chapter 5-1.pdf

8/13/2019 chapter 5-1.pdf

http://slidepdf.com/reader/full/chapter-5-1pdf 1/89

© 2012 Pearson Education, Inc.Publishing as Prentice Hall

11-1




1. What are mass production, flexible production,and customer-driven production, and what are thebenefits and challenges of each?

2. What is operations management, and what isimportant in determining a facility’s location andlayout?

3. What is production management, and whatproduction processes are used by businesses?How is a production plan developed and

controlled?4. How does technology influence the production

process?



5. Distinguish between short and long run6. Explain the relationship between a firm’s

output and labor employed in the short run7. Explain the relationship between a firm’s

output and costs and derive a firm’s short-run cost curves.

8. Explain the relationship between a firm’s

output and costs and derive a firm’s long-run average cost curve.

© 2011 Pearson Education, Inc.Publishing as Prentice Hall 3



! For goods and services! Efficient production processes:

- Decrease costs

- Allow for lower prices- Improve product- Attract customers- Increase profits




! Relies on machines and automated assemblylines to produce goods that are identical andadhere to certain standards of quality

! On an assembly line, partially completeproducts are moved from one worker to thenext on a conveyor belt

! A disadvantage is inflexibility

© 2012 Pearson Education, Inc.

Publishing as Prentice Hall



! Flexible Manufacturing System (FMS)! Several machines linked by a computer! Adaptable to schedule and product specification

changes! Four components:

- Processing machines- Material handling system- Central computer- Human labor

! Used for products with:- Low to medium demand- Frequent changes in demand- A wider variety of possible customization




Factors to consider:! Raw materials! Transportation costs! Human factors

- Labor availability! Physical factors

- Utilities- Communication





!"#$%&'"(#)'$+',-

.,/#$(#0-% 12%#,/#$(#0-%

!"#$%'()* $(++(, +-*.(/0 1((/ 2("3-"4).567-)0 $.-53-"0 25)* /-748-"901((/) -5)479 *"5$%-/

:())467- /5+51- *(1((/)0 *"5;$ /-759)015) 3"4$-)

!"54,<((/ 2(" .-589 1((/)0 $()*=->-$?8-0 @#4$%0 )52-

A547) ,(* -8-"9B.-"-04,C-D467- )$.-/#7-)03())467- /-759)

E.43<((/ 2(" 4,*-",5?(,57 1((/)0.-589 1((/)0 $5, 6- 4,-D3-,)48-

!5%-) +("- ?+-0)#6F-$* *( B-5*.-"/-759)

G4"<((/ 2(" 2"5147- 1((/)0 "534//-748-"9

'()* $()*790 ,(* 2("6#7%9 (" .-589 1((/)0B-5*.-" /-759)



-Proximity to market

-Cost of transporting raw materials-Presence of highways and other transportation systems



! Living conditions- Business brings

opportunities or,potentially, threats

- Business seeks areawith high quality oflife

! Labor availability- Needed skills

! Laws andregulations- Protecting workers- Protecting the

environment © 2012 Pearson Education, Inc.


! Utility supply- Public infrastructure

services such aspower, water,communications, andwaste management

! Hazardous-wastedisposal

- Different state,county, andmunicipalityguidelines



! Also calledoperationsmanagement

! Goal: ensureproducts andservices provideutility

Production planning- Facility location- Facility layout

- What to produce- How much toproduce

- What processes andmachinery to use

- How to meet theneeds of employees

- Quality control





Goals:! Maximize efficiency! Allow for growth! Meet the national (safety

and health) standards! Smooth production flow! Minimize work-in-

progress travel! Meet employee needs;

enhance job satisfaction





! Make-or-buy decision- Cost and quality considerations

! Supplier selection steps:1. Clearly define requirements2. Research potential suppliers and develop a listof 3–5 that fit the defined needs3. Ask the potential suppliers for quotes4. Decide and work out a contract

! Have more than one supplier for an item! Strong vendor relationship is critical- Vendor quality and timeliness affect a business’

products and how its customers view thecompany





! Receiving, storing, handling, and tracking:- Raw materials- Unfinished products (work in progress)

- Finished products- Consumables! Stock book solution! Reserve stock system





! Keeps on hand the smallest amount ofinventory possible

! Items ordered “just-in-time” for use! Reduces storage costs! Requires strong supplier relationships! Requires robust inventory control system

- Technology helps streamline the process





! Forward scheduling

Backward scheduling



Operation1

Operation 2

Operation3

Operation4

H"/-" "-$-48-/IE*5"* J(+37-*- K#-

!"#

Operation1 Operation 2 Operation3 Operation4

H"/-""-$-48-/

E*5"* J(+37-*-/IK#-

!"#



! The way inwhich goods aretransported, viawater, rail,truck, or air

! A company’srouting guideshows detailedroutingsolutions forevery shippingsituation



! Activities to guaranteethat a good or servicemeets a specified level ofquality

! Historically, qualitycontrol happened at theend of the process (finalinspection)

! More commonly today,the product or service isinspected by workers ateach critical operation



Like every firm,-They must decide how much to produce.

