Primary activities in businesses What is a business all about? What are the actions in a business that are the essence of its existence? + At Air France KLM, for example, itis the transportation of freight and passengers through the air. + At Unilever it is the development, production and marketing of foods and personal care products. + AtToys RUS itis trade in toys. + Ata farm itis the production of (for example) grain. What is necessary to carry out these core actions? You can sub-divide the core actions (also known as primary activities) of all businesses into a number of consecutive functions. This chapter is about the primary activities and the primary functions. First the primary activities will be explained. Then all primary functions will be dealt with separately. Scanned with CamScanner44 PART wHATIS A BUSINESS? © Noordhoft Urgeres be What are primary activities? This section deals with what the primary activities are in a business. The primary activities describe its core activity. For example, what is a university all about? What is a vegetable wholesaler all about? What is the point of a large sports brand like Nike? At a business school it is all about educating students and carrying out proper research. At a vegetable wholesaler itis all about the purchase and sale of vegetables in the business market. At Nike it is all about developing and to market sports articles. In the first sub-section of this chapter all sorts of processes will be discussed. Then we will explain how you can determine primary activities in a business. In the sub-section after that we will deal with transformation and adding value, since that is what the primary activities are about. At the end of this section the primary activities will be laid out step by step. 2.1.1 Different processes ‘ You can define a process as a series of actions with a specific purpose. A process has to do with a series of happenings with a beginning and an end. When it comes to business processes, we talk of input and output. The output of one process can then become the input for another process, and a process can be sub-divided into sub-processes. Each activity, or collection of activities, that uses resources in order to convert input into output can be regarded as a process. When you look at a business from the process viewpoint, itis important to pay attention to three specific aspects. These aspects are: 1 Effectiveness. What is the intended effect of this process, and is t achieved? 2 Efficiency. With how many resources, such as money, work and time, is the tended aim of the process achieved? 3 Management. How is the process managed? Can interim adjustments be made? Does the possibility exist at all to direct the process? is effect Primary and secondary activities % In businesses you encounter various sorts of processes. The most important distinction between all those processes is the distinction between: 1 Primary activities. The business processes at the business's core, which are dealt with in this chapter. 2 Support activities. The Processes that support the primary activities, which will be discussed in Chapter 3. : $ Supervisory activities. These activities are also called management Processes, Supervisory activities have to do with the supervision and Controlling of processes, e.g. the primary or support activities. Here are involved things such as planning, auditing, evaluating and adjusting, Process engineering will be handled in Chapter 7. Scanned with CamScanner‘enoorhot Uitgevers bv rIMARY ACTIVITIES IN BUSINESSES 45 wae Primary functions and the primary activities i less turns out to be all about is what business administration calls primary acivifes its primary activities. These primary activities can be sub-divided into a number primary functions < essential ‘Sub-activities. These essential sub-activities are termed primary ee Primary activities. So because the core activity of Marks & Spencer is rade in articles, the primary functions are: purchasing; purchasing logistics in order to get the products into the stores; their marketing, sale and service. We show this schematically in Figure 2.1. FIGURE 2.4. The primary activities +Eop © 21.2 Determining the primary activities Determining the primary activities of a business comes down to the question: i in which order? At a production business,, for example, materials are purchased, then components are produced whereby the purchased materials are transformed into intermediate or end products. Raw materials and intermediate and end products are displaced during the production process. The end there products are marketed and eventually sold. Finally, service is provided to the“ |. customer. For service businesses o trading businesses these primary activites ¢ 5.5] cunt are not really different; there too you have purchasing, production, logistics, marketing, sales and service. These actions are the primary functions of the business. ‘The primary activities of a business thus have to do with all the actions that: must be carried out in order to bring about a product or service: These are the actions in a business without which the product or service cannot be produced. Without purchasing and logistics, for example, there would be no products on Bloomingdale's shelves. FROM PRACTICE The primary activities at a table factory What are the primary activities, for example, at a ‘market. This means that potential buyers have to be table factory? First of all, wood has to be purchased —_sought; indeed, that potential buyers have to be ~ planks and beams. During various transformation _attracted. To this end advertisements must be operations (see Figure 2.2) these planks and beams placed in order to ultimately sell the tables. After the are sawed to size, planed, sanded, varnished and/or _sale there must be service provided to the new painted and then assembled into an end product. buyers. Think of items such as transport and/or Aiter assembly the tables have to be brought to interior decorating advice. Scanned with CamScannerCe Noordhott Ungeves by 46 PART 1 WHAT Is « BUSINESS? nda FIGURE 22 The primary process of a table factory public service business How does this then apply to a service business? Take for example a public service business such as a hospital. The primary activities of a hospital can be desoribed as the intake, diagnosis, treatment and nursing of patients. This is rendered schematically in Figure 2.3. FIGURE 2.2. Part of the primary process of a hospital Depicting the primary activities schematically Depicting the primary activities schematically occurs quite often in business administration. It provides a clear picture of the process and shows clearly the relations between subprocesses. In this way you can go on to sub-divide subprocesses out of the primary activities into primary functions. We have worked this out for the core activities of a nursing process (see Figure 2.4). In the outpatient department of a hospital the primary nursing process consists of the following phases: the decision