Making Operational Decisions

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  • Created by: amy
  • Created on: 30-05-13 20:44

Key Terms

  • UNIT COSTS- the cost of producing a single unit of output.
  • CAPACITY- the maximum output that a business is capable of producing with existing resources.
  • CAPACITY UTILISATION- a measurement of the extent to which a business is using the capacity available to it. 
  • UNDER-UTILISATION of CAPACITY (excess capacity)- where a business is not using their resources to fully meet the demand of its customers. 
  • CAPACITY SHORTAGE- where a business has insufficient resources to fully meet the demands of its customers. 
  • RATIONALISATION- reducing the productive capacity of a business in an effort to increase levels of efficiency. 
  • SUBCONTRACTING- the passing on of a unit of work to another firm outside of the business.
  • NON-STANDARD ORDERS (special order decision)- where a business has to decide whether to accept orders at a price different from that usually charged. Often a one-off request. 
  • STOCK CONTROL- the management of raw materials, work-in-progress and finished goods with the aim of minimising costs of holding stock whilst meeting the needs of the customer. 
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Operations Management

operations management is the functional area of a business concerned with the efficient use and allocation of resources in order to produce goods and services that satisfy the needs of the customer. 

The three operational targets of a business are:

  • to maximise efficiency (capacity utilisation)
  • to minimise costs
  • to maximise quality
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Unit Costs

A business will seek to make the most efficient use of the limited financial resources available to them. This means that the cost of each unit of output needs to be carefully controlled. 

Factors influencing Unit Costs:

  • The number of units produced- the more units, the lower the unit costs as the fixed costs are spread out over more units.
  • The cost of suppliers- can they be negotiated or a new supplier found without damaging the quality?
  • Improving labour productivity- this will mean more units are produced using the same number of employees and decreases the wage costs per unit. 
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Measures of Quality

quality is a highly subjective issue and what might appear high quality to one customer will be poor to another as everyone requires different things.

Key targets for quality might include:

  • Reducing customer complaints
  • Improving personnel performance levels
  • Raising customer service and satisfaction
  • Improving delivery and punctuality times
  • Reducing scrap and wastage rates
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Capacity Utilisation

Why is it so important?

All firms incur fixed costs. If the firm can spread these fixed costs over greater output, unit costs will fall.

Problems of high capacity utilisation

100% capacity utilisation is not always a positie thing. By operating at maximum capacity for long periods of time the business might experience the following issues:

  • No time for the maintenance of machinery 
  • Extra stress upon staff
  • No spare capacity if a machine breaks down
  • Unable to accept additional orders
  • Harder to maintain quality standards
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Capacity Utilisation

The benefits of high capacity utilisation:

  • Increased job security and motivation
  • Lower unit costs
  • Improved profitability 
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Under-utilisation of capacity (excess capacity)

Operating at low levels of capacity utilisation bring with them their own problems:

  • Higher unit costs that may mean either lower profit margins or higher costs for the consumer
  • Reduced competitiveness in the market
  • A negative image for the company
  • Motivational issues for staff 
  • Employee boredom

Possible Cause of Under Utilisation:

  • New competitors entering the market
  • Changing tastes and fashions in the market
  • Unsuccessful marketing
  • Seasonal factors
  • Over-investment in fixed assets
  • A merger leading to duplication of resources
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By asking another business to complete a unit of work for you under your name, there are some key issues to consider:


  • do not have to turn away orders
  • better able to respond to changing demand
  • contractors are specialists


  • lack of direct control over quality issues
  • higher costs
  • risk of damage to the company reputation if any mistakes reach the customer
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Stock Control


  • demand is met quickly
  • maintain goodwill of customers
  • no production delays
  • possibility of bulk buying discounts


  • Storage costs 
  • Risk of damage
  • opportunity costs
  • risk of theft
  • stock might go out of date 
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Changing capacity by modifying staffing needs


  • offering staff more money to work longer hours to satisfy extra demand
  • staff might not agree though!
  • adds to your wage costs

Temporary and Part-Time Staff

  • create a more flexible workforce through greater use of part-time and temporary staff
  • very effective in meeting seasonal demand
  • able to vary the hours according to demand
  • more difficult to train staff as not always there
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Non-standard orders

Key operational factors to consider are:

  • will accepting the extra order mean that your regular orders might be at risk of delay?
  • does the business have enough spare capacity?
  • is the business flexible enough to cope with the extra demand at such short notice?
  • are the labour force willing to work extra hours?
  • what impact will the order have upon costs? 
  • might rejecting the order impact upon the chances of further orders from that business?
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