Chapter 23

Making operational decisions

Operations management – the process that uses the resources of an organization to provide the right goods or services for the customer.

Aspects of operations management:

- Deciding on the location of a business in order to meet the needs of the business and its customers

- Choosing the mix of resources to use in production

- Managing capacity utilization

- Organizing stock control to meet the needs of customers quickly and cheaply

- Ensuring(обеспечение, 确保, Осигуравање, Bảo đảm) high quality of goods and services in an organization

- Providing excellent customer service in order to meet customer expectations

- Working closely with suppliers in order to improve efficiency

- Using technology in order to improve business operations

Operational targets- the goals or aims of the operations function of the business.

Some of examples of operational targets are explained below.

Unit cost

Unit cost – the cost of producing 1 unit of output. It is calculated by the formula:

Measures of quality

Quality could defined as those features of a product or service that allow it to satisfy customers.

There are some examples of measures of quality:

- Customer satisfaction ratings.

- Customer complains. This is basically the number of customers who complain. It is a good way in identifying possible problems ( bad quality, etc.) that the company has.

- Scrap(Phế liệu, Отпад, 废钢, остатки )rate. This calculates the number of items rejected during the production process as a percentage of the number of units produced.

- Punctuality. This calculates the degree to which a business delivers its products on time.

Capacity utilization

Capacity utilization – the percentage of a firms’ total possible production level that is being reached. If a company is a large enough to produce 100 units a week, but is actually producing 92 units, its capacity utilization is 92%

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.

Link between capacity utilization and other operational targets.

- Capacity utilization and unit costs

- Capacity utilization and quality

Managing capacity utilization.

- Under-utilization of capacity ( also known as spare capacity) – when a firms’ output is below the maximum possible. This is also know as excess capacity or spare capacity. It represents a waste of resources and means that the organization is spending unnecessarily on its fixed assets.

- Capacity shortage – when a firms’ capacity is not large enough to deal with the level of demand for its products. This means that certain customers will be disappointed. Further sales may be lost if unhappy customers decide not to buy from the firm again or if negative publicity results from the firms’ failure to supply.

Causes of spare capacity

- New competitors or new products entering the market

- Fall in demand for the product due to changes in taste or fashion

- Unsuccessful marketing

- Seasonal demand

- Over-investment in fixed assets

- A merger or takeover leading to duplication of many resources and sites

Disadvantages of spare capacity

- Firms have a higher proportion of fixed costs per unit. If utilization falls, the fixed costs must be spread over fewer units of output. This leads to higher unit costs

- These higher unit 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(изобразить , 描绘, осликати, vai) a negative image on a firm, suggesting that it unsuccessful.

- With less work to do, employees may become bored and demoralized, lowering their motivation and efficiency.

Advantages of spare capacity

- It 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-utilization allows a company to cope with sudden increase in demand.

Ways of reducing capacity

-selling off all or a part of its production area

- changing to a shorter working week or shorter day

- laying off workers

- transferring resources from another area

Ways of increasing capacity

- Building or extending factories/plans

- asking staff to work overtime or longer hours

- hiring new staff

- a flexible workforce

Subcontracting – when an organization asks another business to make all or part of its product.

Advantages

- business will be able to react to changes in demand more quickly if they have access to a number of different firms’ plants

- subcontractors may be more specialized and therefore more efficient in a particular line of activity

- it lets a firm focus on its core business

- a 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

- firms must recognize that the quality if their products is no longer directly under their control

- excessive subcontracting erodes a company’s operations base and its ability to initiate research and market changes

- the opportunity cost

- confidential information

Stock of control

The management of levels of raw materials, work in progress and finished goods in order to reduce storage costs while still meeting the demands of the customer

Non-standard orders

A business decision relating to a one-off contract. Usually, the nonstandard order requires a response to a request to supply a product at a particular price.

Key factors:

- The effect that the decision has on production

- The flexibility of capacity in the organization

- The impact on costs

- Is there potential for future orders?

- The effect on staff

Some Business Study stuff

Chapter21/ Developing an effective workforce: recruitment, selection and training.

Recruitment – attract the ‘best’ candidates and then select the most suitable.

