December 27, 2014

Development and Training of Managers

This is a chapter in the Principles of Management book of Koontz and O'Donnell, 4th Edition.

Manager development refers to the progress a manager makes in learning how to manage.
Managerial training refers to the program devised by the management of the organization to facilitate this process. The firm is seen as providing training and manager as developing himself by way of this training.

The Nature of Manager Development

A developed manager is a mature manager or a successful manager as he has grown in wisdom. A proposition that a firm cannot develop a manager; it can only provide the opportunity for a manager to develop. According to the proposition, a prime qualification for manager selection is his keen desire to manage. Only a person with such motivation, provided he has the essential intelligence, will take the full advantage of opportunities to acquire knowledge and skill from the various training opportunities provided. He must be ready to learn what he is taught; he must be able, and anxious to absorb learning.

The practice of management training encompasses formal schooling and on-the-job training.  A man may also develop by learning from experience.

Current Approaches to Manager Training (1968)

Formal long term courses and short courses

  Conference Programs
  University Management Programs
  American Management Association's Workshop Programs

Planned Progression

Job Rotation

  Rotaton in  nonsupervisory work
  Rotation in observation assignments
  Rotation among managerial training positions
  Rotation in middle level assistant positions
  Unspecified rotation in managerial positions

Creation of Assistant-to Positions

Psychological Approaches to Traning
  Role playing
  Unstructured discussion

Temporary Promotions

Committees and Junior Boards

Management Training: Suggested Program

Purpose: The major purpose of training should be the creation of opportunities to develop skills related to the execution of managerial functions. They are acquired through study and through the practice of management-the application of learning to experience in solving problems of planning, organizing, staffing, directing and controlling.

Premises: The effectiveness or usefulness of the training program rests on seven premises.

Top managers actively support the program.
Top managers must participate in training programs.
Learning is voluntary.
Training needs vary with manager levels.
Training needs determine methods.
Managers have to successfully learn at all levels. - Managers should develop through effective training at each successive level to become prime candidates for promotion.
Theory and Practice must go hand in hand

Training is a coin, one side of which the teaching of theory and the demonstration of techniques, the other, the actual practice of management technique.

Programs for Various Levels of Management

Front-line Supervisory Training

Objective: Men must be trained to develop and carry out approved programs within budget, to obtain and use service and staff help. Supervisors can in production departments, planning an scheduling, drawing, sales and service, accounting department, or in purchasing department. Supervisors have to train and motivate subordinates, provide adequate space and equipment, fix operating rates with the requirements of other departments, report progress, carry out the provisions of the labor contract and also deal with customers and other regulatory agency personnel when they visit their shop or work area.

They made need some formal course inputs. Many supervisory development programs are available in USA.

On-the-job training is also essential. Supervisors may be trained through the arrangement of assistant to the supervisor. But every supervisor may not be a good trainer. Therefore, if there are some supervisors with good training ability, they can be asked to take three or four assistants to be trained by him.

The practice of management starts when a trainee is assigned a supervisory position. The supervisor is expected to refine his techniques. His further career depends on his development of skills. An unsuccessful supervisor is demoted, an average person is kept in the job and an outstanding person is promoted the middle level.

Middle-management Training

Objective: These men stand most in need of a knowledge of management theory. Middle managers manage managers and not technicians. To manage managers they particularly need an understanding of the functions of managers because these are the means they utilize to accomplish their charters or jobs.

Technique: To teach the theory of management, it is best to borrow the effective technique employed for the same purpose in universities. It consists of lectures, discussions of theory, and case studies relating to management in business functions and general management.

 It is obvious that successful instructor knows his material and teaches it with confidence, skill, and insight, and thereby attracts the attention of his students and inspires them to learn, apply what they learn, and become themselves creative.

Top-management Training

Objective: What additional knowledge should a successful division manager have in order to manage a whole enterprise? .Functional managers who are reach the divisional manager position or enterprise manager position need training in the management of functions which are strange to them. However, all potential and new top managers have some need for training, whether it be in labor relations, in relations with the financial community, trade association work, government relations or foreign relations.  Moreover, the knowledge and technical aspects of managing are rapidly changing and the perceptive top manager will never assume that his education in management is complete. A top manager attending training programs and using the recently learned learned knowledge is a strong inducement to his subordinates to attend training programs and implement new techniques.

Techniques: The basic techniques recommended are seminars and guided reading.  For on the job training in other functions, the manager may be sent as an assistant to an existing manager. In case the existing manager is retiring in short period of time, the trainee can be given the full position after completing training for an year or so.

Follow-Up Training

After formal training, follow-up training is achieved by coaching, refresher courses, and personal reflection upon the meaning practical experience,.

Coaching: Coaching is face to face counseling. It is given by the superior as well as outside coaches. Coaching by a superior involves the continuous analysis by both superior and subordinate, on a face-t-face basis, of the latter's performance. The coach makes certain that certain lessons are learned by his subordinate.

Accountability for Training

Superior managers are accountable for the training of their subordinates. Too often, training is assigned to some one else instead of the immediate superior. One way to bring training into focus is to let the accomplishment of a manager in the area of training be appraised as a part of the regular program of measurement. Men readily attend to goal achievement if they know it will be appraised. Middle and top managers are to be involved in the in-plant training programs. Managers may instruct through such devices as case histories, incidents, and illustrations of the applications they have made of management principles.

Measurement: The Training Payoff

The authors commented that at this stage, training is in somewhat the position of basic research. There are many instances where managers credit improvement in their skill to their training, but it is not possible to generalize these views and isolate the benefit formal training program from the benefits of personal aptitude, logic, imitation, and pressure of the environment.

MBA Core Management Knowledge - One Year Revision Schedule

December 7, 2014

Job Design and Work Measurement - Review Notes

Job Design Techniques

Operating managers have to plan and organize production processes and systems, acquire resources for running the systems and produce using the systems. Human resources is an important component of resources to be acquired by an operations managers. For each person, a job needs to be designed so that operators and employees can be effective and efficient. Effectiveness means operators produce the required feature of the product or service with the specified process satisfying the specifications of the output. Efficiency refers to the resources consumed by the operator including his own time and rework done and items scrapped. Industrial engineering has special focus on efficiency dimension. Each process designed must be tested by operations managers to make sure it produces the required feature of product or service.

An operations manager uses job design techniques to structure work to meet the physical and behavioral needs of the employee. Organization management principles are used to come out with various jobs in an organization. Industrial engineering techniques like motion study, work station design and ergonomics help in developing the most efficient method at a point time. Work measurement methods are used to determine the standard time for performing a given task. . Work performance standards are important to the workplace so that accomplishments  can be measured and evaluated.  Also, standard time estimates permit better planning and costing and provide a basis for compensating the work force and even providing incentives.

Trends in production job design include quality and maintenance of the equipment as part of the worker's job. Today many workers are cross-trained to perform multiskilled jobs and total quality programs are important for all employees. Team approaches, informating, use of temporary workers, automation, and organizational commitment are other key issues in job design decisions.

Behavioral considerations in job design include how specialized a job will be. Specialization has unique advantages and disadvantages. At the other extreme from specialization are the concepts of job enlargement and job enrichment. Sociotechnical systems of the interaction between technology and the work group influence job design as do ergonomic or physical consideration.

Work methods determine how the work should be accomplished in organizations. Methods efficiency engineering or method study is the classical IE tool for this purpose. Inspection methods and maintenance methods can be also be analyzed using methods study. Work methods can be established for an overall productive system, a worker alone, a worker interacting with equipment, and a worker interacting with other individuals. When individual workers are considered, motion study becomes the technique.

Work measurement and standards exist to set time standards for a job. A basic technique used in work measurement is the stop watch time study. Now comprehensive predetermined motion time systems are available to set standards based on process plans.  Time studies can be done for production jobs or for nursing jobs. Work sampling is a work measurement technique using samples instead of full time time study.

Another issue in job design is the financial incentive plan. These plans determine how workers should be compensated for their differences in production output over long periods of time. Persons who are consistently producing more output for number of days expect more compensation. In preparing a financial incentive plan, management must consider individual, group, and organization wide rewards.

Once a job is designed operators have to be trained in it. Each manager is a teacher or a trainer. Right from the first-line supervisor or foreman to the CEO have to act as teachers or trainers when the occasion demands. Improvement in both effectiveness and efficiency demand involvement of operations managers as teachers, trainers and coaches.

