OPERATIONS MANAGEMENT
4.1. Production of goods and services
What resources would you need to manage effectively to ensure the
smooth production of your goods?
● Raw Materials
● Supplier Relationships
● Inventory Management
● Labor
● Tools and Equipment
● Workspace
● Financial Resources
● Quality Control
● Waste Management
Operations management
Involves managing business resources (input) throughout the production process to
produce finished goods or services (output) to be able to be sold.
Production vs Productivity
Production is the process of converting raw materials into goods or services.
Productivity is how efficient an employee is and how much output they can
produce.
Labour productivity
How to measure labour productivity
Labour productivity = Total output / number of production employees
,Example:
Original = 100 units, 5 employees
1 employee = $6, so 5 employees = $30
1 unit = $0.30
*INCREASING PRODUCTIVITY *
Improve 1 = 125 units, 5 employees
1 employee = $6, 5 employees
1 unit = $0.24
How to improve labour productivity
● Improving skills of employees
Will reduce the number of mistakes made by employees if given more training
and education.
● Improving motivation of employees
Will make employees more willing to produce more output, which in return
improves the business’s productivity.
● Introducing more automation and more or better technology
Will improve the efficiency of a business.
● Improving the quality of management decisions
Will increase employees’ motivation and ensure that resources are used
efficiently.
Benefits of improving a business’s efficiency
Can reduce waste across its organisation, which often leads to higher profits, a
happier and more productive staff, and more satisfied customers. Increases product
margin for each product made.
Why businesses hold inventory
1. The production process needs raw materials or components. If these are not
available when required then the process must stop. Employees and
machinery will stand idle and there will be a loss of output.
2. If the business does not have finished goods in stock, then customers’ orders
cannot be met and the business will lose sales. This could result in the loss of
current and future sales, affecting both the short-term and the long-term
profitability of the business.
, 3. Businesses often benefit from economies of scale when they buy inventories
in large quantities because they receive a discount from the supplier. The
supplier may not offer discounts for smaller quantities.
Costs of holding inventory
● Warehousing costs
Business will need to rent / purchase warehouse for storing inventory
● Handling costs
Inventory needs to be able to move in and out of warehouse
● Shrinkage costs
Damaged, lost, or stolen items will need to be replaced
● Insurance costs
Will cover the cost of losses from shrinkage
● Obsolescence
Business may not be able to sell out-of-date goods
● Opportunity cost
💀
Working capital is ‘tied-up’ in inventories which could be used more profitably
by the business; best alternative forgone
Lean production
Philosophy that reduces the amount of a business’s key resources within production.
E.g. Reducing the amount of time, money, people, or materials needed within the
production process.
Methods of lean production
★ Kaizen
Aims to increase efficiency and reduce wastage by getting workers to get
together in small groups and discuss problems and suggest solutions.
Benefits of using kaizen production method:
● increased productivity
● reduced amount of space needed for production
● improved factory layout may allow some jobs to be combined, so
freeing up employees to do other jobs in the factory
4.1. Production of goods and services
What resources would you need to manage effectively to ensure the
smooth production of your goods?
● Raw Materials
● Supplier Relationships
● Inventory Management
● Labor
● Tools and Equipment
● Workspace
● Financial Resources
● Quality Control
● Waste Management
Operations management
Involves managing business resources (input) throughout the production process to
produce finished goods or services (output) to be able to be sold.
Production vs Productivity
Production is the process of converting raw materials into goods or services.
Productivity is how efficient an employee is and how much output they can
produce.
Labour productivity
How to measure labour productivity
Labour productivity = Total output / number of production employees
,Example:
Original = 100 units, 5 employees
1 employee = $6, so 5 employees = $30
1 unit = $0.30
*INCREASING PRODUCTIVITY *
Improve 1 = 125 units, 5 employees
1 employee = $6, 5 employees
1 unit = $0.24
How to improve labour productivity
● Improving skills of employees
Will reduce the number of mistakes made by employees if given more training
and education.
● Improving motivation of employees
Will make employees more willing to produce more output, which in return
improves the business’s productivity.
● Introducing more automation and more or better technology
Will improve the efficiency of a business.
● Improving the quality of management decisions
Will increase employees’ motivation and ensure that resources are used
efficiently.
Benefits of improving a business’s efficiency
Can reduce waste across its organisation, which often leads to higher profits, a
happier and more productive staff, and more satisfied customers. Increases product
margin for each product made.
Why businesses hold inventory
1. The production process needs raw materials or components. If these are not
available when required then the process must stop. Employees and
machinery will stand idle and there will be a loss of output.
2. If the business does not have finished goods in stock, then customers’ orders
cannot be met and the business will lose sales. This could result in the loss of
current and future sales, affecting both the short-term and the long-term
profitability of the business.
, 3. Businesses often benefit from economies of scale when they buy inventories
in large quantities because they receive a discount from the supplier. The
supplier may not offer discounts for smaller quantities.
Costs of holding inventory
● Warehousing costs
Business will need to rent / purchase warehouse for storing inventory
● Handling costs
Inventory needs to be able to move in and out of warehouse
● Shrinkage costs
Damaged, lost, or stolen items will need to be replaced
● Insurance costs
Will cover the cost of losses from shrinkage
● Obsolescence
Business may not be able to sell out-of-date goods
● Opportunity cost
💀
Working capital is ‘tied-up’ in inventories which could be used more profitably
by the business; best alternative forgone
Lean production
Philosophy that reduces the amount of a business’s key resources within production.
E.g. Reducing the amount of time, money, people, or materials needed within the
production process.
Methods of lean production
★ Kaizen
Aims to increase efficiency and reduce wastage by getting workers to get
together in small groups and discuss problems and suggest solutions.
Benefits of using kaizen production method:
● increased productivity
● reduced amount of space needed for production
● improved factory layout may allow some jobs to be combined, so
freeing up employees to do other jobs in the factory
