Operations Management

Operations Management

Analyze how will government influence affect Loyka's decision of choosing location. (Unit 93)

Choosing a suitable place to locate a business is an important decision for a business when setting up. A factor that affects location is the government influence. The main reasons for government intervention in business location are to encourage firms to locate their operations in regions where unemployment is high and business activity is lacking and to attract foreign businesses to the area.

In this case, Colonel Donovan and General Pierce needed to decide whether to construct a hospital or a university. However, the local governor, who agreed to contribute the piece of land for the construction site, preferred the new university campus rather than a hospital. This would give prestige and contribute to the long-term development of Loyka by training future professionals. Another advantage of the government influence is that it might attract private capital for future public-private partnerships in research and development.

General Pierce and the local governor might want to evaluate all the advantages and disadvantages building a university might bring.Setting up in a particular location is an important decision, businesses are likely to stay there for a period of time and relocation is expensive. General Pierce and the local governor might want to evaluate all the advantages and disadvantages building a university might bring.

What might be the benefits to UWP and Loyka when implementing cell production in the construction of the hospital?

Cell production involves dividing the workplace into "cells" where each cell focuses on the production of a "product family". Product family is a group of products, which requires a sequence of similar operations. In this case, cell production is considered to be used when constructing the hospital at Loyka. Since each cell focuses on the production of a “product family”, UWP will use it for a separate section of the hospital.

Some benefits included in using cell production for the construction of the hospital for UWP might be the released floor space, improvement of product flexibility, movement of resources and encouraged team working. This production method will create a high quality product because there will be less space to use and flexibility of the hospital will be improved. Another factor involved in the quality of the product is the encouraged team working because each team will just focus on a specific “family product” without having to worry about the other ones. As part of the benefits for Loyka there are the cut lead times, less work-in progress, reduced handling time and a more efficient maintenance. This means that people at Loyka will have in a short period of time a non-profit hospital to access to medical care, especially for poorer people because the hospital will be build by dividing the workplace into “cells” making it a faster and efficient process. Later on, maintenance for the hospital will be more efficient since each and every cell focused very well on each section of the hospital.

Cell production method for constructing the hospital according to the case, might bring good enough benefits for the UWP and Loyka by improving flexibility, reducing space and handling time which on completion with all of this, the hospital would provide immediate important benefits to the local population.

Buffer stock

The buffer stock is the stock held by a business just in case that the demand raises unexpectedly or in case that a break in supply happens.

In this case, Kos is thinking about managing his own business dealing with some buffer stock, in case that the demand for food raises since now, with a new facility there will be more opportunities within the markets.

JIT and JIC

Kos actually operates within a just in time production, in which he offers “fresh” food to his clients, providing products just a few hours or at the moment the consumer needs them. But if Kos would rather expand his own business, he would need to change his production method to a just in case one, since now he would need to hold more stock in case demand rises.

To change from a just in time to a just in case production may bring certain outcomes,for example:

Now Kos would need to be responsible for the storage of the food, and this will bring additional costs for the business, in his case, he would need to pay $200 monthly to rent a large storage facility. Also other costs will be faced just as the opportunity cost of having “money tied up” in stocks, since as long as they’re just stored, they don’t generate any reward, and therefore the cash flow may be affected. Moreover, the spoilage costs will be added, since the goods stored may deteriorate over time, or may become outdated at the time they keep stored. Anyways, this could be prevented as Kos manages a good level of stocks regarding the nature of the food he is selling.

In contrast to these drawbacks, some advantages may be founded by changing this manufacturing method, for example:

Kos now will be confident about supplying his customers at any time, and his reputation wouldn’t be damaged, he would cope with any kind of increase on demand, and would also enjoy of some bulk buying advantages. In addition, he would establish good relations with his suppliers and there wouldn’t be a lot of faith placed in the reliability of the just in time distribution of the suppliers, since now Kos would be prepared for any break in supplies as well.

Considering the Option 2, it would be more suitable for Kos to change to a just in case production in order to deal with greater demands and keep a good reputation, while dealing with any unforeseen rise in demand. The entrepreneur would improve his economy of scales by lowering some costs while enjoying some bulk buying advantages, and selling to a higher quantity of customers. And spoilage and opportunity costs could be well eliminated or reduced if Kos is aware of the quantity of products he would held according to the nature of the product.

Variable and semi-variable costs

While analysing business costs and classifying them we might decide whether they are variable or semi-variable.

In this case, Kos Palouk's made a comparison of his current income and his forecast income showing selected financial information from produce distribution that depends in the scale of operation of the business he might take.

An example of variable costs could be the costs of goods sold because as we can see in appendix 5 we can infer that as the output increases the cost rises too.
Another example of variable cost could be the gas and vehicle maintenance because as Kos' business has more products to sell, he might need more transportation in order to distribute them.
Semi-variable costs consist of both fixed and variable cost. In this case we can find a rent of storage facility, which with option 1 is zero but in option 2 is 200. So we can infer that the quantity of goods will determine the rent of storage facility but also as a fixed cost it does not change as a result of a change in output in the short run.

