Higher Business Management Operations Higher Business Management

Success Criteria: Learning Intentions: To introduce OPERATIONS MANAGEMENT sometimes called PRODUCTION to pupils Success Criteria: You should be able to: Understand what operation is. Why operations is important Review IPO Understand operations management Describe factors that effect production systems BM Unit 2 - LO2 2

What is it? Operations Management is concerned with the way in which organisations produce goods and services. It transforms inputs into outputs. It could be described as the core activity of a business, as it actually produces the goods and services for sale.

Why is it important? Operations is vital to any organisation as making products and producing services to sell is vital to an organisation’s objectives of making a profit and generating wealth Companies like Arnold Clark and Stagecoach have Operations Managers who oversee the day to day running of the business

Operations/Production Three distinct phases Inputs  Process  Outputs  

Inputs Raw materials Labour

Process Converting raw materials into something useful Use of machinery and other processes Assembly

Output The finished product! Packaging Storage Distribution Transport

Operations Management Planning Production Purchasing Warehousing and Storage (included stock control) Distribution Note that each of these interact with other functional areas of a business!

Production Planning Vital to the success of an organisation. Plan a production system that will most efficiently produce the goods for output. Ideally, planning should be at a constant level. This rarely happens, due to changes in demand, machine breakdown, etc. Realistically, production will vary from day to day or week to week.

Manufacturing Production Systems First task is to decide on the layout of the factory. Splitting production into different jobs is called Division of Labour. A successful system needs a flow of stock from one job to another to avoid shortages and bottlenecks.

Factors Affecting Production Systems - Nature of the product Market Size Quantity to be produced Resources available Labour Capital Availability of technology

Success Criteria: Learning Intentions: To introduce the PURCHASING MIX to pupils Success Criteria: You should be able to: Describe the purchasing mix BM Unit 2 - LO2 13

The Purchasing Mix – Pg 9 This is often the highest expense that a firm will incur and therefore many large organisations have a specialist department dealing only with the purchasing of raw materials and stock control.

The Purchasing Mix cont . . Business organisations must:- “obtain the best quality materials, at the lowest cost, delivered in the correct quantities at the correct time”.

The Purchasing Mix cont …. Decisions on how many raw materials to purchase will depend on The stock of raw materials currently available. Duration of time elapsing between orders. Amount of raw materials likely to be required during this time. Storage space available it its cost.

Purchasing Mix cont . . . Other factors to consider include Normal spoilage levels. Buffer stock Available finance Decision to be made on which supplier to use? Who offers best terms? Consider also quality, quantity, time, dependability, price and location.

Success Criteria: Learning Intentions: To introduce types of production methods Success Criteria: You should be able to: Identify and describe types of production systems along with an ability to describe the advantages and disadvantages of the types BM Unit 2 - LO2 18

Intermediate II and Higher Business Management Methods of Production Intermediate II and Higher Business Management

Production Methods Pg 4 Core Notes Agriculture tends to be very land intensive – efficiency could be measured in terms of output per acre/hectare Whilst all output can be classed as production, different production methods may be more appropriate for different products or services. Copyright: Photolibrary Group

Production Methods As technology and analysis of production methodology has improved, methods have changed dramatically – what used to be labour intensive production methods are now capital intensive Copyright: iStock.com

Production Methods The choice of production method and the factor inputs depends on such things as: the nature of the product factor costs the scale of production California Oil is Source of Wealth and Fear Copyright: iStock.com Bottle production line Copyright: Photolibrary Group

Production Decisions Batch? Market size and Segment One-Off Order? Which method? Complexity of design Type of Product Mass Market product? Factor Costs – Land, Labour and Capital Batch?

Methods of Production Job Production Batch Production Flow Production MASS PRODUCTION IN LARGE FACTORY

Production Methods Job Production – One-off production - each item might have particular specifications Flow Production – suitable for mass market products that are identical Batch Production – each stage of the production process has an operation completed on it before moving on to the next stage – allows modifications to be made to products that otherwise are the same

Job Production A house built to your own design A custom-built boat A piece of artwork A hand-turned wooden bowl

Job Production Advantages:- Disadvantages:- Customers demands can be exactly met. A high price may be charged. Specifications can be changed even if production has started. Workers motivated as variety of skills required. Disadvantages:- Expensive due to skills required. High R&D, transport and admin costs. Variety of equipment and tools required. Lengthy lead times.

Batch Production A number of similar products (repeated jobs) The same house repeated on a building site Bakery produce - each batch may differ slightly

Batch Production Advantages Disadvantages Batches can be changed to meet specific customer requirements. Reduced need for highly skilled staff. Machinery can be relatively standardised. Disadvantages Machines/workers may sit idle between stages. Expensive machinery may be required due to less skilled staff. Stock levels may be high. Staff may be less motivated due to repeating the same task in batches. If batches are small, costs will be high.

