U5: Operations Management - Coggle Diagram
U5: Operations Management
5.7- Crisis management and contingency planning
Crisis management (concerns the steps a company can take to limit the damage caused by an unpredicted event or crisis)
Effective crisis management depends upon four things:
Contingency planning ( the immediate actions a company should take in the event of a crisis)
Advantages and disdvantages: Cost and time; Risks and safety
5.1 The role of Operations Management
Producing goods abd services
The factors of production
Resources are sometimes called factors of production and cover four areas:
Land – the actual piece of land or forest, or even the sea, together with all natural resources found on or in it, such as minerals, oil, trees and fish.
Labour – human effort. The people who produce the product or provide the service: workers, employees, management.
Capital – can be discussed in two ways: the money needed to open a business; or the tools, machinery and equipment used by a business.
Entrepreneurship – an entrepreneur is the person who organises the factors of production to create goods and services. This risk-taking activity creates the enterprise or business.
Goods, services and products
It is easy to use these words in the incorrect context. Although they are similar, they have slightly different meanings.
Products – the output of the operations management department. This could be anything from a haircut (a service) to a lump of coal (a good).
Goods – these are products that are largely tangible (you can touch them). Cars, computers and chocolate bars are examples of goods.
Services – these are products that are largely intangible (you can't touch them). Examples include watching a movie or renting a car. Once the service is finished, there is little physical evidence of what you consumed.
Ecological, social and economical sustainability
Social sustainability is the ability of a business not only to meet the needs of its current stakeholders, but also to support the needs of future generations of stakeholders. Current stakeholders can be divided into internal and external. Subtopic 2.4 covered the work on human needs by Abraham Maslow. A business can meet the needs of its internal stakeholders, such as workers, employees and managers, by adopting Maslow's pyramid of needs.
Basic needs – provide a 'living wage' so that full-time employees can earn sufficient income to support their families.
Security needs – provide contracts to secure the job. Ensure work places and products are safe. Provide insurance for employees.
Social needs – redesign jobs so that teamwork is possible. Provide facilities and opportunities for employees to socialise (e.g. a cafeteria).
Self-esteem needs – have a reward system in place to recognise and reward high-performing employees with promotions, bonuses and fringe benefits. Continually update all employees' skills with ongoing training programmes. Offer apprenticeships to young unskilled workers.
Self-actualisation needs – offer employees time and resources to meet their personal goals.
Operations management and other business functions
The operations department is responsible for the production of goods and services within an organisation.
mass production is the manufactue of standerdised goods
Niche production is the small-scale manufacture of a product that is then sold to a specific section of a market.
The role of the marketing department is to understand and anticipate the needs and wants of its customers. This will lead to the design of correct marketing strategies.
Conducting market research
To ensure that products or services meet the needs of their target market, effective communication between marketing and operations is required. Focus groups may be held to ascertain customers' requirements. This information can then be fed into the research and development process, leading to improved product quality.
5.5 Production planning
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A supply chain refers to all the stages of production through which a product passes, from the extraction of raw materials to the delivery of finished products or services to final customers. This may involve a number of different companies. A simple supply chain for a wooden table might be:
Because of purchasing economies of scale, supply costs may come down if large orders are placed. For this reason, some manufacturers prefer to use a small number of suppliers, with each one providing more than one component.
Reliability is about consistency and keeping promises. For manufacturers using just-in-time production, reliability will be a key factor when selecting a supplier. If a delivery is late or incorrect, the entire production line could be stopped.
Product quality can be defined as meeting an agreed standard. Poor quality components from a supplier can lead to a fall in overall product quality and a loss of reputation.
A lead time is how long it takes for a supplier to make a delivery. Lead times will vary depending on the industry and size of the order. An overseas supplier may take many weeks to fulfil an order, while lead times in a just-in-time manufacturing system may be measured in hours.
Reduced stock holding improves cash flow (Subtopic 3.7).
