Engineering and Commercial Functions in Business

181 Pages·1994·7.149 MB·English

by  W. Bolton (Auth.)

Engineering and Commercial Functions
in Business
W. Bolton
iNEWNES
Newnes
An imprint of Butterworth-Heinemann Ltd
Linacre House, Jordan Hill, Oxford 0X2 8DP
£ A member of the Reed Elsevier plc group
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TOKYO TORONTO WELLINGTON
First published 1994
© W. Bolton 1994
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British Library Cataloguing in Publication Data
Bolton, W.
1 Engineering and Commercial Functions in Business
I. Tide
658.002462
ISBN 0 7506 2197 4
Library of Congress Cataloging in Publication Data
A catalogue record for this book is available from the Library of Congress
Printed and bound in Great Britain
Preface
This book has been written to provide a comprehensive coverage of the
mandatory unit in Engineering and Commercial Functions of Business for
the Advanced GNVQ in Engineering. It aims to introduce engineering
students to the functions of business relevant to engineers. No prior know-
ledge is assumed but it is expected that it will be used in an engineering
context. As such it will also be relevant to engineering students on other
courses.
The aims of the chapters and their relationship to the elements of the
GNVQ unit are:
Aim GNVQ
Element
Chapter 1 Identify business functions, types of business, 1.1
and the activities of engineers in organizations.
Chapter 2 Describe organizational structures and factors 1.1
affecting them.
Chapter 3 Identifies functions within business and the 1.1
interfaces between commercial and engineering 1.2
functions.
Chapter 4 Identifies financial factors that influence 1.2
decisions and explores them using break-even
analysis.
Chapter 5 Identifies the cost elements and investigates 1.3
absorption and marginal costing techniques.
Chapter 6 Describes how budgets are determined and used 1.3
to control costs.
Chapter 7 Explains the reasons for inventory control and 1.3
basic techniques that can be used.
Chapter 8 Explains the role of forecasting and basic 1.3
techniques that can be used.
There are many worked examples in the text. In addition, at the ends of
each chapter there are a large number of revision questions, multiple-choice
questions, assignments and case studies. Answers are given for all the
multiple-choice questions and guides indicated as to the answers for the
revision questions.
W. Bolton
vu
1 Organizations
1,1 Organizations The early chapters in this book are concerned with giving an overview of
the engineering and commercial functions in business and later chapters
with the financial factors involved in decision-making and the costing of
products in business. Chapters 1, 2 and 3 are about organizations. This
chapter is an introduction to the basic terminology used with organizations,
with chapter 2 being a consideration of the structure of organizations and
chapter 3 the functions occurring in organizations.
The terms business and organization occur frequently in this book and
it is worthwhile clarifying their meaning. The term business is used for any
person or group of people who sell goods or services. Thus a business
might be an individual who works alone and cleans windows. It also could
be a large company employing thousands of people and who make cars.
The term organization is used for a group of people working together over
a period of time to achieve a common objective. Thus a business which
employs a number of people to make cars is an organization, the group of
people having the common objective of making cars. A government depart-
ment is also an organization, the group of people working together to carry
out a government service to the people.
1.1.1 Functions
Within a business, whether it be a small one or a large one, there will be a
number of functions that have to be carried out. These are likely to include
(note that sometimes some of the functions are grouped under a single
heading and sometimes split into smaller functions, functions are discussed
in more detail in chapter 3):
1 Finance This involves deciding on how much money is required, where
it is to come from, how it is to be used, etc.
2 Purchasing This function involves the purchasing of the materials,
components and energy required for production purposes and the
maintenance of the plant and buildings.
3 Marketing This involves deciding on the product, the price, promotion
of the product, etc.
4 Sales This is likely to include dealing directly with the customers or
consumer outlets, obtaining orders, advising customers, etc.
5 Distribution This involves providing the means by which customers
obtain the product, packaging and shipping.
6 Research and product development This involves research into new
materials and processes and the development of new production
methods and products.
7 Desigti This involves the design, and redesign, of the product/service to
meet market requirements.
1
2 Engineering and Commercial Functions in Business
8 Production/manufacturing This function involves deciding on how,
where, what with, when the items/services should be produced, etc.
9 Maintenance This involves the maintenance of the buildings, plant and
machinery.
10 Quality control This involves ensuring that products and services are to
the required quality and can involve the testing and checking of in-
coming materials, and inspection of the product.
11 Planning and control This involves the planning and control of the
production function to ensure that it is carried out efficiently and to
schedule.
12 Product support This involves providing maintenance for products.
13 Stores and warehousing This involves the storage of the goods and
materials delivered to the business by suppliers, issuing them as required
for production, maintenance and administration, and the storage of the
finished products for issue to customers as required.
14 Personnel This function involves deciding on who to employ, how to
motivate them, Health and Safety requirements, conditions of employ-
ment, etc.
