Operations Strategy and Competitiveness

WHAT IS OPERATION STRATEGY? ● Firms’ ability to respond to increase and

decrease in demand is important to its
● Setting broad policies and plans for using
ability to compete.
the resources of the firm to the best support
its long-term competitive strategy. FLEXIBILITY & NEW PRODUCT INTRODUCTION
● Strategic decisions involve logic associated SPEED OTHER PRODUCT SPECIFIC CRITERIA
with planning and control systems, quality
● Ability of a company to offer a wide variety
assurance and control approaches, work
of products to its customers.
payment structures and organization of
● Technical liaison and support.
operations function.
● Meeting a launch date
OPERATION COMPETITIVE DIMENSIONS ● Supplier after sales support
● Other dimensions
COMPETITIVE DIMENSIONS
THE NOTION OF TRADE-OFFS
● Cost or Price
● Quantity ● Central to concept of operation strategy in the
● Delivery Speed notion of operation focus and trade-offs
● Delivery Reliability ● Firms cannot excel simultaneously on all
● Coping with changes in Demand competitive dimensions.
● Flexibility and New-Product Introduction ● Management has to decide which parameters of
Speed performance are critical for firms’ success and
● Other Product-Specific Criteria then concentrate resources on these particular
characteristics.
COST OR PRICE
● Plant within a plant (PWP) concept in which
● Make product or deliver the service cheap. different locations within facility are allocated
to different production line each with their own
QUALITY
operation strategy.
● Make a great product or deliver great ● Strategic position is not sustainable unless there
service are compromises with other position
● Quality has two characteristics defined as ● Straddling occurs when company seeks to
design quality and process quality. match the benefits of a
● Design quality relates to set of features the
ORDER WINNERS AND QUALIFIERS
product or service contains.
● Process Quality relates directly reliability of Interface between marketing and operations is
product or services. necessary to provide a business with an
understanding of its market from both prospective.
DELIVERY SPEED
● Order winner is a criterion that differentiates
● Make product or deliver the service quickly.
products or services of one firm from
● Firms’ ability to deliver more quickly than
another
competitors
● Order Qualifier is a screening criterion that
DELIVERY RELAIBILITY permits a firm’s products to even be
considered as possible candidates for
● Deliver it when promised. purchase.
● Firms’ ability to supply product or service on
or before promised delivery date and time CORPORATE STRATEGY DESIGN PROCESS

COPING WITH CHANGES IN DEMAND

 focusses on cost reduction and efficiency. Two
components are: -

● Improve cost structure – Lowering the direct

cost of products and services reducing
indirect cost and share common resources
with other business unit.
● Improve asset utilization – Reduce the
working and fixed capital needed to support
a given level of business by more efficient
utilization, more careful acquisition or
disposal of parts of current and fixed asset.

CORPORATE STRATEGY DESIGN PROCESS

The Customer perspective

CORPORATE STRATEGY DESIGN PROCESS
The customer perspective is the heart of strategy
Financial Prospective and defines how growth will be achieved. This value
proposition defines the specific strategy to
Whether companies use return on investment, compete for new customers or an increased share
return on capital employed (ROCE), Economic Value of existing customers. Three strategies are defined:
Added (EVA) or some other value-based metric as a -
high-level financial objective
● Product leadership – A product leadership
They have basic two strategies companies pushes its product into realm of
● Revenue growth strategy the unknown, the untried or highly desirable.
● Productivity strategy ● Customer intimacy – This type companies
builds bonds with its customers: it knows the
CORPORATE STRATEGY DESIGN PROCESS people to whom it sells and the product and
Financial Perspective services it needs.
● Operational Excellence – Operationally
Revenue growth strategy Excellent Companies delivers a combination
Revenue growth strategy focusses on developing of quality, price and ease of purchase that
new sources and profitability it has generally two no one else can match.
components: - CORPORATE STRATEGY DESIGN PROCESS
● Built a franchise – Develop new sources of The Internal Perspective
revenue from new market new products or
new customers. This strategy implies It defines the business process and the specific
greatest amount of change but longer time activities the organization must master to support
to execute. customer value proposition.
● Increase customer value – work with existing ● Innovation process
customers to expand their relationship with ● Customer management process
company. ● operational process
CORPORATE STRATEGY DESIGN PROCESS ● Regulatory and environment process

Financial Prospective It is important that companies whose operation

entail significant Environment, Health, Safety (EHS)
Productivity strategy risk need to comply with regulations in community
Efficient execution of operational activities in where they operate.
support of existing customers. Productivity strategy CORPORATE STRATEGY DESIGN PROCESS
The learning and growth prospective

It defines the intangible asset needed to enable

activities and customer relationship to be
conducted at higher levels of performance.

