1. Operations Management Teacher copy

2. Operations CEO Operations Director (COO) Marketing Director Finance Director (CFO) HR Director Teacher copy

3. The supply chain Teacher copy

4. Operations management Operations management: the process that uses the resources of an organisation to provide the right goods or services for the customer. In the context of the above definition, ‘right’ means ‘what the customer wants’. It may mean quality and price to one customer, but convenience and flexibility to another. Teacher copy

5. Identifying operations issues Customers have many requirements, so operations management looks at a variety of issues. In the AQA AS Business Studies course it looks at: – location (Unit 1) – resources to use and converting them into outputs (Unit 1) – capacity utilisation – organising stock control – quality – customer service – working with suppliers – using technology Teacher copy

6. Operational targets Operational targets: the goals or aims of the operations function of the business. A business that achieves its operational targets would be described as ‘operating efficiently’. This efficiency may mean low costs or high quality etc. Three examples of operational targets are: – unit costs – measures of quality – capacity utilisation Teacher copy

7. Unit costs unit cost: the cost of producing 1 unit of output. Unit cost =total cost units of output The unit cost is also known as the average cost (AC) or average total cost (ATC). The target for a business is to achieve low unit costs. Example: A business produces 10 units of output at a total cost of £70. average (or unit) cost = £70/10 = £7 Teacher copy

8. Unit costs: calculations Based on the data above, calculate the unit costs of products A to D. Assuming these products are of the same quality, which product is manufactured most efficiently? Total costs (£)Units of outputUnit costs (£) Product A47020 Product B55830 Product C1,06050 Product D1,945100 Teacher copy

9. Unit costs: answers Order of efficiency:B – D – C – A Total costs (£)Units of outputUnit costs (£) Product A4702023.50 Product B5583018.60 Product C1,0605021.20 Product D1,94510019.45 Teacher copy

10. Measures of quality Quality is defined as ’those features of a product or service that allow it to satisfy (or delight) customers’ Because ‘quality’ depends on people’s opinions, there will be different views on what is meant by quality What measures of quality would you use for a business? – Hint: they must be measurable! Teacher copy

11. Examples of measures of quality (1) Note that this is just a sample of quality measures — a good quality measure will be geared towards the specific needs of the individual firm. Customer satisfaction ratings – A survey of customers can reveal customer opinions on a numerical scale (e.g. 1–10) or using qualitative measures (e.g. excellent — very good — good — etc.) – As the purpose of a product/service is to satisfy the needs of the customer, this is an excellent way of measuring whether quality has been achieved. Customer complaints – This calculates the number of customers who complain (it is sometimes measured as a percentage of the total number of customers). – Although this might seem to be a negative approach, it is a good way of measuring whether a company has problems that it needs to solve. Teacher copy

12. Examples of measures of quality (2) Scrap rate or wastage rate – This calculates the number of items rejected during the production process as a percentage of the number of units produced – This will show the business whether its production methods are working effectively, guiding it towards areas that might need improvement Punctuality – This calculates the degree to which a business delivers its products (or provides its services) on time. It is often measured as a percentage: punctuality =deliveries on time× 100 total deliveries – This measure is used by many businesses, especially those involved in transporting goods (eg haulage firms) or customers (eg rail franchises) Teacher copy

13. Using quality measures: question Based on the data below, decide which company is providing the best quality and which one is providing the lowest level of quality for its customers. Company Customer satisfaction (10 = excellent, 1 = poor) Customer complaints (%) Scrap rate (%) Deliveries on time (%) A6.31.62.398.5 B7.91.24.598.0 C5.92.56.393.1 D8.20.86.096.0 Teacher copy

14. Using quality measures: answer (1) Rank order of firms for each quality measure: Firm C has the lowest ranking in all four categories and is clearly the worst performer. Company Customer satisfaction (10 = excellent, 1 = poor) Customer complaints (%) Scrap rate (%) Deliveries on time (%) A3rd 1st B2nd C4th D1st 3rd Teacher copy

