Chapter 1: Process Management and Strategy

1.1 The Process View of Organizations

 Process – Any Transformation that converts inputs to outputs – A systematic series of actions directed to some end.
o Considers any organization to be a process with interconnected sub processes
 Elements that characterize the transformation of a process:
o 1. Inputs & Outputs – To view an organization as a process, we must first identify its inputs and outputs
 Inputs – Any tangible or intangible items that ‘flow’ into the process from the environment.
 Includes RM, component parts, energy, data, and customers in need of service.
 Outputs – Any tangible or intangible items that flow from the process back into the environment
 Finished products, pollution, processed information, or satisfied customers
o 2. Flow Units – The item being analyzed
 May be an unit of input, or a unit of output
 Can also be the financial value of the input or output
o 3. Network of activities and buffers - Process activities are linked so the output of one becomes an input of another
 Activity – The simplest form of transformation; it is the building block of a process
 Buffer – Stores flow units that have finished with one activity but are waiting for the next activity to start
 Inventory – Storage, the total number of flow units present within process boundaries
 Precedence Relationships Among Activities – The sequential relationships that determine which activity must
be finished before another can begin
 Strongly influence the time performance of the process
o 4. Resources – Tangible assets
 1. Capital – Fixed assets such as land, buildings, facilities, equipment, machines, and IS
 2. Labor – People such as engineers, operators, CSReps, and sales staff
 Facilitate the transformation of inputs into outputs during the process
o 5. Information Structure - Shows what information is needed and is available to whom in order to perform activities or
make managerial decisions
 Business Process – A network of activities separated by buffers and performed by resources that transform inputs into outputs
 Process Design – specifies the structure of a business process in terms of inputs, outputs, the network of activities and buffers, and
the resources used
 Process Flow Management – A set of managerial policies that specify how a process should be operated over time and which
resources should be allocated to which activities
 Value Stream/Chain Mapping – A tool used to map the network of activities and buffers in a process identifying the activities that
add value and those like waiting that are wasteful
o Goal: Enable process designers and managers to focus on process improvement by adding value to the final product
 The Process View of organizations is our main tool for:
o 1. Evaluating processes
o 2. Studying the ways in which processes can be designed, restructured, and managed to improve performance

1.2 Performance Measures

 Effectiveness of a Process Is Determined By:

o 1. Evaluation and measurement of the firm’s current and past performance
o 2. Future goals as expressed by the firms strategy
 Quantitative Measurements: Financial, external, and internal

1.2.1 The Importance of Measurement: Management by Fact

 Professional Manager – Defined by General Motors Chairman Alfred Sloan – Someone who manages by fact rather than by
intuition or emotion
 Performance measurement is essential in designing and implementing incentives for improving products and processes and for
assessing the result of improvements

