Operation management

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Operation managements

operation managements is an area of management concerned with designing and controlling the process of production and redesigning business operation in production of goods and services

this involve responsibility:

Effective: meeting customer requirement

Efficient(business operation is efficient): few resources are used

1.1 REDESIGNING BUSINESS OPERATION(practicalities of production):

implementing production methods

designing equipment

selecting suppliers who can deliver the right quality and price

Ensuring health and safety standards are maintained

Deciding the appropriate levels of stock

Specific responsibilities of operation managements

Operational issues:

management inventory levels/Quality control/material handling/maintainance policies

1.2 FUNCTIONS OF OPERATION MANAGEMENT

Supply chains and logistics

management of inventory through supply chains

Acquisition of material plus use of labor TIMELY+COST EFFECTIVE MANNER = deliver customer expectation

Excessive quantity of inventory levels

find VENDORS (appropriate goods - reasonable price- ability to deliver)

This require understand of : -

local and global trend

consumer demand

available resources

Delivery Management

delivered within agreed time

follow customer to ensure product meet quality and funtionality needs

feedback means delivery relevant information to each department=process involvement

1.3 OPERATIONAL MANAGER

operational manager have concerned understand various process- this include about knowing the culture and environment of people -

MAIN AIM

They aim at producing goods at required quality,quantity and most cost effective way.

these managers are involved in coordinating and developing new processes while re-evaluating current structure

THEY CONCERN OVER:

Efficiency of production

keeping costs low

increase competitiveness and profitability if price remain constant

Quality

meet customer expectation

Flexibility and innovation

Dynamic environment

increase the needs to develop new processes and new products

1.4 IMPORTANCE OF OPERATION MANAGEMENTS/MANAGERS

Better Output

Higher output-lower defects-lower costs } improve processes

Competitive advantages

higher profit

improving company bottom line

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Added value

added value is the difference between the cost of purchasing the raw material and the price of finished goods-

for example(!):

sales revenue{1000 units sold for $ 20 each}= $20000

costs to make 1000 units {raw material $7500/labor$5000/other production costs 2500}=total cost:$15000

Added value{20,000-15000}=$5000

for example(2):

TYRELLS POTATO CHIPS

Will chase has been farming potatoes for 20 years (loss making)

wanted to produce something with more value added

came up with idea to make hand fried chips with different flavors and different packaging

successfully created a premium product and turn tyrells into a profitable business

1.1 Marketing added value

Customer's added value :Additional value + basic product = persuasion {perceived value}

WAYS TO ADD VALUE:

building a brand: reputation for quality etc ...

delivery excellent customer service: high quality and attentive personal service and after sale service

product features and benefits:different functionality

offering convenience: save time

Discount price and extra quality assurance

BENEFIT OF ADDED VALUE:

Charge a higher price

creating a point of difference from competitors

protecting from competitors by trying to steal by lower prices

focusing a business closely to its target market segment

SIGNS-Businesses particularly start up using added value:

strong gross profit margin {strong indicator} gross profit/total sales

repeat customers:

signs of satisfied customers

suggests that customer feels that they are getting value for money

brand or name recognition

important for world of mouth recommendation

1.2 OPERATIONAL ADDED VALUE

transformation of inputs to outputs take place to produce goods and services is occur in a number of stages-

Each stage is more valuable than the one before work have been done on the input{Economic added value}

This value will also be the added value that consumers place on a finished product{Marketing added value}

sugarcane>sugar>cake mixture>cake baked>retail outlet>sold

1.3 OPERATION DECISION AND ADDED VALUE

why aims for added value :

push up efficiency and effectiveness

lower unit cost

increase sales revenue or profits

meet customer's value added needs

1.4 EXCEPTIONS that is the factors affecting the degree of added value

Design of product: allow> quality features means higher prices

Efficiency of resources: affect productivity such that reduction in waste > lower costs >push up value(price remain constant)

Ability to convince: exceed costs

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Productivity and Production

1.1 PRODUCTION

production refers to the act of producing goods for their use of sales-

production is a measure of value of output of goods and service e.g measured by national GDP or an index of production in specific industry such as car manufacturing

1.2 PRODUCTIVITY

productivity refers to the rate at which goods are produced

Ratio of output to input

relate to the use of resources to produce goods and services

measure of efficiency of factors of production

1.2 (a) increase productivity:

input{same}=output{increase}

input{increase}<output{increase}

higher productivity allow businesses to pay higher wages and achieved increase profits at the same time