Flow Production Mass production of almost identical products Cars Washing machines

Flow Production Advantages Disadvantages Costs spread over a large number of goods. Bulk discounts Huge quantities can be produced. Automation often used which reduces chance of human error. Machinery can work 24/7 Disadvantages Huge set up costs. Individual customer requirements cannot be met. Equipment may be inflexible. Worker motivation can be low because of the repetitive nature of the job. Breakdowns can be very costly.

Sample questions 1 Describe methods of production that an organisation could use? 3 marks 2 Outline the factors that need to be considered when deciding upon the most suitable method of production? 2 marks Provide a detailed description: give more detail than you would in an outline and use examples where you can. Give a brief description or overview of what you are talking about.

Solution to question 1 Job production could be used whereby a one off, unique product is made to the requirements and specification given by the customer. (1 mark) Batch production involves a number of identical (or nearly) products being made at any one time and then the equipment could be changed or cleaned to produce an entirely different batch of products. (1 mark) Flow production involves a product being built as it moves along an assembly line. As the product moves along the assembly line, parts are added until it is completed. (1 mark)

Solution to question 2 The factors that need to be considered when deciding on the most appropriate type of production to be used are: The type and nature of the product Amount of the product to be manufactured/produced Methods of measuring and ensuring quality Methods of distribution Stock control management system Resources and technology available Any of the above would be worth one mark

Success Criteria: Learning Intentions: To introduce Quality and quality systems Success Criteria: You should be able to: Describe quality and concepts Describe measures of quality Describe quality symbols Describe quality systems BM Unit 2 - LO2 35

Higher Business Management Quality Core notes p6-8 Higher Business Management

Quality - A Definition Those features of a product or service that allow it to satisfy customers’ requirements

Two different concepts … Quality Control – assumes a degree of waste when an organisation has a quality checking system at the end of the manufacturing process Quality Assurance – assumes that the waste caused by quality control can be prevented. Quality is checked at every stage of the manufacturing process.

Quality Control ‘Bolting the door after the horse has gone’ Leads to waste and scrap (as many as 25% of goods not meeting requirements) Can be very “costly”

Quality Assurance Making sure the horse cannot bolt – closing the stable door Getting it right first time All aspects of the business including the commitment of the workforce

Measuring Quality – How to? Tangible – (touch) Appearance/Taste Reliability Durability Functions Suitability After sales service Maintenance Intangible (not able to touch) Image and brand (‘street cred’) Reputation Exclusivity Hype created

Quality Symbols

Quality Systems Total quality management Benchmarking Quality circles

Total Quality Management (TQM) New Term = Quality Management (QM) The aim of TQM is to produce a perfect product each time. It is therefore essential that quality is evident at every stage of the production process. If properly implemented, wastage can be reduced to approx 3%.

Total Quality Management (TQM/QM) Right first time Consistent, clear message on quality Staff commitment to ongoing improvement Partnership with suppliers Educate and train staff Supervisors encourage and help Eliminate fear of failure Departments integrate and share problems Set clear, achievable goals Help employees to take pride in their work Train and educate Establish a structure and culture to support these aims

Features of TQM/QM Commitment to customer needs Close links with the supply chain Personal responsibility by employees Company-wide policy for all staff Emphasis on teamwork Clear measures of “quality” Information gathering to support these measures Well-used 2-way communication systems

Benchmarking - A Definition Benchmarking is the process of setting competitive standards, based on the achievements of other firms, against which an organisation will monitor its progress. Benchmarking tends to focus on the “best in class” companies, but for specific functions a company may compare itself to an organisation in a different industry.

Types of Benchmarks Internal - comparison with a function within the organisation External - comparison with other organisations Competitive - direct comparison with a competitor Generic - comparing general business activities (eg recruitment) Customer - contrasting the level of fulfillment of customer expectation

Quality Circles Production workers know more about the production process than “managers” Workers are motivated by being involved and consulted about production problems (empowerment)

Success Criteria: Learning Intentions: To introduce STOCK and stock control Success Criteria: You should be able to: BM Unit 2 - LO2 50

Intermediate II and Higher Business Management Stock pg 12 onwards Intermediate II and Higher Business Management

What is stock? Raw Materials Work in Progress Finished Goods

Why hold Stock? Having stock enables goods to be available for immediate use in production or for delivery to customers. It enables customer demands to be met. It allows bulk buying to take place so that discounts can be received.

Too much stock can lead to . . High storage and insurance costs. High security costs. Large amount of space taken up storing the stock. Money tied up when it could be used more profitably elsewhere. Stock left for too long can deteriorate or become out-dated Possibility of theft by employees.

Too little stock can lead to . . Business not being able to cope with unexpected changes in demand. If deliveries are delayed, stock may run out. Loss of revenue and custom if unable to deliver on time. Gain bad reputation. Rush order for stock may have to be placed therefore losing out on discounts

So you can see that . . . Stock control, sometimes called Inventory Management is very important!

