Business (9625) | Operational performance

Welcome to Operational Performance!

Hello! This chapter is all about the engine room of the business: the Operations Function. Whether a business makes cars or delivers healthcare, operations management determines how they deliver their goods or services efficiently and effectively. If you can master this section, you’ll understand how businesses turn raw materials (inputs) into final products (outputs) while keeping costs low and quality high. Let’s get started!

---

3.2.1.1 The Importance and Objectives of Operations Management

What is Operations Management?

Operations management is the process of managing the resources and activities needed to create and deliver goods and services. Simply put, it's about turning inputs (land, labour, capital) into desired outputs.

Why is Operations Management Important?

Effective operations directly affects a business's competitiveness. If your operations are excellent, you can:

• Produce items at a lower unit cost, allowing you to charge less or achieve higher profits.
• Deliver higher quality, leading to better customer satisfaction and reputation.
• Be more flexible and responsive to customer demands.

The Interrelationship with Other Functions

Operations doesn't work in isolation. Decisions made here impact everyone else:

• Marketing: Operations determines what product quality and quantity Marketing can sell. (E.g., if operations is slow, marketing can't promise quick delivery.)
• Finance: Operations plans require budgets (for equipment, materials). Efficient operations lead to lower costs, improving profitability targets set by Finance.
• Human Resources (HR): Operations dictates the skills, number, and type of staff (e.g., highly skilled technicians for complex machinery) that HR must hire and train.

Key Operational Objectives (The Performance Targets)

Operations managers set targets to measure success. These objectives include:

1. Total Costs and Unit Costs: The lower the costs, the more competitive the pricing can be. Unit cost (or average cost) is the cost of producing one unit.
   Formula Reminder: Unit Cost = Total Costs / Total Output
2. Measures of Quality: Ensuring the product or service meets the required standard. This could be measured by the number of defects or customer complaints.
3. Speed of Response: How quickly the business can fulfil an order or react to customer issues. (Crucial for fast food and online retail!)
4. Flexibility: The ability to adapt quickly to changes in demand (e.g., producing different product versions or varying output levels).
5. Environmental Objectives: Targets related to sustainability, reducing waste, recycling, and lowering the carbon footprint. (E.g., reducing packaging materials.)
6. Customer Satisfaction: How happy customers are with the product or service received, often measured via surveys or repeat purchases.

The Challenge of Trade-Offs

Don't worry if this seems tricky at first! The biggest challenge in operations is the trade-off: you usually can't maximise one objective without sacrificing another.

Example: If you want maximum Speed of Response (very fast delivery), you often have to hold a lot of inventory (Just in Case), which increases Total Costs. Or, if you cut costs drastically, you might compromise Measures of Quality. Managers must find the optimal balance for their specific business context.

---

3.2.1.2 Operations Planning and Data

Operational Planning

Operational Planning involves the detailed steps taken to achieve the operational objectives. This involves setting specific operational objectives (like reducing defect rates by 5%) and allocating budgets (the money available for purchasing resources or new machinery).

Interpreting Operations Data (Calculations!)

To know if operations are successful, we must calculate and interpret key data points. These formulas help measure how well resources are being used—this is known as Productivity.

1. Productivity Measures

Productivity is a measure of the efficiency of a factor of production (input). It calculates the output generated per unit of input.

Labour Productivity

Measures output relative to the number of workers or hours worked. $$ \text{Labour Productivity} = \frac{\text{Total Output}}{\text{Number of Employees (or Labour Hours)}} $$ Example: If a factory produces 10,000 chairs a week with 50 workers, labour productivity is 200 chairs per worker.

Capital Productivity

Measures output relative to the capital equipment used. $$ \text{Capital Productivity} = \frac{\text{Total Output}}{\text{Capital Employed}} $$ Did you know? Increasing capital productivity often means investing in better technology or ensuring machinery is running constantly.

Sales Per Employee

While not a direct productivity measure, this KPI helps assess the revenue generated by the workforce, linking HR performance to financial success. $$ \text{Sales per Employee} = \frac{\text{Revenue (Sales)}}{\text{Number of Employees}} $$

2. Cost and Capacity Measures

Unit Costs (Average Costs)

We saw this earlier. It's vital for calculating profit margins. $$ \text{Unit Cost} = \frac{\text{Total Costs}}{\text{Total Output}} $$

Capacity and Capacity Utilisation

Capacity is the maximum output a business can produce given its current resources (machinery, factory space, staff).

Capacity Utilisation measures how much of that maximum capacity is actually being used. $$ \text{Capacity Utilisation} = \frac{\text{Actual Output}}{\text{Maximum Potential Output}} \times 100 $$

Interpretation: A high capacity utilisation (e.g., 95%) means the firm is using its resources very efficiently, but it risks breakdown and has little flexibility to take on new orders. A very low percentage (e.g., 50%) means wasted resources and high fixed costs per unit.

---

3.2.1.3 Operations and Competitiveness: Efficiency, Lean and Quality

The Importance of Efficiency and Productivity

Efficiency means achieving maximum output with minimum inputs (doing things right). Productivity is the measure of that efficiency. Businesses aim to increase productivity to lower unit costs and improve competitiveness.

Ways to Increase Efficiency and Productivity

• Investment in Technology/Capital: Buying faster, more accurate machinery (e.g., automation in a factory).
• Improved Training: Ensuring labour is skilled, reducing errors and increasing speed.
• Better Organisation: Streamlining processes and workflow (a key part of Lean Production).
• Motivation: A motivated workforce often works faster and more carefully.

