Process Strategy

1
Process Strategy
Chapter 4
2
How Process Strategy fits the Operations
Management Philosophy
Operations As a Competitive Weapon Operations
Strategy Project Management
Process Strategy Process Analysis Process
Performance and Quality Constraint
Management Process Layout Lean Systems
Supply Chain Strategy Location Inventory
Management Forecasting Sales and Operations
Planning Resource Planning Scheduling
3
Process Strategy

• Process strategy is the pattern of decisions made
  in managing processes so that they will achieve
  their competitive priorities.
• A process involves the use of an organizations
  resources to provide something of value.
• Major process decisions include
• Process Structure
• Customer Involvement
• Resource Flexibility
• Capital Intensity

4
Major Decisions for Effective Process Design
5
Process Structures in Services

• A good process strategy for a service process
  depends first and foremost on the type and amount
  of customer contact.
• Customer contact is the extent to which the
  customer is present, is actively involved, and
  receives personal attention during the process.

6
Customer-Contact Matrix for Service Processes
Less Customer Contact and Customization Service
Package
7
Product-Process Matrix for Processes
8
Production and Inventory Strategies

• Make-to-order strategy A strategy used by
  manufactures that make products to customer
  specifications in low volume.
• Assemble-to-order strategy A strategy for
  producing a wide variety of products from
  relatively few assemblies and components after
  the customer orders are received.
• Make-to-stock strategy A strategy that involves
  holding items in stock for immediate delivery,
  thereby minimizing customer delivery times.
• Mass production A term sometimes used in the
  popular press for a line process that uses the
  make-to-stock strategy.

9
The Big Picture King Soopers Bakery
10
Links of Competitive Priorities with
Manufacturing Strategy
11
Customer InvolvementGood or Bad?

• Improved Competitive Capabilities More customer
  involvement can mean better quality, faster
  delivery, greater flexibility, and even lower
  cost.
• Customers can come face-to-face with the service
  providers, where they can ask questions, make
  special requests on the spot and provide
  additional information.
• Self-service is the choice of many retailers.
• However customer involvement can be disruptive
  and make the process less efficient.
• Greater interpersonal skills are required.
• Quality measurement becomes more difficult.

12
Resource Flexibility

• Flexible workforce A workforce whose members are
  capable of doing many tasks, either at their own
  workstations or as they move from one workstation
  to another.
• Worker flexibility can be one of the best ways to
  achieve reliable customer service and alleviate
  capacity bottlenecks.
• This comes at a cost, requiring greater skills
  and thus more training and education.
• Flexible equipment Low volumes mean that process
  designers should select flexible, general-purpose
  equipment.

13
Capital Intensity

• Capital Intensity is the mix of equipment and
  human skills in the process the greater the
  relative cost of equipment, the greater is the
  capital intensity.
• Automation is a system, process, or piece of
  equipment that is self-acting and
  self-regulating.
• Fixed automation is a manufacturing process that
  produces one type of part or product in a fixed
  sequence of simple operations.
• Flexible (or programmable) automation is a
  manufacturing process that can be changed easily
  to handle various products.

14
Economies of Scope

• In certain types of manufacturing, such as
  machining and assembly, programmable automation
  breaks the inverse relationship between resource
  flexibility and capital intensity.
• Economies of scope are economies that reflect the
  ability to produce multiple products more cheaply
  in combination than separately.
• With economies of scope, the often conflicting
  competitive priorities of customization and low
  price become more compatible.
• Taking advantage of economies of scope requires
  that a family of parts or products have enough
  collective volume to fully utilize equipment.

15
Decision Patterns for Service Processes
Major process decisions
16
Decision Patterns for Manufacturing Processes
Major process decisions
17
Focus by Process Segment

• A facilitys process often can neither be
  characterized nor actually designed for one set
  of competitive priorities and one process choice.
• At a services facility, some parts of the process
  might seem like a front office and other parts
  like a back office.
• Plants within plants (PWPs) are different
  operations within a facility with individualized
  competitive priorities, processes, and workforces
  under the same roof.
• Focused factories are the result of a firms
  splitting large plants that produce all the
  companys products into several specialized
  smaller plants.

