Operational Managemen t

Saadat Ali Mughal

9/18/2011

Operations & Project Management

4AS.1 The nature of operation Production Production is undertaken so as to satisfy wants. Production includes manufacture of goods and provision of services. Production is primarily aimed at creation of utilities. Raw materials or inputs are transformed through certain process and converted into out put or finished goods through applying some factors of production. The three main categories of production are: Primary production It refers to the extraction of raw material and includes agriculture, animal husbandry, fishing, forestry etc. Secondary production It refers to conversion of raw material into finished goods through employment of factors of production i.e. entrepreneur, capital, land and labour. Tertiary production It includes transfer of goods from the factory to the consumer. In the tertiary sector there are two broad groups of workers: Commercial services- they are all involved in getting the finished goods to the final consumers. Usually these businesses provide their services to earn profit i.e. communication, transportation, banking, insurance retailing, wholesaling etc. Direct services- this group work to provide a direct service, rather than to ensure the delivery of goods to consumers. Examples include doctors, engineers, teachers etc.

Saadat Ali Mughal

Resources: factors of production

The scare resources available for use in the production of goods and services to satisfy wants are called factors of production. These work as inputs into a production process from which an output of goods and services emerges. These are conventionally defined as land, labor, and capital, but entrepreneurship (management) is often listed as a fourth factor of production. The availability of the various factors of production in a country its factor endowmenthas an important influence on investment and international trade. To be successful, a business needs to achieve a healthy mix of the various factors of production. The desirable mix will change from time-to-time and will depend on such things as the need to expand, the availability of skilled labor or experienced and enterprising managers, new technology, and the market price for the different factors of production. Land- is the natural resources on the planet. It includes space on the ground, hills, seas, oceans, air etc Labour- is the human input (workers, managers etc.) into the production process. The UK has about 58 million people of which approximately 35 million are of working age. Each individual has a different level of skills, qualities and qualifications. This is known as there Human capital. Capital- man made physical goods used to produce other goods and services. Examples include machines, computers, tools, factories, roads etc. Increases in the level of capital are called investments. Entrepreneur- business know-how or the ability to run a production process is known as enterprise. It may also be defined as the people who have enterprise and can control and manage firms are called entrepreneurs. The entrepreneur provides the initial ideas. They risk their own resources in business ventures. They also organize the other three factors of production. Difference between Effectiveness and efficiency Efficiency refers to doing things in a right manner. Scientifically, it is defined as the output to input ratio and focuses on getting the maximum output with minimum resources. Effectiveness, on the other hand, refers to doing the right things. It constantly measures if the actual output meets the desired output. Since efficiency is all about focusing on the process, importance is given to the means of doing things whereas effectiveness focuses on achieving the end goal. Efficiency is concerned with the present state or the status quo. Thinking about the future and adding or eliminating any resources might disturb the current state of efficiency. Effectiveness, on the other hand, believes in meeting the end goal and therefore takes into consideration any variables that may change in the future.

Operations & Project Management In order to be efficient time and again, discipline and rigor is required. This can build inflexibility into the system. Effectiveness, on the other hand, keeps the long term strategy in mind and is thus more adaptable to the changing environment. Since efficiency is about doing things right, it demands documentation and repetition of the same steps. Doing the same thing again and again in the same manner will certainly discourage innovation. On the other hand, effectiveness encourages innovation as it demands people to think, the different ways they can meet the desired goal. Efficiency will look at avoiding mistakes or errors whereas effectiveness is about gaining success. In the earlier days of mass production, efficiency was the most important performance indicator for any organization. However, with consumers facing an increasing number of choices, effectiveness of an organization is always questioned. In order to be a successful organization, there needs to be a balance between effectiveness and efficiency. Only being efficient and not meeting the requirements of the stakeholders of the organization is of little use to anybody. And effectiveness may result in success but at what cost? Measuring efficiency: Productivity This measures the relationship between inputs into the production process and the resultant outputs. The most commonly used measure is labour productivity, which is measured by output per worker. Productivity is an efficiency measure. If a firm becomes more productive, it becomes more efficient. Following are the ways in which productivity levels can be increased. 1. improve the training of staff to raise skill levels. 2. purchase more technologically advanced equipment to increase the capital productivity 3. improve employee motivation 4. change the layout of work 5. improve working conditions 6. more efficient management Raising productivity is not always a guarantee for success. It does not crate demand among the customers so it is the quality of management which determines the success of any policy. Productivity = Total out put / Number of workers employed For example, assume a sofa manufacturer makes 100 sofas a month and employs 25 workers. The labour productivity is 4 sofas per person per month. There are several other measures of productivity. Output per hour / day / week Output per machine etc.

Saadat Ali Mughal Capital verses labour intensity Labour intensive techniques involve using a large proportion of labour than capital. Capitan intensive techniques involve employing more machinery relative to labour. For example, chemical production is capital intensive with only a relatively small workforce to oversee the process. The postal service is a labour intensive with a considerable amount of sorting and delivery done by land. The process that is chosen depends on a number of factors. The nature of the product. The relative price of the two products. The size of the firm. 4AS.2 Operations planning OPERATIONS DECISIONS There are certain factors which affect operations decisions: Influence of market- Products are manufactured by keeping in view the demand and supply in the market. Markets heavily influence the choice decision and production features and methods are based on the market forces. These forces may include competitors, consumers, international markets, culture, ethics and government etc. Availability of resources- Operations decisions are very much based on availability of resources like land, labour, raw material, infrastructure etc. In case of non availability of technology and infrastructure labour intensive production methods will be adopted. Productions units are moved where all resources are available easily and economically. Most of the countries in the world are now competing international market and attracting multinationals or renowned organizations by successfully providing all resources. Technology- International market can be competed by providing best quality products with economical prices and continuous supply. This can only be possible with the use of technology. Presently Computer Added Designs (CAD) and Computer Added Machineries (CAM) had mad it possible to achieve productive goals. ORGANISING PRODUCTION Work-study This allows a business to find the number of staff needed to carry out a task efficiently i.e. a business may decide to change its production methods so that all of a product was manufactured in a cell rather than a part in batches. Method study It involves identifying all the specific activities in a job, analyzing them, and finding the best way to do the job. This could be an existing or a new job. It allow a firm to Achieve results in least time. Cost management. Improve process effectiveness. 5

Operations & Project Management Minimum efforts and fatigues. Improved layout and workplace in factory. Identify optimum way to carry out tasks.