(b) decrease productivity:

input{increase}>output{increase}

a fall in labor productivity leads to a rise in firm's (units)costs of production {assuming that the level of wages remain the same}

labor productivity: total output in a given time period / total workers employed

capital productivity: output / capital employed

NOTES: an increase in production DOES NOT automatically mean an increase in productivity- it depend on how many factors input have been employed to supply extra output

Eliminate wastage

Facilitate comparisons(competitors>performance)

Efficient utilisation of all factors of production

Enable management to control(performance)

1.3 Difference between production and productivity

DEFINITION

It is defined as the rate at which goods are producing {productivity}

It is defined as the act of manufacturing goods for sale{production}

USE

It is the utilization of resources to form goods{productivity}

it is the actual process of conversion{production}

WORK DONE

It is the amount of work one gets for a certain spending costs{productivity}

It is the amount of work done i.e the output{production}

MEASUREMENT

It is the measure of efficiency {productivity}

It is the measure of produced goods

1.4 RAISING the productivity level

Improve training of staff

fewer mistakes/faster work/Better problem solve > task efficient > more productive

improve worker motivation

emphasis on non financial

involvement in decision making/delegation/quality circle

advance technological equipment

fewer staff-more output

more efficient management

ineffective lead to lower productivity

Changing the culture

(processes} -EFFICIENCY improvement

1.5 Why raising productivity level:

Profitability

more profits without push up costs

sales increased and increase profit margin

Business Growth

necessary cash flow

Meeting consumer demand

improve in adapting to shift in demand e.g hiring temporary staff while increase in demand

competitiveness

1.6 IS RAISING Productivity the answer:

not guarantee success

unpopular=unprofitable even if raise productivity

Greater efforts/contribution

high productivity-higher wage demand-push up costs

Fearful due to dramatic changing to improvement of productivity

20%(RISE productivity)-0%(Sales) > 20%(lose jobs)-[workers and trade unions]

Quality Management

determine overall success of policy often based of culture of the workplace

Difference between efficiency{measure by productivity} and effectiveness

Notes[key concept]:

the quality and effectiveness of management is important determinant of operational efficiency

IMPORTANT FACTORS AFFECTING PRODUCTIVITY:

technical factors

these include proper location/layout and size of plant and machinery/correct design of machinery and equipment, research and development, automation and computerization

high productiveness > latest technology

Production factors

productivity is related to production factors

the production of all departments should be properly planned,coordinated and controlled

The right quality of raw material should be used in production

The production process should be simplified and standardised

Organizational factor

productivity correspond directly to the organizational factor

A simple type of organization should be used

Authority and responsibility for every individual and department should be defined properly

The line and staff relationship should be defined clearly

should be have division of labor and specialization

Personnel factor

productivity is directly related to personnel factor:

Right individual should be selected for suitable post

After selection, they should be given proper training and development

they should be given better working condition and safe environment

they should be properly motivated;financial/non financial this means incentive wage policy,job security should be given;opinions should be given

there should have a proper transfer,promotion

Finance Factors

finance is the blood life in business

there should have been a better control over both fixed capital and working capital

There should be proper Financial planning

Capital expenditure should be properly controlled-both over and under use of capital should be avoided

management should see if they get proper return on capital investment

Management factors

they should make optimal use of resources to get maximum output at the lowest cost

they should use recent technique of production

they should develop better relations with trade unions and employees

enable suggestion and provide safe environment

Government factors

management should have proper knowledge about the government rules and regulations

they should maintain good relations with the government

location factors

productivity depend on location factors;

law and order facilities/nearness to market/nearness of raw material/skilled workforce

ADVANTAGES/IMPORTANCE/BENEFITS OF HIGHER PRODUCTIVITY

Higher profits

enable to produce more output

result in more output

this lead expansion of activities

Employee welfare

more profits

this profits can be used to provide facilities and working condition for employees

this result to welfare for employees

Better return

get better return on investment because of higher productivity

better dividend {share of profits} to shareholders

the market share price will also increase

Nice relations

good working condition,facilities,and incentive to motivate employees to give their best to the organisation

Customer's satisfaction

customers can be provided to good quality at a lower price

this results in loyalty to the company

Good credit rate

result to good credit rating by financial institution

enable to get cheap funds from the market to meet fixed and working capital requirement

