PART IV- MANAGING THE BUSINESS
FUNCTIONS
MANAGING PRODUCTION AND SERVICE
OPERATIONS
 Operations refers to “any process
that accepts inputs and uses
resources to change those inputs in
useful ways”.
 Operations is an activity that needs
to be managed by competent
persons.
 Operations management must be
performed in coordination with the
other functions like those for
marketing and finance. Although the
specific activities of the operations
divisions of firms slightly differ from
one another, the basic function
remains the same, i.e., to produce
products or services.
Efficiency – is related to the “cost of
doing something, or the resource
utilization involved”
Effectiveness – refers to goal
accomplishment.
Efficiency – when a person performs a
job at a lesser cost than when another
person performs the same job, he is
more efficient than the other person
Effectiveness – when one is able to reach his
objectives, say produce 10000 units into one
month, he is said to be effective.
TYPES OF TRANSFORMATION PROCESS
The engineer manager must have some
knowledge of the various types of
transformation process. They are as follows:
 Manufacturing process - are those that
refer to making of products by hand or
with machinery
 Job shop
 Batch flow
 Worker – paced line flow
 Machine – paced line flow
 Batch / continuous flow hybrid
 Continuous flow
 Service process - are those that refer
to the provision of services to persons
by hand or with machineries.
 Service factory
 Service shop
 Mass service
 Professional service
MANUFACTURING PROCESS
Job Shop – one whose production is “based on
sales and orders for a variety of small lots”
Batch Flow – this process is where lots of
generally own designed products are
manufactured
Worker–paced line flow – the quality and
quantity of output in this depends to a great
extent to the skill of labor utilized
Machine–paced line flow – This type of
production process produces mostly standard
products with machines playing a significant
role.
Batch / continuous flow hybrid - this method is
a combination of the batch and continuous flow,
2 layouts are used (batch, continuous)
Continuous flow – This is characterized by the
“rapid rate at which items move through the
system.
SERVICE PROCESS
Service Factory - offers a limited mix of services
which results to some economies in scale of
production
Service Shop – provides a diverse mix of services.
The layout used are those for job shops or fixed
position
Mass service – provides services to a large
number people simultaneously.
Professional Service - companies that provide
specialized services to other firms or individuals
IMPORTANT PARTS OF PRODUCTIVE SYSTEMS
Productive systems consist of six important
activities as follows:
1. Product design
2. Production planning and scheduling
3. Purchasing and materials management
4. Inventory control
5. Work flow layout
6. Quality control
Product design process of creating a set of
product specs appropriate to the demands of the
situation
Production planning and scheduling -
forecasting the future sales of a given product,
translating this forecast into the demand it
generates for various production facilities, and
arranging for the procurement of these facilities
Purchasing and materials management - refers
to the approach that seeks efficiency of
operation through the integration of all the
material acquisition, movement, and storage
activities in the firm.
Inventory control - process of establishing and
maintaining appropriate levels of reserve stocks
of goods.
Work flow layout - process of determining the
physical arrangement of the production system.
Quality control – refers to the measurement of
products or services against standards set by the
company. Certain standard requirements are
maintained by the managaement to facilitate
production and to keep customers’ satisfied.
MANAGING THE MARKETING FUNCTION
 Marketing is a group of activities
designed to facilitate and expedite the
selling of goods and services.
 The marketing concepts states that the
engineer must try to satisfy the needs of
his clients by means of a set of
coordinated activities. When clients are
satisfied with what the company offers,
they continually provide business.
THE ENGINEER AND THE FOUR P’S MARKETING
The engineering organization will be able to
meet the requirements of its clients (or
customers) depending on how it uses the four P’s
of marketing which are as follows:
1. The product (or service)
2. The price
3. The place, and
4. The promotion
The product (or service) – the tangible (or
intangible) item and its capacity to satisfy a
specific need
The price – money or other considerations
exchanged for the purchases or or use of the
product , idea or services.
The place - if every factor is equal, customers
would prefer to buy from firms easily accessible.
If time is of the essence, the nearest firm will be
patronized.
The promotion – communicating between seller
and potential buyer to influence attitude and
behavior.
tools – advertising, publicity, personal selling,
sales promotion
STRATEGIC MARKETING FOR ENGINEERS
 Companies, including those managed by
engineer managers, must markets that
are best fitted to their capabilities. To
achieve this end, a very important
activity called strategic marketing is
undertaken.
 Under this set – up, the following steps
are made:
1. Selecting a target market
2. Developing a marketing mix
1. Selecting a target market – a market consists
of individuals or organizations, or both with the
desire and ability to buy a specific product or
service. To maximize sales and profits, a
company has the option of serving entirely or
just a portion of its chosen market.
In selecting a target market, the following steps
are necessary:
1. Divide the total market into groups of
people who have a relatively similar
product or service needs.
