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C H A P T E R11

Describing How You Run Your Business How are you actually going to run your business? The Operations section of your business plan is where you begin to explain the day-to-day functions of your company. This is where you translate your theories into practice.

Much of the information in this chapter appears mundane, for instance, how you keep track of inventory, or what equipment you need and when it must be replaced. These seem like the kind of details that take care of themselves. But there’s a far greater chance that a business will fail because fundamentals aren’t handled properly than because the basic busi- ness concept is faulty.

Examining your basic operation is particularly important for internal planning. A capable manager does not take any activity in the business process for granted. Each step is worthy of evaluation and improvement. A little bit of extra planning in operational areas can mean marked improve- ments in profit margin. Assessing and developing the underlying mecha- nisms of your business will certainly pay off.

To do a thorough job planning your internal operations, you may want to develop a separate operations or procedures manual. Such a manual should describe the specific details of the processes by which you produce, distribute, or maintain your products and services.

For the purpose of preparing a business plan, however, your operations section does not need to be thoroughly detailed. Be brief. Describing your operations too specifically in a business plan is not only unnecessary, it may be counterproductive, especially if you are seeking outside funding. Focus- ing on very small details may make it appear that you are not seeing the big picture in your business.

Operations

Ninety percent of success comes from properly executing the fundamentals.

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A section to help you plan your technology needs follows. However, if you are seeking financing, you do not need to include a separate Technology section in your written business plan unless yours is a technology-based busi- ness. You can instead incorporate key technology issues in your operations section.

What Your Operations section should cover This chapter describes most of the subjects commonly included in an Oper- ations section of a business plan. In your own plan, you do not necessarily need to address each of these topics. Rather, limit your Operations section to those issues that:

n Are essential to the nature and success of your company;

n Provide you with a distinct competitive edge; and

n Overcome a frequent problem in businesses of your type.

Thus, if yours is a manufacturing business in which distribution is often a major difficulty, you may want to include one or two paragraphs clarify- ing your company’s improved approach to distribution. However, if yours is a retail business, distribution may not be an issue at all, and you needn’t discuss it.

Of course, if your business is an enterprise that develops or relies heavily on new technology, you need to explain those aspects fairly thoroughly. Likewise, if you are counting on a new manufacturing or merchandis- ing method to significantly improve your competitive position, you must describe the mechanisms and importance of those techniques.

Many sources of information exist if you need to locate resources to prepare your Operations section. Commercial real estate agents can easily describe the advantages, disadvantages, and resources available in your location. Trade associations can assist in helping you find consultants for plant and manufacturing design and direct you to sources of equipment. ThomasNet (www.ThomasNet.com), is an invaluable source of suppliers, distributors, and equipment manufacturers.

Operations, naturally, have many financial implications. You should note these in the Flow-Through Financial worksheets in this chapter and transfer the numbers to your financial statements in Chapter 16. If yours is a new business, you should include the Start-Up Costs worksheet in your business plan. For both new and existing businesses, the Equipment Schedule work- sheet, which you need for internal financial projections, can also be included in the Appendix of your business plan.

facilities In real estate the old saying is that the three most important factors are loca- tion, location, location. In business, as well, location can prove the critical factor for success. For example, with retail operations, a bad location can

“The biggest part of becoming a winner is developing standards of performance. Know how you go about doing things; know your process. Constantly develop the application of your knowledge and skills. Having standards means many, many people function within a framework. That framework includes more than just how you do the job at hand. For instance, it might include punctuality and how people dress. Sometimes almost symbolic, ritualistic matters become important; on the 49ers, everyone’s shirt had to be tucked in at all times. It reinforced the sense of professionalism and being part of a team.” Bill Walsh former coach and president, s.f. 49ers

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mean you just don’t attract enough customers to your store. Likewise, in manufacturing and distribution companies, a location lacking adequate access to transportation or suppliers may prevent you from manufacturing or distributing your product in a timely or cost-effective manner.

The physical aspects of the facilities themselves can be extremely impor- tant for a company’s continued growth. Are your facilities large enough to accommodate expansion in the coming years? Are the necessary utilities available and energy efficient? Are you near an airport or rail terminal? Or, are you locked into an inadequate facility that reduces your overall produc- tion and distribution capacity?