to accept into outpatient handling, the intake, the stay in that department, the decision to release, release and finally the evaluation of the care. Of course, these phases all take different amounts of time and can also differ per patient. FIGURE 2.4 The primary nursing process rendered schematically Why distinguish primary activities? When businesses are studied, analysed or advised for example after a reorganisation, a restructuring, a merger, a takeover or a downsizing — it is important to distinguish the primary activities and the primary functions. For all these sorts of organisational change it is important to know what the primary activites are. The primary activities give you insight into the essence of the business, An analysis ofthe primary activities is therefore an important part of every management analysis, Scanned with CamScanner2 PRIMARY ACTIVITIES IN BUSINESSES 47 Business admi tration in the care industry this the function of a business administration professional to find ways for primary activities to run better. Business administration professionals have developed tools to improve the primary activites in hospitals. Think here, for example, of a lst with selection oritera for intake, a checklist to support the release procedure and a list of questions for the evaluation of a care process. ‘Anospital at the east coast of the US wanted to ‘organise their care process better. The goal was to make the customer central, and thereby to shift the accent from care to wellbeing. The hospital at the same time wanted their employees involved in the primary activities to be less bothered by ‘administrative considerations. patient intake and communication with the health ingurance business. All administrative paperwork is This was solved by establishing a department to taken over by the new department so that the support the primary activities. This department is care-givers can do what they are good at: taking called Client Intervention and is responsible for care of people 2.1.3. Transformation Primary activities are transformation processes. While what will become the ultimate product is pushed through the production process, itis subject at value added each stage to a transformation. During this transformation there is value added to the product. Raw materials are worked and made into semi-finished products. Semi manufactured products are assembled into sub-products and finally put together into end products. Take as an example a sports shoe from Nike. In order to make a sports shoe, you first have to make the various materials from which it is composed. So you have to make rubber, certain sorts of plastics and certain other materials. From these materials you can then fabricate soles, shoelaces, boot trees, heels and other components (semi manufactured products). These various components can finally be brought together into the end product. This putting-together is also termed in business administration ‘assembly’ To make a shoe you thus need material producers, producers who from these materials make components of the end product, so-called semi-finished products, and finally producers that assemble the end product, Scanned with CamScannerPy 1 WHATIS A BUSINESS? © Noorchot Utara — net a Shoes comprise various components The adding of value is what the primary activities in businesses are all about. ‘As a manager or entrepreneur you cannot just simply add any sort of value. For there are costs associated with every form of value added in the primary activities. The costs of the value you want to add must have some relation to the proceeds. Think of an extra service that a delivery firm can offer its customer. The delivery firm considers taking on an ICT service that allows customers to follow their parcels on the Internet for their entire journey. But acquiring such a service involves high costs. These costs naturally have to be earned back and eventually have to generate higher gains. These gains could be, for example, higher customer satisfaction that increases customer loyalty. In this way the business will gain more business. If these additional gains outweigh the extra costs, it will be worthwhile for the business to expand the services it offers in this way. Scanned with CamScanner‘north User bv a eS SEES Pte Pett as Guru Michael Porter: pioneer of adding value Michael E. Porter (b. 1847) is an American professor ‘atthe Harvard Business School, He isan icon in the field of competitive strategies. Above al, his Five ‘Competitive Forces model and Value Chain analysis, ‘and the typology he developed of generic ‘competitive strategies belong in the fundamental knowiedge of every business administration professional. Porter was the frst to highlight the significance of the work of managers in the success cof an enterprise. One competitive advantage according to Porter arises from the fact that an enterprise has lower costs than the competition, or that it can add more Value so thatthe consumer is wiling to pay more for the product or service. He described tis, using the ‘Value Chain analysis, in his 1985 book Competitive ‘Advantage: Creating and Sustaining Superior Performance. ‘The analysis was developed for production firms (factories), but is also applicable to service ‘TMELINE 1890 1900 1910 1920 1930 2.1.4 The value chain 1940 1950 1960 1970 ‘esses It shows where the value addition takes place in the value chain, He concludes that its not just that value is added inthe various links of the business's production chain of turning raw materials into end products, but also that within those various links there are activities that can be identified through which businesses can add further value 10 2 product or service. He makes the distinction between primary and support activities and asserts in is analysis that a business can mainly add value in the primary activities. busin ‘The value chain analysis gives insight into the connection between primary and secondary activites and the overall direction of the organisation, thus into the money and goods flows within it All business processes together make it possible to achieve the organisation's strategy. That means that there must be a clear mutual connection between the primary and secondary business ‘activities. We can place Porter within the roster of ‘management gurus ~ see the timeline 1980 1990 2000 2010 2020 Primary activities in a business consist of a number of separate steps. In each stop value is added to the product or service. That does not mean that a business can add just any value. customer and for which he is wil . thas to be value that is recognised by the ling to pay. In Figure 2.5 we show the five phases of the primary activities of a computer manufacturer. Scanned with CamScanner€ Noordhotf Utgever by 50 PaRT1 WHAT IS A BUSINESS? computer manufacturer laure 2.5 The primary process of a Market rs na ‘outbound iy Incoming | car cers Here is the clarification of the five steps of the primary activities: * Primary activities Step 1: Incoming logistics + Primary activities Step 2: Operations 2 + Primary activities Step 3: Internal and outbound logistics + Primary activities Step 4: Marketing and sales + Primary activities Step 5: Service and customer-related service Primary activities Step 1: Incoming logistics The first function within the primary activities in which value is created for the customer is to ensure that raw materials, semi-finished products, production ‘resources and personnel are at the right place at the right time. Business ‘administration professionals speak in this case of incoming logistics. Of course, for trading businesses the logistical process is important for ‘accomplishing a delivery. But it is also important for production firms and service businesses, to bring together the correct production resources on time. Incoming logistical processes are closely related to purchasing. That is why many business administration professionals see purchasing primary activities. as a primary function. Smart purchasing By smart purchasing a production firm or a trade enterprise can add value to its ultimate product. Purchasing is also important for a service business. Think for example of Air France KLM. The business holds a department that focusses on the strategic Purchasing and control of kerosene. By effectively doing this the business can substantially lower the ‘costs per customer per flown kilometre. Considering that fuel costs make up a considerable part of the lower the purchased price is, the higher is the profi. businesses total costs, the importance of a strategic For this reason largo (rtal) trading businesses such pce Policy for such a trading business is ‘as Marks & Spencers, Zeleven, Walmart and Lowe's ee ‘rose margin ofa trading business is Home improvement stores have established very ‘namely the difference between the purchased large and professionally organised purchasing (wholesale) ae the sl etl price, Tho departments, Scanned with CamScanner‘onsordhottUtgevers by transformation mes iw ousinesses 51 Primary activities Step 2: Operations The second function within the primary activities in which value can be added is the actual production, Business administration professionals speak in this respect also of transformation. Transformation is an abstract description of what happens during the production process, namely that by each sub-process the input gradually changes to the desired output, the end product. Business ‘administration professionals often look at processes in an abstract manner ~ after all, they find it important to look at management problems in various ways. Pe i Car manufacturer production process [At the automotive factories Ford, Vol nor Peugeot, production lines typically consist of: + The metal press hall, for pressing the sheet steel; + The body construction hall, where the car bodies are given form and strength; + The painting line, to protect the body with a layer: of paint and give it colour, + The assembly hall, in which the bodies are ‘assembled into complete vehicles by screwing ‘onto them various components such as glass, seats and steering wheels. internal logistics Primary activities Step 3: Internal and outbound logistics ‘The third function within the primary activities has to do with internal logistics. In other words: How do I make sure that the product is at the right place ‘at the moving constantly? If for example you are building an aeroplane, then the plane under construction does not move continuously through the production hall Machines, semi-finished products and employees are continuously brought to the plane under construction. In a car factory, on the other hand, the cars move continuously through the factory and machines and employees stay in one place. When the product is finished, one must look at how the end product can ‘most efficiently be conveyed to the end users. These can be other businesses, but also consumers. Primary activities Step 4: Marketing and sales The fourth function in primary activities through which value is added is marketing and sales. Of course, itis important for a production firm that all products produced are sold. And for a trading business itis also important that all purchased goods be sold on Scanned with CamScanner52__ PART 4 wharis A Business? _ 2 cei kamen by non-physical Through marketing, a business can add much non-physical value to a product, value A business such as Nike which has sports shoes made in Asia for €10 can sell these after a successful marketing campaign for €179 in Europe. ‘Consumers aren't crazy; they just act that way: ‘Anonymous Primary activities Step 5: Service The last function within the primary activities through which value is added has to do with service. Service provides much of the experience of value for the ‘customer. Thus, through good service businesses can add much value to their product or service, Just as with marketing, through service businesses can often add to their product non-physical value as well. Service adds value. For example: a helpdesk that ensures that any problems encountered by users are solved, or an extra service in the aeroplane or during a taxi ride. COS eC In ei BLUNDER / [| SUCCESS ‘Source: Enron Enron Corporation was an American energy, ‘commodities, and services business based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff and was one of the world’s leading electricity, natural gas, communications, and pulp and paper businesses, with claimed revenues of nearly $101 billion in 2000. Fortune named Enron ‘America's ‘Most Innovative Company’ for six consecutive years, ‘At the end of 2001, it was revealed that its reported financial condition was sustained substantially by institutionalzed, systematic, and creatively planned ‘accounting fraud, known as the ‘Enron scandal Enron has since become a popular symbol of wilful Corporate fraud and corruption. The scandal also brought into question the accounting practices and Activites of many corporations throughout the United States and was a factor in the creation of the Sarbanes-Oxley Act of 2002. The scandal also affected the wider business world by causing the Giesolution ofthe Arthur Andersen accounting fim, Scanned with CamScanneroortatt Ungerer by Enron filed for bankruptcy protection in the Souther Distict of New Yorkin late 2001 and selected Weil, Gotshal & Manges as its bankruptcy counsel. ‘emerged from bankruptey in November 2004, pursuant to a court-approved plan of reorganization, after one of the biggest and most complex bankruptcy cases in US. history. A new board of directors changed the name of Enron to Enron Creditors Recovery Corp., and focused on reorganizing and liquidating certain operations and ‘assets of the pre-bankruptoy Enron. On September 7.2008, Enron sold Prisma Energy International Inc. its last remaining business, to Ashmore Energy International Ltd. (now AEN). Now we will further explore the most important steps or phases of the primary activities. 