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4 - Decision-making to improve operational performance (Benefits of new…
4 - Decision-making to improve operational performance
The value of setting operational objectives
Operaitonal objectives might include...
Speed of response and flexibility
-
time
taken for a customer
need
to be
fulfilled
. Will
impact on the customer's perception
of a business and in turn on
reputation
and
sales
.
Dependability
- relates to the
reliability
of a business in terms of its
product
and
service
.
Quality
- quality product =
competitive
advantage. More than just
final product
, it involves the
whole process of operations.
Environmental objectives
- greater consumer
awareness
, environmental objectives are much
more important.
Costs
- lowering costs =
improved
competitiveness
. Relates to the
unit costs of production.
Added Value
- the
difference
between the
price
of the
finished
product and the
cost
of the
raw materials
.
External influences on operational objectives
Political or legal influences
: businesses always have to be
aware
of the
legal environment
and
potential changes
in
legislation
.
Economic influences
- operations needs to be both
prepared
for and
respond
to economic
changes
as demand will fluctuate during the e
conomic cycle
(periods of growth and recession).
Technological influences
: the
introduction
of
computer aided design
and
computer aided manufacture
has resulted in
speedier innovation and production
and better quality.
Consumers
are
more aware
and demanding in terms of
price
,
quality
and
customer service.
Competitive influences:
markets
increasingly competitive
with competition both at
home
and from
overseas
. There is
increasing pressure
on businesses.
Internal influences on operational objectives
Finance
: finance
availability
will determine the
extent
of any operational
decision-making
, e.g. investment in new production technology.
Marketing
: the
marketing function
will determine both
what has to be produced
and the
quantities
.
Human resources
: the
skills
of the workforce determine both
what can be produced
and its
quality
.
Corporate Objectives
-
most important
internal influence. An
operations
objective (e.g.
higher production capacity
) should
not conflict
with a
corporate objective
(e.g.
lowest unit costs
).
Analysing operational performance (4 main areas)
Capacity utilisation
Measures
the
extent
to which a business uses its
production potential
. It is usually
expressed as a %.
It is calculated by:
Actual output in time period / maximum possible output per period x 100.
Labour productivity
Measures the output per worker in a given time period.
It is calculated by:
output per time period / number of employees.
Capacity
Refers to the
total
or
maximum
amount a business can
produce
in a
given time
if it's
working flat out.
Unit cost
It is the
cost of producing one unit
(item) of a
good or service
.
It is calculated by:
total cost / units of output.
The interpretation and use of data in operational decision-making and planning
If
capacity utilitation increases
,
labour productivity will rise
(assuming the number employed remains the
same
).
Unit costs
of production will be
reduced
, as the
fixed costs will be spread
over more units of output.
If
capacity utilisation decreases
, the
opposite
will occur.
The importance of capacity
It is
important
that a business doesn't have
too much spare
of
excess capacity
(where
actual production falls
below maximum potential production.
It is important that a
business operates
at an
optimal level of capacity
, i.e. as
close to 100%
as possible, whilst
leaving sufficient spare capacity
to cope with
new orders.
The importance of efficiency and labour productivity
An
increase in labour productivity
is likely to lead to a
reduction in the unit costs
of production and therefore could lead to a
business being more competitive
in terms of
price
.
How to increase efficiency and labour productivty
Investment in technology
May
improve the quality and reliability
of a product and result in
greater output from fewer employees.
Improvements in training and motivation
Aim of training is to
improve workforce skills
, likely to lead to
greater output
.
Result
of training - employees feel
more involved in the process
which could lead to
greater motivation
and
further improvements
in both
quality and output.
Job redesign
Involves
changing job content
in terms of
duties and responsibilities
and may be executed in such a way as to
improve the overall performance
of the employee.
Reduction in the labour force
Automatically improve productivity
if the same level of
output
can be
maintained
. This might be achieved through
investment
in
technology
or
better training.
The benefits and difficulties of lean production
Lean production
is all about getting
more from less
. It's a
Japense approach
to management that focuses on
cutting out
waste in terms of
time
,
space
and
resources
.
Features include just-in-time (JIT) management, Kaizen, total quality management (TQM) and quality circles.
JIT management
An
inventory strategy
companies employ to
increase efficiency
and
decrease waste
by
receiving goods
only
as
they are needed for production.
Benefits: reduces space as there is no need for storage warehouses; saves time; reduces no. of employees required.
Drawbacks: running out of stock - JIT relies on supplier delivering on time; transport problems can halt production.
Difficulties of increasing efficiency and labour production
Cost
-
improvement
in labour productivity will be
costly
.
New technology is expensive
and workers who acquire new
skills
demand
higher
pay.
Quality
- labour productivity improvement shouldn't come at the
expense of lower quality.
Resistance of employees
- employees can be
resistant to change
, especially where
job losses
are concerned and
job security
is threatened.
New technology brings with it job losses.
How to choose the optimal mix of resources
Resources are the factors of production
:
land
- physical land and the natural resources;
labour
- the workers employed by a business;
capital
- the machines and equipment used in a business;
enterprise
- the skill of combining the other factors of production.
Some businesses may employ a
capital-intensive
approach to production where there is a
high level of capital equipment
used and a
lower emphasis on labour.
