3.4 Operational Performance

Question 1

What are the three main types of business objectives

Answer 1

-Corporate objectives

-Functional objectives

-Operational objectives

Question 2

What are operational objectives?

Answer 2

-Operations management is concerned with those aspects of the business which are directly linked to the fulfilment of customer orders

-Operations management take inputs, processes them to form an output and distributes to the customer

-Operational objectives relate to how efficiently aspects of this process are achieved.

Question 3

Measures of efficiency for operational objectives

Answer 3

-Operational objectives relate to a number of measures of efficiency including:

-Cost
      -The cost of each individual 
       product or service supplied.
-Quality
      -Quality of raw materials, 
       processes, output and customer 
       service to match customers’ 
       expectations
-Speed of response and flexibility
      -The speed with which customers’ 
       needs are met and the ability to 
       tailor the good to meet individual 
       needs I.e matching supply to 
       demand.
-Dependability
      -Getting the right product, with the 
       right quality quantity to the right 
       customer on time 
-Environmental objectives
      -Meeting targets to minimise any 
       detrimental effects of the 
       operations of the business on the 
       environment
 -Added value
      -The ability to ensure that the value 
       of the output is higher than the 
       sum of the value of all the inputs.

Question 4

Internal influences on operational objectives

Answer 4

-A firm will have to take into account the resources that it has available. This may take different forms:
-Finance - Budgeting will be
particularly important in a
competitive environment.
-People - The skills of the workforce
and how they are applied are
fundamental to a firm
-Effective marketing - Important in the
service sector where customers are
persuaded to buy.
-Capital - A capital intensive approach
will improve speed and quality but
will mean high initial costs.

-A firm will need to take into account the nature of the product:
-Target market - Niche might require
specialist operations management
such as expertise in that field; mass
might lead to highly automated,
capital intensive operations.
-Regulatory environment - Legal
requirements will heavily impact on
operations e.g waste.
-Geographical - Location of industry
and the closeness of the available
factors of production e.g Sheffield
steel financial expertise in the city of
london.

Question 5

External influences on operational objectives

Answer 5

-A firm will have to take into account the performance of its competitiors. This may take different forms:
-Benchmarking - identifying best
practice from other firms and
adopting elements of this in the
firm’s performance
-Environmental targets - setting
targets to improve performance e.g
wastage
-Innovation - In order to differentiate
from the competition.

-A firm will have to take into account demand:
-Price elasticity of demand - elasticity
will affect the revenue and a firm can
take this into account when setting
up an operations budget for the
product - the more inelastic the
product the higher the budget is
likely to be.
-Income elasticity of demand - if the
product is a luxury good it will be
income elastic and affected by the
position of the economy in the
business cycle. Necessities will be
income inelastic and the operations
budget is less likely to be cut in
recession ( or raised in a boom)

-A firm will account ethical factors:
-Ethics infers doing what is thought to
be morally correct
-Ethical sourcing of raw materials may
affect costs and speed of response.
-Ethical treatment of employees could
help achieve quality and
dependability
-Ethical treatment of waste helping
achieve environmental objectives.

Question 6

Operational data

Answer 6

-Operational data allows a business to measure the performance of the operations management function

-Performance can then be compared to quantifiable operational objectives

-Changes can then be made to key operational areas to improve the functions performance if necessary.

-Operational data includes:
-Labour productivity
-Unit costs (average costs)
-Capacity
-Capacity utilisation

Question 7

Labour productivity

Answer 7

-Measures output per worker

-Calculated as:
Total output/Number of employees

-Example:
-If rural output is 100000 units and
there are 2000 workers.
Labour productivity=
100000/2000=50 units per worker

-Labour Productivity will be influenced by a number of factors including:
-Training and skills of workforce
-Motivation
-Complexity of the product

Question 8

Unit cost

Answer 8

-The average cost of producing a single unit of output

-Calculated as:
-Total cost/ output

-Example
-Fixed cost = £10000 variable cost= £3
-Total cost for 1000 units =
£10000+(£3x1000) = £13000
-Unit cost = £13000/1000 = £13

-Targets will be Linked to keeping unit cost as low as possible while not affecting quality.

