Operations
Operations
Operating systems
Access to raw materials, machines and workers does not guarantee that you will
obtain the outcomes you require – organisation is essential. Procedures must be
established which control and direct what is done, whom it is done by and when.
This is known as an operating system .
Operations management
This concerns the purchasing of materials that normally is the responsibility of the
Purchasing Department.
LIST A
B the duration of time which will elapse between this order and any future orders
Once these issues have been considered it is possible to identify those suppliers which
offer the best terms. When making this decision the following should be taken into
account.
LIST B
Choosing supplier:
It is unlikely that one single supplier will offer all of these benefits.
Consequently, when purchasing materials, decisions must be taken about the quantity
required (LIST A) and from whom (LIST B). Getting the correct ‘MIX’ for the
organisation in terms of how much and from whom is essential. This is known as the
PURCHASING MIX.
STUDY QUESTIONS
1. Explain the importance of Operations in organisations
2. Describe the IPO process
3. Describe the elements of the Purchasing Mix
From: Mr McGowan
Date: Today’s
You’re a buyer for HGS Ltd and there are 10 items needed for the company.
You’re task is to source the items at the lowest possible cost. You can use the Internet
to research and find the cheapest possible prices BUT for the appropriate features
and quantity of the items.
You will need to keep a record (hyperlinks are good enough) of where the deal was and
obviously the price. The team with the lowest total wins. You must have an entry for
every item or you are disqualified!
SOURCE LIST
ITEM QUANTITY SUPPLIER COST
(inc. delivery)
1 GB Memory Stick 3
Wireless ergonomic 40
keyboard
Microsoft Office School
2007 License
Headphones with 20
Microphones
Duplex Colour 1
Printer
i-book 1
Computer Chair 40
ID Badges 60
Mousemats with 40
Corporate Logo
Webcam 2
TOTAL
Issuing stock
A physical stock count (stock taking) MUST be carried out at least once per
year in order to provide closing stock figures for the Final Accounts.
• Storage, insurance, lighting and handling costs will all be high if too much stock
is held.
• Large stock levels will occupy space in the premises. There may be more
productive ways of using this space, such as improving the layout of the factory.
• The opportunity cost will be high. Money tied up in stocks could be used to buy
fixed assets, for example.
• The business may not be able to cope with unexpected increases in demand if its
stocks are too low. This might result in lost customers if they are let down too
often.
• If deliveries are delayed the firm may run out of stock and have to halt
production. This might lead to idle labour and machinery while the firm waits for
delivery.
• The firm is less able to cope with unexpected shortages of materials. Again, this
could result in lost production.
• A firm which holds very low stocks may have to place more orders. This will raise
total ordering costs.
STORAGE OF STOCK
Advantages include:
specialist staff maintain stocks by following agreed procedures for its control –
only issued when ‘authorised’.
Disadvantages include:
Advantages include:
2 orders of new stocks reflect actual production usage rather than a standard
amount irrespective of needs
Disadvantages include:
Analysts said that supermarkets "had taken their eye off the
ball" and were focusing more on reducing waste and Mystery shoppers found empty spaces
packaging than getting items in stock. Tesco said availability on shelves
was high and queried The Grocer's study methods.
Mystery shopper
The Grocer used mystery shoppers to check price and availability of 33 items - picked to
Sainsbury's, Waitrose and Tesco performed very similarly to one another; while the best two
supermarkets for availability were Asda and Morrisons.
But overall, the number of items out of stock was much higher than for the previous six-
month period. According to Gaelle Walker, reporter for the Grocer, supermarkets were
failing in "basic shop keeping".
"The number of out of stock items has doubled in all the We have our own, very
supermarkets... there seems to be a bit of a problem here. sophisticated stock control
measurements and
availability is much better
"Analysts I spoke to believe the supermarkets have taken than the picture painted by
their eye of the ball; become distracted by side issues such the Grocer study
as reducing waste and packaging," she said.
Tesco spokesman
But a spokesman for Tesco, the UK's biggest supermarket
chain, told BBC News that there was no link between reducing waste and availability.
