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Waterstone； however； knew that ‘browsers’； the majority （60 per cent；
according to his research） of people who go into bookshops to look around；
had no idea what book they wanted； so didn’t know where to start looking。
His differentiating strategy was that as well as following the conventional
model of having books on shelves； he sca。。ered the books in piles around
Operations Management 241
the store using a variety of methods： new books in one pile； special offers
in another。 Sales and profits soared； sufficient to more than pensate for
the near doubling of book stock。
Inventory categories
There are three different categories of inventory that a business needs to
have and keep track of：
。 Finished goods： These are products ready to ship out to customers。
For Apple these would be puters； iPods and so forth； for General
Motors vehicles and for a baker loaves of bread。
。 Work in progress （WIP）： These are products in the process of being
pleted。 They have used up some raw materials and had workers
paid to start the manufacturing process； so the cost will reflect those
inputs。 For General Motors WIP would include vehicles awaiting paint
or a pre…delivery inspection。
。 Raw materials： These are the basic materials from which the end product
is made。 For General Motors this would include metal and paint； but
it could also include a plete bought…in engine for the vehicles in
which they use third…party power units。
Economic order quantity （EOQ）
Businesses have to carry a certain minimum amount of stock to ensure
that the production pipeline works efficiently and likely demand is met。
So the costs associated with ordering large quantities infrequently and
so reducing the order cost but increasing the cost of holding stock has to
be balanced with placing frequent orders； so pushing the costs in placing
orders up； but reducing stock holding costs。 EOQ is basically an accounting
formula that calculates the point at which the bination of order costs
and inventory carrying costs are the least and so arriving at the most costeffective
quantity to order。
The formula for EOQ is：
Economic order quantity = （√ （2×R×O））
C
Where： R = Annual demand in units； O = Cost of placing and order； C= Cost
of carrying a unit of inventory for the year。
InventoryOps； a website created and run by Dave Piasecki to support
his book Inventory Accuracy： People； Processes； & Technology （2003； Ops
Publishing）； provides a useful starting point in your quest for information
242 The Thirty…Day MBA
on all aspects of inventory management and warehouse operations。 At this
link （inventoryops/economic_order_quantity。htm）； you will find
a full explanation of how to use EOQ。
QUALITY
As well as using efficient operation and control procedures an organization
has to deliver a quality product or service。 Quality in operations does
not carry quite the same meaning as it does in； say； marketing； where it
signifies something of a high standard。 In operations； quality means that
something meets a set of prescribed standards and performs as expected。
In other words； promises are made and kept。 But quality is also part of
the efficiency equation too。 Quality below standard can lead to high waste；
disrupted schedules and lost orders。 The ideas； concepts and techniques
that drive thinking on quality e from these management ideas。
Inspection
Frederick W Taylor （see above） in his book The Principles of Scientific Management
stated that one of the clearly defined tasks of management was
to ensure that no faulty product le。。 the factory or workshop。 This led to
a focus on the detection of problems in the product； testing every item to
ensure that it plied with product specifications。 The task was carried
out at the end of the production process using specially trained inspectors。
The ‘big idea’ emerging from this approach was defect prevention as the
means to ensure quality control。 Inspection still plays a part in modern
quality practices； but less as an answer and more as one tool in the toolkit。
Philosophy
W Edwards Deming （deming）； an American statistician and
member of the faculty at the New York University Graduate School of
Business and Columbia University； where he taught up until 10 days
before his death in 1993； is considered as the founder of modern quality
management。 He took the inspection aspect of quality control a stage
further with the introduction of statistical probability techniques。 His view
was that quality should be designed into products and processes and that
mass inspection was redundant as statistical sampling using control charts
will signal when a process is out of control。
Deming is remembered most for his 14…point ‘System of Profound
Knowledge’。 In this he explains that being a quality…driven organization
requires everyone； starting with top management； ‘to fully embrace a
new way of thinking that involves seeking the greater good for everyone
Operations Management 243
involved and implementing continuous improvement’。 He wanted slogans；
targets and numerical targets removed and emphasized to all employees
in the pany that if change is to be made and processes are to be continuously
improved then it’s down to them to achieve it。 Deming’s ideas
were adopted enthusiastically by the Japanese whose economy； having been
crippled by the war （WW2）； was ready to embrace radical change。 It was
not until the Japanese motor industry was cu。。ing deep into its home market
that US industry woke up to Deming’s message on quality。 Total Quality
Management； Quality Circles and Six Sigma have bee buzzwords for
variations and extensions of Deming and other pioneers’ work on quality。
The la。。er term was in use in the 1920s where mathematicians used it as the
symbol for a unit of measurement in product quality variation。 But it was
not until the mid…1980s that engineers in the US pany Motorola used
‘Six Sigma’ first as an informal name – later as a brand – for their initiative
aimed at reducing defects in production processes。 The name Six Sigma
was chosen because mathemat