PROCESS MANAGEMENT

Companies begin the process of organizing operations by setting competitive priorities. That is they must determine which of the following eight priorities are to be emphasized as competitive advantages: 1. Low-cost operations 2. High performance design 3. Consistent quality 4. Fast delivery time 5. On-time delivery 6. Development speed 7. Product customization 8. Volume flexibility Although all eight are obviously desirable, it is usually not possible for an operation to perform significantly better than the competition in more than one or two. The five key decisions in process management are: I. II. III. IV. V. Process Choice Vertical Integration Resource Flexibility Customer Involvement Capital Intensity

These decisions are critical to the success of any organization and must be based on determining the best was to support the competitive priorities of the enterprise. PROCESS CHOICE The first choice typically faced in process management is that of process choice. Manufacturing and service operations can be characterized as one of the following: 1. 2. 3. 4. 5. Project Job Shop Batch Flow Line Flow Continuous Flow

The nature of these processes are discussed below and summarized in the manufacturing productprocess matrix on page 8. Project Process. Examples of a project process are building a shopping center, planning a major event, running a political campaign, putting together a comprehensive training program, constructing a new hospital, doing management consulting work, or developing a new technology or product. A project process is characterized by a high degree of job customization, the large scope of each project, and the release of substantial resources, once a project is completed. A project process lies at the high-customization, low-volume end of the process-choice continuum. The sequence of operations and the process involved in each one are unique to each project, creating one-of-a-kind products or services made specifically to customer order. Although some

projects may look similar, each is unique. Firms with project processes sell themselves on the basis of their capabilities rather than on specific products or services. Projects tend to be complex, take a long time, and be large. Many interrelated tasks must be completed, requiring close coordination. Resources needed for a project are assembled and then released for further use after the project is finished. Projects typically make heavy use of certain skills and resources at particular stages and then have little use for them the rest of the time. A project process is based on a flexible flow strategy, with work flows redefined with each new project. Job Shop Process. Next in the continuum of process choices is the job shop process. Examples are custom metal processing shop, hospital emergency rooms, custom plastic injection molding shop, or making customized cabinets. A job shop process creates the flexibility needed to produce a variety of products or services in significant quantities. Customization is relatively high and volume for any one product or service is low. However, volumes aren't as low as for a project process, which by definition doesn't produce in quantity. The work force and equipment are flexible and handle various tasks. As with a project process, companies choosing a job process often bid for work. Typically, they make products to order and don't produce them ahead of time. The specific needs of the next customer are unknown, and the timing of repeat orders from the same customer is unpredictable. Each new order is handled as a single unit--as a job. A job shop process primarily involves the use flexible flow strategy, with resources organized around the process. Most jobs have a different sequence of processing steps. Batch Flow Process. Examples of a batch flow process are scheduling air travel, manufacturing garments, furniture manufacturing, making components that feed an assembly line, processing mortgage loans, and manufacturing heavy equipment. A batch flow process differs from the job process with respect to volume, variety, and quantity. The primary difference is that volumes are higher because the same or similar products or services are provided repeatedly. Another difference is that a narrower range of products or services is provided. Variety is achieved more through an assemble-to-order strategy than the job shops make-to-order strategy. Some of the components for the final product or service may be produced in advance. A third difference is that production lots or customer groups are handled larger quantities (or batches) than they are with job shop processes. A batch of one product or customer group is processed, and then production is switched to the next one. Eventually, the first product or service is produced again Batch flow processes have average or moderate volumes, but variety is still too great to warrant dedicating substantial resources to each product or service. The flow pattern is jumbled, with no standard sequence of operations throughout the facility. However, more dominant paths emerge than at a job shop and some segments of the process have a linear flow. Line Flow Process. Products created by a line process include automobiles, appliances, personal computers, and toys. Services based on a line process are fast-food restaurants and cafeterias. A line flow process lies between the batch and continuous processes, volumes are high, and products or services are standardized, which allows resources to be organized around a product or service. Materials move linearly from one operation to the next according to a fixed sequence, with little inventory held between operations. Each operation performs the same process over and over with little variability in the products or services provided. Production orders aren't directly linked to customer orders, as is the case with project and job processes. Manufacturers with line flow processes often follow a make-to-stock strategy, with standard products held in inventory so that

