Unit 4 – Decision making to improve operational performance
4.1 Setting operational
objectives
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Unit 4 – Decision making to improve operational performance
Learning outcomes
What you need to know
• Why businesses set operational objectives –
what is the value of setting them
• The external influences on setting operational
objectives
• The internal influences on setting operational
objectives
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Unit 4 – Decision making to improve operational performance
Overview of key concepts
• What is meant by the term ‘operational
objectives’
• Identifying the main operational objectives –
quality, reducing costs, speed of response,
dependability, environmental and adding
value
• The internal and external influences on the
operational objectives
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Unit 4 – Decision making to improve operational performance
Objectives
A definition of objectives is:
‘A quantifiable target which helps to coordinate
activities’
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Unit 4 – Decision making to improve operational performance
Different types of objectives
Mission statement
A statement about
the organisation’s
aims that is
designed to
motivate
Corporate objectives
These are goals for
the whole
organisation and
are usually based
on the mission
statement
Can go further and split functional
objectives into departmental and
even individual objectives – called
MBO or ‘management by objective’
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Functional objectives
These are goals for
each functional
area of a business
and are based on
corporate
objectives
In this unit we are looking at
the Operation Management
functional area
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Unit 4 – Decision making to improve operational performance
Objectives
Objectives should be SMART or:
Specific – easily defined
Measurable - quantifiable
Agreed or achievable – stakeholders involved
in setting them
Realistic – not in conflict with other objectives
Timely or time bound – based on a timescale
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Unit 4 – Decision making to improve operational performance
Why set objectives?
• Having a mission will help to guide employees
and motivate them in the direction the
organisation wants to go
• Having corporate objectives gives a more
detailed sense of direction
• Having functional objectives allows for greater
co-ordination of resources to ensure
corporate objectives are met
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Unit 4 – Decision making to improve operational performance
Operational objectives
Operational objectives are:
• Broad – They encompass anything to do with the
operational side of the business.
• General goals – These ensure that departments can
understand what they need to do to achieve the
operational objectives.
• Long and medium term – Plans and strategies are devised
to ensure that the long- and medium-term objectives are
met.
Short-term measures are called operational tactics.
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Unit 4 – Decision making to improve operational performance
Operational objectives include:
• Costs
• Quality
• Speed of response and flexibility
• Dependability
• Environmental objectives
• Added value
− as well as the internal and external influences on
them.
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Unit 4 – Decision making to improve operational performance
Remember
Sales revenue – (variable cost + fixed costs)
= profit
Therefore to improve profit you can:
•
Increase sales
OR
•
Reduce costs
Reducing costs is frequently part of the operational
management objectives.
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Unit 4 – Decision making to improve operational performance
Reducing costs
• Reducing unit costs – A low unit cost enables a business either
to keep prices low for customers or to enjoy higher profit
margin.
• Reducing fixed costs – This is a common aim when businesses
have merged because they may have duplication of fixed
costs, i.e. two premises on the high street.
• Reducing variable costs per unit – This could include finding
cheaper supplies (i.e. reducing raw material costs) or cheaper
manufacturing (i.e. reducing labour costs by improving labour
productivity).
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Unit 4 – Decision making to improve operational performance
Quality
Quality is defined as:
‘Those features of a product or service that
allow it to satisfy (or delight) customers’
There is no set measure of quality because it
depends on people’s opinions, but it can be
measured using various methods.
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Unit 4 – Decision making to improve operational performance
Quality
• Customer satisfaction ratings – can gather satisfaction
in both qualitative (opinion) or quantitative (numerical)
form. Customer satisfaction surveys can therefore
measure if quality has been achieved.
• Customer complaints – this is a good measure to show
whether a business has problems it needs to address.
Satisfied customers returned, unsatisfied customer
complain – not only to the business but to everybody
else and this can damage a reputation.
• Level of product returns
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Unit 4 – Decision making to improve operational performance
Quality
• Scrap rate – manufacturers track the rejects through the
manufacturing process. This show whether the production
process is working effectively. Scrap is wasted money and
increases the unit cost of goods.
• Punctuality – measures how promptly a business delivers its
goods (or services) and is expressed as a percentage:
punctuality (%) =
deliveries on time x 100
total deliveries
The better the punctuality percentage, the higher the
customer satisfaction (especially important for online and B2-B businesses).
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Unit 4 – Decision making to improve operational performance
Speed of response
For some businesses the speed at which they can
respond to change and have the flexibility to do so
is very important. For example, Zara, the Spanish
clothes retailer, is famous for its speed of response.
It takes just two weeks from the design of a skirt to
it being on the shop floor. This is down mainly to
Zara having vertical integration of the supply chain.
This means they are very flexible and can change
designs far quicker then their rivals – a very good
objective for a fashion retailer!
