Operations Planning

Operations Decisions
Objective - The influence of marketing, availability of resources and technology
(e.g. CAD and CAM) on operations decisions. They must understand how CAD
and CAM can be applied in a business, including the advantages and
disadvantages.
 The operations manager must work with other departments and will
face constraints when making decisions.
 In particular, the marketing department identifies a particular
opportunity or a new product and so marketing must work together
with the operations department to see what is possible.
 This will include: the business’ capacity, the right level of quality and the
profitability of the product.
 Capacity measures the maximum output a business can produce with its
existing resources.
 Operations faces a number a constraints including:
a. Technology and existing capacity – if a business is using CAD and
CAM it is likely to be more flexible and quicker to develop new
products than businesses who are not using these.
CAD – Computer Aided Design involves the use of computers to
develop, explain and modify a design.
CAM – Computer Aided Manufacturing is the use of computer
software to control machines in the manufacturing process.
b. The skills and numbers of its workforce – a business will not be
able to take some orders as it lacks the know-how or expertise.
c. Its suppliers – this affects how easily it can increase its output and
the costs of production.
CAD is used to generate 2D and 3D models. CAD software can be
used for specific applications – architectural designs. It is also used
for computer animation and special effects in movies, advertising and
other applications where the graphic design itself is the finished
product. CAD has a wide range of uses such as furniture making and
in industrial engineering processes and manufacturing.
The benefits of CAD are:
 Lower product development costs
  Increased productivity
 Improved productivity
 Faster time-to-market
 Good visualisation of the final product and its constituent parts
 Great accuracy, so errors are reduced
 Easy re-use of design data for other product applications
The limitations of CAD include:
 Complexity of the programs
 Need for extensive employee training
 Large amounts of computer processing power required which can be
expensive
A production process can be highly automated through the use of CAM. A CAM
system uses computers to control various robotic tools in the manufacturing
process in order to achieve a high level of precision and consistency which is
not possible with human-controlled machinery.
The benefits of CAM include:
 Precise manufacturing and reduced quality problems - compared to
production methods controlled by people
 Faster production and increased labour productivity
 More flexible production allowing quick changeover from one product to
another
 Integrating with CAD, CAM allows more design variants of a product to
be produced, which means that niche products can be produced as well
as well as mainstream mass market products. This increased
customisation increases the competitiveness of businesses in both small
and large market segments.
The limitations of CAM include:
 Cost of hardware, programs and employee training – these costs may
mean that smaller businesses cannot access the benefits of CAM –
although technology is becoming is becoming cheaper.
 Hardware failure – breakdowns can and do occur and they can be
complex and time-consuming to solve.
 Quality assurance is still needed – errors in programs can produce that
faults that have to be spotted ad rectified before being passed on to the
next stage of production.

Flexibility and Innovation

Objectives
 The need for flexibility with regard to volume, delivery time and
specification
 Process innovation – changing current processes or adopting new way of
producing products (e.g. automation/robotics) or delivering services
(e.g. improving workflow)
Operational Flexibility is the ability of a business to vary both the level of
production and the range of products following changes in customer
demand.
Flexibility can be achieved in a number of ways:
 Increase capacity by extending buildings and buying more
equipment – this is an expensive option
 Hold high stocks – but these can be damaged and there is an
opportunity cost to the capital tied up.
 Have a flexible and adaptable labour-force – using temporary, part-
time contracts reduces salary costs but may reduce worker
motivation ( also consider sub-contracting)
 Have flexible flow-line production equipment such as mass
customisation.
Process Innovation
Innovation refers to developing new ideas which include developing
new ideas (product innovation) or developing new ways of doing things
(process innovation).
Process Innovation can occur when:
 When businesses change the way they deliver a service – for
example to enable ordering online
 When businesses change the way they produce or adopt new
ways of producing. For example they may automate a process by
 replacing people with machines – several aspects of building cars
are now undertaken by robots not people.
Operations Methods: job, batch, flow, mass customisation
 Differences between methods – advantages and disadvantages of each
method
a. Job production involves producing single product at a time.
Businesses which use a Job production produce each time a unique,
non standard good that are made to order.
Examples of Job production are ship building because each ship is
made according to the customer’s specification, construction of
bridges.
Advantages Disadvantages
Product is according to customers Short production runs raise unit production
specifications costs.
Specialist equipments and skill labour might
Multipurpose machinery is combined
be needed which may cost more to the
with skilled versatile labour.
business.
There is no finished goods stock.  
Workers are motivated as they carry
 
out the variety of tasks.

b. Batch Production
It involves manufacture of different versions of the same basic
product in batches. For example producing soap in different
fragrances. Unlike Job production there is a repetition of production.
Advantages Disadvantages
Suitable for a wide range of nearly
Relatively short production runs result in
similar goods which can use the same
higher unit costs.
machinery on different settings.
More variety for workers resulting in Changeover between batches results in
more job satisfaction. resources being ideal at times.
  Versatile machinery and multi-skilled labour
is still needed which might cost more.
  Warehouse space is needed for raw material
and finished goods.
 c. Flow production
It involves mass production. Once work has been completed on one
operation, the job moves on to the next without stopping. It is a
continuous process of parts passing on from one stage to another
until completion. The production of Coca Cola on a production is an
example of flow production.
Advantages Disadvantages
Due to production in large quantities
Large inventories of raw material to prevent
of standardized products, economies
stockout.
of scale are achieved.
There should be a continuity of demand. If
Work in progress is at a low level. demand is varied this will lead to constant
overstocking of finished goods.
Specialized labour with low level of Repetitive jobs can lead to boredom for the
skills is needed. workers and thus less job satisfaction.

