Operations function: transforming inputs into outputs.
• must ensure there is added value so that value of final output(product or service)> inputs added together.
• this enabled profit to be made
Importance of setting objectives:
• Performance can be measured
• All business operations should have objectives set
• Helps business achieve overall objectives
• Must all be SMART to evaluate and judge overall performance of operations management
SETTING OPERATIONAL OBJECTIVES:
1. COSTS- REDUCING UNIT COSTS
• Firms aim to cut costs especially if they compete on price.
• Can cut variable or fixed costs
◦Eg: Can restructure to remove a layer of management—reducing fixed costs
• Ensure operations are cost effective
• To measure cost effectiveness—> unit cost=average cost of producing a unit of the product—> Total cost/output
• Businesses competing in same industry—>similar cost structure, they only vary based on productivity, efficiency and scale of production
• Business with lowest unit cost—> have a competitive advantage as lowest price, or highest profit margin at average industry price
Objectives relating to costs:
‣ Productivity and efficiency
‣ Reduced unit costs per item
‣ Greater capacity utilization—> increases output
‣ Better supplier terms—> reduction in costs of supplies
‣ Increase contribution per unit (selling price-variable cost)
2. QUALITY-
• maintaining or improving levels of quality
Objectives relating to quality:
‣ Better quality products
‣ Greater reliability- average lifetime use, how often something goes wrong
‣ Lower wastage and returns-lower scrap/defects
‣ Fewer complaints
‣ High Customer satisfaction- use for customer research
‣ Customer loyalty-% of repeat customers
3. FLEXIBILITY:
• Businesses need to be able to react to customer wants and changes
• They need to be able to vary amount of goods/services they are producing so supply doesn’t exceed demand and vice versa.
• Some companies ensure their work force is flexible by employing people on zero-hour contracts (when a worker is employed without a guaranteed
minimum number of hours per week)
• Efficiency and flexibility are what determines unit costs
4. SPEED OF RESPONSE:
• The speed at which a business can operate us important
• Might need to decrease production time of a product, or the waiting time for customers, or time of getting new products to the market.
• Links to efficiency targets
Objectives related to speed and flexibility:
‣ Enhanced reputation and sales
‣ Greater labor productivity
‣ Greater output per time period
‣ Greater Capacity utilization: actual output/max output
‣ Decrease order lead times: times taken between receiving and processing an order
5. EFFICIENCY:
Make better use of resources to reduce costs and increase profit.
Objectives related:
‣ Increasing capacity utilisation (increasing output so its closer to max potential output)
‣ Improving labour and capital productivity
6. ENVIRONMENTAL:
• increasingly important focus because:
◦More stringent environmental legislation
◦Consumers increasingly becoming more aware hence base buying decisions on firms that have environmental responsibility—> pressured
◦Pressure from government
Objectives related to environment:
‣ Minimize packaging and waste
‣ Sustainability-preserving resources and using supplies of raw materials from sustainable sources
‣ Pollution control- cutting carbon emissions
‣ Less use of non-renewable energy
, ‣ Recycling raw materials and using recycled raw materials
7. DEPENDABILITY
Customers need to depend on a business—> who depends on their suppliers.
If store always has items in stock-> attracts more customers even if more expensive
Objectives related to dependability:
‣ Reliability—> can charge more
‣ Consistent quality
8. INNOVATION:
Businesses can set their Research & Development department innovation targets
(Car manufacturer setting objective to produce electric car that fully charges in 10 mins by 2025)
9. ADDED VALUE: MAIN OPERATIONAL TARGET
Formula: cost-selling price
SALES REVENUE- COST OF BOUGHT-IN GOODS AND SERVICES
• Adding value means increasing the difference between the cost of the raw materials and price.
‣ Helps business make profit
‣ Increase selling price or reduce costs.
‣ Customers will pay more for better quality products but other ways to increase value: Environmentally friendly, quick speed of response, is
dependable.
Operational objectives are influenced by internal and external factors:
Internal influences:
• Nature of product: computer technology firm will have different objectives to a breakfast shop.
• Availability of resources: many businesses want to increase output but don’t have enough resources( not enough employees or capital machinery)
• Other departments:decisions made in other departments affect what production department can achieve and vice versa.