18
Strategies for Change

• Process Reengineering is a fundamental rethinking
  and radical redesign of processes to improve
  performance dramatically in terms of cost,
  quality, service, and speed.
• Process improvement is the systematic study of
  the activities and flows of each process to
  improve it.

19
Process Analysis
Chapter 5
20
How Process Analysis fits the Operations
Management Philosophy
Operations As a Competitive Weapon Operations
Strategy Project Management
Process Strategy Process Analysis Process
Performance and Quality Constraint
Management Process Layout Lean Systems
Supply Chain Strategy Location Inventory
Management Forecasting Sales and Operations
Planning Resource Planning Scheduling
21
Process Analysis

• Process analysis is the documentation and
  detailed understanding of how work is performed
  and how it can be redesigned.

1Identify Opportunity
22
A Systematic Approach to Process Analysis

• Suggestion system a voluntary system by which
  employees submit their ideas on process
  improvements.
• Design team A group of knowledgeable,
  team-oriented individuals who work at one or more
  steps in the process, do the process analysis and
  make the necessary changes.
• Metrics Performance measures that are
  established for a process and the steps within
  it.
• Flowcharts A diagram that traces the flow of
  information, customers, equipment, or materials
  through the various steps of a process.
• Service Blueprint A special flowchart of a
  service process that shows which steps have high
  customer contact (line of visibility).

23
Flowchart for the Sales Process of a Consulting
Company
Service Blueprint
24
Showing the Handoffs Between Departments
25
Process Charts

• Process chart An organized way of documenting
  the activities performed by a person or group of
  people at a work station, with a customer, or on
  materials.
• Five categories of process charts
• Operations that change, create or add something.
• Transportation (materials handling) Moving
  something.
• Inspection Checking or verifying something.
• Delays Time spent awaiting further action.
• Storage When something is put away until a later
  time.

26
Process Chart for an Emergency Room Admission
27
Evaluating Performance

• Checklist A form used to record the frequency of
  occurrence of certain service or product
  characteristics related to performance.
• Bar chart A series of bars representing the
  frequency of occurrence of data characteristics
  measured on a yes-or-no basis.
• Pareto Chart A bar chart on which factors are
  plotted in decreasing order of frequency along
  the horizontal axis.

28
Bar ChartExample 5.1
The manager of a neighborhood restaurant is
concerned about rising customer complaints. He
would like to present his findings in a way that
his employees will understand.
29
Pareto ChartExample 5.1
30
More Tools for Evaluating Performance

• Scatter-diagram A plot of two variables showing
  whether they are related.
• Cause-and-effect diagram A diagram that relates
  a key performance problem to its potential
  causes.
• Sometimes called the fishbone diagram.
• Graphs Representation of data in a variety of
  pictorial forms, such as line charts and pie
  charts.

31
Checker Board AirlinesExample 5.2
Analyzing Flight Delays Using a Cause-And-Effect
Diagram
32
Wellington Fiber Board Co.Example 5.3
The Wellington Fiber Board Company produces
headliners, the fiberglass components that form
the inner roof of passenger cars. Management
wants to identify which defects were most
prevalent and to find the cause.
They decide to use the following tools
Step 1. Checklist
Step 2. Pareto chart
Step 3. Cause-and-effect diagram
Step 4. Bar chart
33
Wellington Fiber Board Co.
Example 5.3 Checklist
34
Wellington Fiber Board Co.
Example 5.3 Pareto Chart
35
Wellington Fiber Board Co.
Example 5.3 Cause-and-Effect Diagram
36
Wellington Fiber Board Co.
Example 5.3 Bar Chart
37
Redesigning the Process

• Ideas for process redesign and improvement can be
  uncovered by asking six questions about each step
  in the process and about the process as a whole.
• 1. What is being done?
• 2. When is it being done?
• 3. Who is doing it?
• 4. Where is it being done?
• 5. How is it being done?
• 6. How well does it do on the various metrics of
  importance?

