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0% found this document useful (0 votes)
55 views53 pagesSection 4 Operations Management
Uploaded by
Yuanyuan GanCopyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
Section 4:
OPERATIONS MANAGEMENT 4.1 Production of Goods and Services
Ray eheena of the lesson, you should be able to describe:
4.1.1 The meaning of production
+ Managing resources effectively to
produce goods and services
+ Difference between production and
productivity
+ Benefits of increasing efficiency and
how to increase it, eg. increasing
productivity by automation and
technology, improved labour
skills
+ Why businesses hold inventories
+The concept of lean production: how
to achieve i, eg, just-in-time inventory
control and Kaizen; benefits of lean
production
4.1.2 The main methods of production:
+ Features, benefits and limitations of
Job, batch and flow production
* Recommend and justify an
‘oppropriate production method for a
siven situation
4.1.3 How technology has changed
production methods, eg. using
computers in design and
‘manufacturing 4.1.1 The Meaning of Production
4.1.1 The meaning of production: « Managing resources effectively to produce goods ond services, «Difference between production and
productivity, « Benefits of increasing efficiency and how to increase it, eg. increasing productivity by automation and technology, improved
labour skils, » Why businesses hold inventories, «The concept of lean production: how to achieve i, eg. just-in-time Inventory control and
Kaizen; benefits of lean production
Heading Description/Information
Managing | Managing resources effectively to produce goods and services
resources _| Production isthe provision ofa product ora service to satisfy consumer wants and needs. The process of production adds value to
effectively to
“vaso
R
‘the raw materials and bought‘in components. As we learned before, value added isthe difference between the cost of inputs and
the final selling price of the product or service.
‘The production process applies to manufacturing as well as
service industries. In adding value, businesses combine the = oa
“inputs ofa business (factor of production, eg land, labour, n/a
capital, enterprise) to produce more valuable outputs to satisfy samme > rece” ep ove
consumer wants or needs —_ ~~ oa
For a business to be competitive it should combine these inputs.
of resources efficiently so that it makes the best use of
resources at its disposal to keep costs low and increase profit. n a developing country, where wages are low, it may be more
efficient to use many workers and few machines to produce goods (labour-intensive). However, in developed countries where
labour costs are high, businesses often use machines/robots and employ few workers to produce goods (capital-intensive) 4.1.1 The Meaning of Production
4.1.1 The meaning of production: « Managing resources effectively to produce goods ond services, «Difference between production and
productivity, « Benefits of increasing efciency and how to increase ite. increasing productivity by automation and technology, improved
labour skils, » Why businesses hold inventories, «The concept of lean production: how to achieve it, eg. just-in-time Inventory control and
Kaizen; benefits of lean production
Heading Description/Information
Difference | Operations department
between _| The role of the Operations department in a business sto take inputs and change them into outputs for customer use. Inputs can
production and} be pyscal goods or se
productivity | The Operations Manager! fesponsible for making sure that raw materials are provided and made into finished goods or services.
‘The different sections of this department will vary depending on what the business produces.
Atypical manufacturing business will have:
+a Factory Manager wo wil be responsible forthe quantity and quality of products coming off a production line; this will
Include the maintenance of the production line and other necessary repairs
= a Purchasing Manager who will be responsible for providing the materials, components and equipment required for the
production
= a Research and Development Manager who willbe responsible for the design and testing of new production processes
and products
Ina retaling business, this department willbe similar but the Factory Manager willbe replaced by the managers for the shops. In a
service business, such asa restaurant, the Operations department wil include managers for each ofthe restaurants. 4.1.1 The Meaning of Production
4.1.1 The meaning of production: « Managing resources effectively to produce goods ond services, «Difference between production and
productivity, « Benefits of increasing efciency and how to increase it, eg. increasing productivity by automation and technology, improved
labour skils, » Why businesses hold inventories, «The concept of lean production: how to achieve it, eg. just-in-time Inventory control and
Kaizen; benefits of lean production
Heading Description/Information
Difference
productivity
Productivity | mi
The level of production isthe total output ofa business ina given time period (eg. one yes"). Productivity - _Outout
This diferent to productivity Productivity is how a business can measure its efficiency using Formula” ~ —Tapat
2 formula, e
Businesses often want to measure the productivity of one of the factors of production or “Mt ostty it suid sin oma
inputs, usualy labour This is measured by dividing the output over a given period of ime _Duu.pe pig unt)
by the numberof employees. Tunbeo ono ot wa 4.1.1 The Meaning of Production
4.1.1 The meaning of production: » Managing resources effectively to produce goods ond services, «Difference between production and
productivity, « Benefits of increasing efficiency and how to increase it, eg. increasing productivity by automation and technology, improved
Tabour skils, » Why businesses hold inventories, «The concept of lean production: how to achieve i, eg. just-in-time Inventory control and
Kaizen; benefits of lean production
Heading Description/Information
Difference | Productivity
between | Productivity can be raised by ether using fewer inputs to produce the same output or using the same inputs to produce a higher
production and} level of output.
productivity
employees become more efficient, the amount of output produced per employee will rise and therefore the costs of producing
each product wil fal. Ths will make the business more competitive and isthe main reason why businesses are usually very
focused on increasing productivity.