Mass production of standardized

goods result in low average cost which Cost of setting up production line is very high.
means low prices for customers.

d. Mass Customization is the new paradigm that replaces mass

production, which is no longer suitable for today’s turbulent markets,
growing product variety, and opportunities for e-commerce. Mass
customization proactively manages product variety in the
environment of rapidly evolving markets and products, many niche
markets, and individually customized products sold through stores or
over the internet.

Mass customizers can customize products quickly for individual

customers or for niche markets at better than mass production
efficiency and speed. Using the same principles, mass customizers
can 'Build-to-Order' both customized products and standard products
without forecasts, inventory, or purchasing delays.
Choosing between Batch and Flow Production methods
The choice of whether to use a batch or flow production process will be
determined by the financial resources of the firm and the extent to which it
seeks to produce a differentiated product. The table below looks in different
aspects of these production methods.
 Batch  Flow
Factors to be considered
Production Production
 Size of order  Small  High
 Output  Low  High
 Product range  High  Low
 Product variation  High  Low
 Flexibility of process  High  Low
 Dedication of machinery  Low  High
 Capital investment  Low  High
 Process time  High  Short
 Economies of Scale  Low  High
 Level of labour skill  High  Low

Before taking a decision a business has to look into all these aspects and see
what is more appropriate for them and then make a choice.
Suggest and justify an appropriate production method for each of the
following products:
a Children’s clothing. [5]
b Electric plugs for kitchen appliances. [5]
c Ceramic pots to decorate the homes of wealthy customers. [5]
d Desktop computers for customers who need slightly different
specifications. [5]
 Problems of changing from one method to another
Job to batch:
 Cost of equipment needed to handle large numbers in each batch.
 Additional working capital needed to finance stocks and work in
progress.
 Staff demotivation – less emphasis placed on an individual’s craft
skills.
Job or batch to flow:
 Cost of capital equipment needed for flow production.
 Staff training to be flexible and multiskilled – if this approach is
not adopted, then workers may end up on one boring repetitive
task, which could be demotivating.
  Accurate estimates of future demand to ensure that output
matches demand.
The traditional differences between the three basic production
methods are becoming much less obvious. Many complex products,
such as computers and industrial engines, can be adapted to meet
different consumers’ different requirements.
The flexibility offered by technology to large businesses could put at
risk the survival of small firms that used to exploit small market
niches with hand-built or batch-produced products.
However, there is always likely to be a demand from increasingly
wealthy consumers for original and specialist products – small firms
with non-mass-production methods will still thrive in these market
segments.
Location
 Factors that determine (a) location and (b) relocation: geographic,
demographic, legal, political, resources, infrastructure, marketing
 Differences between local, regional, national, and international
location decisions
Make Notes from Stimpson
Scale of Operation
 Factors that influence the scale of a business
 Causes and examples of internal/external economies/diseconomies of
scale
 Links between economies/diseconomies of scale and unit costs
Scale of operation: the maximum output that can be achieved using the
available inputs (resources) – this scale can only be increased in the long
term by employing more of all inputs.
Factors that influence the scale of operation of a business include:
 owners’ objectives – they may wish to keep the business small and
easy to manage
 capital available – if this is limited, growth will be less likely
 size of the market the firm operates in – a very small market will not
require large-scale production
  number of competitors – the market share of each firm may be small
if there are many rivals
 scope for scale economies – if these are substantial, as in water
supply, each business is likely to operate on a large scale.
Economies of Scale
As firms grow in size, they acquire certain advantages that are known as
economies of scale. In other words economies of scale are the benefits
enjoyed by a firm because of large scale production. These can be classified
into five categories:
Purchasing economies:
When business buys in large quantities, they are able to get discounts and
special prices because of buying in bulk. This reduces the unit cost of raw
materials and a firm gets an advantage over other smaller firms.
Marketing economies:
The cost of advertising and distribution rises at a lower rate than rises in
output and sales. In proportion to sales, large firms can advertise more cheaply
and more effectively than their smaller rivals.
Financial economies:
A larger company tends to present a more secure investment; they find it
easier to raise finance. Banks and other lending institutions treat large firms
more favourably and these firms are in a position to negotiate loans with
preferential interest rates. Further, large companies can issue shares and raise
additional capital.
Managerial economies:
A large company benefits from the services of specialist functional managers.
These firms can employ a number of highly specialized members on its
management team, such as accountants, marketing managers which results in
better decision being taken and reduction in overall unit costs.
Technical economies:
In large scale plants there are advantages in terms of the availability and use of
specialist, indivisible equipment which are not available to small firms. Large
manufacturing firms often use flow production methods and apply the
principle of the division of labour. This use of flow production and the latest
equipment will reduce the average costs of the large manufacturing
businesses.
Specialisation Economies:

Diseconomies of Scale
These are the drawbacks of being a big business. In other words, all the factors
those lead to an increase in average costs as a business grows.
Diseconomies include the following:
Human relations
It is difficult to organize large number of employees. The business might find
itself spending too much on communication. There might be long chains of
command and instructions will take a long to reach the desired destination.
Moreover there might be distortion in the message. There will be less personal
contact between decision makers and staff, which can lead to low level of
morale, lack of motivation and ultimately industrial relations problems.
Decisions and co-ordinations
There could be coordination problems. With a larger hierarchy, both the
quality of information reaching from the management to the workers and vice
versa could lead to poor decision making. There would be considerable
paperwork and many meetings.
External diseconomies
Recently, consumers have become more conscious of the activities carried out
by big firms. Therefore, big firms have to spend a lot of money on
environmental issues and social responsibility act. These ultimately lead to
higher average cost per unit.
External diseconomies occur due to factors outside of the business.

What can managers do in order to avoid diseconomies of scale ?