Cost targets
·
Reducing unit costs:
o
Likely to be the primary aim of most businesses
in terms of cast targets
o
Low unit costs enable a business either to keep
prices low or to enjoy a higher profit margin by keeping prices at their same
level
·
Reducing fixed costs
o
This allows a more specific focus and is often a
more manageable target than a roader, unit cost reduction.
o
Common to businesses that have recently merged
or been taken over
·
Reducing variable costs per unit.
o
By cutting labour and raw material costs, a
business can reduce its variable costs per unit.
o
This target can also be achieved by improving
labour productivity because this mean that employees’ wages are spread over a
higher level of output.
Volume targets
·
Number of items to be produced
·
Targets in individual markets
·
Percentage growth targets
·
Volume in comparison to other branches or
organisations.
Innovation
·
Spending a certain amount on research and
development
·
Targeting research and development expenditure
as a percentage of sales.
·
Achieving a certain number of patents
·
Developing a particular innovation
·
Innovation to extend product ranges
Efficiency
·
Labour productivity
o
Output/number of workers employed
·
Output per hour (or a measure of production over
a given time period)
·
Reducing stockholding
·
Just-in-time delivery
·
Speed of response and action objectives
Environmental targets
·
Increasing the ethical imaging of the business
Reasons for setting operations management objectives
·
To act as a focus for decision making and effort
·
To provide a yardstick against which success or
failure can be measured
·
To improve coordination, by giving teams and
departments a common purpose
·
To improve efficiency, by examining the reasons
for success and failure in different areas.
Assessing internal influences on operational objectives
Corporate objectives
·
The operations department must ensure that its
objectives are consistent with the corporate objectives of the business.
Finance
·
Operations management objectives rely on
considerable expenditure on capital equipment or research and development.
HR
·
The skills, training and motivation of a
business’ human resources will be a major impact on operational objectives. If
there are weaknesses in human resources, less ambitious objectives will need to
be set.
Resources available
·
If the business is well resourced with
state-of-the-art machinery and equipment, well-known brands, and a good
reputation for quality and customer service, then it is much easier for it to
produce high-quality products cost effectively.
The nature of the product
·
Some products are well suited to mass
production, while others are more appropriate for individual methods of
production
Assessing external influences on operational objectives
Market factors
·
The growth or decline of a market will have a
major impact on a business’ operations management objectives. If demand
changes, the business may need to modify its production levels. If sales are
declining, it may need to introduce new products to replace those in decline.
Competitors’ actions and performance
·
Competitors’ actions may influence a business,
by encouraging it to introduce new products that are proving successful for the
competitor.
Technological change
·
Technology has a major impact on a business’
costs, the level of quality of its products, the ways in which waste can be
reduced and levels of productivity within the business.
·
These four factors are key performance targets
for the operations management function of most businesses, and therefore
technological change is, arguably, the most important factor for many businesses
when it comes to deciding on its operational objectives.
Economic factors
·
Interest rates are one economic factor that has
a major impact on operations management targets. The effectiveness of
operations management is heavily dependent on capital investment, and if
interest rates increase, this can have a negative effect on the success of the
operations management function in two different ways:
o
It can increase costs by increasing the rate of
interest that has to be paid on any loans, therefore reducing the profitability
of the investments.
o
It may reduce sales levels as people cannot
afford the repayments on loans and so cut back on their purchases.
Political factors
·
Operations management departments are often
responsible for targets related to minimising production costs.
·
This can bring them into conflict with
politicians, who may disagree with the methods used to reducer costs,
especially if this involves potential exploitation of workers or unsafe working
conditions in factories.
Legal factors
·
Because of the potential for health and safety
risks, the operations management function is heavily controlled by legislation.
Environmental factors
·
As a result of environmental factors, firms are
now much more closely controlled in terms of the products that they can
produce, the ingredients and raw materials that they use, and the manufacturing
processes that take place in their factories.
Suppliers
·
Chapter 12 – Operational strategies: Scale and resource mix
|
|
Most businesses work closely with suppliers to ensure
flexibility, high quality and relatively low-cost materials. A supplier that
delivers these three factors can help a business to achieve its operations
management targets as they will help it to compete effectively with
competitors.
