Small Business Management Chapter 21 PowerPoint

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CHAPTER
21
Managing Small
Business Operations

LEARNING OBJECTIVES
By studying this chapter, you should be able to…
21-1 Understand how operations enhance a small company’s
competitiveness.
21-2 Discuss the nature of the operations process for both products
and services.
21-3 Identify ways to control inventory and minimize inventory
costs.
21-4 Recognize the contributions of operations management to
product and service quality.
21-5 Explain the importance of purchasing and the nature of key
purchasing policies.
21-6 Describe lean production and synchronous management, and
discuss their importance to operations management in small
businesses.

21-1 COMPETING WITH
OPERATIONS
• Operations – The processes used to create and deliver a product
or service.
• Companies gain power to the degree that they excel in satisfying
customer needs and wants more precisely and/or efficiently than
their competitors.
• To be successful, a company’s operations must involve all of the
activities required to create value for customers and earn their
dollars.
• Operations management – The planning and control of a
conversion process that includes turning inputs into outputs that
customers desire.
• The design and effectiveness of a company’s operations can
determine the success of an enterprise.

21-2 THE OPERATIONS PROCESS
• Product-oriented and service-oriented operations are
similar in that they change inputs into outputs.
• Inputs can include:
• Money.
• Raw materials.
• Labor.
• Equipment.
• Information.
• Energy.
• Outputs are the products and/or services that a business
provides to its customers.
• Thus, the operations process may be described as a
conversion process.

21.1 The Operations Process

21-2a The Operations Process
in a Service Business
• Managers of service businesses face special
challenges in assuring and controlling quality,
given the difficulty inherent in measuring and
controlling intangibles.
• In service businesses, employees interact
extensively with customers.
• The adoption of various technologies has
enabled customers of many businesses to
provide more of their own services.

21-2b The Operations Process
in a Manufacturing Business (slide 1 of 2)
• Most manufacturing operations can be classified as
one of three types:
1. Job shops – Manufacturing operations designed for short
production runs of small quantities of items.
• Example: Machine shops.
2. Project manufacturing – Manufacturing operations used to
create unique but similar products.
• Example: Processing tax returns.
3. Repetitive manufacturing – Manufacturing operations designed
for long production runs of high-volume, standardized products.
• Example: The production of smartphones and apparel items.
• Continuous manufacturing – A form of repetitive manufacturing
with output that more closely resembles a product stream than
individual products.

21-2b The Operations Process
in a Manufacturing Business (slide 2 of 2)
• Most businesses do not implement a pure version of
any of these process types, but rather mix and match
them in order to gain the benefits of each.
• To meet the increasing market demands for unique
products that are low in price, many companies have
turned to flexible manufacturing systems.
• Flexible manufacturing systems – Manufacturing operations
that usually involve computer-controlled equipment that can
turn out products in smaller or more flexible quantities.
• In other words, machine automation can help cut manufacturing
costs while giving customers exactly what they want.
• Buyers will pay much more for products that are highly
customized.

21-2c Capacity Considerations
• A small company’s capacity to offer products
or services is a critical factor.
• It puts a ceiling on the firm’s ability to meet demand
and match competitors, but it may also determine
startup costs and usually represents a long-term
commitment.

21-2d Planning and Scheduling
(slide 1 of 2)
• Production planning and scheduling
procedures are designed to achieve the orderly
sequential flow of manufactured products
through a plant at a rate that matches
deliveries to customers.
• To reach this objective, the manufacturer must
avoid production disruptions and utilize machines
and personnel efficiently.
• Because service firms are closely tied to their
customers, they are limited in their ability to
produce services and hold them in inventory.

21-2d Planning and Scheduling
(slide 2 of 2)
• Part of the scheduling task for service firms
relates to planning employees’ working hours.
• To smooth out and delay investment in
additional capacity, companies are turning
increasingly to demand management
strategies.
• Demand management strategies – Operational
strategies used to stimulate customer demand
when it is normally low.
• Example: Early-bird dinner specials and lower-price tickets
for the afternoon showing of a movie.

21-3 INVENTORY MANAGEMENT
AND OPERATIONS
• Inventory management can help an
entrepreneur understand the vital balance
between two competing pressures in the
business:
1. Increasing inventory to satisfy customer demand.
2. Reducing inventory to maintain a healthy balance
sheet.

