Small Business Discussion Board 12

Please read Chapter 21 – Managing Small Business Operations and complete the following discussion assignment.

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Operations management is at the heart of business success, it is where all of the planning, setting of standards, policies, and practices are implemented to create a company’s goods and services. Operations Management is where inputs like raw materials, equipment and labor are converted into outputs (products and services).

Much of Chapter 21 is dedicated to “Inventory Management and Operations” and “Purchasing Policies and Practices;” using terms and concepts from the reading explain why the two topics listed above are so important to the effective management of business operations.

Small Business Management, 18e

Longenecker/Petty/Palich/Hoy

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Managing Operations

Chapter 21

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Learning Goals:

 Understand how operations enhance a small

company’s competitiveness.

 Discuss the nature of the operations process for

both products and services.

 Identify ways to control inventory and minimize

inventory costs.

 Recognize the contributions of operations

management to product and service quality.

 Explain the importance of purchasing and the

nature of key purchasing policies.

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Learning Goals (cont.):

 Describe lean production and synchronous

management, and discuss their importance to

operations management in small businesses.

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Competing with Operations

 Operations

The processes used to create and deliver a

good or service (value) to customers.

 Operations Management

The planning and control of a conversion

process that includes turning inputs into

outputs (products and/or services) that

customers desire.

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Competing with Operations

(cont.)

 Important Questions about Operations

Factors:

How much flexibility is required to satisfy

customers over time?

What is customer demand today? for the

future? Can facilities and equipment keep up

with demand?

What options are available for satisfying

customers?

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Competing with Operations

(cont.)

 Important Questions about Operations

Factors (cont.):

What skills or capabilities set the firm apart

from its competitors such that the firm can

best take advantage of these distinctive

features in the market?

Does the competitive environment require

certain capabilities that the enterprise lacks?

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The Operations Process

 Managing Operations in a Service

Business

Products are tangible, services are intangible.

Manufacturing can produce goods for inventory;

service operations cannot store or bank services.

Productivity and quality is more easily measured in

manufacturing than service operations.

Quality is more difficult and control to establish in

service than manufacturing operations.

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The Operations Process (cont.)

 Managing Operations in a Service

Business (cont.)

Customers are more involved in service than

manufacturing operations and can influence the

quality of service.

Technology can enable customers to provide more

of their own services.

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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a

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The Operations Processes (Input → Processes → Output)21.1

Types of Manufacturing Operations

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Repetitive

(or Continuous)

Manufacturing

Flexible

Manufacturing

Job Shop

Project

Manufacturing

Types of

Manufacturing

Operations

The Operations Process (cont.)

 Capacity Considerations

Capacity limits firm’s ability to meet demand

Capacity determines startup (fixed) costs

Ability to adjust capacity differs among firms

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The Operations Process (cont.)

 Planning and Scheduling

Involves attempting to achieve the orderly,

sequential flow of products or services to

market.

Is critical in service industry operations

Incorporates demand management strategies

to stimulate customer demand when it is

normally low.

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Inventory Management and

Operations

 Objectives of Inventory Management

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Service Level and Balance Sheet Considerations21.2

Balancing inventory to support customer demand and

balance sheet concerns is critical for a healthy business.

Inventory Management Costs

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Storage space and

warehousing systems

Transaction costs for

managing inventory

Theft, weathering,

spoilage, and

obsolescence

Insurance and

security

Cost of idle

capital invested

in inventory

Disposal costs for

unsalable

inventory

Inventory Management and

Operations (cont.)

 Inventory Cost Control

Economic order quantity (EOQ)

The quantity to purchase in order to minimize total

inventory costs.

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Total

inventory

costs

Total

ordering

costs

Total

carrying

costs = +

Inventory Management and

Operations (cont.)

 ABC Inventory Classification

Classifying items in inventory by relative

value:

Category A (close/continuous control)

 High-value or critical production component items

Category B (moderate control)

 Less costly, secondary importance items

Category C (periodic control)

 Low-cost and noncritical items

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Inventory Management and

Operations (cont.)

 Just-In-Time Inventory (JIT) System

A demand (pull) method of reducing

inventory level to an absolute minimum.

New inventory items arrive at the same time that

the last inventory item is placed in service.

JIT promotes:

Closer coordination with suppliers

Consistent quality production

Lower safety stock levels

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Inventory Record-Keeping

Systems  Physical Inventory System

Provides for periodic counting of items in inventory.