"I fail to see how environmental measures have any effect whatsoever.
"What I do know is that the Grocer sample of 33 products is small and that it only takes one
store to be down on the items, because say of a rush or seasonal factors, to skew the
figures.
"We have our own, very-sophisticated stock control measurements and availability is much
better than the picture painted by the Grocer study."
STUDY QUESTIONS
Originated in Japan during the 1960s and involves keeping stock levels to a minimum.
Stocks arrive just-in-time to satisfy production needs. Raw materials are not
purchased until they are required and finished goods are not produced unless firm
orders have been received.
Advantages Disadvantages
• It improves cash flow since • A lot of faith is placed in the
money is not tied up in stocks reliability and flexibility of
suppliers
• The system reduces waste, • Increased ordering and admin
obsolete and damaged stock. costs
The word Kan means "card" in Japanese and the word "ban" means "signal". So Kanban refers to
"signal cards".
Let's say one of the components needed to make widgets is a 42" stem-bolt and it arrives on
pallets. There are 100 stem-bolts on a pallet. When the pallet is empty, the person assembling the
widgets takes a card that was attached to the pallet and sends it to the stem-bolt manufacturing
area. Another pallet of stem-bolts is then manufactured and sent to the widget assembler.
"I don't like to let something like that go," she says. "That's
really important for people who buy our cars."
Lean production
Pulling the cord, called "andan", is part of Toyota's "lean" production system, which means
that it has been able to produce cars much more cheaply,
and to a higher quality, than its US rivals. Our philosophy is to
think globally but act
locally
In 1998, it took Ford and GM 50% more hours to make a car
than Toyota - and the difference was so great that GM did not
make a profit on any of its cars. Jim Press, President, Toyota
North America
GM's new manufacturing system is vital to its survival, says the man in charge of
implementing it worldwide, Gary Cowger.
GM now has five of the top 10 most productive US assembly plants, according to Harbour
Consulting, and has substantially closed the productivity gap
with Toyota. We are putting cost
pressures on our suppliers,
In 2006, Toyota could build an average car with just 29 but costs are critical to our
hours' labour, while it took GM workers 33 hours - a big survival, and we are facing
the same pressures as they
improvement from 1998. are
GM is cutting its US output by one-third and has cut its US blue-collar workforce by 80%
since 1985, according to the Center for Automotive Research.
GM once produced one of every two cars sold in the US. Now it is down to one in four.
GM has had a more difficult recent history with its suppliers, Federal Mogul: December 2001
having spun off its parts subsidiary, Delphi, several years source: CAR
ago.
GM says its supplier relationships are critical and it needs to bring them into its global
manufacturing system. But it also admits that, with the company losing billions, it is
squeezing the suppliers to lower their prices.
"We are putting cost pressures on our suppliers, but costs are critical to our survival, and we
are facing the same pressures as they are," says Mr Cowger.
As a result, many suppliers like Delphi plan to shift much of their production out of the US,
to Mexico or East Asia, where labour costs are lower.
Many US-based suppliers went bankrupt in the past few years, including Delphi.
One of the key advantages of the new "lean production" system is that it allows companies
to get closer to consumer needs.
The production run is adjusted at the Georgetown plant, and extra Saturday working is
added, only when computerised orders from the dealer network show it is needed.
And individual buyers can alter what they want in their car - changing the paint colour or
specifications - right on the production line, by notifying their dealers.
GM is also aiming at reducing the product cycle time - the length of time it takes from
designing a new car to actually putting it on the road.
And by using a global design system, it can use existing Opel designs for its Saturn model in
the US, or Holden (Australia) models for its new Pontiac G8.
And if GM has made strides in cutting costs, it perhaps still has some way to go before it
starts making enough of the right kind of cars.
"Their problem is on the demand side," says Garel Rhys of Cardiff University.
"For too long, they took they eye off the ball, and they are now being caught out by
changing consumer tastes.
"And there is still a problem of perception. Although their quality has improved, consumers
don't yet recognise it, and Japanese cars can command a $5,000 quality premium in the
marketplace."