2. Determine the profit potentials of each
segment.
3. Make a decision on which segment or
segments will be served by the company.
Factors Used in Selecting a Target Market – a
target market must have the ability to satisfy the
profit objectives of the company. In selecting a
target market, the following factors must be
taken into consideration.
1. The size of the market and
2. The number of competitors serving the
market.
2. Developing a marketing mix – After the target
market has been identified, a marketing mix
must be created and maintained. The marketing
mix consists of four variables: the product, the
price, the promotion and the place (or
distribution).
MANAGING THE FINANCE FUNCTION
 The finance function is an important
management responsibility that deals with
the “procurement and administration of
funds with the view of achieving the
objectives of business.
DETERMINATION OF FUND REQUIREMENTS
Organization needs fund for the following
specific requirements:
 To finance daily operations
 To finance the firms credit services
 To finance the purchase of inventory
 To finance the purchase of major assets
FINANCING DAILY OPERATIONS
 Wages and salary
 Rent
 Taxes
 Power and light
 Marketing expenses
THE SOURCES OF FUNDS
 Cash Sales
 Collection of AR
 Loans and Credit
 Sale of Assets
 Ownership Contribution
 Advances from Customer
To finance its various activities, the engineering
firm will have to make use of its cash inflows
coming from various sources, namely:
Cash sales. Cash is derived when the firm sells its
products or services.
Collection of Accounts Receivables. Some
engineering firms extend credit to customers.
When these are settled, cash is made available.
Loan and Credits. When other sources of
financing are not enough, the firm will have to
resort to borrowing.
Sale of assets. Cash is sometimes obtained from
the sale of the company’s assets.
Ownership contribution. When cash is not
enough, the firm may tap its owners to provide
more money.
Advances from customer. Sometimes,
customers are required to pay cash advances on
orders made. This helps the firm in financing its
production activities.
SUPPLIES OF SHORT-TERMS FUNDS
 Trade creditors refers to suppliers
extending credit to a buyer for use in
manufacturing, processing, or reselling
goods for profit. The instruments used in
trade credit consist of the following: (1)
open book credit, (2) trade acceptance,
and (3) promissory notes.
 The open book credit is unsecured and
permits the customer to pay for goods
delivered to him in a specified number of
days. For financially weak engineering
firms, the open book credit is a very
useful source of financing.
 The trade acceptance is a time draft
drawn by a seller as payee, and accepted
by the purchaser as evidence that the
goods shipped are satisfactory and that
the price is due and payable. Under the
terms granted in the trade acceptance,
the seller allows the buyer to pay within
a certain number of days. The
arrangement provides the buyer some
relief in financing his short-term
requirements.
 A promissory note is an unconditional
promise in writing by one person to
another, signed by the maker, engaging
to pay, on demand or at a fixed or
determinable future time, a certain sum
of money to, or to the order of, a
specified person or to bearer.
 Commercial banks are institutions
which individuals or firms may tap as
source of short-term financing.
Commercial banks grant two types of
short-term loans: (1) those which
require collateral, and (2) those which
not require collateral. Examples of
commercial banks granting short-term
loans are City Trust, Premier Bank, and
Land Bank.
 Commercial paper houses are those that
help business firms in borrowing funds
from the money market. Under this
scheme, the business firm in needs of
funds issues a commercial paper, which
is a short-term promissory note,
generally unsecured, and issued by
large, established firms. The commercial
paper is sold to investors through the
commercial paper house.
  Business finance companies are
financial institutions that finance
inventory and equipment of almost all
types and sizes of business firms.
Example of finance companies in the
Philippines are Philacor Credit
Corporation and Consolidated Orix
Leasing and Finance Corporation.
 Factors are institutions that buy the
accounts receivables of firms, assuming
complete accounting and collection
responsibilities. Engineering firms which
maintain sizable amounts of accounts
receivable may avail of the services of
factors when they are in direct need of
cash.
 Insurance companies are also possible
sources of short-term funds. Industry
reports indicate that insurance
companies in the Philippines regularly
make investments in short-term
commercial papers and promissory
notes.
LONG-TERM SOURCES OF FUNDS
 There are instances when the
engineering firm will have to tap the
THE BEST SOURCE OF FINANCING
long-term sources of funds. An example
is when expenditures for capital assets
become necessary. After the amount
required is determined, a decision has to
be made on the type of source to be
used
Long-term of funds are classified as follows:
1. Long-term debts - Long terms debts are sub
classified into term loan and bonds.
 Term loans – a term loan is a commercial
or industrial loan from a commercial
To determine the best source, Schall and Haley
bank, commonly used for plant and
recommends that the following following
equipped, working capital, or debt
factors must be considered:
repayment.
