PRODUCTION AND OPERATION MANAGEMENT - II

Critical Path Analysis CPA (Network Analysis)Critical Path Analysis (CPA) is a project management tool that:

Sets out all the individual activities that make up a larger project. Shows the order in which activities have to be undertaken. Shows which activities can only taken place once other activities have been

completed. Shows which activities can be undertaken simultaneously, thereby reducing

the overall time taken to complete the whole project. Shows when certain resources will be needed – for example, a crane to be

hired for a building site.

In order to construct a CPA, it is necessary to estimate the elapsed time for each activity – that is the time taken from commencement to completion.

Then the CPA is drawn up a based on dependencies such as:

The availability of labour and other resources Lead times for delivery of materials and other services Seasonal factors – such as dry weather required in a building project

Once the CPA is drawn up, it is possible to see the CRITICAL PATH itself – this is a route through the CPA, which has no spare time (called ‘FLOAT’ or ‘slack’) in any of the activities. In other words, if there is any delay to any of the activities on the critical path, the whole project will be delayed unless the firm makes other changes to bring the project back on track.

The total time along this critical path is also the minimum time in which the whole project can be completed.

Some branches on the CPA may have FLOAT, which means that there is some spare time available for these activities.

What can a business do if a project is delayed?

Firstly, the CPA is helpful because it shows the likely impact on the whole project if no action were taken.

Secondly, if there is float elsewhere, it might be possible to switch staff from another activity to help catch up on the delayed activity.

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As a rule, most projects can be brought back on track by using extra labour – either by hiring additional people or overtime. Note, there will be usually be an extra cost. Alternative suppliers can usually be found – but again, it might cost more to get urgent help.

The key rules of a CPA Nodes are numbered to identify each one and show the Earliest Start Time

(EST) of the activities that immediately follow the node, and the Latest Finish Time (LFT) of the immediately preceding activities

The CPA must begin and end on one ‘node’ – see below There must be no crossing activities in the CPA East activity is labelled with its name e.g. ‘print brochure’, or it may be given

a label, such as ‘D’, below. The activities on the critical path are usually marked with a ‘//’

In the example below

The Node is number 3 The EST for the following activities is 14 days The LFT for the preceding activities is 16 days There is 2 days’ float in this case (difference between EST and LFT) The activity that follows the node is labelled ‘D’ and will take 6 days

 

A simple example – baking a loaf of bread

Here is a simple example, in which some activities depend on others having been undertaken in order, whereas others can be done independently.

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Activity Preceded by Elapsed time (minutes) A weigh ingredients - 1 B mix ingredients A 3 C dough rising time B 60 D prepare tins - 1 E pre-heat oven - 10 F knock back dough and place in tins C&D 2 G 2nd dough rising time F 15 H cooking time E & G 40

In this example, there is a clear sequence of events that have to happen in the right order. If any of the events on the critical path is delayed, then the bread will not be ready as soon. However, tasks D (prepare tins) and E (heat the oven) can be started at any time as long as they are done by the latest finish time in the following node.

So, we can see that the oven could be switched on as early as time 0, but we can work out that it could be switched on at any time before 71 – any later than this and it won’t be hot enough when the dough is ready for cooking. There is some ‘float’ available for tasks D and E as neither is on the critical path.

This is a fairly simple example, and we can see the LST and LFT are the same in each node. In a more complex CPA, this will not necessarily be the case, and if so, will indicate that there is some ‘float’ in at least one activity leading to the node. However, nodes on the critical path will always have the same EST and LFT.

EvaluationCPA is a planning and project management tool. Whilst it can help ensure a project is completed as quickly as possible, and resources used as efficiently as possible, it does depend on the accuracy of the information used.

Just drawing up a CPA will not in itself ensure a project runs to plan; most projects encounter some delay or something unexpected, so managers need to use tool such as CPA to monitor the project and take swift action to rectify any problems.

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These days, businesses use a software package such as Microsoft © Project ® to draw up and manage a CPA.

Examination techniqueSome examination boards require A-level candidates to construct or complete a CPA during the examination. If you are lucky, you may just have to interpret one!

Many pupils find CPA quite difficult in practice, so the best way to help yourself is to do lots of examples so that you become familiar with the various options that might be presented to you.

Remember, even if you do get stuck, there are likely to be marks to be had by explaining what the CPA is for, by relating it to the case study, and describing any limitations to its usefulness. Remember, many projects can be brought back on track by use of extra money and labour.

It is beyond the scope of these revision notes to explain how to do draw one up from scratch – you need plenty of practice before your examination, so consult your teacher or use the exercises in your textbook.

Location, Location, Location!You might have heard people say that location is the most important thing for a business. Then, the next most important is ... location, and so on.

For many businesses, getting the right location can make the difference between success and failure. Can think of a shop or restaurant near where you live that has closed down, maybe because it was in the wrong place?

There are lots of different reasons why location is important to a business and location matters to some businesses much more than it does to others.

Here are some reasons why location matters.

Labour

Workers must be available locally, or must be willing to travel to work at the business.

These workers must have the right skills. If there is high unemployment locally, you might find it easier to recruit

workers, and maybe you won’t have to pay them as much as you would elsewhere.

But if there is high unemployment, local people may not have as much to spend with your business.

Often a location becomes a centre for related industries - Staffordshire for potteries, Sheffield for steel, and the local people have particular skills.

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Land/buildings

The right amount and type of land and buildings must be available. For some businesses, you need a lot of space - perhaps your business is noisy

or creates fumes and needs to be well away from where people live. Some businesses need to be near their customers, or to their suppliers.

Transport and communications links

Your workers need to be able to travel to work. You might need to be able to transport materials and products in and out of

your business. Telephone, postal and Internet services might be better in cities than in the

countryside.

Natural resources

Primary industries need to be sited near to natural resources. Because of the costs of transport of raw materials, secondary businesses may

also be sited close to resources that are important to their businesses.

Customers

Every business needs to be able to reach its customers. For a retail shop, you might want potential customers to be walking past all

the time. An Internet business might be able to locate almost anywhere!

Language

As businesses become more global, you need people who can speak the same language as your customers. This is one reason why, for example, India has been successful in attracting call centres and software development from the UK and North America.

Image

Some businesses need to be in a location that suits their image. Remember, though, high class locations tend to have high rents!

Competitors

In some cases, you might want to be the only business of your type nearby - perhaps this would be good for a petrol station or a news agent.

Other businesses cluster together - restaurants in Soho or Chinatown, fashion shops and jewellers on Bond Street.

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Stock control charts A stock control chart is a graphical illustration of a simple approach to stock management over time. This ‘saw tooth’ shaped diagram is normally shown as if sales were steady throughout each month. Whilst this oversimplifies the situation for many businesses, the principles can be adapted to most situations.

The key features and terms are:

Maximum stock level – this is the maximum amount of stock a business would wish to hold. This could represent enough stock for a month or a week, it might be as much as the warehouse has space for, or it might depend on the order size needed to qualify for a quantity discount – known as the Economic Order Quantity (EOQ). On the diagram below, the maximum stock level is 600 units, and the usual order quantity is 500 units

Re-order level – this acts as a trigger point, so that when stocks fall to this level, the next order should be placed. This helps take account of fluctuations in sales levels over time. When an order is placed, there is a lead time that the supplier needs to meet that order. Ideally this new order will arrive just before stocks fall below the minimum stock level. On the diagram below, 300 units

Lead time – the amount of time between placing the order and receiving the stock On the diagram below, just under two weeks

Minimum stock level – this is the minimum amount of product the business would want to hold in stock. Assuming the minimum stock level is more than zero, this is known as buffer stock – see below. On the diagram below, 100 units

Buffer stock – an amount of stock held as a contingency in case of unexpected orders so that such orders can be met and in case of any delays from suppliers.

 

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Project ManagementWhen projects are major pieces of work undertaken over an extended period of time, it is important to manage them carefully. In many cases, managing a project means co-coordinating a number of different resources, including people from different departments or even from outside of the business. Project Management is all about managing these resources in order that the project is delivered

To specification On time, and Within budget

Students should appreciate the importance of good project management to business success. It is easy to see the impact of failed project management in works such as the new Wembley Stadium:

Damaged reputation which may hamper the ability to gain further work Dissatisfied customers Cost over-runs that lead to loss of profit Financial penalties paid to the customer Low morale amongst the workforce Damaged relationships with sub-contractors and other business partners

Planning

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Good project management starts with good planning - the objectives of a project should be clear and would conform to the SMART model:

Specific Measurable Agreed Realistic, and Time-based

Planning tools would include Simultaneous Engineering (for product development) and Critical Path Analysis, for projects in general - see separate notes on both of these methods.

Monitoring

Projects do not always go according to plan and it is generally the case that when this happens, work takes more, rather than less time, than expected. Good project management recognises the internal and external factors that might throw a project off schedule. Monitoring progress carefully will help identify the likely impact of any delays so that action can be taken to get the project back on track.

Contingency planning

Contingency planning means trying to identify possible sources of disruption to the project so that in the event of a problem, swift action can be taken. This may be as simple as having a back-up supplier for materials, or by building some ‘slack’ into the schedule. In the case of serious delays, this may mean making arrangements to manage the situation, such as happened with Wembley Stadium, when major matches have had to be hosted elsewhere.