22 Purchasing in businesses ‘We said eartier that incoming logistics is an important step in the primary activities. We will now develop this step further, First of all, we will explain in this section how you add value with purchasing and what sort of purchasing processes there are. In the following sub-section the purchasing process will be laid out step by step. 224 Adding value through purchasing Purchasing is an important part of the primary activities of every business. Through smart and strategic purchasing businesses can add quite a bit of value. When a business fails to purchase inteligently, grow and its profit margin wil shrink. A business that purchases incorrect or profit margin its costs per product will poor-quality raw materials will utimately deliver a product that offers little value for the customer. Calas i a Purchasing for service businesses ‘Smart purchasing is also important for service businesses. Think for example of a consulting frm \which hires freelancers for an advisory assignment, Ifthe client/customer is wiling to pay €120 per hour {or this advice, its then important that the business hires the consultants for a lower price per hour; otherwise the business makes no profit. the business can hire these freelancers for €80 per hour, it ams € 40 per hour. Of course, this is not pure profit, since it also has to pay from this general costs, also known as overheads. Overheads include ‘customer-acquisition costs, costs incurred in gaining the assignment, administrative costs and costs such ‘as for hiring an office and using a business car. Sorts of purchasing processes The purchasing activities can be sub-divided into: Product related. This involves buying everything that has to do directly with the end product/service. Whenever products or services are purchased as a part of the primary activities then one can speak of a direct purchasing process. Think for example of a shoe factory that buys rubber for the soles. product-related Scanned with CamScanner54 pany wnaris A BUSINESS? i Non pr the primary activities, facto office articles. When a shoe we rene can sesk ofa suppor paper, ‘Source: Management Tea The purchasing department criti ‘According to the Chartored Institute of Purchasing ‘and Supply (CIPS), representing worldwide more than 33,000 purchasing professionals, organisations spend on average 30 to 80% of their revenue on Purchasing. That is reason enough for many businesses and organisations to take a ortical look at their purchasing depariments. The 80s and 90s were used to pull tight the supply chain ~ that is, the fine from raw material to end product ~ but now the entire purchasing department has to get this same religion. That's why we now see the rise of the CPO: Chief Purchasing Officer. According to the Gartner, research firm, he is the rising star in management land, Most big firms ~ says Gartner — have a worldwide CPO who either sits on the Board or directly reports to it. Thus its that at British Airways procurement director’ goes around with the 2.2.2 1 the P' juct related. Ths involve oom actives, such ae maintenance saa ~a urchase of everything that is suppor ‘energy, temporary workers ang for example, BuyS Paper-Clips Or printing noting purchasing Process. ically examined assignment to lower the total purchasing bill by 410%. Note that we are talking here of an amount of some 300 million pounds. Nick Scheele, President ‘and COO of Ford, said recently that purchasing ultimately determines a business's profitability, ang ‘some even ascribe to the purchasing department strategic importance. Perhaps this is a hopeful sign for Ahold, which has to know like no other how things must be: paying attention to ll the small prin Components of the purchasing process Depending on the size and type of business, various steps are run through ina purchasing process: 1 Orientation; Wiiting specifications Selection of suppliers; Tendering; Contracting; Order confirmation; 2 3 4 5 Negotiations over conditions; 6 7 8 Receipt of goods or services; 9 Accounting of goods; 10 Payment of supplier's invoice; 11 Financial accounting, Item 1: Orientation ie ia Step towards purchasing in a professional manner is to orientate. eS © ! want? What sort of products or services fil that need? Ave there Substitutes? What is roughly the price range | can expect? Scanned with CamScannera prima ACTIVITES tem 2: Writing specitications ‘Atte the orientation, a lst of specifications and req} ‘which the product must fulfil. Indications of quality should be described very specifically, preferably in measurable terms. Specifying your requirements In this way is iiportant, bacalee you may be able to include these demands the purchase contrac. If then after the fac, it turns out that some ofthe requirements were not met, you can then make a claim to the selling Party. What is the (maximum) price that you are willing to pay? What is the desired level of quality? How long must it serve? How strong must it be? What rst be able to do? To what specifications? These are questions that all must be answered as you draw up your programme of requirements. uirements is drawn UP Item 3: Selection of suppliers Ihis important for a business to select a trustworthy party. Afterall tis 2 motier of the delivery of everything for the primary activities. A car factory grinds to a halt if the sheet steels not delivered according to specification by the eee It is important to know whether a ‘supplier is able to fulfil his obligations. The . Chamber of Commerce can look atthe trade register to eee whether the firm fe financially sound, whether it can fulfil its obligations and who has decision- making authority there. Item 4: Tendering ‘When you have made your product request in specific terms and have made a pre-selection of suppliers, you can tender it with these selected suppliers, bearing in mind that suppliers have ltl interest in revealing the cost structure oftheir product or service, nor are very interested in offering quotes which are easily comparable with those of other bidders. tem 5: Negotiations over conditions The next step is to negotiate over conditions. This can be about the price. Of course, you can always try to push the price downwards. But the conditions are at least as important as the price. When will he goods be delivered? How will they be delivered? Who will pay for and arrange transport? How will they be packed? Who is responsible if something happens during transport? tem 6: Contracting Then itis time to set down everything that has been agreed upon in a contract. Item 7: Order confirmation Usually the selling party sends an order confirmation referring to the agreed conditions. This you then sign and return. The order is from that moment confirmed. The supplier begins to fulfil it only from the moment he has that order confirmation back in his hand. Item 8: Receipt of goods or services Purchasing or supply chain logistics is a sub-area of logistics an reconciling on the one hand the purchase and on the ather the logistics. Itis a matter here of purchasing raw materials/semi-finished products and