Topic 4 Operations Management

1|Page: TOPIC 4 – OPERATIONS MANAGEMENT – CIE CH FILES
OPERATIONS MANAGEMENT
MANAGING RECOURCES EFFECTIVELY
 Production is the provision of a product or service to satisfy consumer needs and wants. In the
process firms will be adding value to the product
IMPORTANCE OF MANAGING RESOURCES EFFECTIVELY
 It will keep costs low and increase profits

 Developing nations can use labour intensive methods of production because wages are low
whereas developed nations use capital intensive since labour costs are high.
THE PRODUCTION/OPERATIONS MANAGER IS RESPONSIBLE FOR:
(a) Choosing the method of production that will increase production and productivity.
(b) Ensuring quality of products
(c) choosing the best location for operations
Productivity
 It is the output measured against the inputs used to create it.

 It also measures the efficiency of the business
 An efficient business uses resources in a cost effective way that is more output is realized after
using few resources.
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡𝑠
= ------- units per input used
𝑜𝑢𝑡𝑝𝑢𝑡(𝑜𝑣𝑒𝑟 𝑎 𝑔𝑖𝑣𝑒𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝑡𝑖𝑚𝑒

Labour productivity = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠
= units per employee
e.g. in 2003 a business produced 8 000 chocolate bars 500 employees were available. Calculate labour
productivity.
O’ LEVEL CIE BUSINESS STUDIES – WOGS: CHAPANGAZA 1

8 000
𝐿𝑎𝑏𝑜𝑢𝑟 𝑃𝑟𝑜𝑑𝑢𝑐𝑖𝑣𝑖𝑡𝑦 =
500
= 16 chocolates per employee
In 2004 12 000 bars were produced using 500 employees. Calculate labour productivity and suggest
reasons for the change as compared to 2003.
12 000
𝐿𝑎𝑏𝑜𝑢𝑟 𝑃𝑟𝑜𝑑𝑢𝑐𝑖𝑣𝑖𝑡𝑦 = 500
Ways of increasing productivity
 Training existing staff helps employees to be fast and less wasteful. It also increases output per
worker. BUT, it is costly to train. Output is lost during training due to wastages and low work
rate. Trained workers can also become marketable and leave the organization.
 A change in production lay out which helps to eliminate time wastage caused by movement.
 Motivation through performance related payment (piece rate system) which forces employees
to produce more in a given period.
 Effective supervision, which means employees, did not waste time.
 Use of high quality raw materials that were supplied in time. This means production stoppages
were unlimited.
 Upgrading of machinery. This helps to eliminate leakages of raw materials and down time.
 Use of automated equipment. This reduces labour costs. Increase output. BUT, machines are
expensive to buy. Redundancy payments can be high. Re-training costs can be incurred. Labour
unrest can rise due to a genuine fear of being replaced by machines.
In 2010 6 000 bars were produced using 500 employees. Calculate labour productivity and suggest
reasons for the change.
6 000
𝐿𝑎𝑏𝑜𝑢𝑟 𝑃𝑟𝑜𝑑𝑢𝑐𝑖𝑣𝑖𝑡𝑦 =
500
Causes of decrease in labour productivity
 Ineffective supervision such that employees wasted production time.

 De-motivation of employees which means employees were not putting extra effort leading to
low output.
 Use of old equipment which lead to an increase in leakages and down time.
 Supply chain problems which led to delays in receiving raw materials.
Benefits of increasing efficiency/productivity
 The cost per unit is reduced because fixed costs will be spread over many units.

 Profitability is increased because more goods will be produced at a lower cost.

 The business will have competitive advantage by producing at a lower cost as compared to
competitors
 Employees can be motivated if high profits are used to increase their salaries.
NB: Inefficiency means input output ratio is low. It also means productivity is low leading to high cost
per unit, loss of competitiveness and failure to satisfy orders.
Inventory management
Inventory refers to items (raw materials, work-in-progress and finished goods) held by the business for
use or for resale purposes. [CIE 15, P13, Q4b.] It includes raw materials, work- in- progress and finished
goods. The production manager must ensure that the business has right quantities of inventory at any
particular time.
Reasons for holding inventory
(1) To meet unexpected increase in demand this helps to maintain customers.

