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Topic 5 – Operations Management

Topic 5 – Operations Management. Production Planning. Learning Objectives. HL – Explain the concept of capacity utilisation HL - Explain outsourcing and subcontracting HL – Discuss the arguments for and against outsourcing and subcontracting

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Topic 5 – Operations Management

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  1. Topic 5 – Operations Management Production Planning

  2. Learning Objectives • HL – Explain the concept of capacity utilisation • HL - Explain outsourcing and subcontracting • HL – Discuss the arguments for and against outsourcing and subcontracting • HL – Make appropriate calculations to support a decision to make or buy

  3. Capacity Utilisation (CU) • The proportion of maximum output capacity currently being achieved • Impact on average fixed costs • CU high AFC spread out • CU low unit fixed costs will rise Current Output Level 100 = Rate of capacity ultilisation X Maximum Output Level Excess Capacity / Spare Capacity Exists when the current levels of demand are less than the full capacity output of a business Full Capacity When a business produces at maximum output

  4. Full Capacity working • Drawbacks • Staff may feel under pressure due to the workload, resulting in high stress levels • Increased orders which cannot be fulfilled leading to customers going elsewhere • Machinery working at full capacity, may be insufficient time for maintenance

  5. Full Capacity Working • When a business is operating close to or at full capacity, other decisions have to be taken • Should the firm increase its scale of operation by acquiring more production resources? • Should it keep existing capacity but outsource or subcontract more work to other firms? • Could the quality of products obtained from subcontractors be assured? • Should it keep working at full capacity and not expand?

  6. Capacity Shortage Capacity Shortage When the demand for a business’s products exceeds production capacity • What happens if demand is greater than current output capacity? • 2 options

  7. Outsourcing Using another business to undertake a part of the production process rather than doing it within the business using the firm’s own employees. Offshoring – This process done in another country Business Process Outsourcing A form of outsourcing which uses a third party to take responsibility for certain business functions

  8. Reasons for outsourcing Free up internal sources Reduction and control of operating costs Increased flexibility Improved company focus Access to quality services or resources that may not be internally available

  9. Drawbacks of outsourcing • Loss of jobs within the business • Quality issues • Customer resistance • Ethical concerns • Security Clothing corporations need to step up for Bangladesh factory collapse victims

  10. Make-or-buy decisions • Potential cost advantages of outsourcing are an important part of the make-or-buy decision • Cost to buy a component can be obtained from estimates given by potential suppliers • The cost to make should use contribution costing • But remember • Will the supplier increase prices once the firm has closed down its own production capability? • Will the quality be as good? • Is the supplier reliable?

  11. Outsourcing – Evaluation Cost-benefit analysis

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