Goodwill

good corporate image{goodwill} in the mind of social entities

better credit terms

better terms from supplier{enable to get}

suppliers may give better credit terms due to goodwill

lower turnover

enable company to give better facilities and working conditions to the employees

make employees loyal

employees turnover and absenteism will reduce

Key difference

Production : is an organized activity where in step by step conversion of raw materials into useful output takes place Productivity : is an indicator of efficiency in the production in terms of optimum utilization of firm's resource in the creation of desired output

Production : is a process of value addition wherein at each level,some value is added to the level -Productivity: is a measure of efficiency

Production: show the number of units produced by the firm in a given period of time-Productivity: highlights the ratio of output to input consumed

production: is always expressed in absolute terms that is the volume of output produced-Productivity : is indicate in relative terms meaning that it determine the quantitative relationship between output generated and resource consumed

Production : examine the value of output generated -Productivity : determine the how well the resources are utilized by the firm in the generation of output.

Conclusion

production is a conversion process in which the firm is engaged whereas the productivity os all about how efficiently the company allocates its factors of production to produce the output with least amount of wastages and essential quality-

in short,the efficiency in production is the firm's productivity

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Efficiency and Effectiveness

Efficiency refers to the ability to produce maximum output from a given input

producing output at the highest ratio to input

ability to do things in a well mannered way,to achieve standard output

involve a parameter to calculate performance and productivity by making comparisons between budgeted output and the actual outputs produced with the fixed number of inputs

essential element for resource utilisation as they are in very less number and they have alternative uses so they must utilized in the best possible way

efficient producers use fewer inputs for a given quantity of output so that unit costs are lower

1.1 INCREASING efficiency{particularly employees}

Delegation : give responsibilities to qualified employees > gain skill and leadership experience

Match tasks to skill

Incentive employees

1.2 Linking productivity and efficiency

a garage employs six mechanics to work for nine hours a day and paid $60 per day each-in one day,they can on average repair or service 15 cars

labour productivity:15/6=2.5 cars per mechanics per day

Productivity and costs of production

total cost per day for 15 cars: 6*60=$360

average labor cost:360/15=$24 per car

Productivity rises that each mechanics can deal with the three cars per day -COSTS:

total costs per day for 18 cars:6*60=$360

Average labour costs:360/18=$20 per car

This means :

business become more competitive

able to reduce its price and maintain its profit margin

more efficient factors of production

EFFECTIVENESS

effectiveness is the output that a resource is able to GENERATE:

Employees

from the view of an employee,effectiveness is how much output that employee is able to generate-

if the employee generate a large amount of outputs,this is known as as effective employee

Measure~how well final products meet the needs of customers

Function : ability for the product to do the job it design

Availaility : how easy to obtain the product

Price: relate to the efficiency of production{cost}

Value for money: PRICE + FUNCTION

1.1 Characteristics:

Thus :

Effectiveness refers to the extent to which something has been done, to achieve the targeted outcome

this means closeness of the objective reached while comparing to the predetermine objective {puissance}

Effectiveness has outward look :

expose relationships between the business organisation with the macro environment of the business

focus on reaching competitive position in the market

Effective is a result oriented : shows how excellency the result is

1.2 Improving Effectiveness

make use of Human resource

helping to develop new business strategies

right professional to achieve goals

focus on education and growth

effective team with the capable skill and position

keep customers in mind

adapt to changing need through market research

Work on quality service or product

Balance quality with cost effective solutions

participation in decision making >ideas

Use technology

Difference between efficiency and effectiveness

Efficiency:the ability to produce maximum output with limited resources -Effectiveness:the level of nearness of the actual result with planned result

Efficiency:is "'to do things perfect" Effectiveness:is "to do perfect things"

Efficiency: has a short run perspective-Effectiveness:has a long run point of view

Efficiency: is yield oriented -Effectiveness:is result oriented

Efficiency: is to be maintained at the time of strategy implementation-Effectiveness:require strategy formulation

Efficiency: is measured in operations of the organisation-Effectiveness of strategies is measured which are made by the organisation

Efficiency: is the outcome of actual output upon given the numbers of input-Effectiveness: has relationships with means and end

Example of the difference between efficiency and effectiveness

effectiveness vs efficiency

scenerio:"where a sale representative from a company has to make cold calls to make sales "

if each phone calls costs Rs 5 , and each sales worth Rs 100 to the company:

