3.4 - Decision making to improve operational performance

What is operational performance in a business context?

Operational performance refers to how well a company achieves its operational goals, focusing on efficiency, effectiveness, and the quality of its processes.

Efficiency measurements

Labour productivity, unit costs, capacity, capacity utilisation

Different operational objectives

Costs, Quality, Speed of response, flexibility, Dependability, environmental objectives, Added value

Quality

A measure of excellence which is free from defects or significant variations. A product or service whose features consistently satisfy consumers

Ways to measure quality

Customer satisfaction ratings, Customer complaints, Scrap rate, Punctuality

Punctuality equation

Punctuality = deliveries on time / total deliveries x 100

Speed of response and flexibility

The speed which they can respond to change and have the flexibility to do so

Dependability

Firms do not want to let customers down

Environmental objectives

reducing waste, reducing carbon footprint, minimising waste or products or materials, Increase recyclign

Added Value

Allows the firm to develop a USP

Labour intensive

When labour costs outweighs capital costs of a business. The firm will focus more on labour

Labour productivity

The amount of output that is obtained from each employe. This is a measure of efficiency

Labour productivity equation

Labour Productivity = Output per period / No. of employees in that period

How to achieve higher labour productivity

quality/investment of machinery and technology

Skills, motivation and ability of workforce

Methods of production used

Reliability of materials and suppliers

Increasing number of hours worked

Unit costs

The cost of producing one unit of output

Unit costs are influenced by

How many units a firm can produce

How efficient employees are with the resources available

How efficient the machinery is

How easily variable costs can be controlled

Capacity

The maximum total level of output or production that a business can produce in a given time period

Capacity utilisation

The percentage of a firm’s total possible production level that is being reached

Capacity utilisation formula

Capacity utilisation = Capacity output per annum / maximum possible output per annum

Causes of spare capacity

New rivals in the market causing demand to fall

Changes in taste causing demand to fall

Unsuccessful marketing

Seasonal demand

Over-investment in fixed assets

A merger or takeover causing a duplication of assets

Advantages of spare capacity

Allows firms to plan maintenance and repair time

Improvement can be planned in

Less pressure on employees to perform

Disadvantages of spare capacity

High proportion of FC per unit

Higher unit costs leading to lower profits

Negative image of being unsuccessful

With less work employees may become demoralised or bored

Increasing Capacity

Invest in capital machinary

Invest in employees through training

Hire more employees

Change production practices to be more efficient

Importance of labour productivity

Lower unit costs

Problems improving labour productivity

Training may take time to have an effect on productivity

Employing new people with appropriate skills can being timely and costly

Financial methods of motivation are short term

Non-financial methods of motivation is a long term strategy

Lean production

Aims to reduce all forms of waste in the production process

Aims of lean production

Zero stock

Zero delay

Zero mistakes

Zero waiting

Zero accidents

Lean production of techniques

Kaizen

Just-in-time production

Time based management

Cell production

Benchmarking

Time based management

where firms compete on the time taken to deliver goods. This is to ensure they operate as efficiently as possible

Cell production

Organising production around teams instead of production line

Advantages of cell production

Increases motivation because employees have control over work

‘Cell’ members can divide work and share expertise

Influences quality as one ‘cell’ can reduce poor quality products

They can spot defects before product is finished

Reduces waste

Reduces unit costs

Production happens all in one place

Disadvantages of cell production

Output may be lower than a ‘flow’ production

Different ‘cells’ within the system may work at different speeds which can cause conflict or tension

Businesses may need to invest heavily in machinery because cells may require same equipment

Less output because of the time taken to check quality

Just-in-time production (JIT)

Producing production to order. It involves reducing the stock held to make the firm more efficient.

