5.1 Introduction to operations management
“Operations” refer to the fundamental activities of organizations: what they do and what they deliver, i.e. how they produce goods and services to meet consumers’ needs and wants. The art of managing production to get the best end product is called operations management.
Operations and The Other Business Functions
Operations can be described as the “what” of business management and are closely linked to the other functions.
Operations deliver the “what” question of an organization’s objectives.
Operations are done by people.
Operations need funding and all financial aspects must be carefully budgeted and monitored.
Operations produce goods and services that must be marketed, promoted and sold at the right price to the right audience, so that the businesses are profitable and successful.
All business functions depend on one another and are part of a system. So, operation managers are in a good position to work with other departments and make valuable recommendations such as:
The operations manager has direct experience with the economies of scale or diseconomies of scale that may take place on the factory floor and can identify some of the strengths and weaknesses of the organization that other departments would not necessarily know about, such as machinery obsolescence or likely costs of maintenance in the foreseeable future.
The operations manager can suggest which forms of non-financial rewards (such as job rotation or teamwork) may be suitable (or not) for the organization, instead of those suggested by the HR managers that may be only good in theory and not practice.
The operations manager may know which production costs (such as some semi-variable energy costs) could be cut, which would in turn have an impact on the break-even point and the organization’s margin of safety.
The operations manager can advise on which product extension strategies may be easily implemented (and those that may not).
Operations is not just about “doing and delivering”. Operations management is an integral part of the organization and its decision-making process.
Operations and the production of goods or service
Production is usually defined as the creation of physical products (goods) or non-physical products (services).
Some products are purely goods or services, but there are some that can be a combination of both.
For both goods and services, operations are essential, but the definition must be adapted to the context. The secondary sector and the manufacturing of goods still provide the best situations in which to examine the operations of a business.
Operations management and sustainability
The role of the operations manager, however, is wider than just ensuring that production is correctly planned and executed; operations managers also have to take several other factors into account. These factors fall into three categories:
Economic factors
Social factors
Ecological (also called “environmental”) factors
Economic factors refer to the fact that budgets must be respected; wastage must be kept to a minimum and, whenever possible, further savings should be made, for example through greater efficiency. This is usually measured in monetary terms. For example, in some cases it may be possible to cut some unnecessary costs, such as energy costs. Economic sustainability is the need to use available resources and raw materials to their best advantage, ultimately ensuring profitability and financial performance.
Social factors refer to the fact that more and more organizations are becoming aware of their responsibility towards their workers, as internal stakeholders, and towards local communities, as external stakeholders. As a consequence, they seek to ensure that all employees are fairly treated, that their working conditions are acceptable, and that the quality of life for local people is not negatively affected by the decisions taken by the organization (for example in the case of expansion or relocation). This is also called social sustainability
Ecological (or “environmental”) factors refer to the fact that more and more managers understand the negative impact that their organization may have on the natural environment, especially different forms of pollution, such as air pollution (from carbon monoxide and CFCs), water pollution (industrial waste near factories, mills, and mines), or noise pollution (industrial noise that can also affect the workers themselves, for example in a noisy environment such as ship building). This is also called ecological sustainability (or environmental sustainability).
Economic sustainability, social sustainability and ecological sustainability are also known as “the three pillars of sustainable development”. They are sometimes referred to as “the 3 Ps”: Prot, People and Planet. Together they are called the “triple bottom line”.
The triple bottom line stresses the fact that business decisions should not only consider financial aspects (such as breaking even and making money for shareholders), but also the well-being of local communities and the natural environment. Although this is relevant for all business functions, it is particularly relevant for operations, as manufacturing activities may have more negative impacts than marketing campaigns or financial transactions. In many cases, though, the triple bottom line remains an ideal rather than a reality, as economic aspects largely drive most commercial organizations. There can exist conflicts between stakeholders who have different priorities in terms of sustainability.
5.2 Operations management
Job production is the production of a special “one off” product made to a specific order (for one individual customer).
Batch production is the production of a group of identical products (the word “batch” refers to the fact that the items in each group go together from one stage of production to the next).
Mass production is the production of a high volume (hence the word “mass”) of identical, standardized products.
Mass customization combines mass production with the personalization of custom-made products for marketing purposes.
Job production
Job production is a production method normally associated with the highest end of the market, where the emphasis is on quality, uniqueness and originality; the producer can charge premium prices. Production is market-orientated, with the client deciding precisely what the product should be. This is also called “customized production”, which means that the order is made for a specific customer. Job production requires clear objectives and careful planning, so there may be a longer development phase of the product life cycle. The client may require and expect greater consultation during the process and even after the product has been created. It is likely that the same format would be inappropriate another time. This can add to the time taken to produce the product, as there may not be a “blueprint” to use.
Advantages
The mark-up is likely to be high.
Clients get exactly what they want.
This production method is likely to motivate skilled workers focusing on individual projects.
It can be flexible.
Disadvantages
This production method can be expensive, requiring skilled workers and non-standardized materials.
It is likely to be time-consuming, as there is much more consultation with the client than for other production methods.
The product might fail because of the lack of knowledge of the client. This may reflect badly on the business.
This method can be very labor-intensive and reliant on skilled workers.