Stages in method study 1. Select production area to be study. 2. Record the relevant facts. 3. Critically examine the facts. 4. Develop a new method. 5. Install the new method as a standard practice. 6. Maintain the new practice by routine checks. Work measurement It is done by work-study assessor. The performance of worker is rated from (0-100) like British Standard Rating Scale. It is also known as time study. Stages in time study Obtain necessary information Break the job down into elements Find time for each element Set rates for job operator performance or efforts etc Add allowances for relaxation and contingences Determine a standard time Problems in work-study Work-study can make its practitioners unpopular because of its association with controversial areas such as bonus payments, incentives, redevelopment (to transfer in other department) and redundancies (situation where a worker has to leave his job because there is no work). Success in handling such exercises clearly depends upon the abilities of the management and the extent of the trust between managers and workers. Other areas of human relation policies that have fundamental importance for production include conditions at work, safety, education and training. PRODUCTION METHODS 1Job production Job production is the manufacture of individual product often referred to as one-off or unique products. These products are manufactured to meet the individual needs of the consumer. The quantity produced is often just one unit, though it is possible to produce in a large quantity and there may well be variations that make each unit an individual product. Each stage of product is organized and completed, until the unique product is completed. For example, a Surgeon conduct an operation on a patient from start to finish, he does not open-up several patients, then return to each to make repairs and then finally stitch them all up. However, there are examples of job production, known as project production that are under taken by large companies, usually when the one-off item is highly expensive such 6

Saadat Ali Mughal as the new Severn Bridge linking the English and Welsh Sections of the M4. In this case there is only one customer, the government. The scale of operation depends upon the product involved. Advantages of job production Firms can produce unique or one-off orders according to customers needs. Workers are more likely to be motivated. The tasks which employees carry out often require a variety of skills, knowledge and expertise. There work will be more demanding and interesting. They also see end result of their efforts and are able to take pride in their work. Jobs may be carried out by a team of workers aiming to achive the same objectives. This should help to raise the level of job satisfaction. The organization of job production is fairly simple because only one job is done at a time. Coordination, communication, supervision and inspection can be regularly carried out. Also, it is easier to identify and deal with problems. Disadvantages of job production Labour costs will be high because production tends to be labour intensive. The work force is likely to be skilled and move versatile. Such employees will be more expensive. Because the job production is unique, costing is based on uncertain predictions of future costs and not the experience of past events. For example, the channel tunnel project cost twice as much as originally forecasted. Unit cost tend too high because there will be fewer economies such as bulk purchasing and the division of labour. Because there is variety of work, too many specifications, the business would need a wide range of tools, machines and equipments. This can prove expensive. Lead-time will be lengthy. When building a house the business has to incur costs, which cannot be recovered until the house is sold. Selling cost may be high. This is likely if the product is highly complex and technical. Salesmen should also aware about all technicalities of the product. 2 Batch production The term batch refers to a specific group of components, which go through a production process together. As one batch finishes, the next one starts. For example, in a canning plant, a firm may can several different batches of soap, each batch being a different recipe. Product can be produced in a very large or small batches depending upon the demand. It involves the manufacture of a quantity of products or parts of a product. These are produced in a batch all at once, before the next quantity or batch is manufactured. This involves breaking down production into various processes. It is essential that all items in a batch must pass through a particular process before the batch can move on to the next process. Dividing the process in to a number of stages enables some standardization to take place whilst allowing variations between batches. Batch production may be used when demand for a firms product or service is regular rather than a one-off.

Operations & Project Management Advantages of batch production Even though large quantities are produced than in job production, there is still flexibility. Each batch can be changed to meet customers wishes. It is particularly suitable for a wide range of similar products. The setting on machines can be changed according to specifications, such as different clothes sizes. Employees can concentrate on one operation rather than the whole task. This reduces the need for costly, skilled labour. Less variety of machinery would be needed than in job production, because the products are standardized. Also, it is possible to use more standardized machinery. It often results in stocks of partially finished goods, which have to be stored. This means firms can respond more quickly on an urgent order by processing a batch quickly through the final stage of production. It makes costing easy and provides a better information service for management. Disadvantages of batch production The setup costs are very high. An enormous investment on plant and equipment is needed. Firms must therefore be confident that the demand for the product is sufficient over a period of time to make the investment pay. As products are standardized, it is not possible to offer a wide product range and meet different customers needs. As most of the manual operations are required on the production line which will be repetitive and boring. Factories with production lines tend to be very noisy. Each worker will only be involved in a very small part of the job cycle. As a result of these problems workers morale may be low and labour turnover and absenteeism high. Breakdown can prove costly because of the interdependence of the whole system. The time spent by staff on problems and paper work, stock control and effective plant utilization can be lengthy. Part of a batch has to be held waiting until the rest is completed before moving to another stage. 3 Flow production It is also known as mass production, flow-line or process production. The products made using this method pass straight from one stage of production to the next. Vehicle move from one operation to the next, often on a conveyer belt. The main features of flow production are: Large quantities are produced. A simplified or standardized product is manufactured. A semi skilled workforce, specializing in one operation only. Large amounts of machinery and equipments are used. Large stocks of raw materials and components are required. Flow production realize on the use of computers. Computer sends instructions to machines, control production speeds and conditions, and monitor quality. They allow

Saadat Ali Mughal large number of products to be produced continuously to exact standers or control continuous production, which requires many processes. Advantages of flow production Unit costs are reduced as firms gain from economies of scale. This reduces the need for labour and supervisors. Large quantities with same standards are achieved. The need to stop partially finished products/goods is reduced. The physical handling of items is reduced. Deviations in the line can be quickly identified. Investments in raw materials are more quickly converted into sales. Disadvantages of flow production It is some times difficult to balance the output of one stage with the input of another, and operations may function at different speeds. Flow production requires constant work-study. Providing the workforce with diverse skills to cater for circumstances such as cover for absence may be difficult and expensive, and regular absences can never far-reaching effects. Parts and raw materials need to arrive on time. Maintenance must be preventative to ensure that emergencies do not cause the flow to stop. If demand falters overstocking may occur. The setup cost is very high. The product will be standardized, it is not possible to offer a wide product range and meet different customers needs. Breaking down can prove costly. THE LOCATION OF AN ORGANISATION Location is the general area selected for a particular business. Its choice is likely to involve a detailed process of analyzing alternatives through investment appraisal and other cost benefit analysis. Industrial location is the geographic positioning of our operation in relation to its customers resources, employers, employees and other markets organizations faces problems in finding out the best location for their business and choice can be critical for success. Location decisions also depend upon the type and size of the business. The best location is one which has comparatively low cost of production and therefore should provide the opportunity to maximize return on investments in terms of sales and profits. FACTORS INFLUENCING THE LOCATION (OF BUSINESS) DECISION Types of business 1. Quantitative factors tax, cost, etc 2. Qualitative factors availability of labour, legal cultural 3. Population and demand in the market 4. Number and location of competitors

