Operations Management Higher/Int 2 Business Management 2013-2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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)

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.

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

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

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 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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

QUALITY

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

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

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

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”

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’

UK - Toilet Test Operations folder on server …

Japanese - Toilet Test Operations folder on server …

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

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

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%

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

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)

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

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

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

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

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

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

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)

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

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

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

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