4.2 business

 Unit 4.2 - Analysing operational performance

Efficiency - 

All businesses try to be as efficient as possible. This means controlling costs when making goods or services.

Part of the operational objectives (from Unit 4.1) is to be able to measure the efficiency of the business. This can be done using:

Labour productivity

Unit costs

Capacity

Capacity utilisation


Labour intensive - when labour costs outweigh capital costs of a business


In other words this means when the business has spent more on investing in people to

 complete their goods or services than the capital (money) they have invested in it.


Labour productivity - the amount (volume) of output that is obtained from each employee.

This is a measure of business efficiency especially for firms which have labour intensive production.


Labour productivity -

calculation for labour productivity:

labour productivity = output per period / number of employees in that period


The calculation has significant impacts upon unit costs.


Achieving high labour productivity - 

Getting the workforce to be more productive is not an easy and is influenced by:

-quality (and extent) of machinery 

-skills, motivation and ability of workforce

-the methods of production used 

-reliability of raw material and suppliers


Productivity can be increased by - 

-increasing the number of hours worked

-training to employ output 

-investment in equipment and technology 

-changing the way the work is done 

-motivating employees 


Unit costs - 

another measure of efficiency is unit costs.

This is defined as: 'the cost of producing one unit of output.' This is equally as important if you are a large or small business.

 

Unit cost = *total cost (in £) / units of output (in volume)

 Total costs = fixed costs + variable costs


Fixed costs :

costs that do not change no matter how many units you make 

ie rent , insurance, telephone

Variable costs:

costs that change when output changes 

ie raw materials, distribution 


Unit costs - 

- sometimes known as average costs or average total cost 

- if a business produces 20 units of output at a total cost of £50 then the average cost (for that unit) is £50/20 = £".50

- this means it costs £2.50 to make each unit


Competitors - 

- when competition is based on price it is vital to achieve the lowest unit costs

- note: not all businesses compete on purely price 


Unit cost influences - 

- how many units a business can make with its resources 

- how efficient the workforce is at producing the goods

- how efficient the machinery (fixed assets) are at producing the goods

- how easily variable costs can be controlled


capacity - the maximum total level of output or production in a given time period. A company that is producing at this level is said to be producing at full capacity.

capacity utilisation - the percentage of firms total possible production leave that is being reached.


capacity utilisation - capacity output per annum (or month) / maximum possible out per annum (or month) x 100


Spare capacity - 

- allows you to plan maintenance time -  this is essential, especially if the machine or tools are very high value to the firms.

- most people recognise that 90 per cent or about capacity utilisation is the best 

- every point below 100 per cent shows that resources are not being used - therefore high fixed costs per unit produced.


Causes of spare capacity - 

- new competitors or new products entering the market this means there is a fall in demand for existing products

- fall in demand for the product due to changes in taste or fashion 

- unsuccessful marketing 

- seasonal demand (hotels)

- over investment in fixed costs (channel tunnel)

- a merger or takeover leading to duplication of resources (high street banks merging)


Spare capacity - 

ads - 

-more time for maintenance and repair

-improvements can be planned in 

-less pressure on employees 

-can cope with sudden increase in demand especially in a fast moving industry 


dis - 

-higher proportion of fixed costs per unit 

-higher unit costs lead to lower profits, so lower sales volume

-negative image of being unsuccessful

-with less work employees become bored or demoralised


Using data to make decisions - 

The aim of operations managers is to use as few resources as possible to produce a given output, but conversely they are also seeking to maintain a given level of quality.

Therefore productivity is a vital measure to hep operations managers make decisions. The higher the productivity the more units each worker (or machine) makes.


Profitability - 

Profit is calculated :

Sales revenue - (fixed costs + variable costs)

This means that to increase profit there are three things that can happen


1 - increase revenue - can be hard to do and cost money to market products 

2 - reduce fixed costs - can be hard and can reduce your capacity 

3 - reduce variable costs - this is the easiest to do - decrease unit costs by increasing capacity utiisation.


Increasing capacity - 

it is often a major decision and would have to fit in with corporate objectives of growth. Businesses need to ensure there is future demand for the products as well as finance available.


Summary - 

- businesses need to be able to measure their efficiencies so that operations managers can make decision about how to improve

- the different measures allow the managers to make better decision about which products, machines or people need improving, training or updating.

- changes to capacity can require large amounts of investment

 








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