(2) To avoid production stoppages due to stock outs when suppliers fail to deliver goods on time.
(3) It helps to hedge against inflation or price increases.
Statistical inventory control chart
Buffer inventory – is the inventory held to deal with uncertainty in customer demand and deliveries of
supplies
BENEFITS OF HOLDING LOW LEVELS OF INVENTORY (w17p11)
 Lower inventory holding costs [k] help reduce variable costs [an]
 Lower security OR rent costs OR insurance [k] as less space needed [an]
 More flexible [k] as adapt to each different batch to keep customers returning
 Help cash flow [k]
 Less risk of waste OR damage OR obsolescence [k], hence increasing productivity

Disadvantages:
 Possible delays in production [k] leading to lower output [an]

 Few OR no purchasing economies of scale [k] which could help reduce cash outflows
 Not able to meet orders [k] so could damage reputation [an]
Problems of Holding Inventory
(1) Capital is tied up in inventory which means the business may have cash flow problems.
(2) It increases storage expenses like insurance, warehouse rent, security costs which can reduce
profit.
(3) Inventory can become out of date or absolute which can reduce the profits of a business.
Lean Production
 It is a term used by businesses to cut down on waste and therefore improve efficiency.
 It cuts out any activities that do not add value to the customer
Methods to achieve lean production
Just-in-time inventory control
 It is a method of production where goods are only produced if there is a market order.
 This means the business will not keep inventory of raw materials and finished goods.
Advantages
 It helps to eliminate or reduces costs of holding inventory, as no raw materials and components
are ordered to keep in the warehouse
 warehouse space is not needed, again reducing costs
 the finished product is sold quickly, so money will come back to the business more quickly,
helping its cash flow
Disadvantages
 Just-in-time requires reliable suppliers of raw materials, flexible employees

 The business may also lose bulk buying discounts.
Kaizen/Continuous improvement
 It focuses on elimination of waste

 Small groups of workers meet regularly to discuss problems and possible solutions
 The method can, for example, get rid of piles of inventory or reduce the amount of time taken
for workers to walk between jobs so that they eliminate unnecessary movements

Advantages
 Increased productivity
 Reduced amount of space needed for the production process
 Work-in-progress is reduced
 Improved layout of the factory floor may allow some jobs to be combined, therefore freeing up
employees to carry out some other job in the factory
Disadvantages: Use of new technology may bring significant improvements in efficiency not achieved by
Kaizen
Cell production
 It is where the production line is divided into separate, self - contained units (cells), each making
an identifiable part of a finished product
 It does not make use of flow or mass production line
Advantages
 Improves morale of employees which makes them work harder and become more efficient
 Employees feel more valued and are less likely to strike or cause disruption
Drawbacks: May not achieve as high volumes of output when compared to flow production
ADVANTAGES OF LEAN PRODUCTION
Costs are saved through:

 Less storage of raw materials or components
 Quicker production of goods or services
 No need to repair defects or provide a replacement service for a dissatisfied customer
 Better use of equipment
 Cutting out some processes which speeds up production
 Less money tied up in inventories
 Improved health and safety leading to less time off work due to injury
Reduced costs can also lead to lower prices for customers, businesses being more competitive
and possibly also increased profits
METHODS OF PRODUCTION
(a) Job/Unit Production

 It is the production of individual goods according to customer specifications or requirements.

 Each order will be unique and will have to be completed before moving to the next.
 It can be used to produce custom made vehicles or clothes, wedding cakes and construction of
buildings.
Advantages
 More varied work increases employee motivation – leading to higher job satisfaction.
 The product meets the exact requirements of the customer, which leads to customer loyalty.
 High quality goods and services are often produced with a hand - made image, so higher prices
can be charged
 Less capital is required to set up operations. This is because simple tools are used in operations.
Disadvantages
 Cost per unit is usually high which means the goods may not be affordable to customers. This is
because of the absence of economies of scale or short production runs.
 It requires highly skilled employees which can increase labour costs. This is because the method
requires flexible employees who are able to perform a variety of operations.
 Production is usually slow which means customer orders may not be satisfied on time. This is
because of the use of simple tools and varied designs.
 Products are specially made to order, so any errors can be expensive to correct
(a) Batch production
It is when products are made in groups/blocks, followed by another group/block.
Features (CIE – s10 12, 1c)
 Production is done in discrete groups because usually batches are in response to

market demand
 products in the same batch/block are identical
 variations can be made between batches
 Products in the same block/batch pass through the same stage of production together before
moving to the next.
 machinery can be adjusted/re-set when changing to the next batch
 Each product is made in a set. So, once the whole set has been completed the next one
(or modified version) can be started.
 Change-over time needed as modified batches are produced.
It can be used in bakeries to produce bread, rolls and muffins.
Advantages (w19p11)
 A variety of customer needs are met due to the production of varied products e.g. different
flavors of biscuits.