International locationSome reasons for international location

Historical - a sugar refining firm is likely to own plant in countries where sugar is grown, as well as a network to market and service the business worldwide

Service - many products and services need local country support - e.g. Bosch washing machines.

Access to markets - companies manufacturing in EU have access to the whole market. Nissan opened in Sunderland for this reason, and this also explains why they started making trucks in the USA, to access that market.

Access to raw materials - extraction of natural resources in countries where they are found.

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Access to labour - usually this means cheap labour where regulations are less stringent than in the UK.

Tax avoidance - by means of transfer pricing, multinationals organise their affairs to minimise their overall tax liability.

Local incentives - regional grants and incentives are sometimes given to encourage overseas firms to set up locally and boost the economy.

Some problems of International trade

Risks and uncertainties associated with international trade include the following; for some companies, these risks are managed better by having international offices, factories and so on.

Currency fluctuations Exchange controls Political instability and unrest Tariffs and other restrictive practices Language and cultural barriers - UK firms have an advantage that English is

widely spoken around the world. Differences in ethical approaches

Costs of relocation or expansion

The costs and logistical difficulties are far more difficult in locating an industrial facility (high capital costs), whereas service industries - such as call centres - are cheaper to re-locate, which partly explains recent moves by UK financial institutions to India.

  Stock control - introduction Managing stock effectively is important for any business, because without enough stock, production and sales will grind to a halt. Stock control involves careful planning to ensure that the business has sufficient stock of the right quality available at the right time.

Stock can mean different things and depends on the industry the firm operates in. It includes:

Raw materials and components from suppliers Work in progress or part finished goods made within the business Finished goods ready to dispatch to customers Consumables and materials used by service businesses

In order to meet customer orders, product has to be available from stock – although some firms are able to arrange deliveries Just in Time, see below. If a business does not have the necessary stock to meet orders, this can lead to a loss of sales and a damaged business reputation. This is sometimes called a ‘stock-out’.

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It is important therefore that a business either holds sufficient stocks to meet actual and anticipated orders, or can get stocks quickly enough to meet those orders. For a high street retailer, in practice this means having product on the shelves.

However, there are many costs of holding stock, so a business does not wish to hold too much stock either.

The costs of holding stock include:

The opportunity cost of working capital tied up in stock that could have been used for another purpose

Storage costs – the rent, heating, lighting and security costs of a warehouse or additional factory or office space

Bank interest , if the stock is financed by an overdraft or a loan Risk of damage to stock by fire, flood, theft etc; most businesses would

insure against this, so there is the cost of insurance Stock may become obsolete if buyer tastes change in favour of new or better

products Stock may perish or deteriorate – especially with food products

Stock Control - application and evaluation

When a stock control situation is presented in an examination, it is likely to be in the context of a business that is facing change – so it is rarely as simple as the diagram in the tutor2u stock control revision note.

Candidates need to interpret and apply stock control principles to the particular situation, and make practical suggestions to help address the question.

Examples might include:

A business that is growing will need to review its re-order and buffer stock levels, and the frequency and size of orders

Look out for seasonality in a business; larger or more frequent orders may be needed in busy times

If the supplier is having trouble supplying goods on time, the firm might need to re-order at an earlier point (or seek a new supplier!)

Does the firm have a back-up supplier in case of delays?

Could small additional orders be made with a supplier as a stop gap if the firm’s stock runs out suddenly? Note - these orders would be more expensive because of extra transport costs and lower discount level

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Other aspects of Stock ManagementStock-taking

A simple approach to checking the level of stock in a business is to count it on the shelves – this is called stock-taking. For many businesses, such as a small shop, this is a thoroughly practical approach. Most businesses conduct an ‘annual stock take’ when stocks are checked in considerable detail to find any discrepancies between what is physically and the stock records. This is also a good time to check for any obsolete or out of date stock that needs to be disposed of.

Stock rotation

Most businesses try to use up older stock first to help avoid stock deterioration or becoming obsolete – this is known as stockrotation. You have probably noticed that supermarkets always load the freshest stock to the back of the shelves.

Computerised stock control

Large businesses such as the major retailers use computerised systems to manage stocks of tens of thousands of items, some of which are replenished several times a day. As stock arrives, and again as it is sold, scanning of bar codes keeps the levels up to date.

Automatic re-ordering of stock

As bar codes on products are scanned at the checkout, the system is taking those sales into account as part of a program to re-order stock. Rather than manual stock-taking by counting product on the shelves or in the warehouse, the supermarket has detailed real-time stock level information that the system uses to place re-orders through EDI (Electronic Data Interchange).

Information such as weather forecasts, public holidays and major sporting events can be used to help determine the stock level of seasonal products – such as beer, ice cream and food for barbecues. Huge amounts of data are available from sales around the country to help determine what stock to have in place on different days of the week and even at different times of the day.

The major supermarkets such as Tesco have developed stock management as one of their core competencies and derive competitive advantage from having the right stocks on the shelves when customers want them.

Just-in-time (JIT) stock control

JIT stock control means that stock is only ordered to meet specific orders, and little or no product is held in stock. This requires very responsive and reliable suppliers who can meet stringent requirements to deliver exactly the right stock to a precise location and within a narrow time frame. See the revision notes on Lean Production for more details of JIT.

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Capacity Utilisation A firm’s productive capacity is the total level of output or production that it could produce in a given time period. Capacity utilisation is the percentage of the firm’s total possible production capacity that is actually being used.

Capacity utilisation is calculated as follows:

Capacity utilisation (%) = actual output per month (or per annum) x 100%

maximum possible output per month (or per annum)

For example, if a firm could produce 1200 units per month, but is actually producing 600 per month, its capacity utilisation is as follows:

Capacity utilisation % = 600 units per month x 100%

1200 units per month

= 50%

Financial implications

A firm’s level of capacity utilisation determines how much fixed costs should be allocated per unit, so as a firm’s capacity utilisation increases, the fixed costs (and therefore also, total costs) per unit will decrease. For example, if the firm above had fixed costs of £12,000 per month, the fixed costs per unit would be £20 per unit at 50% capacity utilisation, but only £10 per unit at 100% capacity utilisation.

It therefore follows that a firm should be most efficient if it is running at 100% capacity utilisation. However, if a firm is running at full capacity, there are a number of potential drawbacks:

There may not be enough time for routine maintenance, so machine breakdowns may occur more frequently and orders will be delayed

It may not be possible to meet new or unexpected orders so the business cannot grow without expanding its scale of production

Staff may feel under excessive pressure, leading to increased mistakes, absenteeism and labour turnover

If the factory space is overcrowded, work may become less efficient due to the untidy working conditions

It may be necessary to spend more on staff overtime to satisfy orders, increasing labour costs

NB – these drawbacks are not to be confused with diseconomies of scale, which can arise from a firm operating on a larger scale – e.g. by opening a larger factory. See separate revision note on economies of scale.

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In general, businesses would feel most comfortable at something between 80 to 90% capacity utilisation because fixed costs per unit are relatively low and there is some scope to meet new orders or carry out maintenance and training. A firm that has just invested in major new facilities in anticipation of major growth could take some time before reaching a good level of utilisation, so it is important to consider sales trends when discussing capacity utilisation.

Causes of under-utilisation of capacity

There are a number of reasons why a firm might be experiencing low capacity utilisation, including the following:

New competitors taking market share or causing over-supply in the market Fall in market demand due to changes in consumer tastes or fashion Unsuccessful marketing – one or more aspect of the marketing mix may

simply mean that the firm is not successful Seasonal demand – this is especially apparent in the tourist industry where

firms like hotels and leisure parks are full in the summer but see much lower utilisation at other times of the year

Exam hint: In examination questions on this subject, look for clues as to the root causes of under-utilisation so that you can assess whether it is a long term problem or not, and what the firm could do to remedy the situation

Problems arising from low capacity utilisation

Higher fixed costs per unit mean reduced profitability; if prices were raised to cover these costs, this would probably lead to reduced sales unless the product was price inelastic

Spare capacity can portray a negative image, particularly in a business where it can be seen that it is no longer busy – such as a shop or a health club - signifying loss of popularity

Staff can become bored and demoralised if they don’t have as much to do, especially if they fear losing their jobs

Benefits of low capacity utilisation

Low capacity utilisation is unlikely to be desirable in the long term as the higher unit costs will make it difficult to compete. However it is not all bad news and possible short term benefits include:

A firm may have more time for maintenance and repairs and for staff training, to prepare for an upturn in trade

There may be less stress for employees than if they were working at full capacity

The firm can cope with new orders; firms in expanding markets may expect to have low utilisation whilst they build their sales

See separate revision note on ‘Increasing and reducing capacity’ for ways of dealing with problems of high or low capacity utilisation.

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Economies and diseconomies of scale Economies of scale are advantages that arise for a firm because of its larger size, or scale of operation. These advantages translate into lower unit costs (or improved productive efficiency), although some economies of scale are not so easy to quantify.

In some markets, firms have to be of at least a certain size to be able to compete at all, because of the minimum level of investment required; economists call this minimum efficient scale.

