What is operations management?
Operations (or production) is the part of a business that makes the product or delivers the service.
It is a transformation process:
- Inputs: raw materials, workers (labour), machines (capital), energy, money, information.
- Process: cutting, mixing, assembling, cooking, teaching, treating patients.
- Outputs: goods (bread, phones) or services (a haircut, a train ride).
Good operations add value: the output is worth more to customers than the inputs cost. A cotton shirt is worth more than the cloth and thread it is made from.
Many businesses have made their processes safer, healthier and more efficient: robots for dangerous welding, better air in factories, digital order systems in restaurants, and less packaging.
Methods of production: job, batch and flow
| Method | What it means | Good | Bad |
|---|---|---|---|
| Job | One unique item made to the customer's order | Exactly what the customer wants; high price; motivated skilled workers | Slow; high cost per item; needs skilled labour |
| Batch | A group of identical items, then switch to the next group | Some variety; cheaper than job | Machines stop while switching; stock must be stored |
| Flow (mass) | Identical items move non-stop along a line | Lowest cost per item (economies of scale); fast | Very costly to set up; boring work; little variety |
Labour-intensive production uses more workers than machines (handmade carpets). Capital-intensive production uses more machines (a bottling plant). Process innovation means a new, better way of making things, such as automation or 3D printing.
Operational objectives
- Cost: keep the cost of each unit low so prices can be competitive.
- Quality: the product meets customer needs every time, with no faults.
- Speed (dependability): deliver quickly and on time.
- Flexibility: change the product, the design or the amount made, quickly.
- Environment: use less energy, water and packaging; recycle; cut pollution.
Objectives can clash. Very high quality can raise cost; great flexibility can slow speed. A budget airline aims for low cost; a luxury watch maker aims for quality.
Measuring performance: capacity, utilisation, productivity, unit cost
- Capacity = the maximum output a business can make in a time period with its current resources.
- Capacity utilisation = actual output ÷ maximum capacity × 100%.
- Labour productivity = output ÷ number of workers (per period).
- Unit cost (average cost) = total costs ÷ units of output.
Why it matters: fixed costs (rent, machines) stay the same however much is made. If more units are made, fixed costs are shared by more units, so unit cost falls. Low utilisation means idle machines and higher unit cost. Over about 90% there is no slack for breakdowns, repairs or surprise orders.
To raise low utilisation: sell more (promotion, new markets), or cut capacity (sell machines, shorter shifts, rent out space). Technology (automation, better software) can raise productivity.
Full cost shares all costs, including overheads, across products. Specific (direct) cost looks only at costs caused by that one product, to see what it adds to profit.
Supply chain, push and pull, and quality
The supply chain is every stage from raw material to the final customer: suppliers → producer → warehouse → shop → customer.
- Push flow: make goods based on a forecast, store them, then sell. Safe stock, but storage costs and waste if they do not sell.
- Pull flow (just-in-time, JIT): the customer order starts production; materials arrive just when needed. Little stock and waste, but any supplier delay stops production.
Quality control: inspect products at the end and remove faulty ones. Quality assurance: set standards at every stage so faults do not happen. Total Quality Management (TQM) and kaizen (continuous improvement): every worker looks for small improvements every day. Lean production combines JIT and kaizen to cut waste.
Product lifecycle management means planning a product from design, through production and sale, to repair, recycling or disposal.
Try it
In the 3D free play, slide the output. Note the unit cost at 200, 500 and 1,000 units. Why does it fall?
At home: make 10 paper boats on your own (job style, one at a time), then with family as a line (one folds, one creases, one finishes). Time both. Which was faster per boat?
Key formulas and definitions
- Capacity utilisation (%) = actual output ÷ maximum capacity × 100
- Labour productivity = output ÷ number of workers
- Unit cost = total costs ÷ units of output
- Total costs = fixed costs + (variable cost per unit × output)
- Job = one-off; Batch = groups; Flow = continuous
Worked examples
1. A factory can make 8,000 shirts a month and makes 6,000. Find its capacity utilisation.
6,000 ÷ 8,000 × 100 = 75%.
2. 12 workers make 1,800 chairs in a month. Find labour productivity.
1,800 ÷ 12 = 150 chairs per worker per month.
3. Total costs are 50,000 and output is 2,000 units. Find the unit cost.
50,000 ÷ 2,000 = 25 per unit.
4. Fixed costs are 20,000, variable cost 30 per unit. Find the unit cost at 500 and at 1,000 units.
At 500: total = 20,000 + 30 × 500 = 35,000; unit cost = 35,000 ÷ 500 = 70. At 1,000: total = 20,000 + 30,000 = 50,000; unit cost = 50. Fixed cost is spread over more units, so unit cost falls.
5. A hotel has 120 rooms. On average 78 are filled each night. Find utilisation and suggest one way to raise it.
78 ÷ 120 × 100 = 65%. To raise it: offer weekday discounts, sell through travel websites, or host events and conferences.
6. Productivity rises from 40 to 50 units per worker. By what percentage has it risen?
Change = 10. 10 ÷ 40 × 100 = 25% increase.
Common mistakes
- Thinking productivity and production are the same. Production is total output; productivity is output per worker (or per input).
- Flipping the utilisation formula. It is output ÷ capacity, so it can never be above 100%.
- Believing 100% utilisation is always best. It leaves no time for maintenance or extra orders and stresses workers.
- Mixing up quality control (check at the end) and quality assurance (prevent faults at every stage).