Batch production
Batch production is normally associated with the middle of the market, where the emphasis is on both quality and affordability. Products are still market-orientated; customers are offered customized products, but using a range of standardized options. This method of production requires careful planning, as the components for the products need to be interchangeable. There will have to be some consultation with customers, as their needs have to be taken into account, although the exact options may be limited. Market research can replace the individual consultation.
Advantages
Businesses can achieve economies of scale (for example when a small manufacturer makes savings by bulk buying, or when a group of operators pools resources).
Batch production allows customers more choice than mass production – and so captures more market share.
It may be useful for trialing products, especially with smaller quantities.
It may help deal with unexpected orders.
Disadvantages
Businesses may lose production time as machines are recalibrated and/ or retooled (this is known as “down time”).
Businesses may need to hold large stocks (in case of unexpected orders).
The sizes of batches depend on the capacity of the machinery (or of labor) allocated to them.
Mass production
As its name indicates, mass production is all about quantity: it refers to the production of a high volume of standardized products, typically by using a continuous flow of raw materials along an assembly line. Labour is usually unskilled; its main role may be one of quality control. This method of production tends to be automated, as machines do not need regular breaks and can be relied on to produce to the same standard every time. Mass production, however, requires careful planning in order to synchronize all the stages of the production process. For the process to be viable, the production must rely on large, reliable orders of the final product. Setting up this method may be expensive, and this investment must be recouped by selling a high volume. The product is therefore sold at the low end of the market and in large quantities. The term “flow production” is sometimes used instead of “mass production”. This term uses the image of a continuous flow of materials along an assembly line. This is the common image of a Taylorist factory with long conveyor belts routing the product through the different stages of production without any pause. Likewise, the terms “line production” and “process production” are sometimes used too, stressing the idea of a line (where the end product is gradually created, step by step) and of a process (i.e. a progression through different stages in a particular order).
Advantages
Once set up, the system may need little maintenance.
The business can cater for large orders, thereby achieving considerable economies of scale.
Labour costs may be low as the jobs required are relatively unskilled; with a fully automated process, the need for workers is reduced.
The business can respond to an increase in orders very quickly, as the process has already been set up.
Disadvantages
Set-up costs are usually high.
Breakdowns are costly, as the whole assembly line may have to stop. The business is dependent on a steady demand from a large segment of the market.
The system is inflexible. For example, if there is any sudden drop in demand, the factory may well be left holding large stocks of unwanted products.
The production process can be demotivating for workers who are doing repetitive activities.
Mass individualized customization shares most features of mass production; the main difference is that finished stock cannot be prepared in advance but is rapidly finalized.
Changing the production method
Changing the production method would have implications for all of the business functions. These are some of the implications for HR:
Some workers may have to be redeployed, retrained, or even let go, so human resources would need to be managed carefully.
Refining the roles and responsibilities of workers and middle managers would require careful planning.
These are some of the implications for marketing:
Production runs can reject the orientation of a business as well as the choice of product available to the consumer, so the image or perception of the business may be altered.
Distribution channels may be affected, which may lead to differing response times.
Changes in costs of production could be passed on to the consumer through changes to prices (which are likely to mean an increase, at least in a short term, to pay for the transition costs).
These are some of the implications for finance:
Changing the production method will have an impact on stock control, which affects costs.
Changes may take time and could interrupt current production, causing delays in the working capital cycle.
Any change will need financing, whether it is short term or for significant developments that may require major long-term funding.
The most appropriate method will vary from business to business – there is no one correct method. Factors affecting the decision include:
The target market – for example, the business may be producing high volumes of a low-cost product for a large market with little disposable income.
The state of existing technology – this can limit how flexible production can be.
The availability of resources – fixed capital, working capital, and human capital.
Government regulations – for example, a business may have to meet certain targets for recycling or waste emissions.
5.4 Location
Factors in locating a business
There is a distinction between setting up a business for the rst time and moving the business to a new location. However, many of the same factors have a bearing in both cases. The main difference involves the objectives of the company at that particular time. Setting up may be simply to get started, but relocation may be necessary for various reasons, such as expanding or following the market. The business might also go through a merger and need new, larger premises.
Costs
Costs will be a key determining factor and will largely depend on the type of business being started or relocated. Costs may depend on the following:
Land – if the business is a large manufacturer, it may need a large, flat surface area, whereas a small home-based office may only require a spare room.
Labour – if the business is a technical one requiring skilled workers (such as a laboratory), the biggest cost may be labor.
Transport – if the business is producing large quantities of a physical product, transport costs could be crucial. Two options are possible:
If the business is “bulk increasing” (buying in many components and building something bigger, such as televisions or cars), it may make sense to set up the business close to the market, as transporting the finished items would be more expensive than bringing in lots of small components.
If the business is “bulk decreasing” (buying in large quantities of raw materials and turning them into smaller end products, as in paper mills or glass foundries), it may make sense to set up the business close to the source of the raw materials.