Whether Kos decides to choose option 1 or 2, he might take in account both variable and semi-variable costs in order to compare the scale of the business operation considering the pros and cons he may face.

Other methods of production

Since the hospital should be built as soon as possible, another method of production that might apply to the case is batch production. This method involves dividing the work into a number of operations just like cell production method considered by Colonel Donovan. A particular operation is carried out on all products in a batch. The batch then moves to the next operation.

In this case, when building the hospital as well as cell production, employees can concentrate on one operation rather than the whole task, reducing the need for costly, skilled workers. One of the factors that makes this type of production to be applied in the case is that it is flexible. For example, each batch can be changed to meet customers´wishes. As part of the hospital, there might be need to vary each batch like the rooms: waiting room, o.r, etc.

In conclusion, even though a batch must wait until the next operation can be taken, batch production is the closest method of production to cell as well as the needs for constructing the hospital. It involves dividing of work, flexibility and more concentrated employees, resulting on a high quality product.

Fixed and variable costs

Fixed costs stay the same at the levels of output in the short run, while variable costs increase directly as the output rises.

In this case, fixed costs would be the rent of storage facility and the gas vehicle maintenance whether Kos chooses option 1 or 2. And the variable costs may depend on the production which are identified also as costs of goods sold.

Factors to take into consideration if you are asked to evaluate a possible location

Choosing a suitable place to locate a business is an important decision for a business when setting up. Location decisions are based on the costs and benefits of specific locations. These costs and benefits might be quantitative or qualitative. Quantitative means that they can be measured in monetary terms (costs of transporting goods to customers, qualitative means that cannot be measured in monetary terms (distance staff must travel to work).

Some other factors that affect location are technology, location costs, the markets, transport links, land, labour and government influence. In this case, Donovan and Pierce must decide whether to construct a hospital or a university, and the factor affecting location is likely to be government influence.

A business must find the best possible location when setting up, since once a business has been set up in a particular location, it is likely to stay there for a period of time.

Stock control methods

As a business you must ensure that you control the right level of stocks keeping stocks low to minimise the stock holding costs, but not that much to the point where customers get let down or production is halted. For this, several methods of stock control exists.

In this case, Kos Palouk must take a good decision whether which stock control method he should use for his business. Currently he's using the just in time method in order to provide fresh food to his customers. With this method Kos Palouk don't face problems of stock holding costs, he doesn't have the money tied up in stock.

On the other hand, if Kos Palouk would decide to extend his target market and to provide produce to much more customers, he would need to be prepared for the change in demand coming with this expansion. For this, he might change to a just in case method, in which he would need to raise his stocks and with this the stock holding costs arrive but the buying in bulk advantages are meet as well.

Glossary

Concept	Definition	Application to the case
Cell Production (108)	It involves dividing the work into “cells”. Each cell occupies an area on the factory floor and focuses on the production of a “product family” which is a group of products that requires a sequence of similar operations.	In relation with the case, since the hospital should be built as soon as possible, Colonel Donovan was considering cell production where each cell would be responsible for the construction of a separate section of the hospital.
Fixed Cost (189)	A cost which does not change as a result of a change in output in the short run.
Variable cost (189)	A cost which rises as output rises
Direct cost (189)	A cost which can be clearly identified with a particular unit of output
Indirect cost or overhead (189)	A cost which cannot be identified with a particular unit of output. It is incurred by the whole organization or department.
Total cost(189)	The entire cost of producing a given level of output.
Total revenue(189)	The amount of money the business receives from selling output.
Indirect cost or overhead (189)	A cost which cannot be identified with a particular unit of output. It is incurred by the whole organization or department.
Break-even (196)	Where a business sells just enough to cover its costs
Break-even output(196)	The output the business needs to produce so that its total revenue and total costs are the same.
Quality	Features of a product that allow it to satisfy customers’ needs. It may refer to some standard of excellence.
Quality assurance	A method of working for businesses that takes into account customers’ wants when standardising quality. It often involves guaranteeing that quality standards are met.
Quality control	Making sure that the quality of a product meets specified quality performance criteria.
Total quality management	A managerial approach which focuses on quality and aims to improve the effectiveness, flexibility and competitiveness of a business.
Buffer stock	Stocks held as a precaution to cope with unforeseen demand.
Just in time method	A method highly responsive to customer orders and uses very little stock holding.	(136) Kos’ Palouk started his business by delivering his produce in a just in time basis in order to ensure fresh produce.
Just in case method	A cautious method that uses a greater stock holding in order to provide goods to the customers at any time.	(138) By increasing his scale of operation, Kos would need to change to a just in case method.
Stock rotation	The flow of stock into and out of stores.

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