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Higher Business Management

Business Decision Areas I:


The role and importance of operations in organisations

Operating systems

‘An Operating System is a configuration of resources combined for the

provision of goods and services.’
Ray Wild, Essentials of Production and Operations Management (2nd edn.)

Access to raw materials, machines and workers does not guarantee that you will
obtain the outcomes you require – organisation is essential. Procedures must be
established which control and direct what is done, whom it is done by and when.
This is known as an operating system .

All operating systems have three distinct phases:


Raw Materials Using different amounts The actual goods

+ of different resources or services for
Labour in order to produce a sale
different end product

Operations management

‘Operations Management is concerned with the efficient conversion of an

organisation’s resources into the goods or services that it has been set up to
Howard Barnett, Operations Management

This can be subdivided in three key areas:

(a) The purchase and storage of raw materials;

(b) The production and storage of finished goods;
(c) The distribution of the finished goods.

Higher BM Handbook: Operations M. McGowan 2


This concerns the purchasing of materials that normally is the responsibility of the
Purchasing Department.

The quantity of stock ordered depends upon:


A the stock of materials currently available

B the duration of time which will elapse between this order and any future orders

C the amount of raw materials likely to be required during the period

D the storage space available and cost of storage

Once these issues have been considered it is possible to identify those suppliers which
offer the best terms. When making this decision the following should be taken into


Choosing supplier:

1. PRICE Lowest price?

Discounts for regular customers or bulk orders?
Credit terms?
2. QUALITY Acceptable for needs?
Consistently available?
3. AVAILABILITY Dependable source of supply?
Reliability of deliveries?
Confident in supplier?
4. LOCATION OF SUPPLIER Additional charges for delivery/insurance?

It is unlikely that one single supplier will offer all of these benefits.

Consequently, when purchasing materials, decisions must be taken about the quantity
required (LIST A) and from whom (LIST B). Getting the correct ‘MIX’ for the
organisation in terms of how much and from whom is essential. This is known as the

1. Explain the importance of Operations in organisations
2. Describe the IPO process
3. Describe the elements of the Purchasing Mix

Higher BM Handbook: Operations M. McGowan 3

To: Business Management Students

From: Mr McGowan

Date: Today’s

Subject: Sourcing Task

You’re a buyer for HGS Ltd and there are 10 items needed for the company.

You’re task is to source the items at the lowest possible cost. You can use the Internet
to research and find the cheapest possible prices BUT for the appropriate features
and quantity of the items.

You will need to keep a record (hyperlinks are good enough) of where the deal was and
obviously the price. The team with the lowest total wins. You must have an entry for
every item or you are disqualified!

(inc. delivery)

1 GB Memory Stick 3
Wireless ergonomic 40
Microsoft Office School
2007 License
Headphones with 20
Duplex Colour 1
i-book 1
Computer Chair 40
ID Badges 60
Mousemats with 40
Corporate Logo
Webcam 2

Higher BM Handbook: Operations M. McGowan 4

Stock control

In any organisation the control of stock is essential. Stock is an expensive item

to an organisation – sometimes accounting for as much as 30% of the total
assets held. Any stock management system will try to balance the needs of the
production department with the costs of holding stocks. The 3 main categories
of stock within an organisation are:

• raw materials and components for the product or process;

• work in progress;
• finished stock.

Issuing stock

This should only be done on the production of an authorised requisition card .

Monitoring stock levels

This can be done in a variety of ways:

(a) by recording (manually, using a bin card system );

(b) by using a database or spreadsheet , changes in stock are recorded as they

take place, giving a running balance total which should be accurate at any
point in time and reduces the need for physical stock counting prior to re-
ordering. Many such systems now allow automatic re-ordering when re-
order level is reached, with no need for operator input.

A physical stock count (stock taking) MUST be carried out at least once per
year in order to provide closing stock figures for the Final Accounts.

STOCK LEVELS (raw materials, work-in-progress, finished goods)

Effect of too much or too little stock

Too much stock (Overstocking)

• Storage, insurance, lighting and handling costs will all be high if too much stock
is held.

• Large stock levels will occupy space in the premises. There may be more
productive ways of using this space, such as improving the layout of the factory.

• The opportunity cost will be high. Money tied up in stocks could be used to buy
fixed assets, for example.

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• Large stock levels might result in unsold stock. If there is an unexpected change
in demand, the firm may be left with stocks that cannot sell.
• Very large stocks might result in an increase in theft by employees.

Too little stock (Understocking)

• The business may not be able to cope with unexpected increases in demand if its
stocks are too low. This might result in lost customers if they are let down too

• If deliveries are delayed the firm may run out of stock and have to halt
production. This might lead to idle labour and machinery while the firm waits for

• The firm is less able to cope with unexpected shortages of materials. Again, this
could result in lost production.

• A firm which holds very low stocks may have to place more orders. This will raise
total ordering costs.


Design and Layout of Warehouse – ground level, dry etc.

Centralised Storage of Stock

Advantages include:

 improved security from loss or theft as it tends to be carefully controlled by

specialist staff.

 specialist staff maintain stocks by following agreed procedures for its control –
only issued when ‘authorised’.

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 central stock of components or materials may cost less to hold than many small
‘on-site’ supplies.

 improved efficiency in stock handling and management

Disadvantages include:

 Time wasting going to and from branches

 Cost of specialist stock staff

 Cost of having specific or dedicated warehouse

Decentralised Storage of Stock

Advantages include:

 1 stock is always ‘at hand’ when required

 2 orders of new stocks reflect actual production usage rather than a standard
amount irrespective of needs

 3 speedier turnover of a small quantity of stock reduces the likelihood of its

deterioration or decay

Disadvantages include:

 Less rigid control and supervision: more chance of pilfering

 Takes up more physical space in actual production areas

Shoppers 'facing empty shelves'

Supermarkets are failing to get some basic products

such as milk, bread and butter on the shelves, a study
by the Grocer magazine suggests.

The Grocer tested the availability of 33 basic goods and found

twice as many were out of stock as six months ago.

Analysts said that supermarkets "had taken their eye off the
ball" and were focusing more on reducing waste and Mystery shoppers found empty spaces
packaging than getting items in stock. Tesco said availability on shelves
was high and queried The Grocer's study methods.

Mystery shopper

The Grocer used mystery shoppers to check price and availability of 33 items - picked to

Higher BM Handbook: Operations M. McGowan 7

The number of out of
reflect an average consumer's shopping basket - in different stock items has doubled in
branches each week. all the supermarkets...there
seems to be a bit of a
problem here
Six supermarket groups were tested: Tesco, Sainsbury's,
Asda, Morrisons, Waitrose and Somerfield.
Gaelle Walker, The Grocer
During the 26 weeks from 17 June to 9 December Somerfield
recorded 48 occasions when one of the 33 items was out of stock. This was the worst
performance of the six major supermarkets groups tested.

Sainsbury's, Waitrose and Tesco performed very similarly to one another; while the best two
supermarkets for availability were Asda and Morrisons.

But overall, the number of items out of stock was much higher than for the previous six-
month period. According to Gaelle Walker, reporter for the Grocer, supermarkets were
failing in "basic shop keeping".