There are three principal categories: -

● Strategic competencies – Strategic skills and

knowledge required by workforce support
strategy
● Strategic technologies – are the materials
and process technologies, information
system, database, tools and network
required to support the strategy.
STRATEGIC FIT: FITTING OPERATIONAL ACTIVITY
● Climate for actions – cultural shifts needed
TO STRATEGY
to motivate, empower and align the
workforce behind strategy. A Framework for operating strategy in
manufacturing
STRATEGIC FIT: FITTING OPERATIONAL ACTIVITY
TO STRATEGY Linked vertically to customer and horizontally to
other parts of enterprise.
● Activities of firms’ operation related to one
another. Core Capabilities – skills that differentiates the
● Making these activities efficient means service or manufacturing from others. Getting
minimizing total cost advanced with technologies.
● Also making them effective means making
Operations & Supply Chain Framework
the combined set of activities support the
firm strategy.

Activity System Map

● shows how company strategy is delivered

through a set of tailored activities.
● useful in understanding how good the fit is
between the system of activities and
comparing Strategy.
● Competitive advantage comes from the way
a firms activities fit and reinforce one
another
STRATEGIC FIT: FITTING OPERATIONAL ACTIVITY
Figure 1: Southwest Airlines: Low-Cost Advantage TO STRATEGY

Developing Manufacturing Strategies

OBJECTIVES

● Translate required competitive dimensions

into specific performance requirement for
operations.
● To make plans necessary to ensure that
operations capabilities are significant to
accomplish them.
STEPS

1. Segment the market according to product

group.
2. Identify the product requirements, demand
patterns and profit margin of each group
3. Determine the order winners & order
qualifiers of each group.
4. Convert order winners into specific
performance requirement.

STRATEGIC FIT: FITTING OPERATIONAL ACTIVITY

TO STRATEGY

Operation Strategy in services

● PWP
● focus on uniqueness
● Good location
● Easy access
● Identify order winner and order qualifier.

STRATEGIC FIT: FITTING OPERATIONAL ACTIVITY

TO STRATEGY

Internet complements Strategy

● Replaced conventional ways of doing

business
● Strategies that employ online activities do
not eliminate the need for physical activity.
● Integration of Internet and traditional way
of competing should be a win for any
company.

PRODUCTIVITY MEASUREMENT

Key Performance Indicators

● A quantifiable measure used to evaluate the

success of an organization, Employees etc. in
meeting objectives for performance.

Productivity

● It is a common measure of how well

industry, business unit is using its resources

OPERATION MANAGEMENT focusses on making

the best use of available resources. PRODUCTIVITY
measurement is fundamental to understand
operation related performance.
 Operations Management Technology
Importance of Technology • Many manufacturing industries use specialized
technology.
Virtually everything that is done on a
business depends on some type of technology. Production Process for Jigsaw Puzzle Making

Technology is evolving at an extremely rapid

pace.

Technological innovation in goods, services,

manufacturing, and service delivery is a
competitive necessity.

Hard Technology refers to equipment and devices

that perform a variety of tasks in the creation and
delivery of goods and services.

Soft Technology is the application of the Internet,

computer software, and information systems to
provide date, information, and analysis and to
facilitate the accomplishment of creating and
delivering goods and services.
Examples of Machining Technology
RFID

Radio Frequency ID (RFID) tags are the modern

successor to bar codes.

RFID tags are tiny computer chips that transmit

radio signal and can be mounted on packages or
shipping containers to help organizations identify
product locations and movement.