38
Redesigning the Process

• Answers to the previous six questions are
  challenged by asking still another set of
  questions.
• Why is the process even being done?
• Why is it being done where it is being done?
• Why is it being done when it is being done?
• Brainstorming is letting a group of people,
  knowledgeable about the process, propose ideas
  for change by saying whatever comes to mind.

39
Benchmarking

• Benchmarking is a systematic procedure that
  measures a firms processes, services, and
  products against those of industry leaders.
• Benchmarking focuses on setting quantitative
  goals for improvement.
• Competitive benchmarking is based on comparisons
  with a direct industry competitor.
• Functional benchmarking compares functional areas
  in the firm with those of outstanding firms in
  any industry.
• Internal benchmarking involves using an internal
  unit with superior performance as the benchmark
  for other units.

40
Benchmarking Steps

• Planning Identify the process, service or
  product to be benchmarked and the firm(s) to be
  used for comparison. Determine the performance
  metrics and collect the data.
• Analysis Determine the gap between the firms
  current performance and that of the benchmark
  firm(s).
• Integration Establish goals and obtain the
  support of managers who must provide the
  resources for accomplishing the goals.
• Action Develop cross-functional teams of those
  most affected by the changes, develop action
  plans, implement the plans and monitor progress.

41
Illustrative Benchmarking Metrics by Type of
Process
42
Illustrative Benchmarking Metrics by Type of
Process
43
Illustrative Benchmarking Metrics by Type of
Process
44
Process Management Mistakes

1. Not Connecting with Strategic Issues
2. Not Involving the Right People in the Right Way
3. Not Giving the Design Teams and Process Analysts
   a Clear Charter and Then Holding Them Accountable
4. Not Being Satisfied Unless Fundamental
   Reengineering Changes Are Made
5. Not Considering the Impact on People
6. Not Giving Attention to Implementation
7. Not Creating an Infrastructure for Continuous
   Process Improvement.

45
Constraint Management
Chapter 7
46
How Constraint Management fits the Operations
Management Philosophy
Operations As a Competitive Weapon Operations
Strategy Project Management
Process Strategy Process Analysis Process
Performance and Quality Constraint
Management Process Layout Lean Systems
Supply Chain Strategy Location Inventory
Management Forecasting Sales and Operations
Planning Resource Planning Scheduling
47
Output and Capacity

• What is a Constraint?
• Any factor that limits system performance and
  restricts its output.
• Capacity is the maximum rate of output of a
  process or system.
• A Bottleneck
• An output constraint that limits a companys
  ability to meet market demand.
• Also called Capacity Constraint Resource or CCR

48
Theory of Constraints (TOC)

• A systematic approach that focuses on actively
  managing constraints that are impeding progress.

Constraint Management

• Short-Term Capacity Planning
• Theory of Constraints
• Identification and management of bottlenecks
• Product Mix Decisions using bottlenecks

• Long-term Capacity Planning
• Economies and Diseconomies of Scale
• Capacity Timing and Sizing Strategies
• Systematic Approach to Capacity Decisions

49
Measures of Capacity

• Output Measures
• Input Measures
• Utilization
• Performance Measures in TOC
• Inventory (I)
• Throughput (T)
• Operating Expense (OE)
• Utilization (U)

50
How Operational Measures Relate to Financial
Measures
A decrease in I leads to an increase in net
profit, ROI, and cash flow
All the money invested in the system in
purchasing things that it intends to sell
An increase in T leads to an increase in net
profit, ROI, and cash flows
Rate at which system generates money through sales
A decrease in OE leads to an increase in net
profit, ROI, and cash flows
All the money the system spends to turn inventory
into throughput
An increase in U at the bottleneck leads to an
increase in net profit, ROI, and cash flows
The degree to which equipment, space, or labor is
currently being used, and is measured as the
ratio of average output rate to maximum capacity,
expressed as a
51
7 Key Principles of TOC

• The focus is on balancing flow, not on balancing
  capacity.
• Maximizing output and efficiency of every
  resource will not maximize the throughput of the
  entire system.
• An hour lost at a bottleneck or constrained
  resource is an hour lost for the whole system.
• An hour saved at a non-constrained resource does
  not necessarily make the whole system more
  productive.

