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

Plant Layout - Efficiency

Efficiency Measures of a Layout

Minimum Floor space: Efficient layout engineering can minimize floor space for a specified production output.

Minimum Materials Handling: Efficient layout results in minimum amount and cost of materials handling.

More Efficient Utilization of Machinery and Labor: An efficient layout eliminates general production delays, occasioned by congested aisles, cramped storage areas, crowding of machine layout, and improper materials handling devices, all of which lead to a slowing down of the production process as a whole and in general reduction in the output of goods from a given quantity of production machinery and labor.

Maximum flexibility of production facilities consistent with low cost of production: Production facilities and layout can be designed to attain flexibility and adaptability to meet changing economic and technological conditions.

Reference: John A. Shubin and Huxley Madeheim, Plant Layout: Developing and Improving Manufacturing Plants, Prentice Hall of India, New Delhi, 1965.


Plant Layout Optimization


Clever layout enhances bottling efficiency, 2002

Plant Layout Analysis

The Dynamics of Plant Layouts
Management Science, January 1986. (Interesting paper)

An Interesting Book in NITIE library
John A. Shubib, Ph.d and Huxley Madeheim, Plant Layout: Developing and Improving Manufacturing Plants, Prentice Hall, 1963. (658.23/742)

Review Notes on Plant Layout Design by Operations Managers

Originally posted in Knol number 2800

Updated: 7.12.2014, 2 August 2012, 26.11.2011

MBA Core Management Knowledge - One Year Revision Schedule

Industrial Engineering Knowledge Revision Plan - One Year Plan

January - February - March - April - May - June

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

Strategic Capacity Management - Operations Management Review Notes

Capacity is the ability to hold, receive, store, or accommodate. In a business sense, it is viewed as the amount of output that a system is capable of achieving over a specific period of time.

Strategic capacity planning has as its objective, to determine the overall capacity level of capital-intensive resources - facilities, equipment, and overall labor force size - that best supports the company's long-range competitive strategy.

Economies of scale, experience curve and capacity flexibility are important issues or concepts that are to be incorporated into capacity decision making. The capacity level selected determines a company's cost structure, competitive position and management and staff support requirements. If capacity is inadequate competitors can easily enter the business. If capacity is excessive, utilization becomes poor and costs will be higher than the expected costs.

Capacity Planning Concepts

Best operating level
The best operating level of a plant is the production volume at which average cost is the lowest. Companies try to operate close to this point. If demand is consistently higher than the best operating level, then they increase the capacity to lower the cost close to the best operating level cost.

Economies of scale
This concept signifies that as production volumes increase, the average cost per unit decreases. Higher capacity plants have a lower production cost compared to lesser capacity plants.

The experience curve
As plants produce more units, they gain experience in their production methods, which in turn, results in reducing the per unit costs of production in a predictable manner.

Capacity focus

The concept of focused factory states that it is more effective to have different plants for products with significant difference in specifications especially in terms of performance specifications.

Capacity flexibility

Capacity flexibility means having the ability to rapidly increase or decrease production levels or to shift production capacity quickly from one product or service to another. Such flexibility is achieved through flexible plants, processes, and workers, as well as through strategies that use the capacity of other operations.

Issues to be considered in adding capacity include maintaining system balance, frequency of capacity additions, and the use of external capacity. Capacity strategies can be proactive, neutral, and reactive. Reactive and neutral strategies are not responsive to anticipating future growth or building a facility for future demand.

Capacity planning decisions are based on forecasts for product demand, labor requirements, and equipment requirements.

Decisions include whether to add capacity, determining capacity requirements, and planning service capacity throughout the product life-cycle stages.

Toyota production system operates on the concept of flexibility by being ready to increase production whenever required by employing temporary workers and overtime. It works for only two shifts normally and when required uses overtime to operate for eight extra hours.

Chapter Outline of
Richard B. Chase, F. Robert Jacobs, Nicholas J. Aquilano, Operations Management for Competitive Advantage, 10/e, McGraw-Hill Higher Education, 2004

Capacity Management in Operations
Capacity Planning Concepts
Economies and Diseconomies of Scale
The Experience Curve
Where Economies of Scale Meet the Experience Curve
Capacity Focus
Capacity Flexibility
Capacity Planning
Considerations in Adding Capacity
Determining Capacity Requirements
Using Decision Trees to Evaluate Capacity Alternatives
Planning Service Capacity
Capacity Planning in Service Versus Manufacturing
Capacity Utilization and Service Quality

Case: Shouldice Hospital - A Cut Above


Richard B. Chase, F. Robert Jacobs, Nicholas J. Aquilano, Operations Management for Competitive Advantage, 10/e, McGraw-Hill Higher Education, 2004

Originally posted in

Updated 7.12.2014, 10.12.2011

MBA Core Management Knowledge - One Year Revision Schedule

December 4, 2014

Operations Strategy and Competitiveness - Review Notes

For a company to be considered world class, it must recognize that the ability to compete in the marketplace depends on developing an operations strategy aligned with the mission of serving the customer. This chapter describes a company's competitiveness and its relative position to other firms in both local and global markets. The competitive dimensions of operations are cost, product quality and reliability, delivery speed, delivery reliability, coping with demand change, flexibility, and new product introduction speed. Central to the concept of operations strategy is the notion of operations focus and trade-offs.

