BUSINESS MANAGEMENT

TOPIC5: OPERATIONS MANAGEMENT

NOTES

5.1 introduction to operations management

● Operations management is the provision of goods and services in the right

quantities and at the right quality in a cost-effective and timely manner. The role of
production is to turn factors of production (inputs) into outputs by adding value.
● The five Ms - material, manpower, money. Machines, management
are a useful tool in devising marketing and production plans by viewing factors of
production as inputs in the production process
these 5 Ms are the inputs, in which value is added during production, and outputs are
the goods and services produced, profit is earned when the value of output is greater
than the cost of production
● Marketing implications:
- Production methods affect the quality and individuality of the product.
- Exclusive products can be marketed at high prices due to uniqueness and
quality.
- Mass produced products are more standardised.

● HRM implications
- Change in production can reduce or increase the size of the workforce.
- Training and development needs must be considered for different methods of
production.
- Recruitment and selection can be relatively easy for unskilled work yet
attractive remuneration packages may be needed to recruit specialist
workers.
- Contingency plans for operational crises need to be developed

● Finance implication
- Capital intensity and lean production require heavy investment in machinery
and equipment.
- Investment appraisal is required to assess investment options as fixed
investment costs can be very high.
- Contingency funds need to be set aside for unforeseen emergencies, e.g.
machine breakdowns.
- In labour intensive production, a greater proportion of a firm’s costs go
towards remunerating workers with financial benefits.
5.2 Operations methods

Methods of production
● Job production
- This involves creating an individual product from start to finish, tailor made to
meet specific needs of a customer.
- Typically, these products are one-off items (small to large scale): Buildings
and Wedding dresses
Advantage
1. Quality of production.
2. Highly motivated workers.
3. Uniqueness of the product acts as a unique selling point (USP).
4. Flexibility in the design and specifications of the product are possible.
Disadvantage
1. Labour intensive and therefore expensive
2. Time consuming due to the varying and specific design requirements.
3. Long working capital cycle between producing and selling product.
4. Few economies of scale can be enjoyed since each product is unique (i.e. produced
on a small scale).

● Batch production
- This involves producing a limited number of identical products.
- Work on each batch is fully completed before production switches to a new
batch.
Advantages
1. Economies of scale from machinery producing larger quantities.
2. Specialisation leads to increased productivity.
3. Higher sales from a wider product portfolio, which gives customers greater choice.
4. Products can still be tailored at relatively low cost, e.g. customised birthday cakes.
Disadvantages
1. Inflexibility from difficulty in changing one batch to another once production has
begun.
2. Storage costs are high since there is a lot of work in progress.
3. Jobs are repetitive and may lead to boredom.
4. High production costs from using equipment and machinery.

● Mass production
- This is the manufacturing of large amounts of a standardised product.
- It often involves the assembly of individual components.
- It is capital intensive with many tasks relying on automation.
- eg. - ball bearing, phones, pins, toothpick

● Flow production
- This focuses on a continuous production process of manufacturing products
that are standardized in large quantities.
- Flow production relies entirely on automated systems with very few workers
required.
 - Mass production is highly automated but will have more workers than flow
production.
- Flow production lines are often kept running 24 hours a day, 7 days a week to
maximise output and to eliminate waste

Advantages of mass/flow production

1. Large scale output.

2. Economies of scale through capital intensive methods.
3. Standardized quality.
4. Worker specialization leading to low defect rates.
5. Low labour costs due to use of unskilled workers.
6. Advantages and disadvantages of mass/flow production

Disadvantages of mass/flow production

1. Low levels of motivation due to boring repetitive work.

2. Breakdowns will cause major delays.
3. Little flexibility for change once production begins.
4. Capital intensive and therefore very high set up, running and replacement costs.
5. Large storage system is required for the large amounts of stock.

● Mass customization
- This occurs for businesses that produce large quantities of goods via batch or
mass/flow production, but products can be tailored to a customer’s exact
preferences.

Selecting an appropriate operations method

- Production methods can either be labour or capital-intensive.

- Choosing labour or capital-intensive methods of production depends on:

- Relative cost of labour and capital.

- Size of the market.
- Corporate objectives

● Labour-intensive production
- Labour-intensive production uses a greater proportion of labour than any
other factor input.
- A key benefit is the ability to offer personalized services.
- It is essential in some industries, e.g. health care and education.

● Capital-intensive production
- Capital-intensive industries have a relatively high proportion of capital costs
compared with labour costs.
- High levels of output are possible.
 - However, products tend to be highly homogeneous, so there is no unique
selling point (USP) from customization.

5.3 Lean production and quality management

● Lean Production
- Lean production is the process of streamlining operations and processes to
reduce all forms of waste (or ‘muda’) and to achieve greater efficiency.
- Lead production should lead to improved quality and reduced costs.
Examples of muda

Muda Meaning

Over-processing When the business adds more features or functions to a

product than is necessary to meet the needs of customers.

Time Delays in the production, delivery and inefficient movement

around the production facility.

Human effort Sub-standard and defective output may need to be

re-worked.

Energy Leaving lights, air-conditioning and other utilities on when

not needed.

Resources and materials From underproduction or overproduction.

