[Unit 4 : Chapter 21]

[Operations Planning]

Operations Planning
Operations planning
Preparing input resources to supply products to meet expected demand

Need for planning and coordination between departments

Operations department needs to plan and coordinate with other departments For e.g., operations manager needs to communicate the 50% increase output over the next 6 months with Finance department cashflow HR department labour input Marketing department strategy

Operations Planning
importance of the marketing link
Sales and Operations Planning process
Crucial link to match potential demand to supply

Estimated/forecast market demand

the key information needed by an operations manager when planning future production

With accurate sales forecasts, operations manager is able to :

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closely to the demand levels (no surplus) Keep stock levels to a minimum efficient level Reduce wastage of production (outdated products) Employ and keep appropriate number of staff Produce the right product mix (range of products that are forecast to be demanded)

The need for flexibility

Operational flexibility
The ability of a business to vary both the level of production and the range of products following changes in customer demand

This flexibility can be achieved through :

Increase capacity by extending buildings and buying more equipment expensive option Hold high stocks can be damaged opportunity costs capital tied up Flexible and adaptable labour force temporary, part-time contracts reduces fixed salary costs but may reduce worker motivation Flexible flow-line production equipment Mass customisation

Process Innovation
Process Innovation
The use of a new or much improved production method or service delivery method

E.g. :
Robots in manufacturing Faster machines to manufacture microchips for computer Computer tracking of stocks (bar codes and scanners) Using the Internet to track the exact location of deliveries/orders

Production methods
1. 2. 3. 4. Job production Batch production Mass or flow production Cell production

Production methods
1. 2. 3. 4. Job production Batch production Mass or flow production Cell production

Production methods
1. Job production
Used in production of single, one-off, unique products designed for the customer
o Architectural projects, made to order wedding cakes, tailored suits

Only one product at any time in being made

o Product A has to be completed before starting on Product B

Motivating see the project from start to end Allows specialised products to be produced

Expensive Takes a long time for completion Labour intensive and need to be highly skilled

Production methods
1. 2. 3. 4. Job production Batch production Mass or flow production Cell production

Production methods
2. Batch production
Producing a limited number of identical products each item in the batch passes through one stage of production before passing on to the next stage
o bakery, some clothing manufacturers

Division of labour Economies of scale Design of each batch can be altered

High levels of WIPs at each stage of production Boring (and demotivating)

Production methods
1. 2. 3. 4. Job production Batch production Mass or flow production Cell production

Production methods
3. Mass or flow production
Producing items in a continually moving process Individual products move from one stage to next as soon as theyre ready no need to wait for the other products (unlike batch production) Large quantities produced in short time suitable for industries with high and consistent demand with minimum alterations
o Soft drinks, Mass production items

Needs to be carefully planned - cannot allow disruptions to the system

Production methods
3. Mass or flow production
Labour costs low mechanised, low physical handling of the
products Constant output stock levels input can be planned, controlled and minimised (JIT Chapter 23) Quality remains high easy to check and control

High set up costs machines are high tech capital intensive Boring, demotivating and repetitive

Production methods
1. 2. 3. 4. Job production Batch production Mass or flow production Cell production

Production methods
4. Cell production
Like mass production, but separated to a self-contained miniproduction units cells Each cell responsible for quality and targets

Motivating and creates friendly competition (amongst cells) Leads to worker commitment --> motivation --> productivity Leads to well trained, multi-skilled workforce

Dependant on well trained, multi-skilled workforce Only works if cell dynamics gel

Production methods
1. 2. 3. 4. Job production Batch production Mass or flow production Cell production
Summary on page 397

Production methods
1. 2. 3. 4. Job production Batch production Mass or flow production Cell production

5. Mass customisation new/recent innovation

Production methods
5. Mass customisation
The use of flexible, computer-aided production systems to produce items to meet individual customers requirements at mass-production cost levels Latest technology + Multi skilled labour force = wide ranging products Move away from mass production/identical products Keep some aspects the same, low unit costs, greater product choice
o Dell computers

Higher added value

Production methods making the choice

The following factors will influence a business decision in adopting the right methods of production for the business : Size of market (market demand) Amount of capital available Availability of other resources Company objectives
Market demand exists for products adapted to specific customer requirements cost advantage and different products for different market mass customisation