‘There are a numberof ways to inerease productivity and efficeney. These include:
“Improve quality ofthe product and inventory contol to reduce waste
~ Replace employees with machines automation
Improve traning to increase employee efficiency Rk
= Motivate employees more effectively
= Introduce new technology
= Use more automation 4.1.1 The Meaning of Production
4.1.1 The meaning of production: « Managing resources effectively to produce goods ond services, «Difference between production and
productivity, + Benefits of increasing efficiency and how to increase it, eg. increasing productivity by automation and technology, improved
labour skils, » Why businesses hold inventories, «The concept of lean production: how to achieve it, eg. just-in-time Inventory control and
Kaizen; benefits of lean production
Heading Description/Information
Benefits of | Benefits of increasing efficiency/productivty
Increasing = Reduced inputs needed for the same output level
efficiency and | - Lower costs per unit (average cost)
howtoincrease | = Fewer workers may be needed, possibly leading to lower wage costs
[Link] | - Higher wages might now be paid to workers, which increases
productivity by motivation,
automation and
technology,
improved labour 4.1.1 The Meaning of Production
4.1.1 The meaning of production: * Managing resources effectively to produce goods and services, «Difference between production and
productivity, « Benefits of increasing efficiency and how to increase it, eg. increasing productivity by automation and technology, improved
labour skils, » Why businesses hold inventories, «The concept of lean production: how to achieve i, eg. just-in-time Inventory control and
Kaizen; benefits of lean production
Heading
Description/Information
‘Why businesses
hold inventories
sen er Sores eae verte ea) faeces ees ee aut eo oted
ventories can ae various forms, including raw materials, components, part finished goods or fished products ready for
ea Rat eat ea ea a ea ee a ere aae
aban poducion and tty estore Gea uc
When invertors et certain pont err po)" Tmemran acon nant rn nm
they llbeeorceredio thar when a delverys ode
wat ngnvertries back upto the maximum evel og
The butess mu joer before nett got oo ow
tallow time for the goods to be delivered. inventory If
evel get tooo, they ih actualy Tn cut teres
crunegeceahigrdenansfornegoaetoonaa Hf
level of inventory is held, then this costs a lot of money; i
the snes bought the goods bt they arent being
ted wd the money cube tts eta ie. The ellowng 9h dota how ventory lvls canbe monagd
papeiamer eee 4.1.1 The Meaning of Production
4.1.1 The meaning of production: * Managing resources effectively to produce goods and services, «Difference between production and
productivity, « Benefits of increasing efficiency and how to increase ite. increasing productivity by automation and technology, improved
labour skils, » Why businesses hold inventories, «The concept of lean production: how to achieve i, eg. just-in-time Inventory control and
Kaizen; benefits of lean production
Heading
Description/Information
The concept of
lean production:
hhow to achieve it
eg. justin-time
inventory control
‘and Kaizen;
benefits of ean
production
Lean production
Lean production covers a variety of techniques used by businesses to cut down on waste of resources, including time, and
therefore increase efficiency. It aims to reduce the time it takes fora product to be developed and become availabe inthe shops
for sale Lean production cuts out any activities which do not add value for the customer and ths can apply to services as well.
“There are several types of waste that can occur in production:
+ “overtones rgd n havbon ry sors Teste nigh tng os
possible damage to goods while in storage
= Walting - when goods are not moving or being processed in any way, waste is occurring
= Transportation - moving goods around unnecessarily causes waste and is not adding value to the product. Goods may also
bbe damaged when they are being moved around
= Unnecessary inventory -if there is too much inventory, then ths takes up space, may get in the way of production, and
costs money
+ Motion - any actions (e.g. bending and stretching movement ofthe body of the employee), wastes time. It may also be a
healthy and safety rsk for the employees. Ths also applies to the movement of machines which may not be necessary
= Over-processing - if complex machinery is being used to perform simple tasks then this is wasteful Some activities in
producing the goods may not be necessary and may be because the design of the product is poor
+ __ Defects any faults require the goods being fixed, and time can be wasted inspecting the products, 4.1.1 The Meaning of Production
4.1.1 The meaning of production: « Managing resources effectively to produce goods ond services «Difference between production and
productivity, «Benefits of increasing efficiency and how to ncrease te increasing productiviyby automation and technology imoroved
Tabour skill » Why businesses hold inventores,» The concept of lean production: howto achieve te Justintime inventory control and
Kaizen; benefits of lean production
Heading Description/Information
The concept of | Benefits of lean production
lean production: | Costs are saved through:
hhow to achieve it, | - Less storage of raw materials or components b
eg-justintime | —- Quicker production of goods and services a
Inventory control | - _ Noneed to repair defects or provide a replacement service fora dissatisfied customer
‘and Kaizen; = Better use of equipment
benefitsoftean | Cutting out some processes, which speeds up production
production = Less money tied up in inventories.
= Improved health and safety, leading to less time off work due to injury
Reduced costs can lead to lower prices for customers, businesses being more competitive, and possibly also increased profits
Lean production can be achieved using the following methods:
= Kaizen
= _justin-time inventory control (11C)
+ Cell production 4.1.1 The Meaning of Production
‘4.1.1 The meaning of production: » Managing resources effectively to produce goods and services, «Difference between production and
productivity, « Benefits of increasing efficiency and how to increase it, eg. increasing productivity by automation and technology, improved
labour skils, » Why businesses hold inventories, «The concept of lean production: how to achieve It, eg. just-in-time Inventory control and
Kaizen; benefits of lean production
Heading
Description/Information
The concept of
lean production:
how to achieve it
eg. justintime
inventory control
‘and Kaizen;
benefits of ean
production
Kaizen
Kaizen means ‘continuous improvement’ in Japanese, and its focus in on the elimination of waste. The improvement does not
solutions. This Ns proved effective because no one knows the problems that
‘the best ones to think of ways to overcome them. | ee.
