Operations Management - Design Mix

Unit-2a Operational Management / 2.3.
BUSINESS STUDIES-AS-LEVEL
Unit-TWO: 2.3.2a – Operational Management
1. What is Operations management?

If marketing is about identifying consumers‟ needs and how they are to be satisfied, then operational
management is about how the firm ensures that, at least in terms of the product, it meets those
needs. This involves:
 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.
Deciding how to produce?

A business must decide on the most suitable method to manufacture its goods or to provide services.
It is likely that products which are different will be produced differently.
 What production method will be used? (job, batch or flow production)
 What factors of production will be used? (land, labour, capital, enterprise)
 How will the factors of production be combined? (labour intensive or capital intensive)
2. Product and Service Design

Invention and Innovation
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).
GHAAZEE SCHOOL, HULHUMALE‟ / Department of Business Studies / Grade –11 / Semester – 2, 2012 1
Unit-2a Operational Management / 2.3.2
Procedure innovation: procedure innovation is those involve in the way in which products and
process are integrated into the operations of the organization.
Types of Invention Description Examples

Product Invention Devising a New type or category of product, i.e. -Blue Ray HD DVD
Opening up a new market -Digital Radios
Process Invention Devising a new way of producing or manufacturing -Real Fruit Smoothies
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.
A useful way to consider design is through the design mix:
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
Quality & Function Economic Manufacture
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
 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.
The design process (short version)

The design process has number of stages;
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.
The design Process (the detailed version)
Market Research on
consumers needs and
wants
Identify gap in market
Original Idea Developed
Design Brief Prepare
Approach Designers
Choose the Design
Make Prototypes
Make & Test Working
Sample
Consumer trails
Tooling Up for
manufacture
Organize Supply
of Raw Materials
Full Scale
Production
Invention and innovation in Business

Invention and Innovation Vs marketing
Many argue that the most important element of the marketing mix is the product itself. Successful
product development keeps a firm one step ahead of the competition and in pricing as well
Invention and innovation in finance

Invention and innovation is a long term commitment and it needs long term investment. Companies
which focus on the short term pay backs will not be able to come with invention and innovation,
normally they are imitators, and the innovation is something of a hit and miss process.
Invention and innovation in People

Inventors are sometimes caricatured as „mad Scientists‟ working alone in the laboratories but this is
far from the truth. Team works provides many of the most successful innovations. A research team is
created by taking specialists in various different fields of operation, from different departments.
Invention and innovation in operation management

Innovation and invention is not limited to products it may be new production process which can lead
to more efficient and cheaper or high quality production.
3. Productivity and Efficiency

Productivity is a measurement of efficiency; it measures the output of a firm in relation to its inputs. A
firm can increase its efficiency by producing more with the same inputs or by producing the same
amount with lesser inputs.
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.
Capital productivity = Output/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
Labour intensive production Capital intensive production

Major portion of the cost is contributed Major portion of the cost is contributed toward capital
towards Labour investment
Entry barrier is relatively low Entry barrier is relatively High
High Flexibility in process Relatively low flexiblilty
Factors which increase the Productivity and Efficiency

 Training-in skill, technology etc
 Motivation- through financial and non-financial benefits
 Technology-make the process easy which increases the productivity
 Changes to workforce
o Division of labour
o Team work
o Empowerment
 Standardisation-in tools , process etc
 Renovation of the business
o Delayering - the hierarchy and the communication channel
o Downsizing - the manpower or the business
o Outsourcing or subcontracting
Choosing the production intensity

An organisation may choose labour intensive production or capital intensive production or the
combination of both and this is based on the following factors
o Finance availability
o Availability of labour
o Cost of production
o Type of product
o Production process
o Availability of technology
Methods of Production:
A business must decide on the most suitable method to manufacture its goods or to provide services.
(i) JOB PRODUCTION:

Production of a single, custom made product usually is done by using a job production. Job
production occurs when firms produce items which meet the specific requirements of each
customer. Job production is found both in manufacturing and the service industries. The
number of units produced is small and the production process tends to be labour intensive.
The work force is usually skilled craftsman or specialists and the possibility of using labour
saving machinery is limited.
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.
(ii) BATCH PRODUCTION:

