Operations Management - Design Mix
Operations Management - Design Mix
Operations Management - Design Mix
BUSINESS STUDIES-AS-LEVEL
Unit-TWO: 2.3.2a – Operational Management
Using resources as efficiently as possible, keeping unit costs as low as possible so that prices
can be competitive.
Producing goods and services of the right quality/quantity so that consumers are encouraged
to develop brand loyalty.
The detailed version of operations management consists on five stages (For detail refers Page 272-
274 Ian Marcouse, 3rd Edition Book):-
Step – 1: Designing a product or service to meet the needs or desired of a particular type of
customer need.
Step – 2: Establishing the supply chain
Step – 3: Working with suppliers (cost, quality, reliability, frequency, flexibility, payment terms
etc)
Step – 4: managing quality
Step – 5: using technology effectively
An alternation term to operation is the production. Production is the process of transforming inputs
into output. During this transformation process value is added to the materials. People, materials,
machines, money and technology are all combined to produce goods and services.
An invention occurs when a new product or process is created; inventions will earn money only if they
are put into practice – in other words, innovation takes place. Innovation means using a new idea in
the market place or the work place.
Inventions are all about scientific breakthrough or laboratory breakthrough whereas innovation is all
about commercial breakthrough or market through and innovation can be classified based on class
and nature.
Nature of innovation
Product innovation: product innovations are those involving the functions provided to customers
(things interact with things).
Process innovation: process innovations are those that involve the way a product is developed,
produced and provided (people interact with things).
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Procedure innovation: procedure innovation is those involve in the way in which products and
process are integrated into the operations of the organization.
Design
The design of a product is not just about its appearance and shape. It is also about the product‟s
function, quality and durability. Designer‟s work to a design brief is seeing the criteria for looks, cost
and quality. All must be considered designing the finished product. Large firms may have their own
designing teams on the payroll. Smaller firms may rely on design consultants to turn the product idea
or requirement for a finished product.
1. Aesthetics-the look, feel, smell or taste (i.e. the appeal to the senses).
2. Function-does it work, is it reliable, is it strong enough or light enough for the consumer purpose.
3. Economic manufacture-is the design simple enough for it to be made quickly and efficiently.
Aesthetics
Balance
Required
A useful way to consider design is through the design mix. The above figure indicates the factors
which every designer should consider while designing.
The main factors that influence the design of a product can be summarized as:-
Performance of the product
Efficiency
Reliability
Ease of operation
Safety in operation
Ease of maintenance
Appearance of the product
Economy of manufacture, distribution and storage
Legal requirements (control over the paints used in toys)
Environmental concerns of the public
Market requirements
Company activity
Competitor activity
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Market – the designer must consider the marketing mix when designing the products.
Products are very difficult to market when they are unattractive, clumsy to store and display,
expensive to distribute and Overpriced
Aesthetics – designers must consider the colour, size, appearance, shape, smell and taste of
the product.
Commercial viability – business must be able to produce and sell a product at a profit.
Thought must be given to the choice of materials and the production techniques that are used
so that production cost can be kept down. If costs are likely to be too high, the design may
well be dropped.
Manufacture – designers must ensure that their designs are not expensive or technically
difficult to make.
1. Design brief
Process starts when a need is found for a new, adapted or redesigned product. Needs may be
identified by the marketing department in a design brief for the design team. This will contain
features about a product which the designers can use.
2. Design specification and analysis
One way of achieving this is for the design team, market researchers and clients to meet and
discuss their ideas. The design specification and analysis will give a clear description of the
product and its purpose, functions of the product and constraints such as size and quality.
Several techniques can be used to produce specifications. One way is to note-down all the
essential features of a product and be less interested in those, which are only desirable. Another
way is to use the technique of brainstorming which involves listing all possible alternatives or
solutions, even those which initially might be considered unlikely.
