of production
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Set a quality standard that all products have to achieve
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In developing products and services, quality assurance is any systematic process of
checking to see whether a product or service being developed is meeting specified
requirements
...

A quality assurance system is said to:


Increase customer confidence
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

Reduce costs because there is less wastage and re-working of faulty products as
the product is checked at every stage
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Total quality management
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Is a specific approach to quality assurance that aims to develop a quality
culture throughout the firm
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

Quality is the main aim for all staff
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

Products need to satisfy all customer needs

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