transporting these goods to the receiver. Scanned with CamScanner> das received. booker ; ing of goods aye, they are Item 9: Acc ond products arrive, ‘As soon as t jer's invoice fod, for example 30 days, tom 10: Payment of suppers Tt andard periods fOr 3 is pal ‘Te supple’ inwoic cial acco, the whole purchas is it in the financial tom 11: Financial acco pu ‘As soon as the invo! administration. icted in Figure 2.6. ‘The purchasing sequence is depicted in Fig e une 26 The purchasing process rendered schematically 23 Production in businesses Production is the process whereby a product is made, It is an important component of the primary act business. Its a series of actions at the beginning of which input takes place output and at the end of which output is realised. I is also important that during the production process value be created. That means that the value of the output is higher than the sum of the values of all materials and non-material items Contributed to its making, such as raw materials, labour, knowledge and Production capacity In other words, for the customer the produced product is worth more, and he is thus also wiling to pay more, than the sum of the costs incurred in the production process, A smart brand-name shoe is worth tothe customer more than the bit of leather, polish, glue and skill required to make it. | example, petrol. The physical Place in the following ways: 1 Changing the outer form, For ‘example, Scanned with CamScanner“onoordhot Uigevers by organisation materials, ‘management 2 pruany acriviries In ausinesses 57 Think also of a 3 Displacement. A storage and transport business handles taxi ride, when people pay money to be displaced. 4. Storage. For products which are not needed now but will be later, value can be created by storing them, as in a refrigeration unit for meat. 5 Treatment. In this production variant, goods or people are treated and cared for, for example by a masseur or dentist. ‘The organisation of the production process depends to a large extent on the product that is produced, So the continuous cil-refining process at Shell is organised differently than the serial production process of Hallmark greeting cards or Michelin tires. These processes are in tur different from the potato processing at McCain fries and the crisp production at Lay's. The production process is determined by, among other things, technological factors. These technological factors determine how the transformation process needs to be organised: with what techniques and machines and in what order this must occur. In a leather tannery the necessary leather working techniques determine how production is done. Through the years increasingly advanced techniques have been developed for leather-tanning, which has enabled fewer raw ‘materials and less human handling to be used. Control of the flow of goods in a production process is important and this can certainly be included in the primary activities and is a suitable topic for discussion about internal logistics. But it also often has much to do with production and the production process, so we also need to mention it here. You cannot produce without taking care that materials, semi-finished products and end products appear on time at every processing station. The acti ‘connected with the direction of the internal stream of goods are collectively termed materials management. Materials management has to do with making the flow of raw materials and semi-finished products through the production process as efficient as possible. Ithas to do with the folowing activites: + Making prognoses; + Drawing up production plans; + Handling customer orders; + Choosing suppliers; + Internal logistics; + Planning assembly. [production process consists of chains of supply points and processing stations, flows of goods, fabrication processes, assembly processes, and 60 forth, This whole can be depicted schematically. In Figure 2.7 there is a ‘schematic rendition of the production process for chips. igure 2.7 The production process for chips fen dal © en ee Scanned with CamScannery Crete, 5B paRT1 WHATIS A BUSINESS? customer order point iction process of a sports shoe. The inverteg du Figure 2.8 shows the pro« , : tHangles indicate where inventories are taken. sports shoo rioune 28 The production process of a sport VEE = El -ESv 23.2 The customer order disconnection point One important component in the production process is the customer or disconnection point (CODP). This:designates that point in the process from which the process is directed by individual orders. In other words, the CODP divides that part of production based on planning from the part based on a customer order. When you order a Volvo from a dealer, for ‘example, the customer order disconnection point is that point in the production process where specific customer desires determine that process, and where the standard components and production already are standing by. This isthe Point where the standard chassis and body have been made, which are always the same for every customer, regardless of preference. After the customer order disconnection point the body is decorated in different colours according to the customer's wishes, and various sorts of engines and wheels are put into the car. The customer order disconnection point is also to be found in various production sub-processes. Some components of the interior production are standard for each car ~ think of the dashboard and the seat bases. Whether a Seat is made of leather or fabric is something that comes after the customer n Product, For a standard Fender guitar, for example, the GODP lis nea the £nd of the production process. But for a customized Fender Stratocaster Scanned with CamScanner‘oNoordhot Uitgevers by iguRE 2.9 Customer order disconnection point 2 priwany acrivities in Businesses 59 Disconnection point (DP) concept: How far does a customer order go into the factory? = Y= ——$§ Production by supply Production by supply Ce) q W Make based on local supply centralrced) seerly mts | —___W (Cossenbyio rte ATO A prolkke fp orcler MtO | Vv (eects and pedo er Five DP positions and five different structures — petivities based on planning CO customer-determined activities Green Film Making Filmmaking starts well before an actor steps in front ‘of the camera. It begins by selecting a story, ‘assembling a production team, choosing locations, designing the sets and eventually shooting. Embracing sustainability also starts at the beginning, and one of Sony Pictures’ four main goals includes Green filmmaking. Sony Pictures implements its ‘Best Practice Green Production Guide’ in all ofits motion pictures. In addition, green filmmaking reaches onto the screen to what the audience can ‘see, feel, and hear. Therefore, our productions strive to incorporate dialogue, relevant environmentally ‘conscious props, behaviors and/or products whenever possible. Grow Foc Ep engjineer- lo oncle— ETO wad peaerts hows aves Secluck Cobfoue-ensuences the eee ae Pecetees {In fall 2010, Sony