Occasionally, the length and terms of a lease may be a particularly attrac- tive (or problematic) aspect of a business. Having a long-term, low-rent lease in a desirable area may be, in and of itself, a significant business asset. A lease that needs to be renegotiated in the near future may spell trouble for your company, as you may be facing substantially increased rents. In a new lease, look to negotiate certain concessions, such as leasehold improvements or a few months’ free rent (particularly while construction is occurring).

When evaluating your facilities, examine those aspects most important for your particular business. Do you need a prestigious address in a down- town office building for your law firm? Do you need to be close to key sup- pliers for your manufacturing plant? Do you need access to environmentally approved disposal sites for your chemical company?

In the Facilities worksheet on page 182, describe all the facilities in which your company operates, emphasizing any competitive and cost-saving advantages they may have. Specific points to mention are listed below.

location Include company headquarters, retail store(s), branch offices, additional plants, distribution centers, and the like. Describe any mobile facilities. List square footage, and how the square footage is allocated (office space, retail, production, shipping, etc.). Describe access to parking and transportation; air, rail, and surface shipping access; and loading docks, warehouse, and other necessary facilities.

lease What are the terms and length of the lease? Do you pay straight rent or rent plus a percentage of gross or net profits? Can you sublet? Did you receive concessions in the lease? What restrictions are in the lease (for instance, hours of operation or promotional activities that are often mandated in mall leases)?

improvements What additions, such as walls, signage, or utility hookups, have been made to the property, or remain to be made? Who pays for such improve- ments — you or your landlord?

“People have no idea you’re there if they can’t see you. Get a good location; it’s money well spent. As a start-up, it’s hard to advertise; so, instead of a big advertising budget, spend the money on a better location. Find a good real estate broker with retail experience. Have them identify successful businesses serving your target customer and then locate near them. Capture their customers.” nancy Glaser Business strategies consultant

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facilities $ ➤ $ $ ➤ $ $ $

Describe the attributes of your facilities.

pRincipal lOcatiOn(s)

Location: ______________________________________________________________________________________

square Footage: ________________________________________________________________________________

Description of Use: ______________________________________________________________________________

Parking/Transportation: ___________________________________________________________________________

shipping Access/Facilities: ________________________________________________________________________

Warehouse Facilities: ____________________________________________________________________________

other: ________________________________________________________________________________________

BRancH Offices/aDDitiOnal plants/DistRiButiOn centeRs/OtHeR facilities

number: ______________________________________________________________________________________

Locations: _____________________________________________________________________________________

square Footage: ________________________________________________________________________________

Description of Use: ______________________________________________________________________________

other Aspects: _________________________________________________________________________________

lease(s)

Length of Lease: ________________________________________________________________________________

Rent/Terms of Rent:__________________________________ other Terms:__________________________________

Restrictions: ___________________________________________________________________________________

Concessions: ___________________________________________________________________________________

impROvements

Existing: _______________________________________________________________________________________

To be made: ____________________________________________________________________________________

Paid by landlord:_________________________________ Paid by company:_________________________________

utilities/maintenance

Average monthly utility costs?______________________ How do costs vary seasonally? ______________________

How do costs vary due to production levels? ___________ Are there energy-efficient methods in use? ___________

Average maintenance costs? ______________________ Do any maintenance costs vary? _____________________

other: ________________________________________________________________________________________

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utilities/maintenance Include the costs of gas, water, and electricity. Note seasonal or production level variation. List the cost of janitorial, trash-removal, and other ongoing facility maintenance expenses. Emphasize energy-efficient measures. Is the facility wired for high speed data transmission, ethernet connections, or otherwise fitted out for technology uses?

Key factors What aspects of your facilities are most likely to affect your company’s success? Are you near your target market? Are you in a prestigious or conve- nient location? Does your lease have particularly favorable terms? Will you be able to grow in these facilities without moving?

production Every manufacturing business has a production process — the way it goes about fabricating a raw or component material and creating an item with greater usefulness or desirability. But even if yours is a service or retail business, you have a method of “producing” something of value for your customers, although you may not have given this process much thought.

