3 Process Strategy

A Process View of the firm

External environment

Internal and external

customers

Inputs Outputs
Processes and
• Workers • Goods
operations
• Managers • Services
• Equipment
1 3
• Facilities
• Materials 5
• Land 2 4
• Energy

Information on
performance
The Supply Chain View

Support Processes

New
service/ Customer

External customers
External suppliers

product relationship
development management

Supplier Order
relationship fulfillment
process process
 Process Strategy

● Specifies the pattern of decisions made in

managing processes so that the processes will
achieve their competitive priorities.
● Principles of process strategy
1. Make choices that fit the situation and that make sense together,
that have a close strategic fit.

2. Individual processes are the building blocks that eventually create

the firm’s whole supply chain.

3. Management must pay particular attention to the interfaces between

processes.
 Process Strategy

● There are four basic process decisions

1. Process structure including layout

2. Customer involvement

3. Resource flexibility

4. Capital intensity
Process Strategy Decisions
Process Structure
• Customer-contact position
(services)
• Product-process position
(manufacturing)
• Layout
Customer Involvement Resource Flexibility
• Low involvement • Specialized
• High involvement • Enlarged

Capital Intensity
• Low automation
• High automation

Strategy for Change

• Process reengineering
• Process improvement

Effective Process
Design
Major Decisions for
Effective Processes
Process Structure in Services
● Customer contact is the extent to which the
customer is present, actively involved, and
receives personal attention during the
service process
● Dental, psychiatric services
● Public transportation, theaters
● Fast food restaurant versus five star
restaurant
● Face-to-face interaction is sometimes
called a moment of truth or a service
encounter, brings customers and service
providers together.
 Process Structure in Services
TABLE 1 | DIMENSIONS OF CUSTOMER CONTACT IN SERVICE
| PROCESSES

Dimension High Contact Low Contact

Physical presence Present Absent

What is processed People Possessions or information

Contact intensity Active, visible Passive, out of sight

Personal attention Personal Impersonal

Method of delivery Face-to-face Regular mail or e-mail

 Process Structure in Services

● The three elements of the customer-

contact matrix are
1. The degree of customer contact
2. Customization
3. Process characteristics

● Process characteristics include

1. Process divergence deals with customization and
the latitude as to how tasks are performed.
2. Flow is how customers, objects, or information are
processed, and can be either line flow or flexible
flow.
Process divergence, and flow
* High divergence involves much judgment and
discretion.
Example: Medical care, Consulting and law
●Low divergence is more repetitive and
standardized.
Example: insurance and hotel services.

●Process flow, closely related to divergence, may

range from highly diverse to linear.
●Flexible flow means movements in diverse ways.
-Hospital, auto repair
●Line flow means movement in fixed sequence.
postal services
Service Process Structuring
Less customer contact and
customization
(1) (2) (3)
High interaction with Some interaction with Low interaction with
Process customers, highly customers, standard customers, standardized
Characteristics customized service services with some options services
Less processes divergence and more line

(1)
Flexible flows with
Individual processes Front office

(2)
Flexible flows with
some dominant
paths, with Hybrid office
some exceptions to
how work performed
flows

(3)
Line flows, routine Back office
work same with all
customers

Customer-Contact Matrix for Service Processes

Service Process Structuring

● Front, Hybrid, or Back?

✔ Bank Teller
✔ Financial consultant
✔ Barber/Salon
✔ Employee Payroll
✔ Monthly bank statements
✔ Car wash
✔ Hospital
✔ Bank loan officer
Product-Process Matrix

● For manufacturing organization it brings

together
1. Volume
2. Product customization
3. Process characteristic

● Process choices include job, batch, line,

and continuous flow processes
● Production and inventory strategies
include make-to-order, assemble-to-order,
and make-to-stock
 Process Structure in Manufacturing

Figure 2.3
Manufacturing process structuring

●Job process, high variety of

products
Eg. furniture company,
customized cabinets
●Batch process, higher volumes,
batching of customer orders.
Further differentiated as small
batch and large batch processes.
Eg. Bakeries
Manufacturing process structuring( con’d)
●Line process, high-volumes, standardized
products, dedicated resources, repetitive
manufacturing. Eg. assembly of
computers, automobiles , toys.
● Continuous flow process, the extreme
end of high-volumes, rigid line flows.
Primary material moves without stopping
Oil refinery, soft drinks, chemical process,
making steel process.
 Production and inventory strategies
● Make-to-order strategy
●Make products to customer specifications in low volumes
with job or small batch processes,
●Matches up with flexibility (customization) and top quality
● Assemble-to-order strategy
●Producing a wide variety of products from relatively few
subassemblies and components after the customers orders
are received
●Allows delivery speed and high process divergence
●Principle of postponement - final activities in the provision
of product are until the orders are received.
● This strategy is linked to mass customization
Production and inventory strategies
●Make-to-stock strategy
●Feasible for standardized products with high
volumes and reasonably accurate forecasts with
line or continuous flow processes
●Holding items in stock for immediate delivery
●Combined with line process, it is sometimes
called mass production
●Choice for delivery speed and low cost
Manufacturing Process Structuring

● Job, Batch, Line or Continuous?

