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Terms in this set (38)
What is operations management?
Function responsible for production of firm's goods and services (turning factors of production into goods and services that customers want to buy).
Product-based = design new products, set up manufacturing facilities, run factories
Service-based = oversee all processed to ensure customer satisfaction
What is the difference between products, goods, and services?
Products - output of operations management department (good or service)
Goods - tangible products eg: cars
Services - intangible products eg: movie or haircut
What is sustainability?
The ability to continue a behaviour indefinitely without having a negative impact on future generations.
What are the three types of sustainability?
Ecological - use of natural resources and effect of current consumption on future
Social - ability to not only meet needs of current stakeholders but also support needs of future generations of stakeholders (can also affect social sustainability of external stakeholders eg: suppliers and local community)
Economic - making most efficient use of resources so that future of company and its stakeholders is not adversely affected by decisions made today (focus on long-term growth)
What are the different types of production methods?
Mass and flow production
What is job production and its pros and cons?
Producing unique items that are tailor-made to meet needs of individual customers. Suitable if customers have specific requirements and client base is small and demand low.
+ built exactly to customers' requirements = higher selling price can be demanded
+ workers often more motivated as they produce unique product = fewer mistakes and higher quality products
- small scale output resulting in very high average costs
- demand might be irregular --> potential cash flow problems
What are mass and flow production and when are they appropriate?
Mass production = highly automated assembly of product involving production lines where workers remain at single station performing same task over and over again
Suitable for: large, even global, demand for standardised product
Flow production = continuous production of single product; might be even more capital intensive than mass and workers may not directly be involved in production process but only small # skilled employees for quality control.
Suitable for: when products are homogenous and demand is vast and predictable
What are the pros and cons of mass/flow production?
- capital intensive --> high productivity and low average costs and low selling price
- less skilled labour needs lower wages which reduces costs
- large economies of scale
- standardised products lead to less opportunity for human error in production
- massive output to satisfy global markets
- massive set-up costs needing long-term sources of finance to pay for buildings
- labour unskilled and unmotivated and company has to invest resources to maintain motivation levels to maintain product
- least flexible = costs millions to update production line to change product
What is batch production and its pros and cons?
Involves producing items in identical groups. Small changes are made in each batch to fulfill range of customer needs.
Appropriate for: range of similar products to meet different needs; flexibility for less predictable demand
+ variety of products produced to meet needs of different target markets
+ flexible production can adjust to meet changing customer tastes
+ range of product produced on single machine reducing investment and set-up costs
+ more capital intensive than job = higher productivity and lower average costs
- high storage costs (store different batches to quickly fulfill orders)
- workers' job likely to be repetitive = low motivation
- average costs likely higher than for mass/flow as machines altered between batches
- less flexible than job thus unsuitable for products that need to be tailored to needs
What is cell production and when is it suitable?
Employees work in teams and take joint responsibility for large section of manufacturing process. Teams work largely autonomously and are empowered to decide who carries out which tasks and what training is required. Also responsible for checking quality of work before passing it on to internal customers.
Suitable for: any large-scale, capital intensive production that want to boost motivation
What are the pros and cons of cell production?
+ teamwork fulfills social needs
+ potentially lower absenteeism and turnover
+ increased responsibility leads to higher motivation
+ empowered teams find solutions to problems or even stop them from arising
+ multiskilled staff can perform variety of tasks so can cover for absences
- continued investment in training required
- factories may need to redesign = potentially huge cost
- productivity and capacity utilisation may be lower than for mass production
What factors affect location of company?
- labour costs
- land costs
- external economies of scale (skilled labour, shared infrastructure, access to suppliers, improved image)
- transportation and other infrastructure
- government assistance (may offer grants for relocation to area of high unemployment)
- international factors (trade barriers, exchange rates)
- company history
What do different business types value most?
Manufacture (unskilled labour) = transport links, low labour costs, low land costs
Manufacture (skilled labour) = transport links, skilled workers
Retailer (physical store) = transport links, proximity to target market
Retailer (online) = transport links, low land costs
What is outsourcing? (pros and cons)
The process of hiring an external company (called subcontractor) to carry out task on behalf of company.
+ gives access to skilled labour
+ original company can focus on core business function and is free from management responsibility
+ can lower costs in short term and contract can be ended if no longer needed
- original business still has ultimate responsibility = risk if quality of work not maintained --> loss of control
- finding subcontractor takes time
- may lose commercial secrets
What is insourcing and its reasons?
Ending contracts with external subcontractors to undertake previously outsourced business function using company's own resources.
- bring back control
- keep hold of commercial secrets
- cost saving if outsourcing isn't beneficial
What is offshoring and its reasons? And reshoring?
Offshoring = relocation of business function to another country/overseas
+ can make gains in productivity and cut costs due to lower labour costs, better suppliers, more workers reduced taxes etc.
- but communication & transportation may be more difficult
Reshoring = bringing back business function to original country
What are economies of scale?
Average unit cost of production decreases as level of output increases resulting from purchasing, technical, marketing, managerial and financial economies of scale.
What are diseconomies of scale?
Average unit cost of production actually increases as level of output increases due to difficulty of managing very large operations.
What are the different economies of scale types?
