Prepared by

15 The Nature of Operations

15.1. Operations
 The operations department deals with using resources (inputs) to create final products (outputs)
 They are aiming to produce goods and service of the right quality and the required quantity, at the time
needed in the most cost-effective method
 They are concerned with
 Efficiency of production - produce at the lowest possible cost
 Quality - maintain quality standards and keep improvising
 Flexibility and innovation - keep adapting to the dynamic business environment

15.2. Production process - transformation

 Conversion of inputs into outputs is known as the transformation process
 It involves adding value to the product
 Factors influencing the degree of value added
 Design of the product
 Efficiency with which the input resources are combined and managed
 Ability to convince consumers to pay more than the price of inputs

15.3. Operations stages

 Converting a consumer need into a product/service
 Organising efficient operations
 Deciding on suitable methods of production
 Setting quality standards
 Ensuring they are maintained

15.4. Resources
 Land – natural resources businesses require
 Labour – both manual and mental labour. Quality of labour highly influences the operational success and
maybe improved through training and motivation
 Capital – tools, machinery and other man-made resources required for production
 Intellectual capital – intangible assets of the business. Human capital – trained and knowledgeable
employees, structural capital – IT systems, relational capital – relations with suppliers, customers

15.5. Production and productivity

 Production is the absolute measure of the quantity of output that a firm produces in a given time period
 Productivity is a relative measure of how efficiently inputs are converted into outputs.
 Labour productivity = total output/total employees
 Capital productivity = output/capital employed

15.6. Ways to raise productivity

 Improve training
 Increasing training will make the workforce more flexible and efficient.
 Prepared by

 But it is expensive and time consuming

 Improve motivation
 Using Herzberg’s and Maslow’s theories workers motivation levels can be increased
 This will increase productivity but may also be expensive to implement
 Purchase more machinery/technology
 Employing more machinery will allow the company to increase output and reduce the amount of labour
employed
 Plus, it will ensure good quality and maximum efficiency
 But it is expensive and labourers may be scared to lose jobs, reducing their motivation to worker harder
 More efficient management
 Failure to purchase enough materials, poor schedules will reduce the efficiency of the business

15.7. Is raising productivity always the answer?

 Higher productivity doesn’t guarantee success for a business
 Higher productivity may lead to higher wage demands, raising the firm’s costs of production
 Quality of management will determine the success of the policies implemented and thus the success of a
business
 Effectiveness and efficiency are different
 A product maybe efficient but not effective, leading to its failure

15.8. Efficiency and effectiveness

 Efficiency is producing output at the highest input to output ratio
 Effectiveness is producing goods and services that satisfy customer needs and wants
 Being effective involves meeting business’s corporate aims by satisfying consumer needs, profitably

15.9. Labour intensive and capital intensive

 Labour intensive is when there are more workers employed than machinery
 Being labour intensive will allow firms to charge higher prices as it is hand-made and maybe customised. It
enhances brand image and loyalty. But skilled workers are required and low chances for economies of scale
 Capital intensive is when there is more capital equipment employed relative to labourers
 Being capital intensive will allow opportunities for economies of scale, lower unit costs
 But fixed costs will be high, cost of purchasing and maintaining the machinery is high. Also, skilled employees
and engineers will be required to operate the equipment. Also, technology can quickly become outdated and
obsolete

15.10. Factors influencing choice of resource (labour VS capital)

 Nature of product
 Prices of inputs
 Size and ability of firm
 Intended image