Take time to evaluate and assess your production plan to see if you can enhance efficiencies, improve the quality of the finished “product,” and, in the long run, increase your profit margin. Look at the various stages involved in creating your product or service: Can these stages be shortened? If so, you will be able to produce and sell more in less time.

Examine how you organize and deploy your workforce. Do you use a team approach — with one group of workers responsible for a job from start to finish? Or, do you use a production-line approach, with a worker doing the same portion of each job and then passing it along to someone else? Do you have clear-cut lines of authority, or do workers often not know who is responsible for making decisions?

Increasingly, companies are utilizing variable labor in addition to permanent employees, as an integral part of their workforce. Variable labor — employees hired to perform a specific task for a specific period of time — is particularly useful for seasonal work or unusually large or special orders. Many companies even use variable labor, in the form of consultants, for professional positions. Utilizing variable labor gives you more control over ongoing expenses, since you can add these employees in good times but don’t have them on the payroll when business is slow. Maintaining high quality in a variable labor force is frequently difficult, however, and employee motivation is often low.

Another way to increase flexibility in fixed costs is to subcontract — or outsource — various aspects of production to other companies. These com- panies then have the responsibility for maintaining the workforce, facilities, and equipment necessary to produce their component piece. While the per piece cost to you includes a profit to these companies, and thus, your per piece cost is probably greater than if you had all the necessary means of

“Our mission is to employ women from Vietnam. You could say that our HR policy is the center of the business.” pauline lewis Owner, oovoo design

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production in-house, the advantages of not having your money tied up in overhead may be well worth the additional cost. Even service businesses can consider ways to subcontract portions of their contracts.

You should also pay particular attention to the issue of quality in your production process. Poor quality can be costly — it can not only cost you in the form of goods you have to discard as being faulty, but it can cost you customers. If you intend to sell your goods internationally, you will likely want to follow procedures to get your products or processes certified as meeting international quality standards, such as ISO 9000. These measures are set by the International Organization for Standardization and have been adopted by more than 90 countries worldwide. To find out more about such procedures, check the ISO website at www.iso.ch.

assessing Your production plan Two worksheets on the next few pages help you evaluate your production process. The Production worksheet covers the major aspects other than equipment, which is handled on a separate form, the Equipment Schedule worksheet. You may wish to include the Equipment Schedule in the Appendix of your business plan. If yours is a manufacturing business, you might also wish to include a flow chart of your production process in the Appendix.

The aspects covered in the Production worksheet are:

n Labor/Variable Labor. What kinds of and how many employees do you require to produce your product or service? How do you utilize them? How are decisions reached in the workforce? Do you use variable labor, employ subcontractors, or outsource portions of the production process?

n Productivity. Productivity measures how long and how many people it requires to produce your product or service. This can have a major impact on your profit margin.

If you can produce more goods in less time, you increase the amount of profit earned from every dollar spent on salaries, equipment, and rent. What methods can you use to increase productivity without reducing quality?

n Capacity. Capacity is the measure of how much work your current facili- ties, labor force, and equipment can handle. If you have excess capacity, you have the ability to produce more than you are currently selling using your current workforce, equipment, and plant.

Excess capacity represents a waste of already paid-for earning potential.

Can you find ways to use or reduce excess capacity? If you are operating at close to full capacity, what plans do you have for expansion, to handle growth?

n Quality Control. All the various measures you take to ensure that you maintain the same standards with each product or service come under the category of Quality Control.

“If you want to be financed, you have to be realistic about how your product or service is going to be accepted. You’d be surprised at how many entrepreneurs believe that revenues are going to go through the roof. But most people don’t think that the more sales they make, the more money they are going to need.” Damon Doe managing partner, montage capital

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Such activities include regular inspection throughout the production process, occasional testing or sampling of randomly selected goods, employee-involvement training, reward programs for quality assurance, and solicitation of customer comments.

n Equipment and Furniture. (List separately on the Equipment Schedule worksheet.) Include manufacturing equipment, transportation vehicles, store fixtures and office equipment, and furniture. List any payment obli- gations or leases. Under “Status” describe the state of the equipment in terms of future use potential, technological development, and substantial maintenance required. Also indicate date to be replaced, if known.

inventory control Many businesses overlook the vital contribution that careful inventory management makes to the profitability of a company. How much money you have tied up in supplies or finished product sitting in your warehouse makes a direct impact on your bottom line. Every box of raw material is not just taking up space; it’s money sitting around, losing value.