Workforce planning ( considering what human resources are required)

Job descriptions (tell what the job is about – skills, responsibilities, duties and performance level)

Specification (should include details of skills, aptitude^{способности}, knowledge and expertise; qualifications; personal qualities relevant to the job, such as ability to work as part of a team)

Internal or external recruitment ( internal – filling a job vacancy for selecting a person who is already employed in the organization; external – filling a job vacancy by advertising outside the firm

For internal: the employees’ abilities are known already, internal promotion opportunities are motivating for the workforce, the recruitment and selection process is quicker, a shorter induction period is required, it is less expensive, it reduces the risk of employing the wrong person

For external: it tends to provide a larger choice of well-qualified applicants, it brings in new blood with new ways of thinking, it overcomes jealousies^{ЗАВИСТЬ} that may occur if one member of a group is promoted above his or her colleagues, it can help a firm to improve its understanding of how other firms operate)

Advertise ( newspaper or magazine; job centre, commercial employment agencies; headhunting)

Application (qualifications, work experiences, references)

Assessment^ОЦЕНКА (interview, aptitude and attainment^{приобретение} test, psychometric test, assessment centres)

Appointment

Factors affecting methods of recruitment and selection

- The level of the job in the organization, whether shop-floor or senior management level

- The size of the organization, whether a large multinational or a small shop

- The resources available to fund the recruitment and selection process

- The cost of any particular method – recruitment and selection can be an expensive process and includes the cost of advertising, the cost of administering, perhaps, thousands of applications, and the time spent shortlisting, interviewing and assessing

- The supply of labour – whether there are plenty of potential applicants with relevant skills and experiences or whether there are few

- The culture of the organization and the extent of which this dictates that internal recruitment and promotion are the norm

Practice exercise

1) vacancy arises – job description – personal (job) specification – deciding on internal or external recruitment – advertising – application forms – assessment – appointment

2) Recruiting an internal candidate for job

- The employees’ abilities are known already. The company has already known what this worker is able to do and how he\ she is responsible. So there is no risk that the company employees the wrong person, unless this worker will be changed.

- The cost of internal recruitment is quite low, so the company doesn’t have to spend a lot of funds on recruitment.

Recruiting an external candidate for job

- It involves new way of thinking to the company, which could be a big benefit for the whole business

- Larger choice of possible employees

3) Job description – tells us about the job, what kind of person we want to do a job, gives us a job title, the purpose of the job, accountability, responsibilities and duties. Personal specification – characteristic needed, skills and qualifications, experiences

4) Headhunting organization – recruitment agency, looking for people who tend to be top workers.

5) Aptitude and attainment , psychometric or personally tests, assessment centres

6) Level of job; resources available; costs; supply of labour; internal or external

7) Reducing labour turnover , increasing productivity, increasing profit, motivation.

Case study. Searching for stars on the shop floor.

1) They use internal recruitment. They are training their managers (talent spotting)., having regular meetings with their staff. To identify a potential of their workers.

2) Benefits of staff meetings

- Motivation

- Fill the gap

- Short induction

- it reduces labour turnover

- reduces absenteeism

- less risky

3) In general

- Productivity increases

- Low labour turnover

- Low absenteeism

- More cost effective

- Moving upwards

Store management

- Management become more effective and efficient

- Internal recruitment

4) Advantages of internal recruitment for senior management

- short induction training period

- labour turnover decreases

- costs decrease

- available stuff

- already trained by the company

Disadvantages of internal recruitment of senior management

- Lack of new ideas, new ways of thinking

- Very competitive, so some people could be demotivated

- It could gaps to fill

- It might lead to decrease in productivity, because of different ways of thinking that could be a negative while changing managers in different departments

Training

Training – the provision of work-related education, either on-the-job or off-the-job, involving employees being taught new skills they already have.

Training is often a response to some changes:

- The development and introduction of new products

- Restructuring of the firm

- The development and introduction of new technology

- Changes to procedure, including improvements to customer service

- High labour turnover

- Low morale

- Changes in regulation

Benefits of training

1) It helps new employees reach the level of performance expected of experienced workers

2) It ensures^{обеспечивает} that employees have the necessary skills, knowledge, attributes and qualifications for the job, both at present and in the future

3) It develops a knowledge and committed workforce, with increased motivation and job satisfaction

4) It increases efficiency and productivity, enabling the firm to produce high-quality products and services, which may in turn lead to improved profits

5) It can identify employees’ potential and thus increase employees’ job prospects and changes of promotion, which may improve motivation

6) It reduces costs in the long term by, for example, reducing the number of accidences and injuries, reducing wastage and poor-quality work, and increasing workers’ productivity

7) It encourages employees to deal with change more effectively and to be more flexible – for example, about the introduction of new technology.