The interface between marketing and operations is necessary to provide a business with an understanding of its markets from both perspectives. Operations strategy must be linked vertically to the customer and horizontally to other parts of the enterprise. Chapter two describes the steps for prioritizing competitive dimensions. Operations strategy is also considered in service firms. An example of Southwest Airlines profiles the fitting of operational activities to overall strategy, while the example of Wal-Mart profiles ways to attack the market by using operations.

Productivity is an important dimension of operations. Productivity measures include partial measures, multifactor measures, and total measures of productivity. These measures provide benchmarks to indicate how well the company is doing and are used to measure improvement.

What is Operations Strategy?

Operations strategy involves decisions that related to the specifications and design of the product or service, design of a production process and the infrastructure needed to support the process, the role of inventory in the process, and locating the process. Operations strategy decision are part of corporate planning process that coordinates the goals of operations with those of marketing and that of larger organization.

Strategic operation decisions have to win the customer approval in absolute sense and they have to win in the competitive scenario, that means they have to win the customer approval in a relative sense (their offer must be superior to the target market customers relative to the offers of competitors).

Quality (which includes product benefits and features, reliability, durability) price and ease of purchase and servicing are the three operations related categories that customers use to evaluate before purchasing. Price is related to operations to the extent cost influences the price. Otherwise price is a marketing decision based on customer demand schedules and operations is not directly involved in pricing decision. But whenever operations is able to reduce costs, pricing decision is reconsidered. Hence cost is a strategic variable. Industrial engineering the discipline that specially focuses on rational cost management and industrial engineering strategy is also to be created by an organization along with operations strategy.

Competitive operations strategy development calls for research and improvement of operations processes on continuous basis and also monitoring of developments in competitor organizations. Benchmarking needs to be done periodically to understand the progress made by others and to initiate actions to catch up on parameters where there is a gap. Cost, product scope, product quality, delivery speed, delivery reliability, new product introductions are some of the operations related parameters in which competitors try to improve and gain competitive advantage.

Order qualifiers and Order winners

Terry Hill coined these terms. Order qualifiers are criteria that place a company's products in consideration for purchase. If order qualifiers are not present in a company's product they do not enter the purchase evaluation process of significant number of customers. Order winners are the features which results in getting orders. Order winners are given as reasons for purchase by the buyers from among the alternatives considered for purchase. Both these criteria keep changing and operations people have to redesign their processes to match them.

Operations Strategy
What is Operations Strategy?
Operations Strategy Defined

Operations Competitive Dimensions
Competitive Dimensions
The Notion of Trade-Offs
Plant-within-a-Plant (PWP) Defined
Straddling Defined
Order Winners and Qualifiers
Order Winner Defined
Order Qualifiers Defined
The Marketing-Operations Link

The Corporate Strategy Design Process
The Financial Perspective
The Customer Perspective
The Internal Perspective
The Learning and Growth Perspective

Strategic Fit—Fitting Operational Activities to Strategy
Activity-System Maps Defined
A Framework for Operations Strategy in Manufacturing
Core Capabilities Defined
Developing a Manufacturing Strategy
Operations Strategy in Services
Internet Compliments Strategy

Attacking Through Operations

Productivity Measurement
Key Performance indicators (KPI) Defined
Productivity Defined
How Does Wall Street Evaluate Operations Performance?



Presentation Slides - Operations Strategy

Strategic Role of Operations - Slack's Book chapter summary
Operations Strategy - Slack's book chapter summary - chapter 3

Summaries of all Chapters of Operation Management

Updated  4,12.2014, 10.2.2012

MBA Core Management Knowledge - One Year Revision Schedule

November 29, 2014

Principles of Innovation

The Eureka Factor - Creative Insights and the Brain

John Kounios, Mark Beeman
Random House, 09-Apr-2015 - Psychology - 288 pages

Where do great ideas come from?
What actually happens in your brain during a ‘Eureka’ moment?
How can we have more of them?

John Kounios and Mark Beeman, leading experts on the neural bases of insight and creative thinking, have conducted pioneering neuroimaging research examining brain activity at and before these moments of clarity. In The Eureka Factor they reveal exactly how sudden insights are formed in the brain, how we can increase our chances of generating them, and how they impact our thinking.

