Unit 2: Managing a business Operations management Making operational decisions Chapter 23

Unit 2: Managing a business

Operations management

Making operational decisions

Chapter 23




operations management: the process that uses the resources of an organisation

to provide the right goods or services for the customer.

In the context of the above definition, ‘right’ means ‘what the customer wants’.

It may mean quality and price to one customer, but convenience and flexibility to

another.



Identifying operations issues

Customers have many requirements, so operations management looks at a variety of

issues. In the AQA AS Business Studies course it looks at:• location (Unit 1)• resources to use and converting them into outputs (Unit 1)• capacity utilisation• organising stock control • quality• customer service • working with suppliers• using technology



Operational targets

operational targets: the goals or aims of the operations function of the business.

A business that achieves its operational targets would be described as ‘operating

efficently’. This efficiency may mean low costs or high quality etc.

Three examples of operational targets are:• unit costs• measures of quality• capacity utilisation



Unit costs

unit cost: the cost of producing 1 unit of output.

unit cost = total cost

units of output

The unit cost is also known as the average cost (AC) or average total cost (ATC).

The target for a business is to achieve low unit costs.

Example:

A business produces 10 units of output at a total cost of £70.

average (or unit) cost = £70/10 = £7



Unit costs: calculations

Based on the data above, calculate the unit costs of products A to D.

Assuming these products are of the same quality, which product is manufactured most efficiently?

Total costs (£) Units of output Unit costs (£)

Product A 470 20

Product B 558 30

Product C 1,060 50

Product D 1,945 100



Unit costs: answers

Order of efficiency:B – D – C – A

Total costs (£) Units of output Unit costs (£)

Product A 470 20 23.50

Product B 558 30 18.60

Product C 1,060 50 21.20

Product D 1,945 100 19.45



Measures of quality

Quality is defined as ’those features of a product or service that allow it to satisfy

(or delight) customers’.

Because ‘quality’ depends on people’s opinions, there will be different views on what

is meant by quality.

What measures of quality would you use for a business?

Hint: they must be measurable!

Some examples of measures of quality and a brief comment on the logic behind their

use are provided on the following two slides. How do yours compare?



Examples of measures of quality (1)

Note that this is just a sample of quality measures — a good quality measure will be

geared towards the specific needs of the individual firm.

Customer satisfaction ratings • A survey of customers can reveal customer opinions on a numerical scale (e.g.

1–10) or using qualitative measures (e.g. excellent — very good — good — etc.) • As the purpose of a product/service is to satisfy the needs of the customer, this is

an excellent way of measuring whether quality has been achieved.

Customer complaints

• This calculates the number of customers who complain (it is sometimes

measured as a percentage of the total number of customers).• Although this might seem to be a negative approach, it is a good way of

measuring whether a company has problems that it needs to solve.



Examples of measures of quality (2)

Scrap rate or wastage rate• This calculates the number of items rejected during the production process as a

percentage of the number of units produced.• This will show the business whether its production methods are working

effectively, guiding it towards areas that might need improvement.

Punctuality• This calculates the degree to which a business delivers its products (or provides

its services) on time. It is often measured as a percentage:

punctuality = deliveries on time × 100

total deliveries • This measure is used by many businesses, especially those involved in

transporting goods (e.g. haulage firms) or customers (e.g. rail franchises).



Using quality measures: question

Based on the data below, decide which company is providing the best quality and

which one is providing the lowest level of quality for its customers.

Company Customer

satisfaction

(10 = excellent,

1 = poor)

Customer

complaints

(%)

Scrap rate (%) Deliveries on

time (%)

A 6.3 1.6 2.3 98.5

B 7.9 1.2 4.5 98.0

C 5.9 2.5 6.3 93.1

D 8.2 0.8 6.0 96.0



Using quality measures: answer (1)

Rank order of firms for each quality measure:

Worst performerFirm C has the lowest ranking in all four categories and is clearly the worst performer.

Company Customer

satisfaction

(10 = excellent,

1 = poor)

Customer

complaints

(%)

Scrap rate (%) Deliveries on

time (%)

A 3rd 3rd 1st 1st

B 2nd 2nd 2nd 2nd

C 4th 4th 4th 4th

D 1st 1st 3rd 3rd



Using quality measures: answer (2)

Best performerFirms A, B and D all average second place, so a case could be made for each one.