Culture change
"I hope they make it - but I am not optimistic they all will be
able to," says James Womack, an expert who has advised
many global companies, from Tesco to Boeing, on the
advantages of lean production. The new boss of Ford introduced lean
production at Boeing
Mr Womack says it has to be something that is inculcated in all the company's workers, from
"GM has caught up on assembly plants, but Toyota is still ahead on suppliers, product
development and a problem-solving approach to issues.
"For too long, managers at US car companies were in denial about their problems."
Toyota, for its part, says it does have a worldwide company culture that transcends Japan,
according to Jim Press.
"I think we have a hybrid system where we take the best of every culture and distil that into
a system that really works effectively in every country where we do business - and the
ability to transplant that system throughout other countries is the key to growing globally.
Toyota's only worry appears to be whether, as it expands so fast, it can maintain that culture
- and its quality - intact.
Toyota's President, Katsuaki Watanabe, recently said in a newspaper interview that he didn't
care if Toyota became the biggest car company or not.
STUDY QUESTIONS
1. Describe lean production
2. Discuss the advantages and disadvantages of lean production
3. Explain the key role suppliers play in lean production
4. What is Kaizen?
5. In your opinion, what do you think the future of the car industry will be like?
Definition
In our introduction to production and operations management ("POM") we suggested
that there are several different methods of handling the conversion or production
process - Job, Batch, Flow and Group. This revision note explains these methods in
more detail.
Introduction
The various methods of production are not associated with a particular volume of
production. Similarly, several methods may be used at different stages of the overall
production process.
Job Production
With Job production, the complete task is handled by a single worker or group of
workers. Jobs can be small-scale/low technology as well as complex/high technology.
Low technology jobs: here the organisation of production is extremely simply, with the
required skills and equipment easily obtainable. This method enables customer's
specific requirements to be included, often as the job progresses. Examples include:
hairdressers; tailoring
High technology jobs: high technology jobs involve much greater complexity - and
therefore present greater management challenge. The important ingredient in high-
technology job production is project management, or project control.
Advantages Disadvantages
Easy to organise production Production costs likely to be high
Can customise orders Production time may be longer
‘one-off’ orders can be Investment in machinery may be
accommodated higher as specialist equipment may
Workers involved in entire be needed
production process from start to
finish
Batch Production
Batch methods require that the work for any task is divided into parts or operations.
Each operation is completed through the whole batch before the next operation is
performed. By using the batch method, it is possible to achieve specialisation of labour.
Capital expenditure can also be kept lower although careful planning is required to
ensure that production equipment is not idle. The main aims of the batch method are,
therefore, to:
This technique is probably the most commonly used method for organising manufacture.
A good example is the production of electronic instruments.
Batch methods are not without their problems. There is a high probability of poor work
flow, particularly if the batches are not of the optimal size or if there is a significant
difference in productivity by each operation in the process.
Batch methods often result in the build up of significant "work in progress" or stocks
(i.e. completed batches waiting for their turn to be worked on in the next operation).
Advantages Disadvantages
Allows flexible production Production runs of small batches
Stocks of part-finished goods can be can be expensive to produce
held and completed later If production runs are different
Workers can specialise there may be extra costs and time
delays in setting up different
equipment
Repetitive work for employees
Flow Production
Flow methods are similar to batch methods - except that the problem of rest/idle
production/batch queuing is eliminated.
Flow has been defined as a "method of production organisation where the task is
worked on continuously or where the processing of material is continuous and
progressive,"
Flow methods mean that as work on a task at a particular stage is complete, it must be
passed directly to the next stage for processing without waiting for the remaining
tasks in the "batch". When it arrives at the next stage, work must start immediately on
the next process. In order for the flow to be smooth, the times that each task
requires on each stage must be of equal length and there should be no movement off
the flow production line. In theory, therefore, any fault or error at a particular stage
can halt the entire process.