If demand for a product is continuous rather than one-off, then batch production process may
be applied. In this type of production, groups of items move through the different stages of the
production process at the same time. Batch production involves a great deal of planning to
decide how the firm‟s machines will be used and what batch will be produced when. It is also
likely to involve high levels of stock, as the firm must wait for all the items to finish at one
stage before they are moved on to the next. Another key issue in batch production is the time
it takes to switch from producing one batch to producing another. This is known as Down time.
It becomes more expensive when the down time is more.
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.
(iii) FLOW PRODUCTION:

In this production system, products move continuously from one stage of the process to
another. Production is organized in such a way that different operations can be carried out,
one after the other, in a continuous sequence. Often a conveyor belt is used for moving the
product from one operation to the next. This type of production is appropriate when a firm is
looking to produce large volumes of very similar items. This method tends to be very capital
intensive. Some of the features of flow production include:
 Large quantities are produced.
 Simplified or standardized product.
 Semi -skilled workforce.
 Large amounts of machinery and equipment.
 Large stocks of raw-materials and components.
Some of the other similar flow production techniques include:

Mass production – because flow production involves the production of larger
quantities of standard goods.
Continual flow production – because products pass through a series of process.
Repetitive flow production – because a large number of the same product gets
produced every-time.
Process production - materials pass through a series of processes. (Oil refinery)
Advantages:
 Firms can experience economies of scale.
 Everything is fully automated, hence only machine supervisors and maintenance staff
is required.
 The need to stock-pile finished goods is reduced. Companies are not required to keep
producing goods – if demand is slow, they can shut down the machines.
Disadvantages:
 The set up costs are very high.
 Cannot meet different customer needs.(the product is standardized)
 Manuel operations required on the production line will be repetitive and thus would be
boring.
 Machine breakdowns can be very costly.
A comparison of Job, Batch and Flow Production
Job Production Batch Production Flow Production

 One-off production  Production in batches  Continuous production
or groups.
 Can produce tailor made  Involves high level of  Economies of scale
products. pre-planning to co- involved in mass
ordinate batches. production.
 Suitable for niche  Can produce a variety  Suitable for mass
marketing. of products needing marketing.
different marketing.
 Needs wide range of  Needs fairly wide range  Needs one of machines
machines and skills to meet of equipment and skills to produce
requirements of each job. for different batches. standardized product.
 Highly flexible process  Fairly flexible process.  Inflexible process.
 Often labour intensive  Relatively capital  Capital intensive.
intensive.
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.
Fixed cost capacity

Fixed costs are fixed in relation to output. This means whether the capacity utilisation is 50% or
100% the fixed cost will be the same. The capacity utilisation is inversely related to fixed costs per
unit.
How to get towards full capacity?

There are two possible approaches for attaining full capacity:
(i) Increase demand: Demand for existing products could be boosted by extra promotional
spending, price cutting or devising a new strategy to reposition the products into growth
sectors.
(ii) Cut capacity: If your current factory and labour force is capable of producing 10000 units in
a week, but there is only demand for 4500, there will be a great temptation to cut capacity to
5000. This might be done by cutting out the night shift.
How to change capacity?

Firms may find themselves with excess capacity if demand for their products slows down. Unless the
reduction in demand is just a short-term glitch, a firm will seek to find ways to reduce its maximum
capacity this process is commonly known as rationalization.
Ways of reducing capacity

 Selling off all or a part of its production area
 Changing to a shorter working week or shorter day
 Laying off workers
 Transferring resources from another area
Ways of increasing capacity

 Building or extending factories/ plants
 Asking staff to work longer hours
 Recruiting new staff
Usefulness of operating at full capacity

Advantages of operating at full capacity:
(i) If a firm is working at full capacity, its fixed costs per unit are at the lowest possible level
(ii) At full capacity, the firm is assumed to be using all its fixed assets as effectively as possible,
hence generating higher profit levels.
(iii) A firm working at full capacity will be perceived as a successful firm.
Disadvantages of operating at full capacity:

(i) Firm working at full capacity may need to turn away potential customers.
(ii) Workers who are working at full capacity will have little time to relax and will need to work as
hard as possible at all times.
(iii) Managers may be subject to high stress levels if the firm is operating at full capacity.
Causes of under utilization of capacity

