Operations Management
— Business Studies · Unit 4 —
Unit 4 map: Operations function → transformation process → efficiency & productivity → sustainability → inventory (JIT / JIC) → capacity utilisation → outsourcing → methods of production → supply chain → labour vs capital intensive.
1. What is Operation Management?
Operations is one of the main business departments / functions: HR, Finance, Marketing and Operations (Production) ✓.
Examples: Toyota = car manufacturing · HBL = banking service · EFU = insurance. (Operations exists in goods and service businesses.)
Aims of Operation Management
- To maximise operational efficiency → reduce wastage ↓
- To maintain quality standards
- To add value into a product
2. Transformation (Production) Process
Definition: Transformation = the production process that transforms → converts → changes inputs into outputs.
Tangible vs Intangible goods
| Tangible goods | Intangible goods (= services) |
|---|---|
| physically available | physically unavailable |
| e.g. mobile phone | e.g. internet |
| Habitt → wooden furniture | Hospital → healthcare service |
Tangible (Habitt – wooden furniture): raw material (wood) → FOP / process → finished goods (wooden furniture).
Intangible (services): input = customers → process → output = customers — but their situation changes!
Macro vs Micro transformation process
Macro = the whole process. Micro = the individual stages.
3. Efficiency vs Effectiveness
| Efficiency | Effectiveness |
|---|---|
| To produce right results by utilising the least resources → optimal way | Quality — to produce the product that satisfies customer needs and demand |
| Corolla → 100 km → 10 litres Aqua → 100 km → 5 litres ✓ → efficient | Nokia → efficient but ineffective Apple → efficient and effective |
4. Productivity
Efficiency leads to productivity: wastage ↓ → resources available ↑ → output ↑
Remember: productivity = a performance-measuring tool.
Definition: Productivity is the comparison of output against the input.
Productivity = Total outputTotal workers
= 1000100
= 10 units / worker
Methods to improve productivity
| Method | How it helps | Problem / cost |
|---|---|---|
| 1. Staff training & development | enhance skills → efficient / productive | cost |
| 2. Equip workers with technology | faster, better output | training needed (cost) |
| 3. Motivation → payment method → piece-rate | paid per unit ⇒ work harder | quality issues |
| 4. Team-working and team-pay (e.g. sports team) | ideas / methods are shared; healthy competitive environment | conflicts and clashes |
| 5. Division of labour & specialisation | each worker does one task | how will multi-skilling be achieved? |
5. Sustainability in Operations
Sustainable development avoids ecological damage. Natural resources are finite → limited → they deplete. So: how can we reduce the usage of them?
DefinitionSustainability = to utilise the resources in a conservative manner, by not compromising and making them accessible for future generations.
Methods
- Use of recyclable materials
- Use of biodegradable materials
- Reduction in carbon emission
- Encourage green vegetation
Benefits
- Employer branding as a good employer
- Ethical behaviour → attracts ethical group of customers, investors, shareholders
- Can get access to govt grants
- Can work as a marketing tool → price ↑ → “all binds” (word hard to read on board)
- No actions from the pressure groups
6. Inventory (Stock) Management
Inventory management = managing the levels of inventory → cost. Inventory = stock.
| Business | Its stock is… |
|---|---|
| Car showroom | no. of cars |
| Pharma | medicines / surgical items |
| Furniture | units |
Held for deal / resale / selling purpose → earns revenue / profit → it is a current asset.
Types of inventory
| ① Raw materials | ② Finished goods | ③ Work-in-progress |
|---|---|---|
| = supplies / inputs / components = unfinished goods → held by manufacturers → at the production facility | = output / product → manufacturers → wholesalers (bulk qty) → retailers | = under construction e.g. fast food, local fries seller (fries half-cooked) |
The decision: how much stock to hold?
| 1. High stockholding / high level of inventory | 2. Low stockholding / low level of inventory |
|---|---|
| Overstocking | Understocking |
Costs and benefits of high stockholding
| Costs | Benefits |
|---|---|
| 1. High stockholding cost 2. Opportunity cost 3. Chance of: fire, damage, obsolescence (fashion, tech goods) | 1. Can meet an unexpected increase in demand 2. Low ordering cost 3. Can achieve EOS (bulk buying) 4. Can avoid price hike / shortage |
| Stockholding cost | Ordering cost | |
|---|---|---|
| High stockholding | ↑ | ↓ |
| Low stockholding | ↓ | ↑ |
EOQ — Economic Order Quantity
The order size where stockholding cost = ordering cost → optimum order size (affordable / cheaper).
7. Just-in-Time (JIT) vs Just-in-Case (JIC)
⇒ Just in time
DefinitionJIT = order the supplies when they are needed, process them and deliver to the customer without holding stock.
Used in: job production → make to order (customised) · mass production → Toyota.
But it depends on factors:
- The relationship and reliability / quality of suppliers
- The relationship with workers / quality / skilled workers
- Business needs to invest in technology
- Flexible specialism
⇒ Just in case
Scenario? “What if?” — hold stock in case of:
- Unexpected increase in demand
- Price hike → shortage
- Special order
- Unexpected delay
Inventory control chart
- Maximum level = 1000 units · Re-order level = 500 · Minimum / buffer stock = 250
- Lead time = gap between placing the order (hit re-order level) and delivery arriving.
