Chapter 23

1. Chapter 23 Making operational decisions

2. Operations management • operations management: the process that uses the resources of an organisation to provide the right goods or services for the customer. • In the context of the above definition, ‘right’ means ‘what the customer wants’. • It may mean quality and price to one customer, but convenience and flexibility to another.

3. Identifying operations issues • Customers have many requirements, so operations management looks at a variety of issues. In the AQA AS Business Studies course it looks at: • location (Unit 1) • resources to use and converting them into outputs (Unit 1) • capacity utilisation • organising stock control • quality • customer service • working with suppliers • using technology

4. Operational targets • operational targets: the goals or aims of the operations function of the business. • A business that achieves its operational targets would be described as ‘operating efficently’. This efficiency may mean low costs or high quality etc. • Three examples of operational targets are: • unit costs • measures of quality • capacity utilisation

5. Unit costs • unit cost: the cost of producing 1 unit of output. • unit cost = total cost units of output • The unit cost is also known as the average cost (AC) or average total cost (ATC). • The target for a business is to achieve low unit costs. • Example: • A business produces 10 units of output at a total cost of £70. • average (or unit) cost = £70/10 = £7

6. Unit costs: calculations • Based on the data above, calculate the unit costs of products A to D. • Assuming these products are of the same quality, which product is manufactured most efficiently?

7. Unit costs: answers • Order of efficiency: B – D – C – A

8. Measures of quality • Quality is defined as ’those features of a product or service that allow it to satisfy (or delight) customers’. • Because ‘quality’ depends on people’s opinions, there will be different views on what is meant by quality. • What measures of quality would you use for a business? • Hint: they must be measurable! • Some examples of measures of quality and a brief comment on the logic behind their use are provided on the following two slides. How do yours compare?

9. Examples of measures of quality (1) • Note that this is just a sample of quality measures — a good quality measure will be geared towards the specific needs of the individual firm. • Customer satisfaction ratings • A survey of customers can reveal customer opinions on a numerical scale (e.g. 1–10) or using qualitative measures (e.g. excellent — very good — good — etc.) • As the purpose of a product/service is to satisfy the needs of the customer, this is an excellent way of measuring whether quality has been achieved. • Customer complaints • This calculates the number of customers who complain (it is sometimes measured as a percentage of the total number of customers). • Although this might seem to be a negative approach, it is a good way of measuring whether a company has problems that it needs to solve.

10. Examples of measures of quality (2) • Scrap rate or wastage rate • This calculates the number of items rejected during the production process as a percentage of the number of units produced. • This will show the business whether its production methods are working effectively, guiding it towards areas that might need improvement. • Punctuality • This calculates the degree to which a business delivers its products (or provides its services) on time. It is often measured as a percentage: punctuality = deliveries on time × 100 total deliveries • This measure is used by many businesses, especially those involved in transporting goods (e.g. haulage firms) or customers (e.g. rail franchises).

11. Using quality measures: question • Based on the data below, decide which company is providing the best quality and which one is providing the lowest level of quality for its customers.

12. Using quality measures: answer (1) • Rank order of firms for each quality measure: • Worst performer • Firm C has the lowest ranking in all four categories and is clearly the worst performer.

13. Using quality measures: answer (2) • Best performer • Firms A, B and D all average second place, so a case could be made for each one. • Factors to consider: • the quality measure(s) deemed most important by customers • the quality measure(s) deemed most important by the firm • the numerical difference in ratings (e.g. B has a much higher rating for customer satisfaction than A, but is only slightly behind A on delivery times) • (It could be argued that the first column is the crucial one because it measures the overall view of customers.)

14. Capacity utilisation: key terms • capacity: the maximum total level of output or production that a business can produce in a given time period. A company producing at this level is said to be producing at full capacity. • capacity utilisation: the percentage of a firm’s total possible production level that is being reached. If a company is large enough to produce 100 units a week, but is actually producing 92 units, its capacity utilisation is 92%. • under-utilisation of capacity: when a firm’s output is below the maximum possible. This is also known as excess capacity or spare capacity. It represents a waste of resources and means that the organisation is spending unnecessarily on its fixed assets. • capacity shortage: when a firm’s capacity is not large enough to deal with the level of demand for its products. This means that certain customers will be disappointed and sales will be lost.