It encourages staff to be more careful; with no additional stock, staff know they need to get things right first time.
There are positive benefits for stock-holding costs. With less warehouse space needed and with less chance of waste and damage, costs are reduced.
With less stock holding, there may be more space available for production, which could increase capacity.
Purchasing economies of scale may be lost because order sizes are reduced, leading to higher costs.
There are high risks. Production may halt if a small part of the supply chain breaks down. Any delay in delivery becomes critical for production.
It restricts a firm’s ability to react to significant, unexpected orders.
It may not be suitable for businesses with seasonal demand (such as fireworks manufacturers), where large inventories are typically built up ready for short periods of high demand.
Just in case (JIC)
Buffer stocks are additional quantities of stock kept by a company in case of need. Just-in-case stock control involves holding relatively large levels of buffer stocks so that a business can continue to operate when faced with an unforeseen event. Although retaining large stocks of raw materials, components or finished goods leads to higher storage costs, they enable the company to react to an unexpected order or a bottleneck in the supply chain. Table 2 analyses the main benefits and limitations.
Production can continue if the supply chain is disrupted.
Larger orders should lead to purchasing economies of scale, reducing average costs.
Unexpected orders can be fulfilled quickly.
Storage costs are higher.
There is an increased risk of wastage.
Working capital is tied up in stocks, which reduces liquidity (see Subtopic 3.5).
5.3- Lean production and quality management
Efficiency and waste
Better efficiency reduces costs
Transportation – moving components between work stations or from suppliers.
Inventory – building up excessive stocks, resulting in storage costs.
Motion – staff risking injury while making the product.
Waiting – delays in the production process.
Over-processing – adding features to a product that are not required by the customer and therefore do not add value.
Over-production – producing an inventory of finished goods before they are needed. This can lead to wastage in fast-moving markets.
Defects – finished goods that do not meet quality control standards.
Lean production ( umbrella term that covers a range of techniques aimed at reducing waste)
Just in time (aims to minimise costs by reducing or even eliminating the stock being held by a firm)
Kanban:regulates the supply of components in a factory through the use of a card system.
Kaizen, Benefits (A range of ideas are suggested, so the company is more likely to make the ‘best’ decision.); Limitations (It may lead to lost production time as a result of meetings and evaluation of ideas, possibly reducing productivity.)
Andon: notification system that alerts workers to potential problems in the manufacturing process
Cradle to cradle design and manufacturing
Cradle to cradle is a model of designing and creating products so as to minimise negative effects on the environment and all stakeholders
It has identified five areas where companies can apply the cradle-to-cradle ethos:
Material safety – using non-toxic, safe materials to create products.
Material reuse – maximising the use of both recycled and recyclable materials.
Use of renewable energy – reducing a company's carbon footprint.
Water conservation – reducing the amount of water that is used in the production process and reducing water pollution.
Social fairness – ensuring that no stakeholders are damaged as a result of production or use of a product.
There are various methods businesses can use to improve the quality of their operational performance:
Total quality mamagement
When using a quality assurance system, a business considers quality in every operations decision it makes. This could include:
Product design – if quality is defined by the customer, designers should focus on ensuring customer requirements are met or even surpassed.
Production process – this should be designed to ensure products are not damaged during the manufacturing process.
Component delivery – only reliable suppliers are used. Parts are inspected as they arrive at the factory.
Regular inspections – production staff are trained to check their work to ensure faulty goods are not passed further down the production line.
National and international quality standards
Brand image – once accredited, companies can display the ISO 9000 logo on their marketing materials. This should reassure potential customers that they are purchasing a high-quality product, potentially allowing a higher price to be charged.
Wider target market – some companies will only use suppliers that have been awarded ISO 9000. So, by achieving the ISO 9000 standard, a business can now access this elite market.