they are ready when a customer places an order. This use of a line flow process is sometimes called mass production. However the assemble-to-order strategy and mass customization are other possibilities with line flow processes. Product variety is possible by careful control of the addition of standard options to the main product or service. The pacing of production may be either machine-paced or worker-paced. Continuous Flow Process. Examples are petroleum refineries, chemical plants, and plants making beer, steel, and processed food items. Firms with such facilities are also referred to as the process industry. An electric generation plant represents one of the few continuous processes found in the service sector. A continuous process is the extreme end of high-volume, standardized production with rigid line flows and tightly linked process segments. Its name derives from how materials move through the process. Usually one primary material, such as a liquid, gas, wood fibers, or powder, moves without stopping through the facility. The process often is capital intensive and operated round the clock to maximize utilization and to avoid expensive shutdowns are start-ups. VERTICAL INTEGRATION All businesses buy at least some inputs to their processes, such as professional services, raw materials, or manufactured parts, from other producers. Management decides the level of vertical integration by looking at all the activities performed between acquisition of raw materials or outside services and delivery of finished products or services. The more processes in the supply chain that the organization performs itself, the more vertically integrated it is. If it doesn't perform some processes itself, it must rely on outsourcing, or paying suppliers and distributors to perform those processes and provide needed services and materials. When managers opt for more vertical integration, there is by definition less outsourcing. These decisions are sometimes called make-orbuy decisions, with a make decision meaning more integration and a buy decision meaning more outsourcing. After deciding what to outsource and what to do in-house, management must find ways to coordinate and integrate the various processes and suppliers. Vertical integration can be in two directions. Backward integration represents movement upstream toward the sources of raw materials and parts, such as a major grocery chain having its own plants to produce house brands of ice cream, frozen pizza dough, and peanut butter. Forward integration means that the firm acquires more channels of distribution, such as its own distribution centers (warehouses) and retail stores. It can also mean that the firm goes even further, acquiring its industrial customers. The advantages of more vertical integration are disadvantages of more outsourcing. Similarly, the advantages of more outsourcing are disadvantages of more vertical integration. Managers must study the options carefully before making choices Advantages of Vertical Integration. More vertical integration can sometimes improve market share and allow a firm to enter foreign markets more easily than it could otherwise. A firm can also achieve savings if it has the skills, volume, and resources to perform the processes at lower cost and produce higher quality goods and services than outsiders can. Doing the work in-house may mean better quality and more timely delivery--and taking better advantage of the firm's human resources, equipment, and space. Extensive vertical integration is generally attractive when input

volumes are high because high volumes allow task specialization and greater efficiency. Stability of process technology also favors vertical integration. It is also attractive if the firm has the relevant skills and views the processes into which it is integrating as particularly important to its future success. Management must identify, cultivate, and exploit its core competencies to prevail in global competition. Core competencies are the collective learning of the firm, especially how to coordinate diverse production processes and integrate multiple technologies. They define the firm and provide its reason for existence. Management must look upstream toward its suppliers and downstream toward its customers, and bring in-house those processes that give it the right core competencies--those that allow the firm to organize work and deliver value better than its competitors can. Management should also realize that if the firm outsources a process that's crucial to its mission, it may lose control over that area of its business and may even lose the ability to bring the work inhouse later. Advantages of Outsourcing. Outsourcing offers several advantages to firms. It is particularly attractive to those that have low volumes. For example, most small restaurants need only small volumes of hard-boiled eggs for their salad bars. Instead of preparing their own, most turn to suppliers such as Atlantic Foods where six employees can peel 10,000 eggs in one shift. Obviously, a small restaurant can't match the efficiency of Atlantic Foods in boiling and peeling eggs. Rapidly changing process technology and an emphasis on product customization also favors outsourcing. Outsourcing can also provide better quality and cost savings. RESOURCE FLEXIBILITY The choices that management makes concerning competitive priorities determine the degree of flexibility required of a company's resources--its employees, facilities, and equipment. For example, when new products and services call for short life cycles or high customization, employees need to perform a broad range of duties and equipment must be general purpose. This type of flexibility is product customization. A second type of flexibility is volume flexibility and refers to the ability to operate a facility profitably over a wide range of demand volumes. A good example, is a fast food restaurant that is open 24 hours a day. Work Force. Operations managers must decide whether to have a flexible work force. Members of a flexible work force are capable of doing many tasks, either at their own workstations or as they move from one workstation to another. However, such flexibility often comes at a cost, requiring greater skills and thus more training and education. Nevertheless, benefits can be large: Worker flexibility can be one of the best ways to achieve reliable customer service and alleviate capacity bottlenecks. Resource flexibility is particularly crucial with a flexible flow strategy, helping to absorb the feast-or-famine workloads in individual operations that are caused by low-volume production, jumbled routings, and fluid scheduling. The type of work force required also depends on the need for volume flexibility. When conditions allow for a smooth, steady rate of output, the likely choice is a permanent work force that expects regular full-time employment. If the process is subject to hourly, daily, or seasonal peaks and valleys in demand, the use of part-time or temporary employees to supplement a smaller core of full-time employees may be the best solution. However, this approach may not be practical if knowledge and skill requirements are too high for a temporary worker to grasp quickly.

