Using Operations Data (AQA A Level Business): Revision Note

Effectively using operations data

• A range of operations data can be used to assess how well a business is performing

  • Data can be analysed over time to determine whether performance is improving or worsening

  • They may also be compared with the performance of similar firms

Using productivity data

• Productivity measures how well a business uses its resources to produce output

• Higher levels of productivity are likely to lead to lower unit costs as fixed costs are spread across more units of output

  • This can allow a business to lower selling prices to achieve an important competitive advantage over rivals, especially those with lower levels of output

• Comparing labour productivity can reveal a range of issues

  • When each employee delivers more output, profit should rise without the need to recruit more staff

  • Rising labour productivity also suggests training, motivation techniques or new technology is working, encouraging a business to make further such investments

• Similarly, comparing capital productivity can provide some useful insights

  • High capital productivity shows the firm is getting strong returns from its investments, so it needs less new spending to grow

  • Investors look at output per £1 of capital employed to judge whether the company is making good use of its funds

  • Measuring capital productivity helps managers decide whether to upgrade, sell off underused assets or invest in new technology

• Labour productivity and capital productivity calculations are covered in depth here

Using quality data

1. The defect rate

• The proportion of output that is judged to be substandard in a given time period

  • It is expressed as a percentage and calculated using the formula

2. The returns rate

• The proportion of output that is returned by customers in a given time period

  • It is expressed as a percentage and calculated using the formula

• Businesses take steps to reduce the defect rate and returns rate for several reasons

  • Avoid loss of revenue as faulty products or those that have been returned can rarely be sold

  • Customers will likely complain about substandard products which causes dissatisfaction and impacts business reputation

  • Unsafe products may harm customers and could lead to legal issues

  • Returned products require refunds, processing and disposal

3. The wastage rate

• The proportion of materials and components wasted in production in a given time period

  • It is expressed as a percentage and calculated using the formula

• Businesses take steps to reduce the wastage rate for several reasons

  • Lower production costs

    • By reducing waste, a business uses fewer raw materials overall, which brings down the cost of making each unit

  • Higher profit margins

    • Every tonne of material saves reduced variable costs, increasing the profit earned on each sale

  • Improved sustainability and reputation

    • Cutting scrap reduces costs of disposal and the business's environmental impact and shows customers the business is committed to being green

4. Customer satisfaction

• A business may carry out surveys, focus groups or interview customers to determine how happy they are with their purchase

  • Increasingly, businesses use data collected by research organisations such as Trustpilot to determine levels of customer satisfaction

5. Customer loyalty

• Customer loyalty may be measured by reviewing the volume of repeat sales

  • Loyalty schemes, such as Tesco's Clubcard, have made gathering and analysing this information much more straightforward

Examples of industry measures of quality

Using capacity utilisation data

• Capacity utilisation measures how effectively a business uses its assets to produce output

  • It compares current output to the maximum possible output a business can produce using all of its assets

• High capacity utilisation is important for several reasons

  • Cost efficiency and profitability

    • Using more of a factory’s or machine’s capacity spreads fixed costs, such as rent and salaries, over more units of output, lowering the unit cost and increasing profit margins

  • Resource management

    • High capacity utilisation shows a business is making full use of its non-current assets, such as machines, buildings and labour, so it isn’t wasting money on idle capacity

  • Investment planning

    • Monitoring capacity utilisation helps managers decide when to invest or scale back capital expenditure

  • Cash‐flow forecasting

    • More output generally means more sales and cash coming in

    • A sudden drop in capacity utilisation can signal that there is likely to be an imminent shortage of cash

  • Quality and maintenance balance

    • While high utilisation is good, pushing equipment too hard can increase breakdowns and defects

    • The right rate of capacity utilisation balances the level of output with reliable, high‐quality production

• Calculation of capacity utilisation is covered in depth here

Evaluating the use of operations data to analyse business performance