"The number of out of stock items has doubled in all the We have our own, very
supermarkets... there seems to be a bit of a problem here. sophisticated stock control
measurements and
availability is much better
"Analysts I spoke to believe the supermarkets have taken than the picture painted by
their eye of the ball; become distracted by side issues such the Grocer study
as reducing waste and packaging," she said.
Tesco spokesman
But a spokesman for Tesco, the UK's biggest supermarket
chain, told BBC News that there was no link between reducing waste and availability.

"I fail to see how environmental measures have any effect whatsoever.

"What I do know is that the Grocer sample of 33 products is small and that it only takes one
store to be down on the items, because say of a rush or seasonal factors, to skew the

"We have our own, very-sophisticated stock control measurements and availability is much
better than the picture painted by the Grocer study."


1. Describe the 3 types of stock used in business

2. Why is stock control important?
3. Label and draw the Stock Reorder diagram
4. Discuss the effects of over and understocking
5. Explain the benefits of having a centralised stock system
6. Justify moving to a computerised stock control system

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Just-in-Time Manufacturing

Originated in Japan during the 1960s and involves keeping stock levels to a minimum.
Stocks arrive just-in-time to satisfy production needs. Raw materials are not
purchased until they are required and finished goods are not produced unless firm
orders have been received.

To be successful JIT techniques depend upon the reliability of an organisation’s

suppliers, access to a supply of highly skilled workers and good quality control

Advantages Disadvantages
• It improves cash flow since • A lot of faith is placed in the
money is not tied up in stocks reliability and flexibility of
• The system reduces waste, • Increased ordering and admin
obsolete and damaged stock. costs

• More factory space is made • Advantages of bulk buying lost

available for productive use.

• The costs of stock holding are • Vulnerable to a break in supply

reduced significantly. and machinery breakdowns

• Links with and the control of • Difficult to cope with sharp

suppliers are improved. increase in demand

• Possible loss of reputation if

customers are let down by late

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What is Kanban?
A system of continuous supply of components, parts and supplies, such that workers have what
they need, where they need it, when they need it.

The word Kan means "card" in Japanese and the word "ban" means "signal". So Kanban refers to
"signal cards".

What are signal cards? Here's how Kanban works:

Let's say one of the components needed to make widgets is a 42" stem-bolt and it arrives on
pallets. There are 100 stem-bolts on a pallet. When the pallet is empty, the person assembling the
widgets takes a card that was attached to the pallet and sends it to the stem-bolt manufacturing
area. Another pallet of stem-bolts is then manufactured and sent to the widget assembler.

A new pallet of stem-bolts is not made until a card is received.

This is Kanban, in it's simplest form.

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The triumph of lean production

On the assembly line at Toyota's giant plant, Laura

Wilshire is not happy.

There is something wrong with a seatbelt fitting on the

Camry she is working on.

Laura pulls a cord, stopping the production line - and

prompting her five fellow workers on trim line three to crowd
round. Toyota workers talk about their
experience on the assembly line
They soon see why it is not screwed in properly and fix the

"I don't like to let something like that go," she says. "That's
really important for people who buy our cars."

Workers at the Toyota plant in Georgetown, Kentucky, pull

the cord 2,000 times a week - and their care is what makes
Toyota one of the most reliable, and most desired, brands in
the US.

In contrast, workers at Ford's brand-new truck plant in

Dearborn, Michigan, pull the cord only twice a week - the
legacy of generations of mistrust between shop-floor workers and managers.

Lean production

Pulling the cord, called "andan", is part of Toyota's "lean" production system, which means
that it has been able to produce cars much more cheaply,
and to a higher quality, than its US rivals. Our philosophy is to
think globally but act
In 1998, it took Ford and GM 50% more hours to make a car
than Toyota - and the difference was so great that GM did not
make a profit on any of its cars. Jim Press, President, Toyota
North America

Now GM is attempting to emulate Toyota by introducing a global manufacturing system of its

own and has been closing the productivity gap.

GM's new manufacturing system is vital to its survival, says the man in charge of
implementing it worldwide, Gary Cowger.

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GM aims, like Toyota, to produce the same car by the same

method in any of its production plants around the world.

"Looking at the new plants, you wouldn't know if you were in

Lansing, Michigan, Russelheim, Germany or Shanghai," says
Mr Cowger, GM's global vice-president for manufacturing and

GM is also eliminating national boundaries in its development

process. Instead, it is planning to design plants flexibly
around a single type of vehicle, such as a small car, medium
car or truck (SUV).

And it is also integrating the design of the car and the

manufacturing process to gain efficiencies.

GM's global design centres will be dotted around the world:

Korea (Daewoo) for small cars; Germany (Opel) for mid-size
cars; Australia (Holden) for full-size cars, and Michigan for 'Just-in-time': System of
delivering parts to the assembly
full size trucks and SUVs. line in a continuous flow, rather
than stockpiling large volumes at
Each plant can quickly change the specifications of the the plant
models it produces to adopt to local conditions, although it Continuous improvement
shares a common platform, including engines and Process of analysing problems
transmissions, across the range. and solving them on a daily basis
Personal responsibility Each
This combination of global manufacturing and design worker on a production line is
given responsibility for each
standards with local production is the key to the future, process he carries out
according to Mr Cowger.
Flexible production: Several
different models can be produced
Catching up on the same assembly line
Design for manufacture:
GM's new manufacturing system is part of a fundamental Making the components of a car
reorganisation of the giant company, introduced in 2004, easy to fit together on the
assembly line
which is already paying dividends in its North American
manufacturing operations.

GM now has five of the top 10 most productive US assembly plants, according to Harbour
Consulting, and has substantially closed the productivity gap
with Toyota. We are putting cost
pressures on our suppliers,
In 2006, Toyota could build an average car with just 29 but costs are critical to our
hours' labour, while it took GM workers 33 hours - a big survival, and we are facing
the same pressures as they
improvement from 1998. are

Mr Cowger says it has been tough, but already 90% of the

Gary Cowger, GM global vice-
178 GM plants in 33 countries have adopted the new system. president for manufacturing and
However, the improvement in productivity in North America -
crucial to GM's future - has also come through ruthless restructuring.

GM is cutting its US output by one-third and has cut its US blue-collar workforce by 80%
since 1985, according to the Center for Automotive Research.

GM once produced one of every two cars sold in the US. Now it is down to one in four.

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According to GM boss Rick Wagoner, who has taken charge of North American operations,
the company has already saved $9bn in costs.
Supplier relationships

Another key part of the new production is the relationship

with parts suppliers, who typically provide 85% of the parts
that make up a car.

Ensuring good-quality parts, delivered on time, is one of the

keys to both reliability and efficiency. Missing a key
component can bring the assembly line to a halt.

Toyota pioneered the "just-in-time" manufacturing system,

in which suppliers send parts daily - or several times a day -
and are notified electronically when the assembly line is
running out.

