Operations Management The process that uses the resources of an organisation to provide the right goods or services for the customer

What does it involve? Choosing business location Deciding on mix of resources to use in production Managing capacity utilisation Organising stock control Ensuring high quality of goods & services Providing excellent customer service Working closely with suppliers to improve efficiency Using technology to improve business operations

Operational targets The goals or aims of the operations function of the business Examples include: Unit costs Measures of quality Capacity utilisation

Unit costs The cost of producing 1 unit of output = total cost units of output Expressed as an average, so also known as average unit cost Why does the average unit cost tend to drop as output increases?

Low unit costs may lead to … Operational efficiency compared to competitors Higher profit margins

Labour productivity Cost of labour may be significant cost Higher the labour productivity, the lower the wage cost per unit

How do you measure quality? Customer satisfaction ratings Customer complaints Scrap rate Punctuality Deliveries on time expressed as % of total deliveries

Capacity utilisation Capacity The maximum total level of output or production that a business can produce in a given time period. A company producing at this level is producing at ‘full capacity’ Capacity utilisation The percentage of a firm’s total possible production level that is being reached. If it can produce 100 units, but actually produces 75, then capacity utilisation is 75%

Capacity utilisation = actual output per time period maximum possible output per time period If your capacity utilisation is 75%, you have 25% spare capacity What is the ideal capacity utilisation?

Why is capacity utilisation important? Relationship with other operational targets: Unit costs Quality

Managing capacity utilisation Two types of problem: Under-utilisation (spare capacity) Capacity shortage

Causes of spare capacity New competitors entering the market Fall in demand due to change in taste or fashion Unsuccessful marketing Seasonal demand Over-investment in fixed assets Merger or takeover  duplication of many resources & sites

Impact of spare capacity Disadvantages Can increase costs Higher proportion of fixed costs per unit Lower profit levels May portray negative image of firm Employees may become demotivated

Impact of spare capacity Advantages More time for maintenance, repair, training, etc. Less pressure & stress for employees Allows a company to cope with sudden increase in demand

Matching production & demand Balance demand & supply to achieve full capacity utilisation Increase demand – how? Rationalisation to tackle spare capacity

Ways to reduce capacity Sell off all or part of production area Change to a shorter working week, e.g. Honda Honda Laying off workers Transferring resources from another area

Ways to increase capacity Building or extending factories/plants Staff work overtime or longer hours Hiring new staff A flexible workforce Non-standard orders

Subcontracting When an organisation asks another business to make all or a part of its product Reduces capacity utilisation problems

Advantages React quickly to any change in demand Enjoy efficiencies provided by a specialist operator Firms can focus on core business Non-standard orders can be given to subcontractors so that the firm benefits with no disruption to normal production

Non-standard orders A business decision relating to a one-off contract. Usually, the non-standard order requires a response to a request to supply a fixed quantity of a product at a particular price (invariably a lower price than usual)

Disadvantages Quality is no longer directly under firm’s own control Excessive subcontracting erodes a company’s operations base and its ability to initiate research & make changes Opportunity cost of subcontracting should be evaluated – it may be more expensive that producing in-house May require a firm to give confidential information to a supplier (e.g. details of methods & patents)

Stock control The management of levels of raw materials, work in progress & finished goods in order to reduce storage costs while still meeting the demands of the customer

Advantages of high stock levels Customers’ demands met promptly No loss of goodwill caused by stock-outs Sudden increases in demand can be dealt with efficiently Production lines are not halted because of shortages of raw materials Companies can benefit from bulk buying and longer production runs

Advantages of low stock levels Reduced warehousing costs are possible Opportunity cost is low Security and pilferage costs are lower Perishable products less likely to deteriorate or become obsolete Cash-flow problems due to cash being tied up in stock are less likely

Non-standard orders How do you decide whether to accept a special order?

Key operational factors Effect that decision has on capacity utilisation Flexibility of capacity in the organisation Impact on costs Is there potential for future (more profitable) orders? Effect on staff