Operational Objectives

Objectives How the firm’s operational objectives/targets of a business are linked to its corporate objectives Examples of typical operational objectives Internal and external influences on operational objectives

…then look at some big global businesses and fill out the worksheet Research Operational objectives: quality cost targets volume targets innovation efficiency environmental targets Research businesses and find at least one real-life example of each of the operational objectives listed above. …then look at some big global businesses and fill out the worksheet

Understanding Operational Objectives 4

Key types of operational targets Cost & volume Quality Efficiency & flexibility Environmental 5

Cost & volume targets A business needs to ensure that operations are cost-effective Traditional measure of cost-effectiveness is “unit cost” (total costs divided by total units) Businesses in the same industry face similar cost structures, but each varies in terms of productivity, efficiency and scale of production The business with the lowest unit cost is in a strong position to be able to compete by being able to: Offer the lowest price, or Make the highest profit margin at the average industry price 6

Examples of cost & volume targets Productivity & efficiency (e.g. units per week or employee) Unit costs per item Contribution per unit Number of items to produce (per time period, or per machine etc) 7

The Business Need for Quality Quality is one of the most important challenges facing a business Markets are more competitive: customers are more Knowledgeable Demanding Prepared to complain about poor quality Able to share information about poor quality (e.g. via email & social networking) If a business can develop a reputation for high quality, then it may be able to create an advantage over its competitors 8

Possible quality targets Scrap / defect rates: a measure of poor quality Reliability – how often something goes wrong; average lifetime use etc Customer satisfaction – measured by customer research Number / incidence of customer complaints Customer loyalty – e.g. percentage of repeat business Percentage of on-time delivery 9

Efficiency & flexibility targets Closely linked to cost targets Look at how effectively the assets of the business are being utilised Also measure how responsive the business can be to short-term or unexpected changes in demand Efficiency and flexibility are key determinants of unit costs 10

Examples of efficiency & flexibility targets Labour productivity: e.g. output per employee, units produced per production line; sales per shop Output per time period: e.g. potential output per week on a normal shift basis; potential output assuming certain levels of capacity utilisation Capacity utilisation: the proportion of potential output actually being achieved Order lead times: e.g. the time taken between receiving and processing an order 11

Environmental targets An increasingly important focus of operational targets Businesses face more stringent environmental legislation Customers increasingly base their buying decisions on firms that take environmental responsibility seriously 12

Examples of environmental targets Use of energy efficiently Proportion of production or packaging materials that are recycled Compliance with waste disposal regulations / proportion of waste to landfill Supplies of raw materials from sustainable sources 13

Internal influences on operational objectives Corporate objectives As with all the functional areas, corporate objectives are the most important internal influence. An operations objective (e.g. higher production capacity) should not conflict with a corporate objective (e.g. lowest unit costs) Finance Operations decisions often involve significant investment and cost The financial position of the business (profitability, cash flow, liquidity) directly affects the choices available Human resources For a services business in particular, the quality and capacity of the workforce is a key factor in affecting operational objectives. Targets for productivity, for example, will be affected by the investment in training and the effectiveness of workforce planning Marketing issues The nature of the product determines the operational set-up. Regular changes to the marketing mix – particularly product – may place strains on operations, particularly if production is relatively inflexible 14

External influences on operational objectives Economic environment Crucial for operations. Sudden or short-term changes in demand impact on capacity utilisation, productivity etc. Changes in interest rates impact on the cost of financing capital investment in operations Competitor efficiency flexibility Quicker, more efficient or better quality competitors will place pressure on operations to deliver at least comparable performance Technological change Also very significant – especially in markets where product life cycles are short, innovation is rife and production processes are costly. Legal & environmental change Greater regulation and legislation of the environment places new challenges for operations objectives. 15