Operations & Project Management 5. Availability and cost of labour 6. Availability and cost of raw materials 7. Degree of government intervention 8. Rent and cost of land 9. Physical features, weather and quality of land 10. Personal preference and interest of the owners 11. Industrial inertia locating in a congested area where there are already several similar industries 12. External economies of scale 13. Availability of infrastructure, transportation and communication facilities 14. Availability of natural resources and utilities 15. Financial incentives by govt. as regional policy grants ISSUES REGARDING INTERNATIONAL LOCATION A multinational organization has to make key decisions about location as they are dealing with a wide range of local and international markets. Following issues are considered while making this decision: 1. Trade barriers 2. Exchange rates 3. Political stability 4. Legal boundaries 5. Language and cultural barriers 6. Ethical considerations 7. Market opportunities 8. Availability of labour 9. Financial incentives 10. To build a strong corporate image worldwide Multinationals are growing very rapidly and represent a significant source of industrial development in countries throughout the world. Benefits of multinationals to host countries are as follows: 1. increased employment 2. GDP increases 3. economic growth 4. standard of living 5. increased competition 6. improves quality and efficiency 7. controls prices 8. increases variety and choices 9. technology transfer 10. better trained labour 11. revenue to the government 12. foreign investments increase 13. relations between host and guest countries improve politically and economically 14. balance of payment surplus

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Saadat Ali Mughal

ECONOMIES OF SCALE Economies of scale (EOS) are reductions in long-run average (unit) costs that occur from an increase in production. In the long run, the firm can increase output by varying all factors of production. Economies of scale are divided into two parts 1. Internal Economies of Scale Internal Economies of Scale are those economies, which are internal to the firms. These arise within the firm because of increasing the scale of output of the firm. A firm secures these economies from growth of the firms independently. These can be divided into plant economies of scale and firm economies of scale. Plant economies of scale These arise from the growth of individual workplaces. It includes factories and offices and includes: Increased specialization- the larger the workplace the greater the opportunities for the specialization of workers and machines. In the large workplace the process can be broken down into many separate operations, workers can be employed on specialised tasks, and the continuous use of highly specialised equipments becomes possible. Increased dimensions- there is a simple mathematical principle that if one double the length, breadth and height of a cube, its surface area is four times as great and its volume eight times as great as the original. The large firms can enjoy the economy by increase in the dimensions of much large scale of capital equipment. It requires very few extra crew. Economies of increased dimensions account for the tendency of industries which make use of tanks, vats, furnaces, and transport equipment, etc. to operate large and large units. Indivisibility- this is a situation in which the different items of equipment needed for production come in different sizes, so that larger scale items are not used at full capacity. This can be a problem for small-scale producers, whose average fixed costs will be higher as a result. In this situation, expanding output would lead to economies of scale. Increased specialization- the larger the workplace the greater the opportunities for the specialization of workers and machines. In the larger workplace the process can be broken down into many separate operations, workers can be employed on specialised tasks, and the continuous use of highly specialised equipment becomes possible.

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Operations & Project Management Principle of multiples- industrial plants may use a variety of machines, each carrying out a different operation. Each of these machines is likely to have a different capacity. Economies of By-Products- all the firms can lower the cost of production by making use of waste materials. By-product industry can productively use the by material left by the original industry. Economies of linked process- a large plant may have the capacity to produce more than one product or service. For example, iron and steel may both be produced in one large factory. Stock economies- a large plant may operate with smaller stocks in production to its sales than a smaller firm can. This is because variation in orders in individual customers and unexpected changes in customers demands will tend to offset each other when total sales are very large. Firm economies of scale These are the advantages which can be gained if a firm grows in size. These advantages can be gained if a business opens more branches or if it increases the size of individual branches. Examples of firm economies of scale include the following: Technical Economies- some factors of production are divisible, so that to make full use of them a large output is required. If a small firm buys a computer and uses it for only a few hours a week, there is relatively high input for a relatively small output. If a large firm buys the same computer and can keep it in use for most of each day the output to input ration improves significantly. Another technical economy arises from scale of capital where volume is important. Aero planes, ships, and Lorries all increase their volume and carrying capacity by approximately three times when their surface area and thus their construction costs double. The labour to operate the large transport units is indivisible and does not increase proportionately with size. Thus, the cost of carrying any one unit of cargo, or of carrying passengers falls with size. Managerial Economies- in a small company, one person may have to undertake all functions e.g. telephone operator, receptionist, accountant, production manager, salesman and so on. A bigger company can employ specialist staff and gain greater output from the division of labour and specialization. Marketing Economies- marketing a product can become very much cheaper the more units of product are sold. The creative work behind a magazine advertisement or television advertisement is much the same whether it is for sales of 10 thousand units or 20 million units. Clearly the unit cost (average cost) of advertising the bigger output is much lower. Similarly, the payment to the publishers of a magazine or the owner of a TV station to run an advertisement is the same whether the company sells a few millions of

