Monitor and manage small business operations

A resource for:
BSBSMB405A / BSBSBM405A Monitor and manage small business operations

The small
management SERIES

Monitor and manage small

business operations
A resource for:
BSBSMB405A / BSBSBM405A Monitor and manage small business operations

Small Business
T R A I N I N G C E N T R E
The Small Business Training Specialists
 About this resource

This resource has been written to provide the underpinning knowledge and skills
for the Unit:

4 BSBSMB405A Monitor and manage business operations

4 BSBSBM405A Monitor and manage business operations

This Unit is from the Small Business Management domain of the Business Services
Training Package.

This Unit is concerned with the operation of the business and with implementing the
business plan. The strategies involve monitoring, managing and reviewing operational
procedures.

Completion of this Unit will count towards the qualification:

4 BSB40407 Certificate IV in Business (Small Business Management)

4 BSB40401 Certificate IV in Business (Small Business Management)

Important disclaimer

No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication
is distributed on the terms and understanding that:

1. the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this
publication, nor for any errors in or omission from this publication.
2. the publisher is not engaged in rendering legal, accounting, professional or other advice or services.

The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a
purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by
any such person in reliance, wholly or partially, upon the whole or any part of the contents of this publication.

Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other
author, consultant or editor.

The SMALL BUSINESS M A N A G E M E N T Series Monitor and manage small business operations 
 Contents

Introduction 1

Section 1 : Develop operational strategies 3

Quality management 5
What is quality? 5
Total quality management 8
Productivity 9
Benchmarking 10
Quality accreditation 11
Summary 11

The 80/20 principle 15

80/20 analysis 16
80/20 thinking 17

The Balanced Scorecard 21

The four perspectives 21
A fifth dimension? 24
Summary 24

A business or a job? 27
The E myth 27
Creating a business, not a job 30

Vision and values 33

Your business plan 34

Develop your operations plan 39

Set operational standards 40
Set operational objectives 41
Creating performance measures 44
Summary 47

Summary of Section 1 49

Section 2 : Managing operations 51

Managing operations 53

Managing the process 57

Map the process 57
Define the problem 61
Analyse the problem 62
Decide on solutions 70
Summary 71

Managing the people 73

Estimating staff members 74
Creating an organisational structure 78
Job analysis and design 81
Job descriptions and person specifications 83
Monitoring staff performance 84
Summary 88

The SMALL BUSINESS M A N A G E M E N T Series Monitor and manage small business operations
Managing your place of business 91
Location 92
Security 93
Facilities 93
Access 93
Overall capacity 94
Site layout 94
Appearance 96
Summary 97

Managing equipment resources 101

Is your equipment effective? 101
Is your equipment fully utilised? 102
Is your equipment up to date? 104
Is your equipment safe? 104
How is equipment maintained? 105
Computer equipment 105

Managing materials and stock 111
Managing inventories 111
Managing the purchasing process 116
Managing suppliers 122

Managing information 131
The need for information 131
Information systems 134
Protecting computerised information systems 137
Building a knowledge bank 138
Summary 143

Continuous improvement 147

PDCA 148
Create a culture of innovative learning 149
Use your networks 149

Conclusion 151

References and additional resources 153

Monitor and manage small business operations The SMALL BUSINESS M A N A G E M E N T Series
 Introduction

A book entitled Manage Your Operations could be an A to Z of everything you

ever wanted to know about managing a business! As this text is part of The Small
Business Management Series (see back cover) which covers different aspects of
managing a business such as marketing and finance in different volumes, we have
focused here on managing the internal processes of the business—how the product
or service is produced and delivered to the customer.

The goal of operational management is to improve productivity, that is, the efficiency
with which a business turns inputs into outputs. It is also the pursuit of excellence,
building the reputation of the business through consistency, reliability and quality
of the product or service provided. It is ‘saying what you do and doing what you
say’. The result will be increased customer satisfaction and loyalty and an improved
bottom line.

The text is divided into two sections. In Section 1, we focus on developing operational
strategies to support the strategic objectives in the business plan. We show how an
operations plan must work together with the marketing plan and financial plan to
achieve the goals of the business. We look at some current philosophies surrounding
business operations and how quality standards must drive the whole process.

In Section 2, we examine the work or production process to analyse problems and

improve efficiency. We then look at the resources used by that process—people
(labour), business premises, equipment and machinery, materials and stock,
information—to review how each of these can be managed effectively. Finally, we
discuss ways to hold the gains and reinforce continual improvement strategies.