Resource Mix: Labour vs. Capital Intensive Processes

A key decision is how to combine inputs (labour and capital):

1. Labour Intensive: Production relies heavily on human workers.
Example: A high-end bespoke tailor, hairdressing, or a complex consulting firm.
Benefits: Flexibility, easy to adapt to customer needs.
Disadvantages: High wage costs, lower output volume, potential HR issues (strikes, turnover).

2. Capital Intensive: Production relies heavily on machinery and technology.
Example: Car manufacturing, chemical plants, automated warehouses.
Benefits: High output volume, consistent quality, lower unit costs in the long run.
Disadvantages: High fixed costs, lack of flexibility, risk of technology obsolescence.

Lean Production

Lean Production is an approach that aims to eliminate all forms of waste in the production process, thereby improving efficiency and reducing costs.

Key concepts within Lean Production:

• Just In Time (JIT) Operations: Holding virtually zero buffer stock. Materials and components arrive exactly when they are needed for production.
• Kaizen: Japanese for "continuous improvement." This involves small, ongoing improvements across the business, usually driven by employee suggestions.
• Simultaneous Engineering: A project management approach where different stages of product development (design, manufacturing planning, testing) are conducted at the same time, rather than sequentially, speeding up the process.

Benefits and Difficulties of JIT

Benefits: Reduced inventory holding costs, less risk of stock becoming obsolete, frees up warehouse space.
Difficulties: Highly reliant on reliable suppliers; if a supplier is late or provides faulty goods, the entire production line stops (no buffer stock to cover errors!).

Quality Management

Quality is vital for customer satisfaction and long-term competitiveness. It refers to whether a product or service meets the expectations of the customer.

Measuring Quality

Quality can be measured through:

• Defect rates (number of faulty items per thousand produced).
• Customer feedback scores/reviews.
• Product returns or warranty claims.

Methods of Improving Quality

1. Quality Control (QC): Inspecting products at the end of the production process to identify and reject faulty items. (Think of a checker at the end of an assembly line.)
2. Total Quality Management (TQM): An approach that involves all employees in the business, focusing on continuous improvement and aiming to prevent defects before they happen. Quality becomes everyone's responsibility, not just the inspectors.

The consequences of poor quality are severe: damaged reputation, costly recalls, loss of customer loyalty, and increased waste (rework or scrapping products).

Improving Flexibility and Speed of Response

Improving these areas adds value, especially in dynamic markets.

• Flexibility: Can be improved by using multi-skilled staff, investing in adaptable machinery, and holding semi-finished components instead of final products.
• Speed of Response: Improved through better logistics, efficient IT systems, or by decentralising decision-making (giving frontline staff the power to solve customer problems instantly).

---

3.2.1.4 Inventory and Supply Chain Management

Managing Supply to Match Demand

Matching supply to demand, especially when demand fluctuates (like during seasonal peaks), is crucial to avoid lost sales or excessive holding costs.

Ways to manage supply include:

• Outsourcing: Hiring another company to perform non-core activities (e.g., using a third-party logistics firm for deliveries).
• Flexible Labour: Using temporary staff, part-time employees, or zero-hours contracts during peak times to adjust labour supply instantly.
• Producing to Order: Only manufacturing a product once a customer places an order, which reduces finished goods inventory (e.g., custom furniture or specialised software).

The Problem: If supply doesn't match demand, you either have unsold stock (waste/cost) or stockouts (lost sales/unhappy customers).

Inventory Control

Inventory (or stock) refers to raw materials, work-in-progress, and finished goods held by the business. Effective inventory control minimizes costs while ensuring smooth production.

Key Inventory Control Chart Concepts

Inventory control charts visually manage stock levels over time. Key terms you must understand:

• Lead Time: The time delay between placing an order with a supplier and receiving the delivery.
• Buffer Level of Inventory (Buffer Stock): The minimum level of stock held to protect against unexpected delays in delivery or sudden increases in demand. This is safety stock.
• Re-order Level: The stock level at which a new order must be placed with the supplier. This must be high enough to cover demand during the lead time.
• Re-order Quantity: The amount of stock ordered each time.

JIT vs. JIC (Just In Case)

This is the core strategic choice in inventory:

Just In Case (JIC): Holding significant buffer stock to protect against uncertainties. This approach prioritises customer satisfaction and speed of response but leads to higher costs.

Just In Time (JIT): Holding minimal or zero stock. This approach prioritises cost reduction and efficiency but carries high risks if the supply chain fails.

Supplier Choice and Supply Chain Management

Choosing Suppliers

The choice of supplier significantly impacts operational performance. Managers must consider:

• Price and Quality: Finding the optimal balance between cost and defect rate.
• Reliability: Can the supplier consistently deliver on time? (Crucial for JIT).
• Location: Proximity affects transport costs and speed of delivery.
• Ethical and Environmental Standards: Ensuring the supplier meets the business's CSR goals.

The Importance of Managing the Supply Chain

The Supply Chain is the network of all individuals, organizations, resources, activities, and technology involved in the creation and sale of a product, from the delivery of source materials from the supplier to the manufacturer, through to the delivery of the finished product to the consumer.

Managing the supply chain effectively (especially global supply chains) is complex but vital for:

• Ensuring continuous supply.
• Maintaining high ethical standards (avoiding child labour, for instance).
• Controlling total costs.

The Importance of Logistics

Logistics is the process of managing the flow of goods, services, and information between the point of origin and the point of consumption.

Effective logistics management is incredibly valuable because it ensures the right product is delivered to the right place, at the right time, in the right condition, and at the lowest possible cost. This directly influences the speed of response objective. (Think how Amazon manages millions of deliveries daily—that’s world-class logistics.)