3.2.2 Operations management

Topic 38: Managing operations

Key ideas

• Operations objectives (AQA list):
  • efficiency: low unit costs;
  • quality;
  • volume of goods and services;
  • flexibility: of volume, specification and delivery;
  • environmental impact.
• Influences on operations objectives:
  • corporate and marketing objectives;
  • the nature of the product;
  • demand;
  • resources and capacity;
  • competitors;
  • technology;
  • the law and regulation.
• Adding value = selling price − cost of bought-in materials. Operations add value through:
  • efficient processes;
  • quality;
  • design;
  • speed;
  • customisation;
  • branding and service.
• Choosing an operations location depends on:
  • costs: land, labour, transport;
  • demand and closeness to the market;
  • access to resources and markets;
  • infrastructure;
  • government incentives, e.g. grants and Freeports;
  • ethical and people considerations: skills, labour practices, community;
  • break-even and return on investment of the site options;
  • environmental impact.
• Interrelationships and competitiveness:
  • Operations decisions determine cost (and so price and margin), quality (and so the brand) and delivery speed (and so customer satisfaction).

Self-test

Q1: Give three factors that influence where a business locates its operations. A: Costs (land and labour), closeness to markets or resources, and government incentives (also infrastructure and the availability of skills).

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Topic 39: Operations data – objectives and KPIs

Key ideas and calculations

• Employee productivity = output ÷ employees.
• Unit (average) cost = total costs ÷ units of output.
• Capacity utilisation = actual output ÷ maximum possible output × 100.
• Interpret and analyse KPIs:
  • waiting times;
  • returns;
  • defects;
  • complaints;
  • speed of response;
  • delivery times;
  • customer service and satisfaction ratings;
  • environmental and sustainability measures: carbon emissions per unit, waste to landfill, energy and water use.

Worked example

A factory can produce 6,000 units a month and produces 4,200. Its total costs are £87,000, of which £45,000 are fixed.

• Capacity utilisation = 4,200 ÷ 6,000 × 100 = 70%.
• Unit cost = 87,000 ÷ 4,200 = £20.71.
• If output rises to 5,400 units (90% capacity), total costs = £45,000 + (£10 × 5,400) = £99,000, so unit cost = 99,000 ÷ 5,400 = £18.33.
• Interpretation: higher capacity utilisation spreads fixed costs over more units, so unit costs fall. But above about 90%, there is little room for maintenance or unexpected orders, and staff may be stressed.

Self-test

Q1: Why does unit cost fall as capacity utilisation rises? A: Fixed costs are spread over more units of output, so the fixed cost per unit falls.

Q2: Give two disadvantages of operating at 100% capacity. A: There is no slack for breakdowns, maintenance or extra orders (so customers may be turned away), and staff and machines are overstretched, which risks quality problems.

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Topic 40: Efficiency

Key ideas

• Resource utilisation and efficiency mean making the best use of inputs to minimise unit costs and waste.
• Ways to improve efficiency:
  • Improving capacity utilisation: win more orders, rationalise (reduce capacity), rent out spare capacity.
  • Lean production: minimise waste of all kinds. It derives from the Toyota Production System. Its methods:
    • reducing inventory, e.g. just-in-time;
    • reducing re-works (right first time);
    • reducing waiting times;
    • reducing transportation times;
    • kaizen: continuous improvement through small, frequent suggestions from staff;
    • standardised processes.
  • Reducing waste, recycling and reusing materials.
  • Effective scheduling: planning the use of machines and staff.
  • Improving employee productivity: training, motivation, technology.
  • Improving cost control: budgets, cheaper suppliers, energy efficiency.
• Advantages and disadvantages of these methods:
  • They give lower costs, better quality and competitiveness.
  • But they need investment, training and culture change.
  • Lean production is vulnerable to supply disruption.
  • Kaizen needs engaged staff.

Self-test

Q1: What is kaizen? A: A Japanese approach of continuous improvement: frequent small improvements suggested by all employees, gradually raising efficiency and quality.

