Decision making to improve operational performance PDF

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LECTURE NOTES ON IMPROVING OPERATIONAL PERFORMANCE...

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Decision making to improve operational performance 3.4.1 Setting operational objectives The value of setting operational objectives Operations = the process if taking inputs and turning them into outputs The importance of setting objectives: - The operations function of a business is the ‘engine room’ of the business, and like all engine, performance can and should be measured - All business operations of whatever size and complexity should have objectives set Cost and volume targets: - However it chooses to compete, a business needs to ensure that operations are cost effective - The traditional measure of cost effectiveness is “unit cost” = the average cost of producing a unit of the product - Business competing in the same industry face similar cost structure, but each will vary in terms of its productivity, efficiency, and scale of production - The business with the lowest unit cost is in a strong position to be able to compete by being able to offer the lowest price, or make the highest profit margin at the average industry price - Objectives relating to costs and volume tend to focus on:  Productivity and efficiency (e.g. units per week or employee)  Unit costs per item  Contribution per unit (breakeven)  Number of items to produce (e.g. per time period, or per machine etc) - Example = Tkmaxx, a discount retailer, as they bring in old stock and they sell them at a lower price. They also like to have a larger volume of a range of clothes/shoes/accessories etc so that the customer has a wide range of choice. However they don’t have many if the same product as all of their products are end of line/range. Quality targets: - Achieving or exceeding the required level of quality is also essential for a successful business - There are many ways of measuring the achievement of quality including  Scrap/defect rates – a measure of poor quality  Reliability – how often something goes wrong; average lifetime use  Customer satisfaction – measured by customer research  Number/incidences of customer complaints  Customer loyalty – percentage of repeat business Speed of response and flexibility targets: - This examines how effectively the assets of a business are being utilised, and how responsive the business can be to short term or unexpected changes in demand - Efficiency and flexibility are key drivers of unit costs. Relevant objectives would include  Labour productivity – output per employee, units produced per production line, sales per shop  Output per time period – potential output per week on a normal shift basis, potential output assuming certain levels of capacity utilisation  Capacity utilisation – the proportion of potential output actually being achieved  Order lead times – the time taken between receiving and processing an order Environmental targets:

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This is an increasingly important focus of operational targets as businesses face more stringent environmental legislation, and consumers increasingly base their buying decisions on firms that take environmental responsibility seriously Targets are usually closely integrated into a firms approach to corporate social responsibility Examples include  Use of energy  Proportion of production materials that are recycled  Compliance with waste disposal regulations/proportion waste land fill  Supplies of raw materials from sustainable sources

Added value targets: - Added value is equivalent to the increase in value that a business creates by undertaking the production process - Adding value is the difference between the price of the finished product/service and the cost of the inputs involved in making it External and internal influences on operational objectives and decisions Internal influences: - Corporate objectives – as with all the functional areas, corporate objectives are the most important internal influence. An operations objective (e.g. higher production capacity) should not conflict with a corporate objective (e.g. lowest unit costs) - Finance – operations decisions often involve significant investment and cost. The financial position of the business (profitability, cash flow, liquidity) directly effects the choices available - Human resources – for a services business in particular, the quality and capacity of the workforce is a key factor in affecting the operational objectives. Targets for productivity, for example, will be affected by the investment in training and the effectiveness of workforce planning - Marketing issues – the nature of the product determines the operational set up. Regular changes to the marketing mix – particularly product – may place strains on the operations, particularly if production is relatively inflexible External influences: - Economic environment – crucial for operations. Sudden or short term changes in demand directly impact on capacity utilisation, productivity etc. Changes in interest rates impact on the cost of financing capital investment in operations - Competitor efficiency flexibility – quicker, more efficient, or better quality competitors will place pressure on operations to deliver at least comparable performance - Technological change – also very significant – especially in markets where product life cycles are short, innovation is rife and production processes are costly - Legal and environmental change – greater regulation and legislation of the environment places new challenges for operations objectives

