Operations Management Fundamentals: Productivity, Stock, and JIT

Operations Management Fundamentals

Operations are concerned with the use of inputs to provide outputs in the form of products and services. Operations managers should consider:

• Efficiency of Production: Keeping costs low.
• Quality: Ensuring the product is suitable for its purpose.
• Flexibility: Adapting to new processes and products.

Stages of the Operation Process

The operation process involves converting a consumer need into a product that can be produced efficiently, organizing operations, deciding on production methods, and setting and maintaining quality standards.

Production and Productivity

• Production: The process of converting inputs into outputs.
• Level of Production: The number of units produced during a specific time period.
• Productivity: The ratio of outputs to inputs during production.

Measures of Productivity

• Labour Productivity: Total output in a given time period / Total workers employed.
• Capital Productivity: Output / Capital employed.

Ways to Raise Productivity

• Improve staff training.
• Enhance worker motivation.
• Purchase more technologically advanced equipment.
• Implement more efficient management practices.

It is important to note that productivity does not guarantee business success. Greater effort and contribution may lead to higher wage demands. If productivity increases but sales do not, workers may face redundancy.

Efficiency and Effectiveness

• Efficiency: Producing output at the highest possible ratio of outputs to inputs.
• Effectiveness: Meeting the objectives of the enterprise by satisfying customer needs.

Capital-Intensive and Labour-Intensive Processes

Capital-Intensive Processes

These processes require a relatively high level of capital investment compared to labour costs (e.g., machinery, equipment).

• Firms aim for their capital investment to be fully utilized.
• Decreasing scales of production might be costly.

Labour-Intensive Processes

These processes require a relatively high level of labour compared to capital investment (e.g., human effort).

• The costs of labour include wages, other benefits, recruitment, and training.
• Labour-intensive processes are more likely to be seen in job production and smaller-scale enterprises.

Types of Stock

• Stocks of raw materials.
• Work in progress.
• Stocks of finished products.

Stock Holding Costs

• Opportunity costs.
• Storage costs.
• Capital tied up.
• Risk of wastage and obsolescence.

Costs of Not Holding Stocks

• Lost sales.
• If raw materials run out, production stops, leading to idle workers.
• Special orders could be expensive.
• Loss of bulk-buy discounts.

Controlling Stock Levels

Stock control graphs are used to monitor a firm’s stock position. These charts record stock levels, stock deliveries, buffer stocks, and maximum stock levels over time.

• Maximum Stock Level: The maximum amount of stock a business wishes to hold.
• Re-order Level: A trigger point; when stocks fall to this level, the next order should be placed.
• Lead Time: The amount of time between placing an order and receiving the stock.
• Minimum Stock Level: The minimum amount of product the business wants to hold in stock.
• Buffer Stock: An amount of stock held as a contingency for unexpected orders or delays from suppliers.

Just-In-Time (JIT) Manufacturing

This is a method of manufacturing products that aims to minimize:

• Production time.
• Production costs.
• The amount of stock held in the factory.

Advantages of JIT

• Cash flow is improved, as less money is tied up in stock.
• Less need for storage space.
• The business builds strong relationships with its suppliers.

Disadvantages of JIT

• The business may struggle to meet orders if suppliers fail to deliver raw materials on time.
• The business is unlikely to 'bulk-buy', potentially missing out on discounts.
• Unexpected customer orders could not be met without sufficient stock.