 It gives some variety to workers’ jobs. So employees are motivated to produce quality products.
 Since larger numbers are made [k] lower unit costs (EOS) [an]
 Flexible [k] as able to change product easily to meet changes in customer demand [an]
Disadvantages
 Production time is lost due to change- overs since machines have to be re-set between
production batches.
 Inventory levels are high which increases expenses of holding finished or semi-finished products.
 Warehouse space is needed for stocks of raw materials and components.
(1) Flow/Line/Mass/Continuous Production

It implies production of similar products in large quantities using a continuous process.
Features (CIE – s10 11 Q1c)
 flow implies a continuous (24 hour) movement of products along a line, continuous flow
means that products move from one operation to another without interruption
 It is normally done for the production of fluids but solid and identical products e.g. cars can also
be assembled using this method
 Each product will move from one stage to another independently.
 Production is capital intensive.
 The products are standardized/uniform/identical
 The production line is divided into processes or units e.g. cleaning, filling, capping and labeling
 it is an inflexible process
 associated with high volumes of output
Advantages of flow production
 Production costs are low which means the products can be sold at a lower price, leading to high
sales. This is because the goods are produced in large quantities which help the business to
enjoy economies of scale.
 Production is fast due to the use of machines. This means customers’ orders can be met quickly.
 Unskilled labour is used which reduces labour costs since low pay and little training is needed.
 Capital intensive production methods are used, therefore reducing labour costs, leading to
increased efficiency
 The firms may benefit from economies of scale in purchasing
 Time is saved, since there is no need to move goods from one part of the factory to another as
with batch production.
 It leads to high output of standardized products hence leading to large volumes of quality
products
Disadvantages
 Expensive machinery is required. This will delay the setting up of operations.

 Work is repetitive which can de-motivate the employees as they will be doing the same thing
over and over again leading to a reduction in efficiency.
 It is an inflexible method, which means the needs and wants of customers may not be met. This
is because goods are usually standardized or uniform.
 If one machine breaks down, the whole production line will have to be halted
Factors Considered when choosing a method of production
 Nature of the product – job production is used if a unique product specifically tailored to
customer requirements is to be produced. Flow production can be used if it is possible to mass
produce a uniform product.
 Size of the market: if the market is large, flow production will be used because large quantities
of goods will be produced. BUT, if demand is higher and more products can be sold, but not in
very large quantities, batch production will be used. Small local markets or niche markets will be
served by businesses using batch or job production. International markets are served by
businesses using flow production.
 The capital /financial resources available/ size of the business: if capital employed is limited, we
must use job production because it does not demand complex machines. Small businesses are
more likely to use job or batch production.
 Availability of skilled labour: if skilled labour is available, the business can use job production as
it require employees with a variety of skills.
NB: A business can change from one form of production to another as time progresses. Such changes
may require additional capital and space and may also affect the level of motivation of employees.
RECOMMEND AND JUSTIFY AN APPROPRIATE PRODUCTION METHOD TO USE FOR A GIVEN SITUATION
Job production: (w18 MS 11)
 Meet exact customer demands / unique / higher quality [k] so able to charge higher price
 More varied work leads to higher motivation [k] leading to few workers leaving / less
absenteeism [an]
 Change could damage reputation [k] as the business may lose handmade image which
could lower its sales [an]
Batch production:
 Flexible or easy to switch production [k] so able to react quickly to changes in customer
demand [an]
 Some economies of scale [k] leading to lower average costs [an]
 Can be demotivating for employees (as work likely to be more repetitive) [k] so may not
pay as much attention to quality issues increasing amount or cost of wastage [an]
 Able to produce more [k] which is important if demand is rising so maybe able to meet
additional demand [an]
 Cost of new equipment OR training [k]

HOW TECHNOLOGY HAS CHANGED PRODUCTION METHODS
 Automation
 Mechanization
 CAD
 CAM
 CIM
 EPOS (electronic point of sale)
 EFTPOS (electronic funds transfer at point of sale)
BENEFITS OF NEW TECHNOLOGY TO THE PRODUCTION PROCESS (w19p13)
 Machines replace labour [k] helping improve its income statement [app] so less wages
need to be paid [an]
 Wider range of products [k] so the business can appeal to more customers or markets
[an]
 Able to produce more / improved productivity / more efficient [k] so able to lower prices
[an]
 Technology improves flexibility [k] so the business can react to changes in demand [an]
for computers [app]
 Consistent quality [k] as machinery likely to make fewer errors [an] which can help retain
/ enhance reputation
 Greater job satisfaction stimulates workers, as routine and boring jobs are now done by
machines
 Quicker communication and reduced paperwork, owing to computers, can lead to
increased profitability
 More information becomes available to managers leading to better and quicker decisions
DRAWBACKS
 Risk to reputation [k] for businesses known for their hand-made image so fewer people
may demand the products [an]
 Impact on employee motivation [k] as work could become less interesting [an] so quality
of shoes falls [app]
 Risk of job insecurity [k] as it replaces some / all the skilled workers which could lower
efficiency [an]
 Cost of investment / retraining [k], leading to higher risk as more products have to be
sold to cover such costs
COSTS, SCALE OF PRODUCTION AND BREAK – EVEN ANALYSIS
Production Cost
This is expenditure incurred in converting raw materials into finished goods or bringing products to their
present location or condition. Costs can be classified according to their behavior i.e. fixed and variable
elements.
Identify and classify costs

10 | P a g e : T O P I C 4 – O P E R A T I O N S M A N A G E M E N T – C I E C H F I L E S
Fixed costs
They do not vary or change with a change in output, that is, they remain the same over a given level of
activity, for example, rent, salaries for supervisors, depreciation.
Costs ($)
Fixed costs
0 1 2 3 Output
Variable Costs
 They change with a change in output.