21.2 Service Level and Balance Sheet Considerations

21-3a Objectives of
Inventory Management
• The reasons for carrying inventory include the following:
• To meet customer demand.
• To be less dependent on a supplier.
• To protect against stockouts.
• To benefit from sales or quantity-based discounts.
• To protect against price increases.
• Ensuring continuous operations is particularly important in
manufacturing because delays caused by lack of materials or
parts can be costly.
• Sales can be maximized by completing production in a timely
manner and by stocking an appropriate assortment of
merchandise for distribution to wholesale establishments and
retail stores.
• Protecting inventory from theft, misplacement, and deterioration
contributes to operational efficiency and business profits.

21-3b Inventory Cost Control
(slide 1 of 3)
• Maintaining optimal inventory—the level that minimizes
stockouts and eliminates excess inventory—saves
money and contributes to operating profits.
• Methods of determining ideal inventory levels include
the following:
• Economic order quantity – An index that determines the
quantity to purchase in order to minimize total inventory costs.
• Statistical inventory control – A method of controlling
inventory that uses a targeted service level, allowing statistical
determination of the appropriate amount of inventory to carry.

(slide 2 of 3)
• Inventory comes with many other related costs, including:
• Storage (land and buildings, as well as shelving and organization
systems).
• Theft, weathering, spoilage, and obsolescence.
• Cost of capital (from tying up cash in inventory that could be better
used elsewhere).
• Transaction costs (from ordering, receiving, inspecting, transporting,
and distributing inventory).
• Insurance and security.
• Disposal costs (of inventory that cannot be sold).
ABC INVENTORY CLASSIFICATION
• ABC method – A system of classifying items in inventory by
dollar velocity.
Dollar velocity = Purchase price Annual quantity consumed


(slide 3 of 3)
JUST-IN-TIME INVENTORY SYSTEMS
• Just-in-time inventory system – A method of cutting inventory
carrying costs by making or buying what is needed just as it is
needed.
• With the just-in-time concept, inventory items are made or bought
in response to demand (pull), rather than in response to what is
planned or anticipated (push).
• This prevents the buildup of unnecessary inventory.
• The just-in-time method requires careful coordination with
suppliers and a flexible production system, with short set-up and
turnaround times.
• The benefits of just-in-time management include the following:
• Quality problems become evident sooner, which reduces waste.
• Storage space, insurance costs, and revolving credit are freed up for
other purposes.

21-3c Inventory
Recordkeeping Systems
• Inventory checks can be done in different ways.
• Physical inventory system – A method that
provides for periodic counting of items in inventory.
• Some firms have an annual shutdown to count
everything—a complete physical inventory—whereas other
firms use cycle counting.
• Cycle counting – A method for counting different segments
of the physical inventory at different times during the year.
• Perpetual inventory system – A method for
keeping an ongoing current record of inventory.
• Two-bin inventory system – A method of using two
containers for each item in inventory, one to meet
current demand and the other to meet future demand.

21-4 QUALITY AND
OPERATIONS MANAGEMENT
• Quality can be achieved only to the extent that
operations lead to the outcomes that
customers want.
• Following this logic, companies that fail to produce
quality in their operations will not have the buyers
they need to stay in business for long.

21-4a Quality as a
Competitive Tool
• Quality – The features of a product or service that
enable it to satisfy customers’ stated and implied needs.
• The operations process establishes the level of quality
as a product is being produced or a service is being
provided.
• Total quality management (TQM) – An all-
encompassing management approach to providing
high-quality products and services.
• Total quality management:
• Is customer driven (customer needs and wants are at the core).
• Emphasizes organizational commitment (management leads, but
the organization participates).
• Focuses on a culture of continuous improvement.

21-4b The Customer Focus of
Quality Management
• Customers have expectations regarding the quality of products
(such as durability and attractiveness) and services (such as
speed and accuracy).
• Thus, a company’s quality management efforts should begin with a
focus on meeting the expectations of customers who purchase its
products or services.
RETAIL IS DETAIL
• Paying careful attention to the details of a firm’s operations and
correcting any weaknesses helps ensure that customers get the
quality they expect.
CUSTOMER FEEDBACK
• Listening attentively to customers’ opinions can provide
information about their level of satisfaction.

21-4c “The Basic Seven”
Quality Tools
• Kaoru Ishikawa, the father of “quality circles,”
contended that 95 percent of a typical company’s
quality problems can be solved by the following seven
tools:
1. Cause-and-effect diagram.
2. Check sheet.
3. Control chart.
4. Histogram.
5. Pareto chart.
6. Scatter diagram.
7. Flow chart.

21-4d Quality Inspection
Versus Poka-Yoke
• Inspection – The examination of a part or a product to
determine whether it meets quality standards.
• Because inspection occurs after faulty goods or inadequate
services have been created or offered for sale, considerable
resources have already been consumed in a company’s
operations, but with nothing of quality to show for it.
• This can lead to internal costs (repair, inspection, and prevention)
and external costs (the loss of reputation and repeat customers).
• The savings associated with getting quality right more
than offset the cost of a total quality management
program.
• Poka-yoke – A proactive approach to quality
management that seeks to mistake-proof a firm’s
operations.

