1. Understand how operations enhance a small
company’s competitiveness.
2. Discuss the nature of the operations process for both
products and services.
3. Identify ways to control inventory and minimize inventory costs.
4. Recognize the contributions of operations management to product
and service quality.
5. Explain the importance of purchasing and the nature of key
purchasing policies.
6. Describe lean production and synchronous management, and
discuss their importance to operations management in small firms.
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21–2
Competing with Operations
• Operations
 The processes used to create and deliver a good or
service (value) to customers.
• Operations Management
 The planning and control of a conversion process that
includes turning inputs into outputs (products and/or
services) that customers desire.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–3
Competing with Operations (cont’d)
• Important Questions about Operations Factors:
 How much flexibility is required to satisfy customers
over time?
 What is customer demand today? for the future? Can
facilities and equipment keep up with demand?
 What options are available for satisfying customers?
 What skills or capabilities set the firm apart from its
competitors such that the firm can best take
advantage of these distinctive features in the market?
 Does the competitive environment require certain
capabilities that the enterprise lacks?
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–4
The Operations Process
• 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 is more easily measured in
manufacturing than service operations.

Quality is more difficult and control to establish in service than
manufacturing operations.

Customers are more involved in service than manufacturing
operations and can influence the quality of service.

Technology can enable customers to provide more of their
own services.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–5
21.1
The Operations Processes (Input → Processes → Output)
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–6
Types of Manufacturing Operations
Repetitive
(or Continuous)
Manufacturing
Job Shop
Types of
Manufacturing
Operations
Project
Manufacturing
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Flexible
Manufacturing
21–7
The Operations Process (cont’d)
• Capacity Considerations
 Capacity limits firm’s ability to meet demand
 Capacity determines startup (fixed) costs
 Ability to adjust capacity differs among firms
• Planning and Scheduling
 Involves attempting to achieve the orderly, sequential
flow of products or services to market.
 Is critical in service industry operations
 Incorporates demand management strategies to
stimulate customer demand when it is normally low.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–8
Inventory Management and Operations
• Objectives of Inventory Management
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–9
21.2
Service Level and Balance Sheet Considerations
Balancing inventory to support customer demand and
balance sheet concerns is critical for a healthy business.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–10
Inventory Management Costs
Storage space and
warehousing systems
Theft, weathering,
spoilage, and
obsolescence
Cost of idle
capital invested
in inventory
Transaction costs for
managing inventory
Insurance and
security
Disposal costs for
unsalable
inventory
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–11
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
Total
inventory = carrying
costs
costs
Total
+ ordering
costs
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–12
Economic Order Quantity (Graphic)
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21–13
Inventory Management and Operations
(cont’d)
• ABC Inventory Classification
 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
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–14
Inventory Management and Operations
(cont’d)
• Just-In-Time Inventory (JIT) System
 A demand (pull) method of reducing inventory level to
an absolute minimum.

New inventory 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
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–15
Inventory Record-Keeping Systems
• Physical Inventory System
 Provides for periodic counting of items in inventory.
• Cycle Counting
 Counts different segments of the physical inventory at different
times during the year.
• Perpetual Inventory
 Keeps a running record of inventory that does not require a
physical count except to ensure the accuracy of the system.
• Two-bin Inventory System
 A method of inventory control based on use of two containers for
each item in inventory: one to meet current demand and the
other to meet future demand.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–16
Operations Management and Quality
• 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 all-encompassing management approach to
providing superior, high-quality products and services.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–17
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.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–18
Essential Features of Successful Quality Management
Customer
Driven
Organizational
Commitment
Culture of Continuous
Improvement
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–19
The 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.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–20
“The Basic Seven” Quality Tools
Cause-and-Effect
Diagram
Control
Chart
Check
Sheet
Solving
Quality
Problems
Histogram
Scatter
Diagram
Pareto
Chart
Flow
Chart
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–21
Quality Assurance Using Inspection
versus Poka-Yoke
• The Inspection Process
 The examination of a product to determine
whether it meets quality standards.
 Occurs after the fact—the defective
good has already been produced.
• Poka-Yoke
 A proactive approach to quality management that
seeks to mistake-proof a firm’s operations, thus
avoiding problems and waste before they can occur.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–22
Statistical Methods of Quality Control
• Acceptance Sampling
 The use of a random, representative portion to
determine the acceptability of an entire lot.
• 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.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–23
Statistical Methods of Quality Control
(cont’d)
• 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.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–24
International Certification
for Quality Management
• ISO 9000
 The standards governing international certification of
a firm’s quality management procedures.