More than 400 trucks a day come in and out of Toyota's

Georgetown plant, with a separate logistics company
organising the shipments from Toyota's 300 suppliers - most
located in neighbouring states within half a day's drive of the Dura: October 2006
plant. Dana: February 2006
Delphi: September 2005
Toyota aims to build long-term relationships with its
Meridian: April 2005
suppliers, many of whom it has taken a stake in, and says it
Tower: February 2005
now produces 80% of its parts within North America.
Valeo: January 2002

GM has had a more difficult recent history with its suppliers, Federal Mogul: December 2001
having spun off its parts subsidiary, Delphi, several years source: CAR

GM says its supplier relationships are critical and it needs to bring them into its global
manufacturing system. But it also admits that, with the company losing billions, it is
squeezing the suppliers to lower their prices.

"We are putting cost pressures on our suppliers, but costs are critical to our survival, and we
are facing the same pressures as they are," says Mr Cowger.

As a result, many suppliers like Delphi plan to shift much of their production out of the US,
to Mexico or East Asia, where labour costs are lower.

According to Stephen D'Arcy of PricewaterhouseCoopers, China will eventually become the

preferred location for most suppliers - once they can meet local needs.

Many US-based suppliers went bankrupt in the past few years, including Delphi.

Closer to the consumer

One of the key advantages of the new "lean production" system is that it allows companies
to get closer to consumer needs.

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Toyota's North American President, Jim Press, says the key

to their success is that they are customer-focused - and that
requires quick reactions when consumer tastes changes.

"I think being nimble is really important. As the market

grows and shifts so quickly, you have got to be able to
respond and anticipate where things are going," he says.

Toyota says it can now develop a new model in 18 months,

compared to the three years it takes GM. Models in 1955: 25
Average model run: 62 months
And its flexible manufacturing system and the company's co- Models in 2005: 325
operative culture means that "we roll our sleeves up and go Average model run: 25 months
to work and get the job done", says Mr Press. source: The Machine that
Changed the World
Toyota also has a close relationship between the dealers who
sell its cars and its plants.

The production run is adjusted at the Georgetown plant, and extra Saturday working is
added, only when computerised orders from the dealer network show it is needed.

And individual buyers can alter what they want in their car - changing the paint colour or
specifications - right on the production line, by notifying their dealers.

GM is also aiming at reducing the product cycle time - the length of time it takes from
designing a new car to actually putting it on the road.

And by using a global design system, it can use existing Opel designs for its Saturn model in
the US, or Holden (Australia) models for its new Pontiac G8.

And if GM has made strides in cutting costs, it perhaps still has some way to go before it
starts making enough of the right kind of cars.

"Their problem is on the demand side," says Garel Rhys of Cardiff University.

"For too long, they took they eye off the ball, and they are now being caught out by
changing consumer tastes.

"And there is still a problem of perception. Although their quality has improved, consumers
don't yet recognise it, and Japanese cars can command a $5,000 quality premium in the

Culture change

At a deeper level, the question is whether GM and Ford - the

companies that perfected mass production -can
fundamentally change their culture to the new lean
production system.

"I hope they make it - but I am not optimistic they all will be
able to," says James Womack, an expert who has advised
many global companies, from Tesco to Boeing, on the
advantages of lean production. The new boss of Ford introduced lean
production at Boeing

Mr Womack says it has to be something that is inculcated in all the company's workers, from

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the bosses to those on the factory floor.

"This is not Japanese companies vs American companies, it is smart Japanese companies vs

smart American companies," he says.

"GM has caught up on assembly plants, but Toyota is still ahead on suppliers, product
development and a problem-solving approach to issues.

"For too long, managers at US car companies were in denial about their problems."

Toyota, for its part, says it does have a worldwide company culture that transcends Japan,
according to Jim Press.

"I think we have a hybrid system where we take the best of every culture and distil that into
a system that really works effectively in every country where we do business - and the
ability to transplant that system throughout other countries is the key to growing globally.

"Our philosophy is to think globally, but act locally."

Toyota's only worry appears to be whether, as it expands so fast, it can maintain that culture
- and its quality - intact.

Toyota's President, Katsuaki Watanabe, recently said in a newspaper interview that he didn't
care if Toyota became the biggest car company or not.

"What is important is to be number one in quality."

1. Describe lean production
2. Discuss the advantages and disadvantages of lean production
3. Explain the key role suppliers play in lean production
4. What is Kaizen?
5. In your opinion, what do you think the future of the car industry will be like?

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Production - Types of Production Method

In our introduction to production and operations management ("POM") we suggested
that there are several different methods of handling the conversion or production
process - Job, Batch, Flow and Group. This revision note explains these methods in
more detail.

The various methods of production are not associated with a particular volume of
production. Similarly, several methods may be used at different stages of the overall
production process.

Job Production

With Job production, the complete task is handled by a single worker or group of
workers. Jobs can be small-scale/low technology as well as complex/high technology.

Low technology jobs: here the organisation of production is extremely simply, with the
required skills and equipment easily obtainable. This method enables customer's
specific requirements to be included, often as the job progresses. Examples include:
hairdressers; tailoring

High technology jobs: high technology jobs involve much greater complexity - and
therefore present greater management challenge. The important ingredient in high-
technology job production is project management, or project control.

The essential features of good project control for a job are:

- Clear definitions of objectives - how should the job progress (milestones, dates,
- Decision-making process - how are decisions taking about the needs of each process in
the job, labour and other resources

Examples of high technology / complex jobs: film production; large construction

projects (e.g. the Millennium Dome)

Advantages Disadvantages
 Easy to organise production  Production costs likely to be high
 Can customise orders  Production time may be longer
 ‘one-off’ orders can be  Investment in machinery may be
accommodated higher as specialist equipment may
 Workers involved in entire be needed
production process from start to

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As businesses grow and production volumes increase, it is not unusual to see the
production process organised so that "Batch methods" can be used.

Batch Production

Batch methods require that the work for any task is divided into parts or operations.
Each operation is completed through the whole batch before the next operation is
performed. By using the batch method, it is possible to achieve specialisation of labour.
Capital expenditure can also be kept lower although careful planning is required to
ensure that production equipment is not idle. The main aims of the batch method are,
therefore, to:

- Concentrate skills (specialisation)

- Achieve high equipment utilisation

This technique is probably the most commonly used method for organising manufacture.
A good example is the production of electronic instruments.
Batch methods are not without their problems. There is a high probability of poor work
flow, particularly if the batches are not of the optimal size or if there is a significant
difference in productivity by each operation in the process.

Batch methods often result in the build up of significant "work in progress" or stocks
(i.e. completed batches waiting for their turn to be worked on in the next operation).

Advantages Disadvantages
 Allows flexible production  Production runs of small batches
 Stocks of part-finished goods can be can be expensive to produce
held and completed later  If production runs are different
 Workers can specialise there may be extra costs and time
delays in setting up different
 Repetitive work for employees

Flow Production

Flow methods are similar to batch methods - except that the problem of rest/idle
production/batch queuing is eliminated.
Flow has been defined as a "method of production organisation where the task is
worked on continuously or where the processing of material is continuous and

The aims of flow methods are:

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- Improved work & material flow
- Reduced need for labour skills
- Added value / completed work faster

Flow methods mean that as work on a task at a particular stage is complete, it must be
passed directly to the next stage for processing without waiting for the remaining
tasks in the "batch". When it arrives at the next stage, work must start immediately on
the next process. In order for the flow to be smooth, the times that each task
requires on each stage must be of equal length and there should be no movement off
the flow production line. In theory, therefore, any fault or error at a particular stage
can halt the entire process.