3.4.2 Analysing operational performance Interpretation of operations data Operations data includes - Labour productivity - Unit costs - Capacity utilisation These measure how efficient the business is working and whether they are using the resources around them to their full capacity. Operational data also five firms the chance to compare with other

competitors and set further targets to reach goals in order to achieve a larger market share within the industry the operate in. Calculation of operations data Labour Productivity = this measures the level of output achieved with a given number of employees (how efficient the workforce is). - = total output / number of employees - The higher the number the better as it means there is a higher and more efficient rate of production per employee Unit Costs (average costs) = this measures the costs of producing ONE unit/product of output - = total costs (fixed costs + variable costs) / total output - The lower the number the better as it will give you more profit (higher profit margins – revenue is the same). Also, if you have lower costs, then businesses tend to lower prices to gain more sales. If firms were to lower the price at the same level that they lower costs, they maintain the same level of profit. Capacity Utilisation = the percentage of total capacity that is being achieved in a given period - = actual level of output / maximum level of output x 100 - This higher to percentage to better as it means the business is using their capacity to the best of its ability. When a business is operating at less than 100% capacity, it has ‘spare capacity’ The use of data in operational decision making and planning The use of data such as capacity utilisation, unit costs, and labour productivity, all allow for decisions to be made more efficiently and effectively. It also means the business is able to flow at a steady pace to reach targets set by a managers and the business itself. The use of data is instrumental in decision planning and making as it allows for manager to make informed decisions based on the workforce around them and how they impact the firm as a whole.

3.4.3 Making operational decisions to improve performance: increasing efficiency and productivity The importance of capacity Why capacity is an important concept: - It is often used as a measure of productive efficiency - Average production costs tend to fall as output rises – so higher capacity utilisation can reduce unit costs, making a business more competitive - So firms usually aim to produce as close to full capacity (100% utilisation) as possible It is important to remember that increasing capacity often results in higher fixed costs. A business should aim to make the most productive use it can of its existing capacity. The investment in production capacity is often significant. Think about how much it costs to set up a factory; the production line with all its machinery and technology. The importance of efficiency and labour productivity Why measuring and monitoring labour productivity matters: - Labour costs are usually a significant part of total costs - Business efficiency and profitability closely linked to productive use of labour - In order to remain competitive, a business needs to keep its unit costs down

How to increase efficiency and labour productivity How a business can improve its labour productivity: - Measure performance and set targets - Streamline production processes - Invest in capital equipment (automation + computerisation) - Invest in employee training - Make the workplace conducive to productive effort - Training – e.g. on-the-job training that allows an employee to improve skills required to work more productively - Improved motivation – more motivated employees tend to produce greater output for the same effort than de-motivated ones - More or better capital equipment (this links with the topic of automation) - Better quality raw materials (reduces amount of time wasted on rejected products) - Improved organisation of production – e.g. less wastage How to improve efficiency: - Improve land fertility - Use renewable or recyclable materials - Increase training and education - Increase scale of production - Use a optimal mix of output - Invest more in capital equipment Cost Minimisation = a financial strategy that aims to achieve the most cost-effective way of delivering goods and services to the require level of quality. Economies of Scale = these arise when unit costs fall as output increases - Technical – large-scale businesses can afford to invest in expensive and specialist capital machinery - Specialist – larger businesses split complex production processes into separate tasks to boost productivity – by specialising in certain tasks or processes, the workforce is able to produce more output in the same time - Purchasing – reduced costs for larger businesses in buying inputs, such as raw materials and parts, or of borrowing money because of a larger discount given to a larger purchase than smaller businesses can make - Marketing – a large firm can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discounted prices if it has sufficient negotiation power in the market - Financial – larger firms are usually rated by the financial markets to be more 'credit worthy' and have access to credit facilities, with favourable rates of borrowing – in contrast, smaller firms often face higher rates of interest on overdrafts and loans - Managerial – this is a form of division of labour – large-scale manufacturers employ specialists to supervise production systems, manage marketing systems and oversee human resources The benefits and difficulties of lean production Lean Production = an approach to management that focuses on cutting out waste, whilst ensuring quality. This approach can be applied to all aspects of a business – from design, through production to distribution. Lean production aims to cut costs by making the business more efficient and responsive to market needs.

