Operations Management and Production Techniques
Chapter 18: Production of goods and services
Productivity: is the output measured against the inputs used to create it.
The buffer inventory level: is the inventory held to deal with uncertainty in customer demand and deliveries of supplies.
Lean production: is a term for those techniques used by businesses to cut down on waste and therefore increase efficiency, for example, by reducing the time it takes for a product to be developed and become available for sale.
Kaisen: is a Japanese term meaning ‘continuous improvement’ through the elimination of waste.
Just-in-time: is a production method that involves reducing or virtually eliminating the need to hold inventories of raw materials or unsold inventories of the finished product. Supplies arrive just at the time they are needed.
Job production: is where a single product is made at a time.
Batch production: is where a quantity (batch) of one product is made, then a quantity of another item will be produced (for example bread, dresses).
Flow production: is where large quantities of a product are produced in a continuous process. It is sometimes referred to as mass production.
Study two advantages and two disadvantages of each production method.
Chapter 19: Costs, scale of production and break-even analysis
Fixed costs: are costs which do not vary with the number of items sold or produced in the short run. They have to be paid whether the business is making any sales or not. They are known as overhead costs.
Variable costs: are costs which vary directly with the number of items sold or produced.
Total costs: are fixed and variable costs combined.
Average cost per unit: is the total cost of production divided by total output (sometimes referred to as ‘unit cost’).
Economies of scale: are the factors that lead to a reduction in average costs as a business increases in size. There are five: purchasing, marketing, financial, managerial, and technical.
- Purchasing economies: if the company buys in bulk (in big quantities) the unit price is going to be lower.
- Marketing economies: Large companies have their own distribution network and a considerably big budget for advertising and promotion.
- Financial economies: Banks are more willing to lend large companies money at a lower interest rate because the risk is lower.
- Managerial economies: Large companies can afford to hire specialists for each area and these employees can find ways to lower the costs and make the business more efficient.
- Technical economies: Large companies can invest in expensive machinery and benefit from flow production.
Diseconomies of scale: are the factors that lead to an increase in average costs as a business grows beyond a certain size. These factors are: poor communication, low morale, and slow decision making.
Break-even level of output: is the quantity that must be produced/sold for total revenue to equal total costs (also known as the break-even point).
Break-even charts: are graphs which show how costs and revenues of a business change with sales. They show the level of sales the business must make in order to break even.
The revenue of a business is the income during a period of time from the sale of goods or services. Total revenue= quantity sold x price.
The break-even point is the level of sales at which total costs= total revenue.
The contribution of a product is its selling price less its variable cost.
You will need to draw the break even chart. Please check the chart in the chapter.
Chapter 20: Achieving quality production
Study two benefits for a company if its products are free of defects.
Study two consequences if quality is not maintained.
Quality: means to produce a good or a service which meets customer expectations
Quality control: is the checking for quality at the end of the production process, whether it is the production of a product or service. Study two advantages and two disadvantages.
Quality assurance: is the checking of the quality standards throughout the production process, whether it is the production of a product or service. Study two advantages and two disadvantages.
Total Quality Management (TQM): is the continuous improvement of products and processes by focusing on quality at each stage of production. Study two advantages and two disadvantages.
Chapter 21: Location decisions
Choose and study two factors affecting the location of a manufacturing business, two factors affecting the location of a service business, and two factors affecting the location of a retail business.
Factors affecting the location of a manufacturing business:
- Production methods: the type of production methods used in a manufacturing business is going to have a significant influence on its location, especially if the company uses flow production because a large number of components will be needed from the suppliers and the transport costs could be high.
- Market: it might be necessary for the factory to be near the market where the products are going to be sold if the product perishes quickly and needs to be fresh, such as milk, bread, or cakes.
- Raw materials/components: Locating near the raw materials source is important for example where minerals are processed. The raw materials may be considerably heavier or more expensive to transport than the final product so it’s better to locate the factory near these suppliers. The same happens if the raw materials need to be processed quickly while still fresh. An example is frozen vegetables or tinned fruits. Anyway improved transport has lessened this influence.
- External economies of scale: support businesses which install and maintain equipment should be nearby so that they can respond quickly to breakdowns. Local education establishments (universities with research departments) may help the business to be more effective.
- Availability of labour: if skilled labour is needed, it’s better to locate in an area where these people live (it will be easier and cheaper to recruit these employees). On the other hand, if the manufacturing process requires a large number of unskilled workers, an area with high unemployment may be more suitable.
- Government influence: when a government wants to encourage businesses to locate in a particular area (for example of high unemployment), it will offer state-funded grants to encourage firms to move there. However, if a company produces harmful waste the government can refuse to allow the business to set up in the area so that it doesn’t pollute or poison the surrounding area.
- Transport and communications: the infrastructure of a region can be an important location factor. Factories usually need to be near a road, rail, inland waterway, port, or airport.
- Power and water supply: To some industries having no power cuts may be essential. The same can be said of water, a reliable supply will be needed. If a lot of water is needed, being near a river or sea will be important.
- Climate: it might be important for some factories. For example, Silicon Valley in the USA has a very dry climate, which helps the production of silicon chips.
Read the example of TVR sports car company in the book.
Factors affecting the location of a service sector business:
- Customers: locating a service sector business near its customers will be very important for services that require direct contact between the business and the customer especially when quick response time is needed: this is true of plumbers, electricians, hairdressers, caterers, restaurants, cafés, gardeners. With the increasing use of IT and the internet, more and more firms are becoming free from the need to locate near their customers.
