3.4.3 Making operational decisions to improve performance: increasing efficiency and productivity


    3.4.3 Making operational decisions to improve performance: increasing efficiency and productivity

    The importance of capacity

    Why capacity is an important concept:

    • It is often used as a measure of productive efficiency
    • Average production costs tend to fall as output rises – so higher capacity utilisation can reduce unit costs, making a business more competitive
    • So firms usually aim to produce as close to full capacity (100% utilisation) as possible


    It is important to remember that increasing capacity often results in higher fixed costs.  A business should aim to make the most productive use it can of its existing capacity. The investment in production capacity is often significant. Think about how much it costs to set up a factory; the production line with all its machinery and technology.


    The importance of efficiency and labour productivity

    Why measuring and monitoring labour productivity matters:

    • Labour costs are usually a significant part of total costs
    • Business efficiency and profitability closely linked to productive use of labour
    • In order to remain competitive, a business needs to keep its unit costs down


    How to increase efficiency and labour productivity

    How a business can improve its labour productivity:

    • Measure performance and set targets
    • Streamline production processes
    • Invest in capital equipment (automation + computerisation)
    • Invest in employee training
    • Make the workplace conducive to productive effort
    • Training – e.g. on-the-job training that allows an employee to improve skills required to work more productively
    • Improved motivation – more motivated employees tend to produce greater output for the same effort than de-motivated ones
    • More or better capital equipment (this links with the topic of automation)
    • Better quality raw materials (reduces amount of time wasted on rejected products)
    • Improved organisation of production – e.g. less wastage


    How to improve efficiency:

    • Improve land fertility
    • Use renewable or recyclable materials
    • Increase training and education
    • Increase scale of production
    • Use a optimal mix of output
    • Invest more in capital equipment


    Cost Minimisation = a financial strategy that aims to achieve the most cost-effective way of delivering goods and services to the require level of quality.


    Economies of Scale = these arise when unit costs fall as output increases

    • Technical – large-scale businesses can afford to invest in expensive and specialist capital machinery
    • Specialist – larger businesses split complex production processes into separate tasks to boost productivity – by specialising in certain tasks or processes, the workforce is able to produce more output in the same time
    • Purchasing – reduced costs for larger businesses in buying inputs, such as raw materials and parts, or of borrowing money because of a larger discount given to a larger purchase than smaller businesses can make
    • Marketing – a large firm can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discounted prices if it has sufficient negotiation power in the market
    • Financial – larger firms are usually rated by the financial markets to be more ‘credit worthy’ and have access to credit facilities, with favourable rates of borrowing – in contrast, smaller firms often face higher rates of interest on overdrafts and loans
    • Managerial – this is a form of division of labour – large-scale manufacturers employ specialists to supervise production systems, manage marketing systems and oversee human resources


    The benefits and difficulties of lean production

    Lean Production = an approach to management that focuses on cutting out waste, whilst ensuring quality. This approach can be applied to all aspects of a business – from design, through production to distribution. Lean production aims to cut costs by making the business more efficient and responsive to market needs.

    • Cut out or minimise activities that do not add value to the production process, such as holding of stock, repairing faulty product and unnecessary movement of people and product around the business.
    • Less waste therefore means lower costs, which is an essential part of any business being competitive:
      • Over-production: making more than is needed – leads to excess stocks
      • Waiting time: equipment and people standing idle waiting for a production process to be completed or resources to arrive
      • Transport: moving resources (people, materials) around unnecessarily
      • Stocks: often held as an acceptable buffer, but should not be excessive
      • Motion: a worker who appears busy but is not actually adding any value
      • Defects: output that does not reach the required quality standard – often a significant cost to an uncompetitive business


    Key aspects of lean production:

    • Time based management
    • Simultaneous engineering
    • Just in time production (JIT)
    • Cell production
    • Kaizen (Continuous improvement)
    • Quality improvement and management


    Advantages of lean production:

    • Lead times are cut
    • Damage, waste and loss of stocks/equipment are lowered
    • A greater focus on customer needs
    • Improved quality through the introduction of kaizen and quality circles
    • Lower costs and contribute to improved profits
    • Staff are more involved and potentially more motivated
    • Working environments are safer and cleaner


    Disadvantages of lean production:

    • The business may struggle to meet orders if their suppliers fail to deliver raw materials on time
    • The business is unlikely to ‘bulk buy’ its raw materials and, therefore, it may lose the benefit of achieving economies of scale
    • Buffer stocks are minimal and this may lead to the business having to reject customer orders requiring delivery immediately



    Difficulties increasing efficiency and labour productivity

    Factors influencing how productive the workforce is:

    • Extent and quality of fixed assets (e.g. equipment, IT systems)
    • Skills, ability and motivation of the workforce
    • Methods of production organisation
    • External factors (e.g. reliability of suppliers)


    How to choose the optimal mix of resources

    The production operations of any business combine two factor inputs:

    • Labour – management, employees (full-time, part-time, temporary)
    • Capital – plant and machinery, IT systems, buildings, vehicles, offices


    The relatively importance of labour and capital to a specific business can be described broadly in terms of their “intensity” (or to put it another way, significance).

    • Labour-intensive production relies mainly on labour
    • Capital-intensive production relies mainly on capital


    Labour intensive operations:

    • Labour costs higher than capital costs
    • Costs are mainly variable in nature = lower breakeven output
    • Firms benefit from access to sources of low-cost labour


    Capital intensive operations:

    • Capital costs higher than labour costs
    • Costs are mainly fixed in nature = higher breakeven output
    • Firms benefit from access to low-cost, long-term financing


    How to utilise capacity efficiently

    To operate at higher than 100% moral capacity:

    • Increase workforce hours (e.g. extra shifts; encourage overtime; employ temporary staff)
    • Sub-contract some production activities (e.g. assembly of components)
    • Reduce time spent maintaining production equipment


    Problems with operating at a higher capacity:

    • Negative effect on quality (possibly)
      • Production is rushed
      • Less time for quality control
    • Employees suffer
      • Added workloads & stress
      • De-motivating if sustained for too long
    • Loss of sales
      • Less able to meet sudden or unexpected increases in demand
      • Production equipment may require repair


    How to use technology to improve operational efficiency

    Main types of technology:

    • Robots
    • Stock control/sales order fulfilment programmes
    • Automation
    • Design software systems
    • Communications


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