15. Using quality measures: answer (2) Firms A, B and D all average second place, so a case could be made for each one. Factors to consider: – the quality measure(s) deemed most important by customers – the quality measure(s) deemed most important by the firm – the numerical difference in ratings (e.g. B has a much higher rating for customer satisfaction than A, but is only slightly behind A on delivery times) (It could be argued that the first column is the crucial one because it measures the overall view of customers.) Teacher copy

16. Capacity utilisation: key terms Capacity – the maximum total level of output or production that a business can produce in a given time period. A company producing at this level is said to be producing at full capacity Capacity Utilisation – the percentage of a firm’s total possible production level that is being reached. If a company is large enough to produce 100 units a week, but is actually producing 92 units, its capacity utilisation is 92% Teacher copy

17. Capacity utilisation: key terms Under-utilisation of capacity – when a firm’s output is below the maximum possible. This is also known as excess capacity or spare capacity. It represents a waste of resources and means that the organisation is spending unnecessarily on its fixed assets Capacity shortage – when a firm’s capacity is not large enough to deal with the level of demand for its products. This means that certain customers will be disappointed and sales will be lost Teacher copy

18. Calculating capacity utilisation Capacity Utilisation: the extent to which the company’s maximum possible output is being reached – capacity utilisation (%) =actual output per annum (month) × 100 maximum possible output per annum (month) Example: a company can produce 8,000 units but is actually producing 6,000 units Capacity utilisation is – 6,000/8,000 x 100 = 0.75 x 100 = 75% Teacher copy

19. Spare capacity In the previous example, the company could increase production by 2000 units or 25% of 8,000 units. This is known as its spare capacity There is no one ideal target percentage, but many people believe that 90% capacity utilisation is a sensible target At 100% there is no scope for maintenance and repair, to respond to sudden orders, or to deal with emergency situations that may occur Thus firms like to have some spare capacity BUT…spare capacity means ‘unused’ resources and higher fixed costs per unit since fixed costs over a lower volume of output Teacher copy

20. Managing capacity utilisation In terms of capacity utilisation, there are two types of situation that a firm needs to manage: – under-utilisation of capacity (also known as excess capacity or spare capacity) – capacity shortage Spare capacity is the more normal situation. What causes it? Teacher copy

21. Causes of spare capacity – New competitors or new products entering the market – Fall in demand for the product – Unsuccessful marketing – Seasonal demand – Over-investment in fixed assets Teacher copy

22. Disadvantages of spare capacity – Firms have a higher proportion of fixed costs per unit. This means higher average cost per unit, which means either: Lower profit if the price is unchanged – kept at the same level as competitors Or higher price is needed to cover costs. Higher prices means the firm will lose customers – With less work to do, employees may become bored and demoralised, lowering their motivation and efficiency – Firm’s image may suffer – may be viewed as unsuccessful Teacher copy

23. Capacity utilisation and unit costs Per monthHigh utilisationLow utilisation Fixed costs (£)200,000 Variable cost per unit (£)20 Capacity in units10,000 Monthly output9,0005,000 Capacity utilisation90%50% Total costs (£)380,000300,000 Unit costs (£)42.2260.00 Teacher copy

24. Advantages of under-utilisation Spare capacity means that there is more time for: – maintenance and repair of machinery, – training and for improving existing systems There may be less pressure and stress for employees, who may become overworked at full capacity Under-utilisation allows a company to cope with a sudden increase in demand Evaluation of under-utilisation: if the reason is choice, then the positive factors will be most important. Eg SHS choose to have some spare capacity so there are always rooms, teachers have time and space for clinics, can offer wide range of subjects. If the reason is not choice, for example poor products, fall in demand then most negative aspects apply. Teacher copy

25. Achieving high capacity utilisation Methods include: Teacher copy

26. Ways of reducing capacity Methods include: – selling off all or a part of its production area – changing to a shorter working week or shorter day short term – laying off workers = long term solution – transferring resources away from an area of the business (e.g. moving workers away from a branch with low capacity utilisation) Teacher copy

