operations planning - peterhouse boys' schoolrevision.peterhouse.co.zw/business studies/a...

2121Operations planning

1 Chapter 21 © Cambridge University Press 2010

Activity 21.1 (page 395): Sunburst Bakeries

1 For each of the products referred to above, suggest and justify an appropriate production method. [8]

hand-made wedding cakes − job production, as each cake will be made to • individual specifi cation standard loaves − fl ow production, as there is a large level of demand all year • round and little variation: highly standardised productdoughnuts/family cakes − batch production due to the lower level of demand • and batches can be matched to demand according to the time of the week

2 Explain the possible eff ects on Sunburst’s stock levels and profi tability if it replaced all batch production with fl ow-line production. [7]

Flow production might increase profi tability due to the lower level of labour required as the process will be highly mechanised. However, there would be a signifi cant investment in capital equipment required.

With a consistent rate of output it should be possible to minimise stock holding of inputs, such as fl our and sugar. Th is would reduce costs and increase profi tability. However, demand for the cakes and doughnuts may not be suffi ciently high to justify the investment in a fl ow production line. Demand varies through the week and, therefore, it would be necessary to have a production line capable of switching between products. If fl ow lines were dedicated, then the cost would be greater as one would be needed for doughnuts and another for the large family cakes.

Activity 21.2 (page 396): In search of quality in quantity

1 Explain the diff erence between traditional fl ow or mass production and mass-customisation methods of production. [5]

Traditional fl ow production lines produce mass quantities of standardised products with only minimal variation possible. Th e work tends to be repetitive as it maximises the division of labour, and by breaking down oft en complex products into a series of simple tasks, it requires little or no skill from the worker.

Mass customisation seeks to combine the benefi ts of fl exibility with fl ow production. It is typically dependent on computerisation and the use of a multi-skilled work force to be able to produce diff erentiated products on a fl ow


production line. Th us, companies such as Caterpillar are able to produce 11,000 engines each year with each engine being slightly diff erent.

2 Examine the benefi ts of mass customisation to either a computer manufacturer or a dress-making business. [6]

Th e benefi ts to either business will centre on:Diff erentiating the product will make it possible to meet individual customer • needs. Th is will make the product more attractive to the customer.As the product is individual to customer needs, it may be possible to charge a • higher price than for a highly standardised unit of production.Costs will be kept low as production is still on a large scale. Th us, prices can be • competitive.

Benefi ts should be explained in context of either product.

3 List three of the factors that are necessary for mass customisation to be successful. For each one, explain why you consider it is an important condition for mass customisation to work eff ectively. [9]

Flexible capital equipment − machinery must be able to make small changes • to the product without the need to reset the whole production line. Th erefore, computerised control of machinery is benefi cial. Flexible workers − as products are not standardised, workers must be able • to adapt the specifi cation of the product according to customer needs. Th e machinery will be more complex to control as well.Standardised parts within the various product designs − without • standardisation of parts, the production process will not benefi t from purchasing economies and the unit cost will be much higher. For example, the car manufacturer VW uses standardised parts across its car range, including distinct brands such as Audi, Seat and Skoda.

Activity 21.3 (page 400): Government support

1 Explain the benefi ts the regional economy would gain as a result of this new investment. [6]

Answers might comment on:Jobs will be created. Th e area has a high level of unemployment.• Spending in the economy will be increased. Th e 250 workers will spend their • wages in the local economy, providing income for other businesses.£95 million investment may make use of some locally produced goods and • services, generating income for other businesses.Nissan’s presence in Sunderland may attract other fi rms to the area to provide • services or components to Nissan.

2 Discuss whether the location that off ered the highest government grant would always be the best site for a new car factory. [10]


Th e answer is no. A number of factors may be more important to the car producer. For example:

Availability of a suitably trained workforce − engineering skills will be required • by Nissan; having to train all workers will be expensive.Labour costs − a car factory will require a large number of workers. If there is a • shortage of workers in the area for which a government grant is available, it will be expensive to recruit staff .Access to market − Nissan will have to consider distribution costs. Nissan needs • to be able to get its cars to its key markets elsewhere in Europe at relatively low cost. Th erefore, infrastructure will be important, e.g. having a port nearby.Site costs and other capital costs − these will vary signifi cantly from one region • to another. However, it is likely that availability of a government grant will refl ect relative deprivation of an area and, therefore, site costs in Sunderland are likely to be low. Availability of supplies• − it is benefi cial to locate near key suppliers of components as this reduces costs and will provide greater reliability of supplies.

