N5 Entrepreneurship
Best operating level The concept “best operating level” is used more often than capacity. The reason is that although your business might have a capacity to produce a certain amount of units; it does not mean that the business can sustain that rate of output over a period of time. Both people and equipment cannot operate at an optimum level at all times. It is possible, but there is a cost aspect linked to it. It might be anything from stress to excessive maintenance on equipment. The best operating level does take these costs into consideration.
Economies of scale
Economies of scale refer to the drop in the average cost per unit when larger volumes are produced. Each unit absorbs part of the fixed cost and the more units are produced the more units there are to share the fixed cost. This holds true until capacity is reached and new sources of capacity (i. e. equipment) must be found. This leads to an increase in fixed cost and a subsequent rise in the unit cost. Part of the success of countries like India and China is due to the large volumes that they produce. Lower unit costs make them more competitive.
DEFINITION
Economies of scale refer to the drop in the average cost per unit when larger volumes are produced.
Balancing capacity – Bottlenecks Most operations are not a single process but are made up of quite a few different processes. A T-shirt manufacturer has to deal with the following processes: • cutting • plain sewing • over-locking • labelling • ironing • packing
Not all these processes take the same time. Therefore, if careful planning is not done, one might find that one worker works full-time while others are waiting. This is called a bottleneck. The small business manager can take a few steps to balance this production process, ensuring a more equal utilisation of labour and equipment.
The steps are: 1. Add capacity (machines and people) to those places where bottlenecks occur. 2. Use buffer inventories to lessen the inter-relatedness between processes or stages. 3. Duplicate the facilities of the bottleneck department.
An even distribution of work amongst workers is not only very important from a human perspective but will limit costs as well.
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