Process View & Strategy Based on the Book: Managing Business Process Flow.

2 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Processes Product or services must meet customer expectations; physical ( comfort, safety, convenience), psychological (relaxation, peace of mind), social and spiritual, and they must do so within a budget. Business processes provide products and services: new car financing, producing an engine, making a hamburger, delivering a book from Amazon to a customer, teaching a course. How do organizations categorize customer expectations? How they develop processes capabilities to fulfill customer expectations? What Metrics are used to measure?

3 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Process view Process view: any organization or any part of an organization is Input  Process  Output Inputs: tangible or intangible items that flow into the process from the environment: natural or processed resources, parts and component, energy, data, customers, money, etc. Outputs are any tangible or intangible items that flow from the process back into the environment: products, energy, information, served customers, cash, etc.. Raw material  Manufacturing Process  Finished goods Data  Accounting Process  Financial Statements Accounts Receivable  Billing Process  Cash Unsatisfied customer demand  Transformation Process  Satisfied customer demand

4 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Five Elements of the Process View Outputs Goods Services Human & Capital Information structure Network of Activities and Buffers Inputs (natural or processed resources, parts and component, energy, data, customers, cash, etc.) Resources Process Management Flow units Flow Unit

5 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Flow Unit: The Item to be analyzed A flow unit may be a unit of input, such as customer order, or a unit of output such as finished product, or the value of input or output. ProcessFlow UnitInput-Output Transformation FromTo Order fulfillmentOrdersReceipt of an orderDelivery of product Outbound logisticsProductsEnd of productionDelivery to customer Supply cycleSuppliesIssuing a purchase orderReceipt of the supplies Customer serviceCustomersUnsatisfied customerSatisfied customer Product R&DProjectsRecognition of the needLaunching the project Cash cycleCashExpenditure (costs)Collection of revenue

6 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Product Attributes & Process Competencies Product Attribute (External)Process Competency (Internal) PriceCost Response timeFlow time VarietyFlexibility Quality Customers  Define product attributes. Operation Managers  Create process competencies to meet and exceed customer expectations.

7 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Product Attributes Product Price (cost for customer): purchase price service, maintenance, repair, insurance, and disposal costs. Total cost of ownership. Product Delivery-response time: total time before receiving the product. Is the product on shelves, in a distribution center, or somewhere along the production line. Also reliability in response time. Reliability in response time? Low standard deviation. Product Variety: the choices offered to the customer: At a lower level; options offered for a particular model, colors, styles. At a higher level; number of product lines and product families. Product Quality: the degree of excellence, how well the product works. Features (what it can do), Performance (how well it functions), Reliability, Serviceability (how quickly), Aesthetics, Conformance to expectations. Reliability in quality? Quality over time; consistent quality.

8 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Customer Value Proposition: a set of benefits that the firm offers to customers. Order Qualifiers: Characteristics that convince customers to consider the product. Order Winners: Characteristics that convince customers to buy the product. They differ among market segments. Customers purchase based on the value they derive from a product. It is the greatest amount a customer is willing to pay (the reservation price). If this value > price, the customer enjoys positive net value (consumer surplus). Customers will buy the products that offers highest consumer surplus. Zara's business is design/manufacture/distribution/retailing. Zara differentiates itself by timely fashion for the masses. CVP  timely yet limited variety at modest cost and quality. Customer Value Proposition

9 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Process Competencies Process cost: the total cost of producing and delivering outputs. Remove non-value adding activities and buffers. Process flow time: the total time to transform a flow unit from input into output. Effective layout and smooth material flow. Remove variability in arrival rate, processing rate, and quality. No starvation or blockage. No defect and re-work. Process flexibility: the ability to produce and deliver a variety of products at high and low production volume.  cross trained workers + general purpose equipment + short set-up time + delayed differentiation, Job-Shop layout or U-shaped layout + small batch size. Process quality: the ability to produce and deliver quality products. Effective design as well as production that conforms to design. Quality at source.

10 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Operations Management Operations management Structure the processes competencies in the direction of the customer value proposition. Develop measures to evaluate the effectiveness and efficiency of the processes. Apply methods and techniques to improve process performance. By measurement we find the relationship between controllable process competencies and desired product attributes, and will be able to set appropriate performance standards. Financial performance measures External performance measures Internal performance measures

11 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Financial Measures Absolute measures: revenues, costs, operating income, net income Net Present Value (NPV) = Relative measures: ROI, ROE ROA = Survival measure: cash flow They are lagging, aggregate, and result oriented than action oriented. Link financial measures with external measures which track customer satisfaction with output and internal measure that track operational effectiveness.

12 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy External measures External measures customer satisfaction/ dissatisfaction with output. Customer satisfaction: does the product meet and exceed customer expectations in the four dimensions. Customer dissatisfaction: number of warranty repairs, product recalls, field failures. Weakness: are aggregate (not on individual customers), result oriented (not action oriented), lagging (not leading). External measures must be linked to internal measures that track operational effectiveness and the process manager can control.