RFID tags are being embedded in virtually

everything, from clothes to supermarket products
to livestock, to prescription medicines, and have
been used to monitor residents in assisted living
buildings and track the movements of doctors, E-Commerce View of the Value Chain
nurses, and equipment in hospital emergency
rooms.

Manufacturing Technology Tours

• Making jigsaw puzzles consists of three major

steps: making puzzle pieces, making puzzle boxes,
and final assembly (see diagram on next slide).

• Manufacturing motorcycle transmission gears:

Mazak machining center can operate unattended
for hours—highly automated production (see
diagram on slide 8).

Integrated Operating System (IOS)

• Integrate hard and soft technology across the Customer Relationship Management Systems
organization, allowing managers to make better
• Customer relationship management (CRM) is a
decisions and share information across the value
business strategy designed to learn more about
chain.
customers’ wants, needs, and behaviors in order to
• Computer integrated manufacturing systems build customer relationships and loyalty, and
(CIMS), enterprise resource planning (ERP) systems, ultimately enhance revenues and profits.
and customer relationship management (CRM)
Service Technology
systems are IOSs.
• Service technologies are used behind the scenes
Computer-Integrated Manufacturing Systems
to facilitate your experience as a customer.
• Computer-integrated manufacturing systems
• E-service refers to using the Internet and
(CIMS) represent the union of hardware, software,
technology to provide services that create and
database management, and communications to
deliver time, place, information, entertainment, and
automate and control production activities.
exchange value to customers and/or support the
• A robot is a programmable machine designed to sale of goods.
handle materials or tools in the performance of a
Service Technology
variety of tasks.
• Many health care facilities are adopting electronic
CIMS
medical record (EMR) systems that can be easily
• CAD/CAE enables engineers to design, analyze, integrated with medical records, billing, patient
test, simulate, and “manufacture” products before scheduling, and accounting (see text box).
they physically exist.
• Technology at UPS such as handheld devices,
• CAM involves computer control of the UPSnet, UPS Mail, etc. (see text box).
manufacturing process.
Service Technology
• Flexible manufacturing systems (FMS) consist of
Automation is found in many areas of services,
two or more computer-controlled machines linked
including automated car washes, robotic surgery,
by automated handling devices.
mail sorting machines, delivery of medical records
Enterprise Resource Planning within hospitals, automated one-man garbage
trucks, fetal monitors, electronic hotel keys and
• Enterprise Resource Planning (ERP)systems
locks, airline auto-pilot, and entertainment using
integrate all aspects of a business—accounting,
robots such as Disney World’s Hall of Presidents
customer relationship management, supply chain
and Country Bear Jamboree.
management, manufacturing, sales, human
resources—into a unified information system and Using Technology to Improve Library Service
provide more timely analysis and reporting of sales,
The Metropolitan Library System in Oklahoma City
customer, inventory, manufacturing, human
is implementing a new scanning system that uses
resource, and accounting data.
radio-frequency identification (RFID) tags to keep
Enterprise Resource Planning (ERP) track of books. The program will cost the library
system about $400,000. The system is designed to
Two prominent vendors of ERP software are SAP
speed up check-out times. Up to five books can be
and Oracle.
checked in or out at once. One of the most helpful
• ERP allows departments to share information and features is a new shelf scanner. Librarians used to
communicate with each other easily. check books one at a time, making sure they were
on the right shelf and in the right place. Library
• ERP is not about software, but about changing the
productivity will also increase.
way the organization and its operations are
managed. Technology in Value Chains
Four major types of business relationships: • Stage II. Turbulence

• B2B: Business to Business • Stage III. Build-out

• B2C: Business to Customer

• C2C: Customer to Customer

• G2C: Government to Customer Examples:

Electronic transaction capability allows all parts of • Global Digital Revolution (see text box)
the value chain to immediately know and react to
• U.S. Railroad Industry
changes in demand and supply.
Bracket International-The RFID Decision Case
Study

By searching the Internet and library, summarize

Example Benefits and Challenge of Adopting the advantages and disadvantages of RFID
Technology systems. How does RFID compare to bar-coding?
Did you find any RFID applications for services?
(Maximum of two pages) What is the payback for
this possible RFID adoption? What do you
recommend Mr. Bracket do in the short- and
long-term? Explain your reasoning.

