5.1.

Operations Management
Operations Management

Concerned with producing right goods/services in the right quality and

quantity in a cost-effective and time-efficient manner

Dictated by a companys finances, HR capabilities, and market needs

Value must be added during production to ensure profit

Production process of transforming inputs into outputs

Four factors of production/inputs land, labor, capital, and enterprise

5 Ms materials, manpower, machines, money, and management

Aspects of operations management

Production methods

Size, scope, and timing of production

Production planning

Quality control systems

New products and innovation

Sustainability management

Practice of maintaining ecological, social, and economic sustainability

Operations should also deal with stakeholder interests

Helps reduce costs by reducing waste

Essentially calls for operations to be ethical

Reduce wastage for the environment

Carefully consider economic implications in production processes

Have ethical labor practices

5.2. Production Methods

Job production

Creating a product from start to finish that is tailor made to meet customer
requirements usually one-off or unique items (e.g. violin, painting)

Only one person or groups job to complete entire product

Small firms are likely to use job production

Advantages

High quality and uniqueness

High motivation of workers

More flexibility
Disadvantages

Labor intensive and expensive

Time consuming due to customer requirements

Long working-capital cycle (due to slow production)

Minimal economies of scale

Batch production

Producing limited number of identical products (batch) at a time (e.g.

chocolates, CPUs, breeding)

Usually used when level of demand is not clear and the business

produces a range of products

Advantages

Technical and purchasing economies of scale

Specialisation better quality and productivity

Variety reduce risks of producing single product

Limitations

Inflexibility cant stop once started

Storage costs

Boredom reduced motivation

Flow/line/mass production

Continuous production process of standardized products

Flow/line/mass are usually interchangeable

Generally capital intensive

Flow production
Sequence of steps to create product (e.g. newspapers/magazine)

Line production

Product is assembled in various stages along an assembly line

(e.g. car)

Mass production

Manufacturing large amounts of standardised products (e.g. Chips)

Advantages:

High production scale at low cost due to economies of scale

Initial high costs is spread over high volume of units

Standardized quality (assuming low defect rate)

Low cost for workers

Disadvantages:

Low motivation

Breakdowns cause major delays

Inflexible no reworking or customization

High initial set-up, running, and replacement costs

Requires effective storage

Cell production

Modern adaptation of assembly line

Parts of production are delegated to teams or cells for completion

Any member of team can contribute to the task

Cells work independently but rely on each other to achieve targets

Advantages

Certain degree of autonomy in decision making

Improved standards of quality

Greater sense of responsibility and accountability in team

Higher levels of motivation (team working, empowerment, etc.)

Specialization
Disadvantages

Output may be lower

Higher chances for intra- and intergroup tension and conflict

Capital intensive to initiate and sustain

Labour and capital intensity

Labour intensive

Greater proportion of labour cost than capital cost

Job production and service sector is often labour intensive

Offers personalised service but may have more HR issues

Capital intensive

High proportion of capital costs compared to labor cost

Leads to increased levels of output and productivity

Needs sufficient demand to justify capital investment

Homogenous products; may have no USP

Standardisation means low profit margins and high fixed costs

Choice depends on:

Relative cost and substitution

Market size

Aims and objectives of the organization

Combining methods of production

Businesses usually combine the different methods of production

e.g. Burger King: uses batch production (making burgers in batches) and
job production (customizable burgers for customers)

Possibility of customization, flexibility, and lower costs

5.3. Lean Production and Quality Management (HL only)

Lean production

Process of streamlining operations and processes to reduce waste

Leads to improved quality and reduced costs

Forms of waste: materials/resources, time, energy, human effort

Principles to be followed:

Waste minimisation remove processes that dont add value

Right first time zero defects

Flexibility

Continuous improvement

Supply chain management develop good working relationships

Methods of lean production

Kaizen/continuous improvement

Productivity/efficiency gains from small/continuous improvements

Involves forming small groups/Kaizen groups

Identifies changes and improvements to establish steady

flow of small improvements

Easier to manage change if it is small; less resistance

Continual improvements in quality and eliminate waste

Different from quality circles since suggestions can come from

anyone

Just-in-time (JIT)

