- Created by: Sophie Chanoch
- Created on: 06-03-13 20:08
Making Operational Decisions
Operational targets are the objectives which are set by the business which can be achieved and surpassed and failure to so do have serious repercussions for the business.
The components of operational targets include capacity utilisation, quality, costs.
Capacity utilisation is a vital component of operations target. It's the actual amount of capacity that a business that it uses in the current period.
Quality standards are another aspect of operations targets that are very important to the business. Without the guarantee of high quality standard, a business will lose potential customers and could also be in breach of government legislations on quality standards.
Costs which a business incurs can be fixed or variable. Such costs especially fixed costs are not directly related to the levels of production. It needs to be evenly distributed among the units produced. The contribution made by each unit is high when the capacity utilisation at a low level. With an increase in capacity utilisation, there's a reduction in contribution necessary per unit.
How to Calculate and Manage Capacity Utilisation
To calculate capacity utilisation is a measure of current output with the maximum possible output. Current output/ Maximum output x 100.
The labour potential available to the business, as well as machinery and the buildings will determine the maximum output. This is the output when the business is at optimum capacity, using all of the available resources. At this point the business is working at 100% capacity utilisation. In an ideal business situation, this is highly desirable, in practice output always falls below 100%
Managing capacity utilisation occurs through changes in the capacity. This could occurs through changes in the levels of demand for products over a period of time. This will lead the business to rationalisation which increases efficiency and cuts capacity to raise the percentage utilisation, sell off machinery or renting where necessary to reduce fixed costs, redundancy and reduction of working hours or shift transfers for employees.
Advantages of full capacity- optimisation of fixed assets in production, profit will be at maximum, high demand for products and success in the business.
Disadvantages of full capacity - maintenance of machinery could be difficult, exceeding full capacity can result in too many customer demands which may not be met, leads to overworking of members of staff.
What are Non Standard Orders
A non standard order is usually taken from customers who require products and services which are different from the regular line of products that the business covers. These could differ in colour quality or the size.
There are several types of production and dependent of the type used by the business, non standard orders can be taken into consideration. Batch production, flow production and job production are the various types of production.
Matching Production and Demand
With the optimum utilisation of capacity there tends to be a high level of demand for the products and services which the business has to offer. In order to match the levels of demand created by the full capacity utilisation the business has options which include.
Hiring seasonal workers, expansion of the business, making more work shifts and overtime for workers, subcontracting and outsourcing.
A combination of the above tends to ensure that the business is able to match the demand for its products adequately.
There are instances when the business capacity utilisation is lower than anticipated. This increases burdens on the fixed costs. To increase capacity utilisation then the business can reduce working hours, expansion of client base, reduction in wage rates, downsizing and rationalisation.