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Topic 41: Quality

Key ideas

• Quality means meeting customer expectations: fit for purpose, reliable, consistent.
• Costs of poor quality:
  • internal: scrap, re-work, wasted time;
  • external: returns, refunds, warranty claims, lost customers, reputational damage, legal action, product recalls.
• Methods of improving quality:

Method	Description	✅	❌
Quality control	Inspecting output at the end of the process to find defects	Defects caught before reaching customers	Waste already incurred; inspectors are costly; workers may not take responsibility
Quality assurance	Building quality into every stage, often with set standards (e.g. ISO 9001)	Prevents defects; reassures customers	Bureaucratic; setup costs
Total Quality Management (TQM)	A culture where every employee is responsible for quality and treats the next stage as a customer	Fewer defects; motivation	Needs culture change and training; takes time
Quality circles	Small groups of workers meeting regularly to solve quality problems	Uses workers' knowledge; motivating	Time away from production; needs management support
Benchmarking	Comparing processes and performance with the best in the industry	Identifies best practice and targets	Data access; copying may not fit the firm's context

Self-test

Q1: Distinguish between quality control and quality assurance. A: Quality control inspects products after production to detect defects. Quality assurance aims to prevent defects by setting and checking standards at every stage of the process.

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Topic 42: Environmental impact of operations

Key ideas

• Purpose and value of sustainable operations:
  • meeting customer and investor expectations (ESG);
  • lower long-term costs (energy, waste);
  • regulatory compliance;
  • brand reputation;
  • attracting staff.
• Ways to reduce environmental impact:
  • waste reduction;
  • resource efficiency;
  • reducing emissions and carbon footprint;
  • sustainable sourcing;
  • circularity: designing products for reuse, repair and recycling (the circular economy).
• Challenges:
  • costs of new equipment and materials;
  • supply chain limitations: e.g. sustainable suppliers may be unavailable or expensive;
  • operational disruption required to change processes.

Self-test

Q1: What is meant by "circularity"? A: Keeping products and materials in use for as long as possible through reuse, repair, remanufacture and recycling, rather than a "take–make–dispose" model.

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Topic 43: Matching output to demand

Key ideas

• Ways of managing supply to match high, low and fluctuating demand (cyclical and seasonal):
  • changing production scheduling: e.g. overtime, extra shifts;
  • increasing or decreasing inventory: build stock in quiet periods to sell in peaks;
  • flexible forms of employment: part-time, temporary, zero-hours, freelance;
  • outsourcing: subcontracting extra work;
  • investment in capital and technology;
  • increasing or decreasing capacity: e.g. new premises, or rationalisation.
• Advantages and disadvantages of the options: e.g. outsourcing is flexible but gives less quality control; inventory is costly to store and may spoil or go out of date.
• Challenges of NOT matching supply to demand:
  • too little supply: lost sales, dissatisfied customers, lost market share;
  • too much supply: excess inventory, storage costs, discounting, waste, lower utilisation.

Self-test

Q1: How might a toy manufacturer cope with the pre-Christmas peak? A: Build up inventory during the quieter months, hire temporary staff, use overtime, and possibly outsource some production.

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Topic 44: Supply chain management

Key ideas

• Make or buy:
  • Producing internally: control over quality, supply and know-how. But it needs capital, and the firm may lack economies of scale.
  • Buying in (outsourcing): cheaper, flexible, access to specialist expertise. But there is less control and supplier risk.
• Managing the supply chain: relationships with suppliers, and logistics from suppliers and to customers. Its purpose: reliability, cost, quality and speed.
• Influences on choice of suppliers:
  • the number and choice of suppliers: single sourcing (a close relationship and volume discounts, but risky) versus multiple sourcing (resilience, but less leverage);
  • price;
  • quality;
  • reliability;
  • capacity;
  • location;
  • ethics.
• Impact of supply chain issues: delays, shortages, cost rises and lost sales.
  • Examples: the global semiconductor shortage of 2021–22 hit car production; the Ever Given blocked the Suez Canal for six days in March 2021.
• Distribution of profits along the supply chain depends on bargaining power: e.g. large supermarkets squeezing farmers and suppliers, and the size and uniqueness of suppliers.
• Supply chain transparency and third-party accreditation build trust and manage ethical risk, but they cost money to audit. Examples of accreditations: Fairtrade, Rainforest Alliance, FSC (wood and paper), B Corp.

