PowerPoint Presentations for Small Business Management: Launching and Growing New Ventures, Fifth Canadian Edition Adapted by Cheryl Dowell Algonquin College

Operations Management and Control Systems Chapter 12 Operations Management and Control Systems

Copyright © 2013 by Nelson Education Limited LOOKING AHEAD After studying this chapter, you should be able to: 1. Discuss the nature of the operations process for both products and services. 2. Describe the need for management control systems. 3. Explain the key elements of total quality management (TQM) programs. 4. Explain how reengineering and other methods of work improvement can increase productivity and make a firm more competitive. 5. Discuss the importance of purchasing and the nature of key purchasing policies. 6. Describe ways to control inventory and minimize inventory costs. Copyright © 2013 by Nelson Education Limited

THE OPERATIONS PROCESS Operations Management: planning and control of the operations process activities that produce a firm’s goods and services acquiring inputs and overseeing their transformation in products and services LO 1 Copyright © 2013 by Nelson Education Limited

THE OPERATIONS PROCESS LO 1 Copyright © 2013 by Nelson Education Limited

TYPES OF MANUFACTURING OPERATIONS Job Shops Operations characterized by short production runs of small quantities of unique items. Repetitive Manufacturing Operations in which long production runs are used to produce a large quantity of a standardized product. Batch Manufacturing An intermediate form involving more variety in volume and products than job shops and less than repetitive manufacturing . LO 1 Copyright © 2013 by Nelson Education Limited

Copyright © 2013 by Nelson Education Limited PLANT MAINTENANCE Operations Planning and Scheduling Attempting to achieve the orderly, sequential flow of products to market Production operations Service operations LO 1 Copyright © 2013 by Nelson Education Limited

Copyright © 2013 by Nelson Education Limited PLANT MAINTENANCE correct equipment malfunctions and prevent breakdowns Maintenance activities intended to prevent machine breakdowns, injuries to people, and damage to facilities Preventive maintenance repairs necessary to restore equipment or a facility to good condition Corrective maintenance Preventive maintenance: activities intended to prevent machine breakdowns, injuries to people, and damage to facilities Corrective maintenance: repairs necessary to restore equipment or a facility to good condition LO 1 Copyright © 2013 by Nelson Education Limited

THE NEED FOR MANAGEMENT CONTROL SYSTEMS control cycle: a period of time over which an activity is planned, measured, corrected, and replanned Variance: the difference between planned or forecast activity and actual activity Some critical questions that must be answered are: • What to measure? • How to measure? • How often to measure? • What is unacceptable variance from plan? • What actions can be taken to correct the variance? LO 2 Copyright © 2013 by Nelson Education Limited

QUALITY GOALS OF OPERATIONS MANAGEMENT Quality: features of a product or service that enable it to satisfy customers’ needs. Total Quality Management (TQM): an all-encompassing management approach to providing high quality products and services Essential Elements: focus on customers, supportive culture, appropriate tools LO 3 Copyright © 2013 by Nelson Education Limited

Copyright © 2013 by Nelson Education Limited CUSTOMER FOCUS TQM 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 Customer Feedback customers are the eyes and ears of the business for quality matters Benchmarking process of identifying the best products, services, and practices of other businesses LO 3 Copyright © 2013 by Nelson Education Limited

TOOL AND TECHNIQUES OF QUALITY MANAGEMENT Employee Participation Quality Circle: group of employees who meet regularly to discuss quality related problems Inspection Process an examination of a product to determine whether it meets quality standards Inspection standard a specification of a desired quality level and allowable tolerances LO 3 Copyright © 2013 by Nelson Education Limited

TOOL AND TECHNIQUES OF QUALITY MANAGEMENT Attribute inspection the determination of product acceptability based on whether it will or will not work Variable inspection the determination of product acceptability based on a variable such as weight or length LO 3 Copyright © 2013 by Nelson Education Limited