27. Managing capacity shortage If there is a shortage of capacity, the firm will try to increase its capacity. Ways of increasing capacity include: – building or extending factories/plants – asking staff to work overtime or longer hours (can’t do it for too long, also expensive) – recruiting more temporary or part-time staff – disadvantages (don’t know the business, may not be motivated) – hiring new full-time staff – subcontracting Teacher copy

28. Subcontracting When an organisation asks another business to make all or a part of its product. – Many businesses use subcontracting as a way of reducing capacity utilisation problems – By asking other firms to supply goods, the original firm can increase supply to match demand without needing to increase its own factory size – It can then reduce the amount of work that it subcontracts if it needs to cut output. Teacher copy

29. Advantages of subcontracting – Businesses can react to changes in demand more quickly if they have access to a number of different firms’ production plants. – Subcontractors may be more specialised and therefore more efficient in a particular activity. – Subcontracting lets a firm focus on its core business and helps it to avoid becoming involved in activities in which it is less competent. – A one-off (non-standard) order can be given to a subcontractor so that the business benefits from the order but suffers no disruption to its normal production. Teacher copy

30. Disadvantages of subcontracting – Quality is no longer directly under the firm’s own control. – Excessive subcontracting erodes a company’s operations base and its ability to initiate research. – The subcontractor wants to make a profit, so it is possible that it will be more expensive to subcontract. – Subcontracting may require a firm to give confidential information to a supplier, such as details of its methods and patents. – Ask about Apple subcontracting – who do they subcontract to (Foxconn, a Taiwanese company with huge facilities in China( Teacher copy

31. Stock control and capacity utilisation Stock Control: the management of levels of raw materials, work-in-progress and finished goods to reduce storage costs, while still meeting the demands of the customer. Teacher copy

32. Dealing with non-standard orders non-standard orders: a business decision relating to a one-off contract We have a small factory producing high quality boots which we sell through a specialist store. Normally sell 50 pairs a week. We get an order from a company (it’s an Easter present for staff celebrating a successful year) for 500 boots. Do we accept? Teacher copy

33. Dealing with non-standard orders Often the non-standard order requires a response to a request to supply a fixed quantity of a product at a particular price (invariably a lower price than usual). A decision on a non-standard order will be taken primarily on whether it is profitable However, the firm will also need to look at the impact on the functional aspects of the firm, such as operations. – the level of spare capacity available – the scope for subcontracting – the impact on costs – is there potential for future (profitable) orders – Will there be an impact on staff morale Teacher copy

34. Analysis and Evaluation Unit costs – What are the key factors that affect a firm’s costs – Compare ways to lower costs – Analyse the implications of high unit costs – what caused them and what does it mean for the business Capacity utilisation – What are the reasons for under/over utilisation – What are the consequences of under- or over-utilisation – What are the solutions to u/over utilisation – What are the implications for a particular business of working at full capacity/ or under-utilisation Evaluation – Focus on whether the u/o utilisation is a choice or not – Are solutions short term or long term Teacher copy

35. Developing effective operations: quality Quality not Quantity Teacher copy

36. Quality Quality: those features of a product or service that allow it to satisfy (or delight) customers. Think of a product and list five ways of measuring the quality of that product. – appearance – reliability and durability – functions (added extras) – after-sales service – brand/image/reputation – environmental friendliness Does everyone have the same list? Quality is subjective — a matter of personal opinion — and views of it will vary from individual to individual. Teacher copy

37. Quality of different products Examples from task Teacher copy

38. Quality of different products Which products need and have high quality? – Aircraft? Cars? – M&S, Waitrose, Tesco – food? – Apple? Gucci? Primark? – Eye surgeon? Hairdresser? Teacher copy

39. Benefits and costs of quality to a business What are the main benefits of high quality? – increase in sales volume – creating a unique selling point (USP) and enhancing the firm’s reputation – greater scope for increasing the selling price – pricing flexibility, as customers will want to buy the product even if price is changed – possible reduced manufacturing cost and reduced wastage if high-quality materials and processes improve the efficiency of the production process Teacher copy

40. Benefits and costs of quality to a business Are there any costs? – Quality can cost money. – May need to spend more on better raw materials (remember horse meat scandal?) or components. – Camera with more functions, faster pc, all cost more. – Training staff also matters. So issue is the balance of benefits and costs Teacher copy