Examples of Service Technology

Making Technology Decisions

• Scalability is a measure of the contribution margin

required to deliver a good or service as the
business grows and volumes increase.

• High scalability is the capability to serve

additional customers at zero or extremely low
incremental costs (e.g., Monster.com).

• Low scalability implies that serving additional

customers requires high incremental variable costs
(e.g., see WebVan).

• Many of the dot.coms that failed in the year 2000

had low scalability and unsustainable demand

How Intel describes the history of technology

revolutions:

• Stage I. Birth
 VALUE CHAIN ANALYSIS
Assessing the Internal Environment of the Firm

The Limitations of SWOT Analysis

● Strengths may not lead to an advantage

● SWOT’s focus on the external environment is too
narrow
● SWOT gives a one-shot view of a moving target
● SWOT overemphasizes a single dimension of
strategy

Value-Chain Analysis
Primary Activity: Inbound Logistics
● a strategic analysis of an organization
that uses value creating activities. Associated with receiving, storing and distributing
inputs to the product
Value is the amount that buyers are willing to pay
for what a firm provides them and is measured by ● Location of distribution facilities
total revenue ● Warehouse layout and designs

Primary activities Primary Activity: Operations

● contribute to the physical creation of the Associated with transforming inputs into the final
product or service, its sale and transfer to the product form
buyer, and its service after the sale. ● Efficient plant operations
● inbound logistics, operations, outbound ● Incorporation of appropriate process
logistics, marketing and sales, and service technology
QUESTION ● Efficient plant layout and workflow design

In assessing its primary activities, an airline would Primary Activity: Outbound Logistics
examine: Associated with collecting, storing, and distributing
A. Employee training programs the product or service to buyers

B. Baggage handling ● Effective shipping processes to provide

quick delivery and minimize damages
C. Criteria for lease versus purchase decisions ● Shipping of goods in large lot sizes to
minimize transportation costs.
D. The effectiveness of its lobbying activities
Primary Activity: Marketing and Sales
Support activities
Associated with purchases of products and services
● activities of the value chain that either add
by end users and the inducements used to get them
value by themselves or add value through
to make purchases
important relationships with both primary
activities and other support activities ● Innovative approaches to promotion and
● procurement, technology development, human advertising
resource management, and general ● Proper identification of customer segments
administration. and needs
The Value Chain Primary Activity: Service

Associated with providing service to enhance or

maintain the value of the product
 ● Quick response to customer needs and Two levels
emergencies
● Interrelationships among activities within
● Quality of service personnel and ongoing
the firm
training 3-14
● Relationships among activities within the
Support Activity: Procurement firm and with other organization (e.g.,
customers and suppliers)
Function of purchasing inputs used in the firm’s
value chain Value Chains in Service Industries

● Procurement of raw material inputs

● Development of collaborative “win-win”
relationships with suppliers
● Analysis and selection of alternate sources
of inputs to minimize dependence on one
supplier

Support Activity: Human Resource Management

Activities involved in the recruiting, hiring, training,

development, and compensation of all types of
personnel
Resource-Based View of the Firm
● Effective recruiting, development, and
retention mechanisms for employees ● Perspective that firms’ competitive
● Quality relations with trade unions advantages are due to their endowment of
● Reward and incentive programs to motivate strategic resources that are valuable, rare,
all employees costly to imitate, and costly to substitute.