Question 9

Factors influencing unit cost

Answer 9

-Factors influencing unit costs include:
-Number of units produced
-Spread fixed costs
-Negotiate discounts with suppliers
-Greater use of assets
-Labour productivity
-Efficiency of work force
-Use of workforce hours
-Suppliers
-Cost of inputs
-Material usage
-Wastage

Question 10

Capacity

Answer 10

-The maximum amount of output achievable if all resources are fully utilised

-In the long run capacity can be increased by acquiring more resources e.g bigger premises, more machinery, introducing a 3rd shift

-In the long run capacity can also be reduced by downsizing resources e.g laying off workers, smaller premises, less machinery

-A business will aim to match capacity to demand

Question 11

Capacity utilisation

Answer 11

-Capacity utilisation is a measure of the percentage of potential output being achieved
-Percentage of seats occupied at
football match
-Percentage of t-shirts manufactured

-Calculated by:
-Actual Output/ maximum output x100

-Example
-The Eden hotel has 320 rooms of
which 250 are occupied
-Capacity utilisation=250/320x100=78%

Question 12

The use of data in operational decision making and planning

Answer 12

-Operational data is used to measure performance against predetermined targets

-Labour productivity
-Indication of workforce morale
-Is additional training required?
-Is Labour being used effectively?
-What steps could be taken to increase
labour productivity
-Unit costs
-Are average costs rising or falling?
-Look to change suppliers
-Can inputs be utilised more efficiently
-Inform pricing decisions
-Is waste being managed efficiently?
-Capacity
-Is capacity sufficient to meet demand
or too big
-Should the firm look to increase or
decrease capacity?
-Can demand be altered to make
greater use of capacity?
-Capacity utilisation
-Are resources being used effectively
or are assets being under utilised?
-Is the sufficient spare capacity to meet
targets of flexibility
-Can the business take on new
customers
-Are resources being stretched too
much

Question 13

Increasing Efficiency

Answer 13

-Operational efficiency involves maximising the output achieved from given inputs including machinery, materials and people.

-Efficiency can be improved using a number of methods, these include:
-Increasing capacity utilisation
-Increasing labour productivity
-Lean production techniques
-Choosing the optimal resource mix
-Using technology

Question 14

Capacity

Answer 14

-Capacity affects the ability of a firm to match supply to demand

-Capacity utilisation affects whether resources are being used efficiently or whether they are lying idle.
-Low capacity utilisation will mean the
resources are not being made to work
effectively for the business, this will
result in high unit costs.
-High capacity utilisation will mean the
firm is “sweating” it’s assets I.e they
are being made to work hard for the
business
-This will result in lower unit costs
-But may affect quality and cause
stress to the resources e.g workers
being pushed to work hard or no
maintenance time for machinery.

Question 15

Importance of capacity

Answer 15

-Ability to match supply to demand

-Inverse relationship between capacity utilisation and unit costs

-Image/ public perception

-Workforce motivation

-Ability to achieve business objectives

Question 16

How to utilise capacity efficiently

Answer 16

-Under utilisation
-Increase demand
-Downsize e.g sell off assets or
rationalise the workforce
-Lease off spare capacity

-Over utilisation
-Reduce demand
-Outsource parts of the business’
operations
-Increase capacity by investing in more
resources

Question 17

Labour productivity

Answer 17

-Increasing labour productivity lowers labour cost per unit (assuming employee costs stay the same) and hence unit cost.

-Therefore it is important to use workers efficiently

-Labour productivity can be increased in a number of ways including:
-Training
-Increasing motivation e.g financial
or non-financial rewards, job design.
-Implement new technology
-Better working practises
-Improved recruitment and selection

Question 18

Difficulties increasing labour productivity

Answer 18

-May impact negatively on quality and customer satisfaction.
-Damage to long term reputation
-Increase waste affecting unit cost

-Employees may feel exploited
-Working harder for the same pay,
may work with unions to negotiate
higher wages
-Business benefiting but not
employees
-Increased workload leading to
stress and demotivation.

Question 19

Lean Production

Answer 19

-Lean production techniques are working practises derived from Japan that focus on cutting waste whilst maintaining, or improving, quality.

-Reducing waste is key to increasing efficiencies through lean production.

