Unit 4 – pg 1 CIE – Business Studies

Unit 4. Operations Management

Unit 4.1. Production of goods and services
This chapter talks about: Private sector businesses are providing goods/services for a profit. These goods/services are
the output of a production process. This chapter you will learn about different production methods used by businesses
and how the factors influenced their choice. You will also learn how businesses measure and improve the effectiveness
of their production processes and the impact that technology has on these processes. The chapter looks at the
importance of inventories (stock) to the production process and business costs.

Production: a process that involves using resources (inputs) to make goods and services (outputs) to satisfy
consumer needs and wants.

Notice: Production applies to both goods and services.

What are the four factors of production? ________________________________________________________

Example of production process: A baker (labour) using flour and water to the kitchen (land) and using mixers and
oven (capital) to make bread (output after production process) to sell it to customers.

inputs PRODUCTION (goods/ services) outputs

Operations Management: involves managing business resources – known as inputs – throughout the production
process to produce finished goods, - known as outputs – to sell to consumers. OM must use:

- Must use resources in the most cost effective way

- Produce the required output to meet consumer demand
- Meet the quality standard expected by consumers

Productivity: is a measure of the efficiency of inputs used in the production process, especially labour and capital.
Simply put, productivity measures how efficient production is.

Labour Productivity = Total Output

Number of Production Workers

Average Revenue Productivity of Labour = Total Revenue

Number of Employees
Unit 4 – pg 2 CIE – Business Studies

How to improve labour productivity

- Increase output with same no. of workers
- Keeping output at the same level but with fewer workers
o Improve the skill level of workers
o Improve the motivation of workers -> rewards
o Introduce more automation and better technology
o Introduce new processes and reduce waste
o Improve working environment

Unit: 4.1. Production of goods and services

Effects of improving productivity to a business

_____________________________________________________________________________________________

_____________________________________________________________________________________________

_____________________________________________________________________________________________

_____________________________________________________________________________________________

_____________________________________________________________________________________________

Inventories – Why businesses hold inventories and how to manage them?

Businesses need to hold inventories (stock) onsite for efficient production. Example of stock include raw materials
and parts which are input to the production process and work-in-progress items in the production. Outputs such as
finished goods for sale can be also classified as inventories. See below table.

Manufacturing business will hold Service business will hold

Inventories (stock) are items of value. Shown in current assets in Unit 5 Finance. They also take up space to store
them.
Unit 4 – pg 3 CIE – Business Studies

Business costs related to holding inventories.

- Warehousing costs – cost of renting/buying storage space to store inventory.

- Handling costs – inventory need to be moved into and out of warehouse.
- Shrinkage costs – damaged lost or stolen inventories will need to be replaced.
- Insurance costs – to cover from shrinkage costs.
- Obsolescence – inventory going out of date and business unable to sell them.
- Opportunity cost – working capital tied up in inventories which could be used for more profitable activities.

Concept of Lead time. ____________________________________________________________________________

_______________________________________________________________________________________________

If holding stock cost money, why do businesses hold them?

Inventories such as raw materials and parts are unavailable -> the entire production stops. -> increases Lead times.
-> affect productivity -> affect customers -> affect profits

inputs outputs
PRODUCTION

Overstocking: This happens when a business is holding too much inventory. Working capital is limited due to this.
Inventory is not cash. Business becomes inefficient.

Rate of Inventory turnover (beyond curriculum): It means how quickly inventory is used up in the business and
how quickly they need to be reordered and replaced.

Various businesses have different inventory turnover rates. You can actually measure this from financial statements.

Inventory (stock) turnover = Cost of sales__________

Average stock held

e.g. Amazon, Walmart, Tesco, Sainsbury’s

Unit 4 – pg 4 CIE – Business Studies

What else can you do to increase productivity of the business?

- Manage inventories (stock)
- Introduce Lean Production & other processes to continually reduce waste and inefficiency
- Replace old equipment and machinery with new technologies and automation processes

Lean Production practices: improving efficiency and eliminating waste in a production process so that products
can be made better, cheaper and faster. List 7 types of waste that can occur during production. See page 303.

Just-in-time inventory control – keeping inventories of materials and work-in-progress to a minimum by taking
delivery of new parts and materials only when they are needed for production.

Example: Toyota car factory

The spare parts needed for assembling cars at Toyota car factory will arrive just in time before production run. This
means there is no space/warehousing need for the parts and raw materials.

Kaizen – means continuous improvement in Japanese. The continuous improvement of production processes to
remove waste and increase efficiency.

Example: Kyay Oh chefs at YKKO.

