4.Operations Management

 

Unit 4.1

PRODUCTION OF GOODS AND SERVICES

What is production?

Production is an economic activity by which resources become goods and services. It converts the inputs into outputs.

Operations Management

Operations management involves managing business resources (inputs) throughout the production process to produce finished goods or services(output).

OM consists of following activities

1. Use resources in the most cost-effective way

2. Produce output to meet the consumer demand

3. Meet the quality standard of the products

Differences between production and productivity

Production is the process by which raw materials are transformed (converted) into finished/semi-finished goods.  

Productivity shows the efficiency or capacity to produce output. It measures the amount of output produced against used inputs.

Productivity = Output/Input used

a. By labour   - Productivity = Total output / Number of employees

b. By machine - Productivity = Total output / Number of machines

c. By hours - Productivity = Total output / Number of hours

 

Example: A factory employs 50 workers. Annual output is 8250 units in 2018. What is the productivity per worker?

Productivity = 8250/50= 165 units per worker.

Each worker produced 165 units in the year 2018. 

FACTORS AFFECTING THE PRODUCTIVITY OF THE BUSINESS.

1. Labour absenteeism

2. Machine breakdown

3. Skill level of workers

4. Level of employee motivation

5. Capital or labour intensive business.

 

Measures to improve labour productivity (May/June 2016 Q.No-1d) (May/June 2021 Q.No-2b) (Oct/Nov 2022, Q.No-4d) (May/June 2025 Q.No.2b. P-2)

1. Improve the skill level of workers- Providing training

2. Improve the motivation of workers- Financial and non-financial motivations

3. Introducing more automation or better technology- Capital intensive measures

4. Improve the quality standards using the methods of quality control or assurances to reduce the wastage of resources.

5. Introduce lean production methods such as JIT, Kaizen method, etc.

 

INVENTORY MANAGEMENT

What is inventory (Stock)?

            Inventories are the resources kept in the business for smooth running of business. It includes raw materials, semi-finished goods and goods ready to use.

Why businesses hold inventories? (Mar 2017 Q.No-2c) (May/June 2021 Q. No 4a P-2) (Oct/Nov-2015 Q.No2c) (Feb/Mar 2023 Q.No-2c) (Oct/Nov 2023 Q.No.2c) (Feb/Mar 2025 Q.No.3a P-2)

1. To continue production against delay from suppliers

2. To reduce wastage of resources

3. To meet the demand of consumers

4. To get the seasonal resources and continue the production without delay

5. To benefit from economies of scale-discount from bulk purchases

6. To reduce transport costs

 

Cost/ Problems of holding inventories. (Oct/Nov 2017 Q.No-4a.P-2) (May/June 2016 Q.No-1c) (Oct/Nov 2023 Q.No.2d)

1. Warehousing costs – the business will need to rent or purchase a warehouse to store the inventories.

2. Handling costs – inventories need to be moved into and out of the warehouse so workers cost may increase.

3. Shrinkage costs – damaged, lost or stolen inventories will need to be replaced.

4. Insurance costs – these will cover the cost of losses from shrinkage.

5. Requirement of large working capital – working capital is ‘tied-up’ in inventories so it would affect the liquidity of business.

 

LEAN PRODUCTION (Oct/Nov-2018 Q.No-3c)

The production of goods and services with minimum waste of resources is known as lean production. It aims to lower the costs of production by reducing waste to a minimum while maintaining, or even improving, the quality of the finished product.

Benefits of lean production

1. New products can be brought to the market more quickly.

2. Quality of the product is improved

3. Wastage of time and other resources is eliminated.

4. The costs of holding inventories is eliminated.

5. Unit costs are reduced, which will increase the profit made on each unit sold or enable a business to reduce its price and be more competitive. This will increase sales, revenue and profits.

 

METHODS OF LEAN PRODUCTION

1. JIT production

2. Kaizen.

3. Cell Production

1. Just in time production (Mar 2020 Q.No-3d) (Oct/Nov 2021 Q.No-1b)

            In this method no inventories are held by the business. Here inventories are arrived from the supplier when production is started. Like that finished goods are produced according to the demand. The system originated in Japan first.

