Operations management calculations

It is vital for the operations manager to track the performance of their department. A poorly managed and inefficient process can lead to falling quality and rising costs. This can cause a business’ profit margins to shrink, making it difficult for the company to break even. The key performance indicators that operations managers need to consider are:

• Unit costs (average costs) - the average cost of making one unit of output.

Unit costs: Total cost / Output = $_______

• Productivity rate - a measurement of the efficiency of resources used in the production process.

Productivity rate: Total output / Total input × 100 = _______ %

• Labour productivity - the average output per worker for a given time period (given in number of units of output).

Labour productivity: Total output / Total number of workers = _______ units of production

• Capacity utilisation - the percentage of a firm’s total capacity that is currently being used.

Capacity utilisation rate: Actual output / Productivity capacity × 100 = _____ %

• Cost to buy - the total cost of subcontracting production to a supplier.

Cost to buy: Price × Quantity = $______

• Cost to make - the total cost of production if manufacturing is kept in-house.

Cost to make: Fixed costs + (Variable costs × Quantity) = $______

How to improve productivity

High labour productivity should reduce average costs and increase profits. There are many strategies available to a company that wishes to improve its productivity levels. These include:

• Improve training and staff motivation
• Improve management techniques
• Increase use of technology

Tasks

1. A Business Management teacher is paid €1,000 for each lesson he teaches. Each of his classes has 20 students. What is the average cost per student?
2. Ali and Polina are Business Management teachers. Ali teaches 70 students, while Polina only teaches 10. Calculate their average labour productivity.
3. A Business Management class has 16 students. The classroom has 24 chairs. Calculate the classroom's capacity utilisation.
4. An electronics manufacturer has an order for 1,000 tablet computers from a customer. A subcontractor has offered to make these for $45 a unit. What is the total cost to buy?
5. The same electronics manufacturer is also considering producing the 1,000 tablet computers in its own factory. The fixed costs of running the factory are $30,000. The variable cost of making one tablet is $10. Calculate the cost to make.

Cost To Buy (CTB)

Operational decisions related to making or buying are important. If it costs more for a business to buy a product rather than manufacture it, then clearly the choice is to manufacture. However, is it truly as simply as that? What has to be considered when examining the cost to buy or cost to make. Lets start with the cost to buy.

Deciding to buy a product is essentially the concept of outsourcing that we reviewed earlier. If a business is to consider buying it must determine the impact of costs and ability to meet the capacity. This means that it may be cheaper to purchase or outsource the production and it may also mean that the capacity or demand cannot be met, and therefore it would be better to outsource the manufacturing.

Another factor beyond the profit margin that will also come into play is the quality of the final good and how this may affect the brand name and image.

When consider the Cost to Buy we therefore must consider:

• Costs of in-house production vs Outsourcing
• Insufficient ability to meet the capacity demanded
• Technical Expertise and skill
• Brand, quality and image considerations

Cost To Make (CTM)

The decision to manufacture in-house and not outsource the manufacturing is also dependent on a number of factors.

• Costs of in-house production vs Outsourcing
• Brand, quality and image considerations
• Direct control of the entire process
• Concerns relating to intellectual property
• Organizational tradition

With the trend in globalization and outsourcing, the questions raised in the cost-to buy and cost-to-make have come to the fore of decision-making in operations and management. There are other advanced concepts and considerations, which go further in providing managers with additional tools for decision-making, however the primary ones should now be clear to you.