Unit 5 Key terms - Operations management
Operations management (or production)
It is through the correct use of subject terminology that students show their knowledge and understanding. Effective marketing is core to the success of all business organizations. Operations management (also referred to as production) is essentially about ensuring that goods and services meet the needs and wants (desires) of customers.
This section of the IB Business Management syllabus examines a range of topics such as production methods, quality management, business location and crisis management.
Most of Topic 5 applies to HL students only, although both SL and HL students need to be able to make connections to the six CUEGIS concepts: change, culture, ethics, globalization, innovation and strategy.
Note: Key terms for the HL syllabus are shown in italics.
Unit 5.1 Key terms - The role of operations management
Adding value | An essential part of the production process that ensures customers are willing to pay a price that is higher than the costs of producing the good or service. |
Capital-intensive | When an organization relies on machinery and equipment to produce its output, rather than labour. |
Ecological sustainability | Also known as environmental sustainability, this refers to sustainable use of the planet’s natural resources so that the current level of consumption does not jeopardise the resources available for future generations. |
Economic sustainability | Dimension of the triple bottom line that focuses on using resources, both natural and manufactured, efficiently and responsibly. |
Factors of production | The resources needed to produce a good or service, namely land, labour, capital and enterprise. |
Labour-intensive | When an organization relies on labourers to produce its output, rather than machinery or capital equipment. |
Operation management | The business function that combines inputs (such as human and financial resources) to produce outputs (goods and services). |
Production | Production, or operations management, refers to the process of organizing resources in order to produce goods and/or provide services. |
Social sustainability | Dimension of the triple bottom line that focuses on the extent to which an organization or economy can meet the needs of the current population without jeopardising the needs of future populations. |
Sustainability | The ability of an organization or an economy to continue its business activities indefinitely, without jeopardising opportunities for future generations. |
Triple bottom line | John Elkington’s notion of three pillars (aspects) of sustainability that businesses need to consider: social, ecological and economic sustainability (or people, planet and profits). |
Unit 5.2 Key terms - Production methods
Batch production | Production method that involves producing a set of identical products, with work on each batch being fully completed before production switches to another batch. |
Cellular production | Also known as cell production, this production technique involves teams of people working on a certain section of the production process, completing a whole unit of work. |
Flow production | This is a production method whereby different operations are continuously and progressively carried out in sequence, with a very large volume of output. |
Job production | Production method suitable for making special one-of-a-kind orders. |
Mass/flow/process production | Production method whereby different operations are continuously and progressively carried out in sequence, with a very large volume of standardized products. |
Production | This refers to the output of a good or provision of a service. |
Unit 5.3 Key terms - Lean Production and quality management (HL Only)
Andon | This is a method of lean production that uses audio-visual controls and warning systems to indicate the status of particular aspects of the production process. |
Benchmarking | The routine process of an organization comparing its products, processes (operations) and performance to that of its competitors or its own historical standards. |
Cradle to cradle (C2C) | This lean approach to waste management involves design and manufacturing that is sustainable and waste-free. All material inputs can be recycled or reused, or are consumable or compostable. |
Efficiency | This means using resources more productively, in order to generate more output. |
Just-in-case (JIC) | This is a stock control system that requires businesses to have large quantities of stock, in the event that it is needed for an unexpected order or in case there is a problem with the supply chain. |
Just-in-time (JIT) | This is a lean method of stock control whereby materials and components are scheduled to arrive precisely when they are needed in the production process. |
Kaizen | The Japanese process and philosophy of lean production that involves making continuous improvements in small, incremental steps to in order to achieve greater efficiency. |
Kanban | The Japanese term for ‘billboard sign’, this method of lean production relies on a card system to indicate what needs to be produced, quantities of resources required, and production deadlines. |
Lean production | This is a philosophy, approach or organizational culture about streamlining production processes in order to increase efficiency and reduce waste |