-Lean production techniques include:
-Just-In-Time (JIT) Operations- A
technique used to minimise
inventory holdings at each stage of
the production process, helping
minimise costs.
-Kaizen (continuous improvement)- a
technique that concentrates on small,
but frequent, improvements in every
aspect of the production process.

Question 20

Just in time operations

Answer 20

-Benefits
-Less costs in holding inventory
-Less working capital required
-Less obsolete or ruined inventory
-Lower associated costs e.g security
and insurance
-Avoids having unsold inventory.

-Difficulties
-Little room for error
-Very reliant on suppliers
-Unexpected orders harder to meet
-Any delays in deliveries due to
unforeseen circumstance can cause
production to come to a halt.
-High initial set up costs
-Complex systems have to be put in
place and understood.

Question 21

Kaizen

Answer 21

-Kaizen Is a system that concentrated on small, but frequent, improvements in every aspect of the production process

-All members of workforce will be involved

-Employees are encouraged to work in kaizen groups

-Improvements can take place at any level of hierarchy

-Requires a highly motivated and committed workforce.

-A vital component of Total Quality Management in order to improve the quality of the production process.

Question 22

How to choose the optimal mix of resources?

Answer 22

-Operations management involves combining the four factors of production or resource inputs:
-Land
-Labour
-Capital
-Enterprise

-Firms will attempt to minimise the cost of using these resources whilst maximising the quality of the product and the customer service that the customer receives

-The optimal resource mix is the best way of combining the factors of production in order to meet these requirements within financial constraints

Question 23

Choosing the optimal mix of resources

Answer 23

-The mix of resources can be:
-Capital intensive which uses a
relatively high proportion of capital
such as machinery in the production
of a good or service.
-This tends to occur in the
secondary sector of the economy
I.e manufacturing
-Labour intensive which uses a
relatively high proportion of Labour
I.e workers in the production of a
good or service.
-This tends to occur in the tertiary
sector of the economy I.e services

Question 24

Advantages and disadvantages of capital intensive?

Answer 24

-Advantages:
-Increased productivity
-Improved quality and speed
-Reduced labour costs
-Greater opportunities for economies
of scale (the benefits to a business of
producing on a large scale that lead to
a fall in unit costs)

-Disadvantages:
-High investment outlay
-Lack of human initiative
-Greater resistance to change by
workforce e.g retraining to use new
equipment

Question 25

Advantages and disadvantages of Labour intensive?

Answer 25

-Advantages: -Often cheaper, especially when produced in low wage locations -Workforce can easily adapt to change, especially if multi-skilled. -Continuous improvement through workforce can benefit the firm e.g new ideas -Government funding often available to protect jobs in the economy. -Disadvantages: -Industrial relations can be a problem e.g strikes -Lack of skilled workers in some industries -HRM costs can be very high e.g. recruitment, selection and training

Question 26

Using technology to improve operational efficiency

Answer 26

-Technology I’d the use of tools, machinery and computers to help produce a good or service -Technology can be used to improve operational efficiency in a number of ways, these include: -Robotics -Automation -Communication -Design technology

Question 27

Robotics

Answer 27

-The programming of robots to carry out tasks more traditionally completed by humans e.g -Production processes e.g sterilising bottles -Logistics e.g picking and packaging -Quality assurance e.g weighing and testing -Advantages: -Accuracy -Consistency -Speed -Resilience -Hazardous environment -Disadvantages: -Initial costs and maintenance costs -Loss of human touch -Lack of initiative

Question 28

Automation

Answer 28

-The use of machines to control a process e.g, stock control, production line, warehousing and distribution. -Stock control -More accurate predictions of stock usage through statistical analysis -Automatic control of stock levels and reordering -Assess data on stock levels and geographical location. -Retailers use EPOS (Electronic Point Of Sale) technology. -Barcodes -Scanners -Databases

Question 29

Communication

Answer 29

-Internal: -Interdepartmental -Operations management could email HR about staffing requirements. -Managing supplier relationships, if for example stock is not delivered it may be because of the business being over their credit limit -Order processing -Waiters use hand held devices to transfer orders to the kitchen. -Quality data -Telling production workers about the number of defects. -External: -Working with suppliers -Using EDI (Electronic Data Interchange) to process orders -Automatic reordering from a stock control system -Sourcing supplies -Growth of the internet to find new suppliers -Tracking of supply chain -Informs customers of the progress of their order

