N5 Business Management Unit 2 - Part 2 Operations 1

N5 Business Management

Unit 2 - Part 2Operations

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Topics to CoverSUPPLIERS•how price influences choice of supplier •how location and transport costs influence choice of supplier •how lead time influences choice of supplier •how product quality influences choice of supplier •how reliability and reputation influences choice of supplier

STOCK MANAGMENT•the costs of storing stock (eg warehousing, security) •the risks of storing stock (eg theft, obsolescence) •cash flow problems from overstocking •the loss of profit and reputation from understocking •the processes that businesses use to manage their stock levels

METHODS OF PRODUCTION•the costs and benefits of capital-intensive production •the costs and benefits of labour-intensive production QUALITY•the costs and benefits of quality control activities •the costs and benefits of quality raw materials •the costs and benefits of well trained staff

ETHICAL AND ENVIRONMENTAL•the costs and benefits of recycling •the costs and benefits of minimising packaging

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What is Operations?

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The operations department (or function) is responsible for manufacturing products and services. They do this by processing inputs into outputs during the production process.

Using the 4 Factors of Production

Capital

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EnterpriseLabour

Land

Activities of the Operations Dept

• Make the products – by hand or machine• Help satisfy customers by making the products

they want• Work with suppliers to ensure raw materials

are available at the correct time• Manage levels of stock to make sure nothing

runs out.

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The Supplier – supplies the raw materials• Raw materials are the different items

needed to make something eg a chocolate cake:

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ChocolateEggsFlourSugarButterCreamRaspberries

Oban Chocolate Factory

Imagine you are helping Helen to decide on a new supplier of raw materials, what factors would you take into considderation? 7

How to choose a SupplierFactor What does this

mean?Why is this important?

Cost of raw materials

the price charged by suppliers to purchase raw materials

• costs should be kept low to maximise profit• Low costs will improve the cash flow of the

business

Quality of raw materials

How good the raw materials are

• Quality materials give quality product• Low quality materials will mean more

wasteageLead time/delivery time

How long it will take to receive the raw materials from when an order is placed

• Some materials need to be used quickly eg eggs

• If materials run out, production may have to halt

Quantity of raw materials

How much raw materials are required

• Materials can be expensive to store• Correct quantities are required to meet

customer demand

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How to choose a Supplier contFactor What does this

mean?Why is this important?

Location of supplier

Where the supplier is situated – is it far away

• A distant supplier may take longer to deliver• Transport costs will be higher

Reliability and reputation of supplier

Reliability – will the supplier deliver when they say they will?Reputation – what people think of the supplier

• Supplies must be received on time to satisfy keep customers happy

• Suppliers with a good reputation will get more business

Storage space available

How much space the business has in a warehouse to hold the raw materials until they are needed

• Raw materials may be wasted if not stored correctly

• Storage costs can be expensive eg cost of buildings or insurance

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A job is done from start to finish, then another job is started, eg bridge building, wedding cake manufacture

Advantages Disadvantages

Personal touch – made to customer requirements

Labour-intensive skilled workers – probably expensive

More motivating to workers Cost not recovered until job finished

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Job ProductionClick for video

Number of similar lines of production - each line will be produced in a batch before the next batch is started eg Tesco bakery, chocolates in Oban Chocolate Co


Can be suited to the needs of the customer

Careful planning required

Less skilled workers –cut costs

Reduced worker motivation

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Batch ProductionClick for video

Product is passed down a line with a series of operations eg car manufacture, soft drink production


Goods produced on a large scale – economies of scale

Expensive to set up

Products are identical

Less skilled workers –cut costs

Workers lack motivation

Technical problems can halt production

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Flow ProductionClick for video

Methods of Production

Nature of the product Number of customers wanting to buy Labour Technology available Size of the business Finance available

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Depends on:

Which method would be used to produce the following:

• Bread• A Hospital• Houses• Biscuits• Wedding cakes• Cars• Tins of soup

• Mobile phones• Portrait• Crisps• Subway sandwich• A Ship• Newspapers• Paint

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Labour or Capital Intensive Production(People v Machines)

• Labour IntensiveThis is where people use

their skills and knowledge to produce goods by hand

• Capital IntensiveThis is where products

are made mainly using machines and equipment (technology).