3. Alternative solutions
Solutions, which the design team has suggested, must be assessed. Sketches and working
example will help the evaluation. Finally, the team must decide which model or prototype is the
most suitable solution to the problem.
4. Realization
The design solution will be converted to the product. However, the first production run is likely
to be very small because the total design process is not yet complete.
5. Testing
Most designs are tested to check that they satisfy the customer. It is often necessary to refine or
modify the product. Some times new ideas might be generated once the design solution is in a
working situation.
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Market Research on
consumers needs and
wants
Identify gap in market
Approach Designers
Make Prototypes
Make & Test Working
Sample
Consumer trails
Tooling Up for
manufacture
Organize Supply
of Raw Materials
Full Scale
Production
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The most common tool to measure the productivity and efficiency is labour productivity and capital
productivity.
Labour productivity - this measures the amount a worker produces over a given time e.g. an
employee make 10 pairs of jeans in an hour. Measuring productivity is relatively easy in
manufacturing then service sector. Labour Productivity= Output /No. of employees
Capital Productivity - this measures the output what an organisation derived with the amount of
capital employed.
Labour intensive production - the production process is dominated by the labour i.e. it needs more
labour work to produce the product such as tailoring, farming
Capital intensive production – the production process is dominated by the capital/machinery i.e. it
needs more capital investment to be employed or used to produce the product e.g. Automobiles
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Methods of Production:
A business must decide on the most suitable method to manufacture its goods or to provide services.
Advantages:
Firms can produce unique or one-off orders according to customer needs.
Since employees work is more demanding and highly skilled, they tend to be self
motivated.
The whole process is fairly simple and easy to understand. Each worker knows their
responsibilities and roles rather easily.
Disadvantages:
Production tends to be labour intensive, so labour costs will be high.
Requires a wide range of tools especially made for specific purposes.
Lead times can be lengthy. Costs might not be recovered until the work is done.
Selling costs might be high since certain advanced products might need trained sales
staff.
Might incur difficulties with working capital management.
Not possible to achieve the economies of scale.
Advantages:
Enables mass production.
There exists flexibility.(each batch can be changed to meet customer requirements)
Division of labour.
Standardized machinery can be used.
Can keep stocks of partly finished goods and respond to unexpected demands more
quickly.
Disadvantages:
If there is no careful planning or co-ordination, then machines and workers might sit
idle.
Higher costs attached with some sophisticated machinery although there is a saving
on not having to hire skilled labour.
Bored due to repetition of work.
If batches are small, then unit costs might remain relatively high.
Money can get tied-up on stock of partly finished goods.
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4. Capacity Utilisation
The capacity utilization is about the use that a business makes from its resources and measures the
amount it is producing compared to the amount it could produce. It is the proportion of maximum
possible output that is currently being used. A football stadium is at full capacity when all the seats
are filled. A company producing 15000 units a week when the factory is capable of 20000 units has a
capacity utilization of 75%.
Capacity is measured using the formula: (Current output/Max possible output)x100
The output a firm can produce is determined by the quantity of buildings, machinery and labour it has
available. The level of output achieved when the firm is making full use of all the buildings, machinery
and labour available is the maximum output.
For a service business the same logic applies. In a shop or a bank branch, demand may exceed the
capacity at certain times of a day. A service business wishing to keep cost competitive will measure
demand at different times of the day and then schedule the staffing level to match the capacity
utilization.
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5. Stock Control
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 control system: The management process that makes sure stock is ordered, delivered and
handled in a best possible way. An efficient stock control system will balance the need to meet the
customer demand against the cost of holding stock.
In the ideal world, where businesses know demand well in advance and where suppliers always meet
delivery dates, there would be little need for stocks. In practice demand vary and the suppliers are
often late, and stocks act as a protection against unpredictable events.
Businesses hold a variety of stock for different reasons. Stock can take the form of:
Raw materials and components. These are purchased from suppliers before production. They
are stored by firms to cope with changes in the production levels. Delays in production can be
avoided if materials and components can be supplied from stores instead of waiting for a new
delivery to come in. Also if a company is let down by a supplier it can use its stocks to carry
on production
Work in progress: these are partly finished goods.
