1. Operations Management
Higher/Int 2 Business Management

2. 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

3. Operating System
An Operating System is a configuration of resources to provide a product or service
Raw Materials
Machinery
Workers
The key is efficient management of resources

4. Operations Management
A Transformation Process
Information
Finance
People
Materials
Machinery
Goods
Services
Customer/Employee
Satisfaction
INPUT
PROCESS
OUTPUT

5. 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

6. Input Issues Best price Reliability of suppliers Delivery times
Quality
Quantities available
Storage space (raw materials)

7. 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

8. Output Issues Packaging Individual/Groups of Items
Nature/Size of Containers
Storage Space (Before Dispatch)
Organising Customer Orders
Transportation (Storage/Customers)
Customer Requirements

9. A Complicated Function
Operations Management is a complex area which can be further broken down into the following key areas:
A) planning
B) production
C) purchasing
D) storage and stock control
E) distribution/logistics

10. Planning
To be most efficient production should take place at a constant level

11. Planning In reality this is not possible: Consumer Demand
Staff Shortages
Machinery Breakdowns
Maintenance

12. What Production System?
The Nature of the Product
Washing Machines
Bread
House
Atlas
Farming
New Bridge

13. 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

14. What Production System?
Resources
Materials
People
Buildings
Machinery/Tools
Finance
Time

15. 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

16. 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

17. 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

18. 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

19. 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

20. Automation Advantages Disadvantages
Complicated tasks completed quickly
High accuracy
Less waste
Quality consistent
Disadvantages
Machinery is more likely to break down
Narrow range of tasks

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

22. Purchasing
This varies according to the size/nature of the organisation:
Services - very little purchasing, ‘production’ depends on staff skills
Manufacturing - may have a purchasing department

23. Purchasing Department
Team 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

24. 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

25. Stages in Purchasing Process
Requisition
Negotiation
Place
Order
Chase
Delivery
Clear
Invoice

26. The Purchasing Mix Decisions 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

27. The Purchasing Mix Choice of Supplier:
Price: lowest? discounts? credit terms?
Quantity: acceptable? continuity of supply?
Availability: sources? delivery systems? confidence?
Location: transport? insurance?

28. 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

29. Centralised Purchasing
One department carries out purchasing for the whole business
Economies of Scale (lower rates/market power)
Quality and Standard materials set
Distribution and Warehousing better planned

30. Decentralised Purchasing
Reduces 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

31. 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)

32. 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.

33. 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

34. 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

35. 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)

36. Stock Control Stock Level Time The Traditional Stock Control Model
Maximum Stock Level
Re-order triggered
Re-order level
Minimum Stock Level
Lead Time
Time
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’.
Maximum stock levels achieved after stock delivery. Stock levels decline during production.
The Traditional Stock Control Model

37. 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

38. 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

39. 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

40. 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

41. 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

42. Methods of Production You need to know:
Job Production
Batch Production
Flow Production
and advantages and disadvantages of each

43. Job Production
Each job is completed in full before another is started.
INDIVIDUALITY
Simple
organisation
Production
Costs High
Specifications
Changed
‘One-offs’
Customer Needs
Time-Consuming
Production
Versatile
Equipment
Workers
Motivated

44. Job Production
A single product is custom-made to a customer’s own specifications
Examples:
Boat Building
Bridge Building
Wedding Cakes/Dresses

45. Job Production Advantages “One-off” orders accommodated High price
Specifications can be changed
Motivated workforce
Disadvantages
High labour costs
Wide variety of equipment needed
Each job will require individual design (time)
Lead times lengthy

46. VARY FROM BATCH TO BATCH
Batch Production
All stages in production completed at the same time – possibly different ingredients.
EACH IN BATCH SAME
VARY FROM BATCH TO BATCH
Flexibility
Delays:
Change/Clean
Equipment
Scope for
Specialisation
Stock of Partly
Finished Goods
Co-ordination
Required
Small Batch =
High Cost

47. Batch Production
The 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

48. Batch Production Advantages 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

49. Flow Production
Use of a production line – component parts added at each stage.
STANDARDISATION
Economies of
Scale
Start-up Costs High
Automation
System Failure?
Reduced
Stockholding
eg JIT
Standardised –
All Customers?
Quality Systems
Built In
Work is
Repetitive

50. 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

51. Flow Production Advantages 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

52. 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

53. 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

54. 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

55. 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

56. 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

57. QUALITY

58. 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

59. 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

60. 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

61. 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”

62. Quality Standards (2)
BSI Kitemark - eg safety goggles, independently tested to a specific standard
BS5750 / ISO 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’

63. UK - Toilet Test
Operations folder on server …

64. Japanese - Toilet Test
Operations folder on server …

65. 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

66. ISO 9001
a 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

67. 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%

68. 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

69. 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)

70. 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

71. 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

72. Payment Systems (1) Used to:
Motivate
Reward; and
Control Labour
A variety of Payment Systems have been designed to achieve this.

73. Payment Systems (2) Time-Rate Payment Systems Overtime
Piece-Rate Payment Systems
Piece rate plus Fixed Element
Commission Payments
Fringe Benefits
Bonuses

74. Payment Systems (3) Incentives to Professionals Contract Employment
Profit-Sharing Schemes

75. Payment Systems (4) Employers’ objectives: Employees’ objectives:
Motivation
Cost
Prestige
Employees’ objectives:
Purchasing Power
Recognition and Fairness
How Payments Are Made Up

76. Distribution and Delivery
Warehouse 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)

77. 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

78. Distribution Mix Image of Product The Product itself
Manufacturer’s Distribution Capability
Reliability of Other Organisations
Legal Restrictions
Finance Available

79. Scheduling
Production 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

80. Congratulations Operations Higher/Int 2 Business Management
You have completed
Operations in
Higher/Int 2
Business Management