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Saadat Ali Mughal the product. The unit costs of marketing are much cheaper the higher the number of products sold. A large firm is in a better position to buy the raw material at the cheaper rate because it can buy the commodities on a large scale. Financial Economies- larger firms with larger resources often present a lower risk to banks and other financial institutions when they wish to borrow money, and can therefore usually borrow money at lower rates of interest. The unit cost of borrowing falls with increased scale of production. Risk-Bearing Economies- a big firm can undertake risk-bearing economies by spreading the risk. A big firm produces the variety of goods in order to satisfy the needs of different tastes of people. If the demand for a certain product is slackened, it is counter balanced by the increase in demand of other type of commodities produced by the firm. Research and development R&D- for a large firm the expenditures may be relatively small because the cost is spread over a large output. Plant specialisation economies- a firm may be large enough for its individual plants to specialise. For instance, a large motor vehicle company may have different plants producing busses, cars and lorries. Staff facilities economies- a large firm may be able to offer, among other things, staff canteens, sports grounds and medical care. With a large number of staff the cost of providing these facilities may be relatively low. 2. External Economies of Scale External EOS occurs outside the firm and is independent of the size of the individual firm. External economies are not specially availed by any firm. Rather all the firms in an industry enjoy these facilities as the industry expands. The main external economies are as under: Economies of Localization- when an industry is concentrated in one particular area, all the firms situated in that locality avail some common economies such as: Skilled labour Transportation facilities Post & telegraph facilities Bank facilities Insurance facilities etc These facilities do not provide benefit to a single firm but to the whole industry. For example, most of the textile industry in Pakistan is concentrated in Faisal Abad and the government has provided all the above facilities at the spot to the textile industry.

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Operations & Project Management Economies of Vertical Disintegration- it refers to the splitting up the production process in such a manner that some jobs are assigned to specialized firms. For example, when an industry expands, the various firms specialist in repairs takes up the repair work of the various parts of the machinery. Economies of Information- as the industry expands; it can set up research institutes. The research institutes provide market information, technical information etc. for the benefit of all the firms in the industry. Specialised markets- when an industry is large enough specialised places and facilities to bring buyers and sellers into contact may be developed. DISECONOMIES OF SCALE As firms grow, they may encounter certain cost increases which make the larger scale of production less efficient. Diseconomies of scale seldom appear to trouble man manufacturers. They can be more of a problem when certain kind of customer service is an important part of the product. Diseconomies of scale are divided into two parts: 1. Internal diseconomies of scale These are the problems which may arise when a firm grows beyond the optimum size, efficiency declines and average costs begin to rise The main problems which arise when a firm grows too large are thought to be mainly attributable to management difficulties and prices of inputs. Management problems As the size of the firm increases, management becomes more complex. It becomes increasingly difficult to carry out the management functions of: Co-ordination- large firms are likely to be divided into many specialised departments (production, planning, sales, purchasing, personnel, marketing etc.) as these departments multiply and grow in size, the task of coordinating their activities become more and more difficult. Consulting a team of managers takes time and decision taking in a large firm may be slower than in a small firm. Control- although, the large firm usually have several tiers of management (managing director, director, head of department etc.) but, in practice, the problem of overseeing what id going on can be difficult. Communication- keeping everyone informed and feeling involved in a large firm can be difficult and time consuming process.

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Saadat Ali Mughal Industrial relations- in large firms employing thousands of workers it can be difficult to make any individual worker feel they are important part of the firm. It also takes longer time to sort out any problems due to large number of employees. Prices of inputs As the scale of production increases, the firm will increase its demand for materials, labour, energy and so on. 2. External diseconomies of scale These are the disadvantages to a firm as a result of the industry to which it belongs becoming too large. All firms in the industry, whether they are seeking to expand or not, may suffer rising costs as a result of the industry getting too large too quickly. Shortage of labour- with the appropriate skills may develop so that firms in the industry may find themselves bidding up wages as they try to attract more labour (or hold on to their existing supplies). Increasing demand for raw materials- may also bid up prices and cause costs to rise. If the industry is heavily localized, land for expansion will become increasingly scare and hence more expensive both to purchase and to rent. Transport costs- may also rise because of increased congestion. 4AS.3 Inventory management STOCK MANAGEMENT Stock control This is the system used to ensure that the business always has sufficient stock available to meet customer requirements. Types of stock Raw material and components- these represent the material before they are processed either on the assembly line or as part of the manufacturing process. Not all businesses hold raw material it depends on the principal activities of the business. Work-in-progress- all the stock which is at some point on the production process, whether it is stock which is being worked on or stock that is partially finished and waiting for the next batch process. This can also involve finished goods, which are being tested within quality control. Finished goods- all the stocks, which are waiting to be delivered to the customer.

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Costs of holding stock Administration- with more stock to administer and keep secure, these costs will rise. Insurance- if the level of stock rises, then the value of the business will rise; this may well prompt insurance companies to increase the premium payable. Possibility of theft and damage- more stock has more possibility to be theft or breakage. Businesses dealing in fresh goods like vegetables, fruit and medicines have grater chances of obsolescence (becoming out of date or unfashionable). Cost of storage- where house space is an expense, that must be paid to have the facility to store goods, so that they can be found as and when customer needs them. Costs of finance- stock are normally purchased from suppliers on credit. The business will need to pay for materials before the money comes in from selling the finished goods. When out flow of cash occurs, the business will need to use a source of finance to pay the suppliers. Opportunity costs- by tying money up in stock, the business is unable to use that money elsewhere to earn an alternative return. Costs of not holding stock Inability to satisfy sudden large orders- the business may choose to meet the sudden large orders, but be unable to meet its usual orders, letting its regular customers down. Longer delivery lead time- this is particularly important in highly competitive industries where non-price competition is used heavily. One way of compeeting is on fast delivery times. So business must hold several of the same units in stock at any one time. Loss of goodwill- a business is proved unreliable to a customer, due to lack of stock. RE-ORDER LEVELS This is the minimum amount of stock that a business will hold before it re-orders from its suppliers. The re-order level will vary from business to business and from industry to industry. For example, a supermarket is likely to have a higher re-order level than a car dealer, since in the time taken to receive its supplies, a supermarket is likely to sell far more stock than a car dealer. RE-ORDER QUENTITIES The re-order quantity is the amount of stock and raw materials that a business orders from its suppliers each time it reaches its re-order level. This again will vary from business to business and from industry to industry.