Choosing the right scale of production
Economies of scale: The advantages that an organisation gains due
to an increase in size. These cause an increase in productive efficiency (a
decrease in the average cost per unit of production)
Diseconomies of scale: The disadvantages that an organisation
experiences due to an increase in size. These cause a decrease in productive
efficiency (an increase in the average cost per unit of production).
Economies of scale
·
Fixed costs, such as the depreciation of
machinery and administrative expenses, must be paid, regardless of the number
of units that an organisation produces and sells. This enables large firms that
utilise their equipment effectively to produce at much lower costs per unit.
·
Variable costs, such as labour and raw
materials, can be combined more effectively in a large firm, also leading to a
saving in unit costs.
·
Internal economies of scale can be classified
under a number of headings. Three examples of economies are outlined below:
o
Technical economies
§
Modern equipment that will improve efficiency
can be installed. This should lower unit costs and improve the quality and
reliability of the product or service.
§
Mass production (flow) techniques can be
employed to improve productivity.
§
Highly trained technicians can be employed to
improve the reliability of the production process.
§
Large-scale transportation can reduce
distribution costs per unit.
§
The purchase of computer systems can improve
efficiency in both production and administration.
§
Improvements in communication systems using new technology
can enhance customer service and the working environment, improving the
company’s operations and its reputation.
o
Specialisation economies
§
Large firms can afford to employ specialist with
particular skills. In smaller organisation, staff tend to take on a wider
variety of tasks, and specialist skills, when needed, are bought from outside
at a relatively high price.
§
Production techniques can be adapted to
encourage division of labour (specialisation) in large firms
§
A small firm is unlikely to be able to pay a
high enough salary to attract the best staff, so larger firms should be more
efficient. Training to improve specialist skills is also easier in large firms.
§
If staff are able to specialise, they are likely
to become even more skilled in their role, again increasing the efficiency of
the firm.
o
Purchasing economies
§
Large firms can buy in bulk. This reduces costs
because suppliers can produce in large quantities and thus lower their own
costs.
§
Suppliers may offer greater discounts in order
to guarantee a contract with a large customer.
o
Marketing economies
§
Large firms can use more expensive media that
reach more customers in a more persuasive way. This can both increase the
effectiveness of the advertising and reduce unit costs.
§
Large firms can also do more market research, so
that they understand markets more fully than smaller competitors.
o
Financial economies
§
Because they are considered to be safer, large
companies should be able to get loans more easily and at lower rates of
interest. They will find it easier to access funds through other sources, such
as retained profits and shareholders.
o
Research and development economies
§
Large companies can afford to devote more money
to innovation and research and development. This expenditure should enable a
business to discover new products or to find easier ways to produce goods.
o
Social
and welfare economies.
§
Larger companies are able to provide social facilities
such as sports clubs, canteens and relaxation areas.
o
Managerial and administrative economies
§
Large companies can employ the best managers and
adopt more cost-effective administration procedures. These economies should
reduce the overheads of the business and thus improve its competitiveness.
Diseconomies of scale
·
Coordination diseconomies
o
There may be a loss of control by management as
an organisation becomes more complex, particularly is the organisation becomes
more geographically spread or management experiences an increasing workload.
o
Individuals are less likely to follow
organisational policies if the level of control is reduced. This happens in
larger organisations because managers have larger spans of control and there
are more levels of hierarchy.
o
Large firms often have more rigid and inflexible
policies. These are imposed to limit the loss of control described above but
reduce the ability to respond quickly to changing customer needs
·
Communication diseconomies.
o
Too many levels of hierarchy in a business can
reduce the effectiveness of communication
o
Difficulties also occur as loans of control
widen. It becomes much more difficult for managers to meet with subordinates
o
In large firms, inappropriate methods of communication
are likely to be used, as standardised, large-scale approaches are more common.
o
Employees who do not receive, or are not
involved in, communications may feel unvalued and demotivated.
·
Motivation diseconomies
o
It is more difficult to assess the needs of many
individuals. Even if motivational methods are used, it is less likely that the
managers will know the best approach for each subordinate.
o
In large firms there may be less time for
recognition and reward
o
Large hierarchies create feelings of distance
between decision makers and employees.
o
Large firms often have the financial wealth to
introduce schemes to motivate employees, but they can lack the management time
to provide recognition.
