Entrepreneurship and Small Business Management Chapter 17 Operating

Entrepreneurship and Small Business Management Chapter 17 Operating for Success

Ch. 17 Performance Objectives n n n 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. Entrepreneurship and Small Business Management, 1/e 2 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Operations n n 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. Entrepreneurship and Small Business Management, 1/e 3 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Review of Types of Businesses n Manufacturing n n n Wholesale n n n Buys products from manufacturers in bulk Sells smaller quantities to retailers Retail n n n Makes tangible products Rarely sells direct to consumers Buys products from wholesalers Sells individual items to consumers Service n n Sells time, skills, or expertise Serves other businesses and/or consumers Entrepreneurship and Small Business Management, 1/e 4 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Production-Distribution Chain n n 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. Entrepreneurship and Small Business Management, 1/e 5 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Supply Chain Management (SCM) n n n 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. Entrepreneurship and Small Business Management, 1/e 6 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Sources of Suppliers n n n n n 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 Entrepreneurship and Small Business Management, 1/e 7 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Managing Inventory n n Visual control—inspect inventory on hand; reorder stock when levels appear low Safety stock and reorder point (ROP) n n 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 Entrepreneurship and Small Business Management, 1/e 8 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Managing Inventory (continued) n Economic order quantity (EOQ)—amount of inventory that will equal the minimum total ordering and holding costs EOQ = √ 2 DO C The square root of: (2 x annual demand in units x ordering cost per order) ÷ carrying cost per unit Entrepreneurship and Small Business Management, 1/e 9 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

A Purchasing Plan Includes: n n 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 Entrepreneurship and Small Business Management, 1/e 10 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Factors to Consider When Selecting Suppliers n n n n 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 Entrepreneurship and Small Business Management, 1/e 11 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Idea-to-Product Process n n A manufacturer can make every piece of its own product or have parts or sub-assemblies made by suppliers. Many companies: n n n 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 Entrepreneurship and Small Business Management, 1/e 12 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Idea-to-Product Process (continued) n Whether a company makes its own product or has parts made by suppliers, it controls the design and how the product is made: n n n 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 Entrepreneurship and Small Business Management, 1/e 13 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Just in Time (JIT) Manufacturing n n 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: n n 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. Entrepreneurship and Small Business Management, 1/e 14 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Quality n n n Broadly-used concept with multiple definitions, such as determining degrees of excellence and conforming to specifications or standards Largely defined by your market positioning strategy Profits follow quality (W. Edwards Deming) Entrepreneurship and Small Business Management, 1/e 15 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Organization-Wide Quality Initiatives n Benchmarking n ISO 9000 n Six Sigma n Total Quality Management (TQM) n Malcolm Baldrige Award Entrepreneurship and Small Business Management, 1/e 16 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Benchmarking n Comparison of your company’s performance against: n n n Other companies in your industry Best practices, standards, or certification criteria Examples: n n 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. ” Entrepreneurship and Small Business Management, 1/e 17 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

ISO 9000 n n n Standards for quality management systems established by the International Organization for Standardization (ISO) Certified by independent companies which document the use of consistent business procedures, and indicate an organization has been independently audited for compliance Organizations sometimes market their ISO certification as a mark of excellence, although it is not a guarantee of compliance with standards. Entrepreneurship and Small Business Management, 1/e 18 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

ISO 9000 Quality Management Principles for Organizational Improvement n n n n Customer focus Leadership Involvement of people Process approach System approach to management Continual improvement Factual approach to decision making Mutually beneficial supplier relationships Entrepreneurship and Small Business Management, 1/e 19 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Six Sigma n n n Rigorous process-improvement program that originated in 1980 s by Motorola engineers Uses statistical methods to eliminate defects with a 99. 9997% success rate Two submethodologies: n n n 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 Entrepreneurship and Small Business Management, 1/e 20 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Total Quality Management (TQM) n n n Developed in the 1950 s with goal of achieving strategic advantage through quality Based on concept of continuous improvement— ongoing effort to identify and implement changes throughout the organization Involves constant monitoring and improvement of processes through measures of quality, such as: n n n Complying with product specifications and operating standards Volume of production On-time delivery Repeat rates Requires commitment of all employees to be successful Entrepreneurship and Small Business Management, 1/e 21 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Malcolm Baldrige Award n A competitive process, established by the U. S. Congress, that recognizes quality management n Administered by the National Institute of Standards and Technology (NIST) n Organizations are judged in the areas of: n n n n Leadership Strategic planning Customer and market focus Measurement, analysis, and knowledge management Human resources focus Process management Business results Entrepreneurship and Small Business Management, 1/e 22 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Use Technology to Your Advantage n Invest in a computer. n Capture the potential of the telephone. n n Identify market-specific software and technology. “Open” an electronic storefront (Web site). Entrepreneurship and Small Business Management, 1/e 23 © 2012 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.