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Saadat Ali Mughal For example, a business selling fast-moving consumer goods (e.g. chocolate bars or baked beans) is likely to order a far larger amount of stock from its suppliers than a manufacturer of goods with a slower stock turnover (e.g. televisions or washing machines). There are several factors which will influence the amount of stock which a business orders, including: Lead times. The expected level of customer demand. The costs of stockholding. The type of stock, whether it is perishable or durable. Buffer Stocks BUFFER STOCKS This is the minimum stock level which will be held by a business to meet any unexpected occurrences. It is also called buffer stock or safety stock, it acts as a cushion of supply in excess of forecast demand. Buffer inventory is used to reduce the incidence or severity of stock-out situations in sales and thus provide better customer service. It's also used in production or other inventory situations to ensure unexpected demands can be met with some degree of certainty. For example, A sudden large order from a customer, deliveries of raw materials not arriving on time, or computer re-ordering systems breaking down. Lead Times LEAD TIME This is the amount of time that elapses between a business placing an order with a supplier for more stock or raw materials, and the delivery of the goods to the business. The business will wish the lead-time to be as short as possible, so that it can meet its customer orders and minimise the time between paying for the stock and receiving the revenue from the customer. However, this may not happen due to a number of factors, such as delays in the supplier receiving the order, or the breakdown of the suppliers' lorries delivering the stock to the business. An effective stock control system, combining the above four elements, can be seen below:

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From this diagram, it can be seen that: The re-order level (i.e. the amount of stock remaining when an order is placed) is 20,000 units. The re-order quantity (i.e. the amount of stock ordered from a supplier) is 20,000 units. The buffer stock (i.e. the minimum stock holding) is 10,000 units. The lead-time (i.e. the time delay between placing an order for stock and receiving it) is 8 days. STOCK ROTATION Many businesses use a stock rotation system. This is the process of ensuring that the older batches of stock are used first rather than the newer batches, in order to avoid the possibility that the older stocks will become obsolete or go past their sell-by-date. This is often referred to as a First In First Out (F.I.F.O) system, to encourage the older batches of stock to be used first, therefore avoiding the possibility that the older stock will be left in a warehouse, possibly becoming unusable. Link to Information Technology (C.A.D/C.A.M/) The production process and stock control systems in a business can be assisted by the use of Information Technology (I.T). Sophisticated software packages can enable a business to keep detailed and accurate records on its purchases of stock and its sales to customers, using such systems as Electronic Point of Sale (E.P.O.S). This records every transaction made by a business and can, therefore, enable it to monitor its stock levels and sales of products to a 100% level of accuracy. This system can automatically re-order stock when numbers fall to a certain level in the warehouse, as well as monitoring the quantity of each component that is used in the production process.

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This enables a tight control to be kept on both costs and waste, as well as recording the amount of revenue received from customers and any outstanding customer debts. Computer Aided Design (C.A.D) is the use of sophisticated computer software to design three-dimensional images of products quickly and relatively cheaply. Computer Aided Manufacturing (CAM) is the use of computers and software for a wide variety of production tasks, including automated production lines and stock control systems.

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4AL.1 The Nature of operations No topic beyond AS level 4AL.2 Operations planning Enterprise resource planning (ERP) Enterprise resource planning (ERP) is an Integrated computer-based system used to manage internal and external resources including tangible assets, financial resources, materials, and human resources. It is a software architecture whose purpose is to facilitate the flow of information between all business functions inside the boundaries of the organization and manage the connections to outside stakeholders. Built on a centralized database and normally utilizing a common computing platform, ERP systems consolidate all business operations into a uniform and enterprise wide system environment. An ERP system can either reside on a centralized server or be distributed across modular hardware and software units that provide "services" and communicate on a local area network. The distributed design allows a business to assemble modules from different vendors without the need for the placement of multiple copies of complex and expensive computer systems in areas which will not use their full capacity. Advantages In the absence of an ERP system, a large manufacturer may find itself with many software applications that cannot communicate or interface effectively with one another. Tasks that need to interface with one another may involve:[citation needed] ERP systems connect the necessary software in order for accurate forecasting to be done. This allows inventory levels to be kept at maximum efficiency and the company to be more profitable. Integration among different functional areas to ensure proper communication, productivity and efficiency Design engineering (how to best make the product) Order tracking, from acceptance through fulfillment The revenue cycle, from invoice through cash receipt Managing inter-dependencies of complex processes bill of materials Tracking the three-way match between purchase orders (what was ordered), inventory receipts (what arrived), and costing (what the vendor invoiced) The accounting for all of these tasks: tracking the revenue, cost and profit at a granular level. ERP Systems centralize the data in one place. Benefits of this include: Eliminates the problem of synchronizing changes between multiple systems consolidation of finance, marketing and sales, human resource, and manufacturing applications Permits control of business processes that cross functional boundaries

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Saadat Ali Mughal Provides top-down view of the enterprise (no "islands of information"), real time information is available to management anywhere, anytime to make proper decisions. Reduces the risk of loss of sensitive data by consolidating multiple permissions and security models into a single structure. Shorten production leadtime and delivery time Facilitating business learning, empowering, and building common visions Some security features are included within an ERP system to protect against both outsider crime, such as industrial espionage, and insider crime, such as embezzlement. A data-tampering scenario, for example, might involve a disgruntled employee intentionally modifying prices to below-the-breakeven point in order to attempt to interfere with the company's profit or other sabotage. ERP systems typically provide functionality for implementing internal controls to prevent actions of this kind. ERP vendors are also moving toward better integration with other kinds of information security tools.[23] Disadvantages Problems with ERP systems are mainly due to inadequate investment in ongoing training for the involved IT personnel - including those implementing and testing changes - as well as a lack of corporate policy protecting the integrity of the data in the ERP systems and the ways in which it is used.[citation needed] Customization of the ERP software is limited... Re-engineering of business processes to fit the "industry standard" prescribed by the ERP system may lead to a loss of competitive advantage. ERP systems can be very expensive (This has led to a new category of "ERP light" solutions) ERPs are often seen as too rigid and too difficult to adapt to the specific workflow and business process of some companiesthis is cited as one of the main causes of their failure. Many of the integrated links need high accuracy in other applications to work effectively. A company can achieve minimum standards, then over time "dirty data" will reduce the reliability of some applications. Once a system is established, switching costs are very high for any one of the partners (reducing flexibility and strategic control at the corporate level). The blurring of company boundaries can cause problems in accountability, lines of responsibility, and employee morale. Resistance in sharing sensitive internal information between departments can reduce the effectiveness of the software. Some large organizations may have multiple departments with separate, independent resources, missions, chains-of-command, etc, and consolidation into a single enterprise may yield limited benefits. 4AL.3 Inventory Management No topic beyond AS level

