Unit 4 - Operation:

• Capacity is Maximum Output with the Resources Currently Available

  The capacity of an organisation is the maximum output that it can produce in a given period without buying any more fixed assets- machinery, factory space, etc.

  Capacity depends on the number of employees and how skilled they are.

  It also depends on the technology the business has — what machinery it has, what state it's in. what kind of computer system it has etc.

  The kind of production process the business uses will also affect its capacity.

  The amount of investment in the business is also a factor.
• Capacity Utilisation


  90% is better than 100%
• High capacity utilisation


  • Better than low capacity utilisation
• 100% capacity utilisation has drawbacks
• Businesses have to consider all their operational objectives when they plan their capacity usage


  1. Cost isn't the only thing to think about

  2. It might not be possible to operate at 100% capacity and keep quality levels high
• The business may have to turn away potential customers because it can't increase output any more
• There's no downtime - machines are on all the time
• If a machine breaks down, it'll cause delays as work piles up waiting for it to be fixed
• There's no time for equipment maintenance, which can reduce the life of machinery
• There's no margin of error
• Mistakes are more likely when everyone's working flat out
• The business can't temporarily increase output for seasonal demand or one-off orders
• Firms with High Capacity Utilisation can Increase their Capacity
• Ways firms can increase capacity

  1. Use facilities for more of the working week

  2. Have staff working in two or three shifts in a day, and on weekends and bank holidays

  3. Buy more machines

  4. Increase the staff working the low parts of the day, and have staff work overtime
• Businesses can increase their capacity by increasing productivity

  1. Reorganise production by reallocating staff to the busiest areas

  2. Increase employee motivation
• Subcontracting

  When a business uses another firm to do some work on its behalf
• Subcontracting


  • A manufacturer of detergent might make detergent for a supermarket and package it with the supermarket's own label
• Companies can subcontract work to other businesses in busy periods
• This means they can meet unexpected increases in demand without increasing their own capacity and having the costs of extra staff and facilities all year round
• Operational Objectives

  Targets set for Production
• Setting operational objectives


  • Can help a company achieve its overall objectives
  • Operational decisions will become focused on meeting these objectives
  • The performance of the production department can be reviewed and assessed on its ability to meet these operational objectives
• Types of Operational Objectives


  • Quality
  • Costs
  • Flexibility
  • Efficiency
  • Innovation
  • Environment
  • Speed of Response
  • Dependability
• Quality Objective


  Likely to involve either maintaining or improving levels of quality
• Quality Objective Examples

  • Ensure 95% of products last 5 years or longer
  • Reduce number of customer complaints per month
• Cost Objective

  • Aim to cut costs, especially if competing on price
  • Can cut fixed costs or variable costs
• Cost Objective Examples

  • Restructure to remove a layer of management
  • Reduce costs of an individual product
• Flexibility Objective


  • Ability to react to what customers want
  • Vary amount of goods/services produced to match demand
• Flexibility Objective Example


  • Reduce production of healthy ready-meals at Christmas
• Efficiency Objective


  • Aim to make better use of resources to reduce costs and increase profit
  • Increase capacity utilisation
  • Improve labour and capital productivity
• Innovation Objective

  • Set R&D targets to produce new products or improve existing ones
  • Can be hard to achieve due to unexpected problems
• Innovation Objective Example


  • Produce an electric car that fully charges in 5 minutes by 2026
• Environmental Objective

  Cut carbon emissions or use more recycled raw materials
• Speed of Response Objective

  Decrease production time, customer waiting time, or time to get new products to market
• Dependability Objective


  • Ensure customers and suppliers can depend on the business
  • Allows business to charge higher prices
• Added Value


  Increasing the difference between the cost of raw materials and the selling price
• Adding value will usually increase profits
• Added Value Formula


  Sales Revenue - Cost of Bought-in Goods and Services
• Ways to Increase Added Value

  • Increase selling price
  • Reduce costs of raw materials
• Customers will pay more for a better quality product
• Other ways to increase value: be environmentally friendly, offer quick speed of response, and be dependable