 Cycle Counting

Counts different segments of the physical inventory at different

times during the year.

 Perpetual Inventory

Keeps a running record of inventory that does not require a

physical count except to ensure the accuracy of the system.

 Two-bin Inventory System

A method of inventory control based on use of two containers

for each item in inventory: one to meet current demand and the

other to meet future demand.

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Quality

and Operations Management

 Quality as a Competitive Tool

Quality is a must in international competition

 Quality

The features of a product or service that

enable it to satisfy customers’ needs.

A perception of the customer as to the

suitability of the product or service of a firm.

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Quality

and Operations Management (cont.)

 Total Quality Management (TQM)

An all-encompassing management approach

to providing superior, high-quality products

and services.

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Tools and Techniques of TQM

 Employee Participation

Employee performance is a critical quality

variable.

The implementation of work teams and

empowerment of employees to build

workplace involvement.

Quality circle

A group of employees who meet regularly to

discuss quality-related problems.

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Essential Features of Successful Quality Management

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Customer

Driven

Organizational

Commitment

Culture of Continuous

Improvement

The Customer Focus of

Quality Management  Customer Expectations

Quality is the extent to which a product or service

satisfies customer’s needs and expectations.

Product quality

Service quality

Product and service quality combinations

“The customer is the focal point of quality

efforts.”

 Customer Feedback

Customers are the eyes and ears of the business

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“The Basic Seven” Quality Tools

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Cause-and-Effect

Diagram

Control

Chart

Pareto

Chart

Flow

Chart

Scatter

Diagram

Histogram

Check

Sheet

Solving

Quality

Problems

Quality Assurance Using Inspection

versus Poka-Yoke

 The Inspection Process

The examination of a product to determine

whether it meets quality standards.

Occurs after the fact—the defective

good has already been produced.

 Poka-Yoke

A proactive approach to quality management

that seeks to mistake-proof a firm’s operations,

thus avoiding problems and waste before they

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Statistical Methods of Quality

Control  Acceptance Sampling

The use of a random, representative portion

to determine the acceptability of an entire lot.

 Attributes

Product or service parameters that can be

counted as being present or absent.

 Variables

Measured parameters that fall on a

continuum, such as weight or length.

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Statistical Methods of Quality

Control (cont.)

 Statistical Process Control

The use of statistical methods to assess

quality during the operations process.

 Control Chart

A graphic illustration of the limits used in

statistical process control.

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International Certification

for Quality Management

 ISO 9000

The standards governing international

certification of a firm’s quality management

procedures.

Documents compliance of the firm’s operations

with its quality management procedures.

Serves as an indicator of supplier reliability to its

customers.

Is a requirement before becoming a supplier

to larger U.S. and overseas firms.

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Quality Management in Service

Businesses

 Opportunities for Small Service

Companies

Providing an excellent combination of tangible

products and intangible services.

Providing personalized, high contact services.

Providing service quality without regard to

the profitability of the customer.

Developing good measures to control service

quality.

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Purchasing Policies and Practices

 Purchasing

The process of obtaining materials, equipment, and

services from outside.

 The Importance of Purchasing

The process of acquiring quality raw material inputs

affects:

The timely and consistent production of quality products.

Retailer sales of finished products to customers.

The costs of products, their profitability and their selling

prices.

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Purchasing Policies and Practices

(cont.)

 Make-or-Buy Decisions

A firm’s choice between producing and

purchasing component parts for its products.

Reasons for making:

Increased utilization of plant capacity

Assurance of supply of critical components

Maintaining secrecy in designs and processes

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Purchasing Policies and Practices

(cont.)

 Make-or-Buy Decisions (cont.)

Reasons for making:

Maintaining secrecy in designs and processes

Saving on transportation costs and supplier profits

Closer coordination and control of overall process

Higher quality components for inputs

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Purchasing Policies and Practices

(cont.)  Make or Buy Decisions (cont’d)

Reasons for Buying:

Outside supplier is cheaper and/or higher quality

Investment savings on space, personnel, equipment

Less diversified managerial experience and skills

required

Greater flexibility in matching supply and demand

Increased focus on production of core

products/services

Risk of obsolescence transferred to outsiders

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Purchasing Policies and Practices

(cont.)

 Outsourcing

Contracting with a third party to take on and

manage one or more of a firm’s functions that

are outside

the firm’s area of competitive advantage.

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Purchasing Policies and Practices

(cont.)

