Assignment 5

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CHAPTER

12 Planning Startup

Operations

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CHAPTER OBJECTIVES

• Identify the components of the production process for products and services.

• Explain the critical aspects of supply chain management.

• Discuss how to manage quality. • Examine how outsourcing can jumpstart an

entrepreneurial venture.

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OPERATIONS: STARTUPS VERSUS LARGE COMPANIES

• When it comes to operations, startups are not simply smaller versions of large companies. • Instead, startups typically struggle in a continual effort to find

the best way to do business. • While large companies deal chiefly with variables that are

known and predictable, startups are faced with unknowns and uncertainty.

• The inertia of their hierarchical operational and product development structures has made it difficult to spot opportunities that don’t fit those structures.

• Although the formal operations of a large company can be a competitive advantage in terms of achieving economies of scale efficiencies, startups need to create operational competitive advantages in very different ways.

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OPERATIONS MANAGEMENT AND OPERATIONAL INNOVATION

• Operations management includes new product development, purchasing, inventory, production, manufacturing, distribution, and logistics, all of which are necessary to produce and distribute products and services.

• Whatever type of business you have, your ability to innovate in the operations part of your business can lead to a superior competitive advantage. • Operational innovation entails fundamentally changing how

work gets accomplished. • This means finding new ways to fill customer orders, create and

deliver new products and services, and deal with customer service.

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12.1 PRODUCING PRODUCTS

AND SERVICES (slide 1 of 2)

• In simple terms, production is managing the flow of material and information from raw materials to finished goods. • Think of manufacturing equipment as hardware and

the people and information needed to run the machines as software, and it’s easy to see why it’s possible for two companies to have the same equipment and yet produce significantly different products. • The difference lies in the software driving the machinery—

in other words, information and people.

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12.1 PRODUCING PRODUCTS

AND SERVICES (slide 2 of 2)

• Any new venture that is offering innovative new products will need an operational plan consisting of a fairly complex product development analysis that includes: • Prototyping. • Production processes. • Supply chain. • Distribution. • Fulfillment. • Inventory control mechanisms.

• These systems need to function effectively. • Building a complex production system while your company is in

startup or even later when it is rapidly growing is a recipe for disaster. • Instead, startup companies need to build relationships slowly,

beginning with key independent contractors to whom they may be outsourcing some tasks.

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12.2 SUPPLY CHAIN MANAGEMENT (slide 1 of 5)

• Think of a supply chain as a river with upstream and downstream business activities that move a product through design, product development, sourcing, producing, and delivering to the final customer.

• Supply chain management (S C M) has become a mission-critical activity for most companies. • S C M is about optimizing operations to maximize speed and

efficiency so that products are delivered as quickly and as cheaply as possible.

• Good S C M enables your company to forecast demand, match supply with that demand, and fulfill that demand through the most optimal distribution channels.

• It also enables you to create backups in case of any supply chain disruptions.

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12.2 SUPPLY CHAIN MANAGEMENT (slide 2 of 5)

• Because effective supply chain performance is critical to any company’s successes, you must have ways to manage and measure the performance of your supply chain, especially in terms of customer satisfaction. • That means having a clear understanding of what is

important to your customers. • What level of service are they expecting? • What level of performance are they willing to pay a

premium for?

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12.2 SUPPLY CHAIN MANAGEMENT (slide 3 of 5)

• The goal in supply chain management is to provide the exact service the customer wants at minimal cost. • In S C M terms, it’s the efficient frontier and it’s not

easy to achieve. • To do so, you need to:

• Use current technology that provides superior data analysis. • Ensure that the warehouses and distribution centers you use

are efficiently located. • Look at every aspect of the supply chain to see if there are

ways to reduce costs.

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12.2 SUPPLY CHAIN MANAGEMENT (slide 4 of 5)

• If you have a business that purchases raw materials or parts for production of goods for resale, you must carefully consider the quality, quantity, and timing of those purchases. • If you have established certain quality standards for your

products, you must find vendors who will consistently supply that precise level of quality, because customers will expect it.

• The quantity of raw materials or parts that are purchased is a function of:

• Demand by the customer. • Manufacturing capability. • A company’s storage capability.

• Purchases must be planned so that capital and warehouse space are not tied up any longer than necessary.

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FIGURE 12.1 Example of a Supply Chain

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12.2 SUPPLY CHAIN MANAGEMENT (slide 5 of 5)

• Within the major supply chain functions are many activities that must be planned for and coordinated. • They include such things as:

• Purchasing in quantity for profitability. • Reducing inventories. • Tighter supplier integration. • More frequent and smaller customer orders and receipts. • Faster time from source to stock in the wholesale or retail

outlet.

