Flashcards · IB Diploma Programme Business · Topic 5

Unit 5: Operations management flashcards

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5.1 Introduction to operations management

Operations management: Planning, organizing and controlling the process that turns inputs (materials, labour, equipment, energy, information) into outputs (goods or services) that customers value.
Responsibilities of operations management: Decide output and manage capacity, keep quality, control costs, deliver on time and manage stock, choose the production method, manage suppliers, and handle waste, energy and working conditions.
How do changes in operations affect other business activities?: Finance (investment and unit costs), human resources (automation may cut jobs but raise training needs), marketing (quality, delivery, price). Operational changes can also affect the ethical stance.
Capacity utilization: 450 units on a 600-unit line: Output ÷ capacity × 100 = 450 ÷ 600 × 100 = 75%.

5.2 Operations methods

Job, batch, mass/flow production and mass customization: Job: a one-off product to a customer's specification. Batch: groups of identical items, then reset. Mass/flow: large numbers of a standard product on a continuous line. Mass customization: standard modules used to personalize each unit.
Job production: strengths and limitations: For: exact fit to the customer, high price possible, varied work. Against: slow, highest cost per unit, relies on scarce skilled labour.
Batch cost per unit: set-up USD 300, variable cost USD 4; batches of 50 and 150: Cost per unit = variable cost + set-up cost ÷ batch size: 4 + 300 ÷ 50 = USD 10.00; 4 + 300 ÷ 150 = USD 6.00.
Mass/flow production: strengths and limitations: For: lowest cost per unit at high output, consistent quality, fast. Against: large capital outlay, inflexible, repetitive work, a breakdown can halt the line, falls apart if demand falls.
Mass customization: strengths and limitations: For: premium price, made to order so less unsold stock, customer data for design. Against: needs technology and modular design, longer delivery than off the shelf, complex supply chain.

5.3 Lean production and quality management (HL only)

Lean production, kaizen and just-in-time (JIT): Lean: producing with less waste and greater efficiency. Kaizen: continuous improvement through many small changes by all employees. JIT: materials and production only as needed, with minimal inventory. (HL only)
Cradle to cradle design and manufacturing: Materials are reused or safely returned to nature at end of life, so there is no waste; contrast with the linear cradle-to-grave model of make, use, dispose. (HL only)
Quality control vs quality assurance vs TQM: QC inspects output and removes defects (detects). QA builds quality into the process (prevents). TQM is a whole-organization culture in which all staff own quality, aiming at zero defects. (HL only)
Quality circle and benchmarking: Quality circle: a small group of workers who meet regularly to solve quality problems. Benchmarking: comparing performance with a best performer (internal, competitive or functional) and closing the gap. (HL only)
Scrap falls from 5% to 3% of 12,000 units costing USD 8 each. Saving?: 12,000 × 0.05 × 8 = 4,800 before; 12,000 × 0.03 × 8 = 2,880 after; saving USD 1,920 a year. (HL only)
National and international quality standards: Published requirements an organization is independently checked against (for example ISO 9001). They build trust and access to buyers, but cost fees, audits and paperwork, and show a system exists, not that every unit is perfect. (HL only)

5.4 Location

Reasons for a specific location of production: Costs (land, wages, transport, tax, grants), closeness to customers and suppliers, labour supply and skills, infrastructure, political stability and trade barriers, sustainability and ethics, room to expand.
Outsourcing/subcontracting, offshoring, insourcing and reshoring: Outsourcing: an outside firm does the work. Offshoring: production moved to another country. Insourcing: bringing an outsourced activity back in-house. Reshoring: moving offshored production back home.
Memory aid: outsourcing vs offshoring: Outsourcing and insourcing are about who does the work; offshoring and reshoring are about where it is done. A move can combine both.
Offshoring: home cost 48.00; abroad 30.00 + 5.00 shipping + 6% duty on production cost: Duty 1.80; landed cost 36.80; saving 11.20 a unit. On 40,000 units, 448,000 a year.
In-house: fixed 90,000, variable 3.00 a unit. Contractor: 4.50 a unit. Crossover?: 90,000 + 3.00q = 4.50q, so q = 60,000. Below 60,000 units the contractor is cheaper; above it, in-house is cheaper.

5.5 Break-even analysis

Contribution per unit and total contribution: Contribution per unit = price − variable cost per unit. Total contribution = contribution per unit × units sold (or total revenue − total variable costs). Contribution is not profit: fixed costs must still be covered.
Price 25, variable cost 10, fixed costs 9,000, output 800. Break-even and margin of safety?: Contribution 15; break-even = 9,000 ÷ 15 = 600 units. Profit = 800 × 15 − 9,000 = 3,000. Margin of safety = 200 units (25%).
Target profit output and target price: Target profit output = (fixed costs + target profit) ÷ contribution per unit: (9,000 + 4,500) ÷ 15 = 900. Target price = (fixed costs + variable costs + target profit) ÷ output: (9,000 + 9,000 + 5,400) ÷ 900 = 26.
Effect on the break-even chart of a price rise, variable cost rise and fixed cost rise: Price up: revenue line steeper, break-even moves left. Variable cost up: total cost line steeper, break-even moves right. Fixed costs up: total cost line shifts up with the same slope, break-even moves right.
Limitations of break-even analysis: Assumes straight lines; fixed costs can step up; assumes all output is sold; one product assumed; relies on forecasts; static; ignores non-financial factors; says nothing about whether customers will buy that quantity.

