Production and Operations Management
Production and Operations Management tests production methods, productivity, quality, stock control, break-even and location decisions.
Core rules
- Job production: one-off, customised. Batch: groups of identical items. Mass/flow: continuous, standardised.
- Factors of production: land, labour, capital, enterprise.
- Productivity = output ÷ input, per worker or per hour.
- Quality control inspects at the end; quality assurance builds quality in at each stage.
- Stock control: reorder level, lead time, buffer stock.
- Break-even units = fixed costs ÷ (price − variable cost per unit). Margin of safety = actual sales − break-even sales.
Worked example
A tuckshop sells sandwiches. Fixed costs are E1,200 a month (rent, salary). Variable cost is E4 per sandwich; price is E10; contribution is E6. Break-even = 1,200 ÷ 6 = 200 sandwiches a month. At 300 sandwiches, profit = (300 × 6) − 1,200 = E600. Margin of safety = 100 sandwiches. If rent rises to E1,500, break-even becomes 250; the owner must sell 50 more, raise price or cut variable cost. If the owner's monthly salary were treated as variable, the break-even would be understated.
Traps
- Mixing fixed and variable costs.
- Using total cost instead of contribution in the break-even formula.
- Confusing productivity with production.
- Ignoring stock-holding costs when setting buffer stock.