N5 Business Management Unit 2 - Part 2 Operations 1
Dec 21, 2015
Topics to CoverSUPPLIERS•how price influences choice of supplier •how location and transport costs influence choice of supplier •how lead time influences choice of supplier •how product quality influences choice of supplier •how reliability and reputation influences choice of supplier
STOCK MANAGMENT•the costs of storing stock (eg warehousing, security) •the risks of storing stock (eg theft, obsolescence) •cash flow problems from overstocking •the loss of profit and reputation from understocking •the processes that businesses use to manage their stock levels
METHODS OF PRODUCTION•the costs and benefits of capital-intensive production •the costs and benefits of labour-intensive production QUALITY•the costs and benefits of quality control activities •the costs and benefits of quality raw materials •the costs and benefits of well trained staff
ETHICAL AND ENVIRONMENTAL•the costs and benefits of recycling •the costs and benefits of minimising packaging
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What is Operations?
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The operations department (or function) is responsible for manufacturing products and services. They do this by processing inputs into outputs during the production process.
Activities of the Operations Dept
• Make the products – by hand or machine• Help satisfy customers by making the products
they want• Work with suppliers to ensure raw materials
are available at the correct time• Manage levels of stock to make sure nothing
runs out.
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The Supplier – supplies the raw materials• Raw materials are the different items
needed to make something eg a chocolate cake:
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ChocolateEggsFlourSugarButterCreamRaspberries
Oban Chocolate Factory
Imagine you are helping Helen to decide on a new supplier of raw materials, what factors would you take into considderation? 7
How to choose a SupplierFactor What does this
mean?Why is this important?
Cost of raw materials
the price charged by suppliers to purchase raw materials
• costs should be kept low to maximise profit• Low costs will improve the cash flow of the
business
Quality of raw materials
How good the raw materials are
• Quality materials give quality product• Low quality materials will mean more
wasteageLead time/delivery time
How long it will take to receive the raw materials from when an order is placed
• Some materials need to be used quickly eg eggs
• If materials run out, production may have to halt
Quantity of raw materials
How much raw materials are required
• Materials can be expensive to store• Correct quantities are required to meet
customer demand
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How to choose a Supplier contFactor What does this
mean?Why is this important?
Location of supplier
Where the supplier is situated – is it far away
• A distant supplier may take longer to deliver• Transport costs will be higher
Reliability and reputation of supplier
Reliability – will the supplier deliver when they say they will?Reputation – what people think of the supplier
• Supplies must be received on time to satisfy keep customers happy
• Suppliers with a good reputation will get more business
Storage space available
How much space the business has in a warehouse to hold the raw materials until they are needed
• Raw materials may be wasted if not stored correctly
• Storage costs can be expensive eg cost of buildings or insurance
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A job is done from start to finish, then another job is started, eg bridge building, wedding cake manufacture
Advantages Disadvantages
Personal touch – made to customer requirements
Labour-intensive skilled workers – probably expensive
More motivating to workers Cost not recovered until job finished
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Job ProductionClick for video
Number of similar lines of production - each line will be produced in a batch before the next batch is started eg Tesco bakery, chocolates in Oban Chocolate Co
Advantages Disadvantages
Can be suited to the needs of the customer
Careful planning required
Less skilled workers –cut costs
Reduced worker motivation
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Batch ProductionClick for video
Product is passed down a line with a series of operations eg car manufacture, soft drink production
Advantages Disadvantages
Goods produced on a large scale – economies of scale
Expensive to set up
Products are identical
Less skilled workers –cut costs
Workers lack motivation
Technical problems can halt production
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Flow ProductionClick for video
Methods of Production
Nature of the product Number of customers wanting to buy Labour Technology available Size of the business Finance available
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Depends on:
Which method would be used to produce the following:
• Bread• A Hospital• Houses• Biscuits• Wedding cakes• Cars• Tins of soup
• Mobile phones• Portrait• Crisps• Subway sandwich• A Ship• Newspapers• Paint
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Labour or Capital Intensive Production(People v Machines)
• Labour IntensiveThis is where people use
their skills and knowledge to produce goods by hand
• Capital IntensiveThis is where products
are made mainly using machines and equipment (technology).
