1

Operations Management for

Business Start-ups 7
 Synopsis

This chapter provides the basic knowledge on how

to manage operations of a business start-up and
small businesses. It covers managing inputs,
processes and outputs that involve planning of
product design, process design, location choice
and layout design, production capacity planning
and management of production schedule and cost,
inventory and quality management.

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 Objectives

The objectives of this chapter are:

1. To introduce operations management.
2. To discuss product design, process
design, location choice and layout design,
production capacity planning and
management of production schedule and
cost, inventory and quality management

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 Learning Outcomes

At the end of this chapter, students should

be able to:
 Discuss basic operations management,
especially for small business start-ups.
 Discuss and apply knowledge on
operations management to their
entrepreneurial practicum project.

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 List of Topics

1. Location Planning
2. Process Design, Sourcing of Equipment
and Layout Planning
3. Production Planning and Capacity
Management
4. Inventory Management
5. Quality Management
6. Operational Costs and Product Costing
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 Introduction

 Operations management can be defined

as the management of resources (inputs),
organizing and designing the
transformation process (production
processes) to produce products and
services (outputs) to achieve objectives of
cost, quality, quantity, time and safety.

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 Components of Production
Management

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 1. Location Planning

 It is crucial for an entrepreneur to choose the

right location for his business because a good
location can result in
– higher sales,
– lower operating cost and
– higher profit.

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 1. Location Planning (cont.)

 In general, the choice of location will depend on the

following factors:
– Close proximity to customers.
– High number of potential customers and high population
growth.
– Close proximity to raw materials.
– Availability of good infrastructures and facilities.
– Availability of manpower.
– Good visibility and easier accessibility.
– Low crime rate and availability of facilities and services
such as hospitals, schools, banks, sport facilities, etc.
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 2. Process Design, Sourcing of
Equipment and Layout Planning

 In a small business employing a traditional

production process, products are made in a
small quantity and they are normally produced
to fulfil specific customers’ needs.
 Generally, the tools and machines used are
designed to perform specific isolated tasks to
help operators perform their work.

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 2. Process Design, Sourcing of
Equipment and Layout Planning
(cont.)
 Entrepreneurs must choose machines that
are suitable with his production tasks in terms
of quality, price, quantity, after-sales service
and maintenance, etc.
 The layout planning and the positioning of the
machines must be designed to achieve
– efficient process flow,
– safe operation,
– effective and convenient process control.
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 Example of Process Flow Chart

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 3. Production Planning and
Capacity Management

 An entrepreneur must design adequate

production facilities to produce outputs that fulfil
sales forecast.
 Decisions must be made on the type, quality and
number of machines or equipment and manpower
required for the plan production.
 Depending on the volume of production, he may
choose to use a fully automatic, semi-automatic
or manual production system.

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 4. Inventory Management

 Entrepreneurs must manage inventory effectively

because:
(a) Adequate inventory helps entrepreneurs to meet
market demand.
(b) Inadequate inventory will cause disruption to
operations and incur missed sales opportunities.
(c) Too much inventory means high inventory costs
and reduce business profit.
 In short, inventory is entrepreneurs’ valuable capital.
– All capital must be managed effectively and efficiently.
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 4. Inventory Management

 In short, inventory is entrepreneurs’ valuable capital.

– All capital must be managed effectively and
efficiently.
 A business that has
– too much inventory will increase holding or
storage (carrying) costs and occupy more space;
– while too little inventory may cause stock
shortage and affect customer service.

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 4. Inventory Management

 The objective of inventory management is to

determine optimum inventory level that is
suitable for the business.
 In a retail business, the general rule of
thumb:
– inventory for fast-moving items should be
adequately stocked,
– while the inventory for slow-moving items
should be few but adequate.
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 5. Quality Management

 Definition of Quality:
– a measure of how close a product or service
conforms to standards and specifications
(Stevenson, 2009).
– a product’s fitness for use; its success in offering
features that consumers want (Juran, 1998).
– ISO definition: "The totality of features and
characteristics of a product or service that bear on
its ability to satisfy stated or implied needs".

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 6. Quality Management

Benefits of quality:
 Remain competitive
 Retain market share
 Acquire profitability
 Achieve customer satisfaction and customer
loyalty
 Produce high quality products/services
 Reduce operational costs (reduced quality
problems, scraps, yield loss, wastages)
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 6. Quality Management

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 6. Quality Management

Cost of Non-quality:
 Entrepreneurs must realize that the cost of non-
quality is very high.
 External costs involve poor reputation, loss of
repeat customers, and rejected or returned
product costs.
 Internal costs involve wasted cost on material and
labour, rework costs and low morale among
workers.

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 6. Quality Management

 An entrepreneur should initially focus on

preventive efforts to eliminate defects and
seek the causes of these defects e.g.
– defective methods,
– materials,
– manpower,
– equipment,
– management procedures and systems,
– layout and work place.
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 6. Quality Management

 An entrepreneur has to identify these quality

defects and find the causes of these defects,
before working out a suitable solution.
 The cause-and-effect diagram (next page),
also known as Ishikawa diagram, can
facilitate an exercise to:
– identifying quality problems,
– their root causes and
– possible remedies or solutions.
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 6. Quality Management

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 Operational Costs and Product
Costing
 One of the objectives of operations management is to
minimize the cost per unit of production, so that the product
can be sold at a competitive price.
 Operational costs include cost of direct materials, direct
labour and overhead.
– Direct materials and labour include the money spent on
materials and labour directly used for the production of the
product.
– Overhead costs include other indirect costs such as wages
for administrative, marketing and finance staff; rental, utility,
transportation, maintenance, depreciation of assets
(equipment) and interest.
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 Operational Costs and Product
Costing (cont.)

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 Summary

 This chapter introduces basic operations

management that needs to be addressed by an
entrepreneur when starting a new business.
 An entrepreneur will have to choose the site
location, plan his production system, and
estimate the cost per unit of the output.
 Ultimately, the operations management must
be able to meet operational objectives of
quality, quantity, delivery time, cost and safety.
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