3.4.5 Making operational decisions to improve performance: managing inventory and supply chains


    3.4.5 Making operational decisions to improve performance: managing inventory and supply chains

    Ways and value of improving flexibility, speed of response, and dependability

    Improving flexibility:

    • Product flexibility – switching from producing one product to another
      • +ve = they may have more customer loyalty as they are branching out into different market sectors and so they will have more diversity within their firm (seem like they care more about customers)
      • -ve = they may mess up their product up and then not succeed in that sector meaning they will lose out on money that they have spent to introduce, market, and advertise their new product/service
    • Volume flexibility – changing the level of output to meet changes in demand
      • +ve = they are able to operate at a greater capacity, meaning they will sell more and so revenue and profit will increase too
      • -ve = they will have to spend more money to expand their factories and storage facilities as they will be producing more and may not have anywhere to put their other products
    • Delivery flexibility – changing the timing and volume of customers deliveries
      • +ve = they are offering a wider range of options suiting to more people. They may also decide to charge extra for the different services meaning that will also cover their production and advertisement costs
      • -ve = sometimes the factories may not be able to send as many deliveries at once as they won’t have facilities – meaning they will have to spend even more money to expand their delivery options
    • Mix flexibility – providing a wide variety of alternative versions of the same product
      • +ve = this may increase customer loyalty as the company is offering a wider range of options for them to choose from, meaning they will see the company as more diverse
      • -ve = they will have to expand their business and spend more money of factories and the production line to be able to produce the amount of the different types of products


    Mass Customisation = offering individually tailored goods and services to customers on a large scale

    • Collaborative customisation – when the needs of a customer are understood and followed as part of the manufacturing process (Example = houses are uniquely designed by architects)
    • Adaptive customisation – a basic product is made for customers who then customise it to their needs (Example = the Nike ID trainers which you can personalise)
    • Transparent customisation – customers are provided with unique offerings without being told they are customised (Example = hotels may look at their bookings and add small features to the room to please the customer and ensure they return)
    • Cosmetic customisation – products are offered in different formations to entice different customer (Example = coke names on bottles)


    Factors required for mass customisation:

    • A market which customers value variety and individuality
    • Quick responsiveness to market changes
    • Ability to provide customisation
    • Scope for the use of economies of scale


    Advantages of mass customisation:

    • Low unit costs due to the scale of production
    • Low unit costs combined with personalised product leads to a higher added value
    • The business is able to charge a premium price as their quality is of a very high standard
      • The business is able to do this as they are tailoring their products to the customers meaning their products are more valuable and are more exclusive; meaning the company can charge a higher price. (Example = of this could be things like kitchen ware, or food)
    • The business is able to build brand loyalty and strength
      • If their quality remains the same and the products are delivered as said, then customers will stay loyal to the business and therefore shop there more often
    • Lower inventory (cash flow benefit)
      • They will have lower stocks as their products are tailor made to what the customer orders


    Disadvantages of mass customisation:

    • There may be challenges if a customer was to return a customised product back
      • This would be bad for the business as it would be hard to process and they may have to produce a whole new product which may take quite a while as they are all tailor made
    • Many businesses may struggle with supply chains as the systems of suppliers are designed and optimised for producing a prearranged amount of products, rather than catering for an unforeseen demand
      • This could be hard for a business as they need to be able to gain a strong bond with their suppliers so that they can get the best deals. It may also be hard to organise a set amount of supplies
    • It isn’t an appropriate option for all markets
    • There will be higher costs to customise certain products and clients will have to wait longer for their product


    How to manage supply to match demand and the value of doing so

    Managing supply:

    • A business will have a core capacity that produces a given level, of output
    • This will then be supported by a flexible structure that enables the business to react quickly to changes in demand
    • Example = hotel rooms can add more space for sleeping with a sofa bed, as well as the standard bed


    Ways to match demand with supply:

    • Made to order
    • Using temporary/part time workers
    • Outsourcing


    Made to Order = an approach to production where the production of an item begins only after a confirmed customer order is received.