Other businesses might be more
labour intensive
, placing a
greater emphasis on labour
and
less on capital equipment.
How to utilise capacity efficiently
Increase sales
- may be achieved by
undertaking a new marketing campaign
or
introducing extension strategies
to find new uses or markets for a product.
Reduce capacity
-
rationalise production
and sell off some capacity. Such a decision should
not be taken lightly
as once done it
cannot be reversed.
Alternative uses
- may be possible, could be used for
introduction of new products
or leasing it to
other businesses.
Lack of capacity?
Outsourcing
- transferring portions of work to outside suppliers.
Investment
- into the permanent establishment of new capacity.
Reducing demand
-
increasing price
. Use of
dynamic pricing
has enabled businesses to control more
effectively
, the
level of demand.
Types of technology used in operations
More advanced computer systems
- e.g. enabling automatic stock control systems and electronic data interchange.
The
internet
-
enhances a business's ability to promote
and sell products and its ability to
communicate
with customers.
Computer-aided manufacture
(CAM) - manufacturers use
robots
as an
integral
part of the
production process.
Computer-aided design
(CAD) - can be linked to CAM systems.
Benefits of new and updated technology
Reduces unit costs of production
, enhancing the competitiveness of the business concerned.
High-tech products
- offers the opportunity to
charge a premium price
until the competition catches up.
Use of
CAM
guarantees a
consistent standard of quality.
May allow
access to new markets.
Use of technology can
reduce waste.
Costs of new and updated technology
Can be a
drain on an organisation's capital
.
Difficulty
in
raising funds
to install high-tech stuff.
Inevitably requires
training of the existing workforce
and perhaps
new employees.
Introduction may be
met with opposition
from existing employees especially if
job security is threatened
.
The importance of quality
Provides a USP
, gives consumers
reason
to buy.
Allows a business to
charge higher prices
which
increases profit margins.
Enable a business to
increase its sales.
Enhance reputation and brand loyalty.
Methods of improving quality
Quality assurance
- ensuring the
desired level of quality
in the development, production and delivery of products or services.
Total quality management (TQM)
- where there is a
culture of quality
throughout the
organisation
.
Follow the link for a diagram:
Kaizen
- the
Japanese business philosophy
of
continuous improvement
, where all employees are encouraged to identify and suggest possible
improvements
in the
production process.
The benefits and difficulties of improving quality
Benefits
:
enhanced reputation
and increased
brand loyalty
;
competitive advantage
may give a
USP
;
increased revenue
due to higher sales and perhaps selling price;
greater flexibility
in terms of price.
Difficulties
:
bearing
the cost of
training
,
admin
of the system and
equipment
that may be needed; employees can be
resistant to change.
The consequences of poor quality
Cost of
scrapping
or
reworking
products.
Additional costs
if goods are
returned
for
repair
or
replacement
under warranty.
Costs resulting from the
damage
to the
business's reputation.
Ways and value of improving flexibility, speed of response and dependability
Flexibility
- ability of a business to
meet a customer's requirements
. The
former
refers to the
ability to vary production levels
in order to
cope with variations
in the size of the order.
This latter is known as
mass customisation
which means
tailoring goods
to
specific customer requirements.
Speed of response and dependability
- speed of response refers to how
quickly
a business
fulfils an order
, and
dependability
refers to its
punctuality
or whether it
fulfils the order on time.
Managing demand
Marketing mix
may be used in order to
influence
demand. May be possible to
increase demand by additional marketing.
Managing supply
Flexible workforce
-
multi-skilled
workforce, employing
part-time workers
or workers on
zero hours
contracts. Allows business to
increase or decrease amount produced.
Increase capacity
- if the
market is growing
and
further increases
in demand are
likely
, it makes sense to
invest in further capacity
in order to
satisfy
growing demand.
Produce to order
- some businesses produce to order, but for others this is more difficult.
Outsourcing
- when
another business
is
contracted
to produce the
extra goods
required in order to
satisfy the demand.
Influences on the amount of inventory held
Level of inventory held will depend on: nature of the product; nature of production; nature of demand; opportunity cost.
The inventory control chart. Its key features are...
Lead time
:
time
between an
order being made and its arrival in the business.
Maximum stock level
:
highest amount
of inventory a business is able to hold.
Recorder level
: level of
inventory
at which a
new order is placed.
Recorder quantity
: the
amount ordered.
Buffer level of inventory
:
minimum amount of inventory held
, designed to cover for emergencies such as late arrival.
Link to diagram:
Influences on the choice of suppliers
Quality
Price and payment terms
Flexibility
Ethics
Dependability
How to manage the supply chain effectively and efficiently and the value of this
If a business can achieve having the
right good in the right place
then it is likely to be able to gain
customer loyalty
and
maximise revenues.
It is about managers deciding
what
to produce,
when
to produce it and
how
much to produce.
Getting this right requires
not only good communication
and relations with suppliers but also
coordination with other functional areas.
The value of outsourcing
One of the main benefits is that it enables a business to
respond quicker to any increase in demand,
thereby providing greater
dependability for customers
. It also means a business will
save on costs.
However, the
quality
can sometimes be a problem - whether the outsourcing company produces at the
required level
of quality. There's also
cost
: outsourcing is likely to be
more costly than producing in house
.