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Operations Management
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Productive Efficiency: Economies of Scale
· Introduction:: These occur when mass producing a good results in lower average cost. Average costs fall per unit ­ Average
costs per unit = total costs / quantity produced. Economies of scale occur within an firm (internal) or within an industry
· Internal Economies of Scale
· As a business grows in scale, its costs will fall due to internal economies of scale. An ability to produce units of output more
· External Economies of Scale
· Are those shared by a number of businesses in the same industry in a particular area. Internal Economy of Scale. There are
many types of internal economy of scale. Below is a list and examples of each.
· Production / Technical Economies
· Larger firms can use computers / technology to replace workers on a production line
· Mass production lowers cost per unit
· Large scale producers can employ techniques that are unable to be used by a small scale producer.
· Able to transport bulk materials.
· Purchasing / Marketing Economies
· Advertising costs can be spread across products. Large businesses can employ specialist staff. Bulk buying ­ if you buy more unit
cost falls
· Financial Economies
· Larger firms have better lending terms and lower rates of interest. Easier for large firms to raise capital. Risk is spread over more
products. Greater potential finance from retained profits. Administration costs can be divided amongst more products
· Managerial Economies: More specialised management can be employed, this increases the efficiency of the business decreasing
the costs
· Risk-bearing Economies
· Large firms are more likely to take risks with new products as they have more products to spread the risk over
· External Economies of Scale: These are advantages gained for the whole industry, not just for individual businesses.
· Examples:
· - As businesses grow within an area, specialist skills begin to develop. - Skilled labour in the area ­ local colleges may begin to
run specialist courses. - Being close to other similar businesses who can work together with each other. - Having specialist
supplies and support services nearby.
· Capacity Utilisation: This looks at the amount a firm is producing compared with how much it could be producing given existing
resources. To increase capacity utilisation can increase production levels. Need to ensure there is demand for the excess
production: If produce more need to increase demand by: - Increased promotion - Altering elements of the marketing
mix to increase demand - Producing products for other firms (sub contracting)
· Diseconomies of Scale: Diseconomies of scale occur when firms become too large or inefficient. Average costs per unit start to
rise. Types of diseconomy of scale can be seen below with examples…read more

Slide 3

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· When firms grow there can be problems with communication. As the number of people in the firm increases it is hard to get the
messages to the right people at the right time. In larger businesses it is often difficult for all staff to know what is happening
· Coordination and control problems
· As a business grows control of activities gets harder. As the firm gets bigger and new parts of the business are set up it is
increasingly likely people will be working in different ways and this leads to problems with monitoring
· Motivation: As businesses grow it is harder to make everyone feel as though they belong. Less contact between senior
managers and employees so employees can feel less involved. Smaller businesses often have a better team environment which
is lost when they grow
· Capital vs. Labour Intensity
· Capital intensive businesses are where there is a high level of capital equipment compared to labour input in the production
· Labour intensive businesses are where there is a high level of labour input compared to capital equipment in the production
· Rationalisation: Where firms are producing under capacity however don't foresee an increase in demand they will reduce
production to cut costs
· Research & Development: Introduction: Research & Development is all activities that look at identifying new products / services
and new ways of producing. Need to be able to turn the ideas into products that can be sold
· Innovation ­ where new ideas are turned into products
· Aims - To develop new products which have USPs allowing for product differentiation - Increasing the quality of products to
increase customer satisfaction - To develop more effective ways of producing to decrease costs per unit . - These can all
increase the profitability of the business
· If research and development is good then it considers design issues
· In addition it needs to look at : - Customer needs - Use of product / service - Competitors products - Ease of manufacture
- Costs / quality / profit targets
· Process: The research and development process: 1. Idea generation 2. Screening of ideas 3. Development of ideas 4. Prototype
and testing 5. Launch
· How to Protect Innovations If a business is successful with innovation it needs to protect them from competition
· A patent gives the holder sole use of a process / sole manufacture of a product for the next 20 years
· Copyright protects the work of artists / writers and musicians
· Research & Development & the PLC: Research and development happens before the introduction phase of the product life
cycle. Research and development is very expensive so can often cause cash flow problems prior to the launch of products. After
launching a product businesses need to do more research and development to modify the product or bring out a new product to
increase demand and profit
· Risk: All research and development contains an element of risk. Therefore businesses need to ensure that research and
development minimizes risk to get required results. Businesses cannot guarantee the success of innovations however firms can
try and encourage and support research and development…read more

