3.4 Decision making to improve operational performance

• Operations


  The process of taking inputs and turning them into outputs
• Importance of setting operational objectives


  • Operations function is the 'engine room' of the business, and like all engines, performance can and should be measured
  • All business operations of whatever size and complexity should have objectives set
• Operational objectives


  • Cost and volume targets
  • Quality targets
  • Speed of response and flexibility targets
  • Environmental targets
  • Added value targets
• Unit cost


  The average cost of producing a unit of the product
• Businesses competing in the same industry face similar cost structure, but each will vary in terms of its 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
• Objectives relating to costs and volume


  • Productivity and efficiency (e.g. units per week or employee)
  • Unit costs per item
  • Contribution per unit (breakeven)
  • Number of items to produce (e.g. per time period, or per machine etc)
• Example of a business with cost and volume objectives


  • Tkmaxx, a discount retailer, as they bring in old stock and they sell them at a lower price. They also like to have a larger volume of a range of clothes/shoes/accessories etc so that the customer has a wide range of choice. However they don't have many if the same product as all of their products are end of line/range.
• Ways of measuring quality achievement

  • Scrap/defect rates
  • Reliability
  • Customer satisfaction
  • Number/incidences of customer complaints
  • Customer loyalty
• Objectives relating to speed of response and flexibility

  • Labour productivity
  • Output per time period
  • Capacity utilisation
  • Order lead times
• Examples of environmental targets


  • Use of energy
  • Proportion of production materials that are recycled
  • Compliance with waste disposal regulations/proportion waste land fill
  • Supplies of raw materials from sustainable sources
• Added value


  The increase in value that a business creates by undertaking the production process
• Internal influences on operational objectives and decisions

  • Corporate objectives
  • Finance
  • Human resources
  • Marketing issues
• External influences on operational objectives and decisions


  • Economic environment
  • Competitor efficiency flexibility
  • Technological change
  • Legal and environmental change
• Operations data


  • Labour productivity
  • Unit costs
  • Capacity utilisation
• Labour Productivity


  Measures the level of output achieved with a given number of employees (how efficient the workforce is)
• Unit Costs (average costs)


  Measures the costs of producing ONE unit/product of output
• Capacity Utilisation


  The percentage of total capacity that is being achieved in a given period
• The use of data such as capacity utilisation, unit costs, and labour productivity, all allow for decisions to be made more efficiently and effectively
• Importance of capacity


  • It is often used as a measure of productive efficiency
  • Average production costs tend to fall as output rises – so higher capacity utilisation can reduce unit costs, making a business more competitive
  • Firms usually aim to produce as close to full capacity (100% utilisation) as possible
• Increasing capacity often results in higher fixed costs
• Importance of efficiency and labour productivity

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

  • Measure performance and set targets
  • Streamline production processes
  • Invest in capital equipment (automation + computerisation)
  • Invest in employee training
  • Make the workplace conducive to productive effort
• How to improve efficiency


  • Improve land fertility
  • Use renewable or recyclable materials
  • Increase training and education
  • Increase scale of production
  • Use a optimal mix of output
  • Invest more in capital equipment
• Cost Minimisation


  A financial strategy that aims to achieve the most cost-effective way of delivering goods and services to the require level of quality
• Economies of Scale


  When unit costs fall as output increases
• Types of Economies of Scale

  • Technical
  • Specialist
  • Purchasing
  • Marketing
  • Financial
  • Managerial
• Lean Production


  An approach to management that focuses on cutting out waste, whilst ensuring quality. This approach can be applied to all aspects of a business – from design, through production to distribution.
• Types of waste in lean production


  • Over-production
  • Waiting time
  • Transport
  • Stocks
  • Motion
  • Defects
• Key aspects of lean production


  • Time based management
  • Simultaneous engineering
  • Just in time production (JIT)
  • Cell production
  • Kaizen (Continuous improvement)
  • Quality improvement and management
• Advantages of lean production


  • Lead times are cut
  • Damage, waste and loss of stocks/equipment are lowered
  • A greater focus on customer needs
  • Improved quality through the introduction of kaizen and qual
• Over-production


  • Making more than is needed – leads to excess stocks
• Waiting time


  • Equipment and people standing idle waiting for a production process to be completed or resources to arrive
• Transport


  • Moving resources (people, materials) around unnecessarily
• Stocks


  • Often held as an acceptable buffer, but should not be excessive
• Motion


  • A worker who appears busy but is not actually adding any value
• Defects


  • Output that does not reach the required quality standard – often a significant cost to an uncompetitive business
• Key aspects of lean production

  • Time based management
  • Simultaneous engineering
  • Just in time production (JIT)
  • Cell production
  • Kaizen (Continuous improvement)
  • Quality improvement and management
• Factors influencing workforce productivity


  • Extent and quality of fixed assets (e.g. equipment, IT systems)
  • Skills, ability and motivation of the workforce
  • Methods of production organisation
  • External factors (e.g. reliability of suppliers)
• Labour-intensive production


  Relies mainly on labour