Introduction to Operations Management CHAPTER 1. What is Operations Management?
A2 Operations Management
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Transcript of A2 Operations Management
Focus of subject:
This section will look at regional and international location of business
It will link with the accounting and finance module as break-even and investment appraisal accounting methods will be used to make location decisions in addition to qualitative factors
Location
When setting up, businesses will usually look to locate in the least-cost site, to allow lower prices to be charged for their goods
Other factors may come into the consideration such as the reputation of the company related to its location
Student activity
Think of as many factors as you can that may influence where a business decides to locate. Briefly discuss this with the person next to you.
Factors determining the location of businesses
1. Costs of factors of production Wage levels vary between regions, more expensive the nearer to
London Availability of skilled workers Land costs
2. Resources Location of raw materials, very important for primary industries, Location of suppliers (JIT), Special requirement e.g. airports need large areas of flat land
Factors determining the location of businesses (contd..)
3. Infrastructure network of utilities, such as transport links, sewerage,
telecommunication systems, health service and educational facilities Transport links - moving raw materials and finished goods, workers
getting to work
4. The market Where they sell their goods to the consumer. Customers demand convenience and easy access Transport costs lower if close to market
Factors determining the location of businesses (contd..)
5. Government intervention The UK government, in line with EU policy, provides assistance to
areas of low economic activity and high unemployment The Gov.. provides grants to firms to set up in these assisted areas e.g. Nissan locating in Sunderland
Additional reading: AQA textbook Pg.. 305 - 306, DTI web-site
6. Qualitative factors e.g. where the owners live, the quality of life in the area
Questions to consider
Why do you think Dixons closed many of its inner city stores and moved to out-of-town locations in April 2004?
Why may a company such as Rolls Royce decide to keep its engine production facilities in UK rather than moving overseas?
Why do Governments provide grants to businesses for locating in certain areas?
Why does the clothes retailer Zara continue to produce most of its clothes in Europe rather than in a country with low wage levels?
Why do fashion houses choose to locate in the cities of Paris, Milan and London when the land cost is expensive?
Industrial Inertia
The tendency for firms to remain where they are, even though the original reasons for location no longer apply
This can also influence location
Once established firms may be reluctant to relocate
One reason is that firms may benefit from external economies of scale
External economies of scale
Student task using the AQA textbook Pg.. 307 define external economies of scale and list the main types (5 minutes)
Student Activity (15 minutes)
In pairs complete Group exercise Pg. 312 AQA textbook
Task 1: Decide which square you feel is the least-cost site. Work out the cost per unit for both of the assisted areas as well as the ones you feel would be most suitable.
Task 2: Consider other factors that may be important?
This activity clearly demonstrates that transport costs can be very important in location decisions
Recap
Main factors when considering location
1. Costs of factors of production 2. Resources 3. Infrastructure 4. The market 5. Government Intervention 6. Qualitative factors
External economies of scale Recap
The benefits gained by a firm as a result of the concentration of an industry in one location
Main types:
Labour supply with right skills Specialist training Local suppliers and customers Infrastructure geared towards the needs of that industry Reputation of an area allows premium price to be charged
External diseconomies of scale
Firms should be aware of the disadvantages arising from a concentration of firms in one location. These are known as external diseconomies of scale.
Congestion Pollution Shortages of resources - land, skilled labour
Other factors preventing relocation include - poor morale, loss of skills developed in existing workforce, redundancy payments, damage to firms image
Factors influencing international location
All of the factors previously discussed will be considered when making world-wide location decisions. In addition to:
Political and economic stability Exchange rates Local legislation Local culture Demand for product/service Access to free trade areas
Factors influencing international location contd.
There are two more factors of particular importance
Achieving high economies of scale - moving abroad gives firms access to larger markets and often cheaper labour e.g. China
Avoiding protectionism -
Task: Read Page 309 of the AQA A2 textbook and produce notes on protectionism, include the definition of protectionism, types, why its used, the WTO and free trade areas
Location decisions using break-even analysis
Break-even analysis lets a firm see how many units it needs to produce and sell in order to avoid making a loss.
Market research allows a firm to estimate future sales figures when setting up in a new location
Student activity
A restaurant is seeking to set up in a new location. The financial forecasts for setting up and operating the new restaurant are as follows:
Fixed costs: £120,000 Average price: £18 per meal Variable cost per meal: £8
Task:
1. Calculate the restaurant’s contribution per meal and the necessary break-even output for the year, month and each day.
2. Is this realistic to achieve? How might the owners judge if this sales figure is achievable?
Answer
Contribution = Selling price - Variable cost per meal
Contribution = £18 - £8 = £10 per meal
Break-even = Fixed costs / Contribution
Break-even = £120,000 / £10 = 12,000 meals per annum 1,000 meals per month, 33 meals per day
Student activity
Flybe. are wondering whether to set up base in Newcastle or Teeside International Airport.
Using the forecasts given above calculate the break-even point and the margin of safety for each airport to discover which airport Flybe. should locate to.
Answer
Newcastle: BE = £48 million / £12,000 = 4,000 flights MOS = 4,400 - 4,000 = 400 flights
Teeside: BE = £47.3 million / £11,000 = 4,300 flights MOS = 3,800 flights - 4,300 flights = - 500 flights
Therefore Flybe.com should locate to Newcastle Airport. However qualitative factors should also be considered.
Location decisions using investment appraisal
Investment appraisal can be used to see if a location gives a quick payback, yields a high average rate of return, or gives a positive net present value
Investment appraisal will be a more useful approach to aid making decisions on location
Student Activity:
Argos is considering opening a new store in Liverpool Initial cost (year 0) - £800,000
Argos has targets of : Payback - 3 yearsAverage Rate of Return (ARR) - greater than 12% Net Present Value (NPV) - positive based on a 10% discount rate
Is Liverpool a good location based on investment appraisal?
Answer
Payback period = 2 years + (300/360 x 12 months) = 2 years 10 months
ARR =Net return/ Number of years x 100
Initial cost
Annual return = £840,000 / 5 years = £168,000 per annum
ARR = £168,000 / £800,000 x 100 = 21%
NPV =
Therefore when comparing with Argos’ targets the location is a good option using investment appraisal
NPV = £408,600