Advantages of just-in-time production are:

1. No need more capital in production processes

2. Warehouse cost can be reduced because no need to store much inventories.

3. Reduces wastage or obsoleting of resources by holding minimum quantities.

4. The finished product should be cheaper for the consumer to buy.

5. Improve working capital/cash-flow as less money tied up as inventory in business.

Disadvantages of just-in-time production are:

1. Limited inventories might affect the continuous production if delayed at any reasons- in case of imported resources

2. Production could be halted if the wrong goods were delivered at the last minute

3. Difficult to continue production with seasonal resources such as cotton, fruits, etc.

4. No economies of scale possible as purchases done at minimal quantities.

2. Kaizen (Continuous Improvement)

Kaizen is a Japanese term meaning ‘Continuous Improvement’. In this method the efficiency of employees is improved to increase the production and quality of goods without affecting costs. Employees are given freedom to make suggestions to contribute better. Proper motivation and training will be considered as improvement methods.

3. Cell Production

Cell production is a form of mass production that divides work into teams known as cells. Each cell is managed to achieve goals such as quality, efficiency and waste reduction. It is an example autonomous team working.

 

Factors which might affect how much inventory a business should hold. (Oct/Nov 2024 Q.No-2b)

1.Demand for product/ amount of sales

2. Perishability/nature/type of product/durability

3. Availability of storage space

4. Cost of storage/warehouse

5. Delivery charges

6. Stock control system / JIT

 

METHODS OF PRODUCTION (May/June 2018 Q.No.4.c) (Oct/Nov 2017. Q.No-2d)

1. Job production (Oct/Nov 2016 Q.No-3a) (Oct/Nov 2021 Q.No-2a. P-2) (May/June 2023 Q.No1e)

Job production is where one single item is made at a time. Each product is unique and a long time would usually have been spent on it. For this reason, goods produced by this method are expensive to buy. Job production usually needs highly skilled workers and specialized equipment.

Eg:- boat manufacturing, dress designing, furniture, etc.

Advantages of Job production

1. Unique, high quality products are made

2. Workers are motivated and take pride in their work

3. Workers get freedom to use their skills in production

4. Meet the exact demand of customers.

Disadvantages of Job production (Mar-2018. Q.No-1b)

1. Uses skilled labour rather than machinery, so cost of production may increase

2. Selling prices of products may increase as cost of production is high.

3. Production process may take long time

4. Economies of scale are not possible, often resulting in a more expensive product.

 

2. Batch production. (May/June 2017 Q.No-2d) (Mar 2017 Q.No-2a) (Mar 2017 Q.No-4a P-2) (Mar-2021 Q.No-3b)  (Oct/Nov 2024 Q.No.2c) (May/June 2025 Q.No.1a) (Feb/March 2025 Q.No.3e) (May/June 2025 Q.No.1a)

            In batch production, a group of items is completed at one stage of production. The production of goods is going in batches. Each batch passes through one stage of production before moving onto the next stage.

Eg:- Making of bread in a bakery.

Advantages of Batch production

1. Flexible working method so business can easily change from one product to another.

2. Offers variety and choice of products- Each batch is different

3. Low price due to lower cost of production

Disadvantages of Batch production

1. Workers are often less motivated because the work becomes repetitive.

2. Goods have to be stored until they are sold, which increases warehousing cost

3.One fault of product could affect entire batch products.

 

3. Flow production (Mass production) (Mar 2019 Q.No-2c) (Oct/Nov-2015 Q.No3a) (March 2022 Q.No-1d.) (May/June 2022 Q.No-3e.)(Mar 2023. Q.No-1a.P-2) (Oct/Nov 2023.Q.No.1a P-2) (May/June 2024 Q.No.4e)

Flow production is the production of very large quantities of identical goods using a continuously moving process. At each stage of production additional features are added until the product reaches its finished stage. This type of production is used where a large output of identical, standardized product is required.

Eg:- Making chocolate bar, Electronic equipment, Car factory, etc.

Advantages of Flow production

1. Capital intensive than job or batch production, which lowers the labour cost.

2. Materials can be purchased in large quantities, so they are often cheaper due to bulk-buying- economies of scale.

3. Large number of goods are produced in short time.

4. Standardized outputs.

Disadvantages of Flow production

1. Requires large capital investment in production line technology.

2. Workers are not very motivated, since their work is very repetitive.

3. It is not very flexible method as production lines are difficult to change.

4. If one part of the production line breaks down, the whole production process will have to stop until it is repaired.

5. High levels of raw material, and finished goods (inventories) are held. This increases warehousing cost as well as capital cost.