15. Calculating capacity utilisation • capacity utilisation: the extent to which the company’s maximum possible output is being reached. • capacity utilisation (%) = actual output per annum (month) × 100 maximum possible output per annum (month) • Example: a company can produce 5,000 units but is actually producing 3,800 units. • Capacity utilisation is: • 3,800 × 100 = 76% 5,000

16. Spare capacity • In the previous example, the company could increase production by 1,200 units or 24% of 5,000 units. This is known as its spare capacity. • There is no one ideal target percentage, but many people believe that 90% capacity utilisation is a sensible target. • At 100% there is no scope for maintenance and repair, to respond to sudden orders, or to deal with emergency situations that may occur. • Thus firms like to have some spare capacity. • BUT…spare capacity means ‘unused’ resources and higher fixed costs per unit.

17. Managing capacity utilisation • In terms of capacity utilisation, there are two types of situation that a firm needs to manage: • under-utilisation of capacity (also known as excess capacity or sparecapacity) • capacity shortage • Spare capacity is the more normal situation. What causes it?

18. Causes of spare capacity (under-utilisation of capacity) • new competitors or new products entering the market • fall in demand for the product • unsuccessful marketing • seasonal demand • over-investment in fixed assets

19. Disadvantages of spare capacity • Firms have a higher proportion of fixed costs per unit. • These higher costs will lead to either lower profit levels or the need to increase price to maintain the same profit levels, and therefore to lower sales volume. • Spare capacity can portray a negative image of a firm, suggesting that it is unsuccessful. • With less work to do, employees may become bored and demoralised, lowering their motivation and efficiency.

20. Advantages of under-utilisation • Spare capacity means that there is more time for maintenance and repair of machinery, for training and for improving existing systems. • There may be less pressure and stress for employees, who may become overworked at full capacity. • Under-utilisation allows a company to cope with a sudden increase in demand.

21. Achieving full or high capacity utilisation • Methods include: • increasing marketing to boost demand • lowering price • rationalisation — improving efficiency by cutting the scale of operations. This reduces the capacity of a firm and so increases capacity utilisation.

22. Ways of reducing capacity • Methods include: • selling off all or a part of its production area • changing to a shorter working week or shorter day • laying off workers • transferring resources away from an area of the business (e.g. moving workers away from a branch with low capacity utilisation)

23. Managing capacity shortage • If there is a shortage of capacity, the firm will try to increase its capacity. • Ways of increasing capacity include: • building or extending factories/plants • asking staff to work overtime or longer hours • recruiting more temporary or part-time staff • hiring new full-time staff • subcontracting

24. Subcontracting • subcontracting: when an organisation asks another business to make all or a part of its product. • Many businesses use subcontracting as a way of reducing capacity utilisation problems. • By asking other firms to supply goods, the original firm can increase supply to match demand without needing to increase its own factory size. • It can then reduce the amount of work that it subcontracts if it needs to cut output.

25. Advantages of subcontracting • Businesses can react to changes in demand more quickly if they have access to a number of different firms’ production plants. • Subcontractors may be more specialised and therefore more efficient in a particular activity. • Subcontracting lets a firm focus on its core business and helps it to avoid becoming involved in activities in which it is less competent. • A one-off (non-standard) order can be given to a subcontractor so that the business benefits from the order but suffers no disruption to its normal production.

26. Disadvantages of subcontracting • Quality is no longer directly under the firm’s own control. • Excessive subcontracting erodes a company’s operations base and its ability to initiate research. • The subcontractor wants to make a profit, so it is possible that it will be more expensive to subcontract. • Subcontracting may require a firm to give confidential information to a supplier, such as details of its methods and patents.