Factors to consider:• the quality measure(s) deemed most important by customers• the quality measure(s) deemed most important by the firm• the numerical difference in ratings (e.g. B has a much higher rating for customer

satisfaction than A, but is only slightly behind A on delivery times)

(It could be argued that the first column is the crucial one because it measures the

overall view of customers.)



Capacity utilisation: key terms

capacity: the maximum total level of output or production that a business can

produce in a given time period. A company producing at this level is said to be

producing at full capacity.

capacity utilisation: the percentage of a firm’s total possible production level that

is being reached. If a company is large enough to produce 100 units a week, but is

actually producing 92 units, its capacity utilisation is 92%.

under-utilisation of capacity: when a firm’s output is below the maximum

possible. This is also known as excess capacity or spare capacity. It represents a

waste of resources and means that the organisation is spending unnecessarily on its

fixed assets.

capacity shortage: when a firm’s capacity is not large enough to deal with the

level of demand for its products. This means that certain customers will be

disappointed and sales will be lost.



Calculating capacity utilisation

capacity utilisation: the extent to which the company’s maximum possible output

is being reached.

capacity utilisation (%) = actual output per annum (month) × 100

maximum possible output per annum (month)

Example: a company can produce 5,000 units but is actually producing 3,800 units.

Capacity utilisation is:

3,800 × 100 = 76%

5,000



Spare capacity

In the previous example, the company could increase production by 1,200 units or

24% of 5,000 units. This is known as its spare capacity.

There is no one ideal target percentage, but many people believe that 90% capacity

utilisation is a sensible target.

At 100% there is no scope for maintenance and repair, to respond to sudden orders,

or to deal with emergency situations that may occur.

Thus firms like to have some spare capacity.

BUT…spare capacity means ‘unused’ resources and higher fixed costs per unit.



Managing capacity utilisation

In terms of capacity utilisation, there are two types of situation that a firm needs to

manage:• under-utilisation of capacity (also known as excess capacity or spare

capacity)• capacity shortage

Spare capacity is the more normal situation. What causes it?



Causes of spare capacity (under-utilisation of capacity)

• new competitors or new products entering the market• fall in demand for the product• unsuccessful marketing• seasonal demand• over-investment in fixed assets



Disadvantages of spare capacity

• Firms have a higher proportion of fixed costs per unit. • These higher costs will lead to either lower profit levels or the need to increase

price to maintain the same profit levels, and therefore to lower sales volume.• Spare capacity can portray a negative image of a firm, suggesting that it is

unsuccessful. • With less work to do, employees may become bored and demoralised, lowering

their motivation and efficiency.



Advantages of under-utilisation

Spare capacity means that there is more time for maintenance and repair of

machinery, for training and for improving existing systems.

There may be less pressure and stress for employees, who may become overworked

at full capacity.

Under-utilisation allows a company to cope with a sudden increase in demand.



Achieving full or high capacity utilisation

Methods include:• increasing marketing to boost demand• lowering price• rationalisation — improving efficiency by cutting the scale of operations. This

reduces the capacity of a firm and so increases capacity utilisation.



Ways of reducing capacity

Methods include:• selling off all or a part of its production area• changing to a shorter working week or shorter day• laying off workers• transferring resources away from an area of the business (e.g. moving workers

away from a branch with low capacity utilisation)



Managing capacity shortage

If there is a shortage of capacity, the firm will try to increase its capacity.

Ways of increasing capacity include:• building or extending factories/plants• asking staff to work overtime or longer hours• recruiting more temporary or part-time staff• hiring new full-time staff• subcontracting



Subcontracting

subcontracting: when an organisation asks another business to make all or a part

of its product.

Many businesses use subcontracting as a way of reducing capacity utilisation

problems.

By asking other firms to supply goods, the original firm can increase supply to match

demand without needing to increase its own factory size.

It can then reduce the amount of work that it subcontracts if it needs to cut output.



Advantages of subcontracting

• Businesses can react to changes in demand more quickly if they have access to

a number of different firms’ production plants.• Subcontractors may be more specialised and therefore more efficient in a

particular activity. • Subcontracting lets a firm focus on its core business and helps it to avoid

becoming involved in activities in which it is less competent.• A one-off (non-standard) order can be given to a subcontractor so that the

business benefits from the order but suffers no disruption to its normal

production.



