Operational management

A no-frills airline and a bespoke furniture maker each ask which operational objectives to prioritise. Advise each and explain the trade-offs.

1. 01The airline

   Its strategy is cost leadership, so it prioritises low unit cost and dependability (on-time departures with high aircraft utilisation), accepting limited flexibility and no frills. The trade-off is that squeezing cost too far could harm dependability and reputation.

2. 02The furniture maker

   Its strategy is differentiation, so it prioritises quality and flexibility (bespoke designs), accepting higher unit costs and slower speed. The trade-off is that emphasising craft raises cost and lengthens lead times.

3. 03Evaluate

   Each prioritisation fits the competitive strategy; the error would be for the airline to chase bespoke flexibility or the furniture maker to chase lowest cost. The right objectives depend on how the firm competes.

Result: The airline prioritises low cost and dependability, the furniture maker quality and flexibility - each matching its competitive strategy and accepting the trade-offs, showing that operational objectives must be prioritised, not maximised.

A factory can make 10,000 units a month but is making 7,500 with 50 workers. Fixed costs are £60,000 a month and variable costs are £8 per unit. Calculate capacity utilisation, labour productivity and unit cost, then show how unit cost would change at full capacity.

1. 01Capacity utilisation

   Utilisation = 7,500 / 10,000 x 100 = 75 per cent.

2. 02Labour productivity

   Productivity = 7,500 / 50 = 150 units per worker per month.

3. 03Unit cost at 7,500 units

   Total cost = 60,000 + (8 x 7,500) = 60,000 + 60,000 = £120,000. Unit cost = 120,000 / 7,500 = £16.00.

4. 04Unit cost at full capacity

   At 10,000 units: total cost = 60,000 + (8 x 10,000) = £140,000, so unit cost = 140,000 / 10,000 = £14.00. Raising output from 75 to 100 per cent utilisation cuts unit cost by £2 (from £16 to £14) because the £60,000 fixed cost is spread over more units.

Result: Utilisation is 75 per cent, productivity 150 units per worker, and unit cost £16.00 - falling to £14.00 at full capacity. Raising utilisation cuts unit cost by spreading fixed costs, but the firm must first generate the extra demand and keep some slack for flexibility.

A furniture manufacturer currently holds four weeks of raw-material stock and is considering switching to JIT to cut costs. Evaluate the decision.

1. 01Identify the gains

   JIT would slash the four weeks of stock, freeing tied-up capital, cutting storage and insurance costs, reducing waste and obsolescence, and improving cash flow.

2. 02Identify the risks

   With no buffer, any supplier delay or quality failure halts production, damaging customer service and reputation. JIT needs reliable, nearby suppliers and dependable logistics - conditions the firm must check it has.

3. 03Reach a judgement

   If the firm's suppliers are reliable and local, JIT's cost and cash-flow gains likely outweigh the risk; if supply is unreliable or distant, a hybrid holding a smaller buffer of critical materials is safer. The decision depends on supplier reliability and the cost of a stoppage.

Result: JIT offers real cost and cash-flow gains but only if suppliers are reliable; where supply risk is high, a reduced buffer of critical materials is the more prudent choice - a decision that depends on supplier dependability and the cost of disruption.

An electronics assembler relies on end-of-line inspection but faces a 6 per cent defect rate and rising warranty claims. Evaluate a switch to quality assurance and TQM.

1. 01Cost of the current approach

   A 6 per cent defect rate means one in every 17 units is scrapped or reworked, plus warranty claims and reputational damage from defects that slip through inspection - a large cost of poor quality.

2. 02Benefits of QA/TQM

   Building quality in at every stage and empowering staff to get it 'right first time' should cut the defect rate at source, reducing scrap, rework and warranty costs and protecting reputation.

3. 03Weigh the costs and evaluate

   Introducing TQM needs training, time and sustained management commitment, and gains take time to appear. But given the size of the current cost of poor quality, prevention is likely to pay for itself; the judgement depends on whether the firm can sustain the cultural change rather than treat it as a slogan.

Result: Because the cost of a 6 per cent defect rate and warranty claims is large, a shift towards quality assurance and TQM is likely worthwhile - provided the firm commits to the training and cultural change prevention requires, rather than relying on inspection.

A manufacturer sources a critical component from one low-cost distant supplier with a four-week lead time. Recent delays have caused stoppages. Recommend how it should manage inventory and supply-chain risk.

1. 01Diagnose the problem

   A single distant supplier with a long lead time and no adequate buffer leaves the firm exposed - any delay halts production, and the cost of a stoppage (lost output and customers) is high.

2. 02Consider the options

   Raise buffer stock of the critical component to cover the lead time (more resilient, but ties up capital); dual-source from a second, perhaps nearer, supplier (spreads risk, but may cost more per unit); or re-shore (most resilient, likely most costly).

3. 03Recommend and evaluate

   Recommend holding a larger buffer of this critical component and adding a second supplier, accepting a small rise in cost for a large fall in disruption risk. The right balance depends on the cost of a stoppage versus the extra holding and sourcing cost.

Result: Given the high cost of stoppages, a larger buffer of the critical component plus a second supplier trades a small cost rise for much greater resilience - the appropriate balance of efficiency and resilience for a firm exposed to a single distant supplier.

A toy manufacturer sells 60 per cent of its annual output in the three months before Christmas. Recommend how it should match supply to this seasonal demand.

1. 01Understand the pattern

   Demand is highly seasonal, so level year-round production would mean idle capacity for much of the year, while chasing the Christmas peak alone would need huge temporary capacity.

2. 02Choose methods

   Combine approaches: build finished-goods stock through the quieter months (produce to inventory) to smooth production; add temporary staff and overtime for the peak; and use demand-management tactics such as early-order discounts to retailers to bring some demand forward.

3. 03Add technology and evaluate

   Better sales-data forecasting sharpens how much to pre-build, avoiding costly unsold stock or stock-outs. The stock-building approach ties up capital and risks unsold toys if the forecast is wrong, so the balance depends on forecast accuracy and the perishability of demand (fashion toys date quickly).

Result: A blend of producing to stock in quiet months, flexing labour for the peak and using data-driven forecasting best matches supply to seasonal demand - with the caveat that pre-building stock risks unsold inventory if the demand forecast proves wrong.