Level of technology available

Final Evaluation
Many complex products, such as computers and industrial engines, can be adapted to meet different consumers different requirements Flexibility offered by technology to large businesses could put the survival of small firms at risk
Small firms may be used to exploiting small market niches with hand-built or batch-produced products

However, there is always likely to be a demand from increasingly wealthy consumers for original and specialist products
Small firms with non-mass production methods will still thrive in these market segments

Location decisions
Deciding on the best location for a new business or relocating/expanding an existing one, is crucial to success 3 key characteristics for location decisions :
Strategic in nature
as they are long term and have an impact on the whole business

Difficult to reverse if an error of judgment is made

due to costs of relocation

Taken at the highest management levels

not delegated to subordinates

Optimal location
Optimal location
A business location that gives the best combination of quantitative and qualitative factors

Optimal location is likely to be a compromise that :

Balances of high fixed costs of the site and buildings with convenience for customers and potential sales revenue Balances of low costs of a remote site with limited supply of suitably qualified labour Balances quantitative factors with qualitative ones Balances the opportunities of receiving government grants in areas of high unemployment with the risks of low sales as average incomes in the area may be low

Factors influencing location decisions

Quantitative factors
measurable in financial terms will have a direct impact on either the costs of a site or the revenues from it and its profitability

Qualitative factors
non-measurable factors that may influence business decisions

Quantitative Factors
Site/Capital costs (building or shop-fitting costs)
Strategic site to be close to customers, or other sites that may save costs

Labour costs
Dependant on whether business is capital or labour intensive

Transport costs
Transport of raw materials/products

Sales revenue potential

Convenience to customers Certain locations can add status or image to a business

Government grants
High areas of unemployment greenfield sites

Qualitative factors
Safety
Avoid potential risk to the public and damage to the companys reputation as a consequence of an accident that risks public safety

Room for further expansion Managers preferences

Small business managers preferences regarding desirable work & home environment

Ethical considerations
Relocations could make some workers redundant Exploiting workers in countries with weaker controls over worker welfare and environment

Qualitative factors
Environmental concerns
Business reluctant to set up in area that is particularly sensitive from an environmental viewpoint Could lead to poor public relations and action from pressure group

Infrastructure
Quality of the local infrastructure E.g. transport and communication links

Multi-site locations
Advantages
Greater convenience for consumers
Lower transport costs Reduce the risk of supply disruption

Disadvantages
Coordination problems between the locations excellent two way communication systems essential

Potential lack of control and direction from senior mgmt based in head office
Different cultural standards and legal systems

Opportunities for delegation of authority If sites too close to each other, helps to develop staff skills and cannabalism may occur improve motivation Cost advantages of multi sites in different countries

International location decisions

All quantitative and qualitative factors are all relevant whether the location decision is regional, national, or international one However, additional factors need to be weighed up when a firm is considering locating in another country Offshoring
The relocation of a business process done in one country to the same or another company in another country

International location decisions

To reduce costs
Lower wage rates in developing countries

To access global (world) markets

Rapid economic growth in less-developed countries has created huge market potential for most consumer products

To avoid protectionist trade barriers

Avoid taxes (tariffs) or other limitations on the free international movement of goods and services

Other reasons
Substantial government financial support Highly qualified staff Avoid uncertainty in the exchange rates fluctuations

Issues and potential problems with international location

Language and other communication barriers Cultural differences Level-of-service concerns
Offshoring of call centres and technical support centres Inferior customer service, time-difference problems, language barriers

Supply-chain concerns
Loss of control over quality and reliability of delivery with overseas manufacturing plants

Ethical considerations

Scale of operation
Scale of operation
The maximum output that can be achieved using the available inputs (resources) This scale can only be increased in the long term by employing more of all inputs

Factors that influence the scale of operation of a business :

Owners objectives (they may wish to keep it small, easy to manage) Capital available Size of the market the firm operates in Number of competitors (market share may be small with many rivals) Scope for scale economies

Increasing scale of operations

Considerable costs involved
Purchasing land, buildings, equipment, employing more staff More capital investment

Firms expand to increase capacity to avoid turning business away Firms benefit from the advantage of large-scale production, these are called economies of scale
Reduction in a firms unit (average) costs of production Cost benefits can be substantial Smaller firms will be unlikely to survive due to lack of competitiveness

