4.2.1 A NALYSINGOPERATIONAL PERFORMANCE AQA Business 4 D ECISION MAKING TO IMPROVE OPERATIONAL PERFORMANCE Haribo – numbers and facts How useful are numbers in understanding scale and significance? How are Haribo Goldbears made?

4.2.1 A NALYSING OPERATIONAL PERFORMANCE  In this topic you will learn about  Interpretation of operations data  Calculation of operations data  The use of data in operational decision making and planning

O PERATIONAL DATA  Operational data allows a business to measure the performance of the operations management function  Performance can then be compared to quantifiable operational objectives  Changes can then be made to key operational areas to improve the functions performance if necessary  Operational data includes:  Labour productivity  Unit costs (average costs)  Capacity  Capacity utilisation

C OSTS  Fixed costs: Costs that stay the same as output changes E.g.rent  Variable costs: costs that change as output changes. E.g. supplies

L ABOUR PRODUCTIVITY  Measures output per worker  Calculated as:  Total output Number of employees  Example:  If total output is units and there are 2000 workers  Labour productivity = /2000 = 50 units per worker How can labour productivity effect competitiveness?

O PERATIONAL DATA IS USED TO MEASURE PERFORMANCE AGAINST PREDETERMINED TARGETS  Labour productivity  Indication of workforce morale  Is additional training required?  Is labour being used effectively?  What steps could be taken to increase labour productivity?

W HY L ABOUR P RODUCTIVITY M ATTERS Labour costs are usually a significant part of total costs Business efficiency and profitability are closely linked to productive use of labour In order to remain competitive, a business needs to keep its unit costs down

L ABOUR P RODUCTIVITY I LLUSTRATED EmployeesLabour Costs (£) Output (Units)Output per Employee Labour Cost per Unit 10100,0002,000200£ ,0005,000250£ ,00010,000333£ ,00020,000500£ ,00030,000600£17

K EY FACTORS INFLUENCING LABOUR PRODUCTIVITY  Extent and quality of fixed assets (e.g. equipment, IT systems)  Skills, ability and motivation of the workforce  Methods of production organisation  Extent to which the workforce is trained and supported (e.g. working environment)  External factors (e.g. reliability of suppliers)

W AYS TO I MPROVE L ABOUR P RODUCTIVITY  Measure performance and set targets  Streamline production processes  Invest in capital equipment (automation + computerisation)  Invest in employee training  Improve working conditions

U NIT C OST  The average cost of producing a single unit of output  Calculated as:  Total cost / output  Example  Fixed Cost = £ Variable Cost = £3  Total Cost for units = £ (£3 x 1 000) = £  Unit cost = £13 000/1 000 = £13.00  Targets will be linked to keeping unit cost as low as possible whilst not affecting quality What would be the unit cost if only 500 units were produced? What would be the unit cost if units were produced?

H OW C OSTS C HANGE WITH O UTPUT The table below illustrates how unit costs (cost per unit) change as output increases OutputFixed CostsTotal Variable CostsTotal CostsCost per Unit Units££££ 5010,0005,00015, ,000 20, ,00015,00025, ,00020,00030, ,00025,00035, Fixed costs are £10,000 Variable costs re £100 per unit

C OMPARING O PERATIONAL E FFICIENCY (U NIT C OSTS ) W ITH C OMPETITORS Looking at the table below, which of the five businesses is the most efficient over the period? BusinessOutput Units Total Costs £ Unit Costs £ A10,000£50,000 B20,000£80,000 C5,000£30,000 D25,000£75,000 E15,000£75,000

E CONOMIES OF S CALE Economies of scale arise when unit costs fall as output increases

L ABOUR VERSUS C APITAL INTENSITY Production relies on using labour resources Production relies on using capital resources Labour Intensive Capital Intensive

U NIT C OST  Factors influencing unit costs include:  Number of units produced Spreads fixed costs Negotiate discounts with suppliers Greater use of assets  Labour productivity Efficiency of work force Use of workforce hours  Suppliers Cost of inputs  Material usage Wastage How far will Ryanair go to reduce costs and increase profit margins?

T HE USE OF DATA IN OPERATIONAL DECISION MAKING AND PLANNING  Unit costs  Are average costs rising or falling?  Look to change suppliers  Can inputs be utilised more efficiently  Inform pricing decisions  Is waste being managed efficiently?

E XAMPLES OF LABOUR / CAPITAL INTENSIVE INDUSTRIES Labour intensiveCapital intensive Food processingOil extraction & refining Hotels & restaurantsCar manufacturing Fruit farmingWeb hosting HairdressingIntensive arable farming Coal miningTransport infrastructure

C APACITY  The maximum amount of output achievable if all resources are fully utilised  In the long run capacity can be increased by acquiring more resources e.g. bigger premises, more machinery, introducing a 3 rd shift  In the long run capacity can also be reduced by downsizing resources e.g. laying off workers, smaller premises, less machinery  A business will aim to match capacity to demand What are the costs and benefits of increasing capacity? How would you increase capacity in a restaurant?

T HE USE OF DATA IN OPERATIONAL DECISION MAKING AND PLANNING  Operational data is used to measure performance against predetermined targets  Capacity  Is capacity sufficient to meet demand or too big?  Should the firm look to increase or decrease capacity?  Can demand be altered to make greater use of capacity?

C APACITY U TILISATION  Capacity utilisation is a measure of the percentage of potential output being achieved  Percentage of seats occupied at a football match  Percentage of t-shirts manufactured  Calculated by:  Actual output / maximum output x 100  Example:  The Eden Hotel has 320 rooms of which 250 are occupied  Capacity utilisation = 250 / 320 x 100 = 78% Why might the Eden Hotel use the services of a business such as lastminute.com to try and fill the vacant rooms?

T HE USE OF DATA IN OPERATIONAL DECISION MAKING AND PLANNING  Capacity utilisation  Are resources being used effectively or are assets being under utilised?  Is the sufficient spare capacity to meet targets of flexibility?  Can the business take on new customers?  Are resources being stretched too much?

T EST YOURSELF - 5 MINUTES End 1.What is the formula for labour productivity? 2.What is the formula for unit cost? 3.Distinguish between capacity and capacity utilisation.

4.2.1 A NALYSING OPERATIONAL PERFORMANCE  In this topic you have learnt about  Interpretation of operations data  Calculation of operations data  The use of data in operational decision making and planning

C OMPARING O PERATIONAL E FFICIENCY (U NIT C OSTS ) W ITH C OMPETITORS Business D has the lowest unit costs, perhaps because it operates at higher output – potentially benefitting from economies of scale BusinessOutput Units Total Costs £ Unit Costs £ A10,000£50,000£5 B20,000£80,000£4 C5,000£30,000£6 D25,000£75,000£3 E15,000£75,000£5

C APACITY UTILISATION Average attendance by club 2014/2015 season. Calculate the capacity utilisation for 3 clubs of your choice. What are the advantages and disadvantages of high capacity utilisation at football matches?

How useful is this operational data for Ryanair?