In order that flow methods can work well, several requirements must be met:
(1) There must be substantially constant demand
If demand is unpredictable or irregular, then the flow production line can lead to a
substantial build up of stocks and possibility storage difficulties. Many businesses using
flow methods get round this problem by "building for stock" - i.e. keeping the flow line
working during quiet periods of demand so that output can be produced efficiently.

(2) The product and/or production tasks must be standardised

Flow methods are inflexible - they cannot deal effectively with variations in the
product (although some "variety" can be accomplished through applying different
finishes, decorations etc at the end of the production line).

(3) Materials used in production must be to specification and delivered on time

Since the flow production line is working continuously, it is not a good idea to use
materials that vary in style, form or quality. Similarly, if the required materials are not
available, then the whole production line will come to a close - with potentially serious
cost consequences.

(4) Each operation in the production flow must be carefully defined - and recorded in

(5) The output from each stage of the flow must conform to quality standards
Since the output from each stage moves forward continuously, there is no room for
sub-standard output to be "re-worked" (compare this with job or batch production
where it is possible to compensate for a lack of quality by doing some extra work on the
job or the batch before it is completed).

The achievement of a successful production flow line requires considerable planning,

particularly in ensuring that the correct production materials are delivered on time and
that operations in the flow are of equal duration.
Common examples where flow methods are used are the manufacture of motor cars,
chocolates and televisions.

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Advantages Disadvantages
 Economies of scale  Standard product produced
 Automated production lines save time (opposite of customised)
and money  High set-up costs of automated
 Quality systems can be built into the lines
production  Repetitive and boring work
 Long production runs may produce
more than is needed


The three main types of operation are:

 Job production

 Batch production

 Flow production

(a) Identify a product that Toyota would use in their organisation that would be
made by each of the three different methods of production.

(b) Say what key features of each type of operation method make it most suitable
for the production of that particular product.

(c) What factors will affect the choice of operation method used by an

(d) Young Burberry Ltd. is bringing out a new line of synthetic hats. They will have a
variety of designs, colours and sizes. Which method of production would you advise
that they use? Give reasons for your choice of production method.

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The production game

Making dice

The aim of this activity is to look at some of issues related to different

ways of Producing goods

The class will be divided into three teams.

Each group is to operate as a factory, producing paper dice. The aim is

for each group to produce as many dice as possible in 25 minutes.

Each dice must meet the rigorous quality standards, which are set by the
customer's buyers. Each team must decide how they can best ensure
their dice are of an appropriate quality.

You will have 10 minutes planning time to organise your production.

Every team must report back on their performance at the end of the
production time to the rest of the class so make sure someone takes
notes, you might want to think about the following:

• How well you worked together as a team

• What things went well
• What things didn’t go well
• How could you have prevented any of the problems you

You need to appoint a group leader and a production manager

The Group Leader will have overall control of the group and be
responsible for making sure that all team members are following

The Production Manager is responsible for buying all resources and

selling the final dice and maintaining a running total of costs and final

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Dice game instructions sheet
You will need the following resource to produce the dice: A dice template – use to cut
out the dice shape on the paper provided

Resource Cost
1 Scissors £7
2 Glue £7
3 Paper (per sheet) £2
4 Ruler £5
5 Pencil £5

Resources can be purchased at any time either during or before production. No

other resources apart from the items you have bought can be used. The objective of
each team is to make as much money as possible; you will do this by selling all the
dice you have completed for £20

• Only completed dice can be sold
• Rejected dice have a scrap value of £5.00
• Any paper not used can be resold back to the supplier for £1.00

Job production group

Team one will produce dice one person per a dice working individually with each
person completing all stages in production before they move on to the next dice all
dice should be produced exactly as the template. The purchasing manager will be
responsible for buying the resource and recording the investment on the sheet

Batch production group

This group need to work on one aspect of the production at a time; no one can
complete other parts of the production until the batch is complete. For example
everyone in the group produces two templates and then everyone in the group
marks the dice with the dots then folds etc. The team should decide how many dice
they are going to produce before starting production

The flow production group

This group should split the task into individual processes with specialist workers
involved at each stage (decide who is best at doing what) this should resemble a
production line where someone marks out the template then passes on the paper to
be cut, this person then passes on the template to be marked up etc.

Higher BM Handbook: Operations M. McGowan 21

The decline of Detroit

Globalisation has been a powerful force that has

accelerated change in the world economy over the past

It has affected the fate of companies as much as countries.

And nowhere has been the
change more dramatic than in The Big Three are facing
the US car industry. their greatest challenge ever
in their entire postwar 28,000 workers lost their jobs when GM
history closed Buick City in Flint
Fifty years ago, American car
companies dominated the
Professor Garel Rhys, Cardiff
world, especially the mighty
GM, the world's biggest
industrial company, many of whose factories were based in Flint, Michigan, 40 miles north of

GM in decline

For the grandparents of Claire McClinton, who made the journey from the poverty of the
rural south to Michigan just after World War II, it was like arriving in another world.
"None of their children ever went hungry, we all had a good
education, we had good jobs, and owned our own home. We
thought we were living the American dream," she told the

Claire's whole family followed in their footsteps and became

"Flintsones," working for GM - and so did Claire.

They were loyal members of the autoworkers union, the

UAW, which won increasing benefits for its members, with
average wages of more than $50,000 plus overtime.

"We respected the union then," she said. "We believed it was the union that had delivered
us the American dream."
In the 1950s the Detroit area had the highest median
income, and highest rate of home ownership, of any major
US city. But times are very different now.

GM, under pressure from its competitors, is no longer

making money in the American car market - and it has been
closing plants all across Flint.

Now there are only 6,000 GM workers in Flint, compared to

100,000 at the peak, and the town and workers are We thought we were
suffering. living the American Dream

Claire McClinton, third generation

GM autoworker, Flint, Michigan

Higher BM Handbook: Operations M. McGowan 22

"Flint has the highest rate of unemployment, poverty and homelessness in Michigan," Claire
told me.

She works in a shelter feeding the poor, and would like her union to get more involved in the
community. And she is not sure how much longer she will have a job - and if she retires,
whether she will have any benefits.

GM has already told the unions it wants to cut the generous retirement and health care
benefits it promised its workers in the halcyon days of success.

The company does plan to build more car plants in the future - but in emerging markets like
China and India, not in the United States.

Toyota rising

But 400 miles south of Flint, another group of car workers are
feeling very different.

They work in Toyota's huge Camry factory in Georgetown,

Kentucky, and receive, by their standards, generous pay and

Toyota is the fastest-growing car company in the United

States, and it is building a new factory every year to keep up Toyota builds 500,000 cars a year at its
with demand. vast Kentucky plant

And it is set to overtake GM this year as the world's largest TOYOTA WORKER'S VIEW
car company by sales.

For Laura Wilshire, from Ashland, Kentucky , life is good.

"This is the top notch job in the area," she told the BBC.

She doubled her salary when she joined Toyota, and the
company provides a good health care plan for her family,
including dental coverage for her two children.
This is the top notch job in
And she says that Toyota has also helped to provide better the area
schools for her children by putting money into the town's
budget. Laura Wilshire, Toyota worker,
Georgetown, Kentucky
She says more is expected of workers at Toyota than her
previous job in a convenience store, but she doesn't mind taking responsibility.