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Unit 4 – Decision making to improve operational performance
Flexibility
• Product flexibility – being able to switch production
from one product to another
• Volume flexibility – being able to change the level of
output o a product in accordance with changes in
customer demand
• Mix flexibility – being able to provide a wide range of
alternatives of a particular good or service
• Delivery flexibility – being able to adapt quickly to
changes in the timing and volume of deliveries to
customers
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Unit 4 – Decision making to improve operational performance
Dependability
Some businesses do not want to let customers
down and so focus on ensuring that they meet
promises – or are dependable.
Examples:
• Amazon state delivery dates for their products
and keep customers informed if that date
changes using email – this ensures that their
reputation is maintained with customers.
• Dyson do extensive product testing to ensure that
their vacuums deliver their promises.
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Unit 4 – Decision making to improve operational performance
Environmental objectives
For many businesses ensuring that their operational side does not
harm the environment is important – especially for their corporate
social responsibility reports (see Unit 2).
Environmental objectives would include:
• Reducing waste
• Reducing carbon footprint
• Minimising waste products or materials
• Increase recycling
• Achieving self-sufficiency in energy use.
M&S has a ‘Plan A’ to help them achieve environmental objectives.
This includes having delivery HGVs that have a slopped roof to reduce
fuel consumption and reducing the use of plastic bags at the counter.
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Unit 4 – Decision making to improve operational performance
Added value
Adding value is an operational objective because it allows
the business to develop a unique selling point (USP) for
its products.
Adding value objectives would include:
• Increased spending on R&D – Land Rover, for example,
are one of the world’s biggest spenders on R&D!
• Achieving a certain number of patents – Dyson
currently hold 1,200 patents, sending roughly one a
day!
• Developing a particular innovation – Google glasses
add value to their brand.
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Unit 4 – Decision making to improve operational performance
External influences on operational
objectives
External influences are those outside of the
business. These are covered more extensively in
Unit 7, but briefly:
• Market factors – Is the market growing or
declining? If declining then business should
consider developing a new market; if growing
then market penetration should be used.
• Competitors actions and performance – What are
competitors doing? Will it affect sales? Is there a
more efficient way of operating?
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Unit 4 – Decision making to improve operational performance
External influences on operational
objectives
• Economic factors – Operations management is
dependent on capital investment and if interest rates
are high this may increase costs or may reduce sales as
customers struggle to pay back loans.
• Political factors – For example, car manufacturers have
faced increased pressure to improve the efficiency of
their products and how they manufacture them. This
means modern cars are manufactured in a more
environmental friendly way and are far more fuel
efficient than 10 years ago.
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Unit 4 – Decision making to improve operational performance
External influences on operational
objectives
•
•
•
•
Technological change
Legal factors
Environmental factors
Suppliers
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Unit 4 – Decision making to improve operational performance
Internal influences on operational
objectives
Internal influences are those from within the business
• Corporate objectives – The operations department has
to ensure that its objectives are consistent with the
overall corporate objectives. British Airways’ corporate
objective is to be the world’s leading global premium
airline therefore the routes they fly, the meals they
serve and the planes they fly all need to reflect that. By
contrast, Ryanair’s objective is to be Europe's leading
low-fare airline. They have only European routes and
everything is no-frills!
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Unit 4 – Decision making to improve operational performance
Internal influences on operational
objectives
• Finance – Operations management objectives rely on
high capital expenditure (i.e. machinery, etc.) so
healthy finances are essential.
• Human resources – Skills and training as well as
motivation of the workforce are essential to ensure
objectives are met.
• The nature of the product/service –Some products are
suited to mass production (i.e. Cadbury chocolate bars)
whereas others need to be high quality with good
customer service (i.e. wedding dress design).
• Resources available
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Unit 4 – Decision making to improve operational performance
Discussion - Ryanair
Two of Ryanair’s corporate objective are:
1. To firmly establish itself as Europe’s leading low-fares scheduled
passenger airline. Operations objectives are therefore to… maintain
a continuous focus on cost-cutting and operating efficiencies.
2. To deliver the best customer service performance in its peer group.
(Adapted from: https://www.ryanair.com/doc/investor/Strategy)
Use the above and your knowledge or experience of Ryanair to discuss:
‘Are the operational objectives above at odds with one another. Can you
continually cut costs and improve customer service?’
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Unit 4 – Decision making to improve operational performance
Exam-style question with tips
Evaluate how Zara’s operational objectives help them maintain
their competitiveness in the fashion industry. (24 marks)
Exam tips:
Evaluate – Consider how the operational objectives help with
competitiveness? Do you agree they do? Give your opinions.
Consider – How do the operational objectives help Zara stay
competitive? Why are they different from competitors? Do the
customers understand the difference?
Fashion industry – Write in the context of the fashion industry;
always make sure any points raised are relevant to that industry.
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Unit 4 – Decision making to improve operational performance
Summary
• Operational objectives allow a business to concentrate on
what they consider to be important to make them as
efficient as possible or to give them a competitive
advantage.
• They can be influenced by the finance, HR and marketing of
the goods or services.
• External influences like competitors and the economy can
affect what objectives the business wants to achieve and
how quickly they can achieve them.
• Businesses can have a significant competitive advantage by
having the most appropriate operational objectives.
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