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OK, we're going to talk a little bit about managing
operations now, Chapter 21.
So let's get into that.
There's quite a lengthy discussion.
The interesting thing about operations are that it's much
more complicated than what most people realize.
It can be the crux of your business.
And your ability to manage operations, whether it be a
small retail operation or a large manufacturing operation,
the understanding of the details of your operation and
how you can manage those operations is really a
challenge for every company.
So what are operations?
That's the processes you use to create and deliver a good
or service to customers, a value to your customers.
Operations management then is the planning and control of a
conversion process that includes
turning inputs into outputs.
The outputs being products and/or services
that customers desire.
So operations management is the planning and control,
basically, of the process of converting inputs into
outputs, those outputs being the products and/or services
that your customers want.
So remember these definitions.
So if I'm trying to understand the operations of my company,
then I need to ask myself some questions.
And here's some samples of questions that
you could ask yourself.
How much flexibility is required to satisfy
customers over time?
What is my customer demand today and what will it be
tomorrow and for the future?
And can my facilities and equipment
keep up with my demand?
What options are available for satisfying my customers?
And the derivative of this question would be, am I
employing the best options or most efficient options I can
to satisfy my 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?
Am I missing something in order to compete better in the
market in which I'm playing?
All of these questions are good questions to ask
yourself, even though your company may be operating well
for the moment.
Even though you may be making a profit for the moment.
There's always room for improvement and to become more
efficient in your operation.
So the process is important, whether you're managing
products or whether you're managing services.
Now in this case, products are tangible, services are
intangible.
We'll talk about this some more as we move through this
lecture today too.
Manufacturing can produce goods for inventory.
Service operations cannot store or bank services.
So basically in manufacturing my product, I
can save, I can store.
In service industry, the intangible industry, I can't
store services.
I have to be able to deliver them when I have
them ready to go.
Productivity and quality is more easily measured in
manufacturing.
No question about it.
Whenever I'm trying to measure my productivity in a
manufacturing operation, it's much easier to measure than a
service operation.
Quality is more difficult to control and establish in
service than in manufacturing operations.
Very, very true.
Because where I have a product--
in this case a service--
that's sometimes difficult to define in the first place, how
can I possibly define how I'm going to manage quality in
that service?
What is quality in a service?
You have to first define that.
Customers are more involved in service than manufacturing
operations.
That's exactly true.
In a manufacturing operation, my customer is involved at the
product side.
In a service operation, sometimes my customer's
involved in defining the service.
And so the customer has a tendency to be involved
throughout the entire process.
And technology can enable customers to provide more of
their own services.
If you don't believe this, then talk to some of the
traditional phone companies nowadays, and some of the
folks who traditionally have operated with
walk-up type services.
It's changing across the board.
In fact, sometimes it's hard for you and I to
keep up with it.
So let's look at operations processes.
Now remember, we said that operations is the process of
converting inputs into outputs.
So operations are defined by the process.
So let's look here at some couple examples.
On the left hand side is a bakery.
And interestingly enough, I have, in one of my Management
308 sections, I have a team that's writing a business plan
on a bakery this semester.
So this pertains to them.
The inputs to the bakery are the flour and the ingredients,
and then the labor and the ovens and the energy that goes
into that and any other equipment I use, all my
facilities, any workers, and any skills that they use.
Those are all inputs.
The processes then involve the handling and mixing of the
ingredients in the baking products, storing the finished
products, baking the products, shipping the products to
distributors.
All of those are my processes.
That last one by the way, is really important, the shipping
of products.
And so, what are the outputs?
Well, in case of a bakery, it's just baked products that
satisfy my customers.
And typically they have--
not always true-- but they have very short shelf lives.
On the services side here, the example's a dry cleaner.
It's probably not the best service example I could think
of, but the text uses this is an example.
A dry cleaner, the inputs are your or my dirty clothing, any
chemicals and cleaners that I have to have to clean those
clothes, any hangers to hang them up on, plastic bags,
equipment that allows me to hang clothes on hangers and
put bags on them, any storefront operations I need,
the equipment that I need in the back room, any workers and
skills that they need.
Those are all part of the inputs in a
dry cleaning business.
The process is I have a basically retail transaction.
The customer walks up and leaves dirty
clothes, I write it down.