In order that flow methods can work well, several requirements must be met:
(1) There must be substantially constant demand
If demand is unpredictable or irregular, then the flow production line can lead to a
substantial build up of stocks and possibility storage difficulties. Many businesses using
flow methods get round this problem by "building for stock" - i.e. keeping the flow line
working during quiet periods of demand so that output can be produced efficiently.
(4) Each operation in the production flow must be carefully defined - and recorded in
detail
(5) The output from each stage of the flow must conform to quality standards
Since the output from each stage moves forward continuously, there is no room for
sub-standard output to be "re-worked" (compare this with job or batch production
where it is possible to compensate for a lack of quality by doing some extra work on the
job or the batch before it is completed).
STUDY QUESTIONS
Job production
Batch production
Flow production
(a) Identify a product that Toyota would use in their organisation that would be
made by each of the three different methods of production.
(b) Say what key features of each type of operation method make it most suitable
for the production of that particular product.
(c) What factors will affect the choice of operation method used by an
organisation?
(d) Young Burberry Ltd. is bringing out a new line of synthetic hats. They will have a
variety of designs, colours and sizes. Which method of production would you advise
that they use? Give reasons for your choice of production method.
Making dice
Each dice must meet the rigorous quality standards, which are set by the
customer's buyers. Each team must decide how they can best ensure
their dice are of an appropriate quality.
The Group Leader will have overall control of the group and be
responsible for making sure that all team members are following
instructions
Resource Cost
1 Scissors £7
2 Glue £7
3 Paper (per sheet) £2
4 Ruler £5
5 Pencil £5
Rules
• Only completed dice can be sold
• Rejected dice have a scrap value of £5.00
• Any paper not used can be resold back to the supplier for £1.00
Team one will produce dice one person per a dice working individually with each
person completing all stages in production before they move on to the next dice all
dice should be produced exactly as the template. The purchasing manager will be
responsible for buying the resource and recording the investment on the sheet
provided
This group need to work on one aspect of the production at a time; no one can
complete other parts of the production until the batch is complete. For example
everyone in the group produces two templates and then everyone in the group
marks the dice with the dots then folds etc. The team should decide how many dice
they are going to produce before starting production
This group should split the task into individual processes with specialist workers
involved at each stage (decide who is best at doing what) this should resemble a
production line where someone marks out the template then passes on the paper to
be cut, this person then passes on the template to be marked up etc.
GM in decline
For the grandparents of Claire McClinton, who made the journey from the poverty of the
rural south to Michigan just after World War II, it was like arriving in another world.
GLOBALISATION SERIES
"None of their children ever went hungry, we all had a good
education, we had good jobs, and owned our own home. We
thought we were living the American dream," she told the
BBC.
"We respected the union then," she said. "We believed it was the union that had delivered
us the American dream."
GM WORKER'S VIEW
In the 1950s the Detroit area had the highest median
income, and highest rate of home ownership, of any major
US city. But times are very different now.
She works in a shelter feeding the poor, and would like her union to get more involved in the
community. And she is not sure how much longer she will have a job - and if she retires,
whether she will have any benefits.
GM has already told the unions it wants to cut the generous retirement and health care
benefits it promised its workers in the halcyon days of success.
The company does plan to build more car plants in the future - but in emerging markets like
China and India, not in the United States.
Toyota rising
But 400 miles south of Flint, another group of car workers are
feeling very different.
And it is set to overtake GM this year as the world's largest TOYOTA WORKER'S VIEW
car company by sales.
"This is the top notch job in the area," she told the BBC.
She doubled her salary when she joined Toyota, and the
company provides a good health care plan for her family,
including dental coverage for her two children.
This is the top notch job in
And she says that Toyota has also helped to provide better the area
schools for her children by putting money into the town's
budget. Laura Wilshire, Toyota worker,
Georgetown, Kentucky
She says more is expected of workers at Toyota than her
previous job in a convenience store, but she doesn't mind taking responsibility.
"If a seatbelt isn't right, I stop the line until it is fixed - that is an important issue as it could
affect people's safety."
Toyota encourages workers to take personal responsibility for defects, and to work together
to fix them.
That attitude has given them a well-deserved reputation for quality and reliability - and the
Camry has been the best-selling car in America for the last ten years.