 

FACTORS AFFECTING THE METHOD OF PRODUCTION (Oct/Nov 2020, Q.No-2d)

1. Budget for production - amount of capital available or cost of machinery is to be considered as business may not be able to afford to set up machineries or flow production.

2. Level of demand or quantity needed - if there is a lot of competition production can be reduced and if more demanded, need to produce large quantities using machineries

3. Type of product - if the product needs to be designed based on individual demand better job production is preferred.

4. Availability of storage or warehouse - if large space is available for storage the business can prefer flow or batch production.

5. Access to skilled employees - if skilled employees are available the business can prefer job production.

6. Possible environmental pollution- if heavy machineries are operated the chance of pollution may be increased.

7. Cost of production - if labour cost is higher, the business can think of capital intensive methods such as batch or flow production. It is beneficial in long run.

 

Unit 4.2

TECHNOLOGY AND PRODUCTION OF GOODS AND SERVICES

 

TECHNOLOGIES IN PRODUCTION METHODS

New technology can help to improve productivity and quality, provide faster and more accurate information and reduce costs. Example: improved stock control and ordering

a. Computer aided manufacturing (CAM)

In computer aided manufacturing (CAM), computers can control machinery or equipment, need for labour and correcting faults for resetting machines. Computer aided manufacturing is very accurate and can produce products to exacting standards.

b. Computer integrated manufacturing (CIM)

Computer integrated manufacturing, an entire manufacturing lines is controlled by computers. Robots control in this way can perform simple repetitive or highly complex tasks accurately.

c. Computer aided design (CAD)

With CAD, a product can be designed and displayed in three dimensions on a computer screen and tested using computer programs. Designing and testing on computer screen, saves on expensive prototypes at least in the early stage of product development.

d. EPOS (Electronic point of sale)

Larger retailers, especially supermarkets, use an EPOS system not only to calculate the amount purchased by consumers, but also to manage their inventory levels of each item.

e. EFTPOS (Electronic fund transfer at point of sale).

Many retailers use this method to enable customers to buy goods using debit or credit cards instead of paying by cash or cheque.

 

Advantages and disadvantages of new technology implementation (Oct/Nov 2017. Q.No-2e) (Mar 2016, Q.No.3d) (Feb/Mar 2023 Q.No-1b) (Oct/Nov 2023 Q.No.1b)

Advantages to Business

1. Reduces the costs and time taken to design new products

2. Increased productivity

3. Reduces costs of production per unit

4. Improves quality and reduces waste.

Disadvantages to Business

1. Can be very expensive

2. When technology is rapidly changing it will need to be changed of ten if the business is to remain competitive.

3. Business may need to spend more for training of workers which increases costs

Advantages to Consumers

1. Better quality products

2. Lower prices

3. Products with more features are easier to develop and produce.

Disadvantages to Consumers

1. Products may become out-of-date more quickly.

2. When the product develops a fault, it can be expensive to repair.

 

Advantages to Employees

1. The work is easier with the aid of technology.

2. A business that uses the latest technology is likely to be more successful so provides job security

3. The development and manufacture of new technology products provide employment opportunities

 

Disadvantages to Employees

1. Technology often reduces the need for workers, resulting in redundancy.

2. Technology could make the work less interesting.

3. A smaller workforce reduces opportunities for promotion.

 

Unit 4.3

SUSTAINABLE PRODUCTION OF GOODS AND SERVICES

           

SUSTAINABLE DEVELOPMENT (Mar-2021 Q.No-2e) (March 2022 Q.No-1e.) (Feb/Mar 2023 Q.No-1a)

            A business is said to be sustainable if it contributes towards the economic growth of the country and makes profits abiding the law, being ethical and environmentally friendly.

 

Steps to be followed to sustainable development: (Oct/Nov 2023 Q.No.2b) (Feb/March 2025 Q.No.3d)

1. Use renewable source of energy.

2. Avoid unnecessary travel by promoting work by home policy (telecommuting)

3. Avoid or reduce use of chemicals that produce toxic waste.

4. Use packaging that is made of recycled materials.

5. Use packaging that can be reused or recycled.

6. Use energy efficient process and equipment to minimise the use of energy.

7. Follow 3R policy- Reduce, recycle and re-use waste as raw material.

 

Indicators of sustainable developments

For environmental development. (Oct/Nov 2017. Q. No.2c)

