1. Copyright Atomic Dog Publishing, 2005 Small Business Management: A Planning Approach Joel Corman Suffolk University, Emeritus Robert Lussier Springfield College Lori Pennel Bunker Hill Community College

2. Copyright Atomic Dog Publishing, 2005 CHAPTER 9 The Production/Operations Function PART 3 Planning and Implementation

3. Copyright Atomic Dog Publishing, 2005 9-1 The Interrelationship between the Production/Operations Function and Other Business Plan Components The relationship with the other functional areas of accounting, finance, marketing, and human resources is critical. The production process must be able to meet sales forecasts made by the marketing function. The production process defines the resources that need to be provided by the finance function. All equipment acquired must be identified by the accounting function and determine whether to expense or depreciate equipment expenditures. To hire personnel to operate the equipment would involve the human resources function.

4. Copyright Atomic Dog Publishing, 2005 9-2 Operations Management The scope of production management has included any business whose function is the creation of utility, tangible or intangible. Utility is a good or service that is of some value to the purchaser or final consumer. Production/operations process is a process that converts input to output. Typical operations process

5. Copyright Atomic Dog Publishing, 2005 9-2a Input Every business utilizes  People -Human resources  Capital -Physical assets of the company, like machinery, equipment or plant  Materials The combination of input differs between firms and is determined by the output, but all are used in the initial step in managing operations.

6. Copyright Atomic Dog Publishing, 2005 9-3 The Conversion Process The process of transforming inputs into products is the production/operations process. The conversion process involves:  Output -The end result of the production/operations process  Material -Competition creating significant focus on reducing material cost  Material Requirements Planning (MRP) -Tool used to control the process of ordering and delivering the needed material at the right time, in the right place, and at the lowest cost -Just-in-time (JIT) inventory  Make versus Buy

7. Copyright Atomic Dog Publishing, 2005 9-3 The Conversion Process (contd.) Cost aspects of making versus buying

8. Copyright Atomic Dog Publishing, 2005 9-4 Inventory Adequate system to keep track of materials received Adequate, secure storage facilities and effective requisition procedures Inventory records must be kept up-to-date. Physical inventory is essential to counter human mistakes or mislaid parts. The more the inventory is worth, the more frequently physical checks should be made.

9. Copyright Atomic Dog Publishing, 2005 9-4 Inventory (contd.)

10. Copyright Atomic Dog Publishing, 2005 9-5 Inventory Control and EOQ The primary questions of inventory control are how much to order at any one time and when to order. Economic order quantity is the amount of goods whose total procurement and carrying costs are at a minimum.

11. Copyright Atomic Dog Publishing, 2005 9-5 Inventory Control and EOQ (contd.) Relationship between time and quantity of inventory

12. Copyright Atomic Dog Publishing, 2005 9-6 Time Relationship to Inventory Quantity The ideal inventory (EOQ) quantity will minimize total cost  Carrying cost  Procurement cost

13. Copyright Atomic Dog Publishing, 2005 9-6a Carrying Costs Those costs that are associated with ordering materials from the ordering cost through receiving, inspection and storage The cost component consists of:  Storage costs  Maintenance  Clerical tasks  Insurance  Obsolescence  Taxes

14. Copyright Atomic Dog Publishing, 2005 9-6a Carrying Costs (contd.) Relation between storage cost and quantity

15. Copyright Atomic Dog Publishing, 2005 9-6b Procurement Costs Comprises requisition cost, follow-up tasks, and payment of invoices Varies inversely with the inventory Total procurement costs vary depending on the frequency of ordering. The two costs vary in opposite directions  Large lots minimize procurement costs but increases storage costs.

16. Copyright Atomic Dog Publishing, 2005 9-6b Procurement Costs (contd.) Relation between procurement costs and quantity

17. Copyright Atomic Dog Publishing, 2005 9-6c EOQ Determination EOQ is determined to minimize total variable costs. The minimum variable total cost occurs at the intersection of the annual storage cost and annual procurement cost. Formula for determining EOQ, where:  U = monthly dollar usage of items  P = procurement costs in dollars  I = inventory carrying costs per year

18. Copyright Atomic Dog Publishing, 2005 9-6c EOQ Determination (contd.) Relation between total variable costs and quantity

19. Copyright Atomic Dog Publishing, 2005 9-6d Reorder Point To manage inventory efficiently, you also need to know at what point to order the EOQ  Usage during lead time  Desired safety stock Firms can choose the probability of running out and the risk it will accept, based on the costs it is willing to bear. The P factor (probability) is used to modify the firm’s safety stock, and to calculate reorder point, where:  R = reorder point  U = monthly dollar usage of items  P = procurement costs in dollars  L = lead time

20. Copyright Atomic Dog Publishing, 2005 9-6d Reorder Point (contd.) EOQ reorder point

21. Copyright Atomic Dog Publishing, 2005 9-7 Production Control Necessity of integration Production/Operations Production control approaches

22. Copyright Atomic Dog Publishing, 2005 9-7a Necessity of Integration: Control and Planning of Facilities Control and planning of facilities All individual elements of the production process need to be integrated for a business to function:  People  Materials  Machines

23. Copyright Atomic Dog Publishing, 2005 9-7b Production/Operations Minimize number of delays and interruptions. Planning to provide management with feedback to determine progress. Production control is present in all firms regardless of size.

