Chapter 23

Making operational decisions

Operations management – the process that uses the resources of an organization to provide the right goods or services for the customer.

Aspects of operations management:

- Deciding on the location of a business in order to meet the needs of the business and its customers

- Choosing the mix of resources to use in production

- Managing capacity utilization

- Organizing stock control to meet the needs of customers quickly and cheaply

- Ensuring(обеспечение, 确保, Осигуравање, Bảo đảm) high quality of goods and services in an organization

- Providing excellent customer service in order to meet customer expectations

- Working closely with suppliers in order to improve efficiency

- Using technology in order to improve business operations

Operational targets- the goals or aims of the operations function of the business.

Some of examples of operational targets are explained below.

Unit cost

Unit cost – the cost of producing 1 unit of output. It is calculated by the formula:

Measures of quality

Quality could defined as those features of a product or service that allow it to satisfy customers.

There are some examples of measures of quality:

- Customer satisfaction ratings.

- Customer complains. This is basically the number of customers who complain. It is a good way in identifying possible problems ( bad quality, etc.) that the company has.

- Scrap(Phế liệu, Отпад, 废钢, остатки )rate. This calculates the number of items rejected during the production process as a percentage of the number of units produced.

- Punctuality. This calculates the degree to which a business delivers its products on time.

Capacity utilization

Capacity utilization – the percentage of a firms’ total possible production level that is being reached. If a company is a large enough to produce 100 units a week, but is actually producing 92 units, its capacity utilization is 92%

Capacity – the maximum total level of output or production that a business can produce in a given time period. A company producing at this level is said to be producing at full capacity.

Link between capacity utilization and other operational targets.

- Capacity utilization and unit costs

- Capacity utilization and quality

Managing capacity utilization.

- Under-utilization of capacity ( also known as spare capacity) – when a firms’ output is below the maximum possible. This is also know as excess capacity or spare capacity. It represents a waste of resources and means that the organization is spending unnecessarily on its fixed assets.

- Capacity shortage – when a firms’ capacity is not large enough to deal with the level of demand for its products. This means that certain customers will be disappointed. Further sales may be lost if unhappy customers decide not to buy from the firm again or if negative publicity results from the firms’ failure to supply.

Causes of spare capacity

- New competitors or new products entering the market

- Fall in demand for the product due to changes in taste or fashion

- Unsuccessful marketing

- Seasonal demand

- Over-investment in fixed assets

- A merger or takeover leading to duplication of many resources and sites

Disadvantages of spare capacity

- Firms have a higher proportion of fixed costs per unit. If utilization falls, the fixed costs must be spread over fewer units of output. This leads to higher unit costs

- These higher unit costs will lead to either lower profit levels or the need to increase price to maintain the same profit levels, and therefore to lower sales volume

- Spare capacity can portray(изобразить , 描绘, осликати, vai) a negative image on a firm, suggesting that it unsuccessful.

- With less work to do, employees may become bored and demoralized, lowering their motivation and efficiency.

Advantages of spare capacity

- It means that there is more time for maintenance and repair of machinery, for training and for improving existing systems

- There may be less pressure and stress for employees, who may become overworked at full capacity

- Under-utilization allows a company to cope with sudden increase in demand.

Ways of reducing capacity

-selling off all or a part of its production area

- changing to a shorter working week or shorter day

- laying off workers

- transferring resources from another area

Ways of increasing capacity

- Building or extending factories/plans

- asking staff to work overtime or longer hours

- hiring new staff

- a flexible workforce

Subcontracting – when an organization asks another business to make all or part of its product.

Advantages

- business will be able to react to changes in demand more quickly if they have access to a number of different firms’ plants

- subcontractors may be more specialized and therefore more efficient in a particular line of activity

- it lets a firm focus on its core business

- a non-standard order can be given to a subcontractor so that the business benefits from the order but suffers no disruption to its normal production

Disadvantages

- firms must recognize that the quality if their products is no longer directly under their control

- excessive subcontracting erodes a company’s operations base and its ability to initiate research and market changes

- the opportunity cost

- confidential information

Stock of control

The management of levels of raw materials, work in progress and finished goods in order to reduce storage costs while still meeting the demands of the customer

Non-standard orders

A business decision relating to a one-off contract. Usually, the nonstandard order requires a response to a request to supply a product at a particular price.

Key factors:

- The effect that the decision has on production

- The flexibility of capacity in the organization

- The impact on costs

- Is there potential for future orders?

- The effect on staff