Chapter 23: Making Operational Decisions

Operations Management• The process that uses the resources of an organisation

to provide the right goods or services for the customer• Aspects of operations management:

– Deciding on the location of a business in order to meet the needs of the business and its customers

– Choosing the mix of resources to use in production– Managing capacity utilisation– Organising stock control to meet the needs of customers

quickly and cheaply– Ensuring high quality of goods and services in an

organisation– Providing excellent customer service in order to meet

customer expectations– Working closely with suppliers in order to improve efficiency– Using technology in order to improve business operations

Operational Targets

• As operations management is concerned with getting the right goods or services to the customer, operational targets measure the efficiency with which this overall aim has been achieved.

• Examples of operational targets:– Unit Cost (the cost of producing 1 unit of

output)– Measures of Quality– Capacity Utilisation

Measures of Quality

• Customer satisfaction ratings (survey of customers can reveal customer opinions on a numerical scale or use qualitative measures)

• Customer complaints (calculates the number of customers who complain, can be measured as a percentage of total customers)

• Scrap Rate (calculates the number of items rejected during production process as a percentage of the number of units produced)

• Punctuality (calculates the degree to which a business delivers its products on time)

Capacity Utilisation• Measures the extent to which the company’s

maximum possible output is being reached.• C.U. = • Causes of spare capacity:

– New competitors or new products entering market– Fall in demand for the product due to changes in taste or

fashion– Unsuccessful marketing– Seasonal demand– Over-investment in fixed assets– A merger or takeover leading to duplication of many

resources and sites

Actual output per year or monthMaximum possible output per year or month

Spare Capacity• Under-utilisation of capacity helps a firm to cope with unexpected

problems or increases in demand, but it can increase costs.

Disadvantages of Spare Capacity Advantages of Spare Capacity

* Higher proportion of fixed costs per unit so higher unit costs* Higher unit costs lead to either lower profit levels or the need to increase prices* Can portray a negative image of the businessEmployees may become bored and demoralised

•There is more time for maintenance and repair of machinery, for training and for improving existing systems• Less pressure and stress for employees• Under-utilisation allows a company to cope with a sudden increase in demand.

** Overall, it is often felt that 90% capacity is ideal, as this gives the firm and opportunity to repair and maintain equipment and gives some flexibility in response to changes in demand.

Matching Supply and Demand• In order to maximise its efficiency, a business will try to

achieve full capacity utilisation. This can be done by balancing demand and supply of products.

• Subcontracting• Stock Control• Ways of Reducing Capacity Ways of Increasing Capacity

•Selling off all or part of its production area•Changing to a shorter working week or shorter day•Laying off workers•Transferring resources from another area

*Building or extending factories/plants*Asking staff to work overtime or longer hours*Hiring new staff*A flexible workforce