Operations Control Objectives Identify four types of operating costs Learn how businesses keep track of their inventory Understand what operations managers mean by the term “quality” Explain how total quality management can increase the quality of a company’s products 11/12/2018

Controlling operational costs Direct costs - Labor, materials, and overhead costs associated with production Direct labor costs Wages & salaries of employees directly involved in producing the company’s products Does not include salaries of support staff, such as secretaries Direct materials costs Cost of materials that become part of the final product Direct overhead costs All other costs associated with production Cost of training new production workers, electricity, rent, & taxes are examples To control costs, companies budget a certain amount of money for each of the categories mentioned. They keep careful records showing how much they spend on each category and identify areas where costs appear to be excessive. 11/12/2018

Controlling inventory Raw materials, partially finished goods, and finished goods that a company keeps in stock Finished goods Products that are ready to be shipped to customers Inventories are maintained to ensure that customer demand is met Problem of holding inventory It’s expensive 11/12/2018

Holding costs Storage & handling charges – cost of renting warehouse space to store inventory & staff time involved in keeping track of inventory Interest charges – inventory is purchased on credit. Potential interest is lost on money that is taken out of savings accounts Taxes – many states, cities, & countries impose taxes on business inventories Insurance – purchased by businesses to protect their inventories against burglary, theft, & natural disasters Obsolescence – large amounts of inventory could eventually become obsolete if held too long. It may not be sold. Deterioration – many products have limited shelf lives. After a certain date, the product can no longer be used (ex. Foods) 11/12/2018

Managing inventory levels Operations managers control costs by not maintaining unnecessary inventories. Knowing how much inventory to keep is tricky. Keeping too much inventory is expensive while having too little prevents a business from filling orders. Cost of materials determines the level of raw materials inventories Maintaining safety stocks – used to protect against running out of stock. This is extra inventory kept on hand. Prepare businesses for unanticipated situations Allows a company to respond immediately if a large order arrives unexpectedly. Protects businesses against shortages or delays from suppliers or the receipt of unusable materials. 11/12/2018

Managing Inventory Levels (cont) Maintaining seasonal stocks to account for variations in sales (ex. Outdoor furniture needs to be on hand for spring & summer) Using the ABC classification system Inventory is managed based on their value Allows managers to control closely inventory levels of those items that are most important to their operations Ex. ABC System - Group A are materials that should be monitored daily, (B) should be monitored weekly, (C) should be checked every two or three months Shortcoming of ABC system: some group C items may be important to a business’s operations 11/12/2018

Determining when to reorder Two methods used by operations managers when ordering: Fixed-order quantity method Orders are placed whenever inventory reaches a predetermined level Operations manager keeps track of inventory in stock & reorders when the level falls This method ensures that the company will not run out of inventory Fixed-order period method Orders are placed at predetermined intervals, regardless of how much inventory is on hand Supplies can be ordered on the last day of every month so it’s not necessary to keep track of inventory levels 11/12/2018

Determining the economic order quantity Operations managers need to know when to reorder supplies & materials They also need to know how much to order When determining the optimal number of units to order, managers must consider: How much it costs to place an order, including the cost of preparing & shipping the order How much it costs to keep the item in inventory, including all holding costs By placing small orders, a manager can keep holding costs low. However, frequent re-ordering can be costly. Ordering in small quantities may prevent businesses from taking advantage of scale discounts, or discounts for ordering in bulk. 11/12/2018

Economic order quantity Number of units at which ordering costs equal holding costs. Operations managers use this to keep costs as low as possible Tracking inventory Bar code technology – bar codes on items can reduce errors in tracking inventory. When an item is purchased, the employee scans the bar code. The computer program recognizes the information contained in the bar code & adds or subtracts the item from inventory Physical inventory – involves actually counting the number of units of inventory a company holds in stock. Most businesses perform a physical inventory once or twice a year Purpose is to see if there are discrepancies due to errors or unauthorized withdrawals, including theft 11/12/2018

Quality management What is quality? Managing for quality How well a product is made High-quality products are reliable & attractive A business needs to ensure that established quality standards are met Managing for quality Companies need to maintain the quality of their products at, or above, the level that customers expect. Ensuring that a company’s products meet standards involves three processes: Quality planning Quality control Quality improvement 11/12/2018

Quality planning Establishing goals that will help a company produce goods customers want to buy Sometimes quality goals are driven by the following things: Driven by market Government regulations 11/12/2018

Quality control Process by which a company measures actual performance against set quality standards How companies control for quantity: Quality inspection- inspect products to ensure that they meet quality standards Depending on the type of product sold, inspections can be done by sample or every single product produced. Quality assurance- quality is the responsibility of all employees, not just quality-control inspectors. Emphasis is on preventing defects & mistakes. Productivity increases as a result. 11/12/2018

Quality improvement When quality standards are realistic & performance is not affected by uncontrollable factors, the production process itself may need to be changed Customers are willing to pay for quality only up to a point Total quality management (TQM)- system of management that involves all employees in improving quality & productivity by improving work methods. Company-wide effort to ensure that a commitment to quality becomes part of the company’s corporate culture. Helps companies reduce defects, empower & train workers, implement suggestion programs, & listen to customers 11/12/2018

TQM involves the following steps: Find our what customers want by using surveys, focus groups, interviews, or other technique Design a product that will meet or exceed what customers want Design a production process that gets the job done correctly the first time Keep track of results, and use those results to figure out how to improve the system Extend these concepts to suppliers & distribution 11/12/2018