On the other hand, inefficiencies can also creep in because of increased size, known as diseconomies of scale – see below.

In the correct sense of the term, economies and diseconomies of scale relate to advantages and disadvantages of an increase in the firm’s productive capacity – such as moving to a larger factory or installing completely new technology. Do not confuse these terms with capacity utilisation, which is the degree to which the current scale of operations is actually being used.

Economies of scale can be ‘internal’ (specific to an individual firm) or external (advantages that benefit the industry as a whole).

The main kinds of internal Economies of Scale are:

Purchasing – firms producing on a larger scale should be able to bulk buy raw materials or product for resale in larger quantities. They may be able to cut out wholesalers by buying direct from producers, and transport costs per unit may also be reduced. The firm might also be buying in large enough quantities to make very specific demands about product quality, specifications, service and so on, so that supplies exactly match their needs.

Technical – it may be cost-effective to invest in more advanced production machinery, IT and software when operating on a larger scale.

Managerial – larger firms can afford to have specialist managers for different functions within a business – such as Marketing, Finance and Human Resources. Furthermore, they may be able to pay the higher salaries required to attract the best people, leading to better planning and decision making.

Specialisation – with a larger workforce, the firm may be better able to divide up the work and recruit people whose skills very closely match the requirements of the job.

Marketing – more options are available for larger firms, such as television and other national media, which would not be cost-effective for smaller producers. The marketing cost for selling 10 million items might be no greater than to sell 1 million items. Larger firms might find it easier to gain publicity for new launches simply because of their existing reputation.

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Financial – there is a wider range of finance options available to larger firms, such as the stock market, bonds and other kinds of bank lending. Furthermore, a larger firm is likely to be perceived by banks as a lower risk and the cost of borrowing is likely to be lower.

Risk bearing – a larger firm can be safer from the risk of failure if it has a more diversified product range. A larger firm may have greater resilience in the case of a downturn in its market because of larger reserves and greater scope to make cutbacks.

Social and welfare – larger firms are more likely to be able to justify additional benefits for employees such as pension funds, healthcare, sports and social facilities, which in turn can help attract and retain good employees.

External economies of scale

External economies of scale arise from firms in related industries operating in a concentrated geographical area; suppliers of services and raw materials to all these firms can do so more efficiently. Infrastructure such as roads and sophisticated telecommunications are easier to justify.

There is also likely to be a growing local pool of skilled labour as other local firms in the industry also train workers. This gives a larger and more flexible labour market in the area.

Diseconomies of scale

These are inefficiencies that can creep in when a firm operates on a larger scale (do not confuse with high capacity utilisation). The main diseconomies of scale are:

Lack of motivation – in larger firms, workers can feel that they are not appreciated or valued as individuals - see Mayo and Herzberg. It can be more difficult for managers in larger firms to develop the right kind of relationship with workers. If motivation falls, productivity may fall leading to inefficiencies.

Poor communication – it can be easier for smaller firms to communicate with all staff in a personal way. In larger firms, there is likely to be greater use written of notes rather than by explaining personally. Messages can remain unread or misunderstood and staff are not properly informed.

Co-ordination – a very large business takes a lot of organising, leading to an increase in meetings and planning to ensure that all staff know what they are supposed to be doing. New layers of management may be required, adding to costs and creating further links in the chain of communication.

Evaluation – is bigger better than smaller?

Many firms strive to grow at least partly because of the economies of scale they could enjoy. The increased efficiency from economies of scale is very compelling in many industries.

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Another reason is that they may be able to enjoy market power, with more control over suppliers and customers (see notes on monopoly). Still another reason is the perceived success of the business simply because of its growth – this can be especially important for a stock exchange listed company.

Diseconomies of scale do not have to happen as a business becomes larger. Effective management and organisation can minimise these effects and help to ensure that the benefits of increased size outweigh any disadvantages. In an exam question, consider what you have learned about management approaches to organisational structure and motivation to show how a firm could overcome diseconomies of scale.

Smaller firms are not necessarily at a disadvantage in all markets. In some markets, economies of scale are not available or not compelling enough for large firms to dominate. This is often the case with small local businesses, such as hairdressers and plumbers. Furthermore, small businesses can succeed simply by identifying a niche market and by serving it really well. Smaller firms can be more flexible and may be able to adapt quickly to changes in their markets or in the economy.

Increasing and reducing productive capacity

See the notes on capacity utilisation for a discussion of possible reasons for low or high capacity utilisation, and the problems that can be caused for a business.

Exam hint: the following solutions might be used to address capacity problems. Be careful in exam responses to choose only those approaches that are relevant to the circumstances of the firm that you are discussing. These issues have ample scope for analysis and evaluation, using cross-cutting themes from motivation, marketing, finance and strategy.

Dealing with high capacity utilisation

If a firm is struggling to keep up with demand, it could use the following approaches:

Extra shifts or longer opening hours - using extra labour in the form of staff overtime or additional staff. This is how many firms address short term increases in demand, for example if one very large order is required. As long as it doesn’t go on for too long, staff may welcome the extra pay – which is usually at a higher rate.

There will be an increase in labour and other fixed costs – such as extra heating and lighting - and the firm might find there is insufficient time for maintenance and training. It is nevertheless a suitable approach to meet increased demand while the firm determines whether there will be a longer term need for extra capacity.

In some industries, local residents might object to additional noise and traffic caused by night or weekend working.

Seasonal workers – if the capacity shortage is seasonal, then temporary staff may be taken on to meet the need. This is common in industries such as retail

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at Christmas, and in leisure and farming in the summer. The main problem is finding enough good temporary workers who have the right skills to maintain the firm’s levels of service and quality.

Outsourcing or subcontracting – this means passing one or more aspect of the production process to another firm. For example an engineering firm could send components to another specialist firm for plating and concentrate itself on the other aspects of production. Motor manufacturers have increasingly sourced bodywork panels and other components through subcontractors, concentrating on assembly and finishing of vehicles.

This is a practical approach adopted by many firms that allows the firm to concentrate on what it does best. The partner firm may be more efficient at the outsourced operation. However, there are logistical challenges and costs associated with this and it does depend on the reliability of the partner firms.

This approach is also used as a primary mode of expansion by many large manufacturers. Apple, for example, very quickly out-sourced the manufacture of iPods to Chinese firms and Dyson outsourced vacuum cleaner manufacture to Korea.

Expansion – investment in larger or additional factories, new machinery, further shops or offices. This will involve recruitment and training of new employees. Although there is considerable expense involved, this may be an appropriate strategy if demand is growing steadily and is expected to be sustained.

Dealing with low capacity utilisation

If a firm cannot find enough orders, it will be suffering from increased fixed costs, or overheads, per unit of production. Some possible solutions include:

New business - of course, the most obvious solution is to try and find new business or change the marketing proposition so that the firm’s product or service is more competitive!

However, if this is not successful, other measures may have to be taken to cut overheads, such as:

Rationalisation – or ‘downsizing’ - this means shutting down or selling off parts of the business. Staff may have to be made redundant, losing skilled and trained staff, so long term expectations must be taken into account before taking such drastic measures.

Short-time working – cutting out a shift or reducing working hours. This will mean either reducing the workforce, or asking them to accept reduced wages and/or a loss of overtime. Obviously, this is likely to damage staff morale but might be preferable to permanent job losses – as long as there is the possibility of an upturn in trade.

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Laying off workers – this will reduce labour costs but not other fixed costs unless other actions are also taken.

Labour-intensive or Capital-intensive production?

It is important to distinguish between capital-intensive and labour-intensive methods of production.

Capital-intensive ‘Capital’ refers to the equipment, machinery, vehicles and so on that a

business uses to make its product or service. Capital-intensive processes are those that require a relatively high level of

capital investment compared to the labour cost. These processes are more likely to be highly automated and to be used to

produce on a large scale. Capital-intensive production is more likely to be associated with flow

production (see below) but any kind of production might require expensive equipment.

Capital is a long-term investment for most businesses, and the costs of financing, maintaining and depreciating this equipment represents a substantial overhead.

In order to maximise efficiency, firms want their capital investment to be fully utilised (see notes on capacity utilisation).

In a capital-intensive process, it can be costly and time-consuming to increase or decrease the scale of production.

Labour-intensive ‘Labour’ refers to the people required to carry out a process in a business. Labour-intensive processes are those that require a relatively high level of

labour compared to capital investment. These processes are more likely to be used to produce individual or

personalised products, or to produce on a small scale The costs of labour are: wages and other benefits, recruitment, training and so

on. Some flexibility in capacity may be available by use of overtime and

temporary staff, or by laying-off workers. Long-term growth depends on being able to recruit sufficient suitable staff. Labour intensive processes are more likely to be seen in Job production and in

smaller-scale enterprises.

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Methods of productionProduction is at the heart of all industry and is the process of using the resources of a firm to convert ‘inputs’ into ‘outputs’, which are products or services desired by customers.

Job production Job production is used to create one-off orders or ‘jobs’ especially made for the purpose. This might be a relatively small job such as bespoke suit or a sandwich made to order in a café, or it could be a massive job such as a cruise liner or the Arsenal’s new stadium.