Laura says she feels sad when she reads in the papers about what is happening to
autoworkers in places like Flint.
Dominance to decline
Now, according to Professor Garel Rhys of Cardiff University, the US Big Three are facing
their greatest challenge ever in their entire postwar history.
No other car companies had the capital or the know-how to enter the global car business.
GM's main US rival, Ford, was half its size. The largest foreign carmaker, VW, was little
bigger than GM's own German subsidiary, Opel and only had one model - the VW Beetle.
And Toyota was not even on the horizon. It made 23,000 cars in 1955 in Japan, compared
to 4 million manufactured by GM in the US.
It was left to European manufacturers to develop disc brakes, rack-and-pinion steering, air-
cooled and diesel engines.
And the mass production system discouraged innovation because it was so expensive to
introduce fundamentally new models.
Meanwhile, Toyota was also making a virtue of adversity, changing its production system to
become leaner and more efficient than its rivals.
The Japanese located their plants in low-wage, non-union areas of the US and brought new,
more flexible production methods as well.
As a result, they could make money on smaller cars and change models more frequently.
The US car companies tried and failed to design a competitive small car.
They also experimented with Japanese production methods but neither seemed to do the
trick and close the quality gap.
According to James Womack, author of the influential book The Machine that Changed the
World, it was easy for everyone to say they accepted lean production, but much harder to
actually implement it.
SUV sales soared from one to four million with 60% of the Big Three's sales - and nearly all
of their profits - coming from SUVs.
The SUVs transformed the fortunes of Chrysler, dominating with its Voyager minivan and
Jeep Grand Cherokee, and Ford which had the best-selling SUV, the Ford Explorer.
Last year,the price of gasoline in the US reached a record $3 per gallon in most states.
As a result, SUV sales slumped, and the sale of smaller vehicles rose.
At this year's Detroit Auto Show, Ford and GM made it clear that they were taking the
environment seriously, and produced electric-powered concept cars.
But these cars are years, if not decades, away from reaching the public, while Toyota is
already rolling out its hybrid electric-petrol engine across its entire range.
Downsizing lessons
There is real doubt in the industry that all three can survive.
GM hopes to survive as a global car company which increasingly operates outside the US.
And Ford may survive by selling some of its more profitable European subsidiaries.
But even if they manage this, it is sad end to what was once a central element in the
American industrial dream.
GLOBAL CAR COMPANIES COMPARED
STUDY QUESTIONS
What is Quality?
Consumers, faced with many goods at similar prices, now think about quality when
making choices.
Consumers are more aware. Magazines such as Which? Contain reports on the quality of
certain products.
Consumers also have more disposable income and higher expectations than ever before.
For the producer the aim is to ensure customer satisfaction and reduce the return of
faulty goods.
Organisations now recognise the importance of the view of the customer in the setting
of quality definitions.
Legislation and competition have also forced firms to improve the quality of their
products.
Total Quality Management uses the principles of ‘Quality Assurance’ but takes a
fundamentally different view of quality. The principle upon which this system
operates is that in order to achieve ‘quality’, the requirements, specifications,
and needs of the customer or client come above everything else. The culture
shift must be made from ‘we know what quality is’ to ‘You tell us what you want
and that will be our definition of quality’.
TQM is a method designed to prevent errors, such as poor quality products from
happening.
In practical terms TQM assumes that the next person with ‘ownership’ of the
good, or the next person to use the good, are customers or clients – not simply
the person who ends up purchasing the good for his/her own use.
For example, on the production line in a factory, the next person down the line
from you is your customer or client . You must therefore ensure that when the
part-assembled car leaves you to move on to the next worker, any work you have
done on it is of the highest standard and quality – just as you will expect to
receive the car parts from the worker in front of you.
Quality Chains – failure to meet the requirements in any part of the quality chain
creates problems, such as delays in the next stage of production.
Company policy and accountability – there will only be improvements in quality if there
is company-wide quality policy. TQM must start from the top with the most senior
executive and spread throughout the business to every employee. People must be
totally committed and take ‘a pride in their job’.