Disadvantages of subcontracting

• Quality is no longer directly under the firm’s own control. • Excessive subcontracting erodes a company’s operations base and its ability to

initiate research. • The subcontractor wants to make a profit, so it is possible that it will be more

expensive to subcontract.• Subcontracting may require a firm to give confidential information to a supplier,

such as details of its methods and patents.



Stock control and capacity utilisation

stock control: the management of levels of raw materials, work-in-progress and

finished goods to reduce storage costs, while still meeting the demands of the

customer.

Stock control can overcome capacity utilisation problems: • Holding high stock levels enables a business to release additional products on to

the market when demand increases. • During periods of low demand, the level of stocks can be replenished by

producing more than is being demanded.



Dealing with non-standard orders

non-standard orders: a business decision relating to a one-off contract.

Often the non-standard order requires a response to a request to supply a fixed

quantity of a product at a particular price (invariably a lower price than usual).

A decision on a non-standard order will be taken primarily on the basis of its financial

consequences, but the firm will also need to look at the impact on the functional

aspects of the firm, such as operations.



Non-standard orders:operational factors

• the level of spare capacity available• the scope for subcontracting• the impact on costs• is there potential for future (profitable) orders? • the effect on staff morale



Chapter 24

Developing effective operations: quality



Quality

quality: those features of a product or service that allow it to satisfy (or delight)

customers.

Quality is subjective — a matter of personal opinion — and views of it will vary from

individual to individual.

Think of a product and list five ways of measuring the quality of that product.



Some measures of quality

Possible measures of quality are listed below (like quality itself, these measures are

subjective):• appearance• reliability and durability• functions (added extras)• after-sales service• brand/image/reputation• environmental friendliness

How do these compare with your list? Why are there differences between your list

and this list?



Benefits of quality to a business

• increase in sales volume• creating a unique selling point (USP) and enhancing the firm’s reputation• greater scope for increasing the selling price• pricing flexibility, as customers will want to buy the product even if price is

changed• possible reduced manufacturing cost and reduced wastage if high-quality

materials and processes improve the efficiency of the production process



Issues involved in introducing and managing a quality system

• Costs. Quality procedures require a great deal of administrative expense to set

up and monitor. • Training. This can be a major issue in the introduction of a new quality system,

as a system of quality assurance relies on a well-trained workforce that is able to

understand and implement the quality system that the business uses. • Disruption to production. In the short run, the training programme provided

can be quite disruptive to existing production methods.



Distinction between quality control and quality assurance

Quality control• This is a system that uses inspection as a way of finding any faults in the good or

service being provided.• Inspectors are employed to check the accuracy of completed work.

Quality assurance• This is a system that aims to achieve or improve quality by organising every

process to get the product ‘right first time’ and prevent mistakes ever

happening.• Quality assurance concentrates on the process of production. The idea of self-

checking is crucial to quality assurance.



Quality control: benefits

• Inspection at the end of the process can prevent a defective product reaching

the customer, thus eliminating a problem with a whole batch of products.• It is a more secure system than one that trusts every individual to do his or her

job properly, particularly if workers want to avoid responsibility.• Inspectors may be highly skilled in detecting problems and may spot quality

problems that are being repeated by different workers.



Quality control: problems

• By placing responsibility for quality failures on the inspector, quality control does

little to encourage individuals to improve the quality of their output.• Employing an inspection team is an expense that could be viewed as

unnecessary if the products are produced ‘right first time’.• Giving workers responsibility for their own work helps to increase the interest,

variety and responsibility of their job, and thus helps to motivate them.



Quality assurance: benefits

• Ownership of the product or service rests with the workers rather than with an

independent inspector, giving them greater responsibility.• Theorists such as Herzberg argue that the responsibility will motivate workers.• Costs are reduced because there is less waste — any faults are discovered

during the process.• Because an individual will not want to be blamed for a faulty product, each

worker checks what he or she receives, reducing the possibility of a faulty

product.



Systems of quality assurance: TQM

The most widely recognised quality assurance system is total quality management,

often known as TQM.

TQM is a culture of quality that involves all employees of a firm.