◦Finance—> operations decisions involve significant investment and cost. The financial position of the business such as the following will affect
the choices available on the operational objectives.
‣ Profitability
‣ Cash flow
‣ Liquidity
◦Human Resources—>especially for service businesses, the quality and capacity of the workforce affects the operational objectives. Targets for
productivity involves investment in training, and workforce planning.
◦Marketing issues—> the nature (type) of the product determines the operational set up. Regular changes to the marketing mix (especially regular
changes to the actual product) will place strains on the operations, as they are constantly needing to change the production as product is
changing, this will be a problem especially if production is relatively inflexible.
‣ The marketing function will determine what has to be produced and the quantities, so the operations department will have to co-ordinate
with the marketing department.
• Overall objectives: If business is concerned about its environmental impact—> the production process will have to be more environmentally friendly.
This illustrates the integrated nature of a business.
Operations manager needs to:
• analyze impact of any decision on each functional area of the business.
External influences:
• Political or legal influences:
◦Be aware of legal environment and changes in government legislation
◦There are increasing amounts of legislation due to greater awareness of health, safety and enivironmental issues
• Market conditions:
If customers are spending less in a particular market or there are more competitors in a market, this can affect operational objectives.
• Economic influences:
• Be prepared/responsive for changes in economy—> because demand will fluctuate according to stage of economic cycle
• Businesses should ensure that output isn’t higher than demand and vice versa so they will want to increase flexibility of production.
◦Short term changes in demand directly impact
‣ Capacity utilization
‣ Productivity
◦Changes in interest rates impact:
‣ Cost of capital investment in operations
◦Due to global nature of economy:
‣ Resources can be bought from anywhere in the world
‣ Possible to undertake production from anywhere
• Changing customer needs: eg customers want business to behave more ethically—> affects costs and environmental objectives.
• Technological influences:
Technology has significant impact on operations functions in terms of production and the way consumers purchase goods and services so businesses
need to adapt to make the most of new technology.
◦Introduction of Computer aided design (CAD) and (CAM) has resulted in:
‣ Faster innovation (important for markets where product life cycle is short)
• must ensure there is added value so that value of final output(product or service)> inputs added together.
• this enabled profit to be made
Importance of setting objectives:
• Performance can be measured
• All business operations should have objectives set
• Helps business achieve overall objectives
• Must all be SMART to evaluate and judge overall performance of operations management
SETTING OPERATIONAL OBJECTIVES:
1. COSTS- REDUCING UNIT COSTS
• Firms aim to cut costs especially if they compete on price.
• Can cut variable or fixed costs
◦Eg: Can restructure to remove a layer of management—reducing fixed costs
• Ensure operations are cost effective
• To measure cost effectiveness—> unit cost=average cost of producing a unit of the product—> Total cost/output
• Businesses competing in same industry—>similar cost structure, they only vary based on productivity, efficiency and scale of production
• Business with lowest unit cost—> have a competitive advantage as lowest price, or highest profit margin at average industry price
Objectives relating to costs:
‣ Productivity and efficiency
‣ Reduced unit costs per item
‣ Greater capacity utilization—> increases output
‣ Better supplier terms—> reduction in costs of supplies
‣ Increase contribution per unit (selling price-variable cost)
2. QUALITY-
• maintaining or improving levels of quality
Objectives relating to quality:
‣ Better quality products
‣ Greater reliability- average lifetime use, how often something goes wrong
‣ Lower wastage and returns-lower scrap/defects
‣ Fewer complaints
‣ High Customer satisfaction- use for customer research
‣ Customer loyalty-% of repeat customers
3. FLEXIBILITY:
• Businesses need to be able to react to customer wants and changes
• They need to be able to vary amount of goods/services they are producing so supply doesn’t exceed demand and vice versa.
• Some companies ensure their work force is flexible by employing people on zero-hour contracts (when a worker is employed without a guaranteed
minimum number of hours per week)
• Efficiency and flexibility are what determines unit costs
4. SPEED OF RESPONSE:
• The speed at which a business can operate us important
• Might need to decrease production time of a product, or the waiting time for customers, or time of getting new products to the market.