Automation – only machines are used
Mechanisation – mix of humans and machines
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Click on pizza for
video
Advantages/Disadvantages of Labour Intensive Processes
Advantages Disadvantages
Employees can be creative and use their own initiative
It is expensive and takes time to recruit, select and train employees
Labour is usually readily available
Employees require specialised skills which can take time to learn
No need for expensive equipment
Quality of work can vary depending on who is doing it
One off or unique products can be made
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Advantages/Disadvantages of Capital Intensive Processes
Advantages Disadvantages
Increased output – machines don’t need breaks!
High cost of buying and installing equipment
Fewer employees required Not possible to meet individual customer requirements
Better quality – less chance of human error
Breakdowns and technical difficulties can stop workflow
Greater variety of machinery available which can be adapted to carry out different processes
Can result in workers losing their jobs and higher unemployment
Robots can do work which is dangerous
Machine can’t answer queries
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Effect on Workforce of Automation/Computerisation
• Many jobs have been lost especially in manufacturing where machines can do repetitive, unskilled tasks
• Demand for skilled workers has increased• Skills required to manage and control production• Workers expected to be multi-skilled• Governments and industries must put money into
training staff appropriately
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Are the following items produced using Labour or Capital Intensive methods:
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• Houses• Biscuits• Wedding cakes• Cars• Tins of soup• Bread Click for
John Lewis video
• Portrait• Crisps• Subway sandwich• Newspapers• Paint
Stock Control
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Purpose – to ensure a supply of stock (raw materials) available for the production process and for distribution (finished goods).
Raw materials – resources for production
Work-in-progress – semi-finished products
Finished goods – waiting to be distributed
What are the Costs of Storing Stock?
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Stock must be kept secure
against internal and
external theft
Costs of warehousing can
be expensive. Storage areas
must by dry and well ventilated
What are the Risks of Storing Stock or Overstocking?
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• goods can deteriorate in quality• Goods can quickly go out of
date/obsolete (eg fashion items or electronic games)
• Greater risk of theft • Stock also ties up money – too
much money tied up in stock can lead to cash-flow problems (eg not being able to pay staff)
So a business must hit the right balance of having enough stock to operate but not so much that it will spoil.
What are the Risks of Understocking?
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• Production may have to stop• Unexpected orders cannot be met• Customers may not receive their
orders in time • The reputation of the organisation
can be affected• Profits may be lower
QuizWould the following result from
Over- or Under-stocking• High warehousing costs• Possible loss of unexpected sales orders• Unhappy customers• Not having enough cash to pay bills• Wastage due to out of date stock• Production stoppages• High security costs
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Electronic Stock Records – Using Spreadsheets
• Spreadsheets are designed to complete automatic calculations
• They do this with the use of formula – this tells the spreadsheet which calculation to perform
• Changes can easily be made to data
• They minimise the risk of human error
• The new balance of stock is recalculated each time stock is received or issued
• Graphs can be easily created
• Data can be exported to other packages
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Electronic Stock Records – EPOS (Electronic Point of Sale)
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Most organisations now computerise their stock
control system. Barcodes are scanned which automatically
record stock received and used. This permits stock to be recalculated
automatically and is often linked to
automatic ordering of new stock.
EPOS (electronic point of sale) systems can be set to record stock levels and reorder more stock when it is required
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Re-order level (when to order more) – depends on production needs, delivery time, etc.
details of each item of stock – a record of each item held is necessary to ensure that there is never a shortage of necessary materials.
Stock Control:
Maximum stock level (highest number which should be held) – depends on space, delivery time, etc Minimum stock level (lowest number which should be held) – depends on buffer stock needed, etc
Graph illustrating traditional Stock Control System
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Traditional method where stock never falls below minimum stock level
Just-in-Time Stock Control
JIT is where the manufacturer orders goods from suppliers only when they need stock. This means that stock levels do not build up, however there is no emergency or back-up stock. Manufacturers must be able to rely on suppliers delivering the goods immediately.