‘exist better than the workers who work with them all the time, so they are often
Kaizen eliminates waste (e.g. by getting ri of large amounts of inventory/reducing <0
‘the amount of time taken for workers to walk between jobs). When Kaizen is a
introduced, the factory floors eorgansed by repostoning machines ely os Se
together n cl inorder to improve the ow of production trough the factory a
The fee willbe open and marked withalourcaded ines which map out the ow || a «
‘of materials through the production process.
‘Advantages of Kaizen might be to increase productivity; reduce amount of space needed for the production process;
work-in-progress is reduced; improved layout of the factory floor may allow some jobs to be combined, thereby freeing up
employees to carry out some other job in the factory 4.1.1 The Meaning of Production
‘4.1.1 The meaning of production: * Managing resources effectively to produce goods and services, «Difference between production and
productivity, « Benefits of increasing efficiency and how to increase it, eg. increasing productivity by automation and technology, improved
labour skils, » Why businesses hold inventories, «The concept of lean production: how to achieve it, eg. just-in-time Inventory control and
Kaizen; benefits of lean production
Description/Information
The concept of
lean production:
how to achieve it
eg, justintime
inventory control
‘and Kaizen;
benefits of ean
production
ust-in-time inventory control
Justin-time or JIT sa production method which focuses on reducing or virtually S=#=te ps3
eliminating the hee hold inventories of raw materials or components and on
reducing workin ogress and inventories of the finished product. The raw
‘materials or components are delivered just in time to be used inthe production
process, the making of any parts is undertaken justin time to be used in the next —
stage of production and the finished product is made just in ime to be delivered
tothe customer
= Allthis reduces the costs of holding inventory, as no raw materials and
ov SN
$1
components ae ordered to keep in the wareliouse justin case they are
needed
= Warehouse space is not needed, again reducing costs
PEE
T
= The finished product is sold quickiy and so money will come back to the business more quickly, helping its cash flow
‘To operate just n-time, inventories of raw materials, work-in-progress and finished products are run down and no extra inventory
Is kept. The business therefore needs very reliable suppliers and an effective system of ordering raw materials or components. 4.1.1 The Meaning of Production
‘4.1.1 The meaning of production: » Managing resources effectively to produce goods and services, «Difference between production and
productivity, « Benefits of increasing efficiency and how to increase ite. increasing productivity by automation and technology, improved
labour skils, » Why businesses hold inventories, «The concept of lean production: how to achieve It, eg. just-in-time Inventory control and
Kaizen; benefits of lean production
Heading
Description/Information
The concept of
lean production:
how to achieve it
eg. justintime
inventory control
‘and Kaizen;
benefits of ean
production
Gellproduction
Cell production is where the production line is divided into separate, self-contained
tnits (cells), each making an identifiable part ofthe finished product, instead of
having a flow or mass production line. This method of production improves the
‘morale of the employees and make them work harder so they become more
efficient. The ebaployees feel more valued and are less likely to strike or cause
alisruption
Cell Production
© Splting flow production nto set-contaned
groupe thal ao respons or who work uns
Prot rewsresa d res 4.1.2 The Main HEL of Se
a ea aR Se
‘appropriate producto
Description/Information 4.1.2 The Main Methods of Production
4.1.2 The main methods of production: «Features, benefits and limitations of job, batch and flow production, + Recommend and justify an
‘appropriate production method fora given situation
Description/Information
Features, benefits
‘and limitations of
job, batch and
flow production
Job production
‘This is where products are made specifically to order, for example, a customer would order a particular dish and a cook will make
it. Each order is different, and may or may not be repeated, Other examples include: specialist machinery manufacturers that will
produce a machine for another business to meet a particular specification, bridges, ships, made-to-measure sults, cinema films, or
individual computer programs that perform specialised tasks
them greater job satisfaction
It’s flexible and often used for high-quality goods and
services, meaning that a higher price can be charged
‘Advantages of job productios Disadvantages of job production:
Itis most suitable for personal services or ‘one-off products ‘illed labour is often used and this raises costs
‘The product meets the exact requirements ofthe customer The costs are higher because itis often labour
“The workers often have more varied jobs intensive
More varied work increases employee motivation - giving Production often takes along time
Products are specially made to order and so any
terrors can be expensive to correct
Materials may have to be specially purchase,
leading to higher costs 4.1.2 The Main Methods of Production
4.1.2 The main methods of production: « Features, benefits and limitations of job, batch and flow production, + Recommend and justify an
‘appropriate production method for a given situation
Description/Information
Features, benefits
‘and limitations of
job, batch and
flow production
oducts are made in blocks or batches. A certain number of one product is made, then a certain number of
ee eee ere a ee
the same design, furniture prbxuction (a certain numberof tables are made, then a certain number of chaits), or clothing (a batch,
of a particular size of jeans s produced and then a batch of another size),
‘Advantages of batch production: Disadivantages of batch production:
= Its flexible way of working and production can easily be Itcan be expensive as semi-finished products will
changed from one product to another need moving about to the next production stage
~ __Itstill gives some variety to workers’ jobs = Machines have the be reset between production
= Itallows more variety to products which would batches which means there isa delay in production
otherwise be identical. This gives more consumer outputs lost
choice (eg. different flavours of ready-meals) ~ Warehouse space willbe needed for inventories of
= Production may not be affected to any great extent raw materials, components and finished batches of
machinery breaks down ‘00d. Tiss costly 4.1.2 The Main Methods of Production
4.1.2 The main methods of production: » Features, benefits and limitations of job, batch and flow production, Recommend and justly an
‘appropriate production method for a given situation
Description/Information
Features, benefits
‘and limitations of
job, batch and
flow production
How production
This is where large quantities ofa product are produced ina continuous process.