Control – consumer’s needs will only be satisfied if the business has control of the
factors that affect a product’s quality. These may be human, administrative or
technical factors.
Monitoring the process – TQM relies on monitoring the business process to find
possible improvements.
Teamwork – TQM stresses that teamwork is the most effective way of solving
problems. The main advantages are:
• A greater range of skills, knowledge and experience can be used to solve the
problem
• Employee morale is often improved
• Problems across departments are better dealt with
• A greater variety of problems can be tackled
• Team ideas are more likely to be used than individual ones
• Focus clearly on the needs of customers and relationships between suppliers and
customers
• Achieve quality in all aspects of business, not just product or service quality
OPERATION
AND
CONTROL
OF PROCESS
CONSISTENTLY
SATISFIED
CUSTOMER
• TQM will be only work if there is commitment from the entire business.
Costs of Quality
Firms will want to monitor the costs of quality control carefully. All businesses are
likely to face costs when trying to maintain or improve the quality of their products and
services.
• The cost of designing and setting up a quality control system. This might include
the time used to ‘think through’ a system and the training of staff to use it.
• The cost of monitoring the system. This could be the salary of a supervisor or
the cost of an electronic sensor.
• There will be costs if products do not come up to standard. Faulty goods may
have to be scrapped or reworked. Product failures might also result in claim
against the company, bad publicity and a possible loss of goodwill.
• The costs of improving the actual quality. This may be the cost of new
machinery or training staff in new working practices.
• If the whole quality system fails, there may be cost in setting it up again. Time
may be needed to ‘rethink’ or adjust the system. Retraining might also be
necessary.
STUDY QUESTIONS
1. Describe the features of TQM
2. What benefits does TQM bring to an organisation?
3. What potential problems can arise from implementing TQM?
4. Explain the costs associated with Quality
5. Research 2 UK companies that implement TQM and find out the effect of
TQM on their profitability.
The diagram below shows the ‘iceberg’ effects of quality failure costs – the failure
costs above the water line and the more far reaching failures below the water line.
Although quality control systems can be costly, it is argued that their benefits
outweigh the costs. The actual quality of the product should be improved, so customers
are more likely to purchase he product. Business costs may be cut if faults in products
are identified before the product reaches the market. The costs of failure once the
product has reached the market are likely to be much higher than those during
manufacture.
The Green Award went to hybrid champion Toyota, ahead of Honda Jazz is the most reliable car in
runner-up BMW, which won the Road Testers' Award. the UK, Which? readers say
Some models by US marques Chevrolet, Chrysler and Dodge were criticised due to safety
concerns.
Volvo's safety image was let down by concerns about seatbelts, which enabled Ford Galaxy
and Toyota Auris to jointly grab the Safety Award.
Which? Car Awards 2007
Lexus won the Ownership Award ahead of Honda, though the Reliability: Honda
Honda Jazz was this year's most reliable individual model. Best Manufacturer: Toyota
Safety: Toyota Auris/Ford Galaxy
Safety-conscious car buyers should steer well clear of the Green: Toyota
Chrysler Voyager, a people carrier, the Dodge Caliber, a
Ownership: Lexus
medium-sized car, and the Chevrolet Matiz, a rebadged small
Daewoo, Which? said. Road Testers: BMW
Wooden Spoon: Dodge/Jeep
The only serious non-Japanese contender for the Reliability Consumer group slates dodgy cars
Award was Korea's Hyundai, which came joint third -
alongside five Japanese marques: Daihatsu, Lexus, Mazda, Subaru and Suzuki, with
Mitsubishi following closely behind.
Ford and Nissan also scored highly in the reliability stakes, though when considered at a
group level they were both pulled down by their sister-marques.
Renault, Nissan's partner, and Land Rover, which is owned by Ford Motor, were at the bottom
of the reliability league table.
STUDY QUESTIONS
As indicated earlier, the success of any organisation depends upon its ability to plan for
the future and sets targets for achievement. However, plans – even good ones – do not
guarantee success. Success requires organisations to achieve what was intended
through the implementation, reviewing and monitoring of the plan. As in other areas of
an organisation it is essential to monitor and control working practices as they relate to
operating systems. In order to do so, it is necessary to study the work being carried
out.
