Business Processes Chapter 4

Text: Introduction to Operations and Supply Chain Management Custom edition for Farmingdale State College Authors: Cecil Bozarth & Robert Handfield Where appropriate reference text page numbers will be on bottom of slides OSC may be used as an abbreviation of Operations and Supply Chain

Chapter Objectives Be able to: Explain what a business process is and how the business perspective differs from a traditional functional perspective. Create process maps for a business process and use these to understand and diagnose a process. Calculate and interpret some common measures of process performance. Discuss the importance of benchmarking and distinguish between competitive benchmarking and process benchmarking. Describe the Six Sigma methodology, including the steps of the DMAIC process. Use and interpret some common continuous improvement tools. Explain what the Supply-Chain Operations Reference (SCOR) model is and why it is important to businesses.

Procter & Gamble Page 44

Business Processes Business processes defined Mapping business processes Managing and improving business processes Measuring process performance The SCOR Model

Business Processes Defined Logically related sets of tasks or activities geared toward some business outcome Primary the main value-added activities Support necessary, but not value-added activities Development activities that improve primary & support activities What is the distinction? Examples of each? Are the dividing lines always clear? Primary: Value-added work directly related to what the customer pays for. Support: Purchasing, maintenance, transportation to point-of-sale, moving and tracking material between value-added steps, administration, etc. Developmental: Design, assessment, and marketing efforts to provide new services or products, training new job skills. Pg 46

Examples of processes Primary Support Development Providing a service Educating Customers Manufacturing a product Evaluating suppliers Recruiting new workers Developing a sales & operating plan Developing new products Performing research on improving products Training new workers

Managing functions is not the same as managing what a business does Prior to 1990s, attention was on activities within each business function (P&G) If focus was on individual functions and those functions ran well, then the business should do well Managing functions is not the same as managing what a business does The whole needs to be greater than the sum of it’s parts

Versus the “functional” Perspective Developing new products/services (Chapter 6) Evaluating suppliers (Chapter 10) Developing sales & operations plans (Chapter 13) Suppliers Purchasing Engineering Operations Finance Marketing Customers What are some of the challenges in managing such processes?

To effectively manage, measure and improve something, it must first be understood

Mapping Business Processes An effective, simple way to improve understanding of the business process is by developing a graphic representation of all the activities and relationships with thin the process Creates common understanding of the activities, results and who performs the steps Defines the boundaries of the process Can be a training tool Provides baseline to measure improvement Pg 48

Mapping Business Processes Relationship maps Detailed process maps ‘Swim Lane’ process maps

Relationship Map Example Automotive OEM wanted to understand how the company’s needs were communicated to suppliers First-tier supplier responsible for entire cockpit (all interior pieces) Second-tier suppliers provide “families” of parts to first-tier supplier (e.g., plastic trim, gauges and wiring, etc.) Comment on the flow of information as a separate process. How could it be done differently?

Findings OEM provided first-tier supplier with weekly demand forecast for next 10 weeks First-tier supplier sent its ‘own’ demand forecasts to 10 second-tier suppliers Second-tier suppliers delivered the requirements to first-tier supplier Follow up on the flow of information process. What inefficiencies are exhibited here? What is required for second tier suppliers to see the OEM needs directly?

Relationship Map

Detailed Process Map Identifies the specific activities that make up the process. Basic steps are: Identify the entity that will serve as your focal point: Customer? Order? Item? Identify clear boundaries, starting and ending points Segment of the process? Keep it simple Does this detail add any insight? Do we need to map every exception condition? Comment on how exceptions might be handled – separate process? What about having a set of processes represented by a single step that can be expanded if that step is the one that appears to need the most improvement?

Detailed Process Map Document the process “as is”, not how it should be or how it is remembered May be necessary to observe, monitor &/or follow the process Need to map in manageable, logical segments Keep the focus relatively small Only areas which you have managerial control

Mapping Symbols Start or finishing point Step or activity in the process Decision point (typically requires a “yes” or “no”) Input or output (typically data or materials) Document created Delay Inspection Move activity Typical, but others may be used as appropriate

Detailed Process Map Example

Facts of the Case I Process Dealer faxes order to DC. One out of 25 orders lost because of paper jams. Fax sits in “In Box” around 2 hours (up to 4) until internal mail picks it up. Internal mail takes about one hour (up to 1.5 hours) to deliver to the picking area. One out of 100 faxes are delivered to the wrong place. Order sits in clerk’s in-box until it is processed (0 to 2 hours). Processing time takes 5 minutes. Pages 50 through 52 in the text.

Facts of the Case II If item is in stock, worker picks and packs order (average = 20 minutes, but up to 45 minutes). Inspector takes 2 minutes to check order. Still, one out of 200 orders are completed incorrectly. Transport firm delivers order (1 to 3 hours). Pages 50 through 52 in the text.

Let’s Map the Process What is the focal point of the mapping effort? What are the boundaries of the process map? What detail is missing from this simple example?