 Bonds – Is a certificate of indebtedness
issued by a corporation to a lender. It is
a marketable security that the firm sells
to raise funds. Since the ownership of
bonds can be transferred to another
person, investors are attracted to buy
them.
2. Common stocks - The third source of long-
term funds consists of the issuance of
common stocks. Since common stocks
represents ownership of corporations, many
investors are placing their money in them.
When properly utilized, common stocks can
be cheaper and more stable sources of long
term funds. Unlike bonds and term loans
which may be repaid at a certain date,
common stocks do not have maturity and
repayment dates.
3. Retained earnings - Retained earnings
refer to “corporate earnings not paid out as
dividends.” This simply means that whatever
earnings that are due to the stockholders of
a corporation are reinvested. Because these
retained earnings can be used by the firm
indefinitely, they become an important
source of long-term financing.
 To determine the best source, Schall and
Haley recommends that the following
following factors must be considered:
 1. Flexibility
 2. Risk
 3. Income
 4. Control
 5. Timing
 6. Other Factors
1. Flexibility – some fund source impose certain
restrictions on the activities of the borrower. As
some fund sources are less restrictive, the
flexibility factor must be considered. In
ENGINEERING MANAGEMENT 69
general, however, short-term fund sources offer
more flexibility than long-term sources. This is so
because after settling the debt, short-term
borrowers may shift to other types of financing.
Longterm borrowers are given this opportunity
only after a longer period of waiting.
2. Risk – when applied to the determination of
fund sources, risk refers to the chance that
the company will be affected adversely when a
particular source of financing is chosen.
Generally, short-term debt “subjects the
borrowing firm to more risk than does financing
with long-term debt.” This happens because of
two reasons:
· short-term debts may not be renewed with the
same terms as the previous one, if they can
be renewed at all.
· since repayments are done more often, the risk
of defaulting is greater.
3. Income - the various sources of funds, when
availed of, will have their own individual effects
in the net income of the engineering firm. When
the firm borrows, it must generate enough
income to cover the cost of borrowing and still
be left with sufficient returns for the owners. It
is possible that the owners were enjoying higher
rates of return on their investment before
borrowing was made. The reverse may happen,
however, at other times. Nevertheless, the
effects on income must be considered in
determining the source of funding to be used.
4. Control - when new owners are taken in
because of the need for additional capital, the
current group of owners may lose control of the
firm. If the current owners do not want this to
happen, they must consider other means of
financing.
5. Timing - the financial market has its ups and
downs. These means that there are times when
certain means of financing provide better
benefits than at other times. The engineer
manager must, therefore, choose the best time
for borrowing or selling equity.
6. Other Factors
There are other factors considered in
determining the best source of funds. They are
as follows:
1. Collateral values: Are there assets available as
collateral?
2. Flotation cost: How much will it cost to issue
bonds or stocks?
3. Speed: How fast can the funds required be
raised?
4. Exposure: To what extent will the firm be
exposed to other parties?
INDICATORS OF FINANCIAL HEALTH
The financial health of an engineering firm may
be determined with the use of three basic
financial statements. These are as follows:
1. Balance sheet – also called statement of
financial position;
2. Income statement – also called statement of
operations;
3. Statement of changes in financial position.
RISK
Risk refers to the uncertainty concerning loss or
injury. The engineering firm is faced with a long
list of exposure to risk, some of which are as
follows:
1. Fire
2. Theft
3. Floods
4. Accidents
5. Nonpayment of bills by customers  Hazards may be reduced by simply
6. Disability and death instituting appropriate measures in a
7. Damage claim from other parties variety of business activities. An
TYPES OF RISK example is prohibiting unauthorized
Risks may be classified as either pure or persons to enter the cashier’s office.
speculative.
Pure risk is one in which “there is only a chance
of loss.” This means that there is no way of
making gains with pure risks.
 Speculative risk is one in which there is
a chance of either loss or gain. This type
of risk is not insurable. An example of a
speculative risk is investment in
common stocks.

WHAT IS RISK MANAGEMENT

 Risk management is “an organized
strategy for protecting and conserving
assets and people.” The purpose of risk
Management is “to choose intelligently
from all the available methods of dealing
with risk in order to secure the economic
survival of the firm.”
METHODS OF DEALING WITH RISK
There are various methods of dealing with risks.
They are as follows:
1. the risk may be avoided
2. the risk may be retained
3. the hazard may be reduced
4. the losses may be reduced
5. the risk may be shifted

 Risk retention is a method of handling

risk wherein the management assumes
the risk.
 A planned risk retention, also called self-
insurance, is a conscious and deliberate
assumption of a recognized risk. In this
case, management decides to pay losses
out of currently available funds.
 Unplanned risk retention exists when
management does not recognize that a
risk exists and unwisely believes that no
loss could occur.