-How many people to employ.

- How much and what type of capital equipment to use.- How do firms make these decisions?



The firm makes many decisions to achieve its mainobjective: profit maximization .Some decisions are critical to the survival of thefirm.Some decisions are irreversible (or very costly toreverse).Other decisions are easily reversed and are lesscritical to the survival of the firm, but still influenceprofit.

All decisions can be placed in two time frames:! The short run! The long run



The Short RunThe short run is a time frame in which the quantityof one or more resources used in production is

fixed.For most firms, the capital, called the firm’s plant ,is fixed in the short run.Other resources used by the firm (such as labor,raw materials, and energy) can be changed in the

short run.Short-run decisions are easily reversed.



The Long RunThe long run is a time frame in which the quantitiesof all resources—including the plant size—can be

varied.Long-run decisions are not easily reversed.A sunk cost is a cost incurred by the firm andcannot be changed.If a firm’s plant has no resale value, the amountpaid for it is a sunk cost.Sunk costs are irrelevant to a firm’s currentdecisions.



To increase output in the short run, a firm mustincrease the amount of labor employed.Three concepts describe the relationship between

output and the quantity of labor employed:

1. Total product2. Marginal product3. Average product



Product SchedulesTotal product is the total output produced in agiven period.

The marginal product of labor is the change in totalproduct that results from a one-unit increase in thequantity of labor employed, with all other inputsremaining the same.The average product of labor is equal to total

product divided by the quantity of labor employed.



Table shows a firm’s productschedules.As the quantity of labor

employed increases:! Total product increases.! Marginal product increases

initially …but eventually decreases.

! Average product decreases.



Product CurvesProduct curves show how the firm’s total product,marginal product, and average product change as

the firm varies the quantity of labor employed.



Total Product CurveFigure shows a total

product curve.The total productcurve shows how totalproduct changes withthe quantity of labor

employed.



The total productcurve is similar to the

PPF.It separates attainableoutput levels fromunattainable outputlevels in the short

run.



Marginal ProductCurve

Figure shows the

marginal product oflabor curve and howthe marginal productcurve relates to thetotal product curve.

The first worker hiredproduces 4 units ofoutput.



The second workerhired produces 6units of output andtotal productbecomes 10 units.

The third worker hiredproduces 3 units of outputand total product becomes13 units.

And so on.



The height of eachbar measures themarginal product oflabor.For example, whenlabor increases from2 to 3, total productincreases from 10 to13,so the marginalproduct of the thirdworker is 3 units ofoutput.



To make a graph ofthe marginal productof labor, we can stackthe bars in theprevious graph sideby side.

The marginal product oflabor curve passes

through the mid-points ofthese bars.



Increasing MarginalReturnsInitially, the marginalproduct of a workerexceeds the marginalproduct of theprevious worker.The firm experiencesincreasing marginalreturns .



Diminishing MarginalReturnsEventually, the

marginal product of aworker is less thanthe marginal productof the previousworker.

The firm experiencesdiminishing marginalreturns .



Increasing marginal returns arise from increasedspecialization and division of labor.Diminishing marginal returns arises because eachadditional worker has less access to capital and less

space in which to work.Diminishing marginal returns are so pervasive thatthey are elevated to the status of a “law.”The law of diminishing returns states that:As a firm uses more of a variable input with a given

quantity of fixed inputs, the marginal product of thevariable input eventually diminishes .



Average ProductCurve

Figure 11.3 shows

the average productcurve and itsrelationship with themarginal productcurve.

When marginal productexceeds average product,average productincreases.



To produce more output in the short run, the firmmust employ more labor, which means that it mustincrease its costs.Three cost concepts and three types of cost curvesare! Total cost! Marginal cost! Average cost



Total CostA firm’s total cost (TC) is the cost of all resourcesused.

Total fixed cost (TFC) is the cost of the firm’s fixedinputs. Fixed costs do not change with output.Total variable cost (TVC) is the cost of the firm’svariable inputs. Variable costs do change withoutput.

Total cost equals total fixed cost plus total variablecost. That is:

TC = TFC + TVC



Figure shows a firm’stotal cost curves.

Total fixed cost is the sameat each output level.

