Operations management is about producing goods and services efficiently: using resources well, keeping costs down and quality up.
4.1 Production of goods and services
Production and productivity
Production is the process of turning inputs (raw materials, labour, machines) into outputs (goods or services) by managing resources effectively.
Productivity measures how efficiently inputs are used: output per worker (or per machine) in a given time.
Production is the total output; productivity is output per input. A firm can raise production simply by hiring more workers, but productivity rises only if each worker produces more.
Benefits of increasing efficiency: lower unit costs, higher profit, lower prices or better quality, an advantage over competitors.
How to increase it: automation and technology, improved labour skills (training), better motivation, better layout and organisation, more reliable machinery.
Inventories
Inventories (stocks) are the raw materials, work in progress and finished goods a business holds. Businesses hold them to avoid running out, to meet sudden demand, to keep production going if a delivery is late and to buy materials in bulk more cheaply. Holding too much costs money (storage, insurance, risk of damage, tied-up cash).
Lean production
Lean production means producing with as little waste as possible: of materials, time, effort and money, while keeping quality.
- Just-in-time (JIT): materials arrive only when needed, so almost no inventory is held. Benefits: lower storage costs, less waste, more cash. Risks: delivery delays stop production; needs reliable suppliers.
- Kaizen: continuous improvement: small, regular improvements suggested by all employees. Benefits: lower costs, higher quality, motivated staff.
Benefits of lean production: lower costs, less waste, higher efficiency, better quality, quicker response to customers.
Methods of production
| Method | Description | Benefits | Limitations |
|---|---|---|---|
| Job | one-off, made to order (a wedding dress, a bridge) | high quality, flexible, customer's exact needs, can charge a high price | slow and costly, needs skilled workers |
| Batch | a group of identical products made together, then the next batch (bread, clothes in sizes) | flexible, economies of scale on each batch, variety | time lost switching between batches, stock of unfinished goods |
| Flow | continuous production on a production line (cars, soft drinks) | high output, low unit cost, economies of scale, uses machines | high set-up cost, inflexible and boring work, breakdown stops the whole line, needs a mass market |
Recommend and justify: link the product and demand to the method: unique or custom goods need job; standard goods in varied sizes or flavours suit batch; very high demand for an identical product suits flow.
Technology in production
Computers now help in design (CAD: computer-aided design) and manufacturing (CAM: computer-aided manufacturing), and robots and automated lines do repetitive work. Benefits: faster, more accurate and consistent, lower unit costs, work 24 hours a day, safer. Limitations: high cost to buy and maintain, job losses, training needs, and breakdown or cyber risk.
4.2 Costs, scale of production and break-even analysis
Classifying costs
| Cost | Meaning | Example |
|---|---|---|
| Fixed | do not change with output in the short run | rent, salaries, insurance, loan interest |
| Variable | change with output | raw materials, packaging, piece-rate wages |
| Total | fixed + variable costs | |
| Average (unit) | total cost ÷ output |
Cost-based decisions: a business can use cost data to decide whether to stop or continue production. If the price is below average variable cost, it loses money on every unit and should stop; if the price covers variable costs but not all fixed costs, it may continue in the short run because it still contributes towards the fixed costs.
Economies of scale
Economies of scale are falling average costs as output grows.
| Type | How |
|---|---|
| Purchasing | bulk-buying discounts |
| Marketing | advertising costs spread over more units |
| Financial | large firms borrow at lower interest |
| Managerial | can afford specialist managers |
| Technical | can use larger, more efficient machines and flow production |
Diseconomies of scale are rising average costs when a business becomes too big: poor communication (long chains), lack of commitment from employees who feel unimportant, weak coordination between departments, and slower decisions.
Break-even analysis
The break-even point is the output at which total revenue = total cost: no profit and no loss. Below it, the business makes a loss; above it, a profit.
The break-even chart has output on the horizontal axis and costs and revenue ($) on the vertical axis. To construct one:
- Draw the fixed cost line (horizontal).
- Draw the total cost line, starting at the fixed-cost level on the vertical axis and sloping upward (fixed cost plus variable).
- Draw the revenue line from the origin, sloping upward.
- The point where total cost and revenue cross is the break-even point. The gap between the lines to the right of it is profit, to the left is loss. The margin of safety is the distance between the planned output and break-even output.
Use a chart to read off break-even, profit or loss at a given output, and see the effect of changes (a higher price makes the revenue line steeper, so break-even falls; higher fixed costs raise break-even).
Uses: decide whether a new product is viable, set prices, plan output, show lenders. Limitations: assumes all output is sold, assumes a constant price and constant variable costs per unit (in practice discounts for bulk buying occur), fixed costs may change, only as accurate as the forecast data, ignores competitors.
4.3 Achieving quality production
Quality means that a product or service is fit for purpose and meets customer expectations. It matters to all businesses because poor quality leads to returns and complaints, lost customers, a bad reputation and extra costs, while good quality builds brand loyalty and allows higher prices.
| Quality control | Quality assurance | |
|---|---|---|
| What | checking products at the end (or at set points) to find faults | preventing faults by making quality everyone's responsibility at every stage |
| How | inspection and testing, sampling, rejecting faulty items | quality standards at each stage, supplier checks, training, quality circles (staff groups discussing problems), clear procedures |
| Limitations | finds faults after they happen (waste), needs inspectors | costs of training and setting up, needs staff commitment |
4.4 Location decisions
Factors in choosing a location
| Business type | Factors |
|---|---|
| Manufacturing | cost of land and rent, proximity to raw materials (if heavy or bulky), transport links (to customers and suppliers), availability and cost of labour, government help (grants, tax breaks), space for expansion, power and water |
| Services (such as shops) | closeness to customers, footfall (passing trade), competition, rent and rates, parking, visibility |
| Online | cost, broadband, skilled labour, less dependence on customers' location |
Choosing a country
Cost and availability of labour, wage rates and skills, infrastructure (roads, ports, power), political stability, taxes and government incentives, exchange rate risk, closeness to markets, language and culture, trade restrictions (tariffs).
Legal controls on location
Governments control where firms can locate: planning permission, zoning (industrial against residential areas), environmental laws, and grants and tax incentives that attract firms to development areas.
Practise this chapter
Every past-paper question on these topics, with the mark scheme.