13 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Internal measures Process managers do not directly control financial measures and external measures. They need internal operational measures that are detailed, can be directly controlled, and are linked with financial and external measures. Internal performance can then become the predictor of customer satisfaction/dissatisfaction, and financial performance. Customers: on time flight. Internal goal: average arrival / departure delays not exceed 15 minutes. Customer: Answer the phone. Internal goal: answer in less than 30 second in 95% of times. Customer: More options models and options. Internal goal: 30 minutes set up time to switch from one product to another. Cross trained workers can do more than one task. Customer: Quality. Internal goal: Failure rate less than 1 in

14 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Competitive Product Space Competitive Product Space: A representation of the firm’s product portfolio in the four dimensional space: Q, C, Var., Res. One firm: low cost and standardized products Another firm: expensive and customized products. Low Variety B A Responsiveness =1/Flow Time High Low High

15 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Strategic Positioning Defines those positions that the firm wants to occupy in its competitive product space. The current position and direction. A firm must ensure that its competitors are not able to imitate its chosen position. An sculpture not a block. It is harder for competitors to imitate an array of interlocked activities. Price Efficiency = 1/Price Responsiveness B A LowHigh Low High

16 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Product Attributes – Process Competencies Shouldice Hospital in Canada, focus on hernia operations. Standardized repeatable surgical procedure, in an outpatient environment, very high quality at a low price. Do not accept patients with any risk factor (blood Pressure, allergic,..) or for any thing except hernia. Corolla: flow shop, decentralized assembly plants close to market, short flow time, low cost. Ferrari: job shop, only a single plant in Italy, longer flow time, high cost. McMaster-Carr: a materials, repair, and operations (MRO) product distributor, a process with high flexibility, high quality, short response time, but at a high price. Henry Ford

17 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy High Utilization Bright sunlight + a genetic predisposition  people in India vulnerable to cataracts. Millions unable to access or afford treatment go blind in their 50s. Aravind hospital started by treating paying patients and using the profits to offer free care to those who could not afford it. Still the service was not accessible to patients who could not afford transportation and required a relative to accompany them. Aravind added its own buses and a group of assistants who accompanied patients and worked remotely with doctors at the hospital to offer diagnosis and treatment. To keep costs low, Aravind ensures high utilization of its expensive resources - doctors and surgical equipment. Surgical equipment is used all day and doctors only focus on performing surgery with preoperative and postoperative care largely handled by nurses.

18 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy High Utilization The level of quality has consistently been high enough to attract a significant number of paying patients. Aravind, the winner of the 2008 Gates Prize for Global Health, served 2.5 million outpatients and performed 3 hundred thousands cataract surgeries in less than one year. Despite providing 2/3 of the outpatient visits and 3/4 of the surgeries as free service to the poor, Aravind generated healthy profits that it used to fund its growth. The cataract surgery at Aravind, the hernia surgery at Shouldice Hospital are example of implementing Ford Motor Production line in healthcare.

19 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Wal-Mart: Average Quality, Low Cost, Low Variety Operations Strategy –Short flow times –Low inventory Operations Structure –Cross docking –Electronic Data Interchange –Fast transportation system –Focused locations –Communication between retail stores Inventory turns at retail stores Wal-Mart: 9.2 times Target: 6.1 Sales per square foot Wal-Mart: $425/sqf Target: $273/sqf

20 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Focused Strategy, Focused Operations Focused Strategy: Committing to a limited, congruent set of objectives in terms of demand (product, market) and supply (input, technologies, and volumes). A focus process is not limited to a few products. Focused process: one whose products all fall within a small region of the 4 dimensional product space. Plant Within Plant(PWP): The business strategy is diverse. But the entire business is divided into several mini-plants each with focused processes. One PWP may focus on low cost, the other on quick response.

21 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Focus and the Efficient Frontier Cost Responsiveness World-class Emergency Room World-class (non-emergency) Hospital One general facility Efficient frontier Low High

22 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy What distinguishes an effective business process? Operational effectiveness: developing operations strategy (resources, processes, values, competencies) that support the strategic positioning (customer value proposition) better than the competitors. How does effective differ from efficient? Conventional Management Definition: Effectiveness; doing right things. Efficiency; doing thing right. Operations Management Definition: Cost Efficiency: achieving an output with minimal level of input and resources. Effective Process: supports execution of company’s strategy in the four dimensions of C/Q/T/V. Operational Effectiveness

23 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Strategic Positioning and Operational Effectiveness Responsiveness A B C Price High Low Firms located on the same ray share strategic priorities. World class firms are on the efficient frontier. Efficient frontier is the minimal curve covering all the current positions in an industry. Strategic positioning: the direction of the improvement from current position; the position on the EF the company wants to occupy. High Low Efficient operations frontier Firms not on the EF, are not on strict trade-off, they can make simultaneous improvement on more than one dimension. They do not need to trade-off. Firms on EF need to trade-off.

24 Ardavan Asef-Vaziri August, 2013Process View & Operations Strategy Trade-off: decreasing on one dimension to increase on the other dimension. World class firms also try to push the EF outward. As technology and management practices advances, the EF moves upward. But the impact is not the same in all industries. If I am forced to define Operations Management in one line  Create a Smooth Flow. If I have one more line  Understand Trade-off. When you have smooth flow (i) you have low cost because flow unites do not have time to collect cost, (ii) you have high quality because as soon as you observe low quality flow unit you must stop the production line and you cannot have smooth flow, and (iii) you are flexible because you do not have too much inventory and you can go from one product easily to another one. Efficient Frontier