Evaluation may consider:Th e highest government grants are most likely to be off ered to a fi rm to locate in an area of high unemployment. Th erefore, it is likely that labour recruitment costs and site costs will be low. However, it does not follow that there will be a suitable supply of qualifi ed workers or that the area off ers good access to market. In conclusion, it is not always the case that an area off ering the highest possible grant will be the best location for a car factory.

Activity 21.4 (page 401): Profi ts in different locations

1 Calculate the estimated annual profi t from these two possible locations for a mobile-phone shop. [6]

Site A: Revenue = sales × price = 25,000 × 50 = $1,250,000 Profi t = TR − TC = 1,250,000 − 975,000 = $275,000

Site B: Revenue = 17,000 × 45 = $765,000 Profi t = 765,000 − 498,000 = $267,000

2 In future years, why might the annual profi ts made from each location change? [6]

A number of factors might change including:Level of economic activity − this will aff ect the demand for and price of the • mobile phones. If there is economic growth, then the demand for mobile phones will increase.Level of competition in the market − if another mobile-phone shop opens/• closes, it will aff ect revenue.Change in costs − rental cost of premises and/or local business rates may • change between locations.Technological change − changes to mobile phones will have a signifi cant impact • on demand.


Activity 21.5 (page 401): Which site is the best investment?

1 Using the investment appraisal results in the table and any other information, which of these two sites would you recommend for the new shop? [8]

Site Y has a higher rate of return, that is a higher level of profi t for each • dollar invested.Site X has a lower capital cost, 33% below that of site Y. Th erefore, it will be • easier to raise fi nance for site X. As TLC already has substantial borrowing, it may wish to minimise any further borrowing. Site X has a shorter payback period – 1.3 years quicker than site Y. Th erefore, • site X is preferable as there is less risk; the longer the payback period, the more likely that the estimates of cash fl ows will be inaccurate.As TLC is short of funds for expansion, it may prefer a quick payback as this • reduces risk.A quick payback will enable TLC to continue its expansion elsewhere sooner. • Th e threat of an increase in interest rates will favour site X as less needs to be • borrowed and the payback is quicker. As the business has substantial loans, it faces the possibility of an increase in its existing borrowing costs; this will cause cash-fl ow problems and thus further borrowing should be minimised. However, the higher rate of return for site Y makes it more likely to off er a positive return in the event of an increase in interest rates.

Evaluation may consider:Evaluation should identify which is the most important factor to TLC Cosmetics and why.

Activity 21.6 (page 402): Which site covers its costs at a lower output level?

1 Suggest to the business which location should be selected by using the data shown in the table. Th e expected annual production level is 6 million litres. Briefl y explain your answer. [6]

Site C has a much higher break-even level of output and, consequently, a lower margin of safety. Th erefore, on the basis of break-even ICT should choose site D.

2 What other factors do you think the business should consider before taking the fi nal location decision? [4]

Transport costs to market − these may erode the advantage of site D if the • market is located nearer to site C.Political stability − the UK has a stable political environment within which to • operate; it is therefore ‘safe’. Some political systems are unstable and volatile and, therefore, less safe to invest in.Ethical considerations − it is likely that the paint factory will cause a variety • of pollutants to be released into the environment. Which site is suffi ciently far away from residential areas to avoid opposition from local residents?


