Chapter Outline

LO 16.1 Describe the elements of operations systems.

In developing a system for producing your product or service, your business takes inputs such as raw materials, skills, money, information, and energy, and transforms them in some way to add value to product outputs. You need to receive feedback at every stage to control the process.

Operating systems used by manufacturers are either analytic (systems that take inputs and reduce them into component parts to produce outputs) or synthetic (systems that combine inputs in producing outputs). The processes that manufacturers use are either continuous or intermittent. A continuous process produces the same good without interruption for a long period of time. An intermittent process is stopped with some frequency to change the products being made. Service businesses also take inputs and produce outputs through some transformation process. Most have used intermittent processes, but some have adopted continuous processes in an effort to increase productivity.

LO 16.2 Explain how to measure productivity.

The ratio of inputs used to produce outputs is called productivity. Productivity measures the efficiency of your entie business or any part of it. It can be improved by changing processes used by your business, by getting your employees to accomplish more, or by using some type of technology that speeds production. To calculate productivity, simply divide outputs by inputs.

LO 16.3 Recount the methods of scheduling operations.

Scheduling involves planning what work will need to be done and determining what resources you will need to produce your product or service. Forward scheduling is accomplished by having resources available and ready as customer orders come in. Backward scheduling is used when you plan a job around the date when the project must be done. Gantt charts are a useful backward-scheduling tool.

LO 16.4  Discuss the role of quality in operations management.

A company’s tolerance range denotes the boundaries of acceptable quality. The defect rate indicates the number of products made that fall outside the tolerance range. Six sigma establishes a tolerance range of only 3.4 defects per million products produced. Statistical process control (SPC) is a procedure used to determine the probability of a devi-ation being a simple, random, unimportant variation or a sign of a problem in your production process that must be corrected.Controlling operations enables you to measure what is being accomplished in your business. Feed forward qual-ity control applies to your company’s inputs. Concurrent quality control involves monitoring your transformation pro-cesses. Feedback quality control relies on inspecting your outputs.

LO 16.5  Explain the importance of purchasing and describe its procedures.

Purchasing is an important part of a small business because the goods or raw materials that you bring into your business become the products you will in turn have available to sell to your customers. A savings gained from the cost of purchased items has a larger effect on your profit levelthan an increase in sales revenue.Small manufacturers must first decide whether to make theparts needed in their production or to purchase components from another business. Retailers must decide whether to hire personnel or to outsource needed services. Both of these are examples of the make-or-buy decision. Factors such as prod-uct quality, location of supplier, services that suppliers offer, and credit terms available need to be considered when selecting suppliers.

LO 16.6  Calculate how much inventory you need and when.

If your small business requires inventory, you must maintain a balance between having enough goods on hand to prevent lost sales due to items being out of stock and having inventory dol-lars lying idle on a shelf. Retailers and manufacturers need to heed the Pareto rule by paying attention to the “vital few” rather than the “trivial many” items in inventory. Shrinkage, obsoles-cence, holding costs, and ordering costs are factors to be con-sidered in determining the inventory needs of your business.To control your inventory, you must begin by determining your reorder point (when you need to reorder) and your reorder quan-tity (how much you need to reorder). Many small businesses depend on visual control to maintain inventory. Economic order quantity and ABC classification ae common tools for con-trolling small business inventory.