Helping to unlock the mechanisms behind intuitive flashes and inspiration, this ground-breaking account not only explains the science of insight, but also describes the keys to innovation and creativity.

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.

1. Innovation is essential to survival, and all innovation is strategic.

Through innovation organizations create their own futures,  Hence, the development of a highly productive innovation capability is one of the most important strategic priorities for any organization. At the same time, all innovation that is commercialisation  must be guided by strategic priorities and

2. There are four types of innovation: incremental, breakthrough products & technologies, new business models, and new ventures.

3. The longer you wait to begin innovating, the worse things will get.

The lack of innovation can significantly diminish their future prospects. The competition isn’t
waiting, and if you are late, you are up against bigger barriers.

4. Innovation is a social art; it happens when people interact with one another.

People drive creative ideas, inventions and  innovations.  Hence they are the core of any innovation process. Their insights, concerns, and desires shape the pursuit of new ideas and the countless decisions to be made in the process of transforming these ideas into value. Consequently, managing innovation involves  managing people, It also using the principles and practices according to which their work is organized.

5. Innovation without methodology is just luck.

You have to develop and apply right  methodologies, to make the shift from luck to
consistency, predictability, and sustainability. Without the right innovation methodology you’re risking far too much - you’re risking your future.

6. All four strategic innovation viewpoints are critical to

 The  innovation methodology has to leverage all four viewpoints: Topdown, Bottom-up, Outside-in, and Peer-to-peer.

7. Great innovations begin with great ideas; to find them, identify unknown and unmet needs.

There are dozens of tools that you can apply to come up with new ideas.

8. Ready, Aim, Aim, Aim, Fire.
Effective innovation requires very careful targeting. Why? Because there are so
many possibilities to chase that you have to make sure you’re going after the right ones. Besides which, innovation is expensive both in terms of cash and time, and good aiming enables you to use your resources wisely.

9. Prototype rapidly to accelerate learning.

The goal of any innovation process is to come up with the best ideas and get them into market as quickly as possible. Innovation process has  learning component, and learning faster has enormous advantages. Prototyping effectively condenses the learning process. Rapid prototyping is therefore central to most forms of effective innovation methodology.

10. There is no innovation without leadership.

The organizational hierarchy has tremendous influence on the culture of any company, on its ways of working, and the results it achieves. Top managers can be powerful champions of innovation. It’s up to leaders to ensure that their words and their actions support and enhance innovation efforts and methods, and that at the same time they work diligently to eliminate the many obstacles that otherwise impede or even crush both creativity and innovation.




Marissa Mayer in 2008 with Google gave a similar but some different principles

Principles of Innovation - National Association for Healthcare Quality

1. Make innovation a part of the culture.
• Innovation has to be part of our culture. Organizations must encourge and make  continuous improvement and innovation a part of the routine.

2. Take risks.
• 96% of innovations fail (Doblin Group).
Organizations must be willing  take this high  risk and be ready to fail many time in order to
learn and come out with an innovation which ultimately leads to great success.

3. Be our own critic.
 • Be honest about what research/data reveal about your organization's performance in various parameters.

4. Build the innovator group.
• Identify effective innovators in the organization and form groups with the freedom to do the thinking with special facilities.
• Encourage creativity and outside-the-box thinking. Acknowledge and encourage people who think

5. Limit constraints. Cultivate creativity.
• Ask “Why?” rather than ”Why not?” Accentuate the positive.
• Truly promote change and look for opportunities to change.
• Don’t establish too many constraints on innovation—allow and support wildly innovative ideas.

6. Awareness of future.
• Anticipate the future customer needs and quality issue that are likely to come up in delivering products and services.
• Learn from the past. Revisit what had value and why.

7. Diminish risk by allowing for adequate
• Move fast-selecting/implementing innovations. Time spent researching and vetting every possible
outcome can help reduce significant risk.

Criteria for Innovation Evaluation

1. Lead the customer to a superior alternative.
• Give them what they don’t yet know they need by anticipating future needs.

2. Maintain focus.
• Aim for depth (execute a few ideas for programs/products expertly) rather than breadth (attempting to accomplish too much, leading to ineffectiveness).
• Align innovations with strengths.

3. Add measurable value
• Consider and implement ideas that have the potential to produce revenue.
• New programs and products should increase participation and membership (value-added outcomes).

4. Think differently. Execute differently.
• Make minor or major changes to fit current needs.
• Consider new constructs and models not previously implemented in healthcare organizations. It can be a product, process, or program.

5. Keep the customer in mind. • Design programs and products with the voice of the customer in mind, making sure to include testing.