 New competitors or new products entering the market
 Fall in demand for the product as a whole due to changes in taste or fashion
 Unsuccessful marketing
 Seasonal demand
 Over-investment in fixed assets
 A merger or takeover leading to duplication of many resources and sites
The impact of under utilization of capacity

Question to practice: Explain advantages and disadvantages of under-utilization of capacity (10
marks)
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.
Business holds stock in a variety of forms:
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.
The cost of holding stock

In recent years stock management has become important since careful stock control can improve
business performance. Having too much stock may be costly for a business organization as money is
being tied up but inadequate stock can also lead to delays in delivery and production.
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
 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.
Factors influence stock levels:

 Demand
 The cost of holding stock
 The amount of working capital available
 The type of stocks and the lead time
 External factors etc.
Problems of having incorrect stock levels:

Having too little stock
 Difficult to satisfy consumer demands
 Lead to a loss of business
 Lead to a loss of goodwill
 Frequent ordering required
 Handling costs are high
 Workers and machines may be kept idle if there is no enough stock.
Having too much stock
 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.
 Buffer stock: Stocks held as a precaution to cope with unforeseen demand.
 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.
Stock control diagrams

Stock control diagrams are used to illustrate a firm‟s stock level over time.
A number of variables can be illustrated using the below diagram
 Buffer stock levels: the desired minimum stock level that the firm aim to keep at all times
 Maximum stock level: the maximum amount of stock that a firm is willing to store
 Re-order level: the stock level at which replacement stock is automatically ordered
 Re-order quantity: the amount of stock delivered each time a delivery is made
 Lead time: the length of time taken for an order to arrive, that is between re-order and
delivery.
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.
Economic order quantity (EOQ)

The quantity at which the cost of holding stock and cost of not holding stock both coincide. This point
is also known as optimum level of stock. This is the point where total cost is lowest.
Costs associated with stock-out?
 Loss of goodwill – the cost of future orders lost
 Inability to satisfy large or rush orders – lost revenue and opportunity cost
 Longer delivery lead times – inability to meet orders quickly may result in loss of revenue
especially in industries where non-price competition is relied upon.
Costs associated with stock-holding

 Interest on capital.
 Storage charges.
 Holding cost.
 Insurance charges.
 Cost of wastage.
 Obsolescence
 Opportunity cost.
EOQ can be shown as below: -
How to calculate EOQ?

Formula:
The basic Economic Order Quantity (EOQ) formula is as follows:
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.
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.
Key lean principles are:
- 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.
Maximize stability in a changing environment:

In lean production emphasis is given on identifying the problem, solving it, and in the improved
utilization of people, space, capital, and inventory. This is done by the adoption of lean production
techniques of:
 Just in time production.
 Time based competition.
 Cell working.
 Flexibility in working methods.
 Team working
 Continuous improvement.
 Quality circles, TQM.
7. Kaizen – Continuous Improvement

As the name suggests, Kaizen is all about improvement. It suggests that businesses should keep
continually improving their performance, their production and their status in order to achieve its
objectives. The difference between the Japanese methods of production and Western is based on
the kaizen concept. In the west, there are too many one-off improvements, whereas in Japan,
continuous improvements are experienced.
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.
There are two key elements to Kaizen:

 Most kaizen improvements are based around people and their ideas rather than investment in
new technology.
 Each change on its own may be of little importance. However if hundreds of small changes are
made, the cumulative effects can be substantial.
Components of Kaizen philosophy:

 One Employee, Two Jobs – Convinces all the employees that they have two jobs to do- doing
the job and then looking for ways of improving it. The Kaizen culture is based on the belief that
the production line worker is the real expert. This means that the worker knows more about the
causes of problems and their solutions than a highly qualified engineer who sits in an office.
 Team working – Employees cannot be allowed to work as isolated individuals. They need to
work as a Team. Each team is often referred as a cell. The members in a cell are responsible
for the quality of the work in their section. The members of each cell meet regularly to discuss
the problems cropping up within their section.
 Empowerment – Empowerment involves giving the employees the right to make decisions that
affect the quality of their working lives. Empowerment enables good shop-floor ideas to be
implemented quickly.
 Performance Targets – Setting performance targets and then monitoring achievement is also a
key component of Kaizen. Each production cell is given a quality targets. The targets achieved
are then displayed inside the factory.
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
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.
The limitations of Kaizen

