4.3 business

Unit 4.3 - Increasing efficiency and productivity

Capacity - the maximum total level of output or production that a business can produce in a given time period.

A company that is producing at this level is said to be producing at this level is said to be producing at full capacity.

Importance of capacity - 

getting capacity right is important because managers need to decide on the correct sale of production for the organisation. 

too low and they will not be able to meet demand for their products: get it too high and they will waste money with idle resources (machinery, people or stock etc)

How to increase capacity?

For businesses to increase capacity they need to:

-invest in capital machinery

-invest in employees through training 

-hire more employees 

-change production practices to be more efficient

Importance of labour productivity - 

If a business has an increase in labour productivity then this means that the output will be increased but using the same number of employees. This implies a lower labour cost per unit.

This lower labour cost per unit allows the firm to charge a lower price to gain competitive advantage or get higher profit margins.

Being more efficient is important for a business and countries, which is why the labour productivity of the UK is used as a measure to see how efficient we are as a nation.

If labour productivity is high then the workforce is productive and this will aid the competitiveness of the business.

Labour costs are the highest proportion of total costs for most companies so getting it right is crucial.

Increasing labour productivity - 

it is achieved through human resource management.

Policies could include:

-Recruiting suitably skilled and trained employees 

-Training to improve skills and attitudes of existing employees 

- Using appropriate remuneration and non financial benefit to improve motivation

Labour productivity can also be improved through:

-Improving working practices 

-Improved technology and capital equipment 

These are not 'increasing' the efficiency of the labour workforce but increasing output by investing in new equipment or changing the way the workforce is carried out.

But by getting the new equipment the employees have got new skills the labour force could then be said to have become more effective.

Difficulties of improving labour productivity - 

- Training of existing staff may take a long time to take affect on labour productivity.

- Employing new people with appropriate skills can be costly and may also take time.

- Financial methods of motivation are more effective in the short term but loose their impact in the long term.

- Non-financial methods of motivation can improve labour productivity, however this is again a long term strategy.

Economies of scale - 

They are also known as internal economies of scale. The advantages that an organisation gains due to an increase in size. These cause an increase in efficiency. A decrease in the unit costs of production.

Economies of scale :

-technical economies

-finance economies 

-marketing economies

-specialisation economies

-social and welfare economies

-managerial and administrative economies 

-R&D economies 

-purchasing economies

Diseconomies of scale - 

They are also known as internal diseconomies of scale. The disadvantages that an organisation experiences due to an increase in size. These cause a decrease in efficiency and/or an increase in unit costs of production.

Diseconomies of scale:

-co-ordination diseconomies 

-communication diseconomies 

-motivation diseconomies

-other diseconomies 

   -technical diseconomies 

   -excessive bureaucracy 

   - staff problems 

   - less flexibility

Lean production - 

Lean production - aims to reduce all forms of waste in the production process

This can include the waste of:

-materials 

-time

-energy

-human effort

Production based on the range of time saving and waste saving measures inspired by Japanese manufacturing companies.

-Just in time management 

-quality circles 

total quality management 

-cell production 

-benchmarking 

-time based management 

-kaizen (continuous improvement)

Aims of lean production - 

- zero delay 

- zero stocks 

- zero mistakes 

- zero waiting 

- zero accidents

The techniques  involved in lean production include:

- time based management 

- cell production 

- benchmarking 

- kaizen 

- just in time production 

Time based management - 

If a business is able to produce a product in a shorter time than rivals then more sales could result. Businesses therefore sometimes compete on the time taken to deliver goods.

E.G. 

- dominos pizza aims to get fats food pizzas delivered within 30 mins 

- opticians aim to get glasses completed within 24 hours 

- amazon delivers goods within 24 hours 

These examples all take careful management to ensure the business is as efficient as possible.

Cell production -

Cell production - organising production around teams instead of production line

The production is divided into a series of different stages which are undertaken by teams or 'cells'

Advantages of cell production - 

-cell production can be very motivating for employees as they feel they have more control over their own work 

-team or 'cell' members can divide the work amongst themselves: they can also share their skills and knowledge.

-this also influences quality as one 'cell' can refuse the work of the previous 'cell' if production was of a poor quality. Each cell is taking responsibility for its own work.

