Process Strategy

Chapter 4

© 2007 Pearson Education

 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 Supply Chain Strategy
Lean Systems Location
Inventory Management
Forecasting
Sales and Operations Planning
Resource Planning
Scheduling

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 Duke Power

¾ Duke Power serves nearly 2 million customers in

North and South Carolina.
¾ In 1995, when deregulation was looming, they
realized that their processes needed to do a much
better job of serving customers, but the existing
structure was getting in the way.
¾ They identified the five core processes that comprised
the essential work, and assigned each an owner,
reporting to the head of Customer Operations.
¾ Their customer service is now ranked first or second
in the nation among electric utilities, their electric
rates are among the lowest in the nation, and in 2004
they won the EPA’s Clean Air Excellence Award
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 Process Strategy

¾ Process strategy is the pattern of decisions made

in managing processes so that they will achieve their
competitive priorities.
¾ A process involves the use of an organization’s
resources to provide something of value.
¾ Major process decisions include:
¾ Process Structure
¾ Customer Involvement
¾ Resource Flexibility
¾ Capital Intensity

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 Major Process Decisions

¾ Process Structure determines how processes are

designed relative to the kinds of resources needed,
how resources are partitioned between them, and
their key characteristics.
¾ Customer Involvement refers to the ways in which
customers become part of the process and the
extent of their participation.
¾ Resource flexibility is the ease with which
employees and equipment can handle a wide
variety of products, output levels, duties, and
functions.
¾ Capital intensity is the mix of equipment and
human skills in a process.
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 Major Decisions for
Effective Process Design

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 Process Structures in Services
¾ A good process strategy for a service process depends first and
foremost on the type and amount of customer contact.
¾ Customer contact is the extent to which the customer is present, is
actively involved, and receives personal attention during the process.
High Contact Dimension Low Contact

Present
Present Physical
Physical presence
presence Absent
Absent

People
People What
What is
is processed
processed Possessions
Possessions

Active,
Active, visible
visible Contact
Contact intensity
intensity Passive,
Passive, out
out of
of sight
sight

Personal
Personal Personal
Personal attention
attention Impersonal
Impersonal

Face-to-face
Face-to-face Method
Method of
of delivery
delivery Regular
Regular mail
mail
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© 2007 Pearson Education
 Customer Contact
and Process Elements
¾ Active Contact: The customer is very much part of
the creation of the service and affects the service
process itself.
¾ Passive Contact: The customer is not involved in
tailoring the process to meet special needs or in how
the process is performed.
¾Process Complexity: The number and intricacy of
the steps required to perform the process.
¾Process Divergence: The extent to which the
process is highly customized with considerable latitude
as to how it is performed.
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 Customer-Contact Matrix for
Service Processes
Less Customer Contact and Customization
Less Complexity, Less Divergence, More Line Flows

Service Package
(1) (2) (3)
Process High interaction with Some interaction with Low interaction with
customers, highly customers, standard customers, standardized
Characteristics customized service services with some options services

(1)
Flexible flows,
complex work with Front office
many exceptions

(2)
Flexible flows with
some dominant
paths, moderate Hybrid office
job complexity with
some exceptions

(3)
Line flows, routine Back office
work easily
understood by
employees
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© 2007 Pearson Education
 Process Flows

¾ Flexible flow: The customers, materials, or

information move in diverse ways, with the
path of one customer or job often
crisscrossing the path that the next one will
take.

¾ Line Flow: The customers, materials or

information move linearly from one operation
to the next, according to a fixed sequence.

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 Service
Process Structuring

¾ Front office: A process with high customer

contact where the service provider interacts
directly with the internal or external
customer.
¾ Hybrid office: A process with moderate
levels of customer contact and standard
services with some options available.
¾ Back office: A process with low customer
contact and little service customization.

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 Service Process Structures in the
Financial Services Industry
Front Office Hybrid Office Back Office
Sale of financial Creation of quarterly Production of
services performance report monthly client fund
balance reports
• Research customer • Data obtained
finances electronically • Data obtained
• Work with customer to • Report calculated using electronically
understand customer standardized process • Report run using
needs • Report reviewed using standardized process
• Make customized standardized diagnostic • Results checked for
presentation to systems “reasonableness”
customer addressing • Manager provides using well-established
specific customer needs written analysis and policies
• Involve specialized staff recommendations in • Hard copies and
offering variety of response to individual electronic files
services employee performance forwarded to analysts
• Continuing relationship • Manager meets with • Process repeated
with customer, reaction employee to discuss monthly with little
to changing customer performance variation
needs

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© 2007 Pearson Education
 Process Structuring
in Manufacturing
Process choice: A way of structuring the process by
organizing resources around the process or
organizing them around the products.

¾Job Process: A process with the flexibility needed

to produce a wide variety of products in significant
quantities, with considerable complexity and
divergence in the steps performed.

¾Batch process: A process that differs from the job

process with respect to volume, variety and quantity.

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 Process Structuring
in Manufacturing
¾ Line process: A process that lies between
the batch and continuous processes on the
continuum; volumes are high and products
are standardized, which allows resources to
be organized around particular products.
¾ Continuous flow: The extreme end of high-
volume, standardized production and rigid
line flows, with production not starting and
stopping for long time intervals.

