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 : • • • • • 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closely to the demand levels (no surplus) Keep stock levels to a minimum efficient level Reduce wastage of production (outdated products) Employ and keep appropriate number of staff Produce the right product ‘mix’ (range of products that are forecast to be demanded) The need for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 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 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 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 • • 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 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 : • • • • • 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