Of course, if you don’t have sufficient inventory, you occasionally can’t make sales. Every business dreads the possibility of receiving lucrative orders it can’t fill due to inadequate supplies. And sometimes you don’t just lose sales; you lose a customer. This is the risk in maintaining too low an inventory.

The answer is to develop inventory management systems that substan- tially increase the flow of information from the sales point to the production and purchasing teams. Information can reduce the amount of guesswork that goes into maintaining inventory. Know how sales are going, even on a daily basis.

Suppliers can help. Work with them to see how to reduce the amount of time necessary to receive goods and to explore the potential of lowering the amount of minimum orders. Large businesses often have significant clout with suppliers, but even smaller companies should look for suppliers who are willing to increase flexibility in their orders and deliveries.

methods of inventory management One of the approaches to inventory management is “just-in-time” inven- tory control. This concept emphasizes keeping inventory stocked only to the levels needed to produce goods just in time for delivery, usually in response to orders in-hand. Such a system is highly dependent on adequate commu- nication systems and good supplier relationships.

In devising your inventory control and communication procedures, you will want to devise a Management Information System (MIS). Usually such a system centers on the computerized maintenance and communication of information, such as order and stock levels, reorder dates, historical tracking of sales, and so forth. Computer professionals can help you select and adapt an MIS for your company.

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production

Describe the key factors (other than equipment) involved in producing your product or service.

pROcesses

What are the stages of production? _________________________________________________________________

How does the product/work get transferred from one stage to another? _____________________________________

How does the process utilize new technologies? _______________________________________________________

What are the advantages of your production process? __________________________________________________

What are the drawbacks of your production process? ___________________________________________________

What components are contracted for others to produce? ________________________________________________

What are the costs of these outside services/components?_______________________________________________

Briefly describe the subcontracting company(s): _______________________________________________________

What other costs are directly associated with the production process? _____________________________________

laBOR

Total number of employees: ___ permanent: full-time: ___ part-time: ___ variable: full-time: ___ part-time: ___

When do you use variable labor? ___________________________________________________________________

How many shifts do you operate? ______ How long are the shifts? ______ What are the hours of operation? ______

What are the basic qualifications required of employees? ________________________________________________

How are employees organized:  team approach?  production line?  other?________________________

Who supervises employees? ______________________________________________________________________

other labor issues: ______________________________________________________________________________

other labor costs: _______________________________________________________________________________

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$ ➤ $ $ ➤ $ $ $

pRODuctivitY

For each product or service, list how many minutes, hours, days, weeks, and workers it takes to produce one unit.

How many units can each worker produce in a minute, hour, day, week? ____________________________________

What methods could reduce the amount of production time required without reducing quality? ___________________

What other methods can you use to increase productivity? _______________________________________________

capacitY

How many units of goods or services can be produced in your current facility in a day ____ week ____ month ____?

How many units of goods or services can your workforce handle in a day ____ week ____ month ____?

At what percentage of capacity are you now operating in terms of workforce ____ equipment ____ facilities ____?

How is excess capacity currently utilized? ____________________________________________________________

What are other ways to use excess capacity? _________________________________________________________

How can you provide for increased capacity, if needed for growth? ________________________________________

QualitY cOntROl

Who is responsible for overall quality control issues? ___________________________________________________

What steps are taken to inspect finished goods or services? ______________________________________________

What intermediate steps are taken to ensure quality in the process? _______________________________________

Are products and services tested for quality? __________________________________________________________

How are employees motivated to ensure quality? _______________________________________________________

How do you solicit customer comments? _____________________________________________________________

What other steps are taken for quality control? ________________________________________________________

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equipment schedule $ ➤ $ $ ➤ $ $ $

List your company’s existing and anticipated equipment.

cuRRentlY OWneD eQuipment

Description (name/Model #) status Date Purchased Cost Payments

eQuipment tO Be puRcHaseD

Description Purchase Date Cost Terms Payments

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You will also need to discuss how you want to value and record your inventory. Two commonly used methods are LIFO ( last in, first out) and FIFO (first in, first out). These are basic methods of valuing your remaining stock, and they can have significantly disparate tax implications, so this deci- sion should be reached in consultation with your accountant. Complete the worksheet on page 190 to assess your inventory control procedures.

supply and Distribution Almost every business has goods or materials coming in to the company and finished products or services going out. The companies you rely on to provide you with incoming goods, and the methods you use to sell and distribute your product, are both essential to the continuing well-being of your business.