27. Stock control and capacity utilisation • stock control: the management of levels of raw materials, work-in-progress and finished goods to reduce storage costs, while still meeting the demands of the customer. • Stock control can overcome capacity utilisation problems: • Holding high stock levels enables a business to release additional products on to the market when demand increases. • During periods of low demand, the level of stocks can be replenished by producing more than is being demanded.

28. Dealing with non-standard orders • non-standard orders: a business decision relating to a one-off contract. • Often the non-standard order requires a response to a request to supply a fixed quantity of a product at a particular price (invariably a lower price than usual). • A decision on a non-standard order will be taken primarily on the basis of its financial consequences, but the firm will also need to look at the impact on the functional aspects of the firm, such as operations.

29. Non-standard orders:operational factors • the level of spare capacity available • the scope for subcontracting • the impact on costs • is there potential for future (profitable) orders? • the effect on staff morale

30. Chapter 24 Developing effective operations: quality

31. Quality • quality: those features of a product or service that allow it to satisfy (or delight) customers. • Quality is subjective — a matter of personal opinion — and views of it will vary from individual to individual. • Think of a product and list five ways of measuring the quality of that product.

32. Some measures of quality • Possible measures of quality are listed below (like quality itself, these measures are subjective): • appearance • reliability and durability • functions (added extras) • after-sales service • brand/image/reputation • environmental friendliness • How do these compare with your list? Why are there differences between your list and this list?

33. Benefits of quality to a business • increase in sales volume • creating a unique selling point (USP) and enhancing the firm’s reputation • greater scope for increasing the selling price • pricing flexibility, as customers will want to buy the product even if price is changed • possible reduced manufacturing cost and reduced wastage if high-quality materials and processes improve the efficiency of the production process

34. Issues involved in introducing and managing a quality system • Costs. Quality procedures require a great deal of administrative expense to set up and monitor. • Training. This can be a major issue in the introduction of a new quality system, as a system of quality assurance relies on a well-trained workforce that is able to understand and implement the quality system that the business uses. • Disruption to production. In the short run, the training programme provided can be quite disruptive to existing production methods.

35. Distinction between quality control and quality assurance • Quality control • This is a system that uses inspection as a way of finding any faults in the good or service being provided. • Inspectors are employed to check the accuracy of completed work. • Quality assurance • This is a system that aims to achieve or improve quality by organising every process to get the product ‘right first time’ and prevent mistakes ever happening. • Quality assurance concentrates on the process of production. The idea of self-checking is crucial to quality assurance.

36. Quality control: benefits • Inspection at the end of the process can prevent a defective product reaching the customer, thus eliminating a problem with a whole batch of products. • It is a more secure system than one that trusts every individual to do his or her job properly, particularly if workers want to avoid responsibility. • Inspectors may be highly skilled in detecting problems and may spot quality problems that are being repeated by different workers.

37. Quality control: problems • By placing responsibility for quality failures on the inspector, quality control does little toencourage individuals to improve the quality of their output. • Employing an inspection team is an expense that could be viewed as unnecessary if the products are produced ‘right first time’. • Giving workers responsibility for their own work helps to increase the interest, variety and responsibility of their job, and thus helps to motivate them.

38. Quality assurance: benefits • Ownership of the product or service rests with the workers rather than with an independent inspector, giving them greater responsibility. • Theorists such as Herzberg argue that the responsibility will motivate workers. • Costs are reduced because there is less waste — any faults are discovered during the process. • Because an individual will not want to be blamed for a faulty product, each worker checks what he or she receives, reducing the possibility of a faulty product.

39. Systems of quality assurance: TQM • The most widely recognised quality assurance system is total quality management, often known as TQM. • TQM is a culture of quality that involves all employees of a firm. • Key features of TQM are: • The quality chain. Each person involved in production treats the receiver of their work as if they were an external customer. • ‘Right first time’. Employees aim for defect prevention rather than detection. • All staff share a commitment to continuous improvement. • Partnerships are built with suppliers. • Staff are educated and trained to take responsibility for their own quality. • Employees are encouraged to take pride in their work.