21-4e Statistical Methods
of Quality Control
• The use of statistical methods and control charts often
can make controlling product and service quality
easier, less expensive, and more effective.
• Acceptance sampling – The measurement of random
samples of products against predetermined standards to
determine the acceptability of an entire lot.
• The use of statistical analysis makes it possible to establish
tolerance limits that allow for inherent variation due to chance.
• Control charts graphically show the limit for the process being
controlled and may be used for either attribute or variable
inspections.
• 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.

21-4f International Certification
for Quality Management
• A firm can obtain international recognition of its quality management
program by meeting a series of standards, known as ISO 9000.
• ISO 9000 – The standards governing international certification of a
firm’s quality management procedures.
• The certification process requires full documentation of a firm’s
quality management procedures, as well as an audit to ensure that
the firm is operating in accordance with those procedures.
• Buyers in other countries view this certification as an indicator of
supplier reliability.
• Some large U.S. corporations require their domestic suppliers to
conform to these standards.
• I S O 14001 certification reflects how efficiently companies have
set up and improved their operations processes in order to control
the impact of vehicle and smokestack emissions, noise, and other
fallout on air, water, and soil.

21-4g Quality Management
in Service Businesses
• Although it is easier to measure the quality of
products, effective methods for measuring the
quality of services can also be devised.

21-5 PURCHASING POLICIES
AND PRACTICES
• Although its role varies with the type of
business, purchasing constitutes a key part of
operations management for most small
businesses.
• Through purchasing, firms obtain materials,
merchandise, equipment, and services to meet
production and marketing goals.

21-5a The Importance
of Purchasing (slide 1 of 6)
• The quality of a finished product depends on the quality of the raw
materials used.
• Purchasing contributes to profitable operations by ensuring that
goods are delivered when they are needed.
• Purchasing practices that seek out the best prices can have a
major impact on the financial health of a business.
MAKE OR BUY?
• Make-or-buy decisions – A choice that companies must make
when they have the option of making or buying component parts
for products they produce, or the option of purchasing necessary
services or providing them in-house.

• Some reasons for making component parts, rather the buying
them, follow:
• More complete utilization of plant capacity permits more economical
production.
• Supplies are assured, with fewer delays caused by design changes
or difficulties with outside suppliers.
• A secret design may be protected.
• Expenses are reduced by an amount equivalent to transportation
costs and the outside supplier’s selling expense and profit.
• Closer coordination and control of the total production process may
facilitate operations scheduling and control.
• Parts produced internally may be of higher quality than those
available from outside suppliers.

• Reasons for buying component parts, rather than making them,
include the following:
• An outside supplier’s part may be cheaper because the supplier
specializes in the production of that particular part.
• Additional space, equipment, personnel skills, and working capital are
not needed.
• Less-diversified managerial experience and skills are required.
• Greater flexibility is provided, especially in the manufacture of a
seasonal item.
• In-plant operations can concentrate on the firm’s specialty—finished
products and services.
• The risk of equipment obsolescence is transferred to outsiders.
• The decision to make or buy should be based on long-run cost
and profit optimization because it can be expensive to reverse.

OUTSOURCING
• Outsourcing – Contracting with a third party to take on and
manage one or more of a firm’s functions.
• Companies can sometimes save money by outsourcing to
suppliers specializing in a particular type of work.
COOPS AND THE INTERNET
• Cooperative purchasing organizations (coops) – An
organization in which small businesses combine their demand for
products or services in order to negotiate as a group with
suppliers.
• The Internet provides small business owners with connections to
hundreds of suppliers.

DIVERSIFICATION OF SUPPLY
• Small businesses often must decide whether it is better to use
more than one supplier or diversify purchases from suppliers.
• A small company might concentrate purchases with one supplier
for any of the following reasons:
• A particular supplier may be superior in its product quality.
• Larger orders may qualify for quantity discounts.
• Orders may be so small that it is impractical to divide them among
several suppliers.
• The purchasing business may, as a good customer, qualify for
prompt treatment of rush orders and receive management advice,
market information, and flexible financial terms in times of crisis.
• The franchise contract might require purchasing from the franchisor.

• The following reasons favor diversifying rather than concentrating
sources of supply:
• Shopping among suppliers allows a company to locate the best
source in terms of price, quality, and service.
• A supplier, knowing that competitors are getting some of its business,
may provide better prices and service.
• Diversifying supply sources provides insurance against interruptions
caused by strikes, fires, or similar problems with individual suppliers.