41. Costs of low quality to a business – From p 204 of the book Marketing costsBusiness costs Loss of salesScrapping of unsuitable goods Loss of reputationReworking of unsatisfactory goods – cost of labour and raw materials May have to discount pricesLower prices for ‘seconds’ May impact on other products in rangeHandling customer complaints Retailers may not stock the productLoss of consumer goodwill and repeat purchases Teacher copy

42. Quality control and quality assurance How can companies make sure quality is high enough: Quality Control – Inspectors are employed to check the accuracy of completed work. Quality Assurance – This is a system that aims to achieve or improve quality by organising every process to get the product ‘right first time’ and prevent mistakes ever happening. – Quality assurance concentrates on the process of production. The idea of self-checking is crucial to quality assurance. Teacher copy

43. Quality control: benefits – Inspection can find defects Inspection at the end of the process can prevent a defective product reaching the customer – Can be safer than trusting every individual It is a safer than a system that trusts every individual to do his or her job properly, particularly if workers want to avoid responsibility. – Inspectors are well trained Inspectors are likely to be highly skilled in detecting problems – this is what they specialise in! Teacher copy

44. Some questions 1.Name 2 industries which need to produce products/services to a high quality 2.Name 2 industries for which quality is less important 3.List 3 benefits of producing high quality goods/services 4.List 2 costs of producing high quality goods/services 5.List 4 costs to a business of low quality 6.What are the 2 main ways companies make sure quality is high enough 7.Describe quality control Teacher copy

45. Quality control: problems – Individuals may lose incentive to increase quality – Empowering workers to take responsibility for quality may motivate the workforce – Cost of employing inspectors Teacher copy

46. Quality assurance: benefits Ownership is with the workforce – Rather than with an independent inspector, giving them greater responsibility. – Theorists such as Herzberg argue that the responsibility will motivate workers. Lower costs – there is less waste — any faults are discovered during the process. – Because an individual will not want to be blamed for a faulty product, each worker checks what he or she receives, reducing the possibility of a faulty product Teacher copy

47. Issues involved in introducing and managing a quality assurance system Costs – Quality procedures require a great deal of administrative expense to set up and monitor. Training – This can be a major issue in the introduction of a new quality system, as a system of quality assurance relies on a well-trained workforce that is able to understand and implement the quality system that the business uses. Disruption to production – In the short run, the training programme provided can be quite disruptive to existing production methods. Teacher copy

48. Quality Assurance vs Quality Control Teacher copy

49. Quality standards International Organization for Standardization ISO International Standards ensure that products and services are safe, reliable and of good quality Various standards (eg ISO 9000 and ISO 9001) cover what is required to have a quality management system, including – Documented quality systems that cover the quality of their working methods, services and processes as well as the quality of the product Teacher copy

50. Benefits/costs of quality assurance standards Advantages Marketing advantages from having ‘proof’ of high quality standards Assurance to customers that products meet certain standards. Some organisations insist on these awards before agreeing to trade with a firm, as this helps to guarantee the quality of their supplies Greater employee motivation from the sense of recognition Financial benefits from the elimination of waste and the improved reputation of the firm – possibly higher prices Disadvantages Quality Assurance means a high quality and reliable process – it does not guarantee a higher quality product It may encourage complacency. Whilst QA standards require firms to have processes to improve processes, employees may believe having a QA process is enough Teacher copy

51. Total Quality Management Total Quality Management is the best known approach to quality assurance TQM can be defined as a management philosophy committed to a focus on continuous improvements of product and services with the involvement of the entire workforce Everyone in the workforce is concerned with quality at every stage of the production process Quality is ensured by workers and not inspectors Teacher copy

52. TQM Teacher copy

53. Kaizen Quality system based on continuous improvement The Japanese philosophy of kaizen has given rise to quality systems based on continuous improvement. Kaizen (or ‘continuous improvement’) is a policy of implementing small, incremental changes in order to achieve better quality and/or greater efficiency. These changes are invariably suggested by employees and emanate from a corporate culture that encourages employees to identify potential improvements. Familiar in sport – Sir David Brailsford pioneered marginal gains in cycling Teacher copy

