Small Business Management, 18e Longenecker/Petty/Palich/Hoy Small Business Management, 18e © 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 password-protected website for classroom use.

Managing Operations Chapter 21 © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

Learning Goals (cont.): Describe lean production and synchronous management, and discuss their importance to operations management in small businesses. © 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 password-protected website for classroom use.

Competing with 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. © 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 password-protected website for classroom use.

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? © 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 password-protected website for classroom use.

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? © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

21.1 The Operations Processes (Input → Processes → Output) © 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 password-protected website for classroom use.

Types of Manufacturing Operations Job Shop Repetitive (or Continuous) Manufacturing Types of Manufacturing Operations Project Manufacturing Flexible Manufacturing © 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 password-protected website for classroom use.

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 © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

Inventory Management and Operations Objectives of Inventory Management © 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 password-protected website for classroom use.

21.2 Service Level and Balance Sheet Considerations Balancing inventory to support customer demand and balance sheet concerns is critical for a healthy business. © 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 password-protected website for classroom use.

Inventory Management Costs 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 © 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 password-protected website for classroom use.

Inventory Management and Operations (cont.) Inventory Cost Control Economic order quantity (EOQ) The quantity to purchase in order to minimize total inventory costs. Total inventory costs Total ordering costs Total carrying costs = + © 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 password-protected website for classroom use.

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 © 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 password-protected website for classroom use.

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 © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

Quality and Operations Management (cont.) Total Quality Management (TQM) An all-encompassing management approach to providing superior, high-quality products and services. © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

Essential Features of Successful Quality Management Customer Driven Organizational Commitment Culture of Continuous Improvement © 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 password-protected website for classroom use.

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 for quality matters. © 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 password-protected website for classroom use.

“The Basic Seven” Quality Tools Cause-and-Effect Diagram Check Sheet Control Chart Solving Quality Problems Histogram Pareto Chart Scatter Diagram Flow Chart © 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 password-protected website for classroom use.

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 can occur. © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

Purchasing Policies and Practices 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. © 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 password-protected website for classroom use.

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 © 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 password-protected website for classroom use.

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 © 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 password-protected website for classroom use.

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 © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

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 © 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 password-protected website for classroom use.

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 © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

Purchasing Policies and Practices (cont.) Measuring Supplier Performance (cont.) SCOR Model Supplier Attributes Reliability Responsiveness Flexibility Cost Asset efficiency © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

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 © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

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. © 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 password-protected website for classroom use.

Synchronous Management (cont.) Constraint The most restrictive of bottlenecks, determining the capacity of the entire system. © 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 password-protected website for classroom use.

21.3 Avoiding Bottlenecks and Constraints 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). © 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 password-protected website for classroom use.

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 © 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 password-protected website for classroom use.