Topics covered in the Note

Job Design Decisions
Job Design Defined

Behavioral Considerations in Job Design
Degree of Labor Specialization
Specialization of Labor Defined
Job Enrichment
Job Enrichment Defined
Sociotechnical Systems
Sociotechnical Systems Defined

Physical Considerations in Job Design
Work Physiology Defined
Ergonomics Defined

Work Methods
A Production Process
Workers at a Fixed Workplace
Workers Interacting with Equipment
Workers Interacting with Other Workers

Work Measurements and Standards
Work Measurement Techniques
Work Measurement Defined
Work Sampling Compared to Time Study
Time Study Defined
Predetermined Motion Time Data Systems Defined
Elemental Data Defined
Normal Time Defined
Standard Time Defined
Work Sampling Defined

Financial Incentive Plans
Basic Compensation Systems
Individual and Small-Group Incentive Plans
Organizationwide Plans

Case: Jeans Therapy—Levi's Factory Workers Are Assigned to Teams, and Morale Takes A Hit

Download material of the text book

Material from the textbook of Chase

Summaries of all Chapters of Operation Management

MBA Core Management Knowledge - One Year Revision Schedule

Project Management

A project is a series of related jobs or tasks directed toward a major output. They require a long period of time to perform.

Many projects are undertaken in manufacturing companies as well as service companies. Developing new product in the design department is a project. Establishing the production process, inspection process and the production line for a new product is a project. Industrial engineering studies to increase efficiency of processes are projects. Thus projects are undertaken by an organization to increase revenue sources, expand capacity, and to improve efficiency or reduce costs. Replacement of equipment is also an example of a project. Thus, it is clear that organization undertake every year number of projects. They are undertaken in marketing area also like  market research projects. In an higher educational institution organizing a research conference can be given as an example of a project. Similarly every year, new admissions can be cited as example of project which has a specific commencement date with admission announcement and gets completed on a specific date when all seats are filled and classes start.

Managing projects require planning, directing and controlling resources. Before a project can begin, senior management must decide which of three organizational structures will be used to tie the project to the parent firm: pure project, functional project, or matrix project. All three structures have advantages and disadvantages.

Projects begin with a statement of work, which can be a written description of the objectives. Breaking the work into smaller and smaller pieces that defines the system in detail is at the center of project management. Milestones or critical steps in the project might be completion of the design or production of a prototype. Maintaining control over projects requires the use of charts to show the scope of the entire project as well as the steps completed at a particular time. Other reports for detailed presentations of projects are used.  Work Breakdown Structure (WBS) shows projects in terms of tasks, subtasks, work packages and activities. A project is complete when all the tasks are completed.

Critical path scheduling is a graphical technique used to plan and control projects. Techniques like PERT and CPM display a project's completion in graphical form. PERT takes, the probabilistic times for the activities involved in the project from various vendors or contractors and summarizes them in expected completion time estimate for the project. It also gives an idea of the risk associated with this expected completion time. Both techniques focus on finding the longest time-consuming path through a network of tasks as a basis for planning and controlling a project. This longest sequence of activities is also the shortest processing time for a project. Slack time for an activity is the amount of time an activity can be delayed without affecting the overall completion time of the project. Non-critical path activities have some slack time. Managers also use PERT and CPM to compute the early start schedule and late start schedules for activities so as not to delay the entire project and change its original completion date. CPM also helps in developing cost estimates for accelerating activities by increasing resources and completing the project in a shorter period as compared to the period planned in the original plan in response to various delays as the project is executed.

Managers must consider the time to complete a project versus the cost to complete the project. Time-cost trade-off models have been developed to help managers with this task. Clearly identified project responsibilities, a simple and timely progress reporting system, teamwork, and good people-management practices are required in effective project management. Teams must have the commitment of top management as well as a talented project manager. CPM and PERT are simply tools to assist the manager in meeting these objectives.

What is Project Management?
Project Defined
Project Management Defined

Structuring Projects
Pure Project
Functional Project
Matrix Project

Work Breakdown Structure
Project Milestones Defined
Work Breakdown Structure Defined
Activities Defined

Project Control Charts
Gantt Chart Defined

Network-Planning Models
Critical Path Defined
CPM With a Single Time Estimate
Immediate Predecessors Defined
Slack Time Defined
Early Start Schedule Defined
Late Start Schedule Defined
CPM with Three Activity Estimates
Maintaining Ongoing Project Schedules

Time-Cost Models
Time Cost Models Defined
Minimum-Cost Scheduling (Time-Cost Trade-Off)

Managing Resources
Tracking Progress

Cautions on Critical Path Analysis


Case: The Campus Wedding (A)

Case: The Campus Wedding (B)

Case: Product Design at Ford


Summaries of all Chapters of Operation Management

MBA Core Management Knowledge - One Year Revision Schedule

Facility Layout - Review Notes

Layout decisions entail determining the placement of departments, work groups within the departments, workstations, machines, and stock-holding points within a production facility.

This chapter examines how layouts are developed under various formats or work-flow structures. The emphasis is on quantitative techniques but examples of qualitative factors are also included in layout design. Both manufacturing and service facilities are included. When designing the layout of a facility, decisions have long-term consequences in both cost and the firm's ability to serve its market(s). Management must take the time to identify and evaluate layout alternatives. The objective for a layout is to provide a smooth work flow of material through a manufacturing facility or an uncomplicated traffic pattern for customers and employees in a service system.

A process or flow shop layout groups similar equipment or functions together. A product layout groups equipment or work processes according to the steps by which the product is made. Group technology layout groups dissimilar machines into work centers, or cells, to work on products that have similar shapes and processing requirements. The final layout, a fixed-position layout, produces the product at one location.

Process layout focuses on minimizing material handling cost or customer and worker travel times. Computerized layout programs are useful in devising good processing layouts. The original program is CRAFT, or the Computerized Relative Allocation of Facilities Technique.

Product layouts focus on making the product flow easier. As product demand increases, it becomes cost effective to use an assembly line layout for processing. The assembly line consists of a series of workstations with a uniform processing time interval between each workstation.

Line balancing means that tasks are assigned to a series of stations so that the time required at each station is less than or equal to the cycle time and processing time is minimized. Tasks can be balanced, or minimized, by splitting the tasks, by duplicating by number of stations dedicated to a task, sharing the tasks by a neighboring station, using more skilled workers, working overtime, or redesigning the tasks.

Mixed Model Line Balancing

While the earlier assembly lines were designed for assembling one one product at a time in a continuous fashion, Toyota Motors has come out with mixed model assembly lines wherein number of different products are assembled in the same day actually within the same hour. Now operations managers have to learn this technique to become world class operations managers.

The note by Chase et al. discusses the issues of flexible and U-shaped line layouts as well as the use of computerized line balancing and mixed-model line balancing. Current views on assembly lines try to incorporate greater flexibility in products produced on the line, more variability in workstations, improved reliability, and high-quality output. A reading on Dell Computer is included to illustrate current thoughts on assembly lines.

Layouts of facilities are important in service and retail service businesses as well as in assembly and manufacturing. In retail services, layout specialists and planners must consider servicescapes, ambient conditions, spatial layout and functionality, and even signs, symbols, and artifacts.

Industrial engineers evaluate layout from the efficiency perspective and keep doing improvements to reduce material handling and movement of operators etc. Even the U layout promoted by Toyota Motors came out as a result of improving efficiency by encouraging operators with high natural speed of working to help operators experiencing delays. Thus group work is brought into picture in production cells so that line output is maintained within standards.

Basic Production Layout Formats
Process Layout Defined
Product Layout Defined
Group Technology (Cellular) Layout Defined
Fixed-Positing Layout Defined

Process Layout
Computerized Layout Techniques - CRAFT
CRAFT Defined
Systematic Layout Planning
Systematic Layout Planning (SLP) Defined

Product Layout
Assembly Lines
Assembly-Line Balancing
Workstation Cycle Time Defined
Assembly-Line Balancing Defined
Precedence Relationship Defined
Splitting Tasks
Flexible and U-Shaped Line Layouts
Mixed-Model Line Balancing
Current Thoughts on Assembly Lines

Group Technology (Cellular) Layout
Developing a GT Layout
Virtual GT Layout

Fixed-Position Layout

Retail Service Layout
Ambient Conditions
Spatial Layout and Functionality
Signs, Symbols, and Artifacts

Office Layout

Case: Soteriou's Souvlaki

Case: State Automobile License Renewals


Full Material from the Book of Chase on Facility Layout

Full Material from the Book of Chase on Facility Location

Updated 7.12.2014,  3.2.20102

Summaries of all Chapters of Operation Management

MBA Core Management Knowledge - One Year Revision Schedule

Product Design and Process Selection—Services - Review Notes

Services are different from manufacturing, with the key service difference being the interaction of the customer in the delivery process. Service design is no longer considered to be an art form as logical approaches to better design and management of service systems are emerging.

In a facilities-based service, the customer must go to the service facility. In contrast, in a field-based service, the production and consumption of the service takes place in the customer's environment. Internal services refer to services required to support the activities of the larger organization. There is a blurring of manufacturing and service firms since the manufacturer product always has a certain percentage of service content. Services are also seen as the next source of competitive advantage for firms.

