3.4.3 Making operational decisions to improve performance: increasing efficiency + productivity

Few products have completely predictable sales - fine balance between using factory capacity fully + efficiently, + having room to meet unexpectedly high orders.

Vital to have sufficient spare capacity to cope w/ higher demand while keeping max capacity low enough to keep costs down.

Fixed costs fixed in relation to output. Whether capacity utilisation 50% or 100%, fixed costs the same. Don't change in total as output changes, means do change per unit of output/demand. 

CU important as it has opposite effect on fixed costs per unit. When utilisation high, fixed costs spread over many units. Cuts cost per unit - enables producer either cut prices to boost demand further/enjoy large profit margins. If CU low, fixed costs per unit high. 

Ideal level of CU near 100%. Spreads fixed costs thinly as possible - boosts profit margins. 2 key concerns about operating at max capacity for long:
 - if demand rises further, have to turn it away, giving competitors business
 - struggle to service machiner + train/retrain staff. May prove costly in long term + will increase chances of production breakdowns in short term

Increase in demand - demand could be boosted by extra promo spending etc. If doubling sales needed, unlikely existing product will have whole answer. Could launch new products - could be highly effective, implies LT planning + investment.

Cut capacity - May be done by eg cutting out night shift. Would avoid disruption + infelxibility caused by alternative (move to smaller premises). Moving will enable all fixed costs to be cut, but may look bad if 6 months later demand has recovered to 6,000 units when new factory capacity only 5,000.

How to decide best option: - key factor - underlying cause of low utilisation. May be result of known temp demand shortfall. May be due to economic recession, may hit demand for 18-24 months. Could me mistake in long run to cut capacity. Firm faces huge short-term losses from excess fixed costs, may have to forget future + concentrate on ST survival.

Means labour costs form high % total costs.

Low financial barriers to entry as cheap to start up production.

Makes necessary for management to focus on cost of labour.

Has adv of being highly flexible, making it possible for small firm to operate successfully w/o direct comp from large one.

Large % total costs tied up in fixed costs of purchasing + operating machinery.

High financial barriers to entry.

May be able to keep producing in high-cost country b/c labour costs such small proportion of total costs.

Can be inflexible, both in terms of switching from one product to another, + in ability to tailor a product to an individual customer.

3 main targets focused on operations managers:
 - quality targets
 - cpacity utilisation targets
 - unit costs

Optimum mix between them best compromise that can be found - may mean none of 3 targets met at its ideal point. Start by choosing degree of automation they think they require, where on spectrum between absolute labour-intensive + absolute capital-intensive production, then actual level of CU will kick in. 

Ideally, production mix should mean compromise between cost efficiency + ability to respond flexibly to changing customer requirements.

Automated stock control systems

Computer-aided design (CAD)

3D printing

Modern SCS based on laser scanning of bar-coded info. Ensures computer knows exact quantity of each product/size/colour has come into stockroom. Retail outlets, laser-scanning till is used to record exactly what's been sold. Allows store's computer to keep up-to-date records of current stocks of every ite,. Data can enable buyer to decide how much extra to order, or electronic link w/ supplier can re-order automatically.

Info held in database. Easy for firm to carry out aged stock analysis: computer provides printout showing stock in order of age.

Now affordable + hugely powerful. Can show 3D version of drawing + rotate to show back + sides. CAD system works digitally, allows designs to be saved, changed + reworked w/o starting from scratch.

Eg multinationals eg Sony, product can be designed in Tokyo, sent electronically to offices in USA + Europe for local designers to tweak work to make better suited to local tastes. When work behind schedule, designers in Tokyo can pass design to London at end of Japanese working day - then design can be sent to America. Time differences mean 24 hour working can be kept up.

Benefits:
 - data generated by CAD system linked to CAM to provide highly accurate production
 - hugely beneficial for businesses that are unique, yet based on common principles
 - improves productivity of designers + also helps them to be more ambitious

Can make 3D solid objects of almost any shape from digital design/model. LAyers material to build up shape. Enables business to print prototype of new car part/false tooth/high heeled shoe. Makes prototyping cheaper. Costs around £3,000 + would provide scope to make hundred of different prototype designs.

Industrial robots fundamental to car industry + are becoming increasingly important in production. Nevertheless, remains surprise that robots not become more powerful force in industry.

In Britain, fewer than 50 robots per 10,000 workers.

Japan, 500 robots per 10,000 manufacturing workers.

Electronic data interchange (EDI) - permanent link between computers on different sites, enabling sppecified types of data to be exchanged. By establishing an EDI link firms can ensure latest info available instantly to other branches  of business, or to other businesses.

Output per employee important measure of performance. Direct impact on cost of producing a unit. If productivity increases (+ wages unchanged), labour cost per unit falls. 

W/ low labour costs, firm likely to be in better competitve position.

By increasing productivity, firm can improve competitiveness. Can either sell products at lower price or keep price as it is + have higher profit margin. This is why firms constantly monitor productivity relative to competitors + try to increase it. 

However, need to make sure quality doesn't suffer. May be necessary to set both productivity + quality targets.

