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Business 20

The document discusses improving operational efficiency through capacity utilization, emphasizing the importance of maximizing output to lower average fixed costs and enhance profitability. It outlines the benefits and drawbacks of operating at full capacity, the concept of economies and diseconomies of scale, and the significance of work study in optimizing resource use. Strategies for managing capacity, including expansion and addressing potential diseconomies, are also highlighted.

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Joseph Nkomo
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15 views6 pages

Business 20

The document discusses improving operational efficiency through capacity utilization, emphasizing the importance of maximizing output to lower average fixed costs and enhance profitability. It outlines the benefits and drawbacks of operating at full capacity, the concept of economies and diseconomies of scale, and the significance of work study in optimizing resource use. Strategies for managing capacity, including expansion and addressing potential diseconomies, are also highlighted.

Uploaded by

Joseph Nkomo
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Improving Operational Efficiency: 1.

Capacity, Scale of operations & Work study


Increasing their efficiency of this process means using fewer inputs to
achieve the same level of production. It also can mean achieving quality
production.

Capacity utilisation is a measure to which the maximum output of the


business is being used.

Maximum capacity is the total level of output that a business can achieve
in a certain time period.

Capacity utilisation - Impact On Average Fixed


Costs
 Thisis the most important aspect of the concept of capacity utilization. It
helps to explain why the rate at which capacity is used is of such
significance to operational efficiency.

 When utilisation is at a high rate, average fixed costs will be spread out over
a large number of units. Unit fixed costs will be low.

 Low utilisation, fixed costs will have to be borne by fewer units & unit fixed
costs will rise.

 Unitfixed costs will be at their lowest possible level & this should help to lift
profits. The business will be able to claim how successful it is as it has no
spare capacity. E.g.: Put up “No vacancy “ signs.

If a business is not be able to increase output, it is said to be running at


Full Capacity. Its capacity utilisation is 100%.
 Most businesses would wish to be operating at close to full capacity. E.g.: At
90% capacity utilisation, they might want to have capacity to cope with
increased orders.
Drawbacks to operating at full capacity for a
period of time:
a) Staff may feel under pressure due to the workload.
b) Regular customers who wish to increase their orders will have to kept
waiting for long periods.
c) Machinery will be working flat out & there may be insufficient time for
maintainance & preventative repairs.

Spare or unused or excess capacity exists when the current levels of


demand are less than the full capacity output of a business. E.g.: Cinema
has 100 seats but only 72 seats is filled. The extra 28 seats is excess.

Low levels of capacity utilisation lead to high unit fixed costs. So what options
do firms have when attempting to reduce excess capacity?
a) Is spare capacity a long-term problem resulting from a fashion change,
technological development of rival products or an economic recession?
b) Is spare capacity just a short-term, seasonal problems. The main option
would be to:
 maintain high output levels but add to stocks.
 adopt a more flexible production system allowing other goods to be made.

Working At Full Capacity


 When a business is operating at close to or at full capacity then other decision
have to be taken.

Should the firm:


a) increase its scale of operation by acquiring more production resources?
b) retain existing capacity or sub-contract more work to other firms?
 Final decision depend on many factors.

A business can LOWER its unit or average costs if it can increase its capacity
utilisation. This is because some its costs are fixed.
 Higher levels of capacity utilisation & higher levels of output will make a
business more efficient. E.g.: When capacity utilisation (C.U) is raised from
60% to 80%, then average cost falls from $2.42 to $2.31. This is because the
fixed costs of $50,000 are spread over more units of output. And this is the
reason.

Business Expansion - Increasing The Scale Of


Operations
 The decision to expand the scale of operations of a business cannot be taken
lightly.
 Likely to be considerable costs involved. Purchasing land, buildings,
equipment, employing more staff.
 Firms expand to increase capacity to avoid turning business away & to benefit
from the advantages of large scale production.

Economies Of Scale is the factors that lead to reductions in unit cost as a


firm’s scale of generation increases.

Internal Economies Of Scale - The cost reductions enjoyed by


a single firms as it grows.
They arise for 5 reasons:
a) Purchasing economies - A.K.A bulk buying economies / Marketing economies
 Suppliers will offer discounts for large orders. This is because it is cheaper
for them to process & deliver one large order.

b) Technical economies - 2 main sources of technical economies.


 Large firms are more likely to be able to justify the cost of flow production
lines. If these are worked at high capacity level then they offer lower unit
costs than other production methods.

c) Financial economies - Large organisations have 2 distinct cost advantages


when it comes to raising finance.
 Firstly, banks often show preference for lending to a big business with a
proven track record & a range of products.
 Second, raising finance by going public or by issues for shares for existing
public limited companies.

d) Risk bearing economies - As a firm grows, it may well diversify to reduce


risk. Large businesses can also reduce risk by carrying out Research &
Development. It will help firms gain a competitive edge over smaller rivals.

e) Managerial economies - Small firms often employ managers who have a


variety of management functions to perform. As a firm expands so it should
be able to afford to attract specialist functional managers who should
operate more efficiently than manager.

Diseconomies Of Scale is factors that increase unit costs as a firm’s scale


of operation increases beyond a certain size./ Factors that lead to increasing
average costs of production when a firm increases its scale of operation.

3 main causes of these management problems.


Internal diseconomies of scale
a) Communication problems in larger organisations.
 Large-scale operations will often lead to poor feedback to worker,
communication overload, excessive use of non-personal comm. media &
distribution of message caused by the long chain of command.

b) Alienation of the workforce


 It is difficult to directly involve & give them a sense of purpose in the work.

c) Coordinating the business.


 Problem of coordinating & control all these operation. Loss of control.

Coordination is when all divisions of the business are aiming to achieve


the same objectives by producing goods that are consistent with each other.

External diseconomies of scale


a) Lack of funds - Small firms are not able to attract investors.
b) Market limitations - Limited market for a product due to high market price.
It is also due to the existence of competitors in the market.
c) Geographical limitations. High transport cost.
Large-scale production - Unit costs of production
 The combined effect of economies of scale & diseconomies of scale on unit
costs of production. The process is much more difficult to measure than this
as certain economies of scale may continue to received because scale
increases but the growing of diseconomies gradually begins to take over &
average costs may rise.

Are Diseconomies Avoidable?


 Nearlyall managers recognise the problems inherent in operating large-scale
operations.

3 approaches could be used to overcome the


impact of potential diseconomies:
a) Management By Objectives. This will assist in avoiding coordination
problems by giving each division & development agreed objectives to work
towards that are components of the long-term aims of the whole business.

b) Decentralisation - This gives divisions a considerable degree of autonomy &


independence. They will now be operated more like smaller business units
as control will be exercised by managers closer to the action.

c) Reduce diversification - The movement towards less diversified businesses


that concentrate on activities may help to reduce coordination & some
communication problems.

 This process was first analysed scientifically by F.W. Taylor.

Work Study is a process investigates the best possible way to use the
business resources. It attempts to find the best or the most efficient way of
using labour, machinery & materials.

Work study involves:


a) method study - to find the most effective of undertaking a task.
b) work measurement - recording output levels using different methods &
arriving at a target time for each task by observing the worker. This is an
important element in the scientific management approach to production.
(Taylor)

These techniques should allow:


a) improvement in productivity.
b) improved use of space & equipment.
c) improved planning as the time for each task would be recorded.
d) the calculation of piece rates for each task, if this was the method of
remuneration to be used.

Method study aims to improve on existing work


practices. The key stages in method study are:
a) select the task to be analysed.

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