Infrastructure − the UK has a highly developed infrastructure that will provide • the necessary support for production, e.g. reliable access to power and water and good transport links. Is the less economically developed country able to off er these benefi ts?Suitably skilled labour − it is important to make sure this is available.•

Activity 21.7 (page 403): Rolls-Royce goes for a quality location

1 Explain why qualitative factors were considered to be so important in this case when Rolls-Royce could fi nd much cheaper locations to produce its cars. [8]

Rolls-Royce is a luxury brand and although controlling costs is still important, there are other qualitative factors that are particularly signifi cant. Although Goodwood is an expensive location with a high cost of land and labour, it off ers distinct benefi ts to Rolls-Royce including:

Infrastructure − the proximity of a small airport enables wealthy customers to • visit the factory. Rolls-Royce customers are primarily from outside the UK, so the location provides easy access to the factory. Unlike a mass-produced car, the customer is buying a highly individualised, hand-craft ed product and may want to see how it is produced.Promotion − there are exclusive venues nearby to which Rolls-Royce can take • potential customers. Th is is part of the promotional activity of Rolls-Royce and a way of securing orders from customers.

Rolls-Royce is a premium brand that retails at extremely high prices and, therefore, the Goodwood location helps enhance the brand image and off ers the company an excellent marketing opportunity. Th e production costs are, therefore, less important.

Activity 21.8 (page 404): One company, many factories

Discuss the advantages and disadvantages to Toyota of operating factories in so many diff erent countries. [12]

Advantages:Costs will be reduced. Toyota is a Japanese fi rm where wages are relatively high. By • locating factories in countries such as Mexico, it will benefi t from lower labour costs and lower fi xed costs. Markets in developing countries are also growing strongly; locating in those countries provides better access to customers.It will gain access to markets for which there are import restrictions such as the • European Union. Locating in the EU gives Toyota free access to the markets of all 27 member states.Transport costs will be reduced. Th e factories will be closer to consumer markets. • Lead times to meet customer demand will be reduced. • Delegation of responsibility to regional managers will develop skills and enhance • motivation.


Reputation in the countries in which factories are located will be enhanced. Th e • cars can be marketed as being produced locally; this is an appealing factor to some customers.Supply problems from one factory or country can be overcome by increasing • production at another site.

Disadvantages:Th ere may be coordination problems. Toyota has 52 manufacturing facilities in 26 • diff erent countries. Th is will create problems of coordination. Time and money will have to be devoted to ensuring that communications are excellent between locations and head offi ce. Head offi ce may lose control over the business.Th ere may be quality concerns. It may be diffi cult to replicate the successful quality • systems used by Toyota in all countries due to cultural diff erences and attitudes towards work.Th ere may be criticism of Toyota if it moves production to another country to take • advantage of lower labour costs.Th ere may be diffi culties with maintaining supply chains. Factories around the world • may be dependent on supplies from companies in one particular country. Th erefore, manufacturing will be riskier as components have to be shipped around the world.Toyota will have to adapt its production to meet the diff erent legal requirements • imposed by governments in each country.

Activity 21.9 (page 406): TRG’s excellent experience in Pakistan

1 Using knowledge of your own country, do you think TRG would be advised to move its head offi ce to your country or remain in Pakistan? Give reasons for your answer. Students in Pakistan: Evaluate the main reasons for TRG’s decision to base the company in Pakistan. [12]

Answers will be country specifi c, but will comment on factors highlighted in the case material:

relative cost of labour• availability of government grants• fi xed costs, e.g. cost of land• telecommunications infrastructure to support web- and phone-based services• political stability• proximity to operations in India, Pakistan, the Philippines and Morocco• educational standards of potential employees − a pool of English-speaking • labour is likely to be critical as phone-based customer services are off ered to businesses in the USA.

Evaluation may consider:Final decision needs to be based on balance of arguments.

2 Explain why another business-services fi rm setting up in Lahore might benefi t from TRG’s presence there. [6]


TRG’s presence in Lahore would bring the following benefi ts:Th e number of workers in the labour market that have the relevant general • management experience would increase.Specialist personnel recruitment fi rms would begin to emerge, providing • services to TRG and other similar businesses.Graduates would be increasingly fl exible in their attitudes toward working US • business hours.Local colleges would start to off er courses providing training relevant to • businesses such as TRG.

Activity 21.10 (page 409): Cooking pots

1 Outline the problems facing Ben because his factory is operating at full capacity. [6]

He is unable to expand production to meet increasing demand without • investing to increase capacity. Th us, customers will be dissatisfi ed.Machine for stamping out the metal pans is working to its full potential. Th is • will reduce downtime available for maintenance. In the long term this might result in the machine breaking down.Ben has to work long hours to ensure that production is maximised. Ben’s job • is increasingly stressful. Workers are working long shift s – this may lead to dissatisfaction, and quality of production may fall.