Equipment. When a firm's product or service has a short life cycle and a high degree of customization, low production volumes mean that a firm should select flexible, inexpensive, general-purpose equipment. When volumes are low, the low fixed cost more than offsets the higher variable unit cost associated with this type of equipment. Conversely, specialized, higher-cost equipment is the best choice when volumes are high and customization is low. Its advantage is low variable unit cost. This efficiency is possible when customization is low because the equipment can be designed for a narrow range of products or tasks. Its disadvantage is high equipment investment and thus high fixed costs. When annual volume produced is high enough, spreading these fixed costs over more units produced, the advantage of low variable costs more than compensates for the high fixed costs. CUSTOMER INVOLVEMENT The fourth significant process decision is the extent to which customers interact with the process. The amount of customer involvement may range from self-service to customization of product to deciding the time and place that the service is to be provided. Self-Service. Self-service is the process decision of many retailers, particularly when price is a competitive priority. To save money, some customers prefer to do part of the process formerly performed by the manufacturer or dealer. Manufacturers of goods such as toys, bicycles, and furniture may also prefer to let the customer perform the final assembly because production, shipping, and inventory costs frequently are lower, as are losses from damage. The firms pass the savings on to customers as lower prices. Product Selection. A business that competes on customization frequently allows customers to come up with their own product specifications or even become involved in designing the product. A good example of customer involvement is in custom-designed and -built homes: The customer is heavily involved in the design process and inspects the work in process at various times. Time and Location. When services can't be provided in the customer's absence, customers may determine the time and location that the service is to be provided. If the service is delivered to the customer, client, or patient by appointment, decisions involving the location becomes part of process design. Will the customer be served only on the supplier's premises, will the supplier's employees go to the customer's premises, or will the service be provided at a third location? Although certified public accountants frequently work on their clients' premises, both the time and the place are likely to be known well in advance. CAPITAL INTENSITY For either the design of a new process or the redesign of an existing one, an operations manager must determine the amount of capital intensity required. 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. As the capabilities of technology increase and its costs decrease, managers face an everwidening range of choices, from operations utilizing very little automation to those requiring taskspecific equipment and very little human intervention. Automation is a system, process, or piece of

equipment that is self-acting and self-regulating. Although automation is often thought to be necessary to gain competitive advantage, it has both advantages and disadvantages. Thus the automation decision requires careful examination. One advantage of automation is that adding capital intensity can significantly increase productivity and improve quality. However, the disadvantage of capital intensity can be the prohibitive investment cost for low-volume operations. Generally, capital-intensive operations must have high utilization to be justifiable. Also, automation doesn't always align with a company's competitive priorities. If a firm offers a unique product or high-quality service, competitive priorities may indicate the need for skilled servers, hand labor, and individual attention rather than new technology. Fixed Automation. Manufacturers use two types of automation: fixed and flexible (or programmable). Particularly appropriate for line flow and continuous flow process choices, fixed automation produces one type of part or product in a fixed sequence of simple operations. Until the mid 1980s most U.S. automobile plants were dominated by fixed automation--and some still are. Chemical processing plants and oil refineries also utilize this type of automation. Operations managers favor fixed automation when demand volumes are high, product designs are stable, and product life cycles are long. These conditions compensate for the process's two primary drawbacks: large initial investment cost and relative inflexibility. The investment cost is particularly high when a single, complex machine (called a transfer machine) must be capable of handling many operations. Because fixed automation is designed around a particular product, changing equipment to accommodate new products is difficult and costly. However, fixed automation maximizes efficiency and yields the lowest variable cost per unit. Flexible Automation. Flexible (or programmable) automation can be changed easily to handle various products. The ability to reprogram machines is useful with both flexible flow and line flow strategies. A machine that makes a variety of products in small batches, in the case of a flexible flow, can be programmed to alternate between the products. When a machine has been dedicated to a particular product or family of products, as in the case of a line flow, and the product is at the end of its life cycle, the machine can simply be reprogrammed with a new sequence of operations for a new product. SERVICE OPERATION RELATIONSHIPS The five process types described earlier provide meaningful insights into both manufacturing and service operations. Additional insights regarding service operations, however, may be gained by focusing on two dimensions: 1. amount of customer involvement requiring customized service, and 2. the degree of capital intensity The service-process matrix on page 9 shows the relationships of these two dimensions to four service processes: professional service, service shop, mass service, and service factory.