- Buffer stock = safety cushion so stock never runs out while waiting.
8. Capacity Utilisation
Capacity = maximum available resources (usage). e.g. passenger bus → 50 seats = its capacity.
Define 'capacity utilisation' (2 marks)Measures or compares the current output of the business with the maximum possible output.
Capacity utilisation = Current outputMax possible output × 100 = %
Example 1
2550 × 100= 50%
Example 2
10005000 × 100= 20%
Impact of operating at full capacity
- Average cost ↓ (fixed costs spread over more units — word partly unclear on board)
- No capacity to cater for special orders / unexpected increase in demand
- Excess workload and pressure on the workers → work-life balance
- No downtime for machinery (no time for maintenance)
Under-capacity vs Excess-capacity — an issue!
| Excess capacity (under-utilised) | Full capacity → risk / threat (capacity shortage) | |
|---|---|---|
| Situation | resources ↑ , production / demand ↓ (e.g. 70% / 80%) | resources ↓ , production / demand ↑ |
| What to do? Short-term | Seasonal variation → ① variety of goods / services ② flexible contracts | ① outsourcing / subcontracting |
| What to do? Long-term | Structural decline / recession → ① rationalisation (cut down resources → layoffs, cut-offs) ② develop new products ③ enter into new markets (e.g. TESCO) | ② investment ↑ |
9. Outsourcing
DefinitionOutsourcing = to make another organisation responsible to perform a function on behalf of your organisation.
| Pros + | Cons − |
|---|---|
| 1. Can get lower cost → EOS 2. Specialisation 3. Internal resources are freed up 4. Can focus on core activity | 1. May not meet quality standards 2. Security / secrecy issues 3. May not meet operational decisions (ethical issues) 4. Loss of jobs internally |
10. Methods of Production
Every method: input → FOP → output (e.g. iPhone vs Pepsi — two very different methods).
① Job production
One-off product — one particular product / customer at a time. e.g. hair dresser, bespoke suit, customised software; luxury cars: Pagani / Rolls-Royce / Aston Martin.
| Advantages | Disadvantages |
|---|---|
| • Customer satisfaction ↑ → demand ↑ • Hand-made concept = “premium” → price ↑ → profit ↑ • Motivation ↑ → variety of work → sense of recognition | • Smaller scale → cannot achieve EOS → avg. cost ↑ • Labour-intensive → highly skilled → expensive → cost ↑ |
② Batch production
Identical products are passed from one stage to another (a batch at a time). e.g. bakery, uniforms / clothing, textbooks.
- Initial stage → same, later stages → categories (S / M / L)
- Relatively large-scale → can achieve EOS → cost ↓
- Additional working capital → inventory
- Machine / labour-intensive · downtime (machines reset between batches) · variety of products to manage
③ Flow production
High volume of standardised products → standardisation ⇒ quality, quantity. e.g. Pepsi / Coke.
| Advantages | Disadvantages |
|---|---|
| • Greater economies of scale → avg. cost ↓ • Customer trust ↑ (consistent quality) | • Capital-intensive; expensive method → inventory holding • Demotivation → repetition of task • Customer satisfaction ↓ (no variety) |
④ (Mass) customisation
Large-scale / high-volume production according to the demand of each customer. e.g. Nike iD, Dell computers.
- Large scale → can achieve EOS → cost ↓
- Customisation → satisfaction ↑
- Flexible labour / machinery · inventory ↑ → variety ↑
- Segments targeted → market share ↑
Problems when changing method
| Job → Batch | Job / Batch → Flow |
|---|---|
| 1. Demotivation 2. Additional working capital is required 3. Loss of hand-made concept 4. Lesser customer satisfaction | 1. Demotivation → monotonous work 2. High cost of investment 3. Training is required → cost 4. Dependency on machinery |
Factors (choosing the method): → nature of the product → sales and demand → availability of resources (skills / finance)
11. Supply Chain Management (SCM)
DefinitionSCM encompasses the stages from the purchase of supplies till the delivery of finished goods to the customers effectively and efficiently → the flow of production till delivery of goods to the customer.
Importance of effective SCM
- Relationship with suppliers → good
- Inventory effectively maintained → cost controlled
- Customer satisfaction / customer relationship
- Efficiency ↑ → cost ↓ → profit ↑
Quality, timely delivery. Examples written on board: JOMO → delivery · Speed sports.
12. Labour-intensive vs Capital-intensive
| Labour-intensive | Capital-intensive |
|---|---|
| e.g. hospital, educational institutes | e.g. oil refineries, giga factories (Tesla → China) |
| labour ↑ , capital ↓ | capital ↑ , labour ↓ |
✓ Quick Recap — Operations Management
- Transformation: input → FOP → output · aims: efficiency, quality, add value
- Efficiency = least resources · Effectiveness = satisfy customers (quality)
- Productivity = total output ÷ total workers · improve: training, technology, motivation, team-work, specialisation
- Sustainability = use resources without compromising future generations
- Stock types: raw materials · WIP · finished goods · high stock (overstocking) vs low stock (understocking)
- EOQ: stockholding cost = ordering cost · JIT = zero stock · JIC = buffer stock
- Capacity utilisation = current output ÷ max output × 100
- Production: job → batch → flow (+ mass customisation) · SCM: supplies → … → reverse logistics