• Links to efficiency targets
Objectives related to speed and flexibility:
‣ Enhanced reputation and sales
‣ Greater labor productivity
‣ Greater output per time period
‣ Greater Capacity utilization: actual output/max output
‣ Decrease order lead times: times taken between receiving and processing an order
5. EFFICIENCY:
Make better use of resources to reduce costs and increase profit.
Objectives related:
‣ Increasing capacity utilisation (increasing output so its closer to max potential output)
‣ Improving labour and capital productivity
6. ENVIRONMENTAL:
• increasingly important focus because:
◦More stringent environmental legislation
◦Consumers increasingly becoming more aware hence base buying decisions on firms that have environmental responsibility—> pressured
◦Pressure from government
Objectives related to environment:
‣ Minimize packaging and waste
‣ Sustainability-preserving resources and using supplies of raw materials from sustainable sources
‣ Pollution control- cutting carbon emissions
‣ Less use of non-renewable energy
, ‣ Recycling raw materials and using recycled raw materials
7. DEPENDABILITY
Customers need to depend on a business—> who depends on their suppliers.
If store always has items in stock-> attracts more customers even if more expensive
Objectives related to dependability:
‣ Reliability—> can charge more
‣ Consistent quality
8. INNOVATION:
Businesses can set their Research & Development department innovation targets
(Car manufacturer setting objective to produce electric car that fully charges in 10 mins by 2025)
9. ADDED VALUE: MAIN OPERATIONAL TARGET
Formula: cost-selling price
SALES REVENUE- COST OF BOUGHT-IN GOODS AND SERVICES
• Adding value means increasing the difference between the cost of the raw materials and price.
‣ Helps business make profit
‣ Increase selling price or reduce costs.
‣ Customers will pay more for better quality products but other ways to increase value: Environmentally friendly, quick speed of response, is
dependable.
Operational objectives are influenced by internal and external factors:
Internal influences:
• Nature of product: computer technology firm will have different objectives to a breakfast shop.
• Availability of resources: many businesses want to increase output but don’t have enough resources( not enough employees or capital machinery)
• Other departments:decisions made in other departments affect what production department can achieve and vice versa.
◦Finance—> operations decisions involve significant investment and cost. The financial position of the business such as the following will affect
the choices available on the operational objectives.
‣ Profitability
‣ Cash flow
‣ Liquidity
◦Human Resources—>especially for service businesses, the quality and capacity of the workforce affects the operational objectives. Targets for
productivity involves investment in training, and workforce planning.
◦Marketing issues—> the nature (type) of the product determines the operational set up. Regular changes to the marketing mix (especially regular
changes to the actual product) will place strains on the operations, as they are constantly needing to change the production as product is
changing, this will be a problem especially if production is relatively inflexible.
‣ The marketing function will determine what has to be produced and the quantities, so the operations department will have to co-ordinate
with the marketing department.
• Overall objectives: If business is concerned about its environmental impact—> the production process will have to be more environmentally friendly.
This illustrates the integrated nature of a business.
Operations manager needs to:
• analyze impact of any decision on each functional area of the business.
External influences:
• Political or legal influences:
◦Be aware of legal environment and changes in government legislation
◦There are increasing amounts of legislation due to greater awareness of health, safety and enivironmental issues
• Market conditions:
If customers are spending less in a particular market or there are more competitors in a market, this can affect operational objectives.
• Economic influences:
• Be prepared/responsive for changes in economy—> because demand will fluctuate according to stage of economic cycle
• Businesses should ensure that output isn’t higher than demand and vice versa so they will want to increase flexibility of production.
◦Short term changes in demand directly impact
‣ Capacity utilization
‣ Productivity
◦Changes in interest rates impact:
‣ Cost of capital investment in operations
◦Due to global nature of economy:
‣ Resources can be bought from anywhere in the world
‣ Possible to undertake production from anywhere
• Changing customer needs: eg customers want business to behave more ethically—> affects costs and environmental objectives.
• Technological influences:
Technology has significant impact on operations functions in terms of production and the way consumers purchase goods and services so businesses
need to adapt to make the most of new technology.
◦Introduction of Computer aided design (CAD) and (CAM) has resulted in:
‣ Faster innovation (important for markets where product life cycle is short)
