Unit 4: Operational Performance

• Capacity


  The maximum output that a business can produce in a given time period with the available resources
• Capacity of Wembley Stadium

  • 90,000
• Maximum capacity for Birkin Bags

  • 70,000 per year
• Maximum capacity for a fast-food outlet

  • Serve 1,000 customers per hour
• Maximum capacity for a call-centre

  • Handle 10,000 calls per day
• Maximum capacity for a car production line

  • Complete 50,000 cars per year on average
• Capacity Utilisation


  The proportion (percentage) of a business' capacity actually being used over a specific period
• Capacity utilisation can influence the image of a company
• Formula for Capacity Utilisation


  Actual level of output / Maximum possible output. x 100
• Unused capacity examples


  e.g. chairs, raw materials
• Unused capacity is called spare capacity
• Reasons why businesses operate below capacity

  • Lower than expected market demand
  • A change in customer tastes
  • Loss of market share
  • Competitors
  • Seasonal variations in demand
  • Weather changes lead to lower demand
  • Maintenance and repair programmes
  • Capacity is temporarily unavailable
• Dangers of operating at low capacity


  • Reduced competitiveness
  • Harder to reach break-even output
  • Capital tied up in under-utilised areas
  • Staff may become bored and have job security concerns
  • Portrays a negative image
  • Higher unit costs leading to lower profit levels
• Pros of operating at high capacity

  • Unit costs will be lower therefore more competitive
• Cons of operating at high capacity

  • Can't meet surges in demand
  • Production may be rushed
  • Strain on resources e.g. stress and tiredness
• Over-utilisation

  When the firm attempts to produce more than its capital is capable of
• How a business can work at more than 100% capacity utilisation

  1. Increase workforce hours

  2. Extra shifts; encourage overtime; temporary staff

  3. Sub-contract some production activities

  4. Reduce time spent maintaining production equipment
• Why capacity utilisation matters?

  • Useful measure of productive efficiency since it measures whether there are idle resources in business
  • Higher utilisation can reduce unit costs, making a business more competitive
  • Higher levels Of capacity utilisation is required if a business has a high break-even output
• Added Value

  The process of increasing the worth of a product by modifying it to increase its value
• Inputs


  • Transformation
  • Creating value
  • Outputs
• Added Value

  Selling price - Cost of production
• Ways a business can add value


  • Celebrity endorsement
  • Build brand reputation
  • Delivering excellent service
  • Differentiate through product features & benefits
  • Offering convenience
  • Packaging
• The 4 Vs of adding value


  • Volume of output
  • Variety of output
  • Visibility of production
  • Variation of demand
• Low value adding operations


  • Variation in demand is low
  • Visibility is low
  • Variety is low
  • Volume is high
  • Unit costs are high
  • Capacity utilisation is high
  • Processes are standardised
  • Employees have limited customer service skills
• High value adding operations


  • Variation in demand is high
  • Visibility is high
  • Variety is high
  • Volume is low
  • Unit costs are low
  • Capacity utilisation is low
  • Processes are flexible
  • Employees have good customer service skills
• Unit Cost

  The total spending by a company to produce, store and sell one unit of a particular product or service
• Measuring Operational Performance


  1. Total costs

  2. Total output

  3. Labour productivity

  4. Labour costs per unit
• As cost per unit have fallen the business is benefitting from economies of scale
• Formula: Labour productivity or Output per employee 


  Total value of output / Total number of employees
• How to increase efficiency and labour productivity 


  • Productivity bonus
  • Productivity deal
  • Staff training
  • Investment in new machinery and equipment
• Productivity bonus

  1. A business may decide to boost their productivity levels by offering employees a productivity bonus

  For example, if employees increase production by 5% they may be entitled to a Lump sum bonus
• Productivity bonus


  This will increase the costs of the business so may not maximise efficiency
• Capacity utilisation = Actual Output / Maximum Potential Output x 100
• Actual output = Number of units produced during a given period
• If actual output is less than maximum potential output then there is excess capacity
• Excess capacity can lead to underutilised labour and capital which reduces efficiency
• Productivity deal

  An agreement for employees that aims to make them work harder and become more efficient
• Staff Training

  Helps workers become better trained and more productive, however is expensive for the business
• Investing in new machinery

  1. Will make production more efficient and produce more goods per hour

  3. Machinery and capital expenses are costly
• Difficulties increasing efficiency and labor productivity


  • Main problem is resource constraints
  • Poor training or unskilled staff leads to mistakes and wastage
  • Unmotivated employees won't work hard even if paid