Quality | This means that a product is fit for purpose, i.e. the good or service meets or exceeds the needs of its customers. |
Quality assurance (QA) | This is a lean approach to quality management as it involves all employees in the quality process. |
Quality circles | Small groups of employees who meet on a regular basis to discuss quality issues and make recommendations to improve quality standards. |
Quality control (QC) | The most traditional form of quality management in which a supervisor or inspector periodically checks and examines output for possible defects, usually at the end of the production process. |
Quality standards | These national and international benchmarks enable certification of quality assurance, certifying that the product has met certain minimum standards to meet the needs of customers. |
Total quality management (TQM) | An approach to quality management that involves all workers having responsibility for maintaining quality standards throughout the production process. |
Waste | Anything that prevents an organization from being efficient or lean, such as defected products, stockpiling and overproduction. |
Zero defects | An aspect of lean production that focuses on preventing mistakes being made by getting things done right, first time round. |
Unit 5.4 Key terms - Location
Bulk-increasing industries | Describes the businesses that need to be located near to their customer as the final product (such as hand-made home furniture) is bulkier and heavier than the raw materials used to make it. |
Bulk-reducing industries | Describes the businesses that need to be located near to the raw materials needed to produce a certain good. For example, breweries should locate where there is a readily available supply of barley and water, as the weight of the final output is less than that of the raw materials. |
Clustering | This occurs when businesses choose to locate near other firms operating in related industries in order to benefit from passing trade and demand for products in complementary markets. |
Footloose organizations | These businesses do not have to locate in any particular area, i.e. they can choose to locate almost anywhere as there are no cost advantages of any particular location. |
Government incentives | Financial motivators offered by the state to businesses to locate in a particular area or regions, perhaps due to high unemployment. Examples of such incentives include: grants, subsidies, tax allowances and interest-free loans. |
Industrial inertia | This exists when a business chooses to remain in the same location although there are no cost advantages in doing so. |
Infrastructure | Refers to the physical and organizational structures and systems necessary for society to function, such as transportation facilities, motorways (highways), road networks, and communications networks. |
Insourcing | This refers to the use of an organization’s own resources in order to fulfil a specific job, function or project instead of it being outsourced to a third party provider. |
Offshoring | This is an extension of outsourcing but involves relocating part of or all of an organization’s functions and processes overseas. |
Outsourcing | This is the use of third-party subcontractors for carrying out non-core activities of an organization in order to improve operational efficiency and reduce production costs. |
Subcontractors | These outsourced firms perform non-core activities for an organization. They are used for their expertise and the cost advantages they bring. |
Unit 5.5 Key terms - Production planning (HL Only)
Buffer stock | The minimum stock level that a firm wishes to hold at any point in time. |
Capacity utilization | Refers to the extent to which an organization operates at its maximum level (known as the firm’s productive capacity). |
Capacity utilization rate | Measures a firm’s actual output as a percentage of its capacity (maximum potential output), at a particular point in time. |
Capital productivity | This measures how efficiently an organization’s fixed assets are used to generate output for the business. |
Cost to buy (CTB) | In a ‘make or buy decision’, this method calculates the total cost of subcontracting production to a third-party supplier. |
Cost to make (CTM) | In a ‘make or buy decision’, this method calculates the total cost of producing the product in-house, instead of using a third-party provider. |
Finished goods | The completed and final products of a business, that are ready to be sold to consumers. |
Just-in-case (JIC) | A stock control system that relies on the use of reserve or buffer stocks in order to meet changing levels of demand. |
Just-in-time (JIT) | A lean stock control system that relies on deliveries of stock being made just in time for them to be used in the production process. |
Labour productivity | This measures the average output per worker, for a given period of time. |
Lead time | The timeframe (or time lag) from when a firm places an order for stock and it receiving delivery of the stock. |
Make or buy decision | The choice of managers whether to manufacture a product in-house (make) or to purchase it (buy) from a third-party subcontractor. |
