Business - Operations Management - Output And Capicity

Revision notes on Operations management - Output and Capacity for A2 Business Studies

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Business Angela Emma Rudd BMA
27th January 07
Operations Management
Output and Capacity
The scale of production refers to a firm's output level this will depend on its capacity. The
capacity is the maximum output that an organisation can produce at any moment, given its
The capacity of a firm will depend on:
The level of machinery and equipment
The existing level of technology
The numbers and skills of its employees.
Deciding on the correct level of capacity for an organisation is a critical decision for its
managers. If the level is too low they will have to turn away orders, possibly losing customers.
If the level is too high, they will have inactive equipment and machinery.
The desired level of capacity will depend on the expected levels of demand. The higher the
level of demand the greater the desired capacity. It will also depend on the costs involved. In
some cases the scale of production a firm chooses will be limited by the availability of
finance. The organisation may not be able to produce on the scale it wants because it does
not have the money to buy all the equipment it needs. The capacity level may also be
constrained by the labour market: firms may not be able to recruit sufficient numbers of staff.
A firm can increase its capacity by:
Investing in new equipment and technology
Training the workforce
Hiring more employees
Economies and Diseconomies of Scale
Economies of scale occur when the cost of producing a unit (the unit cost) falls as the firm's
output increases.
There are several types of economy of scale.
Technical Economies of Scale
As a firm expands it may be able to adopt different production techniques to reduce
the unit cost of production. For example a business may be able to replace
employees on the production line with technology as it increases its output. This will
enable the firm to reduce the unit costs of production.
As firms get bigger, they are able to employee people to specialise in different areas of
the organisation. Instead of having managers trying to do several jobs at once or
having to pay specialist companies to do the work, they can hire their own staff to
concentrate on particular areas of the business. For example they might employ their
own accountants or market researchers. By using specialists rather than buying in
these services from outside firms, the business can save money it is also likely to be
more efficient.
Purchasing Economies
As firms get bugger, they need to buy more supplies. As a result they should be able
to negotiate better deals with suppliers and reduce the price of their components and
raw materials. Large firms are also more likely to get discounts when buying
advertising space or dealing eth distributors

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Business Angela Emma Rudd BMA
27th January 07
Why do Economies of Scale Matter?
Economies of scale can be important because the cost of producing a unit can have a
significant impact on a firm's competitiveness. If an organisation can reduce its unit costs, it
can either keeps its price the same and benefit from higher profit margins, or it can pass the
cost saving on to the customer by cutting the price.…read more

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Business Angela Emma Rudd BMA
27th January 07
Agreeing to produce products for other firms ­ Sometimes producers of
wellknown brands also produce items for the supermarkets, which are sold with the
supermarkets name on them (these are called own label items). Although this may
seem strange, because it is help9ng competition, the manufactures may actually
benefit because they are using their machinery at full capacity and this reduces the
cost of each unit produced. Producing goods for other firms is known as
subcontracting.…read more


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