I do what they ask me to do.
Spot cleaning, spot treating, or dry
cleaning or washing, whatever.
And then pressing and ironing and packaging and getting it
ready to deliver to the customer,
that's all part of processes.
And the outputs then are clean and pressed clothing and
satisfied customers.
So you can see here that in the services example, it's
just a little bit different in this specific
example than the bakery.
I would tell you that a better example here for services
would be a professional company.
Let's say an accounting company or a law firm or some
other consulting company.
Then you would have a different set of inputs, and
then you would have a different set of processes
that go on with them within that service.
And customers all involved in here.
And then the output would be a customer acceptable report or
a set of specifications or whatever the particular output
might be, a software program, whatever that output might be.
So we could use a little bit better example
on the service side.
But you get the gist here.
It's inputs being converting into outputs.
That's the operation,
converting inputs into outputs.
It could be either product or service.
So always there are capacity considerations, whether I have
a service company or a manufacturing company.
My capacity limits what I can turn out, how much I can
produce, how much services I can offer.
It just limits.
I have planning and scheduling considerations I have to think
about on the operations process.
How do I achieve an orderly and sequential flow of
products or services through my operations?
The planning and scheduling is critical for service
operations.
Let me just give you an example.
I have a consulting company.
I have a client who's awarded me a large contract to do a
study for him or to generate a master plan or to do whatever.
And then I have another client that comes in that needs
another equivalent type job done.
But I'm already stretched with the number of employees that I
have to do this first job.
And so immediately I've got a planning
and scheduling problem.
And so in order to do the second job, I'm going to have
to put that second customer off a little bit further down
the schedule calendar wise.
And so then I need to look at various strategies to
accomplish demand.
How do I manage demand?
And how do I stimulate customer demand when it's low?
In other words, how do I get customers to walk in my front
door or to contact me and get me to do a job for them?
So demand is an issue always on an operation, whether it be
manufacturing or service.
Now inventory.
And in manufacturing operation, it's critical.
And we have all kinds of things to think about in
inventory management.
We have to think about how do we keep a continuous
operation going on?
Well, one way you keep a continuous operation going on
is you have the inventory there to
support that operation.
Well, how do you maximize sales?
Well again, inventory management's
critical for that as well.
How do you protect that inventory, because inventory
now becomes an asset.
Once I'm buying the inventory, I've got to store that
inventory, I've got to put it somewhere, I've
got to protect it.
And then of course, I've got to optimize my
investment in inventory.
I do not want inventory sitting around for a long time
not being used, because that's dollars sitting around not
being used.
So inventory management always becomes an issue for smaller
companies, whether it be a service company or a
manufacturing company.
This diagram is a pretty simple diagram to see.
If I've got my seesaw here in the situation that you see,
where service level is very low, then I'd like to satisfy
more customers and so I'm going to lower that balance
sheet down a little bit where I can get my service level up.
Or another way to look at is if my service level is in good
shape where I can satisfy more customers, then my balance
sheet is going to be a little bit different than what
I want it to be.
Because when I buy inventory, that inventory goes on to the
asset side of my balance sheet.
And it tends to impact other areas of the balance sheet
when I do that.
So there's kind of a balancing act, no pun intended here,
where I've got to be able to provide service but I've got
to try to minimize the investment in inventory that's
not being used.
And you can see here from this diagram alone, what the
advantage of just-in-time inventory control is, or
just-in-time manufacturing.
Just-in-time manufacturing says, I really don't have any
inventory because all of my parts, all of my supplies that
go into the manufacturing process show up at exactly the
right moment and they're not stored.
So they never become an asset that's sitting
in a warehouse somewhere.
They go straight into the production line,
straight into a product.
That's the whole concept is to optimize this issue of
inventory management.
So what are the cost components of inventory
management?
Well, storage and space and warehouses is, and theft and
loss is, and just the cost of inventory that's just sitting
around not being used, or inventory that's become
outdated and can't be used.
So those are all costs.
The cost that's incurred just for managing inventory.
I have to be able to move it around a warehouse.
I've got to be able to go get and get it ready to go.
I've got to be able to cycle through and get rid of the
inventory that's not damaged or not good anymore.
I have to have insurance and security to
manage and protect it.