Pictures was recognized by the Environmental Media Association with EMA Green ‘Seal Awards for environmental production practices con the following 12 films: + Eat, Pray, Love + SALT + The Green Hornet + The Social Network + Grown Ups + Karate Kid + Bad Teacher + Baitle: Los Angeles + The Other Guys + Anonymous + How Do You Know + Just Go With It Scanned with CamScanneriar 4 BUSINESS? duction rocvoduction processes. The most important aesce production, mass production and process Sorts of PI are different sorts of P jt between pis 233 There difference is that production. Piece production by piace, we speak of piace production. Here yoy I things 2 Pace constructions such as bridges, roads, churches, works of can think ot a te but also most products made to order, Such as tax rt and craft products, but achice ora ‘wedding dress for a princess. Tho characteristics of piece production are a high cost and unique specifications. Piece production can be fpbour intensive; in that case one speaks of project-directed work. Each such project has its own planning. Mass production re was no mass production to speak of. After the Until industrialisation ther invention of the steam engine, managers started thinking how to make as. | / efficient as possible processes such as weaving. Actually, the first true instance of mass production occurred when Henry Ford developed his first | conveyor-belt assembly line in 1913 for the Model T. With this he set off a revolution in the production process. The assembly line in the first Ford factory in Highland Park, Michigan, became the worldwide standard for mass production methods. It was Ford's intention to produce the largest number of cars, with the simplest of designs and for the lowest possible costs. lia The first assembly line: that of Henyy Ford Scanned with CamScanneronoordhof Uitgevers by continuous ‘tow production production factors MRP ERP 2 primary acriviries in eusinesses 61 Process production A production process that hardly ever stands still we call continuous: Production or flow production. Often it runs seven days a week, 24 hours per day. Here it is always a matter of bulk production, such as in the petrochemical industry and steel plants, but also in sugar production or the processing of milk. Enormous volumes are significant here; factories generally operate continuously. Often those factories are entirely focused on making but one type of product. These are enormous factories with few employees. After an initial costly investment in such a factory, the labour costs and operation costs are low. The costs for this type of production process are generally low. 2.3.4 Production management Production management has to do with the planning, execution and control of production processes. Production management techniques are used in both the product and the service sectors. Production management is about the Five Ms: + Men (that is, people); + Machines; + Methods; + Materials; + Money. In order that production processes be set up as effectively and efficiently as possible, production managors make sure that these Five Ms are synchronised with each other as closely as possible. Production planning In smaller businesses production planning still takes place on paper or with a tray of index cards. Production planning is important in trading businesses and service businesses just as much as it is in production firms, for that is how all sub-processes of the primary activities are synchronised. Businesses can gain a strategic advantage by coordinating their strategic planning. This means that all production factors are at the right place at the right time. These production factors are people, raw materials, semi-finished products, machines and other resources accessory to the process. It is also important to know how much needs to be produced and when, so itis important to coordinate production planning with the sales prognoses. Nowadays most big businesses have an automated planning system, a so-called MRP system. The concept of MRP was developed in America in 1975, and it stands for material requirements planning. MRP software is used especially by production firms. A more general automated planning system used also for trading businesses and service businesses is ERP, which stands {or enterprise resource planning. The advantage of an automated planning system is that materials, information and financial streams can be linked to each other and coordinated. A well known maker of MRP and ERP software is Oracle. Scanned with CamScanneroutsource suppliers strategic decision The headquarters of Oracle, maker of MRP systems Make or buy? Manufacturing goods or products can be a complicated process, e.g. producing an aeroplane or a building. Such production consists of thousands of components that need to be either manufactured or purchased. Wires, switches, wheels, displays and many other items are often made by other producers, who in such cases are called outsource suppliers. It is important for production firms like Boeing to make the important strategic decision not to manufacture certain components of its product by itself but to outsource that production. One important reason for outsourcing is that businesses that lise in certain components can often produce them more cheaply. For isa core activity, while for the aircraft maker it is a subsidiary, although important, activity. Two reasons not to outsource can be, for example, that the business would become dependent on another firm if it did, and that important information about its production process might leak out. Boeing outsources the prartuntinn at Scanned with CamScannerwordt Utgevers by = 2 PRIMARY ACTIVITIES IN BUSINESSES 63 One well known example of a business that outsources al its production is » the famous sports article maker. It has outsourced all its production to businesses in low-wage regions, such as India and China. What Nike itself is 900d at doing, namely the design, sales and marketing of sports articles, it does itself. You could thus say that the core competence of Nike is the ‘commercialization, distribution and merchandising of sports articles. One can define a core competence as that part of the primary activities where an Organisation can distinguish itself from the competition through its knowledge and skills. For a bank you could think of knowledge of financial markets (futures/money/capital markets, stock exchange, etc.). This is also known as a business's core business. ‘core competence 24 Businesses logistics Business logistics is about organising, planning, directing and executing the stream of goods that flows from the moment raw materials are purchased to when the end products are delivered to the customer. This concept is further broken down *+ Incoming logistics; ‘+ Internal logistics or production planning; + Outbound logistics. Logistical processes make up an important part of the primary activities. Business's primary activities are in fact a logistics chain. The most important links in this logistics chain are: + Supply (incoming logistics). Raw materials and components that are needed for production must by delivered by the supplier. These deliveries must be planned, and there needs to be agreement with the suppliers over prices and delivery conditions. + Production. Within the production process one can also speak of a flow of goods that needs to be under control. For example, forklifts can take care of internal transport to and from (unloading points. + Storage. Control of the warehouse and the stock is also part of logistics. How can the business keep costs as low as possible while the stock remains sufficient so that there is always enough? + Distribution (outbound logistics). The path the product takes from warehouse to consumer depends on distribution. Often this happens from distribution centres (DCs) and stores. Webshops often deliver directly from the distribution centre, + Transport. Transport connects all the previous steps with each other. ‘Whether at supply, production, storage or distribution stage, goods must be displaced from one location to another. How a business organises its transport is an important choice within its logistics. + Information management. In order to direct all logistical processes effectively, itis of great importance to process the associated stream of information efficiently. Where, when and how must the goods be delivered? Logistics stands or falls by whether itis well organised. Scanned with CamScanneroe 64 parts whar1s A BUSINESS? technical obsolescence economic obsolescence linear programming a istics: incoming, internal and ith the three divisions of logistics: incom : wth the three Simulation, and finally we will look at justin. Now we will deal d supply-chain management. outbound. Then we will discuss time production and logistics an 2.4.1 Incoming logistics - ‘The primary actives of every business start wih incoming logistics, That ices are brought together at the right place at means that all production resour : ; the right time so that the actual production or transformation process can take place. Incoming logistics is the handling (storage and further dispatch) of the firm. It is the opposite of outbound goods and materials that arrive a 8, uboun logistics. For example, at a tomato products factory incoming logistics is concerned with the receipt and storage of empty cans and raw tomatoes, which arrive separately. A business can add value ~ or subtract it ~ with its incoming logistics. By maintaining an optimal supply a business can hold supply costs within acceptable limits without running short and so bringing the production process to a halt, The costs of holding supplies are determined by: + Obsolescence rate. We distinguish two sorts of obsolescence, namely technical obsolescence and economic obsolescence. Technical obsolescence occurs if the product or component in the supply loses its characteristics. For example, you cannot store paper for ever since it eventually turns yellow. The same for iron, which will eventually rust. Economic obsolescence, in the business administration sense, occurs when new products or components embodying the latest technology come onto the market, so that the older supplies are worth less. A warehouse full of iPhone? handsets has only a limited value. Spoilage rate. In the food industry, businesses must take into account the spoilage rate of the supply. Wheat or potatoes can be stored only for a limited period. It is possible to freeze products in order to increase their storage period, but this is more expensive than promptly delivering them to the customer. * Storage costs. In order to store products, raw materials or components, you need facilities like warehouses. Flowers, for example, have to be put in cold ‘storage. * Theft risk. Theft increases storage costs (without adding value; indeed quite the contrary). In many warehouses measures are taken to counter the theft of supplies. * Damage. As long as a product has not been delivered, the producer bears the risk that something might happen to it - for example, that a forklift will tun into a shelf, A business must always weigh the costs ofuy holding supplies against the Costs of transport. A business can choose to order few supplies each time, but if that means that it has to place orders more often, then transport costs will rise. Optimising supplies is then also a mathematical optimisation problem. We call this linear programming, With linear programming you as a business administration professional can calculate how large the optimal supply of a raw material, semi-finished product or end product is. Scanned with CamScannerce noord Uitgevers by 2 primary activities IN susinesses 6S 242 Internal logistics Internal logistics deals with the displacement of raw materials and semi- finished products within the production process in order to transform these into end products. The purpose of internal logistics is to ensure that each machine and each work station has the right product, in the right quantity, with just the right quality, at just the right time, Goods can be moved through the factory in various ways. One can distinguish four basic production or logistical forms: 1 Divergent production. This often occurs in the raw materials and process industries, where several different products are made from one single raw material. 2 Parallel production. This occurs in factories where two production streams, which have nothing to do with each other, occur at the same time. 3 Serial production. We see this in businesses having only one production stream, such as a printing press at a newspaper publisher's. 4 Convergent production. This occurs at businesses that make complex products put together from many other products, such as offshore oil platforms. In Figure 2.10 the different basic production forms are depicted schematically. FiguRE 2.10 Different basic production forms Be ausor ae * Ee eri serial production convergent production Scanned with CamScannerInnovative Supply Chain Practices at H&M Kennes & Mauritz in Europe and in Asia in cas longer lead time. In all, the more than 1,600 stores. Production units and more HEM's core businese strategy — io provide the Central Warehouse and bi fashion ‘concept and quali constant. replenishment + manufacturing is cared ug » Last year, H&M entered in Fe are around 20 © than 700,000 people involved in product manufacturing, H&M's Business Model Advantage distribution with central warehouse in Hamburg in Germany Collects all apparel from various locations and Cistributes locally to various distribution centres o coss various counties wherever HM has « preance: Based on the demand, tho apparel ae replenished constantly. The constant replenishment helps maintain novelty and attract Tepeat customers. in be done manually or, in larger businesses, automatically: Scanned with CamScanner‘onoordott Utgever by controllable effectiveness 2 prumany activities IN BusINEssES 67 to a discount? Or should a loyally card be added to the order? Is ita ‘drop shipment’ for some