✔ School Uniform production
✔ Ice Cream
✔ Automobile manufacturing
✔ Oil refinery
✔ Auto repair shop
Layout

● The physical arrangement of human and

capital resources

● An operation is a group of resources

performing all or part of one or more
processes

● Layout involves three basic steps

1. Gather information
2. Develop a block plan
3. Design a detailed layout
A Detailed Layout

● Once a block plan has been selected, a

detailed representation is created showing
the exact size and shape of each center
● Elements such as desks, machines, and
storage areas can be shown
● Drawings or models can be utilized

● Options can be discussed and problems

resolved
Customer Involvement

● -reflects the ways in which customers

become part of the process and the extent
of their participation.
● Possible disadvantages
◆ Can be disruptive
◆ Managing timing and volume can be
challenging
◆ Quality measurement can be difficult
◆ Requires interpersonal skills
◆ Layouts may have to be revised
◆ Multiple locations may be necessary
Customer Involvement

● Possible advantages

◆ Increased net value to the customer

◆ Can mean better quality, faster delivery, greater
flexibility, and lower cost
◆ May reduce product, shipping, and inventory
costs
◆ May help coordinate across the supply chain
◆ Processes may be revised to accommodate the
customers’ role
Resource Flexibility

● A workforce whose member are capable of doing

many tasks, either at their own workstations or as
they move from one workstation to another.
● A flexible workforce can often require higher skills
and more training and education
● Worker flexibility can help achieve reliable
customer service and alleviate bottlenecks
● Resource flexibility helps absorb changes in
workloads
● The type of workforce may be adjusted using full-
time or part-time workers
Resource Flexibility

● The volume of business may affect the type

of equipment used

● Break-even analysis can be used to

determine at what volumes changes in
equipment should be made
Break-Even Analysis

Process 2:
Special-purpose
Total cost (dollars)

equipment

Break-even
quantity

Process 1:
F2 General-purpose
equipment
F1

Units per year (Q)

Relationship Between Process Costs and Product Volume

Application 3.3
BBC is deciding whether to weld bicycle frames manually or to
purchase a welding robot. If welded manually, investment costs
for equipment are only $10,000. the per-unit cost of manually
welding a bicycle frame is $50.00 per frame. On the other hand,
a robot capable of performing the same work costs $400,000.
robot operating costs including support labor are $20.00 per
frame.
welded manually welded by robot
(Make) (Buy)
Fixed costs $10,000 $400,000
Variable costs $50 $20

At what volume would BBC be indifferent to these alternative

methods?

Fm – Fb $10,000 – $400,000
Q = = = 13,000 frames
$20 – $50
cb –
c
Capital Intensity

● Automation is one way to address the mix

of capital and labor
● Automated manufacturing processes
substitute capital equipment for labor
● Typically require high volumes and costs
are high
● Automation might not align with a
company’s competitive priorities
Capital Intensity

● Fixed automation produces one type of

part or product in a fixed sequence
● Typically requires large investments and is
relatively inflexible
● Flexible automation can be changed to
handle various products
● Industrial robots are classic examples of
flexible automation
 Capital Intensity
● Capital intensity is the mix of equipment and
human skills in the process.
● Capital equipment may be used to automate
service processes
● Investment can be justified by cost reduction and
increased task divergence through expanded
customer choice
● May impact customer contact

● May be used in both front and back-office

operations
Capital Intensity

● Economies of scope reflect the ability to

produce multiple products more
inexpensively in combination than
separately

● Applies to manufacturing and services

● Requires sufficient collective volume

Strategic Fit

● The process chosen should reflect the

desired competitive priorities

● The process structure has a major impact

on customer involvement, resource
flexibility, and capital intensity
 Decision Patterns for Services

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

Low customer-contact
process
• Less complexity, less
divergence, more line flows Back
• Less customer involvement
• Less resource flexibility
office
• Capital intensity varies with
volume
High Low
Customer contact and
customization
Decision Patterns for Service Processes
Decision Patterns for Manufacturing

● Processes can be adjusted for the degree

of customization and volume

● Process flows can be made more or less

linear

● Competitive priorities must be considered

when choosing processes
Decision Patterns for Manufacturing
Competitive Process
Priorities Choice
Top-quality, on-time delivery, and Job process or
flexibility small batch process

Low-cost operations, consistent Large batch, line, or

quality, and delivery speed continuous flow process

(a) Links with Process Choice

Competitive Production and Inventory
Priorities Strategy
Top-quality, on-time delivery, and
Make-to-order
flexibility

Delivery speed and variety Assemble-to-order

Low-cost operation
Make-to-stock
and delivery speed
(b) Links with Production and Inventory
Strategy
Links of Competitive Priorities with Manufacturing Strategy
 Decision Patterns for Manufacturing

Low-Volume,
make-to-order process Job
• process
More process divergence
and more flexible flows
• More customer involvement Small
• More resource flexibility batch
• Less capital intensity process
Batch processes
decisions
process

Large
Major

batch
process

Line
process
High-Volume,
make-to-stock process
• Less process divergence Continu
and more line flows ous
• Less customer involvement process
• Less resource flexibility
• More capital intensity Low High
Volume

Decision Patterns for Manufacturing Processes

Gaining Focus

● Operations can be focused by process

segments when competitive priorities differ
● Plants within plants (PWPs) are different
operations under the same roof
● Service can be focused in much the same
way
● Focused factories can be created by
splitting a large plant into several smaller
plants dedicated to narrower product lines
Strategies for Change

● Process reengineering is the fundamental

rethinking and radical redesign of a
process to improve performance
● Can be successful but it is not simple or
easy
● The people who are involved with the
process each day are the best source of
ideas on how to improve it
● Process improvement is the systematic
study of activities and flows of a process to
find ways to improve it
Process Reengineering

KEY ELEMENTS OF REENGINEERING

Element Description
Critical processes Emphasis on core business processes, normal process
improvement activities can continue with other processes
Strong leadership Strong leadership from senior executives to overcome
resistance
Cross-functional teams A team with members from each functional area charged with
carrying out the project
Information technology Primary enabler of the project as most reengineering projects
involve information flows
Clean-slate philosophy Start with the way the customer wants to deal with the company
and includes internal and external customers
Process analysis Must understand the current processes throughout the
organization