And then I have to get rid of inventory that's gotten old
and can't be used anymore.
So there's a lot of costs.
That's the story of this chart.
There's a lot of costs that go into managing inventory that
we don't think about sometimes.
So let's look at one way to look at cost.
And this is called the economic order quantity.
It's kind of a principle that most of you've seen before.
So what this principle says is that the total inventory cost
is equal to the total carrying cost plus the
total ordering cost.
And that truly is the total inventory cost.
How much does it cost to buy it plus how much does it cost
to keep it before we ship it?
So once I look at that, then I'm gonna say well, I want
keep my total inventory cost as low as I possibly can.
So I want to optimize that equation.
So to do that then, I'll look at the EOQ curve, the economic
order quantity curve.
Well remember, it consists of two elements, the ordering
costs and the carrying costs.
And carrying costs go up linearly as I increase the
amount of inventory that I have.
And then of course, ordering costs go down as I increase my
order quantity.
And so I've got these two factors playing
against each other.
And if I plot out the sum of those, I get this red line
right here.
And so what I'm gonna do to minimize my costs, I'm gonna
try to hit the bottom or the minimum point on this curve
right here, and that's going to be my economic order cost.
And that's where these two lines cross each other right
there, the intersection point.
That's my economic ordering cost.
That's my lowest cost for buying inventory.
Now every company that buys inventory, so a manufacturing
type company, has an inventory classification system.
This is what the authors call the ABC system.
Not every company uses this, but every company that uses a
lot of inventory has some way of
classifying their inventory.
And so in this case here, Category A is the inventory
that requires real close control.
It's high dollar item inventory or it's inventory
that has to be specially cared for, or has some other thing
affiliated with it that drives it.
Typically, it'll be a high value item.
Category B are those lesser value items that are of
secondary importance.
Doesn't require a lot of cost to keep control of those.
And then Category C are those items that you
just use all the time.
And every company has those items.
Nuts, bolts, screws, you name them.
All those little things that you use in a manufacturing
operation that you use all the time, lots of them.
They don't cost very much.
So I keep those in a warehouse situation or a warehouse
dispensing situation, where the production line can just
get them as they need them and I'm not going to worry about
counting them out and keeping track of them.
I just buy some when I need them.
And when they're gone, then I make sure that I note that
they're gone and I buy some more.
Now in a practical situation, depending upon the
manufacturer, I may have just a couple of categories here,
inventory classifications.
Those items that are higher dollar items and those items
that are lower dollar common items, or common parts and
supply items.
So it varies on the company.
But just about every company will have some inventory
classification system that they use.
We've already mentioned just-in-time.
Here's the definition.
It's a demand method of reducing inventory level to an
absolute minimum.
And basically what that concept is that new inventory
items arrive at the same time that the last inventory item
is placed in service.
Let me say it another way.
New inventory items arrive just at the time
that they are needed.
So what does that do?
That promotes closer
coordination with our suppliers.
I've mentioned in the earlier lecture, in Chapter Nine, that
the Jaguar automobile manufacturing plant in
Coventry, England, that was what they
operated on, that premise.
They wanted very close coordination with suppliers,
they wanted no time lost, did not want to store inventory.
And so consequently, they worked out a deal where one of
their major suppliers could be co-located with them.
And so the supplier was providing product on the day,
the moment, that it was needed to go into an assembly.
It provides you a real consistent quality production.
Quality control's a lot easier with just-in-time.
And then you can lower your stock levels,
your inventory levels.
In fact, optimally what you'd like to do is
take them to zero.
Always in an operation, inventory record
keeping is an issue.
And for manufacturing, it's more so than it is in a
service industry.
In a service industry, sometimes
there's not much inventory.
But there's a little bit of inventory you have
to keep track of.
But in a manufacturing business, you have to really
keep track of your inventory from a physical standpoint.
In other words, the physical inventory.
So there's a lot of ways to do that.
I can do cycle counting, where I just count different
segments of the inventory at different times of the year.
Or I can do a perpetual inventory, where I keep a
running record of inventory that does not require a
physical count.
This system right here, perpetual, is the best system.
It's the most efficient system.
And what that says is that every time I use something, I
clock it out and I make a record of it.
Every time I buy something, I clock it in,
make a record of it.