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FIGURE 12.2 Apparel Supply Chain

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12.2a Purchasing (slide 1 of 2)

• There are several advantages to using a single vendor where possible. • A single vendor will probably offer more individual attention

and better service. • Orders will be consolidated, so a discount based on quantity

purchased may be possible.

• The principal disadvantage of using just one vendor is that if that vendor suffers a catastrophe, it may be difficult or impossible to find an alternative source in a short time. • To guard against this possibility, it is wise for a startup to use

one supplier for about 70 to 80 percent of its needs and one or more additional suppliers for the rest and also as backups in case the principal supplier fails.

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12.2a Purchasing (slide 2 of 2)

• When considering a specific vendor as a source, ask yourself several questions: • Can the vendor deliver enough of what is needed when it’s

needed? • What is the cost of transportation using a particular vendor? • What services is the vendor offering? • Is the vendor knowledgeable about the product line? • What are the vendor’s maintenance and return policies?

• It is also important to “shop around,” compare vendors’ prices, and check for trade discounts and quantity discounts that may make a particular vendor’s deal more enticing.

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12.2b Inventory Management (slide 1 of 2)

• Inventory is defined as the stocks of items used to support production, associated activities, and customer service.

• Whether entrepreneurs start small manufacturing enterprises, retail businesses, or restaurants, they will frequently hold an inventory of materials or goods. • Today, businesses that hold inventories of raw materials or goods for

resale have found that they must reduce these inventories significantly to remain competitive.

• The problem that entrepreneurs face relative to inventories is that once their business gets beyond early startup and begins growing, most still do not have the resources to purchase raw materials and goods for sale in sufficient quantities to trigger significant industry discounts, often ranging from 30 to 50 percent. • Even if you could purchase the required quantities, you typically don’t

have the space to store the inventory.

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12.2b Inventory Management (slide 2 of 2)

• As a result, today many entrepreneurs are taking advantage of inventory management companies that oversee storage, track inventory numbers, and fill and ship orders, among many other services. • There are many advantages to this approach:

• It saves you time and the cost of hiring employees to manage the inventory.

• It frees up space at your place of business. • It avoids the need to purchase special equipment. • Because most inventory management companies have

information technology for tracking and providing detailed data on the inventory, you can inspect and control your inventory from any computer with Internet access.

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12.3 PRODUCTION AND MANUFACTURING (slide 1 of 3)

• Production is the actual manufacturing and assembly of a product.

• Today, manufacturers tend to produce one unit at a time serially in manufacturing cells—called flexible manufacturing cells (F M Cs) or work cells. • What that means is that the product moves from raw materials

through a series of tasks and processes in a continuous flow to complete the product while remaining inside the manufacturing cell.

• The benefits of cell manufacturing are: • Reduced lead times. • Improved costs, quality, and timing. • More employee involvement in the production of the entire

product rather than in simply one component of a product.

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12.3 PRODUCTION AND MANUFACTURING (slide 2 of 3)

• The production process consists of a series of inputs, such as raw materials, labor, and machinery, which are then transformed through a series of processes into new products and services. • Each component of the process must be managed,

measured, and tested for efficiency and effectiveness.

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FIGURE 12.3 The Production Process

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12.3 PRODUCTION AND MANUFACTURING (slide 3 of 3)

• In general, manufacturing and production firms are organized as: • Product- or project-focused organizations.

• These organizations are highly decentralized or distributed so that they can respond better to market demands.

• Each product or project group acts essentially as a separate company or profit center.

• Process-focused organizations. • These organizations are common among manufacturers with

capital-intensive processes and among service companies. • These organizations are highly centralized in order to control all

the functions of the organization.

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12.3a Quality

• Quality control is the process of reconciling product or project output with the standards set for that product or project.

• Quality is a strategic issue that is designed to bring about business profitability and positive cash flow.

• Effective total quality programs result in: • Customer satisfaction. • Lower operating costs. • Better utilization of company resources.

• The real success or failure of a quality control effort is dependent on the human element in the process: customers, employees, and management. • Quality begins with satisfying the needs of the customers, and that

cannot be accomplished unless those needs and requirements are communicated to managers and employees.

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TABLE 12.1 Quality Management Programs

Benchmarking Involves the use of criteria or standards that can be employed to compare one company with another to better understand organizational performance

Continuous Improvement A program that focuses on undertaking incremental improvements in processes to increase customer satisfaction

Failure Mode and Effects Analysis

A way to identify and rank potential equipment and process failures

I S O 9001 An internationally recognized quality set of standards with a certification process

Total Quality Improvement A set of management practices designed to meet customer requirements through process measurement and controls

Six Sigma A data-driven approach to eliminating defects with a goal of 3.4 defects per million

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12.3b Logistics

• Logistics is the management and control of the flow of goods and resources from the source of production to the marketplace.