 That is they increase as output increases and decrease as output decreases, for example direct
wages , cost of raw materials and packaging costs, stock costs, component costs.
 They are also called direct costs:
Costs ($) Variable Costs
0 1 2 3 Output
NB: the distinction between fixed and variable costs is important as it facilitates decision making, for
example when making pricing decisions, when finding ways of reducing costs, when preparing budgets
and under break-even analysis.
Total Costs
Costs ($)

Total Costs
0 1 2 3 Output
It is the sum of fixed and variable costs.

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠 + 𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠
Where total variable costs = units produced ×variable costs per unit. For example, a business produces
textbooks and provided the following: rent = $1 000, paper cost per book = $2.00. The business
produced 2 000 books, calculate:
(a) Total fixed costs

(b) Total variable costs
(c) Total production costs
Total fixed costs = $1 000
Total variable costs = cost/unit × units produced
= $2/unit × 2 000 units
= $4 000
Total production cost = Total Fixed Costs + Total Variable Costs
= 1 000 + 4 000
= $5 000
Production Cost per Unit/Average Cost

𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡𝑠
This is expenditure incurred in producing one unit. 𝑈𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
5 000
= 2 000
= 2.50 per book.
USE OF COST DATA TO MAKE COST BASED DECISIONS

When making decisions, a business may ignore fixed costs and just use variable costs. This is because
fixed costs are unavoidable, that is, they will be incurred even if there is no production. Such decisions
include make or buy, accept or reject a special order and close a department or drop a product.
Make or Buy Decision
This is when a business is considering stopping producing a product and start outsourcing. The business
must compare the buying- in price and the marginal cost/variable cost per unit of production. The
general principle is, we buy if – Buying in price is less than variable per unit/marginal cost.
For example, a school produces bread and its variable costs per loaf are $0.60. The school has an option
to buy bread from Proton at $0.50 per loaf. Should the school make or buy? $0.50 versus $0.60
DECISION: we buy because the buying price is $0.1 lower than variable cost per unit. NB: other factors
like quality and the reliability of the supplier should be considered too.
Closing down a Department or Dropping a Product
A department or a product making a zero or negative contribution must be closed or dropped. This is
because it will not be contributing anything to the covering of fixed costs. For example, given:
Product A B C
Variable costs/unit 30 39 33
Selling Price/unit 40 41 30
Which product should be dropped and why?
Contribution calculations:
Product A B C
Selling Price/unit 40 41 30
Variable costs/unit 30 39 33
Contribution/unit 10 2 -3
Product C should be dropped because it has a negative contribution.
Special Order
It is when customers offer to buy products at a price lower than the normal price. The business must
accept the order if special order price is greater than variable/marginal costs per unit. Accept if special
order price/unit > variable/marginal cost per unit. That is, there must be a positive contribution. It is
normally applied if a business has idle capacity. For example, a bakery has a maximum capacity of 100
000 loaves. Normally it sells a loaf at $0.90. It is approached by a school with a request to buy 5 000
loaves at $0.65 per loaf. The cost of ingredients and labour per loaf is $0.5. Should the bakery reject or
accept the special order?

Special order price – Variable cost = contribution
$0.65 - $0.5 = $0.15
Decision: accept because it produces a positive contribution. NB: when making decisions, a business
must also consider qualitative factors not just quantitative information.
ECONOMIES OF SCALE
 It refers to factors that lead to a reduction in average costs as a business increases in

size.
EXAMPLES ARE:
Purchasing economies
 Bulk buying discounts

 It reduces unit costs of each item giving a larger business an advantage over smaller
firms that buy in small quantities
Marketing economies
 E.g. using own delivery vehicles