Maximum stock level | The most amount of stock that a firm wants to hold at any point in time, given its storage facilities and capacity. |
Productive capacity | The maximum level that a firm is able to operate at, given the resources it has. |
Productivity | Refers to the level of efficiency in the production process. The more productive resources are, the more output they generate. |
Raw materials | Natural resources used in the production process, e.g. wood, fish, physical land, and water. |
Reorder level | The level of inventory when a firm is required to reorder its stock. |
Reorder quantity | The amount of new stock that is ordered for production. |
Semi-finished goods | Inventory consisting of work-in-progress, i.e. components of an incomplete product. |
Stock control chart | A visual tool used to monitor and analyse a firm’s stock levels. It shows the rate at which stocks are used, when stocks are order, how long they take to be distributed, and when they are delivered. |
Stock-out | This occurs when a business has no more stock for production or sale, i.e. it is out of stock. |
Stockpiling | This occurs if a business orders more stock than it would usually do, perhaps in anticipation of higher levels of demand during economically prosperous times, such as peak trading periods. |
Supply chain management (SCM) | The art of managing and controlling the sequence of activities from the production of a product to it being delivered to the final customer. |
Usage rate | This shows the speed (rate) at which stocks are used in the production process. |
Unit 5.6 Key terms - Research & Development (HL Only)
Adaptive creativity | Refers to incremental innovation, which adjusts or develops a product or process that already exists. |
Copyrights | Legal protection for the owners of published works, including those of authors, artists, composers, journalists, musicians, photographers, and film directors. |
Development | The section of R&D that is concerned with adapting existing ideas and products in order to commercialise new products in a financially feasible way. |
Innovation | The commercial of a new idea in order to fulfil existing customer needs or to create an unmet customer wants (desires). |
Innovative creativity | Refers to innovation that involves creating entirely new products and/or processes. |
Paradigm innovation | Type of innovation that involves R&D focusing on radical innovation that has the capability of changing the nature of a market. |
Patents | The exclusive right given to the registered owner to commercialise an invention, for a pre-determined length of time. |
Position innovation | Type of innovation that involves R&D focusing on altering customer perceptions of a brand or product. |
Process innovation | Type of innovation that involves R&D focusing on developing new methods of production (or work practises) or product delivery. |
Product innovation | Type of innovation that involves R&D focusing on creating new products or developing (improving) existing ones. |
Prototype | A test (or trial) version of a product to determine whether it addresses the unmet needs of customers, thereby gauging the chances of commercial success. |
Research | The section of R&D that is concerned with the creation of new ideas and new products. |
Research and development (R&D) | The process of creating new products (goods and services) and processes (how things are down), in order to meet market needs. |
Sunrise industry | A rising (growing) industry as there is significant growth potential in the market, so R&D expenditure is justified. |
Sunset (declining) industry | A declining industry as there is no or negative growth in the market, so R&D expenditure is minimal or withdrawn. |
Trademarks | The sole right to the owner to use a particular sign or symbol that belongs to the organization, such as brand names and business logos. |
Unit 5.7 Key terms - Crisis management & contingency planning (HL Only)
Communication | One of the factors that affects the effectiveness of crisis management, about informing internal and external stakeholders to help them to know and understand the issue. |
Contingency planning | The management process of devising and developing pre-arranged plans to deal with a crisis, in case it actually occurs. |
Control | One of the factors that affects the effectiveness of crisis management, about using a crisis management team to handle a crisis and ensure there is leadership and governance. |
Crisis | Any unpredicted event that has widespread negative consequences, causing major disruptions to the normal operations of an organization. |
Crisis management | The management process of responding to an actual crisis facing an organization. |
Speed | One of the factors that affects the effectiveness of crisis management, about making prompt decisions and actions in order to return to the business to its normal operations as soon as possible. |
Spokesperson | A representative of the organization appointed to handle the communications with key stakeholder groups should a crisis occur. |
Transparency | One of the factors that affects the effectiveness of crisis management, about being open and honest with all stakeholders during a crisis. It is about disclosing the truth, such as the scale or severity of the crisis. |
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