Operations Management

Operations Management Higher/Int 2 Business Management 2013-2014

Contents • Role and importance of operations • Input-process-output • Planning • Importance of purchasing • Purchasing mix • Centralised/decentralised purchasing • Stock control • Computerised stock control • Labour intensive/capital intensive • Methods of production • Quality • Quality management • Quality standards • Payment systems • Warehousing/distribution

Operating System • An Operating System is a configuration of resources to provide a product or service • Raw Materials • Machinery • Workers • The key is efficient management of resources

Operations Management • A Transformation Process Information Finance People Materials Machinery Goods Services Customer/Employee Satisfaction INPUT PROCESS OUTPUT

INPUT Raw Materials (LAND) eg flour, yeast, water Human Resources (LABOUR) the workers and managers Man-made Resources (CAPITAL) eg ovens and baking trays PROCESS The process for the manufacturing of bread will include measuring, sifting, mixing, kneading the bread, heating and cooling. OUTPUT The finished product, loaves of bread, distributed to the consumers THE PRODUCTION PROCESS FOR BREAD

Input Issues • Best price • Reliability of suppliers • Delivery times • Quality • Quantities available • Storage space (raw materials)

Process Issues • Average Demand per Week • Production Capacity Available • Working Procedures (eg H&S) • Storage Space (Finished Product) • Efficiency/Productivity • Payment Systems • Quality • Stock Control

Output Issues • Packaging Individual/Groups of Items • Nature/Size of Containers • Storage Space (Before Dispatch) • Organising Customer Orders • Transportation (Storage/Customers) • Customer Requirements

A Complicated Function • Operations Management is a complex area which can be further broken down into the following key areas: A) planning B) production C) purchasing D) storage and stock control E) distribution/logistics

Planning • To be most efficient production should take place at a constant level

Planning • In reality this is not possible: • Consumer Demand • Staff Shortages • Machinery Breakdowns • Maintenance

What Production System? • The Nature of the Product • Washing Machines • Bread • House • Atlas • Farming • New Bridge

What Production System? • Market Size • Where the firm is producing large numbers of standard products the production can be simplified eg Irn Bru • Customised products for individual clients need a great deal of client input eg customised software or stained glass windows

What Production System? • Resources • Materials • People • Buildings • Machinery/Tools • Finance • Time

What Production System? • Business Development • Small firms, small productions, production system limited eg Wallace & Gromit Cheese • As firms grow they can increase their capacity and produce a greater variety of goods

What Production System? • Labour Intensive Systems • A labour intensive system is one which relies more heavily on its workforce than machinery • ‘Tattie Holidays’ • Strawberry Picking • Clothing Promotion

What Production System? • Labour Intensive Systems • Labour is cheaper than machinery • Skill in craftsmanship required • Can’t use machinery - working environment • Ability required to think/reason/use initiative/make decisions • Flexibility in production

What Production System? • Capital Intensive Systems • A Capital Intensive System is most common when: • Supply of labour is limited • Production benefits from machine efficiency and consistency • Production is routine and repetitive

Automation • CAM (Computer Aided Manufacture) • CAD (Computer Aided Design) • Robotics • Allows firms to design, develop and produce products with high quality • Ability to make a wider range of similar products to appeal to different segments of the market

Automation • Advantages • Complicated tasks completed quickly • High accuracy • Less waste • Quality consistent • Disadvantages • Machinery is more likely to break down • Narrow range of tasks

Activities Wallace & Gromit - Stinking Bishop • Research and produce a short report on the production of the cheese Stinking Bishop and the Wallace & Gromit effect

Purchasing • This varies according to the size/nature of the organisation: • Services - very little purchasing, ‘production’ depends on staff skills • Manufacturing - may have a purchasing department

Purchasing Department • Team of specialists with the aim to: • Purchase the best quality materials • At the lowest cost • With the correct quantities • At the correct time Purchasing Mix

The Importance of Purchasing • Quantity and quality that the firm requires • Purchase at the most competitive prices • Ensure speedy delivery • Arrange delivery to a suitable point eg site or gate • Choose reliable suppliers and maintain good relationships with them

Stages in Purchasing Process Requisition Negotiation Place Order Chase Delivery Clear Invoice

The Purchasing Mix • Decisions on quantity to purchase: • Stock of raw materials available • Time between orders placed • Amount of raw materials to meet output demand • Availability and cost of storage space

The Purchasing Mix • Choice of Supplier: • Price: lowest? discounts? credit terms? • Quantity: acceptable? continuity of supply? • Availability: sources? delivery systems? confidence? • Location: transport? insurance?