Job production helps ensure that the product or service matches the customer’s exact needs, as closely as the firm is able, because it is literally ‘custom-made’. In many cases, skilled or specialised staff make products of very high quality, or which have individual character that might have less appeal if they were mass-produced.

Job production is a relatively expensive process because it requires specialised and skilled staff who concentrate on the individual job or project. It is therefore labour intensive, although some projects – such as the cruise liner – may also need a lot of expensive capital equipment.

Small businesses that are built on the skills of the owner, such as a window cleaner or a hairdresser, use job production techniques.

Batch production As the name suggests, products are produced in small or large batches. This process is useful to a firm that makes a number of different variations of basically similar products. Examples would include; a bakery, a car exhaust pipe factory or a toothpaste manufacturer.

If the sandwich shop mentioned above wanted to speed up production, instead of making sandwiches to order, it might be able to benefit by making the day’s sandwiches in batches of all the different types and have them available for sale, pre-packed.

A toothpaste manufacturer will set its weekly batches of production of each product according to the orders from the supermarkets and wholesalers. The same machinery is used for each product but the ingredients, packaging and/or size is changed for each batch as required. It is crucial that the machinery can be quickly cleaned and re-configured for each new batch to minimise unproductive time.

In a factory that uses flow production (see below), it is quite common for component parts to be made in batches enough for a week’s production.

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Flow production This is a production line method, where product is continuously produced, flowing from one stage of production to the next. Workers and, increasingly robots, carry out individual repetitive tasks aiming to work as quickly as possible without loss of quality. This is the method pioneered by Henry Ford for his Model T car, and the efficiencies he gained enabled him to produce large numbers of cars at low cost. Any product made in high volumes will almost certainly be made on a flow production line.

This approach to production has close links with FW Taylor and his ‘Scientific school of management’ – Taylor’s motivational theories were all about creating the workplace and forms of reward to maximise efficiency. This in turn led to very boring work and contributed to industrial unrest over the years where workers’ interests were overlooked.

More modern, lean production techniques have at least partly recognised the fact that this type of work can be extremely boring, and ideas such as cell production and quality circles can help improve the workplace as workers become multi-skilled, take more responsibility for quality and can contribute their ideas for improvements.

Flow production systems are typically capital intensive and it is important to keep them running smoothly with high levels of capacity utilisation, so that these high overhead costs are spread over as many units as possible.

Once set up properly, flow production lines can in some cases produce millions of consistently high quality products.

Cell production

This is a form of flow production in which the line is separated into a number of sections, each looked after by a group of workers called a ‘cell’. Cells take responsibility for work in their area, such as quality, job rotation, training and so on. See notes on Lean Production for more detailed discussion of Cell Production.

Evaluation - ‘Personalised flow’ The distinction between the different methods of production is sometimes not totally clear. With some higher-value products made in flow production, such as motor vehicles, it is now possible to personalise the product for each order.

Cars such as the new Mini are made to order, and customers specify colour, trim, and accessories from an extensive list. This has been made possible through advances in computerised ordering and manufacturing systems and through advances in the actual processes – such as robotised paint spraying in the case of the Mini. This means that customers get a very personalised product with all the cost benefits and consistent quality from flow production.

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Also see the revision note on labour intensive and capital intensive production for a more detailed discussion of these terms.

Capacity Utilization A firm’s productive capacity is the total level of output or production that it could produce in a given time period. Capacity utilisation is the percentage of the firm’s total possible production capacity that is actually being used.

Capacity utilisation is calculated as follows:

Capacity utilisation (%) = actual output per month (or per annum) x 100%

maximum possible output per month (or per annum)

For example, if a firm could produce 1200 units per month, but is actually producing 600 per month, its capacity utilisation is as follows:

Capacity utilisation % = 600 units per month x 100%

1200 units per month

= 50%

Financial implications

A firm’s level of capacity utilisation determines how much fixed costs should be allocated per unit, so as a firm’s capacity utilisation increases, the fixed costs (and therefore also, total costs) per unit will decrease. For example, if the firm above had fixed costs of £12,000 per month, the fixed costs per unit would be £20 per unit at 50% capacity utilisation, but only £10 per unit at 100% capacity utilisation.

It therefore follows that a firm should be most efficient if it is running at 100% capacity utilisation. However, if a firm is running at full capacity, there are a number of potential drawbacks:

There may not be enough time for routine maintenance, so machine breakdowns may occur more frequently and orders will be delayed

It may not be possible to meet new or unexpected orders so the business cannot grow without expanding its scale of production

Staff may feel under excessive pressure, leading to increased mistakes, absenteeism and labour turnover

If the factory space is overcrowded, work may become less efficient due to the untidy working conditions

It may be necessary to spend more on staff overtime to satisfy orders, increasing labour costs

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NB – these drawbacks are not to be confused with diseconomies of scale, which can arise from a firm operating on a larger scale – e.g. by opening a larger factory. See separate revision note on economies of scale.

In general, businesses would feel most comfortable at something between 80 to 90% capacity utilisation because fixed costs per unit are relatively low and there is some scope to meet new orders or carry out maintenance and training. A firm that has just invested in major new facilities in anticipation of major growth could take some time before reaching a good level of utilisation, so it is important to consider sales trends when discussing capacity utilisation.

Causes of under-utilisation of capacity

There are a number of reasons why a firm might be experiencing low capacity utilisation, including the following:

New competitors taking market share or causing over-supply in the market Fall in market demand due to changes in consumer tastes or fashion Unsuccessful marketing – one or more aspect of the marketing mix may

simply mean that the firm is not successful Seasonal demand – this is especially apparent in the tourist industry where

firms like hotels and leisure parks are full in the summer but see much lower utilisation at other times of the year

Exam hint: In examination questions on this subject, look for clues as to the root causes of under-utilisation so that you can assess whether it is a long term problem or not, and what the firm could do to remedy the situation

Problems arising from low capacity utilisation

Higher fixed costs per unit mean reduced profitability; if prices were raised to cover these costs, this would probably lead to reduced sales unless the product was price inelastic

Spare capacity can portray a negative image, particularly in a business where it can be seen that it is no longer busy – such as a shop or a health club - signifying loss of popularity

Staff can become bored and demoralised if they don’t have as much to do, especially if they fear losing their jobs

Benefits of low capacity utilisation

Low capacity utilisation is unlikely to be desirable in the long term as the higher unit costs will make it difficult to compete. However it is not all bad news and possible short term benefits include:

A firm may have more time for maintenance and repairs and for staff training, to prepare for an upturn in trade

There may be less stress for employees than if they were working at full capacity

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The firm can cope with new orders; firms in expanding markets may expect to have low utilisation whilst they build their sales

See separate revision note on ‘Increasing and reducing capacity’ for ways of dealing with problems of high or low capacity utilisation.

Cell productionCell production has the flow production line split into a number of self-contained units. Each team or ‘cell’ is responsible for a significant part of the finished article and, rather than each person only carrying out only one very specific task, team members are skilled at a number of roles, so it provides a means for job rotation.

Cell production is a form of team working and helps ensure worker commitment, as each cell is responsible for a complete unit of work, which Herzberg sees as part of job enrichment. Cells would usually have responsibility for organising work rosters within the cell, for covering holiday and sickness absences and for identifying recruitment and training needs.

Cells deal with other cells as if they were customers, and take responsibility for quality in their area. Also see notes on Kaizen, under ‘Improving Quality’.

Benefits of cell production

Closeness of cell members should improve communication, avoiding confusion arising from misunderstood or non-received messages

Workers become multi-skilled and more adaptable to the future needs of a business

Greater worker motivation, arising from variety of work, team working and more responsibility

Quality improvements as each cell has ‘ownership’ for quality on its area

Evaluation

Lean production and cell production can be very effective approaches to improving efficiency in a wide range of businesses. Some possible notes of caution:

The company culture has to encourage trust and participation, or workers can feel that they are being constantly pushed for more and more output with no respite

The company may have to invest in new materials handling and ordering systems suitable for cell production

Cell production may not allow a firm to use its machinery as intensively as in traditional flow production

Some small scale production lines may not yield enough savings to make a switch cell production economically worthwhile

The allocation of work to cells has to be efficient so that they have enough work, but not so much that they are unable to cope

Recruitment and training of staff must support this approach to production

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Just in time production (JIT)Just in time is a ‘pull’ system of production, so actual orders provide a signal for when a product should be manufactured. Demand-pull enables a firm to produce only what is required, in the correct quantity and at the correct time.

This means that stock levels of raw materials, components, work in progress and finished goods can be kept to a minimum. This requires a carefully planned scheduling and flow of resources through the production process. Modern manufacturing firms use sophisticated production scheduling software to plan production for each period of time, which includes ordering the correct stock. Information is exchanged with suppliers and customers through EDI (Electronic Data Interchange) to help ensure that every detail is correct.

Supplies are delivered right to the production line only when they are needed. For example, a car manufacturing plant might receive exactly the right number and type of tyres for one day’s production, and the supplier would be expected to deliver them to the correct loading bay on the production line within a very narrow time slot.