1. Conservation of natural resources

2. Conservation of habitats for endangered animals and plants.

3. Use of renewable sources of energy like solar and wind power for business activity

4. Reduced greenhouse gas emissions by using greener sources of energy

5. Proper waste management. Example-recycling.

For social development

1. High life expectancy by generating less pollution

2. Gender equality by having relevant human resources policies in place.

3. Ethical business decision by conducting a social cost-benefit analysis of a project.

4. Fair compensation to employees

For economic development

1. Low unemployment by providing more work opportunity to people

2. High literacy rates by setting up training and knowledge-sharing programmes for employees

3. Growing GDP by generating products and services.

4. Improved standards of living by paying employees fairly and improving working conditions.

 

Arguments against the environmental protection (May/June 2018 Q.No-3e) (May/June 2016 Q.No-4e) (Oct/Nov 2021 Q.No-2d)

1. Protecting the environment can be expensive. Reducing waste, recycling waste and reducing polluting smoke all cost businesses money and this reduces profits.

2. Firms might have to increase prices to pay for environmentally friendly policies.

3. This could make firms uncompetitive and they could lose sales to businesses, perhaps in other countries, that are not environmentally friendly.

4. Consumers will buy less if they have to pay higher prices.

5. If pollution is a problem, then government’s expenditure may increase to clean it up.

 

Arguments for environmental protection. (Oct/Nov 2021 Q.No-2d)

1. Global warming and global pollution affect us all and businesses have social responsibility to reduce these problems.

2. Using scarce natural resources, such as rainforest timber, leaves less for future generations and increases prices.

3. Improves business image, if people demanding products from environmentally friendly firms and this can become a marketing advantage.

4. If business damages the environment, then pressure groups (pressure groups are formed by people who share a common interest and who will take action to try to change government policy or business decisions) could take action to harm the firm’s reputation and sales.

 

Ways to make business more environment friendly

As per law, the following business activities are illegal:

1. Locating in environmentally sensitive areas.

2. Dumping waste products into rivers or the sea, though it is sometimes difficult to prove which firm is responsible for this.

3. Making products that cannot easily be recycled.

 

UNIT 4.4

COSTS, SCALE OF PRODUCTION AND BREAK-EVEN ANALYSIS

 

What is cost of production?

Cost of production is the total amount of money that is required for the production of a good or service. Cost does not include a mark-up or profit.

 

TYPES OF COSTS

1. Fixed cost. (May/June 2019 Q.No.1b) (May/June 2018 Q.No.4.b) (May/June 2017 Q.No-1b.) (May/June 2021 Q.No-3a) (Oct/Nov 2022, Q.No-4b)

            This is the cost that is not varying based on output. Fixed cost will be same amount when output is zero or when producing maximum.

            Eg:- Rent, Rate (land tax), Insurance, Salary of office staffs, loan instalment or interest, etc. 

2. Variable cost (Mar 2019 Q.No-3b) (Oct/Nov 2021 Q.No-2a)

            This is the cost always varying according to the output. If output is zero variable cost also will be zero and if output increases variable cost also increases.

            Eg:- Raw materials, Transport, wages of part-time employees, fuel, etc.

3. Total cost (Mar 2019 Q.No-3a) (March 2022 Q.No-2b)

            Total cost is all the costs of making a certain level of output.

TC (Total Cost) = FC + VC

4. Average cost (May/June 2025 Q.No.4a)

Average cost is the cost of producing a single unit of output.

AC (Average cost) = Total Cost/Output

 

Measure to reduce cost in business (May/June 2020 Q. No 4c)

1. Reduce the number of employees if employees are redundant.

2. Reduce amount of wastage by mechanizing the production unit

3. Train the employees the waste management criteria

4. Place orders with cheaper suppliers or find alternate cheaper sources.

5. Buy in bulk quantity so it helps to avail trade discount.

 

ECONOMIES AND DISECONOMIES OF SCALE

Economies of scale (Mar 2020 Q.No-2a) (Mar 2019 Q.No-2a) (Mar 2019 Q.No-2b P-2) (May/June 2018 Q.No-3a.P-2) (Oct/Nov 2016 Q.No-3a P-2) (Mar 2016, Q.No.3c) (Oct/Nov 2023 Q.No.2c)

Economies scale indicates the reduction in average costs as a result of increasing the scale of operations. The term scale means the size of the business operations. It is the measure of output, as output grows, a business often benefits from reduced average costs.

