Operation and Production Management

Planning is vital when starting a small business and the operational components of the business are key drivers. Below are eight areas that require attention prior to business start-up. These elements should be very detailed and included as a part of your business plan.

Production

The first thing to consider is how you will produce your product or deliver your service. A very detailed set of steps outlining production and delivery methods is required along with a list of the equipment and machinery needed and related costing. Itemize the costs of raw materials and packaging to determine what it will cost to produce what is sold. In a service-based business, do not forget to consider and include the hourly rates for any personnel that will be involved in the creation or delivery of the service.

Quality control

Customers want products that are both consistent and of a high quality.  When reviewing operational procedures, consider what steps have been taken to ensure that the product meets the expectations of your customers. Quality control processes need to be in place if you are manufacturing products. Even retailers and distributors need to ensure that consistency in the product or service offered is maintained.

Location

The location of the business can be paramount to success. When choosing a location, you must be mindful of your customers. Beyond the type of building (retail, industrial, commercial, etc.), business owners need to determine whether the space has adequate parking for employees and customers and whether it is on a transportation line that is easily accessible. Once all occupancy costs, including rent, maintenance, utilities, taxes, and insurance have been factored in, be sure that the size of the building is adequate for current needs as well as any anticipated future growth. Where possible, selecting a location that can accommodate long-term needs will be more cost-efficient and customer friendly. 

Legal environment

The legal environment that the business operates in will differ greatly depending on the industry or sector of operation. Licences or permits required to operate the venture may vary depending on the nature of the work and will need to be in place before start-up. Consider the costs of these issues/permits and whether any trademarks, copyrights or patents are needed. Insurance requirements may differ from industry to industry, but at a very basic level the business will require liability insurance.  Contact your local insurance broker to assess what types of coverage are needed for the business. WSIB coverage will be required for any employees or if you will be conducting business at a third-party location. You must be aware of the costs for the various insurance requirements and factor these costs into the product/service pricing.

Personnel

Hiring and retaining top talent is a challenge that every business owner faces. When building a team, define the skillsets, licences, experience, and educational requirements needed of employees. Compensation structure can vary greatly depending on the position. Will you pay an hourly wage, salary, base salary plus commission and will you offer bonuses or profit sharing? Initially, it may be more cost-effective to hire freelancers or temporary contractors for special projects or occasions. Once staff have been onboarded, be sure to have a solid training strategy in place to ensure that everyone is aware of their role and what is expected of them.

Inventory

The level of inventory of both finished goods and raw materials and supplies must be carefully managed.  Today’s supply chains can be unpredictable and access to raw materials can adversely affect your ability to produce and maintain a healthy level of finished goods. Having a strong relationship with suppliers, understanding lead times, and factoring in shipping time will help avoid inventory shortfalls. Budget for the value of your inventory, determine how much inventory you can afford to hold, and try to estimate inventory turnover to achieve both production and financial management. Prepare for any seasonal demands and plan to have increased supply available as needed.

Suppliers

Keep a list of suppliers and potential suppliers. Access to multiple suppliers for critical items is important should supply issues emerge. Buy from the best and most reliable vendors, and when setting up your supplier network, always negotiate the best possible credit terms, continually monitor payment, and ask for extended credit lines as you build your credit rating. If extended terms are not viable, request other concessions such as free shipping or early pay discounts. What may seem to be insignificant allowances can add up to sizable financial impacts to the business. In addition to stable supply, determine if vendors can commit to fixed pricing or if the cost of raw materials will fluctuate on a regular basis. If pricing fluctuates, you will need to develop a pricing model to reflect the changing input costs.

Credit policies

Cash flow can make or break a business. The credit policies implemented with customers are an important component in the equation. Consider what criteria to use when extending credit and how much credit to extend. Before making any decisions, investigate industry norms, how your competitors handle credit with customers, and think about customer expectations. Often, the amount of credit issued and the credit terms extended align with the amount of credit offered to you by your suppliers. Have a strategy for following up on late payments and be prepared to engage a lawyer or credit collection agency when the need arises.

These operational factors are crucial considerations for a start-up but should also be reviewed annually for all businesses. Focus on the granular details of each of the eight areas above and you will be well on your way to a successful venture.