This mini-lesson covers the whole of AQA 7132 section 3.4: operational objectives, the calculation of capacity utilisation, labour productivity and unit costs, raising efficiency, capital vs labour intensity, lean production and JIT, quality assurance and TQM, inventory control charts, and managing the supply chain.
Work through each screen, answer the questions as you go (some are analysis, some are calculations) and collect ⭐ stars. Every number here is worked through step by step. Press Start when you're ready.
Operations is the transformation process — inputs into outputs. Its objectives are the levers that decide whether the firm can actually deliver what marketing has promised, at a cost finance can live with. AQA's list:
The central operational trade-off: you cannot usually maximise all of these at once. Cutting cost by lengthening production runs destroys flexibility. Raising quality raises cost. Guaranteeing dependability means holding buffer capacity and buffer stock, which is expensive. The examinable skill is deciding which objective this firm's strategy requires it to win on — and what it is therefore willing to sacrifice.
Tap a target, then tap the operational objective it serves.
Four formulas. Learn them exactly — they are asked every year.
Maximum capacity: 20,000 units. Actual output: 16,000 units.
Employees: 40. Fixed costs: £96,000. Variable cost: £14 per unit.
At 80% utilisation: unit cost £20.00. At 100%: unit cost £18.80 — a fall of 6%.
Nothing about the process got better. The £96,000 of fixed costs was simply spread over 4,000 more units — £6.00 of fixed cost per unit at 16,000, but only £4.80 at 20,000.
This is why under-utilisation is expensive: idle machines and salaried staff still cost money, unit costs rise, margins fall, and staff morale suffers as they sense the plant is failing.
But 100% is not the goal. Running flat out means: no slack for a rush order or a demand spike · no time for maintenance, so breakdowns rise · staff under sustained pressure, so quality slips and turnover rises · no margin for error anywhere in the chain. Most firms target around 90% — high enough to spread fixed costs, with enough slack to stay dependable and flexible. That is the evaluation point examiners are looking for.
How to raise labour productivity: invest in better technology and automation · train staff · improve motivation (job enrichment, financial incentives — see 3.6) · improve the layout and flow of the process · introduce Kaizen (continuous improvement) · organisational redesign.
Difficulties: capital investment needs cash the firm may not have, and takes time to pay back · staff may resist change or fear redundancy · unions may block it · a productivity push can cut quality if workers rush · training raises costs before it raises output · and some processes are inherently labour-intensive (a hairdresser cannot be automated).
Choosing the mix of resources:
The link to break-even (3.5): capital intensity raises fixed costs and lowers variable costs, so it pushes break-even output up but raises contribution per unit. It is a bet on high, stable volume. Labour intensity is the hedge against uncertain demand.
Lean production means systematically eliminating waste — anything that does not add value for the customer: excess inventory, waiting time, over-production, defects, unnecessary movement.
Just in Time (JIT) is the flagship lean technique: components arrive from suppliers exactly when needed, and stock is held at close to zero.
Benefits: working capital is released from stock · storage and insurance costs fall · less waste and obsolescence · defects surface immediately instead of hiding in a warehouse of finished goods · the discipline forces process improvement everywhere.
Risks — and they are severe: there is no buffer. One late delivery, one strike, one blocked canal, and the whole line stops. JIT demands utterly reliable suppliers, excellent IT and communication, and a stable, predictable demand pattern. It sacrifices the ability to absorb a demand spike, and it forfeits bulk-buying discounts.
The counterweight — Just in Case (JIC): deliberately holding buffer stock. It costs money and ties up cash, and lean orthodoxy calls it waste. But firms that held buffer stock through recent global supply shocks kept trading while JIT competitors shut their lines. JIT optimises for a stable world. How stable is this firm's world? That question is the evaluation.
Quality control (QC) inspects the output at the end and rejects the defects. It catches faults, but it is reactive: the waste has already been made and paid for, and responsibility sits with inspectors, not workers.
Quality assurance (QA) builds quality into the process — agreed standards at every stage, checked by the people doing the work. Faults are caught early and cheaply, and workers own the outcome. TQM extends this to a culture in which every employee is responsible for quality and every colleague is treated as an internal customer. It is powerful, but it requires heavy training, a genuine culture change, and time before it pays.
The consequences of poor quality are cumulative: the direct cost of scrap, rework, returns and warranty claims → lost sales and lost repeat customers → damage to the brand, which makes demand more price elastic and destroys the price premium → recall costs, legal liability, and in a regulated sector, sanctions.
Influences on how much stock to hold: the reliability of suppliers · the predictability of demand · whether the product is perishable or fast-obsolescing · the cost of storage · the cash the firm can afford to tie up · and how catastrophic a stock-out would be.
Tap an item on the left, then its partner on the right.
Matching supply to demand — the options AQA names: outsourcing (buy in capacity when you need it), temporary and part-time employees (flex the labour force), and producing to order rather than to stock (no unsold inventory, but longer customer waits).
Flexibility, speed and dependability can be improved by cutting set-up times, cross-training staff, holding buffer capacity, and — at the sophisticated end — mass customisation: modular design and flexible technology that lets a firm offer near-bespoke variety at close to mass-production cost.
Choosing suppliers is not simply "cheapest". Weigh price against: quality and consistency · reliability and lead time · capacity to grow with you · financial stability (a bankrupt supplier stops your line) · flexibility · and increasingly, their ethical and environmental standards, because their scandal becomes yours.
Outsourcing — the real trade-off: it converts fixed costs to variable, releases capital, and buys in specialist expertise. But it hands over control of quality and timing, risks the loss of a core competence the firm may need back one day (see 3.7.3), exposes the firm to the supplier's ethics, and creates dependency that the supplier can later price into the contract.
Objectives: cost · quality · speed & flexibility · dependability · environment · added value — they trade off.
Formulas: capacity utilisation = actual ÷ max × 100 · labour productivity = output ÷ employees · unit cost = total costs ÷ output.
Utilisation: higher utilisation spreads fixed costs and cuts unit cost — but 100% leaves no slack for maintenance, quality or a rush order.
Resources: capital intensive = high fixed, low variable, inflexible · labour intensive = low fixed, high variable, flexible.
Lean/JIT: cuts waste, stock and working capital — but no buffer means one failure stops the line.
Quality: QC inspects at the end; QA/TQM builds it in. The real cost of poor quality is the customers who never return.
Inventory: lead time · re-order level · buffer stock · re-order quantity.
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You've worked through Decision making to improve operational performance for AQA A-level Business (7132). 🎉
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