Operations management
Domain 4 examines the transformation of inputs into outputs, productivity, capacity, inventory, quality and project management. Practice examines whether you can calculate operating measures and explain the trade-offs behind them.
Core rules
- Operations add value through transformation: inputs become outputs. Labour productivity can be output per worker or per labor hour; state the input unit and period consistently. unit cost = total cost ÷ output.
- Capacity utilisation = actual output ÷ maximum output × 100. High utilisation spreads fixed costs but risks bottlenecks, breakdowns and poor quality; low utilisation wastes resources.
- Inventory includes raw materials, work in progress and finished goods. Buffer stock protects against uncertainty; just-in-time (JIT) reduces holding costs but depends on reliable suppliers. EOQ balances ordering and holding costs.
- Quality control inspects output; quality assurance builds quality into the process; TQM involves everyone and pursues continuous improvement. Kaizen and benchmarking support this.
- Lean production removes waste: overproduction, waiting, transport, excess inventory, motion, over-processing and defects. Project management uses critical path analysis to identify the longest path and float.
Worked example
A plant has maximum capacity of 25,000 units and currently makes 21,000. Capacity utilisation = 21,000 ÷ 25,000 × 100 = 84%. Fixed costs are $120,000, variable cost is $4 per unit and price is $10, so unit contribution is $6 and break-even is $120,000 ÷ $6 = 20,000 units. Margin of safety = 21,000 − 20,000 = 1,000 units, only 4.8% of output. If demand falls 10% to 18,900 units, the firm makes a loss of (20,000 − 18,900) × $6 = $6,600. Reasoning: utilisation looks comfortable, but the margin of safety shows how little demand can fall before losses begin.
Traps
Capacity utilisation uses maximum capacity, not current demand. Margin of safety can be expressed in units or as a percentage - label it. High utilisation is not always efficient if maintenance is deferred. JIT is not simply zero inventory; it requires supplier reliability and accurate forecasting. In critical path analysis, the critical path is the longest path, not the shortest, and float is the spare time on non-critical activities.