 Advertising costs spread over a large volume of sales
Financial economies

 Banks can loan large firms at lower interest rates

 Large firms are considered as less risky than small firms
Managerial economies
 Large firms afford to pay specialist managers such as accountants who can make more
efficient decisions
 Small firms may not be able to fully utilize big machines
Technical economies
 Use of flow production, division of labour and use of specialist equipment make larger
firms more efficient
DISECONOMIES OF SCALE
 It refers to factors that lead to an increase in average costs as a business grows beyond
a certain size
Poor communication
 Communication may become slow and inaccurate due to a long chain of command
 This may lead to many mistakes resulting in a reduction in efficiency
Low morale
 Workers in very large firms may never have a chance to see top managers
 Such workers may feel unimportant and divorced from the organization, leading a
reduction in morale and efficiency
 This will push average costs up
Slow decision making
 It may take longer for decisions made by managers to reach all workers
 This may lead to workers taking longer to respond and act upon managers’ decisions
 Top managers may also lack personal contact with customers
WAYS OF KEEPING PRODUCTION COSTS LOW (w19p13)
 choose low cost locations [k] leading to lower fixed costs [an]
 pay minimum wage/employ fewer people [k] to keep variable costs low [an]
 economies of scale [k] leading to lower average costs [an]
 set lower marketing budget [k]
 replace workers with machinery / automation / reduce workforce [k]
 cheaper supplier [k]
 close some locations [k] which would reduce electricity cost [an]
 set up online [k]
 reduce waste [k]
 Buy direct from manufacturer [k] so lower cost than buying from wholesaler [an]
 Less advertising [k] but this could lead to less awareness of the business [an]

BREAK – EVEN ANALYSIS
It is the study of the relationship between sales, fixed costs, total costs of production and output so
as to establish the break-even point. A break-even point is a point where a business does not make
profit or incur a loss. It is a point where sales revenue is equal to total costs. The point can be
determined graphically or by use of a formula.
Graphical Approach
Steps
(1) Draw the sales revenue line

(2) Draw the fixed costs line
(3) Draw the total cost line
NB: dollars will be shown on the y-axis and output on the x-axis.
For example, a business produces tables and provided the following information. Fixed costs = $500.
Selling price per table = $10 and variable costs per table = $5. The business sold 200 tables. Draw a
break-even chart.
(1) Sales revenue line
output 0 50 100 150 200

$ 0 500 1 000 1 500 2 000
Sales revenue = Selling Price/Unit × Output
(2) Fixed cost line
Output 0 50 100 150 200

$ 500 500 500 500 500
(3) Total cost line
Output 0 50 100 150 200

$ 500 750 1 000 1 250 1 500

Revenue/Costs
($) Sales Revenue Line
Break-even point Total Cost Line
PROFIT REGION
1 000
Fixed Cost Line
LOSS REGION
Margin of Safety
0 50 100 150 200 Output
Break-even output Maximum output
Break-even point/Break - even
 Where total costs equal total revenue OR Where business makes neither profit or loss
Margin of safety
It is a measure of how far a business will be from making a loss. It is calculates as follows: Maximum
output in units/dollars – break –even units/dollars. It is therefore an assessment of risk associated with
different levels of activity. A wide margin of safety is desirable as the business will not be close to
making a loss.
Margin of safety = current output – break even output/units
= 200 tables – 100 tables
= 100 tables
Profit or loss = sales revenue – total costs
= selling price per unit * number units – [Fixed costs + variable cost per unit × units sold]

Profit at 200 tables = $2 000 – $1 500
= $500
Break- even by Calculations

Fixed Costs
Break − even in units = Contribution per unit
Contribution per unit = selling price per unit – variable costs per unit
Break even in dollars = Break even units × Selling price per unit
= 100 × 10
= $1 000
Assess the usefulness of break - even analysis in decision making (20).
Break even analysis is the study of the relationship between sales revenue, output and total costs. The
tool can be used to make decisions like choosing between options, price determination, choosing a
method of production and output determination.
Firstly, break even analysis can be applied when choosing between options. Generally, the option with a
low break even point and a wide margin of safety is desirable. This is because it will be a less risk form of
investment because more profits will be realized. For example, given two products A and B as shown
below:
A B
Sales Revenue
$ $ Sales revenue
Total costs Total costs
Fixed costs Fixed costs
0 50 200 Output 0 150 200 Output
In this case, product A will be desirable because of the low break even point of 50 units as compared to
150 units for product B.

Another area of application is when determining prices. This is because management can study the
effects off reducing prices on the break even point. If they decide to reduce the price, the break even
point will be pushed further. This means the business will not make a profit quickly.
Break even can also be used when determining output. This is because it shows the profits that are
earned at different levels of activity. Generally, a high level of activity will help the business to earn
more profits. Management can therefore motivate employees by showing them a break even chart so
that they understand the need to increase output.
The method can also be used when choosing a method of production that is, between capital and labour
intensive production. Generally, capital intensive methods can help reduce total cost, but can also
increase fixed costs. Management can therefore analyze the overall effect of a method on cost
reduction and the break even point.
HOWEVER, break even analysis can be of limited use because it is based on assumptions like: (i)
everything that is produced will be sold (ii) costs can be easily classified into fixed and variable costs (iv)
the goods are sold at one price and profits increase as output increases. This is not realistic in practice
because businesses can have closing inventory, profits may decrease as output continue to increase due
to diseconomies of scale and there are other factors which affect production and sales like employee
motivation and quality.
IN A NUTSHELL, despite the limitations, break even analysis is useful in making decisions but should be
used with other tools to achieve the best results.
Quality
It is the ability of the product to meet customer expectations or to serve its purpose (fitness for
purpose).
Reason for ensuring quality
(1) It helps to reduce customer complaints which mean they can even recommend the quality
product to their friends. This will in turn help to increase sales.
(2) It helps to reduce reworking costs that is costs associated with amending faulty products. This
means the business will not waste time but concentrate on increasing good production.
(3) It helps to create and maintain the image of the business or brand loyalty. These customers will
continue to buy products made by the business which can lead to long product life cycles.
(4) It allows a business to charge a premium of high prices on its products. This will also increase
sales as customers may become less sensitive to price changes.
W16p11
POSSIBLE REASONS WHY QUALITY IS IMPORTANT TO A BUSINESS