1.2.2 Types of Measures: Financial, External and Internal

 Solid financial performance depends on the ability of a process to effectively meet customer expectations. Thus process
management requires external measures that track customer expectations and internal measures that gauge the effectiveness
of the process in meeting them.
 Financial Measures – Track the difference between the value provided to customers and the cost of producing and delivering
the product or service.
o Represents the goal of the organization but cannot be used as the sole measures to manage and control processes
o It is important to link financial measures to external measures that track customer satisfaction with the process
output and internal measures that track operational effectiveness
o Goal: Maximize the difference
o Quarterly Reports:
 1. Absolute Performances (revenues, costs, net income, profit
 2. Performance relative to asset utilization (accounting ratios, ROA, ROI, inventory turns)
 3. Survival strength (cash flow)
o External Measures - indicate how customers view the organization’s products and services
 Track customer expectations in terms of product or service cost, response time, variety, and quality, as
well as customer satisfaction with performance along these dimension
 Can be used to estimate the value of goods or services to customers
 American Society for Quality UOMichigan – American Customer Satisfaction Index – tracks overall
customer satisfaction in several mfging. And service industries and public sectors. Score is weighed
average of customer responses to questions relating to service, quality, value, and the extent to which
products meet expectations
 Customer Expectations Defined in terms of a Process Output
 Cost, response time, variety, and quality
 Customer Satisfaction: linked to whether the performance of the product along with the four attributes
meets or exceeds the customers’ expectations
 External market perspective that is objective and bottom-line oriented because it identifies
competitive benchmarks at which the process manager can aim
 Measures satisfaction at an aggregate not individual level. More results oriented then action
oriented. Lagging rather than leading indicators of success.
 Measures that track customer dissatisfaction can be used to guide future improvement – Warranty
repairs, recalls, field failures
 Organizations typically lose 20% of their unsatisfied customers forever. Attracting a new
customer is about 5x that of serving a current
o Internal Measures - identify areas where the process is performing well and areas where improvement is necessary.
How satisfied the customer is likely to be with the process performance.
 Internal Measures Must:
 1. Be linked to external measures that customers deem important
 2. Be directly controllable by the process manager
 Can be a predictor of external measures of customer (dis)satisfaction, if the customer expectations have
been identified accurately
 Performance can only be assessed through actual experience relative to expectations
 In order to meet customer expectations and improve financial performance, a manager requires internal
operational measures that are detailed, can be controlled, and ultimately correlate with product and
financial performance.
 Customer expectations in terms of product/service cost, response time, variety, and quality
can be translated into internal measures that track the performance of the process in terms
of processing cost, flow time, process flexibility, and output quality
o Process Flexibility: Can be measured either by the time or cost needed to switch
production from one type of product/service to another or by the # of different
products/services that can be produced and delivered
o Product Quality: Managers must be specific as to which quality dimensions are
concerned with: product features, performance, reliability, serviceability,
aesthetics, and conformance to customer expectations.
 Reliability measured in terms of durability an frequency of repair can be
assessed by:
 Failure rate which measures probability of product failure
  Mean time between failures (MTBF), which indicates how
long a product is likely to perform satisfactory before
needing repair
 Serviceability: Measured using mean time to repair (MTTR), indicates
how long a product is likely to be out of service while under repair

1.3 Products and Product Attributes

 Products – Desired set of process outputs

o Service V Products
 Services include tangible and intangible aspects experienced by the customer
 Some services are often produced and consumed simultaneously and cannot be produced in advance
 Product Attributes – Properties that customers consider important that define customer expectations (external measures help
identify product attributes)
o 1. Product Cost – The total cost that a customer incurs in order to own and experience the product
 Includes purchase prices plus any costs incurred during the lifetime of the product, including final disposal
o 2. Product delivery-response time – The total time that a customer must wait for, before receiving a product for which
he or she has expressed a need to the provider
 Related to availability and accessibility – reliability and duration
o 3. Product Variety – The range of choices offered to the customer to meet his or her needs
 Level of customization offered, number of product lines or families offered
o 4. Product Quality – The degree of excellence that determines how well the product performs.
 A function of effective design and production that conforms to design
 Most difficult to define and measure because subjective judgment and perception
 Can be seen from customer and producer perspective
 Customer: Depends on products features (what I can do), performance (how well it functions),
reliability (how consistently it functions over time), serviceability (how quickly is can be restored),
aesthetics, and conformance to expectations
o Product features and performance are influenced by quality of design
o Reliability if influenced by how well the production process conforms to design –
durability and failure-free performance over time
 PRODUCT: Cost, Time, Variety, Quality
 PRODUCT SPACE: When CTVQ are measured and quantified
 EXTNERLA MEASURES: Well defined track product performance along CTVQ relative to competition and relative to customer
expectations.
 PROUDCT VALUE: Measured by the utility that the customer derives from buying the combination of these attributes. The maximum
price a specific customer is willing to pay for a product

1.4 Process and Process Competencies

 Manufacturing – Process of producing physical goods

 Service Operations – Processes that perform services
 Operations – Business processes that design, produce, and deliver goods and services
 Process Competencies – Determine the product attributes that the process is particularly good at supplying
 Process Competence Measures
o 1. Process Cost – The total cost incurred in producing and delivery outputs. Includes RM and both fixed and variable cost
of operation the process.
o 2. Process Flow Time – The total time needed to transform a flow unit from input into output. Includes the actual
processing time as well as any waiting time a flow unit spends in buffers.
 Depends on the number of resource units and speed of processing by each resource unit
o 3. Process Flexibility – Measures the ability of the process to produce and deliver the desired product variety. Ability to
deal with fluctuating demand.
 Depends on the flexibility of its resources
 Flexible Resources – Can perform multiple different activities and produce a verity of products
 Specialized Resources – Can perform only a restricted set of activities, typically those designed for one
product
o Process Quality – The ability of the process to produce and deliver quality products.
  Includes process accuracy (precision) in producing products that conform to design specifications, as well as
reliability, and maintainability of the process

