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Operations Management

Higher/Int 2 Business Management

2013-2014

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Contents Role and importance of operations Input-process-output Planning Importance of purchasing Purchasing mix Centralised/decentralised purchasing Stock control Computerised stock control Labour intensive/capital intensive Methods of production Quality Quality management Quality standards Payment systems Warehousing/distribution

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Operating SystemAn Operating System is a

configuration of resources to provide a product or service Raw Materials Machinery Workers

The key is efficient management of resources

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Operations ManagementA Transformation Process

PROCESSINPUT OUTPUT

InformationFinancePeople

MaterialsMachinery

GoodsServices

Customer/Employee Satisfaction

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THE PRODUCTION PROCESS FOR BREAD

INPUT Raw Materials (LAND) eg flour, yeast, water

Human Resources (LABOUR) the workers and managers

Man-made Resources (CAPITAL) eg ovens and baking trays

PROCESS The process for the manufacturing of bread will include measuring, sifting, mixing, kneading the bread, heating and cooling.

OUTPUT

The finished product, loaves of bread, distributed to the consumers

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Input IssuesBest priceReliability of suppliersDelivery timesQualityQuantities availableStorage space (raw materials)

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Process Issues Average Demand per Week Production Capacity Available Working Procedures (eg H&S) Storage Space (Finished Product) Efficiency/Productivity Payment Systems Quality Stock Control

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Output IssuesPackaging Individual/Groups of

ItemsNature/Size of ContainersStorage Space (Before Dispatch)Organising Customer OrdersTransportation (Storage/Customers)Customer Requirements

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A Complicated FunctionOperations Management is a

complex area which can be further broken down into the following key areas:

A) planningB) productionC) purchasingD) storage and stock controlE) distribution/logistics

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PlanningTo be most efficient production

should take place at a constant level

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Planning In reality this is not possible:

Consumer Demand Staff Shortages Machinery Breakdowns Maintenance

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What Production System?The Nature of the Product

Washing Machines Bread House Atlas Farming New Bridge

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What Production System? Market Size

Where the firm is producing large numbers of standard products the production can be simplified eg Irn Bru

Customised products for individual clients need a great deal of client input eg customised software or stained glass windows

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What Production System?Resources

Materials People Buildings Machinery/Tools Finance Time

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What Production System? Business Development

Small firms, small productions, production system limited eg Wallace & Gromit Cheese

As firms grow they can increase their capacity and produce a greater variety of goods

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What Production System?Labour Intensive Systems

A labour intensive system is one which relies more heavily on its workforce than machinery

‘Tattie Holidays’ Strawberry Picking Clothing Promotion

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What Production System?Labour Intensive Systems

Labour is cheaper than machinery Skill in craftsmanship required Can’t use machinery - working

environment Ability required to think/reason/use

initiative/make decisions Flexibility in production

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What Production System? Capital Intensive Systems

A Capital Intensive System is most common when:

Supply of labour is limited Production benefits from machine efficiency

and consistency Production is routine and repetitive

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Automation CAM (Computer Aided Manufacture) CAD (Computer Aided Design) Robotics

Allows firms to design, develop and produce products with high quality

Ability to make a wider range of similar products to appeal to different segments of the market

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Automation Advantages

Complicated tasks completed quickly High accuracy Less waste Quality consistent

Disadvantages Machinery is more likely to break down Narrow range of tasks

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Activities

Wallace & Gromit - Stinking Bishop

Research and produce a short report on the production of the cheese Stinking Bishop and the Wallace & Gromit effect

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PurchasingThis varies according to the size/nature

of the organisation:

Services - very little purchasing, ‘production’ depends on staff skills

Manufacturing - may have a purchasing department

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Purchasing DepartmentTeam of specialists with the aim to:

Purchase the best quality materials At the lowest cost With the correct quantities At the correct time

Purchasing Mix

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The Importance of Purchasing

Quantity and quality that the firm requires Purchase at the most competitive prices Ensure speedy delivery Arrange delivery to a suitable point eg site

or gate Choose reliable suppliers and maintain

good relationships with them

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Stages in Purchasing Process

Requisition

Negotiation

PlaceOrder

ChaseDeliveryClear

Invoice

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The Purchasing MixDecisions on quantity to purchase:

Stock of raw materials available Time between orders placed Amount of raw materials to meet output

demand Availability and cost of storage space

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The Purchasing MixChoice of Supplier:

Price: lowest? discounts? credit terms? Quantity: acceptable? continuity of

supply? Availability: sources? delivery systems?

confidence? Location: transport? insurance?