"If a seatbelt isn't right, I stop the line until it is fixed - that is an important issue as it could
affect people's safety."

Toyota encourages workers to take personal responsibility for defects, and to work together
to fix them.

That attitude has given them a well-deserved reputation for quality and reliability - and the
Camry has been the best-selling car in America for the last ten years.

Higher BM Handbook: Operations M. McGowan 23

Toyota has no trouble hiring the right sort of workers - 100,000 people applied for the 3,000
jobs when the plant opened in 1990.

Laura says she feels sad when she reads in the papers about what is happening to
autoworkers in places like Flint.

Dominance to decline

Now, according to Professor Garel Rhys of Cardiff University, the US Big Three are facing
their greatest challenge ever in their entire postwar history.

What has led to the decline of US car manufacturers in their

home market?

While it was inevitable they would eventually lose their

monopoly position, their failure to adapt their production
methods and meet changing consumer tastes has accelerated
their decline.

In 1955, the world looked like a very different place.

Flint, Michigan, GM's production centre,

Four out of every five cars in the world were made in the US, was once a thriving community
half of them by GM.

No other car companies had the capital or the know-how to enter the global car business.

GM's main US rival, Ford, was half its size. The largest foreign carmaker, VW, was little
bigger than GM's own German subsidiary, Opel and only had one model - the VW Beetle.

And Toyota was not even on the horizon. It made 23,000 cars in 1955 in Japan, compared
to 4 million manufactured by GM in the US.

Innovation and experiment

But the near-monopoly conditions in the American market

bred complacency - and the assumption that the American
lead in technology and marketing was unassailable.

According to Stephen D'Arcy, head of Global Automotive

Practice at PriceWaterhouse Coopers, in the long run "the US
monopoly was an unsustainable anomoly."
Ford and GM dominated the US auto
In the 1950s and 1960s, US firms failed to innovate in the industry in the l960s
design of cars, preferring to make money by increasing the size and weight of their vehicles
by adding extras like air conditioning, power steering, and fancy sound systems.

It was left to European manufacturers to develop disc brakes, rack-and-pinion steering, air-
cooled and diesel engines.

And the mass production system discouraged innovation because it was so expensive to
introduce fundamentally new models.

Meanwhile, Toyota was also making a virtue of adversity, changing its production system to
become leaner and more efficient than its rivals.

Higher BM Handbook: Operations M. McGowan 24

Oil crisis
Lean production: It is
It was the oil crisis in the 1970s that first illuminated the easy to say you will do it, but
problems of US automakers. harder to actually implement
For the first time, smaller cars were the rage, and US
consumers found that cars like the Toyota Corolla were an James Womack, author, The
attractive alternative to big American cars. Machine that Changed the World

Imports of Japanese cars soared in the 1980s, to the chagrin

of the US companies and the unions alike, taking nearly one-
quarter of the US market.

And when the companies pressured the US government into

limiting imports from Japan, Toyota and Nissan started
building car plants in the US.

By 2005, these Japanese "transplants" were producing 4

million cars a years, one-quarter of US output, and more than

The Japanese located their plants in low-wage, non-union areas of the US and brought new,
more flexible production methods as well.

As a result, they could make money on smaller cars and change models more frequently.

The US car companies tried and failed to design a competitive small car.

They also experimented with Japanese production methods but neither seemed to do the
trick and close the quality gap.

According to James Womack, author of the influential book The Machine that Changed the
World, it was easy for everyone to say they accepted lean production, but much harder to
actually implement it.

The SUV craze

If the 1980s was a decade of fear, the 1990s represented a

false dawn.

With oil back at $18 a barrel, the US companies thought they

had the answer to the Japanese threat - the SUV (Sports
Utility Vehicle).

As light trucks, SUVs were protected by a 25% import tariff

and also escaped government rules laid down to boost fuel

SUV sales soared from one to four million with 60% of the Big Three's sales - and nearly all
of their profits - coming from SUVs.

The SUVs transformed the fortunes of Chrysler, dominating with its Voyager minivan and
Jeep Grand Cherokee, and Ford which had the best-selling SUV, the Ford Explorer.

Higher BM Handbook: Operations M. McGowan 25

Abandoning cars proved a costly mistake for Detroit when it became clear in recent years
that environmental concerns were here to stay.

Last year,the price of gasoline in the US reached a record $3 per gallon in most states.

As a result, SUV sales slumped, and the sale of smaller vehicles rose.

At this year's Detroit Auto Show, Ford and GM made it clear that they were taking the
environment seriously, and produced electric-powered concept cars.

But these cars are years, if not decades, away from reaching the public, while Toyota is
already rolling out its hybrid electric-petrol engine across its entire range.

Downsizing lessons

In 2006, both Ford and GM finally accepted they would never

dominate the US car market as in the past.

They both announced huge downsizing programmes, cutting

70,000 jobs between them.

And Chrysler - now owned by German firm Daimler - also

Detroit still puts on a glitzy image at the
announced its own downsizing programme and is effectively annual motor show
up for sale.

There is real doubt in the industry that all three can survive.

GM hopes to survive as a global car company which increasingly operates outside the US.

And Ford may survive by selling some of its more profitable European subsidiaries.

But even if they manage this, it is sad end to what was once a central element in the
American industrial dream.

Sales Sales Profit Market Workforce

(volume) ($bn) ($bn) value
GM 8.3m 192 -10.9 20 335,000
Toyota 8.2m 176 12.5 208 285,000
Daimler/Chrsyler 4.8m 185 -1.7* 65 382,000
Ford 6.6m 153 -12.7 16 300,000
Volkswagen 5.2m 118 5.2 43 344,000
*2006 (Chrysler only)
Source: PriceWaterhouseCoopers, 2005


1. What factors contributed to the decline of the American Car Industry?

2. What External Factors are mentioned in the article?

Higher BM Handbook: Operations M. McGowan 26

3. What role did the Oil Crisis of the 1970s play in the changes of fortunes?
4. Discuss the effect of Downsizing
5. What do the Car companies see as the future for their products?
6. If you were in charge of GM, what would you be aiming to do?

What is Quality?

Consumers, faced with many goods at similar prices, now think about quality when
making choices.

Consumers are more aware. Magazines such as Which? Contain reports on the quality of
certain products.

Consumers also have more disposable income and higher expectations than ever before.

Quality may be seen as subjective.

Quality could be described as the features of a product or service that allow it to

satisfy customers.

Eg a family buying a television may consider the following features:

• Reliability and durability

• Special features
• Suitability + value for money
• Parts
• Repairs
• After sales service
• Physical appearance

They may also consider features such as:

• The image of product

• The reputation of manufacturer

For the producer the aim is to ensure customer satisfaction and reduce the return of
faulty goods.

Organisations now recognise the importance of the view of the customer in the setting
of quality definitions.

Legislation and competition have also forced firms to improve the quality of their

Higher BM Handbook: Operations M. McGowan 27

Total Quality Management

The main aim of Total Quality Management is to produce a perfect product or

service every time in order to meet customer requirements. In the UK the
system was first seen more than twenty years ago when the Ministry of
Defence set out the specifications or standards that their suppliers had to
meet before the Ministry would buy from them. Gradually over the years similar
standards have evolved to cover a wide range of industries.

