3.4.1 Setting operational objectives


    3.4.1 Setting operational objectives

    The value of setting operational objectives

    Operations = the process if taking inputs and turning them into outputs


    The importance of setting objectives:

    • The operations function of a business is the ‘engine room’ of the business, and like all engine, performance can and should be measured
    • All business operations of whatever size and complexity should have objectives set


    Cost and volume targets:

    • However it chooses to compete, a business needs to ensure that operations are cost effective
    • The traditional measure of cost effectiveness is “unit cost” = the average cost of producing a unit of the product
    • Business competing in the same industry face similar cost structure, but each will vary in terms of its productivity, efficiency, and scale of production
    • The business with the lowest unit cost is in a strong position to be able to compete by being able to offer the lowest price, or make the highest profit margin at the average industry price
    • Objectives relating to costs and volume tend to focus on:
      • Productivity and efficiency (e.g. units per week or employee)
      • Unit costs per item
      • Contribution per unit (breakeven)
      • Number of items to produce (e.g. per time period, or per machine etc)
    • Example = Tkmaxx, a discount retailer, as they bring in old stock and they sell them at a lower price. They also like to have a larger volume of a range of clothes/shoes/accessories etc so that the customer has a wide range of choice. However they don’t have many if the same product as all of their products are end of line/range.


    Quality targets:

    • Achieving or exceeding the required level of quality is also essential for a successful business
    • There are many ways of measuring the achievement of quality including
      • Scrap/defect rates – a measure of poor quality
      • Reliability – how often something goes wrong; average lifetime use
      • Customer satisfaction – measured by customer research
      • Number/incidences of customer complaints
      • Customer loyalty – percentage of repeat business


    Speed of response and flexibility targets:

    • This examines how effectively the assets of a business are being utilised, and how responsive the business can be to short term or unexpected changes in demand
    • Efficiency and flexibility are key drivers of unit costs. Relevant objectives would include
      • Labour productivity – output per employee, units produced per production line, sales per shop
      • Output per time period – potential output per week on a normal shift basis, potential output assuming certain levels of capacity utilisation
      • Capacity utilisation – the proportion of potential output actually being achieved
      • Order lead times – the time taken between receiving and processing an order


    Environmental targets:

    • This is an increasingly important focus of operational targets as businesses face more stringent environmental legislation, and consumers increasingly base their buying decisions on firms that take environmental responsibility seriously
    • Targets are usually closely integrated into a firms approach to corporate social responsibility
    • Examples include
      • Use of energy
      • Proportion of production materials that are recycled
      • Compliance with waste disposal regulations/proportion waste land fill
      • Supplies of raw materials from sustainable sources


    Added value targets:

    • Added value is equivalent to the increase in value that a business creates by undertaking the production process
    • Adding value is the difference between the price of the finished product/service and the cost of the inputs involved in making it


    External and internal influences on operational objectives and decisions

    Internal influences:

    • Corporate objectives – as with all the functional areas, corporate objectives are the most important internal influence. An operations objective (e.g. higher production capacity) should not conflict with a corporate objective (e.g. lowest unit costs)
    • Finance – operations decisions often involve significant investment and cost. The financial position of the business (profitability, cash flow, liquidity) directly effects the choices available
    • Human resources – for a services business in particular, the quality and capacity of the workforce is a key factor in affecting the operational objectives. Targets for productivity, for example, will be affected by the investment in training and the effectiveness of workforce planning
    • Marketing issues – the nature of the product determines the operational set up. Regular changes to the marketing mix – particularly product – may place strains on the operations, particularly if production is relatively inflexible


    External influences:

    • Economic environment – crucial for operations. Sudden or short term changes in demand directly impact on capacity utilisation, productivity etc. Changes in interest rates impact on the cost of financing capital investment in operations
    • Competitor efficiency flexibility – quicker, more efficient, or better quality competitors will place pressure on operations to deliver at least comparable performance
    • Technological change – also very significant – especially in markets where product life cycles are short, innovation is rife and production processes are costly
    • Legal and environmental change – greater regulation and legislation of the environment places new challenges for operations objectives


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