2 Analyse the advantages and disadvantages of the two methods he is considering for solving the problem. [12]

Increase capacity

Buy in components from the

other fi rm

Advantages Th ere will be benefi ts from • economies of scale as raw materials will be bought in greater quantities.Old machinery may have to • be replaced in near future anyway.

Th ere will be greater fl exibility • to match production to demand. If the increase in demand is only temporary, then the contract with the supplier of components can be ended or reduced.Production will be quicker and • there will be no disruption.

Disadvantages Th ere will be the high cost • of purchasing machinery and extending the factory. Th ere will be disruption • to production during the expansion.Workers may need • retraining.Th ere may be worker • resistance if new machinery replaces workers.If demand falls, the fi rm • will be operating well below capacity.

Supplier has to make a profi t; • therefore, costs may be higher than if production is undertaken by Ben’s fi rm.Quality is in the hands of • the supplier and no longer directly controlled by Ben.Currently the fi rm has spare • capacity; however, this may not remain so. Th e fi rm might end the contract in the future, leaving Ben’s fi rm with its original problem.


3 Outline three additional pieces of information Ben would fi nd useful before making a decision about how to solve the capacity problems. [6]

impact on unit costs of the two options – the scope for scale economies• availability of fi nance for expansion• state of the economy − to help assess future growth of demand• reputation of the component supplier• degree of spare capacity at the other fi rm•

Activity 21.11 (page 412): Expansion plans at Bookworm Ltd

1 Using this case as an example, outline the cost and effi ciency disadvantages oft en experienced by small fi rms. [6]

Initially Aymen had to undertake all management roles himself − keeping • accounting records, ordering and delivering stock and recruiting and selecting staff . It is diffi cult for one person to be effi cient in all of these roles.Th e business justifi es purchasing its own transport due to low level of sales. • Aymen had to hire a van each week; this would be relatively expensive.Advertising could not be undertaken due to its cost and relatively low level of sales.• Th e overdraft was expensive.•

2 a What is meant by ‘economies of scale’? [3]

As the scale of production increases, there is a fall in unit cost of production.

b Explain how the expansion of the Bookworm business might result in lower average costs of selling each book. [15]

Bookworm will benefi t from economies of scale such as:Greater division of labour could increase effi ciency.• Bulk buying books for the increased number of stores will result in discounts • from book suppliers.Bookworm will benefi t from fi nancial economies. Larger loans can be taken • with a lower level of interest charged than the bank overdraft initially required.Employment of specialist managers will increase effi ciency: for example, the • two brothers who joined the business, bringing accounting and marketing expertise. Th is resulted in the business managing the cash fl ow more eff ectively and reducing its overdraft .Advertising will be spread over more units and, therefore, the unit cost will be lower.• Th ere will be technical economies of scale. Th e business is considering • purchasing a new computerised stock management system which will help reduce administrative costs of the business and provide more eff ective stock control. Such a sophisticated system would be too expensive for a small business to purchase.


3 Examine the potential diseconomies of scale that could result from continued expansion of the business. [9]

Coordination of the 20 shops will be diffi cult and could lead to cost increases • due to mistakes.Th e organisation will become less fl exible as more layers of management are • added. Bookworm is currently considering a new middle layer of management. Th is will increase the length of the chain of command and make two-way communication between senior management and shop employees more diffi cult.Employees will become alienated due to their lack of contact with senior • management. If workers feel relatively insignifi cant, it reduces their commitment and leads to demotivation.

Revision case study 1 − answer provided on Student’s CD-ROM.

Revision case study 2 (page 416): Is offshoring best for HiSonic Ltd?

1 Diff erentiate between quantitative and qualitative factors involved in location decisions. [4]

Quantitative factors are measurable in fi nancial terms, whereas a fi nancial value cannot be placed on qualitative factors. An example of a quantitative factor is the cost of land; qualitative factors include managerial preferences.

2 What is the current production method used by HiSonic? Explain your answer. [4]

Job production as all products are assembled to specifi c customer requirements.

