Functional areas of the firm: production, operations, supply chain and quality
Domain 3 - Production, operations, supply chain and quality
Questions test quantitative operations skills (productivity, break-even, capacity) alongside qualitative judgement (make-or-buy, supplier choice, quality systems). Always show the formula, the substitution and the units.
Core rules and concepts
- Labour productivity = output / hours (or workers); total factor productivity = output / all inputs. Rising productivity means more output per unit of input, not necessarily more profit.
- Break-even point (units) = fixed costs / (price − unit variable cost). The denominator is the unit contribution margin. In euros: break-even units × price.
- Margin of safety = (actual sales − break-even sales) / actual sales, expressed as a percentage.
- Economies of scale: falling long-run average cost as output rises; diseconomies arise from coordination and motivation problems.
- Make-or-buy: compare relevant costs - avoidable fixed costs belong in the comparison, sunk costs do not.
- Inventory and lean: EOQ balances ordering against holding costs; JIT cuts stock but raises dependence on suppliers; safety stock buffers lead-time variability.
- Quality: control detects defects by inspection; assurance builds quality into the process; TQM involves everyone through the PDCA cycle; ISO 9001 certifies the quality management system, not the product.
Worked example
Fixed costs €120,000, price €50, unit variable cost €30. Contribution = 50 − 30 = €20. Break-even = 120,000 / 20 = 6,000 units. Expected sales of 7,500 units give a margin of safety of 1,500 / 7,500 = 20%. If a supplier pushes the variable cost to €35, contribution falls to €15 and break-even rises to 8,000 units - above expected sales, so the operation becomes loss-making. This sensitivity check is what earns the top band.
Traps that cost marks
- Dividing fixed costs by price instead of by contribution per unit.
- Reporting break-even as a percentage rather than in units or euros.
- Treating productivity and profitability as the same measure.
- Confusing quality control (detect) with quality assurance (prevent).
- Presenting JIT as risk-free, ignoring supply disruption.