Competition
A balance needs to be made between finding a gap in the market and setting up not far from the direct competitors. Retail outlets, theaters, law firms, and many other businesses often operate close to their rivals, as the chances of getting passing trade increase if the area becomes known for a particular product. Sometimes, some companies (such as chains of coffee shops) adopt a system called “cannibalistic marketing” in order to stop possible competitors from opening their own outlets and taking some of their market share. Cannibalistic marketing involves setting up more than one branch in a location (such as a shopping mall); they may keep on opening more branches in the same area, even though each new branch eats up some of the profits of the existing outlets (hence the word “cannibalistic”), until eventually there are so many outlets that there is no more possible extra trade to be generated.
Type of land
Different types of land will incur different costs, and their suitability for a given business will vary.
See Also10 Key Factors in Creating a Robust Contingency Plan for Your CompanyBusiness continuity plan template to help safeguard your businessWhat Is Contingency Planning? Creating a Contingency PlanContingency Plans in an Operational Plan – SkillmakerMarkets
In the past, many businesses had to set up close to their customers. Markets are no longer necessarily physical and could just include an efficient distribution system (a key aspect of e-commerce).
Familiarity with the Area
Often, new businesses are set up in the place that the owners are familiar with. This has advantages and disadvantages. On the one hand, it means the business owners may already have some knowledge of local networks (such as possible suppliers and customers). On the other hand, they may overlook a more appropriate venue in another area (such as one with better access to suppliers or distribution networks). For example, setting up a business in your garage may cut down on costs, but it will also restrict your ability to expand.
Labour Pool
Most businesses need to take account of the type of workers available locally and balance this with the skills and qualifications needed for all business operations.
From a more strategic perspective, demographic change could make considerable differences to the type of workers available, not only in the present but also in years to come. Linked to the labor pool, another point to consider is the level of unemployment in the area. This may be a good indicator of possible savings on salaries: a higher unemployment level could mean that more people want a job, even on a low salary. The increase in teleworking (working from home) is another factor, though it may not be possible for many posts directly involved in production in the primary and secondary sectors.
Infrastructure
Infrastructure refers not only to the existing transport networks for people and products but also to electronic networks. In a broader sense, other factors and facilities may need to be taken into consideration when choosing a location for the business, for example, the provision of services such as education, housing, healthcare, and police, as well as utilities such as power and water. Access to services is important for the business, as this may affect the welfare and motivation of staff. If staff have to be relocated, this could become a major issue.
Suppliers
The availability of reliable local suppliers may be important for some businesses, especially those using the JIT stock control system which requires a greater deal of coordination.
Government
The role of both local and national government can be crucial for a business. In some cases, local authorities may offer financial support, resulting in significant savings. This could be through grants (non-returnable, one-time-only funds), subsidies (funds to be offset against the cost of production), soft loans (loans at preferential rates of interest), or tax rebates (a cut in the tax to be paid).
Laws – These are crucial for all businesses as even minor local changes could have a major impact on a business.
Taxes – The amount of money a business is liable to pay in tax will have a major effect on where a business may wish to locate. All of the different taxes on different stakeholders will have a major impact not only on the amount of business the company can conduct but also on how much profit can be retained and reinvested – and that, too, may be taxed.
National, Regional, or International Ambition
In the past, businesses were initially local, serving their immediate community. However, it has become much easier to communicate and transport large volumes of materials across greater distances. Many businesses when locating or relocating must now think beyond their locality. The increasing importance of regional trading blocs has also had a major impact on decisions about location. The growth of trading hubs such as Hong Kong, Singapore, and Dubai needs to be considered as these can represent good options for a business wanting to set up a regional base or access global transport networks.
The impact of globalization on location
The impact of globalization on location decisions is best analyzed in terms of “push factors” and “pull factors” affecting the four business functions, i.e. the four areas of operations management, marketing, HR and finance.
Pull factors
The following scenarios may make it attractive for a business to set up or relocate abroad:
Improved communications
Dismantling of trade barriers
Deregulation of the world’s financial markets
Increasing size of multinational companies
These are known as “pull factors”.
Push factors
As well as the external factors noted above, there are a number of internal factors that may help to push companies (especially those that are already multinational) to operate overseas. By expanding overseas, they may be able to:
reduce costs
increase market share
use extension strategies
use defensive strategies.
Ways of reorganizing production, both nationally and internationally
Outsourcing (or Subcontracting)
The practice of employing another business (as a third party) to perform some peripheral activities (this enables the organization to focus on its core activity).
NOTE: The peripheral services obtained from external providers help the providers achieve economies of scale because they are specialists in that particular service.
Advantages
- Can reduce costs (and potential prices, helping the business gain a competitive advantage)
- Can allow the business to focus on its core activities and what it does best, ensuring improvements in quality.
- Can lead to improved capacity utilization.
- Delivery time can be reduced.
- Can lead to transfer of expertise.
Disadvantages
- The business can become dependent on the supplier. Reliability could be an important issue for eg. What if the transporters go on strike?
- The business may have less control of the final product. What if a key component doesn’t meet the expected quality standards?
- Dilution of the brand could be a problem for eg. if the consumers realize that the company’s product is not produced by the company at all.
Offshoring is the practice of subcontracting overseas, i.e. outsourcing outside the home country. All of the advantages and disadvantages of outsourcing apply with offshoring, but the international aspect usually intensifies them. In particular:
There may be cultural differences between the companies, both in terms of national cultures and corporate cultures.