Just-in-case production (JIC)

Holding stock in case of a sudden increase in demand

Disadvantages of JIC

Holding stock held means holding cash

Advantages of JIT

They do not have to pay storage costs which reduces unit costs

Cash is not tied up in stock which improves liquidity

It reduces waste because you only order to produce

Reduction of perished goods

Less stolen or less damaged stock

Leads to a better relationship with suppliers

Disadvantages of JIT

If suppliers are late to deliver customers will get delayed goods

Cannot benefit from economies of scale

Employees can get demotivated from the pressure

Delivered goods can be faulty or broken

How to choose the optimal mix of resources

Deciding the best way of producing goods

Deciding the best resources to use and the combination of resources

Deciding where to get the resources

Deciding how many resources to hold in stock

Factors influencing resource mix (It depends on)

The type of operations process and the operations strategy

Relative price of the resources

Availability of resources

State of technology

Ethics

Becoming capital intensive

Raising finance to invest in machinary

Changeover - introductions new equipment

Innovation - Improving productivity with new equipment

Using technology

Robotics

Automation

Controlling the quality of the goods produced

Stock controls

Communication

Design

Electric POS

Benefits of using technology

Reducing costs

Improving quality

Reducing waste

Increasing productivity

Flexibility

Financial monitoring

New and better products

Better working conditions

Quality characteristics

Reputation

Dependability

Exclusivity

Durability

Image & Brand

Reliability

Functions

Appearance

Repair and maintenance needs

Consumer Right Act 2015

Satisfactory quality

Fit for purpose

Not as described

Benefits of quality

Impact on sales

Creating a USP

Impact on selling price - higher prices

Price flexibility

Cost reduction - less waste

Firm’s reputation

Quality control

A system that uses inspections to check the quality of work at different stages of the manufacturing process

quality control methods

Sampling and testing products after production

Inspecting manufacturing plants during production

Advantages of Quality Control

quality checks at the end can stop faulty goods reaching customers

Inspectors can spot common problems and put them right

Disadvantages of Quality control

Does not encourage team responsibility

Expensive to operate

Responsibility tests with the inspectors, therefore staff take no responsibility, which can reduce motivation

Quality Assurance

A system that improves quality by arranging every process to get products right the first time

Quality Assurace methods

Developing quality control plans and documentation process

Auditing internal quality assurance procedures during production

Training employees to keep quality high

Advantages of quality assurance

Workers take responsibility over ensuring quality

Motivates employees

Reduced costs because less waste

Greater consistency of quality because responsibility is spread throughout workforce

Disadvantages of Quality Assurance

Needs a change in the culture of the firm

Can take time to embed the system because of culture change

Could increase costs in the short term

Quality Assurance systems

Total Quality Management

Kaizen

Total Quality Management (TQM)

An approach to long term success that aims for improvements continually throughout every functional area of a business

Advantages of TQM

Getting it the right the first time is adopted

A culture of quality that involves all employees

TQM allows consistent and flexible approach to quality

Consistent quality can allow for higher prices

Kaizen

A policy of implementing small incremental changes in order to achieve better quality and greater efficiency. It encourages employees to identify possible ways of improvements

Consequences of poor quality

Lower Productivity

Profitability falls

Customer dissatisfaction- customers are more vocal, bad reviews and it is easier for them to complain

Increased costs

Reducing capacity

Selling fixed assets

Changing to shorter working days

Making employees redundant

Transferring resources to another area

Increasing capacity

Extending factories

Overtime or longer hours

Higher in new staff

Flexible welfare

Subcontracting (outsourcing)

Rationalisation

A process by which a firm improves its efficiency by cutting the scale of its operations.

Outsourcing (subcontracting)

When a business asks another business to make all, or part of their products

Advantages of outsourcing

Improved productivity

Reduced costs - reduced space and labour

Increased focus on strategy and core competencies

Increased efficient

Maintain operational control

Developing internal staff

Business can react to changes in demand quickly

Specialisation can be brought in

Disadvantages of outsourcing

No direct control over quality

Too much subcontracting can damage a firm’s operational base

Profit margins can be affected

Lower employee morale - risk of losing their job

Lead time

The time taken between the order being placed with the supplier and the stock arriving at the factory

Re-order levels

When stock falls to this point then it is time to reorder

Buffer level inventory

The amount of stock held just in case

Re-order quantities

The quantity of stock which is re-ordered once stock falls to this level