Inventory management system based on stocks being delivered as

and when they are needed for the production process

Buffer stocks are not required/no storage

Finished goods are delivered as soon as they are produced

Advantages

Reduces costs of holding stock

Working capital may be used elsewhere

Businesses become more responsive to the needs of

customers

Improves motivation by promoting employee participation

Reduces wastage

Improves relationship with suppliers

Disadvantages

Reliance on external suppliers

No room for error

Less economies of scale

Inflexible and cannot cope with fluctuations in demand

Admin and transaction costs will increase due to frequent

ordering

Quality control can be an issue

Relies on sophisticated technologies

Requires commitment of workers

Kanban

Variation of JIT

Scheduling system that aligns inventory levels with consumption

Rate of demand controls rate of production

Utilizes kanban cards which signals the need to restock products or

inventory when used
Advantages

Reduce wastage

Flexibility in production

Problems in production are evident by checking the kanban

Improves flow
Disadvantages

No room for error

No buffer stock means quality problems/defects will

be harder to address

Large variations in demand can cause problems

Ineffective when there is no variation in products

Andon

Refers to any visual system that shows the status of production

e.g. worker will change a signboard to red to indicate a problem

Used when personnel are far away from each other or attend to
many different machines
Advantages

Allows for quick communication in production floor

Problems can be resolved faster

Employees are more involved

Production status can be observed easily

Disadvantages

May require training for operators to use andon system

Relies on operators to be responsible

Cradle to cradle manufacturing and design

Design and manufacturing approach that seeks to eliminate waste

Takes the entire product life cycle into account

Inputs and outputs are seen as nutrients

Technical nutrients recyclable with no loss of quality

Biological nutrients consumable or compostable

5 key features:

Material health (e.g. source, toxicity)

Material reutilization

Use of renewable energy

Water usage and discharge

Social responsibility

Quality control and assurance

Quality

Features of a product that fulfils its purpose and meets user

expectations

Perceived value for money

Importance:

Essential in satisfying customers

Provides competitive advantage

Reduces likelihood of bad reputation due to poor products

Competition makes this even more relevant

Four driving forces:

Higher disposable income

Higher customer awareness

Govt legislation

Competition

Costs of poor quality:

Reputation of the business

Costs to repair/fix

Physical harm to customers

Compensation claims
Methods to measure quality

Reject rates

Level of product returns

Customer complaints

Level of customer satisfaction

Degree of customer loyalty

Market share
Quality control

Inspecting, testing and sampling of the quality of work

Advantages

Defects do not reach customers

Saves reputation

Cheaper specialized QC inspectors can find several issues

Disadvantages

Does not prevent mistakes made

Individuals are not accountable for quality of work

Lack of quality culture

Quality assurance

Process of guaranteeing a products quality at the first time

Informs/convinces customers that there is a specific standard

Serve as a competitive advantage vs. other businesses

Advantages
Involves employee participation (more ownership and

recognition)

Improves staff morale

Generation of new ideas

Break down certain cultures (them vs. us)

Less wastage and production costs

Disadvantages

Time-consuming

Requires training

Managing quality

Total Quality Management (TQM)

Process that requires dedication of all employees in the

organization to commit to achieving quality standards and minimizing waste

and defects

Embeds quality in every business operation and process

Management by example

Empowers employees to improve quality to have zero defects

Advantages

Motivation/empowered employees

Reduces wastage and costs

Improves image

Possible competitive edge through quality assurance

Limitations

Added costs (such as market research)

Costs to improve quality

Requires all members to be committed

Somewhat bureaucratic

Time lag before benefits are seen

Quality circles

Small groups of people that examine issues relating to quality

Consists of volunteers from various departments

Often uses circle or all channel network

Directly involved in executing solutions

Advantages

Increased efficiency

Productivity

Profitability
Limitations

Demotivation by teamworking and extra workload

Benchmarking

Comparing products, operations, and processes to similar

businesses
Stages:

Identify area

Measure internal performance using set criteria

Identify most appropriate competitors to benchmark with

Measure external performance of rivals

Use comparative data to find main weakness of firmr

Set standards for quality improvements

Implement change

Evaluate outcome and check for improvements

Can be either historical or interfirm benchmarking

Advantages

Close performance gap

Eliminates guesswork

Allows perception of customers to be heard

Help lower costs and improve competitiveness

Disadvantages

Costs and time implications

Can discourage innovation

Time and finance must be used to implement change

National and international quality standards

National and international quality awards are given to businesses that

show their products meet certain quality standards.

Purpose:

Promote quality awareness within organization

Recognize quality achievements

Attract high calibre employees

Strengthen firms competitiveness

International Standards Organization (ISO)

One of the most powerful NGOs in the world by providing a single

set of quality standards

ISO Standard for Quality Management: ISO 9000

Endorses businesses that have done quality management.