 

Types of Economies of scale

1. Financial economies

            Lenders such as banks, prefer to lend money to large business than smaller businesses considering the chance of risk. As a result, large businesses get more money from the bank at lower rate of interest.

2. Managerial economies

            As a business grows, it often employs specialist managers in major functional areas such as finance, marketing, HR and operations, it would improve the quality of output and reduces mistakes than non-specialist manager.

3. Marketing economies

            If a business increases advertising and promotions, by result, its sales increases, so the business can meet such expenses from. This means that the average cost of marketing decreases as output and sales increase

4. Purchasing economies

            Large scale businesses usually buy in bulk quantities of raw materials and goods than smaller business so sellers often offer discounts on bulk purchase- Trade discount. It is known as bulk buying economies.

5. Technical economies

            Automation of production (capital intensive method) units may result to the production of large quantity of output at lower unit costs. Normally large-scale business units prefer this method of production.

 

Diseconomies of scale (Oct/Nov 2019 Q.No-4d) (Oct/Nov 2022, Q.No-1a.P-2) (Oct/Nov 2024 Q.No-4d)

            Diseconomies of scale is the opposite of economies of scale where business grows it may lose the benefit of growth due to some problems such as,

1. Poor communication.

            As business grows the number of staffs also increases. So managers may be unable to contact with the employees directly. It results the poor decision making and increases in mistakes.

2. Increased warehousing cost

            If business collect large quantities of inventories or raw materials, it may increase warehousing cost and handling cost.

3. Weak co-ordination

            As business grows, the number of departments also increases this may result to the weak co-ordination of various production and related departments consequently business may face issues in production processes.

4. Lack of control.

Because a larger business may not have a close working relationship with all employees so some employees may not be motivated to work hard producing outputs.

5. Increases labour cost

            As level of operations increasing the business may need large number of employees

 

BREAK-EVEN ANALYSIS (Mar-2020 Q.No-4a P-2), (Oct/Nov 2020 Q.No-4a) (May/June 2017.Q.No-3b P-2) (Oct/Nov 2016 Q.No-2a(i) P-2) (May/June 2022 Q.No-3b.) (May/June 2023 Q.No1b) (Feb/March 2024 Q.No.4a) (May/June 2024 Q.No1b P.2)

            Break-even describes a situation where a business is not making profit or loss from the production and sale of products. Here sales revenue equals to the cost of production.

 

Break-even Output and Margin of safety

Break-even output = Fixed costs / (Price per unit – Variable cost per unit)

Margin of safety = Actual output – Break-even output

 

Break-even point

 Break-even point is the level of sales at which Total costs = Total revenue.

 

Break-even point: the calculation method.

It is possible to calculate the breakeven point without having to draw the graph. We need two formulas to achieve this:

·         Contribution = Selling Price - Variable Costs

·         Break-even point = Total fixed costs/Contribution

Drawing a break-even chart (March 2022 Q.No-2a) (May/Jun 2015, Q.No.1c)

In order to draw a break-even chart, we need information about the fixed costs, variable costs and revenue of a business. For example, in sports shoe business:

·         Fixed costs are $5000 per year

·         The variable costs of the business are $3 per unit of output (a pair of sports shoes)

·         Each pair of shoes is sold at $8

·         The factory can produce a maximum output of 2,000 pair of shoes per year.

 

Outputs	Fixed cost	Variable cost	Total cost	Revenue
0	5000	0	5000	0
500	5000	1500	6500	4000
1000	5000	3000	8000	8000
1500	5000	4500	9500	12000
2000	5000	6000	11000	16000

 

·         When output is 2,000 units, variable costs will be: 2,000 × $3 = $6,000.

·         Assuming all output is sold, total revenue will be: 2,000 × $8 = $16,000

 

 

 

 

 

 

 

 

 

Advantages of Break-even analysis (Mar-2020. Q.No-4(a)(iii) P-2) (Oct/Nov 2017. Q.No-1c) (May/Jun 2015, Q.No.1b)

1. It shows the margin of safety which is the amount by which sales exceed the breakeven point

2. It helps to predict how much sales the business needs to make profit

3. It helps to make financial plans or budget in business.

4. It shows the potential profit/loss for the business at different levels of output.

5. It shows possible effect of change in price on the break-even level of output/profit.

6. It shows possible effect of change in costs on the break-even level of output/profit.

7. It helps to get loans or advances from the bank.

 