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McDonalds Purchasing McDonalds do not have contracts with any

of their suppliers

They can change suppliers without notice

Size of McDonalds makes them an attractive customer

Must meet very strict quality standards

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Centralised PurchasingOne department carries out purchasing

for the whole businessEconomies of Scale (lower

rates/market power)Quality and Standard materials setDistribution and Warehousing better

planned

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Decentralised PurchasingReduces the cost and burden of

administration If each store manager (in retail) takes

responsibility - needs of the store better catered for

Managers get additional responsibility - increasing motivation

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Nature of Stocks Raw materials and components – purchased by

suppliers before production

Work in Progress – partly finished goods

Finished Goods – finished product (changes in demand)

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A stocktake will be performed at least annually to record the amount/value of stock. This is a physical count.

Stock is listed as a current asset on the balance sheet.

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Costs of Holding Stock Stock improves business performance but:

too much means capital is unproductive too little means that there could be delays in

production Opportunity cost Spoilage costs Administration/Finance costs Out-of-Stock costs

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Stock Levels Decisions on how much stock to hold depend on:

Demand – cover growth in sales and unexpected demand

Stockpile – eg Christmas (toys) Costs of Stock holding – if expensive less held

eg furniture retailers Working capital – if limited can’t purchase more

stock Type of stock – perishable eg bread/cakes, out-

of-date eg new models Lead time – time to place and receive new order External factors – fear of future shortages

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Stock Control Issuing stock Monitoring Stock levels Quantities of Stock held

Economic Stock Level Minimum Stock Level Re-order level Re-order Quantity

(see student notes)

Stock ControlStock Level

Time

Maximum Stock Level

Minimum Stock Level

Re-order level

The Traditional Stock Control Model Maximum stock levels achieved after stock delivery. Stock levels decline during production.

When the stock level reaches the re-order level, it triggers a new order. The difference between the time of re-order and delivery is the ‘lead time’.

Lead Time

Re-order triggered

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Computerised Stock Control Most organisations use computer stock control

systems Computer automatically orders more stock at the

reorder level May use barcodes (30 yrs old in 2007) or RFID tags Physical checks to ensure discrepancies accounted

for: Theft Natural wastage Deterioration

Management make decisions with regard to popular products and adjust stock levels as necessary (local tastes)

Information useful when dealing with large orders – judge delivery date possible

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Just-in-Time (JIT) Limits stock holding to almost zero Close relationship between manufacturer and

supplier (need reliability) Stock brought to factory only when needed In a JIT system stock holding costs paid for

by supplier: Capital tied up in stock Storage costs Stock loss/wastage

Nothing produced unless there are customers ready to buy

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Storage of Stock (Centralised)Advantages

Security Specialist Staff

Supervise/Control Agreed

Procedures Economies of

Scale: Bulk Buying

Reduces Duplication of Stock around organisation

Disadvantages

May Be Remote from Production Facilities: Time Wasting

Cost of Moving Stock

Large wastage Cost of Specialist

Staff/Storage Area

Specialised Department Requirements

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Storage of Stock (Decentralised)

Advantages

Stock at Hand Order as Required (Depends on

Production) Fast Turnover of Small Quantities of Stock

Disadvantages

Less Control Theft Loss

Space in Production Area Required

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Storage of Stock (Kanban)Advantages

Exactly Meets Production Requirements

Savings on Purchase/Storage

Production Delays Prevented

Close Links with Suppliers

Disadvantages

Dependency on Suppliers

Suppliers must be Willing to Participate

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Methods of ProductionYou need to know:

Job Production Batch Production Flow Production

and advantages and disadvantages of each

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Job Production

Simpleorganisation

‘One-offs’Customer Needs

Specifications Changed

WorkersMotivated

Production Costs High

Time-ConsumingProduction

VersatileEquipment

Each job is completed in full before another is started.