    • By using mass customisation techniques, it is possible to include a customer’s specific requirements into the product.
    • Example = most restaurants match demand with supply by using produce to order. You order what you’d like from the menu and the production process begins! As a restaurant customer you might make some specific requests about your food which can be incorporated into production. Alternatively, in a fast-food environment, you pick a standard product from the menu.


    Advantages of made to order:

    • Lower levels of finished goods in inventory = lower inventory holding costs & less risk of obsolescence
    • Greater customer satisfaction = customers get what they want


    Disadvantages of made to order:

    • Capacity to produce to order may be limited; although mass customisation is automated, it doesn’t work for all products
    • It may be difficult to handle sudden or unexpected increases in demand


    Part Time Workers = a form of employment with less than 35 hours worked per week

    • This is used by agencies to hire works as and when they need them. So when demand is higher a company will hire part time workers to increase the supply. They are more flexibility than permanent worker as they may not have a set number of hours to work or a contract.
    • Example = toy factories will hire more part time works near the Christmas season as demand increases rapidly. They will then let these workers go when the demand for toys decreases after the Christmas period


    Advantages of part time workers:

    • Only have to pay workers when the demand is high, rather than having surplus staff when demand, and therefore production, is low
    • When hiring from agencies, you will find the workers with the right qualifications and skills required for the job and the firm in general
    • Productivity may be increased as staff are more motivated if they have hours to suit them and their work-life balance. Workers will feel more valued and therefore will be more loyal to the firm


    Disadvantages of part time workers:

    • There will be an increase in costs as agencies often charge high prices for their workers
    • Temporary workers could be less motivated and they may not get the hours to suit them and firms will drop them quickly if they don’t need them. This will then decrease productivity and thus could have a knock on effect on the firms reputation if they aren’t efficient enough
    • Retention of staff may be low and staff turnover will be high


    Outsourcing = when a business sub-contracts a process, such as design or manufacturing, to another business


    Advantages of outsourcing:

    • Businesses can react to change quicker if they have access to other firms.
    • Outsourcing can provide specialised workers that will be more efficient in their sector. g. a car manufacture will buy its tyres in from a firm such as Michelin because they know they know they will be better than if they make their own as they specialise in tyres.
    • Outsourcing allows the business to focus on its core business instead of getting involved in activities that would be less competent.
    • A non-typical order can be given to another provider instead so that the business benefits from the order but it does not disrupt its normal production.


    Disadvantages of outsourcing:

    • The quality of the service being provided is no longer under their own control. So an unreliable outsourcer may influence the reputation of the business in a negative way. g. customers will blame a supermarket if its own brand of products are poor quality even though it is not the supermarket that makes them.
    • It comes at a cost that needs to be evaluated. The outsourcer will also want to make a profit so it is likely that it will be more expensive to subcontract or outsource production.
    • It may require you to be more confidential information to a supplier such as details of its methods. This could lead to firm loses its competitive advantage if the supplier steals its ideas


    Influences on the amount of inventory held

    Types of inventory held by a business:

    • Raw materials
    • Work in progress
    • Finished goods


    Advantages of high inventory levels:

    • Increased customer satisfaction
    • Supplier price discounts (economies of scale)
    • Production lines are not halted because of shortages of raw materials
    • Customer demands are met properly
    • Always stock in, in case of sudden increases of demand


    Advantages of low inventory levels:

    • Lower holding costs
    • Easier organisation
    • Reduce in waste and products becoming outdated
    • Security cost and pilferage are lower
    • More space
    • Less cash flow problems
    • More useable cash


    Stock control charts:

    Maximum Level = the maximum level of stock a business can or wants to hold

    Re-order Level = this acts as a trigger point, so that when stock falls to this level, the next supplier order should be placed

    • = buffer stock + the number of resources used during the lead time

    Lead Time = the amount of time between placing the order and receiving the stock

    Minimum Stock Level = the minimum amount of product the business would want to hold in stock.