8) It encourages employees to work towards the organisation’s aims and objectives

9) It improves the image of the company. Customers will have more confidence in well-trained stuff, and a better image will attract more able recruits.

Induction^{введение в должность} training

Education for new employees, which usually involves learning about the way the business works rather than about the particular job that the individual will do.

Benefits

- Reduction in labour turnover

- Improve employees’ understanding of both the corporate culture and the situation in which the organization is placed

- Means that employees contribute to he organization more quickly

- Increases motivation

On-the-job training – where an employee learns a job by seeing how it is carried out by an experienced employee

Off-the-job training – all forms of employee education apart from that at the immediate workplace.

Practice exercise

1) Training is a process of instructing people about how to carry out tasks directly related to their current job. Development, on the other hand, involves helping individuals to realize their full potential. It covers general growth and not necessarily related specifically to employees’ existing posts.

2) It reduces labour turnover. As employees get new information about how the whole company is works, it is becoming more interesting and existing to work for the organization in order to aim general goals. As people get interested with their jobs they are less likely to leave the company, so the labor turnover is decreasing.

3) External training gives employees opportunities to meet other workers from other companies, allowing an interchange of ideas and a broadening ^{расширение} of understanding. It also makes employees feel valued and increases motivation. Internal training could be very efficient if the worker need a particular skill. Here internal training is less expensive than external.

4) On-the-job training: cheaper; no loss of output. Off-the-job training: less pressure from work; focused on skills that are needed.

5) Market failure- when free market system fails to achieve economic efficiency (productive and allocative). Poaching employees means attractive workers who have already been trained by another business. One company attracts employees from another company by offering higher salaries. ( loss to company that have trained employees and lost them because of higher wages, that were offered by another company)

New teacher! New home work)

Analyse the impact of the following scenarios.

1) Government announces a large increase in spending on health and education.

An increase in spending on health and education (increase in government spending ) is likely to impact on aggregate demand. As we know that government spending is a component of aggregate demand, so increase in spending is likely to lead to an increase in aggregate demand (assuming that other thing are not changing – CETERIS PERABUS ). Therefore the aggregate demand curve will shift to the right. This will lead to a rise in inflation (demand pull inflation), if aggregate supply would not increase. As AD shifts to the right, the Real GDP rises and we will expect higher economic growth (assuming that AS will be changing too, in case to avoid a high inflation). This, in turn, would suggest that unemployment is likely to fall.

2) Bank of England signals rise in interest rates of 0.5 %

An increase in interest rates is likely to have an influence on both aggregate supply and aggregate demand. One of the main components of AD is consumption and it is affected by interest rates. Consumers borrow money and spend them (consumer expenditure = consumption). If they know that interest rate has increased they will borrow less and therefore spend less (in case they will wait for declining in interest rates to buy a new car, for instance). Changes in interest rate also affect investment ( in case with AD, investment means money spent on capital goods by firms). Obviously, firm will spend less on capital goods if interest rate rises (less investment). Interest rates might also affect government spending. One of the sources of money for the government is borrowing. As interest rate rises, it is more expensive for the government to borrow, so it would probably cut its spending. Interest rate could affect a balance of payments, because changes in interest rate lead to changes in exchange rate. If interest rate rises, the currency falls, therefore import is becoming more expensive and export is becoming cheaper. In some cases it could lead to increase in trade surplus (more exports than imports, because imports are more expensive and exports are becoming more competitive in some cases). A rise in interest rate also would probably lead to fall in production, because it would more expensive for firms to borrow in case to expand or cover their debts. Considering all this consequences of a rise in interest rate we can say that the AD curve and the AS curve shift to the left, causing a fall in a capacity of the economy, which tends to fall in economic growth, rise in unemployment level.

3) Government “stealth taxes” increase a tax burden to highest level for 50 years.

This type of tax is actually not recognized by firms or households, so it doesn’t affect consumption or investment or production process. What it might affect is government spending, because the government can raise money from increasing “stealth taxes” , but the task doesn’t say anything about increasing government spending.

4) UK productivity levels at their highest level for 10 years.

Providing this information tends to raise firms’ confidence ( how they are optimistic about future economic prospects), that would lead to increase in capital investment and probably increase in production. Consumer confidence also will increase, that means that consumption will rise. As the result AS and AD will increase and the both curves will shift to the right. This will tend to rise in economic growth and fall in unemployment rate. Inflation rate would depend on how AD and AS will increase.