McDonalds Purchasing • McDonalds do not have contracts with any of their suppliers • They can change suppliers without notice • Size of McDonalds makes them an attractive customer • Must meet very strict quality standards

Centralised Purchasing • One department carries out purchasing for the whole business • Economies of Scale (lower rates/market power) • Quality and Standard materials set • Distribution and Warehousing better planned

Decentralised Purchasing • Reduces the cost and burden of administration • If each store manager (in retail) takes responsibility - needs of the store better catered for • Managers get additional responsibility - increasing motivation

Nature of Stocks • Raw materials and components – purchased by suppliers before production • Work in Progress – partly finished goods • Finished Goods – finished product (changes in demand)

A stocktake will be performed at least annually to record the amount/value of stock. This is a physical count. • Stock is listed as a current asset on the balance sheet.

Costs of Holding Stock • Stock improves business performance but: • too much means capital is unproductive • too little means that there could be delays in production • Opportunity cost • Spoilage costs • Administration/Finance costs • Out-of-Stock costs

Stock Levels • Decisions on how much stock to hold depend on: • Demand – cover growth in sales and unexpected demand • Stockpile – eg Christmas (toys) • Costs of Stock holding – if expensive less held eg furniture retailers • Working capital – if limited can’t purchase more stock • Type of stock – perishable eg bread/cakes, out-of-date eg new models • Lead time – time to place and receive new order • External factors – fear of future shortages

Stock Control • Issuing stock • Monitoring Stock levels • Quantities of Stock held • Economic Stock Level • Minimum Stock Level • Re-order level • Re-order Quantity • (see student notes)

Stock Control Stock Level Maximum Stock Level Re-order triggered Re-order level Minimum Stock Level Lead Time Time When the stock level reaches the re-order level, it triggers a new order. The difference between the time of re-order and delivery is the ‘lead time’. Maximum stock levels achieved after stock delivery. Stock levels decline during production. The Traditional Stock Control Model

Computerised Stock Control • Most organisations use computer stock control systems • Computer automatically orders more stock at the reorder level • May use barcodes (30 yrs old in 2007) or RFID tags • Physical checks to ensure discrepancies accounted for: • Theft • Natural wastage • Deterioration • Management make decisions with regard to popular products and adjust stock levels as necessary (local tastes) • Information useful when dealing with large orders – judge delivery date possible

Just-in-Time (JIT) • Limits stock holding to almost zero • Close relationship between manufacturer and supplier (need reliability) • Stock brought to factory only when needed • In a JIT system stock holding costs paid for by supplier: • Capital tied up in stock • Storage costs • Stock loss/wastage • Nothing produced unless there are customers ready to buy

Advantages Security Specialist Staff Supervise/Control Agreed Procedures Economies of Scale: Bulk Buying Reduces Duplication of Stock around organisation Disadvantages May Be Remote from Production Facilities: Time Wasting Cost of Moving Stock Large wastage Cost of Specialist Staff/Storage Area Specialised Department Requirements Storage of Stock (Centralised)

Advantages Stock at Hand Order as Required (Depends on Production) Fast Turnover of Small Quantities of Stock Disadvantages Less Control Theft Loss Space in Production Area Required Storage of Stock (Decentralised)

Advantages Exactly Meets Production Requirements Savings on Purchase/Storage Production Delays Prevented Close Links with Suppliers Disadvantages Dependency on Suppliers Suppliers must be Willing to Participate Storage of Stock (Kanban)

Methods of Production • You need to know: • Job Production • Batch Production • Flow Production • and advantages and disadvantages of each

Job Production Each job is completed in full before another is started. INDIVIDUALITY Simple organisation Production Costs High Specifications Changed ‘One-offs’ Customer Needs Time-Consuming Production Versatile Equipment Workers Motivated

Job Production • A single product is custom-made to a customer’s own specifications • Examples: • Boat Building • Bridge Building • Wedding Cakes/Dresses

Advantages “One-off” orders accommodated High price Specifications can be changed Motivated workforce Disadvantages High labour costs Wide variety of equipment needed Each job will require individual design (time) Lead times lengthy Job Production

Batch Production All stages in production completed at the same time – possibly different ingredients. EACH IN BATCH SAME VARY FROM BATCH TO BATCH Flexibility Delays: Change/Clean Equipment Scope for Specialisation Stock of Partly Finished Goods Co-ordination Required Small Batch = High Cost

Batch Production • The production of a group of similar products. No item in a group goes to the next stage until all are ready. • Examples: • Tinned Foods • Bakery • Houses in an Estate

Advantages Flexible production Partly finished goods can be stockpiled and completed later Reduced need for highly skilled staff Machinery can be standardised Disadvantages Higher costs per unit (small batches) Needs careful planning High stock levels Less motivated staff Delays in changing/cleaning equipment Batch Production

Flow Production Use of a production line – component parts added at each stage. STANDARDISATION Economies of Scale Start-up Costs High Automation System Failure? Reduced Stockholding eg JIT Standardised – All Customers? Quality Systems Built In Work is Repetitive

Flow Production • Production items move continuously from one operation to the next. Products are produced to a standard specification. • Examples: • Cars • Computers • White goods eg washing machines

Operations Management