Operations Management

Making operational decisions.

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  • Created by: sonny
  • Created on: 20-05-11 12:00


Operations Management - The process that uses the recources of an organistation to provide the right goods or services for the customer.

Operational Targets - This measures the efficiency with which operations management has been acheived.

Three examples of operational targets are:

  • Unit Cost
  • Measures of quality
  • Capacity Utilisation

Unit Cost - The cost of producing one unit of output. This is calculated by the formula:

Total costs divided by total units of output equals Unit Cost!

In order for a business to be competitive in the marketplace, a business will try to reduce the cost of each unit it produces so therefore unit cost is very important.

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Quality - Those features of a product or service that allows it to satisfy customers.

Measures of quality:

  • Customer satisfaction ratings.
  • Customer complaints.
  • Scrap rate - that is the number of items rejected during the production process as a percent of units produced.
  • Punctuality - Are they delivered on time?
  • Quality standards.
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Capacity utilisation!

Capacity: the maximum output that a firm can produce with existing resources.

Capacity Utilisation: the extent to which the company's maximum possible output is being reached.The forumla is Actual output divided by maximum possible output times by 100.

At full Capacity utilisation: there is no room to create more e.g. you will not be able to meet an increase in demand and there is no room for maintenance. Also the chances of quality problems will rise for example, printers.

At 90% Capacity utilisation: This keeps unit costs low due to economies of scale and also allows space capacity.

At 50% Capacity utilisation: Will allow spare capacity but will not be efficient in terms of cost due to diseconomies of scale.

Production matched with demand: When firms use this method e.g. production is matched perfectly with demand, it is extremely efficient. This is because they will not go over or under so will not waste money on things like staff and equipment.

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Why have spare capacity?

Causes of spare capacity:

  • New competitors or new products entering the market.
  • Fall in demand due to changes in fashion or taste or Seasonal demand, e.g. cadburys creme egg.
  • Unsucessful marketing.
  • Over investing in fixed assets e.g. buying machines when they are not needed.
  • A merger or takeover leading to duplication of many recources and sites.


  • There is more time for maintance and repair of the machinery.
  • There may be less pressure and stress for employees.
  • Under utlilisation means that a company can take on a sudden increase in demand or a large order.
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Why have spare capacity? Continued.


  • Firms have a higher proportion of fixed costs per unit.
  • These higher unit costs will then lead to either lower profit or the need to increase the price.
  • Spare capacity can portray a negative image of the firm.
  • With less work to do, employees may become bored and demotivated.

If a business has spare capacity they could offer deals such as hotel rooms on weekdays are 20 percent off, or they can try to increase demand by using the marketing mix.

If a business is over capacity, they can raise there prices such as Glastonbury festival. Also if the business is producing far more then they are selling, they can rationalise so that they are creating less products, therefore having a more efficient capacity utilisation. 

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Ways of increasing capacity:

  • building or extending extending factories.
  • Asking staff to work overtime or longer hours.
  • Hiring new staff.
  • Having a flexible workforce.

Ways of reducing capacity:

  • Sell off all or part of its production area.
  • Changing to a shorter working week or shorter days.
  • Laying off workers (make them redundent).
  • Transferring recources from another area.
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Non standard orders.

Such as customisations to the colour scheme of a car etc.

Does the business take on the non-standards?

  • Revenue gained from the purchase.
  • The cost of the goods.
  • Whether further orders are likely to be received.
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