module 4-operations management - updated

Revision Notes: Module 4Operations and Project Management

Compiled by: Sohail B. Ansari (0321-6828888)

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Operations and Project Management

The nature of operations

Operations management is an area of business that is concerned with the production of good quality goods and services, and involves the responsibility of ensuring that business operations are efficient and effective. It is the management of resources, the distribution of goods and services to customers.

4.1.1. Inputs, outputs and the transformation process

The task of production and operations management is to manage the efforts and activities of people, capital, and equipment resources in changing raw materials into finished goods and services profitably and to do so it is essential to set up a business. To start any new business proper business plan is required, regarding the nature, location and finances of the business.

It is very essential to allocate the factors of production in the best efficient way to guarantee the optimum output. Land, labour, capital and intellectual skills are to be utilised effectively to transform inputs into desired output/outputs via most cost effective method of production. A business having all its operations managed properly experiences high level of productivity.

To assure the survival and profitability of the business, decisions are to be made in the best efficient way and always in the benefit of the business. Production decisions are to be efficient and most cost effective to take the first step towards the optimum profit of the business. The most important aspects of controlling production activity are stock management and quality control (TQM).

Value added is defined as the difference between selling price and cost price of the good. A cost effective production method along with a successful marketing campaign increases this difference. As, value added is one of the business objects, it has to be properly linked with the marketing strategy and operations of the business. Because marketing is always aimed at developing a consumer panel by publicizing the product in such a way that it establishes consumer confidence and catch their interests. This enables the business to charge a higher price for its products and it is only possible when all the essentials of marketing are well coordinated with each other and such a product is produced which satisfy the consumers.

• operations encompasses products and services

• process: from idea/need to final product/service

• resources: land, labour, capital (including intellectual capital)

4.1.2 Effectiveness, efficiency and productivity

• difference between effectiveness and efficiency

• productivity: measuring efficiency

http://en.wikipedia.org/wiki/Effective

http://en.wikipedia.org/wiki/Efficient

http://en.wikipedia.org/wiki/Business_operations



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Productivity: A tool used to measure the efficiency of the business i.e. how well the resources are employed to derive the output. In simple terms

i. Labour Productivity = Total output / Workers employed

Capital Productivity = Total Output / Amount of capital employed

4.1.3 Value added

• how ‘value added’ is linked to marketing, the operations process and operations decisions

4.1.4 Capital versus labour intensity

• benefits and limitations of capital and labour intensive processes

Capital Intensity and Labour Intensity

Capital intensity is the relative term used to describe a business’s nature when it has employed large proportion of finances to complete the production process. Capital word usually refers to the employment of mechanized resources in the line of production.

Benefitsi) per unit cost decreases,ii) continuous production,iii) minimal waste,iv) economies of scale could be implemented.

Limitationsi) high fixed cost,ii) high maintenance cost,iii) skilled labour required,iv) breakdowns.

Labor intensity is the relative proportion of labor (compared to capital) used in a process. The term "labour intensive" can be used when proposing the amount of work that is assigned to each worker/employee, emphasizing on the skill involved in the respective line of work.

Benefitsi) low capital,ii) suitable for small businesses,iii) workforce could be mobilize to apply delegation.

Limitationsi) labour issues,ii) more wastage,iii) training.

Production Decision Making

Industrial Location: This is the decision that a business or an industry makes concerning its geographical placing in a country. Wise location decisions could be important enough to make a business survive and further lead to growth. There are many factors which influence the precise location of a business or an industry, including:

The cost and the availability of land. Land in an urban area is clearly less abundant (and therefore more expensive) than land in rural locations or on the edge of towns and cities. Therefore it would be advisable, and also more feasible, for a business which requires a large amount of land to locate away from the centre of an urban area.



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The cost and the availability of labour. The unemployment rate varies in different areas of the UK, and a business which is labour-intensive may choose to locate near to an area of high unemployment in order to take advantage of the availability of labour at a fairly low wage.

Communication links. Many businesses choose to locate near to motorways, rail links, seaports or airports if they either have a significant amount of raw materials to receive, or a significant number of products to distribute across a wide area of the country.

Transport costs/proximity to the market. Some businesses will locate in certain areas of the country in order to minimise their transportation costs. For example, producers of fast-moving consumer goods (f.m.c.gs) will often have to distribute their products nationwide, and therefore will try to locate as near to the market as possible so their transportation costs are not excessively high.