40. Kaizen • The Japanese philosophy of kaizen has given rise to quality systems based on continuousimprovement. • Kaizen (or ‘continuous improvement’) is a policy of implementing small, incremental changes in order to achieve better quality and/or greater efficiency. These changes are invariably suggested by employees and emanate from a corporate culture that encourages employees to identify potential improvements.

41. Quality standards • ISO 9001: the international standard of quality assurance that is equivalent to BS 5750. • BS 5750: a British Standards award granted to organisations which possess quality assurance systems that meet the standards set. • These standards aim to increase quality throughout an organisation. Firms must show that they have quality systems that cover the quality of their working methods, services and processes as well as the quality of their products.

42. Benefits of quality standards • Marketing advantages from having ‘proof’ of high quality standards. • Assurance to customers that products meet certain standards. Some organisations insist on these awards before agreeing to trade with a firm, as this helps to guarantee the quality of their supplies. • Greater employee motivation from the sense of recognition. • Financial benefits from the elimination of waste and the improved reputation of the firm.

43. Chapter 25 Developing effectiveoperations: customer service

44. Customer service • customer service: the overall activity of identifying and satisfying customer needs and the delivery of a level of service that meets or exceeds customer expectations. • customer expectations: what people think should happen and how they think they should be treated when asking for or receiving customer service. Higher expectations among customers mean that better customer service must be provided. • customer satisfaction: the feeling that the buyer gets when he or she is happy with the level of customer service that has been provided and the degree to which customer expectations have been met.

45. What do customers want? • Customers do not always want the same service from a business. • Consequently, most businesses use their own measurements of customer satisfaction, to make it relevant to their own customers. • A survey by the Institute of Customer Service (ICS) found that customers had ten top priorities that affected customer satisfaction. • Remember: you are all customers! • Make a list of five factors that you believe would fit into the top ten. • See whose list is closest to the results of the ICS survey on the next slide.

46. Calculating your score • Score 10 marks if you had the number one factor, 9 marks for the second most important factor… down to 1 mark for the tenth factor. • Customer priorities/expectations were: • Quality of the product or service 10 marks • Friendliness of staff 9 marks • Efficiency in dealing with problems/complaints 8 marks • Speed of service or delivery 7 marks • Helpfulness of staff in general 6 marks • Effectiveness in handling enquiries 5 marks • Extent to which customers felt ‘valued/important’ 4 marks • The competence of staff in completing their tasks 3 marks • The ease with which the transaction was completed 2 marks • The extent to which the customer was kept informed 1 mark

47. Other findings of the ICS survey • Service businesses (e.g. hairdressers and decorators) and professional services (e.g. architects) are best at satisfying customers. • The public sector and utilities (e.g. electricity suppliers) bring up the rear. • The survey also highlighted the importance of employee satisfaction. Typically, the more satisfied employees are, the more highly motivated they are to provide a good service. This leads to a higher level of customer satisfaction.

48. Methods of meeting customer expectations • Customer expectations can be met through a series of stages: • Stage 1: Conduct market research to find out customer expectations so that customer service targets the right factors. • Stage 2: Introduce relevant training in customer service into the organisation so that the workforce can meet and surpass customer expectations. • Stage 3: Set up quality procedures and set quality standards so that the organisation is geared towards the needs of its customers. • Stage 4: Monitor performance against these standards so that high quality and good customer service are maintained.

49. Meeting customer expectations through market research • The standard for ‘quality’ is set by the customer, who is therefore the best place to start. • Primary market research can be used to get comments from consumers. • Secondary market research can help a firm to discover successful measures used by other businesses. • The Department for Business, Enterprise and Regulatory Reform (BERR) can provide data on the factors and features that are most valued in the marketplace. • Other sources of secondary market research are surveys such as the UK Customer Satisfaction Index and the annual CompariSat survey provided by FDS International.

50. Meeting customer expectations through training • A look at the top ten factors shows how many depend on the quality of the employees. Training helps employees to be good at their jobs. • Companies often provide specific training in customer care. • Vocational qualifications in customer care help employees to improve customer service.