Sale representative A make 25 phone calls and is able to convert 5 of them into sales for the company-this means A spent RS 125 on phone calls and in return he got Rs500 for the company

Calculate the return for rupee he spent: he made RS 4 for each oney he spent

Sale representative B make just 16 phones call and converted them into 4 of them-this means that he spent RS 80 on making calls and in return got business worth Rs 400

Return for every rupee spent is RS 5

B makes fewer calls than A and also fewer number of sales but his return on the cost incurred is higher than B-

in this case:

A is more effective

B is more efficient

Conclusion:

success lies within both elements-Efficiency has an

introspective approach:

that is it measures the performance of operations,processes,workers,cost,time etc inside the company

it has a clear focus on reducing the expenditure/wastage/eliminate unnecessary cost to achieve ouput with stated number of inputs

should not overdo such extent of efficiency:

lose a profitable opportunity to grow and invest in a potentially bright future

some actual opportunity such as invest and process changes might not as profitable in the upcoming future

Effective has an

Extroverted approach:

highlights the relationship of the business organisation with the rest of the world to attain a competitive position in the market that is

it helps the organisation to judge the potency(potential) of the whole organisation by making strategies and choosing the best means for the attainment result

Effective + Efficiency make sense when:

goals are clearly defined

good thought after on the flow of processes

Efficiency and Productivity

Productivity:

by the term productivity, we mean the measure,which helps in measuring the efficiency of an organisation/person/machine etc.. in producing something-It can be measure by

identifying the number of output produced with the given set of inputs

it confirm how effectively the resources are combined and used by the firm for getting a maximum possible outcome with available resources

in other words, productivity closely related to the yield that is the larger the yield,the higher would be the productivity of the organisation

Productivity: INPUT OBTAINED/OUTPUT CONSUMED

There are two types of productivity:

Total productivity: when the change in inputs is caused by changed in the quantity of all or more than one variable- it is called as total factor productivity

partial productivity: when there is a change in outputs due to the change in one input,it is called as partial factor productivity

Efficiency:

Efficiency is used to mean a state of producing the maximum number of quality with limited input {i.e : money,time,material etc..

it reflects the firm's ability to achieve the best from the available resources with no to minimum wastages of efforts and expenses

Efficiency determine how the output is produced or objective is atttained as planned with minimum costs

it is always measured against a defined standard

the actual output will be compared with standard output in order to verify the efficiency of the production process

Efficient producers target to reduce the units of costs of production and to achieve this:

the firm look for different ways to do the same things:

change the production process

material uses

time allowed

labour employed etc..

Efficiency: ACTUAL OUTPUT/STANDARD OUTPUT

productivity : means the rate at which goods are produced by the organisation that is the higher the number of goods produced,the greater would be the productivity- Efficiency : describe as the use of energy,time and money and other resources,in a way that the rate of wastages is minimum and the output achieve is maximum

Productivity: is a used to measure the number of output produced with the given input-Efficiency: refer to the optimum utilisation of the firm's resources to obtain better results with least wastages

Productivity: attempt on the quantity of products produced -Efficiency : emphasize the quality of products produced

Productivity: can be calculated by dividing the total output obtained with the input consumed in the process of production-Efficiency : can be expressed as the ratio of actual output to the standard output

Conclusion:

efficiency is all about smart, to get more out of less

productivity is nothing than that of increasing yields and this is done by raising the performance level to achieve better results

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Labor vs capital intensity

labor intensive means using more labor than capital so labor costs are a higher proportion of the total costs than capital costs :

The degree of labor intensive is typically measured in terms of proportion of capital to produce the goods

The higher the proportion costs of labor required,the more labor intensive the business

1.1 Breaking down labor intensive

labor intensive industries requires large amount of physical efforts to complete the necessary task

In labor intensive industries, the costs associated with securing the necessary personnel outweigh the capital costs in regards to importance and volume

not all industries requires workers at a low education position{FALSE EVIDENCE}

worker productivity and advances in technology has shift the labor intensive status

labor intensive include restaurant,hotel, agriculture and mining

1.2 Example of labor intensive industries

Agriculture industries

this refers to job cultivating food stuff with the minimal damage possible: for example,picking fruits from trees