Economies of Scale
Purchasing economies Technical economies Financial economies Marketing economies Managerial economies

Purchasing Economies
Bulk buying economies Suppliers are more than happy to offer substantial discounts for large orders :
Convenience Larger profit from larger quantities sold

Technical Economies
Very expensive Usually only large firms could afford it when output is high so fixed costs can be spread evenly among the outputs

Financial Economies
Big firms obtain lower interest charged on loans
proven track record and diversified range of products

When going public, the cost such as adviser fees, prospectus publishing costs will be lower for larger firms, as spread over the large amount of shares to be sold

Marketing Economies
Marketing costs rise with the size of the business Small firms will still have marketing costs With EOS, these costs can be spread over a higher level of sales for a big firm

Managerial Economies
Small firms employ general managers who have a variety of management functions to perform An expanding firm/big firm needs specialist functional managers who could operate more efficiently than general managers (i.e. sole trader for small firms) Potential economy for firms who could afford specialist functional managers Thats how big firms benefit from EOS!

Diseconomies of scale (DOS)

DOS are factors that cause average costs of production to rise when the scale of operation is increased DOS prevents one or just a few firms from being able to completely dominate the market Related to management problems trying to control and direct a large organisation
1. 2. 3. Communication problems Alienation of the workforce Poor coordination

1. Communication problems
Large scale operations leads to : poor feedback to workers misleading information communication overload (prevent the most important messages being acted upon first)

2. Alienation of the workforce

Difficult to directly involve every worker to give them a sense of purpose and achievement in work Staff may feel insignificant in the overall business plan and lead to demotivation

3. Poor coordination
Business expansion often leads to growing number of departments/divisions/products Challenge is to coordinate all departments Making sure all have the same objectives by adopting similar ethical standards and produce goods that are consistent with one another

Are diseconomies avoidable?

Management by Objectives (MBO)
Giving each departments agreed objectives to achieve long term aims

Decentralisation
Giving managers freedom to make decisions

Reduce diversification
Able to concentrate on core activities, reduce coordination and communication problems

A2

Enterprise Resource Planning (ERP)

The use of a single computer application (single database program) to plan the purchase and use of resources in an organisation to improve the efficiency of operations Making it possible to coordinate and link together all of the support systems of a business
Stock control and ordering Invoicing to customers Human resource planning Production planning and so on

Example 1 Bicycle Shop

A bicycle is ordered by a customer (credit sale); The order is recorded on the ERP programme, which updates the stock of bicycles; A replacement is automatically ordered from the manufacturer; The customer is sent an invoice; When the payment is made, the accounting records are updated ERP programme could also handle:
bicycle-repair orders manage spare-parts stock provide forecasts of future sales to plan staffing needs over the next few months

Example 2 Water supply company

Customer requests repair; A date is scheduled in by the ERP system; Job is allocated to a team/staff; Correct parts are ordered; When job is done and entered on the system, customer is sent an invoice for payment

Benefits of ERP software

Supply only according to demand
Avoids waste, reduces opportunity costs

Just-in-time ordering of stocks (Chapter 22) Reduces costs at all stages of the supply chain
materials and products are electronically tracked at all stages

Improved delivery times and better customer service Departments linked more closely together by the single database
Better coordination between departments

Management information increased

Data and information available for all related departments

Limitations of ERP software

Costs
database and computer systems could be expensive

Resentment among departments

Multiple ways of operating in different departments now have to be reduced to one common system

Software obsolete
It is estimated that in most businesses the full implementation of ERP can take 1-3years Technology can be obsolete during that time

Supply chain management (SCM)

5 main stages of SCM :
Plan - deciding which resources are needed and how many Suppliers choosing the best and most cost-effective, and to arrive on time Costs recorded, price to customer calculated Manufacture check quality and monitor rate of progress of the order Deliver transport system that can deliver goods on time, safely and cost effectively Returns if there is a problem with the product, taken back and replaced or cost reimbursed

Final Evaluation
Proven way of saving costs and increasing competitiveness

Most of the worlds largest companies now use ERP software routinely
Contributing towards the trend of conducting B2B and B2C operations online