I's sometimes referred to mass production because ofthe large quantity of 3
standardised product that is produced,
Its called flow production because products look a¥if they are flowing down the
production line. The basic ingredients are put together at one end of production
Tine and then the product maves dawn and more parts are added, and so on,
Lnti the products finished and packaged ready for sale.
Large numbers of identical products are made and the costs of production are
low (the business will gan from economies of scale). Examples of products
produced inthis way include: cars, cameras, televisions, packaged foods and drinks; n fact any mass produced, standardised
product which i sold to.a mass market will be produced inthis way. 4.1.2 The Main Methods of Production
4.1.2 The main methods of production: + Features, benefits and limitations of job, batch and flow production, + Recommend and justify an
‘appropriate production method for a given situation
Description/Information
Features, benefits
‘and limitations of
job, batch and
flow production
Hlow production
‘Advantages of flow production:
‘There isa sy output ofa standardised product
Costs of maeiyg each item are kept low and therefore prices are
also lower
It's easy for capita-intensive production methods ot be used -
reducing labour costs and increasing efficiency
Capitalintensive methods allow workers to specialise in specific,
repeated tasks and therefore the business may require only
relatively unskilled workers litle training may be needed
tmay benefit from economies of scale in purchasing
Low average costs and therefore low prices usualy mean high sales
‘Automated production lines can operate 28 hours a day
‘There is no need to move goods from one part of the factory to
another a with batch production, so time is saved
Disadvantages of flow production:
+ Itisa very boring system for the workers,
50 there i ittle job satisfaction, leading
to2 lack of motivation for employees
= There are significant storage
requirements - costs of inventories of
raw materials/components and finished
products can be very high unless
justintime systems are used
= The capital costs of setting up the
production can be very high
= Ifone machine breaks down, the whole
production line will have to be halted 4.1.2 The Main Methods of Production
4.1.2 The main methods of production: + Features, benefits and limitations of job, batch and flow production, + Recommend and justify an
‘appropriate production method for a given situation
Heading Description/Information
Recommend and
justify an & factors which determine which method of production to use are as follows:
appropriate The nature ofthe product - fairly unique product or an individual service is required, job production willbe used. Ifthe
production product can be mass produced using an automated production line, then flow production will be used
methodfora | - The size of the market -If demand is higher and more products can be sold but notin very large quantities, batch
given situation production wll be used. The product will be produced ina certain quantity to meet the particular order. Small local
‘markets or niche markets will be served by businesses using job or batch production. International markets are served by
businesses using low production
= Thenature of demand - f there's @ large and steady demand for the product (e.g. soap powder), it become economical to
set up a production line and continuously produce the product (flow production). if demand is less frequent (e..
furniture), then job or batch production may be more likely
= The siz ofthe business f the business is small and does not have the access to large amounts of capital, then it will ot
produce on a large scale using automated production lines. Only large businesses can operate on this scale, Small
businesses are more likely to use job or batch production methods 4.1.3 How Technology has Changed Production Methods
‘4.1. How technology has changed production methods, eg using computers in design and manufacturing
Es
in design and paint-spraying on a car assembly line)
manufacturing
‘Mechanisation is where the production Is done by machines but operated by people (eg. printing process). Robots are
‘quick, very accurate, and work non-stop, 24 hours a day
CCAD (computer-aided design) is computer software that draws items being designed mare quickly and allows them to be
rotated to see the item from all sides instead of having to draw it several times. Itis particularly useful for detaled
technical drawings
CAM (computer-aided manufacture) is where computers monitor the production process and control machines or robots
‘on the factory floor (e.g. on the production line ofa car plant, computers wll control the robots that spot-weld the car
body together or the robots that spray paint the car)
iM (computer-integrated manufacturing) i te total integration of CAD and CAM. The computers that design the
products are linked directly to the computers that ald the manufacturing process 4.1.3 How Technology has Changed Production Methods
‘4.1.3 How technology has changed production methods, eg. using computers in design and manufacturing
= Desipton information
Terao
Tes hated’ | echoes spreed produc Fic nth ore parent met cane beatres she a
producin | EPOS (cron oe) Tg eet ee eee te ota fee Veco of och er rer one
hsiaiven Tr uric nse ay hag oo NGS nar hs booR eA ro alow rte oda
asa coer | oR cts eben ae Se
in design and - _ EFTPOS (electronic funds transfer at point of sale) - This is where the electronic cash register is connected to the retailer's
manufacturing
‘main computer and also to banks over a wide area computer network. The shopper's card wil be swiped, and a receipt will
be printed as confirmation thatthe payment has gone out of the customer's account
Contactless payment is increasingly being used in many countries. t's fast, easy, and secured. Pre-paid, debits, charge and
credit cards, key fobs, wearable devices and mobile devices can be used to make contactless payments.
It works by the contactless device having an antenna. When its touched against a contactless terminal, it securely
transmits information about the purchase 4.1.3 How Technology has Changed Production Methods
‘4.1.3 How technology has changed production methods, eg using computers in design and manufacturing
Heading Description/information
How technology
has changed
‘production Advantages of new tac Disadvantages of new technology:
methods, e.g. Productivity i greater as new, more efficient production methods are Unemployment could rie as
using computers Used, reducing average costs machines/computers replace people on
iva soar = Greate ob satisfaction stimulates workers, a5 routine and boring jobs the factory floor and in offices
manufacturing
are now done by machines
= More skilled workers may be needed to use and maintain the new
technology. The workers may become more motivated and therefore
Improve the quality of thet work as businesses offer training inthe use
of new technology
= Better quality are produced owing to more accurate production
methods
= Quicker communication and reduced paperwork, owing to computers,
lead to increased profitability
‘The information that is avallable to managers through the use of I is
‘much greater and will esuit in better and quicker decision making
New ‘high tech’ products are introduced as new technology makes
completely new products avaiable
Itis expensive to invest in new
technology products and machinery.