3 Discuss the potential advantages and disadvantages to this business of changing its current production method to fl ow production. [12]

Advantages:Th ere will be high levels of output. HiSonic is experiencing increasing demand • and, therefore, needs to increase production to satisfy customers.Th ere will be the benefi ts from economies of scale, such as greater division of • labour and purchasing economies.Th ere will be reduced unit costs of production and, therefore, lower prices • could be charged, or a higher profi t margin achieved.Quality is standardised and parts are interchangeable.•

Disadvantages:Product would be less exclusive as it is produced in larger numbers.• Th ere may be an impact on quality. Th e production line may not produce hi-fi • systems of the same quality as before.Th ere will be the fi nancial burden of setting up a fl ow production line. Capital • cost is $5 million to move production to Malaysia.Increase in fi xed costs will increase the break-even level of output (compared • with making no changes).


Prices may have to be reduced due to the less-individualised production process.• Work on the fl ow production line may be less challenging and, therefore, less • motivating for workers.Errors or breakdowns are costly. Th e continuous fl ow of production means a • breakdown at any one stage will stop the whole production line.

4 Analyse problems that might result from this business transferring all production in the future from Europe to Malaysia. [8]

Adverse exchange rate movements may aff ect price competitiveness in the • European market. No longer being seen as a European brand may aff ect its demand in Europe.• HiSonic may initially face bad publicity for moving its operations abroad. In • the short term there will be resistance from European employees who may take industrial action against HiSonic.Th ere will be the loss of the loyal and skilled workforce.• Th e cost of moving operations abroad is $5 million. Th is may cause cash-fl ow • problems.

5 Using the information provided, make a justifi ed recommendation to the chief executive as to whether the business should expand its European factory or open a new operating plant in Malaysia. [10]

Note: Th is is not a choice between moving production entirely to Malaysia and staying in Europe. Initially, HiSonic would continue operations at its factory in Western Europe even if it decided to open a new plant in Malaysia.

New operating plant in Malaysia Expand European site

Th e annual profi t is higher.• Th e ARR is 20% compared • with only 15% for the European expansion.Th e margin of safety is • signifi cantly more than expanding the European site.Access to the Asian market will • be improved, leading to a long-term increase in sales.Having established production • in Malaysia, it will be possible to move all production from Europe and, therefore, reduce costs even further.

Capital cost is signifi cantly lower – 40% less • than shift ing production. Payback is only 1.5 years. Th is is an • advantage as it means funds will be available for other projects more quickly. HiSonic has a loyal and skilled workforce in • Europe with a proven record of producing quality products.Employees in Europe may view a decision to • build a factory in Malaysia as the fi rst step in shift ing all production abroad. Th is would aff ect motivation in the European factory and could lead to industrial relations problems.Th e product’s reputation for quality may be • undermined if it is produced in Malaysia. Th is depends critically on consumer perception of the brand.

Evaluation may consider:Availability of fi nance will be an important infl uence; however, the higher ARR and margin of safety suggest that a decision to locate in Malaysia off ers, in quantitative terms, the better long-term option.

Final recommendation needs to be based on balance of arguments applied to HiSonic.


Revision case study 3 (page 416): German effi ciency and ERP

1 Evaluate the importance of the following factors in Mercedes’s decision to locate a factory in Egypt:

the size of the Egyptian car market• low unit labour costs due to high productivity and low wages• high Egyptian import tariff s imposed on foreign-built cars.• [12]

Size of the Egyptian car market − as Egypt is the largest market in the Middle East and Africa region, it is an important market for Mercedes to establish itself in. Locating a factory in Egypt will help service the market effi ciently and ensure that Egyptians regard the Mercedes brand as being ‘local’. Although sales are only 1,600, it is a market with the potential to expand rapidly.

Low unit labour costs − this will help ensure that Mercedes cars are competitively priced and, therefore, sales will increase. Production costs are signifi cantly lower than in Germany and it might be unprofi table to supply this market from Germany. Th e Egyptian factory is able to supply parts to the rest of the Mercedes group and this reduces the costs of cars produced elsewhere. Labour costs are important, but for a luxury brand such as Mercedes, it is critical that quality is high, even if costs are low. Th is has been achieved in Egypt. Th us, establishing a factory in Egypt would have been desirable, even if it was not an important strategic market.

