Reduced inputs needed for the same output level, lower cost per unit (average cost), fewer workers needed potentially leading to lower wage costs, higher wages might be paid to workers which increases motivation

Buffer inventory level

Inventory held to deal with uncertainty in customer demand and deliveries of supplies

Seven types of waste that can occur in production

Overproduction, waiting, transportation, unnecessary inventory, motion, over processing, defects

Lean production

Used by businesses to cut down on waste and increase efficiency, by reducing the time it takes for a product to be developed and become available for sale

Advantages of lean production

Less storage of raw materials or components, improved health and safety leading to less time off work due to injuries, cutting out some processes which speeds up production

Lean production methods

Kaizen, JIT, cell production

Kaizen

Continuous improvement through the elimination of waste (making things easy to access and in order to improve flow)

Advantages of kaizen

Increased productivity, reduced amount of space needed for production process, work-in-progress is reduced

JIT

Involves reducing or virtually eliminating the need to hold inventories or raw materials or unsold inventories of the finished product

Advantages of JIT

Reduces inventory costs, warehouse space is not needed, finished product is sold quickly increasing cash flow

Cell production

The production line is divided into separate self contained units (cells). each making an identifiable part of the finished product instead of having a flow production line

Cell production advantages

Improves workers morale which improved efficiency, feel more valued so are less likely to strike or cause disruption

Methods of production

Job, batch, flow

Job production

A single product is made at a time

Advantages of job production

Suitable for one off products, meets exact customer requirements, workers often have more varied jobs which can increase employee motivation and give greater job satisfaction

Disadvantages of job production

Skilled labour is often used and raises costs, takes a long time, materials have to be specially purchased, any errors can be expensive to correct

Batch production

A quantity of one product is made then a quantity of another item will be produced

Advantages of batch production

Still gives some variety to workers jobs, allows more variety to products, production may not be affected to a great extent if machinery breaks down

Disadvantages of batch production

Warehouse space is needed for inventories of raw materials, machines have to be reset between production batches leading to a delay in production, semi-finished products need to be moved to the next production stage which can be expensive

Flow production

Large quantities of a product are produced in a continuous process (flowing down a production line)

Advantages of flow production

High output of a standardized product, can benefit from economies of scale in purchasing, automated production lines can operate 24 hours a day

Disadvantages of flow production

Boring system for workers so lack job satisfaction so lack of motivation, significant storage requirements, capital costs of setting up the production line can be high, one machine breaks the whole production line has to stop

Production in action

A business may use a combination of all three types of production at different times depending on product or customer needs

Factors affecting which method of production to use

Size of the market, size of the business, nature of demand, nature of the product

Size of market

If demand is higher and more products will be sold in smaller quantities then batch production is used, businesses in niche markets will use job or batch production whereas international markets will use flow

Size of the business

If the business is small and doesnt have access to a large amount of capital then its more likely to use job or batch production. Larger business will operate on a larger scale and use flow production

Nature of demand

If there is a large and steady demand for a product its economical to use flow production. if demand is less then its more likely to be produced using batch or job production

Nature of the product

If a unique product then job production will be used, if the product is mass produced then flow production will be used

Automation

Where the equipment used in the factory is controlled by a computer to carry out mechanical processes

Mechanization

Is where the production is done by machines but operated by people, like a robot which is a machine that is programmed to do tasks

CAD

(computer-aided design) is computer software that draws items being designed more quickly and allows them to be rotated to see the item from all sides instead of having to draw it several times. (theater)

CAM

(computer-aided manufacture) is where computers monitor the production process and control machines or robots on the factory floor.

CIM

(computer-integrated manufacturing) is the total integration of computer aided design (CAD) and computer-aided manufacturing (CAM)

EPOS

(electronic point of sale). This is used at checkouts where the operator scans the barcode of each item individually

EFTPOS

(electronic funds transfer at point of sale). This is where the electronic cash register is connected to the retailer’s main computer and also to banks over a wide area computer network.

Contactless payment

It is a fast, easy and secure way to pay for purchases that are less than a small amount, for example, in the UK this is £30 or less

Advantages of new technology

Productivity is greater because better production methods are used, boring jobs are now done by machines leading to greater job satisfaction, better quality products are produced because of more accurate production methods

Disadvantages of new technology

Unemployment rises because machines replace people, expensive to buy new tech and machinery, technology can become outdated quickly leading it too need to be replaced frequently

Why businesses hold inventories (stock)

Allows a business to maintain production and satisfy customer demand quickly, to know when a business gets to its re-order point, economies of scale

Why businesses hold inventories (stock) can be bad

Costs a lot to store, reduces cash flow as money is tied up in inventory

Fixed costs

Costs which do not vary in the short run with the number of items sold or produced. They have to be paid whether the business is making sales or not

