Chapter 5

5.1 The role of operations management

Operations management and business functions

Operations management, often referred to as production is concerned with providing the right
goods and services in the right quantities and the right quality in a cost-effective and timely
manner.
It relates to the other functional areas of the organization;
- Marketing - production method affects quality and individuality of products, exclusive
products get marketed at different prices and in different methods to those that are mass
produced.
- HRM - different production method affect the number and skill required of the workforce
- Finance - production heavy methods often require capital investment in machinery and
equipment, investment appraisal methods are used to assess risks, more
labour-intensive production requires more costs to go into wages and other financial
benefits.
It’s concerned with all four sectors of economy:
- Primary - extracting raw materials, harvesting crops and rearing animals
- Secondary - converting natural resources into processed or finished goods
- Tertiary - provision of services
- Quaternary - provision of intellectual, knowledge-based activities

Land, labour, capital and enterprise are combined in a cost effective way to ensure that there is
value-added during the production stage, i.e. value of output is greater than costs of
production.

Operations management strategies and practices

Sustainability promotes intergenerational equity, i. E production enable consumption of goods

and services for the people of today without compromising consumption for future generations
- Ecological sustainability refers to the capacity of the natural environment to meet the
needs of the current generation without jeopardising the ability of future generations to
meet their needs.
- Social sustainability examines social interactions and structures that are necessary for
sustainable development, i.e. it is the ability of the society to develop in such a way that
it meets the social wellbeing needs of the current and future generations.
- Economic sustainability refers to the development that meets the economic needs of
the present generation using existing available resources without compromising the
ability of future generations to meet their needs.
 5.2 Production Methods

Job production (or customized production) involves the manufacturing of a unique or

one-off job. It can be completed by one person or by a team of people.

Advantages Disadvantages

Quality likely to be high due to high skill Time consuming due to detail

Workers more likely to be motivated Labour-intensive so relatively expensive

Flexibility throughout planning process Long working capital cycle

Uniqueness adds value to product Few economies of scale due to lack of bulk

Variety in choice for customer Cash flow issues from irregularity of orders

Batch production involves producing a set of identical products. Work on each batch is fully
completed before production switches to another batch. It is used where the demand for a
product is frequent and steady.

Advantages Disadvantages

Economies of scale, machinery and bulk Possible high amount of stock, storage costs

Increased productivity due to specialization Jobs can get repetitive

Choice for customers due to variety Inflexibility bc can’t switch mid-batch

Variety in production reduces risks High production costs due to machinery

Mass production is the large-scale manufacturing of a homogeneous (standardised) product.

Often involved assembly of individual components bought from other companies. Unit costs of
production are relatively low when using mass production methods.
Specialized capital equipment can lead to productivity. Unlike batch production, standardized
products are made on a large scale.

Flow production (or process production) uses continuous and progressive processes, carried
out in a sequence for standardized products. When one task is completed, the next stage of
production starts immediately. Unlike mass production its at a larger scale with assembly lines
often being kept running constantly.
(for both)
Advantages Disadvantages

Capital-intensive, output is large Work is likely to be monotonous and boring

Costs can be spread over high volume of Lack of flexibility in changing product once
output, technical economies of scale process begins

Machinery and equipment assure Large set up, running and replacement costs
standardized quality and large volume leads to storage costs

Low labour costs due to low level of skill Inflexible system, sub-standard products
required to operate cannot be reworked.

Cellular manufacturing (or cell production) organizes workers into independent ‘cells’ with
each team comprising of multiskilled staff with responsibility and autonomy for compering a
while unit of work in the production process.

Advantages Disadvantages

Autonomy in decision-making & team Lower output compared to mass and flow
management production. Cells are not equally productive

Collective responsibility for production targets Capital-intensive so costs for machinery and
and quality of items that get passed on equipment

Teams and autonomy improve motivation Conflict inter- or intra- cell harms productivity

Team dynamics and spirit increase Capacity utilization is relatively low so

productivity average fixed costs tend to be higher

Appropriateness of different production methods

Labour intensive Capital intensive

Greater proportion of labour than any other High capital costs in comparison with labour
factor input. costs.

Found in job production and highly skilled Found in batch, flow and mass production
professions

Key benefit is the ability to offer a Increasing capital investment expenditure

personalized service often leads to improved levels out output,
however there needs to be sufficient demand
for a product.
 Having a USP justifies higher prices per Tents fo be highly homogeneous, no USP,
product lower selling price therefore lower profit
margins

Machinery, equipment and automation costs

are extremely high

A business choosing a method depends on:

- Relative cost of labour and capital
- Size of the market - the larger the more capital intensive
- Aims and objectives of the organization - if profit is a focus, businesses tend to operate
in mass parkets.
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5.4 Location

Factors affecting location decisions

Location refers to the geographical position of a business, i.e. where it is sited. There's a
number of factors to consider:
- Quantitative factors:
- Site costs - quality trade and attention comes at a higher price
- Proximity to market - bulk/weight gaining industries need to position closer to
where they sell e.g. water or alcohol producers
- Feasibility of E-commerce - it can greatly reduce costs, but not feasible for all
organizations
- Labour costs - availability and quality of labour affect wages paid to workers
- Government incentives and limitations - financial incentives or difficulties in
obtaining a licence to trade or tax
- Qualitative factors:
- Infrastructure - transportation, communication & support networks
- Environmental and planning issues
- Government restrictions/regulations and politics - bureaucracy and good trading
relations
- Management preferences - preferences or gut feeling of manager or familiarity to
place
- Clustering - firms locating near other businesses that cater for similar or
complementary markets

Reorganizing production

Outsourcing (or subcontracting) is the practice of transferring internal business activities to an

external organization to reduce costs and increase productivity.
 Advantages Disadvantages

Firms can focus on core activities by There must be mutual trust between
outsourcing the rest contractor and sub

Quality output due to external specialisation Lack of quality control

Helps cut production costs for contractor Requires effective communication and
coordination

Could lead to possible restructuring or

redundancies.

Offshoring involves relocating business functions and processes overseas. The offshored
functions can remain within the business (with overseas operations) or outsources to an
overseas organization (offshore outsourcing). Advantages above also apply here. However,
offshoring has often been associated with unethical practices, quality assurance is harder and
business becomes vulnerable to external influences.

Insourcing is the use of an organization’s own people and resources to accomplish a certain
function or task which would otherwise have been outsourced. Two main reasons:
- Business had previously outsources a certain function
- There are no longer cost saving benefits from using a subcontractor

Business may also need to consider re-shoring due to rising labour costs abroad and/or higher
rents being demanded. There are potential disadvantages known as industrial inertia:
- Relocation costs
- Lower morale and higher anxiety caused to workforce
- Damage to corporate image if firm is seen valuing profit over people
- Loss of skilled and loyal (but geographically immobile) workers
- Likely need to find new customers and suppliers
- Strong links with existing local community
- Redundancy payment to retrenched employees