Researchers and practitioners acknowledge the vital role of Small and Medium sized manufacturing Enterprises (SMEs) in economic revival and job creation. These enterprises have limited resources, knowledge bases and expertise in building and integrating diverse operational capabilities. A continuous assessment of these capabilities is essential to visualise and estimate future changes. However, existing literature does not provide adequate knowledge about how operational capabilities develop, emerge and evolve in these organisations. It is evident that current approaches of assessing operational capabilities are either aimed at large organisations or the assessment is done on Likert type scale, which does not provide any evidence for future improvement. This research attempts to develop an assessment tool to evaluate the operational capabilities of manufacturing SMEs. A systematic process using maturity grid principles is adopted to develop the assessment tool. The research builds on existing knowledge of capability measurement models and identifies specific operational capabilities and their underlying routines/activities, which affect the performance of manufacturing SMEs. In this study the concept of operational capabilities is first defined and differentiated from other related terms. Then, the operational environment and specific characteristics of manufacturing SMEs are investigated from the literature. A set of operational capabilities and routines/activities for each capability are identified in the context of manufacturing SMEs. The assessment tool is developed after obtaining the draft characterisation of operational capabilities. The development of assessment tool is completed iteratively with the consultation of academic and industrial experts. It is also supported by evidence from literature and exploratory case studies in the industry. A focus group of industrial and academic experts has participated in the identification and development process of capability assessment tool. The validation of tool is performed in two ways. First, a number of industrial owners/managers validate the tool by highlighting the strengths and future improvement needs. Secondly, the tool is used to empirically evaluate the operational capabilities of two case manufacturing SMEs. These case studies demonstrate how this novel approach can be used to systematically assess the operational capabilities and to identify the areas of improvement. The assessment tool can guide the owners/managers to improve manufacturing strategy to gain competitive advantage.