Key Takeaways
- The three types of business operations are service, merchandising and manufacturing. A hybrid operation combines any or all of these three operations.
- Operating cycle is the average period of time for cash to be converted back into cash within the normal operations of the business. The operating cycles of each type of business operations are different from each other.
Introduction to the Types of Business Operations
Business operations are the regular day-to-day activities of a business that are designed to achieve its mission. If you own a business or manage one, you’ll need to identify the core activities that will make your business function well and become successful in achieving its mission.
The type of operations a business has may vary depending on the kind of products they sell. A business that sells merchandise operates differently from a business that manufactures goods. Some businesses don’t carry huge amounts of inventory and focus only on providing services.
Businesses are classified into three types according to their operations – namely, service business, merchandising business, and manufacturing business. A company can be involved in one or more business operations, also referred to as hybrid operations.
Each type of operation can be used with any legal form of business, whether sole proprietorship, partnership or corporation.
Service Business
A Service Business involves performing a service using labor and/or expertise to a customer for a fee.
A service business is the simplest type of business operation since it does not involve complex inventory or manufacturing systems to operate. This type of business does not sell tangible products and neither does it maintain any physical inventory for sale except for supplies that are used to perform the services.
A service business can be as simple as a small laundromat, beauty parlor, or repair shop, or as complex as an airline business, bank, hotel, engineering firm, or a cloud hosting provider. The easiest way to determine what kind of service business you could start is to know what you’re an expert at or what field you already have gained a decent experience to provide quality service.
Merchandising Business
A Merchandising Business is a business entity whose primary operation involves the buying and selling of finished goods.
If your business buys and sells goods for a profit, then it is considered a merchandising business. A merchandiser buys goods from a manufacturer or another merchandiser with the intention of selling those goods at a higher price, without making any additional physical changes to the product.
Examples of merchandising businesses are supermarkets, clothing retail shops and boutiques, bookstores, department stores, e-commerce shops, drugstores, and appliance stores, to name a few.
A merchandising business is seen as a middleman for manufacturers to be able to get their manufactured goods in the hands of the consumer. A merchandiser can either be a wholesaler or retailer.
Wholesaler vs. retailer
A Wholesaler buys a large quantity of finished goods from a manufacturer, distributor or another wholesaler and resells them in bulk to retailers or other wholesalers. Wholesalers operate under a business-to-business (B2B) model and do not have to deal directly with consumers.
A Retailer buys its products from a wholesaler, distributor or manufacturer and sells directly to consumers. They operate under a business-to-consumer (B2C) model.
A business, however, can be involved in both wholesaling and retailing if it sells products in small quantities directly to consumers while also selling in bulk or wholesale to other resellers.
Wholesaler vs. distributor
A Distributor is a business entity that engages in supplying goods to various customers in a manufacturer’s supply chain such as wholesalers, retailers and direct consumers.
Below are some differences between a wholesaler and a distributor:
- Scope of operations – the scope of operations of a distributor is much larger than a wholesaler, the latter only having a limited area.
- Distribution contracts – the main difference between distributors and wholesalers is the presence of contracts with the manufacturer. A wholesaler only buys goods in bulk and does not enter into a distribution contract with a manufacturer, hence it has the liberty to sell other competing products as well. A distributor, on the other hand, acts as link in the supply chain and enters into contracts with manufacturers to sell non-competing products.
- Marketing – a wholesaler is not involved in the promotional activities of the manufacturer whereas a distributor engages in marketing and sales for the manufacturer.
- Profits – a wholesaler profits by buying large quantities of products at a lower price and then selling them at higher amounts, while a distributor earns a percentage of sales as service income.
Manufacturing Business
A Manufacturing Business is a business entity that produces finished goods from raw materials, labor and manufacturing overhead. The finished goods are sold to merchandisers, other manufacturers or even to direct consumers.
Most of the day-to-day items that we use are produced by businesses that are engaged in manufacturing. Examples of these businesses are automobile manufacturers, food processing companies, pharmaceutical laboratories, chipset manufacturers, beverage bottlers, chemical plants, and furniture makers.