• Every business is affected by logistics to some degree, even service businesses that rely on logistics to receive their supplies.

• Logistics is a fundamental part of supply chain management and can make the difference between success and failure, profit and loss in a growing company.

• Most small companies outsource to third-party logistics providers (such as U P S) who can move packages by air, land, and sea from the factory to the customer without stopping at the entrepreneur’s business.

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12.3c Warranting the Product (slide 1 of 2)

• Product / service warranties protect companies from potential liability and demonstrate that they stand behind what they produce and the work that they do.

• Although the length of the warranty depends on industry standards, the components of the product or service depend on the situation. • Some components may come from other manufacturers who

have their own warranties. • In this case, it is important to have use of that component on

your product certified by the original equipment manufacturers (O E Ms) so that the warranty isn’t inadvertently invalidated.

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12.3c Warranting the Product (slide 2 of 2)

• Some warranty considerations include: 1. Will the warranty cover one or all products in a line or will

there be separate warranties?

2. Will the same warranty apply in all markets? • This will depend on local laws.

3. Is there anything the customer must do to keep the warranty in force, such as servicing or replacing disposable parts?

4. Who executes the warranty? • You must decide who will handle warranty claims—the

manufacturer, dealers, distributors, or your company.

5. What are the plans for advertising and promotion relative to the warranty?

6. Who will pay shipping and handling costs for refunds and returns?

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12.4 OUTSOURCING TO REDUCE COSTS

• Calculation of the upfront investment in plant, office, and equipment, coupled with the high per-unit cost of production, has convinced many entrepreneurs to outsource manufacturing to an established manufacturing firm, particularly one overseas where labor costs are much less.

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12.4a Manufacturing Overseas (slide 1 of 4)

• In some industries, particularly labor-intensive ones, the only way to achieve competitive costs is to manufacture in a country where labor costs are low.

• Outsourcing may not always be the wisest choice, however. • Some products are too heavy to be shipped by air, and shipping by

sea is costly and typically takes four to six weeks, resulting in the company losing the advantage it has in schedule flexibility.

• Many companies have not been able to leverage the benefits of outsourcing to create real impact in their companies in the areas of pricing at a premium, entering new markets, and creating entry barriers for competition. • That is why you need to work backward from customer needs and

align your workflows appropriately.

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12.4a Manufacturing Overseas (slide 2 of 4)

• Deciding to move some operations offshore is an important decision that will affect your business in ways you may not have considered.

• Figure 12.4 (on the following slide) presents some questions you should ask yourself as you start to think about this decision.

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FIGURE 12.4 The Outsourcing Decision

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12.4a Manufacturing Overseas (slide 3 of 4)

• Here are some additional considerations that you should look at before deciding to leap offshore: 1. Go offshore when all efforts to boost efficiency and

innovation at home have been exhausted. • Don’t do it just because everyone else is doing it.

2. Consider whether to set up a captive operation (you own it) or to contract with a local specialist.

3. Management and employees must both believe in going offshore and must be in the loop during transition.

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12.4a Manufacturing Overseas (slide 4 of 4)

4. Don’t do it if management does not have the time and willingness to put a lot of effort into the process.

5. You must be willing to treat your outsourcing partners as equals, not as subservient workers, and make them part of the project design process.

6. The supply chain needs to be flexible enough with backups to avoid costly disruptions, particularly from natural and man-made disasters.

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12.4b Lessons from Outsourcing Overseas (slide 1 of 2)

• Whether you are looking to ship manufacturing overseas or outsource your back office functions, successful outsourcers point to several critical lessons they have learned from the experience. 1. Start by doing some serious research.

• Talk to entrepreneurs, consultants, lawyers, and others who have successfully outsourced or advised companies on manufacturing overseas.

2. Start small and gradually build the overseas capability because there will always be problems in the beginning that will slow the process.

3. Communicating by email and fax is not enough. • Most projects require a company expert who can guide the

technical workers in person.

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12.4b Lessons from Outsourcing Overseas (slide 2 of 2)

4. It is important that you create a culture that encourages the staff to stay with the business long term. • Outsourced staff typically have a high turnover rate because the

average age is 25 and they are constantly looking to move up.

5. Make sure you understand the regulatory requirements of your industry and how they might impact your ability to manufacture overseas.

6. It is important to outsource only those tasks that have a high probability of going smoothly and making the customer happy. • Problematic projects are better handled domestically.