Chapter 21- operations management Introduction to operations planning:
3. Break-even analysis:
Method of comparing two or more possible locations. Calculates level of production that must be sold to reinvest equal total costs. Lower break even, better the site as you will regain all your many invested quicker and start to gain higher profit. Limitations: this analysis should be uses with caution and the normal limitations of this technique apply when using it to help make location decisions.
Qualitative factors:
Qualitative factors: these are the non-measurable factors that may influence business decisions.
Safety : Avoid potential risk to public and damage to the company reputation. Some businesses are located in remote areas because of the potential damage they can cause.
Room of further expansion : May be expensive to relocate a business if the site proves to be too small to accommodate and expansion of the business. If location has spare rooms or place in the site, it can be considered for a long-term objective.
Manager’s preferences : A manager's preferences may be influenced in the location as they will choose an appropriate sit they think will suit the business.
Ethical considerations : This must be in mind when choosing a location to have cleared that depending where the business must be located in certain places. Make sure it’s doesn’t affect the environment and have clear if the business its isolated from other place to make it accessible to employees to have access to it.
Environmental concerns : Business may be reluctant to set up in areas that is particularly sensitive from and environmental viewpoint. Could lead to poor public relations and action from pressure groups.
Infrastructure :Quality of location will affect the business. Such as communication, accessibility and transport links. Business must have a quality IT infrastructure which has an important
consideration for companies that need quick communication with their different sites or customers.
The pull of market: Less important with the development of transport and communication industries. Internet can achieve massive amount in terms of making location of a retailing business.
Planning restrictions : Local authorities have a duty to serve the interest of their populations; every government will have certain restrictions to
business.
External economies of scale : There are costs of reductions that can benefit a business as the industries grow in one region. Common that firms in the same industry to be clustered in the same region.
Advantages and Disadvantages of multi-site locations
Multi-site location – a business that operates from more than one location. Advantages of multi-site locations
• Greater convenience for consumers • Lower transports costs
• Production-based companies reduce the risk of supply disruption if there are technical or industrial-relations problems in one factory
• Opportunities for delegation of authority to regional managers from head office – helps to develop staff skills and improves motivation
• Cost advantages of multi-sites in different countries
Disadvantages of multi-site locations
• Coordination problems between the locations – excellent two way communication system will be essential
• Potential lack of control and direction from senior management based at head office
• Different cultural standards and legal systems in different countries – the business must adapt to these differences
• If sites are too close then there is the danger that one store might take the sales away from another owned by the same business.
Off shoring - the relocation of a business process done in one country to the same or another company in another country
Multinational – a business with operations or production bases in more than one country
Reasons for international locations decisions 1. To reduce costs
This the major reason which shows the movement of most companies to abroad. With labour wage rates in India, Malaysia, China and Eastern Europe being a fraction of those in Western Europe and the USA
2. To access global (world) markets
Rapid economic growth in less developed countries has created huge market potential for most consumer products. Some businesses have reached the limit of their internal domestic expansion, as there are threats from government regulatory bodies about increasing monopoly power.
3. To avoid protectionist trade barriers
Trade barriers – taxes (tariffs) or other limitations on the free international movement of goods and services.
4. Other reasons
These include substantial government financial support to relocating businesses, good educational standards and highly qualified staff and avoidance of problems resulting from exchange rate fluctuations.
Issues and potential problems with international location 1. Language and other communications barriers
Distance is a problem because there is less face to face contact, also when some operations are abroad language can be another problem.
2. Cultural differences
This is the consumer´s tastes and the religious factors that determine what goods should be stocked.
3. Level of service concerns
This applies to the off shoring of call centres, technical support centres and functions such as accounting. Some consumer groups argue that off shoring of these services has led to inferior customer service due to time difference problems, time delays in phone message, language barriers and different practices and conventions.
There may be loss of control over quality and reliability of delivery. 5. Ethical considerations
There may be loss of jobs when a company locates all or some of its operations abroad.
Scale of operations
Scale of operations - the maximum output that can be achieved using the
available inputs – this scale can only be increased in the long term by employing more of all inputs.
Factors that influence the scale of operations
• Owners objectives
• Capital available
• Size of the market the firm operates in
• Number of competitors
• Scope for scale of economies Economies of Scale
This is the reductions in a firm’s unit (average) costs of production that result from an increase in the scale of operations.
The cost benefits arise for five main reasons
Purchasing Economies
These economies are often known as bulk-buying economies. Suppliers will often offer substantial discounts for large orders. This is because it is cheaper for them to process and deliver one large order rather than several smaller. In addition, they will obviously be keener to keep a very large customer happy due to the profits made on the large quantities sold.
Technical Economies
Technical economies, basically is the use of technology to have a greater output than the labour work-force. This will make the unit cost of the products much lower, and so they will make more at a less cost.
Financial Economies
This economy of scale refers the ease of getting liquidity in the firm. Larger firms will be better off getting money, by two main ways: Firstly by the use of banks and other lending institutions which are giving
record and that the business shows that if one product fails they will not be bankrupt, meaning that they have diversified products. Banks receive money with the interest rates, which are lower to larger firms, compared to small firms, and especially newly formed businesses. The second way is by the issue of shares, if the firm is a PLC. This will allow them selling many millions of dollars’ worth of shares.
Marketing Economies
Marketing costs obviously rise with the size of the businesses. So the larger firms which do have finance available, they tend to employ marketing managers, of advertising agencies, to study the market and direct specifically adverts to them. These costs can be spread over a higher level of sales for a big firm and this offer a substantial economy of scale.
Managerial Economies
Small firms often employ general managers who have a range of
management functions to perform. As a firm expands, it should be able to afford to attract specialist functional managers, the skills of specialist managers and the chance of them making fewer mistakes because of their training is a potential economy for larger organisations.
Diseconomies Of scale
These are factors that cause average costs of production to rise when the scale of operations is increased
If there were no disadvantages to large-scale operations, nearly all industries and markets would be dominated by huge corporations. The impact of
“diseconomies of scale” prevents one or just a few firms from being able to completely dominate. Diseconomies of scale are those factors that increase unit’s costs as a firm’s scale of operation increases beyond a certain size. These diseconomies are all related to the management problems associated with trying to control and direct an organisation with many thousands of workers, in many separate divisions. The three main causes are
Communication Problems
Large-scale operations will often lead to poor feedback to workers. These communication inefficiencies may lead to poor decisions being made, due to inadequate or delayed information. Poor feedback reduces worker incentives.
Alienation of the workforce
The bigger the organisation, the more difficult it becomes to directly involve every worker and to give them a sense of purpose and
achievement in their work. They may fell so insignificant to the overall business plan that they become demotivated.
Poor coordination
As business become bigger and expand, they also expand in an international way. The major problem for senior management is to
coordinate and control all of these operations as a worldwide business. If coordination doesn’t work, problems arise, and again money is needed to mend these problems, which arises costs. So a tighter control and
coordination is needed. Large- scale production
It is important to point out that there is not a particular point of operation at which economies of scale cease and diseconomies begin. The process is much more difficult to measure than this, as certain economies of scale may continue to be received because sales increases, but the growing significance of
diseconomies gradually begins to take over and average costs may rise. In
practise it is often impossible to state at what level of output this process occurs, which is why many managers may continue to expand their business unaware that the forces causing diseconomies are building up to a significant degree.
Are diseconomies avoidable?
MBO- (Management by Objectives ) - This will assist in avoidingcoordination problems by giving each division and department agreed objectives to work towards.