23: Making operational decisions

Question 1

Operational targets

Answer 1

These are specific and usually measurable objectives set for each operations activate of a business.

Question 2

Why set these operational targets?

Answer 2

The purpose of these targets is to improve operational efficiency. The aim may be to achieve efficiency equal to the best in the industry. Unless targets are set and agreed with operations staff there is lily to be no improvement from one year to the next in the ability of the organisation to convert resources into output efficiently.

Question 3

Capacity:

Answer 3

The maximum output that a firm can produce with existing resources.

Most businesses do not work at full capacity al the time. There are often real disadvantages to doing this. For example, there will be no time for repair and maintenance of equipment and the staff will have little time to discuss problems or new ideas for production improvements.

Question 4

Capacity utilisation:

Answer 4

This is the proportion that current output is of full capacity output. It is calculated by the formula:

Current output/Maximum output X 100

Question 5

Unit cost:

Answer 5

is average cost per unit of output.

= Total costs/Output

Question 6

Excess capacity:

Answer 6

When a business has greater production capacity than is likely to be used in the foreseeable future.

Question 7

Overtime:

Answer 7

Staff working beyond their contracted hours in exchange for a higher hourly wage.
Will increase output as staff are available for more hours.
(higher hourly wage = increase units cost. Workers may ‘slow down’ production to ensure tat overtime is worked.)

Question 8

Temporary staff:

Answer 8

Workers employed for a fixed period of time after which the employment contract may not be renewed.
(Need to be recruited and trained - may be expensive. `may lack commitment)

Question 9

Part time staff:

Answer 9

Workers employed on a less than full weekly hours contract e.g. 15 hours per week.
Can be called into work at peak periods and will not be needed - or paid - at other times.

Question 10

Sub-contracting:

Answer 10

Using a supplier to manufacture part or all of a firms product or service.
(More expensive, as subcontractor all add on a profit margin to the cost of the work. Quality assurance becomes more difficult)

Question 11

Managing stocks efficiently:

Answer 11

Stocks can act as a ‘buffer’ between production and customer demand. Stocks of both materials and finished goods may be held.
(Stock holding is expensive and carries an opportunity cost. Goods can come out of date or may be perishable.)

Question 12

Rationalisation:

Answer 12

Reorganising resources to cut costs - often leading to a cut back in capacity.

Question 13

Unit cost significance:

Answer 13

Unit cost is of great significance to the competitiveness of any business. If operations managers can reduce this cost to levels equal to or brow that of the firms main rivals and maintain an appropriate level of quality then the profitability of the business will be much higher and its future should be secure.

Question 14

Advantages and disadvantages of working at full capacity or with spare capacity:

Answer 14

Most businesses do not work at full capacity all the time. There are often real disadvantages to doing this. For example, there will be no time for repair and maintenance of equipment and the staff with have little time to discuss problems or new ideas for production improvements.

However, better to work at 90% capacity rather than 50% as the main benefit is the greater use it makes of the company’s fixed assets.
This means that the fixed costs are ‘spread out’ over a higher level of output.
It helps to reduce unit costs.