The Nature of Services - Seven Generalizations
Chase et al (11th Edition)

1. Everyone is an expert on services.
It means many more people understand how services are delivered and have an opinion how they should be delivered.
2. Services are idiosyncratic.
People want services done differently at different times and places.
3. Quality of work alone is not quality of service.
Time spent is also a parameter.
4. Most services have tangible and intangible attributes.
5. High contact services are experienced.
6. Effective management of services requires understanding of marketing aspects, operations aspects as well as aspects of service personnel involved.
7. Services often take different forms of encounters involving face-to-face, telephone, electromechanical, and mail interactions.

In services we also consider the amount of customer contact or the physical presence of the customer in the system. Service systems range from those with a high degree of customer contact to those with a low degree of customer contact.

Service encounters can be configured in a number of different ways. The service-system design matrix includes six common alternatives. Flowcharting, like in manufacturing process design, is the standard tool for service process design. The flowchart, or service blueprint, emphasizes the importance of design. Poka-yoke systems applied to services prevent mistakes from becoming service defects.

Approaches to services include the production line approach, the self-service approach, and the personal attention approach. Service guarantees are not only a marketing tool for services but, from an operations perspective, these guarantees can be used as an improvement incentive and can focus the firm's delivery system on things it must do well to satisfy the customer. Finally the case on Pizza USA provides an example of design of services.

Waiting Lines

Understanding waiting lines or queues and learning how to manage them is one of the most important areas in operations management. Queuing theory is used in both manufacturing and service organizations to understand queues and to arrive at solutions to eliminate or minimize them.

The waiting line system consists of six major components: the source population, the way customers arrive at the service facility, the physical waiting line itself, the way customers are selected from the line, the characteristics of the service facility, and the condition of the customer exiting the system.

Arrivals at a service system may be drawn from a finite or limited customer pool or from a population that is large enough in relation to the service system so that changes do not significantly affect the system probabilities.

Another determinant of waiting line formation is the arrival characteristics of the queue members. The arrivals are far more controllable than normally recognized. Coupons, discounts, sales, and other methods can control demands on a system.

Queue lines can vary in length, in the number of lines used, and in the queue discipline or rules used for determining the order of service to customers. First come, first serviced is the most common priority rule. The service facility itself, with its particular flow and configuration can influence the queue. Computer spreadsheets are used to arrive at answers to waiting line problems. Computer simulations can also be used to arrive at solutions of more complex or dependent waiting line situations. Waiting line problems present challenges to management to attempt to eliminate them.

Chapter outline

The Nature of Services
Service Businesses and Internal Services
Facilities-Based Services Defined
Field-Based Services Defined
A Customer-Centered View of Service Management

An Operational Classification of Services
High and Low Degree of Customer Contact Defined

Designing Service Organizations
Service Strategy: Focus and Advantage

Structuring the Service Encounter: Service-System Design Matrix
Strategic Uses of the Matrix

Service Blueprinting and Fail-Safing
Service Blueprint Defined
Poka-Yokes Defined

Three Contrasting Service Designs
The Production-Line Approach
The Self-Service Approach
The Personal-Attention Approach

Applying Behavioral Science to Service Encounters

New Service Development Process

Service Guarantees as Design Drivers
Service Guarantee Defined


Case: Pizza U.S.A.: An Exercise in Translating Customer Requirements into Process Design Requirements.

Case: Contact Centers Should Take a Lesson From Local Businesses

Outline of the technical notes on Waiting lines

Queues Defined

Economics of the Waiting Line Problem
Cost-Effectiveness Balance
The Practical View of Waiting Lines

The Queuing System
Queuing System Defined
Customer Arrivals
Arrival Rate Defined
Exponential Distribution Defined
Poisson Distribution Defined
Distribution of Arrivals
The Queuing System: Factors
Service Rate Defined

Waiting Line Models

Approximating Customer Waiting Time

Computer Simulation of Waiting Lines


MBA Core Management Knowledge - One Year Revision Schedule


Summaries of all Chapters of Operation Management

Total Quality Management: Focus on Six Sigma - Review Notes

Total quality management is managing the entire organization so it excels on all dimensions of products and services that are important to the customer. In today's competitive marketplace, the production and delivery of high-quality goods and services is a key element of any organization's success. Quality can be used as a competitive advantage or a strategic weapon for an organization. TQM, or total quality management is the advanced stage of quality programs, not only in Japan, but also in Europe and North America. The critical elements of a successful TQM program include leadership, employee involvement, excellence in products or processes, and customer focus.

The Malcolm Baldrige National Quality Award is a quality award sponsored by the U.S. Commerce Department to recognize organizations that have achieved excellence in their total quality management program. The Award was created in 1987 to recognize total quality management in American industry and represents the government's endorsement of quality as an essential component of a successful business strategy. The award seeks to improve quality and productivity.

The award consists of comprehensive criteria for evaluating total quality in organizations. A Board of Examiners reviews applicants. The Baldrige is designed to be flexible and it evaluates quality in various business categories including health care, educational institutions as well as manufacturing and service companies and small businesses.

The quality criteria focus on seven broad topical areas that are integrally and dynamically related. The seven areas are: Leadership, Strategic planning, Customer and Market Focus, Information and Analytics, Human Resource Focus, Process Management and Business Results. Customer satisfaction is the ultimate goal of the quality program.

The categories addressed in the award were selected because of their importance to all businesses. Companies not applying for the award can use the criteria to assess their current operations, design a total quality system, evaluate internal relationships, and to assess customer satisfaction. Participation in the award program is declining but many state-sponsored quality programs and awards are growing. The Deming Prize recognizes quality excellence in Japanese companies. A European Quality Award exists as well and is similar to the Baldrige Award.

Leaders in the quality revolution include Deming, Juran, and Crosby. These three gurus researched and advanced the role of quality. When considering quality, the concept has many dimensions. One is the performance of a product. Another dimension is the features of a product. Still other important quality variables include reliability, conformity, durability, serviceability, aesthetics, and finally perceived quality. The customer perceives quality. That is why a customer-focus is critical to any quality implementation.

Operation managers have to evaluate their designs for quality output. Do the specification of the product satisfy the customers? Is the design capable of providing satisfaction to the users? Is the production system capable of producing the specification. The operations managers are responsible for the design of processes and they have to certify that processes are capable of producing the designed specification. Even though processes are designed with the ability to produce the desired quality, there has to be control during the execution phase so that machines are reset whenever the performance deteriorates. Similarly operators must take adequate care in operating the machine. Management should not force operators to work when they are exhausted as the probability of making errors increases whenever operators feel fatigued or bored.

A key to a successful quality initiative is the use of planning and management tools and procedures to track quality progress. Both quantitative and non-quantitative measures are used to track initial quality and quantity improvements over time. An important quantitative method for monitoring a process is statistical process control. SPC allows employees to distinguish between random fluctuations in machines and processes and to determine when variations signal that corrective action is needed. Some of recent ideas that emerged in quality improvement or management field are the process of developing quality specifications by understanding customer requirements,  understanding the cost of quality concept, conformance quality concept, quality at the source, and the goal of zero defects.

Continuous improvement has its own tools and procedures including the concept of Kaizen borrowed from the Japanese, the PDCA Cycle, and benchmarking both internally and externally in the industry.

An alternative to the statistically based approach is the Shingo system, developed in Japan. It focuses on self-checks, source inspections, and successive checks to ensure quality. Key features of the Shingo system include fail safe or poka-yoke systems that prevent defects.

ISO 9000 is a series of standards agreed upon by the International Organization for Standards. Adopted in 1987 these standards consist of five primary parts and more than 100 countries now recognize the 9000 series for quality standards and certification for international trade. ISO 14000 standards cover environmental compliance by manufacturing companies. ISO 9000 standards are compared to the Baldrige Criteria in this section.

SERVQUAL is a questionnaire used to poll customers about service quality. It is an important tool for customer satisfaction. Many methods are available to production practitioners to measure quality. However, quality is a strategic issue and the internal capabilities and  the external environment requirements have to be taken into consideration in decisions related to quality. Internal capability needs to be developed as required and also external commitments must be based on internal capability at any point in time.  Quality programs are valuable in all organizations -- both service and manufacturing.

Total quality management may be defined as "managing the entire organization so that it excels on all dimensions of products and services that are important to the customer."

It has three important stages or steps.

1. Design of the product or service taking into consideration the customer expectations.
2. Designing a production system capable of delivering to design specifications and maintaining and improving the process capability on a continuous basis.
3. Controlling the production system during the execution phase so that it function according to design and any problems are highlighted so that they can be rectified or eliminated from the production system.