- Personal preference of the owners: business owners often locate their businesses near where they live.
- Technology: some services are now conducted by telephone or via the internet and therefore the business itself does not need to be near the customers. They may locate in remote areas where the rent is cheaper (especially if they don’t need many employees to be present in the office). They may even locate abroad.
- Availability of labour: if the service business requires a large numbers of employees to be at the office, then it cannot locate in remote areas. It will need to be near a large town or city. If a particular type of skilled labour is needed, it might have to locate where this type of labour is found. However, it is more likely that the skilled labour will move near the business than the other way around.
- Climate: it will affect some businesses, particularly if they are linked to tourism in some way. Hotels often need to locate themselves where the climate is good and near a beach/ the mountains or other attractions.
- Near to other businesses: repairing firms need to be near large companies that may need that service. Banks needed to be near busy areas for convenience of customers. However, internet and mobile banking has made this less important today.
- Rent/taxes: if the service does not need to be in the city centre, for example, doctors, dentists or lawyers, then the business will locate in the outskirts of town to benefit from lower rents and taxes.
Read the example of McDonald’s in the book.
Factors affecting the location of a retailing business:
There are factors affecting the location of a retailing business if the business wants to have a physical shop where customers can come to see the products. If the sales are only made online then these factors are no longer important.
- Shoppers: most retailers will want an area which is popular, such as a shopping centre. If the retailer sells expensive goods, it needs to be in an area which is visited by people on high incomes. If the goods are small gift-type products, the retailer might want to be in an area visited by tourists.
- Nearby shops: having competitors nearby can be bad for the business but it can also be good. If the business sells clothes, for example, being located near many other clothes shops encourages people to visit the area as there is a lot of choice, therefore increasing business.
- Customer parking: if parking is convenient and near the shops, it will encourage shoppers to visit the area and therefore possibly increase sales.
- Availability of suitable vacant premises: if a suitable vacant shop or premises is not available for purchase or rent, the business may not be able to locate in the area it wishes.
- Rent/taxes: the more central the site of the premises, the higher the rent and taxes will be. If the retail area is popular, the cost will be higher than if the area is less popular because there will be less demand for this site.
- Access for delivery vehicles: access for delivery vehicles might be a consideration if it is very difficult for them to gain access to the premises.
- Security: high rates of crimes such as theft or vandalism in a particular area is an important factor to take into account. Insurance companies may not want to insure the business if it is an area of high crime. A shopping area which is patrolled by guards, even though it will be more expensive to rent the premises, might prove preferable.
- Legislation: in some countries there may be laws restricting the trading or marketing of goods in particular areas.
Factors that a business could consider when deciding in which country to locate operations: Multinational companies have offices, factories, service operations or shops in different countries. However, the rapid growth of newly industrializing countries, increasing of international trade, improved global communications and improvements in transport have meant that many businesses can now consider where in the world to operate rather than just considering a single country; this is often called globalization. Therefore, this means that many more businesses, other than multinationals, are considering moving to another country, either to expand their operations or sometimes to relocate entirely, many from developed countries to rapidly growing economies.
A number of factors will affect whether a business decides to relocate to another country and which country to choose.
New markets overseas: when a business sees a steady increase in its sales overseas, it may decide to relocate nearer to these markets rather than transport its products from the existing manufacturing base because it maybe more cost effective. JBC construction equipment has built additional factories in Brazil and China as well as keeping its existing factory in the UK. If the business is in the service sector, then locating near its customers maybe essential (Starbucks or Hilton Hotels).
Cheaper or new sources of materials: if the raw material source runs out, the business must move to a new site in a country where it can more easily obtain these supplies. This is particularly true of mineral sources such as oil wells- these need to be in the country where the oil is found. Also, it might be cheaper to use the raw materials at their source rather than transport them to another country to process.
Difficulties with the labour force and wage costs: if the business is located in a country where wage costs keep on rising (particularly labour intensive businesses), it may decide it is more profitable to relocate overseas to reduce wage costs (Vietnam for textile products). If a particular type of skilled labour is needed, it can relocate to a country where they can find that type of labour (India has a large number of university graduates with IT-related degrees).
Rents/taxes considerations: if other costs such as rent or taxes (on profits or personal incomes) keep increasing, this might cause the business to relocate to countries where these rents or taxes are lower.
Availability of government grants and other incentives: governments may want to encourage foreign businesses to locate in their country to bring in investment and job opportunities. They may be willing to give grants, lower taxes or other incentives to businesses to persuade them to come to their country.
Trade and tariff barriers: if there are trade barriers, such as tariffs (tax on imported goods) or quotas (where a limit is placed on the quantity of imports of a particular good), then by locating in that country there will be no restrictions. An example of this is the investment by Japanese car companies in Europe to avoid the European Union’s import tariffs on some imported cars.
The role of legal controls on location decisions (planning regulations and government grants or subsidies)
Governments try to influence the location decisions of businesses for two main reasons:
1) To encourage businesses to set up and expand in areas of high unemployment
2) To discourage firms from locating in overcrowded areas or sites which are noted for their natural beauty.
The two types of measures that are often used to influence where firms locate are the following:
1) Planning regulations: they legally restrict the business activities that can be carried out in certain areas. For example the government can refuse to give a planning permission to a company that wants to set up a company in a residential area.
2) Government grants or subsidies to businesses to encourage them to locate in undeveloped parts of the country. This assistance could be in the form of financial grants (such as a non-repayable amount of money) or subsidies (for example low rent). This assistance is usually given when there is high unemployment in the area.