Mba 505 business_processes_operations_productivity_strategy

Management Decision Making: Operations and Decision Analysis May 2010 Week – 1 Business Processes Operations, Productivity & Strategy Anupam Das, PhD

Outline Course Introduction / Orientation Business Processes What Is Operations Management? What Operations Managers Do The Heritage of Operations Management The Productivity Challenge Ethics and Social Responsibility

Course Introduction / Orientation Faculty: Anupam Das, PhD Office : Building 250, Room 446 Email: [email_address] Phone: 250-753-3245 ext. 2477 Class Hours: 08.30am – 10.30am, Monday, Bldg: 250/125 (All sections) 08.30am – 10.30am, Friday, Bldg: 250/140 (sec. I11N70) 10.30am – 12.30pm, Friday, Bldg: 250/140 (sec. I11N72) 01.30am – 03.30pm, Friday, Bldg: 250/140 (sec. I11N71) Office Hours: 10.30 am – 12.00noon Monday, 09.30 am – 12.00noon Tuesday, or by appointment Textbook: Jay Heizer and Barry Render (2011), Operations Management , 10 th edition, Prentice Hall

Course Introduction / Orientation Methods of Evaluation Assignment value Due Class Participation and Learning 15% May 30, June 13, Reinforcement/Quizzes July 11 Group assignments (3 @ 15%) 45% June 1 & 20, July 15 Final Exam (Closed book) 40% July 18

“ The systematic design, direction and control of processes that transform inputs into services and products for internal, as well as external customers ” Operations Management is ---- Inputs Transformation Processes (Adding value) Outputs

Business Process is an organized group of related activities to create a result of value to the customer. Processes should add value. Processes can be broken down into sub-processes, which in turn can be broken down further. Any process that is part of a larger process is considered a “ nested process .” Each process and each nested process has inputs and outputs. Business Processes

Customer relationship processes Identify, attract, and build relationships with external customers and facilitate the placement of orders. New service/product development processes Design and develop new services or products from inputs received from external customer specifications. Order fulfillment processes The activities required to produce and deliver the service or product to the external customers. Supplier relationship processes Select suppliers of services, materials and information and facilitate the timely and efficient flow of these items Core Processes – a chain of activities that adds-value to external Customers

Firms have many processes that support the core processes. Core & Support Process Linkages Support processes New service/ product development process Supplier relationship process Order fulfillment process Customer relationship process External Suppliers External Customers

Provide key resources, capabilities, or other inputs required to execute core processes Can include: accounting & finance, human resources functions, Information and Communications Technology (ICT) support, and enterprise and functional management. Support/Non-Core Processes – provide vital resources and inputs to the core processes and are essential to the management of the business

Firms have many processes that support the core processes. Support Process Support processes New service/ product development process Supplier relationship process Order fulfillment process Customer relationship process External Suppliers External Customers (i.e. accounting, finance, human resource management, etc)

Value chains are an interrelated series of processes that produce a service or product to the satisfaction of customers. Value chains may have core processes or Support processes. Core processes deliver value to external customers. Non-Core - Support processes/functions: provide vital inputs for the core processes. Value Chains

Michael Porter’s Value Chain Model

Process Improvement & Value Chains allows the analyst to focus on a process vs. a functional Area can be used to identify processes for improvement provides a cross‐function view of an organization activity under process analysis can be further broken down into sub‐processes as required a value chain must be present and analyzed before considering process improvements to the industry value chain

APQC Process Classification Framework

Competitive Priorities Cost 1. Low-cost operations Quality 2. Top quality 3. Consistent quality Time 4. Delivery speed 5. On-time delivery 6. Development speed Flexibility 7. Customization 8. Variety 9. Volume flexibility

Adding Value to a Process Increase – quality, customer service, ease of‐ use, flexibility, simplicity, functionality, and linkages to strategic plan Decrease – costs, waste, cycle time, delay time, process time, complexity, environmental impact, and other non-value adding activities

Process Analysis Process analysis is the documentation and detailed understanding of how work is performed and how it can be redesigned. 2 Define Scope 6 Implement Changes 5 Redesign Process 4 Evaluate Performance 3 Document Process 1 Identify Opportunity

Redesigning the Process Ideas for process redesign and improvement can be uncovered by asking six questions about each step in the process and about the process as a whole. What is being done? When is it being done? Who is doing it? Where is it being done? How is it being done? How well does it do on the various metrics of importance?

