Page 603 - Introduction to Business

CHAPTER 16 Managing Business Operations 577

• Does the function performed by the part add value to the product?
• Are there alternative sources for the part?
• Can the part’s specifications be relaxed to lower its cost without affecting the
function performed?
• Can the part be combined with another part?
Obviously, value analysis should not be performed every time a part is ordered.
Instead, it should be applied periodically to large-dollar-volume parts that offer the
highest savings potential.
Supplier selection involves evaluating the different sources of supply, and takes supplier selection An evaluation of
into account the following factors: different supply sources in order to
select one or more
Price. Is the supplier offering a price that is competitive?
Quality. A supplier may charge a higher price, but the quality of its product
may also be higher. Higher quality leads to lower production costs due to
less waste and disruptions.
Service. If the part fails, what is the supplier willing to do?
Location. Nearby suppliers may lead to lower transportation costs and faster
response time.
Flexibility. How easily can the supplier handle changes in production vol-
umes of the part or in its design?
One recent trend in supplier selection is to look at suppliers as partners instead
of as adversaries. Maintaining good relations with suppliers has become a new
source of competitive advantage. Hence companies are establishing long-term
relationships with fewer suppliers that can provide high-quality parts, can deliver
the parts quickly and reliably, and can be relatively flexible in modifications of pro-
duction specifications and delivery schedules. Another important trend in supplier
selection is globalization. As international trade barriers fall, it is getting easier and
more attractive to get parts from international sources. Some of the risks and chal-
lenges that accompany this trend are
• Dealing with different languages and cultures
• Having to use additional modes of transportation
• Facing exchange rate fluctuations
• Managing with different time zones and very long procurement times

Inventory
Inventories are omnipresent. All companies have them and need them. The deci-
sion for the operations manager is one of balancing: if inventories are too low, busi-
ness operations could be disrupted or customers could be lost; if inventories are
too high, the associated monetary investment will translate into high financial
costs and a risky position for the firm, thus impacting negatively on the organiza-
tion’s market stock price. To achieve an appropriate inventory level, the operations
manager needs to consider the following inventory costs:
• Ordering cost is the cost that is incurred every time an order is placed to pro- ordering cost The cost that is incurred
cure more items. In order to minimize ordering costs, one would try to place every time an order is placed to procure
more items
infrequent but large procurement orders. When the item is produced in-house
instead of purchased, ordering costs are also called setup costs, alluding to the
setup times that are typically needed to produce a batch of products. For
example, when an ice cream company has finished producing an order of 200
gallons of chocolate ice cream, it would incur a setup cost when cleaning the
process to run a different ice cream flavor, say vanilla.
holding cost The cost resulting from
• Holding cost is the cost resulting from keeping one unit in inventory for a
keeping one unit in inventory for a given
given time period, typically one year. Holding cost includes, among other time period, usually a year
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