Variable costs

Costs which vary directly with the number of items sold or produced

Why costs are important

Compare revenue from one business to another, calculate profit and loss, helps managers make decisions, determine selling price

Total costs

Fixed costs and variable costs combined

Average cost per unit

Total cost of production/total output

Use of cost data

Setting prices, decide weather to stop production or continue, decide on the best location

Economies of scale

Factors that lead to a reduction in average costs as a business increases in size

5 types of economies of scale

Purchasing, marketing, financial, managerial, technical

Purchasing economies of scale

Business is able to buy large number of components and get it cheaper, reduces unit cost

Marketing economies of scale

Transport costs are reduced by using larger vehicles, might be able to afford it's own vehicles to distribute goods

Financial economies of scale

Larger businesses can often raise capital cheaper than smaller ones, bank managers often consider that lending to larger businesses as they are less risky

Managerial economies of scale

Small businesses can't usually afford to pay for a specialist manager (marketing manager), tends to reduce their efficiency, larger companies can afford this which increases efficiency

Technical economies of scale

Small businesses cant afford the equipment that large businesses can, the use of flow production and latest equipment will reduce average costs

Dis-economies of scale

Factors that lead to an increase in average costs as a business grows beyond a certain size

3 types of dis-economies of scale

Poor communication, lack of commitment from employees, weak coordination

Poor communication dis-economies of scale

Can become more difficult to send and receive messages, mistakes can occur if there is slow/inaccurate communication leading to lower efficiency and higher average costs

Lack of commitment

Workers may feel not important leading to lack of commitment and low efficiency

Weak coordination

Takes longer for decisions to be expressed leading to different worker objectives

Break even level of output/point

Quantity that must be produced/sold for total revenue to equal total costs

Break even charts

Graphs which show how costs and revenues of a business change with sales. They show the level of sales the business must make in order to break even.

Revenue

Income during period of time from the sale of goods or services

Total revenue formula

Quantity sold x price

Break even point

Level of sales at which total costs = total revenue

Advantages of break even charts

Managers can figure out expected profit or loss, impact on profit or loss decisions can be shown by redrawing the graph, used to show the margin of safety

Limitations of break even graphs

Doesn't show possibility of inventories not being sold, only concentrates on break-even point, fixed costs only remain constant if the scale of product doesn't change

Margin of safety

Amount by which sales exceed the break-even point

Contribution formula

Selling price - variable costs

Quality

Produce a good or service which meets customer expectations

Importance of quality

Establish brand image, build brand loyalty, increase sales

If quality isn't maintained

Lose customers to other brands, replace faulty products raising costs, creates a bad reputation through word of mouth

Quality control

Using quality inspectors to check for faults and for quality at the end of the process weather its the production of a product or a service,

Advantages of quality control

Tries to eliminate faults or errors before the customer receives the product, less training required as inspectors are employed to check quality

Disadvantages of quality control

Expensive to pay for inspectors, doesnt find why the fault occurred, higher costs if the products has to be scrapped

Quality assurance

Checking for quality standards throughout the production process by employees

Advantages of quality assurance

Fewer customer complaints, tries to eliminate errors before passing onto next production stage, reduced costs if products don't need to be re made

Disadvantages of quality assurance

Expensive to train employees, relies of employees being committed to maintaining the standards set

Total quality management

Continuous improvement of products and processes by focusing on quality at each and every stage of production

Advantages of total quality management

Waste is removed and efficiency increases, reduced costs as products don't have to be reworked, no customer complaints so brand image is improved

Disadvantages of total quality management

Expensive to train employees, relies of employees following TQM ideology and accepting responsibility for quality

Factors affecting location of manufacturing business

Production methods, markets, raw materials, external economies of scale, availability of labour, government influence, transport and communications, climate

Factors affecting location of a service sector business

Customers, personal preference of the owners, technology, availability of labour, climate, near to other businesses, rent/taxes

Factors affecting location of a retailing business

Shoppers, nearby shops, customer parking, availability of suitable vacant premises, rent/taxes, access for delivery vehicles, security, legislation

Factors that a business should consider when deciding in which country to locate operations

New markets overseas, cheaper or new sources of materials, difficulties with the labour force and wage costs, rent/taxes, availability of government grants, trade and tariff barriers

What do finance departments do

Record all financial transactions, preparing final accounts, forecasting cash flows

Main reasons reasons businesses need finance

Starting up a business, expansion of an existing business, additional working capital

Start up capital

Finance needed by a new business to pay for essential fixed and current assets before it can begin trading

Working capital

Finance needed by a business to pay its day-to-day costs

Capital expenditure

Money spent on fixed assets which will last more than one year

Revenue expenditure

Money spent on day-to-day expenses which do not involve the purchase of a long-term asset like wages