Communication could sometimes be difficult (especially when people have to deal with different languages and time zones).
There may be issues of quality and ethics.
Insourcing is the practice of performing peripheral activities internally, within the company (the opposite of outsourcing). The business decision to stop outsourcing may be motivated by the desire to regain full control, or to reduce the costs of taxes, labor, and transportation
Reshoring (or backshoring) is the practice of bringing back business functions (jobs and operations) to the home country (the opposite of offshoring). This could be to focus refocus on the quality end of the market. The business may still use external providers: they are now simply located in the home country.
5.5 Break-even analysisOrganizations usually need to know the minimum quantity of products they must sell in order to start making a profit. This minimum quantity is called the break-even quantity.
The contribution shows how much a product contributes to the fixed costs of a business, and thus to its overall profit, after deducting the variable costs.
contribution per unit = price per unit – variable cost per unit
total contribution = total sales revenue – total variable costs
profit = total contribution − total fixed costs
total contribution = contribution per unit × number of units sold
The break-even quantity is the minimum number of items that must be sold so that all costs are covered by the sales revenue. At the breakeven point, there is no loss, but no profit either. This can be calculated numerically or graphically on a break-even chart. This is a graphical method that shows the value of a firm's costs (fixed costs, variable costs, total costs) and revenue against a given level of output. The break-even point can be identified by drawing all three cost lines and the total revenue line on a graph. The horizontal axis (the X-axis) measures the output (the number of units sold), while the vertical axis (the Y-axis) measures the financial values (of the costs and revenue).
When drawing a break-even chart, the following points need to be carefully considered:
Fixed costs (FC) are paid whatever the level of output is; as they remain constant, they are represented by a horizontal continuous line.
With zero output, there will be no variable costs (VC), so the VC line starts from zero (origin). The higher the number of units produced, the higher the variable costs will be. In some cases, the VC line is not included in the break-even chart.
The total cost (TC) line begins on the Y-axis at the level of the FC line; it then follows the same trend as the VC line, running parallel to it.
With no units sold, there will be no revenue, so the total revenue (TR) line begins from the origin (zero), like the VC line. The greater the number of units sold, the greater the TR will be.
The break-even point is the point where the TC line intersects the TR line. At this point, the break-even level of output can be read on the horizontal axis.
The left of the break-even point shows the loss made by a firm, whereas the right of this point shows the profit made.
Margin of safety is the output amount that exceeds the break-even quantity. margin of safety = current output – break-even output
Calculating break-even quantity
The break-even quantity can be calculated in two ways: using the “contribution per unit” method and using the “total costs = total revenue” method. Both methods give the same result, which can also be checked graphically.
Contribution per unit method
Total costs = total revenue method
total revenue = price per unit × quantity sold
total costs = total fixed costs + total variable costs
total variable costs = variable cost per unit × quantity sold
total revenue = total costs
P × Q = TFC + TVC
P × Q = TFC + (VC × Q)
Target Profit
Target Profit Output
The level of output that is needed to earn a specified amount of profit.
Contribution per unit can also be written as = target price – the variable cost per unit
Effects of changes in price or costsThe break-even chart can be a helpful decision-making tool as it can show the impact on break-even quantity, prot, and margin of safety that may result from changes in price or cost. The new position after the changes can then be compared with the previous position.
Changes in price
The firm will break even at a lower level of output; as a consequence, there will be higher profits at every output level. This also leads to an increase in the rm’s margin of safety.
Changes in costs
Increase in fixed costs
An increase in fixed costs leads to an increase in total costs by the same amount at every level of output. Break-even quantity also increases and therefore prot decreases at all levels of output. This also decreases the margin of safety.
Increase in variable costs
Increases in variable costs increase the gradient of the total cost line. This leads to a rise in the break-even quantity and reduces the margin of safety.
See AlsoHow to Host a Tea PartyBenefits and Limitations of Break-Even Analysis
Benefits
Break-even charts help visualize a firm’s profit or loss at various levels of sales.
By using break-even charts, a manager can determine the margin of safety, break-even quantity, and break-even revenue or cost.
Formulae and calculations can be used to confirm the break-even charts and to check the results.
Changes in prices and costs and their impact on profit or loss, the break-even point, and the margin of safety can be compared by using the charts or by calculation.
Break-even analysis can be used as a strategic decision-making tool to decide on key investment projects, or whether a business should relocate or merge with another one.
Limitations
Break-even analysis assumes that all the units produced are sold, with no stocks built up or held.
Break-even analysis assumes that all costs and revenue are linear, i.e. represented by straight lines. This is not always the case as, for example, price reductions or discounts will influence the slope of the revenue line. Similarly, the slope of the variable cost line would change if workers are paid overtime in an effort to increase output.
Fixed costs may change at different levels of activity. It would be preferable to represent these fixed costs as a “stepped” line.
Semi-variable costs are not usually represented on simple break-even charts, for example if some workers receive a variable commission on top of their regular wages.
A break-even chart may not be very useful in dynamic business environments with sudden changes in prices, costs, or technology.
The accuracy and quality of the costs and revenue data used determine the effectiveness of break-even analysis.
