Improving Efficiency (AQA A Level Business): Revision Note

Improving capacity utilisation

• Improving capacity utilisation means making better use of the productive resources already available to the business

  • It involves getting closer to the maximum output the business is capable of producing

• As capacity utilisation rises, fixed costs are spread across more units, reducing the unit cost and improving overall efficiency

• The most efficient level of utilisation for most businesses is considered to be around 85–95%

  • High enough to minimise unit costs, but with sufficient spare capacity to remain flexible

Ways of improving capacity utilisation

Stimulating demand

• Through marketing activity or price reductions to increase orders

Taking on subcontract work

• Using spare capacity to produce goods for other businesses

Rationalising

• Permanently reducing capacity to match a lower but stable level of demand, eliminating the cost of maintaining underused resources

Lean production

• Lean production is an approach to operations management that aims to minimise waste in all forms while maximising value delivered to the customer

  • It was originally developed by Toyota in Japan and has since been adopted across manufacturing and service industries worldwide

Key elements of lean production

Reducing inventory

• Holding as little inventory as possible by ordering materials only when needed

  • This is called 'Just-in-Time' (JIT)

• It reduces storage costs and eliminates waste from obsolete or damaged inventory

Example

A car manufacturer orders components to arrive hours before they are needed on the production line, rather than storing weeks of stock in a warehouse

Reducing re-works

• Minimising defects that require correction after production

• Reworking a faulty product adds cost and time without adding value for the customer

Reducing waiting times

• Eliminating delays between production stages

• Any time a product is waiting to move to the next stage, it is non-productive and adds to lead times

Reducing transportation times

• Minimising unnecessary movement of materials and products within the production facility

  • Unnecessary movement is a form of waste that adds time and cost without improving the product

Kaizen

• A Japanese term meaning continuous improvement

  • The principle that all employees at every level should constantly look for small, incremental ways to improve their work and processes

• Kaizen empowers workers to contribute ideas rather than waiting for management to drive change

Standardised processes

• Performing every task in the same way each time, using documented methods

  • Standardisation reduces variation, lowers the risk of errors and makes training faster and more consistent

Reducing waste, recycling and reusing materials

• Any material or resource that does not become part of the finished product is waste

  • Waste is a direct financial cost to a business

Reducing waste

• Better production planning reduces overproduction and the resulting disposal of unsold goods

• Tighter quality control reduces defective output that must be scrapped or reworked

• Precise measurement and cutting of materials reduces offcuts and material wastage

Example

A textile manufacturer optimises the layout of pattern pieces on fabric to minimise offcuts reduces material waste and lowers the cost per garment

Recycling

• Sending waste materials for reprocessing rather than disposal reduces waste removal costs

• It can also generate revenue from materials that would otherwise be thrown away

Example

A food manufacturer that sells vegetable offcuts to animal feed producers recovers value from material that would otherwise go to waste

Reusing materials

• Using materials, packaging or components again within the production process before they become waste

• This reduces the need to purchase new raw materials or components

Effective scheduling

• Scheduling involves planning when and in what sequence production tasks will be completed

  • It helps ensure that resources – workers, machinery and materials – are used in the most efficient order

• Effective scheduling prevents workers and machines from sitting idle while waiting for earlier tasks to finish, and ensures the business meets customer deadlines

Key scheduling tools

Gantt charts

• Visual timelines that display tasks, their duration and their sequence

• Gantt charts allow managers to see at a glance which tasks are running in parallel, which depend on others and where delays might occur

Critical Path Analysis (CPA)

• A technique for identifying the sequence of tasks that determines the minimum time needed to complete a project

• Tasks on the critical path cannot be delayed without pushing back the overall completion date

Just-in-Time scheduling

• Coordinating production and material deliveries so that inputs arrive exactly when needed

• Done well, this can eliminate unnecessary storage and waiting time

Improving employee productivity

• Improving employee productivity means increasing the output generated per worker

  • This directly reduces unit costs and improves overall operational efficiency

Ways of improving employee productivity

Training and development

• Better-trained employees work more accurately and efficiently, reducing errors and wasted time

Performance management

• Setting clear targets, holding regular appraisals and providing ongoing feedback focuses employee effort on the areas that matter most

Financial and non-financial incentives

• Performance-related pay, recognition schemes and flexible working increase motivation and the effort employees invest in their work

Job enrichment and empowerment

• Giving employees greater responsibility and autonomy increases engagement and encourages them to find more efficient ways of working

Better equipment

• Providing employees with up-to-date, well-maintained resources allows them to work more effectively and reduces time lost to equipment failure

Reducing absenteeism

• Improving employee wellbeing and addressing the causes of stress reduces sick days, maintaining consistent output levels

Improving cost control

• Cost control means monitoring and managing business costs to ensure they do not exceed budgeted levels, and identifying areas where spending can be reduced without compromising quality or output

Methods of improving cost control

Budgeting

• Setting planned spending limits for each area of the business in advance

• This gives managers a clear target and a basis for measuring actual performance

Variance analysis

• Comparing actual costs against budgeted costs at regular intervals and investigating significant differences

• E.g. If energy costs are 20% above budget, the business investigates whether this reflects inefficiency, a price increase or an error

Supplier management

• Renegotiating contracts, consolidating purchasing with a small number of suppliers, or switching suppliers to secure better terms on materials, components and services

Energy management

• Monitoring and reducing energy consumption through more efficient equipment, scheduling energy-intensive processes when energy costs are lower (e.g. at night) and investment in renewable sources

Reducing labour costs

• Improving shift scheduling to eliminate unnecessary overtime, reducing absenteeism and carefully managing how labour time is used