Most businesses will experience difficulties with their suppliers or dis- tributors at some point. So it can serve you well to explore the abilities, flex- ibility, and alternatives of your current suppliers and distributors.

Try not to be dependent on just one supplier or distributor; your finan- cial future will be too vulnerable if they fail you. Work to develop excellent relationships with your suppliers and distributors; you want them to feel that you are in a partnership together so that they will try to do everything possible to meet your needs. Be responsive to their needs as well; work out payment plans and communication methods to reduce pressures on them.

select suppliers that understand Your needs Usually, competitive supply sources exist, giving you a number of choices and enabling you to negotiate better prices. But don’t make your decisions based on price alone, for you may find the price right but the delivery time and quality problematic. Select suppliers with whom you can communicate well; make certain they understand your specifications and can consistently meet your standards.

Reliable Distribution is a must Reliable distribution often presents a far more difficult problem. If your product is distributed through a wholesaler or “middleman,” you need to carefully examine your choice of such distributor(s). Your selection of distributor(s) may be one of the single most important decisions you make, especially if they are responsible for most of your sales.

Once again, try not to put all your eggs in one basket. If you can ethi- cally use more than one distributor, do so. Ask retailers or consumers about the reputation of distributors who sell to them so that you can be certain you are dealing with a reliable company and one that is well-regarded.

Complete the Supply and Distribution worksheet on page 192 to assess your sources of supply and distribution.

“To finance our growth rate, we opted to lease everything. The only thing we purchased was the equipment necessary for our patents. From an ultimate financial strategy, leasing was the only way we could grow the way we did. For us, growth was the objective rather than net profit.” larry leigon founder, ariel vineyards

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inventory control

This worksheet helps you get a clear picture of your inventory control procedures.

Who is responsible for inventory control? _____________________________________________________________

What is the minimum level of inventory necessary to be maintained at all time? _______________________________

What is the minimum amount of time necessary to get materials from suppliers? ______________________________

What is the minimum amount of time necessary to produce goods to order? __________________________________

What is the minimum amount of time necessary to ship goods? ____________________________________________

How is information about sales translated to the production and purchasing departments? ______________________

What Management information systems does your company use? _________________________________________

What steps do you take to reduce theft of inventory? ____________________________________________________

What other inventory control steps does your company take? _____________________________________________

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supply and Distribution $ ➤ $ $ ➤ $ $ $

These questions help you evaluate your current supply and distribution needs.

supplieRs

Who is responsible for your purchasing decisions? _____________________________________________________

What are the key goods or materials necessary? _______________________________________________________

What are the average costs of these goods? __________________________________________________________

List your sources of key goods or materials: ___________________________________________________________

List any alternative sources of these supplies: _________________________________________________________

Are any goods available from only one or two suppliers?  Yes  no

if so, how reliable or secure are these suppliers? _______________________________________________________

Can your suppliers provide you with “on demand” or short-notice goods?  Yes  no

if so, what additional costs do you incur? _____________________________________________________________

Will your suppliers negotiate no- or low-minimum order contracts?  Yes  no

What kind of credit terms will your suppliers offer? _____________________________________________________

What are your average credit costs? ________________________________________________________________

Which key factors will determine your choice of suppliers? _______________________________________________

other supplier issues: ____________________________________________________________________________

DistRiButiOn

How is your product or service distributed to the consumer? ______________________________________________

is there a wholesaler or distributor between you and the consumer?  Yes  no

if so, how many such companies do you use? _________________________________________________________

What are the key qualifications and advantages of such companies? _______________________________________

What are the drawbacks of such companies? _________________________________________________________

if you use only one or two distributors, how secure are these companies? ___________________________________

What is their reputation among consumers? __________________________________________________________

What kinds of payments or commissions do these distributors receive? _____________________________________

Describe any alternative distribution methods available: _________________________________________________

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Order fulfillment and customer service Remember, your work is not finished when you produce a product or secure an order from a customer. You still need to make sure your customer receives the product he or she wanted, in good condition, and in a timely fashion. You need to know that you have satisfied your customer.