Thisincreases the risks as large
uantities of products need to be solé
[Link] the cost of purchasing the
equipment
Employees may be unhappy with the
changed in their work practices when
new technology is introduced
New technology i changing al the time
and will often become outdated quite
{Quickly and need tobe replaced ifthe
business is to remain competitive 4.1 Production of Goods and Services
Definition
b Productivity isthe output measured against the inputs used to create it
[the butfer inventory levels the inventory held to deal with uncertainty in customer demand and deliveries of supplies
Lean production Lean production isa term for those techniques used by businesses to cut down on waste and therefore increase
efficiency for example, by reducing the time it takes for a product to be developed and become available for sale
Kaizen Kaizen is a Japanese term meaning ‘continuous improvement’ through the elimination of waste
Just-in-time (JT)
Just-in-time (IT) isa production method that involves reducing or virtually eliminating the need to hold inventories of
raw materials or unsold inventories of the finished product
Job production
Job production is where a single product is made ata time
Batch production
Batch production is where a quantity of one product is made, then a quantity of another item will be produced
Flow production
Flow production is where large quantities ofa product are produced in @ continuous process. It is sometimes referred to
as mass production 42 Costs, Scale of Production, Break-even Analysis
By the end of the lesson, you should be able to describe:
42.1 Identify and classify costs
+ Classifying costs using examples, eg.
{fixed, variable, average, total
+ Use cost data to help make simple
cost-bosed decisions, eg. to stop
production or continue
4.2.2 Economics and diseconomies of
scale:
+ The concept of economies of scale
with examples, e.g. purchasing,
‘marketing, financial, managerial,
technical
+ The concept of diseconomies of scale
with examples, eg. poor
communication, ack of commitment
{from employees, weak coordination
4.2.3 Break-even analysis:
“The concept of break-even
+ Construct. complete or amend a
simple breok-even chart
+ Interpret a given chart and use ito
analyse o situation
+ Calculate break-even output from
given dato
* Define, calculate and interpret the
margin of safety
+ Use break-even analysis to help make
simple decisions, eg. Impact of higher
price
* Understand the limitations of
break-even analysis 4.2.1 Identify and Classify Costs
42.1 Identify and classify costs: + Clasifying costs using examples, eg. fixe, variable, average, total, « Use cost data to help make simple
cost-based decisions, eg. to Stop production or continue
Heading Description/Information
Classifying costs | Business costs
using examples, | ll business activities involve costs of some sort. These costs cannot be ignored. For
cease (ecsie tenes eee declare ees eee eee?
varal,average, | shoes Wy does the mage’ nea thnk about cts? Some ofthe reason ae
wa onan
+ cont of paring he actor can be compared wth he een rom
the sale ofthe sports shoes to calculate whether or not the business will
‘make a profit or loss. This caleuation is one ofthe most important made in
any businesses
= The costs of two different locations for the new factory can be compared,
‘This would help the owner make the best decision
- Tohelp the manager decide what price should be charged fora pair of sports
shoes
Accurate costs information is therefore very important for managers 4.2.1 Identify and Classify Costs
4.2.1 Identify and classify costs: + Clasifying costs using examples, eg. fixed, variable, average, total, Use cost data to help make simple
cost-based decisions, e.g. to Stop production or continue
Heading Description/Information
Clasiving costs | Eked costs and variable cS
using examples, | Fixed costs are cost hich do not vary in the short run with the number of
e.g. fixed, items sold or produtt. They have to be paid whether the business is making
varlable, average, | any sales or not, They are also known as overhead costs.
total Variable costs are costs which vary directly withthe number of items sold or
produced.
Incaleulating the costs ofthe business, itis important to understand the
difference between different types of costs. The main types of costs are fixed
costs and variable costs,
Example of fixed costs include management salaries and rent paid for
property. Even if output was zero, these costs would stil have to be pai.
Examples of variable costs include material costs and piece-rate labour costs, The more units that ae produced, the higher these
variable costs will be 4.2.1 Identify and Classify Costs
42.1 Identify and classify costs: + Clasifying costs using examples, eg. fixe, variable, average, total, Use cost data to help make simple
cost-based decisions, eg. to Stop production or continue
Heading Description/Information
Classifying costs. | Total cost and average cost
using examples, | Total costs are fixed and variable costs combined.
[Link], | Average cost per units the total cost of product
variable, average,
total
ion divided by total output (sometimes referred to as ‘unit cost’)
erase tpad ue ae eaanee feed aes nh Ec
pan Ta coo rs ine pid) 4.2.1 Identify and Classify Costs
42.1 Identify and classify costs: «Classifying costs using examples, eg. fixed, variable, average, total, Use cost data to help make simple
cost-based decisions, eg. to Stop production or continue
Heading Description/Information
Use cost data to | Using cost data
help make simple | Once a business has classified all costs into either fixed or varable, this information can be used to help make business decisions
costbased | Here are three examples:
decisions, e.g-to | iviniisi sins ein
stop production | Sewaries —mweycotetmsingopan= fh
or continue 4.2.2 Economics and Diseconomies of Scale
4.2.2 Economics and diseconomies of scale: « The concept of economies of scale with examples, eg. purchasing, marketing, financial,
‘managerial, technical, «The concept of diseconamies of scale with examples, eg. poor communication, lack of commitment from
employees, weak coordination
Heading
Description/Information
The concept of
‘economies of
scale with
‘examples, eg.