High Egyptian import tariff s − these are critical to the location decision as it would only be possible to sell cars on a small scale if they were imported into Egypt. Import tariff s of 230% left Mercedes with ‘no choice other than to set up its own operations’ in order to serve the market.

2 To what extent might qualitative factors have infl uenced this location decision? [8]

Qualitative factors will always infl uence location decisions to some extent such as:Political stability − the government recently decided to increase the percentage • of local parts from 40% to 45% ‘virtually overnight’. Th is sort of political decision making may have been a concern to Mercedes before entering the joint venture. Suitable partner − in this case, the presence of a suitable partner fi rm in Egypt • will have been important. Mercedes would have to be confi dent that they could work eff ectively with the Egyptian entrepreneurs.Ethical considerations − the impact on Mercedes workers elsewhere in the • world will need to be considered.

In this case, the decision appears to be based overwhelmingly on quantitative factors which infl uence profi t.

3 Evaluate the signifi cance of the enterprise resource planning system to the profi tability of Mercedes’s operations in Egypt. [14]

An enterprise resource planning (ERP) system is a company-wide computer soft ware system used to manage and coordinate all the resources, information and

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functions of a business. Th is may include e.g. the coordination of manufacturing, logistics, inventory and accounting.

ERP contributes to the profi tability of operations in Egypt because:It facilitates lean production techniques, such as JIT manufacturing. Stock-• holding costs are reduced as parts can be effi ciently ordered to arrive just in time to be used on the production line.It reduces waste. ERP provides high-quality information. For example, each worker • has a computer printout of which parts must be added at each stage of production.It aids mass customization. Th ere is more fl exibility to adapt each car to the • specifi c needs of individual customers.Th e effi ciency of administrative procedures is increased, such as billing customers.• It enables the Egyptian factory to export Mercedes parts to other factories. With • ERP, the parts can be supplied on demand.Th e supply chain is improved. Materials can be electronically tracked at all times.• Coordination between departments is improved, as a single database is used.•

ERP contributes to profi tability by improving effi ciency. However, there are other factors which are important such as:

low unit labour costs• high import duties, restricting competition in the market from imports• low transport costs, enabling parts to be sold at competitive prices to other • divisions in the Mercedes organisationthe skills of the Egyptian entrepreneurs involved in the joint venture• the quality of the products designed by the parent company• tax-free revenues as a result of locating in a government-sponsored industrial • zone.

Revision case study 4 (page 417): Wicklow Fine Foods to increase scale of operation

1 Why do you think the owners of this business want to double production capacity? [4]

Th e business has been successful and its sales are increasing. In order to fulfi l • higher levels of demand, Wicklow Fine Foods needs to increase its capacity. A key objective is to increase sales. Th e text implies that the fi rm is working at • full capacity; thus to double sales it must double capacity.Wicklow wishes to target export markets in Europe and beyond.•

2 In the current world economic conditions, is this a good decision, in your opinion? Justify your answer [10]

YesDoubling production capacity will enable Wicklow to benefi t from economies • of scale and, therefore, they will be able to sell their products at a lower price to attract customers without reducing their profi t margin.

A

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Interest rates are low in the EU and, therefore, it is a good time to borrow money.• Sales of chocolate are quite resilient to economic downturn as consumers stay • in more and look for relatively cheap ways of giving themselves a treat.Other competitors may struggle to survive the recession and some will go into • liquidation. Th is provides an opportunity for Wicklow to increase sales.It will be relatively cheap to recruit new labour as unemployment is increasing.• Prices of raw material ingredients may be low due to the fall in demand for products.•

NoAs workers lose their jobs there will be a decrease in spending on luxury items. • Th is may lead to a drop in demand for Wicklow’s products as they are relatively expensive compared with other chocolates on the market.Wicklow should focus on consolidating its position in the market during the • recession rather than risk increasing the strain on its fi nances and working capital needs associated with expansion.Th e depth and length of the recession are diffi cult to predict; therefore, it will be • diffi cult to estimate future revenue streams.Retail customers will be reluctant to pay cash for the chocolates and this will • increase the pressure on working capital.