Increase investment in modern equipment - investing in this improves output per worker. Would improve individual companies' competitiveness + helps boost country's economic growth.

Improve ability level to those at work - Skilled, well-trained workforce likely to produce more + make fewer mistakes. Finish tasks quicker w/o supervision/advice. Able to solve own work-related problems, may be in better position to contribute ideas on how to further increase productivity. But firms reluctant to invest in training as employees may leave - skill goes to competitors. Danger training won't provide sufficient gains to justify initial investment - spending in this area needs to be properly researched + costed. Elaborate training may not be necessary. Good reputation brings best people.

Improve employee motivation - Herzberg - most people's idea of fair day's work less than half what they can give. Key to success to design jobs contained motivators to help employees give more. Motivated sales force may achieve twice sales level of unmotivated one. Overall business performance boosted.

Role of management - perhaps key management role to identify increasing productivity as permanent obj. In many firms, productivity not direct target. Focus mainly on production instead, as ensures customers orders are fulfilled. Operations manager faced w/ 10% increase in orders may ask workforce to do overtime. Harder to reorganise workplace to make production more effective. Managers whose main focus is on ST, therefore think of production not productivity. Productivity been weak in Britain since 2007 - if this continues, economic recovery will stall.

Boosting productivity when markets are static - of productivity-boosting production method intro'd to business in static market, only on possible outcome: job losses. Better productivity, less people needed to produce units. Staff aware of this, so those working in static markets aware changes to production methods - resist change as fear outcome. LT business needs help to improve productivity, or become uncompetitive. ST worry about income, families etc. Can be difficult to intro productivity-boosting measures.

Creates higher levels of labour productivity, therefore uses less labour.

Requires less stock, less factory space + less capital equipment than mass producer of comparable size; lean producer has substantial cost advs over mass producer.

Creates substantial marketing advs: 1) results in fewer defects, improving quality + reliability for customer. 2) lean production requires half of engineering hours to develop new product - lean producer can develop vast range of products that mass prodicer can't afford to match.

Lean producers reject waste of human talent involved in narrow, repetitive jobs. Believe in empowerment + job enrichment. Problem solving not just left to specialists. Employees trained in preventative maintenance to spot when fault developing + correct it before production line has to stop.

If problem emerges on line, trained to solve it w/o needing engineer or supervisor. Teams meet regularly to discuss way their sections could be run more smoothly.

In mass production system, quality control specialised job that takes place at end of line. Lean system, each team responsible for checking own quality of work. If fault spotted, every worker has power to stop assembly line - prevents errors being passed on. Lean approach - self-checking at every production stafe so quality failures at end.

To achieve lean quality - total quality management (TQM). Attempts to achieve quality through organisation, sp primary objective to ahcieve quality first time. To achieve TQ, managers must 'make quality number 1, non-negotiable priority'.

As consumers more demanding + tech advances, car design - highly complex. Threatens to increase costs + development times. Lean producers combat this by simultaneous engineering.

Means integrated development functions so separate design + engineering stages are tackled at same time. Speeds up development times, cuts costs, reduces risk of early obsolescence. 

Approach to component supply varies greatly from company to company. Mass producers - distant relationships w/ suppliers, based on minimising delivery cost per unit. May buy from several sources to keep up competitive pressure.

Supplier may be secretive about costs + profit margins to prevent buyer from pressing for lower prices. Lean producers work in partnership w/ suppliers. Keep supplier fully informed of new product developments etc.

Means by time assembly line starts running, errors sorted so few running changes/failures. Both parties likely to share financial + sales ingo electronically. Encourages atmosphere of trust + common purpose + aids planning.

No buffer stocks of any type held.
Production to order.
Stock ordered only when needed, just in time.
Zero defects essential as no stock safety net exists.
No 'spare' workers are employed.
Staff are multi-skilled + capable of filling in for absent colleagues.
Used by lean producers.

Advs:
 - improves liquidity
 - costs of holding stocks reduced
 - stock wastage + rotation become lesser issues for management

Disadvs:
 - any break in supply causes immediate problems for purchaser
 - costs of processing orders may be increased
 - purchaser's reputation placed in hands of external supplier

Involves managing time in same way most companies manage costs, quality/stock. Time-based manufacturers try to shorten rather than lengthen production runs in order to reduce costs + increase levels of customer satisfaction. Manufacturers invest in flexible capital: machines that can make more than 1 model. Training seen as priority as staff must be multi-skilled.

TBM 5 benefits:
 - reducing lead + set-up times, productivity improves, creates cost-adv
 - shortening lead times cuts customer response times, increasing consumer satisfaction as receive orders sooner
 - lower stock holding costs: short lead + set-up times - more responsive firms to changes in market. Should be less need for long production runs + stockpiles of finished product. If demand inreases suddenly, can be quickly restarted
 - ability to offer consumer more varied product range w/o losing cost-reducing economies of scale. Makes market segmentation much cheaper strategy to operate
 - keeping time under control helps achieve first mover adv if can get new product out before rivals get theirs to market