Unit 4
Operations Planning
Operations Planning
• Operations planning
• Preparing input resources to supply products to meet expected demand
• Need for planning and coordination between departments
• Operations department needs to plan and coordinate with other departments
• For e.g., operations manager needs to communicate the 50% increase output
over the next 6 months with
• Finance department – cashflow
• HR department – labour input
• Marketing department – strategy
Operations Planning –
importance of the marketing link
Sales and Operations Planning process
• Crucial link to match potential demand to supply
Estimated/forecast market demand
• the key information needed by an operations manager when planning future
production
With accurate sales forecasts, operations manager is able to :
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Match output closely to the demand levels (no surplus)
Keep stock levels to a minimum efficient level
Reduce wastage of production (outdated products)
Employ and keep appropriate number of staff
Produce the right product ‘mix’ (range of products that are forecast to be demanded)
The need for flexibility
• Operational flexibility
– The ability of a business to vary both the level of production and the range of
products following changes in customer demand
• This flexibility can be achieved through :
– Increase capacity by extending buildings and buying more equipment
• expensive option
– Hold high stocks
• can be damaged
• opportunity costs – capital tied up
– Flexible and adaptable labour force
• temporary, part-time contracts reduces fixed salary costs but may reduce worker motivation
– Flexible flow-line production equipment
• Mass customisation
Process Innovation
• Process Innovation
– The use of a new or much improved production method or service delivery
method
• E.g. :
– Robots in manufacturing
– Faster machines to manufacture microchips for computer
– Computer tracking of stocks (bar codes and scanners)
– Using the Internet to track the exact location of deliveries/orders
Production methods
1.
2.
3.
4.
Job production
Batch production
Mass or flow production
Cell production
Production methods
1. Job production
• Used in production of single, one-off, unique products designed for the
customer
o Architectural projects, made to order wedding cakes, tailored suits
• Only one product at any time in being made
o Product A has to be completed before starting on Product B
 Motivating – see the project from start to end
 Allows specialised products to be produced
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Expensive
Takes a long time for completion
Labour intensive and need to be highly skilled
Production methods
2. Batch production
•
Producing a limited number of identical products – each item in the batch
passes through one stage of production before passing on to the next
stage
o bakery, some clothing manufacturers
 Division of labour
 Economies of scale
 Design of each batch can be altered
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High levels of WIPs at each stage of production
Boring (and demotivating)
Production methods
3. Mass or flow production
• Producing items in a continually moving process
• Individual products move from one stage to next as soon as they’re
ready – no need to wait for the other products (unlike batch
production)
• Large quantities produced in short time – suitable for industries
with high and consistent demand with minimum alterations
o Soft drinks, Mass production items
• Needs to be carefully planned
- cannot allow disruptions
to the system
Production methods
3. Mass or flow production
 Labour costs low – mechanised, low physical handling of the
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products
Constant output – stock levels input can be planned,
controlled and minimised (JIT – Chapter 22)
Quality remains high – easy to check and control
 High set up costs – machines are high tech – capital intensive
 Boring, demotivating and repetitive
Production methods
4. Cell production
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•
Like mass production, but separated to a self-contained mini-production
units  cells
Each cell responsible for quality and targets
 Motivating and creates ‘friendly’ competition (amongst cells)
 Leads to worker commitment --> motivation --> productivity
 Leads to well trained, multi-skilled workforce
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Dependant on well trained, multi-skilled workforce
Only works if cell dynamics ‘gel’
Production methods
5. Mass customisation
The use of flexible, computer-aided production systems to produce
items to meet individual customers’ requirements at mass-production
cost levels
• Latest technology + Multi skilled labour force
= wide ranging products
Move away from mass production/identical products
Keep some aspects the same, low unit costs, greater product choice
o Dell computers
Higher added value
Production methods – making the choice
The following factors will influence a business decision in adopting the
right methods of production for the business :
• Size of market (market demand)
• Amount of capital available
• Availability of other resources
• Market demands
•
Market demand exists for products adapted to specific customer
requirements
•
cost advantage and different products for different market – mass customisation
• Level of technology available
Final Evaluation
• Many complex products, such as computers and industrial engines, can be
adapted to meet different consumers’ different requirements
• Flexibility offered by technology to large businesses could put the survival
of small firms at risk
• Small firms may be used to exploiting small market niches with hand-built or batchproduced products
• However, there is always likely to be a demand from increasingly wealthy
consumers for original and specialist products
• Small firms with non-mass production methods will still thrive in these market
segments
Location decisions
• Deciding on the best location for a new business or
relocating/expanding an existing one, is crucial to success
• 3 key characteristics for location decisions :
• Strategic in nature
• as they are long term and have an impact on the whole business
• Difficult to reverse if an error of judgment is made
• due to costs of relocation
• Taken at the highest management levels
• not delegated to subordinates
Optimal location
• Optimal location
• A business location that gives the best combination of quantitative and
qualitative factors
• Optimal location is likely to be a compromise that :
• Balances of high fixed costs of the site and buildings with convenience for
customers and potential sales revenue
• Balances of low costs of a remote site with limited supply of suitably qualified
labour
• Balances quantitative factors with qualitative ones
• Balances the opportunities of receiving government grants in areas of high
unemployment with the risks of low sales as average incomes in the area may
be low
Factors influencing location decisions
• Quantitative factors
• measurable in financial terms