Diminishing returns – it might prove to be difficult to maintain staff enthusiasm as the improvements
created through kaizen programme will invariably fall as time goes on.
Radical solutions – sometimes radical solutions implemented quickly are necessary in order to
tackle problems.
8. JIT (Just in Time)

Just in time is a production management system, where materials and components are delivered just
in time to be used, while finished goods are produced when the customer demands them just in time
for them to be sold.
The idea is to run a company with the smallest possible levels of stock and work in progress. Clearly
this needs careful planning:
 All sorts of uncertainty must be removed from the manufacturing process. There must be
absolute reliability of production targets, supplies and levels of output achieved.
 The time to set up machines must be reduced to a minimum so that components and finished
products can be produced in small batches as and when required
 Bottlenecks must be eliminated.
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
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.
The advantages of producing good quality products are:

 Easier to create customer loyalty
 Saves on the costs associated with customer complaints, for example compensation,
replacing defective products and loss of consumer goodwill
 Longer life cycles
 Less advertising maybe necessary as the brand will establish a quality image through the
performance of the products
 A higher price- a premium price could be charged for such goods and services. Quality
products/services can therefore be profitable.
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.
Problems of quality control

 It assumes defects are inevitable. The task is to find out the defect products before it reaches the
customer, signalling to the production team that it is acceptable to make mistakes because the
quality control department will find it later. This may result in employees being careless.
 It is looking for problems and is therefore negative in its culture. It can cause resentment amongst
workers as they may regard the inspectors as management employees who are there just to check
on output and to find problems with the work.
 The job of inspection can be tedious, so inspectors can become demotivated and may not carry
their tasks efficiently
 If checking only takes place in specific points in the production process then faulty products may
pass through several production stages before being picked up. This could lead to a lot of time
being spent finding the source of the fault between the quality checkpoints.
ii. Quality Assurance:-

Quality assurance is a method of ensuring quality that takes into account customer‟s views.
Customers may be consulted about their views through market research before a product is
manufactured or a service provided. They may also be part of a consultation group involved at the
design and manufacturing stage.
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.
iii. TOTAL QUALITY MANAGEMENT
Total Quality Management (TQM) is a management strategy aimed at embedding awareness of

quality in all organizational processes. TQM has been widely used in manufacturing, education,
government and service industries, as well as NASA space and science programs. Total Quality
provides an umbrella under which everyone in the organization can strive and create customer
satisfaction at continually lower real costs.
"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.
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
(b) Company policy and Accountability:

There will only be improvement in quality if there is a company wide policy. TQM must start from the
top with the most senior executive and spread throughout the business to every employee. People
must be totally committed and take a „Pride in the Job‟. This might be considered as job enrichment.
Lack of commitment, particularly at the top causes problems. For example if the managing director
lacks commitment, employees lower down are unlikely to commit themselves. TQM stresses the role
of the individuals and aims to make everyone accountable for their own performance.
(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.
(d) Monitoring the process:

TQM relies on monitoring the business process to find possible improvements. Methods have been
developed to help achieve this. Statistical Process Control (SPC) involves collecting data relating to
the performance of a process. Data is presented in diagrams, charts and graphs. The information is
then passed to all those concerned.
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.
(f) Consumer views:

Firms using TQM must be committed to their customers. They must be responsive to changes in
peoples needs and expectations. So this information must be gathered on a regular basis and there
must be clear communication channels for customers to express their views. Consumers are often
influential in setting quality standards.
(g) Zero defects:

This aims to ensure that every product that is manufactured is free from defects.
(h) Quality circles

Quality circles are an important part of the TQM process and are an important way of increasing
participation in organizational activities. Quality circles are small groups of staff, usually from the
same area of work, who meet on a regular and voluntarily basis. They attempt to solve problems and
make suggestions about how to improve various aspects of the business. Issues such as pay and
conditions are normally excluded. After discussion the team will present the ideas and solutions to the
management. Teams are also involved in implementing and monitoring the effectiveness of solutions.
Quality circles have been widely used in the car industry and also in service sectors such as banking
and finance.
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.
9. Consumer protection legislation