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Click for video
Advantages/Disadvantages of Just-in-Time Stock Control
Advantages Disadvantages
Up-to-date raw materials Very dependent on suppliers for quality and punctuality
No over-stocking Production held up if supplies are late – no stock to fall back on
No storage costs Difficult to expand production at short notice
No money tied up in stock
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Graph Illustrating Just-in-Time Stock Control
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Just-in-time method
where stock levels fall to zero before
new supplies are bought
The Importance of Quality
• How might products or services be improved:– Better raw materials– Improved packaging– More eco friendly– More care with
production process
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Must find out who you are selling to
Can produce a range of products for different types of customers
QUALITY
Low quality + low price product
High quality + high price product
Why is Quality Important?
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Quality raw materials
After-sales service
Quality of production
(click for video)
Quality targets should be set and monitored, and
procedures should be set up to deal with areas in
which quality is not meeting the targets. If
quality is poor, demand will fall as customers will not return so profits will
fall as the company reputation suffers.
• Benchmarking• Quality Control• Quality Assurance/Quality Circles• Total Quality Management• Quality Standards
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Methods of Improving Quality
• BenchmarkingThis means identifying the best performance in
the industry and trying to match their quality
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Methods of Improving Quality
• Quality StandardsThis is where a symbol or logo is applied to the
product. This indicates that a product/service has met an agreed standard.
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Methods of Improving Quality
Methods of Improving Quality
• Quality ControlThis is where one department is
responsible for checking and monitoring quality. Inspectors check final product and scrap them if they are substandard. This means, however, that substandard items are not found till the end of the process and results in high waste levels.
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Methods of Improving Quality
• Quality Assurance/Quality CirclesWorkers are organised in teams to ensure
quality during and after production. These teams may be known as Quality Circles.
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Methods of Improving Quality
• Total Quality ManagementThis is the newest form of quality control where views
are sought by–Involving customers in quality monitoring by asking how satisfied they are with quality of product or service–Also involving workers in quality control–People will also work in teams to help each other
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Advantages/Problems of Quality Checks
Advantages Problems
Less likelihood of customer dissatisfaction
Time involved in consistently checking production
Attempts to improve and stabilise production
Need more manpower to carry out quality checking process
Good reputation for company
Higher revenue through
Less waste of materials and substandard products
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Why Consider Ethical and Environmental Issues?
• Most business organisations wish to be seen as being SOCIALLY RESPONSIBLE. This can give them a more positive image and help them to gain more customers as well as, in many cases, saving money and looking after the environment.
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Consumers don’t want to buy from a business whose products are
polluting the environment – this gives the business a bad reputation
and affects sales
The Supply Chain
• Organisations should consider where they buy their raw materials. Use of FairTrade materials ensures producers in developing countries get a fair share of the profits
• Some overseas countries do not have the same care policies regarding looking after the environment
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Minimise Waste
• Ensure employees are trained to do the job properly
• Ensure machinery is kept in good condition• Don’t overstock
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Consider alternatives such
as recycling
Store waste securely
Recycle• Encourage employees to use appropriate
recycling bins• Try to use recycled materials in the production
process or for packaging
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Costs of Recycling Benefits of Recycling
Cost of providing bags/recycling bins etc
Helps protect natural resources
Costs of personnel to collect waste
Saves energy
Cost of transport to recycling sites Protects the natural environment
Costs of providing recycling sites Fewer landfill sites
Minimise Packaging• Packaging is necessary as it protects the
product during transportation and on the shelves. It can also help attract customers eg perfume sets.
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Costs of Reducing Packaging Benefits of Reducing Packaging
Products can be damaged on route to customers
Less packaging means less waste and fewer resources being used up
Customers may think the product is inferior if the packaging is not attractive
Less litter being dumped (eg fast food wrapping/packaging)
Avoid Pollution• Greenhouse gases and emissions have to be reduced
in order to prevent further damage to the environment
• Business should consider their carbon footprint – eg sourcing raw materials locally to cut down on transportation costs. Some have changed the product (concentrated fabric softener) so that it takes up less space during transport.
• Businesses using dangerous materials must dispose of waste carefully. If they don’t they can risk prosecution
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