purchasing,
‘marketing,
financial,
managerial,
technical
Economies of scale
Economies of scale are the factors that lead to a reduction in average costs as a business increases in size
‘There are five economies of scale
= Purchasing economies - When businesses buy af numbers of components (e, materials or spare parts), they are able to gain
Aiscouns for buying bulk. Ths reduces the unit cost of each item Bought and gives the fim an advantage over smaller businesses
which buy in small quantities
= Marketing economies - There are several advantages for large business when marketing its products including being able to
purchase its own vehicles to distribute goods rather than depending on other fms. Transport costs wll be reduced using larger
vehicles
= Financial economies - Larger businesses are often able to raise capital more cheaply than smaller ones. Bank managers often consider
that ending to large organisations i less risky than lending to small ones. lower rate of interests therefore often charged
= Managerial economies Small businesses cannot usually afford to pay for specials managers e.g. marketing managers) This tends to
reduce their efficiency. Large companies can afford specialists and this increases their efficiency and help to reduce their average costs
= Technical economies - There are many ofthese, but there are afew examples. Transport costs can be eut by a large amount when sing
larger ships and vehicles. Large manufacturing frms often used low production methods. These apply the principle ofthe dvsion of
labour. The use of low production and the latest equipment wil reduce the average cost for the large manufacturing business. In
addition, some machinery is only made witha certain high output capacity (e.g. automatic welding machine can do 100 welds a
minute) A smal firm bought such a machine, couldnt keep the machine working all day andthe average cost of using t would be
high. This is because the machinery snot ‘visible into smaller capacity machines 4.2.2 Economics and Diseconomies of Scale
4.2.2 Economics and diseconomies of scale: « The concept of economies of scale with examples, eg. purchasing, marketing, financial,
‘managerial, technical, « The concept of diseconamies of scale with examples, eg. poor communication, lack of commitment from
employees, weak coordination
Heading
Description/Information
The concept of
diseconomies of
scale with
‘examples, eg.
oor
communication,
lack of
‘commitment from
‘employees, weak
coordination
Diseconomies of scale
ae ee eee ee ene 4.2.2 Economics and Diseconomies of Scale
4.2.2 Economics and diseconomies of scale: « The concept of economies of scale with examples, eg. purchasing, marketing, financial,
‘managerial, technical, « The concept of diseconamies of scale with examples, eg. poor communication, lack of commitment from
employees, weak coordination
Heading Description/Information
The concept of
diseconomies of
scale with
‘examples, eg.
oor
communication,
lack of ;
aon
coordination 4.2.3 Break-even Analysis
eas
42.3 Breakeven analysis: «The concept of break-even, + Construct, complete or amend o simplaxteak-even chart «Interpret a given chart
‘and use it to analyse a situation, + Calculate break-even output from given data, + Define, coleuat¥ and interpret the margin of safety, + Use
‘breakeven analysis to help make simple decisions, eg. Impact of higher price, « Understand the limitations of break-even analysis
Heading Description/Information
‘The concept of | The concept of break-even
breakeven | ‘Break-even’ is avery important idea for any business: especially a newly set up business
‘The break-even level of output or sales indicate to the owner or manager of a business
‘the minimum level of output that must be sod so that total costs are covered. At this
break-even level of output, itis important to note that a profit is not being made - but
neither isa loss! The ‘quicker’ a newly set up business can reach break-even point, the
‘more likely i to survive -and go on to make a profit, fa business never reaches
break-even point, then it ill aways make a loss.
‘The break even level of output can be worked out in two ways - by drawing a breakeven
chart or graph and by calculation. 4.2.3 Break-even Analysis
423 Breakeven analysis: «The concept of break-even, + Construct, complete or amend o simple break-even chart, « Interpret o given chart
‘and use it to analyse a situation, + Calculate break-even output from given data,» Define, colculate and interpret the margin of safety, « Use
‘breakeven analysis to help make simple decisions, eg, Impact of higher price, « Understand the limitations of break-even analysis
Heading Description/Information
Construct, ‘Drawing a break-even chart
complete or | inorder to draw a break-even char, we need information about the ied costs, variable costs and revenue of a business
amend a simple |For examplexna sports shoe business we wil assume that
scien | aneen oe a
© Thevallable costs ofeach pairof shoes vse ims Sere ae
are $3 A ra
Exhnarotshoesisaérameest From] se ie, sateen
- Thefactory can produce amaximum ZA, breakeven Fixed Costs
‘output of 2000 pairs of shoes per year me Units ae
When output is 2000 units, variable costs willbe © ts Bo Someta
2000 * $3 = $6000 on
Assuming all outputs sol, total revenue wl be
Pageeee Stead Sn tea
Make sure you understand how the other figures were ininus > = =
artived at before looking athow the data sused touts Sn a ise
construct a break-even graph, 4.2.3 Break-even Analysis
423 Breakeven analysis: «The concept of break-even, + Construct, complete or amend o simple break-even chart «Interpret o given chart
and use it to analyse a situation, + Calculate break-even output from given data, « Define, colculate and interpret the margin of safety, « Use
‘breakeven analysis to help make simple decisions, eg. Impact of higher price, « Understand the limitations of break-even analysis
Description/Information
Interpret a given
chart and use it to
analyse a
situation
Calculate
breakeven
‘output from given
data
‘Break-even chart
\We can plot the p> information on the graph
~The y-axis Measures money amounts - costs
and revenue
‘The x-axls shows the number of units
produced and sold
= The fixed costs do not change at any level of
output
= The total cost line isthe adaltion of variable
costs and fixed costs
What does the graph show?
