Operations, production methods, capacity utilisation and outsourcing

Last time

Before we start: last time, in Inventory management and supply chains, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

Turning inputs into outputs

Operations management turns inputs, such as materials, labour and capital, into goods and services that customers want. It aims for efficiency, quality and flexibility. This lesson covers the transformation process, productivity, production methods, capacity utilisation and outsourcing.

The transformation process

Inputs are transformed into outputs, adding value: the difference between the price of the output and the cost of bought-in inputs. Efficiency means producing with the least waste of resources; effectiveness means meeting the objective. Productivity is output per input, such as labour productivity: output per worker.

Labour- and capital-intensive operations

Labour-intensive operations use more labour relative to capital: suited to personal services and hand-made goods. Capital-intensive operations use more machinery: suited to mass production. Benefits of capital intensity: lower unit costs at high output, consistent quality, and fewer labour problems; but high initial cost and less flexibility.

Production methods

Job production makes one-off items to order: high quality and customisation, high cost. Batch production makes groups of identical items: some variety, lower cost. Flow production is continuous mass production: lowest unit cost, little variety. Mass customisation uses technology to tailor mass products.

Capacity utilisation

Capacity utilisation is actual output divided by maximum possible output, times 100. A factory producing 8,000 units with capacity for 10,000 has 80 per cent capacity utilisation. High utilisation spreads fixed costs, lowering unit costs; but very high utilisation leaves no room for maintenance or extra orders.

Improving capacity utilisation

Increase demand: marketing, new markets, or taking on contracts for other firms. Reduce capacity: sell or lease unused space and machinery, or reduce shifts. Each has costs: marketing spending, or losing capacity needed if demand rises later.

Outsourcing

Outsourcing means using another business to carry out a function, such as cleaning, IT, or manufacturing components. Benefits: lower costs, access to specialists, and flexibility to focus on core activities. Drawbacks: less control over quality, dependence on suppliers, and possible job losses and reputational risk.

Efficiency improvements

Automation and robots raise productivity and consistency. Better training, motivation and work methods raise labour productivity. But change needs investment and may meet resistance from staff.

Production methods compared

The production methods compared.

Mistakes that lose marks

Mistake one: using maximum output as the numerator in capacity utilisation. Mistake two: saying outsourcing always cuts costs, ignoring quality and control. Mistake three: benefits of capital intensity not linked to the business in the case. The fix: correct formula, both sides, and the case.

The full-marks tip

The full-marks tip: calculate capacity utilisation as actual over maximum, and explain its effect on unit costs. For outsourcing and capital intensity, give benefits and drawbacks for this business.

On one card

So, on one card: operations and capacity. Keep it for revision.