Disadvantages of Break-even Analysis (Oct/Nov 2021 Q.No-2b)

1. The graph assumes that all goods produced are sold.

2. Fixed costs will change if the scale of production is changed.

3. Only focuses on the breakeven point. Completely ignores other aspects of production.

4. Does not take into account discounts or increased wages, etc. and other things that vary with time.

Analysis of Margin of Safety (May/June 2021 Q.No-3b) (May/June 2022 Q.No-3c.) (Feb/March 2024 Q.No.4b)

            The margin of safety is the difference between the number of units of actual sales and the number of units of sales at break-even point. This is the revenue earned after the company or department pays all of its fixed and variable costs associated with producing the goods or service.

Calculate BEP, Margin of Safety and draw a graph indicating margin of safety.

The Noor enterprises, a single product company, provides you the following data for the Month of June 2020.

·        Sales (3,500 units @ $20/unit): $70,000

·        Contribution margin per unit: $12

·        Total fixed expenses for the month: $15,000

Solution

1. Break-even point

Break-even point in units

Fixed cost/Contribution margin per unit
= $15,000/$12
= 1,250 units

Break-even point in dollars:

Break-even point in units × Selling price per unit
= 1,250 units × $20
= $25,000

2. Margin of safety

Margin of safety in dollars:

Actual sales – Break-even sales
= $70,000 – $25,000
= $45,000

Margin of safety in units:

It is done by dividing the MOS in dollars by the sales price per unit.

The MOS of Noor Enterprises in terms of units is 2,250 as computed below:

= $45,000/$20
= 2,250 units

 

 

 

Unit 4.5

QUALITY OF GOODS AND SERVICES

Quality product

            Quality products means products without any defects. High quality never means high price or high cost of production. Quality product is one that meets the needs and requirements of consumer without any complaints.

Quality standards

Business sets the standard of quality of products which are expected by the consumers after conducting proper market research. Quality represents the level of satisfaction getting from a product. Quality standards are of two types – design standards and process standards.

 

IMPORTANCE OF QUALITY IMPROVEMENTS (Mar 2018 Q.No.4a P-2) (May/June 2017 Q.No-3d) (Mar-2021 Q.No-4a P-2) (May/June 2021 Q.No-1c) (Feb/March 2025 Q.No.2d)

1. To develop a strong brand image.

            Quality attracts the consumers so quality is the basis of brand image. Promotional costs can be saved while introducing high quality goods in the market.

2. To maintain customer loyalty.

            Once the customers get satisfied, it would help to maintain customer loyalty towards such products so it attracts more customers to the products.

3. To reduce costs, customer complaints and return.

            If the products do not meet the quality standard, the customers would return the products so the business should take extra cost to replace or repair the products.

4. To charge high price.

            Business can charge higher price to the products with unique quality than other products. It would increase the revenue of business.

5. To encourage middlemen- wholesalers and retailers.

            Mostly wholesalers and retailers prefer to stock high quality products or branded products so it would help them to clear the stocks quickly without damage or other warehousing costs.

6. To lengthen product life cycle.

            Demand for high quality goods will be higher in market so it would help to stay longer in market in product life cycle without being declined.

7. To increase market share.

            Quality speaks itself about the product so it helps to increase the percentage of products sold in the market.

 

HOW BUSINESS ACHIEVE QUALITY PRODUCTION?

METHODS TO ENSURE QUALITY PRODUCTION (Oct/Nov 2020 Q.No-1b P-2) (May/June 2020 Q.No-1c) (Oct/Nov 2018 1a. P-2) (Mar-2021 Q.No-3c)

 

A. Quality control. (Oct/Nov 2016 Q.No-3b) (Oct/Nov 2021 Q.No-1c) (Feb/Mar 2023 Q.No-4b) (Oct/Nov 2023.Q.No.2e)

            In this method, trained quality inspectors check the products at the end of production process to ensure the quality standard. Here quality inspectors use sampling methods to check the quality of products so not all the product is checked properly.