5.6 Production planning
Supply chain is the system of connected organizations, information, resources, and activities that a business needs to produce goods or provide services to its customers.
This involves two types of flows that must be managed:
The flow from raw materials to finished products that eventually reaches the end customer, via different stages of transformation.
The flow of information (for example, a factory ordering oranges and specific packages to protect the juice from spoilage and deterioration during distribution and storage).
So the supply chain has two dimensions:
Logistics: the “hardware” of the supply chain.
Information and communication: the “software” of the supply chain.
Supply chains can be local or global.
A local supply chain is characterized by the short distance between producers and consumers. A local supply chain also involves less transport, less pollution, fewer transactions, and it may benefit the local community more. There may also be fresher products such as in the case of produce. In many ways, it is more sustainable than the global supply chain.
A global supply chain involves international trade, i.e. exports and imports. In many ways, this is less sustainable than a short supply chain. However, consumer demand means that it can be very profitable to trade internationally. From an economics viewpoint, exports and imports are essential because not every country produces every type of good.
If a supplier is not able to deliver its product, it may block the entire chain. The final customer may be left waiting for the spare part of a good, and becoming increasingly dissatisfied with the manufacturer of the washing machine. Yet the responsibility lies elsewhere, as the manufacturer might well be dependent on its own supplier, or its supplier’s supplier. When considering the whole supply chain process, stock control becomes particularly important. When businesses adopt a just-in-time (JIT) method of stock control, they do not hold much stock, which may create problems in the supply chain.
JIC (“just-in-case”) is the traditional method of stock control, which involves holding reserves of both raw materials and finished products in case of a sudden increase in demand (or a problem in the supply chain).
JIT (“just-in-time”) is a modern method of stock control, which involves avoiding holding stock by being able to get supplies only when necessary and to produce just when ordered.
Buffer stock is the minimum amount of stock that should be held (to ensure that production is still possible and customers’ orders can still be fulfilled).
Reorder level is the level at which stock has to be reordered (a form of trigger or signal).
Reorder quantity is the amount of stock that is reordered.
Lead time is the amount of time it takes between ordering new stock and receiving it.
Stock control
The question of holding stock raises two issues in terms of cost:
Holding too much stock is costly (especially in relation to storage and also possible damage).
Not holding enough stock can be costly too (for example an emergency delivery may be more expensive, or customers may decide to go elsewhere, which means lost orders).
Cost of holding stock – if we do not have any stock, there is no cost, but then the cost rises as we store more and more units.
Cost of stock out – if we have a small amount of stock, then the cost of having a sudden surge in demand could be substantial, but this will reduce as more stock is ordered and bought in.
Total cost – by combining the two sets of costs, we can see the minimum point of the total cost. This is called the “economic order quantity” (EOQ); it is the amount that should be ordered for a given time period. The EOQ is one of the oldest calculations in the area of operations management and stock control.
The following seven elements of stock control are important:
The initial order: the first amount of stock delivered.
The usage pattern: how much stock is used over a given time period. Is the usage pattern regular or not? Are there some predictable highs and lows (for example for Christmas, Chinese New Year, or school holidays)? In general, the stock is depleted over time and so is shown by a line with a negative slope.
The maximum stock level: the maximum amount of stock held at any one time.
The minimum stock level: the amount of stock that is kept back as a reserve, also called the buffer stock. The amount of stock should never go lower than this level (otherwise production of finished goods may not be possible, and customer orders cannot be fulfilled).
The reorder level: the level at which stock has to be reordered (this is always a bit higher than the minimum stock level) as a type of trigger.
The reorder quantity: the amount of stock that is ordered.
The lead time: the amount of time it takes between ordering new stock and receiving it.
Optimal stock levels
In order to calculate the optimal level of stock, a business must take several factors into account:
The market
The final product
The stock
The infrastructure
Finance
Human resources
Capacity utilization rate
In sectors where profit margins are low businesses should aim for a high capacity utilization rate. These businesses cannot afford to lose any opportunity to sell their products and so will need to market them accordingly.
Defect rate
A defect is a problem or fault in one item gained during its production. The lower the defect rate, the better. The defect rate is an indicator of quality: it shows the operations manager where quality should be monitored and improved. One of the principles of lean production is to reduce the defect rate as much as possible, ideally bringing it to zero.
Productivity rate
It is a measure of the efficiency of production. The productivity rate is the ratio of output to input in production; it refers to the added value of the business. On its own, the productivity rate is very crude; it needs to be contextualized, particularly in connection to the industry in which a business operates, ideally by establishing comparisons and benchmarks with competitors. Only when comparing it with the industry averages can the operations manager make a judgment and possibly take action.
If the productivity rate is much lower than the industry average, the manager should take remedial action; adopting a lean strategy could help cut down on waste and increase efficiency. Several factors and variables should be considered. Maybe the input is too high, with too many raw materials held in stock that lose value, cannot be used, and are eventually discarded. Maybe the output is too low because of a high defect rate.
If the productivity rate is higher than the industry average, the manager will be pleased with the efficiency of the company’s operations. Nonetheless, the manager may still examine how the plant could be even more productive, using its resources (raw materials, human resources, machines, energy) in a more efficient and sustainable way.
