Ten things you need to know about Operations - Business Review

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back to basics
5 Quality management 8 Time-based
Ten things you need to know about
The procedures and culture relating to quality, established management
over time by management.
Example: after encountering consumer resistance to its Focusing management thinking on time as a key business
unknown brand name, car company Kia offered a 7-year resource.
warranty against the 3 years offered by rivals. It then had to Example: in September 2013 Microsoft announced that
establish the production systems to ensure that the promise the Xbox One would be launched 1 week before the
proved inexpensive. Playstation 4. Being first to market clearly matters to
Advantage: a quality culture is the best way to ensure games console producers
affordable, consistently high quality, i.e. all staff pursue Advantage: if operational efficiency enables one firm to
quality without even thinking about it. produce more quickly than another, this adds value to the
Disadvantage: procedures such as quality assurance can customer experience, e.g. 1-hour dry-cleaning.
be overly bureaucratic -- a way of covering up faults rather Disadvantage: focusing too much on time might cause a
than preventing them. shortfall in meeting other objectives such as cost or staff
1 Capacity utilisation Ian Marcousé provides a framework of
ten key operations concepts that you can
Measuring the extent to which actual output makes use of a
firm's maximum capacity.
base your revision around 6 Service
Example: at full capacity, Airbus is capable of producing four
A380 aircraft a month. If actual production is three aircraft, 3 Lean production
Providing customers with the level of support they require
before, during and after purchase. 9 Economies of scale
its capacity utilisation would be 75%, i.e. 25% underutilised.
Example: clothes shop staff being honest about how well a
Advantage: shows what the interaction of supply and garment fits a client. Factors that cause average costs to be lower as the scale of
The attempt to squeeze waste out of a business, thereby
demand means to a single business. operation increases.
reducing the cost and carbon footprint. Advantage: a customer who feels well served will repeat
Disadvantage: the desire to make full use of capacity can the purchase decision. Example: technical economies stemming from automation
Example: a bakery making 40 doughnuts a day (and
tempt firms to be too active in short-term sales promotions can cut labour costs per unit as long as output levels are
throwing away 30 unsold ones each week) decides to make Disadvantage: sometimes companies provide too much
that may damage long-term corporate image. sufficiently high.
25 each morning and produce more in the afternoon if service, irritating customers despite having good intentions.
demand is sufficiently high. Advantage: if economies of scale kick in (as with the
production of consumer electronic items such as iPhones)
Advantage: reducing waste can lead to fresher products, as
high sales are enriched by ever-higher profit margins.
buffer stocks are minimised.
Disadvantage: lean production inevitably leads to shorter 7 Design mix Disadvantage: many businesses assume that growth
will lead to economies of scale, without appreciating that
2 Supply chain production runs, which can result in higher unit costs.
The design mix shows the need to balance three critical
diseconomies of scale are at least as powerful an effect of
management factors: aesthetics (appeal to the senses), function (does it
4 Productivity work?) and economic manufacture.
Example: when designing a new iTV, Apple would prioritise
The sequence of suppliers and producers that starts with its look and its functions, seeing economic manufacture as
raw materials and ends up with a product in a customer's The efficiency with which inputs are turned into outputs, less of an issue because Apple can charge a price premium
hand. such as output per worker. for the product. 10 Diseconomies of
Example: beer starts with raw barley, hops and water. Example: if a factory producing 4,000 units a day has 25
Having gone through the brewing process it is left to mature workers, their productivity is 4,000/25 = 160 units per
Advantage: the mix can be shown diagrammatically,
making it easier to discuss the right balance and priorities. scale
in tanks before being bottled, transported to wholesalers worker.
Disadvantage: in
and then transported again to retailers. Advantage: productivity is a key element in unit costs. The the hands of weak Factors that cause average costs to rise as the scale of
Advantage: if a business has a full understanding of its higher the productivity the lower the labour cost will be per managers there operation increases.
supply chain it can identify parts that fail to add value and unit. is a temptation
Aesthetics Example: when Supergroup (owner of Superdry) grew
should therefore be eliminated. Disadvantage: boosting productivity through automation to treat each of rapidly in 2010 and 2011, it found that it needed a greater
Disadvantage: some companies see the supply chain as a can prove a mistake because machinery is inflexible, so if the three factors percentage increase in head office staff than the percentage
fact of life, whereas they should be wondering what could demand falls for Product X it is often easier to switch staff equally. increase in sales. This hit average costs.
be improved. to Product Y than it is to replace machinery.
Advantages: the advantage comes from anticipating the
inevitable cost pressures from growth. Bulk buying benefits
are an exception among many other costs that increase per
unit sold.
Economic Disadvantages: diseconomies of scale often kick in when
Function manufacture one company buys another. This can wreck the synergies
anticipated from the merger.
16 Business Review February 2014 17


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