Cost of Quality Framework

Costs associated with quality are categorized and reported as;

1. Prevention costs
2. Appraisal costs
3. Internal failure costs
4. External failure costs

While the traditional quality systems concentrated on appraisal, the Japanese quality movement focused on prevention level. Now it is understood that prevention is economical. :Philip Crosby gave a benchmark that total quality related costs can be brought down to 2.5 percent of every sales dollar from the estimated 15 to 20 percent of sales dollar.(Crosby, 1979)

Six Sigma Quality

A process that is in Six-Sigm control will produce no more than two defects out of every billion units. In practice it is stated as four defects per million units, as the process mean may be somewhere within one sigma of the target specification. This notation provides a common metric to compare processes - defects per million opportunties (DPMO)

Six Sigma methodology advocated DMAIC cycle


The tools used for measuring and analyzing data on defects are flowcharts, run charts, pareto charts, checksheets, cause-and-effect diagrams, opportunity flow charts, control charts. Failure mode and effect analysis (FMEA) and design of experiments (DOE) are also used. DOE is used test the relationship between process inputs and outputs. Six Sigma emphasizes the scientific method like operations research and optimizes variance of the processes that minimizes variance of the process by developing various conjectures about the levels of input variables and variability of the process and the conjectures are converted into hypotheses that are tested using design of experiments (DOE) methods. Modern statistical software specially developed to support process analysis has reduced the drudgery of displaying and analyzing data.

Six Sigma has large number of successful applications in various companies and companies like GE claim billions of dollars of saving. Hence it is a very popular technique now in the world and more and more companies are training their employees in Six Sigma methods. 

Chapter Outline (Chase et al. Book)

Total Quality Management
Total Quality Management Defined
Malcolm Baldrige National Quality Award Defined

Quality Specification and Quality Costs
Developing Quality Specifications
Design Quality Defined
Conformance Quality Defined
Quality at the Source Defined
Zero Defects Defined
Dimensions of Quality Defined
Cost of Quality
Cost of Quality Defined
Functions of the QC Department

Six Sigma Quality
Six Sigma Defined
DPMO Defined
Six Sigma Methodology
DMAIC Defined
PDCA Cycle Defined
Continuous Improvement Defined
Kaizen Defined
Analytical Tools of Six Sigma and Continuous Improvement
Six Sigma Roles and Responsibilities

The Shingo System: Fail-Safe Design
Fail-Safe Procedures (Poka-Yoke) Defined

ISO 9000
ISO 9000 Defined
ISO 14000 Defined
The ISO 9000 Series
ISO 9000 Certification

External Benchmarking for Quality Improvement
External Benchmarking Defined

Service Quality Measurement: SERVQUAL
SERVQUAL defined


Case: Hank Kolb, Director of Quality Assurance

Case: Shortening Customers' Telephone Waiting Time

Case: "Hey, Is Anybody There? " An Example of DMAIC at American Express


Updated  7.12.2014, 10.12.2011

MBA Core Management Knowledge - One Year Revision Schedule

Process Capability and Statistical Quality Control - Review Notes

Statistical quality control includes acceptance sampling and process control. Total quality management has more concepts apart from statistical quality control.

Acceptance sampling involves testing a random sample of existing goods and deciding whether to accept an entire lot based on the quality of the random sample.

Statistical process control involves testing a random sample of output from a process to determine whether the process is producing items within a pre-specified range. The details of  techniques are presented in this chapter. Techniques for measurement of process control as well as charting procedures are presented along with a discussion of size of samples, number of samples, frequency of sampling, and control limits. Key points to consider are the costs to justify inspection as well as the correct sampling plan to ensure quality. While there are variations in every process, as variation is reduced, quality is improved.

Motorola made process capability famous by adopting its well-known six-sigma quality limits, ensuring only 3.4 defects per million using six-sigma quality limits.  SPC recommends that a machine needs adjustments if the output is falling outside 3 sigma limits of the process. Motorola came out with the policy that they will employ processes whose six sigma limit on either side is  equal to the difference between the acceptable specification level and the specified size. So naturally, the defects produced in the process will come down. Additionally, the six sigma limit will allow the process mean to drift up to 1.5 sigma and still the defect produced by the process will be only 2 per million items.

Motorola's Six Sigma program also has a method to analyze the existing processes and reduce their sigma or variability by studying the process by changing the input variables' levels and observing the resulting sigma.


Assignable Variation Defined
Common Variation Defined

Variation Around Us
Upper and Lower Specification or Tolerance Limits Defined

Process Capability
Six-Sigma Defined
Capability Index Defined
Capability Index (Cpk)

Process Control Procedures
Statistical Process Control (SPC) Defined
Attributes Defined
Process Control With Attribute Measurement: Using p Charts
Process Control With Variable Measurement: Using X-bar and R Charts
Variables Defined
How to Construct X-bar and R Charts

Acceptance Sampling
Design of a Single Sampling Plan for Attributes
Operating Characteristic Curves



Full Material from the book

Video Lectures from MIT




Updated  7.12.2014, 31.5.2012, 10.12.2011

MBA Core Management Knowledge - One Year Revision Schedule

Operations Consulting and Reengineering - Chapter Review Notes

Operations' consulting assists clients in developing operations strategies and improving production processes.

In strategy development, the focus is on analyzing the capabilities of operations in light of the firm's competitive strategy.

In process improvement, the focus is on employing analytical tools and methods to help operating managers enhance the performance of their departments. Regardless of where one focuses, an effective job of operations consulting results in an alignment between strategy and process dimensions in a way that enhances the business performance of the client firm.

The management consulting industry can be categorized in three ways: by size, by specialization, and by in-house and external consultants. Most consulting firms are small, generating less than $500,000 in annual billings. Consulting firms are also frequently characterized according to whether their primary skill is in strategic planning or in tactical analysis and implementation.

Some of the major strategic and tactical areas where companies typically seek operations consulting can be classified in five key areas. In the plant area, assistance is provided for adding and locating new plants, expanding, contracting or refocusing existing facilities. In the people area, the consultants focus on quality including quality improvement, setting or revising work standards, and learning curve analysis. Make or buy decisions and vendor selection decisions are key parts decisions. Process decisions for consultants include technology evaluation, process improvement, and reengineering. Finally, planning and control systems analyzed by consultants include supply chain management, MRP, shop floor control, and warehousing and distribution.

Consultants are needed when companies are faced with major investment decisions or when they believe they are not realizing maximum effectiveness from their productive capacity. Operations consulting tools can be categorized as tools for problem definition, data gathering, data analysis and solution development, cost impact and payoff analysis, and implementation.

Consulting Tools

Problem Definition Tools

Customer Surveys
Employee Surveys
Gap Analysis - This can identify the gap between expectations of customers and employees and current performance of the organization.
SWOT Analysis
Porter's Five Force Analysis
Value Chain Analysis
Issue Trees - They are used by McKinsey company to highlight the problems and possible solutions to develop a consulting assignment specification.

Data Gathering

Plant Tours/Audits
Work Sampling

Data Analysis and Solution Development

Statistical tools
Bottleneck analysis
Computer simulation

Cost Impact and Payoff Analysis

Engineering Economic Analysis
Decision Trees - are useful when a set of decisions are to be taken sequentially in response to environment behavior
Stakeholder analysis
Balanced scorecard
Process dashboards


Responsibility Charts
Project Management

Business process reengineering (BPR) is a way of rethinking and redesigning business processes for improvements of performance, including cost, quality, service, and speed especially based on new technology. BPR basic premise is that new technology is not understood thoroughly by many users and also the existing way of producing is continued by using the new technology in those areas in which application is visible quickly. Principles of reengineering include: organize around outcomes desire and not around current ways of doing tasks, have those who use the output of the process perform the process, merge information-processing work into the real work that produces the information, treat geographically dispersed resources as though they were centralized, link parallel activities instead of integrating their results, put the decision point where the work is performed and build control into the process, and capture information once - at the source.

Chapter outline (Chase et al Book)

What is Operations Consulting?
Operations Consulting Defined

The Nature of the Management Consulting Industry
"Finders," "Minders," and "Grinders" Defined

Economics of Consulting Firms

When Operations Consulting Is Needed
When Are Operations Consultants Needed?

The Operations Consulting Process

Operations Consulting Tool Kit
Problem Definition Tools
Data Gathering
Data Analysis and Solution Development
Cost Impact and Payoff Analysis

Business Process Reengineering (BPR)
Reengineering Define

Principles of Reengineering

Guidelines for Implementation


Case: A California Auto Club Reengineers Customer Service

Appendix: RPA Questionnaire and Rating Sheet


Updated  7.12.2014, 10.12.2011

MBA Core Management Knowledge - One Year Revision Schedule

November 28, 2014

Long Term Finance for Companies - USA

The corporate lending world can, in its simplest form, be divided into two different
approaches: the asset-based credit market and the cash flow-based credit market.
In ABL transactions, the lender’s interest is secured by the borrower’s assets, which then
forms the basis for determining how much credit the borrower can access. In contrast, the
cash flow method of determining credit capacity is principally based on an analysis of
the borrower’s enterprise value.

