Setting Operational Objectives (AQA A-Level Business): Revision Notes
Setting operational objectives
Introduction to operations and added value
The operations function is responsible for the actual production of goods and services in a business. It manages the process of transforming inputs (such as raw materials, labour, and equipment) into outputs (finished products or services).
A crucial concept in operations is added value. This is the amount added to the value of a product or service, equal to the difference between its cost to produce and the amount received when it is sold. The value of the final product should be greater than the combined value of all inputs used. This allows businesses to make a profit and is a key operational target.
Adding value doesn't only happen through operations. Marketing can also create added value by building brand awareness and developing a unique selling proposition (USP), which allows the business to charge higher prices.
Why businesses set operational objectives
Setting clear operational objectives helps businesses improve their performance and remain competitive. These objectives provide targets for the operations function to work towards and can be used to measure and evaluate success.
Operational objectives must align with the overall corporate objectives of the business. They should also be SMART (Specific, Measurable, Achievable, Relevant, Time-bound) so that managers can properly assess operational performance.
The SMART framework ensures that objectives are not vague aspirations but concrete targets that can be tracked and measured. Each element of SMART serves a specific purpose: Specific objectives are clear and unambiguous, Measurable objectives can be tracked with data, Achievable objectives are realistic given resources, Relevant objectives align with broader goals, and Time-bound objectives have clear deadlines.
Types of operational objectives
Cost objectives
Reducing costs is a key way to improve competitiveness. In operations management, cost objectives typically focus on unit costs of production.
Businesses can reduce unit costs by:
- Increasing capacity utilisation (using more of their available production capacity)
- Improving productivity (producing more output per worker or per hour)
- Negotiating better terms with suppliers to reduce input costs
Worked Example: Reducing Unit Costs Through Capacity Utilisation
A factory operating at 60% capacity could reduce its unit costs by increasing production to 80% capacity, spreading fixed costs over more units.
For instance, if fixed costs are £100,000 per month:
- At 60% capacity (6,000 units): Fixed cost per unit = £100,000 ÷ 6,000 = £16.67
- At 80% capacity (8,000 units): Fixed cost per unit = £100,000 ÷ 8,000 = £12.50
This represents a reduction of £4.17 per unit in fixed costs alone.
Quality objectives
Consistently providing a quality product or service creates a competitive advantage. However, quality isn't just about the final product – it involves the entire operations process.
Quality targets might be set for:
- Wastage (materials wasted during production)
- Returns (products sent back by customers)
- Number of complaints (customer dissatisfaction)
- Reliability (consistency of product standards)
Meeting quality objectives helps build customer trust and loyalty, which directly impacts sales and reputation.
Worked Example: Quality Improvement Target
A manufacturer might set a target to reduce product defects from 3% to 1% of total production within six months.
If the company produces 50,000 units per month:
- Current defect rate (3%): 1,500 defective units per month
- Target defect rate (1%): 500 defective units per month
- Improvement needed: Reduction of 1,000 defective units per month
This would save on waste costs, returns processing, and improve customer satisfaction.
Speed of response and flexibility
This objective measures the time taken for a customer need to be fulfilled. The timing matters from the moment a customer places an order until they receive the product or service.
Examples include:
- Time from ordering a meal in a restaurant to receiving it
- Time from ordering a product online to receiving delivery
Speed of response directly impacts:
- Customer perception of the business
- Business reputation
- Sales levels
If businesses set targets in this area, they must ensure they can meet them consistently. Failure to deliver on time can damage reputation and reduce customer loyalty.
Exam Tip: Consider how speed objectives might conflict with quality objectives – rushing production could compromise quality. Businesses must carefully balance these competing priorities. For example, a restaurant that serves meals too quickly might sacrifice food quality, while one that focuses too heavily on perfection might lose customers due to slow service.
Dependability
Dependability relates to how reliable a business is in terms of both products and services. Key questions include:
- Is the product reliable and fit for purpose?
- Is quality consistent across all products?
- Does the business do what it promises?
Failure to meet dependability objectives seriously damages a business's reputation and leads to lost sales. Customers need to trust that they'll receive what they've been promised.
Worked Example: Testing Dependability
If a business promises first-class post delivery the next day, does it actually arrive the next day?
A company might track its dependability by measuring:
- Percentage of orders delivered on time: Target 98%
- Current performance: 92%
- Gap to close: 6 percentage points
For 10,000 monthly orders, this means improving on-time delivery for an additional 600 orders per month.
Environmental objectives
With growing consumer awareness of environmental issues, environmental objectives have become increasingly important in recent years.
Environmental objectives might focus on:
- Reducing pollution from production processes
- Minimising waste during manufacturing
- Reducing the amount of packaging used
- Improving recycling rates
- Enhancing overall sustainability practices
Many consumers now actively choose businesses based on their environmental credentials, making this a competitive issue as well as an ethical one.
UK Example: Supermarket Sustainability Initiatives
Many UK supermarkets now have objectives to reduce plastic packaging and offer plastic-free alternatives, responding to consumer demand for more sustainable options.
For instance, a supermarket chain might set targets to:
- Reduce plastic packaging by 50% by 2025
- Introduce 100% recyclable packaging across own-brand products
- Eliminate single-use plastic bags completely
- Achieve zero waste to landfill in all stores
These objectives not only improve environmental performance but also attract environmentally conscious customers and enhance brand reputation.
Linking operational objectives to corporate strategy
Whatever operational objectives are chosen, they must align with the overall corporate objectives of the business. This ensures that the operations function supports the broader strategic goals.
By making operational objectives SMART, businesses can:
- Set clear, specific targets
- Measure progress objectively
- Hold managers accountable for performance
- Evaluate and judge overall operations management effectiveness
Key Points to Remember:
- Added value is the difference between the selling price and the cost of inputs – it's essential for profitability
- Operational objectives typically cover five key areas: costs, quality, speed/flexibility, dependability, and environmental performance
- Cost objectives focus on reducing unit costs through improved capacity utilisation and productivity
- Quality affects the entire operations process, not just the final product
- Speed and dependability objectives directly impact customer perception and business reputation
- Environmental objectives are increasingly important due to consumer awareness and can create competitive advantage
- All operational objectives must be SMART and align with corporate objectives to be effective