Redesigning the Process Answers to the previous six questions are challenged by asking still another set of questions. Why is the process even being done? Why is it being done where it is being done? Why is it being done when it is being done?

Process Value Analysis Step 1: what activities are being done – where, when, how, and who Step 2: why are they (activities) being done this way? Step 3: Is each step necessary; does it add value? Step 4: Design alternative ways to add value; consider radical verses incremental Change

Facilitation Skills Facilitation 101 – a facilitator is a third-party who’s main purpose is to assist a group of people in generating ideas and solutions to various problems under consideration . Specific tasks can vary however facilitators should follow the Do’s – Don’ts

Idea Generation Brainstorming is letting a group of people, knowledgeable about the process, propose ideas for change by saying whatever comes to mind Posit notes are ideal for sharing ideas Group like-ideas together, eliminate duplicates, and name the groupings

Process Mapping Activities List all known activities through personal knowledge, experts, brainstorming, research, documentation, and standard operating procedures (SOPs), Assemble activities into 4-6 groupings, Name the groupings noun/verb or verb noun combinations), Conceptualize the process flow, Decompose the process(es) as required to gain a thorough understanding of the process, Identify inputs, outputs, and enablers, and Map and document the process

Business Process Flowcharting – “Picturing the Process” Mapping Protocols Use Excel to create your process map (using Insert and the Shapes button on the ribbon) Label your map (i.e. give it a title such “Order Fulfillment Process”) Maps flow from left to right; top‐to‐bottom Use a consistent font when labeling processes, decision points, inputs and outputs Use a rectangle (use a consistent size) to represent all processes/activities under investigation Cascade your processes (if possible) Group related activities together; use a dash line to denote activities related to a process; label the process; use verb/noun or noun/verb combinations (i.e. Enter Order) Inputs and outputs are to be denoted use a line with an arrow All processes/activities must have inputs (entering the process on the left) and outputs (leaving the process on the right) All inputs and outputs must be labeled Inputs/outputs/enablers should not cross‐over one another, however minor cross‐over is permitted Denote process enablers such as IT systems as inputs to the bottom of the process Major outputs of the main process under consideration are to be aligned on the right side of the process map Decision points are to be depicted using a diamond shape Decision points logic flow; inputs to the left or top and outputs to the right and bottom; maintain consistent logic flow (i.e. “true” to the left and “false” from the bottom

Business Process Management Business process management (BPM) is a management discipline that combines a process-centric, IT enabled, and cross-functional approach to improving how organizations achieve their business goals. BPM ensures that business processes follow a disciplined design, the process is repeatable and is followed, measured regularly, and the processes are kept up-to-date.

What Is Operations Management? Production is the creation of goods and services Operations management (OM) is the set of activities that create value in the form of goods and services by transforming inputs into outputs

Organizing to Produce Goods and Services Essential functions: Marketing – generates demand Production/operations – creates the product Finance/accounting – tracks how well the organization is doing, pays bills, collects the money

Organizational Charts Commercial Bank Operations Teller Scheduling Check Clearing Collection Transaction processing Facilities design/layout Vault operations Maintenance Security Finance Investments Security Real estate Accounting Auditing Marketing Loans Commercial Industrial Financial Personal Mortgage Trust Department

Airline Organizational Charts Operations Ground support equipment Maintenance Ground Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications Dispatching Management science Finance/ accounting Accounting Payables Receivables General Ledger Finance Cash control International exchange Marketing Traffic administration Reservations Schedules Tariffs (pricing) Sales Advertising

Manufacturing Organizational Charts Marketing Sales promotion Advertising Sales Market research Operations Facilities Construction; maintenance Production and inventory control Scheduling; materials control Quality assurance and control Supply-chain management Manufacturing Tooling; fabrication; assembly Design Product development and design Detailed product specifications Industrial engineering Efficient use of machines, space, and personnel Process analysis Development and installation of production tools and equipment Finance/ accounting Disbursements/ credits Receivables Payables General ledger Funds Management Money market International exchange Capital requirements Stock issue Bond issue and recall

Why Study OM? OM is one of three major functions of any organization, we want to study how people organize themselves for productive enterprise We want ( and need ) to know how goods and services are produced We want to understand what operations managers do OM is such a costly part of an organization