Self-test

Q1: Give one advantage and one risk of single sourcing. A: Advantage: a close relationship, consistent quality and volume discounts. Risk: if that supplier fails or is disrupted, production stops.

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Topic 45: Inventory management

Key ideas

• Reasons to hold inventory:
  • to meet unexpected demand;
  • buffer stock against supply delays;
  • bulk-buying discounts;
  • seasonal demand;
  • work-in-progress between production stages.
• Purpose of inventory management: balance the costs of holding inventory (storage, insurance, obsolescence, theft, tied-up cash, i.e. opportunity cost) against the costs of running out (lost sales, idle production).
• Influences on the amount held:
  • demand and its predictability;
  • lead time;
  • storage space and cost;
  • perishability;
  • finance;
  • supplier reliability.
• Just-in-time (JIT) versus just-in-case (JIC):

	JIT (hold minimal inventory, delivered as needed)	JIC (hold buffer stocks)
✅	Less cash tied up; less storage and waste; exposes inefficiency	Resilience to supply shocks; can meet demand spikes; bulk discounts
❌	Vulnerable to disruption (e.g. Covid-19 and the 2021 chip shortage); needs reliable suppliers; frequent delivery costs	Storage costs; cash tied up; waste and obsolescence

• Inventory turnover = cost of sales ÷ average inventory held.
  • Worked example: cost of sales £360k ÷ average inventory £60k = 6 times a year, i.e. inventory is held for about 365 ÷ 6 ≈ 61 days.
  • Higher turnover is generally better (less cash tied up), but it varies by industry: perishable food turns over very fast; furniture or jewellery much more slowly.

Self-test

Q1: Cost of sales is £1.2m and average inventory is £150k. Calculate inventory turnover and the average days inventory is held. A: 1,200 ÷ 150 = 8 times a year. 365 ÷ 8 ≈ 46 days.

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Topic 46: Innovation

Key ideas

• Innovation means turning ideas into new products or processes that create value.
  • Purpose and value:
    • competitive advantage;
    • premium prices (a USP);
    • growth;
    • efficiency (process innovation);
    • extending the product portfolio.
  • Challenges:
    • high cost and risk of failure;
    • long payback;
    • copying by rivals;
    • the need for skills and culture.
• Ways of developing innovation:
  • research and development (R&D);
  • talent acquisition and retention;
  • cross-functional teams;
  • intrapreneurship: employees acting entrepreneurially inside the firm.
• Protecting innovation through intellectual property:
  • Patents give the exclusive right to an invention, for up to 20 years in the UK (renewal fees apply).
  • Copyright protects original creative works automatically. For literary, artistic, musical and dramatic works it generally lasts the creator's life plus 70 years.
  • Benefits: the firm can recoup R&D costs and license the IP. Drawbacks: applications cost money, patents are published (revealing the idea), and they are expensive to enforce.

Self-test

Q1: What is intrapreneurship? A: Employees behaving like entrepreneurs within an organisation, developing new ideas and ventures with company resources.

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Topic 47: Project management and network analysis

Key ideas

• Project management means planning, organising and controlling resources to complete a project on time, within budget and to the required quality.
• Network analysis (critical path analysis):
  • It shows the order and dependency of activities, the minimum project duration, and the critical path: the activities with zero float, where any delay delays the whole project.
  • Nodes show the node number, the EST (earliest start time) and the LFT (latest finish time).
  • Float time = LFT − duration − EST: how long an activity can be delayed without delaying the project.

