Chapter 21: Managing Small Business Operations
CHAPTER 21: MANAGING SMALL BUSINESS OPERATIONS
CHAPTER OUTLINE
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1) Competing with Operations
LO1: Understand how operations enhance a small company’s competitiveness.
i) Operations – the processes used to create and deliver a product or service
ii) Processes create value for the customer
iii) Operations management refers to the planning and control of a conversion process
that includes bringing together inputs (such as raw materials, equipment, and
labor) and turning them into outputs (products and services) that customers want.
iv) Operations are at the heart of any business.
2) The Operations Process
LO2: Discuss the nature of the operations process for both products and services.
a) The Operations Process in a Service Business
i) Services are intangible
ii) Services require extensive personal interaction of employees with customers
iii) Must understand the service provider-customer connection
iv) Implications for managing personnel
v) Technology can provide better service than the traditional model by providing
additional information to the customer
(1) Customers who bought this item also bought
(2) What Other Items Do Customers Buy After Viewing This Item?
(3) Look for Similar Items by Category
(4) Customer Reviews
(a) Exhibit 21-1 The Operations Processes (Input—Processes—Output)
b) The Operations Process in a Manufacturing Business
i) Classified as one of three types:
(1) Job shops
(2) Project manufacturing
(3) Repetitive manufacturing
(a) Continuous manufacturing
(4) Flexible manufacturing systems
(5) Mix and match the types to gain the benefits of each
c) Capacity Considerations
i) Capacity to serve or produce is critical
ii) Meeting demand and matching competitors as well as startup costs and long-term
commitment restrict the capacity
d) Planning and Scheduling
i) Have students discuss how their class schedule is affected by and affects their
work schedule. How do these two parts of their personal schedule affect their
personal family life?
Chapter 21: Managing Small Business Operations
ii) Production planning and scheduling procedures designed to achieve the orderly,
sequential flow of products through a plant at a rate matching deliveries to
customers
iii) Demand management strategies used to stimulate customer demand when it is
normally low
3) Inventory Management and Operations
LO3: Identify ways to control inventory and minimize inventory costs.
a) Objectives of Inventory Management
i) Know how much inventory is available at all times to meet customer needs and
wants
ii) Know the high and low points required to meet needs and wants throughout the
year
b) Inventory Cost Control
i) Economic order quantity
ii) Statistical inventory control
iii) Inventory comes with many other related costs. Consider the following:
(1) Storage
(2) Theft, weathering, spoilage, and obsolescence
(3) Cost of capital
(4) Transaction costs
(5) Insurance and security
(6) Disposal costs
iv) ABC Inventory Classification
(1) Classifies items in inventory by relative value
(2) A = a few high-value items that account for the largest percentage of total
dollars.
(3) B = less costly items that still make up a significant share of the cost.
(4) C = low-cost or noncritical items such as paper clips.
v) Just-In-Time Inventory Systems
(1) Reduces inventory levels to an absolute minimum
(2) Allows quality problems to become evident more quickly to reduce waste
(3) Used by businesses of all sizes with good results
c) Inventory Record-Keeping Systems
i) Physical inventory system
ii) Cycle counting
iii) Perpetual inventory system
iv) Two-bin inventory system
4) Quality and Operations Management
LO4: Recognize the contributions of operations management to product and
service quality.
a) Quality as a Competitive Tool
i) Discuss how quality affects a business that sells products as well as a business
that sells services. Ask students about the service provided by a business that sells
products.
ii) Features of a product/service that enable it to satisfy customers’ needs
iii) Total quality management (TQM)
(1) It is customer driven
(2) It emphasizes organizational commitment
(3) It focuses on a
(4) culture of continuous improvement
b) The Customer Focus of Quality Management
i) Retail Is Detail
(1) Operating details are crucial to the success of a business, especially in an
industry such as food service.
ii) Customer Feedback
(1) Actively listening to customer’s opinions can provide information about their
level of satisfaction.
c) “The Basic Seven” Quality Tools
i) Quality problems can be solved by using the following seven tools:
(1) Cause-and-effect diagram (or Ishikawa chart or fishbone chart)
(2) Check sheet
(3) Control chart
(4) Histogram
(5) Pareto chart
(6) Scatter diagram
(7) Flow chart (or run chart)
d) Quality Inspection versus Poka-Yoke
i) Inspection – examination of a part or a product to determine whether it meets
quality standards
ii) Poka-Yoke is a proactive approach to quality management that seeks to mistake-
proof a firm’s operations, thus avoiding problems and waste before they can occur
e) Statistical Methods of Quality Control
i) The use of statistical methods and control charts often can make controlling
product and service quality easier, less expensive, and more effective.