And I can do that using standard bar codes or QRC
codes to do that.
And I can do it electronically.
So a lot of companies that are really good at what they do
are using perpetual inventories nowadays.
An example that you see every day is the supermarket.
I go to the supermarket, that supermarket market operator
knows when I buy something and what it is that I buy, and
knows how many they have in inventory at all times.
That's what enables the Walmart example I gave in the
Chapter Nine lecture, where if I want to buy an item that I
know Walmart carries, I go to the internet, I check to see
if Walmart carries that item.
If they carry it, do they have it in stock?
Which store do they have it in stock in?
Well, these record keeping systems is what allows them to
be able to keep track of what they have in stock, what's
available for the customers to get.
Now a two-bin inventory system is a method of inventory
control based on use of two containers for
each item in inventory.
One to meet the current demand and the other
to meet future demands.
And so what that means is that I have a bin where I keep
parts say, and I work out of that bin until all
the parts are gone.
And then in the meantime, I've purchased another bin full of
those same parts and it's sitting there not being used.
So as the first bin empties, then I slide the second bin
in, began using it.
That then becomes my transaction record.
I've used up one bin.
I'm starting another bin and I go order a replacement bin to
be able to start that cycle over again.
Let's talk about quality just for a little bit.
Quality is a very important principle to incorporate in
your business, whether it be production business or a
service business.
Here's the definition of it.
It's the features of a product or service that enable it to
satisfy customers' needs.
It's the perception of the customer as to the suitability
of the product or service of a firm.
Oftentimes, so often, quality is in
the mind of the customer.
And so then as the service provider or product provider,
then that immediately gives me some ideas about how I can
improve my quality.
I want my quality to be something that's recognized by
my customer.
And so as the manufacturer or provider of a service or
product, I want to know what are the quality factors that
are important to my customers?
And so that becomes one component of what we called
TQM, total quality management.
Total quality management is an aggressive, all-encompassing
management approach to providing superior,
high-quality products and services.
And one of the really embedded features of TQM is that
everybody involved in the process is involved in
defining and managing quality that goes into its process or
into its operations.
So let's look at the essential features of really a
successful quality management program.
Well first of all, it's customer driven.
I'm looking at my customer to find out what's important in
my customer's eyes from a standpoint of quality.
What is quality in my customer's eyes?
And how do I define that?
Is my organization committed to quality?
And there's so many times I've seen companies that will say
yeah, we're really focused on quality.
We like quality.
And they just give you the old spiel, so
to speak, on quality.
But then when I look inside, and see what's going on, I see
well, it's mostly lip service.
It's not a real commitment.
And so it's a big difference between lip service to quality
and commitment to quality.
And then if I'm committed to quality, I'm going to be
watching and talking to my customer, figuring out what is
quality in my customer's eyes.
And I'm going to develop a culture that stays focused on
that all the time.
And that is going to be a top down, top driven
culture in my company.
And so that's the difference.
Some companies give it lip service.
Some companies integrate into their culture.
And consequently, they end up with a better product.
And you can probably cite several examples that fall
right into this category.
As I said before, we've based this whole premise of quality
discussion on the customer.
My customer expectations is what's going to drive my
definition of quality.
So quality is the extent to which your product or service
satisfies my customer's needs and expectations.
I can sell an imperfect product that in my mind is
imperfect, but my customer believes that its perfect.
And so then I have to ask myself the question, is that
sufficient?
Is that the quality that I need to incorporate, that I
need to accomplish all the time?
So I need to be constantly looking at customer feedback.
In my customers' minds, what is quality?
What do they expect from me and from my company in terms
of quality products or quality services?
Talk a bit about the International Standards
Organization.
ISO 9000, very, very common certification requirement.
Many large government projects require ISO 9000
certification.
A lot of large suppliers, both in the US and overseas,
require ISO 9000 certification.
When I say suppliers, I mean manufacturing companies.
And so it behooves me then, if I'm operating a company that's
building parts that I'm supplying, or I'm supplying
some kind of service, to at least look into
being ISO 9000 certified.
I've gone through this process before.
I got into a situation one time where I was competing for
a big contract and woke up one day to discover that the
company that we had kind of merged with and absorbed part
of their operation was not ISO 9000 certified.