Total Quality Management uses the principles of ‘Quality Assurance’ but takes a
fundamentally different view of quality. The principle upon which this system
operates is that in order to achieve ‘quality’, the requirements, specifications,
and needs of the customer or client come above everything else. The culture
shift must be made from ‘we know what quality is’ to ‘You tell us what you want
and that will be our definition of quality’.

Errors are costly for business.

It is estimated that one-third of all effort of British business is wasted in correcting


TQM is a method designed to prevent errors, such as poor quality products from

The business is organised so that the manufacturing process is investigated at every

stage. Every department, activity and individual is organised to take into account
quality at all times.

In practical terms TQM assumes that the next person with ‘ownership’ of the
good, or the next person to use the good, are customers or clients – not simply
the person who ends up purchasing the good for his/her own use.

Quality is therefore essential at each and every step in the production of a

good, or, for that matter, in the provision of a service, to which the same
principles apply.

For example, on the production line in a factory, the next person down the line
from you is your customer or client . You must therefore ensure that when the
part-assembled car leaves you to move on to the next worker, any work you have
done on it is of the highest standard and quality – just as you will expect to
receive the car parts from the worker in front of you.

It is felt that, although it is initially costly to establish, TQM can achieve

savings in the long run by reducing wastage to around 3%. This can make a
considerable difference to an organisation.

Higher BM Handbook: Operations M. McGowan 28

TQM requires:

• the understanding that this is a core corporate philosophy focusing on the

needs of the consumer;
• a commitment by top management, and therefore the provision of the
necessary resources;
• that every member of the organisation be consulted and involved in setting
standards ( every member of the organisation means just that, from the
receptionist, office cleaner and store-man to top management);
• a focus on teamwork and creative thinking to identify future improvements;
• that it be viewed as a long-term concept;
• a quality plan to be established which offers a structured, disciplined
approach to quality;
• emphasis to be placed on the collection and analysis of information;
• employee training to be treated as essential;
• a constant checking of performance (quality standards) by individuals;
• a constant search for improvement;
 focus on the total quality of output, in which case cost savings can be

What are the features of TQM?

Quality Chains – failure to meet the requirements in any part of the quality chain
creates problems, such as delays in the next stage of production.

Company policy and accountability – there will only be improvements in quality if there
is company-wide quality 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 their job’.

Control – consumer’s needs will only be satisfied if the business has control of the
factors that affect a product’s quality. These may be human, administrative or
technical factors.

Monitoring the process – TQM relies on monitoring the business process to find
possible improvements.

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
• 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 ones

Higher BM Handbook: Operations M. McGowan 29

TQM strongly favours teamwork throughout the business. It builds trust and morale,
improves communications and cooperation and develops interdependence. Many UK
firms in the past have suffered due to lack of sharing of information and ideas.

Using TQM - TQM helps companies to:

• Focus clearly on the needs of customers and relationships between suppliers and

• Achieve quality in all aspects of business, not just product or service quality

• Critically analyse all processes to remove waste and inefficiencies

• Find improvements and develop measures of performance

• Develop a team approach to problems solving

• Develop effective procedures for communication and acknowledgement of work

• Continually review the processes to develop a strategy of constant improvement

Good Consistent Consistent Consistent Satisfactory

design method equipment materials instructions



There are however, some problems:

• There will be training and development costs of the new system.

• TQM will be only work if there is commitment from the entire business.

Higher BM Handbook: Operations M. McGowan 30

• 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 the product.

Costs of Quality

Firms will want to monitor the costs of quality control carefully. All businesses are
likely to face costs when trying to maintain or improve the quality of their products and

• The cost of designing and setting up a quality control system. This might include
the time used to ‘think through’ a system and the training of staff to use it.

• The cost of monitoring the system. This could be the salary of a supervisor or
the cost of an electronic sensor.

• There will be costs if products do not come up to standard. Faulty goods may
have to be scrapped or reworked. Product failures might also result in claim
against the company, bad publicity and a possible loss of goodwill.

• The costs of improving the actual quality. This may be the cost of new
machinery or training staff in new working practices.

• If the whole quality system fails, there may be cost in setting it up again. Time
may be needed to ‘rethink’ or adjust the system. Retraining might also be

1. Describe the features of TQM
2. What benefits does TQM bring to an organisation?
3. What potential problems can arise from implementing TQM?
4. Explain the costs associated with Quality
5. Research 2 UK companies that implement TQM and find out the effect of
TQM on their profitability.

The diagram below shows the ‘iceberg’ effects of quality failure costs – the failure
costs above the water line and the more far reaching failures below the water line.

Higher BM Handbook: Operations M. McGowan 31

query handling,
waived fees,
complaint Waterline

Lost customers, staff overtime,

lost repeat business, machine
downtime, bad employee morale

Although quality control systems can be costly, it is argued that their benefits
outweigh the costs. The actual quality of the product should be improved, so customers
are more likely to purchase he product. Business costs may be cut if faults in products
are identified before the product reaches the market. The costs of failure once the
product has reached the market are likely to be much higher than those during

W. Edwards Deming is the

Godfather of the Japanese success

He was an American whose ideas

were laughed at in his native land,
but when he went to help build the
Japanese infrastructure in the late
1940s and 50s he transformed

Find out more about Deming and his

W. Edwards Deming
views on Quality. “Quality is about reducing
variation”. Discuss

Higher BM Handbook: Operations M. McGowan 32

Car poll hails Japanese quality

Japanese cars are the most reliable, the least polluting

and the best to own, according to consumer group

Honda has won this year's Reliability Award, based on a

Which? readers' survey of 100,000 cars, beating the Best
Manufacturer Award-winner Toyota.

The Green Award went to hybrid champion Toyota, ahead of Honda Jazz is the most reliable car in
runner-up BMW, which won the Road Testers' Award. the UK, Which? readers say

Some models by US marques Chevrolet, Chrysler and Dodge were criticised due to safety

Volvo's safety image was let down by concerns about seatbelts, which enabled Ford Galaxy
and Toyota Auris to jointly grab the Safety Award.
Which? Car Awards 2007
Lexus won the Ownership Award ahead of Honda, though the Reliability: Honda
Honda Jazz was this year's most reliable individual model. Best Manufacturer: Toyota
Safety: Toyota Auris/Ford Galaxy
Safety-conscious car buyers should steer well clear of the Green: Toyota
Chrysler Voyager, a people carrier, the Dodge Caliber, a
Ownership: Lexus
medium-sized car, and the Chevrolet Matiz, a rebadged small
Daewoo, Which? said. Road Testers: BMW
Wooden Spoon: Dodge/Jeep
The only serious non-Japanese contender for the Reliability Consumer group slates dodgy cars
Award was Korea's Hyundai, which came joint third -
alongside five Japanese marques: Daihatsu, Lexus, Mazda, Subaru and Suzuki, with
Mitsubishi following closely behind.

Ford and Nissan also scored highly in the reliability stakes, though when considered at a
group level they were both pulled down by their sister-marques.