A single individual operating as a business has to do all the functions
required for that business. Thus the person working for him/herself as a
window cleaner has to market the product, i.e. obtain the customers for his/
her services, produce the service, i.e. do the window cleaning, deal with the
finances of the business, i.e. decide how much to charge and on what items
money will be spent, keep the accounts, etc., maintain the equipment, office
and company van, etc. In a larger business different individuals or groups of
individuals will deal with the different functions, each group specializing in
a particular function or group of functions. Within any one group there is
also likely to be further specialization. Thus, for example, in a production
group some employees might do one type of production operation and
some another. The term division of labour is used when there is a need to
subdivide the activities involved in running a business.
Specialization/division of labour occurs in organizations and coordin-
ation of the different areas of specialization is required if an organization is
to meet a common objective. Organizations are structured so that there is a
framework within which individuals can carry out specified duties and
which serves as a basis for implementing the procedures required to manage
and control the business. Chapter 2 discusses such structuring.
Example
Identify the functions which are likely to occur within the following case
study of a small company:
XYZ is a company making lawn mowers. It has a workforce of about
100. The sales staff, sales administration and a small production line
account for most of the staff. Salesmen/women visit garden centres and
shops around the country to obtain orders. The demand is seasonal
with garden centres and shops stocking up in Spring. The orders are
Organizations 3
met by the company delivering, by their own vans, the mowers from
stocks held in the company warehouse. In order to have a steady work-
load over the year, stocks are built up during the winter months in
anticipation of sales in the Spring. The design of the mowers is not
changed very often but, because of competitors, there is great pressure
on the selling price and quality. Thus the company has to continually
monitor its production methods to ensure they are the most efficient and
also maintain strict quality control. The company buy-in some of the
components and raw materials, doing some of the manufacturing in the
company. It has a small production line to assemble the mowers.
If we analyse the case then the functions that are likely to occur with the
business are:
XYZ is a company making lawn mowers. It has
a workforce of about 100. The sales staff, sales Personnel
adminstration and a small production line
account for most of the staff. Salesmen/women Marketing, sales
visit garden centres and shops around the coun-
try to obtain orders. The demand is seasonal
with garden centres and shops stocking up in
Spring. The orders are met by the company
delivering, by their own vans, the mowers from Distribution
stocks held in the company warehouse. In order Stores/warehouse
to have a steady workload over the year, stocks Production planning
are built up during the winter months in and control
anticipation of sales in the Spring. The design of| Finance
the mowers is not changed very often but,
because of competitors, there is great pressure
on the selling price and quality. Thus the comp-
any has to continually monitor its production Product
methods to ensure they are the most efficient development
and also maintain strict quality control. The Quality control
company buy-in some components and raw Purchasing
materials, doing some manufacturing in the Production
company. It has a small production line to
assemble the mowers.
1.2 Inputs and outputs We can consider any business in terms of what its inputs and outputs are.
Inputs with a manufacturing business are typically materials, energy, labour
and money and outputs are finished products and waste (figure 1.1). A
business making cars can be considered as one which has an input of
materials, energy, labour and money and an output of cars and scrap. A
college can be considered to be an organization with an input of untrained
students, labour and money and an output of trained and failed students. A
bank can be considered to be an organization with an input of money and
labour and an output of money and financial services.
4 Engineering and Commercial Functions in Business
Materials ->
Business
Energy -> -> Products
organization
Labour -» -> Waste
Money —>
Figure LI A manufacturing business
Production, in one sense, can be considered to be the conversion or
transformation of physical inputs into physically different outputs. How-
ever, we can regard it in a broader sense and include the provision of
services as also being a production activity. Thus we can regard all business
organizations as, in a sense, being production organizations. All have
inputs, which they transform into their outputs.
Example
What are the main inputs and outputs for a car repair/maintenance
business?
The main inputs might be considered to be cars needing repair or
maintenance, materials, labour, money, electrical power, etc. The main
outputs might be considered to be repaired or serviced cars and waste
materials.
Example
What are the main inputs and outputs for a company building houses?
The main inputs might be considered to be materials, labour and money
and the main outputs finished houses.
1.2.1 Different types of business
There are many different types of business. They are frequently classified by
the type of the production activity they are engaged in. The terms primary,
secondary and tertiary are used for the three levels in the classification,
these being defined as:
1 Primary organizations These are organizations concerned with the first
stage of production, having raw materials as their input and output of
materials in a more useful form for other production organizations.
Examples of the types of activities of such organizations are mining,
agriculture, fishing and forestry.
2 Secondary organizations These take the end product of the primary
organizations, or other secondary producers, and further transform
them into new products. They make things and are generally referred to
as the manufacturing or construction industries. Examples of such
Organizations 5
organizations are businesses which make cars, washing machines,
aircraft or build houses or factories.
3 Tertiary organizations These offer services to people and other busin-
esses. Such services include retailing, insurance, banking, teaching,
medical services, repair services, transport, etc.
Example
With what type of production activity could (a) a motor manufacturer,
(b) a coal mining company, (c) a shop, be associated?
(a) The motor manufacturer has inputs of materials such as sheet steel,
fittings, paint, etc., energy, labour and money and an output of cars for
sale to the public. The end products of primary and other secondary
organizations are transformed into new products and so the motor
manufacturer is a secondary production organization.