This text will give you an opportunity to stand back from your business and view
its performance objectively. It will help you to work ON your business, not just
IN it. Many of the topics can only be covered briefly and students are encouraged
to study further the areas particularly relevant to their businesses through the
references provided.

At the end of this text, you should be able to:

4 Set quality standards for your business in line with customer requirements.
4 Develop operational objectives to support the strategic objectives and goals of
your business.

4 Develop strategies to achieve these operational objectives.

4 Develop appropriate performance measures to measure your progress towards
these objectives.

4 Use quality management tools to analyse processes, find root causes of problems
and devise solutions that will improve productivity.

4 Review systems and structures with a view to more effectively managing

resources.

The SMALL BUSINESS M A N A G E M E N T Series Monitor and manage small business operations 
Section 1
Section 1
Develop operational strategies
Developing an operational plan is part of the strategic planning process. In this section, we
will look at some of the current philosophies and practices that can help you to develop
strategies and set standards for the operation of your business. We will discuss:

4 Quality management
4 The 80/20 principle

4 The Balanced Scorecard

4 A business or a job?—the E Myth

4 Vision and values

Then we will look at how you can develop your operations plan.

The SMALL BUSINESS M A N A G E M E N T Series Monitor and manage small business operations 
 Quality management

It is fair to say that most small business owner/managers strive for excellence in
what they do, realising that their reputation relies on providing a quality product or
service. Yet most owner/managers have only a vague, undefinable view of what
‘quality’ means and how it can be achieved.

Much has been written about quality management and a visit to a library or bookshop,
or an internet search, will give you plenty of reading matter. As part of your self-
development, read up on the quality management ‘gurus’ like Dr W. Edward Deming
(www.deming.org) and Dr Joseph Juran (www.juran.com). We will be discussing
some of their concepts throughout this book.

What is quality?
David Garvin, a professor at Harvard Business School, identifies eight ‘dimensions’
of quality that he believes cover the meaning of quality that managers, operators
and customers have. Products or services do not usually compete on all eight, but
usually on a select few.

The SMALL BUSINESS M A N A G E M E N T Series Monitor and manage small business operations 
 1. Performance: the primary operating characteristics of the product or
service. Examples would be size, speed, power, sound.

2. Features: the ‘extras’ that supplement the main performance

characteristics. The ‘sunroof’ and ‘spotlamps’.

3. Reliability: what may go wrong and how often it is likely to.

4. Conformance: the closeness of match between the design specification

and what is actually produced (or the match between what is advertised
and what is experienced by customers).

5. Durability: how long the product may last and its robustness in operating
conditions. How often service is needed is also relevant.

6. Serviceability: the ease, speed, cost and friendliness of service. Whereas

reliability is concerned with mean time between failures, serviceability
is concerned with mean time to repair.

7. Aesthetics: the appearance, style, ‘class’ and impression.

8. Perceived quality: the ‘feel’, the ‘finish’ and perhaps the reputation. Also
the friendliness and the manner in which the customer is served.

Bicheno, The Quality 75, p16

Garvin adds other dimensions for the service sector—helpfulness, clarity of

communication, knowledge, safety and security, decision making ability and
response time. He argues that care should be taken in formulating a ‘quality mix’,
drawing a comparison to marketing and the marketing mix.

Owner/managers often find it difficult to decide which ‘dimensions’ of quality to

focus on to achieve the highest level of customer satisfaction. You may be helped
by studying what is known as The Kano Model. Dr Noriaki Kano argues that there
are three types of factors present in every product and service:

4 Basic factors – things that customers simply expect to be there. If they are
absent, customers will be very dissatisfied, but if they are present they result in
a feeling of neutrality. It is essential that you identify these factors and do not
overlook them. You must get the basics right.

4 Performance factors – things that will cause dissatisfaction if they are missing,
but are also capable of causing delight when present—the ‘more is better’
syndrome. You should focus on improving current performance factors or
including new ones.

 Monitor and manage small business operations The SMALL BUSINESS M A N A G E M E N T Series
 4 Delighter factors – something that customers do not expect, but that causes
delight or excitement when included. (The ‘Add 1%’ you learned about in the
text Customer Service Strategies.) Include delighter factors when you can, but
they should not incur additional costs.