Labour productivity
Labour productivity measures the efficiency of a worker. It represents the value of the output produced by a worker per unit of time (usually per hour). It can help compare the efficiency of different workers and identify if one is under-performing compared to the average. Labor productivity can be calculated for a single worker, for a group of workers, for the entire workforce of a company, or even for the whole country to help make international comparisons as part of macroeconomic analysis. 
Like other rates, this needs to be contextualized, particularly in connection to the industry in which a business operates, for example by establishing comparisons and benchmarks with competitors, or by analyzing trends over a period of time.
Operating leverage
Operating leverage measures how total costs are made up of fixed costs and variable costs in an effort to calculate how well a company uses its fixed costs to generate profits. 
Companies with a high operating leverage must cover a large amount of fixed costs each month, no matter how many units they sell. However, a high operating leverage also means that an incremental increase in sales will result in much more revenue. A business with a low operating leverage may have high costs that vary directly with its sales, but it may have lower fixed costs to cover each month.
Cost to buy (CTB) and cost to make (CTM)
A Gantt chart is a tool used to plan a project. It shows the various tasks (which may overlap), when they are scheduled, and the deadlines and milestones.
5.7 Crisis management and contingency planning
Crisis management is the systematic steps and efforts by an organization to limit the damage from a sudden crisis.
Contingency planning is an organization’s attempts to put in place procedures to deal with a crisis, anticipating it through scenario planning, modeling and simulation.
Crises are unpredictable, and managers must take immediate action to limit the damage for their stakeholders.
Four related factors affect crisis management:
Transparency – stakeholders will want to be kept informed about what is happening. Staff, customers, and local residents will want to be sure, for example, that safety is the priority. Irrespective of its size and share of responsibility in the crisis, the business will need to be honest and tell the truth; this is part of its corporate social responsibility (CSR) and it is linked to ethical practices.
Communication – senior managers will need to communicate in an objective way, despite the temptation to turn this into a media exercise in public relations (PR), with a possible bias and concerns for the reputation of the business rather than for the safety of all involved.
Speed – managers will need to act promptly, both in their actions (for example in the factory or in the workplace) and in their communications (such as through a press conference or media release). This will be a particular challenge, as analyzing the problem and evaluating possible solutions before implementing one may require more time than is available. A rushed decision will not always be the best one.
Control – managers need to do their utmost to prevent further damage and keep the situation under control. Depending on the crisis and its nature, this may be more or less feasible. This is about minimizing further impacts, be they environmental, social, or economic.
Contingency planning
Four factors are particularly important for contingency planning:
Cost – contingency planning may be costly, due to both the planning process itself and the need to train staff to deal with a wide range of events and scenarios, from IT failure to accidents at work to a terrorist attack. However, contingency planning is much less expensive than dealing with a crisis without any preparation (not to mention the lawsuits that could follow).
Time – contingency planning may also be time-consuming, again both in terms of planning and training. For example, health and safety legislation may mean some members of staff have to be trained and retrained in rst aid and emergency response.
Risks – contingency planning will have to assess a range of possible risks (to the workers, to the machines, to the company, and to other stakeholders too, such as suppliers and customers). The degree and level of risks and hazards are also likely to change, so contingency planners will need to review their plans regularly.
Safety – contingency planning hinges on the notion that safety must be the priority, which is why the number one aim of fire drills is to ensure that everyone is kept safe in the case of a real fire.
The key benefit of having people in a crisis management team who have prepared contingency plans is that the plans can be written when modeling a hypothetical crisis (as opposed to a real one). If a crisis occurs and there is no contingency plan in place, it is likely that decisions will be made under great stress and urgency. In this situation, there is a chance that the wrong decision will be made. While members of the crisis management team will not be able to anticipate every crisis, the fact that they are a team and have a contingency plan means that they will, at least, be prepared. If the crisis that occurs is similar to one that has been simulated, it is more likely that the damage will be limited.
5.8 Research and development
Research and development is a form of innovation directly associated with the technical development of existing products or processes, or the creation of new ones.
R&D is important as it can help to extend the product life cycle by developing new ways to use existing products or by indicating new strategic directions for the company.
Successful R&D can lead to many advantages for a business. It can:
Give the business a competitive advantage.
Extend the life of an existing product.
Open up new markets.
Enhance the prestige of the company (by being known as an innovator).
Motivate the workforce (by designing new products and appearing to be at the cutting edge of innovation).
Lead to improvements in quality.
Reduce costs.
However, R&D is not without its problems:
There may be opportunity costs.
R&D may head in the wrong direction.
R&D is time-consuming.
R&D can be fiercely competitive.
There may be ethical issues involved.
Developing Goods and Services that Address Customers’ Unmet Needs
Innovation is essential for any business. Quality can be improved through methods such as kaizen or approaches such as TQM, but most businesses do not simply develop a product and then leave it unchanged forever. If businesses fail to innovate, they may lose market share against existing competitors who do innovate, or against new entrants with fresh ideas and new products or services.