And so we were in a bind, because the customer was
demanding that.
And so we had to do some scrambling.
Most large government customers nowadays require ISO
9000 certification.
This is the standards governing international
certification of a firm's quality management procedures.
There's a whole set of procedures that a company has
to put into place and manage with data indicating that
management in order to be ISO 9000 certified.
Well, there's one thing that you need to be aware of.
And I've always believed this and still believe it, that
small companies can really outmaneuver larger companies
in a number of areas.
And this is one of the areas where they can do it, because
small companies tend to have smaller organizations, smaller
number of levels of organization, and smaller
number of people they've got to communicate with.
And so they tend to be very agile and can maneuver in the
marketplace much better, or much more efficiently than
larger companies.
So a small company has some opportunities here that other
large companies may not have, to provide a really good
combination of tangible products
and intangible services.
That's really a double statement when I say that.
Products are tangible by definition, services are
intangible by definition.
As a small company, I can provide very
personalized services.
Lot of contact, personal contact.
I can provide service quality without regard to the
profitability of the customer.
And I can really develop good measures to control service
quality, because I have a much smaller organizational
structure to deal with and so consequently, communications
are faster, training is faster,
response times are faster.
All those things serve to favor small companies.
Talk a little bit about purchasing.
That's a really important part of operations whether you be a
service company or a manufacturing company.
But purchasing is the process of obtaining materials,
equipment and services from outside.
And purchasing is the one area of operations that can easily
sometimes fall into corruption, where you've got a
weak purchasing organization or you got a purchasing
manager that's trying to sell favors.
And it's just an area that lends itself to corruption,
and so you have to constantly manage purchasing.
You've got to really stay on top of your purchasing
function, whether you be a large company or a small
company, or even a government organization.
I know in some of my involvement over the years in
government organizations, I know that the purchasing part
of that, particularly in large education institutions, is a
very important function.
And it's one that just provides all kinds of
opportunities for corruption.
And so you've got to set it up to stay on top of that.
Now what's the importance of purchasing?
Well, it allows you to provide timely and consistent
production of quality products.
It allows you to get your finished products to your
customers faster.
And it allows you to control the cost of your products and
therefore, make your profitability better.
So purchasing is really important to the operation of
either manufacturing or service type
operations to companies.
What's the make-or-buy decision?
That's always a purchasing issue.
I have a manufacturing company.
I have to decide whether I want to make a
part or buy a part.
And there's all kinds of reasons for doing that.
I can free up some plant capacity.
I can get a product out of my production line that I don't
really need to be dealing with.
And so obviously, one of the things that I want to do if
I'm looking at a make-or-buy is if I do a buy here, am I
removing from my capability any central function that's
critical to the market that I'm in right now?
So you want to be careful about purchasing parts that
really aren't directly involved in what
you're trying to build.
But if it's a key component, if it's a part that's really a
proprietary type part, then it's highly unlikely I would
not buy it.
But if it's a part where I can buy cheaper than I can make
it-- and by the way, that's the ultimate
decision making point--
can I buy the part or buy the item cheaper
than I can make it?
If the answer is yes, then you need to look at really buying
the part, as long as it's not going to be revealing your
critical trade or manufacturing secrets.
So what are the reasons for buying?
Cheaper.
Most of the time, that's the driver right there.
It saves me having to invest in
personnel, space, and equipment.
I don't have to manage that process anymore.
I don't have to hire people to build those
kind of things anymore.
I have a little more flexibility in matching my
supply and demand.
There's just a whole list of reasons to buy.
And probably, I'll say one more time, the driver here is
going to be cost, given the fact that this is not a
critical item from a technology and manufacturing
standpoint for my company.
In other words, I'm not going to give away the crown jewels
of the company, the core essential
function of my company.
I'm not going to outsource those or I'm not
going to buy those.
Outsourcing is where I purchase products or services
that are outside the firm's area of competitive advantage.
So typically, outsourcing is what I'm going to do when I
don't have a skill level or a competitive
advantage in that area.
Cooperative purchasing organization, a co-op.
C-O-O, sometimes you'll see a hyphen between those Os.
That's where a group of small businesses get together to
provide a buying function, purchasing function, for that
group of small businesses in order to get volume up and to
be able to compete for lower prices.