Availability of raw materials. Some businesses will try to locate near to their suppliers or to the source of their raw materials. For example, businesses which require bulky raw materials, such as timber, will often try to locate near their suppliers so to reduce the lead-time between ordering and receiving the raw materials.

Government location incentives. The UK government has over the past 30 years offered a range of incentives to businesses to locate in depressed areas of the UK, in order to reduce the unemployment rates in those areas by creating jobs. The incentives (such as grants, tax breaks, and reduced rent and rates) are offered both to existing businesses to relocate to the depressed areas, as well as to new businesses which are about to set up.

Industrial inertia refers to the situation when a business or an industry decides to remain in its original location and is very reluctant to relocate, even after the reasons for it locating there in the first place are exhausted. Possible reasons for this include:

1. The cost of moving may be very large. 2. Strong links with the local community and with other local businesses may have been developed and a move

away from there may destroy those links. 3. Some areas and products have an international reputation which may be difficult to establish if the business

were to locate elsewhere (e.g. Scottish whisky).

However, industrial inertia can actually make an area become depressed if that area depends on a particular industry or business for employment and wealth-creation. If the industry goes into decline and no other industries or businesses wish to move to this area, then mass unemployment is created, and many of these unemployed will not be trained to perform any other jobs.

International location of industry is also a very important factor in today's global business environment. As well as the reasons for location mentioned earlier, there are a number of other factors that a business will need to consider before choosing a foreign country in which to locate.

These factors include:

the language spoken

legal differences the economic environment the stability of the political structure.

Over the past 25 years, the UK government has encouraged much foreign investment into the UK from outside Europe - specifically from Japan. These Japanese companies (e.g. Nissan, Sony) create wealth for the UK by providing employment and income to workers, and paying tax to the UK government. They can help to rejuvenate depressed areas and often purchase their supplies and raw materials from other UK businesses.



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The Japanese companies are enticed to locate in the UK through a number of factors:

1. English is the first foreign language taught in Japan. 2. Low wage rates in the UK. 3. Government incentives to locate in the UK (e.g. cheap rent, rates, etc). 4. Gateway for selling goods to other EU countries.

Production Methods

There are four ways for manufacturing businesses to organise their production - job production, batch production, flow production and cell production.

Job production: This method of production involves an item being manufactured entirely by one worker or by a group of workers. This method is often used for producing customised products for each customer.

These items are often made according to customer requirements, rather than being mass produced. This type of production is usually undertaken by small businesses and craft industries (e.g. carpenters), although larger businesses which specialise in 'one-off' products (e.g. bridges) may also use this production method.

Advantages

Businesses having small capital are best suited to job production and during their early phase, they usually apply job production,

Workers are motivated working under job production methods as they get a chance to produce the whole product by them and take pride in it,

Specialisation could be achieved at individual or firm level, Products meet up with consumers’ requirements. May help in creating a good image of the business as each order is completed in accordance with

customer’s requirements.

Disadvantages

Expensive and time consuming as each product has to be completed first before moving to the next product,

Most of the time, this method is labour intensive so labour issues are always to be considered, Skilled labour force is required.

Batch production: This method of production involves the manufacture of an item being divided into a number of small tasks. A collection (or 'batch') of items each have one of these tasks completed, and then the batch moves onto the next manufacturing task. In other words, several items have the same task performed on each of them and then they move onto the next task together in a group.

Advantages



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This production method can result in the build-up of large amounts of stock. (This may be a problem if the business is in a fashion industry, where customers' tastes can change quickly and unpredictably, leaving the business with much stock that it is unable to sell).

Allows division of labour to be applied thus shares the workload, May lead to economies of scale in increase productivity.

Disadvantages

Could be boring and demotivating for the workers, Factors of production like labour and machinery has to be readjusted in accordance with every next

batch, May lead to high level of work-in-progress thus increasing the bound stock.

Flow production: This method of production involves the tasks which were identified in 'batch' production becoming continuous for each unit, often with the use of a moving conveyor belt (e.g. a car assembly line or a electronic parts production line). Each unit is produced individually, instead of being produced in batches. An example could be coca cola, where large quantity is produced as its demand remain consistent.

This type of production is usually undertaken by large businesses. This method of production was first established by Henry Ford in the 1920s, when he developed the world's first automated production line. This involved each car passing the workers on a moving conveyor belt, rather than the workers continually moving to the car. This method should boost labour productivity and reduce average cost of production even further.