Key features of TQM are:• The quality chain. Each person involved in production treats the receiver of their

work as if they were an external customer.• ‘Right first time’. Employees aim for defect prevention rather than detection.• All staff share a commitment to continuous improvement.• Partnerships are built with suppliers.• Staff are educated and trained to take responsibility for their own quality.• Employees are encouraged to take pride in their work.



Kaizen

The Japanese philosophy of kaizen has given rise to quality systems based on

continuous improvement.

Kaizen (or ‘continuous improvement’) is a policy of implementing small, incremental

changes in order to achieve better quality and/or greater efficiency. These changes

are invariably suggested by employees and emanate from a corporate culture that

encourages employees to identify potential improvements.



Quality standards

ISO 9001: the international standard of quality assurance that is equivalent to

BS 5750.

BS 5750: a British Standards award granted to organisations which possess quality

assurance systems that meet the standards set.

These standards aim to increase quality throughout an organisation. Firms must

show that they have quality systems that cover the quality of their working methods,

services and processes as well as the quality of their products.



Benefits of quality standards

• Marketing advantages from having ‘proof’ of high quality standards.• Assurance to customers that products meet certain standards. Some

organisations insist on these awards before agreeing to trade with a firm, as this

helps to guarantee the quality of their supplies.• Greater employee motivation from the sense of recognition.• Financial benefits from the elimination of waste and the improved reputation of

the firm.



Chapter 25

Developing effectiveoperations: customer service



Customer service

customer service: the overall activity of identifying and satisfying customer needs

and the delivery of a level of service that meets or exceeds customer expectations.

customer expectations: what people think should happen and how they think they

should be treated when asking for or receiving customer service. Higher

expectations among customers mean that better customer service must be provided.

customer satisfaction: the feeling that the buyer gets when he or she is happy

with the level of customer service that has been provided and the degree to which

customer expectations have been met.



What do customers want?

Customers do not always want the same service from a business.

Consequently, most businesses use their own measurements of customer

satisfaction, to make it relevant to their own customers.

A survey by the Institute of Customer Service (ICS) found that customers had ten top

priorities that affected customer satisfaction.

Remember: you are all customers!

Make a list of five factors that you believe would fit into the top ten.

See whose list is closest to the results of the ICS survey on the next slide.



Calculating your score

Score 10 marks if you had the number one factor, 9 marks for the second most important

factor… down to 1 mark for the tenth factor.

Customer priorities/expectations were:

Quality of the product or service 10 marks

Friendliness of staff 9 marks

Efficiency in dealing with problems/complaints 8 marks

Speed of service or delivery 7 marks

Helpfulness of staff in general 6 marks

Effectiveness in handling enquiries 5 marks

Extent to which customers felt ‘valued/important’ 4 marks

The competence of staff in completing their tasks 3 marks

The ease with which the transaction was completed 2 marks

The extent to which the customer was kept informed 1 mark



Other findings of the ICS survey

Service businesses (e.g. hairdressers and decorators) and professional services

(e.g. architects) are best at satisfying customers.

The public sector and utilities (e.g. electricity suppliers) bring up the rear.

The survey also highlighted the importance of employee satisfaction. Typically, the

more satisfied employees are, the more highly motivated they are to provide a good

service. This leads to a higher level of customer satisfaction.



Methods of meeting customer expectations

Customer expectations can be met through a series of stages:

Stage 1: Conduct market research to find out customer expectations so that

customer service targets the right factors.

Stage 2: Introduce relevant training in customer service into the organisation so

that the workforce can meet and surpass customer expectations.

Stage 3: Set up quality procedures and set quality standards so that the

organisation is geared towards the needs of its customers.

Stage 4: Monitor performance against these standards so that high quality and good

customer service are maintained.



Meeting customer expectations through market research

• The standard for ‘quality’ is set by the customer, who is therefore the best place

to start. • Primary market research can be used to get comments from consumers. • Secondary market research can help a firm to discover successful measures used

by other businesses.• The Department for Business, Enterprise and Regulatory Reform (BERR) can

provide data on the factors and features that are most valued in the

marketplace. • Other sources of secondary market research are surveys such as the UK

Customer Satisfaction Index and the annual CompariSat survey provided by FDS

International.



Meeting customer expectations through training

• A look at the top ten factors shows how many depend on the quality of the

employees. Training helps employees to be good at their jobs.• Companies often provide specific training in customer care. • Vocational qualifications in customer care help employees to improve customer

service.