1.5 Enabling Process Success

 1. What should the process design or architecture be?

o During Process Design, managers select process architecture that best develops the competencies that will meet
expectations of the product
 Planet location and capacity, product and process design, resource choice and investment, and scale of
operation
 2. What metrics should be used to track performance of a process?
o Metric Identification – Managers identify measureable dimensions along which the performance of the process will be
tracked
o Process metrics – Derived from customer expectations and company’s strategic goals, which should related to desired
process competencies
 Goal: Provide managers with information about performance that allows them to plan, control, and improve
the process to better meet customer expectations about the product
 3. What policies should govern process operations?
o Process Planning – Identifying targets for various metric and specifying managerial policies that support that
achievement of these targets
o Managerial Policies – Specify the operation of the process and use of resources over time to best meet customer
demand
 4. How should process performance be controlled over time?
o Process Control – The tactical aspect of process management that is focused on continually ensuring that in the short
run, the actual process performance conforms to the planned performance
 Goal: continuously monitor process performance to identify instances where external factors may have
intruded into process environment, limiting its ability to conform to the planned performance
 Monitoring and correcting product cost, delivery time, inventory levels, and quality defects
 5. How should process performance be improved?
o Process Improvement – Managers identify metrics that need to be improved in the long run and work on changes in
process design or planning that are required to achieve this improvement

1.6 Some Base Process Architectures

 Process Architecture – The types of resources used to perform the activities and their physical layout in the processing network
o Spectrum: A flexible job shop process and a specialized flow shop process
 Job Shop: Uses flexible resources to produce low volumes of highly customized variety products
 Artisan bakeries, tool and die shops, management consulting firms, law firms, architectural and
design companies
 Use general-purpose resources that can perform many different activities and locate similar
resources together
 Functional/Process Layout – Groups organizational resources by processing activities or functions
in departments
 Simultaneously many products flowing through the process, each with its own resource needs and
route
 Large amount of storage buffers and substantial waiting between activities
 Highly structured IS to direct work flow
 Because high variety, resources often need setups before they can be changed over - delays, loss of
production, fluctuating workload
 Less process flexibility that permits product customization
 High processing costs and long flow times
 Flow Shops: Uses specialized resources that perform limited tasks but do so with high precision and speed
 Standardized product produced quickly in large volumes
 More consistent quality
 High fixed costs for plant and equipment, low variable processing cost, economics of scale
 Resources arranged according to sequence of activities needed to produce a product, limited
storage space used between activities
  Product Layout – The location of resources is dictated by the processing requirements of the
product, network layout
o Specialization of dedicated resources, duplication
o Shorter process flow times
o Low unit-processing cost, short flow time, consistent quality at high volumes

Summary

 Process – Network of activities and buffers that use resources to transform inputs into outputs
 Effectiveness of a Process: Determined by financial performance – difference between value provided to customer and cost of
producing and delivering the product
o Financial measures are lagging – cannot be used to manage and control process
o To improve, a firm must attract and retain customers by providing goods and services that meet or exceed expectations
o To improve FP, firm must identify and deliver attributes that are valued by customers at a lower cost than the value
delivered
 Customer Expectations – Cost, delivery-response time, variety, and quality
 Value: Measured by the utilized that the customer derives from buying the combination of CTVQ
 Product attributes – Output of a process, can be measured only after the processing is complete
 Process performance – manager must manage competency in terms of cost, flow time, flexibility, and quality.
o Competencies of a process determine the products that the process will be good at supplying
o Different process architectures result in different process competencies
 Job Shop: High process flexibility, customization, but high processing cost, and long flow times
 Flow Shop: Low cost, short flow times, consistent quality, but cannot produce a wide variety of products