Chapter 11

Operating Decisions

This chapter introduces the operations function: the fulfilment of a customer order following the marketing function. We consider operations through the value chain and contrast the different operating decisions faced by manufacturing and service businesses. Several operational decisions are considered, in particular capacity utilization, the cost of spare capacity and the product/service mix under capacity constraints. Relevant costs are considered in relation to the make versus buy decision, equipment replacement and the relevant cost of materials. The cost of quality and environmental costs are also introduced.

The operations function

Operations is the function that produces the goods or services to satisfy demand from customers. This function, interpreted broadly, includes all aspects of purchasing, manufacturing, distribution and logistics, whatever those activities may be called in particular industries. While purchasing and logistics may be common to all industries, manufacturing will only be relevant to a manufacturing business. There will also be different emphases such as distribution for a retail business and the separation of ‘front office’ (or customer-facing) functions from ‘back office’ (or support) functions for a service business or financial institution.

Irrespective of whether the business is in manufacturing, retailing or services, we can consider operations as the all-encompassing processes that produce the goods or services that ...

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