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Operations Management Main Concepts

Scroll down to read all about the main concepts found in operations management, and have a look at some essays for inspiration.

Production

This is the actual process of transforming material inputs (raw materials) and intangible inputs (expertise, plans) into the finished product for the consumer. Production may be labour intensive- mainly using labour to produce the product, or capital intensive- where machinery is mainly used. Another key way of categorising the production process is to consider whether it is using job production, batch production, or flow production.

Job production is where each item made individually, one after another e.g. craftsmen producing souvenir pottery. Batch production is where groups of the same item are made together (for example, bakers producing a batch of currant buns before moving on to a batch of wholemeal loaves). Flow production is when the same product made repeatedly on a production line- like a bread factory which produces sliced white bread.

The choice of production method depends on whether the end product is standardised, and the numbers required. In the long run, flow production is likely to be more efficient after the cost of the production line is accounted for, but only if it can still be produced to a high enough standard and a large enough number of them are required.

Suppliers

Businesses will need to balance a number of factors when deciding on the suppliers of the raw materials or components that they need. As businesses want to reduce costs, price will be a major consideration. They will have to balance this with quality- a business with a reputation for high quality will not want to sacrifice this. Another factor that a business will need to consider when deciding on their supplier will be reliable- a breakdown in supply can be very costly if it affects production. Being a large customer of a small supplier may be more sensible than being a small customer of a larger supplier. The large customer will be more important to the supplier, whereas the smaller customer may be sacrificed if a larger customer takes priority. Other factors that a business may need to consider when choosing a supplier include payment terms, lead time (the time between order and delivery) and the flexibility of the supplier.

Economies and Diseconomies of Scale

Economies of scale are the benefits that a business gains by being larger. There are a number of specific areas in which larger firms are able to reduce costs and students need to be able to recognise these. A firm may benefit from technical economies of scale. This is its ability to have more capital equipment, reducing the average cost of each item produced or sold. This may lead to increased division of labour which is more efficient. Consider how a car factory with its huge production lines is much more efficient than someone producing cars one at a time. A larger firm will have marketing economies of scale. Any expense on promotion will be spread over a larger number of sales so again the average cost comes down. A newspaper advertisement costs the same regardless of how many sales a business hopes to gain from it.

Managerial economies of scale mean that a firm will be able to have specialist managers which will be more efficient than in a smaller business where a manager may have several functions. Purchasing economies of scale mean that a larger business will be buying their supplies in bulk. This will enable them to purchase them at a lower average cost. Heinz will sell beans to Tesco at a much lower price than to a corner shop which will probably have to buy from a wholesaler. Financial economies of scale mean that a large business will have access to capital at a much cheaper rate- for example, share issue or bond than a smaller business which may have to use a bank loan.

Diseconomies of scale are the inefficiencies that may occur if a business becomes too big. They usually revolve around problems of managing a large business and difficulties in communicating. It is also possible that workers may have less motivation if they are working for a large business. A counterpoint to this is that there is no such thing. If businesses are managed and organised properly then diseconomies of scale should never be an issue.

It is worth noting that despite the large cost savings available to large firms, small firms still survive and make up the majority of businesses. This is often because they provide a specialist service and operate in a niche e.g. personal service in a particular locality.

Industry Sectors

All businesses are involved in the production of a good or service for their customers. This includes the private sector which is owned by private individuals, usually for a profit, and the public sector which is owned by an arm of government, usually to provide a service. This provision of a good or service is known as industry. One of the main ways of classifying industry is to look at the three main sectors – primary, secondary and tertiary. The primary sector is concerned with the extraction of resources such as fishing, farming, mining and logging. Their product is normally then sent to a business in the secondary sector. This sector is concerned with transforming resources into the goods that people want and use, i.e. manufacturing. The tertiary sector is involved with the provision of services, for instance- selling the manufactured goods, banking, insurance, teaching and hairdressing.

Business Expansion

Businesses may expand in two main ways. It may be through organic growth- by increasing sales through their own efforts- opening more branches, producing more products, expanding abroad etc., or through acquisition and merger with other businesses. This way is much faster and may mean they are rapidly able to move into a new product line, area or take over a rival. If it is in the same industry sector, e.g. Ford taking over Volvo, it is known as a horizontal integration. If it is taking over a business in a different sector it is known as vertical integration. This can be backward vertical- Ford buying a steel manufacturer or forward vertical- Ford taking over a car dealership. A business that takes over a completely different type of business is involved in a conglomerate integration. The reason for a takeover will often be linked with increasing the economies of scale available to the business.