OPERATIONS MANAGEMENT

• Operations - the part of a business organization that is responsible for producing goods or services

• Operations management - The management of systems or processes that create goods and/or

provide services

Good or Service?

• Goods - physical items that include raw materials, parts, subassemblies, and final products. (e.g

Oven, Shampoo)

• Services - activities that provide some combination of time, location, form or psychological value.

(e.g Air travel, Haircut)

Supply Chain

• Supply chain – a sequence of activities and organizations involved in producing and delivering a

good or service

The Transformation Process

• Feedback - measurements taken at various points in the transformation process

• Control - the comparison of feedback against previously established standards to determine if

corrective action is needed

Goods-service Continuum - products are typically neither purely service- or purely goodsbased.
Manufacturing vs. Service

1. Degree of customer contact

2. Uniformity of input

3. Labor content of jobs

4. Uniformity of output

5. Measurement of productivity

6. Production and delivery

7. Quality assurance

8. Amount of inventory

9. Evaluation of work

10. Ability to patent design

Why Study Operations Management?

• Every aspect of business affects or is affected by operations

• Many service jobs are closely related to operations

o Financial services

o Marketing services

o Accounting services

o Information services

• Through learning about operations and supply chains you will have a better understanding

of:

o The world you live in

o The global dependencies of companies and nations

o Reasons that companies succeed or fail

 o The importance of working with others

Basic Functions of the Business Organization

1. Organization

a. Marketing

b. Operations

c. Finance

Function Overlap

• Finance & operations

o Budgeting

o Economic analysis of investment proposals

o Provision of funds

• Marketing & operations

o Demand data

o Product and service design

o Competitor analysis

o Lead time data

OM and Supply Chain Career Opportunities

• Operations manager

• Supply chain manager

• Production analyst

• Schedule coordinator

• Production manager
 • Industrial engineer

• Purchasing manager

• Inventory manager

• Quality manager

Process Management

• Process - one or more actions that transform inputs into outputs

Three Categories of Business Processes:

• Upper-management processes - govern the operation of the entire organization.

• Operational processes - are core processes that make up the value stream.

• Supporting processes - support the core processes.

Process Variation

Variations can be disruptive to operations and supply chain processes. They may result in additional costs,

delays and shortages, poor quality, and inefficient work systems.

Four Sources of Variation:

• Variety of goods or services being offered - the greater the variety of goods and services

offered, the greater the variation in production or service requirements.

• Structural variation in demand - these are generally predictable. They are important for

capacity planning.

• Random variation - natural variation that is present in all processes. Generally, it cannot be

influenced by managers.
 • Assignable variation - variation that has identifiable sources . This type of variation can be

reduced, or eliminated, by analysis and corrective action.

Scope of Operations Management

The operations function includes many interrelated activities such as:

• Forecasting

• Capacity planning

• Facilities and layout

• Scheduling

• Managing inventories

• Assuring quality

• Motivating employees

• Deciding where to locate facilities

Role of the Operations Manager

The Operations function consists of all activities directly related to producing goods or providing services.

A primary function of the operations manager is to guide the system by decision making.

• System design decisions

• System operation decisions

OM Decision Making

Most operations decisions involve many alternatives that can have quite different impacts on costs or profits.

• What: What resources are needed, and in what amounts?

 • When: When will each resource be needed? When should the work be scheduled? When should

materials and other supplies be ordered?

• Where: Where will the work be done?

• How: How will he product or service be designed? How will the work be done? How will resources

be allocated?

• Who: Who will do the work?

Key Issues for Operations Managers Today

• Economic conditions

• Innovating

• Quality problems

• Risk management

• Competing in a global economy

MARKETING

Marketing - a process by which companies create value for customers and build strong customer

relationships to capture value from customers in return.

