Operational Decisions

This diagram shows the range of different activities involved in a typical operations management department. imageupload.co.uk_files_g5wydujx3oyan1hv7r1m.jpg

All these activities are interlinked i.e. the design of a product will affect the cost involved in making it. It would be worthless setting a target if no one could check that you were going to achieve it. To allow a company to check that they are able to achieve their targets, a quantifiable value is generally added to the target to allow management to check their progress towards achieving their targets. For example:

  • Quality – To keep wastage caused by faulty batches of cereals to below 3% of output.
  • Productivity – To increase worker output by 5% each year.
  • Tertiary Sector – Convert 20% of cold calls into eventual new customers.

The purpose of targets is to improve operational efficiency, this might be to catch up with rivals or to become a market leader.

Capacity Utilisation

All firms have a maximum capacity output with their current production methods. Capacity is the maximum output that a firm can produce with existing resources. Generally firms will not work at maximum capacity al the time, they have many reasons for doing this including: no time to service machines, no time for staff consultation on new production methods. Capacity Utilisation is the proportion that current output is of full capacity output. To calculate the capacity utilisation of a business we can use the following formula:

 Capacity Utilisation Formula
 Capacity Utilisation = Current Output / Maximum Output x 100

Unit Cost

This is of great importance to any business since reducing the cost per unit allows a business to be more competitive and increase profitability. It must be noted that reducing cost must not impact of the quality of the product.

Other Operational Issues

These are orders for products that the company does not normally produce, i.e. an envelope company is asked to produce 1 million no standard sized envelopes. Management have two important decisions:

Do we accept the order?

  • Revenue gained from the order as opposed to a standard order
  • Whether further orders are likely to be received
  • The importance of the customer
  • Whether there are other potential customers for this product

If so, how do we cope with the operational problems involved?

  • Sub contracting or outsourcing
  • Hire machines and temporarily employ specialists
  • Job production, produce each product as a separate item.

Matching production to consumer demand

This is one of the biggest problems that operations managers have to solve, the problem is greatly reduced if demand is constant or easy to predict. Generally though, businesses go through periods of slack demand and excess capacity followed by high demand and full capacity. Changes in demand can be caused by seasonal demand patterns and economic factors such as a growth or recession in the economy. Production is revised over time to try and match output with demand, uncertainty does not only exist with consumer demand though, machine breakdowns, staff absences and factory fires can all reduce capacity.

Methods of matching production to demand

There are many ways to match production with demand, they are also used to prevent machines lying idle leaving the business with excess capacity (when a business has greater production capacity than is likely to be used in the foreseeable future.) These are:

  • Overtime – Staff are employed for more hours to increase capacity, this will increase unit costs since staff will expect compensation.
  • Temporary Staff – Employed on a temporary basis to cope with higher demand, may well be released once the demand has eased.
  • Part Time Staff – Called in to work at peak periods and will not be needed or paid at other times.
  • Sub Contracting – A supplier will provide some or all of the goods that the contracting business requires. Generally in the short term otherwise this is outsourcing.
  • Managing Stocks Efficiently – Stocks can act as a buffer between production and consumer demand, stocks of both materials and finished goods can be held.
  • Rationalisation – Other methods are concerned with providing goods in times of high demand, rationalization is concerned with reducing the production capacity when demand reduces.


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