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Within a business or other organization, the term operations refers to the system through which it converts its inputs into the products and/or services it outputs.
The term operations management refers to planning, leading, organizing and controlling an organization's inputs to provide its products and/or services efficiently in a competitive market.
Though organizational inputs encompass materials and the people and devices used to process them, for brevity this article largely focuses on materials management to the exclusion of the vast field of human resources management.
Provisioning, Procurement and Purchasing
When those in an organization believe they need some thing or service, they should ask themselves several questions. The obvious first question should be "Do we really need this?" or, more specifically, "How will this add value to what our organization offers?"
Through experiences using money as early as childhood, most people gain intuitive understandings of the purchasing process. However, in dealing with larger groups of people and larger amounts of money, it quickly becomes important to communicate aspects of the process in widely-accepted formal terms.
The purchasing process and its terms are summarized below.
The "Next-Best Alternative" Concept
To help answer this first question, we can introduce the "next-best alternative" concept. In this context, we may first ask what the value organization stands to gain or loose without acquiring the product or service. If it adds value, we may proceed to the "make-or-buy" decision.
The "Make-or-Buy" Decision
For any needed product or service, the organization should evaluate whether it would likely create more value for its clients through creating the particular product or service internally or through buying from an external source. Organizations that specialize in providing a particular product or service in large quantities are usually able to better amortize fixed costs – such as specialized equipment and setup – and are said to benefit from economies of scale. Because most organizations – small businesses in particular – have very limited internal resources, much is often bought rather than made.
The process of buying a product or service from an external or "outside" source is often refered to as outsourcing, which begins with selecting potential vendors.
The Vendor Qualification Process
Once it is determined that a product or service is needed and that it is to be bought, the next step in the purchasing process is vendor qualification. Through a formal vendor qualification process, a prospective purchaser will seek potential vendors (usually through some networking process). The prospective purchaser then selects vendors that can reasonably be expected able to supply the desired product or service, and submits to them either a request for quotation (r.f.q., used for relatively common items) or request for proposal (r.f.p., for relatively uncommon items). Interested vendors submit their quotations and proposals; others may reply "no bid".
Whether they seek to provide products, services or both, competent practitioners of any given trade should always know and adhere to its governing laws and industrial standards. Potential clients should always seek some demonstration of this ability.
Qualifying Vendors of Services
Prospective service vendors will often refer the prospective client to at least one of its past clients or projects.
Qualifying Vendors of Products
Prospective product vendors will often attempt to do this by submitting (through sale or gift) at least one first article for approval, which usually also helps to demonstrate the vendor's ability to deliver the desired product in a timely manner. All first articles should be representative of typical product that the vendor will supply to the customer; by approving the first articles, the customer implicitly accepts the amount of manufacturing variance documented by the vendor and demonstrated by the first articles. (Note, however, that some disreputable vendors might attempt to "cherry pick" the first articles they submit, which the vendor tests to assure conformity with the purchaser's tolerances though they may not necessarily represent the product that will be shipped. Any vendor caught doing this should be summarily disqualified from any further commerce with the client, charged with fraudulent misrepresentation, and openly identified and criticized within its industry.)
Every type of item purchased should be made uniquely identifiable so that it may be easily orderer, received, paid for, used or sold, and re-ordered if necessary. This is done by assigning a stock-keeping unit (usually abbreviated as sku, pronounced as "skew") number, often referred to simply as an "internal part number". (Often, "internal" is assumed or implied and "part number" is abbreviated, so "P/N" is used. However, sku is a more generally-applicable term and should thus be used in its place.)
For each product bearing a product look-up (p.l.u.) code such as a Universal Price Code (U.P.C., usually associated with its machine-readable bar code) numbers, some companies (usually including retailers) may use that number as their internal sku. Other companies may wish to use products with different U.P.C. numbers interchangeably; in that case, the different U.P.C. numbers may be associated with a company's single sku number via the company's authorized vendors list.