Advantages of JIT

Lower stock holding means a reduction in storage space which saves rent and insurance costs

As stock is only obtained when it is needed, less working capital is tied up in stock

There is less likelihood of stock perishing, becoming obsolete or out of date Avoids the build-up of unsold finished product that can occur with sudden

changes in demand Less time is spent on checking and re-working the product of others as the

emphasis is on getting the work right first time

Disadvantages of JIT

There is little room for mistakes as minimal stock is kept for re-working faulty product

Production is very reliant on suppliers and if stock is not delivered on time, the whole production schedule can be delayed

There is no spare finished product available to meet unexpected orders, because all product is made to meet actual orders – however, JIT is a very responsive method of production

Kaizen (Continuous Improvement) & Quality CirclesThis forms part of the ‘Japanese’ approach to management, or ‘Lean Production’.

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Kaizen , or ‘Continuous Improvement’ is a policy of constantly introducing small incremental changes in a business in order to improve quality and/or efficiency. This approach assumes that employees are the best people to identify room for improvement, since they see the processes in action all the time. A firm that uses this approach therefore has to have a culture that encourages and rewards employees for their contribution to the process.

Kaizen can operate at the level of an individual, or through Kaizen Groups or Quality Circles which are groups specifically brought together to identify potential improvements. This approach would also be compatible with Team working or Cell Production, as improvements could form an important part of the team’s aims.

Key features of Kaizen:

Improvements are based on many, small changes rather than the radical changes that might arise from Research and Development

As the ideas come from the workers themselves, they are less likely to be radically different, and therefore easier to implement

Small improvements are less likely to require major capital investment than major process changes

The ideas come from the talents of the existing workforce, as opposed to using R&D, consultants or equipment – any of which could be very expensive

All employees should continually be seeking ways to improve their own performance

It helps encourage workers to take ownership for their work, and can help reinforce team working, thereby improving worker motivation

As Kaizen is characterised by many, small improvements over time, it contrasts with the major leaps seen in industry when radical new technology or production methods have been introduced. Over the years, the sheer volume of Kaizen improvements can lead to major advances for a firm, but managers cannot afford to overlook the need for radical change from time to time. For example, many UK manufacturers and service companies have found it necessary to outsource processes to cheaper centres such as India and China – these changes would be unlikely to arise from Kaizen.

Whilst staff suggestions can help to enrich the work for many employees, Kaizen can be seen as an unrelenting process. Some firms set targets for individuals or for teams to come up with a minimum number of ideas in a period of time. Employees can find this to be an unwelcome pressure, as it becomes increasingly difficult to find further scope for improvement. Some firms, especially Japanese-owned, conduct quality improvement sessions in the workers’ own time, which can lead to resentment unless there is appropriate recognition and reward for suggestions.

For Kaizen to be effective there has to be a culture of trust between staff and managers, supported by a democratic structure and a Theory Y view of employees. Good two-way communications and a de-layered organisation would also support this approach. Nevertheless, some workers might see the demands as an extra burden rather than an opportunity and it can take time to embed Kaizen successfully into an organisation’s culture.

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Time-based ManagementTime-based Management is an aspect of Lean Production. It is a general approach that recognises the importance of time and seeks to reduce the level of unproductive time in an organisation. Benefits include:

Quicker response times (reduced lead times) to meet changing market and customer needs

Faster new product development

Reduction in waste, therefore greater efficiency

For a firm to operate time-based management effectively, it needs to have flexible production facilities that enable it to make changes easily. For example, it may need to be able to switch production quickly between different products and to alter the length of production runs as needed.

As with other aspects of Lean Production, Time-based management also calls for flexible, multi-skilled staff, and a culture of mutual trust between workers and managers.

Simultaneous EngineeringSimultaneous Engineering is part of the Time-based Management approach. It is a project management approach that helps firms develop and launch new products more quickly.

All of the areas involved in a project are planned together. Everything is considered simultaneously (together, in parallel) rather than separately (in series).

Product teams are set up to include people in all areas that are relevant to the new product – design, development, production, marketing etc.

Suppliers are involved in the new product development so that potential delays in resourcing of raw materials, components and services can be anticipated and avoided

A teamwork approach is used, with all areas involved in the project working on the project at the same time.

The end result is that:

The new product is brought to the market much more quickly

The firm may be able to charge a premium price that will give a better profit margin and help recoup R&D costs

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There is less likelihood of a need to modify the product later due to unforeseen problems

A greater sense of involvement across business functions improves staff commitment to the project.

This can therefore be a source of competitive advantage (‘first mover advantage’) for the firm if it can get a reliable new product into the market and build brand loyalty before its competitors.

Exam hintRemember, Simultaneous Engineering is a project management approach, it is not a production method

Invention and Innovation There is a subtle difference between these two words, but it is an important one for Business Studies students.

Invention if the formulation of new ideas for products or processes Innovation is all about the practical application of new inventions into

marketable products or services

Most of us have visions of mad inventors who come up with ideas with no practical use! Like everything else in Business Studies, we are interested in activities that actually help a firm meet its objectives, such as growth, profitability, increased market share or stability – so it is Innovation, rather than Invention, that really counts.

Innovations can fall into one of two categories:

Product (or service) innovation As the name suggests, this is all about launching new or improved products (or services) on to the market.

Advantages might include (note links to marketing)

‘First mover advantage’ – which can include some of the following; Higher prices and profitability Added value Opportunity to build early customer loyalty Enhanced reputation as an innovative company Public Relations – e.g. news coverage Increased market share

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Process Innovation This has to do with finding better or more efficient ways of

producing existing products, or delivering existing services.

Advantages might include:

Reduced costs Improved quality More responsive customer service Greater flexibility

Possible drawbacks

Loss of jobs, especially if work is outsourced Need for re-training of workers

Research & DevelopmentResearch & Development (or ‘R&D’) is technical or scientific research that is undertaken with a view to introducing new or improved products and services.

Although Market Research would also be undertaken as part of any product development process, do not confuse it with R&D.

R&D can be very expensive and the chances of success can be slim, with a relatively low rate of commercially successful ideas. However, in many industries, a committed programme of R&D is absolutely essential in order for firms to maintain their competitiveness. Industries with an especially high level of R&D would include:

Pharmaceuticals Aerospace Consumer electronics Computers Communications

The major pharmaceutical companies typically spend 10-15% of annual sales turnover on R&D and yet might expect only around 1 in 500 new drug formulations to become a commercial success. Nevertheless, whilst the stakes are high, so are the potential rewards, and one successful new drug – such as Viagra and Retrovir, can secure the financial future of a company for several years.

R&D as a percentage of sales is one way of comparing companies in a given industry. Remember, also, to look at the actual amount spent on R&D – for example:

Company A spent £30 million per year on R&D, 6.7% of turnover

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Company B spent £80 million per year on R&D, 3.2% of turnover

Plainly, Company A spends a larger percentage of its turnover on R&D, but n absolute terms, Company B, which is the larger company, spends far more. In some industries, it is the largest firms that can afford to spend enough on R&D to make it worthwhile, especially when specialised equipment and highly qualified staff are needed to conduct R&D activity.

In other questions, you may see figures that illustrate how the firms of some countries spend far more than comparable firms from other countries.

Patents and Registered Designs Companies that invest in R&D want to make sure that they can reap the rewards of their investment without simply being copied by their competitors. Their technical know-how and innovations are aspects of what is known as ‘intellectual property’, which is increasingly important – not to say difficult – to protect in our globalised marketplaces.

If a firm or individual invents a new product or process and can prove that it is genuinely novel, a PATENT may be applied for. In the UK, this is looked after by the UK Patent Office.

Typically, a patent is based on one of the following:

How something works How something is made What something is made of

This requires the details of the invention to be registered with the Patent Office, which if approved, grants a licence that means that the holder has exclusive rights to exploit the invention for 20 years as long as the patent is renewed annually.

The patent holder may choose to sell or license part or all of these rights to other firms around the world – for example, if it did not have the capital required to manufacture the product in sufficient quantities to meet market demand.

For an idea to be patented

The invention must be genuinely new It cannot just be adaptation of something that is already in the public domain It must be capable of industrial application

In other words, the invention must make a technical contribution. This means you can’t, for example, patent a business method unless it involves some technical innovation. For example, in the USA, eBay failed to gain a patent for ‘Buy it Now’ and Amazon for ‘One Click’.

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Inventions relating to computer software may be ‘patentable’, but only if they involve something more than just software running on a computer in a technically ordinary way.

Other ideas that cannot be patented are:

Scientific or mathematical discoveries, theories or methods; Literary, dramatic, musical or artistic works; Schemes, rules or methods for performing a mental act; Methods of medical treatment.

There are similar ways to register patents in many other countries around the world. It is up to the patent holder to ‘police’ any infringements and to take anyone to court that infringes their rights. There is no authority actively looking out for infringements, and in some countries, patent holders will receive little support from local courts. It is often the case that bringing legal action in the case of patent infringement can be expensive and ultimately fruitless.

Evaluation It is a moral dilemma whether a patent should be granted for products such as drugs when society could benefit from widespread low-cost production of, for example, an effective AIDS drug. However, there has to be an incentive for firms to spend massive amounts on R&D, and this is one justification for granting patents, so that the extraordinary profits that are earned by some successful innovations can help fund new developments.