Automation – only machines are used

Mechanisation – mix of humans and machines

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Click on pizza for

video

Advantages/Disadvantages of Labour Intensive Processes


Employees can be creative and use their own initiative

It is expensive and takes time to recruit, select and train employees

Labour is usually readily available

Employees require specialised skills which can take time to learn

No need for expensive equipment

Quality of work can vary depending on who is doing it

One off or unique products can be made

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Advantages/Disadvantages of Capital Intensive Processes


Increased output – machines don’t need breaks!

High cost of buying and installing equipment

Fewer employees required Not possible to meet individual customer requirements

Better quality – less chance of human error

Breakdowns and technical difficulties can stop workflow

Greater variety of machinery available which can be adapted to carry out different processes

Can result in workers losing their jobs and higher unemployment

Robots can do work which is dangerous

Machine can’t answer queries

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Effect on Workforce of Automation/Computerisation

• Many jobs have been lost especially in manufacturing where machines can do repetitive, unskilled tasks

• Demand for skilled workers has increased• Skills required to manage and control production• Workers expected to be multi-skilled• Governments and industries must put money into

training staff appropriately

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Are the following items produced using Labour or Capital Intensive methods:

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• Houses• Biscuits• Wedding cakes• Cars• Tins of soup• Bread Click for

John Lewis video

• Portrait• Crisps• Subway sandwich• Newspapers• Paint

Stock Control

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Purpose – to ensure a supply of stock (raw materials) available for the production process and for distribution (finished goods).

Raw materials – resources for production

Work-in-progress – semi-finished products

Finished goods – waiting to be distributed

What are the Costs of Storing Stock?

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Stock must be kept secure

against internal and

external theft

Costs of warehousing can

be expensive. Storage areas

must by dry and well ventilated

What are the Risks of Storing Stock or Overstocking?

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• goods can deteriorate in quality• Goods can quickly go out of

date/obsolete (eg fashion items or electronic games)

• Greater risk of theft • Stock also ties up money – too

much money tied up in stock can lead to cash-flow problems (eg not being able to pay staff)

So a business must hit the right balance of having enough stock to operate but not so much that it will spoil.

What are the Risks of Understocking?

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• Production may have to stop• Unexpected orders cannot be met• Customers may not receive their

orders in time • The reputation of the organisation

can be affected• Profits may be lower

QuizWould the following result from

Over- or Under-stocking• High warehousing costs• Possible loss of unexpected sales orders• Unhappy customers• Not having enough cash to pay bills• Wastage due to out of date stock• Production stoppages• High security costs

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Manual Stock Record Keeping(on paper)

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Records must be kept of stock

ordered, received and used

Electronic Stock Records – Using Spreadsheets

• Spreadsheets are designed to complete automatic calculations

• They do this with the use of formula – this tells the spreadsheet which calculation to perform

• Changes can easily be made to data

• They minimise the risk of human error

• The new balance of stock is recalculated each time stock is received or issued

• Graphs can be easily created

• Data can be exported to other packages

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Electronic Stock Records – EPOS (Electronic Point of Sale)

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Most organisations now computerise their stock

control system. Barcodes are scanned which automatically

record stock received and used. This permits stock to be recalculated

automatically and is often linked to

automatic ordering of new stock.

EPOS (electronic point of sale) systems can be set to record stock levels and reorder more stock when it is required

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Re-order level (when to order more) – depends on production needs, delivery time, etc.

details of each item of stock – a record of each item held is necessary to ensure that there is never a shortage of necessary materials.

Stock Control:

Maximum stock level (highest number which should be held) – depends on space, delivery time, etc Minimum stock level (lowest number which should be held) – depends on buffer stock needed, etc

Graph illustrating traditional Stock Control System

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Traditional method where stock never falls below minimum stock level

Just-in-Time Stock Control

JIT is where the manufacturer orders goods from suppliers only when they need stock. This means that stock levels do not build up, however there is no emergency or back-up stock. Manufacturers must be able to rely on suppliers delivering the goods immediately.

