Small Business Management: A Planning Approach

Joel Corman Suffolk University, Emeritus Robert Lussier Springfield College Lori Pennel Bunker Hill Community College

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PART 3 Planning and Implementation CHAPTER 9 The Production/Operations Function

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9-1 The Interrelationship between the Production/Operations Function and Other Business Plan Components
The relationship with the other functional areas of accounting, finance, marketing, and human resources is critical. The production process must be able to meet sales forecasts made by the marketing function. The production process defines the resources that need to be provided by the finance function. All equipment acquired must be identified by the accounting function and determine whether to expense or depreciate equipment expenditures. To hire personnel to operate the equipment would involve the human resources function.
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9-2 Operations Management

The scope of production management has included any business whose function is the creation of utility, tangible or intangible. Utility is a good or service that is of some value to the purchaser or final consumer. Production/operations process is a process that converts input to output. Typical operations process

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9-2a Input
Every business utilizes People - Human resources Capital - Physical assets of the company, like machinery, equipment or plant Materials The combination of input differs between firms and is determined by the output, but all are used in the initial step in managing operations.

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9-3 The Conversion Process

The process of transforming inputs into products is the production/operations process. The conversion process involves:

Output
The end result of the production/operations process Competition creating significant focus on reducing material cost Tool used to control the process of ordering and delivering the needed material at the right time, in the right place, and at the lowest cost Just-in-time (JIT) inventory

Material
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Material Requirements Planning (MRP)

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Make versus Buy

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9-3 The Conversion Process (contd.)

Cost aspects of making versus buying

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9-4 Inventory
Adequate system to keep track of materials received Adequate, secure storage facilities and effective requisition procedures Inventory records must be kept up-to-date. Physical inventory is essential to counter human mistakes or mislaid parts. The more the inventory is worth, the more frequently physical checks should be made.

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9-4 Inventory (contd.)

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9-5 Inventory Control and EOQ

The primary questions of inventory control are how much to order at any one time and when to order. Economic order quantity is the amount of goods whose total procurement and carrying costs are at a minimum.

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9-5 Inventory Control and EOQ (contd.)

Relationship between time and quantity of inventory

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9-6 Time Relationship to Inventory Quantity

The ideal inventory (EOQ) quantity will minimize total cost

Carrying cost Procurement cost

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9-6a Carrying Costs

Those costs that are associated with ordering materials from the ordering cost through receiving, inspection and storage The cost component consists of:

Storage costs Maintenance Clerical tasks Insurance Obsolescence Taxes

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9-6a Carrying Costs (contd.)

Relation between storage cost and quantity

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9-6b Procurement Costs

Comprises requisition cost, follow-up tasks, and payment of invoices Varies inversely with the inventory Total procurement costs vary depending on the frequency of ordering. The two costs vary in opposite directions

Large lots minimize procurement costs but increases storage costs.

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9-6b Procurement Costs (contd.)

Relation between procurement costs and quantity

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9-6c EOQ Determination

EOQ is determined to minimize total variable costs. The minimum variable total cost occurs at the intersection of the annual storage cost and annual procurement cost. Formula for determining EOQ, where:

U = monthly dollar usage of items P = procurement costs in dollars I = inventory carrying costs per year

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9-6c EOQ Determination (contd.)

Relation between total variable costs and quantity

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9-6d Reorder Point

To manage inventory efficiently, you also need to know at what point to order the EOQ

Usage during lead time Desired safety stock

Firms can choose the probability of running out and the risk it will accept, based on the costs it is willing to bear.

The P factor (probability) is used to modify the firms safety stock, and to calculate reorder point, where:

R = reorder point U = monthly dollar usage of items P = procurement costs in dollars L = lead time

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9-6d Reorder Point (contd.)

EOQ reorder point

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9-7 Production Control

Necessity of integration

Production/Operations
Production control approaches

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9-7a Necessity of Integration: Control and Planning of Facilities

Control and planning of facilities
All individual elements of the production process need to be integrated for a business to function:

People Materials Machines

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9-7b Production/Operations
Minimize number of delays and interruptions.