THE KANO MODEL

delight

“performance”

Customer Satisfaction
“delighter” “basic”
Degree of

neutral

“reversal”

dissatisfaction
absent fulfilled
Presence of Characteristic

To test if a characteristic is basic, performance or delighter, ask two questions.

1. How do you feel if (the characteristic) is absent?

2. How do you feel if (the characteristic) is present?

If 1 = bad, 2 = neutral, it is a basic

If 1 = neutral, 2 = good, it is a delighter
If the answer is “it depends”, it is a performance
Bicheno, The Quality 75, p21

You can see that to achieve customer satisfaction, you will have to pay attention
to how you operate your business to ensure that quality products and services
result. While this whole text is aimed at improving the quality of your business
operations, this chapter will give you an insight into what it means to develop a
quality management system in your business. We will look at:
4 Total Quality Management
4 Productivity
4 Benchmarking
4 Quality accreditation.

The SMALL BUSINESS M A N A G E M E N T Series Monitor and manage small business operations 
Total Quality
Management
Many organisations today have adopted a Total Quality Management (TQM)
approach to business. TQM is defined as:

“A management approach that sustains a competitive advantage by

consistently exceeding the current and future expectations of customers,
based on continuous improvement in all processes, goods and services,
through the creative involvement of all people.”

National Industry Extension Service, 1990

TQM adopts the ideal of ‘doing it right the first time’ and affects operations across
the whole organisation. It focuses on the twin goals of customer satisfaction
and continuous improvement in internal operations and, as the definition says, it
requires the involvement of everyone working in the business.

Customer satisfaction is achieved if a business meets or exceeds customer

expectations. Therefore part of managing quality is to clearly understand what
customers want. As the manager, you will need to set the quality standards of
products and services to be delivered based on the information you gather on
customer preferences. It is important that decisions are based on data not just on
gut feelings.

Further, customers can be external or internal to the business. An external customer

is the one who buys your products or services. An internal customer is a person
within the business who receives or uses the output of another worker. TQM extends
customer service to every process and every individual in the business. If every
worker aims to meet or exceed the expectations of his or her ‘customer’, the goal
of ‘doing it right the first time’ is more likely to be achieved.

The ability to satisfy customers depends on the processes or systems used to provide
products and services—the internal operations of the business. This is where
small businesses often fall down. A TQM approach to systems means looking for
continuous improvement in the way your business operates. When systems fail,
when things don’t go as planned, you need to be able to diagnose the causes and
fix them.

TQM is a holistic system—it applies totally to all parts of the business. It requires
a change of culture throughout the business. The employee’s role will change from
‘working for the boss’ to ‘working for the customer’. For TQM to be effective, all
people working in the business need to be involved and an attitude of continuous
improvement cultivated. In this way, both the profitability and reputation of the
business are improved.

 Monitor and manage small business operations The SMALL BUSINESS M A N A G E M E N T Series
Productivity

You have probably read in the press that Australian businesses are being encouraged
to continually improve productivity. What do they mean by productivity?

Productivity can be defined as the efficiency with which a business turns inputs into
outputs. It is expressed in the formula:

Productivity = outputs
inputs

Measures of productivity can be based on any combination of input factor to output

factor. For example:

4 Chargeout hours achieved per worker

4 Products produced per day (or per machine, or per person)
4 New customers gained for advertising dollars spent
4 Sales per square metre of floor space in a retail shop.

A business can improve productivity by achieving either:

4 higher output with current inputs

4 current output with lower inputs.

Productivity improvements are part of TQM. Not ‘doing it right the first time’
greatly increases input costs and so has a big effect on productivity. Poor quality
costs money in many ways, including:

4 the time and materials wasted in making a defective product or providing a poor
service

4 the time taken to fix the defect

4 the time lost in fixing defects that could be spent making more products or
providing more services

4 the time taken to deal with customer complaints.

Added to this is the well known fact that dissatisfied customers tell many other
people, harming the reputation of the business and reducing the number of potential
customers.

The SMALL BUSINESS M A N A G E M E N T Series Monitor and manage small business operations 
 Apply 80/20 thinking to your business. Start work on identifying the ‘vital few’,
for example:

4 the 20% most profitable products or services

4 the 20% most profitable customers
4 the 20% of activity that yields the most results
4 etc.

Collect statistical data on at least one of these and verify your thinking.

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