Asset-based lenders have generally found that, over time, the valuation of a borrower’s
assets is remarkably stable over a variety of business and economic cycles. This makes
calculating a borrower’s credit capacity based on asset values a highly predictable way
of providing capital to clients.

Cash flow-based loans, while also usually a secured form of financing, often use EBITDA
(or a company’s earnings before interest, taxes, depreciation and amortization) along with
a multiplier to determine credit capacity, rather than the value of the underlying collateral
assets. The level of EBITDA can change and the multiplier applied can change significantly during business and economic cycles. During an economic downturn, most companies will see their EBITDA decline, both on a relative and absolute basis. Often, the multiplier being used by lenders will shrink at the same time; this combination of declining EBITDA and a shrinking multiplier can result in a significant decline in available credit capacity at what could be the exact time a company most needs access to capital.

Typical uses

Frequent uses of ABLs

For higher quality, large-corporate borrowers, ABLs are often used simply for financing working capital. These companies will often access the public or private capital markets for long-term forms of financing for the majority of their overall capitalization. They will then use ABLs to fund seasonal changes in working capital, for shareholder value-creating actions such as share repurchase programs, dividends or distributions, and for opportunistic acquisitions.

For midsized companies, in addition to providing working capital financing, ABLs often incorporate
term loans, which are secured by longer-term assets such as machinery and real estate, to provide incremental credit capacity.

ABLs also tend to play a key role in the financing of companies facing cyclical or operating
performance headwinds that have caused their credit profile to deteriorate. They need
patient capital to attempt to execute on their business turnaround or restructuring
plans, or just to weather the current environment, including the possibility of bankruptcy
reorganization. Often, an ABL is “transitional” capital for these companies; for a time it
provides incremental liquidity and structural flexibility characteristics that help owners
and managers reposition the company. Once that is completed, these companies often
refinance again in the cash flow credit market.

There are also times when companies use an ABL as transitional capital only to later
realize that many of the characteristics of ABLs fit their business well. They may see that
both the discipline and freedom associated with these loans can enhance the way they
execute their plans. These companies often never go back to the cash flow loan market.
In fact, there are several Fortune 500 companies that have opted to used ABLs.

Qualifying companies

Manufacturers, wholesale distributors, retailers, and some forms of service companies
are prime candidates for ABLs. Solid ABL candidates will usually have tangible asset-rich
balance sheets, often with at least half of their total assets in working capital assets,
such as accounts receivable and inventory.

Like all lenders, asset-based loan providers look for companies with solid management
teams and a history of being able to effectively manage their businesses, even when
facing difficult circumstances. They also look for companies with excellent financial
accounting information systems that can provide reliable data about both operating and
asset performance.

Does company size matter in qualifying for an ABL?

No. Companies of all sizes can qualify for an ABL as long as their business is a good match
for the characteristics that asset-based lenders look for. For midsized companies, annual
revenues between $35 million and $250 million are typical of today’s borrowers. But ABLs
are also delivered just as easily to multibillion-dollar revenue companies.

What about credit ratings?
Since asset-based lending is always secured, its target market is non-investment grade
companies (companies with an actual or equivalent S&P rating of BB+ and below, or a
Moody’s rating of Ba1 and below). External credit ratings are not required to issue an ABL.

Which assets qualify as collateral under ABL structures?
Accounts receivable and inventory—assets that have a high degree of market liquidity
and can be easily valued and monitored—head the list of qualifying assets. Long-term
assets such as equipment and real estate are often used as additional collateral when
the ABL is structured as a term loan with a fixed amortization schedule.
Some proportion of even the most liquid of asset classes are typically ineligible in ABLs.
Examples include substantially past due accounts receivable, some types of work-inprocess
inventory or assets held for sale not in the ordinary course of business.

Project Finance
Project Finance can be characterised in a variety of ways and there is no universally adopted definition
but as a financing technique, the author’s definition is:
 “the raising of finance on a Limited Recourse basis, for the purposes of developing a large capitalintensive
infrastructure project, where the borrower is a special purpose vehicle and repayment of the
financing by the borrower will be dependent on the internally generated cashflows of the project”
The terms ‘Project Finance’ and ‘Limited Recourse Finance’ are typically used interchangeably and
should be viewed as one in the same. Indeed, it is debatable the extent to which a financing where the
Lenders have significant collateral with (or other form of contractual remedy against) the project
shareholders of the borrower can be truly regarded as a project financing. The ‘limited’ recourse that
financiers have to a project’s shareholders in a true project financing is a major motivation for
corporates adopting this approach to infrastructure investment.
Project financing is largely an exercise in the equitable allocation of a project’s risks between the
various stakeholders of the project.

MBA Core Management Knowledge - One Year Revision Schedule

November 27, 2014

Role of Finance Managers in Enterprise Risk Management

Companies should be managed so that they do not go into financial distress. Benjamin Graham tells conservative investors not to invest in a company that made a loss in the last ten years.

Financial distress is associated with having operating cash flows fall below minimum required levels. Risk management can reduce the likelihood of low cash flows and hence of financial distress.

Risk management meant buying insurance against fire, theft, and liability losses sometime back. Now finance managers have more alternatives.

 In an article in CFO, Scott Lange, who was head of Microsoft Risk at the time the article appeared, identified these 12 major sources of risk:

1. Business partners (interdependency, confidentiality, cultural conflict, contractual risks).
2. Competition (market share, price wars, industrial espionage, antitrust allegations).
3. Customers (product liability, credit risk, poor market timing, inadequate customer support).
4. Distribution systems (transportation, service availability, cost, dependence on distributors).
5. Financial (foreign exchange, portfolio, cash, interest rate, stock market).
6. Operations (facilities, contractual risks, natural hazards, internal processes and control).
7. People (employees, independent contractors, training, staffing inadequacy).
8. Political (civil unrest, war, terrorism, enforcement of intellectual property rights, change in leadership,
revised economic policies).
9. Regulatory and legislative (antitrust, export licensing, jurisdiction, reporting and compliance, environmental).
10. Reputations (corporate image, brands, reputations of key employees).
11. Strategic (mergers and acquisitions, joint ventures and alliances, resource allocation and planning, organizational agility).
12. Technological (complexity, obsolescence, workforce skill sets).

 Lange defined the role of finance in risk management: The role of finance is to put on paper all of
the risks that can be identified and to try to quantify them. When possible, use a number—one number perhaps or a probability distribution. For example, what is the probability of losing $1 million on a product? $10 million?

MBA Core Management Knowledge - One Year Revision Schedule

Market Development for New Products, Processes and System

Market development is the last mile of  any innovation.  The authors proposed  two very
different kinds of market development. Accelerating adoption applies to individual products, services, and business models, while creating new markets is a more fundamental process that supports the success of revolutionary business ideas.

Accelerating Adoption

For introducing a single innovation to the marketplace, firms often rely on proven techniques such as
advertising, public relations, and trade shows to persuade potential customers that the new products or services are worth paying attention to. One of the reasons for the increased sophistication required for breakthrough innovations is that their users make fundamental change to how they function or how they behave, changes that involve switching costs incurred by the end user to make use of the new product or service. This cost is the most significant factor in new product adoption and may inhibit the adoption.

The development of principles in this area  has been significantly influenced by Everett Rogers, a Stanford professor whose book "Diffusion of Innovations" pioneered the study of the critical relationship between innovations and the customers who adopt them. Rogers showed that the rate
of new product adadoption commonly follows a bell curve, and defined different groups within a total population according to how quickly or slowly they tended to adopt innovations. He also explored issues such as opinion leadership, diffusion networks, change agents, and innovation in
organizations, all of which are significant factors in market development. Consultant Geoffrey Moore subsequently applied Rogers’ ideas in a model that has become widely used in high tech industries. Moore’s book, "Crossing the Chasm", explains how the adoption curve can be applied to
understand how and why new high tech products succeed or fail in the market. It also examines how differing psychological factors affect different groups of buyers, and therefore how marketing, advertising, and sales have to be adapted at each different phase of the adoption curve.
Moore identifies four groups of adopters: early adopters who in the technology world tend to be technology enthusiasts, and then visionaries, pragmatists, and conservatives. The mass market that is your goal begins with the pragmatists,  The important principle is that marketing communications have to be different for different groups. Hence the organization has to identify when the product is moving into the hands of the next group and change its marketing communications to create awareness first and then attract the persons in the target group to sample the product and then become advocates of the product.

Malcolm Gladwell’s concept of the “tipping point,” described in his book of the same name, also explores the factors underlying the adoption of new ideas and new products.   The book
shows how contagious behavior—like a fashion trend or the sudden emergence of a bestselling book—starts in an organic fashion and then suddenly takes off exponentially, much like a virus, without any central control or master plan. The idea from which the book takes its title is that moment in a
system’s development when a small change leads to a huge effect in a very rapid time frame, and spreads contagiously. For those who want to instigate rapid change, the principles of the
tipping point model are important.

