analysing operational performance

• Performance measures

  The first step towards improving all the important things like sales, profits, productivity and quality
• Dashboards

  Management tool used in most businesses to track performance through an agreed set of metrics
• Dashboards

  • Take complex data and provide the business with a quick visual awareness of current performance
  • Give an at a glance performance data
• Labour productivity


  Looks at output from each worker and can be measured by the output over a length of time
• Unit costs

  cost of producing one unit per output -referred to as 'average cost of production'
• Capacity


  Maximum amount of production or activity possible to process e.g number of cars that come off an assembly line
• Capacity utilisation

  proportion of a business's capacity that is actually being used over a specific period
• Peter drucker said 'what gets measured gets managed'
• Labour productivity

  • Concerned with the volume of output produced by each employee
  • Indicator of how efficient the business operation is
• Why labour productivity matters

  • Business efficiency and profitability are closely linked to productive use of labour
  • In order to remain competitive, a business needs to keep its unit costs down
  • Labour costs are a significant part of total costs
• Labour productivity

  Output per time period/ number of employees
• Factors influencing labour productivity

  • Extent and quality of fixed assets(machinery, equipment,IT systems)
  • Skills, ability and motivation of workforce
  • External factors(reliability of suppliers)
• How to improve labour productivity

  1. Measure performance and set targets

  2. Streamline production process

  3. Invest in capital equipment(automation + computerisation)

  4. Invest in employee training

  5. Improve working conditions
• Introducing efficiency measures that allow people to be more productive is one way of improving performance measures
• Potential problems when trying to increase productivity

  • Potential 'trade off' with quality-higher output must be of right quality
  • Employee resistance depending on the methods used (e.g technology)
  • Employees may demand higher pay for their higher productivity
• Unit cost


  The cost of producing one unit per output , or delivering one instance of a service, taking into account any fixed and variable costs
• This measure is useful as it helps a business owner understand when they will make a profit i.e how many items of a product they need to sell before making a profit
• Capacity

  A measure of how much output a business can achieve in a given period
• Capacity utilisation

  The proportion(percentage) of a business's capacity that is actually being used over a specific period
• Why capacity utilisation matters

  • Useful measure of productive efficiency since it measures whether there are idle resources
  • Average production costs tend to fall as output rises-so higher production reduces unit costs, making a business more competitive
  • High level of capacity utilisation is required if a business has a high break even output due to significant fixed costs of production
  • It shows the ability of the business to respond to changes in demand
• Most firms are more comfortable with running at 90% utilisation as it gives them some capacity to deal with fluctuation in demand immediately without incurring extra costs
• Reasons why businesses operate below capacity

  • Loss of market share-competitors gain customers
  • Seasonal variations in demand-weather changes leads to lower demand
  • Maintenance repair-capacity is temporarily unavailable
• Service businesses are often in a better position to deal with fluctuations in demand as they can quickly take on extra staff using short term or casual contracts to boost their permanent workforce if needed
• Harder for this business to be flexible as its investment is in premises, equipment and skilled people
• Many factories build in some spare capacity so they don't have to turn work away when it's offered, but use the spare capacity for routine and preventative maintenance in the meantime
• Consequences of operating below capacity utilisation

  • Business has resources that aren't utilised e.g factory space,machinery
  • Acting inefficiently
  • Increases unit costs-impact on competitiveness
  • Less likely to reach break-even output
  • Capital tied up in under-utilised assets
• Consequences of operating to close to capacity

  • No flexibility-loss of sales
  • If an unexpected order came in that could lead to a longer term contract the business may have to turn this down
  • Negative effect on quality; production is rushed,less time for quality control
• Consequences for employees of operating close to capacity

  • Added workload and stress
  • De-motivating
• Strategies to increase capacity

  • Marketing strategies-price reduction, promotions,distribution
  • Rationalisation-downsizing organisation to bring down overall capacity to increase capacity utilisation e.g moving to smaller premises, closing outlets
• Strategies to cope with high capacity

  • Outsource work to other firms-hire other firms to complete work on their behalf
  • Reduce demand-increase price so level of output is achieving a greater sales price
  • Waiting lists for products
• Why capacity is important

  • Supports strategic decision making- what people, tech and equipment to invest in
  • Helps with forecasting demand, sales, capital investment and impact
  • Indicate commercial viability and competitiveness
• Analytics

  Data about what is happening in the business and is based on statistical info such as sales figures
• Once data has been collected over a period of time it can be used to forecast what likely to happen in the future
• Trends begin to appear
• Particularly useful when industries operate in a seasonal cycle e.g a courier firm is likely to be able to forecast the volume of parcels for delivery after black Friday