1. 4.3.1 M AKING OPERATIONAL DECISIONS TO IMPROVE PERFORMANCE : INCREASING EFFICIENCY AND PRODUCTIVITY AQA Business 4 D ECISION MAKING TO IMPROVE OPERATIONAL PERFORMANCE A spinning class has a capacity for 20 participants. There is one class per day. The average class size Monday to Friday is 16 but the classes are fully booked at the weekend. The instructor charges the gym £30 per session. 1.What is the weekly capacity of the spinning class? 2.What is the weekly capacity utilisation? 3.What is the average labour cost per unit? 4.What would be the advantages to the gym of adding 10 more bikes to the class? 5.What would be the disadvantages to the gym of adding 10 more bikes to the class?

2. 4.3.1 M AKING OPERATIONAL DECISIONS TO IMPROVE PERFORMANCE : INCREASING EFFICIENCY AND PRODUCTIVITY  In this topic you will learn about  The importance of capacity  The importance of efficiency and labour productivity  How to increase efficiency and labour productivity  The benefits and difficulties of lean production  Difficulties increasing efficiency and labour productivity  How to choose the optimal mix of resources  How to utilise capacity efficiently  How to use technology to improve operational efficiency

3. I NCREASING EFFICIENCY  Operational efficiency involves maximising the output achieved from given inputs including machinery, materials and people  Efficiency can be improved using a number of methods, these include:  Increasing capacity utilisation  Increasing labour productivity  Lean production techniques  Choosing the optimal resource mix  Using technology

4. C APACITY  Capacity affects the ability of a firm to match supply to demand  Capacity utilisation affects whether resources are being used efficiently or whether they are lying idle  Low capacity utilisation will mean that resources are not being made to work effectively for the business, this will result in high unit costs  High capacity utilisation will mean the firm is “sweating “ its assets i.e. they are being made to work hard for the business This will result in lower unit costs But may affect quality and cause stress to the resources e.g. workers being pushed to work hard or no maintenance time for machinery Recap. Capacity is the maximum amount of output achievable if all resources are fully utilised. Capacity utilisation is a measure of the percentage of potential output being achieved.

5. I MPORTANCE OF CAPACITY  Ability to match supply to demand  Inverse relationship between capacity utilisation and unit costs  Image / public perception  Workforce motivation  Ability to achieve business objectives Should the UK increase capacity at London airports or try to make greater use of existing capacity?

6. H OW TO UTILISE CAPACITY EFFICIENTLY Under utilisationOver utilisation Increase demand Downsize e.g. sell off assets or rationalise the workforce Lease off spare capacity Reduce demand Outsource parts of the business’ operations Increase capacity by investing in more resources The actions taken will depend upon: Business objectives Whether the issue is seen as short term or long term Ease with which options could be implemented e.g. who could the business outsource to and how might this affect other targets such as dependability Bournemouth put plans to increase capacity of Goldsands Stadium on hold. Why?

7. L ABOUR PRODUCTIVITY  Increasing labour productivity lowers labour cost per unit (assuming employee costs stay the same) and hence unit cost  Therefore it is important to use workers efficiently  Labour productivity can be increased in a number of ways including:  Training  Increasing motivation e.g. financial or non - financial rewards, job design  Implement new technology  Better working practises  Improved recruitment and selection Recap. Labour productivity is a measure of output per worker. What are the possible causes and effects of the productivity gap in the UK?

8. D IFFICULTIES INCREASING LABOUR PRODUCTIVITY  May impact negatively on quality and customer satisfaction  Damage to long term reputation  Increase waste affecting unit cost  Employees may feel exploited  Working harder for the same pay, may work with unions to negotiate higher wages  Business benefiting but not the employees  Increased workload leading to stress and demotivation Can a firm just expect workers to work longer hours?

9. LEAN PRODUCTION  Lean production techniques are working practices derived from Japan that focus on cutting waste whilst maintaining, or improving, quality  Reducing waste is key to increasing efficiencies through lean production  Lean Production techniques include:  Just-In-Time (JIT) operations – a technique used to minimise stock holdings at each stage of the production process, helping to minimise costs  Kaizen (continuous improvement) – a technique that concentrates on small, but frequent, improvements in every aspect of the production process 4 principles of lean production.

10. J UST IN TIME OPERATIONS BenefitsDifficulties Less costs in holding inventory Less working capital required Less obsolete or ruined inventory Lower associated costs e.g. security and insurance Avoids having unsold stock Little room for error Very reliant on suppliers Unexpected orders harder to meet Any delays in deliveries due to unforeseen circumstance can cause production to come to a halt High initial set up costs Complex systems have to be put in place and understood Inventory can be held in 3 forms: Raw materials Work in progress Finished goods What are the benefits to both the supplier and the customer? (B2B)

11. K AIZEN  Kaizen is a system that concentrates on small, but frequent, improvements in every aspect of the production process  All members of the workforce will be involved  Employees are encouraged to work in Kaizen groups  Improvements can take place at any level of the hierarchy  Requires a highly motivated and committed workforce  A vital component of Total Quality Management in order to improve the quality of the production process How a small change can make a big difference at Pizza Express. Who came up with the idea?