• will have a direct impact on either the costs of a site or the revenues from it
and its profitability
• Qualitative factors
• non-measurable factors that may influence business decisions
Quantitative Factors
Site/Capital costs (building or shop-fitting costs)
• Strategic site to be close to customers (lower transport costs) vs. other sites that may save costs (cheaper land, but higher
transport costs)
Labour costs
• Dependent on whether business is capital or labour intensive
Transport costs
• Transport of raw materials/products
Sales revenue potential
• Convenience to customers
• Certain locations can add status or image to a business
Government grants
• High areas of unemployment
• ‘greenfield’ sites
Qualitative factors
• Safety
– Avoid potential risk to the public and damage to the company’s reputation as a
consequence of an accident that risks public safety
• Room for further expansion
• Manager’s preferences
– Small business managers preferences regarding desirable work & home environment
• Ethical considerations
– Relocations could make some workers redundant
– Exploiting workers in countries with weaker controls over worker welfare and
environment
Qualitative factors
• Environmental concerns
• Business reluctant to set up in area that is particularly sensitive from an
environmental viewpoint
• Could lead to poor public relations and action from pressure group
• Infrastructure
• Quality of the local infrastructure
• E.g. transport and communication links
Multi-site locations
Advantages
Disadvantages
Greater convenience for consumers
Coordination problems between the
locations – excellent two way
communication systems essential
Lower transport costs
Potential lack of control and direction
from senior mgmt based in head office
Reduce the risk of supply disruption
Different cultural standards and legal
systems
Opportunities for delegation of authority
If sites too close to each other,
– helps to develop staff skills and
‘cannabalism’ may occur
improve motivation
Cost advantages of multi sites in
different countries
International location decisions
• All quantitative and qualitative factors are all relevant whether the
location decision is regional, national, or international one
• However, additional factors need to be weighed up when a firm is
considering locating in another country
• Offshoring
• The relocation of a business process done in one country to the same or
another company in another country
International location decisions
• To reduce costs
• Lower wage rates in developing countries
• To access global (world) markets
• Rapid economic growth in less-developed countries has created huge market
potential for most consumer products
• To avoid protectionist trade barriers
• Avoid taxes (tariffs) or other limitations on the free international movement of goods
and services
• Other reasons
• Substantial government financial support
• Highly qualified staff
• Avoid uncertainty in the exchange rates fluctuations
Issues and potential problems with
international location
• Language and other communication barriers
• Cultural differences
• Level-of-service concerns
• Offshoring of call centres and technical support centres
• Inferior customer service, time-difference problems, language barriers
• Supply-chain concerns
• Loss of control over quality and reliability of delivery with overseas
manufacturing plants
• Ethical considerations
Scale of operation
• Scale of operation
• The maximum output that can be achieved using the available inputs
(resources)
• This scale can only be increased in the long term by employing more of all
inputs
• Factors that influence the scale of operation of a business :
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Owner’s objectives (they may wish to keep it small, easy to manage)
Capital available
Size of the market the firm operates in
Number of competitors (market share may be small with many rivals)
Scope for scale economies
Increasing scale of operations
• Considerable costs involved
• Purchasing land, buildings, equipment, employing more staff
• More capital investment
• Firms expand to increase capacity to avoid turning business away
• Firms benefit from the advantage of large-scale production, these are
called economies of scale
• Reduction in a firm’s unit (average) costs of production
• Cost benefits can be substantial
• Smaller firms will be unlikely to survive due to lack of competitiveness
Economies of Scale
• Purchasing economies
• Technical economies
• Financial economies
• Marketing economies
• Managerial economies
Purchasing Economies
• Bulk buying economies
• Suppliers are more than happy to offer substantial discounts for large
orders :
• Convenience
• Larger profit from larger quantities sold
Technical Economies
• Very expensive
• Usually only large firms can afford it when output is high so fixed
costs can be spread evenly among the outputs
Financial Economies
• Big firms obtain lower interest charged on loans
– proven track record and diversified range of products
• When going public, the cost such as adviser fees, prospectus
publishing costs will be lower for larger firms, as spread over the large
amount of shares to be sold
Marketing Economies
• Marketing costs rise with the size of the business
• Small firms will still have marketing costs
• With EOS, these costs can be spread over a higher level of sales for a
big firm
Managerial Economies
• Small firms employ general managers who have a variety of
management functions to perform
• An expanding firm/big firm needs specialist functional managers who
could operate more efficiently than general managers (i.e. sole trader
for small firms)
• Potential economy for firms who could afford specialist functional
managers
• That’s how big firms benefit from EOS!
Diseconomies of scale (DOS)
• DOS are factors that cause average costs of production to rise when
the scale of operation is increased
• DOS prevents one or just a few firms from being able to completely
dominate the market
• Related to management problems trying to control and direct a large
organisation
1. Communication problems
2. Alienation of the workforce
3. Poor coordination
1. Communication problems
Large scale operations leads to :
• poor feedback to workers
• misleading information
• communication overload (prevent the most important messages
being acted upon first)
2. Alienation of the Workforce
• Difficult to directly involve every worker to give them a sense of
purpose and achievement in work
• Staff may feel insignificant in the overall business plan and lead to
demotivation
3. Poor coordination
• Business expansion often leads to growing number of
departments/divisions/products
• Challenge is to coordinate all departments
• Making sure all have the same objectives by adopting similar ethical
standards and produce goods that are consistent with one another
Are diseconomies avoidable?
• Management by Objectives (MBO)
• Giving each departments agreed objectives to achieve long term aims
• Decentralisation
• Giving managers freedom to make decisions
• Reduce diversification
• Able to concentrate on core activities, reduce coordination and
communication problems