Advantaged

Large number of output could be produced as its a continuous method of production,

Quality is improved as it a capital intensive way of production (standardisation),

Average cost decreases because of economies of scale,

Labour cost tends to be low,

Whole production line could be monitored easily at different stages.

Disadvantages

Huge capital is required for setup, Skilled labour may be required, May alienate the workers due to its repetitive

nature of work,

NOTE: It is often argued that flow production leads to high rates of alienation, demotivation and absenteeism amongst the employees - it is for these reasons that much machinery is today used on these production lines to perform simple, repetitive tasks which humans may easily become bored in performing.

Cell production: This method of manufacturing an item organises workers into 'cells' within the factory, with each cell comprising several workers who each possess different skills. It was first started in USSR and its aim was to create motivation and friendly competition. Each cell is independent of the other cells and will usually produce a complete item, and each cell will usually have an output target to achieve for a given period of time. Cellular production, being the full form is type of flow production. Coca cola has different cells responsible for their line of production like sprite and mountain dew (one line, two line production or more).



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It is often argued that if the group of workers in each cell can see the completion of the finished product, then their work will have more meaning and therefore their levels of motivation and job satisfaction will be greatly enhanced.

Mass Production: Large scale production of similar or identical items. First pioneered by Henry Ford, his production system for car manufacture led to substantial productivity improvements. For example, HP can make a customised computer to suit every individual client’s specific needs in a matter of hours by changing just a few of the key components and keeping the rest the same.

Research and Development (R&D)

All businesses need to develop long-term strategies, and an important part of this strategy must be the continual development and launch of new products, or amendments made to existing products. This is the purpose of research and development (R&D).

R&D can basically be defined as: 'carrying out extensive scientific research into the product and its design, and then developing a range of prototypes, each to a slightly different specification'.

The prototype which best meets the needs of the customers and the business is then likely to be commercialised. The development of products can take several years to complete and many businesses spend a huge amount of money on this process (e.g. Unilever spent over £600 million on R&D in 1997). It can often be a very risky process, since much money can be spent on ideas that will never be commercialised.

It is within the 'sunrise' industries (i.e. industries which are fairly young and have rapid growth potential, such as computers and aerospace) that extensive R&D spending today can result in a huge competitive advantage in the future. The benefit of being the first company to launch a new, innovative product is immeasurable, since the company can charge a high price and build up a strong market share as it faces no competition..

The businesses which are most likely to succeed in the future are those which develop more new products than their closest rivals, bring their new products to the market in less time than their rivals, compete in more product- and geographic-markets than their rivals, and provide very strong after-sales service to customers.

Economies of scale

As a business grows in size and produces more units of output, then it will aim to experience falling average costs of production (i.e. on average, each unit of output costs less to produce). This is known as benefiting from economies of scale. In other words, the business is becoming more efficient in its use of its inputs to produce a given level of output.

Economies of scale can be divided into internal and external economies:

o Internal economies of scale simply benefit a single business as it grows (i.e. its average cost of production starts to fall).

o External economies of scale, however, benefit all the businesses in a particular industry (i.e. the average cost of production will fall for all the businesses in a particular industry).



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INTERNAL economies of scale fall into following main categories:

Technical: This refers to the fact that the use of automated equipment and machinery to produce output is far more cost-effective than using labour, since the machinery can be used 24 hours a day, with no breaks and with a constant level of output per hour.

Purchasing: Larger businesses are more likely to be able to bulk-buy their supplies and their raw materials, and therefore secure their supplies at a far lower cost per unit than a smaller business.

Financial: Banks and other financial institutions are more likely to offer a lower rate of interest on a loan repayment to a larger business than to a smaller business, since the larger business represents less of a risk because it is more financially secure.

Managerial: Larger businesses are more likely to be able to afford to employ managers who are specialists in a particular field. These managers can therefore devote all their time to specialising in one particular field (resulting in higher levels of efficiency and hopefully falling average costs). Smaller businesses will often employ managers who have to perform a variety of tasks and therefore cannot specialise in a single area of the business.

Marketing: Mass marketing is done to carter a larger population with keeping marketing budget minimal. Timing and duration of marketing has to be accurate to make the campaign successful and most efficient. Marketing strategy is dependent upon the size of the business and the marketing budget. Marketing decisions are always taken in accordance with other departments of the business like; the financial department.