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4AL.4 Capacity utilization Capacity utilisation measures the extent to which a business is using its production potential. Capacity utilisation can be defined as - the percentage of total capacity that is actually being achieved in a given period Capacity utilisation ( which is traditionally expressed as a percentage) is calculated using this formula: Actual level of output 100 Maximum possible output For example, if a firm could produce 1200 units per month, but is actually producing 600 per month, its capacity utilisation is as follows: Capacity utilisation % = 600 units per month x 100% 1200 units per month = 50%

Financial implications A firms level of capacity utilisation determines how much fixed costs should be allocated per unit, so as a firms capacity utilisation increases, the fixed costs (and therefore also, total costs) per unit will decrease. For example, if the firm above had fixed costs of 12,000 per month, the fixed costs per unit would be 20 per unit at 50% capacity utilisation, but only 10 per unit at 100% capacity utilisation. It therefore follows that a firm should be most efficient if it is running at 100% capacity utilisation. However, if a firm is running at full capacity, there are a number of potential drawbacks:

There may not be enough time for routine maintenance, so machine breakdowns may occur more frequently and orders will be delayed It may not be possible to meet new or unexpected orders so the business cannot grow without expanding its scale of production Staff may feel under excessive pressure, leading to increased mistakes, absenteeism and labour turnover If the factory space is overcrowded, work may become less efficient due to the untidy working conditions It may be necessary to spend more on staff overtime to satisfy orders, increasing labour costs

NB these drawbacks are not to be confused with diseconomies of scale, which can arise from a firm operating on a larger scale e.g. by opening a larger factory. See separate revision note on economies of scale.

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Saadat Ali Mughal In general, businesses would feel most comfortable at something between 80 to 90% capacity utilisation because fixed costs per unit are relatively low and there is some scope to meet new orders or carry out maintenance and training. A firm that has just invested in major new facilities in anticipation of major growth could take some time before reaching a good level of utilisation, so it is important to consider sales trends when discussing capacity utilisation. Causes of under-utilisation of capacity There are a number of reasons why a firm might be experiencing low capacity utilisation, including the following:

New competitors taking market share or causing over-supply in the market Fall in market demand due to changes in consumer tastes or fashion Unsuccessful marketing one or more aspect of the marketing mix may simply mean that the firm is not successful Seasonal demand this is especially apparent in the tourist industry where firms like hotels and leisure parks are full in the summer but see much lower utilisation at other times of the year

Exam hint: In examination questions on this subject, look for clues as to the root causes of under-utilisation so that you can assess whether it is a long term problem or not, and what the firm could do to remedy the situation Problems arising from low capacity utilisation

Higher fixed costs per unit mean reduced profitability; if prices were raised to cover these costs, this would probably lead to reduced sales unless the product was price inelastic Spare capacity can portray a negative image, particularly in a business where it can be seen that it is no longer busy such as a shop or a health club - signifying loss of popularity Staff can become bored and demoralised if they dont have as much to do, especially if they fear losing their jobs

Benefits of low capacity utilisation Low capacity utilisation is unlikely to be desirable in the long term as the higher unit costs will make it difficult to compete. However it is not all bad news and possible short term benefits include:

A firm may have more time for maintenance and repairs and for staff training, to prepare for an upturn in trade There may be less stress for employees than if they were working at full capacity The firm can cope with new orders; firms in expanding markets may expect to have low utilisation whilst they build their sales

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Operations & Project Management Ways to increase capacity utilization 1. Rationalisation Increase efficiency It is the process of reorganizing the production in order to increase productivity and efficiency. It can be done through following actions: 1. Closing admin departments. 2. Closing smaller factories 3. Reducing the number of managers 4. Reducing the number of workers (This is bad news for some workers because it often results in redundancies) 2. Sub-contracting Subcontracting refers to the process of entering a contractual agreement with an outside person or company to perform a certain amount of work. The out-side person or company in this arrangement is known as a subcontractor, but may also be called a free-lance employee, independent contractor, or vendor. Many small businesses hire subcontractors to assist with a wide variety of functions. For example, a small business might use an outside firm to prepare its payroll, an accountant to help with its record keeping and tax compliance, or a free-lance worker to handle a special project. Subcontracting is probably most prevalent in the construction industry, where builders often subcontract plumbing, electrical work, drywall, painting, and other tasks. Hiring subcontractors offers a number of advantages for small businesses. For example, subcontracting mundane but necessary tasks can free up time and resources to enable the small business owner to concentrate on making money and growing the business. In addition, hiring a subcontractor is usually less expensive than hiring a full-time employee, because the small business is not required to pay Social Security taxes, workers' compensation benefits, or health insurance for independent contractors. Subcontracting does pose some potential pitfalls, however, such as a loss of control over the quality and timeliness of work. But small business owners can take several steps to help ensure that their relationships with subcontractors are productive and beneficial for all concerned. The disadvantages are that with the pass over of responsiblity to a subcontractor, arguments can arise when something does go wrong between the Main contractor the secondry contractor and the sub-contractor. (is the subcontractor at fault for poor workmanship, or is the secondry contractor at fault for employing an inexperienced subcontractor?) 4AL. 5 Lean production and quality management LEAN PRODUCTION Lean production is an approach to production developed in Japan. Lean represents an attempt to minimize cost and Improve quality in the widest possible sense. Lean production should therefore mean higher level of productivity, for both its labour force and capital equipments, by reducing the quantity of resources used up in production.