R&D can also allow the business to find gaps in existing markets, or to open up new markets entirely. It is also important to develop goods and services that address customers’ unmet needs, which is why the marketing department and the R&D department should work together. One of the key functions of market research is to identify customers’ unmet needs, i.e. to spot business opportunities. This information can then help the R&D department develop the items for which there is a market demand. This is a key premise of market orientation (as opposed to product orientation). The absence of a dialogue between the marketing and R&D departments could have unfortunate, costly consequences.
Intellectual property rights (IP rights)
Marketing and R&D also overlap on the important issue of intellectual property rights (IP rights). Their ownership by the business constitutes a valuable asset that needs to be protected; without this protection, the business could lose its edge and the competition may be able to develop identical products. According to the World Trade Organization (WTO), IP rights fall into two categories:
Copyright and rights related to copyright.
Industrial property, especially trademarks and patents.
All of these IP rights help to ensure that the business can:
have first-mover advantage
increase profit margins
safeguard continuity of production
develop brand loyalty
have time to develop new products
financially benefit from its creativity, innovation, and R&D.
Innovation
Innovation simply refers to the addition of something new. In business, this may be the incremental or radical improvement of a business idea, product or process in order to be more successful or more competitive.
There are two main types of innovation; product and process.
Product innovation is a type of innovation where new products are created or improvements to existing products are made.
Process innovation is a type of innovation where some parts of the manufacturing or service delivery are improved.
In the case of services, the notion of “service innovation” may cover aspects pertaining to both product innovation and process innovation.
Adaptive innovation is an innovation in existing organizational elements. It is not a radical innovation, but a gradual, incremental one.
Disruptive innovation is an innovation so important that it may change the industry itself.
Factors affecting R&D and innovation
Organizational culture
Past experience (also called path dependence)
Technology
The pace of change
The level of competition
Finance
HR
Legal constraints
Ethical constraints
5.9 Management information systems
Information systems
An information system (IS) is a system composed of databases in the form of electronic les used to record information. In a business context, databases are usually about customers and sales transactions. More advanced IS use software that enables two related practices: data mining and data analytics. These practices are mainly relevant for large companies that collect a lot of data.
Database is a collection of data that is organized to be easily accessed, managed, explored and updated. Companies can then use those findings to predict future situations, and thus to increase revenue, improve customer relations, cut costs, and reduce risks.
Data mining is the process of finding trends, patterns and correlations within large databases. The aim is not to find any hidden pattern nor to test some hypothesis, as in data mining, but simply to reach conclusions based on the analysis of the raw data collected. Data analytics can be used in three ways:
Descriptive analytics is about past performance.
Predictive analytics is about forecasting the future.
Prescriptive analytics is the third phase of business analytics, after descriptive analytics and predictive analytics. Using both historical data and external data, prescriptive analytics explores what may happen in the future.
The Use of Data to Manage and Monitor Employees
Data analytics and data mining are used in different ways to help business managers make informed decisions, for example for market research (to collect data from potential customers), for promotional purposes (targeting certain groups using a selection of criteria), or for credit risk management (profiling how some customers may not be creditworthy).
Data mining techniques are also used by many large supermarket chains and grocery stores for customer loyalty programmes. Many offer free loyalty cards that give members access to reduced prices not available to non-members. Thanks to these cards and all the data they generate, the businesses can keep track of who is buying what, when, where and at what price. Data mining and data analytics can help identify patterns to send certain customers offers, vouchers, discounts or coupons, based on their buying habits. They also help managers to decide when to put items on sale or when to sell them at full price.
For customers, there are advantages and disadvantages. Customers may appreciate the offers and discounts, but they may feel uncomfortable knowing that so much personal information is collected, stored and used (not only their contact details, but also what they buy and when, how much they spend on different types of food and drinks, etc).
Information systems and data analytics can help make decisions about marketing and operations, as well as about human resources (although this may be more controversial).
Within his scientific management methods, Taylor applied scientific methods (such as observation and experimentation) to find the most efficient production process to increase productivity. One of Taylor’s key principles (known as Taylorism) is that managers should monitor their workers’ performance. In the early-20th-century context of Taylor’s factories, managers could visually observe their workers; in the 21st century, in our digital era, computer systems enable this, hence the term “digital Taylorism” to describe the practice of monitoring workers through IT systems.
Technology also makes it possible for employers to spot workers who are underperforming and may be in need of upskilling or retraining, and keep track of all workplace communications by their employees, including reading emails sent from the company’s work email accounts.
Date analytics the process of inspecting and modeling data in order to discover useful information.
Digital Taylorism the use of digital technology to monitor workers.
The use of data to manage and monitor employees
Information systems and data analytics can help make decisions about marketing and operations, as well as about human resources (although this may be more controversial).
Taylor applied scientific methods (such as observation and experimentation) to find the most efficient production process to increase productivity. One of Taylor’s key principles (known as Taylorism) is that managers should monitor their workers’ performance. In the early-20th-century context of Taylor’s factories, managers could visually observe their workers; in the 21st century, in our digital era, computer systems enable this, hence the term “digital Taylorism” to describe the practice of monitoring workers through IT systems. Technology also makes it possible for employers to keep track of all workplace communications by their employees, including reading emails sent from the company’s work email accounts.