The rapid growth is usually started by a handful of people who exhibit some kind of exceptional behavior. In the propagation of infectious diseases, some people, who by the nature of what they do or the lifestyle they lead, allow the growth of the disease to tip so that it becomes an epidemic.
The same can be said for many other trends—a small number of people (like skateboarders) have the ability to infect a large number of other people with a new idea (like a style of clothing or shoes). Gladwell suggests that there are three types of exceptional people whose disproportional influence can make a change tip and become a trend. They’re Connectors, Mavens and Salesmen.

Connectors are people who seem to know everyone. As information travels through networks it’s highly likely to come in contact with a connector, and if the information engages the connector’s interest, he or she will distribute it to a huge number of other individuals in a short period of time, creating a tipping point. Only a small number of connectors are needed in any system to propagate a new trend.

Mavens are information specialists. They’re the people who seem to know everything there is to know about a certain topic, and they have one additional characteristic that makes them different from ordinary experts: they love to share what they know with others. If somebody asks them, they ar willing to explain and share.  Mavens are important as tipping points because they’re on the leading edge of acquiring new information.

Salesmen are the quintessential persuaders who can get people to make decisions and take actions that they ordinarily wouldn’t take if left to themselves. They’re individuals who have the ability to persuade in part because they can get another person to root for them in the same way that an audience roots for a performer on stage. Their ability to persuade makes them strong carriers of infectious ideas, concepts, trends and changes.

Creating New Markets

When new markets or industries emerge, it’s often because someone has been able to catalyze the connectors, mavens, and salesmen in a community, although this doesn’t necessarily happen quickly.

If you look down the list of breakthrough technologies, you’ll notice that just about every breakthrough, and many of the new business models, was supported by focused market development efforts that articulated existing needs and defined new possibilities for meeting them.

Autos: Minivans
Computer: Personal Computers
Banking: ATMs
Food: Genetic Engineering (still an ongoing development process)
Airlines: Online reservations
Telecommunications: Cell phones
Health Care: MRI / CAT Scan
Retail: Bar codes
Office Supply: Post-it Notes
Media: BLOGs

Early adopters bought the first versions of nearly all these products, and gradually the value was proven as more and more users were satisfied. Mainstream buyers eventually became interested, leading to the development of a large customer base. All this was supported by advertising, and constant effort to gain favorable (and free) media publicity.

From Permanent Innovation - Langdon Morris

Permanent Innovation
The Definitive Guide to the Principles, Strategies, and Methods of
Successful Innovators
Langdon Morris

Langdon Morris is a co-founder and principal of InnovationLabs LLC and Senior Practice Scholar at the Ackoff Center of the University of Pennsylvania and Senior Fellow of the Economic Opportunities Program of the Aspen Institute.

MBA Core Management Knowledge - One Year Revision Schedule

Opportunities or Areas for Innovation

Every activity done by an organization provides an opportunity for innovation. Porter brought out this idea strongly in his value chain model of an organization. Every activity can become a differentiator and a differentiation in multiple activities becomes difficult for competitors to imitate because they will take time to understand.

Business structure

alliances & partnerships
capital formation


information flow
insourcing / outsourcing services


structure type
facilities infrastructure
 IT infrastructure
employee / contractor mix
employee experience
decision making processes
facilities effectiveness
process to improve processes
 education & training

Customer experience

communication process
brand / image

Customer service

service process

Supply chain

distribution system


product offering
product availability
technology (hidden)
technology (evident)
user interface
life cycle model
sales model
after-sale service

Production Processes and Technology

Maintenance Processes

Inspection and Quality Control Processes

Pollution Control Process

Industrial Engineering

From Permanent Innovation - Langdon Morris

Permanent Innovation
The Definitive Guide to the Principles, Strategies, and Methods of
Successful Innovators
Langdon Morris

Langdon Morris is a co-founder and principal of InnovationLabs LLC and Senior Practice Scholar at the Ackoff Center of the University of Pennsylvania and Senior Fellow of the Economic Opportunities Program of the Aspen Institute.

MBA Core Management Knowledge - One Year Revision Schedule

Financial Management Aspects of Mergers and Acquisitions

An acquisition of a company or substantial portion of its shares is an investment. Financial managers have to appraise it to see whether return on such investment is higher than the cost of the capital for the company.

Financial managers and theorists have proposed many reasons for acquisitions and merger activity. The primary economic motives mentioned are:


Synergistic effects can arise from four sources: (1) operating economies, which result from economies of scale in management, marketing, production, or distribution due to combining operations; (2) financial economies, including lower transactions costs and better coverage by security analysts; (3) differential efficiency, which implies that the management of one firm is more
efficient and  will increase the return from that the weaker firm’s assets after the acquisition or  merger; and (4) increased market power due to reduced competition.

Tax Considerations
Tax considerations have stimulated a number of mergers. For example, a profitable firm in the highest tax bracket could acquire a firm with large accumulated tax losses. These losses could then be turned into immediate tax savings rather than carried forward and used in the future. Thus excess cash can be used  as a way of minimizing taxes.

Purchase of Assets below Their Replacement Cost
Sometimes a firm acquires a company because the cost of replacing its assets is considerably higher than its market value. If the new management uses the assets appropriately, the market value will increase in the future.

Managers contend that diversification helps stabilize a firm’s earnings and thus benefits its owners as risk premium of the company's comes down. Stabilization of earnings is certainly beneficial to employees, suppliers, and customers; but its value is less certain from the standpoint of stockholders. Stockholders also can buy the stock of both firms? Many studies find that diversified firms are worth significantly less than the sum of their individual parts as top managements cannot provide adequate managerial expertise to diversified businesses.

Breakup Value
 Recently, takeover specialists have identified breakup value as  a basis for
valuation. A company’s breakup value, is the value of the individual parts of the firm if they are sold off separately. If this value is higher than the firm’s current market value, a takeover specialist could acquire the firm at or even above its current market value, sell it off in pieces, and earn a substantial profit. Such a breakup value is mainly appearing in diversified companies.

Types of Mergers

Mergers are classified into four types:
(1) horizontal,
(2) vertical,
(3) congeneric, and
(4) conglomerate.

A horizontal merger occurs when one firm combines with another in its same line of business.
An example of a vertical merger is a steel producer’s acquisition of one of its own suppliers, such
as an iron or coal mining firm. Congeneric means “allied in nature or action”; There is a relationship but not producers of the same product (horizontal) or firms in a producer-supplier relationship (vertical). A clothing retailer may acquire a food retailer.  A conglomerate merger occurs when unrelated enterprises combine.

Vertical and horizontal mergers generally provide the greatest synergistic operating benefits

Financial Analysis

The acquiring firm performs an analysis to value the target company based on its expected cash flows and cost of capital applicable and then determines whether the target can be bought at that value or, preferably, for less than the estimated value.

The target company also makes an analysis of its cash flows and makes a valuation of them and will accept the offer if the price exceeds either its value if it continued to operate independently or the price it could receive from some other bidder.

MBA Core Management Knowledge - One Year Revision Schedule

Management of Cash and Marketable Securities

Sophistication is increasing  in cash management by corporations. The trend has been toward reducing cash—the firm’s most liquid asset—to a minimum.  and the funds are invested in interest earning securities or in earning assets. This trend can be attributed to rising interest rates on securities, which make the opportunity cost of holding cash more expensive, to innovations in cash management, and to economies of scale in cash management as corporations grow larger.

A number of methods have come into existence in recent years to speed up this collection process and maximize available cash. These methods helps cash management in the following ways:
(1) speed the mailing time of payments from customers to the firm;
(2 ) reduce the time during which payments received by the firm remain uncollected funds; and
(3) speed the movement of funds to disbursement banks.

Multiple Collection Centers

 Instead of a single collection center located at the company headquarters, multiple collec-
tion centers are established. The purpose is to shorten the period between the time a customer mails in his payment and the time when the company has the use of the funds. Customers in a particular geographic area are instructed to remit their payments to a collection center in that area.  When
payments are received, they are deposited in the collection center’s local bank. Surplus funds are then transferred from these local bank accounts to a concentration bank or banks. A bank of concentration is one with which the company has a major account—usually a disbursement account.

Bank Collection of Checks from Post Offices

Another means of accelerating the flow of funds is a lock-box arrangement. The purpose
of a lock-box arrangement is to eliminate the time between the receipt of remittances by the company and their deposit in the bank. The company rents a local post office box and authorizes its bank in
each of these cities to pick up remittances in the box. Customers are billed with instructions to mail their remittance to the lock box. The bank picks up the mail several times a day and deposits the checks in the company’s account. This procedure frees the company from handling and depositing the checks. The main advantage of a lock-box system is that checks are deposited at banks sooner and become collected balances sooner than if they were processed by the company prior to deposit. No doubt, the bank will take an extra fee for the service. But the service is utilized only when it is profitable for the company to employ it.