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 Product-Process Matrix for Processes
Less Customization and Higher Volume

Product Design
(1) (2) (3) (4)
Low-
Low-volume Multiple products with low Few major High volume, high
products, made to moderate volume products standardization,
Less Complexity, Less Divergence, More Line Flows

Process to customer higher Continuous Flow

Characteristics order volume

(1)
Complex and highly
customized process,
Job
unique sequence of process
tasks
Small batch
(2) process es
s
Disconnected line r oc es
P
ch
flows, moderately B at Large batch
complex work
process

(3) Line
Connected line, , process
highly repetitive work

(4)
Continuous
Continuous flows process

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© 2007 Pearson Education
 Production and
Inventory Strategies
¾ Make-to-order strategy: A strategy used by
manufactures that make products to customer
specifications in low volume.
¾ 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.
¾ Make-to-stock strategy: A strategy that involves
holding items in stock for immediate delivery,
thereby minimizing customer delivery times.
¾ Mass production: A term sometimes used in the
popular press for a line process that uses the make-
to-stock strategy.
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 Automobile
Assembly Process

Midsiz
ed i ds i zed
M er
6-cylin yl in d
der 6-c

A H F S
o m p act Co m p
ac
C
lin d er 4-cylin t
4- c y der

A: Front-end body-to-chassis assembly

H: Hood attachment
F: Fluid filling
S: Start-up and testing

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 The Big Picture King Soopers Bakery

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 Links of Competitive Priorities with
Manufacturing Strategy

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 Customer Involvement
Good or Bad?
¾ Improved Competitive Capabilities: More customer
involvement can mean better quality, faster delivery, greater
flexibility, and even lower cost.
¾ 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.
¾ Self-service is the choice of many retailers.
¾ However customer involvement can be disruptive and make
the process less efficient.
¾ Greater interpersonal skills are required.
¾ Quality measurement becomes more difficult.
¾ Emerging Technologies: Companies can now engage in an
active dialogue with customers and make them partners in
creating value.
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 Resource Flexibility
¾ 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.
¾ Worker flexibility can be one of the best ways to achieve
reliable customer service and alleviate capacity bottlenecks.
¾ This comes at a cost, requiring greater skills and thus more
training and education.
¾ Flexible equipment: Low volumes mean that
process designers should select flexible, general-
purpose equipment.

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 Relationship between Process
Costs and Product Volume

Process 2:
Special-purpose
Total cost (dollars)

equipment

Break-even
quantity

Process 1:
F2 General-purpose
equipment
F1

Units per year (Q)

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 Application 4.1

Fm – Fb $10,000 – $400,000 = 13,000 frames

Q = =
cb – cm $20 – $50

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 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.
¾Automation is a system, process, or piece of
equipment that is self-acting and self-regulating.
¾Fixed automation is a manufacturing process that
produces one type of part or product in a fixed
sequence of simple operations.
¾Flexible (or programmable) automation is a
manufacturing process that can be changed easily to
handle various products.
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 Flexible Automation
at R.R. Donnelley

¾ R.R. Donnelley is the largest commercial printer in

the United States.
¾ Uses a make-to-order strategy
¾ Orders often were as high as 100,000 books.
¾ High “make-ready” times for new orders and time-
consuming change over of the presses was costly.
¾ Flexible automation allowed them to reduce this
time to 12 minutes.
¾ Throughput increased 20% without having to purchase any
additional presses.
¾ Productivity also increased 20%.
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 Economies of Scope

¾ In certain types of manufacturing, such as machining

and assembly, programmable automation breaks the
inverse relationship between resource flexibility and
capital intensity.
¾ Economies of scope are economies that reflect the
ability to produce multiple products more cheaply in
combination than separately.
¾ With economies of scope, the often conflicting
competitive priorities of customization and low price
become more compatible.
¾ Taking advantage of economies of scope requires
that a family of parts or products have enough
collective volume to fully utilize equipment.
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 Decision Patterns for
Service Processes
Major process decisions

High customer-contact
process
• More complexity, more Front office
divergence, more flexible flows
• More customer involvement
• More resource flexibility
• Capital intensity varies with
volume.

Hybrid office

Low customer-contact
process
• Less complexity, less
divergence, more line flows Back office
• Less customer involvement
• Less resource flexibility
• Capital intensity varies with
volume..
Low High
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© 2007 Pearson Education
 Decision Patterns for
Manufacturing Processes
Major process decisions

Low-Volume,
make-to-order process
• More complexity, more Job
divergence, more flexible process
flows
• More customer involvement Small batch
• More resource flexibility process s es
• Less capital intensity r oc es
P
ch
B at Large batch
process

High-Volume, Line
make-to-stock process process
• Less complexity, less
divergence, more line flows
• Less customer involvement Continuous
• Less resource flexibility process
• More capital intensity
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© 2007 Pearson Education
 Focus by
Process Segment
¾ A facility’s process often can neither be
characterized nor actually designed for one set of
competitive priorities and one process choice.
¾ At a services facility, some parts of the process might
seem like a front office and other parts like a back office.
¾ Plants within plants (PWPs) are different
operations within a facility with individualized
competitive priorities, processes, and workforces
under the same roof.
¾ Focused factories are the result of a firm’s splitting
large plants that produce all the company’s products
into several specialized smaller plants.
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 Strategies for Change

¾ Process Reengineering is a fundamental

rethinking and radical redesign of processes
to improve performance dramatically in
terms of cost, quality, service, and speed.

¾ Process improvement is the systematic

study of the activities and flows of each
process to improve it.

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