The Five C’s of Marketing are the five most important areas of marketing. The five C’s stand for

• Company

• Customers

• Collaborators

• Competitors

• Climate
Understanding the Marketplace and Customer Needs

Core Concepts

• Customer needs, wants, and demands

• Market offerings

• Customer Value and satisfaction

• Exchanges and relationships

• Markets

Customer Needs, Wants, and Demands

• Needs

States of deprivation

o Physical—food, clothing, warmth, safety

o Social—belonging and affection

o Individual—knowledge and self-expression

• Wants - form that human needs take as they are shaped by culture and individual personality

• Demands - human wants backed by buying power

Market offerings - combination of products, services, information, or experiences offered to a market to

satisfy a need or want

Marketing myopia - focusing only on existing wants and losing sight of underlying consumer needs

Customer Value and Satisfaction Expectations

• Customers - value and satisfaction

 • Marketers - set the right level of expectations. not too high or low

Exchange - act of obtaining a desired object from someone by offering something in return

Markets - the set of actual and potential buyers of a product or service

Designing a Customer-Driven Marketing Strategy

Marketing management - art and science of choosing target markets and building profitable relationships

with them

• What customers will we serve?

• How can we best serve these customers?

Selecting Customers to Serve

• Market segmentation - dividing the markets into segments of customers

• Target marketing - which segments to go after

• Demarketing - marketing to reduce demand temporarily or permanently; the aim is not to destroy

demand but to reduce or shift it

Choosing a Value Proposition

• Value Proposition - set of benefits or values a company promises to deliver to customers to

satisfy their needs

Marketing Management Orientations

• Production concept - idea that consumers will favor products that are available or highly

affordable
 • Product concept - idea that consumers will favor products that offer the most quality,

performance, and features. Organizations should therefore devote its energy to making continuous

product improvements.

• Selling concept - idea that consumers will not buy enough of the firm’s products unless it

undertakes a large scale selling and promotion effort

• Marketing concept - idea that achieving organizational goals depends on knowing the needs and

wants of the target markets and delivering the desired satisfactions better than competitors do

Preparing an Integrated Marketing Plan and Program

The marketing mix is the set of tools (four Ps) the firm uses to implement its marketing strategy.

• Product

• Price

• Promotion

• Place

Integrated marketing program - comprehensive plan that communicates and delivers the intended value

to chosen customers.

Building Customer Relationships

Customer Relationship Management (CRM) - overall process of building and maintaining profitable

customer relationships by delivering superior customer value and satisfaction

Relationship Building Blocks: Customer Value and Satisfaction

Customer perceived value

• The difference between total customer value and total customer cost
Customer satisfaction

• The extent to which a product’s perceived performance matches a buyer’s expectations

The Changing Nature of Customer Relationships

• Relating with more carefully selected customers uses selective relationship management to target

fewer, more profitable customers

• Relating more deeply and interactively by incorporating more interactive two-way relationships

through blogs, Websites, online communities and social networks

Partner relationship management - involves working closely with partners in other company departments

and outside the company to jointly bring greater value to customers

• Partners inside the company is every function area interacting with customers

o Electronically

o Cross-functional teams

• Partners outside the company is how marketers connect with their suppliers, channel partners, and

competitors by developing partnerships

• Supply chain is a channel that stretches from raw materials to components to final products to final

buyers

• Supply management

• Strategic partners

• Strategic alliances

Capturing Value from Customers

Creating Customer Loyalty and Retention

 • Customer lifetime value - value of the entire stream of purchases that the customer would make

over a lifetime of patronage

Growing Share of Customer

• Share of customer - portion of the customer’s purchasing that a company gets in its product

categories

• Customer equity - total combined customer lifetime values of all of the company’s customers

Building Customer Equity

• Building the right relationships with the right customers involves treating customers as assets that

need to be managed and maximized

• Different types of customers require different relationship management strategies

- Build the right relationship with the right customers

The New Marketing Landscape

Major Developments

• Digital Age

• Rapid Globalization

• Ethics and Social Responsibility

• Not-for-profit Marketing

BASIC FINANCE

Finance - describes activities associated with banking, leverage or debt, credit, capital markets, money,

and investments
10 Axioms of Financial Management: The Foundations of Financial Decision Making

1. The Risk-Return Trade-off

2. The Time Value of Money

3. Cash is King

4. Incremental Cash Flows

5. Curse of Competitive Markets

6. Efficient Capital Markets

7. The Agency Problem

8. Taxes Bias Business Decisions

9. All Risk is Not Equal

10. Ethical Behavior Means Doing the Right Thing

Financial Markets

Financial Market - a marketplace, where creation and trading of financial assets, such as shares,

debentures, bonds, derivatives, currencies, etc. take place.