There are three key areas of quality improvement:
Total quality management
5.2 Production Methods
Batch production= the production of a limited number of identical goods in a batch, each batch needs to complete one stage of production before moving onto the next
Cell production= a production method of producing similar finished products using cells/ groups of employees to eliminate set up time between stages of operation
Each cell produces complete units of work
Flow production= the continuous production of goods at a large scale (especially homogenous products in high demand)
5.6 research and development
The importance of research and development
Factors that affect location
Transportation and other infrastructure
Access to efficient transport networks allows customers to visit stores and suppliers to deliver raw materials. This has the twin advantage of increasing potential sales while reducing costs. It is common to find businesses clustering at the intersections of major roads. Retail parks and large shopping malls may take advantage of the relatively cheap land, good transport links and ample space for customers to park their cars while they shop.
Sometimes governments will offer grants to companies that relocate to an area of high unemployment. This support might be in the form of free land, a favourable tax status or even a direct subsidy, all of which can significantly reduce business costs. Governments do this as it helps them to achieve their own macroeconomic objective of low unemployment. As a result, the assistance is only likely to be offered to major employers with large work forces.
External economies of scale
This idea was introduced in Unit 1.6. External economies of scale are those factors that lead to a lower average cost of production because of similar industries clustering together. Examples of external economies of scale are listed below.
Trade barriers: government actions designed to reduce the number of imports into a country. Typical examples include tariffs (a tax on imported goods) and quotas (a physical limit on the number of imports allowed into a country). Trade barriers increase the cost of exporting to another country and moving production to another country will avoid these restrictions. For example, the USA attempts to limit the number of cars that can be imported into the country. Japanese manufacturers have avoided these limitations by building assembly plants within the United States. The video below explains why countries attempt to restrict trade.
Exchange rates: the price for which a country’s currency can be exchanged for a different currency. If a currency becomes stronger, this can make it harder to export goods; foreign customers will have to pay more to buy the same quantity of goods.
Prime locations cost money. A shop on a busy high street will pay considerably more in rent than one a few streets back. The same is true on a national scale. In the UK, land prices in London and the South East are considerably higher than in the rest of the country. This has led some companies to leave London and relocate to regional towns. If a firm does not need the benefits of an expensive location, it makes little sense paying for one. Famously, the BBC moved large parts of its operations from London to Manchester to save costs.
Finally, comes perhaps the most influential factor. If a company has been in an area for a long time, it may make sense just to stay there. Relationships with suppliers will already be established, the company's work force will be experienced and local customers may have developed brand loyalty. Remember, the grass may not always be greener on the other side!
If production is labour intensive, it may make sense to move operations to a country that has a low minimum wage. For example, the national minimum wage for someone over the age of 21 in the UK is currently £7.20 an hour while in Thailand the national minimum wage per day is just 300THB (about £5.70). It is cheaper to employ someone in Thailand for an entire day than to pay a British person's wages for an hour.
Insourcing is the opposite of outsourcing: carrying out previously outsourced activities, using a company's own resources. Outsourcing can bring about significant cost savings. However, it also requires companies to give up a certain degree of control. In essence, outsourcing means that companies place their reputation in the hands of others. Some companies may decide that this is no longer worth the risk and bring these activities back 'in-house'. Other reasons for insourcing may include the need to keep hold of commercial secrets or simply cost saving if outsourcing has not proved as beneficial as predicted.
Offshoring means relocating business functions overseas. As discussed in the previous section, it is becoming more common for companies to transfer part of their activities to another country. In fact, countries and regions are developing specialised comparative advantages to attract international companies.
Subcontracting or outsourcing involves paying an outside company to carry out a task that may traditionally have been seen as an internal business function. Imagine you pay a builder to build you a house. It's a complex task and requires many different skills. For instance, the skills necessary to install the electrical cables safely are very different from those needed to connect the home's water supply. As it is unlikely that one person can do all these tasks, the builder will need to hire (or subcontract) work to skilled electricians and plumbers. The builder still has ultimate responsibility for ensuring the job is done, and he will also be the only person you pay. The subcontractors are subsequently paid by the builder.