Surprisingly, many companies pay relatively little attention to order ful- fillment and customer service since they do not seem like pressing concerns or sources of increased profit margin. However, order fulfillment is part of any current sale, and customer service is part of any future sale.

Customers are constantly demanding better and better service. They expect to get what they want, when they want it, and to be treated graciously and fairly in the process. Many companies are renowned for their customer service and have built entire marketing strategies around it.

Some companies assume they are doing just fine in the way of customer service because they don’t receive many complaints. But you can’t judge how well you are serving your customers just by the number of complaints you receive; the unhappy customer who doesn’t complain is almost certainly a lost customer. At least a customer who tells you the problem gives you a chance to make it right.

So, it is your job to make certain that customers have little reason for complaints. Training all employees — from the shipping clerk to the sales representative — in customer service can pay off for you in customer reten- tion and referrals. Build sufficient flexibility into your policies so that you can easily handle unusual or difficult requests. Empower employees to make certain decisions on the spot (such as accepting returns) instead of requiring each customer request to be approved by a manager. Make it easy for your customers to let you know what they want by soliciting customer sugges- tions and feedback.

Examine your order fulfillment processes. Often, orders are not commu- nicated clearly or quickly to the processing department, and valuable time is lost due to inadequate internal communication. Assess the methods by which you prepare goods for shipping and deliver goods to customers. If you hire outside companies to ship or deliver your product directly to the cus- tomer, make certain they can deliver on emergency or rush time schedules, or line up other shippers for such deliveries.

Look at the kinds of services you provide customers after sale. Good customer service emphasizes developing an ongoing relationship with your customers, so you need repair, service, warranty, and return policies that reassure customers that you continue to be interested in them even after you have their money.

Complete the worksheet on page 193 to evaluate your order fulfillment and customer service practices.

“One method of ensuring quality-control is to put guest comment sheets in each room. The comment sheets are read, assessed, and charted. Every month, we do detailed assessments of cleanliness, friendliness, ground maintenance, telephone service, and so forth, for each managed property.” andre tatibouet founder, aston Hotels

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Order fulfillment and customer service $ ➤ $ $ ➤ $ $ $

Describe your company’s order fulfillment and customer service practices.

Who processes orders? __________________________________________________________________________

How are orders communicated from the salesperson to the order fulfillment department? _______________________

How are online orders transmitted to the order fulfillment department? ______________________________________

How are orders checked to be certain they are filled promptly and accurately? _______________________________

What percentage of orders are prepared incorrectly? ___________________________________________________

How are goods prepared for shipping? _______________________________________________________________

How do you ship products? ________________________________________________________________________

What is the shipping cost of your average order? _______________________________________________________

Are your shippers able to ship on short or emergency notice?  Yes  no

if so, are extra expenses incurred?  Yes  no

Who pays these:  you or  the customer?

What alternative methods exist to ship products? ______________________________________________________

What service programs do you offer? ________________________________________________________________

What maintenance or repair programs do you offer? ____________________________________________________

What percentage of your orders require repairs? _______________________________________________________

What is the average cost of the repair to your company? _________________________________________________

What is your return policy? ________________________________________________________________________

What is your average rate of returns? ________________________________________________________________

What is the cost of the average return? ______________________________________________________________

Do you have a complaint or customer service department?  Yes  no

How do you solicit the opinions of customers? _________________________________________________________

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Global Operational issues Virtually any aspect of your operations can have a global component today, regardless of the size of your business. A restaurant in Sioux Falls, South Dakota, has its website built by a company in India. A wholesaler in Virginia imports handmade purses from Vietnam. An electronics company has its video games manufactured in China. A San Jose, California, travel agency’s call center is staffed in the Philippines.

Another example is The Planning Shop, the publisher of this book. Although a small company, it does business globally. The content is created in the United States. The books are printed in Canada. Mobile applications are developed in Australia. Other publishers in more than 30 countries license the content and translate it for their nations. And books are sold to business schools and consumers throughout the world.