52
7 Key Principles of TOC

1. Inventory is needed only in front of the
   bottlenecks to prevent them from sitting idle,
   and in front of assembly and shipping points to
   protect customer schedules. Building inventories
   elsewhere should be avoided.
2. Work should be released into the system only as
   frequently as the bottlenecks need it. Bottleneck
   flows should be equal to the market demand.
   Pacing everything to the slowest resource
   minimizes inventory and operating expenses.

53
7 Key Principles of TOC

• Activation of non-bottleneck resources cannot
  increase throughput, nor promote better
  performance on financial measures.
• Every capital investment must be viewed from the
  perspective of its global impact on overall
  throughput (T), inventory (I), and operating
  expense (OE).

54
Application of TOC

1. Identify The System Bottleneck(s).
2. Exploit The Bottleneck(s).
3. Subordinate All Other Decisions to Step 2
4. Elevate The Bottleneck(s).
5. Do Not Let Inertia Set In.

55
Identification and Management of Bottlenecks

• A Bottleneck is the process or step which has the
  lowest capacity and longest throughput.
• Throughput Time is the total time from the start
  to the finish of a process.
• Bottlenecks can be internal or external to a
  firm.

56
Setup Time

• If multiple services or products are involved,
  extra time usually is needed to change over from
  one service or product to the next.
• This increases the workload and could be a
  bottleneck.
• Setup Time is the time required to change a
  process or an operation from making one service
  or product to making another.

57
Where is the Bottleneck?Example 7.1
It takes 10 20 max (15, 12) 5 10 60
minutes to complete a loan application. Unless
more resources are added at step B, the bank will
be able to complete only 3 loan accounts per
hour, or 15 new load accounts in a five-hour day.

58
Diablo Electronics Examples 7.2 and 7.3
Diablo Electronics makes 4 unique products,
(A,B,C,D) with various demands and selling
prices. Batch setup times are negligible. There
are 5 workers (1 for each of the 5 work centers
V, W, X, Y, Z) paid 18/hour. Overhead costs are
8500/week. Plant runs 1 Shift/day or 40
hours/week Your objective 1. Which of the four
workstations W, X, Y, or Z has the highest total
workload, and thus serves as the bottleneck for
Diablo Electronics? 2. What is the most
profitable product to manufacture? 3. What is
the best product mix given bottleneck based
approach?
59
Diablo Electronics Flowchart for Products A, B,
C, D
Purchased Part

60
Identifying the Bottleneck at Diablo Electronics
Example 7.2
Bottleneck
61
Determining the Product Mix at Diablo Electronics
Example 7.3
Decision rule 1 Traditional Method - Select
the best product mix according to the highest
overall profit margin of each product. Step 1
Calculate the profit margin per unit of each
product
A
Price 75.00
Raw materials parts -10.00
Labor -15.00

Profit margin 50.00
B
72.00
-5.00
-9.00

58.00
C
45.00
-5.00
-6.00

34.00
D
38.00
-10.00
-9.00

19.00

• When ordering from highest to lowest, the profit
  margin per unit order of these products is
  B,A,C,D