Once a patent expires after 20 years, the firm’s product is open to widespread imitation – if this has not happened through firms finding an alternative approach in the meantime. One UK example was Dyson, the firm that invented a bag-less vacuum cleaner that was extremely effective – and went on to capture the largest share of the US market. As the patent drew towards the end and new competition loomed, Dyson switched manufacture from Wales to the Far East in order to cut costs and also launched a new innovation called ‘The Ball’, that brought new, patented features to its vacuum cleaners. Patent law is quite complex and does not need be dealt with in depth in A-level Business Studies

Registered Design

This provides a weaker form of protection than a patent and has more to do with form and shape, so can protect products that might not qualify for a patent.

Once again, there is often little that can be done when products are copied in other countries, although it may be possible to prosecute anyone selling these products sold in the UK, other EU countries, the USA and so on. In the UK, Trading Standards officers offer a degree of enforcement.

Products that are often counterfeited and offered for sale in markets and boot sales include fashion, jewellery, watches and perfumes.

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Note – there are other ways of protecting intellectual property that you will cover in the Law’ part your A2 External Influences Module. Here are brief descriptions for the purpose of comparison and to help avoid confusion.

Registered Trademarks Used to protect trade names, logos and even colours (Dyno-Rod and its ‘Dyno-Glo’ colour) and tunes (Intel) – all of which help a firm to defend itself against other firms passing themselves off as an imitation of the firm’s service or product.

Copyright Anyone creating prose, poetry, art and music automatically has copyright for that material and can prevent others from imitating it or from using it in a way not approved of by the creator. When the holder does allow others to use their work, they are entitled to charge a fee for their consent.

Quality – introductionWhat is quality?

Quality is important to businesses but can be quite hard to define. Customers want quality that is appropriate to the price that they are prepared to pay and the level of competition in the market.

Key aspects of quality for the customer include:

Good design – looks and style Good functionality – it does the job well Reliable – acceptable level of breakdowns or failure Consistency Durable – lasts as long as it should Good after sales service Value for money

‘Value for money’ is especially important, because in most markets there is room for products of different overall levels of quality, and the customer must be satisfied that the price fairly reflects the quality. For example, the car maker Skoda is now part of the Volkswagen group which is well-known for quality cars, but prior to this, Skoda owners were amongst the most loyal because even though the cars fell short of most others in style, comfort and performance, they were tough, reliable and very good value for money.

Some products and services are marketed as ‘basic’, having none of the extra features and benefits of more expensive alternatives. Good examples would be Easyjet and George at Asda clothing ranges. Even though it may be ‘low quality’ in terms of style

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or features, these products still give good value for money for their overall level of quality.

For the firm, good design is fundamental, so that the product can be produced efficiently, reliably and at the lowest possible cost. Also see the revision note on Quality Improvement. If products are being made for other, large firms, then the quality standards may be dictated by the firm placing the order.

Why is quality important?

Quality helps determine a firm’s success in a number of ways:

Customer loyalty – they return, make repeat purchases and recommend the product or service to others.

Strong brand reputation for quality Retailers want to stock the product As the product is perceived to be better value for money, it may command a

premium price and will become more price inelastic Fewer returns and replacements lead to reduced costs Attracting and retaining good staff

These points can each help support the marketing function in a business. However, firms have to work hard to maintain and improve their reputation for quality, which can easily be damaged by a news story about a quality failure. See the Tutor2U Business Blog story about Cadburys and salmonella. (LINK)

How is quality measured?

Aside from achievement of standards like BSI, firms can measure quality aspects such as:

Failure or reject rates Level of product returns Customer complaints Customer satisfaction – usually measured by a survey Customer loyalty – evident from repeat purchases, or renewal rates

A detailed analysis of areas such as these would be an important part of Quality Improvement – see the separate revision note for more details

Some areas for evaluation

Quality is subjective, it is a matter of personal opinion and what constitutes an acceptable level of quality will vary from one individual to another.

Not all aspects of quality are tangible – for example the degree of assurance given by a firm’s name or reputation can be very important even though it is hard to measure.

Quality is always evolving because of things like improved technology, better materials, new manufacturing techniques and fresh competitors. No firm can afford to stand still as far as quality is concerned.

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Whilst controlling quality has benefits to the firm, it can also be costly to do, so it is important that the benefits outweigh the costs in the long term.

Quality Improvement See the revision note ‘Quality – introduction’ for a summary of what determines the quality of a product or service, and why it is important to firms. This revision note looks at ways of controlling and improving quality.

Quality control

This method checks the quality of completed products for faults. Quality inspectors measure or test every product, samples from each batch, or random samples – as appropriate to the kind of product produced.

Advantages - inspection is intended to prevent faulty products reaching the customer. This approach means having specially trained inspectors, rather than every individual being responsible for his or her own work. Furthermore, it is thought that inspectors may be better placed to find widespread problems across an organisation.

Disadvantages – individuals are not necessarily encouraged to take responsibility for the quality of their own work. Giving workers responsibility for their own work helps to improve motivation by increasing the interest and variety in the job, so quality assurance tends to be preferred for this reason as well. Other approaches to quality (such as TQM, see below) mean that there is much less need for quality control if the whole process is geared towards ‘zero defects’ or getting it right first time.

Rejected product is expensive for a firm as it has incurred the full costs of production but cannot be sold as the manufacturer does not want its name associated with substandard product. Some rejected product can be re-worked, but in many industries it has to be scrapped – either way rejects incur more costs,

A quality control approach can be highly effective at preventing defective products from reaching the customer. However, if defect levels are very high, the company’s profitability will suffer unless steps are taken to tackle the root causes of the failures.

Quality Assurance

This is an approach that aims to achieve quality by organising every process to get the product ‘right first time’ and prevent mistakes ever happening. This is also known as a ‘zero defect’ approach.

In quality assurance, there is more emphasis on ‘self-checking’, rather than checking by inspectors. Advantages include:

Costs are reduced because there is less wastage and re-working of faulty products as the product is checked at every stage.

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It can help improve worker motivation as workers have more ownership and recognition for their work (see Herzberg).

It can help break down ‘us and them’ barriers between workers and managers as it eliminates the feeling of being checked up on.

With all staff responsible for quality, this can help the firm gain marketing advantages arising from its consistent level of quality.

Total Quality Management (TQM)

This is a specific approach to quality assurance that aims to develop a quality culture throughout the firm. In TQM, organisations consist of ‘quality chains’ in which each person or team treats the receiver of their work as if they were an external customer and adopts a target of ‘right first time’ or zero defects.

Although the philosophy was developed by Japanese companies, it was originally put forward by an American, Edward Deming whose 14-point plan applies to management in general, but is especially useful in respect of quality.

Quality Benchmarking

Benchmarking is a general approach to business improvement based on best practice in the industry, or in another similar industry. It can provide a useful quality improvement target for a business.

This can be a helpful approach for services as well as for products – for example a fast food business selling fish and chips could decide that it wanted to aim to equal McDonalds’ speed of meeting customer orders for takeaway food. A financial services firm might want its call centre staff to answer 95% of telephone calls within six rings, if this is the practice of the best in the industry.

In some cases, firms can use internal benchmarking in which best practice may be set with reference to another department, or by a similar factory in a different location.

BS5750/ISO 9000

BS5750 is a British Standard for quality assurance and ISO 9000 is the international equivalent. This approach requires that firms set out clear procedures for all business processes – usually these are set out in manuals and reinforced through staff training. Regular audits are carried out to ensure that processes are being carried out consistently according to standards.

This approach was very common in the 1980s and 1990s and many major organisations would only buy products and services from firms that possessed BS5750 accreditation. In general, accreditation was achieved by engaging external consultants to help with documenting processes and setting and monitoring targets. Many firms achieved substantial benefits from this process, by reduction in waste and an improved reputation for quality.

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However, BS5750 can result in a rigid and inflexible, process-driven approach to providing products and services to customers. It can mean that employees are not encouraged to take ownership for improvement, and therefore it can be at odds with approaches such as Kaizen and Quality Circles. Furthermore, just because a firm holds BS5750 and is delivering a consistent service, it does not guarantee that the service is better than a firm that does not have the award.

Quality Circles, Continuous Improvement, Kaizen

See separate revision note on lean production which can be used to help engage all workers in improving quality.

Quality Improvement Quality Management

See the revision note ‘Quality – introduction’ for a summary of what determines the quality of a product or service, and why it is important to firms. This revision note looks at ways of controlling and improving quality.

Quality control

This method checks the quality of completed products for faults. Quality inspectors measure or test every product, samples from each batch, or random samples – as appropriate to the kind of product produced.

Advantages - inspection is intended to prevent faulty products reaching the customer. This approach means having specially trained inspectors, rather than every individual being responsible for his or her own work. Furthermore, it is thought that inspectors may be better placed to find widespread problems across an organisation.

Disadvantages – individuals are not necessarily encouraged to take responsibility for the quality of their own work. Giving workers responsibility for their own work helps to improve motivation by increasing the interest and variety in the job, so quality assurance tends to be preferred for this reason as well. Other approaches to quality (such as TQM, see below) mean that there is much less need for quality control if the whole process is geared towards ‘zero defects’ or getting it right first time.