5.4. Location
Factors in choosing location of production

Quantitative factors

Availability, suitability, and cost of land

Availability, quality and cost of labour

Proximity and access to raw materials

Distance between raw materials and factory, factory to retail stores

Government incentives and limitations

Feasibility of e-commerce
Qualitative factors

Management preferences

Local knowledge

Infrastructure

Transportation networks

Communication networks

Support networks

Political stability and economic factors

Government restrictions and regulations

Ethical issues
e.g. pollution, job losses

Comparative shopping/clustering

Based on other businesses in the area

Similar vs. complementary goods

Relocation

Moving production to a different location

Maybe necessary due to higher rents or more attractive locations available

Limitations

Relocation costs

Lower morale of workforce

Loss of geographically immobile workers

Potential need to find new customers and suppliers

Loss of connection with local community

Possible damage to corporate image

Redundancy payments to employees

Location and business activity

Affects all functional areas of a business

HR employees, local labor, wages by rivals, employees relocating

Marketing different customers, availability of product, etc.

Production resources, suppliers, competitors, quality

Finance costs of land, licenses, regulations, etc.

Reorganizing production

Outsourcing/subcontracting

Transferring internal business activities to an external business/firm

Same as outsourcing in HR except in production perspective

Reasons for outsourcing

Activities are not of great importance

Business lacks specific skills

To cut costs
Advantages

High quality standards (from specialization)

Competitive prices (due to subcontractors)

Reduce labour costs

Business can focus on core activities

Improves workforce flexibility

Disadvantages

Redundancies

Affects morale

Requires careful monitoring of subcontractors

Presence of unethical practices

Can lead to stained brand image/reputation

Difficulty in quality management

Cutting corners
Offshoring

Extension of outsourcing

Relocation of business activities/processes abroad

Reduce costs but may affect quality of output

Same as offshoring in HR except in production perspective

Insourcing

Performing an otherwise contracted work internally

May involve bringing specialists in or training employees

Advantages

Greater control over business functions

May be cheaper overall (assuming business has the

capacity)

Employees may be empowered

Boosts local economy

Disadvantages

Requires investment in either training or equipment

Employees may be overworked

Less focus on core business activities

5.5. Production Planning (HL only)

Supply chain process

System that moves a product/service from supplier to customer

Involves transformation of inputs to outputs

Includes every entity that comes into contact with the business during
production
Basic elements:

Customer

Starts the chain/process by creating demand

Planning

Purchasing

Purchases raw materials needed to satisfy demand

Purchase orders sent to suppliers

Inventory

Receiving, storing, and checking raw materials

Production

Transportation (to customer)

Just-in-time vs. just-in-case

Just-in-case (JIC)

Traditional stock management system that recognizes need to

maintain large amounts of stock (reserve/buffer stock)

Important during supply or demand fluctuations or contingencies

Ensures there is always stock available to meet customer demands

Fatal to the business if they overestimate the demand for its

products
Advantages:

Allows a business to meet sudden changes in demand

Increased flexibility

Purchasing economies of scale

Reduces down time

Disadvantages:

Costs of holding stock costs for storage

Opportunity cost of money being tied in stocks

Just-in-time (JIT)

See unit 5.3

Stock control

Managing stock levels

Careful planning to ensure sufficient stocks are available at the right time

Disadvantages of stockpiling (holding too much stock):

Storage costs will increase

Stocks might be prone to fire, theft or damage

Stock might perish and deteriorate

Stocks can be illiquid and do not generate money

May become obsolete when demand changes

Excess stocks may need to be discounted to offload unwanted

products
Disadvantages of stock-out (not holding enough stock):

Lost sales

Damaged corporate image and disgruntled customers

Inefficiencies in machinery

Higher administration costs

Goal is optimum level of stock/economic order quantity

Large orders = economies of scale but storage costs

Factors:

Type of product (e.g. FMCGs need to have large volume of

stock)

Forecast level of demand

Lead times large lead time = large volume of stock

Costs of stockholding

Stock control chart

Assumes sales are constant

Lead time time it takes for ordered stock to arrive

Buffer stock/minimum stock level reserve stock (JIC)

Reorder quantity how much the business orders at reorder level

Reorder level

Level of stock wherein the business reorders

(Minimum stock level) + (lead time * demand per day)

Capacity utilization rate

(Actual output / productive capacity) * 100

Measure of firms efficiency in terms of idle resources

How to improve CU marketing, subcontracting, reduce capacity

High CU means:

Level of output is close to max (productive capacity)

Fixed costs are spread over high production

High CU is important for firms that have

High fixed costs

Low profit margins

Low marginal costs

Drawbacks of high CU

Machinery may be in constant use; no time for maintenance

breakdown

For service oriented businesses, may mean health and safety

concerns, lower standards of service, long waiting times, etc.

Quality may suffer

Diminishing marginal returns/less efficiency

Not a substitute for growth

Productivity rate

(Units of output / units of input)

Measures the efficiency of production

Whether inputs are effectively turned into outputs

How to improve productivity training, innovation, technology, motivation

High productivity means a company can reduce prices or improve profit

margins
Cost to make (CTM) or cost to buy (CTB)

Quantitative analysis on whether an item should be made or bought

CTB = Price x Quantity

CTM = Fixed Cost + (Average Variable Cost x Quantity)

Qualitative factors to consider:

Is it a core function that must be controlled and/or kept confidential?