Options for Increasing Contribution Sales $100,000 $150,000 $100,000 $100,000 Cost of Goods – 80,000 – 120,000 – 80,000 – 64,000 Gross Margin 20,000 30,000 20,000 36,000 Finance Costs – 6,000 – 6,000 – 3,000 – 6,000 Subtotal 14,000 24,000 17,000 30,000 Taxes at 25% – 3,500 – 6,000 – 4,250 – 7,500 Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500 Finance/ Marketing Accounting OM Option Option Option Increase Reduce Reduce Sales Finance Production Current Revenue 50% Costs 50% Costs 20%

What Operations Managers Do Planning Organizing Staffing Leading Controlling Basic Management Functions

Design of goods and services What good or service should we offer? How should we design these products and services? Managing quality How do we define quality? Who is responsible for quality? Process and capacity design What process and what capacity will these products require? What equipment and technology is necessary Location strategy Where should we put the facility? On what criteria should we base the location decision? Ten Critical Decisions

Layout strategy How should we arrange the facility? How large must the facility be to meet our plan? Human resources and job design How do we provide a reasonable work environment? How much can we expect our employees to produce? Supply-chain management Should we make or buy this component? Who should be our suppliers and how can we integrate them into our strategy? Inventory, material requirements planning, and JIT How much inventory of each item should we have? When do we re-order? Ten Critical Decisions

Intermediate and short – term scheduling Are we better off keeping people on the payroll during slowdowns? Which jobs do we perform next? Maintenance How do we build reliability into our processes? Who is responsible for maintenance? Ten Critical Decisions

The Heritage of OM Division of labor (Adam Smith 1776; Charles Babbage 1852) Standardized parts (Whitney 1800) Scientific Management (Taylor 1881) Coordinated assembly line (Ford/ Sorenson 1913) Gantt charts (Gantt 1916) Motion study (Frank and Lillian Gilbreth 1922) Quality control (Shewhart 1924; Deming 1950) Computer (Atanasoff 1938) CPM/PERT (DuPont 1957, Navy 1958) Material requirements planning (Orlicky 1960) Computer aided design (CAD 1970) Flexible manufacturing system (FMS 1975) Baldrige Quality Awards (1980) Computer integrated manufacturing (1990) Globalization (1992) Internet (1995)

Eli Whitney Born 1765; died 1825 In 1798, received government contract to make 10,000 muskets Showed that machine tools could make standardized parts to exact specifications Musket parts could be used in any musket © 1995 Corel Corp.

Frederick W. Taylor Born 1856; died 1915 Known as ‘father of scientific management’ In 1881, as chief engineer for Midvale Steel, studied how tasks were done Began first motion and time studies Created efficiency principles

Taylor’s Principles Matching employees to right job Providing the proper training Providing proper work methods and tools Establishing legitimate incentives for work to be accomplished Management Should Take More Responsibility for:

Frank & Lillian Gilbreth Frank (1868-1924); Lillian (1878-1972) Husband-and-wife engineering team Further developed work measurement methods Applied efficiency methods to their home and 12 children! Book & Movie: “Cheaper by the Dozen,” “Bells on Their Toes” © 1995 Corel Corp.

Henry Ford Born 1863; died 1947 In 1903, created Ford Motor Company In 1913, first used moving assembly line to make Model T Unfinished product moved by conveyor past work station Paid workers very well for 1911 ($5/day!)

W. Edwards Deming Born 1900; died 1993 Engineer and physicist Credited with teaching Japan quality control methods in post-WW2 Used statistics to analyze process His methods involve workers in decisions

Contributions From Human factors Industrial engineering Management science Biological science Physical sciences Information technology

Characteristics of Goods Tangible product Consistent product definition Production usually separate from consumption Can be inventoried Low customer interaction

Characteristics of Service Intangible product Produced and consumed at same time Often unique High customer interaction Inconsistent product definition Often knowledge-based Frequently dispersed

Goods and Services Automobile Computer Installed carpeting Fast-food meal Restaurant meal/auto repair Hospital care Advertising agency/ investment management Consulting service/ teaching Counseling Percent of Product that is a Good Percent of Product that is a Service 100% 75 50 25 0 25 50 75 100% | | | | | | | | |

Productivity Challenge Productivity is the ratio of outputs (goods and services) divided by the inputs (resources such as labour and capital) The objective is to improve productivity! Important Note! Production is a measure of output only and not a measure of efficiency

Productivity Measure of process improvement Represents output relative to input Only through productivity increases can our standard of living improve Productivity = Units produced Input used