The manufacturing process happens in a factory where resources are put together and undergo fabrication. An assembly line is a manufacturing process in which raw materials and components undergo change with each workstation it passes down in the assembly line. Parts and materials are added or replaced on the semi-finished product in each workstation until the product is fully assembled into its final form. As a result, the manufacturing process involves less manual labor and is quicker and more efficient.
Modern and large-scale factories use assembly lines in order to make the manufacturing process faster and more efficient. With technological advancements, manufacturers are now replacing human labor with artificial intelligence and machines that make the production process even more efficient than ever.
The main difference of a manufacturer and a merchandiser is that a manufacturer purchases and converts raw materials, parts or components into another product which is physically different in form. A merchandiser, on the other hand, purchases and sells finished goods without making any physical and functional changes to the product. In short, the manufacturer creates the product and the merchandiser buys them for resale.
Hybrid Operations
Sometimes, identifying the type of operation a business has could be confusing. Certain businesses seem to use or combine more than one type of operation. It can be a combination of service and merchandising, manufacturing and service, or manufacturing and merchandising.
For example, when you visit a restaurant, your first thought is that they’re in the business of providing services such as table service and function room events. However, if you take a closer look at their kitchen, you’ll begin to realize that the cooking of raw foods combined with additional ingredients, human labor and kitchen equipment is reflective of a manufacturing activity. Furthermore, many restaurant chains today adopt an assembly line style in preparing food and dividing labor. The combination of these two operations makes restaurants a hybrid of service and manufacturing.
Many people consider restaurants as a service business since cooking and serving food is a service done by the restaurant’s staffs. However, while restaurants are generally considered service businesses, it’s worth considering that many restaurant owners are using manufacturing concepts such as just-in-time production, total quality management and waste reduction in food preparation.
Even if a company is involved in more than one type of operation, its core interest would generally lean to only one type. For example, there are dermatological clinics that sell skin care products in addition to offering a variety of skin treatment services. Though they may be involved in both service and merchandising operations, their major or core interest is on providing dermatological services. The selling of skin products is only secondary.
There are manufacturing businesses that leverage the internet to reduce their reliance on middlemen, i.e. distributors, wholesalers and retailers. These businesses sell finished goods directly to consumers through their websites or online stores. An example is a leather goods business that manufactures their own leather products and sells them exclusively in the internet through their own e-commerce website. This makes them a hybrid business operating both as a manufacturer and a retailer.
Business Operating Cycle
An Operating Cycle is the average period of time for cash to be converted back into cash within the normal operations of the business. It is also referred to as Cash Conversion Cycle.
As a business owner, you need to know how long it will take for you to recover the initial outlay of cash that you put into operations to buy or produce a product, sell the product and receive cash from your customers. Of course, you’ll always want to prefer a shorter operating cycle since it is indicative of liquidity and efficiency.
Each of the three types of business operations has their own operating cycle.
Operating cycle of a service business
The operating cycle of a service business is often the simplest and the shortest as it only involves the following steps:
- Payment of cash by customers in exchange of rendering services for them. This involves the payment for supplies and other costs related to doing the services. Rendering of services are sometimes on account, which means the customer pays at a later date.
- Collection of cash from customers.
Operating cycle of a merchandising business
In a merchandising business, the operating cycle consists of the following transactions:
- Purchase of merchandise inventory.
- Sale of merchandise to customers. This includes sales on account.
- Collection of cash from customers.
Operating cycle of a manufacturing business
The operating cycle of a manufacturer includes the following processes:
- Purchase of raw materials to be used as inputs in the manufacturing process.
- Conversion of raw materials and turning them into finished goods with the use of labor and other manufacturing overhead.
- Sale of finished goods to customers.
- Collection of cash from customers.
Review Questions
- What is the difference between a merchandising and manufacturing business?
- What are the key differences between a wholesaler, a retailer and a distributor?
- What are the steps in the operating cycle of a service business?
- What are the steps in the operating cycle of a merchandising business?
- What are the steps in the operating cycle of a manufacturing business?