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Click for video

Advantages/Disadvantages of Just-in-Time Stock Control


Up-to-date raw materials Very dependent on suppliers for quality and punctuality

No over-stocking Production held up if supplies are late – no stock to fall back on

No storage costs Difficult to expand production at short notice

No money tied up in stock

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Graph Illustrating Just-in-Time Stock Control

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Just-in-time method

where stock levels fall to zero before

new supplies are bought

The Importance of Quality

• How might products or services be improved:– Better raw materials– Improved packaging– More eco friendly– More care with

production process

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Must find out who you are selling to

Can produce a range of products for different types of customers

QUALITY

Low quality + low price product

High quality + high price product

Why is Quality Important?

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Quality raw materials

After-sales service

Quality of production

(click for video)

Quality targets should be set and monitored, and

procedures should be set up to deal with areas in

which quality is not meeting the targets. If

quality is poor, demand will fall as customers will not return so profits will

fall as the company reputation suffers.

• Benchmarking• Quality Control• Quality Assurance/Quality Circles• Total Quality Management• Quality Standards

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Methods of Improving Quality

• BenchmarkingThis means identifying the best performance in

the industry and trying to match their quality

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• Quality StandardsThis is where a symbol or logo is applied to the

product. This indicates that a product/service has met an agreed standard.

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• Quality ControlThis is where one department is

responsible for checking and monitoring quality. Inspectors check final product and scrap them if they are substandard. This means, however, that substandard items are not found till the end of the process and results in high waste levels.

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• Quality Assurance/Quality CirclesWorkers are organised in teams to ensure

quality during and after production. These teams may be known as Quality Circles.

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• Total Quality ManagementThis is the newest form of quality control where views

are sought by–Involving customers in quality monitoring by asking how satisfied they are with quality of product or service–Also involving workers in quality control–People will also work in teams to help each other

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Advantages/Problems of Quality Checks

Advantages Problems

Less likelihood of customer dissatisfaction

Time involved in consistently checking production

Attempts to improve and stabilise production

Need more manpower to carry out quality checking process

Good reputation for company

Higher revenue through

Less waste of materials and substandard products

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Why Consider Ethical and Environmental Issues?

• Most business organisations wish to be seen as being SOCIALLY RESPONSIBLE. This can give them a more positive image and help them to gain more customers as well as, in many cases, saving money and looking after the environment.

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Consumers don’t want to buy from a business whose products are

polluting the environment – this gives the business a bad reputation

and affects sales

The Supply Chain

• Organisations should consider where they buy their raw materials. Use of FairTrade materials ensures producers in developing countries get a fair share of the profits

• Some overseas countries do not have the same care policies regarding looking after the environment

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Minimise Waste

• Ensure employees are trained to do the job properly

• Ensure machinery is kept in good condition• Don’t overstock

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Consider alternatives such

as recycling

Store waste securely

Recycle• Encourage employees to use appropriate

recycling bins• Try to use recycled materials in the production

process or for packaging

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Costs of Recycling Benefits of Recycling

Cost of providing bags/recycling bins etc

Helps protect natural resources

Costs of personnel to collect waste

Saves energy

Cost of transport to recycling sites Protects the natural environment

Costs of providing recycling sites Fewer landfill sites

Minimise Packaging• Packaging is necessary as it protects the

product during transportation and on the shelves. It can also help attract customers eg perfume sets.

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Costs of Reducing Packaging Benefits of Reducing Packaging

Products can be damaged on route to customers

Less packaging means less waste and fewer resources being used up

Customers may think the product is inferior if the packaging is not attractive

Less litter being dumped (eg fast food wrapping/packaging)

Avoid Pollution• Greenhouse gases and emissions have to be reduced

in order to prevent further damage to the environment

• Business should consider their carbon footprint – eg sourcing raw materials locally to cut down on transportation costs. Some have changed the product (concentrated fabric softener) so that it takes up less space during transport.

• Businesses using dangerous materials must dispose of waste carefully. If they don’t they can risk prosecution

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Documents

N5 Business Management Unit 2 - Part 2 Operations 1