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Business

Study Notes

Operational Objectives

Level:
AS, A Level
Board:
AQA, Edexcel, OCR, IB

The operations function of a business is the "engine-room" of the business, and like all engines, performance can and should be measured.

All business operations of whatever size and complexity should have objectives set. The key objectives for operations are outlined below.

Cost & 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. Businesses competing in the same industry face similar cost structures, 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 cost and volume tend to focus on:

  • Productivity & efficiency (e.g. units per week or employee)
  • Unit costs per item
  • Contribution per unit
  • Number of items to produce (per time period, or per machine etc)

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 etc
  • Customer satisfaction – measured by customer research
  • Number / incidence of customer complaints
  • Customer loyalty – e.g. percentage of repeat business

Efficiency and flexibility targets

Closely linked to cost, efficiency and flexibility targets look at how effectively the assets of the 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: e.g. output per employee, units produced per production line; sales per shop
  • Output per time period: e.g. 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: e.g. 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. Examples include:

  • Use of energy
  • Proportion of production materials that are recycled
  • Compliance with waste disposal regulations / proportion of waste to landfill
  • Supplies of raw materials from sustainable sources

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