INDIVIDUALITY

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Job ProductionA single product is custom-made to a

customer’s own specifications

Examples: Boat Building Bridge Building Wedding Cakes/Dresses

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Job Production

Advantages

“One-off” orders accommodated

High priceSpecifications

can be changedMotivated

workforce

Disadvantages

High labour costs

Wide variety of equipment needed

Each job will require individual design (time)

Lead times lengthy

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Batch Production

Flexibility

Stock of Partly Finished Goods

Scope for Specialisation

Delays:Change/Clean

Equipment

Small Batch =High Cost

Co-ordinationRequired

All stages in production completed at the same time – possibly different ingredients.

EACH IN BATCH SAMEVARY FROM BATCH TO BATCH

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Batch ProductionThe production of a group of similar

products. No item in a group goes to the next stage until all are ready.

Examples: Tinned Foods Bakery Houses in an Estate

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Batch ProductionAdvantages

Flexible production Partly finished goods

can be stockpiled and completed later

Reduced need for highly skilled staff

Machinery can be standardised

Disadvantages

Higher costs per unit (small batches)

Needs careful planning

High stock levels Less motivated staff Delays in

changing/cleaning equipment

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Flow Production

Economies of Scale

Reduced Stockholding

eg JIT

Automation

Start-up Costs High

Standardised – All Customers? Work is

Repetitive

Use of a production line – component parts added at each stage.

STANDARDISATION

Quality Systems Built In

System Failure?

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Flow Production Production items move continuously from

one operation to the next. Products are produced to a standard specification.

Examples: Cars Computers White goods eg washing machines

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Flow ProductionAdvantages

Economies of Scale Automated production

lines save time and money – 24/7

Large quantities produced

Reduced stockholding eg JIT

Quality systems can be built in/standard products

Disadvantages

Large investment required

Mass consumption required

If one part of the system fails – shutdown

Lack of worker motivation - repetitive

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Choice of Production Method Nature of the Product - eg bridge, sewers (job);

arable farming (batch)

Size of Market - eg fast moving consumer goods such as soap/canned drinks have a large market (flow)

Stage of Business Development - eg when starting up (job or batch) may then move to flow as sales increase

Technology - new materials/machinery eg computers and robotics in car manufacturing - also different models on same production line

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Labour vs Capital Intensive Nature of the Product - eg everyday high

demand mass produced, large quantities of machinery (newspapers)

Relative Prices - if labour costs are rising might use more capital

Size of Firm - as firm grows scale of production increases employing more capital

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Marginal Output Productivity rises as each additional worker is

added to a production process

The marginal output is the increase in production by adding the extra worker

As more workers are added eventually marginal output will fall as workers can no longer specialise this is called the Law of Diminishing Returns

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Efficiency of Production A work study shows how tasks are currently

done with a view to improvement:

Select the task to be analysed Record how it is currently done Examine the information collected Develop a better method of doing the task Install the new method Maintain the new method

Method Study

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Efficiency of Production A work study shows how tasks are currently

done with a view to improvement:

Establishing how long tasks should take so that standard times can be identified

Actual times then judged on the standard

Work Measurement

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QUALITY

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What is Quality? Physical appearance (style) Reliability and durability (lifespan) Special features (eg play MP3 CDs?) Suitability (what the customer requires) Availability of spare parts Ease of repair (service centres) After care service (prompt delivery?) Image of manufacturer (brand name?) Reputation of the product

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Quality Control Quality checks take place at the end of the

manufacturing process Often goods need destroyed or re-worked Historic concept assuming a degree of

waste

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Quality Assurance Assumes that wastage caused by Quality

Control can be prevented Quality checked at every stage of the

process instead of just at the end Reduces waste to levels as low as 5% In a highly competitive market:

Increased profits Reduced costs Increased customer satisfaction

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Quality Standards (1) Quality is often defined as conformity with a

standard: Fit for purpose, Appearance, Safety, Availability,

Value for money, Ease of use, After sales, Reputation, Customer service

British Standards Institute on Quality Assurance: “an all embracing concept involving all stages and

all people in the production process”