‘Sree pana root
freak even Fixed Costs
TS ‘sP-ve
‘The break-even point of production is where total costs and total revenue cross. The business above must therefore sell 1000 pairs
of shoes in order to avoid making a loss.
[At production below the break-even point, the business is making a loss. At production above the break-even point, it makes a
profit. Maximum profit is made when maximum output is reached and this sa profit level of $5000. 4.2.3 Break-even Analysis
423 Break-even analysis: “The concept of breakeven» Construct, complete or amend o simple break-even chart « interpret sven chart
and use it to anaise a situation,» Calculate break-even output from given det,» Define coleulote and interpret the margin ofsfey » Use
break-even analysis o help make simple decisions, eg. Impact of higher price,» Understand the tations of breakeven analysis
Description/Information
Define, calculate
and interpret the
margin of safety
Understand the
limitations of
breakeven
analysis
‘Advantages & limitations of break-even charts
‘Advantages of break-even charts:
‘Managers are able to read off from the graph the
‘expected profit or loss to be made at any level of
output
The impact of profit o loss of certain business
decisions can also be shown by redrawing the graph
The break-even chart can also be used to show the
‘margin of safety -the amount by which sales exceed
the break-even point,
aomglaialonanw 42 Costs, Scale of Production, Break-even Analysis
Term . Definition
Fined costs Fixed costs are costs which do not vary inthe short run withthe numberof ems sold or produced. They have to be
paid whether the business s making ary sales or not. They are also known as overhead costs
Variable costs Variable costs are costs which vary directly with the numberof items sold or produced
Total costs Total costs are fixed and variable costs combined
‘Average cost per unit
‘Average cost per units the total cost of production dvided by total output (sometimes refered to as ‘unit cost’)
Economies of scale
Economies of scale are the factors that lead to a reduction in average costs as a business increases in size
Diseconomies of scale
Diseconomies of scale ae the factors that lead to an increase n average costs as a business grows beyond a certain size
Break-even level of
‘Break-even level of output isthe quantity that must be produced/sold for total revenue to equal total costs (also known
‘output ‘as break-even point)
Break-even charts | Sreak-even charts are graphs which show how costs and revenues ofa business change with sales. They show the level
‘of sales the business must make in order to break even
Revenue ‘The revenue of a business is the income during a period of time from the sale of goods or services.
Total revenue = quantity sold * price 42 Costs, Scale of Production, Break-even Analysis
Definition
Margin of safety
contusion [BR 43 Achieving Quality Production
By the end of the lesson, you should be able to describe:
43.1 Why quality fs important and how
quality production might be achieved:
+ What quality means and why itis
important for ail businesses
+The concept of quality control and
how businesses implement quality
control
+ The concept of quality assurance and
how this can be implemented 4.3.1 Importance of Quality and How to Achieve it
43.1 Why quality is important and how quality production mip be achieved: + What quality means and why itis important for all
businesses «The concept of quality control and how businesses imp)ément quality cantrol «The concept of quality assurance and how this
can be implemented
Description/information
What quality
‘means and why it | Imagine you went shopping and bought a pair of jeans, took them home and found that they had a hole in them - you would not
{is important for_| be a very happy customer!
allbusinesses _| The business will get a bad reputation, and you would probably take the jeans back to the shop and expect a replacement. ifthe
shop refused to replace the jeans, you Would fee! this was unfair. This I why in some countries, there are laws to protect
consumers so that shops have to replace faulty parts or refund the price. A business needs to try to ensure that all products or
services it sels are free of faults or defects
aly products help businesses
Establish a brand image
Build brand loyalty
Maintain a good reputation
Increase sales
Attract new customers
‘ut f quality isnot maintained, then businesses will
= Lose customers to other brands
Have to replace faulty products or offer to repeat a
service that was poor, which raises costs
Have customers who tell other people about their
‘experiences, an this will create a bad reputation,
leading to lower sales and profits 4.3.1 Importance of Quality and How to Achieve it
43.1 Why quality is important and how quality production might be achieved: + What quality means and why itis important for all
businesses, «The concept of quality control and how businesses implement quality cantrol «The concept of quality assurance and how this
can be implemented
Heading Description/information
What quality
‘means and why it | What does quality mean? Quality does not necessarily producing an excellent product or
Is important for_| service. Consumers’ ef 3gctations of quality will be much higher for an expensive product
allbusinesses | than for one sold at alder price. But you do expect the low-priced product to be ‘it for
purpose’, to work effectively and not have any faults.
‘A manufacturing business needs a product with a good design, that is manufactured
without any faults and that satisfies the expectations of customers. A business providing,
services, such as hotels or banks, needs to match customer expectations with its level
of customer service, customer waiting times and convenience.
‘Therefore, quality isa very important part of any business in both the manufacturing and
service sectors. There are several ways businesses can try to ensure that they produce a
‘good quality product or provide a good service. 4.3.1 Importance of Quality and How to Achieve it
43.1 Why quality Is important and how quality production might be achieved: « What quality means and why itis important fo all
businesses, «The concept of quality control and how businesses implement quality cantrol «The concept of quality assurance and how this
can be implemented
Description/information
‘The concept of
quality control
and how
businesses
Implement
{quality control
‘Quality controt
Chay contol isthe checking for aut thew ofthe prodcton proces radon wa oy to mae sire that
pts wr eve om ner thro Se
ierroror ute were foun, hen 2 wholebateh 9 prodcon mighthave tobe scrapped of rearke. The spect fam the
Cay Control department woud check hat qualty was Being alraned ring the production of ood, ty teat eer
before they cecued, and fin any detective product before they wet out ofthe factory to consumers business mays sea
‘year customer oft ot the sece to heck fe quay sas expert.