 Cooperative Purchasing Organization

(COOP)

Small businesses combine demand for

products or services to negotiate as a group

with suppliers.

Benefits: increased buying power, more access to

resources and information

Small firms save on inputs by using the Internet to

seek out the lowest cost suppliers.

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Purchasing Policies and Practices

(cont.)

 Diversifying sources of supply

Reasons for having a sole supplier:

Outstanding supplier quality

Quantity discounts for volume purchases

Single orders too small to divide among suppliers

Quality of supplier-customer relationship

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Purchasing Policies and Practices

(cont.)

 Diversifying sources of supply (cont.)

Reasons for having multiple suppliers:

Choice of best quality, price, and service

Supplier competes for business

Insurance against input interruptions

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Purchasing Policies and Practices

(cont.)

 Measuring Supplier Performance

Supply Chain Operations Reference (SCOR)

model

A list of critical factors that provides a helpful

starting place when assessing a supplier’s

performance.

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Purchasing Policies and Practices

(cont.)

 Measuring Supplier Performance (cont.)

SCOR Model Supplier Attributes

Reliability

Responsiveness

Flexibility

Cost

Asset efficiency

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Purchasing Policies and Practices

(cont.)

 Building Good Relationships with

Suppliers

Pay bills promptly.

Give sales reps a timely and courteous

hearing.

Minimize abrupt cancellation of orders

merely

to gain a temporary advantage.

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Purchasing Policies and Practices

(cont.)

 Building Good Relationships with

Suppliers (cont.)

Avoid attempts to browbeat a supplier into

special concessions or unusual discounts.

Cooperate with the supplier by making

suggestions for product improvements and

cost reductions.

Provide explanations when rejecting bids, and

make fair adjustments in the case of disputes.

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Purchasing Policies and Practices

(cont.)

 Forming Strategic Alliances with Suppliers

Involves close coordination of buyers and

sellers to:

Reduce product introduction lead time

Improve product quality

Engage in joint problem solving

Make joint adjustments to market conditions

Involve the supplier early in product development

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Purchasing Policies and Practices

(cont’d)

 Forecasting Supply Needs

Associative forecasting

Considers a variety of variables to determine

expected sales.

 Using Information Systems

Increases operational efficiencies by reducing

inventory management, ordering, payment

collection, and personnel costs.

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Lean Production

 Lean Production

Emphasizes efficiency by eliminating waste in a

firm’s operations—using minimum resources to

satisfy the greatest customer wants and needs.

Defects are costly because they must be repaired or

scrapped.

Overproduction must be stored and may never be sold.

Transportation is minimized by locating close to suppliers

and customers.

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Lean Production

 Lean Production (cont.)

Waiting can be wasteful because resources are idle.

Inventory above the minimum is unproductive and costly.

Motion by product, people, or machinery can be wasteful.

Processing itself is wasteful if it is not productive.

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Synchronous Management

 Synchronous Management

An approach that recognizes the

interdependence of assets and activities and

manages them to optimize the entire firm’s

performance.

 Bottleneck

Any point in the operations process where

limited capacity reduces the production capability

of an entire chain of activities.

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Synchronous Management

(cont.)

 Constraint

The most restrictive of bottlenecks, determining

the capacity of the entire system.

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Avoiding Bottlenecks and Constraints21.3

Add Capacity • Expand resources.

• Subdivide the work.

• Outsource production to a firm with more capacity.

Increase Efficiency • Arrange schedules so that the resources take no breaks

(for example, have employees take breaks during setup,

teardown, or maintenance activities).

• Schedule maintenance on nights, weekends, and holidays

rather than during productive time.

• Increase productivity through employee training, upgraded

tools, or automation.

Filter Production • Inspect quality prior to a constraint.

• Allow only work that achieves firm goals and contributes

to performance (that is, a finished goods inventory would

be unnecessary).

Key Terms ABC method

acceptance sampling

associative forecasting

attributes

bottleneck

constraint

continuous manufacturing

cooperative purchasing organization

cycle counting

demand management strategies

economic order quantity

flexible manufacturing systems

inspection

ISO 9000

job shops

just-in-time inventory system

lean production

make-or-buy decisions

operations

operations management

outsourcing

perpetual inventory system

physical inventory system

poka-yoke

project manufacturing

quality

repetitive manufacturing

statistical inventory control

Supply Chain Operations Reference (SCOR) model

synchronous management

total quality management (TQM)

two-bin inventory system

variables

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