Do activity 4.1 on page 299 / activity 4.2 on page 305

Unit 4 – pg 5 CIE – Business Studies

Unit: 4.1.2 Main methods of production

Job Production: the production of a single item or items made to order, usually involving labour-intensive
techniques.
Example:

Flow Production: mass production of a large number of identical items in a continuous, usually automated,
process.
Example:

Batch Production: production of a limited number of identical products to meet a specific requirement or
customer order. Each new batch may be slightly different from the last one produced.
Example:

Methods of Benefits Limitations

production
Job  Unique, high quality products are made.  Uses skilled labour rather than machinery,
 Workers are often more motivated and so selling prices are usually higher.
take pride in their work.  Production can take a long time and can be
expensive, for instance if special materials
or tools are required.
 Economies of scale are not possible, often
resulting in a more expensive product.
Batch  Since larger numbers are made, unit costs  Workers are often less motivated because
are lower. the work becomes repetitive.
 Offers the customer some variety and  Goods have to be stored until they are sold,
choice. which is expensive.
 Materials can be bought in bulk, so they are
cheaper.
Flow  More capital intensive than job or batch  Requires very large capital investment in
production, which lowers the labour cost. production line technology.
 Materials can be purchased in large  Workers are not very motivated, since their
quantities, so they are often cheaper due work is very repetitive.
to bulk-buying economies of scale.  It is not a very flexible method as
 Large number of goods are produced. production lines are difficult to change.
 If one part of the production line breaks
down, the whole production process will
have to stop until it is repaired.
 High levels of raw material, work in
progress and finished goods inventories are
held. This increases business costs.

Do activity 4.3 on page 310

Unit 4 – pg 6 CIE – Business Studies

How technology has changed production

New technologies reduce costs, improves efficiency and quality. Businesses must pay attention to the continuous
threat posed by disruptive technologies as well as trying to find opportunities created by new technologies. E.g.
digital cameras has replaced film cameras. Yellow pages replaced by Google search.

CAD: Computer aided design; e.g. AutoCAD software aiding in design. 3D rotation, modelling. 3D printers allow for
fast prototyping and testing.
CAM: Computer aided manufacturing. Manufacturing process is more capital intensive, reduces need for labour and
therefore, production costs. Speed of production is faster, more accurate, higher quality, reduces waste and increase
output.
CIM: Computer integrated manufacturing. For e.g. uses heavily in car manufacturing industry. Uses of robots in a
factory controlled by computers.

Advantages and disadvantages of new technology

Advantages Disadvantages
Business  Reduces the costs and time taken to design o Can be very expensive.
new products. o When technology is rapidly changing it will
 Increases productivity need to be changed often if the business is
 Reduces costs of production to remain competitive.
 Improves quality and reduces waste o May need to spend money training workers
which increases costs.
Consumers  Better quality products o Products may become out of date more
 Lower prices quickly
 Products with more features are easier to o When the product develops a fault, it can be
develop and produce expensive to repair
Workers  Technology completes simple and repetitive o Technology often reduces the need for
tasks that workers find boring workers, resulting in redundancy
 The work is easier with the aid of technology o Technology could make the work less
 A business that uses the latest technology is interesting
likely to be more successful so provides job o A smaller workforce reduces opportunities
security for promotion
o The development and manufacture of new
technology products provide employment
opportunities

Do Exam prep 4.1, page 315

Unit 4 – pg 7 CIE – Business Studies

Unit: 4.2. Costs, Scale of production and break-even analysis

Classification of costs
Fixed costs: costs that do not change with output. E.g. __________________________________________
Variable costs: costs that change in direct proportion to output. E.g. ______________________________
Total costs: all the variable and fixed costs of producing the total output.
Total costs = Fixed costs + Total variable costs
E.g. __________________________________________________________________________________________

16000

14000

12000

10000
Costs $

8000

6000

4000

2000

0
0 1000 2000 3000 4000 5000 6000
Output of light bulbs per month

Total fixed costs Total variable costs Total costs

Average costs: the cost of producing a single unit of output. Average cots per unit usually decreases as the output is
increased.
Average cost per unit = Total cost / Total output
e.g. Average cost per light bulb (when output is 1000 per month) = 5000 / 1000 = 5$
Average cost per light bulb (when output is 6000 per month) = 15000 / 6000 = 2.5$

Direct costs and Indirect costs

Direct costs are costs associated directly with a business activity or function, or production of a particular product.
They include material and labour cost of employees directly involved in making a product. Similar to variable costs.
Indirect costs or overheads are the day to day running costs of a business, such as insurance charges, rent, cleaning
and office costs. Indirect costs are similar to fixed costs.
Do activity 4.5 on page 319 (1 & 2 only)
Unit 4 – pg 8 CIE – Business Studies

Break-Even Analysis

Break-even level of output = Total fixed cost = 3000_

(Price per unit – Variable cost per unit) ($3 - $2)

20000
18000
16000
14000
12000
Costs $

10000
8000
6000
4000
2000
0
0 1000 2000 3000 4000 5000 6000
Output of light bulbs per month

Total revenue Total costs

BEP can be used to analyse what happens when costs and prices changed.
What happens to BEP chart if there is a rise in the variable costs? What happens if revenue is increased as a result of
the increase in selling price? Do Activity 4.7 on page 327 and Activity 4.8 page 330.
Unit 4 – pg 9 CIE – Business Studies

Limitation of Break-even analysis

1. Assumes that all the products are sold, no leftovers.
2. BEP assumes that fixed costs do not change. Above a certain threshold, fixed costs do change. For example,
more machinery required for more output beyond the machine’s max output, larger premises needed to scale
up production, for machinery.
3. BEP assumes that selling prices are the same for all levels of output. In reality, businesses may need to reduce
the selling price to sell things in bulk.
4. Market conditions are always changing. Threats from competitors will affect selling price and costs. Changes
in technology can also be a threat to business.
5. BEP need accurate data on costs. For a production business with multiple products on the production line, it
may not be easy to get accurate reflection on costs.