Total variable costincreases as outputincreases.

Total cost, which is the sum

of TFC and TVC alsoincreases as outputincreases.



The AVC curve getsits shape from the TP curve.

Notice that the TP curvebecomes steeper at lowoutput levels and then lesssteep at high output levels.

In contrast, the TVC curvebecomes less steep at lowoutput levels and steeperat high output levels.



To see therelationship betweenthe TVC curve and theTP curve, lets lookagain at the TP curve.

But let us add a second x -axis to measure totalvariable cost.

1 worker costs $25;2 workers cost $50: and soon, so the two x -axes lineup.



Redraw the graphwith cost on the y -axis and output onthe x -axis, andyou’ve got the TVC curve drawn the usualway.

Put the TFC curve back inthe figure,

and add TFC to TVC , andyou’ve got the TC curve.



Marginal CostMarginal cost (MC) is the increase in total cost thatresults from a one-unit increase in total product.

Over the output range with increasing marginalreturns, marginal cost falls as output increases.Over the output range with diminishing marginalreturns, marginal cost rises as output increases.



Average CostAverage cost measures can be derived from each ofthe total cost measures:

Average fixed cost (AFC) is total fixed cost per unitof output.Average variable cost (AVC) is total variable cost perunit of output.Average total cost (ATC) is total cost per unit of

output.ATC = AFC + AVC.



Figure 11.5 shows theMC , AFC , AVC , and ATC curves.The AFC curve showsthat average fixed costfalls as outputincreases.

The AVC curve is U-shaped.

As output increases,average variable cost falls toa minimum and thenincreases.



The ATC curve is alsoU-shaped.

The MC curve is very

special.The outputs over which AVC is falling, MC is below AVC .

The outputs over which AVC is rising, MC is above AVC .

The output at which AVC is atthe minimum, MC equals AVC .



Similarly, the outputs overwhich ATC is falling, MC is

below ATC .The outputs over which

ATC is rising, MC is above ATC .

At the minimum ATC ,MC equals ATC .



The AVC curve is U-shaped because:Initially, MP exceeds AP , which brings rising AP andfalling AVC.Eventually, MP falls below AP , which brings fallingAP and rising AVC .The ATC curve is U-shaped for the same reasons.In addition, ATC falls at low output levels becauseAFC is falling quickly.



Why the Average Total Cost Curve Is U-ShapedThe ATC curve is the vertical sum of the AFC curveand the AVC curve.

The U-shape of the ATC curve arises from theinfluence of two opposing forces:1. Spreading total fixed cost over a larger output—AFC curve slopes downward as output increases.2. Eventually diminishing returns—the AVC curve

slopes upward and AVC increases more quickly thanAFC is decreasing.



Cost Curves and Product CurvesThe shapes of a firm’s cost curves are determinedby the technology it uses:!

MC is at its minimum at the same output level atwhich MP is at its maximum.! When MP is rising, MC is falling.! AVC is at its minimum at the same output level atwhich AP is at its maximum.! When AP is rising, AVC is falling.



Figure shows theserelationships.



Shifts in the Cost CurvesThe position of a firm’s cost curves depend on twofactors:!

Technology! Prices of factors of production



TechnologyTechnological change influences both the productcurves and the cost curves.An increase in productivity shifts the product curvesupward and the cost curves downward.If a technological advance results in the firm usingmore capital and less labor, fixed costs increaseand variable costs decrease.In this case, average total cost increases at low

output levels and decreases at high output levels.



In the long run, all inputs are variable and all costsare variable.

The Production Function

The behavior of long-run cost depends upon thefirm’s production function.The firm’s production function is the relationshipbetween the maximum output attainable and thequantities of both capital and labor.



Table 11.3 shows afirm’s productionfunction.As the size of the plantincreases, the outputthat a given quantity oflabor can produceincreases.But for each plant, asthe quantity of laborincreases, diminishingreturns occur.



Diminishing Marginal Product of CapitalThe marginal product of capital is the increase inoutput resulting from a one-unit increase in theamount of capital employed, holding constant the

amount of labor employed.A firm’s production function exhibits diminishingmarginal returns to labor (for a given plant) as wellas diminishing marginal returns to capital (for aquantity of labor).

For each plant, diminishing marginal product oflabor creates a set of short run, U-shaped costscurves for MC , AVC, and ATC .



Short-Run Cost and Long-Run Cost

The average cost of producing a given output variesand depends on the firm’s plant.

The larger the plant, the greater is the output atwhich ATC is at a minimum.



Long-Run Average Cost Curve

The long-run average cost curve is the relationshipbetween the lowest attainable average total cost

and output when both the plant and labor arevaried.

