5 - Business operations

If total cost rises from £80,000 for 10,000 units to £120,000 for 20,000 units, average total cost falls from £8 to £6 per unit. The business has grown and total cost is higher, but each unit carries £2 less cost.

Lower unit cost may allow a lower price, a higher margin or investment in quality and promotion. The benefit depends on selling the increased output and maintaining quality, coordination and capacity use.

The limit to growth is reached when an additional expansion is expected to add more coordination and control cost than scale savings. Managers can respond through delegation, clearer structures, decentralised decisions, suitable systems, training or by slowing/reversing expansion.

Track average total cost alongside productivity, quality, delays, staff turnover and customer service. A temporary rise caused by new capacity or training is not automatically a lasting diseconomy; investigate the cause and time horizon.

If 8 workers make 480 units per day, labour productivity is 480 ÷ 8 = 60 units per worker per day. If the same 8 workers make 560 units, productivity rises to 70 units per worker—a 10-unit or 16.7% improvement.

Higher productivity can reduce labour cost per unit, raise capacity and improve competitiveness. It may come from training, layout, motivation, technology or fewer errors, but judge quality, safety, employee effects, investment cost and whether extra output can be sold.

Using resources effectively means matching material, labour, time, energy, space and capital to useful output. Example: redesigning packaging to use less material while preventing damage can lower material and replacement cost and reduce waste; cutting protection too far would be false economy.

Map the process, locate the waste, change one controllable cause, compare quality/time/cost before and after, standardise a proven improvement and keep monitoring. JIT and Kaizen can complement each other, but neither replaces supplier, quality or contingency management.

Robotics can remove repetitive or hazardous tasks and create technical roles, but can displace some jobs and require reskilling. The employee effect and implementation disruption belong in the decision, not only the machine's output rate.

Compare lifetime cost and expected usable output, not purchase price alone. Consider demand volume/variety, defect cost, reliability, maintenance support, safety, capacity utilisation and whether a labour, mixed or automated system best preserves responsiveness.

The preferred mix depends on output volume and variety, required quality, customer contact, technology, skill availability, wage and capital costs, finance, reliability and flexibility. Most activities use both labour and capital; intensity describes their relative importance.

Consistent quality → fewer defects/complaints and a dependable experience → customer satisfaction, trust, repeat purchase and recommendation → stronger reputation and differentiation. This can protect sales, support a price premium or reduce failure cost, creating competitive advantage when customers value the difference.

Set relevant standards, measure them throughout the process, trace failures to causes and improve the system. Balance prevention/inspection cost against the cost of defects, returns, reputation loss and customer switching; the appropriate method depends on risk, process and service variability.