BPB is a technique used by some businesses to help them discover the ‘best’ methods of
production available and adopt them.
BPB involves:
• Finding out what makes the difference, in the customers eyes, between an
ordinary supplier and an excellent supplier.
• Setting standards for business operations based on the best practice that can
be found.
• Applying both competitors’ standards and their own to meet the new standards
and, if possible, exceed them.
Drawbacks
• There may be resistance from the market leaders to provide their performance
figures to be used by competitors.
STUDY QUESTIONS
1. Explain the process of benchmarking
2. Discuss the advantages and disadvantages of benchmarking
Originally the idea of American business guru W. Edwards Deming, the idea was
taken up in Japan after the Second World War.
The idea was that the front-line production workers – the people who knew best about
the product – would meet regularly with supervisors and managers (engineers and
salespeople may also be involved) in order to discuss ways of improving work.
Production
Production
Worker Circle
Worker
Leader
Manager
Supervisor
Production
Production
Worker
Worker
Supervisor
Quality circles offer more responsibility to the production worker. They are more part
of the decision-making process, which is called empowerment.
Quality control circles are only likely to work if they have the support of both
management and employees. Businesses have to want worker participation and
involvement in decision-making, and set up a structure that supports this. Workers and
their representatives also need to support the scheme. Employees must feel that their
views within the circle are valued and make a contribution to decisions.
Payment systems
The search for a way to motivate, reward and even control labour has led
managers to devise a variety of payment systems.
Overtime
There are instances where employers operate a time rate system, but also offer
overtime payments when individuals work for more than their normal number of
hours per week. Overtime payment systems are common in the construction
industry, for example.
Commission payments
When looking to establish payment systems for a sales force, it is very common
to base this too on a flat-rate wage supplemented by some form of commission
based on sales volume or value achieved. In some organisations the greatest
part of the wage received by the sales force comes in the form of commission
paid. This has led to complaints that such workers may use pressure tactics in
order to achieve sales – and maintain their own income levels.
Bonuses
Another common production payment system is one that operates with a flat
rate of pay that is then supplemented by a bonus directly related to the output
each worker, or group of workers, achieves. Such bonuses might be related to
setting targets for:
• volume of output,
• quality standards achieved,
• reductions of wastage,
• improved machine use,
• reduction in the loss of working days through workplace accidents. (This last
example is very common in the North Sea oil industry.)
Incentives to professionals
It is generally accepted that professional employees, for example dentists,
doctors and other health service specialists, receive a basic salary from their
employing health authority, but can enhance this by undertaking private patient
work for which they receive payment on an individual case basis. There has also
been an increase in ‘no win no fee’ legal cases in recent years. Based on a
system devised in the USA, and particularly common in civil law suits for damage
claims, the client only pays the lawyer a fee if the outcome of the case is in his
favour. The percentage rate of the fee will be set out and agreed before the
legal action is started.
Profit-sharing schemes
Although not widespread in Britain, there has been a move in recent years for
employers to use systems that include a share of pre-tax profits as part of the
payment made to the workforce. Some employers feel that this system is likely
to increase the commitment from the workforce, not only in terms of output,
but also in overall terms to the organisation itself. However, others are less
enthusiastic and feel that the relationship between daily output and annual
profit-share payments is too remote to be an effective motivator.
Employers will have several objectives that they want to achieve when devising
payment systems for their employees. These include:
• Motivation
Many people believe that workers are motivated by money, and this is
reflected in the number of employers who use performance related payment
systems.
• Cost
As one of the objectives of the employer is to maximise profits he will wish
to keep the cost of labour as low as possible. The procedures for calculating,
recording and making payments to employees should also be cost effective.
• Prestige
Employers may want to have the reputation of being ‘good payers’ rather than
‘poor payers’. This improves their ability to recruit and retain workers,
which, in the long term, is cost effective for the organisation.
