The two words do have distinct meaning, and in this case, operation would be the correct word to use in that context.
The word function
describes the intent and purpose of a thing. In the case of a school, the school's "function" is to serve as a place of teaching by the resident staff for the edification of and learning by the resident students. A purpose and intent lacks any real connotation of how well it might actually operate, it is a definition.
The word operation
describes the performance and implementation of the function of a thing. In the case of a school, the school's "operation" is the act of teaching the students by the staff. A smoothly operating school performs its function well...a poorly operating school performs its function badly.