Productivity Calculations Labour Productivity One resource input  single-factor productivity Productivity = Units produced Labour-hours used = = 4 units/labor-hour 1,000 250

Multi-Factor Productivity Also known as total factor productivity Output and inputs are often expressed in dollars Multiple resource inputs  multi-factor productivity Output Labor + Material + Energy + Capital + Miscellaneous Productivity =

Collins Title Productivity = .25 titles/labour-hr Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: = Old labour productivity 8 titles/day 32 labor-hrs

Collins Title Productivity = .25 titles/labor-hr = .4375 titles/labor-hr Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 14 titles/day Overhead = $800/day New System: 8 titles/day 32 labor-hrs = Old labor productivity = New labor productivity 14 titles/day 32 labor-hrs

Collins Title Productivity = .0077 titles/dollar Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 14 titles/day Overhead = $800/day New System: = Old multifactor productivity 8 titles/day $640 + 400

Collins Title Productivity = .0077 titles/dollar = .0097 titles/dollar Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 14 titles/day Overhead = $800/day New System: 8 titles/day $640 + 400 = Old multifactor productivity = New multifactor productivity 14 titles/day $640 + 800

Measurement Problems Quality may change while the quantity of inputs and outputs remains constant External elements may cause an increase or decrease in productivity Precise units of measure may be lacking

Productivity Variables Labor - contributes about 10% of the annual increase Capital - contributes about 38% of the annual increase Management - contributes about 52% of the annual increase

Developing Missions and Strategies Mission Mission - where are you going? Organization’s purpose for being Provides boundaries & focus Answers ‘What do we provide society?’ Mission of the Hard Rock Café To spread the spirit of Rock ‘n’ Roll by delivering an exceptional entertainment and dining experience. We are committed to being an important, contributing member of our community and offering the Hard Rock family a fun, healthy, and nurturing work environment while ensuring our long-term success. © 1995 Corel Corp.

Developing Missions and Strategies Factors Affecting Mission Mission Philosophy & Values Profitability & Growth Environment Customers Public Image Benefit to Society Benefit to Society

Strategic Process Organization’s Mission Marketing Operations Finance/ Accounting Functional Area Missions

Developing Missions and Strategies Mission/Strategy Mission - where you are going Strategy - how you are going to get there; an action plan Strategy Action plan to achieve mission Shows how mission will be achieved Company has a business strategy Functional areas have strategies Strategies exploit opportunities and strengths, neutralize threats, and avoid weaknesses

Strategies for Competitive Advantage Differentiation – better, or at least different Cost leadership – cheaper Response – rapid response

Uniqueness can go beyond both the physical characteristics and service attributes to encompass everything that impacts customer’s perception of value Safeskin gloves – leading edge products Walt Disney Magic Kingdom – experience differentiation Hard Rock Cafe – dining experience Competing on Differentiation

Provide the maximum value as perceived by customer. Does not imply low quality. Southwest Airlines – secondary airports, no frills service, efficient utilization of equipment Wal-Mart – small overheads, shrinkage, distribution costs Franz Colruyt – no bags, low light, no music, doors on freezers Competing on Cost

Flexibility is matching market changes in design innovation and volumes Institutionalization at Hewlett-Packard Reliability is meeting schedules German machine industry Timeliness is quickness in design, production, and delivery Johnson Electric, Bennigan’s, Motorola Competing on Response

Components of OM Mission and Strategy P/OM Mission and Strategy Location Procurement Human Resources & Job Design Inventory Reliability and Maintenance Process Design Layout Scheduling Quality Management Product Design

Issues In Operations Strategy Resources view Value Chain analysis Porter’s Five Forces model Operating in a system with many external factors Constant change

Product Life Cycle Best period to increase market share R&D engineering is critical Practical to change price or quality image Strengthen niche Poor time to change image, price, or quality Competitive costs become critical Defend market position Cost control critical Introduction Growth Maturity Decline Company Strategy/Issues Internet search engines Sales Drive-through restaurants CD-ROMs Analog TVs iPods Boeing 787 LCD & plasma TVs Twitter Avatars Xbox 360