3 Analyse why it might be cheaper to produce each box of chocolates or biscuits aft er the increase in scale of production. [8]

Unit costs will fall as Wicklow will benefi t from a range of scale economies including:

Th ere will be purchasing economies. As Wicklow will buy packaging, cocoa • and other ingredients in greater bulk, discounts with suppliers can be negotiated.Wicklow will benefi t from technical economies of scale. Th e increased scale of • production will justify the purchase of machinery that was unsuitable for lower levels of production. Partial automation of production will reduce the labour cost per unit.Wicklow will benefi t from greater division of labour. Th is will increase • productivity.As output doubles, distribution costs are unlikely to double. Wicklow will be • able to use bigger vans for distributing its product or the fi rms that provide logistics services will be able to move the product at a lower unit cost.

4 Analyse how the business might experience diseconomies of scale following the expansion. [8]

Possible diseconomies of scale include:Th ere could be increased worker alienation. As the craft element of the • production process is reduced, this will lead to worker demotivation; work will be less challenging and enjoyable. Th ere is an increased chance of industrial disputes occurring.Workers become more removed from the owners, leading to dissatisfaction. • Workers may no longer identify with the objectives of the business as they increasingly feel unimportant.

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Th e business will become more diffi cult to coordinate, particularly as Wicklow • wishes to expand its export markets.Communication problems could develop. Th e chain of command may increase • as more layers are added to the organisational structure; this will reduce two-way communication within Wicklow.

Essay1 a Analyse the possible reasons why a manufacturer of toys might relocate from the USA

to China. [10]

Possible reasons include:Lower cost of land will reduce fi xed costs.• USA has a federal minimum wage of $7.25 (July 2009), although in some states • it is higher. In China wages are less than $1 per hour.China has a plentiful supply of labour. • Transport costs to export markets for toys are relatively low.• Legal controls regarding the environment and employment are less stringent in • China than the USA. Th is will reduce costs of production and provide greater fl exibility in terms of hiring and fi ring workers.Th ere will be external economies of scale. As China is the said to be the ‘world’s • factory’ in provinces such as Guangdong, there may already exist supporting fi rms for the toy industry.China has a relatively well-educated workforce.• Th ere are government incentives off ered in economic zones.• China has an adequate physical infrastructure.•

b Assess the view that a good location guarantees business success. [15]

A good location will contribute signifi cantly to the success of a business in some, but not all, cases.

Th e best location is one that should maximise the long-term profi ts of the business but identifying the best location oft en involves a compromise between confl icting benefi ts and disadvantages. However, over time the weighting of these benefi ts and disadvantages may change, meaning that location may, also, have to change.

Th ere are many factors that aff ect the location decision and what is most important for one fi rm will not necessarily be important to another fi rm. Factors include: labour costs and availability, infrastructure, site and other capital costs and closeness to market.

Answers should try and explain why location is important to success. Location will have an eff ect on the cost of production and, therefore, price • competitiveness. Th is could be crucial in very competitive industries where there is little product diff erentiation. Location is important for access to market. In some industries, it is crucial to • locate near to market. For example, a multiplex cinema has to be near a centre of population.

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Avoiding protectionist trade barriers can aff ect location decisions. Th is is also • about access to market. Customs unions such as the EU protect their markets by erecting trade barriers. To gain access to those markets it may be critical to locate within the customs union.External economies of scale can be crucial to the decision on where to locate. • Concentration of industry in a particular location may bring increased labour skills and supply industries to the area and, therefore, give an important advantage to fi rms in the industry, e.g. Silicon Valley in the USA.Access to infrastructure is important, e.g. shipping fi rms needing access to • ports.

However, location is just one of many factors that infl uence success. Th ere are many other factors, such as access to fi nance, the quality of marketing and human resource management. Increasingly, in a globalised world market, location is becoming less and less important for many businesses. Many fi rms are ‘footloose’, meaning that they can locate anywhere and have the potential to be successful if they get their marketing mix and other factors right.

Evaluation may consider:Location does not guarantee success, but does have a signifi cant infl uence on profi tability. Location is just one of many factors that are important. Diff erent business examples should be used to apply this evaluation.

operations planning - peterhouse boys' schoolrevision.peterhouse.co.zw/business studies/a...

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