STATISTICAL METHODS OF QUALITY CONTROL the use of a random, representative portion to determine the acceptability of an entire lot Acceptance sampling the use of statistical methods to assess quality during the operations process Statistical process control Acceptance sampling taking random samples of products and measuring them against predetermined standards Suppose, for example, that a small firm receives a shipment of 10,000 parts from a supplier. Rather than evaluate all 10,000 parts, the purchasing firm might check the acceptability of a small sample of parts and generalize about the acceptability of the entire order. The size of the sample affects the discriminating power of a sampling plan. The smaller the sample, the greater the risk of either accepting a defective lot or rejecting a good lot due to sampling error. A larger sample reduces this risk but increases the cost of inspection. A well-designed plan strikes a balance, simultaneously avoiding excessive inspection costs and minimizing the risk of accepting a bad lot or rejecting a good lot. Statistical process control applying statistical techniques to control work processes Items produced in a manufacturing process are not completely identical, although the variations are sometimes very small and the items may seem to be exactly alike. careful measurement can pinpoint differences differences can be plotted in the form of a normal curve, which aids in the application of statistical control techniques statistical analysis makes it possible to establish tolerance limits that allow for inherent variation due to chance When measurements fall outside these tolerance limits, however, the quality controller knows that there is a problem and must then search for the cause. The problem might be caused by variations in raw materials, machine wear, or changes in employees’ work practices. Example: Candy maker is producing 500 g boxes of candy. Though the weight may vary slightly, each box must weigh at least 500 g. A study of the operations process has determined that the actual target weight must be 550 g, to allow for the normal variation between 500 and 600 g. During the production process, a box is weighed every 15 or 20 minutes. If the weight of a box falls outside the tolerance limits—below 500 or above 600 g—the quality controller must immediately try to find the problem and correct it. Continuing improvements in computer-based technology have advanced the use of statistical control processes in small firms. LO 3 Copyright © 2013 by Nelson Education Limited

STATISTICAL METHODS OF QUALITY CONTROL graphic illustration of the limits used in statistical process control Control chart control chart graphically shows the limits for the process being controlled as current data are entered, it is possible to tell whether a process is under control or out of control may be used for either variable or attribute inspections LO 3 Copyright © 2013 by Nelson Education Limited

INTERNATIONAL CERTIFICATION FOR QUALITY MANAGEMENT ISO 9000: 2000 The standards governing international certification of a firm’s quality management procedures. 1. Customer focus 2. Leadership 3. Involvement of people in the organization 4. A process approach to quality management 5. A systems approach to quality management 6. Continual improvement 7. A factual approach to decision making 8. Mutually beneficial supplier relationships ISO 9001 certification can give a business credibility with purchasers in other countries and thereby ease its entry into export markets. However, substantial costs are involved in obtaining certification. is particularly valuable for small firms, because they usually lack a global image as producers of high-quality products. Buyers in other countries, especially in Europe, view this certification as an indicator of supplier reliability. Many large corporations, such as automobile makers, require their domestic suppliers to conform to these standards. Small firms, therefore, may need ISO 9001 certification either to sell more easily in international markets or to meet the demands of their domestic customers. ISO 9001 for Small Business is a handbook published jointly by the ISO and the International Trade Centre, and a valuable resource for small and medium-sized enterprises to help them understand and implement the standards. LO 3 Copyright © 2013 by Nelson Education Limited

INTERNATIONAL CERTIFICATION ISO 14001 Generic requirements for implementing an environmental management system Minimize harmful effects on the environment caused by its activities Continual improvements of its environmental performance ISO 9001 and ISO 14001 standards are currently implemented by over 1 million organizations in 162 countries worldwide LO 3 Copyright © 2013 by Nelson Education Limited

QUALITY MANAGEMENT IN SERVICE BUSINESSES Being on target set and meet customer’s expectations do what was promised, when and where it was promised heighten the customer’s awareness of the service provider’s actions Care and concern tune in to the customer’s situation, frame of mind, and needs be attentive and willing to help Spontaneity empower service providers to think and respond quickly LO 3 Copyright © 2013 by Nelson Education Limited

QUALITY MANAGEMENT IN SERVICE BUSINESSES Problem solving train and encourage service providers to be problem solvers Follow-up captures customers’ attention and is often sincerely appreciated. associated with caring and professionalism create a reputation for legendary service quality Recovery customers experiencing problems have low expectations for resolution & exceedingly mindful and appreciative of speedy solutions LO 3 Copyright © 2013 by Nelson Education Limited

COMPETITIVE STRENGTH THROUGH IMPROVED PRODUCTIVITY the efficiency with which inputs are transformed into outputs LO 4 Copyright © 2013 by Nelson Education Limited