Authorized Vendors List
A company's authorized vendors list (a.v.l.) is a simple, though usually very lengthy, (usually now computerized) database in list form containing records of every product (and sometimes service) that the organization purchases. The a.v.l. is used to associate products bearing potentially many different manufacturers' names and part numbers with a single application (assigned a sku number) for which the item is intended. For example, a company might not care who manufactures the staples it uses, as long as the staples adequately bind pages and fit the company's staplers.
The a.v.l. includes which vendors it has found to be qualified or unqualified to supply each particular item. Once a company qualifies (or disqualifies) a vendor to supply a particular product or service, the vendor should be entered onto the organization's a.v.l., either "authorizing" or "de-authorizing" the organization's purchasing agent(s) to trade with the vendor. This allows an organization to avoid repeating mistakes with vendors that fail to meet expectations, following the adage, "Fool me once, shame on you; fool me twice, shame on me."
Bills of Materials
If an organization manufactures products, associated with each of those products will be a list of components used known as a bill of materials (usually abbreviated as bom, usually pronounced as "bomb"). On each product's bom, each type of component used is listed by sku number, quantity of that component used in each unit, and often includes placement information for each component.
Throughout an organization's operation, certain materials often need to be moved and/or reassigned between different groups within the same organization. Though these operations fall under the purview of the chief operating officer, it is the chief financial officer who is responsible for accounting for the whereabouts of all goods at any given time. So, members of all groups within the organization must learn to recognize the accounting boundaries between groups so that they may document each materials transfer (m.t.).
Documenting materials transfers between groups may be done with simple manual forms, such as the half-page (8.5" x 5.5") two-sheet carbonless copy used by Media Vision, the model for the example form below. Using such a form, one copy would be given to the person or group from which the materials are transferred (thus providing that party with evidence absolving it of responsibility for the materials) and the other copy given to the accounting department. This form allows inter-departmental materials requests to be quick and verbal (thus helping to maximize the agility of the organization) while providing the minimum amount of information needed for accountability.
In addition to materials requested and transferred from other departments, many materials are often required from sources outside an organization; these materials are requested and purchased from outside sources via an organization's authorized agent. After receiving a materials request or materials requisition (often abbreviated "req.", pronounced as "wreck") that sufficiently describes the goods or services to be obtained (and preferably up to three potential vendors), a purchasing agent will issue to approved vendors a request for quotations (r.f.q.) or request for proposals (r.f.p.), respectively.
A purchase order (p.o.) is a formal document delivered from an organization's authorized agent (a purchasing agent) to a vendor that legally forms a contract for the purchase and delivery certain goods and/or services at a specific time, place, and price.
As a legal contract, the purchase order is governed by (among other things) each state's derivation of the Uniform Commercial Code (U.C.C.), which defines what a contract should include (in order for the agreement to be considered legally binding) and requires all contracts involving an exchange of value of at least $500 to be written (via the U.C.C. statute of frauds). The U.C.C. defines a contract, in its simplest form, as communication and mutual acceptance of terms. So, as a contract, a purchase order should in writing:
The vendor's obligation is usually described in terms of when and where delivery will occur and title of ownership becomes free on board (f.o.b.).
The customer's obligation is usually described as the amount of consideration to be paid, in how many days from the invoice date payment of the net amount (as opposed to gross amount) of the invoice will be due, and any discount offered for early payment. Typically, the date of the postmark is used to establish timeliness of payment, as described below.
Some common examples, Net30, Net60, and Net90, would indicate that the full invoice amount will be due 30, 60, or 90 days past the date of invoice, respectively. (Some prefer to capitalize all or none of the letters in "net", but these differences are not significant.) Another example, 2%10Net30, would indicate that full payment is due 30 days past the date of invoice and that a 2% discount may be taken if payment is made within 10 days.