Renault, Nissan's partner, and Land Rover, which is owned by Ford Motor, were at the bottom
of the reliability league table.


1. How would you define quality?

2. What are the qualities you think customers want in a car?
3. What are the benefits to Japanese Car Manufacturers of this survey?
4. What advice would you give to the Car Makers near the bottom of the survey?

Higher BM Handbook: Operations M. McGowan 33

Meeting Quality Requirements

Monitoring and Controlling the Production Process

As indicated earlier, the success of any organisation depends upon its ability to plan for
the future and sets targets for achievement. However, plans – even good ones – do not
guarantee success. Success requires organisations to achieve what was intended
through the implementation, reviewing and monitoring of the plan. As in other areas of
an organisation it is essential to monitor and control working practices as they relate to
operating systems. In order to do so, it is necessary to study the work being carried

Best practice benchmarking

BPB is a technique used by some businesses to help them discover the ‘best’ methods of
production available and adopt them.

BPB involves:

• Finding out what makes the difference, in the customers eyes, between an
ordinary supplier and an excellent supplier.

• Setting standards for business operations based on the best practice that can
be found.

• Finding out how these best companies meet those standards.

• Applying both competitors’ standards and their own to meet the new standards
and, if possible, exceed them.


• There may be resistance from the market leaders to provide their performance
figures to be used by competitors.

• Organisations must continue to benchmark their processes – even if they

become industry leaders – as competitors will also be trying to produce better
quality goods and thereby increase their market share.

Benchmarking is seen as a vital element in the success of an organisation in a global and

highly competitive market.

1. Explain the process of benchmarking
2. Discuss the advantages and disadvantages of benchmarking

Higher BM Handbook: Operations M. McGowan 34


Originally the idea of American business guru W. Edwards Deming, the idea was
taken up in Japan after the Second World War.

The idea was that the front-line production workers – the people who knew best about
the product – would meet regularly with supervisors and managers (engineers and
salespeople may also be involved) in order to discuss ways of improving work.

Worker Circle





Quality circles offer more responsibility to the production worker. They are more part
of the decision-making process, which is called empowerment.

Quality circles benefit management by giving employees a less formal opportunity to

discuss what they think is going well or what can be improved on, thereby bringing the
product on in terms of quality.

Higher BM Handbook: Operations M. McGowan 35

The use of quality circles is a management approach that allows people to become more
involved in decision-making. Small groups of workers (about 5-20) in the same area of
production meet regularly to study and solve production problems. This allows the
workforce the opportunity to directly improve the work they are doing. If quality
circles are successful they will motivate the workforce, improve efficiency and raise

Quality control circles are only likely to work if they have the support of both
management and employees. Businesses have to want worker participation and
involvement in decision-making, and set up a structure that supports this. Workers and
their representatives also need to support the scheme. Employees must feel that their
views within the circle are valued and make a contribution to decisions.

Payment systems

The search for a way to motivate, reward and even control labour has led
managers to devise a variety of payment systems.

Time-rate payment systems

These are simple payment systems where the workforce receives a basic wage
or salary. Workers are rewarded for the amount of time they spend at work,
and for most workers in Britain this is the average working week of thirty-six
hours. In addition, holidays with pay are usually included. The system is very
common in many jobs from teachers to bank workers and shopkeepers. It
provides a simple method of calculating payment for employees, whether they
are paid hourly, weekly, or monthly. It also overcomes difficulties that might
arise when trying to work out the exact value of an employee’s work, for
example a doctor. From the employee’s point of view such a system guarantees

There are instances where employers operate a time rate system, but also offer
overtime payments when individuals work for more than their normal number of
hours per week. Overtime payment systems are common in the construction
industry, for example.

Piece-rate payment systems

In manufacturing industries the most common method of payment is some form
of payment by results, or a productivity related scheme. In some instances this
can simply be payment to the worker for each item he or she makes/produces.
This system was very common in the soft fruit industry where workers would be
paid by the weight of each basket of strawberries or raspberries they picked.
It is also felt to offer the greatest incentives to employees to maximise their
output – the more they produce the more they get paid. However, a system that
only offers piece-rate payments may result in little or no income for employees,
because of breakdowns in machinery or other unplanned stoppages.

Higher BM Handbook: Operations M. McGowan 36

Piece rates plus a basic or fixed pay element
To avoid the problems mentioned above, some employers calculate pay using a
system made up of two elements. Firstly, they will pay a basic or fixed-rate
wage calculated on a time rate basis, and then to this they will add a variable,
piece-rate element, calculated on output.

Commission payments
When looking to establish payment systems for a sales force, it is very common
to base this too on a flat-rate wage supplemented by some form of commission
based on sales volume or value achieved. In some organisations the greatest
part of the wage received by the sales force comes in the form of commission
paid. This has led to complaints that such workers may use pressure tactics in
order to achieve sales – and maintain their own income levels.

Fringe benefits and non-financial payments

This covers any payments other than wages and salaries that an employer might
make. They include private medical insurance, subsidised meals, company cars
or loan and mortgage facilities. Since the 1960s fringe benefits have increased
in importance, particularly in the managerial and professional sectors.

Another common production payment system is one that operates with a flat
rate of pay that is then supplemented by a bonus directly related to the output
each worker, or group of workers, achieves. Such bonuses might be related to
setting targets for:

• volume of output,
• quality standards achieved,
• reductions of wastage,
• improved machine use,
• reduction in the loss of working days through workplace accidents. (This last
example is very common in the North Sea oil industry.)

Incentives to professionals
It is generally accepted that professional employees, for example dentists,
doctors and other health service specialists, receive a basic salary from their
employing health authority, but can enhance this by undertaking private patient
work for which they receive payment on an individual case basis. There has also
been an increase in ‘no win no fee’ legal cases in recent years. Based on a
system devised in the USA, and particularly common in civil law suits for damage
claims, the client only pays the lawyer a fee if the outcome of the case is in his
favour. The percentage rate of the fee will be set out and agreed before the
legal action is started.

Higher BM Handbook: Operations M. McGowan 37

Contract employment
It is becoming more and more common for employers to hire staff on a contract
basis. This may be for the completion of a job or project, for example the
building of a new stretch of dual carriageway, or may be for a fixed time period
of, say, one university academic year. The employer can make substantial
savings using a contract basis for employment – it is unlikely that he will offer
paid holidays, pay for days lost through sickness, maternity pay or a company
pension scheme. From the employee’s point of view the rate of pay is often
higher than for those on permanent contracts. But there is a high degree of
uncertainty and risk of loss of income when the contract ends.

Profit-sharing schemes
Although not widespread in Britain, there has been a move in recent years for
employers to use systems that include a share of pre-tax profits as part of the
payment made to the workforce. Some employers feel that this system is likely
to increase the commitment from the workforce, not only in terms of output,
but also in overall terms to the organisation itself. However, others are less
enthusiastic and feel that the relationship between daily output and annual
profit-share payments is too remote to be an effective motivator.

Employers will have several objectives that they want to achieve when devising
payment systems for their employees. These include:

• Motivation
Many people believe that workers are motivated by money, and this is
reflected in the number of employers who use performance related payment

• Cost
As one of the objectives of the employer is to maximise profits he will wish
to keep the cost of labour as low as possible. The procedures for calculating,
recording and making payments to employees should also be cost effective.