Professional Service. The professional service process demands high customization. Examples of such services include management consultants, lawyers, physicians, and corporate bankers. Professionals interact frequently with customers, often one-to-one, to understand and diagnose each customer's individual needs. They must be able to relate well with the public, not just have technical skills. Exercising judgment as they provide new or unique services and solutions is commonplace. Because of the infinite variability of problems confronted, the mental and physical requirements of these services are difficult to automate. Capital intensity is low, which means high labor intensity; the high skill levels required are very expensive. The professionals have a great deal of operating discretion and relatively loose superior-subordinate relationships. Service Shop. The work force and customer also interact frequently in the service shop. Considerable attention is given to a customer's unique requirements and preferences. Hospitals, repair shops, and gourmet restaurants are examples of such services. In contrast to professional service, capital intensity in the service shop tends to be high and thus labor intensity low. Equipment often is crucial for handling diverse and specialized service requirements. Because customization of services continues to be high with this process, work-force skill levels also must be high, compared to a mass service or service factory process. Workers must be able to handle new or unique services on demand. When they are in close contact with the customer, they also must have the training and people skills to deal effectively with customers. Mass Service. Mass service processes are quite different from the first two processes because customized customer involvement is low. Examples of such services include wholesalers, fullservice retailers, spectator sports, and large classes at schools. Service specifications are tightly controlled. Standardizing services increases volumes and process repeatability. Line flows are preferred, although the customer often moves through the facility. Capital intensity is low because automation is difficult to achieve, so labor intensity is high. Skill levels may vary but often are low to moderate because the need for customized service is less. Service Factory. The service factory involves the least customized customer involvement. Examples of such services include public transportation; movie theaters; the back-room operations in banking, insurance, and postal service facilities; dry cleaners; airport baggage handling; and catalogue stores. The little contact that occurs between workers and customers is for standardized services. If the customer is involved in the process, it is in doing self-service

The Manufacturing Product-Process Matrix

PRODUCT MIX PROCESS PATTERN Very jumbled flow, process segments loosely linked One of a kind Low volume custom products High volume standard Very high volume products commodity products MANAGEMENT CHALLENGES

PROJECT

Scheduling, material handling, shifting bottlenecks

Jumbled flow with dominant line

JOB SHOP

BATCH FLOW Process built around a pacing line LINE FLOW

CONTINUOUS FLOW

Worker motivation, maintaining capacity balance and flexibility

Highly automated, continuous process flow with tightly linked segments

Capital expenses for big chunk capacity, technological change, vertical integration

MANAGEMENT CHALLENGES

Bidding, delivery, product customization

Product differentiation, volume flexibility

Price

The Service-Process Matrix

CUSTOMIZATION AND CUSTOMER INVOLVEMENT CAPITAL INTENSITY LOW HIGH MANAGEMENT CHALLENGES

HIGH PROFESSIONAL SERVICE SERVICE SHOP

Fighting cost increases, maintaining quality, reacting to customer interventions in process, managing employee advancement, managing flat hierarchy with loose subordinate-superior relationships, binding employees to firm

LOW

MASS SERVICE

SERVICE FACTORY

Marketing, making service warm, attention to physical surroundings, managing rigid hierarchy with need for standard operating procedures

MANAGEMENT CHALLENGES

Hiring, training, methods development and control, employee welfare, scheduling workforces, start-up of new units 9

Capital decisions, technological advances, scheduling delivery of service, leveling demand

PRODUCT FLOWS BY PROCESS TYPE PRODUCT A PRODUCT B PRODUCT C JOB SHOP

BATCH FLOW PROCESS

10

PRODUCT FLOWS BY PROCESS TYPE PRODUCT A PRODUCT B PRODUCT C LINE FLOW PROCESS

CONTINUOUS FLOW PROCESS

11