Booklet 25=IMPROVING OPERATIONAL EFFICIENCY & PRODUCTIVITY
Efficiency- how effectively a firm use its resources, measured by inputs used to make output = low unit cost
Productivity- output per worker over a period, its a measure of efficiency
Benefits of high productivity:
-Maximise production
-Average unit cost falls
-Firm becomes competitive as lower costs
Employees=higher wages
Customer=Better quality products
Local community=Less waste/more recycling
Shareholders=high dividends
Improving Efficiency
1.using capacity more effectively
2.increasing labour productivity
3.choosing optimal resources
4.introducing lean production
5.using technology
1. USING CAPACITY MORE EFFECTIVELY
- Low capacity utilisation means high unit costs.
- High capacity utilisation means low unit costs
- 90% is the ideal capacity, this allows time to cope with increase of demand
Economies of scale- advantage of increasing size Technical=can afford modern equipment which improves efficiency,large scale transportation reducing costs Specialisation= have specialist managers who are highly trained and efficient
Purchasing=buying bulk
Marketing= firms use expensive media,can do more market research, find out more about target market
Financial=loans at lower rates, attracts more shareholders
R&D=can spread the costs over more units
business increases scale=unit costs fall
Spare capacity (below 90%)
✅less stress on machinery ✅allows sudden increase in demand
❌high unit costs as not spread over as many units ❌lower profits
Capacity shortage (100% being used)
✅lower unit costs
❌possible loss of sales if demand suddenly increases ❌ poor quality output
Managing spare capacity
(long term) 1.cut capacity so smaller factory ➡ redundancy and closure costs ➡utilisation rises
(short term) 2. increase demand ➡ advertising and new product development costs ➡ utilisation rises
2.IMPROVING LABOUR PRODUCTIVITY
ways to improve labour productivity:
🏴 Recruiting skilled and trained staff so they know what they're doing 🏴Rewarding staff to motivate 🏴Training existing employees so higher output 🏴 Improve the ways of worker such as make the process faster 🏴Improve equipment like technology
Managing capacity shortage
1.extend property(LT) 2. hire more workers(LT) 3.Flexible work force(ST) 4.outsourcing (ST) 5.Transfer resources from another area(ST)
Problems with increasing labour productivity
-Increased levels of investment in training mean less to spend so opportunity cost
-Workers may resit new ways of working which can lead to redundancies which is more costs
-Employees might demand higher pay if they become more productive
Problems of becoming bigger=Diseconomies of scale
Co-ordination=loss of control as business becomes too Complex Communication=too many layers can reduce effectiveness of communication
Motivation=larger company's find it more difficult to assess needs of individuals
3.CHOOSING OPTIMAL MIX OF RESOURCES
4.ADOPTING LEAN PRODUCTION
Business transform inputs into outputs=chain of production
A businesses operations process can be -capital in intensive -labour intensive -mixture of both
Capital intensive= high levels of machinery eg airlines
Labour intensive firms= high level of people involved eg a nail parlor
Most appropriate combination depends upon:
-The process itself so the scale
-The product so a unique product may need more labour type of
-Customer
-If the product is high quality or mass produced
Lean production- when a firm aims to produce more by using less and reduce waste
It reduces waste by:
Improving quality and reducing wasted items
Reducing the amount of stock held(JIT)
Reducing waiting time
Reducing time when items are moving between processes
This process is continuous (kaisen)
Forms of waste:
Overproduction-issue with food
Inventory-holding to much stock
Movement-time wasted as product or service moves
Waiting-process is slow eg restaurant
Transportation-base it near supplier
Over processing-too much packaging
Defects-faulty products
Waste is anything that adds to a firms costs which is not valued by the customer
Just in time - production based on min stock and new supplies arrive as and when they are needed
-Orders are 'pulled' rather than ;pushed' through the system
-It relys on flexibility in process,strong relationship with suppliers and quality of workers
✅Reduces cost as no warehouse with cash tied up in stock
✅Reduces wastage ❌Dont benefit from economies of scale ❌If there are supply problems then no production can happen
Lean production
✅ increased staff motivation as part of a successful process
✅ improvement in cash flow as tighter stock control and less waste
❌reduce opportunity to gain economies of scale ❌ may not be able to meet customer demand if sudden changes
5.TECHNOLOGY AND EFFICIENCY
2 main reasons for using machines:
-Reduce the mistakes made
-Improve the efficiency and consistency
Types of technology
Automated stock control-when a barcode is scanned it automatically tells the business how much is sold and the price of it
Design technology-designs done on the computer means updates are done quicker etc
Robotics-fundamental to certain industries,machines
3D printing - prototypes built more easily,reduces the waste and smaller batches produced more efficiently
Communications - enables JIT and responses to orders, it can also help predict future requirements
Benefits and drawbacks of using technology ✅waste is reduced ✅large amounts can be made so unit costs fall ❌workers may get made redundant, so costs are high to do this ❌building and installation can be expensive and updates can be expensive