Functions of Financial Market

• The functions of the financial market are explained with the help of points below:

• It facilitates the mobilization of savings and puts it to the most productive uses.

• It helps in determining the price of the securities. The frequent interaction between investors helps

in fixing the price of securities, on the basis of their demand and supply in the market.
 • It provides liquidity to tradable assets, by facilitating the exchange, as the investors can readily sell

their securities and convert assets into cash.

• It saves the time, money, and efforts of the parties, as they don’t have to waste resources to find

probable buyers or sellers of securities. Further, it reduces cost by providing valuable information,

regarding the securities traded in the financial market.

• The financial market may or may not have a physical location, i.e. the exchange of assets between

the parties can also take place over the internet or phone also.

Types of Financial Markets

Stock market - trades shares of ownership of public companies

• Over-the-Counter (OTC) Market - a decentralized market—meaning it does not have physical

locations, and trading is conducted electronically—in which market participants trade securities

directly between two parties without a broker.

• Bond Markets - a bond is a security in which an investor loans money for a defined period at a

pre-established interest rate.

• Money Markets - Typically the money markets trade in products with highly liquid short-term

maturities (of less than one year) and are characterized by a high degree of safety and a relatively

low return in interest.

• Derivatives Market - A derivative is a contract between two or more parties whose value is based

on an agreed-upon underlying financial asset (like a security) or set of assets (like an index).

• Forex Market - The forex (foreign exchange) market is the market in which participants can buy,

sell, exchange, and speculate on currencies.

Interest Rates
Interest Rate - percentage of principal charged by the lender for the use of its money. calculated as a

percentage of a loan (or deposit) balance, paid to the lender periodically for the privilege of using their

money.

Principal - amount of money loaned. Since banks borrow money from you (in the form of deposits), they

also pay you an interest rate on your money.

When borrowing: To borrow money, you’ll need to repay what you borrow.

When lending: If you have extra money available, you can lend it out yourself or deposit the funds in a

savings account (effectively letting the bank lend it out or invest the funds).

How much do you pay or earn in interest? It depends on:

• The interest rate

• The amount of the loan

• How long it takes to repay (Capital One, n.d.)

• A higher rate or a longer-term loan results in the borrower paying more.

• Earning Interest - You earn interest when you lend money or deposit funds into an interest-

bearing bank account such as a savings account or a certificate of deposit (CD).

• Paying Interest - When you borrow money, you generally have to pay interest.

• Installment debt - With loans like standard home, 1 auto, 5 and student loans, 6 the interest costs

are baked into your monthly payment.

• Revolving debt - Other loans are revolving loans, meaning you can borrow more month after

month and make periodic payments on the debt.

• Additional costs - Loans are often quoted with an annual percentage rate (APR).
Financial Statements and Cashflow

Main Financial Statements

• Balance Sheets - show what a company owns and what it owes at a fixed point in time.

• Income Statements - show how much money a company made and spent over a period of time.

• Cash Flow Statements - show the exchange of money between a company and the outside world

also over a period of time.

• Statements of Shareholders’ Equity - shows changes in the interests of the company’s

shareholders over time.

Balance Sheets

• Balance Sheet - provides detailed information about a company’s assets, liabilities, and

shareholders’ equity.

• Assets - things that a company owns that have value.

• Liabilities - amounts of money that a company owes to others.

• Shareholders’ equity - sometimes called capital or net worth.