Meeting customer expectations through quality control, quality

assurance and monitoring quality standards

• Quality control can ensure that faulty goods are identified and rejected as a

result of the inspection process.• Quality assurance helps to improve customer satisfaction by ensuring that goods

and services are ‘right first time’.• Any business that subscribes to a quality standard, such as ISO 9001, must

regularly monitor its activities to ensure that it is still meeting the standards that

have been set. This will normally be sufficient to ensure that high-quality

customer service is offered.



Main benefits of high levels of customer service

• Impact on sales volume. High-quality service that exceeds the expectations of

customers will lead to increased demand for the goods and services provided by

a business.• Creating a unique selling point (USP). The quality of customer service can

be used as a USP to enhance a company’s uniqueness and individuality. • Impact on selling price. The USP will enable a business to charge higher prices

and thus earn higher profits. • The firm’s reputation. Companies with a reputation for good customer service

are likely to gain repeat business and have a solid base of loyal customers.



Additional benefits of high levels of customer service

• A motivated workforce. Good relations with customers may make the

workplace a happier working environment. • Lower costs. Costs may be reduced because a high level of customer service is

likely to mean fewer complaints to handle. • References. In some cases, organisations will insist on proof of high levels of

customer service (e.g. testimony from other customers) before agreeing to trade

with a firm. • Public relations. Positive publicity arising from good customer service can be

used for PR.



Customer service: follow-up exercise

Complete the practice exercise and the questions in the case study at the

end of Chapter 25.



Chapter 26

Working with suppliers



Working with suppliers

supplier: an organisation that provides a business with the materials that it needs

to carry out its business activities.

For a manufacturer, suppliers mainly provide the raw materials and components

needed to produce the finished good.

For a retailer, suppliers invariably provide the finished goods that the retailer sells.



Choosing effective suppliers

A business may improve its efficiency to a large extent by choosing effective

suppliers.

When choosing suppliers, the main factors that a business will consider are:• prices• payment terms• quality• capacity• reliability• flexibility



Choosing suppliers: prices

A business will seek value for money from its suppliers.

If the supplier offers low prices, a business can benefit in two ways:• The business can reduce the final selling price of its own product and therefore

gain a competitive advantage.• The business can keep its final selling price the same, but enjoy the benefit of a

higher profit margin/higher added value.

BUT…a business must be cautious when choosing a supplier that is offering low

prices.



Potential problems from low-price suppliers

The prices charged by the supplier may be low because:• the quality of the raw materials is low• the supplier may be unreliable in terms of meeting delivery dates • the supplier may be inflexible if a sudden change is needed• the supplier is in financial trouble and desperate to get a contract

Overall, the business must consider how important price is to its own customers. If

they are willing to pay high prices, low-price supplies are less important.



Choosing suppliers: payment terms

payment terms: arrangements made concerning the timing of payment and any

other conditions agreed between buyer and seller.

It is normal practice in the business world for credit to be offered to the buyer of

supplies of materials. This means that payment is delayed, often by 28 or 30 days.

There are two major reasons for this type of agreement:• Buyers will want this type of agreement because there will be a delay between

the purchase of the materials and the receipt of sales revenue from selling of the

final product. This delay may cause cash-flow problems for the buyer. • Suppliers will offer payment terms in order to get business. Offering payment

terms to buyers should boost the supplier’s sales, as they will be chosen in

preference to those not offering credit.



Importance of payment terms

This will depend on the situations of both buyer and supplier.

If the supplier is manufacturing a component that takes a long time to produce, it is

likely to need cash immediately and so it will not want to offer payment terms.

If it is an organisation such as a wholesaler that has been given credit by the

manufacturers, it will not be under pressure to get cash quickly. Therefore it can

offer credit terms to its buyers.

ConclusionCredit is most likely to be offered when buyers of supplies face cash-flow difficulties

because the end product takes a long time to sell. Payment terms are less likely to

be needed if the final product brings in sales revenue quickly.



Choosing suppliers: quality

In many industries, price competitiveness is being superseded by quality

considerations. Therefore, quality is a critical factor to consider when choosing and

working with a supplier.