EXTERNAL economies of scale fall into three main categories:

Labour. A large pool of available labour in a particular area of the country which has been trained at a local college, or even at a rival business, will possess specialised skills which will be useful to the whole industry, rather than simply to just one business.

Joint ventures. Two or more businesses may decide to join forces (perhaps for R&D) in order to spread the costs and the risks of developing a new product or manufacturing process.

Support services. A wide range of commercial and support services often cluster together in a certain area near a number of rival businesses (e.g. waste disposal, cleaning, component suppliers, distribution, etc). Clearly this benefits all the businesses in the area, rather than just one of them.

Dis-economies of scale

It is also possible that as a business grows in size and produces more units of output, then it will actually experience rising average costs of production (i.e. on average, each unit of output costs more to produce). This is known as experiencing diseconomies of scale. In other words, the business is becoming less efficient in its use of its inputs to produce a given level of output.

Diseconomies of scale can also be divided into internal and external economies:

Internal diseconomies of scale simply affect a single business as it grows (i.e. its average cost of production starts to rise).

External diseconomies of scale, however, affect all the businesses in a particular industry (i.e. the average cost of production will rise for all the businesses in a particular industry).

INTERNAL diseconomies of scale fall into three main categories:



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Communication. This refers to the fact that as a business grows in size, the channels of communication lengthen and are more prone to delay and distortion. This can result in inefficiency in terms of the time taken to perform a task and, therefore, this can lead to higher costs.

Co-ordination. As a business grows in terms of the number of employees, the number of departments and the number of different plants, then the overall co-ordination of all these can become very difficult. More and more meetings will be required and this all costs both time and money.

Motivation. As the number of workers increases in a business, each worker will be seen to be making only a very small contribution to the finished product. This can result in falling levels of job satisfaction and motivation, which in turn can result in falling levels of productivity and, therefore, higher costs.

EXTERNAL diseconomies of scale

External diseconomies of scale often result from the overcrowding of businesses in a particular area and the resulting congestion, the late arrivals of supplies and raw materials, the late deliveries of finished goods to customers or warehouses, and the late arrival of employees to work. All these factors will affect all the businesses in a particular area and therefore push up their costs of production and distribution.

Stock Management

STOCK CONTROL

Re-Order Levels: This is the minimum amount of stock that a business will hold before it re-orders from its suppliers. The re-order level will vary from business to business and from industry to industry.

For example: A supermarket is likely to have a higher re-order level than a car dealer, since in the time taken to receive its supplies, a supermarket is likely to sell far more stock than a car dealer.

Re-Order Quantities: The re-order quantity is the amount of stock and raw materials that a business orders from its suppliers each time it reaches its re-order level. This again will vary from business to business and from industry to industry.

For example: a business selling fast-moving consumer goods (e.g. chocolate bars or baked beans) is likely to order a far larger amount of stock from its suppliers than a manufacturer of goods with a slower stock turnover (e.g. televisions or washing machines).

There are several factors which will influence the amount of stock which a business orders, including:

1. Lead times (time taken to re-maintain minimum stock level).2. The expected level of customer demand. 3. The costs of stockholding. 4. The type of stock, whether it is perishable or durable.

Buffer Stocks: This is the minimum stock level which will be held by a business to meet any unexpected occurrences.



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For example: A sudden large order from a customer, deliveries of raw materials not arriving on time, or computer re-ordering systems breaking down.

Lead Times: This is the amount of time that elapses between a business placing an order with a supplier for more stock or raw materials, and the delivery of the goods to the business. The business will wish the lead-time to be as short as possible, so that it can meet its customer orders and minimise the time between paying for the stock and receiving the revenue from the customer. However, this may not happen due to a number of factors, such as delays in the supplier receiving the order, or the breakdown of the suppliers' lorries delivering the stock to the business.

STOCK ROTATION

Many businesses use a stock rotation system. This is the process of ensuring that the older batches of stock are used first rather than the newer batches, in order to avoid the possibility that the older stocks will become obsolete or go past their sell-by-date.

This is often referred to as a First in First out (F.I.F.O) system, to encourage the older batches of stock to be used first, therefore avoiding the possibility that the older stock will be left in a warehouse, possibly becoming unusable.

Link to Information Technology (C.A.D/C.A.M)

The production process and stock control systems in a business can be assisted by the use of Information Technology (I.T).

Sophisticated software packages can enable a business to keep detailed and accurate records on its purchases of stock and its sales to customers, using such systems as Electronic Point of Sale (E.P.O.S).