Planning to provide management with feedback to determine progress.

Production control is present in all firms regardless of size.

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9-7c Production Control: Two Approaches

Two approaches

Loading
Assigns work to a facility Specifies the time and sequence in which the work is done and develops a schedule for it.

Scheduling
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Both approaches require complete understanding of the production process:

Knowing the capacity of each process. Knowing the time taken to complete each process. Balance work with machinery, material, equipment, and people.

The plan is a measurement of progress and where necessary corrective action can be taken.
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9-7c Production Control: Two Approaches (contd.)

Master Scheduling

Simple and easily understood Jobs are not split. Establishes a production schedule for the facility on a first come/first served basis To establish this schedule you need to know:
Maximum hours available for work Minimum hours needed before you open for the week Take each job as it is called in and schedule in the week required. Confirm available production capacity. Know the time required for completion.

To set up the schedule

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On reaching the production capacity for the week, it is considered as fully loaded.

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9-7c Production Control: Two Approaches (contd.)

Master schedule for production planning

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9-7c Production Control: Two Approaches (contd.)

Perpetual loading

Tabulation of the time necessary to finish unfulfilled orders and determine how long it will take to finish this work. Perpetual loading

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9-7c Production Control: Two Approaches (contd.)

Gantt chart

Shows work and how long it should take to be completed Plots actual work against forecasts and when compared to expectations, appropriate actions can be decided. Gantt chart

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9-8 Performance Evaluation and Review Technique (PERT)

PERT was developed by Booz, Allen and Hamilton Company.

Represents a refinement of the flowchart analysis first developed by Henry Gantt. Uses a sequential list of operations and the times required for each operation to establish an operations chart. The chart allows both planning and control. Critical path method (CPM) A typical plan comprises:

Building of network to cover all activities Ensure that steps are reasonable and probability of completion is high. Use of the plan to control the work as it proceeds

PERT is universally applicable

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9-8 Performance Evaluation and Review Technique

(PERT) (contd.)
PERT schematic describing studying for and taking an exam

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9-9 Work Design and Work Measurement

Motion and time study

Techniques used by management to establish performance standards against which to measure work. Motion study establishes the best way to accomplish a task.
Done to eliminate wasteful motions and find simpler ways of performing a task. Analysis of methods, tools, and materials used in addition to motions of employees.

Time study establishes how much time it should take to accomplish the task.
Systematically recording, analyzing, and synthesizing the times required to perform a task

Managements goal is to simplify work and arrive at a standard by which progress can be measured.
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9-10 Planning and Control Techniques

Job Categories and Techniques:

Interjob
- Process chartsimulates on paper the operation under analysis. - Flow process chartprocess chart superimposed on a floor plan of a manufacturing business.

Intrajob
- Simo-chart - Manmachine chart - Multiple activity chart

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9-10 Planning and Control Techniques (contd.)

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9-10 Planning and Control Techniques (contd.)

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9-10 Planning and Control Techniques (contd.)

Comparison between the present and the proposed procedures

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9-10 Planning and Control Techniques (contd.)

Direct (watch) time study

Procedure using a stopwatch to time a task

Predetermined time standard:

Are determined by using known times for all tasks in a job in order to determine how long it should take to complete it. Based on the idea that there are 17 basic motion patterns and all jobs are combinations of these.
- GraspTakes place when a hand or body part touches an object and takes control of it. - AssembleTakes place when parts are put together or caused to be put together by an operator.

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9-11 Quality
Combination of attributes commensurate with the price of a product or service that the customer expects Total Quality Management (TQM) is a strategy that requires everyone in the organization to continually improve products and services.

Involves giving people responsibility for performing their jobs in the best way.

Small business must allow employees to contribute to the quality process. Necessity for inspection

Production/operations vulnerability

Statistical quality control Use of control charts

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9-11 Quality (contd.)

Control chart

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