Key benefits of high-quality supplies are that they enable a business to produce high-

quality products. These will:• increase the volume of its sales• increase its selling price and probably its profit margin• create a unique selling point (USP)• enhance its reputation and its customer and brand loyalty• reduce its manufacturing costs through elimination of waste



Importance of quality

For buyers, a poor-quality component or product can cause major damage to a

manufacturer’s reputation.

Overall, the significance of quality will depend on the product in question:• For an economy brand that is sold on the basis of its low price, quality will be

relatively unimportant.• For a product being sold on the basis of its quality, the product itself and its

components must meet high standards.



Choosing suppliers: capacity

capacity: the maximum possible output of an organisation.

An organisation will need to be reassured that a supplier can meet the quantity of

supply that it requires.

If the supplier is providing a unique component or material that cannot be obtained

from other sources, failure to supply might seriously damage the reputation of the

buyer.

If the supplier is providing a component or material that can be sourced from other

suppliers, its capacity may be less critical.



Choosing suppliers: reliability

reliability: the extent to which the supplier meets the requirements of the buyer.

Typically, reliability can be measured by the percentage of deliveries on time or the

degree to which a supplier meets the terms of the contract to supply.

For a manufacturer, an unreliable supplier can lead to the whole production line

coming to a halt because a crucial material or component is not available.

For a retailer, a failure to supply can affect its reputation. Customers will blame the

retailer if they are unable to buy a product that they want.



Choosing suppliers: flexibility

There may be situations where an organisation radically needs to change its orders

from suppliers — for example:• sudden changes in demand for a product• the liquidation of a rival supplier, leaving buyers short of a product or component

In these circumstances, an organisation will want its suppliers to be flexible enough

to adapt to the changing circumstances.

Flexibility is a reason why many large organisations do not buy all of their materials

from one single source, even where one supplier could provide all of their needs.



Role of suppliers in improving operational performance

Suppliers can help a business to achieve each of its three main operational targets:• Lower unit costs. An efficient supplier can offer low-priced materials, helping a

customer/business to keep its own costs low.• Higher quality. If the supplier is able to meet quality standards consistently,

the buyer of the materials will find it easier to produce high-quality products.• High capacity utilisation. A flexible supplier can allow a business to increase

its capacity utilisation suddenly by supplying more supplies.

Other possible benefits include:• Suppliers may develop new products or materials.• Suppliers may find ways of extending the life of a product.



Porter’s value chain and suppliers

According to Michael Porter in his book Competitive Advantage, a business can gain

a competitive advantage in one of two ways:• cost advantage• differentiation

Working with suppliers, a business can achieve both of these benefits.

The cost advantage comes from finding the supplier offering the lowest prices.

Differentiation is achieved if a supplier is able to provide a unique product or

material.



Chapter 27

Using technology in operations



Using technology in operations

technology: the applications of practical, mechanical, electrical and related

sciences to industry and commerce.

Technology influences industry and commerce in many ways. Examples are:• robotics• automation (e.g. stock control)• communications• design

In groups, identify five aspects of business that have been affected by technology in

recent years.

Produce a report, based on your five aspects, highlighting:• the benefits of the technology to businesses• any problems for businesses using new technology• any benefits and problems for other people or organisations



Robotics

Uses of robotics:• handling operations• welding• other production applications (e.g. dispensing liquid, painting and coating

materials)• assembling• packaging and palletising• measurement, inspection and testing• hazardous applications



Automation: key terms

automation: the use of machinery to replace people in the production process,

usually to carry out routine activities.

computer-aided manufacturing (or manufacture) (CAM): the use of computers

to undertake activities such as planning, operating and controlling production.



Areas of operations management benefiting from technology

Planning and controlling• Computers can be used to plan the most efficient way of producing a product. • Production can be monitored by the computer and remedial action taken if

problems arise.

Operating• CAM (computer-aided manufacture) has increased productivity and reduced the

problems arising from human error. • Flexible programming allows a fully automated line to produce different varieties.



Technology and stock control

Stock control is aided by technology in the following ways:• Computer programs linked to statistics on patterns of consumer purchases allow

firms to anticipate changes in stock levels more accurately. This reduces the

possibility that a firm will run out of stock or build up unnecessarily high levels. • Computerised systems allow organisations to recognise their current stock levels

immediately, reducing the need for time-consuming manual checks. • EPOS (electronic point of sale) systems monitor stock levels and can also order

new stock from suppliers automatically when the stock has been reduced to a

certain level (the ‘reorder level’).• Organisations with many branches can also use technology to establish the

locations where stock is being held.