·
Other
o
Technical diseconomies
§
Production on a very large scale can become
difficult to organise
o
Excessive bureaucracy
§
As organisations grow, the number of levels of management
increases and this may slow down decision making
o
Staff problems
§
Industrial relations problems and higher staff
turnover and absences may result from the factors described above.
o
Less flexibility
Factors influencing the choice between capital intensive and labour
intensive production.
·
The method of production
o
In general, mass production on a large scale,
such as at a car plant, requires capital equipment. Machinery can produce more
quickly and consistently than a human being. Consequently, large scale
production usually means that a firm will choose capital-intensive production
methods.
o
In contrast, if products are specifically
designed for the consumer, then labour intensive methods are more likely. The
success of the business will depend more on the workers than on machinery.
·
The skills and efficiency of their factors of
production
o
Depends on the sills of its workers is more
likely to use labour intensive methods.
o
However, if machinery or other forms of capital
can greatly lower unit costs, or produce a more consistent, high-quality product,
then capital intensive methods will be employed.
·
The relative costs of labour and capital
·
The size and financial position of a business
·
The product or service
·
The customer
Innovation: The successful
exploitation of new ideas. Innovation enables businesses to compete effectively
in an increasingly competitive global environment.
Research and development: the
scientific investigation necessary to discover new products or manufacturing
processes, and the procedures necessary to ensure that these new products and
processes are suited to the needs of the market.
Benefits and purposes of innovation and R&D
·
Improve quality
·
Enter new markets
·
Increase value added
·
Increase product range
·
Reduce costs
·
Improve flexibility
·
Increase capacity
·
Meet regulations
·
Reduce environmental impact.
Problems of innovation and R&D
·
No guarantee that innovation and R&D
expenditure will lead to new products and processes.
·
Operational difficulties are common with new
products, processes and ideas.
·
Innovation spending may encourage rivals to
undertake similar activities.
·
Copies.
How to improve the chances of successful innovation
·
Protection – copyrights, trademarks and patents
·
Early planning
·
Developing a supportive culture
·
Maintaining secrecy
·
Remembering the consumer
The implications of innovation for other functional areas
·
Financial – expensive
·
Marketing – needs to increase – extension
strategies
·
HR – recruit and train suitable employees
How much should an organisation spend on innovation and R&D?
main factors
·
The nature of the product
·
Competition
·
The market
How much should an organisation spend on innovation and R&D? –
determining how much is spent?
·
Company finance
·
Company culture
·
Chances of success
·
Efficiency of innovation
Chapter 14
- Operational strategies: location
|
|
The main factors influencing business location
·
Technology
o
Allows business to be more flexible, operating
from much wider choice of location
o
Encouraged the use of teleworking, where
employees work from home.
·
Costs of factors of production
o
In order to improve their competiveness, business
will take into consideration any costs affected by location.
o
The main costs involved are land costs (rent),
transport costs and labour costs (wages).
o
The target for most businesses is to locate at
the least-cost site: this is the business location that allows a firm to
minimise its unit costs. As a consequence, more businesses are relocating their
manufacturing to emerging economies, such as china and Russia.
·
Infrastructure
·
Qualitative factors
Factors influencing location decisions involving expansion and/or
relocation.
·
Resources
o
Location of raw materials
o
Etc.
·
The market
·
Government intervention
o
Assisted areas
§
Parts of the UK that have relatively low levels
of economic activity and high and persistent unemployment.
o
Financial assistance provided usually takes the
form of a grant.
Industrial inertia
·
Industrial inertia
o
The tendency for firms to remain where they are,
even though the original reasons for location no longer apply.
·
The main external economies of scale are:
o
A labour supply with the skills needed by firms
in that industry
o
Specialist training facilities in the region
o
An infrastructure that is geared towards the
needs of that industry, such as specialist transport facilities.
o
Suppliers and customers based locally
o
The reputation of the area, which may help to
sell the product or allow the firm to charge a premium price.
·
The main external diseconomies of scale are
o
Congestion
§
The concentration of firms in an area increases
travelling times and expenses. Where delivery times are an essential factor,
this may reduce the competitiveness of an organisation because transport costs
will increase and delivery may become unreliable.
o
Pollution
§
The social costs created but these areas nay be
considered excessive by firms that place a high value on their impact on
society. Local councils may impose additional costs on firms in order to
alleviate this problem.
o
Shortages of resources
§
In particular, the costs of land and skilled
labour will be inflated by the competition among firms to acquire these
resources.