1. Purchasing = acquire inputs at lower costs if larger amounts purchased
2. Technical = investing in good equipment results in reduction of production cost = more automated and efficient. As output increases, investment cost spread over higher volume = average fixed costs reduced
3. Marketing = costs spread over larger volume
4. Managerial = more personnel allows hiring more specialised managers = more efficient
5. Financial = cost of capital (interest rates) decreases as financing requirements grow --> seem less of risk than small new firm
What are different types of diseconomies of scale?
1. Managerial issue = if too big, long chain of command, rivalries between divisions, lack of coordination and cooperation = inefficiencies and increased costs
2. Increase in workforce size = complex structure, many levels and managers (more wages); overcrowding, employees feel alienated from decision making
3. Communication = very hierarchical --> complicated communication
How to small and large organisations compare in terms of economies of scale, marketing, management, regulations, financing, competitors and owner's objectives?
Small: limited potential for economies of scale; close to customers and better understanding of needs for marketing; managers personally know employees = greater motivation & loyalty; may be difficult complying with regulations or may be exempted; difficulty accessing low cost finance; can respond quickly to local market opportunities and competitors; objective= sometimes less profit-fixated or profit satisficing (no longing for growth as financial needs are met)
Large: potential for (dis-)economies of scale, more resources for expensive marketing; able to hire more skilled employees (more career opportunities for them); able to hire specialists & make investments to comply to regulations; able to borrow more easily at lower cost; more resources to drive competitors out of market; may want to stay private and not float
What is the difference between internal and external growth?
Internal growth = includes everything organisation does on its own to expand and develop
External growth = development that involves participation of another organisation.
What are the different external growth types?
What is a merger?
A form of external growth that usually results in two firms combining to form a third entity. The new company then replaces the two that existed before the merger.
What is an acquisition?
A form of external growth that is the result of one firm purchasing another (>50% shares) and thus the other firm becomes its subsidiary.
What is a takeover and what forms does it take?
Often used to describe process that results in either a merger or acquisition. Involves one firm offering to buy shares from shareholders of another firm, usually at higher price than on stock market.
friendly = management favours operation
hostile = senior managers of target firm are opposed
What is a joint venture?
Involves creation of new company by two or more 'parent' firms. Joint venture formed to carry out aims or objective that is difficult for each parent company to achieve alone. Can be dissolved at end of project. Thus loose structure.
What is a strategic alliance?
Involves two or sometimes more firms working together to realise set of common objectives. Relationship may be in contractual agreement but no new entity formed and original stay intact. Is the loosest type because easy to set up and flexible.
What are the different factors in the evaluation of what type of external growth to choose?
2. Competitive environment (takeover and elimination of competitors)
3. Regulatory environment (some mergers result in too large and dominating company = not allowed, or foreign companies have to work with local ones to enter market)
5. Proprietary information and technology
6. Culture (clash in corporate cultures)
What are advantages and disadvantages of internal growth?
+ often less risky
+ existing shareholders remain in control
+ internally financed = won't increase gearing, interest expense or risk of insolvency
+ strong internal management --> can react to external changes quicker
- slow, strong competitors may enter market
- limited resources
- more employees = more wages might harm cash flow
- market may not allow growth above certain size
What are advantages and disadvantages of external growth?
+ possible elimination of competitors
+ potential economies of scale
+ create synergy, increase talent pool and widen expertise range
+ might improve access to capital
- failure can increase risk (decreased risk in success case)
- J.V./strategic alliances proprietary info and technology might be lost
- need more control and knowledge of employees and assets
- possible culture clash between firms
- if externally financed may increase gearing
What is globalisation?
The increasing interconnectedness of countries across the world in terms of communication, culture, trade and movement of people.
What are MNCs?
Multinational companies are corporations that operate in at least two countries one of which is outside the corporation's 'home' country.
What are the reasons for growth of MNCs?
- Improved technology
- Political forces (improved understanding by government)
- Economics (growing demand in developing countries, availability of low-cost labour benefits)
- Culture (increased popularity of western culture following WW2)
- Competition (saturation of domestic markets & lower competition abroad)
What are the impacts of MNCs on host countries?
+ employment opportunities
+ transfer of skills and technology
+ opportunities for local businesses (suppliers)
+ construction of infrastructure
+ can benefits consumers in host country by providing improved product choices
+ government benefits from taxes and foreign currency earning
- limited commitment to local workforce (low standards for compensation or safety)
- can drive up prices as MNCs have high demand for goods and services (can harm local customers)
- strong competitors for local companies
What is a franchise?
A legal agreement whereby a franchisee buys right to use name and business model of franchisor. Franchisee pay for franchise (both upfront fees and royalties) and must respect norms and practices of franchise. Franchisor usually supports franchisee with franchise-wide purchasing, marketing, 'best-practices' and training.
What are the pros and cons of franchises for franchisor?
+ reduction in financing needs
+ potential for accelerated expansion
+ motivated managers running individual outlets
+ benefits from know-how of local entrepreneurs when entering new market
+ regular income from upfront fees and royalties
- reputation is vulnerable to poor practices in single outlet
- little control over daily running of individual outlets
- may lose touch with customers
What are the pros and cons of franchises for franchisee?
+ access to proven business model and recognised brand
+ support and training
+ reduced risk of running business
+ benefit from nationwide or worldwide marketing campaigns
- must pay upfront fee and annual royalties
- requirement to respect fixed formula and maintain standards
- little room for innovation to adapt to local market
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