    Buffer Stock = an amount of stock held as a contingency in case of unexpected orders so that such orders can be met and in case of any delays from suppliers


    Influences on the choice of suppliers

    Factors that influence that choice of suppliers and why they’re important to a business:

    • Price – when looking for a supplier, a businesses primary thought would be how much they will have to pay per unit for their product (usually in bulk – economies of scale)
    • Payment terms – this is the arrangements that are made about the timing of payment and any other conditions agreed between the buyer and the seller
    • Quality – as society develops, consumers also develop to become more selective of the products they buy and so it is crucial for businesses to deliver high quality products
    • Capacity – this is the maximum possible output of an organisation – firms need to be reassured that suppliers can provide the quantity of materials required to meet demands
    • Reliability – this is the extent to which the suppliers meets the requirements of the buyer and typically, it can be measured by the percentage of deliveries made on time or the degree to which a supplier meets the terms of the contract to supply
    • Flexibility – whilst running a business, there may be situations when an organisation needs to make a radical change to its orders from their supplier. Examples of this may be:
      • A sudden change in demand for a product
      • The liquidation of a rival supplier, leaving the business short of a product or component
      • Negative publicity concerning the ingredients or components of a product, or the way in which the product is manufactured
      • Transport difficulties preventing the delivery of supplies from other sources
    • Ethics – when choosing a supplier, the business needs to choose one that has the same ethics as them – this is important because if they don’t, then they may receive bad publicity


    Areas included in supply chain management:

    • Matching supply to demand (part time workers, outsourcing, producing to order)
    • Mass customisation
    • Flexibility, speed of response, and dependability
    • Channels of distribution (retailers, wholesalers)
    • Choice of suppliers
    • Managing inventory


    How to manage the supply chain effectively and efficiently and the value of this

    Approaches to supply chain management p:

    • Traditional – VIKING (‘Volume Is KING’). Buying resources to in large amounts to benefit from economies of scale. Firms focus their business on just part of the supply chain
    • Modern – buying small amounts from a wider range of suppliers, it creates competition within the supply chain causing prices to fall. There is more of a focus on how there action within the supply chain affects the environment
    • Porter’s value chain and suppliers- thus main purpose is how to gain an advantage over their rivals. It is a combination of traditional and modern approaches
      • Cost advantage
      • Differentiation


    The value of outsourcing

    When a business transfers a part of its operations, which was previously undertaken within the business, to another company, they are outsourcing as they are no longer responsible for that part of operations. For example, a business with high demand for customer service, such as a mobile phone provider, may outsource their telephone calls to a call centre in India as they do not have the capacity to meet the demand within their UK office, despite having operated in this way in the past, due to increase in demand. This allows supply to be increased because the call centre in India may work for several companies, or will have larger facilities and more staff available than the business did in the UK and so more calls can be taken. This will increase customer satisfaction because they are not waiting as long for their call to be answered and so the process of the service is quicker and easier.

    Because the business can cope with greater demand, it means that it can take larger orders or produce larger quantities of a product without having to invest in capital equipment (such as a larger factory or machinery) which may not be used frequently if demand fluctuates. This would be a waste of money and cause the business to operate at spare capacity. By outsourcing, supply can be adjusted easily and quickly without needing to invest in equipment because the manufacturing company or call centre, for example, can take on a small contract or a large contract as is required by the business. This allows them to meet demand if it increases or decreases, causing no waste for the business themselves and maximising sales as all customer can be satisfied.

    Outsourcing is paying another company to carry out operations which were once performed within the business but are not anymore due to increase in demand, but subcontracting is when another business is paid to do an assigned task which was never originally done by the business. For example, if a business grows and decides to use e-commerce but does not have the staff or facilities to design and run a website, then it may subcontract a business which does this, which will save them the money of paying to train staff and buying the software, but also increase supply to match demand by creating the option of buying online.



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