(b) The coal mining company is engaged in the removal o fcoal from the
earth, processing it to yield fuel which is graded by quality and size, and
then selling it to others to use. The company can be classified as a
primary organization.
(c) A shop has inputs of manufactured goods, labour and money and an
output of customers with the goods. The end products of secondary
organizations are provided as a service to customers. The shop can be
classified as a tertiary organization.
1.2.2 The chain of production
Businesses tend to be linked in a chain of production which typically
stretches from the raw materials being mined and refined by a tertiary
business, the refined products being bought and used by secondary
businesses and tertiary businesses providing services to support both the
primary and secondary businesses (figure 1.2).
Raw materials Primary: 1 Energy
Electric
company
Raw materials Primary: Steel Secondary Products
Steel business
-> ->
supplier
Money Tertiary: Finance
Bank
->
Figure 1.2 A simple chain of production
6 Engineering and Commercial Functions in Business
Thus, some businesses sell the products and services they produce to other
businesses. For example, a motor manufacturer will buy-in such items as
steel sheets, steel bars, and other materials in a form that has been prepared
by primary businesses. In addition they are likely to buy-in components
such as lamp mountings, electrical meters, etc. from secondary businesses.
They also are likely to buy-in services such as retailers, banking, insurance,
etc. from tertiary businesses. It has been suggested that half of those
employed in non-manufacturing organizations depend for their jobs on the
links with the manufacturing sector.
1.3 Engineering In the engineering industry in Britain, over 80% of the businesses have less
organizations than 100 employees. However, because the large organizations, though far
fewer than the small ones, are very large, most of those who work in the
engineering industry are employed by large organizations. The large
businesses were however, once small. Why do businesses expand? The
major reason is to increase profits. Businesses expand by what is termed
horizontal integration, vertical integration or lateral integration.
The term horizontal integration is used to describe the expansion of an
organization when it increases the scale of its operations while continuing
to specialize in the same range of products. The increase in output of the
same products is expected to give a less than proportionate increase in
costs, i.e. as outputs increase there is a reduction in unit costs. The
organization is said to be benefiting from economies of scale. Economies of
scale can arise from:
1 The larger volume output allowing a greater division of labour, i.e.
employees can become more specialist and concerned with a narrower
range of skills and hence more proficient in the narrower range. This
specialization may mean that unskilled labour can be used for some jobs
where previously a skilled person had to be used because of the range
of skills required. Hence the labour costs per unit can be reduced.
2 The larger volume output can lead to a greater mechanization of the
production process as it becomes more economic to use machines if
they are used a lot.
3 There can be economies in purchasing materials and items because
larger quantities are required.
4 There can be economies in marketing. For example, the distribution
costs per unit can decrease because the distribution costs may not rise in
proportion to quantity.
5 Finance may be easier to obtain and on better terms.
The term vertical integration is used when an organization expands to
take in more of the elements involves in its chain of production, e.g. engag-
ing in both primary and secondary stages of production. For example, a
steel company might not only extract the raw materials, produce iron and
steel, shape the steel into semi-finished products such as sheet and bar, but
also produce some finished products, e.g. railway lines. This may lead to
economies through giving greater efficiency and also increase the power of
the organization over the market.
Organizations 7
The term lateral integration is used when an organization expands by
diversifying its activities, i.e. increasing the range of products. Such diver-
sification can reduce reliance upon a single product and so reduce the risk
factor. For example, a maker of aircraft engines might diversify into the
production of electric power generators.
However, the larger an organization the greater the management
problems. The rise in the costs required to administer and control the
organization might outweigh the advantages gained by economies of scale.
There is also the point that increased division of labour can lead to employ-
ees performing such narrow tasks at such a frequent rate that they become
bored and lose motivation with the result that a deterioration in labour
relations occurs.
1.3.1 Employment in the engineering industry
The workforce employed in the engineering industry has been classified
(EITB Research Report 9, The technician in Engineering: Part 1 Patterns of
technican employment) as being made up of:
Managers 5.4 %
Scientists and technologists 3.0%
Technicians 8.3 %
Administrative and professional staff 6.0 %
Supervisors 5.1%
Craftsmen 19.1%
Operators 33.8 %
Clerical staff 11.1%
Others 8.2 %
The employment of engineering technicans in the engineering industry was
in a range of different jobs. In the survey of the industry, in general it was
found that among the engineering technicans about:
1 50% were working in production as production or planning engineers/
technicians, installation or commissioning engineers, software engineers,
maintenance engineers, test engineers/technicians, project engineers,
quality engineers, inspectors, etc.,
2 20% were working in the research, design and development area in such
capacities as design draughtsmen/women, detail draughtsmen/ women,
design engineers, development engineers, etc.,
3 20% were working in areas involving customers or suppliers as service
engineers for customer products servicing, contract engineers, buyers,
estimators, technical sales, etc.,
4 10% were working in central services such as work study engineers,
technical writers/authors, technical illustrators, service engineers for
internal company servicing, etc.