Advantages of Quality control

1. Products are checked before reaching to the customer’s hand.

2. Less training is required for workers so quality inspectors check the outputs.

Disadvantages of quality control

1. Cost increases as the salary of specialized quality inspectors

2. Difficult to trace where the fault occurs if only output is checked.

3. Inspection mostly done at the end of production process so faults may repeat if not identified.

4. Cost increases if outputs scrapped when faults detected.

5. Quality inspectors use sampling method to check quality of product so it cannot check all the products.

 

B. Quality Assurance. (Mar 2016, Q.No.3b) (May/June 2015, Q.No.1a) (May/June 2025 Q.No.1c) (May/June 2025 Q.No.1c)

            Quality assurance is better than quality control. It focuses the following aspects,

1.  Checking the quality of raw materials before they are used.

2. Makes quality standards- BSI, ISI, etc.

3. Uses more automation in product design and manufacturing.

Benefits of Quality Assurance (Mar 2020 Q.No-3b)

1. It helps to eliminate faults or errors at each stage of production before passing to the next stage.

2. It reduces the costs of scrap and improves quality at each level of production

3. Before starting production, ensure quality materials so it prevents fault in products.

4. Business can save the cost of quality inspectors or experts.

5. It improves brand image, reduces customer complaints and return.

Disadvantages of Quality Assurance

1. Can be expensive to train employees to check the quality of their own work as there is no special team to check quality.

2. The reliability of employees is important, and they need to be committed or quality assurance will not be effective

3. Takes longer to produce output as each worker needs to check their own faults.

 

C. TQM (Total Quality Management)

            TQM is the advanced form of quality improvement to ensure continuous improvement focusing on each and every stage of the production processes.

Advantages

1. Quality becomes the central character of employees so it ensures best output.

2. Right first time- ensures no customer complaints by offering full customers satisfaction throughout the existence.

3. It reduces costs as no faults to repair or price reductions needed

Disadvantages

1. Increase cost to train all employees

2. Quality is depending on employee’s attitude and responsibility.

 

QUALITY STANDARD

A quality standard is a set of various guidelines instructed by the standard institutes to be followed when producing products in order to meet the purpose of the consumer.

 

STANDARD INSTITUTES

1. ISO

The International Organization for Standardization (ISO) is an international standard-setting body composed of representatives from various national standards organizations. Founded on 23 February 1947, the organization promotes worldwide industrial and commercial standards.

2. BSI

            The British Standards Institution (BSI) is a service organization that produces standards across a wide variety of industry sectors. Its codes of practice and specifications cover management and technical subjects ranging from business continuity management to quality requirements.

Kite mark is the quality symbol offered by BSI.

3. ISI  

Bureau of Indian Standards (BIS), the national standards body of India. The ISI mark is by far the most recognized certification mark in the Indian subcontinent. The name ISI is an abbreviation of Indian Standards Institute.

 

 

 

Unit 4.6

LOCATION DECISIONS

 

The location of a business is usually considered either when the business is setting up first or when its present location changes. Changing location is not so easy decision regarding each and every business as it needs more investment and studies.

 

 

Why business locates to another country or location (Oct-Nov 2020, Qno-1d)

1. To achieve growth and expansion by accessing into new markets

2. To reduce cost of production because resources may be available at cheap rate.

3. To locate closer to the market because shifting location into a city or town would bring more sales.

4. Lower labour cost because workers are ready to work at lower remuneration.

5. Access to global market because international market brings worldwide market.

6. To reduce legal barriers because government may support business or industry.

7. To avoid competition from similar business.

 

             FACTORS AFFECTING THE LOCATION OF MANUFACTURING INDUSTRY (Oct/Nov 2018 4b. P-2) (May/June 2016 Q.No-4d) (Mar-2021 Q.No-4d) (Mar 2016, Q.No.3e) (Oct/Nov 2022, Q.No-4e) (Oct/Nov 2023.Q.No.2b P-2) (May/June 2024 Q.No.4d) (Feb/Mar 2025 Q.No.2b P-2)

1. Production methods

If job production is used, the business is likely to be on a small scale and so the influence of the nearness of components will be of less importance to the business than if flow production is used.

2. Cost of the site/ Rent

The area type and cost of land are important factors in choosing a location. The cost of land will vary across different regions (city/urban/rural). Normally higher rent is charged in city or populated area than remote area. 

3. Personal preferences of the owner

            Usually, the personal preferences of the owner will also influence the location decisions of the business. They may wish to stay in an area due to family links or they may want to live in an area that is particularly pleasant for some reason. E.g: Good climate.

4. Availability of labour

            The availability of workers, their skill level and wage rate they need to be paid, etc., are important in deciding the business location; some business may need skilled labours where as other require a large supply of cheap unskilled workers according to the availability business can be located.