Consumers, in practice, are represented by the ordinary shopper, who has neither the knowledge nor
the means of ascertaining whether goods that are offered for sale are in reality what they are claimed
to be, or whether he or she is the victim of unfair practices agreed between traders, or whether the
goods he is buying are in fact reasonably safe to use.
As a result, a number of Acts have been passed to regulate these matters. In general, they impose
criminal liability on traders or others who infringe them, rather than providing an aggrieved consumer
with a civil remedy.
1. TRADE DESCRIPTIONS ACT 1968

The descriptions under which goods are sold, or which are applied to them for the purposes of sale,
are of course covered to an extent by the Sale of Goods Act 1979. The Merchandise Marks Acts
1887-1953 strengthened the common law mainly in respect of the tort of “passing off” as it applies to
goods.
Examples of Individual Words

Many individual descriptive words have been examined, and the following have been held to be false
trade descriptions:
 “Beautiful” – applied to a car which looked good but was in fact unroadworthy (Robertson v.
Dicicco (1972)).
 “Immaculate condition”, applied to a car which was not mechanically sound (Kensington and
Chelsea Royal London Borough Council v. Riley (1972)).
 “Waterproof “, applied to a watch that was not waterproof (Sherratt v. Geralds (1970)).
2. FAIR TRADING ACT 1973

The Fair Trading Act 1973 (the Act), on the other hand, is of an administrative nature; it set up a
statutory body, the Office of Fair Trading, to monitor the behaviour and practices of traders and
manufacturers. The Director-General of Fair Trading, whose post was created under the Act, has
substantial powers. Some of these are designed to afford protection to consumers against unfair
trading practices, and others to control monopolies, mergers and practices which lead to
uncompetitive trading. His powers with regard to anti-competitive practices were extended by the
Competition Act 1980.
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”
Impact of legislation on businesses

It is easy to assume that legislation simply constrains business activities and therefore has a
purely negative effect on businesses. However, this is not the case. Legislation can have positive
and negative effects on businesses and their activities.
Benefits of consumer legislations to businesses

 Consumer confidence could be higher
 Image and reputation increases
 Competitive advantage could be gained.
 Helps to gain higher market share and enjoy long run success.
Drawbacks of consumer legislations to businesses

 Increases costs of production
 May require recruitment of non-productive personnel
 More legal formalities/reports
 Competitiveness may reduce because of higher prices
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.

Operations Management - Design Mix

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Unit-2a Operational Management / 2.3.

1. What is Operations management?

Deciding how to produce?

2. Product and Service Design

Types of Invention Description Examples

A useful way to consider design is through the design mix:

Quality & Function Economic Manufacture

The design process (short version)

The design Process (the detailed version)

Original Idea Developed

Design Brief Prepare

Choose the Design

Invention and innovation in Business

Invention and innovation in finance

Invention and innovation in People

Invention and innovation in operation management

3. Productivity and Efficiency

Capital productivity = Output/Capital Employed

Labour intensive production Capital intensive production

Factors which increase the Productivity and Efficiency

Choosing the production intensity

(i) JOB PRODUCTION:

(ii) BATCH PRODUCTION:

(iii) FLOW PRODUCTION:

Some of the other similar flow production techniques include:

A comparison of Job, Batch and Flow Production

Job Production Batch Production Flow Production

Fixed cost capacity

How to get towards full capacity?

How to change capacity?

Ways of reducing capacity

Ways of increasing capacity

Usefulness of operating at full capacity

Disadvantages of operating at full capacity:

Causes of under utilization of capacity

The impact of under utilization of capacity

Business holds stock in a variety of forms:

The cost of holding stock

Factors influence stock levels:

Problems of having incorrect stock levels:

Having too much stock

 Buffer stock: Stocks held as a precaution to cope with unforeseen demand.

Stock control diagrams

Economic order quantity (EOQ)

Costs associated with stock-holding

EOQ can be shown as below: -

How to calculate EOQ?

Key lean principles are:

Maximize stability in a changing environment:

7. Kaizen – Continuous Improvement

There are two key elements to Kaizen:

Components of Kaizen philosophy:

The limitations of Kaizen

8. JIT (Just in Time)

The advantages of producing good quality products are:

Problems of quality control

ii. Quality Assurance:-

iii. TOTAL QUALITY MANAGEMENT