Finished goods: the main reason for keeping finished goods is to cope with changes in
demand and stock. If there is a sudden rise in demand, a firm can meet urgent orders by
supplying customers with stock holdings.
Efficient stock control involves finding the right balance. One of the reasons why control is so
important is because the costs of holding stock can be high. It involves:
Opportunity cost of holding stock. The money used to purchase stocks could have been put to
other uses, such as new machinery which might have earned the business money
Cost of storage: stock occupy space in buildings, heating, lighting and lighting costs , e.g a night
watch man, some products require special storage conditions, insure against fire theft and other
damages
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Spoilage costs: the quality of stock may deteriorate over time e.g perishable goods. It can
become out of date e.g computers
Administrative and financial costs: these include the cost of placing and processing the orders,
handling costs etc.
Stock Levels:
One of the most important tasks in the stock control is to maintain the right level of stocks. This
involves keeping stock levels as low as possible. But balancing stock at the right level is fundamental
for business success. The keeping of low or excessive stock can have harmful effects on the
business. High stock will represent money lying idle when it could be put to better use.
Opportunity cost
Liquidity Problem
Storage Cost
Insurance cost
Lighting and handling cost.
May result in theft by the employees
May result in unsold stock, if there is unexpected change in demand.
The cost of the finance
Spoilage costs
Administrative and financial cost.
Important terms
Reorder quantity - the quantity of stock ordered when a new order is placed.
Reorder level – The level of stock when order is placed.
Economic order quantity (EOQ) - This is the level of stock which minimizes costs. Getting the
EOQ involves taking into account the cost of holding stock. Costs will rise with the amount of
stock held, and the average cost of ordering stock will fall as the size of the order is increased.
Fixed reorder intervals - order of various sizes are placed at fixed time intervals. This method
ignores the economic order quantity, but ensures that stock is topped up on a regular basis.
This method may result in fluctuating stock levels.
Fixed reorder level - this method involves setting a fixed order level. Perhaps using EOQ.
Two-bin system: This method involves dividing stock into two bins. When one bin is empty a
new order is placed. When the order arrives it is placed into the first bin and stock is used
from the second bin.
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Stockpile: manufacturers build up stocks in the few months to cope up with the demand for a
particular season. Eg : Manufacturers make things for Christmas season before December
and keep it ready for the month.
Computerized stock control:
Nowadays, a stock control in most organization is carried out using computers. Barcoding has made
this operation simple. Some systems are programmed to automatically order stock when the reorder
level is reached. In some supermarkets, computerized check out system record every item stock
purchased by customers and automatically subtracts items from total stock levels.
This is a hypothetical model which would be ideal for a business. In practice, deliveries are sometime
late so there is a delay in stock arriving. Firm also may need to use their buffer stock (as shown
above). However the reorder quantities will need to be reviewed from time to time according to
demand.
Question: Explain all the possible reasons of stock-out as shown in above diagram (6 marks)
Hint: In general there are two reasons – one supplier’s side, second company side. Should explain
the possible issues in each case.
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Annual Usage.
Expressed in units, this is generally the easiest part of the equation. You simply input your
forecasted annual usage
Order Cost.
Also known as purchase cost or set up cost, this is the sum of the fixed costs that are incurred each
time an item is ordered. These costs are not associated with the quantity ordered but primarily with
physical activities required to process the order.
Carrying cost.
Also called Holding cost, carrying cost is the cost associated with having inventory on hand. It is
primarily made up of the costs associated with the inventory investment and storage cost. For the
purpose of the EOQ calculation, if the cost does not change based upon the quantity of inventory on
hand it should not be included in carrying cost. In the EOQ formula, carrying cost is represented as
the annual cost per average on hand inventory unit. Below are the primary components of carrying
cost.