Frequently, firms give special attention to the handling of large remittances so that they may be deposited in a bank as quickly as possible. This special handling may involve personal pickup of these checks or the use of airmail or special delivery.. The firm should exercise tight control over interbank transfers of cash and transfers between various units of the company, such as divisions or subsidiaries. Excessive funds may be tied up in various divisions of the firm.

Some companies maintain too many bank accounts, thereby creating unnecessary pockets of idle funds. With less number of accounts also similar service can be provided at a lesser cost to the company.

MBA Core Management Knowledge - One Year Revision Schedule

Management of Investment in Accounts Receivable

Management of Accounts Receivable

Accounts receivable is a current asset that appears due to the extension of open-account credit
by one firm to other firms and to individuals. Credit has to be extended to generate sales.
Therefore, accounts receivable are necessary investment, but require careful analysis. Receivables can be managed efficiently so that the level of investment in them is optimal.

Credit policy involves a tradeoff between the profits on sales that give rise to receivables on one hand and the cost of carrying these receivables plus bad-debt losses on the other. Credit policy determines
the amount of credit risk  accepted. In turn, the risk accepted or taken affects the slowness of receivables as well as the amount of bad-debt losses. Collection procedures also affect these factors. Thus, proper the credit granting and collection procedures of the firm determine the success of the firm’s overall credit management and collection policies.


The policy variables include the quality of the trade accounts accepted, the length of the credit period, the cash discount given, any special terms given, such as seasonal datings, and the collection program of the firm. Together, these elements largely determine the average collection period and the proportion of bad-debt losses.

Credit Standards

Credit policy can have a significant influence upon sales. If competitors extend credit liberally and if a firm does not, the policy may have a dampening effect upon the marketing effort. Trade credit is one of many factors that influence the demand for a firm’s product.  In theory, the firm can lower its quality standard for accounts accepted as long as the expected profitability of sales generated exceeds the added costs of the receivables. What are the costs of relaxing credit standards? The incremental cost comes from the increased probability of bad-debt losses. Also a slower average collection
period will occur.

To determine the profitability of a more liberal extension of credit, we must know the profitability of additional sales; the added demand for products arising from the relaxed credit standards; the increased slowness of the average collection period; and the required return on investment.

Suppose a firm’s product sells for $ 10 a unit, of which $7 represents variable costs before taxes, including credit department costs. Current annual sales are $2.4 million, represented entirely by credit sales, and the average total cost per unit at that volume is $9 before taxes. The firm is considering a more liberal extension of credit, which will result in a slowing in the average collection period from one to two months. This relaxation in credit standards is expected to produce a 25 per cent increase in sales, to $3 million annually.  With this percentage increase, the unit sales and total costs of the firm become:

Cost of Present sales  =  240,000 units X $9 = $2,160,000
Marginal cost of Additional sales =  60,000 units X $7 = 420,000
Total cost =  $2,580,000
The average cost per unit of sale at the new level of sales is

Assume that the firm’s required return on investment is 20 per cent before taxes.

Inasmuch as the profitability on additional sales, $180,000 (60,000 * $3), exceeds the required return on the additional investment in accounts receivable, $50,000, the firm is advised to relax its credit standards. An optimal credit policy would involve extending trade credit more liberally until the marginal profitability on additional sales equals the required return on the additional investment in receivables necessary to generate those sales.

MBA Core Management Knowledge - One Year Revision Schedule

Financial Management of Inventory


Inventory management usually is not the direct operating responsibility of the financial manager. But  the investment of funds in inventory is a very important aspect of financial management. The finance manager has to appraise the proposed investment in inventory like the appraisal he does for fixed capital assets. Consequently, the financial manager must be familiar with methods proposed in the theory to plan and control inventories. Planning of the inventory is based on minimising the costs associated with keeping inventory.

The inventory control or management methods described give  a means for determining an optimal level of inventory, and also to decide when to ordered and in what quantity. . These tools are necessary for
managing inventory efficiently and balancing the advantages of additional inventory against the cost of carrying this inventory. With the use of computers, great improvements in inventory control have been made
and are continuing to be made. Also there are manyu applications of operations research to inventory management.

New ideas to reduce inventory required normally occur with in the inventory management theory. But even finance theory sometimes may come out with principles related to optimizing inventory. When the innovation occurs in the finance field, finance managers have to take the responsibility of implementing it within their activity or within inventory management activity.

Inventories, like receivables, represent a significant portion of most firms’ assets, and, accordingly, require substantial investments. Inventories must be managed efficiently.

Inventories provide a very important link in the production and sale of a product. For a company engaged in manufacturing, a certain amount of inventory is absolutely necessary in the production distribution system. Toyota Production System came out of the efforts of managers identify and eliminate excess inventory which was thought at that time as essential.

 The obvious disadvantages of inventory are the total cost of holding the inventory, including storage and handling costs, and the required return on capital tied up in the investment in inventory. Inventories, like accounts receivable, should be increased as long as the resulting savings exceed the total cost of holding the added inventory. The balance finally reached depends upon the estimates of actual savings, the cost of carrying additional inventory, and the efficiency of inventory control.


Without inventory between production stages, each stage of production would be dependent upon the preceding stage’s finishing its operation on a unit of production. As a result, there probably would be delays and considerable idle time in certain stages of production.

According to traditional inventory theory,  the advantages of increased inventories, then, are several. The firm can effect economies of production and purchasing and can fill customer orders more quickly. In short, the firm is more flexible.

For a given level of inventory, the efficiency of inventory control affects the flexibility of the firm. Two essentially identical firms with the same amount of inventory may have significantly different degrees of
flexibility in operations due to differences in inventory control. Inefficient procedures may result in an unbalanced inventory —the firm may frequently be out of certain types of inventory, and overstock other
types, necessitating excessive investment. These inefficiencies ultimately have an adverse effect upon profits. Turning the situation around, differences in the efficiency of inventory control for a given level of flexibility
affect the level of investment required in inventories. The less efficient the inventory control, the greater the investment required. Similarly, excessive investment in inventories affects profits adversely.



The economic order quantity (EOQ) is an important concept in inventory management.

The optimal order quantity for a particular item of inventory, given its forecasted usage, ordering cost, and carrying cost is determined using mathematics. Ordering can mean either the purchase of the item or its production. Assume for the moment that the usage of a particular item of inventory is known with certainty. Moreover, assume that ordering costs per order, O, are constant regardless of the size of the order. In the purchase of raw materials or other items, these costs represent the clerical costs involved in placing an order as well as certain costs of receiving and checking the goods once they arrive.

For finished-goods inventories, ordering costs involve scheduling a production run. For in-transit inventories, ordering costs are likely to involve nothing more than record keeping. The total ordering cost for
a period is simply the number of orders for that period, times the cost per order. It is important to state at this point that Toyota reduced its ordering cost or set up cost and thereby reduced its economic order quantities.

Carrying costs per period, C, represent the cost of inventory storage, handling, and insurance, together with the required rate of return on the investment in inventory. These costs are assumed to be constant per unit
of inventory, per unit of time. Thus, the total carrying cost for a period is the average number of units of inventory for the period, times the carrying cost per unit. In addition, it is  assumed  that inventory orders are filled immediately, without delay.

If the usage of an inventory item is perfectly steady over a period of
time and there is no safety stock, average inventory (in units) can be expressed
as:  EOQ/2

The EOQ formula is  SQRT(2AS/I)

A = annual demand
S = ordering cost
I = inventory carrying cost per unit


In practice, the demand or usage of inventory generally is not known with certainty; usually it fluctuates during a given period of time. Typically, the demand for finished-goods inventory is subject to the fluctuation. . In addition to demand or usage, the lead time required to receive delivery of inventory once an order is placed is usually subject to some variation. Owing to these fluctuations, it is not feasible in most cases to allow expected inventory to fall to zero before a new order is expected to be received, as could be done when usage and lead time were known with certainty.

Most firms maintain some margin of safety, or safety stock; otherwise, they may at times be unable to satisfy the demand for an item of inventory. There are opportunity costs to being out of stock. In the case of
finished-goods inventory, the customer is likely to become irritated and may take his business elsewhere. In the case of raw-materials and intransit inventories, the cost of being out of stock is a delay in production.
While this opportunity cost is measured more easily than that associated with finished-goods inventory, a stockout of the latter has a cost; and the firm must recognize it.

. If we know the cost per unit of stockout, we can calculate the expected cost of stockouts and then compare this cost with the cost of carrying additional inventory.

