Page 208 - Cambridge IGCSE Business Studies
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Cambridge IGCSE Business Studies Section 4 Operations management
If holding inventories is costly, then why do businesses hold them?
■ The production process needs raw materials or components. If these are not
available when required then the process must stop. Workers and machinery will
stand idle and there will be a loss of output.
■ If the business does not have finished goods in stock, then customers’ orders
cannot be met and the business will lose sales. This could result in the loss of
current and future sales, affecting both the short-term and long-term profitability of
the business.
■ Businesses often benefit from economies of scale when they buy inventories in
large quantities because they receive a discount from the supplier. The supplier
may not offer discounts for smaller quantities.
Businesses have to balance the costs of holding inventories with the costs of not
holding inventories in order to minimise inventory costs.
Economies of scale: see Lean production
Chapter 16, p. 219.
Earlier in this chapter we looked at the benefits to a business of improving
Working capital: see productivity and how this can reduce the cost of producing each unit of output.
Chapter 20, page 263.
This can be used to reduce the final price of the product and enable the business
to be more competitive. This is particularly important for businesses operating in
global markets as the level of competition is likely to be much greater than that
for those businesses that operate in more local markets. However, lower costs
and prices must not lead to a reduction in the quality of the business’s products,
206 otherwise it may lose customers and its competitiveness and profitability will suff er.
KEY TERM Many businesses use lean production methods in order to improve their
competitiveness. Lean production aims to lower the costs of production by reducing
Lean production: the
waste to a minimum while maintaining, or even improving, the quality of the fi nished
production of goods and services product. At the same time, inputs to the production process must be used effi ciently.
with the minimum waste of
The main sources of waste in business are shown in Figure 15.2.
resources.
Figure 15.2 Sources of business waste