Example: A firm uses 500 units of product each year. The cost of order is £600 and the cost of
holding each unit is £300. Calculate EOQ and number of orders required per year.
Hint answer: EOQ: 44.7 units, no of orders per year (annual demand/EOQ): 11 times/year.
6. Lean Management
* Lean is all about getting the right things to the right place at the right time the first time while
minimizing waste and being open to change.
"Lean Production (a term coined by IMVP researcher John Krafcik) is "lean" because it uses less of
everything when compared to mass production-half the manufacturing space, half the investment in
tools, half the engineering hours to develop a new product in half the time. Also, it requires keeping
far less than half the needed inventory on site, results in many fewer defects, and produces a greater
and ever growing variety of productions
“„Lean‟ is not a new concept. If you are reducing inventory, expanding jobs and responsibilities,
participating on a multi-functional work team, benchmarking, or creating and maintaining relationships
with customers, then you are practicing a part of lean production."
Lean manufacturing refers to an evolving dynamic new process of production covering the
total enterprise, embracing all aspects of industrial operations (product development,
manufacturing, organization and human resources, customer support) and including
customer-supplier networks, which is governed by a systemic set of principles, methods and
practices. Key lean principles are perfect first-time quality, waste minimization by removing all
activities that do not add value, continuous improvement, flexibility, and long-term
relationships.
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Lean production is an approach to production developed in Japan. Toyota, the Japanese car
manufacturer was the first company to adopt this approach. It is an integrated approach to design,
technology, components and materials and requires a new culture for the firm. The aim is to reduce
the quantity of resources used up in production.
Lean producers use less of everything, including factory space, materials, stocks, suppliers labour,
capital and time. Thus lean production raises productivity and reduces costs. It also reduces defective
products and cut down lead times. Lean producers are also able to design new products more quickly
and can offer customers a wide range of products to choose from. Seven types of waste are identified
by the Japanese proponents of Lean production:
Waste from over production
Waste of waiting time.
Waste of transportation.
Processing waste.
Inventory waste.
Waste of motion.
Waste of product defects.
- Perfect first-time quality through quest for zero defects, revealing and solving problems at their
ultimate source, achieving higher quality and productivity simultaneously, teamwork, worker
empowerment.
- Waste minimization by removing all non-value added activities making the most efficient use of
scarce resources (capital, people, space), just-in-time inventory, eliminating any safety nets.
- Continuous improvement (reducing costs, improving quality, increasing productivity) through
dynamic process of change, simultaneous and integrated product/process development, rapid
cycle time and time-to-market, openness and information sharing.
- Flexibility in producing different mixes or greater diversity of products quickly, without sacrificing
efficiency at lower volumes of production, through rapid set-up and manufacturing at small lot
sizes.
- Long-term relationships between suppliers and primary producers (assemblers, system
integrators) through collaborative risk-sharing, cost-sharing and information-sharing
arrangements.
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This is perhaps the most important concept in Japanese management. It means continuous
improvement. Every aspect of life, including social life, working life and home life is constantly
improved.
Implementing Kaizen:
It is often difficult for workers in business to look for continuous improvement all the time. Japanese
businesses tried to solve this problem by introducing PDCA (Plan, Do, Check, Action)
Plan: - Businesses must identify where improvement is needed. Data must be gathered and used
to develop a plan which will result in improvement.
Do: - Once the plan has been finalized it must be carried out.
Check:- the next stage in the cycle is to check whether or not there has been an improvement.
Action:- If the plan has been successful, it must be introduced in all parts of the business.
Cell Concept:
Cellular manufacturing adopts a different approach and involves dividing the work place into „cells‟.
Each cell occupies an area on the factory floor and focuses on the production of a „Product family‟. A
Product family is a group of products which requires a sequence of similar operations. The cell may
also be responsible for tasks such as designing, schedule planning, maintenance and problem
solving, as well as the manufacturing tasks which are shared by the team.