With the Internet, VOIP (Voice over IP), and other technologies, it’s both easy and inexpensive to do business internationally, even to have staff members or critical subcontractors or vendors located halfway around the world.

You, too, can take advantage of a more connected global business world to source supplies, inventory, or raw materials; to have your products manufactured; or to have services provided. Perhaps you may choose to have actual facilities or production in other countries.

As you begin to consider your international operations, it is useful to understand two terms that are widely used:

n Outsourcing: Having another company or vendor provide a business service or component product. For example, a company may outsource the manufacturing of its products to another company or may outsource its technical support service to a separate company. Technically, using an independent contractor to accomplish a key business function, such as managing your company’s public relations or human resource functions, is also outsourcing. You can outsource to companies in your own country or internationally.

n Offshoring: Having some of your company’s operations or functions performed in another country. This typically means utilizing outside vendors located in another country, but it could technically mean trans- ferring your own company’s operations to another country, usually to reduce costs. It can also mean setting up an independent subsidiary in another country to both lower costs and reduce taxes.

While offshoring is typically chosen to reduce costs, hidden expenses may reduce the anticipated savings. Many companies that offshore key services — such as software development — have found that they must spend significantly more of their onshore staff time developing clear project descriptions and requirements and that projects are not com- pleted as quickly.

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Globalization: Operations

Complete the worksheet on global operations if you plan to handle any of your company’s operations internationally.

Do you plan on having any international locations or facilities?  Yes  no

if so, where will they be located? ___________________________________________________________________

Have you identified the specific facilities? ____________________________________________________________

ORDeR fulfillment

Will you sell any tangible products internationally?  Yes  no

if so, how will you fulfill those orders? _______________________________________________________________

Are there custom, tariff, shipping, or other problems? ___________________________________________________

supplieRs anD venDORs

Which products can be provided by international vendors? _______________________________________________

Which parts/supplies/inventory can be provided by international vendors? __________________________________

Are there any import/custom/tariff considerations? _____________________________________________________

What is the potential for disruption of your supply chain (due to political, climate, or other factors)? _______________

Which services can be provided by global vendors? ____________________________________________________

manufactuRinG/pRODuctiOn

Customer service/tech support/call centers: __________________________________________________________

Design/creative: ________________________________________________________________________________

Business infrastructure services (e.g., marketing, HR, etc.): _______________________________________________

other technology services: ________________________________________________________________________

OtHeR GlOBal OpeRatiOnal issues

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Some of the unexpected costs you may encounter when offshoring ser- vices are:

— additional time spent in describing project requirements

— additional time spent in managing offshore staff/vendors

— lower productivity levels

— lower quality levels

— time and expense of occasional face-to-face meetings

— currency fluctuations or exchange costs

One solution many smaller companies use when dealing with interna- tional suppliers is to go through brokers in their home countries who find and manage global suppliers. Your industry association may help you identify brokers who deal with international vendors.

Research and Development A business that stands still is one that is almost certainly going to fail. You must keep on top of new developments that are going to affect your busi- ness. Your target market is always changing: growing older, developing new tastes, using new products. Your competitors understand this, so you need to stay aware of what they are doing if you wish to increase your ability to compete effectively.

all companies need Ongoing product Development Some companies need relatively large research and development components because they deal with constantly evolving technology or rapidly changing consumer preferences. But even companies that sell old-fashioned products (chocolate chip cookies, for instance) need to be developing new products based on changing customer values and concerns (such as low-fat cookies).

Your research and development activities may range from running a complete department staffed with researchers experimenting with new prod- ucts and new equipment, to merely subscribing to certain publications and attending conferences. Regardless of the extent of such activities, research and development must be a priority in any business.

Examine the ways you plan to stay aware of developments likely to change your company’s products, services, and practices. Make certain that key employees are likewise involved in research and development activities.

Complete the Research and Development worksheet on page 197 to evaluate research and development in your company.

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Research and Development $ ➤ $ $ ➤ $ $ $

This worksheet helps you assess your ongoing research and development efforts and costs.

Describe any new products currently in development: ___________________________________________________

Describe any new services currently in development: ___________________________________________________

Which staff members have research and development responsibilities? _____________________________________

How are staff members used for research and development? _____________________________________________

What percentage of your staff’s time is devoted to research and development? _______________________________