other party so that some other logo should be applied? * Preparation for dispatch. The products have to be packed, provided with the Tight documents and placed in the correct shipment. + Dispatch of the order. Outbound logistics are depicted schematically in Figure 2.11. FIOURE 2.12 Outgoing logistics 2.4.4 ‘Simulation The primary activities are a sequence of logistical processes, working of materials, supplies, and so forth, Processes can be very simple ~ think of a potter who produces by hand ~ or very complex ~ think of a car factory. Business logistics therefore is often complex and, well managed, production can easily come to a halt, e.g. through exhaustion of supplies in stock ina factory, o become overloaded. In order to test and improve the workings of a supply chain, itis possible to simulate (mimic) situations in order to lear from them and to apply the knowledge to current situations. Simulation is an important instrument in business administration for making complex processes controllable and analysing their effectiveness. Simulation is, useful when directing very complex processes. Simulation is used for complex logistical problems within firms in order e.g, to optimise inventories, coordinate processes or make optimal use of capacity. Businesses use simulation software for this purpose. Of course, simulation only ‘comes into play when you cannot solve the management problem with simpler calculations. For an airport such as London Heathrow, for example, itis important to know when capacity problems are likely to arise. Using a simulation program airport management can simulate all sorts of realistic and even not-so-realistic situations, As an example: say that, because of high winds, there is only one runway available for take-off and landing, Fifty aeroplanes per hour arrive and thirty leave. The simulation program can then make clear whether and where queues are likely to form. For production firms as well, simulation can provide insights into processes. ‘Simulation can be applied to various business sectors — to logistics, of course, but for example also to construction and the car industry. It has as its goal: + Optimising the flow of materials; + Eradicating bottlenecks; + Accelerating processing times; + Analysing supplies and buffers. Scanned with CamScannerreduction production is that supplies and hardly ever inventories Justin-time Pe acvtios 2.45 a ofustinrtime Primary A that there are . oa should be 3 a enables considerable savings on somge Costs Soon Ao a Think of spoilage ‘obsol lescence o and other costs 2900 Tis that small disturbances in do very can “9 the thot. A big disadvan a standstill. Often a computerised supply system entire production Prog just-in-time logistics. eused in order t0 i ions. We distinguish between: 5 fulfil several functions. fi Holding inventors vores, These are held when a business expects, for ora otto avoid having to pay that higher price later, the business tes, a supply. ; : oe pea These arise when delivery of supplies does not match their depletion and so goods have to wait until they can be further processed. 24.6 Supply-chain management i Supply-chain management tries to deliver an optimal coordination of production supply-choin e fg ; i ‘management with supplies for not just one business but several businesses in a network. Several firms often work together in order to make an end product. You can imagine that litle in the way of inventories will be necessary for any of the firms in this relationship if all of them coordinate their supply- and order-management systems, or if supply-chain management is supported with software that keeps them in contact and allows orders to proceed automatically. CELT — f | Supply-chain management in car production In the car industry supply-chain management is vital, When a new car is ordered from a dealer, that order is passed through the wholesaler directly to the factory. In the factory the order is immediately Converted to requisitions for components such as steel, wheels, an engine, paint and so forth, so that all these components can be in place at the right ‘moment as the car is being produced. The Outsource suppliers to the car factory are also informed immediately and even the production of the Steel, wheels and engine is coordinated when a Signature is set on a purchase Contract at the dealer's, Scanned with CamScanner‘enoordot Ungevers by market 2 primany acriviries In Businesses 69 25 Marketing in businesses one is an important function of the primary activities, and this section will ale aaa must sell their product or service. The place where this ia oe In the old days that was a physical market in the middle Tod: YY, Su ol the Saturday market still held nowadays in a town or city. foday a market is more commonly a place where people do not physically ‘meet. In order to sell products or services, a business has to be active in one ‘or more markets. Furthering a business's success in one or more markets is the core of marketing, ‘We have a pretty recognisable brand name. First we settled on Uerry's Guide to the World Wide Web’, but then we decided on ‘Yahoo!” Jerry Yang 2.5.1 Marketing Marketing has to do with the activities for creating, communicating, delivering and exchanging products and services which are of value to customers. Marketing concerns all activities related to the sale of a product or service. Marketing is broad, and covers everything from market research to business development, from communication to promotion and from price determination to advertising. All of these have to do with marketing. Building relationships with customers in order to create value for them also belongs to marketing. The customer is the focus of all marketing activities — everything revolves around the customer. Marketing ensures that the customer is found and retained and that the business continues to fulfil his wishes. Marketing is therefore an important function of the primary activites. It often happens that entrepreneurs ido not survive even though they have developed a nice product. ll effort is devoted to the development of the product, while marketing questions are neglected — questions like: Does anyone really need this product? Do ‘customers know where to find it? Is the customer prepared to pay more than what it costs to make? Marketing is often seen as a creative process, ike advertising. But advertising is realy ust a part of marketing. Advertising only comes into play when you know who your customer is and what he wants. Since the 1950s marketing as a field of study has made use of various sciences, such as psychology, sociology, mathematics, economics, anthropology and neuroscience. As a result, marketing itself has come to be seen as a science. Tho marketing concept implies that attaining organisational goals depends upon knowing the needs and desires of customers and providing fr them. In order to achieve these goals, a business has to satisfy these needs and desires better then the competition. Scanned with CamScanner