Are there suppliers that are competent and reliable?

Do you have enough skill, time, and capacity to produce at desired

volume/quantity?
How will it affect the brand?

5.6. Research and Development (HL only)

Research and Development (HL only)

Technical process of generating new ideas, discoveries and inventions that

can be commercialized or which can improve operations

Not limited to product design but also how product is made

Most expensive part of product development

May mean catering to unmet and unknown needs and demands

Advantages

Growth opportunities

Increased productivity

Competitive advantage

Customer loyalty

Creation of jobs

Improved quality of life for customers

Disadvantages

Expensive and time consuming

Requires skilled labor and capital

High failure rate

May be difficult to commercialize

Types of innovation

Process

Improvements to increase production

Enhance quality

Reduce time/effort

e.g. Fords production line , barcoding for inventory control

Product

Development of new products

Enhancement of existing products

May be radical or incremental

Positioning

Changing consumer perception about product/process

Promotion is only a part of this since customer and supplier

relationships can also affect perception
Paradigm

Radical change in product or business process

May be creating a new product that satisfies an unknown

need/demand or changing the way products are sold

e.g. cars replacing horses

Types of creativity

Adaptive

Improvements in current paradigms

Refines and improves

Normally less costly to follow

Innovative

Out of the box thinking

Radical change to the system

Risky and costly to follow

5.7. Crisis Management and Contingency Planning (HL only)

Contingency/crisis planning

Proactive to changes in the business environment

Developing plans before crisis to reduce its risks and impacts

Involves a crisis plan (e.g. in case of fire)

Details roles and responsibilities, procedure, etc.

Has to be regularly updated and tested

e.g. Xavier emergency drills

More quantifiable crisis = better contingency plan

Advantages

Reduces risk since what-ifs are accounted for

Reduces impact of crisis or disaster

Reassures staff; satisfies safety need (Maslow)

Enhances motivation, communication, and productivity

Disadvantages

Uses up time and resources; costs

Crisis may not happen

Plans can be based on inaccurate or dated data

Cannot totally prevent disasters/external shocks are inevitable

Crisis management/disaster recovery

Reactive to events

Formulating the best response to a crisis to minimize impact

Important to act fast, communicate effectively, and maintain control

Favors radical measures and autocratic leadership

Focus on public relations to restore image and stakeholder confidence

Benefits of open and immediate crisis mgmt.:

CSR honest business

Minimize negative reactions

Reduce personal liability (compliance to legislation)

Handles staff concerns and anxieties

Minimize financial loss

3.3. Break-even Analysis

Note:

Total contribution = Total revenue Total variable cost

Contribution per unit = Price per unit Variable cost per unit
Break-even analysis

BEQ is quantity when all are equal

Break-even point
Intersection of Total Cost and Total Revenue in a Break Even Chart

Margin of safety

Shows how much demand exceeds or fails to exceed BEQ

Sales volume (Projected Demand) BEQ

Evaluate degree of risk based on demand for a product

Can be expressed as a percentage of demand

Target profit and revenue

Can be used to calculate level of sales needed to attain a certain

profit

Ignores other factors that affect profit:

Different pricing throughout time

Level of demand is subject to change

Profit depends on risk

Innovation and luck prediction arent always followed

Must consider:

Pricing strategies (penetration pricing, market skimming,

etc.)

Price elasticity

Break-even is when total costs equal total revenue

Helps to tell whether a good can be financially worthwhile and the level of
profit a business is likely to earn
Break-even quantity

Minimum level of sales before the firm could break even

Total revenue = Total fixed cost + [Total variable cost x Quantity]

Break-even chart

Title : Break Even Analysis for Company XYZ

Label Axes:

X-axis is output

Y-axis is Revenue/Cost (label currency as well)

Determine max. output and mark it, as well as revenue from this level of
output

If maximum isnt given, make it twice the BEQ

Determine BEQ and draw a vertical line at that point

Mark the revenue gained from this quantity on the line (Break Even

Point)

Draw Total Fixed Cost line

Draw Total Cost line

starts at TFC at x=0, intersects the BEP

Draw Total Revenue line

starts at (0,0), intersects BEP

Limitations

Makes several assumptions:

Fixed costs must be paid regardless of output

Variable cost increases linearly

Ignores economies of scale

Sales revenue increases linearly

Ignores discounts for large orders and price discrimination

Assumes only one product is sold

Every unit of output is sold

Selling price is constant regardless of units sold

Provides a static model (e.g. production costs can change)

Depends on reliability of data

Other factors can have an effect (e.g. competitors, staff motivation)

Only suitable for single product firms