Rejected product is expensive for a firm as it has incurred the full costs of production but cannot be sold as the manufacturer does not want its name associated with substandard product. Some rejected product can be re-worked, but in many industries it has to be scrapped – either way rejects incur more costs,

A quality control approach can be highly effective at preventing defective products from reaching the customer. However, if defect levels are very high, the company’s profitability will suffer unless steps are taken to tackle the root causes of the failures.

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Quality Assurance

This is an approach that aims to achieve quality by organising every process to get the product ‘right first time’ and prevent mistakes ever happening. This is also known as a ‘zero defect’ approach.

In quality assurance, there is more emphasis on ‘self-checking’, rather than checking by inspectors. Advantages include:

Costs are reduced because there is less wastage and re-working of faulty products as the product is checked at every stage.

It can help improve worker motivation as workers have more ownership and recognition for their work (see Herzberg).

It can help break down ‘us and them’ barriers between workers and managers as it eliminates the feeling of being checked up on.

With all staff responsible for quality, this can help the firm gain marketing advantages arising from its consistent level of quality.

Total Quality Management (TQM)

This is a specific approach to quality assurance that aims to develop a quality culture throughout the firm. In TQM, organisations consist of ‘quality chains’ in which each person or team treats the receiver of their work as if they were an external customer and adopts a target of ‘right first time’ or zero defects.

Although the philosophy was developed by Japanese companies, it was originally put forward by an American, Edward Deming whose 14-point plan applies to management in general, but is especially useful in respect of quality.

Quality Benchmarking

Benchmarking is a general approach to business improvement based on best practice in the industry, or in another similar industry. It can provide a useful quality improvement target for a business.

This can be a helpful approach for services as well as for products – for example a fast food business selling fish and chips could decide that it wanted to aim to equal McDonalds’ speed of meeting customer orders for takeaway food. A financial services firm might want its call centre staff to answer 95% of telephone calls within six rings, if this is the practice of the best in the industry.

In some cases, firms can use internal benchmarking in which best practice may be set with reference to another department, or by a similar factory in a different location.

BS5750/ISO 9000

BS5750 is a British Standard for quality assurance and ISO 9000 is the international equivalent. This approach requires that firms set out and follow clear procedures for all business processes - see separate revision note for more detail.

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Quality Circles, Continuous Improvement, Kaizen

See separate revision note on lean production which can be used to help engage all workers in improving quality.

Quality StandardsLegislation

In many products and services, quality standards are set by Health & Safety legislation and enforced by Trading Standards officers.

This is especially important in areas such as catering, food, health and electrical products and for any product that might pose risks to users if the quality was poor.

Other relevant legislation would include food labelling and weights and measures, which aim to ensure that the product is as described, contains the correct quantity, and to include correct information about ingredients.

Some examination specifications may require a more detailed understanding of relevant legislation, as part of the study of external influences on business.

British Standards and ISO

The British Standards Institute (BSI, and the International Equivalent, ISO) publishes standards for many kinds of product and services, known as the ‘Kitemark’, which can be seen as a badge of quality.

BS5750/ISO 9000

BS5750 is a British Standard for quality assurance and ISO 9000 is the international equivalent. This approach requires that firms set out clear procedures for all business processes – usually these are set out in manuals and reinforced through staff training. Regular audits are carried out to ensure that processes are being carried out consistently according to standards.

This approach was very common in the 1980s and 1990s and many major organisations would only buy products and services from firms that possessed BS5750 accreditation. In general, accreditation was achieved by engaging external consultants to help with documenting processes and setting and monitoring targets. Many firms achieved substantial benefits from this process, by reduction in waste and an improved reputation for quality.

However, BS5750 can result in a rigid and inflexible, process-driven approach to providing products and services to customers. It can mean that employees are not encouraged to take ownership for improvement, and therefore it can be at odds with approaches such as Kaizen and Quality Circles.

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Furthermore, just because a firm holds BS5750 and is delivering a consistent service, it does not guarantee that the service is better than a firm that does not have the award.

CE Mark

In electrical products, the CE mark signifies a standard of safety.

Royal Warrants

Some British firms are fortunate to gain a ‘Royal Warrant’, which allows them to state that they are endorsed by Royal Appointment to Her Majesty the Queen, to the Duke of Edinburgh or to the Prince of Wales. This accreditation will be proudly displayed on the product packaging and on the firm’s correspondence and marketing literature.

Firms are awarded royal warrants when favoured by a member of the Royal Family, and cannot be formally ‘applied for’. Interestingly, Cadbury manufactures some products abroad whilst still displaying its royal appointment, and Harrods famously lost its royal appointment, apparently following the public falling-out between the firm’s owner Mohammed Fayed, and the British royal family.

Branding as a mark of quality

Many firms rely on their own brand to signify quality. Firms such as BMW, Sony, Rolls-Royce and Waitrose all place quality at the centre of their marketing. Clearly, it is important that, in the long run, the product or service supplied does actually measure up to what the marketing says about its quality.

Applications of ICT - Introduction ICT is now part of everyday life for many, if not most, businesses. These revision notes set out the key ICT applications that you need to know about for A-level Business Studies. Many of these applications will be familiar to you from your own experience, whereas others will not be.

The key uses of ICT have been separated into the following convenient headings, each of which has its own revision note on Tutor2U.

There is some overlap between these notes – business practices do not always lend themselves to easy classification.

Customer Service Workplace efficiency Planning & controlling operations Marketing Finance and accounting E-commerce Collaboration & Outsourcing Banking and payments Data Protection Act 1998

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As with most aspects of Business Studies A-level, it is crucial that your examination responses demonstrate the following skills, as required by the question that has been set:

Knowledge/Content – show that you understand what the ICT application is and broadly how it works.

Application – why does it matter in this particular case?

Analysis – what business results might be achieved – for example, as we shall see, EDI might enable a Just in Time production process to run more efficiently, ensuring that orders are met on time and thereby improving customer retention.

Evaluation – remember, all ICT systems are there to support the staff, suppliers and/or customers of a business – rarely will an ICT system entirely take the place of people. ICT systems can break down and sometimes they can seem too rigid and inflexible.

Applications of ICT in Customer ServiceThe real key to the application of ICT to Customer Service is in the use of customer databases.

Customer databases are electronic repositories of all manner of customer information including:

Contact information - name, address, telephone, email address etc. Security information to help confirm identity Buying history; products bought, times, days of week etc Payment information Policy renewal dates

… and so on

Whenever a customer logs on, makes a telephone call or presents a loyalty card for swiping, the customer service representative - or even the form’s website - has a wealth of information available to offer products and services that the customer is likely to be interested in.

Every time the customer makes a purchase or has an interaction with the business, more information can be added. When data is gathered at the ‘checkout’, this is done through EPOS (Electronic Point of Sale) – usually based on barcode scanners.

As these databases are electronic and centralised, it is no longer necessary to hold customer data in a local branch. This is the key to a move to on-line banking and to call centres, including offshore call centres, and the data can be accessed anywhere.

Modern customer databases are relationship centred, that is to say that the key is the customer himself or herself. If a member of the customer service staff makes a query

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about the customer, they would expect to be able to see all the related accounts and/or orders.

In the early days of customer databases, information was usually held according to individual products or account numbers. Data was primarily used for accounting purposes and had limited use for customer service, marketing, sales etc.

Electronic customer serviceCustomer databases allow many organisations to offer customer service through new channels, such as telephone and on-line, via the Internet. Although some customers bemoan the loss of personal contact, many organisations find that massive cost savings can be made and in many cases, service hours can be extended – sometimes 24 hours a day.

Some new organisations have been able to build their entire operations through electronic customer service – good examples include: Direct Line, Amazon, eBay, Dell, and Esure.

Customer Relationship Management (CRM)

CRM systems attempt to bring all of the above – and more - together in one system customer-centric system.

For example, a business like Amazon uses CRM to do things like:

Email customers with recommended purchases Recognise the customer as soon as he/she logs in Present customer-targeted web pages, promoting items likely to be of interest Be ready to accept orders without having to re-enter all the payment details Offer promotions and incentives Manage loyalty programmes Manage prices – not all customers have the same pricing Contact customers for feedback and surveys

Although CRM systems have tended to be the preserve of major companies, systems are becoming available that are affordable by smaller businesses.

Applications of ICT - Data Protection Act 1998

Any organisation that keeps and processes personal data has to be registered under the Data Protection Act 1998, and to keep its regulations, which mainly require that the data about individuals must be:

Kept Secure

Accurate

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Kept up to date

Adequate, relevant and non-excessive for the purpose

Only used for the purposes for which it was supplied

Retained only for as long as needed by the purposes for which it was obtained.

There are certain rights that individuals have as a result of these provisions, for example being able to deny the use of data given for direct marketing purposes.

This is one reason why application forms give the applicant the option to specify that they wish that their data would not be used for marketing purposes.

Many surveys about eBusiness have shown that one of the main barriers for consumers has been worry about issues like fraud, identity theft, spamming, ‘phishing’ and so on.

As a Business Studies student, remember that businesses must comply with the law and need to treat their customers, employees, suppliers etc with respect - this is good business practice, as well.

