GCE Business

Operations planning
Objectives
 Explain the need for operations planning
 Analyse the influence of marketing, resources and
technology on operations decisions
 Explain the need for flexibility and process innovation
 Differentiate between different production methods:
job, batch, flow, mass customisation
 Evaluate the factors that determine production
methods used in different situations and explain the
problems in changing method
 Assess the importance of location decisions to the
success of a business and evaluate the factors that
influence location and relocation decisions
 Explain why businesses may want to increase scale
of production
 Analyse the importance of economies and
diseconomies of scale and the impact on unit costs
Introduction to operations
planning
 Operations planning is preparing input
resources to supply products to meet
expected demand

Operations managers need to coordinate

and plan all production decisions with
departments of the business –
marketing, human resources, finance.
Operations planning – the
importance of the marketing
link
 Key information needed by an operations
manager when planning future production
levels is estimated or forecast market demand
 This is a crucial link – trying to match supply to
potential demand
 This process is called sales and operations
planning
 Operations planning will also be affected by the
resources available to a business and
developments in IT – such as CAD and CAM
The need for flexibility
 Operational flexibility means the
ability of a business to vary both the
level of production and the range of
products following changes in
customer demand
Process innovation
 Process innovation is the use of a new or much
improved production method or service
delivery method

Some recent examples of process innovation

include,
 Robots in manufacturing
 Computer tracking of stock
 Using the internet to track the exact location of
parcels being delivered worldwide
Process innovation
Made in Britain BBC Feature – The
History of Pilkington Glass

http://www.youtube.com/watch?v=G
pektVh6aFw
Production methods
 Job production – producing a one-off item specially
designed for the customer

 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

 Flow production – producing items in a continually

moving process

 Mass customisation – the use of flexible computer-aided

production systems to produce items to meet individual
customers’ requirements at mass-production cost levels
Job production
Main  single one-off items
feature
Essential  highly skilled workforce
requirement
s
Main  able to undertake specialist projects
advantages or jobs, often with high value added
 high levels of worker motivation

Main  high unit production costs

disadvantag  time consuming
es  wide range of tools and equipment
needed
Batch production
Main group of identical products pass through
feature each stage together
Essential labour and machines must be flexible to
requiremen switch to making batches of other designs
ts
Main  some economies of scale
advantages
 faster production with lower unit costs
than job production
 some flexibility in design of product in
each batch
Main  high levels of stocks at each production
disadvanta stage
ges
 unit costs likely to be higher than flow
Job & Batch Production
Video case study – Investment in Cricket
Bat Production

http://www.tutor2u.net/business/videocase
s/videocase-cricketbats.pdf
Flow production
Main  mass production of standardised
feature products
Essential  specialised, often expensive, capital
requiremen equipment – but can be very efficient
ts
 high steady demand for standardised
products
Main  low unit costs due to constant working
advantage of machines, high productivity and
s
economies of scale
Main  inflexible – often very difficult and time
disadvanta consuming to switch from one type of
ges
product to another
 expensive to set up flow-line machinery
Flow production
Main  mass production of standardised
feature products
Essential  specialised, often expensive, capital
requiremen equipment – but can be very efficient
ts
 high steady demand for standardised
products
Main  low unit costs due to constant working
advantage of machines, high productivity and
s
economies of scale
Main  inflexible – often very difficult and time
disadvanta consuming to switch from one type of
ges
product to another
 expensive to set up flow-line machinery
Flow production
How Jaffa cakes are made

http://www.tutor2u.net/blog/index.php/business-stu
dies/comments/a-cracking-business-lesson-video-on-
my-favourite-product-jaffa-cakes