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Quality Standards (2) BSI Kitemark - eg safety goggles,

independently tested to a specific standard BS5750 / ISO9000 - mark of quality worldwide

CE mark an EU award - eg armbands, won’t deflate and need supervision warning

ABTA Wool Mark - pure new wool, Wool Marketing

Board IIP - Investors in People - provide training and

development of staff Warranties - manufacturer will undertake

work arising out of a defect ‘free of charge’

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UK - Toilet TestOperations folder on server …

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Japanese - Toilet TestOperations folder on server …

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ISO 9000 Can help business to:

Examine and improve systems, methods and procedures to lower costs

Motivate staff to gets things right first time Assure that orders are delivered on time Highlight product or design problems -

identifying improvements Record and investigate all quality failure and

customer complaints Give a clear signal to customer - “we take quality

seriously” Produce a documented system for recording and

satisfying the training needs of staff in terms of quality

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ISO 9001a set of procedures that cover all key processes in the business;

monitoring processes to ensure they are effective;

keeping adequate records;

checking output for defects, with appropriate and corrective action where necessary;

regularly reviewing individual processes and the quality system itself for effectiveness; and

facilitating continual improvement

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Total Quality Management (1) Culture shift:

‘we know what quality is’ ‘You tell us what you want and that will be our

definition of quality’ TQM assumes quality to your client or

customer, even if that is the next worker in the assembly line - your work should be of the highest standard and quality

Costly to establish TQM Wastage can be reduced to around 3%

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Total Quality Management (2) TQM requires:

A whole-company focus on quality A commitment from each individual in the

company Consultation with every employee at every level

of the organisation in setting standards A focus on teamwork Viewing TQM as a long term concept The creation of a plan for quality Training for employees Constant checking and review of performance Constant checking for improvement

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Total Quality Management (3) Four (4) key elements need managed:

The definition of quality at each stage of production - lies with customer

The commitment of all - mission statement, handbook, responsibilities, procedures, quality audits, quality circles, benchmarking etc

System in which quality can be assured - checking, monitoring, documentation, appraisals, targets etc

A measure of the ability to meet quality requirements - quantitatively or qualitatively

(see student notes for more detail)

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Benchmarking A process of Quality Assurance Compare your performance with the market

leaders (efficient producers) Customers Industrialists Business Analysts Journalists

Could be resistance to obtaining information

May continue to benchmark when you become the market leader

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Quality Circles Groups of employees who meet regularly to

identify, discuss and resolve problems in the production process Shop floor workers know production problems

best Workers will be motivated by involvement in

problem solving process

Team will then present ideas and solutions to management

First established in Japanese car industry

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Payment Systems (1)Used to:

Motivate Reward; and Control Labour

A variety of Payment Systems have been designed to achieve this.

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Payment Systems (2)Time-Rate Payment SystemsOvertimePiece-Rate Payment SystemsPiece rate plus Fixed ElementCommission PaymentsFringe BenefitsBonuses

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Payment Systems (3) Incentives to ProfessionalsContract EmploymentProfit-Sharing Schemes

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Payment Systems (4)Employers’ objectives:

Motivation Cost Prestige

Employees’ objectives: Purchasing Power Recognition and Fairness How Payments Are Made Up

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Distribution and DeliveryWarehouse Planning:

Design and Layout – ground level, readily accessible and stock rotated

Mechanical Handling – specialist equipment (inc pallets)

Transportation – owned or hired, owning is expensive but complete control, careful route planning (see BBC Box)

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Transportation

Road – 80% of goods transported, specialist vehicles, door-to-door delivery

Rail – shortage of lorry drivers, restrictions on driving time, road congestion, haulage to final destination

Air – Prestwick highest freight in Scotland, expensive, quick delivery

Sea – Forth Estuary, petrol/minerals/coal, lengthy delivery times

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Distribution Mix Image of ProductThe Product itselfManufacturer’s Distribution CapabilityReliability of Other OrganisationsLegal RestrictionsFinance Available

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SchedulingProduction Plans will show where the

Factors of Production are needed at any point in time.

The aim being to eliminate idle time

May use a Gantt Chart

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CongratulationsYou have completed

Operations

in

Higher/Int 2 Business Management