- Session 02 -

Reading 2.1: “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. Process Choice
II. Vertical Integration
III. Resource Flexibility
IV. Customer Involvement
V. 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. Project
2. Job Shop
3. Batch Flow
4. Line Flow
5. Continuous Flow

The nature of these processes are discussed below and summarized in the manufacturing
product-process 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 shop’s 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.

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.
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-or-buy 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 in-house 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 ever-widening range of choices, from operations utilizing very little
automation to those requiring task-specific 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.