Advantages
– Greater flexibility
– Benefits of team-working
– Facilitates quality circles
– Empowers and motivates workers
– Reduced material handling
Disadvantages
– Costly as duplication of resources
– Supportive corporate culture is required
– Training requirements
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Kanban System:
Kanban is a Japanese term which means signboards or cards. The Kanban system is a method used
to control the transfer of materials between different stages of production. It may be a solid plastic
marker or colored ping-pong ball. Kanbans are an important part of JIT manufacturing as they
prevent the build up of stock or parts in a factory. They might be used to:
Inform the employees in the previous stage of production that a particular part must be taken from
stocks and sent to a specific destination.
Inform employees that they can begin production and add their output to stock.
Instruct external supplier‟s o send parts to a destination.
Potential problems of implementing Lean/ Kaizen
Culture – for a successful kaizen programme employees must be proud to contribute their ideas to
the company. Japanese companies do not offer any financial rewards for the participation. Their point
of view is that employees are told that kaizen is part of the company policy when they are recruited.
Training costs – changing the organization is difficult as it involves the changing attitudes, therefore
an effective continuous training programme is required to be implemented which may be expensive.
Advantages Disadvantages
It improves cash flow since money A lot of faith is placed in the
is not tied up in stocks reliability and the flexibility of
The system reduces waste, suppliers
obsolete and damaged stock Increased ordering and
More factory space is available for administrative costs
productive use Advantages of bulk buying may be
The cost of stockholding are lost
reduced significantly Vulnerable to a break in supply and
Links with and the control of machinery breakdowns
suppliers are improved Difficult to cope with sharp
More scope for integration within increases in demand
the firms computer system Possible loss of reputation if
The motivation of workers may customers are let down by late
improve, they are given more deliveries.
responsibility and encouraged to
work in teams
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Just in case
Under the traditional just in case approach a business will hold stocks of raw materials, semi finished
goods and finished goods just in case they are needed.
Stocks will be ordered less frequently but in greater bulk, enabling large scale purchasing economies
and reduced distribution costs in getting these stocks to the plant
There is also less need to create a zero defects because there are always extra supplies to deal with
errors. However just in case approach can be regarded as inflexible and outdated.
8. QUALITY MANAGEMENT
“Quality is described as those features of a product or service that allow it to satisfy
customer’s wants”.
A quality product does not have to be expensive- it simply has to meet the requirements of the
customers. A light bulb priced at 75p can be quality products but by comparison a £1 m house may
be poor quality if they do not meet customer expectations. The minimum standard demanded by
customers is that the product should work. Beyond this minimum quality level, consumers will expect
more if they pay a higher price.
To produce good quality products a firm must identify exactly what customers are looking for; this
would involve market research. The firm must then specify exactly what the product has to do and
make sure that these specifications are achieved every time.
During the 1980‟s the Japanese industry became a considerable force in world markets. The
Japanese realized that producers could not simply assume that they knew their market and that
because they produced high standard product they were the right product in the market. The
Japanese set out to find out what the customers wanted and then at every stage in the production of
goods there was one emphasis on quality. The Japanese concept of Kaizen involves continual
improvement of products and processes.
It is possible to identify three stages in the development of quality:
(i) Quality control
(ii) Quality assurance.
(iii) Total Quality Management and quality circles
i. Quality Control:
It is concerned with detecting and removing of components of products, which fall bellow the set
standard. The process takes place after the products have been produced. It may involve
considerable waste of defective products as scrap. Inspection and testing are the most common
methods of carrying out quality control. This was the type of Quality control that existed in the UK
organizations.
This traditional approach to improving the quality of a firm‟s product puts resources into inspecting the
finished products to find any faults that exist and remove them. So if all the products with defaults can
be removed the customer will only receive perfect products. As a result quality will improve.
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Quality assurance attempts to guarantee that quality has been maintained at all stages in the
production process. The aim is to stop problems occurring rather than finding them. That is it puts
emphasis on preventing mistakes. If the process can be designed in such a way that ensures defects
do not happen, inspection at the end of the production process is unnecessary.