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Saadat Ali Mughal Lean producers use less of every thing, including factory space, materials, stocks, suppliers, labour, capital and time. The number of defective products is reduced. The lead time (time between the order and delivery of goods) is cut and readability improved. Lean producers are also able to design new products more quickly and offer customers a wider range of products to choose from. Lean production involves using a range of practices. Just in Time Management (JIT)- JIT manufacturing is a method of organizing a business in such a way as to cut down the level of stocks held. The stocks might be raw materials, work in progress, or finished goods waiting for sale. In such cases they tie up space and working capital. A completely established JIT system means that goods are only produced after an order has been made, i.e., the thing is produced for stock. Clearly, it is vital that suppliers are organized in such a way that the correct number and quantity of components or raw materials are delivered on time (when they are needed). REQUIREMENTS FOR JIT PRODUCTION If the business really wishes a successful introduction of JIT production then it must make sure that a few very important requirements of JIT are met: 1. Excellent relationships with suppliers JIT production essentially depends upon the very precise delivery of raw materials and other suppliers. Therefore, the business suppliers should be ready to supply at a very short lead time. The firm therefore can have only one or two suppliers at the most for mutual benefits. 2. Employee flexibility The workers a employees of the business have to be multi-skilled and should be able to switch jobs quickly so that no excess stocks of goods built up while those in demand are produced quickly for orders to be met. 3. Flexibility of machinery Old fashioned equipment can only produce one type or range of product in large quantities. Modern, computerized machinery is required for JIT production as it can produce a wide variety of products just by changing a single software. This adaptability would produce small batches of single products to keep the stocks to a minimum. 4. Accurate demand forecasts This would enable to produce a reliable production schedule which would help in the calculation of precise number of goods to be produced over a certain time. If forecasts or demand is fluctuating then keeping no tocks would be a very risky strategy. 5. Extensive use of IT Computerised records of sales, sales trends and stock levels would allow minimal stocks to be held. Electronic communication with suppliers would enable accurate delivery of supplies

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6. Employee commitment Workers must work smoothly for JIT to be effective. Therefore empowerment i.e. giving employees power to undertake decisions as well as team working is essential for worker motivation as well as for the meeting of customer orders. 7. Strict Quality control or zero-defect Since there are no spare stocks, therefore goods have to be produced correctly the first time otherwise customer orders will not be completed on time. BENEFITS OF JIT This also is part of evaluation The right quantities are produced or purchased at the right time Higher quality Improved customer service Reduced space requirement leads to reduced storage costs System flexibility leads to quicker response to change in demand Space released from stock holding used for more production purposes Reduction in manufacturing lead time Increased equipment utilization Simpler planning systems Increased worker participation Multiskileld and adaptable staff gain from improved motivation Continuous emphasis on improvement and problem solving Less chance of stock being outdated or obsolescent Less stock reduces risk of damage and wastage Reduces capital invested or tried in stock and reduces opportunity cost of stock holding Higher multi factor productivity Higher profits due to overall decrease in costs Evaluation does not only mean disadvantages. It includes advantages. Disadvantages of JIT JIT is not suit for all businesses at all times. It is a very expensive system to implement i.e. it has very high start-up costs. Other control systems are often referred to as JIC-Just in case as stock are kept tin case they are required. JIT requires a very different organizational culture than this. There are several problems that have to be overcome for successful JIT working: Requires a high degree of delegation Requires change in the philosophy and culture of business Advantages of bulk buying are lost Business is vulnerable to a break in supply including breakdown in machinery Doesnt work in case of irregularly used parts or specially ordered materials 26

Saadat Ali Mughal Reputation depends significantly on outside factors Requires atmosphere of close cooperation and mutual trust between work force and managers Delivery costs rise as frequent small deliveries are essential Purchasing requires reliable and flexible suppliers Order admin costs rise as so many small orders need to be processed However JIT is an important aspect of the move to wards lean production and is definitely a principle which is widely accepted.

Kanban system- This is a system that uses a card, which is attached to all items in production process. Each item or part has a number, which is printed on the card using a bar code. Every time an item is used, the Kanban is removed and delivered to a computer terminal where the computer reads the code on it and automatically record, the ports. Therefore the entire production line is governed by the Kanban, which ensures there are enough ports in the right place at the right time. This system means that the assembly line does not have to be cluttered with parts waiting to be used, thus saving space. Judoka- it requires money to be spent on electronic sensors that can detect a fault and stop the production line and so prevent the fault being repeated or being made worse due to late detection. Time base management- it involve reducing the amount of time business take to carry out certain tasks, such as launching new products, cutting lead time in production or cutting down time (time taken to setup the machines to produce particular parts of product). Time is a very valuable resource and time-based management is concerned with reducing both the length of time taken to produce the product and also, therefore, reducing the lead-time (the time lag between the customer placing an order and the business delivering the finished product). In order for a business to successfully operate a time-based management system, it is important that machinery is flexible and production runs can be shortened or lengthened at short notice, in order to produce more of an existing product or to start the production of an alternative product. It is also essential that staff are multi-skilled and can rotate between different tasks, as they may be required to perform a number of different jobs in a short space of time. Time-based management makes it easier for a business to implement other lean production techniques (such as just-in-time and cell production), and since these techniques require less time and fewer stocks of raw materials than more traditional mass production techniques, then the business will save money.

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Operations & Project Management However, it is often argued that the move away from mass production and lengthy production-lines will reduce the chance of the business benefiting from economies of scale in its manufacturing techniques. It is also likely that a business will be able to implement the time-based management philosophy to its R&D processes, as well as to the production-line. A business which can develop and launch more products in a shorter time than its competitors will benefit from a number of advantages: 1. If the business is the first to launch a product on the market, then it can charge a premium price to reflect the innovative nature of the product. 2. Premium prices help to quickly recoup R&D costs, as well as earning the business a significant profit-margin per unit sold. 3. Brand loyalty is likely to develop - enabling the business to use this strong customer base as a 'launch pad' for new products in the future. 4. The diversity of products that are on sale will increase the product portfolio of the business, as well as reduce the risk of business failure should one or two of the products prove unsuccessful. Empowerment- it involves giving employees the power to make decisions in a business. The aim of empowerment is to gives employees more control over their own work conditions. They are required to think, make decisions, solve problems or work creatively. Empowerment is not without difficulties. Some workers may not be able to make their own decisions and training may be required to teach them such skills. Some staff may abuse their power to make decisions and conflict may arise. Cell production/Team working- this involves dividing the work force into fairly small groups or teams. Each team focus on a particular area of production and team member has the same common aims. Workers develop relations with colleges and a team sprit may improve motivation and productivity. The sell is made up of several teams; the idea is that each cell sells the part-finished product on to the next cell, which receives it as an internal customer. Kaizen- Kaizen means continuous improvement. Striving for continuous improvement, by involving the workers for their ideas, their flexibility of approach and their ability to operate in teams is the key to enhancing performance. Elimination of waste into any form like time, unnecessary movements of workers, irregular use of machines etc. In this technique, it is essential to communicate clearly so that all concerned are aware of the potential problems and can therefore be in a position to make suggestions for improvements. All the activities of the business should be geared to its customers. Any thing that can be done to help the customers is considered important.