This records every transaction made by a business and can, therefore, enable it to monitor its stock levels and sales of products to a 100% level of accuracy. This system can automatically re-order stock when numbers fall to a certain level in the warehouse, as well as monitoring the quantity of each component that is used in the production process.

This enables a tight control to be kept on both costs and waste, as well as recording the amount of revenue received from customers and any outstanding customer debts.

Computer Aided Design (C.A.D) is the use of sophisticated computer software to design three-dimensional images of products quickly and relatively cheaply.

Computer Aided Manufacturing (CAM) is the use of computers and software for a wide variety of production tasks, including automated production lines and stock control systems.

Total Quality Management (T.Q.M)



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Quality control is the process of checking the quality and the accuracy of raw materials and supplies as they arrive at the business, and also of the finished products as they leave the business en route to retailers and customers.

Total quality management refers to an attempt by a business to stop errors and waste from occurring at all levels within the organisation, and to try to encourage all employees to be most motivated and efficient make in their daily activities (whether in production, marketing or personnel).

There are a number of components of T.Q.M:

1. Internal relationships between workers and their superiors and subordinates are seen to be as important as the external relationships that exist between the business and its customers and suppliers.

2. TQM must be seen to be a policy that is followed by, and has the commitment of, all workers, from senior management to shop floor employees.

3. The business must monitor all its activities and processes in order to identify any areas for improvement and to ensure that quality is being achieved.

4. Team-working is important, since a group of people working together will develop a wider range of skills, co-operation, and higher motivation than if workers were performing repetitive tasks on their own.

5. Regular market research must be undertaken to ensure that customers are happy with the level of service that they receive (any complaints can be used to improve the existing systems).

Quality Circles: This is a group of workers that meets at regular intervals during the working week in order to identify any problems with quality within production, to consider the alternative solutions to these problems, and to then recommend to management the solution that they believe will be the most successful. The members of the quality circle are also involved in the implementation and monitoring of the solution.

This should help to improve the level of motivation amongst the workers because it makes each person in the group feel valued and that they are making a significant contribution to the improvements on the factory-floor.

Zero Defects: This is the ultimate objective for a business, to produce every product with no defects, therefore eliminating waste and the time taken to correct mistakes.

Zero defects can lead to an improved business and customer reputation, as well as increasing levels of both sales and profitability. To assure that zero defects stage of production is achieved, employees should always be committed and suitably trained. It also requires that every employee is involved in the production activity at individual level and this could only be possible when employees are motivated to their maximum.

Continuous Improvement (Kaizen)

Kaizen is a Japanese word which means 'change for the better'. A business will often be facing increasing demands from customers to add new features to their products, as well as facing pressures from their competitors who are producing new and improved products, or offering improved after-sales service. The



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business will need to continually update and improve their products and marketing, in order to stay ahead of their competitors and boost revenue and profitability.

It is widely held that any aspect of the business can be improved, not just the production processes and, as with zero defects, it is vital that every employee in the business is involved in this philosophy, not simply those in the production department, but also those in marketing, finance and personnel. Kaizen aims to eliminate waste, and reduce both the time and the costs of production. It links in with other concepts such as TQM, quality circles, productivity improvements and new product development.

Quality Standards

The British Standards Institution (BSI) is the body that is responsible for setting quality and performance standards in UK industry.

The BSI 'kitemark' on a product implies to customers that it has been manufactured and produced to a high level of quality, and will be fit for the purpose for which it was advertised.

Quality assurance refers to the attempt to achieve customer satisfaction, by ensuring that the business sets certain quality standards and publicises the fact that these standards are met throughout the business.

British Standard 5750 (BS 5750) was the most common quality certification in the UK. It is now known as ISO 9000, which is an international standard that tells customers that a business has reached a required level of quality in its products and processes.

Quality of output is vital for retaining customer loyalty and, therefore, it is necessary for quality to be an important consideration in the design, the production, the distribution, the sale and the after-sales service of products.

Employee involvement and participation in quality programmes (e.g. quality circles and suggestion-schemes) will serve two purposes: 1. Improve the overall quality of the output and processes. 2. Help motivate the workers by making them feel that their contributions and their suggestions are highly valued.