• Prestige
Employers may want to have the reputation of being ‘good payers’ rather than
‘poor payers’. This improves their ability to recruit and retain workers,
which, in the long term, is cost effective for the organisation.

Employees will also have a number of objectives that they want to be able to
meet from the payment they receive.

• Purchasing power
The higher the wage the employee gets the more he can buy and the higher
his standard of living will be. Workers will always try to win wage increases
higher than the present (or expected) level of inflation – as this means that
they will continue to be able to raise their standard of living.

Higher BM Handbook: Operations M. McGowan 38

• Recognition and fairness
Most employees like to have the value of their work recognised. Many see the
level of their wage or salary as the main indicator of such recognition. They
also want to see fairness between payments they receive and payments made
to other workers doing similar work or holding similar qualifications. For
example, the pay of nurses is often compared to that of teachers or the

• How payments are made up

Many workers are interested in the way in which their total remuneration is
made up. For example, they might be very happy to settle for a lower annual
salary provided that the employer is making a contribution into a pension fund
on their behalf. Benefits such as a fully funded company car may be worth as
much as £4,000 or £5,000 per year to the employee, although he/she will
almost certainly have to pay more in tax.

For each of the Payment Systems create a T-chart like the one below and fill it in.

Payment System
Advantages Disadvantages


You will be divided into small working groups as usual.

Your task is to create a 5-minute presentation on one of the following


a) Methods of Production GROUP ROLES

b) Stock Control
1. Researcher
2. Recorder
c) Quality
3. Presenter
d) Payment Methods

In your presentation use as many up-to-date examples from organisations

as possible.

Remember to evalutate your performance as a team!

Higher BM Handbook: Operations M. McGowan 39

The Choice of Distribution Channel

An efficient channel of distribution will allow a business to make products available to

consumers quickly, when required, and at a minimum distribution cost to the firm itself.
Large firms often choose different channels for different products.

There are many factors that can influence a business’ decision.

The Product

The nature of the product itself will influence the type of distribution channel chosen.

• Perishable or fragile goods, such as fresh fruit, require direct channel of

distribution, so half the time spend handling the product is reduced.

• Technically complex goods also need a direct link between the producer and the
consumer. This is so that any problems which arise from installation can be
quickly dealt with, without the need to go through an intermediary.

• Goods or services which are tailor made tend to have more direct channels so
that the consumer’s needs can be passed to the producer.

• Goods which are heavy or are packaged in non-standard shapes are likely to
require a direct channel of distribution. If handling is difficult, the cost of
distribution is likely to find rival brands on shop shelves.

• Producers wishing to sell large quantities of low valued goods are likely to use a
wholesaler. They will not want to keep stocks of low valued goods if they are
receiving order for more highly priced goods. Selling through wholesalers will
mean they can sell low valued products in bulk, as quickly as possible.

The Market

Large and dispersed markets usually require intermediaries. Smaller, local markets can
often use a system where consumers buy directly. This is also true of the size of an
order, where smaller orders can be sent by a more direct channel of distribution.

The market segment at which the product is aimed may influence the retail outlet at
which the product is made available. For example, products aimed at travelling business
people may be sold near to a railway station.

Legal Restrictions

Legislation may influence the channel that can be used for particular product. Certain
drugs, for example, can only be sold by pharmacists through a prescription.

Higher BM Handbook: Operations M. McGowan 40

The Company

Larger companies are often able to set up their own distribution networks.

Physical Distribution

Physical distribution is the movement of products from one place to another. It is an

important part of the marketing process for 2 main reasons:

• Failure to deliver a product in the right quantities at the right place and at the
right time can damage an effective marketing effort.

• The cost of physical distribution can be high – in some cases higher than the
cost of actually producing the product.

Two aspects of physical distribution are important to a business holding stocks and
transporting products.

Holding Stocks

Ideally a business would be able to guarantee every customer the product they wanted,
whenever they wanted it. To do this a firm would have to hold huge amounts of stock.
Holding excessive amounts of stock is very costly. Holding very low stock levels,
however, could mean turning down orders.

The solution is for a business to assess the level of stocks needed to maintain an
agreed level of customer service. This often means holding enough stock to satisfy
regular orders, but not enough to deal with sudden changes in demand.

Transporting Products

This is concerned with how goods can be physically delivered to markets. Firms need to
consider the relative costs and speed of transporting their goods by road, rail, sea or
air. For example, aeroplanes are faster than ships when transporting exports for the
UK. However, firms must decide whether this advantage outweighs the costs which
result from using this mode of transport. There are times when the nature of a product
dictates the transport. For example, an Orkney Islands based firm which sell freshly
caught lobster to Paris restaurants has little choice but to fly the product to France.

When transporting goods, firms must also consider possible damage to or deterioration
of goods. Packaging may help to reduce damage and deterioration, for example, if
vacuum packs are used.

1. What is a Distribution Channel?

Higher BM Handbook: Operations M. McGowan 41

2. Discuss the factors that influence the choice of Distribution channel
Operations – Additional Information

British Standards – a system for setting quality targets and monitor

performance targets. There is no guarantee of quality and critics argue
that it is a triumph of paper over performance. Indeed, a firm may hold
a BS 5750 certificate for setting and achieving a low quality target!

Investors in People (IIP) – a government standard for employee consultation and

training that establishes a procedure for ‘relating training to your business plan’. In
order to achieve the standard, assessors from IIP will ask:
• Have goals been set for the business?
• Have these been explained to the workers?
• Have workers the right skills to meet those targets?

ISO 9000 - ISO is a network of the national standards institutes of 148 countries, on
the basis of one member per country, with a Central Secretariat in
Geneva, Switzerland, that coordinates the system.

Deming Prize – Japan’s top quality award, named after W. Edwards Deming, the world
famous quality guru. Estabished in 1950 by the Japanese Union of Scientists and
Engineers (JUSE). It’s main concern is the implementation of TQM in the firm. Previous
winners include Kawasaki, Toyota and Fuji and Hitachi.

Baldridge Award – America’s top quality award. It’s key factors are: customer focus
and customer quality, continuous improvement, and leadership. Previous winners include
Motorola, Boeing, AT&T and Federal Express.

Higher BM Handbook: Operations M. McGowan 42


1 Discuss the factors which must be considered when deciding on the most
effective channel of distribution for a product.
(7 marks)

2 A furniture manufacturer chooses to use the JOB method of production.

Describe the advantages and disadvantages of this method over FLOW
production for the furniture manufacturer.
(6 marks)

3 Manufacturers have to transport goods to retailers. Describe the external

factors which might result in transport difficulties. (4

4 The British Standards Institute (BSI) Kitemark is an indication of product

(i) Name 2 other quality standards. (2 marks)

(ii) Describe the benefits of a quality standard to both an organisation and its
customers. (3 marks)

5 Describe the main factors which have to be taken into account by an

organisation when choosing a method of production.
(5 marks)

6 What steps can be taken in the manufacturing process to ensure a quality

product is produced at all times?
(10 marks)

7 Describe the factors influencing a purchasing manager’s choice of suitable

suppliers of materials and services.
(10 marks)

Higher BM Handbook: Operations M. McGowan 43