Operations management
Operations turn inputs into goods and services efficiently. This covers production methods, productivity, technology, costs and break-even, quality and location decisions.
📌 Key points
- Production turns inputs into outputs; productivity = output ÷ inputs (e.g. output per worker). It can be raised by training, better technology, motivation and better methods.
- Job production makes one-off items to order; batch production makes groups of identical products; flow production makes large numbers continuously on a production line.
- Lean production cuts waste: just-in-time keeps almost no inventory, with supplies arriving just when needed; kaizen is continuous improvement through small changes.
- Technology such as automation, CAD (computer-aided design), CAM (computer-aided manufacturing) and EPOS improves productivity and accuracy but costs a lot and may cause job losses.
- Fixed costs do not change with output; variable costs change directly with output. Total cost = fixed costs + variable costs; average cost = total cost ÷ output.
- Economies of scale lower average costs as a business grows (purchasing, marketing, financial, managerial, technical); diseconomies of scale raise them (poor communication, low morale, slow decisions).
- Break-even is where total revenue = total costs. Break-even output = fixed costs ÷ contribution per unit, where contribution = price − variable cost per unit.
- Margin of safety = actual sales − break-even output. A break-even chart helps plan, but assumes all output is sold at one price.
- Quality control checks finished products; quality assurance checks quality at every stage of production; total quality management (TQM) makes every employee responsible for quality.
- Location depends on: market, raw materials, labour, transport, power, government grants and rules; shops need to be where many customers pass by.
📖 Key terms
- Productivity
- A measure of how efficiently inputs are turned into outputs, e.g. output per worker.
- Batch production
- Producing a limited number of identical products, then switching to a different batch.
- Flow production
- Producing large quantities of a standardised product on a continuous production line.
- Just-in-time
- A lean method in which supplies arrive exactly when needed, so almost no inventory is held.
- Break-even point
- The level of output at which total revenue equals total costs.
- Contribution
- Selling price minus variable cost per unit.
- Margin of safety
- The amount by which sales exceed the break-even level of output.
- Total quality management
- Making quality the responsibility of every employee at every stage.
✏️ Worked example
A firm has fixed costs of $12,000 a month. It sells its product for $20 and the variable cost per unit is $14. It sells 2,600 units a month. Calculate the break-even output, margin of safety and profit.
- Contribution per unit = $20 − $14 = $6.
- Break-even output = fixed costs ÷ contribution = $12,000 ÷ $6 = 2,000 units.
- Margin of safety = 2,600 − 2,000 = 600 units.
- Profit = margin of safety × contribution = 600 × $6 = $3,600.
- Answer: break-even 2,000 units; margin of safety 600 units; profit $3,600.
Break-even output is a number of units, not dollars. Check by testing: at break-even, total revenue and total cost should be equal.
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