Constructive industries

this job require hand on activities-Even the use of certain tool,the person involved in major activities

Hospitality in service sectors {labor intensive}

plus personal care industries-

1.3 Labor costs

labor costs take in all the costs necessary to secure the human capital necessary to complete work

human capital refers to the skill/knowledge/experience possessed by an individual viewed in terms of their value or cost to an organization

these costs can include:

funds directly towards based wage along other benefits

Labor costs are considered as variable - capital costs are considered as fixed

because labor costs can be adjusted during market downturns through layoffs or reduction in benefits

lower break even output

labor intensive has some flexibility over controlling their expenses-

But however limited economies of scale

as a firm cannot pay a worker less by hiring more

sensible to wage forces within the labor market

firms benefit from access to sources of low costs and often job production e.g hairdresser

1.4 Benefits and Drawback of labor intensive

Benefits of labor intensive:

Labor is a flexible resources-through multi-skilled and training

well delivered personal service

low start cost

unit costs may be still low in low wage location

lower unit costs if labor is relatively cheap

labor at the heart of the production process-can help continuous improvements

possible to produce custom made product

easy to alter labor force by recruitment

Drawback of labor intensive

greater risks of problem with employer/employee relationship

potentially high cost of labor turnover{recruitment}

Need for continuous training and investment

difficult to produce at a large scale

economies of scale difficult to achieve

capital intensive production means using relatively more capital than labour so that capital costs are a higher proportion of the total costs than labor costs -

capital intensive production refers to business processes or industries that requires large amount of investment to produce a good or service

have a high percentage of fixed assets which are also known as property,plant and equipment

companies in capital industries are marked by high level of depreciation

`1.1 Breaking capital intensive

capital intensive industries tend to have a high level of operating leverage which is the ratio of fixed costs to variable costs

As a result, capital intensive industries need a high volume of production to provide an adequate return on investment

This also means that a small change in sales can lead to a big change in profits and return on investment

these high operating leverage make capital intensive industries much more vulnerable to economic slowdown compared to labor intensive

BECAUSE they still have to pay the fixed costs such as overhead on the plant that house the equipment/depreciation of the equipment/other fixed costs associated with a capital intensive businesses even the industry is n a recession

1.2 Example:

all these industries requires capital expenditure:

automobile manufacturing/oil production and refinery/steel production/transport

infrastructure

1.4 Measurement of capital intensity

capital intensity can be measured by by calculating how many assets are needed to produce a dollar of sales which is total assets divided by sales

Another way is to compare capital expenses to labor expenses

If a company spent $ 100000on capital expenditure and $30000

this mean the industries is likelt to be capital intensive industries

is a company spent $300000 labor costs and only $10000 on capital expenditure

this mean the industries is more service-or-labor oriented

1.5 Impact of capital intensity on earnings:

capital intensive firms generally use lots of financial leverage

as they can use plants and equipment as collateral

both financial leverage and operating leverage is very risky when :

when sales fall unexpectedly

Because capital intensive industries have high level of depreciations costs

Analysts{ often add depreciation back to net income using a metric called Earning before interest/taxes/depreciation and amortization (EBITDA)

By using EBITDA : a non cash expense vs {instead of} net income on performance ratios

it is easier to compare the performance of companies in the same industry

costs are mainly fixed =higher breakeven output

firms benefits from low costs and long term financing

1.6 Benefits and Drawback of capital intensive"

Benefit of capital intensive

Mass production is possible on assembly line

lower unit costs if capital relatively cheaper

economies of scale is possible

labor force is less skilled so recruitment is easy and labor costs are low

potentially significant for better productivity

better quality and speed<depend on product>

Drawback of capital intensive

significant investment

HIGH startup cost due to the cost of machinery

not suitable for personal service

Potentially lost competitiveness to obsolescence

may generate resistant to change from workforce

machine dependency

breakdown are expensive

may stop production

not suitable for varying product types

cannot vary capital in the short run

lack of variety might lead unmotivated labor

factors in deciding between capital or labor intensity

NATURE of product and the product image firm wishes to establish

mass production-capital intensive

labor intensive-craft products

Relatively costs of labor and capital

low labor costs: labor intensive

high labor costs:capital intensive

Business size

larger-have more finance to afford to be more capital intensive

Level of personal service

involve in the delivery of the product for example manicure

customer's need

market where personal service is important to the customer tend to be more labor intensive