6. Strive to create win-win situation.
• Develop new ways to collaborate and cooperate with states or other associations while improving national products/programs while including key stakeholders early in the process.
• Create a win-win situation for NAHQ and its customers.

8 Pillars of Innovation - Article by Susan Wojcicki - VP Advertising of Google
July 2011

MBA Core Management Knowledge - One Year Revision Schedule

November 28, 2014

International Finance and Financial Management in Multinational Company

World trade has increased. Companies export a lot and import a lot. Apart from import and export, now multinational, or global, corporations are emerging which operates in an integrated fashion in a number of countries. Also, there are companies that are using number of factories in various countries which are supported by suppliers located in various countries and then different countries are served by different factories.

In managing finance in companies with international trade or multinational operations,  some additional factors need to be considered.  Five of these factors are listed and described here:

1. Different currency denominations. Cash flows occur in  various currencies.  Hence,
exchange rates must be included in all financial analyses.

2. Political risk. Nations are free to place constraints on the transfer or use of corporate resources, and they can change regulations and tax rules at any time. They can even expropriate assets within their boundaries. Therefore, political risks occur in many forms  and they must be addressed explicitly in any financial analysis.

3. Economic and legal ramifications. Each country has its own unique economic and legal systems, and these differences can cause significant problems in operations.  For example, differences in tax laws among countries can cause a given economic transaction to have strikingly different after-tax consequences depending on the country where the transaction occurs. Legal differences
make procedures that are required in one part of the company illegal in others. These differences also make it difficult for executives trained in one country to move easily to another.

4. Role of governments.  Frequently, in many countries, the terms under which companies compete, the actions that must be taken or avoided, and the terms of trade on various transactions are determined not in the marketplace, but by direct negotiation between host governments and multinational enterprises. This is essentially a political process, and it must be treated as such. Thus,
traditional financial models have to be recast to include political and other noneconomic aspects of the decision.

5. Language and cultural differences. Different countries have unique cultural heritages that shape values and influence the conduct of business. Multinational corporations find that matters such as defining the appropriate goals of the firm, attitudes toward risk, performance evaluation and compensation systems, interactions with employees, and the ability to curtail unprofitable
operations vary dramatically from one country to the next.

Those five factors complicate financial management and increase the risks that multinational firms face. However, the prospects for high expected returns make it worthwhile for firms to accept these risks and learn how to manage them.

International Monetary Terminology

1. An exchange rate is the price of one country’s currency in terms of another country’s currency. One U.S. dollar would buy 0.5046 British pound, 0.6340 euro, or 0.9919 Canadian dollar.

2. A spot exchange rate is the quoted price for a unit of foreign currency to be delivered “on the spot” or within a very short period of time.

3. A forward exchange rate is the quoted price for a unit of foreign currency to be
delivered at a specified date in the future say 3 months or 6 months.

4. A fixed exchange rate for a currency is set by the government and is allowed to
fluctuate only slightly (if at all) around the desired rate, which is called the par

5. A floating or flexible exchange rate is not regulated by the government, so
supply and demand in the market determine the currency’s value. The U.S.
dollar and the euro are examples of free-floating currencies.

6. Devaluation or revaluation of a currency is the technical term referring to the
decrease or increase in the stated par value of a currency whose value is

7. Depreciation or appreciation of a currency refers to a decrease or increase,
respectively, in the foreign exchange value of a floating currency. These
changes are caused by market forces rather than by governments.

Monetary Arrangements of Countries with respect to Exchange Rates

At the most basic level, currency regimes can be divided into two broad groups:
floating rates and fixed rates.  In the floating-rate category, two main subgroups are there.

1. Freely floating. Here the exchange rate is determined by the supply and demand
for the currency.

2. Managed floating. Here there is significant government intervention to manage
the exchange rate by manipulating the currency’s supply and demand.  Governments rarely reveal their target exchange rate levels when they use a managed-float regime because doing so would
make it too easy for currency speculators to profit.

Types of fixed-exchange-rate regimes include the following:

1. No local currency. The most extreme position is for the country to have no local
currency of its own, using another country’s currency as its legal tender (such
as the U.S. dollar in the Panama Canal Zone).

2. Currency board arrangement. Under a variation of the first subregime, a country
technically has its own currency but commits to exchange it for a specified
foreign money unit at a fixed exchange rate.

3. Fixed-peg arrangement. In a fixed-peg arrangement, the country locks, or
“pegs,” its currency to another currency or basket of currencies at a fixed
exchange rate. This allows the currency to vary only slightly from its desired
rate; and if it moves outside the specified limits (often set at 1% of the target
rate), its central bank intervenes to force the currency back within the limits.

Other variations have been used, and new ones are developed from time to time.

MBA Core Management Knowledge - One Year Revision Schedule

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