You see this a lot, particularly in the
agricultural business community a lot.
Lots of co-ops, both buying co-ops and
selling co-ops as well.
There's a lot of talk about sole source suppliers and
multiple suppliers and things like that.
But let's just talk about a couple things here.
If I have a critical product and I've got a supplier who's
been a dedicated supplier and supplies that product
efficiently and cost effectively and timely and
really performs, there's absolutely nothing wrong with
going to a sole source acquisition or sole source
purchasing.
A lot of people, particularly people who are trying to
criticize government purchasing policies, or trying
to apply government purchasing policies to industry, don't
realize that sometimes sole source providers are better
than multiple source providers.
There's kind of a false concept in the political world
that says well, if I've got a lot of people betting on a job
then I'm going to get the best price for that job.
But that's not always true.
And price is not always what you want.
What you really want in trying to get a service or a product
is, I want best value.
And value is not just cost sometimes.
And so this is sometimes why those who are trying to make
purchasing decisions, particularly in government,
get led astray, and say well, this is the cheapest price,
we're just going to buy it.
Law doesn't require cheapest price.
Law requires best value.
And sometimes we lose sight of that.
Value is what's really important.
Now so if I've got a qualified, loyal, very good
sole source supplier, I'm gonna stay with him.
I may not even compete.
Now if prices go up and I can figure out that he's gouging
me a little bit, then next time
around, I'll be competing.
There's good reason to have multiple suppliers as well,
particularly on common products, products that are
common products in the marketplace.
Then it's good to have multiple suppliers there for a
lot of reasons.
First of all, to get the best quality and price.
And secondly, I've got supplier assurance.
I'm assured that I'll have a supplier for those products.
I guess the bottom line here is a sole source is not bad.
Competition is not bad either, it's good.
So you have to decide for yourself what's
best for your company.
One thing you do want to think about though, is as a
purchasing organization, you want to keep good
relationships with your supplier.
So what that means is you're going to pay
them promptly on time.
You're going to treat them with respect and
courteousness.
You're going to allow them to come in and talk to you and
not look down your nose at them, not be condescending or
ugly in that sense.
You want to build good relationships, that's really
what we're talking about.
You want to try to minimize any order cancellations or
order changes.
Keep those to a minimum if you can.
You don't want to browbeat your suppliers.
And you want to make suggestions, feedback to your
suppliers that allows them to do a better job at supplying
you, even to improve their product.
There's nothing wrong with that as well.
Now strategic alliances are important sometimes as well,
and require a lot of coordination.
I'm both a proponent and an opponent
of strategic alliances.
Sometimes they're good, sometimes they're bad.
But from a supplier standpoint,
they can be very nice.
And so what that means is that I form a strategic alliance, I
form a sole source strategic alliance.
I bring a supplier in or a subcontractor in as a partner
on a large job or a large prime contract that I'm
bidding on and I create a strategic
alliance with that customer.
I still have a subcontract relationship.
But I have a relationship that's formalized, it's
documented, that is broader than just a buyer seller type
relationship.
For instance, I bring a subcontractor as a strategic
partner on a particular type of product that I'm trying to
sell somewhere.
One of the deals that subcontractor's going to ask
for, and I'm going to negotiate an agreement with
him on is the agreement that says that if we win this
contract or we win this job, and we sell this item, then on
the next job I get first dibs.
I get a first right of refusal.
Or I will be the sole source supplier of that product for
forever as long as this customer's trying to build
this product that he's going into the market with.
So strategic alliances can be good.
They can not be good, depending upon your
relationship.
Relationship's everything in a strategic alliance.
If you can't manage the relationship, if you can't
cultivate the relationship, then don't do it.
Stay away from the strategic alliance.
But it allows you to get a good product quality.
You get the joint problem solving
capability of your partner.
You can together make adjustments to market
conditions.
So there's a lot of pluses about
supplier strategic alliances.
It's something you really ought to be looking at.
Now this concludes our discussion in Chapter 21.
And so what we'll do now is move after Chapter
21, we'll move to--
this is Unit Seven, obviously-- so we'll move to
Unit Eight in our mid-term exam.
So this is going to basically get us through the first half
of the semester.
And we'll move on into Unit Nine, Chapters 22 and 23 next.