COMPETITIVE STRENGTH THROUGH IMPROVED PRODUCTIVITY Reengineering: Fundamental restructuring to improve the operations process “If it isn’t broken, take it apart and fix it anyway” VS. Asking “Why?” is important in the reengineering process Continuous quality improvement programs emphasize doing things better from an operations standpoint to increase quality, increase throughput, or reduce cost involves things such as training for personnel and replacing old equipment with newer, faster equipment incremental improvements to existing processes Reengineering requires a much more radical change in the way operations processes work continuous improvement seeks to make in existing processes reengineering involves a discontinuous change in the way an organization works by changing the processes themselves changes to processes and also the management structure, control systems, and reporting lines between people in the process and those who manage it LO 4 Copyright © 2013 by Nelson Education Limited

COMPETITIVE STRENGTH THROUGH IMPROVED PRODUCTIVITY Organizational change tips: Start at the beginning Use structure Adapt to the situation Top management drives communication Rely on individual employees Surprising employees reduces their commitment LO 4 Copyright © 2013 by Nelson Education Limited

Copyright © 2013 by Nelson Education Limited LEAN MANUFACTURING Key Principles: Define value from the customer’s perspective Identify and map the value stream Reduce or eliminate waste or improve flow Pull from customers, using their information and demand to establish production levels Pursue perfection by returning to step one and repeating this process periodically lean manufacturing: a system of techniques designed to eliminate waste, ensure quality, and involve employees in designing and managing their work Three-pronged approach to: Eliminate waste Ensure quality Involve employees in designing and managing their work LO 4 Copyright © 2013 by Nelson Education Limited

Copyright © 2013 by Nelson Education Limited LEAN MANUFACTURING Benefits Culture of continuous improvement Decreasing manufacturing cycle times Reducing waste Empowering employees Increasing profits and cash flow Increasing production capacity Increasing customer satisfaction Reducing costs LO 4 Copyright © 2013 by Nelson Education Limited

ESTABLISHING PERFORMANCE STANDARDS Operations Analysis Laws of motion economy: arranging work in most cost-effective and efficient manner possible Methods of Work Measurement Motion Study: analysis of all motions worker makes to complete a given job Time Study: determination of the average time, it takes to complete LO 4 Copyright © 2013 by Nelson Education Limited

PURCHASING POLICIES AND PRACTICES process of obtaining materials, equipment, and services from outside suppliers Effective Purchasing: Well-managed production process = excellent products Goods delivered when needed Securing the best possible price Increases the cost-effectiveness Determining which is best: make, buy, outsource, diversify LO 5 Copyright © 2013 by Nelson Education Limited

PURCHASING POLICIES AND COST CONTROL MAKE BUY Increased utilization of plant capacity Assurance of supply of critical components 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 Supplier’s part/service is cheaper and/or higher quality Investment savings on space, personnel, equipment Greater flexibility in matching supply and demand Increased focus on production of core product/service No risk of equipment obsolescence Making or buying: A firm’s choice between producing and purchasing component parts for its products. Outsourcing: Purchasing products or services that are outside the firm’s area of competitive advantage LO 5 Copyright © 2013 by Nelson Education Limited

PURCHASING POLICIES AND COST CONTROL Sole supplier may be outstanding in its product quality may lead to quantity discounts. may qualify for prompt treatment , receive management advice, market information, and financial leniency a small firm may be linked to a specific supplier by the very nature of its business LO 5 Copyright © 2013 by Nelson Education Limited

DIVERSIFYING SOURCES OF SUPPLY locate the best source in terms of price, quality, and service provide better prices and service in order to obtain a larger piece of the purchasing pie. provides insurance against interruptions caused by strikes, fires, or similar problems with sole suppliers LO 5 Copyright © 2013 by Nelson Education Limited

Copyright © 2013 by Nelson Education Limited MANAGING INVENTORY Objective: to have the right goods in the right quantities at the right time and place economic order quantity (EOQ) quantity to purchase in order to minimize total inventory costs ABC method a system of classifying items in inventory by relative value just-in-time inventory system (JIT) a method of reducing inventory levels to an absolute minimum LO 6 Copyright © 2013 by Nelson Education Limited

Copyright © 2013 by Nelson Education Limited EOQ LO 6 Copyright © 2013 by Nelson Education Limited

Copyright © 2013 by Nelson Education Limited ABC LO 6 Copyright © 2013 by Nelson Education Limited

INVENTORY RECORD-KEEPING SYSTEMS physical inventory system a method that provides for periodic counting of items in inventory cycle counting a system of counting different segments of the physical inventory at different times during the year perpetual inventory system a method for keeping a running record of inventory LO 6 Copyright © 2013 by Nelson Education Limited