5. Nearness to raw-materials

            Businesses that use large quantities of raw materials need to be located nearer to the sources of raw material as it will reduce transport cost. Such businesses are called ‘bulk reducing’ as the weight and size of the finished products is less than the raw materials went in to make it.

E.g. steel factories, sugar producers, etc.

6. Nearness to market

            Businesses that assemble components often choose to locate closer to the customers. Because the transporting cost of bulkier or heavier finished products are greater than the transporting of raw materials. Such businesses are called ‘bulk increasing’ business.

e.g. car manufacturers, breweries.

7. Infrastructure (transport, communication, power, water supply, etc.)

            Infrastructure covers the modes of transport, communication network and access to basic facilities like water and electricity. Businesses need to ensure that there are adequate infrastructure facilities to locate the business. It is the government that is largely responsible for providing all these facilities.

8. Government incentives

            Government policy also influences businesses location. Government often offers incentives to start businesses or relocate existing ones in areas that need economic development (regeneration). This has led to certain areas being called enterprise zones or assisted areas where firms are offered grants or low interest loans. Business are encouraged to develop ‘brown field’ sites rather than on green fields’.

9. Climate

Climate will not influence most manufacturing business but occasionally it might be important.       

e.g: Silicon Valley in USA has a very dry climate which aids the production of silicon chips.

 

 

 

FACTORS AFFECTING THE LOCATION OF A RETAILING BUSINESS (Mar 2019 Q.No-3b.P-2) (Oct/Nov 2018 Q.No-1d) (May/June 2018 Q.No-1d) (May/June 2017 Q.No-1c.) (Oct/Nov 2016 Q.No-4d) (May/June 2021 Q.No-1b P-2) (Feb/March 2022 Q.No-2c) (Feb/March 2024 Q.No.4d)

1. Access to the customers

            A retailer decides to locate the business in those areas which are regularly visited by shoppers than areas which shoppers don’t visit.

2. Nearby shops/ competitions

            Being able to locate near to other shops, offices and institutions helps to increases sales. Because people pass your shop on the way to other shops and office may be attracted by the shop display that motivate them to make purchases.

3. Customer parking facility

Where parking is convenient and near to the shops. This will convenient and near to the shops. This will encourage choppers to that area and therefore it possibly increases the sales.

4. Availability of suitable vacant premises/access for delivery vehicles

            There should be suitable vacant shop or premises for purchase or rent, where the business likes to be locating its operations. Access for delivery vehicles might be a consideration if it is very difficult for them to gain access to the premises.

5. Rent and taxes

            The more central the site of the business the higher the taxes and the rent will be. The amount of tax and rent payable by the business also influence the location decision of the business.

6. Security

            The rate of crime in an area might be important to a business. High rates of crimes such as theft and vandalism may discourage business from locating from that area.

7. Legislation

            In some countries there may be laws restricting the trading or marketing of goods in particular area.

 

FACTORS THAT INFLUENCE A BUSINESS TO RELOCATE EITHER AT HOME COUNTRY OR ABROAD (May/June 2020 Q. No-2d) (Mar 2018. Q.no 4.e) (May/Jun 2015, Q.No.3e)

1. Increased demand.

            When demand for the products increase, business may produce more products by investing in its present site. But there will be a limit to the expansion with in the present location, so the business will have to relocate the business into larger market.

2. Lack of resources

            If the raw material of a business runs out, the business might either bring in another supply from elsewhere or relocate their business to where they can obtain these supplies easily.

3. Difficulties with labour force

            It the business is located where the wage rate keeps rising, it might relocate overseas in order to take the advantage of lower wage rate and if particular types of skilled labours are needed by the business it might relocate to a place where they can recruit the right type of labour to enable business expansion.

4. Rents/taxes rising

            If other costs like rent and taxes keep raising it might cause the business to relocate in order to decrease their business costs.

5. New markets open up overseas

            If new markets open up in different countries, the business will have to transport the goods overseas, so in order to decrease the transport costs business might relocate.

6. Government grants.

            Government might provide grants and subsidies to encourage foreign businesses to locate in their country in order to bring in job opportunities and investment.

7. Tariff barriers

            If there are tariff barriers, such as quotas (where limits are placed on quantity of imports of a particular good) then by location in such countries there will be no restrictions.