4. Operations management
- Syllabus
- 0264–2027–2028
- Section
- 4
- Level
- —
4.1. Production of goods and services
- Syllabus
- 0264–2027–2028
- Topic
- 4.1
- Level
- —
Improve productivity with lean production
labour productivity=number of employeesoutput produced
If 24 employees produce 3,600 units in a week, labour productivity is 3,600/24=150 units per employee per week. Use matching time periods and state the unit.
Higher efficiency can lower unit cost, improve competitiveness, capacity, profit and reliability. It may rise through suitable automation, better technology, training, layout, maintenance and reduced waste—but capital cost, disruption and workforce effects must be judged.
| Lean method | How it reduces waste | Main risk |
|---|---|---|
| just-in-time (JIT) | inputs arrive close to use, reducing inventory and storage | disruption can stop production |
| Kaizen | employees make continuous small improvements | needs participation, time and sustained culture |
Businesses hold inventory to meet uncertain demand, avoid supply interruption, gain bulk discounts and keep production flowing. The amount depends on demand predictability, lead time, reliability, perishability, storage cost, cash availability and the cost of running out.
Productivity is output per input, not total output alone. Zero inventory is not automatically efficient when delays or shortages would cost more than storage.
Match production method to demand
| Method | Pattern | Advantages | Disadvantages |
|---|---|---|---|
| job | one customised item at a time | flexibility, customer fit, skilled work | high unit cost, slow, hard to automate |
| batch | a group of identical items, then changeover | variety with some scale | inventory and changeover time |
| flow | continuous standardised high-volume output | low unit cost, speed, consistent automation | high setup cost, inflexible, breakdown affects line |
Recommend using demand volume and variety, customisation, capital, labour skills, required speed, flexibility and reliability. One-off specialist demand favours job; repeated varieties may favour batch; stable mass demand can justify flow.
Flow is not automatically best because its unit cost is low. Without enough stable demand, high fixed cost and inflexibility can outweigh scale benefits.
4.2. Technology and production of goods and services
- Syllabus
- 0264–2027–2028
- Topic
- 4.2
- Level
- —
Evaluate technology in goods and services
| Technology | Production change |
|---|---|
| mechanisation | machines assist human work |
| automation | equipment or software controls processes with limited direct human action |
| Computer-Aided Manufacture (CAM) | digital instructions guide production machinery accurately and repeatedly |
| 3D printing | a digital design is built layer by layer, supporting prototypes and customised small runs |
| contactless payment | service transactions are completed faster with less cash handling and shorter queues |
For businesses, technology can raise speed, capacity, consistency and productivity, lower unit labour cost, improve data and enable new products or services. It may require high capital and training, become obsolete, fail or face cyber risk, and be uneconomic at low volume.
Employees may gain safer work, new skilled roles, higher productivity and flexible service tools. Others may face redundancy, deskilling, monitoring, retraining or work disruption. The result depends on whether technology replaces tasks or complements workers and whether the business retrains them.
Contactless payment improves service productivity by processing more transactions in a given time; it does not produce a physical good. New technology is not automatically efficient unless its benefits exceed full purchase, integration, maintenance and training costs.
4.3. Sustainable production of goods and services
- Syllabus
- 0264–2027–2028
- Topic
- 4.3
- Level
- —
Making production more sustainable
Sustainable production meets current needs while preserving resources and productive capacity for the future. A business becomes more sustainable by reducing the resources, energy and waste linked to what it produces—not simply by calling a product ‘green’. Different methods suit different operations.
