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.
Actual output per year or month
• C.U. = Maximum possible output per year or month
• 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
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 business
Employees 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