Technology and communications

information and communication technology (ICT): the acquisition, processing,

storage and dissemination of vocal, pictorial, textual and numerical information by a

microelectronics-based combination of computing and telecommunications.

Benefits of ICT are:• It allows a firm to improve both internal and external communications, improving

efficiency and the firm’s understanding of its market.• Internal information can be processed and amended more quickly. • Company intranets enable employees and, where necessary, suppliers and

customers to access company information continually. • Technology increases the speed of communication and the scope for greater

responsibility. It allows firms to delayer and operate wider spans of control.• Loyalty cards allows firms to accumulate information on the buying habits of

their customers.



The internet and operations

The internet brings many possible advantages to firms that use it:• It can eliminate the need for expensive high street premises. • It can reduce the need for staff.• It adds flexibility to business operations, which no longer need to fit in with

traditional business structures. • Data can be stored more cheaply and accessed more quickly.



Technology and design: key terms

computer-aided design (CAD): the use of computers to improve the design of

products.

CADCAM: an approach that combines computer-aided design and computer-aided

manufacture, using IT to aid both the design and the manufacture of an item.



Benefits arising from CAD or CADCAM

• Different ideas can be introduced and compared faster in a CAD system than in a

manual one. • Two-dimensional drawings can be transformed into three-dimensional images

and rotated in order to demonstrate the whole range of possible views. • Programs can simulate testing (e.g. wind tunnel simulations). This can save

considerable sums of money by eliminating the production and testing of

expensive prototypes.• New products have been created by technology (e.g. mobile phones).



Benefits of using technology in operations

The main benefits are:• reducing costs• improving quality• reducing waste• increasing productivity



Technology: reducing costs

• The use of technology to replace manual systems in areas such as planning,

office work, manufacturing and stock holding has greatly reduced labour costs.• ICT can be used in production planning in order to devise the most cost-effective

way of manufacturing a product.• Use of the internet enables businesses to locate away from expensive sites.



Technology: improving quality

• Computer-based quality assurance systems can overcome the possibility of

human error and also provide more rigorous scrutiny of quality. • ICT enables businesses to understand customers’ requirements more fully and to

adapt their products.• The flexibility of IT (e.g. 24-hour access to automated teller machines) can

improve the quality of the product and/or customer service.



Technology: reducing waste

• Stock control systems ensure that orders are placed at the most appropriate

time so that excessive stock levels do not build up. • Integrated systems of stock control can also identify branches holding stock that

may be needed by other branches. • Many business activities can be carried out quicker with the benefit of

technology, saving valuable time and money.



Technology: increasing productivity

• Machines can work at a faster speed than humans. • Computerised systems allow organisations to keep closer control over their stock

levels, reducing the need for time-consuming manual checks and therefore

reducing wage bills.• ICT may be used to plan the most efficient approach to production. This enables

the business to improve productivity.



Other benefits of technology

• Flexibility. The adaptability of technology is now enabling businesses to provide

an immediate response to consumers’ demands or sudden changes. • Financial monitoring. ICT greatly improves the budgeting process and the

monitoring of variances.• New products. New and better products and services can be created through

technology.• Better working conditions — through factors such as reductions in the level of

noise and greater control over working temperatures.



Issues in introducing and updating technology (1)

The use of new technology can also cause problems: • People are often concerned by change. ICT can lead to job losses for workers in

traditional skilled crafts. This causes stress for workers, so productivity may fall.• ICT can undermine group morale by breaking up teams. • For many firms, the most significant problem is the cost of new technology. Not

only is it expensive to introduce, but also it needs regular updating.



Issues in introducing and updating technology (2)

• The nature of technology is changing constantly. Consequently, there is a

constant need to replace hardware and software, and to provide continuous

training for staff, again adding to costs. • Consumers can use the internet to compare prices. ICT has the potential to force

prices and profits down.

SummaryAn organisation needs to weigh up the pros and cons before deciding whether it

should introduce or update its technology.

Usually the short-term problems and costs must be weighed up against the

long-term benefits.

Documents

Unit 2: Managing a business Operations management Making operational decisions Chapter 23