 Good reputation / brand image [k] so customers trust the paint [app] which could help
increase sales [an]
 Attract new customers [k] as products might be better than rivals
 Meet legal controls [k] e.g. chemicals must be safe to avoid being prosecuted / sued
[an]
 More competitive this could give them a competitive advantage over its rivals [an]
 Create brand / customer loyalty [k] customers keep returning [an]
 Can charge a higher price [k] to increase revenue [an]
 sales might fall [k] if quality is lowered [an]
PROBLEMS OF POOR QUALITY: [CIE N12, P12, Q2d.]
 loss of confidence by customer [k] so less sales [an] as customers look for alternative
suppliers (an)
 cost of rectification [k] e.g. rework products [an] which will increase costs and could lead
to lower profit [an]
 costs of fines/legal action [k]
 damage to reputation/image [k] so it can cost the business when trying to rebuild los
image (an)
 Inability to supply on time [k] so could lose important future orders [an].
NB: ensuring quality can increase the expenses of a business because quality controllers may need to be
employed, employees trained and high quality raw materials purchased or bought.
THE METHODS OF ENSURING QUALITY (w19p13)
1) Training employees [k] so that all employees make less mistakes / more efficient [an
2) Quality assurance [k] so errors are prevented before they happen or spotted earlier in
the process [an] so finished product is suitable to be used (an)
3) Continuous improvement or Kaizen: This when an organization keeps on finding new ways of
doing things. The organization will not be satisfied with the status quality, this means the
production quality will be constantly revised and product quality will be improved.
4) Bench marking: it is when a business compares its products to those of the market leader and
tries to improve its products. This means the quality of market leader will be a standard or a
bench mark that has to be reached or surpassed.
5) Use quality control [k] so ensure that all finished products are up to standard [an]
6) Buy better quality materials
7) Total Quality Management (TQM)
8) Hire skilled workers [k]
9) Increase motivation OR examples, e.g. use job rotation
Quality Control
 checking that a product meets the required standard

 OR checking of goods at the end of the production process [2]
 OR Checking the standard of goods through inspection [2]
 OR process of reviewing accuracy of work bought in or completed [2]

Advantages
 Tries to eliminate faults or errors before the customer receives the product or service
 Less training required for workers
Disadvantages
 Expensive as employees need to be paid to check the product or service

 Identifies the fault but doesn’t find why the fault has occurred and therefore it is difficult to
remove the problem
 Increased costs if the product have to be scraped or reworked or service repeated
Quality assurance
 It refers to checking for the quality standards throughout the production process.
Advantages
 Tries to eliminate faults or errors before the customer receives the product or service
 Fewer customer complaints
 Reduced costs if the product do not have to be scraped or reworked or service repeated
Disadvantages
 Expensive to train employees to check the product or service

 Relies on employees following instructions of standards set
THE DIFFRENCE BETWEEN QUALITY CONTROL AND QUALITY ASSUARANCE
Quality assurance involves checking Quality control happens at end [k] after the
throughout the process [k] product have been made
Quality assurance means everyone is involved Quality control inspectors responsible
in checking [k]
Quality assurance is process orientated [k] product orientated [k]
Total Quality Management (TQM)
 It is the continuous improvement of products and processes by focusing on quality at each stage
of production
Advantages
 Quality is built into every part of the production of a product or service, hence becomes central
to the ethos of employees
 Eliminates all faults or errors before the customer receives the product or service
 No customer complaints, so brand image is improved, leading to higher sales

 Reduced costs as product do not need to be scraped or reworked or service repeated

 Waste is removed and efficiency increases
Disadvantages
 Expensive to retrain employees to check the product or service

