Entrepreneurship and smaill business management chapter 17

Entrepreneurship and
Small Business
Management
Chapter 17
Operating for Success


Ch. 17 Performance
Objectives
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Understand the significance of
operations in a business.
Develop a production-distribution chain
for your business.
Manage suppliers and inventory.
Explore the idea-to-product process.
Ensure product quality.
Use technology to benefit your business.

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Operations
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Operations is a set of actions that produce
goods and services, allowing businesses to
deliver on promises.
Inputs (materials, data, funds, etc.) are
converted into outputs (products, services).
The steps required depend on the specific
industry and business.
Operating efficiency is critical to business
success.

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Review of Types of
Businesses
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Manufacturing
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Wholesale
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Buys products from manufacturers in bulk
Sells smaller quantities to retailers

Retail
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Makes tangible products
Rarely sells direct to consumers

Buys products from wholesalers
Sells individual items to consumers

Service
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Sells time, skills, or expertise
Serves other businesses and/or consumers

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Production-Distribution Chain
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Manufacturer sells in bulk to…
Wholesaler who sells in quantities to…
Retailer who sells single pieces to…
Consumer

Each link along the chain marks up the price.

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Supply Chain Management
(SCM)
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Management of sourcing, procurement,
production, and logistics across multiple
intermediate steps in order to go from
raw materials to end consumers
Creates and maintains efficient supply
flows by addressing models and
relations
Partners work together to use tools and
techniques for increased efficiency.

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Sources of Suppliers
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Trade shows or conferences
Trade catalogs or journals
The Yellow Pages
Internet search engines
Wholesale supply houses and brokers
Newspapers and magazines
Competitors
Firms like yours, outside your trading area
Sales representatives

Customers

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Managing Inventory
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Visual control—inspect inventory on
hand; reorder stock when levels appear low

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Safety stock and reorder point (ROP)
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Safety stock—amounts of inventory, raw
materials, or work-in-progress kept in order to
meet customer demand
ROP—level at which materials need reordered

ROP = (avg. demand per unit of lead time x lead time) +

safety stock

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Managing Inventory
(continued)
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Economic order quantity (EOQ)—
amount of inventory that will equal the
minimum total ordering and holding costs
EOQ = √ 2DO
C
The square root of:
(2 x annual demand in units x ordering
cost per order) ÷ carrying cost per unit

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A Purchasing Plan Includes:
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When orders should be placed to have
products as promised
An estimate of when the product will
reach its peak to know when
replacement orders need to be in place
When to stop ordering a product and
drop it from production
The end date for stocking particular
inventory

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Factors to Consider When
Selecting Suppliers
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Product conformance to quality standards
Certification
Timely delivery
Lead times
Minimum-order quantities
Extension of trade credit
Value added (training, promotion, leads)
Flexibility and responsiveness

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Idea-to-Product Process
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A manufacturer can make every piece
of its own product or have parts or subassemblies made by suppliers.
Many companies:
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Make the most important or complex parts
of their products, but purchase minor ones
Do the final assembly, regardless of who
makes the parts

Job shops (“jobbers”)—suppliers or
subcontractors for other manufacturers

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Idea-to-Product Process
(continued)
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Whether a company makes its own product
or has parts made by suppliers, it controls
the design and how the product is made:
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Drawings and specifications—diagrams
explaining how to make the product
Parts and materials lists—materials needed
and where to get them
Prototype—working sample of the product
Tooling—making/adapting equipment to
produce the product
Setup—setting up equipment, workers, etc.
each time a “lot” (batch) of product is made

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Just in Time (JIT)
Manufacturing
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Excess inventory creates multi-million-dollar
losses each year.
JIT does not waste materials, labor, shipping, or
warehousing on products that might not be sold.
JIT focuses on making the smallest amount of
product needed, quickly and efficiently.
Principles:
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Run the smallest lots feasible.

Reduce setup time/cost to the bare minimum.
Schedule production so products are finished “just in
time” to ship.
Stay flexible.

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Quality
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Broadly-used concept with multiple
definitions, such as determining
degrees of excellence and conforming
to specifications or standards

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Largely defined by your market
positioning strategy

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Profits follow quality (W. Edwards

Deming)

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Organization-Wide
Quality Initiatives
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Benchmarking

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ISO 9000

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Six Sigma

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Total Quality Management (TQM)

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Malcolm Baldrige Award

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Benchmarking
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Comparison of your company’s
performance against:
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Other companies in your industry
Best practices, standards, or certification
criteria

Examples:
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Compare your financial ratios to industry levels.
Use market research to create a list of criteria
important to your customers, and then compare
how well your company “measures up.”

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ISO 9000
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Standards for quality management systems
established by the International Organization for
Standardization (ISO)

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Certified by independent companies which
document the use of consistent business
procedures, and indicate an organization has
been independently audited for compliance

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Organizations sometimes market their ISO
certification as a mark of excellence, although it
is not a guarantee of compliance with
standards.

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ISO 9000 Quality Management
Principles for Organizational
Improvement
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Customer focus
Leadership
Involvement of people
Process approach

System approach to management
Continual improvement
Factual approach to decision making
Mutually beneficial supplier relationships

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Six Sigma
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Rigorous process-improvement program that
originated in 1980s by Motorola engineers
Uses statistical methods to eliminate defects
with a 99.9997% success rate
Two submethodologies:
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DMAIC (define, measure, analyze, improve, control)
for enhancing existing production
DMADV (define, measure, analyze, design, verify)
for supporting new procedures and products

May be too overwhelming for a new enterprise

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Total Quality Management
(TQM)
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Developed in the 1950s with goal of achieving
strategic advantage through quality

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Based on concept of continuous improvement—
ongoing effort to identify and implement changes
throughout the organization

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Involves constant monitoring and improvement of
processes through measures of quality, such as:
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Complying with product specifications and operating standards
Volume of production
On-time delivery
Repeat rates

Requires commitment of all employees to be
successful

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Malcolm Baldrige Award

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A competitive process, established by the U.S.
Congress, that recognizes quality management

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Administered by the National Institute of
Standards and Technology (NIST)

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Organizations are judged in the areas of:
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Leadership
Strategic planning
Customer and market focus
Measurement, analysis, and knowledge management
Human resources focus
Process management
Business results

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Use Technology to Your
Advantage
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Invest in a computer.

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Capture the potential of the telephone.

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Identify market-specific software and
technology.

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“Open” an electronic storefront (Web
site).

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