Slide 4

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Critical Path Analysis
· Introduction
· Critical Path Analysis is a planning and management tool with the following advantages:
· - Allows a business to plan ahead - efficiency
· - Is time related giving an accurate plan
· - Enables resources to be planned ahead
· - Allows for good management
· - Helps with cash flow management
· - Reduces waste
· CPA may be used as part of the decision making process to allow a business to plan and monitor operations
· Time related ­ identifies the maximum time for an operation to be completed
· Identify potential problems in implementing operation Identifies where and when resources (including human
ones) are needed
· Advantages
· Maximise efficiency in the use of time
· Improve efficiency and generate cost saving in the use of resources
· Beneficial to monitoring cash flow
· Disadvantages
· Usefulness may be limited in complex and large scale operations
· Necessity of having clear and reliable information
· Skilled management and team philosophy is essential
· Process
· Identify and prioritise the activities and how long each task will take to do
· Identify which activities must be done before others
· EST ­ identify earliest start time
· LFT ­ identify latest finish time
· Identify the float ­ tasks which can be completed outside the critical path
· Identify the critical path ­ points connecting ESTs and LFTs (where these are the same)…read more

Slide 5

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Controlling Operations
· Stock Control
· Stock refers to products that the business has produced but have not been sold
· They incur the following costs: - Storage costs Depreciation costs - Administration cost
· There is also an opportunity cost of holding stocks, when a business is holding their products as stock they are
not earning any revenues on them and are incurring costs. Businesses keep stocks to ensure they have enough
products to meet customer demand
· Buffer Stocks the minimum level of stock a business wants to hold at any one time. These are additional stocks
which allow a business to cope with unplanned changes in demand
· Lead time This measures how long it takes to for an item to arrive once its ordered. By keeping stocks a
business means it is less vulnerable to changes in lead time
· Maximum stock levels This is the greatest amount of stock that a business is able to hold
· This depends on: - The amount of space a business has - The opportunity cost of holding stocks
· Stock rotation: Stock rotation organises stocks so the oldest products are used first
· This is used in supermarkets where they put the new stock behind the old stock on the shelves
· Stock wastage: Stock rotation aims to decrease stock wastage If too much stock is held some may go off
causing wastage for the firm
· This is a specific problem for perishable goods
· Quality Control: Quality control is the process of ensuring that products have standard or uniform quality. It
aims to reduce any problems before a product reaches the end of the production cycle. All employees have to
be committed to controlling the quality for it to be effective
· One form of quality control is TQM (Total Quality Management)
· Features of TQM:
· - Quality Circles ­ Workers meet to discuss issues relating to quality in the business, this can also act as a
motivator to employees that are involved
· - Zero defects ­ these are systems that make sure no products leave the business with defects
· - Statistical Process Control ­ this describes statistics which are generated to enable the business to evaluate
their quality procedures
· Quality Assurance: This looks at guaranteeing all stages in the production process leading to high quality
products. The emphasis is on preventing mistakes.
· Self checking is a key part of quality assurance. Self checking is where workers check their own work…read more

Slide 6

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Government Regulations (UK)
· The UK government have a number of regulations and standards regarding quality
· These include: ISO ­ISO 9000 and ISO 14000.These are quality standards business have to adhere to
· British Standards Institution (BSI) ­ The Kitemark and the CE mark are both important standards of quality.
· Impact of ICT on Operations
· ICT has an impact on operations within a business
· CAD and CAM are used for design and manufacture
· CAD ­ computer aided design uses computers to help in the production of designs, drawings and data to be
used in manufacturing
· CAM ­ computer aided manufacture uses computers to support manufacturing processes
· These can lead to less waste in production
· ICT and Communications
· ICT can speed up communications within a business reducing the impact of diseconomies of scale
· The use of email, intranet and faxes can ensure that information can get round a firm more easily
· Spreadsheets and databases allow information to be processed more quickly
· ICT and Employment
· The increase in the use of ICT has lead to an increase in tele working
· Tele working is where people work from home
· Due to the increase in tele working and the impact of ICT
· ICT and Location
· Due to the increase in tele working and the impact of ICT many firms do not need to be linked to a specific
· This can reduce costs as firms locate away from expensive city centres or locate in areas where there is
cheaper labour
· Problems with ICTT
· he use of ICT is dependent on:
· - Staff being trained and having the appropriate skills
· - Compatibility across ICT systems
· - How the information is used…read more

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