 Relies on employees following TQM ideology
INDUSTRY
MAIN FACTORS INFLUENCING LOCATION AND RELOCTION OF BUSINESS DECISIONS
Factors influencing location of a manufacturing business
Methods of production
 Job production does not place much importance to locating near supplier of components as
compared to flow production
Market
 If products gain weight and volume when manufactured require the business to locate near the
market e.g. soft drinks
 A business producing perishable products may also need to locate closer to the market so that
the products are bought whist they are still fresh
Raw materials/components
 If raw materials lose weight and volume during processing, locating closer to the source of raw
materials will cut transport costs
 If the business is selling non-perishable products, it’s okay
External economies of scale

 It refers to costs benefits arising from locating in a region with other businesses
 Being closer to component suppliers, support businesses providing installation and repair will
reduce production stoppages caused by breakdowns
 Universities and colleges can assist on research and development of new products
Availability of labour
 It is important to locate in an area where people with the relevant skill live
 It makes it cheaper and easier to recruit
 If the firm requires a large number of unskilled labour, an area of high unemployment becomes
more suitable
 A region where wages are lower might also be preferable
Government influence
 Government may offer grants to firms that locate in particular areas e.g. regions of high
unemployment
 This will act as a pull factor as firms are encouraged to locate there
 BUT, government may also negatively influence location in an area through regulations or
restrictions e.g. to businesses producing harmful waste
Transport and communication
 Being near a transport system such as road, rail, inland waterway, port or airport is important
 It will reduce costs by speeding up deliveries
Power and water supply
 Areas where there are no regular power cuts are preferable

 Ares with reliable water supplies are also important for cooling purposes e.g. near a river or sea
Climate
 E.g. the silicon valley in the US has very dry climate which aids the production of silicon chips
Factors influencing the location of a service sector business
Customers
 Businesses providing direct/personal services such as hairdressers, builders, post offices,

plumbers, beauticians, restaurants, gardeners etc. should locate close to where people live
 Businesses providing indirect services such as retailing, transport, insurance and banking can
provide them via telephone, post or internet, but should locate to different parts of the country
or in different countries where people live
Personal preference of the owners

 Can choose to locate the business close to where they live
Technology
 Service businesses can now locate anywhere and provide their services by telephone or via
internet e.g. website designers
Availability of labour
 A service business requiring a large number of employees can locate near a large town or city
 If a particular skill is needed, then locating close to where people with the right skill live
becomes important
 Usually, in reality, people with the right skill move closer to the business, not the other way
round
Climate
 Businesses linked to tourism such as hotels require the right climate
Near to other businesses
 Services such as maintenance of equipment or office cleaning requires the service provider to be
a call away
 Banks may also need to locate in busy areas for the convenience of customers
Rent/taxes
 Locating in the outskirts of town to benefit from lower rentals is important if the service does
not need to be in a town or city centre e.g. lawyers, doctors, dentists etc.
Factors affecting the location of a retailing business
Shoppers
 A retailer selling expensive goods need to locate in an area where high income earners visit
 A business selling gift type of products may need to locate in areas visited by tourists
Nearby shops
 If located in popular shopping areas, there will be a high traffic of shoppers, so chances of walk
in customers are high
 BUT, competition may be very high
 Customers may still get attracted to that shopping area because of a wider choice, so a business
locating where there are no other shops may hardly get customers because customers don’t see
a variety in that area
Customer parking available/nearby

 If parking is available, the convenience will encourage customers, increasing sales

 Lack of parking may put people away, reducing sales
Availability of suitable vacant premises
 If not available, location in that area wished for becomes impossible
Rent/taxes
 Central areas may be associated with high rentals and taxes, but high demand may generate
sales that cover the costs
 Lower rent and tax areas in the edge of town may be less popular, so sales may be lower
Security
 High crimes and vandalism may deter businesses from locating in that area
 Insurance companies may refuse to insure a business if it is in such an area
 High rent area patrolled by security guards may be preferable
FACTORS THAT A BUSINESS SHOULD CONSIDER WHEN DECIDING WHICH COUNTRY TO LOCATE
OPERATIONS IN
 Further to reach its market [k] so may not be able to react quickly to changes in demand
[an]
 Availability of suitable land [k] as will need a large area which will increase the cost [an]
 Availability of suitable labour [k]
 Distance to raw materials [k] which could lead to delays in production [an]
 Negative reaction of local community [k]
 Legal controls may restrict or encourage where it can locate [k]
Cheaper sources of raw materials
 E.g. exhaustion of mineral owes or oil wells may require locating in a country where new
deposits have been found
 It is also cheaper to use raw materials at their source rather than transport them to another
country
Rent/taxes considerations
 If taxes and rents keep on rising it may force a business to relocate into a country where such
costs are lower
Availability of government grants and other incentives
 Government offering grants and subsidies will induce firms to choose locating in that country
rather than elsewhere
 Such firms in turn may provide employment, develop infrastructure and bring new skills