Lean production is the term given to a range of measures traditionally used by Japanese businesses in an attempt to reduce waste and costs in production. Lean production refers to the theme of efficiency; it is a present-day instance of the larger recurring theme in human life of increasing efficiency, decreasing waste, and using empirical methods to decide what matters, rather than uncritically accepting pre-existing ideas of what matters.

Just-In-Time

This is a method of manufacturing products which aims to minimise:

the production time

http://en.wikipedia.org/wiki/Efficiency



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the production costs the amount of stock held in the factory.

Raw materials and supplies arrive at the factory as they are required, and consequently there is very little stock sitting idle at any one time. Each stage of the production process finishes just before the next stage is due to commence and therefore the lead-time is significantly reduced.

With a just-in-time production system, the level of production is related to the demand for the output (i.e. the number of orders) rather than simply producing finished goods and waiting for orders. This means that raw materials and stock only needs to be ordered from suppliers as required - this reduces the amount of money tied up in stocks, and leaves more money available for investment elsewhere.

The advantages of a just-in-time production system are:

1. Cash flow is improved, as less money is tied up in raw materials, work-in-progress and finished goods. 2. Less need for storage space for raw materials and finished goods. 3. The business builds up strong relationships with its suppliers. 4. Communication and co-operation between the marketing and the production departments are

improved.

The disadvantages of a just-in-time production system are:

1. The business may struggle to meet orders if their suppliers fail to deliver the raw materials on time. 2. The business is unlikely to 'bulk-buy' its raw materials and, therefore, it may lose the benefit of achieving

economies of scale. 3. Buffer stocks are minimal and this may lead to the business having to reject customer orders requiring

delivery immediately.

Cell Production

This method of manufacturing an item organises workers into 'cells' within the factory, with each cell comprising several workers who each possess different skills. Each cell is independent of the other cells and will usually produce a complete item, and each cell will usually have an output target to achieve for a given period of time.

It is often argued that if the group of workers in each cell can see the completion of the finished product, then their work will have more meaning and therefore their levels of motivation and job satisfaction will be greatly enhanced. This method of production is often combined with the just-in-time approach.

The advantages of cell production are:

1. Improved job satisfaction and motivation. 2. Improved quality as the group of workers take responsibility for the output. 3. Multi-skilling of workers means that job rotation can occur. 4. Stockholdings are reduced (leaving less money tied up in stocks). 5. The factory space can be used more efficiently. 6. Lead-times are reduced.



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The disadvantages of cell production are:

1. Output may not be as high as a 'flow' production system. 2. Different 'cells' may work at different speeds (leading to conflict and tension). 3. The business may need to invest heavily in new machinery and equipment, as each cell will require the

same capital items.

Benchmarking refers to a business finding the best methods and processes that are used by other businesses, and then trying to emulate these in order to become more efficient in its operations. Benchmarking can be used in all areas and processes in a business, not just for production. For example, it can be used to improve customer service, advertising campaigns, Human Resource Management, and budgeting procedures. Data for benchmarking is collected and used with the full co-operation of the other businesses, and often the results will help both businesses to improve their systems and procedures.

There are several stages involved in implementing a benchmarking system:

1. Researching the areas in a business which needs improvement. 2. Deciding how an improvement in these areas can be measured. 3. Identifying 'best practice' in other businesses. 4. Agreeing the exchange of information with other businesses. 5. Comparing the 'best practice' with the existing processes, systems and procedures in the business. 6. Altering the processes, systems and procedures in order to improve performance. 7. Evaluating how successful the changes have been.

In order for benchmarking to be successful, the business must ensure that firstly every employee is committed and involved in the system, (from senior management to shop-floor employees), and secondly that sufficient time and finance is available for the gathering of data and the implementation of new procedures.

Benchmarking will fail to deliver improvements to the business if there is a lack of willingness by other businesses to disclose information, or if the systems and procedures used by the 'best practice' businesses are not appropriate for the business in question.

In summary, benchmarking can help a business identify those areas in its operations which need improvement, as well as considering alternative processes and procedures for achieving its objectives. 'Best practice' can be emulated and the competitiveness of the business should improve as it strives to improve and become more efficient.

Time-based Management

Time is a very valuable resource and time-based management is concerned with reducing both the length of time taken to produce the product and also, therefore, reducing the lead-time (the time lag between the customer placing an order and the business delivering the finished product).



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In order for a business to successfully operate a time-based management system, it is important that machinery is flexible and production runs can be shortened or lengthened at short notice, in order to produce more of an existing product or to start the production of an alternative product.