Principles of lean production

● Waste minimization
- This requires the removal of any operation or process that does not add value
to the product.
● ‘Right first time’ approach
- Businesses aim for zero defects by identifying and resolving problems at the
source.
● Flexibility
- Resources must be adaptable to changing needs of the business.
● Continuous improvement
- The firm must continually strive to improve quality and efficiency.
● Supply chain management
- Businesses must develop and maintain good professional working
relationships in the supply chain.

● Continuous improvement (kaizen)

- Kaizen is a Japanese philosophy of making small and continuous
improvements to increase efficiency and productivity.
- Small groups of employees are formed with the purpose of identifying
changes and improvements to the firm’s products, processes and procedures.
- The focus is on incremental improvements in quality.

Impact of Kaizen on an organisation

- Change is easier to manage in small, continuous improvements.
 - People tend to be resistant to big changes.
- The focus on quality often brings about cost savings.
- Motivating employees as anyone in the firm can contribute, irrespective of rank.

● Just-in-time (JIT) stock control

- JIT is a Japanese stock management method based upon having stocks
delivered as and when they are needed.
- Only the absolute minimum levels of stock are held, and finished goods are
dispatched as soon as they have been produced.

● Sustainable design and manufacturing

- Cradle to cradle (C2C) is a sustainable model of production based on natural
processes, thus benefiting the environment.
- By contrast, cradle to grave (C2G) refers to single use products. It is the most
common form of manufacturing.

● Quality
- Quality means that a product fulfils its purpose and meets the expectations of
the consumer.
- Customers perceive quality based on various factors including:
1. Physical appearance and design
2. Image and reputation of the firm
3. Reliability
4. Durability
5. Fit for purpose
6. Safety features
7. Customer service
8. After-sales service

● Quality management
- This is the function concerned with controlling business activities to ensure
that products are fit for their purpose.
- There are four driving forces that have led to quality being of paramount
priority for many businesses.
1. Increasing consumer awareness
2. Increasing competition
3. Govern-ment legislation
4. Increasing consumer incomes

● Approaches to quality management

Quality control
- This traditional approach involves inspecting, testing and sampling the quality
of completed work.
- This is a reactive approach.
Quality assurance
- This is a process of assuring customers that everything is done ‘right first
time’.
- This is a proactive approach.

Advantages of quality control (QC)

1. Prevents faults reaching the customer, thus safeguarding reputation.

2. Cheaper to have trained QC inspectors than to train every employee to be
responsible for QC.
 3. Widespread issues and problems across the organisation can be identified by QC
inspectors.
Disadvantages of quality control (QC)

1. It is expensive to fix mistakes.

2. The root cause of the problem is not dealt with.
3. There is a lack of accountability for substandard work by individuals.

Advantages of quality assurance (QA)

1. Improves staff morale as QA programs involve employee participation and ownership
for their work.
2. New ideas for improving quality can be generated from all employees.
3. Breaks down a ‘them and us’ culture.
4. Less wastage from reworking faulty products as they are checked at every stage of
output.

Disadvantages of quality assurance (QA)

1. The time, energy and training needed to nurture a total quality culture within an
organisation.
2. The costs of implementing the above changes to establish a quality culture.

● Methods of managing quality

Quality circle
- These are small groups of people who meet regularly.
- They examine issues relating to the quality of output and make
recommendations for improvement.
- Quality circles are like kaizen groups. However, the key difference is
members of quality circles also execute and manage solutions to quality
issues.
Advantage
- Improved efficiency, production, profitability and motivation.

Disadvantage
- Not all employees enjoy this form of empowerment and would rather be told
what to do.

Benchmarking
- Benchmarking is the comparison of products, operations, processes and
financial data of a firm with others in the same industry, especially the market
leaders.
- There are two methods of benchmarking:

Historical benchmarking
- Comparing the same performance data over time.

Inter-firm benchmarking
- Comparing the same performance data of different businesses.
Advantage
- Reduces performance gaps with rivals.
- A simple way to determine quality rather than using guesswork.
- Quality is assessed from the perception of customers, thus helping a
firm meet its needs and wants.
- Competitive advantage from improved quality and lower production
costs
 Disadvantage
- Collecting relevant and up-to-date benchmarks can be
time-consuming and expensive.
- Replicating the ideas and best practice of other firms does not create
USPs.
- Cost of implementation (finance and time) can be very high.
- Restrains creative and innovative thinking when relying on the ideas of
others.
Total quality management
- TQM is a process that requires the dedication of everyone in the organisation
to commit to achieving quality standards.
- Quality is seen from the perspective of the consumer rather than the
producer.
- Creating a total quality culture means it is embedded throughout the whole
organisation.

Advantages.
- Improved motivation from empowered employees.
- Reduces or eliminates wastage, therefore lowering production costs.
- Improved corporate image when reputation is associated with TQM.
- Competitive advantage due to customer focused production process.
- TQM improves the chances of a firm’s survival.

Disadvantages.
- Costs of implementation and maintaining TQM can be high
- Bureaucracy can hamper TQM processes.
- Staff training and development is necessary, which can be expensive.
- TQM only works if there is full commitment by all employees.
- Time lag between implementation and results can sometimes take
several years.

Quality standards
- National and international quality awards are used to show that certain quality
standards have been met.
- Businesses that meet or exceed these standards can include the quality
symbols or logos on their products and in their promotional material.

Benefits of quality standard accreditation

- Promote quality awareness within the organisation.
- Improve performance.
- Recognize quality achievements.
- Motivate the workforce.
- Attract high calibre employees.
- Gain a competitive advantage.