Trade and tariff barriers
 Locating in a country can be an easy way to go round trade restrictions such as quotas and
tariffs
Labour laws and wage costs
 If wage costs keep rising in a country a business may find it more profitable to relocate overseas
in order to cut wage costs
 Countries providing a pool of graduates from a particular skill can attract foreign firms to locate
there
THE ROLE OF LEGAL CONTROLS ON LOCATION DECISIONS
Reasons why government influence location decisions:
 Encourage businesses to set up and expand in areas of high unemployment

 Discourage firms from locating in overcrowded areas or sites which are noted for their natural
beauty
Measures used by government to influence firms to locate in a given area:
 Planning regulations where government legally restrict business activities that can be
undertaken in certain areas
 Providing grants or subsidies to businesses to encourage them to locate in underdeveloped
parts of the country
RECOMMEND AND JUSTIFY AN APPROPRIATE LOCATION FOR A BUSINESS IN GIVEN CIRCUMSTANCES
Relocation
It refers to a process of moving operations to another place or area. This is done because of:
(a) The need to benefit from low taxes

(b) The need to benefit from cheap labour or skilled labour
(c) Rising rentals
(d) Depletion/exhaustion of raw materials e.g. mines
(e) Rising competition
(f) The need for more space
(g) The need to be close to customers

Topic 4 Operations Management

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1|Page: TOPIC 4 – OPERATIONS MANAGEMENT – CIE CH FILES

MANAGING RECOURCES EFFECTIVELY

IMPORTANCE OF MANAGING RESOURCES EFFECTIVELY

 It will keep costs low and increase profits

THE PRODUCTION/OPERATIONS MANAGER IS RESPONSIBLE FOR:

 It is the output measured against the inputs used to create it.

= ------- units per input used

𝑜𝑢𝑡𝑝𝑢𝑡(𝑜𝑣𝑒𝑟 𝑎 𝑔𝑖𝑣𝑒𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝑡𝑖𝑚𝑒

= units per employee

O’ LEVEL CIE BUSINESS STUDIES – WOGS: CHAPANGAZA 1

= 16 chocolates per employee

= 24 chocolates per employee

Ways of increasing productivity

= 12 chocolates per employee

Causes of decrease in labour productivity

 Ineffective supervision such that employees wasted production time.

Benefits of increasing efficiency/productivity

O’ LEVEL CIE BUSINESS STUDIES – WOGS: CHAPANGAZA 2

 Profitability is increased because more goods will be produced at a lower cost.

Reasons for holding inventory

(1) To meet unexpected increase in demand this helps to maintain customers.

Statistical inventory control chart

BENEFITS OF HOLDING LOW LEVELS OF INVENTORY (w17p11)

O’ LEVEL CIE BUSINESS STUDIES – WOGS: CHAPANGAZA 3

 Possible delays in production [k] leading to lower output [an]

Problems of Holding Inventory

Methods to achieve lean production

Just-in-time inventory control

 Just-in-time requires reliable suppliers of raw materials, flexible employees

 It focuses on elimination of waste

O’ LEVEL CIE BUSINESS STUDIES – WOGS: CHAPANGAZA 4

ADVANTAGES OF LEAN PRODUCTION

Costs are saved through:

(a) Job/Unit Production

O’ LEVEL CIE BUSINESS STUDIES – WOGS: CHAPANGAZA 5

 It is the production of individual goods according to customer specifications or requirements.

(a) Batch production

It is when products are made in groups/blocks, followed by another group/block.

Features (CIE – s10 12, 1c)

 Production is done in discrete groups because usually batches are in response to

It can be used in bakeries to produce bread, rolls and muffins.

O’ LEVEL CIE BUSINESS STUDIES – WOGS: CHAPANGAZA 6

(1) Flow/Line/Mass/Continuous Production

Features (CIE – s10 11 Q1c)

Advantages of flow production

 Expensive machinery is required. This will delay the setting up of operations.

O’ LEVEL CIE BUSINESS STUDIES – WOGS: CHAPANGAZA 7

Factors Considered when choosing a method of production

Job production: (w18 MS 11)

O’ LEVEL CIE BUSINESS STUDIES – WOGS: CHAPANGAZA 8

HOW TECHNOLOGY HAS CHANGED PRODUCTION METHODS

BENEFITS OF NEW TECHNOLOGY TO THE PRODUCTION PROCESS (w19p13)

COSTS, SCALE OF PRODUCTION AND BREAK – EVEN ANALYSIS

Identify and classify costs

 They change with a change in output.

Costs ($) Variable Costs

O’ LEVEL CIE BUSINESS STUDIES – WOGS: CHAPANGAZA 10

It is the sum of fixed and variable costs.

(a) Total fixed costs

Total fixed costs = $1 000

Total variable costs = cost/unit × units produced

= $2/unit × 2 000 units

Total production cost = Total Fixed Costs + Total Variable Costs