‘Advantages & drawbacks of quality control
Advantages of quality control: Drawbacks of quality control
= Tres to eliminate faults or errors before the Expensive as inspectors need to be paid to check the product
customer receives the product or service or service
= Less training is required for the workers as. Identifies faulty products but doesn’t find why the fault has
Inspectors are employed to check quality ‘occurred and therefore is dificult to solve the problem
High costs if products have to be scrapped or reworked or
service repeated 4.3.1 Importance of Quality and How to Achieve it
43.1 Why quality is important and how quality production might be achieved: « What quality means and why itis important for all
businesses, «The concept of quality control and how businesses implement quality cantrol «The concept of quality assurance and how this
can be implemented
Description/information
‘The concept of
quality assurance
and how this can
bbe implemented
Quality assurance
Quality assurance is the checking for quality standards throughout the production process by employees. This takes a slightly
‘Advantages & drawbacks of quality assurance
Advantages of quality control: Drawbacks of quality control
= Tres to eliminate fauts/errors at all stages of production before Expensive to train employees to check
passing onto the next stage the quality oftheir own work at each
= There are fewer customer complaints stage of production
+ Reduced costs if products don’t have to be = Relies on employees being committed to
scrapped/reworked/service repeated ‘maintaining the standards set 4.3.1 Importance of Quality and How to Achieve it
43.1 Why quality is important and how quality production might be achieved: « What quality means and why itis important for all
businesses, «The concept of quality control and how businesses implement quality cantrol «The concept of quality assurance and how this
can be implemented
Heading Description/Information
The concept of | Total Quality Management
quality assurance | Total Quality Management (TOM)
and how this can | every stage of production
bbe implemented | The influence of Japanese manag&gent has changed the way quality is ensured in many businesses today. The idea of Total Quality
‘Management (TQM) i at the heart of many practices. TAM is the continuous improvement of products and processes by focusing
‘on quality at each and every stage of production. It tries to gett right the frst time and not have any defects -‘2ero faults isthe
TOM aim,
‘There isan emphasis on ensuring that the customer is always satisfied, and the customer can be other people/departments in the
same business that you are completing tasks fr, not just the final customer. This should mean that quality is maintained
throughout the business and no faults should occur, a5 all employees are involved in accepting responsibilty for a quality good or
service being delivered. TOM should mean that production costs wil fll. is closely linked with Kaizen and the use of quality
circles. Quality circles are where groups of workers meet regularly and discuss problems and possible solutions. Workers are
encouraged to suggest new ideas to reduce waste and ensure zero defects.
the continuous improvement of products and processes by focusing on quality at each and 4.3.1 Importance of Quality and How to Achieve it
43.1 Why quality is important and how quality production might be achieved: + What quality means and why itis important for all
businesses, «The concept of quality control and how businesses implement quality cantrol, «The concept of quality assurance and how this
can be implemented
Description/information
‘The concept of
quality assurance
and how this can
bbe implemented
Advantages of TOM:
product¥service and becomes central to the ethos
of all employees
Iteliminates all faults or errors before the customer
receives the product or service asit has aight fst
time’ approach
No customer complaints and so brand image is
Improved - leading to higher sales
Reduced costs as products do not have to be
scrapped or reworked or service repeated
Waste is removed and efficiency increases
oat Oe ny PAL oagoN Sy
Drawbacks of TOM:
Is expensive to train all employees to check the
product or service
Relies on all employees following TOM ideology and
accepting responsibilty for quality
Sn | itor eset
cas 4.3.1 Importance of Quality and How to Achieve it
43.1 Why quality isimportont and how quality production might be achieved: + What quality means and why itis important for all
businesses, «The concept of quality control and how businesses implement quality cantrol «The concept of quality assurance and how this
can be implemented
Heading Description/information
‘The concept of
quality assurance | Ifa customer wants to be sure that a product or service will meet particular
and how this can | standards, then they can look fora quality mark associated with the product
bbe implemented | or service. The Inusiness can apply to have this quality mark on its goods or
services and it wxthave to follow certain rules - and be inspected to make
bsi sO. 9001
Quality
Sure that is folowing them - tobe abet ep this quality mark Management
‘An example is the ISO (international Organisation for Standardisation) which Systems
{porta busines the ight to ue at SO number nf lerture and CERTIFIED
severing
Internet sites, such as TripAdvisor, are useful ways for businesses to gain a
‘300d reputation i satisfied customers put positive reviews on the site. Of course bad reviews will have the opposite effect and the
business will ose many potential customers as well asthe dissatisfied customer who posted the review. 4.3 Achieving Quality Production
Term Definition
Quality Quality means to produce a good or a service which meets customer expectations
Quality contro! quality controls the checking for quality at the end of the production process, whether itis the production of a product
‘ra service. It uses quality Inspectors as a way of finding any faults
Quality assurance
‘Quality assurance is the checking for quality standards throughout the production process by employees, whether itis,
the production of a product or a service
Total Quality
‘Management (TOM)
Total Quality Management (TOM) isthe continuous improvement of products and processes by focusing on quality at
each and every stage of production 44 Location Decisions
By the end of the lesson, you should be able to describe:
4.4.1 The main factors influencing the
location and relocation decisions of a
business:
+ Factors relerant tothe ocaton R
deasion of manfacuring businesses
and sevice businesses
"Factors that a busines could consider
wen dectng which county to focte