62
Step 2 Allocate resources V,W, X, Y, and Z to
the products in the order decided in step 1.
Satisfy each demand until the bottleneck resource
(workstation X) is encountered. Subtract minutes
away from 2,400 minutes available for each week
at each stage.
Traditional Method Product Mix at Diablo
Electronics
The best product mix according to this
traditional approach is then 60 A, 80 B, 40 C,
and 100 D.
63
Traditional Method Profits
Step 3 Compute profitability for the product mix.
Revenue (60x75) (80 x 72) (40 x 45) (100
x 38) 15,860 Materials (60x10) (80 x
5) (40 x 5) (100 x 10) 2,200 Labor
(5 workers) x (8 hours/day) x (5 days/wk) x
(18/hr) 3,600 Overhead 8,500 Profit
1,560
Notice that in the absence of overtime, the labor
cost is fixed at 3,600 per week regardless of
the product mix selected. Manufacturing the
product mix of 60 A, 80 B, 40 C, and 100 D will
yield a profit of 1,560 per week.
64
Bottleneck-based Approach at Diablo Electronics

• Decision rule 2 Bottleneck-based approach -
  The solution can be improved by better using the
  bottleneck resource. Calculate profit margin per
  minute at the bottleneck (BN).
• Step 1 Calculate profit margin/minute at
  bottleneck
• A B
  C D
• Profit Margin 50.00 58.00
  34.00 19.00
• Time at X 10 min. 20 min. 5 min.
  0 min.
• Profit margin/ minute 5.00
  2.90 6.80 Not defined
• Allocate resources in order D,C,A,B, which
  happens to be the reverse under the traditional
  method. New profitability is computed with new
  production quantities as follows 60 A, 70 B, 80
  C, 100 D.

65
Step 2 Allocate resources V,W, X, Y, and Z to
the products in the order decided in step 1.
Satisfy each demand until the bottleneck resource
(workstation X) is encountered. Subtract minutes
away from 2,400 minutes available for each week
at each stage.
Bottleneck-based Product Mix at Diablo Electronics
The best product mix according to this
bottleneck-based approach is then 60 A, 70 B, 80
C, and 100 D.
66
Bottleneck Scheduling Profits
Step 3 Compute profitability for the product mix.
Revenue (60x75) (70 x 72) (80 x 45) (100
x 38) 16,940 Materials (60x10) (70 x
5) (80 x 5) (100 x 10) 2,350 Labor
(5 workers) x (8 hours/day) x (5 days/wk) x
(18/hr) 3,600 Overhead 8,500 Profit
2,490
Manufacturing the product mix of 60 A, 70 B, 80
C, and 100 D will yield a profit of 2,490 per
week.
67
Long-Term Capacity Planning
Constraint Management

• Short-Term Capacity Planning
• Theory of Constraints
• Identification and management of bottlenecks
• Product Mix Decisions using bottlenecks

• Long-term Capacity Planning
• Economies and Diseconomies of Scale
• Capacity Timing and Sizing Strategies
• Systematic Approach to Capacity Decisions

68
Long-Term Capacity Planning

• Deals with investment in new facilities and
  equipment.
• Plans cover a minimum of two years into the
  future.
• Economies of scale are sought in order to reduce
  costs through
• Lower fixed costs per unit
• Quantity discounts in purchasing materials
• Reduced construction costs
• Process advantages

69
Economies of Scale

• Economies of scale occur when the average unit
  cost of a service or good can be reduced by
  increasing its output rate.
• Diseconomies of scale occur when the average cost
  per unit increases as the facilitys size
  increases

70
Capacity Timing and Sizing Strategies

1. Sizing Capacity Cushions
2. Timing and Sizing Expansions
3. Linking Process Capacity and other operating
   decisions.

71
Capacity Cushions

• A capacity cushion is the amount reserve capacity
  a firm has available.
• Capacity Cushion 100 - Utilization Rate ()
• How much capacity cushion depends on
• The uncertainty and/or variability of demand
• The cost of lost business
• The cost of idle capacity

72
Capacity ExpansionExpansionist Strategy
Staying ahead of demand
73
Capacity ExpansionWait-and-See Strategy
Chasing demand
74
Linking Process Capacity and Other Decisions

• Competitive Priorities
• Quality
• Process Design
• Aggregate Planning

75
A Systematic Approach To Long-Term Capacity
Decisions

1. Estimate future capacity requirements.
2. Identify gaps by comparing requirements with
   available capacity.
3. Develop alternative plans for filling the gaps.
4. Evaluate each alternative and make a final choice.