One Possible Solution Internal Mail Delivers Fax Paper Order Created Dealer Faxes Order Order Sits In Fax In Box Order Sits In Clerk’s In Box Clerk Processes Order 5 minutes 4% of orders lost 0 to 4 hours 2 hours on average 0 to 2 hours 1 hour on average 0.5 to 1.5 hours 1 hour on average 1% of orders lost 10 to 45 minutes 20 minutes on average Transport Firm Delivers Order Inspector Checks Order Dealer Receives Order Worker Picks Order YES Is Item In Stock? NO 2 minutes 0.5% of orders incorrect 1 to 3 hours 2 hours on average No history of lost, damaged, or incorrect deliveries Clerk Notifies Dealer and Passes Order On to Plant

Is there room for improvement? Dealer Faxes Order Paper Created Order Sits In Fax In Box Internal Mail Delivers Fax In Clerk’s Clerk Processes Is Item In Stock? Worker Picks Clerk Notifies Dealer and Passes Order On to Plant Inspector Checks Transport Firm Delivers Order Receives 2 minutes 0.5% of orders incorrect 1 to 3 hours 2 hours on average No history of lost, damaged, or incorrect deliveries YES NO 10 to 45 minutes 20 minutes on average 0 to 2 hours 1 hour on average 0.5 to 1.5 hours 1% of orders lost 0 to 4 hours 4% of orders lost 5 minutes Order spends 6.45 hrs in process 3 hrs is waiting 5% of orders are lost before picking 1 out of 200 will be shipped with wrong items or amounts

Detailed Process Map Example Process mapping at a San Diego distribution center (DC) *Textbook, pages 50-52.

Improving Business Processes: Guidelines Attack each delay What causes it? How long is it? How could we reduce its impact? Examine each decision point Is this a real decision or just a checking activity? If the latter, can we automate or eliminate it? Dematerialize documentation. Can we do it electronically? Eliminate multiple copies? Share a common database? Review differences between value-added and other activities. Good place to point out that unnecessary movement between value-added steps often requires tracking, counting, and storing of inventories. Decision points do not add value, take time

More Guidelines Look for loops Process steps Why is this loop here? Would we need to loop if we didn’t have any failures in quality, planning, etc? Process steps What is the value of this activity, relative to its cost? Is this a necessary activity (support or developmental?), or something else? Loops take time, do not add value. Work to eliminate them, particularly if they occur frequently.

Taking It Further ... All activities add costs and time Not all value-added activities provide “net” value “Underperformers” Not all support and developmental activities are necessary Necessary versus “symptomatic” “Underperformers” that have poor yields, take too long, use unnecessary resources, etc.

Symptomatic Activities ... Inspecting or reworking goods Expediting shipments or “fighting fires” Overproducing, holding excessive inventories Standard backorder process Symptomatic – exist because of problems that shouldn’t be there.

…and Typical Causes Poor quality “Flying blind,” poor planning Poor controls, training, etc. Excessive demand variability Mismatches between an organization’s capabilities and market requirements

Process Improvement Value Cost Description Action Net Value-Added Activity ++ + Adds net value Find ways to increase value and lower costs further Underperformer Potential value-adding activity Change to value-adding activity or eliminate Necessary Necessary business activity Reduce cost of performing activity Symptomatic Activity caused by poor business practices Eliminate practices that cause the activity

Swim Lane Process Map In some situations, we may need to understand not only the process, but who, or which departments are involved and how they need to interact Swim Lane Process Maps graphically arrange the process so that responsibility & interaction is clear.

Swim Lane Process Map Shows functional relationships versus time Can help in measuring loading on various functional areas Illustrates cross-function communication processes Other names: cross-functional flowchart, Rummler-Brache diagram. Useful for mapping MIS support for processes

Swim Lane Process Map* * Adapted from map by John Grout, Campbell School of Business, Berry College, Mount Berry, Georgia

Process Measures There are countless ways of measuring a process. To be effective, they should be based upon some type of measurable information or data

Four Performance Dimensions Quality (performance, conformance, reliability) Time (delivery speed and reliability, development speed) Flexibility (mix, changeover, volume) Cost (labor, material, engineering, quality-related) What does the customer value?