Worked example

Activity	Duration (days)	Depends on
A	3	–
B	4	A
C	2	A
D	5	B
E	3	C
F	2	D and E

• Forward pass (EST):
  • A = 0.
  • B = 3 and C = 3.
  • D = 3 + 4 = 7.
  • E = 3 + 2 = 5.
  • F = max(7 + 5, 5 + 3) = 12.
  • The project ends at 12 + 2 = 14 days.
• Backward pass (LFT):
  • F = 14.
  • D and E must finish by 14 − 2 = 12.
  • B must finish by 12 − 5 = 7; C by 12 − 3 = 9.
  • A must finish by min(7 − 4, 9 − 2) = 3.

Activity	EST	Duration	LFT	Float = LFT − D − EST
A	0	3	3	0
B	3	4	7	0
C	3	2	9	4
D	7	5	12	0
E	5	3	12	4
F	12	2	14	0

• Critical path: A → B → D → F, 14 days.
• C and E have 4 days of float, so their resources could be moved temporarily to critical activities.
• Amending a network: if B takes 6 days instead of 4, D starts at day 9, F at day 14, and the project ends at 16 days. Any delay to a critical activity delays the whole project.
• Value of network analysis:
  • It identifies critical activities to monitor.
  • It enables JIT ordering of resources and identifies float for redeploying resources.
  • It gives a completion date.
• Limitations:
  • It relies on estimated durations.
  • It doesn't show cost or quality.
  • Complex projects are hard to draw.
  • It needs updating.

Self-test

Q1: An activity has EST 6, duration 4 and LFT 14. Calculate its float. A: 14 − 4 − 6 = 4 days.

Q2: What is the critical path? A: The sequence of activities with zero float that determines the minimum project duration. Any delay to these activities delays the whole project.

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Topic 48: Scale of operations

Key ideas

• Economies of scale: unit costs fall as the scale of output increases. AQA lists three types:
  • technical: larger, more efficient machinery, and specialisation;
  • purchasing (bulk-buying): discounts and bargaining power;
  • financial: large firms borrow more cheaply and can issue shares.
• Diseconomies of scale: unit costs rise as the firm becomes too large. AQA lists three causes:
  • control: it is harder to monitor performance;
  • communication: long chains of command, message distortion, slow decisions;
  • coordination: departments and sites work at cross-purposes.
  • They often come with lower motivation and a sense of alienation.
• Significance: economies of scale give a cost advantage and pricing power. Diseconomies limit optimal size and encourage decentralisation.

Self-test

Q1: Give an example of a purchasing economy of scale. A: A large supermarket chain buys in bulk and negotiates lower prices per unit from suppliers than a small independent shop can.

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Topic 49: Impact of technology on operations

Key ideas

• Technology, including AI, in operations:
  • inventory management: automated reordering, barcodes and RFID, AI demand forecasting;
  • supply chain management: real-time tracking, supplier portals, route optimisation;
  • automation: robotics, automated warehouses, self-service checkouts.
• Benefits:
  • lower unit costs;
  • fewer errors;
  • faster processes;
  • 24/7 operation;
  • better data for decisions;
  • competitiveness.
• Drawbacks:
  • high capital cost;
  • training needs;
  • job losses and staff resistance;
  • cyber-security risks;
  • rapid obsolescence.

Self-test

Q1: Give one benefit and one drawback of AI demand forecasting for inventory. A: Benefit: more accurate orders reduce both stock-outs and excess inventory. Drawback: it is costly to implement and depends on good-quality data; forecasts can still fail after unexpected shocks.

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Topic 50: Ethics in operations (A-level only)

Key ideas

• A supplier code of conduct and supplier audits set and check standards: e.g. labour rights, health and safety, environmental practices, anti-bribery.
• Ethical issues:
  • sourcing suppliers: child or forced labour, unsafe factories (e.g. Rana Plaza, Bangladesh, 2013, 1,134 deaths);
  • product safety;
  • environmental impact.
• The UK Modern Slavery Act 2015 requires organisations with a turnover of £36m or more to publish an annual modern slavery statement.

Self-test

Q1: Why do firms carry out supplier audits? A: To check that suppliers actually meet the firm's code of conduct (e.g. labour rights, safety and environmental standards), which protects the firm from ethical scandals and reputational damage.

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