Good data management and security are therefore absolutely essential.

Applications of ICT in Finance & Accounting

Accounting recordsMost firms have accounting software packages to help produce statutory accounts and reports for bankers and management, as well as to help with the day-to-day control of its finances. One very popular package amongst small to medium UK businesses is Sage www.sage.co.uk, which also has modules to manage, for example, payroll and debt factoring facilities.

The main components of an accounting system would include modules such as:

Invoicing Bought ledger (trade creditors) Sales ledger (trade debtors) Bank reconciliation Cash flow forecasts Producing draft accounts and trial balances

Spreadsheets Widely used by finance departments to help manage cash flow, for bank reconciliations and in credit control.

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Any department holding a budget for expenses and/or revenues would typically use a spreadsheet to help create the budget in the first place, and then to monitor incomes and expenditure and any variances.

Credit control Remember the work in Unit 1, looking at managing cash flow? Well, much of this work can be made much more efficient with computerised credit control. As businesses typically buy from and sell to other businesses on credit terms, it is essential to have up to date and accurate information about which creditors need to be paid, and when money is due from debtors.

Banking & payments

Businesses are able to take advantage of electronic banking which allows them to check their bank account records in real time – saving time and helping ensure that payments due have been made and received, and also to operate the bank account within any agreed overdraft limit.

Large and overseas payments can be made quickly and securely with on-line banking, as long as the business has its own security checks to protect against theft by staff or by anyone else who managed to obtain account details and passwords.

EFTPOS Electronic Funds Transfer at Point Of Sale is familiar to most of us in the form of card readers that swipe credit and debit cards for payments. This has the advantage of avoiding the expense and risk of handling cash and in generally a much more efficient payment method. Again, even quite small businesses are now using this technology, and portable EFTPOS devices have made it feasible to use in places such as taxis and restaurants.

Applications of ICT in Marketing

Market research Customer databases (see notes on applications of ICT – Customer Service) also a useful mine of information for marketing and operational purposes – NB this would be a form of secondary market research, as the data has not been gathered for the purpose of market research. In fact, sophisticated analysis of these databases is often known as data mining.

ICT can be useful in helping with primary market research, such as on-line surveys and questionnaires. Firms that run Ecommerce websites can request customers to participate and often offer some kind of incentive for doing so, such as a code that can be entered for a discount at their next visit.

Targeted marketing promotion

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Customer data can provide marketing with a very powerful means of closely targeting

Direct mail Email and Telemarketing

Campaigns can be refined to choose only people meeting the right criteria for a given product or service, hopefully improving the response rates to the campaign. One reason that consumers find ‘junk mail’ so irritating is that much of it is poorly targeted; whereas many do buy as a result of receiving information about products they are actually interested in.

Also see the revision notes about CRM under ‘applications of ICT in customer service’.

On-line advertising Many businesses advertise through ‘banners’ and similar advertisements on other websites. This offers potential customers a quick and easy way to respond to an advertising message. Of course there is so much on-line advertising that careful targeting is essential, otherwise effort is wasted. The good news is that large popular websites such as Google (and Tutor2U!!) have very sophisticated systems to help ensure that advertisements on their websites are presented according to what the particular ‘surfer’ seems to be looking for on that website. Payment for web advertising tends to include an element linked to the number of ‘click-throughs’ – in other words the number of surfers who actually click on the advertiser’s link.

Corporate websites Most medium to large business, and many small businesses, maintain a website. This would usually include basic contact information as well as key marketing messages about the business and its products. The website offers a good place to keep public relations information such as press releases and other announcements.

Of course, many websites are also an electronic store – see also the revision notes about applications of ICT in electronic commerce.

Geo-demographics This is a software package that overlays demographic data over a map. For example, a retailer might choose its location partly on the basis of the demographic make-up of the local population. This could help them to place their store in the most convenient place for a suitable size of target market.

Demographics is all about measuring and classifying populations according to criteria such as; age, sex, income, level of education, household composition, car ownership and so on.

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Applications of ICT - Planning & Controlling Operations

Stock control Students will be familiar with the principles of stock management from the AS level studies. Increasingly, businesses use real time data from EPOS, on-line stores and electronic sales ledgers to drive their re-order processes.

EDI (Electronic Data Interchange) facilitates exchange of orders between different businesses and allows Just In Time stock ordering. Other businesses place orders electronically once production schedules have been set for the next period.

With computerised stock control, businesses should be able to check stock levels almost on a real-time basis. Stock checks are still required to reconcile stock levels that may be incorrect due to faults in scanning or because of pilferage or other wastage.

CAD/CAM - Computer Aided Design/ Computer Aided Manufacture Computer Aided Design and Computer Aided Manufacture are two systems that tend to work together.

Computer Aided Design helps design products on computers, rather than having to create endless drawings. The system can create realistic 3D images of the finished product.

CAD also allows virtual testing of the product before it is actually made, dramatically reducing lead times and minimising waste in new product development.

As CAD acts together with CAM, its outputs are designed to optimise designs for efficient manufacture with CAM systems.

CAM uses computers to control tooling such as CNC and other robotised machinery. Benefits would be expected to include; improved quality, reduced wastage, faster production and less reliance on labour, in other words, it is more capital intensive. In many cases, CAM facilitates the manufacture of designs that would have been impossible without this technology.

Project management

The key Project Management tool that appears in A-level Business Studies is Critical Path Analysis (CPA), also known as Network Analysis – see separate Tutor2U revision note for details of CPA.

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Project Planning software, such as Microsoft Project, allows project managers to enter tasks, lead times, dependencies and staff skills and availability, even allowing for holiday, and the system will produce an optimised work schedule. Any student who has attempted to produce even a simple CPA will appreciate how helpful such a software package would be!

The system produces regular reports for project managers to check progress and take any corrective action. Networked versions enable different people to query the system and keep it up to date.

Copyright Microsoft – source http://download.microsoft.com/download/2/9/d/29d9b1f1-f875-430e-8138-8d0a23dbd1c4/ProjectStdGuide.doc

MRP/ERP – Management Resource Planning/Enterprise Resource Planning

These are names for computer systems that attempt to manage the whole company and draw together all aspects of its operations and administration. In practice, this is a considerable challenge and the software firms that offer this service tend to do so by integrating a number of existing systems to allow them to ‘talk’ to one another by exchanging data.

Students with a particular interest in ICT might wish to do their own research about ‘middleware’ and XML, a set of data standards that software developers adopt to help with systems integration.

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Applications of ICT - Workplace EfficiencyMany of the key uses of ICT in the office will be familiar to A-level students from their own experience – in particular, the Microsoft Office ® suite of software including; word processor, database, spreadsheet, presentation, email etc.

Offices and many other workplaces typically have networked PCs with centralised databases and high-speed Internet connections – just as seen in modern schools, except that most users would each have their own desktop or laptop computer.

Email Increasingly, the majority of office workers have company email accounts available on their desktop PC. This provides a cheap and fast means of communication within the company and with customers and suppliers.

Possible areas for discussion include; wasting time on non-company business, and, susceptibility to virus attacks.

Refer also to your notes about communications and remember, not everyone checks his or her email regularly.

Word processing and Desktop Publishing (DTP)

Word processing has taken over from typing in most workplaces, and means that many – if not most - office workers now create their own letters and documents, rather than pass written notes or a voice recording to typists.

More sophisticated DTP software with graphics capability means that brochures, newsletters, pricelists and other official documents can easily be produced ‘in-house’, rather than having to pass the work to an outside agency.

‘Teleworking’ Some of the above solutions, combined with relatively cheap desktop and notebook PCs and widely available broadband and connections, mean that many workers can do at least part of their job remotely. In some cases, this means workers working from home or when away on business (or ‘holiday’!).

Teleworking can help provide practical ways of offering more flexible working conditions. This means that many people can work who would find it hard to manage regular office hours. In turn, this can widen the available pool of experienced and qualified staff – such as people with childcare commitments, other carers and the disabled.

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Teleworking is also the key to outsourcing call centre and other office work to overseas centres such as India, where there is an abundance of low cost, well-qualified staff and a good infrastructure.

Document archives Rather than store correspondence and other documents in paper form, they can be scanned and stored electronically for instant retrieval from anywhere on a company’s network. This can dramatically reduce the cost of storing and managing paper files, although one only has to visit a typical office to see that we are a long way from being ‘paperless’.

Personnel management – employee databases

Human Resources (or Personnel) Departments use employee databases to help with areas such as:

Payroll, Benefits, Holidays, Pensions and General administrative purposes

Evaluation – FLEXIBILITY For businesses and for workers, ICT in the office undoubtedly offers scope for more flexibility in the location and time at which work is done. For many people, this makes the difference between working, and not working, and so it has a positive effect on the economy, allowing more people to contribute.

However ICT enables the easy transfer of work to other countries, and so it has been a cause of UK job losses too. Nevertheless, in the UK, there has been rising employment as workers have been concentrating on service and other jobs with greater added value.

Combined with mobile telephones, this technology means that many people, especially senior managers, are never really able to enjoy any holiday or leisure time. Many families lose out due to a poor ‘work-life balance’, and managers can suffer ill health through excessive stress.

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