5.6 Production planning (HL only)

Local vs global supply chain: Local: shorter lead time and easier control, often higher input price. Global: often lower unit cost, but longer lead time, exchange-rate and disruption risk, harder oversight. (HL only)
JIT vs just-in-case (JIC): JIT: minimal stock, low holding cost, little cash tied up, but high dependence on suppliers and risk of stoppage. JIC: larger stocks against delay or surges, but high holding cost and risk of waste. (HL only)
Stock control: usage 30 a day, lead time 4 days, buffer 60, reorder quantity 360: Reorder level = buffer + usage × lead time = 60 + 120 = 180. Maximum stock = 60 + 360 = 420. Days between orders = 360 ÷ 30 = 12. (HL only)
Productivity rate, defect rate and capital productivity: Productivity rate = total output ÷ total input × 100 (guide formula). Defect rate = defective units ÷ total units × 100 (48 of 1,200 = 4%). Capital productivity = output ÷ capital employed. (HL only)
Operating leverage: Total contribution ÷ profit from operations: how strongly a change in sales changes profit because of fixed costs. With operating leverage 3, a 5% rise in sales volume gives about a 15% rise in profit. (HL only)
Cost to buy (CTB) vs cost to make (CTM): buy at USD 8; make at USD 5 + USD 4,500 fixed: For 2,000 units, CTB = 16,000 and CTM = 14,500, so make. Crossover = 4,500 ÷ (8 − 5) = 1,500 units; below it, buying is cheaper. (HL only)

5.7 Crisis management and contingency planning (HL only)

Crisis management vs contingency planning: Contingency planning: preparing in advance for possible adverse events (proactive, before). Crisis management: the response during and after the event, to limit damage and restore operations (reactive, under pressure). (HL only)
The four factors affecting effective crisis management: Transparency (openness about what happened), communication (who is told, by whom, how), speed (detecting, deciding and acting fast), and control (clear authority and defined roles). (HL only)
Impact of contingency planning: cost, time, risks, safety: For: lower losses, quicker decisions, lower impact of some events, protects people. Against: equipment, training and staff time; time to write and rehearse; cannot cover every event; false confidence. (HL only)
Backup costs 30,000 over 3 years; 20% yearly chance of a failure costing 90,000 (15,000 with backup): Without: 0.2 × 90,000 × 3 = 54,000. With: 30,000 + 0.2 × 15,000 × 3 = 39,000. The backup is 15,000 better on these estimates. (HL only)

5.8 Research and development (HL only)

Research and development (R&D) and unmet needs: R&D: work to discover new knowledge and turn it into new or improved products or processes. An unmet need is one no good product satisfies: known if customers can name it, latent if they cannot. (HL only)
Copyright, patent and trademark: Copyright protects original creative works; a patent protects a new invention; a trademark protects a sign that identifies a brand. The owner may license them for a fee. (HL only)
Incremental vs disruptive innovation: Incremental: small improvements to what exists; lower risk and reward. Disruptive: a change that reshapes how a market works; higher risk, possibly higher reward. (HL only)
Importance of R&D: for and against: For: new products, competitive advantage, lower costs through better processes, new markets. Against: spending is certain and results are not, payback can be slow, a product may not meet a real need. (HL only)

5.9 Management information systems (HL only)

Big data, data analytics and data mining: Big data: very large, fast, varied data sets. Data analytics: examining data for patterns to support decisions. Data mining: searching large datasets for patterns; a pattern is not a cause. (HL only)
Cloud computing, IoT and AI: Cloud computing: storage and processing over the internet, paid by use. Internet of things: connected objects with sensors. AI: systems doing tasks that normally need human intelligence; risks of bias and lack of transparency. (HL only)
Cybercrime vs cybersecurity: Cybercrime: crime through computers and networks, causing loss of data, money and reputation. Cybersecurity: measures that protect systems and data; costly and never complete. (HL only)
Digital Taylorism: Using digital tools to monitor and measure work broken into small tasks, applying Taylor's scientific management. For: clear targets and evidence. Against: stress, lower trust, privacy loss. (HL only)
Customer loyalty programmes: for and against: Reward repeat purchases and collect data on members. For: repeat sales, targeted offers, customer knowledge. Against: reward costs, privacy concerns, members who would have bought anyway. (HL only)