Advanced computer technologies and the growth of e-commerce
Advanced computer technologies have enabled the growth of e-commerce, which is now present in most countries. E-commerce can be defined as the buying and selling of goods and services through electronic networks, commonly via the internet. E-commerce has many advantages for businesses selling online:
They can reach a wide target market, resulting in an increased customer base (which may even be international).
There is no need for physical spaces such as expensive shops in city centers; instead, warehouses are the main buildings used for storage (Amazon is a well-known example).
E-commerce platforms make it possible to advertise goods and services in many ways, including text, images and videos, as well as previous customers’ reviews.
E-commerce also has many advantages for customers purchasing online:
It is convenient for consumers because they can shop from home, 24/7, without having to visit a shop physically. This is particularly beneficial for people who live in more rural areas or who cannot easily leave their home.
Consumers can compare the various products on offer before deciding to make a purchase, and they have more choice.
They can buy from other individuals, for example to purchase second hand goods. This is called C2C (customer-to-customer) as opposed to B2C (business-to-customer).
E-commerce also has many disadvantages for businesses and consumers. For example, consumers cannot try or feel certain products before buying them, and businesses now have even more competitors.
Cybercrime and cybersecurity
Businesses and consumers share common concerns regarding cybercrime (an intentional, malicious attack on an organization or an individual by targeting their computer systems and accessing their data, including condential data such as banking details). Consumers may fear that internet security related to the payment process is not strong enough, which may reduce the number of sales and the growth potential for rms. Fraud and ID theft are real risks, which is why companies invest in cybersecurity systems designed to protect and defend their networks, computers, and other related electronic systems and devices from any type of cyberattack.
Cybersecurity is the practice of defending computers and IT systems against malicious attacks.
Critical infrastructure
Critical infrastructures are the systems, networks and assets that are essential for operations – in this case for information systems.
Artificial neural network (ANN) is an element of a computing system designed to simulate how the human brain analyses and processes information. ANN are the foundation of artificial intelligence (AI) as they help to solve problems that are too complicated for humans. ANN can also learn from the data they receive and from the operations they do, hence the expression “machine learning” (a branch of AI). For example: Chatbots are developed with ANNs in order to simulate how a human would naturally behave in a conversation (this is called “natural language processing” or NLP).
Data centers
Data centers are the buildings where computer systems and associated components are housed. From simple computer rooms they have now evolved into carefully designed, specialized facilities that are heavily protected against accidents such as re, power cuts and unauthorized intrusion, either physical (terrorism) or digital (cybercrime, cyberterrorism).
Cloud computing
Cloud computing is the delivery of services via the internet, especially data storage, databases, networking, and software. Using “the cloud” means that someone can retrieve their data from anywhere whenever they want (hence the phrase “on demand”), as long as they have access to the internet. The practice of cloud computing has many advantages for businesses:
Flexibility of work practices: employees can work remotely, from virtual offices in their home.
IT costs may be reduced; operating costs may be reduced too.
Business continuity: in case of accidents, all data is stored and protected in a secure and safe location, and can easily be retrieved.
However, cloud computing has some disadvantages:
Concerns for security, data protection, privacy, and confidentiality.
The location of the servers: these may be in another country where security and privacy laws are different.
Cloud providers may lock businesses into contracts that they may later regret, with less flexibility than anticipated and high service fees.
The difference between big data, virtual reality, the internet of things and artificial intelligence
Big data is extremely large databases that can be analyzed to show trends and patterns. The characteristics of big data were initially called “the 3Vs” – volume, variety and velocity. These considered the amount, diversity and speed at which data is created. Other Vs are sometimes added, such as value and veracity (how useful is the data, and how truthful is it?), as well as other parameters such as comprehensiveness (is all data collected, or just a sample?). Big data comes from many sources, such as the increasing number of devices that are interconnected every second as well as retail e-commerce databases, social media applications, and transportation information, among others. Very large amounts of data are created, which constitute the data sets necessary for data analytics and data mining.
Businesses use big data in many ways, for example:
To track the performance of equipment or of employees, and to make decisions as a consequence.
To help market research, generating marketing intelligence about the needs and wants of customers.
To set prices automatically according to fluctuations in demand and level of interest.
Virtual Reality (VR)
VR is the creation of a simulated three-dimensional environment that can be explored by a person who has entered that computer generated world. The person is immersed within the world, and has interactions with other people, characters or objects.
The internet of things (IoT)
IoT is the network of connected devices that transmit data to one another without human involvement. The connected devices are computerized devices. In a business context, IoT has many applications that keep evolving, for example in the following sectors:
Retail, shopping and supply chain management: managers do not need to check the stock themselves, as stock control can be automated and reorder is done via IoT.
Health: wearable devices that monitor heart rate, sleep and activity patterns, communicating with medication dispensers and healthcare providers.
Agriculture: “smart farming” with sensors to monitor natural conditions such as humidity, air temperature and soil quality, connected to automated irrigation and fertilization systems.
Artificial Intelligence (AI)
Artificial intelligence (AI) is the ability of computers (and other machines such as computerized robots) to mimic humans, especially how humans think and process information. AI is possible thanks to artificial neural networks (ANN) processing large amounts of data faster and better than humans could do.