54. Customer service Developing effective operations: customer service Teacher copy

55. Customer service – The overall activity of identifying and satisfying customer needs and the delivery of a level of service that meets or exceeds customer expectations Customer expectations – what people think should happen and how they think they should be treated when asking for or receiving customer service. – Higher expectations among customers mean that better customer service must be provided. Customer satisfaction – When a customer is happy with the level of service Teacher copy

56. What do customers want? Survey by Institute of Customer Service Marks out of 10 10Quality of the product or service 9 Friendliness of staff 8 Efficiency in dealing with problems/complaints 7 Speed of service or delivery 6 Helpfulness of staff in general 5Effectiveness in handling enquiries 4Extent to which customers felt ‘valued/important’ 3The competence of staff in completing their tasks 2 The ease with which the transaction was completed 1 The extent to which the customer was kept informed Teacher copy

57. Other findings of the ICS surveyICS Service businesses (e.g. hairdressers and decorators) and professional services (e.g. architects) are best at satisfying customers. The public sector and utilities (eg electricity suppliers) are poor The survey also highlighted the importance of employee satisfaction. Typically, the more satisfied employees are, the more highly motivated they are to provide a good service. This leads to a higher level of customer satisfaction. Teacher copy

58. How to meet customer expectations Customer expectations can be met through a series of stages: Stage 1: Identify customer expectations Conduct market research to find out customer expectations so that customer service targets the right factors. Stage 2: Agree how to meet customer expectations. Stage 3: Train staff in how to provide the customer service. John Lewis example of excellence Stage 4: Monitor performance against these standards so that high quality and good customer service are maintained Teacher copy

59. Meeting customer expectations through trainingtraining A look at the top ten factors shows how many depend on the quality of the employees. Training helps employees to be good at their jobs Companies often provide specific training in customer care Vocational qualifications in customer care help employees to improve customer servicecustomer care Teacher copy

60. Main benefits of high levels of customer service Impact on sales volume High-quality service that exceeds the expectations of customers will lead to increased demand for the goods and services provided by a business Creating a unique selling point (USP) Impact on selling price Apple charges more than other companies. Strong customer service will enable a business to charge higher prices and thus earn higher profits. The firm’s reputationreputation Companies with a reputation for good customer service are likely to gain repeat business and have a solid base of loyal customers. Teacher copy

61. Additional benefits of good customer service A motivated workforce Lower costs Costs may be reduced because a high level of customer service is likely to mean fewer complaints to handle Public relations Positive publicity arising from good customer service can be used for PR Teacher copy

62. Working with suppliers Supplier: an organisation that provides a business with the materials that it needs to carry out its business activities. For a manufacturer, suppliers mainly provide the raw materials and components needed to produce the finished good. For a retailer, suppliers provide the finished goods that the retailer sells. Teacher copy

63. Choosing effective suppliers A business may improve its efficiency to a large extent by choosing effective suppliers. When choosing suppliers, the main factors that a business will consider are: – prices – payment terms – quality – capacity – reliability – flexibility Teacher copy

64. Choosing suppliers: prices A business will seek value for money from its suppliers. If the supplier offers low prices, a business can benefit in two ways : – The business can reduce the final selling price of its own product and therefore gain a competitive advantage. – The business can keep its final selling price the same, but enjoy the benefit of a higher profit margin/higher added value. BUT…a business must be cautious when choosing a supplier that is offering low prices Teacher copy

65. Potential problems from low-price suppliers The prices charged by the supplier may be low because: – the quality of the raw materials is low – the supplier may be unreliable in terms of meeting delivery dates – the supplier may be inflexible if a sudden change is needed – the supplier is in financial trouble and desperate to get a contract Overall, the business must consider how important price is to its own customers. If they are willing to pay high prices, low-price supplies are less important. Teacher copy