ASSETS = LIABILITIES + SHAREHOLDERS' EQUITY

Income Statements

• Income Statement - a report that shows how much revenue a company earned over a specific

time period (usually for a year or some portion of a year).

• Earnings Per Share or EPS - This calculation tells you how much money shareholders would

receive for each share of stock they own if the company distributed all of its net income for the
 period. To calculate EPS, you take the total net income and divide it by the number of outstanding

shares of the company.

Cash Flow Statements - report a company’s inflows and outflows of cash.

Cash Flow Statements are divided into three main parts. Each part reviews the cash flow from one of three

types of activities:

• Operating Activities - this section of the cash flow statement reconciles the net income (as shown

on the income statement) to the actual cash the company received from or used in its operating

activities.

• Investing Activities - shows the cash flow from all investing activities, which generally include

purchases or sales of long-term assets, such as property, plant, and equipment, as well as

investment securities.

• Financing Activities - shows the cash flow from all financing activities.

Statement of shareholders' equity - details the changes within the equity section of the balance sheet

over a designated period of time.

The report is typically set up in a grid pattern, with the beginning balance in each element of equity stated

across the top, additions to and subtractions from the beginning balances in the middle of the report, and

ending balances at the bottom that incorporate the additions and subtractions. The same format should be

used in all subsequent periods, to provide reporting consistency to the reader. The columns in the matrix

may contain several of the following:

• Common stock - adds the sales of common stock during the period.

• Preferred stock - adds the sales of preferred stock during the period.
 • Retained earnings - adds profits, subtracts losses, and subtracts dividends during the period.

• Treasury stock - adds stock purchased and subtracts treasury stock re-issued during the period.

• Accumulated other comprehensive income - adds and subtracts a variety of unrealized gains

and losses during the period.

• Totals column - includes all of the preceding column totals in aggregate.

Financial Analysis

Corporate Finance Institute Guide to Financial Statement Analysis

Income Statement Analysis

Most analysts start their analysis of financial statements with the income statement. Intuitively, this is

usually the first thing we think about with a business…we often ask questions such as, “how much revenue

does it have, is it profitable, what are the margins like?”

Main Types of Analysis:

Vertical analysis - we will look up and down the income statement (hence, “vertical” analysis) to see how

every line item compares to revenue, as a percentage.

The key metrics we look at are:

• Cost of Goods Sold (COGS) as a percent of revenue

• Gross profit as a percent of revenue

• Depreciation as a percent of revenue

• Selling General & Administrative (SG&A) as a percent of revenue

 • Interest as a percent of revenue

• Earnings Before Tax (EBT) as a percent of revenue

• Tax as a percent of revenue

• Net earnings as a percent of revenue

Horizontal Analysis - we look across the income statement at the year-over-year (YoY) change in each

line item.

Balance Sheet and Leverage Ratios

In this section of the financial statement analysis, we will evaluate the operational efficiency of the

business.

The balance sheet metrics can be divided into several categories, including liquidity, leverage, and

operational efficiency.

The main liquidity ratios for business are:

• Quick ratio

• Current ratio

o Net working capital

The main leverage ratios are:

• Debt to equity

• Debt to capital

• Debt to EBITDA
 • Interest coverage

• Fixed-charge coverage ratio

The main operating efficiency ratios are:

• Inventory turnover

• Accounts receivable days

• Accounts payable days

• Total asset turnover

• Net asset turnover

Cash Flow Statement Analysis - will help us understand the inflows and outflows of cash over the time

period we’re looking at.

Cash Flow Statement Overview

The cash flow statement, or statement of cash flow, consist of three components:

• Cash from operations

• Cash used in investing

• Cash from financing

Rates of Return and Profitability Analysis - we unlock the drivers of financial performance. By using the

pyramid of ratios, we are able to demonstrate how you can determine the profitability, efficiency, and leverage

drivers for any business.

The key insights to be derived from the pyramid of ratios include:

• Return on equity ratio (ROE)

• Profitability, efficiency, and leverage ratios

• Primary, secondary, and tertiary ratios

• Dupont analysis