Flow production in action – making Vienetta (video)

http://www.tutor2u.net/blog/index.php/business-
studies/comments/flow-production-in-action-
making-vienetta-video
Flow production
Video case study – inside the Easter egg factory

http://www.tutor2u.net/business/videocases/videocas
e-eastereggs.pdf

Video case study – mass-market housing

http://www.tutor2u.net/business/videocases/videocas
e-mass-market-housing.pdf
Production
Production Process in Action – 2010 World
Cup Football

http://www.tutor2u.net/blog/index.php/busi
ness-studies/comments/production-
process-in-action-the-2010-world-cup-
football#extended
Recent improvements in
production methods
 Advances in technology such as computer-
aided design (CAD) and computer-aided
manufacturing (CAM) have allowed much
quicker developments of new products,
designs that feature common components,
and robotic machinery that can be
switched to making a range of parts – not
just one
Recent improvements in
production methods
Technology in action: inside the transparent factory
http://www.tutor2u.net/blog/index.php/business-
studies/comments/technology-in-action-inside-the-
transparent-factory

A tour of a handmade chocolate factory

http://www.tutor2u.net/blog/index.php/business-
studies/comments/a-tour-of-a-handmade-chocolate-
factory#extended
Recent improvements in
production methods
Amazing Production Video – Nissan
Qashqai built at Sunderland, UK
http://www.tutor2u.net/blog/index.php/business-
studies/comments/amazing-production-video
 Mass customisation
Main  flow production of products with many
feature standardised components but customised
differences too
Essential  many common components
requiremen
 flexible and multi-skilled workers
ts
 flexible equipment – often computer-
controlled to allow for variations in the
product
Main  combines low unit costs with flexibility to
advantages meet customers’ individual requirements

Main expensive product redesign may be

disadvanta needed to allow key components to be
ges
switched to allow variety
Production methods – making
the choice
These factors will influence the production
method a business adopts,

 Size of the market

 The amount of capital available
 Availability of other resources
 The type of market demand for products
Problems of changing
production methods
Job to batch,

 Cost of equipment needed to handle large

numbers in each batch
 Additional working capital needed to
finance stocks and work in progress
 Staff de-motivation – less emphasis placed
on a individual's craft skills
Problems of changing
production methods
Job or batch to flow,

 Cost of capital equipment needed for flow

production
 Staff training to be flexible and multi-skilled –
of this approach is not adopted, then workers
may end up on one boring repetitive task,
which could be de-motivating
 Accurate estimates of future demand to
ensure that output matches demand
Problems of changing
production methods

Video case study – smart production

http://www.tutor2u.net/business/videocase
s/videocase-smart-production.pdf
Location decisions
 An optimal location means a business location that
gives the best combination of quantitative and
qualitative factors

An optimal location is likely to be a compromise that,

- Balances quantitative and qualitative factors

 Quantitative factors are measurable in financial

terms and will have a direct impact on either the
costs of a site or the revenues from it and its
profitability

 Qualitative factors are non-measurable factors that

may influence business decisions
Factors influencing location
decisions
Quantitative factors

 Business costs – capital costs, labour

costs, transport costs
 Potential sale revenue
 Government grants
Factors influencing location
decisions
Qualitative factors

 Safety
 Room for further expansion
 Ethical considerations
 Environmental concerns
 Infrastructure
Advantages and disadvantages
of multi-site locations
 Multi-site location means a business that
operates from more than one location

Advantages of multi-site Disadvantages of multi-site

locations
 greater convenience for
customers, e.g. McDonald’s
restaurants in every town
 lower transport costs
 opportunities for
delegation of authority to
regional managers from
head office
 cost advantages of multi-
locations
 coordination problems
between the locations –
excellent two-way
communication systems will
be essential
 potential lack of control and
direction from senior
management based at head
office
 different cultural standards
International location issues
One of the main features of globalisation is the growing
trend for businesses to relocate completely to another
country or to set up new operating bases abroad. This
process is often referred to as ‘offshoring’. The world’s
largest corporations are now virtually all multinationals.