In their sales contracts, vendors typically establish rules governing past-due balances that are created when a customer becomes becomes delinquent in paying an invoice. Many specify that interest will accrue at a rate of 1.5% of the overdue balance per month overdue, or roughly 18% annually.
Though a vendor usually communicates receipt and acceptance of a purchase order, acceptance of these terms by the vendor may be implicitly communicated by the vendor's delivery of the subject specified on the purchase order.
Dates of Delivery, Invoice and Payment
It should be noted that the deliveries of goods or services and their payments may be actual or constructive. As the name suggests, the term "actual delivery" describes transferring possession from one party to the other (including transfers between agents of those parties). In contrast, "constructive delivery" may include delivery through an intermediary.
Because the United States Postal Service (U.S.P.S.) is a governmental entity (though run semi-privately), actual delivery of goods, invoice or payment to a U.S.P.S. post office or agent is generally considered (and may be defined by the U.C.C.) as "constructive delivery". Therefore, a U.S.P.S. postmark effectively evidences the date of delivery and that date should be used as the date of invoice and/or payment if delivered by U.S.P.S. mail. Because of this legal significance, when a document is received by mail and especially if the envelop bears a U.S.P.S. postmark, the containing envelopes should be attached to and retained with the document.
The scope of receiving inspection is limited to comparing the goods or services received with what was specified on the purchase order and documenting any material defects or shortages; if none are found, the invoice for that purchase order should be cleared for payment.
Total Quality Management
The purchasing process is a bit of a double-edged sword: the use of the same vendor-qualification process can be reasonably anticipated by potential and existing customers. It is, therefore, critical that the organization apply the same degree of internal discipline in providing its own products or services. By well-managing everything that enters and leaves the organization – effectively the total organization – we begin to engage in total quality management (t.q.m.).
In his book Management (fourth edition), Richard Daft defines total quality management as "a philosophy of organization-wide commitment to continuous improvement, with the focus on teamwork, increasing customer satisfaction, and lowering costs" (640). (Unfortunately, the author's last name is in Britain a derogatory adjective and in academia the name of a textbook is often prefaced with the author's last name; referring to the book as "Daft Management" in no way describes the book's quality, but does offer some – likely unintended – humorous and sad commentary on the state of American business education.)
The "Five S" System
In Japan, the kaizen (literally "improvement") family of business practices stress continuous innovation. The "Five S" system is a part of the kaizen family, so named because its five guiding principles can be described (in both Japanese and English) though words starting with the letter "s"; performed in ordered sequence, they are:
As with t.q.m., the uniting principle of "Five S" system is to create a sense of individual ownership in every aspect of the organization.
Substandard Quality Sets a Precedent
While the need for total quality management should be self-evident, organizations too often consciously compromise quality in their low-end products or services, dismissing them as less important than those at the high end. This assumption fails to recognize that low-end offerings often provide an introduction to new customers and that substandard low-end offerings will lead customers to permanently disqualify the vendor.
It may be interesting to observe what happens to these vendors as their customers become more sophisticated (or at least more disciplined with their purchasing processes) as a result of the customers' own t.q.m. processes. For example, how many customers will forgive bad experiences with a vendor if a vendor claims to have improved? (How many vendors will have actually improved?) Disciplined customers (using the processes above) are likely to have very long memories that may make them very unforgiving.
To combat the memories of dissatisfied customers, substandard vendors often change their names and/or logotypes. (Several examples appear on Syncopated's list of disqualified vendors. One particularly observant friend has even suggested that changes to a company's logotype is an early indicator of trouble, potentially useful to investors and employees; to date, I haven't found a single counterexample.) Because of this, changes to companies' names and/or logotypes (including through mergers and acquisitions) should be discouraged or even prohibited, as it is ultimately a deceptive trade practice.
The Beginning of the End
From the above, we can infer that the first time an organization deviates from its path toward continuous improvement, it commits to its own demise.
For further reading on business management, see An Introduction to Business.
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