Uncertainty o f Lead Time. Suppose that the lead time required for procurement, like demand or usage, is subject to a probability distribution. Based on this probability distribution can determine the optimal level of safety stock for the period.


At order point which is a stock level, an order is placed.

Order Point* = S(L) +  Safety Stock

where S is the usage, L is the lead time required to obtain additional inventory

Suggestions for Inventory Efficiency

When demand or usage of inventory is uncertain, the financial manager may try to effect policies that will reduce the average lead time required to receive inventory once an order is placed. The lower the
average lead time, the lower the safety stock needed and the lower the total investment in inventory, all other things held constant. The greater the opportunity cost of funds invested in inventory, the greater the
incentive to reduce this lead time. In the case of purchases, the purchasing department may try to find new vendors that promise quicker delivery or place pressure on existing vendors for faster delivery. In the
case of finished goods, the production department may be able to schedule production runs for faster delivery by producing a smaller run. In either case, there is a tradeoff between the added cost involved in reducing the lead time and the opportunity cost of funds tied up in inventory. This discussion serves to point out the importance of inventory management to the financial manager. The greater the efficiency with which
the firm manages its inventory, the lower the required investment in inventory, all other things held constant.

The modern inventory system is zero inventory system. It is also being called lean system (non stock system). To know how nonstock highly efficient systems were developed in Toyota read
Toyota Production System Industrial Engineering.

MBA Core Management Knowledge - One Year Revision Schedule

Working Capital Finance - USA

This article  introduces the five major forms of debt used to finance working capital. The purpose of this information is to provide insight into the different ways in which debt for working capital can be structured and prepare finance professonals  to choose and structure  debt best suited to a firm’s financial situation and needs.

Line of Credit

A line of credit is an open-ended loan with a borrowing limit that the business can draw against or repay at any time during the loan period. This arrangement allows a company flexibility to borrow funds when the need arises for the exact amount required. Interest is paid only on the amount borrowed, typically on a monthly basis. A line of credit can be either unsecured, if no specific collateral is pledged for repayment, or secured by specific assets such as accounts receivable or inventory.

The standard term for a line of credit is 1 year with renewal subject to the lender’s annual review and approval. Lenders usually require full repayment of the line of credit during the annual loan period
and prior to its renewal. This repayment is sometimes referred to as the annual cleanup.

Lenders require a fee for providing the line of credit, based on the line’s credit limit, which is paid whether or not the firm uses the line. This fee, usually in the range of 25 to 100 basis points, covers the bank’s costs for underwriting and setting up the loan account in the event that a firm does not use the line and the bank earns no interest income. A second cost is the requirement for a borrower to maintain a compensating balance account with the bank. Under this arrangement, a borrower must have a deposit account with a minimum balance equal to a percentage of the line of credit, perhaps 10% to 20%. If a firm normally maintains this
balance in its cash accounts, then no additional costs are imposed by this requirement. However, when a firm must increase its bank deposits to meet the compensating balance requirement, then it is incurring an additional cost. In effect, the compensating balance reduces the business’s net loan proceeds and increases its effective interest rate.

 Like most loans, the lending terms for a line of credit include financial covenants or minimal financial standards that the borrower must meet. Typical financial covenants include a minimum current ratio, a minimum net worth, and a maximum debt-to-equity ratio. The advantages of a line of credit is that it allows a company to minimize the principal borrowed and the resulting interest payments.

With full repayment required each year and annual extensions subject to lender approval, a line of credit cannot finance medium-term or long-term working capital investments.

Accounts Receivable Financing

Loans secured by accounts receivable are a common form of debt used to finance working capital.
Under accounts receivable debt, the maximum loan amount is tied to a percentage of the borrower’s accounts receivable.  The firm must use customer payments on these receivables to reduce the loan balance. The borrowing ratio depends on the credit quality of the firm’s customers and the age of the accounts receivable. A firm with financially strong customers should be able to obtain a loan equal to 80% of its accounts receivable. With weaker credit customers, the loan may be limited to 50% to 60% of accounts
receivable. Lenders may exclude receivables beyond a certain age (e.g., 60 or 90 days) in the base used to calculate the loan limit.

Since accounts receivable are pledged as collateral, when a firm does not repay the loan, the lender will collect the receivables directly from the customer and apply it to loan payments. The bank receives
a copy of all invoices along with an assignment that gives it the legal right to collect payment and apply it to the loan. In some accounts receivable loans, customers make payments directly to a bank-controlled account (a lock box).

Firms gain several benefits with accounts receivable financing arrangements. Borrowing capacity grows automatically as sales grow. This automatic matching of credit increases to sales growth provides a ready means to finance expanded sales, which is especially valuable to fast-growing firms. Accounts receivable financing allows small businesses with creditworthy customers to use the stronger credit of their customers to
help borrow funds.


Factoring entails the sale of accounts receivable to another firm, called the factor, who then collects payment from the customer. Through factoring, a business can shift the effort and costs of collection and the risk of nonpayment to a third party. In a factoring arrangement, a company and the factor work out a credit limit and average collection period for each customer. As the company makes new sales to a customer, it provides an invoice to the factor. The customer pays the factor directly, and the factor then pays the company based on the agreed upon average collection period, less a slight discount
that covers the factor’s collection costs and credit risk.

A factor may advance payment for a large share of the invoice, typically 70% to 80%, providing the
company with immediate cash flow from sales. In this case, the factor charges an interest rate on this advance and then deducts the advance amount from its final payment to the firm when an invoice is collected

Factoring saves the cost of establishing and administering its own collection system. Second, a factor can often collect accounts receivable at a lower cost than a small business, due to economies of scale, and transfer some of these savings to the company. Third, factoring is a form of collection insurance that provides an enterprise with more predictable cash flow from sales. On the other hand, factoring costs may be higher than a direct loan,.The business loses control over the collection  part of the customer relationship, which may affect overall customer relations, especially when the factor’s collection practices differ from those of the company.

Inventory Financing

Inventory financing is a secured loan with inventory as collateral.  Firms with an inventory of standardized goods with predictable prices, such as automobiles or appliances, will be more successful at securing
inventory financing than businesses with a large amount of work in process or highly seasonal or perishable goods. Loan amounts also vary with the quality of the inventory pledged as collateral, usually ranging from 50% to 80%. For most businesses, inventory loans yield loan proceeds at a lower share of pledged assets than accounts receivable financing. When inventory is a large share of a firm’s current assets, however, inventory financing has to be sought to finance working capital.

Lenders need to control the inventory pledged as collateral to ensure that it is not sold before their loan is repaid. Two primary methods are used to obtain this control: (1) warehouse storage; and (2) direct assignment by product serial or identification numbers.  Under one warehouse arrangement, pledged inventory is stored in a public warehouse and controlled by an independent party (the warehouse operator). A warehouse receipt is issued when the inventory is stored, and the goods are released only upon
the instructions of the receipt-holder. When the inventory is pledged, the lender has control of the receipt and can prevent release of the goods until the loan is repaid. A field warehouse, can also be established. Here, an independent public warehouse company assumes control over the pledged inventory at the
firm’s site.  Direct assignment by serial number is a simpler method to control inventory used for manufactured goods that are tagged with a unique serial number. The lender receives an assignment or trust
receipt for the pledged inventory that lists all serial numbers for the collateral. The company houses and controls its inventory and can arrange for product sales. However, a release of the assignment or return of the trust receipt is required before the collateral is delivered and ownership transferred to the buyer. This release occurs with partial or full loan repayment.

While inventory financing involves higher transaction and administrative costs than other loan instruments, it is an important financing tool for companies with large inventory assets.

Term Loan

Term loans can finance medium-term noncyclical working capital. A term loan is a form of medium-term debt in which principal is repaid over several years, typically in 3 to 7 years. Since lenders prefer not to bear interest rate risk, term loans usually have a floating interest rate set between the prime rate and prime plus 300 basis points, depending on the borrower’s credit risk.
Term loans have a fixed repayment schedule that can take several forms. Level principal payments over the loan term are most common. In this case, the company pays the same principal amount each month plus interest on the outstanding loan balance. A second option is a level loan payment in which the total payment amount is the same every month but the share allocated to interest and principle varies with each payment. Finally, some term loans are partially amortizing and have a balloon payment at maturity. Term loans can be either unsecured or secured; a business with a strong balance sheet and a good profit and cash flow history might obtain an unsecured term loan, but many small firms will be required to pledge assets. Moreover,
since loan repayment extends over several years, lenders include financial covenants in their loan agreements to guard against deterioration in the firm’s financial position over the loan term. Typical financial covenants
include minimum net worth, minimum net working capital (or current ratio), and maximum debt-to-equity ratios. Finally, lenders often require the borrower to maintain a compensating balance account equal to 10% to 20% of the loan amount.

To be rewritten once again.

MBA Core Management Knowledge - One Year Revision Schedule