 Offshoring means the relocation of a business process

done in one country to the same or another company in
another country

 Multinational means a business with operations or

production bases in more than one country
International location issues
Reasons for international location decisions

1. To reduce costs e.g. labour costs

2. To access global (world) markets
3. To avoid protectionist trade barriers*
4. Other reasons e.g. foreign government support

*Trade barriers are taxes (tariffs) or other

limitations on the free international movement of
goods and services
International location issues
Video Case Study – Twinings Offshores
Tea production

http://www.tutor2u.net/blog/index.php/bu
siness-studies/comments/video-case-
study-twinings-offshores-tea-production
Issues and potential problems
with international location

 Language and other communication

barriers
 Cultural differences
 Level-of-service concerns
 Supply-chain concerns
 Ethical considerations
Location issues
Enterprise, Location and Culture – Inside
the new Google Campus in London

http://www.tutor2u.net/blog/index.php/bu
siness-studies/comments/enterprise-locat
ion-and-culture-inside-the-new-google-ca
mpus-in-london
Scale of operation
 The scale of operation is 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

Businesses can benefit from the advantages

of large-scale production – these are called
economies of scale.
Economies of scale
 Economies of scale means reductions in a firm’s
unit (average) costs of production that result
from an increase in the scale of operations

There are five main reasons for economies of

scale,
 Purchasing economies
 Technical economies
 Financial economies
 Marketing economies
 Managerial economies
Economies of scale
Purchasing economies of scale

 Purchasing economies are also known as

bulk-buying economies
 Cheaper deals are always offered for
greater quantities offered e.g. suppliers
will often offer substantial discounts for
large orders
 Economies of scale
Technical economies of scale

 Larger firms are more likely to be able to invest and install

high-tech equipment that are more efficient (produce lower
cost per unit) than the equipment smaller firms can afford

How crisps are made – technological economies of scale

http://www.tutor2u.net/blog/index.php/gcse-economics/co
mments/how-crisps-are-made-technological-economies-of-s
cale

Economies of scale – container ships

http://news.bbc.co.uk/1/hi/business/7992136.stm
Economies of scale
Financial economies of scale

 Larger firms often get charged lower

interest rates when borrowing finance
compared to smaller firms
Economies of scale
Marketing economies of scale

 Marketing costs (e.g. employing a sales

force, employing an advertising agency)
can be spread over a higher level of sales
for a big firm therefore lowering the
marketing cost per unit
Economies of scale
Managerial economies of scale

 Larger firms should be able to afford to

attract specialist functional managers who
should operate more efficiently than
general managers
Economies of scale
Operations in Action – Video Tour of the
Amazon Depot

http://www.guardian.co.uk/business/video/
2009/nov/20/amazon-fulfilment-centre
Diseconomies of scale – big
can be inefficient too
 Diseconomies of scale means the factors
that cause average costs of production to
rise when the scale of operation is increased

There are three main causes for

diseconomies of scale,
 Communication problems
 Alienation of the workforce
 Poor coordination
Diseconomies of scale
Communication problems

 Large-scale operations will often lead to poor

feedback to workers, excessive use of non-
personal communication media,
communication overload with the sheer
volume of messages being sent, and distortion
of messages caused by the long chain of
command
 All of these factors will reduce management
efficiency
Diseconomies of scale
Alienation of the workforce

 The bigger the organisation, the more

difficult it becomes to directly involve
every worker and to give them a sense of
purpose and achievement in their work
 They may feel so insignificant to the
overall business plan that they become de-
motivated and fail to give of their best
Diseconomies of scale
Poor coordination