Documents compliance of the firm’s operations with
its quality management procedures.

Serves as an indicator of supplier
reliability to its customers.

Is a requirement before
becoming a supplier
to larger U.S. and
overseas firms.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–25
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.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–26
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.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–27
Purchasing Policies and Practices (cont’d)
• Make-or-Buy Decisions
 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
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–28
Purchasing Policies and Practices (cont’d)
• Make or Buy Decisions (cont’d)
 Reasons for Buying:

Outside supplier is cheaper and/or higher quality

Investment savings on space, personnel, equipment

Less diversified managerial experience and skills required

Greater flexibility in matching supply and demand

Increased focus on production of core products/services

Risk of obsolescence transferred to outsiders
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–29
Purchasing Policies and Practices (cont’d)
• Outsourcing
 Contracting with a third party to take on and manage
one or more of a firm’s functions that are outside
the firm’s area of competitive advantage.
• Cooperative Purchasing Organization (COOP)
 Small businesses combine demand for products or
services to negotiate as a group with suppliers.

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.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–30
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
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–31
Purchasing Policies and Practices (cont’d)
• Measuring Supplier Performance
 Supply Chain Operations Reference (SCOR) model

A list of critical factors that provides a helpful starting place
when assessing a supplier’s performance.
 SCOR Model Supplier Attributes

Reliability

Responsiveness

Flexibility

Cost

Asset efficiency
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–32
Purchasing Policies and Practices (cont’d)
• Building Good Relationships with Suppliers
 Pay bills promptly.
 Give sales reps 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 cost reductions.
 Provide explanations when rejecting bids, and make
fair adjustments in the case of disputes.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–33
Purchasing Policies and Practices (cont’d)
• Forming Strategic Alliances with Suppliers
 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
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–34
Purchasing Policies and Practices (cont’d)
• Forecasting Supply Needs
 Associative forecasting

Considers a variety of variables to determine expected sales.
• Using Information Systems
 Increases operational efficiencies by reducing
inventory management, ordering, payment collection,
and personnel costs.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–35
Lean Production
• Lean Production
 Emphasizes efficiency by eliminating waste in a firm’s
operations—using minimum resources to satisfy the
greatest customer wants and needs.

Defects are costly because they must be repaired or scrapped.

Overproduction must be stored and may never be sold.

Transportation is minimized by locating close to suppliers and
customers.

Waiting can be wasteful because resources are idle.

Inventory above the minimum is unproductive and costly.

Motion by product, people, or machinery can be wasteful.

Processing itself is wasteful if it is not productive.
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21–36
Synchronous Management
• Synchronous Management
 An approach that recognizes the interdependence of
assets and activities and manages them to optimize
the entire firm’s performance.
• Bottleneck
 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.
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21–37
21.3
Avoiding Bottlenecks and Constraints
Add Capacity
• Expand resources.
• Subdivide the work.
• Outsource production to a firm 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).
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–38
Key Terms
ABC method
acceptance sampling
associative forecasting
attributes
bottleneck
constraint
continuous manufacturing
cooperative purchasing organization
cycle counting
demand management strategies
economic order quantity flexible
manufacturing systems
inspection
ISO 9000
job shops
just-in-time inventory system
make-or-buy decisions
operations
operations management
outsourcing
perpetual inventory system
physical inventory system
poka-yoke
project manufacturing
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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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21–39