| Method | How it improves sustainability | Business trade-off |
|---|---|---|
| renewable energy | replaces finite energy sources with supplies such as solar or wind | can reduce long-run energy cost, but equipment is expensive and output may be unreliable |
| fewer resources / less waste | redesigns production to use less material, water or energy and avoid defective or surplus output | can lower material and disposal costs, but process changes may require investment or training |
| reuse | uses an item again, such as refillable containers or recovered water, without first turning it into a new material | reduces replacement purchases and waste, but collection, cleaning and storage take time and money |
| recycle | processes waste into usable material or chooses recycled inputs | reduces demand for new resources and waste sent away, but sorting and processing use resources and not every material is suitable |
| environmentally friendly products | designs goods or services to cause less environmental harm during use or disposal | may improve reputation and attract customers, but development costs or a higher price can reduce demand |
| environmentally friendly packaging | reduces packaging or uses reusable, recyclable, recycled or biodegradable material | can reduce waste and strengthen the brand, but the package must still protect the product and may cost more |
Benefits can reinforce one another: using fewer inputs may lower unit cost, while a credible sustainable approach may improve reputation, attract environmentally concerned customers and make future supplies more secure. Disadvantages often appear first: new equipment, materials and training increase cash outflow; unreliable energy or unsuitable recycled inputs can interrupt output; higher costs passed into price may reduce sales.
Choose by tracing the largest environmental pressure in that business, then compare operational fit, reliability, initial cost, long-run savings and customer response. For example, refillable packaging may suit a service using many bottles, while renewable electricity may have more impact in an energy-intensive factory. The best option is the one whose lasting benefit outweighs its cost and practical risk in that context.
Sustainable does not mean zero environmental impact, and it does not guarantee higher profit. The claim must follow from a real change in resource use, waste, product or packaging, and its short-run cost may differ from its long-run effect.
4.4. Costs, scale of production and break-even analysis
- Syllabus
- 0264–2027–2028
- Topic
- 4.4
- Level
- —
Classify costs and use them in decisions
| Cost | Behaviour | Example |
|---|---|---|
| fixed cost | unchanged with output in the short run | rent |
| variable cost | changes with output | direct materials |
| total cost | fixed plus total variable cost | all production cost |
| average cost | total cost per unit | unit cost at stated output |
total cost=fixed cost+total variable cost,average cost=outputtotal cost
Compare relevant cost with expected revenue, quality, reliability and capacity when choosing a product or supplier, setting price or deciding whether to continue. A lower average cost can support competitiveness, but the decision may also depend on cash and future demand.
Fixed cost is fixed only over a relevant time and capacity range. Average cost is not the same as variable cost per unit.
Explain scale economies—and when they reverse
Economies of scale reduce average cost as a business grows; diseconomies of scale raise average cost when growth makes the organisation harder to manage.
| Economy | Cost mechanism |
|---|---|
| purchasing | bulk buying lowers input price |
| marketing | campaign cost spreads across more output |
| financial | stronger borrowers may obtain cheaper finance |
| managerial | specialist managers improve decisions |
| technical | efficient machinery and processes spread fixed cost |
Too much scale can lengthen communication, weaken coordination and control, and reduce employee commitment or loyalty. Errors, delays, duplication and lower productivity then raise average cost.
Growth does not guarantee economies forever. Economies and diseconomies can operate together; the net average-cost result depends on which is stronger.
Build and interpret break-even analysis
contribution per unit=selling price−variable cost per unit,break−even output=contribution per unitfixed cost,margin of safety=actual output−break−even output
With price 25,variablecost15 and fixed cost 40,000,contributionis10 and break-even output is 4,000 units. At actual sales of 5,500 units, the margin of safety is 1,500 units: sales could fall by that amount before loss begins.
On a simple chart, output is horizontal and money is vertical. Fixed cost is horizontal; total cost starts at fixed cost and rises by variable cost per unit; total revenue starts at zero and rises by selling price per unit. Their intersection is break-even. Complete or amend a chart by calculating and plotting consistent points, then labelling axes and lines.
| Change | Break-even effect, other things equal |
|---|---|
| higher price | lower break-even output |
| higher fixed cost | higher break-even output |
| higher variable cost per unit | higher break-even output |
Break-even assumes price, unit variable cost, fixed cost and sales equal output. Demand, mixed products, step costs and changing efficiency can make the forecast inaccurate.
