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Operations Management

Operational Targets

These may be set in terms of:

  • Improvements in unit costs - measured by a reduction in costs, leading to increased profit.
  • Improvement in quality - measured by a reduction in wastage, decrease in level of complaints.
  • Increased capacity utilisation - measured by an increase in actual output as a percentage of maximum possible output.

Unit cost : The unit cost is the cost of producing one unit of output. (average cost)

Measuring Quality - It should be recognised that firms will use different measures of quality according to the needs of the firm or its customers.Examples of quality measures include:

  • customer satisfaction ratings  - a survey of customers can reveal opinions on a numerical scale
  • customer complaints - this calculates the number of complaints
  • puntuality - this calculates the degree to which a business delievers its products on time.
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Calculating and managing capacity utilisation:

Capacity utilisation measures the percentage of a firms total possible possible production level that is being reached at present.

It can also be measured over any chosen time period. For many organisations it may be more appropriate to calculate it on a daily, weekly or monthly basis. There is no one ideal target percentage, but many people believe that 90% capacity utilisation is a sensible level. At 100% there is no scope for maintenance and repair or to deal with emergengy situations which may occur. However, every percentage point below 100 represents unused resources and higher fixed costs.Spare capacity (under utilisation) measures the extent to which production falls below the maximum possible level. e.g. a company which has 90% capacity has a spare capacity of 10%.

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Possibe causes of under utilisation:

  • New competitors or products
  • unsuccessful marketing
  • seasonal demand
  • fall in demand

Possible impacts of under-utilisation:

  • a higher proportion of fixed costs per unit
  • lower profit levels or the need to increase price to maintain the same levels
  • a negative image and the perception that the company is unsuccessful
  • employee boredom
  • motivational issues

Ways of increasing, capacity utilsation:

  • Stimulate demand for the product
  • rationalise prodction - leasing or selling part of a production area, laying of workers.
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Operational issues dealing with non standard orders & matching production and demand.

To overcome problems of temporary increases in demand an organisation can:

  • ask employees to work overtime
  • use staff from an agency
  • hire in temporary employees or part- time employees

Although these methods will increase costs in the short term they tend to decrease them in the long term.

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Developing effective operations: Quality: those feautres of a product or service that allow it to satisfy (or delight) customers.

  • appearance, reliability, image and brand, functions , after sales service .                        Quality systems: The approach used by an organistion in order to achieve quality.  Most quality systems can be classified under two headings: Quality control & quality assurance.                                                                                                             Benefits of having a quality system
  • impact on sales volume - if it meets the needs of customers then demand will increase.
  • creating a usp - businesses can use the level of quality of their products as a usp.
  • impact on selling price - having a usp allows businesses to charge higher prices
  • cost reductions - a quality system can reduce costs by improving production methods and reducing wastage and faulty products.
  • pricing flexibility - a reputation for quality gives a firm the ability to be more flexible in its pricing in order to target different market segments.
  • the firms reputation - a good quality system can prevent problems and help avoid damage to reputaion.
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Issues involved in intorducing and managing a quality system

  • Costs - quality procedures require a great deal of admistrative expense to set up.
  • Training - the training needed may be quiet extensive and costly.
  • Disruption to production - in the short run the training programme provided can be quiet disruptive to existing production methods 

Quality control versus quality assurance : Benefits of quality control -

  • As inspection is at the end of the production process, it can prevent a faulty product reaching a customer.
  • It is securer than a system that relies on one individual.
  • It may detect common problems throughout the organisation.

Benefits of quality assurance -

  • It provides cost savings.
  • helps ensure consistent product quality.
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The main method of quality assurance

Total quality management occurs when there is a culture of quality throughout the organisation. It is based on the philosophy of "right first time". If the individual making the product ensures quality, then there is no need for inspection.

Quality Standard : ISO 9001 is a national/international quality standard. To achieve it, firms must show that they have quality systems that cover the quality of their working mehtods, services and processes as well as quality of their products.The focus is on prevention of defects.

The benefits of this award are:

  • marketing advanatages from the achnowledgement of higher quality standard.
  • financial benefits in the long term, from the elimination of waste and the improved reputation of the firm.
  • greater employee motivation from the sense of responsibility and recognition.
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Customer Service : Customer service is concerned with ensuring that the needs of every single customer are met. Customer expectations can be met by:

  • ensuring the organisation is selling what the customer wants. This can be monitored by undertaking market research.
  • ensuring that the product or service sold is of high quality.
  • ensuring that staff are friendly, helpful and knowledgeable about the product/service being offered.
  • ensuring that staff are efficient in dealing with customers.
  • ensuring that genuine customer complaints are dealt with efficiently and courteously.


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Monitoring and improving cutomer service.                                                            Methods of monitoring and improving customer sevice.

  • Setting up systems for customer feedback, customer surveys and suggestions boxes to assess customer satisfaction. Using focus groups, mystery shoppers or observation methods to monitor employees customer service skills and knowledge of product/service.
  • Ensuring improvements are made in the light of comments and information recieved as part of the monitoring process.
  • Training employees to ensure product/service knowledge and customer service skills.

Benefits of high level customer service include:

  • Customer returns
  • It creates a usp
  • It gains a competitive advantage.
  • It creates a good image for the organisation
  • It ensures long term viability of the business.
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Working with suppliers - Choosing effective suppliers: many factors will effect an organisation's choice of supplier.

  • Price of raw materials - important if it is to make a sufficient level of profit.
  • Quality of raw materials - to ensure the end product also has good quality.
  • Trade credit terms - favourable terms may enable an organisation to delay payements and improve cash flow.
  • Reliability of supplier - they must be able to satisfy demands efficently.
  • Lenght of lead times - to ensure production is not held up.
  • Flexibility of supplier - they may need to be able to satisfy sudden increases in demand.

Role of suppliers in improving operational performance

  • suppliers play an important role in improving operational performance. They do this by ensuring that the right raw materials of the best quality at the optimum price are available to the organisation in time for it to fulful its customers orders.
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Using technology in operations

Types of technology in operations:

  • ROBOTICS - used in many production situations, e.g. in the production of the Mini, the building process is highly automated with the use of robotics.
  • AUTOMATED STOCK CONTROL - enables accurate records to be kept of stock levels of raw materials and finished goods. Ensuring greater efficiency.
  • COMMUNICATIONS - methods can involve any or all of intranet, internet, e-mail, teleconferencing etc. They speed up communication processes and enable communication with different sections or organisations to be more effiecient.
  • DESIGN TECHNOLOGY - Involves using computer aided design (CAD), which enables designs of new products to be produced and modified on screen in three- dimensional format.
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  • technology replaces labour and therefore reduces labour costs.
  • beings improvements in quality, as organisations are more likely to get it right the first time.
  • it reduces waste, for the same reason.
  • it increases productivity and therefore reduces the costs of production.
  • monitors stock levels much easier
  • it makes for ease of communication
  • easier to update product design.


  • initial costs of investing in new technology will be high.
  • technology will cost alot as it will need to be updated.
  • maintence costs may be high.
  • motivation problems, employees fear being replaced.
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