Employees will also have a number of objectives that they want to be able to
meet from the payment they receive.
• Purchasing power
The higher the wage the employee gets the more he can buy and the higher
his standard of living will be. Workers will always try to win wage increases
higher than the present (or expected) level of inflation – as this means that
they will continue to be able to raise their standard of living.
ACTIVITY
For each of the Payment Systems create a T-chart like the one below and fill it in.
Payment System
Description
Advantages Disadvantages
GROUP TASK
The Product
The nature of the product itself will influence the type of distribution channel chosen.
• Technically complex goods also need a direct link between the producer and the
consumer. This is so that any problems which arise from installation can be
quickly dealt with, without the need to go through an intermediary.
• Goods or services which are tailor made tend to have more direct channels so
that the consumer’s needs can be passed to the producer.
• Goods which are heavy or are packaged in non-standard shapes are likely to
require a direct channel of distribution. If handling is difficult, the cost of
distribution is likely to find rival brands on shop shelves.
• Producers wishing to sell large quantities of low valued goods are likely to use a
wholesaler. They will not want to keep stocks of low valued goods if they are
receiving order for more highly priced goods. Selling through wholesalers will
mean they can sell low valued products in bulk, as quickly as possible.
The Market
Large and dispersed markets usually require intermediaries. Smaller, local markets can
often use a system where consumers buy directly. This is also true of the size of an
order, where smaller orders can be sent by a more direct channel of distribution.
The market segment at which the product is aimed may influence the retail outlet at
which the product is made available. For example, products aimed at travelling business
people may be sold near to a railway station.
Legal Restrictions
Legislation may influence the channel that can be used for particular product. Certain
drugs, for example, can only be sold by pharmacists through a prescription.
Larger companies are often able to set up their own distribution networks.
Physical Distribution
• Failure to deliver a product in the right quantities at the right place and at the
right time can damage an effective marketing effort.
• The cost of physical distribution can be high – in some cases higher than the
cost of actually producing the product.
Two aspects of physical distribution are important to a business holding stocks and
transporting products.
Holding Stocks
Ideally a business would be able to guarantee every customer the product they wanted,
whenever they wanted it. To do this a firm would have to hold huge amounts of stock.
Holding excessive amounts of stock is very costly. Holding very low stock levels,
however, could mean turning down orders.
The solution is for a business to assess the level of stocks needed to maintain an
agreed level of customer service. This often means holding enough stock to satisfy
regular orders, but not enough to deal with sudden changes in demand.
Transporting Products
This is concerned with how goods can be physically delivered to markets. Firms need to
consider the relative costs and speed of transporting their goods by road, rail, sea or
air. For example, aeroplanes are faster than ships when transporting exports for the
UK. However, firms must decide whether this advantage outweighs the costs which
result from using this mode of transport. There are times when the nature of a product
dictates the transport. For example, an Orkney Islands based firm which sell freshly
caught lobster to Paris restaurants has little choice but to fly the product to France.
When transporting goods, firms must also consider possible damage to or deterioration
of goods. Packaging may help to reduce damage and deterioration, for example, if
vacuum packs are used.
STUDY QUESTIONS
1. What is a Distribution Channel?
ISO 9000 - ISO is a network of the national standards institutes of 148 countries, on
the basis of one member per country, with a Central Secretariat in
Geneva, Switzerland, that coordinates the system.
Deming Prize – Japan’s top quality award, named after W. Edwards Deming, the world
famous quality guru. Estabished in 1950 by the Japanese Union of Scientists and
Engineers (JUSE). It’s main concern is the implementation of TQM in the firm. Previous
winners include Kawasaki, Toyota and Fuji and Hitachi.
Baldridge Award – America’s top quality award. It’s key factors are: customer focus
and customer quality, continuous improvement, and leadership. Previous winners include
Motorola, Boeing, AT&T and Federal Express.
1 Discuss the factors which must be considered when deciding on the most
effective channel of distribution for a product.
(7 marks)
(ii) Describe the benefits of a quality standard to both an organisation and its
customers. (3 marks)