12. I N PAIRS EmployeesMachineryStockFinance Just in Time operations Kaizen In pairs complete the table to show how each method of lean production will impact upon other resources. Remember impacts can be positive and negative.

13. HOW TO CHOOSE THE OPTIMAL MIX OF RESOURCES  Operations management involves combining the four factors of production or resource inputs:  Land  Labour  Capital  Enterprise  Firms will attempt to minimise the cost of using these resources whilst maximising the quality of the product and the customer service that the customer receives  The optimal resource mix is the best way of combining the factors of production in order to meet these requirements within financial constraints

14. C HOOSING THE OPTIMAL MIX OF RESOURCES The mix of resources can be:  Capital intensive which uses a relatively high proportion of capital such as machinery in the production of a good or service  This tends to occur in the secondary sector of the economy i.e. manufacturing  Labour intensive which uses a relatively high proportion of labour i.e. workers in the production of a good or service  This tends to occur in the tertiary sector of the economy i.e. services Potter versus 3D printing.

15. CAPITAL INTENSIVE AdvantagesDisadvantages Increased productivity Improved quality and speed Reduced labour costs Greater opportunities for economies of scale (the benefits to a business of producing on a large scale that lead to a fall in unit costs) High investment outlay Lack of human initiative Greater resistance to change by workforce e.g. retraining to use new equipment

16. L ABOUR INTENSIVE AdvantagesDisadvantages Often cheaper, especially when produced in low wage locations Workforce can easily adapt to change, especially if multi-skilled Continuous improvement through workforce can benefit the firm e.g. new ideas Government funding often available to protect jobs in the economy o Industrial relations can be a problem e.g. strikes o Lack of skilled workers in some industries o HRM costs can be very high e.g. recruitment, selection and training

17. I N PAIRS  Complete the table below to show examples of capital and labour intensive industries operating in both mass and niche markets Capital intensiveLabour intensive Mass market Niche market

18. U SING TECHNOLOGY TO IMPROVE OPERATIONAL EFFICIENCY  Technology is the use of tools, machinery and computers to help produce a good or service  Technology can be used to improve operational efficiency in a number of ways, these include:  Robotics  Automation  Communication  Design technology

19. R OBOTICS  The programming of robots to carry out tasks more traditionally completed by humans e.g.  Production processes e.g. s terilising bottles  Logistics e.g. p icking and packaging  Quality assurance e.g. w eighing and testing AdvantagesDisadvantages Accuracy Consistency Speed Resilience Hazardous environments Initial costs and maintenance costs Loss of human touch Lack of initiative

20. A UTOMATION  The use of machines to control a process e.g. stock control, production line, warehousing and distribution  Stock control  More accurate predictions of stock usage through statistical analysis  Automatic control of stock levels and reordering  Assess data on stock levels and geographical location  Retailers use EPOS (Electronic Point of Sale) technology barcodes scanners databases

21. C OMMUNICATION InternalExternal Interdepartmental Operations management could e-mail HR about staffing requirements Managing supplier relationships, if for example stock is not delivered it may be because of the business being over their credit limit Order processing Waiters use hand held devices to transfer orders to the kitchen Quality data Telling production workers about the number of defects Working with suppliers Using EDI (Electronic Data Interchange) to process orders Automatic reordering from a stock control system Sourcing supplies Growth of the internet to find new suppliers Tracking of supply chain Informs customers of the progress of their order

22. D ESIGN T ECHNOLOGY  The use of computers in the design stage of developing a product  CAD (Computer Aided Design) Used in many professions including  Architecture As well as new product development  Car manufacturing  Tea pots  3D simulations allow for greater degrees of manipulation prior to investment in prototypes  Designs can easily be altered to provide a range of options  Designs can be tested in changing conditions e.g. wind tunnels

23. A CTIVITY – C ONCEPT C OFFEE  An existing chain of coffee shops is looking to expand their market share with a new concept in coffee houses, Concept Coffee  Concept Coffee combines old and new technology to present a staff free coffee house.  Customers will use press button vending machines to select their cappuccinos before scanning the paper cups at the end of the line and paying in the same style as self service checkouts in the supermarkets.  Stock levels within the machines are automatically updated through chutes from an upstairs store room.  Once you have finished with your drinks a simple press of a button sees your table open up and swallow the empties leaving the table clean for the next customer. Identify the types of technology being used within Concept Coffee. Analyse the strengths and weaknesses of these uses of technology to open a coffee house before reaching a conclusion as to whether or not this is a viable expansion plan.

24. I N PAIRS  Help or hinder? Fill in the table below to show whether technology will help or hinder a business in achieving its operational objectives HelpHinder Costs Quality Speed of response and flexibility Dependability Environmental objectives Added value

25. 4.3.1 M AKING OPERATIONAL DECISIONS TO IMPROVE PERFORMANCE : INCREASING EFFICIENCY AND PRODUCTIVITY  In this topic you have learnt about  The importance of capacity  The importance of efficiency and labour productivity  How to increase efficiency and labour productivity  The benefits and difficulties of lean production  Difficulties increasing efficiency and labour productivity  How to choose the optimal mix of resources  How to utilise capacity efficiently  How to use technology to improve operational efficiency