Disadvantages of cell production - 

-output may be lower than a 'flow' production system

-different 'cells' within the production may work at different speeds. This can lead to conflict or tension between cells 

-the business may need to invest heavily in new machinery and equipment because each cell may require the same capital items

Just in time production (JIT) -

Just in time production - producing products to order 

This involves reducing the stock holding of a business to make it more efficient

Stock - 

There are three types of stock:

Raw materials and components - stocks waiting to be turned into goods 

Works in progress or unfinished goods - goods which are still on the production line 

Finished goods - goods which are complete and awaiting delivery to customers 

Being able to reduce all of these means that businesses can significantly reduce their cost per unit 

JIT - 

benefits:

-reduced stock holding 

-smaller warehouses 

-less staff needed to manage and control stock 

-improved relationships with suppliers 

-less risk as stock will not perish or go out of date 

Disadvantages - 

-Production line could stop completely leaving staff and machinery line 

-reliability of suppliers, could be problems with quality or delivery of items 

-reliability of raw material, could be problems with quality or availability 

-reduced options for responding to customer demands 

JIT order - 

customers place orders - supplies are ordered -  supplies arrive and go straight to production line - used  in production line - products delivered to customers

How to choose the optimal mix of resources - 

Operations management is all about managing the resources of the business and this includes:

-deciding the best way of producing goods (whether to use lean production methods, etc)

-deciding the best resources to use and the combination of resources needed (resource mix)

-deciding where to get the resources from (working with suppliers)

-deciding how many resources to hold in stock

Mix of resources - 

Operation processes can be either:

-labour intensive - specialised roles for employees within the production system

or 

-capital intensive - high investment needed in capital machinery 

Factors influencing resources mix - 

- The type of operations process and the operations strategy, could go for volume (highly capital intensive): could go for specialist low volume (highly labour intensive)

- Relative prices of the resources - if cheap labour is available then the processes may be very labour intensive: in the UK labour is relatively expensive so it may be a more automated process which would be capital intensive 

- availability of resources - in some sectors there is a shortage of land (for example, in London land is very expensive which can reduce the size of the production facilities)

Factors influencing resource mix - 

-Nature of the product or process - Morgan cars are handmade so very labour intensive : Ford cars are mass produced and so are very capital intensive 

-State of the technology - Cheap effective technology has turned farming from labour intensive to capital intensive businesses

-Ethics - Businesses may decide not to produce in low wage economies, for example, Primark attempts to work with suppliers who pay better wages.

Becoming more capital intensive -

Businesses can become more capital intensive through:

-Raising finance - funds need to be available to invest in machinery 

- Changeover - introducing new equipment or ways of producing goods (though this could lead to a temporary dip in efficiency)

- Innovation - improving productivity through new equipment

Maintaining or improving labour intensive business - 

-attracting the right people - being labour intensive frequently means using specialisation, businesses therefore need to attract the right people

-keeping the right people - you need to keep the people you have got 

-managing peoples knowledge - knowledge needs to be stored so that it can be shared effectively - team working helps knowledge management

Technology -

Using technology helps businesses become more capital intensive, more efficient and can change the nature of the production process.

Using technology includes:

-Robotics 

-Automation 

-Communication 

-Design

Using technology -

Robotics - can be used to do routine and complex activities 

Automation - can be used to hep with planning the operations management. and operating 

Controlling - controlling the quality of goods produced 

Stock control -  ensuring all stock levels are maintained

Communication - improving communication internally and externally 

Design - using technology to help create new products or test new ideas

Benefits - 

-reducing costs

-improving quality 

-reducing waste

-increasing productivity 

-other benefits , flexibility can allow businesses to respond to consumers demand

-financial monitoring, ICT can improve the ability of managers to monitor the businesses budgets and plan more accurately

-new and better products are services - new designs can be created or quality improved to give competitive advantage 

-better working conditions - IT can improve noise  reduction: control temperatures etc.

Summary -

-If a business is run as efficiently as possible then it can gain a competitive advantage

-this advantage can be used to either reduce the price to the customer or increase profits margins.

-lean production is a way of reducing waste from the production line but it is not an easy task for businesses to achieve

-technology (including robotics, IT and automation) can really help with the planning, introduction and maintaining of aspects of lean production