The nature of operations

Business AS · Operations management. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

Operations is the part of a business that makes the product. It takes inputs (the factors of production: land, labour, capital and enterprise) and turns them into outputs, the goods or services that customers buy. This is the transformational process. If customers pay more for the output than the bought-in inputs cost, operations has added value.

Managers judge operations by efficiency (output from a given amount of input), effectiveness (meeting the aims and what customers need) and productivity (output per unit of input). They also choose between machines and people, and between job, batch, flow and mass customisation methods. Each choice changes unit cost, flexibility and quality.

Rules to remember

Added value = selling price − cost of bought-in materials and components.
Labour productivity = total output ÷ number of workers (units per worker in a time period).
Efficient = low waste and low cost per unit. Effective = achieves the aim. A business can be efficient without being effective.
Capital intensive = high share of machinery in production: low unit cost at high output, but high fixed costs and little flexibility. Labour intensive = high share of labour: flexible and personal, but higher unit labour cost.
Job = one-off products made to order. Batch = groups of identical items, one group after another. Flow = continuous production of identical items on a line.
Mass customisation = flexible, computer-controlled flow production that gives each customer some choice at close to mass-production cost.
Moving from job or batch to flow needs large capital spending, retraining and steady high demand. Sustainable operations usually raise costs at first but can cut waste and improve the firm's image.

Common mistake

Productivity is not the same as production. Total output can rise while output per worker falls, so always divide output by the number of workers before you compare.

Worked example

A factory made 7,500 units with 30 workers last year. This year it made 8,960 units with 32 workers. What is the percentage change in labour productivity?

Last year: 7,500 ÷ 30 = 250 units per worker.
This year: 8,960 ÷ 32 = 280 units per worker.
Change = 280 − 250 = 30 units per worker.
Percentage change = 30 ÷ 250 × 100 = 12%.

Answer: Labour productivity rose by 12%.

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