(1) Acceptance sampling involves taking random samples of products and
measuring them against predetermined standards.
(2) Attributes are product or service parameters that can be counted as being
either present or absent.
(3) Variables are measured parameters that fall on a continuum, such as weight or
length.
f) International Certification for Quality Management
i) ISO 9000 certification
ii) Environmental concerns and a focus on social responsibility create new
opportunities and challenges for entrepreneurs
g) Quality Management in Service Businesses
5) Purchasing Policies and Practices
LO5: Explain the importance of purchasing and the nature of key purchasing
policies.
a) The Importance of Purchasing
i) Quality depends on raw materials used
ii) High-quality merchandise makes retailer’s sales to customers easier and reduces
the number of necessary markdowns and merchandise returns
Chapter 21: Managing Small Business Operations
iii) Make or Buy?
(1) Many firms face decisions whether to make or buy products, components
and/or services.
(2) Some reasons for making component parts, rather than buying them are:
(a) More complete utilization of plan capacity permits more economical
production.
(b) Suppliers are assured, with fewer delays caused by design changes or
difficulties with outside suppliers.
(c) A secret design may be protected.
(d) Expenses are reduced by an amount equivalent to transportation costs and
the outside supplier’s selling expense and profit.
(e) Closer coordination and control of the total production process may
facilitate operations scheduling and control.
(f) Parts produced internally may be of higher quality than those available
from outside suppliers.
(3) Some reasons for buying component parts, rather than making them are:
(a) An outside supplier’s part may be cheaper because the supplier specializes
in the production of that particular part.
(b) Additional space, equipment, personnel skills, and working capital are not
needed.
(c) Less diversified managerial experience and skills are required.
(d) Greater flexibility is provided, especially in the manufacture of a seasonal
item.
(e) In-plant operations can concentrate on the firm’s specialty – finished
products and services.
(f) The risk of equipment obsolescence is transferred to outsiders.
iv) Outsourcing
v) Coops and the Internet
(1) Coops (cooperative purchasing organizations)
vi) Diversification of Supply
(1) Several reasons a small company might prefer to concentrate purchases with
one supplier
(2) Franchises may require specific suppliers
b) Measuring Supplier Performance
i) Supply Chain Operations Reference (SCOR) model
ii) Five attributes stand out
(1) Reliability
(2) Responsiveness
(3) Agility
(4) Costs
(5) Assets
c) Building Good Relationships with Suppliers
i) Small business practices that help
(1) Pay bills promptly
(2) Give sales reps a timely and courteous hearing
(3) Minimize abrupt cancellation of orders
(4) Avoid attempts to browbeat a supplier into special concessions or unusual
discounts
(5) Cooperate with supplier by making suggestions for product improvements
and/or cost reductions whenever possible
(6) Provide courteous, reasonable explanations when rejecting bids and make fair
adjustments in the case of disputes
d) Forming Strategic Alliances
i) Partnering with suppliers and others
ii) Choice determines whether the arrangement succeeds or fails
iii) Some potential alliance partners design their business especially to help small
firms
e) Forecasting Supply Needs
i) Associative forecasting considers a variety of driving variables when determining
expected sales
ii) Some businesses may require higher accuracy and thus need a more complex
model for forecasting
f) Using Information Systems
i) Computers, software, and Internet links with suppliers and customers
ii) MIS are improved continuously
6) Lean Production and Synchronous Management
LO6: Describe lean production and synchronous management, and discuss their
importance to operations management in small businesses.
a) Lean Production
i) Guiding philosophy and management approach emphasizing efficiency through
elimination of waste in a company’s operations
ii) Toyota Production System (TPS) makes the eliminate of waste a top priority:
(1) Defects are costly because they have to be repaired or scrapped.
(2) Overproduction must be stored and may never be sold.
(3) Transportation can be minimized by locating close to suppliers and customers.