21-5b Measuring Supplier
Performance (slide 1 of 2)
• Supply Chain Operations Reference (SCOR)
model – A list of critical factors that help in
assessing a supplier’s performance.
• Five critical factors stand out:
1. Reliability.
• The supplier should provide what the firm needs and fill
orders accurately.
2. Responsiveness.
• The supplier should deliver inputs when they are needed.
3. Agility.
• The supplier should respond quickly to changes in orders.

21-5b Measuring Supplier
Performance (slide 2 of 2)
4. Costs.
• The supplier should help control the firm’s cost of goods
sold, total supply chain management costs, and
warranty/returns costs.
5. Assets.
• The supplier should help the firm improve efficiencies by
shortening the cash cycle, inventory holding time, and
demand on assets.

21-5c Building Good
Relationships with Suppliers
• Good relationships with suppliers are essential for small
businesses.
• To implement a policy of fair play and to cultivate good relations
with suppliers, a small business should try to observe the
following purchasing practices:
• Pay bills promptly.
• Give sales representatives a timely and courteous hearing.
• Minimize abrupt cancellation of orders merely to gain a temporary
advantage.
• Avoid attempts to browbeat a supplier into special concessions or
unusual discounts.
• Cooperate with the supplier by making suggestions for product
improvements and/or cost reductions, whenever possible.
• Provide courteous, reasonable explanations when rejecting bids, and
make fair adjustments in the case of disputes.

21-5d Forming Strategic Alliances
• Some small firms have found it advantageous
to develop strategic alliances with suppliers.
• Partners should be chosen carefully.
• The firm should look first at companies with which it
already has a relationship, such as a faithful
supplier or distributor.
• The firm should then make sure that they offer a
right fit, are trustworthy, and have track records of
true performance.

21-5e Forecasting Supply Needs
• Forecasting can help with understanding
where the business is going and the level of
resources—from personnel to capital funding—
that will be required.
• Associative forecasting – Forecasting that
considers a variety of variables to determine
expected sales.

21-5f Using Information Systems
• In recent years, small firms have greatly improved
operational efficiency by using computers, new
business software, and Internet links with suppliers
and customers.
• Tedious, paper-based processes for tracking orders,
work in process, and inventory have been replaced by
simplified and accelerated computer-based processes.
• Information systems options and other tech-based
tools available to small companies keep getting better,
more powerful, and less expensive.

21-6 LEAN PRODUCTION AND
SYNCHRONOUS MANAGEMENT
• With a focus on eliminating waste, lean
production and synchronous management
have made their mark on both large and small
companies.

21-6a Lean Production
• Lean production – An approach that emphasizes efficiency
through elimination of all forms of waste in a company’s
operations.
• Waste is defined as “anything other than the minimum amount of
equipment, materials, parts, space, and workers’ time, which are
absolutely essential for adding value to the product.”
• The goal of lean production is to use the minimum amount of
resources necessary to achieve a total bundle of satisfaction for
the customer.
• Maintaining a very low amount of inventory can lead to a variety of
benefits, ranging from capital efficiency to a smooth production
process.
• More and more small businesses are using robots to handle a
wide range of unbearably tedious and unpleasant tasks, and with
greater precision and fewer errors than human beings.

21-6b Synchronous Management
(slide 1 of 2)
• Synchronous management – An approach that
recognizes the interdependence of assets and
activities and manages them to optimize the entire
company’s performance.
• This approach presumes that the goal of the
organization, and the definition of performance that
flows from it, is known and influences all decision
making.
• It requires an understanding of how a shift in one area
of operations can affect the rest of the organization—
that is, it provides insight regarding interrelationships
between assets, changes in activities, and
achievement of the firm’s goals.

21-6b Synchronous Management
(slide 2 of 2)
• Identifying bottlenecks is imperative to making
synchronous management work.
• Bottlenecks – Any point in the operations process
where limited capacity reduces the production
capability of an entire chain of activities.
• Constraint – The most restrictive of bottlenecks,
determining the capacity of the entire system.

21.3 Avoiding Bottlenecks and Constraints
Add Capacity • Expand resources.
• Subdivide the work.
• Outsource production to a company 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 (slide 1 of 2)
ABC method
acceptance sampling
associative forecasting
attributes
bottleneck
constraint
continuous manufacturing
cooperative purchasing
organization (coop)
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 decision
operations
operations management
outsourcing
perpetual inventory system
physical inventory system
poka-yoke
project manufacturing

Key Terms (slide 2 of 2)
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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