24. Copyright Atomic Dog Publishing, 2005 9-7c Production Control: Two Approaches Two approaches  Loading -Assigns work to a facility  Scheduling -Specifies the time and sequence in which the work is done and develops a schedule for it. Both approaches require complete understanding of the production process:  Knowing the capacity of each process.  Knowing the time taken to complete each process.  Balance work with machinery, material, equipment, and people. The plan is a measurement of progress and where necessary corrective action can be taken.

25. Copyright Atomic Dog Publishing, 2005 9-7c Production Control: Two Approaches (contd.) Master Scheduling  Simple and easily understood  Jobs are not split.  Establishes a production schedule for the facility on a first come/first served basis  To establish this schedule you need to know: -Maximum hours available for work -Minimum hours needed before you open for the week  To set up the schedule -Take each job as it is called in and schedule in the week required. -Confirm available production capacity. -Know the time required for completion.  On reaching the production capacity for the week, it is considered as fully loaded.

26. Copyright Atomic Dog Publishing, 2005 9-7c Production Control: Two Approaches (contd.) Master schedule for production planning

27. Copyright Atomic Dog Publishing, 2005 9-7c Production Control: Two Approaches (contd.) Perpetual loading  Tabulation of the time necessary to finish unfulfilled orders and determine how long it will take to finish this work. Perpetual loading

28. Copyright Atomic Dog Publishing, 2005 9-7c Production Control: Two Approaches (contd.) Gantt chart  Shows work and how long it should take to be completed  Plots actual work against forecasts and when compared to expectations, appropriate actions can be decided. Gantt chart

29. Copyright Atomic Dog Publishing, 2005 9-8 Performance Evaluation and Review Technique (PERT) PERT was developed by Booz, Allen and Hamilton Company. Represents a refinement of the flowchart analysis first developed by Henry Gantt. Uses a sequential list of operations and the times required for each operation to establish an operations chart. The chart allows both planning and control. Critical path method (CPM) A typical plan comprises:  Building of network to cover all activities  Ensure that steps are reasonable and probability of completion is high.  Use of the plan to control the work as it proceeds PERT is universally applicable

30. Copyright Atomic Dog Publishing, 2005 9-8 Performance Evaluation and Review Technique (PERT) (contd.) PERT schematic describing studying for and taking an exam

31. Copyright Atomic Dog Publishing, 2005 9-9 Work Design and Work Measurement Motion and time study  Techniques used by management to establish performance standards against which to measure work.  Motion study establishes the best way to accomplish a task. -Done to eliminate wasteful motions and find simpler ways of performing a task. -Analysis of methods, tools, and materials used in addition to motions of employees.  Time study establishes how much time it should take to accomplish the task. -Systematically recording, analyzing, and synthesizing the times required to perform a task Management’s goal is to simplify work and arrive at a standard by which progress can be measured.

32. Copyright Atomic Dog Publishing, 2005 9-10 Planning and Control Techniques Job Categories and Techniques:  Interjob -Process chart—simulates on paper the operation under analysis. -Flow process chart—process chart superimposed on a floor plan of a manufacturing business.  Intrajob -Simo-chart -Man–machine chart -Multiple activity chart

33. Copyright Atomic Dog Publishing, 2005 9-10 Planning and Control Techniques (contd.)

34. Copyright Atomic Dog Publishing, 2005 9-10 Planning and Control Techniques (contd.)

35. Copyright Atomic Dog Publishing, 2005 9-10 Planning and Control Techniques (contd.) Comparison between the present and the proposed procedures

36. Copyright Atomic Dog Publishing, 2005 9-10 Planning and Control Techniques (contd.) Direct (watch) time study  Procedure using a stopwatch to time a task Predetermined time standard:  Are determined by using known times for all tasks in a job in order to determine how long it should take to complete it.  Based on the idea that there are 17 basic motion patterns and all jobs are combinations of these. -Grasp—Takes place when a hand or body part touches an object and takes control of it. — -Assemble—Takes place when parts are put together or caused to be put together by an operator.

37. Copyright Atomic Dog Publishing, 2005 9-11 Quality Combination of attributes commensurate with the price of a product or service that the customer expects Total Quality Management (TQM) is a strategy that requires everyone in the organization to continually improve products and services.  Involves giving people responsibility for performing their jobs in the best way. Small business must allow employees to contribute to the quality process. Necessity for inspection  Production/operations vulnerability Statistical quality control Use of control charts

38. Copyright Atomic Dog Publishing, 2005 9-11 Quality (contd.) Control chart