Flashcards · 7115 · Topic 4

Operations management flashcards

25 cards on Topic 4, subtopics 4.1 to 4.4. Pick a subtopic or study them all.

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4.1 Production of goods and services

Production and productivity: Production is how much is made. Productivity is output compared with the resources used, such as labour productivity = output ÷ number of workers.
1,800 loaves with 9 workers, then 2,200 loaves with 10 workers. What happens to labour productivity?: 1,800 ÷ 9 = 200 and 2,200 ÷ 10 = 220 loaves per worker, a rise of 10%.
Ways to increase efficiency: Automation and technology (faster, steadier output, but costly and jobs may go) and improved labour skills through training (fewer mistakes, but trained staff may leave).
Lean production, just-in-time and Kaizen: Lean production: producing with as little waste as possible. JIT: very low inventories, with materials arriving as needed; depends on reliable suppliers. Kaizen: continuous improvement through many small changes suggested by workers.
Job, batch and flow production: Job: one item to a customer’s order (high unit cost, very flexible). Batch: identical items in groups, then the process is reset (medium cost). Flow: continuous production of standard items on a line (lowest unit cost, inflexible).
CAD and CAM: CAD: computer-aided design; designs and tests products on screen. CAM: computer-aided manufacturing; computers control machines and robots. Linked, a design goes straight to production.
Why hold inventories, and the cost of doing so: Why: buffer against late supplies, meet unexpected demand, bulk-buying discounts, seasonal peaks. Costs: storage, insurance, damage or going out of date, and money tied up.

4.2 Costs, scale of production and break-even analysis

Fixed, variable, total and average cost: Fixed: do not change with output. Variable: change directly with output. Total cost = fixed costs + total variable costs. Average cost = total cost ÷ output.
Fixed costs $27,000, variable cost $12 per bag. Find average cost at 1,500 and at 3,000 bags.: 1,500: (27,000 + 18,000) ÷ 1,500 = $30. 3,000: (27,000 + 36,000) ÷ 3,000 = $21. Fixed costs are spread over more bags.
Economies of scale: the five types: Purchasing (bulk discounts), marketing (advertising spread over more units), financial (lower interest for larger firms), managerial (specialist managers), technical (large equipment at high output).
Diseconomies of scale: Average cost rises when a business becomes too large, through poor communication, lack of commitment from employees and weak coordination.
Break-even output and margin of safety: Break-even output = fixed costs ÷ contribution per unit (price − variable cost per unit). Margin of safety = expected or actual output − break-even output.
Price $30, variable cost $12, fixed costs $27,000, expected sales 2,100. Find break-even, margin of safety and profit.: Contribution = $18. Break-even = 27,000 ÷ 18 = 1,500 bags. Margin of safety = 600 bags. Profit = 18 × 2,100 − 27,000 = $10,800.
What moves break-even output?: Higher fixed costs or higher variable cost per unit: break-even rises. A higher price or lower fixed costs: break-even falls.
Limitations of break-even analysis: It assumes all output is sold, a constant price and variable cost per unit, and fixed costs that stay fixed; it normally covers one product, and forecasts may be wrong.

4.3 Achieving quality production

Quality: How well a product or service meets customer needs and expectations. It is not the same as luxury or a high price.
Quality control and quality assurance: Quality control: checking products to find faults, at checkpoints or at the end, mainly by inspectors. Quality assurance: organising the whole business so faults are prevented at every stage, involving everyone.
Why does quality matter?: Repeat custom and a stronger reputation, fewer refunds and scrapped items, less risk of legal action, keeping business customers, and possibly a higher price.
A sample of 400 tiles has 14 cracked. Estimate the cracked tiles in an output of 8,000.: 14 ÷ 400 = 3.5%. 8,000 × 0.035 = 280 cracked tiles (assuming the sample is representative).
Quality assurance methods: Written standards, supplier checks, training, workers checking their own work, planned machine maintenance and using customer feedback.

4.4 Location decisions

Location factors for a manufacturer: Land and building costs, labour (skills, wages, availability), nearness to materials and to markets, transport links, utilities and room to expand, and government help.
Location factors for a service business: Closeness to customers and footfall, competitors, visibility and access, rent, and staff. For online services, customer location matters little.
Factors in choosing a country to locate in: Labour cost and skills, market size and growth, transport, tariffs and trade barriers, exchange rates, political stability, language and culture, government incentives and legal controls.
How can legal controls affect location?: Limits on land use (keeping factories out of residential or protected areas), permission needed to build, environmental rules, safety standards, and incentives to locate where jobs are needed.
Relocation: reasons and risks: Reasons: premises too small, rising rent, customers or suppliers moving, better access to labour or markets. Risks: moving costs, disrupted production, staff leaving, customers not following.