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Saadat Ali Mughal QUALITY CONTROL AND ASSURANCE Quality could be described as those features of a product or service that allows it to satisfy customers wants. It may include physical appearance, reliability and durability, special features, suitability, availability of spare parts, repair and after sale service etc. Quality is very important for business because It is an essential requirement in the process of satisfying the consumer. It is essential for businesses to be able to satisfy their customers if further sales are to be made. It may provide the competitive advantage. It reduces the number of complaints about the product and build product image. Quality assurance It is a method ensuring quality that takes into account customers views. Customers may be consulted about their views through marketing research before a product is manufactured or a service is provided. Businesses may ensure quality by following methods. Total quality management (TQM)- TQM is not a management tool. It is a philosophy. It is a way of looking at quality issues. It requires commitment from the whole organization, not just the quality control department. The business considers quality in every part of a business process. This will improve design right through to sales. TQM is about building in rather than inspecting out. Quality circles- this is a process that involves a group of workers, normally between 4 and 10, meeting at regular intervals, usually on a voluntary basis, to discuss problems of their choosing and attempting to find remedies to their problems. The workers tend to concentrate on problems that affect their own workstations. Many of the problems are related to manufacturing quality and ways to improve productivity. The philosophy behind the quality circles is that the workers who are actually on the production line who are in the best position to make suggestions as how to remedies difficulty or make recommendations for improvement. Some businesses do not provide time for the employees to meet during the working day. Instead, they operate a suggestion scheme and offer rewards for suggestions that are implemented and saved the business money. Zero defects- the aim is to produce goods and services with no faults or problems. It a management philosophy and requires commitment throughout the organization. It emphasizes that each employee must contribute to quality. Training- training can make enormous contribution to quality. It might be specifically job oriented, such as training the machinist or a sales assistance in customer care. It could be induction, or more general such as an introduction to the objectives of the company. This is important where the company is trying to introduce the quality culture.

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Operations & Project Management Bench marking- This refers to a business finding the best methods and processes that are used by other businesses, and then trying to emulate these in order to become more efficient in its operations. Benchmarking can be used in all areas and processes in a business, not just for production. For example, it can be used to improve customer service, advertising campaigns, Human Resource Management, and budgeting procedures. Data for benchmarking is collected and used with the full co-operation of the other businesses, and often the results will help both businesses to improve their systems and procedures. There are several stages involved in implementing a benchmarking system: 1. 2. 3. 4. 5. Researching the areas in a business which needs improving. Deciding how an improvement in these areas can be measured. Identifying 'best practice' in other businesses. Agreeing the exchange of information with other businesses. Comparing the 'best practice' with the existing processes, systems and procedures in the business. 6. Altering the processes, systems and procedures in order to improve performance. 7. Evaluating how successful the changes have been. In order for benchmarking to be successful, the business must ensure that firstly every employee is committed and involved in the system, (from senior management to shopfloor employees), and secondly that sufficient time and finance is available for the gathering of data and the implementation of new procedures. Benchmarking will fail to deliver improvements to the business if there is a lack of willingness by other businesses to disclose information, or if the systems and procedures used by the 'best practice' businesses are not appropriate for the business in question. In summary, benchmarking can help a business identify those areas in its operations which need improvement, as well as considering alternative processes and procedures for achieving its objectives. 'Best practice' can be emulated and the competitiveness of the business should improve as it strives to improve and become more efficient. Obtaining quality accreditation- this includes schemes such as ISO 9000. Companies have to have in place a documented quality assurance system. This should be an effective quality system, which operate throughout the company and involves suppliers and subcontractors.

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Saadat Ali Mughal 4AL.6 Project management NETWORK ANALYSIS It maps out sequence of events that must be carried out. Events are divided into two groups. Sequencing- it moves in a sequence of straight line. Each activity is started at the completion of previous activity. For instance, in building a house walls will normally assembled before the roof was put on.

Simultaneous- some activities do not have to take place in sequence they can be carried out simultaneously. For example, after mixing ingredients one can bake cake or prepare icing.

Network diagram A node denotes the start and finish of each activity and an arrow denotes an activity, which has duration to demonstrate how activities are drawn to present a project, here is a project with four activities.

The network diagram above means A begins on its own, then B and C may begin once A has finished. D may start once C has finished.

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Operations & Project Management Dummy Activity Is an activity of zero duration it exists to affect which activities follow others? Consider the following set of activities. A and B begin together, C follows A and B, but D follows only B. E follows D and C. A dummy activity is presented by a dotted line.

CRITICAL PATH ANALYSIS (CPA) Critical path analysis may be used where the business faces problems like Department activities: some activities can take place once other has finished. Deadlines: when time is important for the completion of an activity. Restricted Resources: some times a particular raw material or skilled labour may be in short supply. Each node is divided according to the following,

Once the network diagram has been drawn, the time for each activity must be inserted on each arrow with a view to calculate the following. Earliest start time of each activity is the earliest time an activity may begin, which will depend on the duration and order of previous activity. Latest finish time of each activity is the least time an activity must finish, so that the entire project can finish within the minimum duration time. Minimum duration of the project is the earliest time the project may finish, given the order and duration of all activities.

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Refer to Appendix B. Draw a network diagram of this building project, showing all earliest start times and latest finish times.

Critical path ABDGH The minimum project duration 89 days Advantages of using network (critical path) analysis It requires careful planning of the order in which events needs to occur, and the length of time each one should take. This improves the smooth operation of an important project. By identifying events that can be carried out simultaneously, it shortens the length of time taken to complete the project. This is an important element in the modern businesses focus on time base management. The resources needed for each activity can be ordered/hired not earlier than their scheduled EST. If the completion of an activity is delayed for some reason, the network diagram is a good starting point for working out the implications, and deciding on appropriate courses of action.

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Operations & Project Management Disadvantages of using network (critical path) analysis A complex project (such as the construction of the Channel Tunnel) entails so many activities that a drawing becomes unmanageable. Fortunately computers can zoom in and out of drawings, enabling small parts of the network to be magnified and examined. Drawing a diagram does not, in itself, ensure the effective management of a project. The value of the network diagram is reduced slightly because the activity lines are not in proportion to the duration of the activities.

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