76
Estimating Capacity Requirements

• Capacity Requirement is determined over some
  future period based on demand and desired
  capacity cushion.
• Planning Horizon is a set of consecutive future
  time periods for planning purposes.

77
Output Measures for Estimating Capacity
Requirements

• Output Measures are the simplest way to express
  capacity.
• Products produced or customers served per unit of
  time
• Example Current capacity is 50 per day and
  demand is expected to double in five years.
  Management uses a capacity cushion of 20.
• Capacity (M) in 5 years should be
• M 100/(1 - 0.2) 125 customers

78
Input Measures for Estimating Capacity
Requirements

• Input Measures are typically based on resource
  availability.
• Availability of workers, machines, workstations,
  seats, etc.

Capacity Requirement
D demand forecast for the year p processing
time N total number of hours per year during
which the process operates C desired capacity
cushion, expressed as a percentage
79
Identifying Gaps and Developing Alternatives

• A Capacity Gap is any difference, positive or
  negative, between forecast demand and current
  capacity.
• Alternatives can be anything from doing nothing
  (Base Case), short-term measured, long-term
  expansion, or a combination.
• Evaluation of each alternative is important.

80
Grandmothers Chicken RestaurantExample 7.5

• Grandmothers Chicken Restaurant expects to serve
  a total of 80,000 meals this year. Although the
  kitchen is operating at 100 percent capacity, the
  dining room can handle a total of 105,000 diners
  per year. Forecasted demand for the next five
  years is 90,000 meals for next year, followed by
  a 10,000-meal increase in each of the succeeding
  years.
• One alternative is to expand both the kitchen and
  the dining room now, bringing their capacities up
  to 130,000 meals per year. The initial investment
  would be 200,000, made at the end of this year
  (year 0). The average meal is priced at 10, and
  the before-tax profit margin is 20 percent. The
  20 percent figure was arrived at by determining
  that, for each 10 meal, 6 covers variable costs
  and 2 goes toward fixed costs (other than
  depreciation). The remaining 2 goes to pretax
  profit.
• What are the pretax cash flows from this project
  for the next five years compared to those of the
  base case of doing nothing?

81
Grandmothers Chicken RestaurantExample 7.5 -
Solution

• The base case of doing nothing results in losing
  all potential sales beyond 80,000 meals. With the
  new capacity, the cash flow would equal the extra
  meals served by having a 130,000-meal capacity,
  multiplied by a profit of 2 per meal.
• In year 0, the only cash flow is 200,000 for
  the initial investment.
• In year 1, the 90,000-meal demand will be
  completely satisfied by the expanded capacity, so
  the incremental cash flow is
• (90,000 80,000)(2) 20,000.

82
Grandmothers Chicken RestaurantExample 7.5 -
Solution

• If the new capacity were smaller than the
  expected demand in any year, we would subtract
  the base case capacity from the new capacity
  (rather than the demand).
• The owner should account for the time value of
  money, applying such techniques as the net
  present value or internal rate of return methods.

83
Grandmothers Chicken RestaurantExample 7.5 -
NVP Calculation
The NPV of this project at a discount rate of 10
is calculated as shown below, and equals
13,051.75
NPV -200,000 (20,000/1.1) 40,000/(1.1)2
60,000/(1.1)3 80,000/(1.1)4
100,000/(1.1)5 -200,000
18,181.82 33,057.85 45,078.89 54,641.07
62,092.13 13,051.75
84
Evaluating Alternatives

• Qualitative Concerns
• The fit between alternatives and strategy
• Demand uncertainty
• Reactions of the competition
• Changes in technology
• Quantitative Concerns
• Cash flows
• The difference between the flows of funds into
  and out of an organization over time, including
  revenues, costs, and changes in assets and
  liabilities.

85
Tools for Capacity Planning

• Waiting Line Models
• Supplement C
• Simulation
• Supplement B
• Decision Trees
• Supplement A