 A major problem for senior management

of large-scale operations is coordination
 Poor coordination could lead to
substantially higher production costs than
for a smaller business with much tighter
control over operations
 Large-scale production – unit
costs of production
The impact of economies and diseconomies of scale on
average costs
Economies and diseconomies
of scale
Missing words
Economies of scale are factors that cause average
_______________ to fall as a consequence of operating at a
___________________ scale of output. It is often assumed
that they always provide benefits to large firms in every
industry, however experience suggests this in not the
case. The car industry certainly benefits from technical
economies stemming from up-to-date, expensive
machinery and purchasing economies such as
_______________
_________________. In some circumstances an increase in
the scale of output can actually result in an ___________ in
average costs. This is referred to as
_________________________ _______ _________________.
Words from: (Increase, diseconomies of scale,
costs, larger, bulk buying)
 Economies and diseconomies
of scale
Tick the relevant category for each of
these
Factor Economy of Diseconomy of Neither
scale scale
Costs arising from poor
communication
Effect on the interest rate
of borrowing large sums
Impact of automation on
labour costs
Rising wages due to
shortage of IT staff
Effect on variable costs
of bulk buying
Impact of poor staff
Economies and diseconomies
of scale
Look at these figures for three Smoothie
manufacturers and answer the 3 questions that
follow Not JPs PureFrui
Guilty t
Tonnes of smoothies 20,000 35,000 10,000
produced per annum
Factory workforce 4,000 5,000 2,500
Product waste/reject % 2.2% 2.9% 0.9%
Cost per tonne of fruit £815 £809 £820
purchased
Interest charges on 6.75% 6.25% 7.00%
bank loans
Economies and diseconomies
of scale
Calculate the productivity level for each Smoothie
producer _______________________________________

______________________________________________________
________________________________
Identify and briefly explain two factors that suggest
economies of scale ______________________________

______________________________________________________
________________________________
Identify one factor that clearly suggests diseconomies
of scale. Briefly explain your answer. ________________

______________________________________________________
______________________________________
Operations planning: Multiple
Choice
Accurate sales forecasts will help operations managers to
achieve all of the following except:
a keep stock levels to a minimum
b reduce wastage of production
c maximise output
d match output closely to demand levels.

All of the following are examples of process innovation

except:
a robots in manufacturing
b CAM
c computer tracking of stock
d product development.
Operations planning: Multiple
Choice
Mass customisation is defined as:
a producing a one-off item specially designed for the customer
b producing items to meet individual customer requirements at
mass-production levels
c producing a limited number of identical products
d producing items in a continually moving process.

Batch production is defined as:

a producing identical products in batches
b the use of flexible computer-aided production systems
c producing items in a continually moving process
d producing items in batches in which every item in the batch
passes through one stage of production before the batch moves
on to the next stage.
Operations planning: Multiple
Choice
The Coca-Cola factory in South Korea produces a
range of products on its production lines. An
individual production line may produce Diet Coke
one day and then be switched to Fanta the next.
Cans move along a conveyor belt producing items in
a continually moving process. Th e production
method used by Coca-Cola is:

a flow production
b batch production
c job production
d mass customisation.
Operations planning: Multiple
Choice
Which of the following is an advantage of job production
relative to batch production?
a The work is more likely to motivate workers.
b It provides the opportunity to take advantage of economies of
scale.
c There is greater division of labour.
d It allows a higher level of demand to be met.

Which of the following is not a problem associated with making

a change from job to batch production?
a the increased working capital cost needed to finance stocks
b the increased capital cost of machinery
c staff demotivation
d increasing unit costs
Operations planning: Multiple
Choice
Some European banks have moved their call
centres to India. The reason for this change
in location is most likely to be:

a a reduction in transport costs

b a reduction in labour costs
c an increase in sales-revenue potential
d ethical considerations.
Operations planning: Multiple
Choice
A retailer is considering expanding to a new city-
centre location. It estimates the following costs and
revenues:
 annual costs $500,000
 annual sales 60,000 units
 selling price per unit $11

What is the estimated annual profi t?

a $100,000
b $16,000
c $160,000
d $10,000
Operations planning: Multiple
Choice
Which of the following is an example of a qualitative factor in
making a decision about location?
a manager preference
b site costs
c potential revenues
d government grants

Economies of scale are best defined as:

a the benefits of large-scale production
b the reduction in a firm’s average cost as the scale of
production increases
c the increase in a firm’s average cost as the scale of
production increases
d the discounts obtained for buying in bulk.
Operations planning: Multiple
Choice
Which of the following is a technical economy of scale?

a indivisibilities
b the ability to employ specialist functional mangers
c bulk buying
d lower interest rates for large-scale finance

Which of the following is not a diseconomy of scale?

a communication problems
b workforce alienation
c poor coordination
d decentralisation