What are operations?
The process of taking inputs and turning them into outputs
Why is setting objectives important?
- The operations function of a business is the ‘engine room’ of the business, and like all engine, performance can and should be measured
- All business operations of whatever size and complexity should have objectives set
What are objectives relating to costs and volume focusing on?
- 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)
Explain why businesses may make cost and volume targets
Business 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
What is an example of cost and volume targets being used?
Example = 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.
What are quality targets?
Targets that help the business achieve or exceed the required level of quality for a successful business
What are examples of quality targets?
- Scrap/defect rates – a measure of poor quality
- Reliability – how often something goes wrong; average lifetime use
- Customer satisfaction – measured by customer research
- Number/incidences of customer complaints
- Customer loyalty – percentage of repeat business
Explain speed of response and flexibility targets
This examines how effectively the assets of a business are being utilised, and how responsive the business can be to short term or unexpected changes in demand. Efficiency and flexibility are key drivers of unit costs.
What are examples of speed of response and flexibility targets?
- Labour productivity – output per employee, units produced per production line, sales per shop
- Output per time period – potential output per week on a normal shift basis, potential output assuming certain levels of capacity utilisation
- Capacity utilisation – the proportion of potential output actually being achieved
- Order lead times – the time taken between receiving and processing an order
What are environmental targets?
This is an increasingly important focus of operational targets as businesses face more stringent environmental legislation, and consumers increasingly base their buying decisions on firms that take environmental responsibility seriously. Targets are usually closely integrated into a firms approach to corporate social responsibility
What are 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
What is added value?
Added value is equivalent to the increase in value that a business creates by undertaking the production process
What is adding value?
Adding value is the difference between the price of the finished product/service and the cost of the inputs involved in making it
What are internal influences on operational objectives and decisions?
- Corporate objectives
- Finance
- Human resources
- Marketing issues
How do corporate objectives affect operational objectives?
as with all the functional areas, corporate objectives are the most important internal influence. An operations objective (e.g. higher production capacity) should not conflict with a corporate objective (e.g. lowest unit costs)
How does finance affect operational objectives and decisions?
operations decisions often involve significant investment and cost. The financial position of the business (profitability, cash flow, liquidity) directly effects the choices available
How does human resources affect operational objectives?
for a services business in particular, the quality and capacity of the workforce is a key factor in affecting the operational objectives. Targets for productivity, for example, will be affected by the investment in training and the effectiveness of workforce planning
How does marketing issues affect operational objectives?
the nature of the product determines the operational set up. Regular changes to the marketing mix – particularly product – may place strains on the operations, particularly if production is relatively inflexible
What are external influences on operational objectives and decisions?
- Economic environment
- Competitor efficiency flexibility
- Technological change
- Legal and environmental change
How does the economic environment affect operational objectives?
crucial for operations. Sudden or short term changes in demand directly impact on capacity utilisation, productivity etc. Changes in interest rates impact on the cost of financing capital investment in operations
How does competitor efficiency flexibility affect operational objectives?
quicker, more efficient, or better quality competitors will place pressure on operations to deliver at least comparable performance
How does technological change affect operational objectives?
also very significant – especially in markets where product life cycles are short, innovation is rife and production processes are costly
How does legal and environmental change affect operational objectives?
Greater regulation and legislation of the environment places new challenges for operations objectives
-
3.4.1 Setting operational objectives23
-
3.4.2 Analysing operational performance9
-
3.4.3 Making operational decisions to improve performance: increasing efficiency and productivity32
-
3.4.4 Making operational decisions to improve performance: improving quality15
-
3.4.5 Making operational decisions to improve performance: managing inventory and supply chains50
