1. 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
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2. 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.
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3. 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
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4. 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)
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5. 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.
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6. 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
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7. 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
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8. 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.
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9. 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
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10. 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
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11. 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
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12. 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.
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13. 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
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14. 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
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