66. Choosing suppliers: payment terms Payment terms: arrangements made concerning the timing of payment and any other conditions agreed between buyer and seller. – normal practice in the business world for credit to be offered to the buyer of supplies of materials. This means that payment is delayed, typically 30 days There are two major reasons for this type of agreement: – Buyers will want this type of agreement because there will be a delay between the purchase of the materials and the receipt of sales revenue from selling of the final product. This delay may cause cash-flow problems for the buyer. – Suppliers will offer payment terms in order to get business. Offering payment terms to buyers should boost the supplier’s sales, as they will be chosen in preference to those not offering credit. Teacher copy

67. Choosing suppliers: quality In many industries, quality is becoming more important than price, perhaps as we become richer. Therefore, quality is a critical factor to consider when choosing and working with a supplier. Key benefits of high-quality supplies are that they enable a business to produce high-quality products. These will: Teacher copy

68. Importance of quality For buyers, a poor-quality component or product can cause major damage to a manufacturer’s reputation. Examples? Overall, the significance of quality will depend on the product in question: Teacher copy

69. Choosing suppliers: capacity Capacity: the maximum possible output of a business Teacher copy

70. Choosing suppliers: reliability Reliability: the extent to which the supplier meets the requirements of the buyer Typically, reliability can be measured by the percentage of deliveries on time or the degree to which a supplier meets the terms of the contract to supply – For a manufacturer, an unreliable supplier can lead to the whole production line coming to a halt because a crucial material or component is not available – For a retailer, a failure to supply can affect its reputation. Customers will blame the retailer if they are unable to buy a product that they want Teacher copy

71. Choosing suppliers: flexibility There may be situations where an organisation radically needs to change its orders from suppliers — for example: Teacher copy

72. Suppliers – improving operational performance Suppliers can help a business to achieve each of its three main operational targets: – Lower unit costs. An efficient supplier can offer low-priced materials, helping a customer/business to keep its own costs low. – Higher quality. If the supplier is able to meet quality standards consistently, the buyer of the materials will find it easier to produce high-quality products. – High capacity utilisation. A flexible supplier can allow a business to increase its capacity utilisation suddenly by supplying more supplies. Other possible benefits include: – Suppliers may develop new products or materials. – Suppliers may find ways of extending the life of a product. Teacher copy

73. Using technology in operations Technology: the applications of practical, mechanical, electrical and related sciences to industry and commerce Technology influences business in many ways. Examples include: – Robotics – Automated stock control – Design – Communications Homework, read the chapter on technology Teacher copy

74. Robotics Uses of robotics – Very important in some manufacturing industries in particular, eg car industry, electrical industrycar industry – Use includes: Teacher copy

75. Robotics Advantages Disadvantages Teacher copy

76. Automation: key terms Automation: the use of machinery to replace people in the production process, usually to carry out routine activities. Computer-aided manufacturing (or manufacture) (CAM): the use of computers to undertake activities such as planning, operating and controlling production. Teacher copy

77. Technology and stock control How does it work? Simple version (in syllabus) of a stock control system: Products are bar codedbar coded The information will be held in a database The buyer/owner can: Teacher copy

78. Technology and design: key terms Computer-aided design (CAD): the use of computers to improve the design of products. CAD CAM: an approach that combines computer-aided design and computer-aided manufacture, using IT to aid both the design and the manufacture of an item. Teacher copy

79. Benefits arising from CAD or CADCAM Homework: design a kitchen using Ikea software, print off Teacher copy

80. Technology and communications Information and communication technology (ICT): The use of technology for the input, storage, processing and transfer of data and the output of Benefits of ICT are: – Communication with customers – Communication with suppliers – Internal communications Teacher copy

81. Benefits of technology in operations The main benefits are: – reducing costs – improving quality – reducing waste – increasing productivity Teacher copy

82. Technology: reducing costs Teacher copy

83. Technology: improving quality Teacher copy

84. Technology: reducing waste Teacher copy

85. Issues in introducing and updating technology (1) The use of new technology can also cause problems: Teacher copy

86. Technology – a summary An organisation needs to weigh up the pros and cons before deciding whether it should introduce or update its technology Usually the balance is – short-term problems and costs – long-term benefits Teacher copy