Ideally an organisation should operate with as little stock as possible, but this is not always ideal. There has to be a balance between the cost of holding stock and the cost of lost production and sales. But, a continuous supply of stock is required for efficient production.

Stock levels by diagram Sales Time – months

Stock levels by diagram Re-order quantity Sales Max level Re-order level Min level Buffer stocks Lead time Time – months

Economic Stock Level This is the lowest level of stock that ensures that production is not interrupted. At the same time, it ensures that the organisation is not carrying too much stock. Economic Stock Level is based on the following . . .

Re-order Stock Level When stock falls to this level, new stock must be ordered to make sure that the organisation does not run out. For example, if it takes a week for new stock to arrive, then the reorder level will be at the point where there is one week’s stock left (but more likely 10 days to allow time for delivery delays). Minimum Stock Level Ensures that there will always be stock for production, allowing for ordering and delivery times (known as lead time)

Computerised Stock Control The computer automatically orders more stock when the stock falls to the re-order stock level. One example is bar codes Bar Code Reader logs stock into and out of the system. Physical checks should also be made from time to time as discrepancies may occur. This system means that slow moving lines and best sellers can easily be identified.

Storage of Stock Centralised Improved security Specialist staff Held in one central place. Improved security Specialist staff Costs may be less with a one site location Improved efficiency Decentralised Stock located in the different areas in which it is used. Always “at hand” Speedier turnover of a small quantity of stock reduces the likelihood of its deterioration or decay.

Just in Time (JIT) H A Japanese approach to production – first developed by Toyota. Involves keeping stock levels at a minimum. Works only if there is a very good relationship between manufacturer and their suppliers. The stock is held by the supplier and is only brought to the factory as and when it is needed. Savings can be high as there are very little stock-holding costs.

Pros and Cons of JIT H Capital not tied up in stocks. Reduction in warehouse costs. Good relationship with suppliers. Reduce wastage. Increase in cash flow Reduction in stock-holding costs Danger of disruption due to non-arrival of stock. Danger of lost sales. High dependence on suppliers. Increased ordering. Increased transport costs. Less chance of discounts for buying in bulk.

Kanban H This is another Japanese system devised by Toyota. It uses markers (eg lights or flags), to order movement of stocks between different stages of production. For example, if a worker has to fit six steering wheels, a Kanban Card would be sent to the production team to order another 6 wheels. These would arrive just in time, before the worker ran out of steering wheels. When Toyota opened up in the UK, they had to train suppliers in this process. Suppliers had to prove that they could deliver small quantities of high quality goods and short notice in order to be awarded contracts.

Factors to consider when choosing Supplier – copy down Question type: Describe the type of features that Marks and Spencer’s would be looking for before choosing a new range of uniforms? If you were a Operations/Production manager You would think about: PRICE DESIGN DELIVERY COSTS DISCOUNTS AVAILABLE CREDIT TERMS QUANTITY RELIABILTY AVAILABILITY LOCATION QUALITY

Transportation/External Problems – Copy down What can cause transport problems? Reliability of suppliers – maybe unrealiable in terms of when they deliver. Location of suppliers – Overseas and could need planes or ships to transport Weather – bad weather eg snow can affect transport routes due to unsafe driving conditions Legislation – regarding the number of hours a driver can work and the speed they drive at. Also the type of good transported eg hazardous chemicals Industrial action/strikes – by distribution workers, including drivers can affect delivery Breakdowns in transport method – this is something that cannot be pre-planned but does happen

Outsourcing Meaning – Companies/organisations can sometimes get certain things done for the business by outside companies eg Irn-Bru may get their cans made by a separate company Ryanair may get their catering produced by separate company Hospitals sometimes get their cleaning and catering done by outside companies SOMETIMES REFERRED TO AS TENDERING/CONTRACTING OUT

Outsourcing continued… What advantages are there to this? Allows organisation to concentrate on its core activity – meaning the main thing eg Irn-Bru the drink is the CORE activity Specialists can be employed to undertake the tasks outsourced Specialist businesses will have specialist equipment readily available No need for training staff within YOUR organisation Specialists may produce costs cheaper Downsizing (making business smaller) becomes possible

Outsourcing continued …… What would the disadvantages be? You have less control over the outsourced organisation eg Irn-Bru would have to trust the company making the aluminium cans Issues with regard to confidentiality may become a problem eg Information on Accounts may become knowledgeable to the public or rival companies Problems with communication may occur between you and the outsourced organisation The level of service provided may deteriorate due to parts of the work being outsourced eg Hospital cleaning services are constantly in the press for poor performance

Operations/Production Summary Job Production Batch Production Flow/Continuous production Quality – meaning? Quality control V Quality Assurance Quality Systems TQM or Quality Management Benchmarking Quality circles Stock control features Max Stock Min Stock Re-order level Re-order quantity Lead time Buffer Stocks JIT/Kanban system Supplier decisions Purchasing mix Transportation problems Outsourcing You should know and understand the above to be successful in Operations within your exam!