Process Measures Productivity Efficiency Cycle Time Benchmarking

Productivity Measures Outputs Inputs Productivity = Productivity is the ratio of outputs to inputs Single-factor, Multifactor, and Total measures of productivity

Variations of Productivity Batteries Produced Machine Hours + Direct Labor Hours Total Nightly Sales ($) Total Nightly Costs ($) Direct Labor Hours Single-factor productivity ratio: Multifactor: Total multifactor: Measures output levels relative to a single input Measures output levels relative to more than one input Ratio of a total output factor to total input factor

Variations of Productivity There are many common or standard productivity measures, typically a company will develop productivity ratios which are suited to their specific needs

Consider the following data . . . Quantity $/Unit Car X 4000 cars $8,000/car Car Y 6000 cars $9,500/car Total labor for building X 20,000 hours $12/hour Total labor for building Y 30,000 hours $14/hour

What is the Labor Productivity in hours for Each Car? Car X: (4,000 cars / 20,000 hrs) = ? Car Y: (6,000 cars / 30,000 hrs) = ? 0.2 0.2 Car X: 0.2 cars/hour Car Y: 0.2 cars/hour

What is the Labor Productivity in dollars for Each Car? Car X: (4,000 × $8,000) = ? (20,000 × $12) Car Y: (6,000 × $9,500) = ? (30,000 × $14) Car X: 133.33 Car Y: 135.714 Impact of wage, price changes?

Results (What are the Benefits? Caveats?) Car X: (4,000 × $8,000) = 133.33 (20,000 × $12) Car X: (4,000 units / 20,000 hrs.) = 0.2 units / hr Productivity (hours) Productivity ($) Values for Car Y?

A comparison of a company’s actual performance to some standard output Efficiency A comparison of a company’s actual performance to some standard output Usually expressed as a percentage Standard is an estimate of what should be produced based on studies or historical results Efficiency = 100%(actual rate / standard rate) OR: Efficiency = 100%(standard time/actual time) for one unit Here the actual and standard values represent output or output rate. Standard output – an estimate of what should be produced, given a certain level of resources

Measuring Efficiency at BMA Software Text pages 56 thru 59

Cycle Time (throughput time) Total time required to complete a process from start to finish. To reduce cycle time, organizations must perform well on other performance dimensions It is a straight forward measure; can be measured in absolute terms, no estimates Called “takt” time in Germany. Can be considered as the “pulse” or “heartbeat” of the process. Throughput is controlled by the cycle time, but is also affected by how many units can be processed together. Percent Value Added Time – the percentage of cycle time which is spent on value-added activities

Cycle Time Drivers Causes that increase cycle time are: Waiting times Unneeded steps Rework Unnecessary controls or testing Outmoded technology Lack of information or training

Benchmarking A comparison of a company’s performance to the performance of: Other firms in its industry (strategic or competitive) Firms identified as “world-class” (process)

Benchmarking Data from “The Machine That Changed The World” Number of assembly defects per 100 vehicles (1989): Average Japanese plant: 34.0 Average US plant: 64.6 Average European plant: 76.8 J. Womack, D. Jones, and D. Roos, The Machine That Changed the World: How Japan’s Secret Weapon in the Global Auto Wars Will Revolutionize Western Industry, New York, HarperPerennial, 1991. Is this strategic or process benchmarking?

More Benchmarking Data ... Labor and machine hours per vehicle (1989): Average Japanese plant: 16.9 Average US plant: 35.7 Average European plant: 57 What is the benefit of having both sets of figures?

So what’s happened since? Some new productivity figures.

From “The Harbour Report”, July 1998 “Labor hours needed for stamping, power train, and assembly operations”: (100%) Nissan 27.6 hours (168%) GM 46.5 hours (126%) Ford 34.7 hours "If GM could operate at Nissan's level of productivity, they'd save themselves about $4.4 billion a year," Measured another way, the report shows GM has about 55,000 more workers than it needs. Harbour Report North America 1999, http://www.harbourinc.com Note changes since 1998 discussed in the text on page 61.

Other Measures I Costs Quality Materials Labor Shipping etc. Defects per million (ppm) Number of returns Time between failures (MTBF, reliability) Costs Quality

Other Measures II Speed Flexibility Lead time to customer Percent orders late Changeover time Volume to meet changes in demand Speed Flexibility

Measurement Key Points Can be situation-specific Should be relative to past performance and future goals Potential for conflicts. Consider: # of Students Taught Professor hours % of Satisfied Students versus

Supply-Chain Operations Reference (SCOR) Model A comprehensive model of the core management processes and individual processes that define the domain of SCM Reference model which provides a common language Provides a template to guide the design & implementation of SC processes Provides mechanism for better understanding of SCM

Supply-Chain Operations Reference (SCOR) Model Five core processes for Level 1 Source Make Deliver Return Plan Three expanded processes for Level 2 Planning Execution Enable

Supply-Chain Operations Reference (SCOR) Model Five core processes for Level 1 Source Procure goods & services to meet planned or actual demand Make Transform source material into finished good Deliver Provides goods & services Return Returning & receiving returned product Plan Balance resources with requirements Pg 72

Supply-Chain Operations Reference (SCOR) Model Three expanded processes for Level 2 Planning Aligns expected resources to meet expected demand. Execution Process triggered by planned or actual demand requirements Enable Prepares, maintains or manages information or relationships on which planning & execution rely

SCOR Model www.supply-chain.org Source: Supply-Chain Council, www.supply-chain.org

Business Processes Case Study Zephtrex Fabric