It is also essential that staffs are multi-skilled and can rotate between different tasks, as they may be required to perform a number of different jobs in a short space of time.

Time-based management makes it easier for a business to implement other lean production techniques (such as just-in-time and cell production), and since these techniques require less time and fewer stocks of raw materials than more traditional mass production techniques, then the business will save money.

However, it is often argued that the move away from mass production and lengthy production-lines will reduce the chance of the business benefiting from economies of scale in its manufacturing techniques.

It is also likely that a business will be able to implement the time-based management philosophy to its R&D processes, as well as to the production-line.

A business which can develop and launch more products in a shorter time than its competitors will benefit from a number of advantages:

1. If the business is the first to launch a product on the market, then it can charge a premium price to reflect the innovative nature of the product.

2. Premium prices help to quickly recoup R&D costs, as well as earning the business a significant profit-margin per unit sold.

3. Brand loyalty is likely to develop - enabling the business to use this strong customer base as a 'launch pad' for new products in the future.

4. The diversity of products that are on sale will increase the product portfolio of the business, as well as reduce the risk of business failure should one or two of the products prove unsuccessful.

Capacity Utilization

Capacity utilization is a concept in economics which refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. Thus, it refers to the relationship between actual output that 'is' produced with the installed equipment and the potential output which 'could' be produced with it, if capacity was fully used.

Economic significance: If market demand grows, capacity utilization will rise. If demand weakens, capacity utilization will slacken. Economists and bankers often watch capacity utilization indicators for signs of inflation pressures. It is believed when utilization rises above somewhere between 82% and 85%, price inflation will increase. Excess capacity means that insufficient demand exists to warrant expansion of output.

All else constant, the lower capacity utilization falls (relative to the trend capacity utilization rate), the better the bond market likes it. Strong capacity utilization (above the trend rate) reports leads to bonds being sold off, as investors expect higher interest rates (which decreases bond prices) to offset the higher expected rate of inflation.

http://en.wikipedia.org/wiki/Bond_market

http://en.wikipedia.org/wiki/Gross_Output

http://en.wikipedia.org/wiki/Output

http://en.wikipedia.org/wiki/Economics



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Implicitly the capacity utilization rate is also an indicator of how efficiently the factors of production are being used. Much statistical and anecdotal evidence shows many industries in the developed capitalist economies suffer from chronic excess capacity. Critics of market capitalism therefore argue the system is not as efficient as it may seem, since at least 1/5 more output could be produced and sold, if buying power was better distributed. However, a level of utilization somewhat below the maximum prevails, regardless of economic conditions.

Measurement

In economic statistics, capacity utilization is normally surveyed for goods-producing industries at plant level. The results are presented as an average percentage rate by industry and economy-wide, where 100% denotes full capacity. This rate is also sometimes called the "operating rate". If the operating rate is high, this is called "overcapacity", while if the operating rate is low, a situation of "excess capacity" or "surplus capacity" exists. The observed rates are often turned into indexes.

There has been some debate among economists about the validity of statistical measures of capacity utilization, because much depends on the survey questions asked, and on the valuation principles used to measure output. Also, the efficiency of production may change over time, due to new technologies.

For example, Michael Perelman has argued the US Federal Reserve Board measure is just not very revealing. Prior to the early 1980s, he argues, American business carried a great deal of extra capacity. Running close to 80% indicated at the time approaching capacity restraints. Since that time, firms have scrapped much of their most inefficient capacity. As a result, 77% capacity utilization now would be equivalent to a historical level of 70%.

Engineering and economic measures

One of the most used definitions of the "capacity utilization rate" is the ratio of actual output to the potential output. But potential output can be defined in at least two different ways.

One is the "engineering" or "technical" definition, according to which potential output represents the maximum amount of output that can be produced in the short-run with the existent stock of capital. Thus, a standard definition of capacity utilization is the (weighted) average of the ratio between the actual output of firms to the maximum that could be produced per unit of time, with existing plant and equipment (see Johansson 1968). Obviously, "output" could be measured in physical units or in market values, but normally it is measured in market values.

However, as output increases and well before the absolute physical limit of production is reached, most firms might well experience an increase in the average cost of production (even if there is no change in the level of plant & equipment used). For example, higher average costs can arise, because of the need to operate extra shifts, undertake additional plant maintenance, and so on.