Benefits of optimal location
·
Improving competitiveness
·
Providing a unique selling point
·
Increasing access to customers
·
Increasing flexibility
Multi-site locations
·
Where a business chooses to operate from a
number of different sites, as opposed to
a single-site location. These sites may be within one country or located
in many different countries.
·
Advantages
o
Lower costs
o
Improved market focus
o
Avoidance of trade barriers
o
Increased flexibility
o
Overcoming cultural barriers
o
Regional specialisation.
·
Disadvantages
o
Globalisation
§
Local people may perceive that another country’s
culture is being imposed on their own.
o
Increased unit costs
o
Increased risk
o
Loss of control
o
Cultural differences.
Chapter 15 – Operational strategies: Lean
production.
|
|
Time-based management : an
approach that recognises the importance of time and seeks to reduce the level
of ‘unproductive’ time within an organisation. This leads to quicker response
times, faster new product development and reductions in waste, culminating in
greater efficiency.
Network analysis: a method of
planning business operations in order to identify the most efficient way of
completing an integrated task or project. The main form of network analysis is
critical path analysis.
Critical path analysis: the
process of planning the sequence of activities in a project in order to
discover the most efficient and quickest way of completing it.
Critical path: the sequence of activities
in a project that must be completed within a designated time in order to prevent
any delay in overall completion of the project
Critical activity: any
activity on the critical path.
Float time: the amount of time
that non-critical activities within a project can be delayed without affecting
the deadline for completion of the project as a whole.
Total float for an activity: the
number of fays that an activity can be delayed without delaying the project,
measured by the formula:
Total
float: LFT-EST-duration of the activity
For example
|
Activity
|
Total float (days)
|
|
A
|
0
|
|
B
|
2
|
|
C
|
0
|
|
D
|
1
|
|
E
|
0
|
|
F
|
1
|
|
G
|
0
|
For activity D it can be delayed
by 15-11-3= 1 day without delaying the project.
Benefits of critical path analysis
·
Allows a business to improve the efficiency of
its resources. If a business can reduce the time taken to complete a project,
it can translate these savings in time into cost savings. In turn, this will
increase the competitiveness of the business, particularly if cost or speed of completion
is a vital factor in the eyes of the customers.
·
The process lets a business know precisely when
activities are scheduled to take place. This assists the business in its
resources, such as labour, as it enables the business to make sure that the use
of labour corresponds to the available supply.
·
Investigate changes in resources or sequencing
that would improve efficiency.
·
Forces managers to engage in detailed planning.
This helps the business to reduce the risk of delays
Problems of using critical path analysis
·
May encourage managers to see these timings and
this sequence as unchangeable, so they may miss opportunities to reduce the
overall time of a project by failing to identify the scope for flexibility.
·
Greater inefficiency if a crucial activity is
delayed.
·
Complex activities may be difficult to represent
accurately on a network.
Lean production
·
Methods of lean production
o
Just-in-time production
o
Continuous improvement (kaizen) and the
principles of gradual change and staff involvement in change.
·
Just-in-time
o
Purposes
§
Reduce waste by eliminating the need for high
levels of stock.
o
Requirements
§
Excellent communications and high levels of
cooperation and flexibility from suppliers
§
Reliable and flexible employees
§
A flexible approach to managing workers
§
Suitable equipment
·
Continuous improvement (kaizen)
o
Key features
§
It relies on many small steps, rather than on
fewer, more significant changes, such as happen with research and development
§
It sues everyday ideas from ordinary workers
rather than major technological or dramatic innovative changes
§
It usually focuses on methods rather than
outcomes, assuming that improved methods and approaches will guarantee a more
effective outcome
§
It employs the talents of the workforce rather
than requiring expensive equipment, and encourages staff to use their talents
to seek improvements.
·
Benefits of lean production
o Increased
productivity as better methods are identified by staff and greater flexibility
prevents bottlenecks and idle time on the production line
o A more
motivated workforce as a result of their greater skills and more interesting
jobs, and greater chances of recognition and responsibility
o Increased
worker participation in decisions making leading to better, more informed ideas
and methods
o Reduced waste
and stockholding costs, improving firms’ cash-flow positions
o Higher quality
and a greater variety of goods and
services that are continuously improved for the customers’ benefit.