Question 30

Design technology

Answer 30

-The use of computers in the design stage of developing a product. -CAD(Computer Aided Design) -Used in many professions including -Architecture -As well as new product development. -Car manufacturing -Tea pots -3D simulations allow for greater degrees of manipulation prior to investment in prototypes -Designs can be altered to provide a range of options -Designs can be tested in changing conditions e.g wind tunnels

Question 31

The meaning of quality

Answer 31

-Quality means the ability of a product or service to meet customers’ expectations -Different customers will however have a different perception of quality -Customers’ interpretation of quality may be influenced by a number of factors including: -Price -Brand -Customers’ personal expectations and experiences -Nature of product or service -Quality can be expressed or measured in a number of ways, these include: -Aesthetics I.e physical appearance -Features I.e physical attributes -Core aspects I.e basics abilities/ functionality -Actual aspects I.e added extras/ functionality -Augmented aspects I.e support feature e.g warranty -Performance I.e reliability, durability -Intangible aspects I.e non physical attributes e.g brand name, reputation -Quality is also important when providing a service, the measures we apply may however be different, these include: -Friendliness of staff -Speed of service -Efficiency of service -Staff knowledge -Cleanliness of facilities -Appearance of environment

Question 32

Why is quality important?

Answer 32

-Can help achieve lower unit cost -Less waste -Positive image to consumer -Reputation -Positive word of mouth -Unique selling point -Pricing decisions -Improved competitiveness

Question 33

Methods of improving quality

Answer 33

-Training and motivating employees -Understanding customers’ expectations -Using technology -Working closely with suppliers -Quality systems -Quality control -Quality assurance

Question 34

What is quality control?

Answer 34

-The checking of a good or service before it is delivered to a customer I.e at the end of the process -Normally relies on an inspection process -Head chef inspects a meal on a plate before it leaves the kitchen. -Quality inspector test a product at the end of the production line. -Supervisor records and listens into a phone conversation at a call centre

Question 35

Advantages and disadvantages of quality control

Answer 35

-Advantages: -Quality can be monitored -Stops faulty products reaching the customer -Common problems can be identified -Inspector take responsibility. -Often a robust system -Disadvantages: -Takes responsibility away from operatives -Requires specialist/ additional personnel -Problems only identified at end of process -Waste levels may be high

Question 36

What is quality assurance?

Answer 36

-The checking of a product or service at each stage of its production. E.g as it travels along a production line. -Relies upon self checking -A sauce chef tastes the sauce before passing to chef in charge of a dish -Each operative checks their stage of the process or component before passing it along. -Businesses will often strive for quality assurance through the adoption of a system. -They will set down a clear process to be followed -The more frequently adopted system is Total Quality Management. (TQM) -Many businesses will seek to achieve accreditation for their quality assurance standards e.g ISO9000

Question 37

Advantages and disadvantages of Quality Assurance?

Answer 37

-Advantages: -Spots any faults early saving resources being wasted at the next stage of the production process. -Motivates workers who are responsible for ensuring quality standards are met. -Aims to achieve an objective of zero defects -Ensures clear systems are in place -Enhances the reputation of the business as less chance of faulty goods reaching the end customer. -Disadvantages: -Requires staff training and high levels of staff commitment. -Can slow down the production process and Labour productivity leading to higher unit costs -May demotivate workers who feel under pressure -Opportunity cost of managers time when initially implementing the systems and procedures

Question 38

Total Quality Management

Answer 38

-TQM sees quality as the responsibility of all employees. -Each employee is a link in the chain and treats the next link as if they were an external customer -They will pass the product on only if it is correct -Philosophy of get it right first time

Question 39

Benefits and Difficulties of improving quality

Answer 39

-Benefits: -Achieve operational objectives -Gain a competitive advantage -Reduce unit costs -Enhanced reputation -Motivated workforce striving to achieve common goals -Difficulties: -Reluctance of employees to adapt to change or take on additional responsibility -Requires finance to invest in training and test and implement new systems -Reliant on good relationships with resource providers including suppliers -Once achieved must be monitored and reviewed regularly to ensure standards are being maintained