4.5. Quality of goods and services
- Syllabus
- 0264–2027–2028
- Topic
- 4.5
- Level
- —
Choosing how to achieve quality
Quality means consistently meeting the standard and customer need a good or service is intended to satisfy. For a product, this includes being fit for purpose rather than merely looking expensive; for a service, it includes reliably delivering the promised experience.
High quality can reduce faults, waste, replacements, complaints and legal risk. When customers are satisfied, it can protect reputation, encourage repeat purchases and word-of-mouth promotion, attract new customers and support a higher price. Poor quality reverses this chain: extra rework and returns raise cost while lost trust can reduce sales.
| Feature | Quality control (QC) | Quality assurance (QA) |
|---|---|---|
| central idea | inspectors check finished output, usually at the end of production | quality is checked throughout production, with workers responsible for their own stage |
| main advantage | faults can be stopped before the finished item reaches the customer; production workers need less checking training | faults are found earlier, reducing later scrap, rework and complaints; responsibility may motivate workers |
| main disadvantage | inspectors add labour cost and a late check may find waste without revealing where the fault began | all workers need training, must be reliable and committed, and frequent checks may slow production |
| strongest fit | a simple final test is reliable, output is easy to inspect, or training every worker would cost too much | defects can arise at several stages, late failure is costly, or reputation and safety make prevention especially important |
Choose from the process, not from the label. Compare the number and complexity of stages, cost of inspectors versus training, reliability of workers, cost of scrap or rework, speed requirements and the harm caused if a fault reaches the customer. A simple phone-cover check may favour QC; a multi-stage protective product may justify QA because preventing an early fault is worth more than detecting it at the end.
Neither method guarantees perfection. QC is detection after work has been done; QA is prevention and responsibility during the process. QA is not automatically best for every large business, and QC is not cost-free simply because production workers need less training.
4.6. Location decisions
- Syllabus
- 0264–2027–2028
- Topic
- 4.6
- Level
- —
Choosing a business location
A location decision changes both the customers a business can reach and the costs and reliability of its operations. The important factors therefore depend on what the business produces, how it reaches customers and whether it is comparing sites within one country or countries with different conditions.
| Context | Factors to compare | Why they matter |
|---|---|---|
| manufacturing site | raw materials and suppliers; skilled labour and wages; suitable land and rent; transport links; market distance; power and water; grants and legal controls | distance or poor links can delay inputs and raise delivery cost; weak utilities can stop output; land, labour and government policy change fixed and operating costs |
| service site | customer access and demand; rent and suitable premises; nearby competitors; available employees; opening or planning restrictions; grants | many services need customers to reach the site, so a cheaper location can still fail if demand is too low; competitors may divide demand but can also signal high footfall |
| country choice | wage and skill levels; suppliers and market size; land and infrastructure; language and communication; laws and standards; tariffs or quotas; government incentives | a low headline cost may be offset by training, unreliable supply, trade barriers or legal change; an established market and infrastructure may support faster, safer entry |
Translate every factor into a business consequence. Nearer suppliers may reduce transport cost and support reliable delivery; skilled workers may raise wages but reduce training and mistakes; low rent lowers fixed cost, while weak customer demand lowers revenue; a grant reduces setup cost, but an unsuitable site can limit output for years.
For a recommendation: first identify any non-negotiable requirement, such as reliable power, enough land or customer access. Then compare the largest likely effects on cost, revenue and operational risk over the relevant time period. Finally choose one location and reject the strongest alternative using the case evidence. Country A may cost more but allow rapid production near skilled workers and suppliers; Country B may be better only if lower cost and future market growth outweigh training and supply-chain risk.
No factor is always ‘most important’. Cheap land cannot compensate for missing customers in a location-dependent service, and proximity to customers may matter less for a factory if bulky raw materials or unreliable power dominate its costs. The recommendation must match the business and the evidence given.