(4) Waiting can be wasteful because resources are idle.
(5) Inventory in excess of the minimum required is unproductive and costly.
(6) Motion, whether by product, people, or machinery, I wasted when it’s
unnecessary.
(7) Processing itself is wasteful if it is not productive.
iii) Companies of all sizes use the principles of lean production
b) Synchronous Management
i) Bottleneck
ii) Constraint
iii) Exhibit 21-3 Avoiding Bottlenecks and Constraints
Chapter 21: Managing Small Business Operations
ADDITIONAL DISCUSSION QUESTIONS
1. How important is managing operations to the competitiveness of a small
business? Why?
The customer’s idea of quality is the one that counts. The seller’s idea that a
quality rating of 8 is satisfactory is irrelevant if the buyer expects a quality rating
2. What are some distinctive features of the operations process in service firms?
Total quality management (TQM) refers to a people-focused philosophy of
3. Customer demand for services is generally not uniform during a day, week, or
other period of time. What strategies can be used by service businesses to better
match a company’s capacity to perform services to customers’ demand for those
services?
4. What are the major features of the just–in-time inventory system? Is it
applicable to small companies? Be prepared to defend your answer.
Traditional methods will not usually suffice in a small manufacturing plant.
Studies have been made of 100 percent re-inspections conducted in many plants;
5. Why is the customer focus of quality management so important in a small firm?
Why can be done to ensure that the quality of a small venture’s products or
services remains high?
6. How important is effective purchasing to a small business? Can the owner–
manager of a small firm safely delegate purchasing authority to a subordinate?
7. Under what conditions should a small manufacturer either make component
parts or buy them from others?
8. What are the relative merits of inspection approaches and poka-yoke to quality
assurance in a small company?
9. What steps can a company take to build good relationships with suppliers? Can
you think of any ethical issues that should be taken into account when deciding
how to interact with suppliers?
10. Explain the meaning of the terms lean production and synchronous
management. How are these relevant to operations in a small company?
Purchasing would be a vital function if, for example, the firm faces a relatively
SUGGESTED ANSWERS TO YOU MAKE THE CALL EXERCISES
Situation 1
1. Is the writer of the article correct in believing that quality levels now are
generally high and that quality differences among businesses are minimal?
2. What are the benefits and drawbacks of placing the firm’s primary emphasis on
minimizing customer wait time?
3. If you were advising Poole, what would you recommend?
This question allows for individual answers that should be supported by sound
4. How would your answers to the previous questions be different if Poole sold a
$6 pizza? What if it were a $25 pizza?
Chapter 21: Managing Small Business Operations
the present level of quality, how the owner can discern this level (e.g., through
Situation 2
1. What are the ethical issues raised by Tandy’s payment practices?
The ethical implications here are a bit nebulous. Clearly he is violating the terms
2. What impact, if any, might these practices have on the firm’s supplier
relationships? How serious would this impact be?
Building good relationships with suppliers is essential for the success of a small
business. Tandy could jeopardize his working relationship with these suppliers
3. What changes in company culture, employee behavior, or relationships with
other business partners may result from Tandy’s practices?
Chapter 21: Managing Small Business Operations
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thereby increasing his cost structure and lowering his profits. An extreme and
consistent trend of this behavior could result in Tandy’s going out of business.
Situation 3
1. What can be done to improve capacity?
2. What can be done to improve efficiency?
3. What could be done at a store level to improve the performance of the business?
There are several options. Among them is to hire part time employees for peak
SUGGESTED SOLUTION TO CASE 21: RIVER POOLS & SPAS
1. Review the history of the operations of River Pools & Spas, from start to success
to scaling back. How was the company affected by scaling back? What changes
made it more competitive?
• 2005 River Pools & Spas have over 75 in-ground pool installations, 20 full-
time employees, and a new 10,000 square foot showroom/warehouse
• 2006 they installed 80 in-ground pools in a declining economy
2. Describe how River Pools & Spas’ customer focus affects the business. What
can the owners do to ensure that the quality of their products and services
remains high?
River Pools and Spas embodies the essential features of successful quality
management. The company is customer driven, with a commitment to the
3. Does this company use a synchronous management approach?
Synchronous management is an approach that recognizes the interdependence of
assets and activities and manages them to optimize the entire firm’s performance.