1. PowerPoint Presentation by Charlie Cook The University of West Alabama Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Part 5 Managing Growth in the Small Business Managing Operations

2. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–2 Looking Ahead After studying this chapter, you should be able to: 1. Explain the key elements of total quality management (TQM) programs. 2. Discuss the nature of the operations process for both products and services. 3. Explain how reengineering and other methods of work improvement can increase productivity and make a firm more competitive. 4. Discuss the importance of purchasing and the nature of key purchasing policies. 5. Describe ways to control inventory and minimize inventory costs.

3. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–3 Quality Goals of 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 Total Quality Management (TQM) –An aggressive, all-encompassing management approach to providing high-quality products and services

4. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–4 Exhibit 20.1 Essential Elements of Successful Quality Management

5. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–5 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.

6. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–6 Organizational Culture and TQM Organizational Culture –The behavior, beliefs, and values that characterize a particular firm Continuous Quality Improvement –A constant and dedicated effort to improve quality –The ultimate goal is zero defects—a goal popularized by many quality improvement programs Benchmarking –The process of studying the products, services, and practices of other firms and using the insights gained to improve quality internally

7. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–7 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

8. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–8 Tools and Techniques of TQM The Inspection Process –The examination of a product to determine whether it meets quality standards –Inspection standard A specification of a desired quality level and allowable tolerances –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

9. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–9 Statistical Methods of Quality Control Acceptance Sampling –The use of a random, representative portion to determine the acceptability of an entire lot 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

10. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–10 International Certification for Quality Management ISO 9000 –The standards governing international certification of a firm’s quality management procedures Documentation of the firm’s operations in compliance with its quality management procedures –A requirement before becoming a supplier to larger U.S. and overseas firms

11. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–11 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

12. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–12 The Operations Process The Nature of the Operations Process –Operations management The planning and control of the process of converting inputs to outputs –Conversion process Involves acquiring inputs and overseeing their transformation in outputs as products and/or services

13. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–13 Exhibit 20.2 The Operations Process

14. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–14 The Operations Process (cont’d.) 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 are more easily measured in manufacturing than service operations. –Quality is more difficult to establish and control in service than in manufacturing operations. –Customers are more involved in service than manufacturing operations. –Individual characteristics of customers influence the quality of service.

15. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–15 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

16. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–16 The Operations Process (cont’d.) Operations Planning and Scheduling –Attempting to achieve the orderly, sequential flow of products to market Production operations Service operations Plant Maintenance –The role of maintenance To correct equipment malfunctions and prevent breakdowns –Types of maintenance Preventive maintenance Corrective maintenance

17. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–17 Competitive Strength Through Improved Productivity The Importance of Improving Productivity –Productivity is the efficiency with which inputs are transformed into outputs. Innovation is the key to increased productivity. –Productivity is more difficult to increase in service industries than in manufacturing sectors. Improving quality reduces waste and raises productivity.

18. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–18 Competitive Strength Through Improved Productivity (cont’d.) Reengineering for Improved Productivity –Reengineering Fundamental restructuring to improve the operations process Involves asking why a function is done the way it is done Requires rethinking and radically redesigning basic processes that create value for the customer Upgrading Information Systems –Management information systems Paper-based processes for tracking orders, work in progress, and inventory have been replaced by computerized data management systems

19. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–19 Competitive Strength Through Improved Productivity (cont’d.) Operations Analysis –Analyses of work flow, equipment, tooling, layout, working conditions, and individual jobs Laws of motion economy: guidelines for arranging work in the most cost-effective and efficient manner possible Methods of Work Measurement –Motion Study Analysis of all the motions a worker makes to complete a job –Time Study Determination of the average time it takes to complete a task

20. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–20 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.

21. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–21 Purchasing Policies and Practices (cont’d.) Purchasing Practices and Profitability –Make-or-buy decision 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 Saving on transportation costs and supplier profits Closer coordination and control of overall process Higher quality components for inputs

22. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–22 Purchasing Policies and Practices (cont’d.) Purchasing Practices and Profitability (cont’d.) –Reasons for Buying 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

23. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–23 Purchasing Policies and Practices (cont’d.) Purchasing Practices and Profitability (cont’d.) –Outsourcing Purchasing products or services that are outside the firm’s area of competitive advantage –Buying on the Internet 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

24. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–24 Purchasing Policies and Practices (cont’d.) 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 –Reasons for having multiple suppliers Choice of best quality, price, and service Supplier competes for business Insurance against input interruptions

25. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–25 Purchasing Policies and Practices (cont’d.) Relationships with Suppliers –Selecting suppliers Price and quality Location and delivery reliability Services offered—credit, product support, promotion Building Good Relationships with Suppliers –Purchasing practices Pay bills promptly Be courteous to sales representatives Bargain fairly; avoid abrupt cancellations of orders Maintain a professional relationship Make product improvement and cost reduction suggestions

26. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–26 Purchasing Policies and Practices (cont’d.) Developing Strategic Alliances –Strategic alliance is an organizational relationship that links two independent business entities in a common endeavor. It 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.

27. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–27 Exhibit 20.3 Inventory Management and Operations Objectives of Inventory Management

28. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–28 Inventory Management and Operations (cont’d.) 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 =+

29. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–29 Exhibit 20.4 Graphic Portrayal of the Economic Order Quantity

30. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–30 Inventory Management and Operations (cont’d.) ABC Inventory Analysis –A system of 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

31. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–31 Inventory Management and Operations (cont’d.) Just-In-Time Inventory (JIT) System, also Kanban –A method of reducing inventory level to an absolute minimum New 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

32. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–32 Inventory Management and Operations (cont’d.) 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 A method for keeping a running record of inventory Does not require a physical count except to ensure the accuracy of the system

33. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 20–33 Key Terms operations process quality total quality management (TQM) organizational culture continuous quality improvement benchmarking quality circle inspection inspection standard attribute inspection variable inspection acceptance sampling statistical process control control chart ISO 9000 operations management job shops repetitive manufacturing batch manufacturing preventive maintenance corrective maintenance productivity reengineering laws of motion economy purchasing make-or-buy decision outsourcing strategic alliance economic order quantity (EOQ) ABC method just-in-time inventory system physical inventory system cycle counting perpetual inventory system