Operating Plan: Production & Support Activities

• Chapter 7 focuses on the operating plan
• The operating plan includes:
  • Production activities
  • Support activities
  • Capacity planning
  • Estimating costs
• The product or service offered to the public through the marketing plan is just the tip of the iceberg
• Activities that create the product or make the service available are normally unseen by the customer
• "Operations" covers behind-the-scene activities
• Marketing is the face a business presents to the outside world, its inner workings fall under operations

Learning Objectives

• State the subject and goal of an operating plan
• Define and distinguish production activities from support activities
• Illustrate a simple production process as a process flow or a flowchart
• State the goal of capacity planning and the sources of inefficiency
• Distinguish start-up costs from running costs

Story from Real Life: Mystic Masala

• Mystic Masala is a small business in Canada that offers handmade aromatherapy soy candles and body and shampoo bars made with spice, herb, and flower oils
• Importing is vital to Mystic Masala's operations
• When importing it is important to do your homework before you begin and to know the product codes and laws that apply to the goods you want to import
• Customs brokerage fees vary depending on the agent, so shop around for a cost-effective and reliable option
• Doing the paperwork yourself could save several hundred dollars a shipment if you are good at it
• It can be more difficult to guarantee quality when shipping merchandise
• Originally, the soaps were shipped via boat, but after coming all the way from Nepal in the heat and through the monsoon season, they didn't always arrive in the best shape and are now sent by air cargo

The Operating Plan

• An operating plan lays down the roadmap that will show how to convert inputs into products in a cost-effective manner
• An operating plan consists of:
  • Production activities
  • Support activities
  • Capacity planning (start-up costs)
  • Estimating costs (running costs)
• Operations is the set of activities that convert inputs into outputs

Inputs and Outputs

• Inputs are resources used by a business such as materials, labor, and machines
• Outputs are the goods produced or the services provided

Marketing and Operations

• The marketing plan should determine the operations plan
• By having marketing as the driver of the enterprise, you ensure that your product and the activities that create it are aligned with the needs of the customer

Production Activities

• Production activities are the business activities that are directly related to making goods or providing services

Process Flow

• Process flow is a visual representation of the steps and sequence required to make a product.
• Steps are normally limited to production activities

Flowchart

• Flowchart present the activities and sequence of a process represented in symbols
• Each step in the process is shown as a symbol with a short description of the step
• The symbols are linked together with arrows to show the proper sequence of the activities

Support Activities

• Support activities are activities that help production activities to function as intended, though they do not produce the goods themselves
• Support activities aid production and add value to the production process

Capacity Planning

• Capacity planning is the process of deciding on the production capacity to meet the demand for the products of a business
• Capacity planning means to schedule over time the investments and resources a business will need to produce at a desired level

Start-Up Costs

• Start-up costs are costs associated with putting up the production capacity of a business
• Start-up costs enable a business to begin operations, though it has not done so yet

Running Costs

• Running costs are recurring costs associated with inputs to continuing operations
• Unit cost are the total cost to produce one unit of a product or service
• Start-up costs are associated with setting up the production capacity of a business
• Businesses require inputs like raw materials, supplies, rent, labor and electricity to run operations and these are the running costs

Review Questions

• What is the goal of an operating plan?
• What are the sections of an operating plan?
• Should marketing determine operations or the other way around?
• What happens when support activities are neglected?
• What is the output of capacity planning?
• What happens when there is too much (or too little) capacity compared to demand?
• Why can demand still be different from capacity despite careful planning?
• How are start-up costs different from running costs?

Case Study: Zara

• Is ZARA very successful? What facts in tell you this?
• Many other successful fashion retailers outsource production to countries where labor cost is low rather than producing the items themselves
• ZARA produces 50% of its sales with its own facilities
• Should ZARA do this? What are the pros and cons of this strategy?
• Views on using operations as the main means to compete in an industry like fashion retailing?

Explanation of an operating plan, including production and support activities. Covers capacity planning, estimating costs, and differences between start-up and running costs. Includes a real-life example of Mystic Masala.