An alternative approach, sometimes called the "economic" utilization rate, is therefore to measure the ratio of actual output to the level of output, beyond which the average cost of production begins to rise. In this case, surveyed firms are asked by how much it would be practicable for them to raise production from existing plant and equipment, without raising unit costs (see Berndt & Morrison 1981). Typically, this measure will yield a rate around 10 percentage points higher than the "engineering" measure, but time series show the same movement over time.

http://en.wikipedia.org/wiki/Federal_Reserve_Board

http://en.wikipedia.org/wiki/Michael_Perelman

http://en.wikipedia.org/wiki/Capitalism

http://en.wikipedia.org/wiki/Factors_of_production



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FRB and ISM utilization indexes

In the survey of plant capacity used by the US Federal Reserve Board for the FRB capacity utilization index, firms are asked about "the maximum level of production that this establishment could reasonably expect to attain under normal and realistic operating conditions, fully utilizing the machinery and equipment in place.By contrast, the Institute of supply management (ISM) index asks respondents to measure their current output relative to "normal capacity", and this yields a utilisation rate which is between 4 and 10 percentage points higher than the FRB measure. Again, the time series show more or less the same historical movement.

Data

The average economy-wide capacity utilization rate in the US since 1967 was about 81.6% according to the Federal Reserve measure. The figure for Europe is not much different, for Japan only slightly higher.

The average utilization rate of installed productive capacity in industry, in some major areas of the world, was estimated in 2003/2004 to be as follows (rounded figures):

United States 79.7% (April 2008 - Federal Reserve measure) Japan 83-86% (Bank of Japan) European Union 82% (Bank of Spain estimate) Australia 81% (National Bank estimate) Brazil 60-80% (various sources) India 70% (Hindu business line) China perhaps 60% (various sources) Turkey 79.8% (September 2008 - Turkish Statistical Institute) Canada 87% (Statistics Canada)

Break Even Analysis

The break-even point for a product is the point where total revenue received equals the total costs associated with the sale of the product (TR=TC). A break-even point is typically calculated in order for businesses to determine if it would be profitable to sell a proposed product or not. Break even analysis can also be used to analyse the potential profitability of an expenditure in a sales-based business. fixed cost break even point (for output) = ------------------------------ contribution per unit contribution (p.u) = selling price (p.u) - variable cost (p.u)

fixed cost break even point (for sales) = ------------------------ X sp (pu) contribution (pu)

http://en.wikipedia.org/wiki/Turkish_Statistical_Institute

http://en.wikipedia.org/wiki/Turkey

http://en.wikipedia.org/wiki/Institute_of_supply_management

http://en.wikipedia.org/wiki/Federal_Reserve_Board



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In break-even analysis, margin of safety is how much output or sales level can fall before a business reaches its break-even point (BEP).

Budgeted sales - break-even sales Margin of safety = --------------------------------------------- x 100% Budgeted sales

If the product can be sold in a larger quantity that occurs at the break even point, then the firm will make a profit; below this point, a loss.

Total fixed costs Break-even quantity = ---------------------------- selling price – avg. VC

Explanation: in the denominator, "price minus average variable cost" is the variable profit per unit, or contribution margin of each unit that is sold.

This relationship is derived from the profit equation: Profit = Revenues - Costs

where Revenues = selling price x quantity of product and Costs = (average variable costs x quantity) + total fixed costs.

Therefore, Profit = (selling price x quantity) - (avg. VC x quantity + total fixed costs).

An example:

Assume we are selling a product for $2 each. Assume that the variable cost associated with producing and selling the product is 60 cents. Assume that the fixed cost related to the product (the basic costs that are incurred in operating the

business even if no product is produced) is $1000. In this example, the firm would have to sell (1000 / (2.00 - 0.60) = 715) 715 units to break even. in that

case the margin of safety value of NIL and the value of BEP is not profitable or not gaining loss.

Break Even = FC / (SP − VC)

where FC is Fixed Cost, SP is selling Price and VC is Variable Cost

Limitations

Break-even analysis is only a supply side (i.e. costs only) analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices.

It assumes that fixed costs (FC) are constant It assumes average variable costs are constant per unit of output, at least in the range of likely quantities

of sales. (i.e. linearity) It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e., there is no

change in the quantity of goods held in inventory at the beginning of the period and the quantity of



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goods held in inventory at the end of the period). In multi-product companies, it assumes that the relative proportions of each product sold and produced

are constant (i.e., the sales mix is constant).

module 4-operations management - updated

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