The long-run average cost curve is a planning curvethat tells the firm the plant that minimizes the costof producing a given output range.

Once the firm has chosen its plant, the firm incursthe costs that correspond to the ATC curve for thatplant.



Figure illustrates the long-run average cost ( LRAC ) curve.



Economies and Diseconomies of Scale

Economies of scale are features of a firm’stechnology that lead to falling long-run averagecost as output increases.

Diseconomies of scale are features of a firm’stechnology that lead to rising long-run average costas output increases.

Constant returns to scale are features of a firm’stechnology that lead to constant long-run averagecost as output increases.



Figure 11.8 illustrates economies and diseconomies of scale .



Minimum Efficient ScaleA firm experiences economies of scale up to someoutput level.

Beyond that output level, it moves into constantreturns to scale or diseconomies of scale.

Minimum efficient scale is the smallest quantity ofoutput at which the long-run average cost reachesits lowest level.

If the long-run average cost curve is U-shaped, theminimum point identifies the minimum efficientscale output level.



Total Cost

Non operatingcost :

1.InterestExpenses

2. Loss on assetsdisposals

3. Affiliates’losses

4. Miscellaneousitems (foreignexchange losses)

Operating costs

Indirect Operating costs IOC)

1. Ticketing, sales andpromotion. 2.Passenger services

(handling, catering, liability

insurance)3. Cargo sales and handling

4. Station and ground (facilitiesand equipment)

5. General and administrativeoverhead

Fixed element : facilitiesand equipment rental,

depreciation, andinsurance

Variable element : commissions, fees,catering, and handling costs per

passenger or per shipment

Direct OperatingCosts DOC )

Fixed DOC’s

1. Aircraft ownership:depreciation; leaserentals unrelated to

flight-hours, hull andwar risk insurance

2.Fixed maintenance

3.Fixed flight-crew(base salary; benefits;

social costs such asemployment taxes)

4.Fixed cabin crew

Variable DOC’s

1. Fuel and oil

2.Variablemaintenance: flight-

hours driven.

3. Airport charges

4.ATS charges

5. Variable flight-crew

6.Variable cabincrew.



! A Schedule development process

! Forecasting Scheme

! A scheduling timeline




! The amount of a product that producers arewilling and able to make available during agiven time period and subject to a given set ofdeterminant variables.

! Market supply is the aggregate of each firm’sindividual supply decision.! Supply function! Supply schedule! Supply curve

! Movements in the supply curve or shifts in thesupply curve???




! The percentage change in output (thedependent variable) that occurrs in responseto a 1 per cent change in an independentvariable is known as elasticity of supply.

! The most common used independent variableis price: price-elasticity supply.

! Other can be: rates/ wage rates/non-labourinput costs.

! When do you think supply is more elastic, inthe long or short run?




! A Profit- maximizing firm should produce atthe level that maximizes the differencebetween total revenue and total cost.

! Marginal cost=Marginal Income.! If MC>MI " sell less increasing prices! If MC<MI " sell more lowering prices




! 1.Decision makers ever know what theirmarginal cost is….or details about suppplyand demand

! 2.Airlines produce excess of output mainly for2 reasons:! Sometimes extreme demand peaking experience;

inability to inventory output means that any level ofcapacity capable of meeting a substantial proportionof peak demand will lead to the production ofexcess off-peak output.

! Some market segments (business travellers) areresponsible for significant demand variation, (lateavailability of space.




! 1. Adding output improves product quality as perceived bycustomers. This manifests 2 ways:! Empty airline seats not evidence oversupply! Additional frequencies improve choice of departure time.

! 2. The product is highly perishable.! 3.The more service concepts an airline has in its portfolio the

more heterogeneous its output.! 4.High interpersonal contact: marketing!!!! 5. Front-line personnel in direct contact with consumers can

have a high impact on the quality of the service delivered, butlittle influence over the design of the service.

! 6. Business travellers! 7. Service delivery depends heavily on the effective managementof both people and technology.




! 8. airline operations exhibit a great deal ofshort run rigidity:! the fact that a system comprised of capital

equipment and highly trained people has to be in

place to offer service on any significant scale meansthat fixed costs are high.

! Output decisions in many international marketsremain constrained by the terms of bilateral airservice agreements




! Raw materials: carbon fiber! Customers: 57 customers have ordered 892 jets at $162 million each

! Delivery is more than a year behind- Due to a small number of suppliers that couldn’t

deliver their components when needed! Manufacturing process

- Dozens of partners around the worldpreassembling large sections of the plane

© 2012 P Ed i I

chapter 5-1.pdf

Documents