BUSS2 Operations: making operational decisions

Making operational decisions Candidates should be able to: Describe operational targets relating to unit costs, quality and capacity utilisation Calculate and interpret unit costs Calculate and manage capacity utilisation Assess operational issues dealing with non- standard orders and matching production and demand (use of overtime, hiring temporary and part-time staff, rationalisation and sub-contracting and the importance of managing stocks efficiently).

Operations departments What does an operations department do?

Operational targets What are operational targets? Typically they refer to: C___________ u______________ D___________ t________ N___ p____________ P_______________ Q____________ U_____ c_______

Sectors What is the primary sector? What is the secondary sector? What is the tertiary sector?

Secondary sector operational target examples Improve c________ u__________ by maintaining a high level of output compared to total capacity Improve d__________ t_______ and meet orders within two days Develop and launch one n_____ p_________ a year for the next three years Increase p______________ by increasing output per worker by 5% each year Improve q__________ and keep wastage to below 3% for the next year Reduce u_______ c_______ by 5% within the next year

Other sectors and operation targets Primary sector dairy farm – forest – Tertiary sectors insurance company – credit card provider – hospital –

Why set targets?

Capacity What is capacity? All firms have a maximum capacity output – hospitals, coffee shops, factories etc. all have a maximum number of units or customers that they can serve in a period of time

Reducing capacity How can capacity be reduced? What is rationalisation?

Increasing capacity How can capacity be increased?

Capacity utilisation formula Capacity utilisation is the percentage of the firm’s total possible production capacity that is actually being used. Example A factory produced 300 units last year yet it had the capacity to produce 500, what was its capacity utilisation?

Low capacity utilisation Why do firms not want to operate at a low capacity utilisation e.g. 50%? What are fixed assets? Firms want to be using their assets as much as possible as it will reduce their unit costs

Maximum capacity utilisation Why do most firms NOT work at maximum capacity all the time?

Changes to capacity utilisation Why does capacity utilisation change?

Unit costs The unit cost is the average cost per unit of output. E.g. if total costs pf production are £12,000 and output is 5,000 then what is the unit cost?

Significance of unit costs Why is the unit cost very important to a firm?

Unpredictable demand Why is demand likely to vary frequently, and sometimes unpredictably, for the following goods or services? Hospital accident and emergency services Barbecue charcoal Textbooks Luxury cars Restaurant meals What can organisations do?

Other operational issues Businesses may be asked to fulfil non-standard orders E.g. a restaurant is asked to prepare a special menu for a large group. Two questions to be answered: (1) Do we accept the order? (2) If so, how do we cope with the operational problems?

Key definitions (1) _______________ – when a business has greater production capacity than is likely to be used in the foreseeable future. _______________ – staff working beyond their contracted hours in exchange for a higher hourly wage. _______________ - workers employed for a fixed period of time after which the employment contract may not be renewed

Key definitions (2) ________________ – workers employed on a less than full weekly hours contract e.g. 15 hours per week. ________________ – using a supplier to manufacture part or all of a firm’s product. ___________ – material or finished goods held by a firm as needed to supply customers demand ________________ – reorganising resources to cut costs – often leading to a cut in capacity

Quick question Which of these options might help a London hotel increase its room capacity utilisation at weekends? Increase the price of a room at weekends Offer a 20% weekday price reduction Run a promotional campaign for discounted weekend breaks Increase weekend wage rates for hotel employees