Product Life Cycle Product design and development critical Frequent product and process design changes Short production runs High production costs Limited models Attention to quality Forecasting critical Product and process reliability Competitive product improvements and options Increase capacity Shift toward product focus Enhance distribution Standardization Fewer product changes, more minor changes Optimum capacity Increasing stability of process Long production runs Product improvement and cost cutting Little product differentiation Cost minimization Overcapacity in the industry Prune line to eliminate items not returning good margin Reduce capacity Introduction Growth Maturity Decline OM Strategy/Issues

Developing Missions and Strategies Strategy Process

Identify critical success factors Build and staff the organization Integrate OM with other activities The operations manager’s job is to implement an OM strategy, provide competitive advantage, and increase productivity Strategy Development and Implementation

Strategy Development Process Determine the Corporate Mission State the reason for the firm’s existence and identify the value it wishes to create. Form a Strategy Build a competitive advantage, such as low price, design, or volume flexibility, quality, quick delivery, dependability, after-sale service, broad product lines. Analyze the Environment Identify the strengths, weaknesses, opportunities, and threats. Understand the environment, customers, industry, and competitors.

SWOT Analysis to Strategy Formulation

Four International Operations Strategies Cost Reduction Considerations High Low High Low Local Responsiveness Considerations (Quick Response and/or Differentiation) Import/export or license existing product Examples U.S. Steel Harley Davidson International Strategy

Four International Operations Strategies Cost Reduction Considerations High Low High Low Local Responsiveness Considerations (Quick Response and/or Differentiation) International Strategy Import/export or license existing product Examples U.S. Steel Harley Davidson

Four International Operations Strategies Cost Reduction Considerations High Low High Low Local Responsiveness Considerations (Quick Response and/or Differentiation) International Strategy Import/export or license existing product Examples U.S. Steel Harley Davidson Standardized product Economies of scale Cross-cultural learning Examples Texas Instruments Caterpillar Otis Elevator Global Strategy

Four International Operations Strategies Cost Reduction Considerations High Low High Low Local Responsiveness Considerations (Quick Response and/or Differentiation) Standardized product Economies of scale Cross-cultural learning Examples: Texas Instruments Caterpillar Otis Elevator Global Strategy International Strategy Import/export or license existing product Examples U.S. Steel Harley Davidson

Four International Operations Strategies Cost Reduction Considerations High Low High Low Local Responsiveness Considerations (Quick Response and/or Differentiation) Standardized product Economies of scale Cross-cultural learning Examples: Texas Instruments Caterpillar Otis Elevator Global Strategy International Strategy Import/export or license existing product Examples U.S. Steel Harley Davidson Use existing domestic model globally Franchise, joint ventures, subsidiaries Examples Heinz McDonald’s The Body Shop Hard Rock Cafe Multidomestic Strategy

Four International Operations Strategies Cost Reduction Considerations High Low High Low Local Responsiveness Considerations (Quick Response and/or Differentiation) Standardized product Economies of scale Cross-cultural learning Examples: Texas Instruments Caterpillar Otis Elevator Global Strategy International Strategy Import/export or license existing product Examples U.S. Steel Harley Davidson Multidomestic Strategy Use existing domestic model globally Franchise, joint ventures, subsidiaries Examples Heinz, The Body Shop McDonald’s Hard Rock Cafe

Four International Operations Strategies Cost Reduction Considerations High Low High Low Local Responsiveness Considerations (Quick Response and/or Differentiation) Standardized product Economies of scale Cross-cultural learning Examples: Texas Instruments Caterpillar Otis Elevator Global Strategy International Strategy Import/export or license existing product Examples U.S. Steel Harley Davidson Multidomestic Strategy Use existing domestic model globally Franchise, joint ventures, subsidiaries Examples Heinz The Body Shop McDonald’s Hard Rock Cafe Move material, people, ideas across national boundaries Economies of scale Cross-cultural learning Examples Coca-Cola Nestl é Transnational Strategy

Four International Operations Strategies Cost Reduction Considerations High Low High Low Local Responsiveness Considerations (Quick Response and/or Differentiation) Standardized product Economies of scale Cross-cultural learning Examples: Texas Instruments Caterpillar Otis Elevator Global Strategy Transnational Strategy Move material, people, ideas across national boundaries Economies of scale Cross-cultural learning Examples Coca-Cola Nestl é International Strategy Import/export or license existing product Examples U.S. Steel Harley Davidson Multidomestic Strategy Use existing domestic model globally Franchise, joint ventures, subsidiaries Examples Heinz The Body Shop McDonald’s Hard Rock Cafe

Mba 505 business_processes_operations_productivity_strategy

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