Scale of Production
Economies of scale – buy more and save more. e.g.

1. Purchasing economies of scale

2. Marketing economies of scale

3. Risk bearing economies

4. Technical economies

5. Financial economies

Diseconomies of scale – happens when a business grows too large. e.g.

1. Management diseconomies

2. Labour diseconomies

Do exam prep 4.3 on page 341.

Unit 4 – pg 10 CIE – Business Studies

Achieving Quality Production

Why is quality important?

 Quality is producing goods/services that is fit for purpose intended and meets consumer expectations
 Improve the quality by improve the process
 Reduce costs
 Improve customer satisfaction
 Improve reputation means better sales
 Improve brand image
 Differentiating factor in a competitive market

Benefits of investing & improving in quality Costs of failing to invest & improve in quality

How do you achieve quality?

Ways in which you can improve the quality of goods and services.

1. Quality control of finished goods and services

2. Quality assurance at every stage of production
3. Total Quality Management (TQM)
Unit 4 – pg 11 CIE – Business Studies

Achieving Quality Production

Quality control – check the quality of a good or service for any defects or errors at the end of its production
process.

Benefits of Quality Control Disadvantages of Quality Control

Quality Assurance – setting and monitoring of quality standards across an organisation and ensuring that they are
met.

Benefits of Quality Assurance Disadvantages of Quality Assurance

Total Quality Management (TQM) – continuous improvement in products and every business process at every
stage of production. TQM aims to achieve zero defects. Sounds like Kaizen? What’s the difference?
Unit 4 – pg 12 CIE – Business Studies

Key features of TQM

Quality circles

Benchmarking

Empowerment

Statistical process control

Benefits of TQM Disadvantages of TQM

Do exam prep 4.4 on page 354.

Unit 4 – pg 13 CIE – Business Studies

Location Decisions

Factors that influence location and relocation decisions

Quantitative factors – factors that can be measured using financial terms and will directly affect costs, revenue
and profitability of a location/site. Read page 347, 348.

Quantitative factor Explanation

Scale of production

Labour costs

Market potential

Cost of site

Transport costs / Access to

raw materials

Government incentives

Size of available site

Qualitative factor – Non-financial factors that business need to consider when thinking about location decisions.

Qualitative factor Explanation

Legal restrictions

Quality of local infrastructure

Ethical issues and concerns

Personal preferences of
owners

Security and environment

Unit 4 – pg 14 CIE – Business Studies

Why businesses relocate to other countries?

 To achieve growth
 Lower production costs
 Locate production closer to markets

Benefits of international relocation

+ Access cheaper sources of raw materials

+ Lower labour costs

+ Lower taxes

+ Access to new markets

+ Avoid legal barriers and import tariffs

+ Government incentives

Limitations to international relocation

- Cultural differences

- Communication problems

- Ethical concerns

- Quality issue

Legal controls by governments

Governments try to control and influence location decisions by international businesses through legal controls. Legal
controls can restrict business location related decisions.

- Planning laws
- Building regulation
- Government grants and subsidies
- Government incentives
Unit 4 – pg 15 CIE – Business Studies

Unit 4 - Active Recall Questions

1. State three factors that might influence location decisions.
2. Explain two reasons why a business may decide to relocate in another country.
3. Explain how legal factors can influence location decisions.
4. How can a relocation decision affect a business’s existing workforce?
5. How might consumers influence a location decision?
6. Should cost be the major influence on location decisions?
7. How and why might a country’s government encourage a business to locate in their country?
8. Explain the term ‘quality control’.
9. Why are quality inputs important to quality products?
10. What do you understand by the term ‘quality’?
11. How do consumers influence quality?
12. State three benefits to a business of producing quality products.
13. What is meant by the term ‘break-even’?
14. State tow uses of break-even charts.
15. State one benefit and one limitation of break-even charts.
16. Explain the importance to a business of economies of scale.
17. Explain how a business could experience diseconomies of scale.
18. Using suitable examples, explain the difference between fixed costs and variable costs.
19. What is meant by ‘average cost’?
20. How do you calculate average cost?
21. What is meant by ‘computer aided design’?
22. Identify and explain one advantage and one disadvantage to a business of new technology.
23. State two differences between job production and flow production.
24. State two factors that influence the choice of production method.
25. Define the term ‘production’.
26. With the aid of examples, explain the difference between ‘goods’ and ‘services’.
27. State three ways of improving labour productivity.
28. What is the main objective of lean production?