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Cut out or minimise activities that do not add value to the production process, such as holding of stock, repairing faulty product and unnecessary movement of people and product around the business. Less waste therefore means lower costs, which is an essential part of any business being competitive:  Over-production: making more than is needed – leads to excess stocks  Waiting time: equipment and people standing idle waiting for a production process to be completed or resources to arrive  Transport: moving resources (people, materials) around unnecessarily  Stocks: often held as an acceptable buffer, but should not be excessive  Motion: a worker who appears busy but is not actually adding any value  Defects: output that does not reach the required quality standard – often a significant cost to an uncompetitive business

Key aspects of lean production: - Time based management - Simultaneous engineering - Just in time production (JIT) - Cell production - Kaizen (Continuous improvement) - Quality improvement and management Advantages of lean production: - Lead times are cut - Damage, waste and loss of stocks/equipment are lowered - A greater focus on customer needs - Improved quality through the introduction of kaizen and quality circles - Lower costs and contribute to improved profits - Staff are more involved and potentially more motivated - Working environments are safer and cleaner Disadvantages of lean production: - The business may struggle to meet orders if their suppliers fail to deliver raw materials on time - The business is unlikely to 'bulk buy' its raw materials and, therefore, it may lose the benefit of achieving economies of scale - Buffer stocks are minimal and this may lead to the business having to reject customer orders requiring delivery immediately

Difficulties increasing efficiency and labour productivity Factors influencing how productive the workforce is: - Extent and quality of fixed assets (e.g. equipment, IT systems) - Skills, ability and motivation of the workforce - Methods of production organisation - External factors (e.g. reliability of suppliers) How to choose the optimal mix of resources The production operations of any business combine two factor inputs: - Labour – management, employees (full-time, part-time, temporary) - Capital – plant and machinery, IT systems, buildings, vehicles, offices

The relatively importance of labour and capital to a specific business can be described broadly in terms of their "intensity" (or to put it another way, significance). - Labour-intensive production relies mainly on labour - Capital-intensive production relies mainly on capital Labour intensive operations: - Labour costs higher than capital costs - Costs are mainly variable in nature = lower breakeven output - Firms benefit from access to sources of low-cost labour Capital intensive operations: - Capital costs higher than labour costs - Costs are mainly fixed in nature = higher breakeven output - Firms benefit from access to low-cost, long-term financing How to utilise capacity efficiently To operate at higher than 100% moral capacity: - Increase workforce hours (e.g. extra shifts; encourage overtime; employ temporary staff) - Sub-contract some production activities (e.g. assembly of components) - Reduce time spent maintaining production equipment Problems with operating at a higher capacity: - Negative effect on quality (possibly)  Production is rushed  Less time for quality control - Employees suffer  Added workloads & stress  De-motivating if sustained for too long - Loss of sales  Less able to meet sudden or unexpected increases in demand  Production equipment may require repair How to use technology to improve operational efficiency Main types of technology: - Robots - Stock control/sales order fulfilment programmes - Automation - Design software systems - Communications

3.4.4 Making operational decisions to improve performance: improving quality The importance of quality Quality = a measure of the worth of a product, for example its durability, reliability, or reputation The importance of quality to a business: - Gaining a competitive advantage - Impact on sales volume - Impact on selling price - Cost reductions

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Brand loyalty and reputation

Methods of improving quality Quality Control = the process of inspecting products to ensure they meet the required quality standards (check the product at the end for any mistakes) - At its simplest, quality control is achieved through inspection. For example, in a manufacturing business, trained inspectors examine samples of work-in-progress and finished goods to ensure standards are being met. - For businesses that rely on a continuous process, the use of statistical process control ("SPC") is common. SPC is the continuous monitoring and charting of a process while it is operating. Data collected is analysed to warn when the process is exceeding predetermined limits Quality Assurance = the processes that ensure production quality meets the requirements of customers (continuation of checking at each stage of production) Total Quality Management (TQM) = 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. Quality Benchmarking = a general approach to business improvement based on best practice in the industry, or in another similar industry. Benchmarking enables a business to identify where it falls short of current best practice and determine what action is needed to either match or exceed best practice. Done properly, benchmarking can provide a useful quality improvement target for a business. Kaizen = an approach 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 improvements, 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. The benefits and difficulties of improving quality Advantages of quality control: - With quality control, 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 of quality control: - Individuals are not necessarily encouraged to take responsibility for the quality of their own work. - 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

Advantages of quality assurance: - 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 The consequences of poor quality Consequences of poor quality: - Reputation - Lower sales volume - Lower price - Lower profits - More waste - Increased costs All of these factors have a knock on effect on the others

3.4.5 Making operational decisions to improve performance: managing inventory and supply chains Ways and value of improving flexibility, speed of response, and dependability Improving flexibility: - Product flexibility – switching from producing one product to another  +ve = they may have more customer loyalty as they are branching out into different market sectors and so they will have more diversity within their firm (seem like they care more about customers)  -ve = they may mess up their product up and then not succeed in that sector meaning they wil...