Many quality assurance departments aim to receive recognition for the quality control framework they
have in place. This is done by qualifying for an internationally recognized qualification such as the
ISO 9000 certificate. If a firm qualifies for this certificate it can be used in the firm‟s promotional
material and is likely to attract customers. In addition many government contracts are only awarded to
firms that have gained this certificate.
However there might be some costs involved in getting the certificate (for example costs of preparing
for inspection) as well as some bureaucratic form filling.
"TQM is a management approach for an organization, centered on quality, based on the participation
of all its members and aiming at long-term success through customer satisfaction and benefits to all
members of the organization and to society."
TQM is not a technique rather a philosophy of quality being everyone‟s responsibility. The aim is to
make all workers at all levels accept that the quality of the work they perform is important. In addition
they should be empowered with the responsibility of checking this quality level before passing their
work to the next production stage.
TQM aims to cut the cost of faulty or defective products by encouraging all staff to get it right the first
time. This is in contrast to traditional inspected quality methods that considered quality control as a
cost centre of the business.
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Features of TQM:
(a) Quality chains:
In any business a series of suppliers and customers exists. For eg: a Secretary is a supplier to a
manager, who is the customer. The secretarial duties must be carried out to the satisfaction of the
manager. The chain also includes customers and suppliers outside the business. The chain remains
intact if the supplier satisfies the customer. It is broken if a person or item of equipment does not
satisfy the needs of the customer. Failure to meet the requirements in any part of the quality chain
creates problems such as delays in the next stage of production
(c) Control:
Consumers need will only be satisfied if the business has control of the factors that affects the
product quality. These may be human, administrative or technical factors. The process is only under
control if materials, equipment and tasks are used in the same way every time.
SPC can be used to reduce variability, which is the cause of most quality problems. Variations in the
products, delivery times, methods, materials, people‟s attitudes and staff performance often occur.
For eg: Statistical data may show that worker attitudes may have led to variations in output late on
Friday.
(e) Teamwork:
TQM stresses that teamwork is the most effective way of solving problems. The main advantages
are:-
A greater range of skills, knowledge and experience can be used to solve the problem.
Employee morale is often improved.
Problems across departments are better dealt with.
A greater variety of problems can be tackled.
Team ideas are more likely to be used than individual areas.
TQM strongly favours team work throughout the business. It builds trust and morale, improve
communications and cooperation and develops interdependence.
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Advantages of TQM:
Focus clearly on the needs of customers and the relationships between suppliers and
customers.
Achieve quality in all aspects of business, not just product or service quality. This
would decrease the rejection and demand will rise over time
Critically analyze all process to remove waste and inefficiencies.
Find improvement and develop measures of performance.
Develop a team approach to problem solving.
Develop effective procedures for communication and acknowledgement of work.
Continually review the processes to develop a strategy of constant improvement.
Problems of TQM:
Training and development costs of the new system.
TQM will only work if there is commitment from the entire business.
There will be a great deal of bureaucracy and documents and regular audits are
needed. This may be a problem for small firms.
Stress is placed on the process and not on the product.
Pros and cons of TQM, QC and QA – Refer page 294, Ian Marcouse, 3rd Edition.
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3. CONSUMER SAFETY
The Consumer Safety Act 1978 gives the Secretary of State much wider powers to make regulations
“for the purpose of securing that goods are safe or that appropriate information is provided and
inappropriate information is not provided in respect of goods”
The effects of legislation may be greater on small firms who have fewer resources and are less
able to keep up with changes in laws and may not be able to afford to respond in the appropriate
manner. Larger firms have legal experts and are geared up for change. They may also be able to
afford specialist lawyers to advise them on avoiding some of the effect of a new piece of
legislation.
PS: Students are advised to mainly focus on business studies books and
practice the case studies given at the end of each chapter.
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