Support Activity: Technology Development Two perspectives

Related to a wide range of activities and those ● The internal analysis of phenomena within a
embodied in processes and equipment and the company
product itself ● An external analysis of the industry and its
competitive environment
● Effective R&D activities for process and
product initiatives Types of Resources
● Positive collaborative relationships between Tangible resources
R&D and other departments
● Excellent professional qualifications of ● organizational assets that are relatively
personnel easy to identify, including physical assets,
financial resources, organizational
Support Activity: General Administration resources, and technological resources.
Typically supports the entire value chain and not Intangible resources organizational
individual activities
● assets that are difficult to identify and
● Effective planning systems account for and are typically embedded in
● Excellent relationships with diverse unique routines and practices, including
stakeholder groups human resources, innovation resources, and
● Effective information technology to reputation resources.
integrate value-creating activities
Organizational capabilities
Interrelationships among Value-Chain Activities
within and across Organizations ● The competencies and skills that a firm
employs to transform inputs into outputs.
QUESTION ● Customers
● Owners
Gillette combines several technologies to attain
unparalleled success in the wet shaving industry. Financial Ratio Analysis
This is an example of their A. Tangible resources
Five types of financial ratios
B. Intangible resources
● Short-term solvency or liquidity
C. Organizational capabilities ● Long-term solvency measures
● Asset management (or turnover)
D. Strong primary activities
● Profitability
Firm Resources and Sustainable Competitive ● Market value
Advantages
Financial Ratio Analysis
● First, the resource must be valuable in the
● Historical comparisons
sense that it exploits opportunities and/or
● Comparison with industry norms
neutralizes threats in the firm’s environment.
● Comparison with key competitors
● Second, it must be rare among the firm’s
current and potential competitors. Five Types of Financial Ratios
● Third, the resource must be difficult for
competitors to imitate.
● Fourth, the resource must have no
strategically equivalent substitutes.

29. Sources of Inimitability

● Physical uniqueness
● Path dependency
● Causal ambiguity
● Social complexity

The Generation and Distribution of a Firm’s Profits

Four factors help explain the extent to which

employees and managers will be able to obtain a
proportionately high level of the profits that they The Balance Scorecard
generate
Provides a meaningful integration of many issues
● Employee bargaining power that come into evaluating a firm’s performance
● Employee replacement cost
● Employee exit costs Four key perspectives
● Manager bargaining power ● How do customers see us?
Evaluating Firm Performance ● What must we excel at?
● Can we continue to improve and create
Financial ratio analysis value?
● How do we look to shareholders?
● Balance sheet
● Income statement Customer Perspective
● Historical comparison
● Comparison with industry norms ● Time
● Comparison with key competitors ● Quality
● Performance and service
Stakeholder perspective ● Cost
● Employees Internal Business Perspective
 ● Processes
● Decisions
● Actions
● Coordination
● Resources and capabilities

Innovation and Learning Perspective

● Introduction of new products and services

● Greater value for customers
● Increased operating efficiencies

Financial Perspective

● Profitability
● Growth
● Shareholder value
● Increased market share
● Reduced operating expenses
● Higher asset turnover

Potential Limitations of the Balanced Scorecard

● Lack of a clear strategy

● Limited or ineffective executive sponsorship
● Too much emphasis on financial measures
rather than non-financial measures
● Poor data on actual performance
● Inappropriate links to scorecard measures to
compensation
● Inconsistent or inappropriate terminology
 PROCESS SELECTION, DESIGN, AND ANALYSIS
Three Types of Goods and Services 3. Flow shop processes are organized around a
fixed sequence of activities and process steps, such
1. Custom, or make-to-order, goods and
as an assembly line, to produce a limited variety of
services are generally produced and
similar goods or services.
delivered as one-of-a-kind or in small
quantities, and are designed to meet specific Characteristics: Little or no setup time,
customers’ specifications. dedicated to small range of goods or services that
● Examples include ships, weddings, are similar, similar sequence of process steps,
certain jewelry, estate plans, moderate to high volume.
buildings, and surgery
An assembly line is a common example of a
2. Option,or assemble-to-order, goods and
flow shop process. Many option-oriented and
services are configurations of standard
standard goods and services are produced in
parts, subassemblies, or services that can be
flow-shop settings.
selected by customers from a limited set.
● Examples are Dell computers, Subway Examples: automobiles, appliances, insurance
sandwiches, machine tools, and travel policies, checking account statements, and hospital
agent services. laboratory work.
3. Standard, or make-to-stock, goods and
services are made according to a fixed A continuous flow process creates highly
design, and the customer has no options standardized goods or services, usually around the
from which to choose. clock in very high volumes.
● Examples: appliances, shoes, sporting Characteristics: not made from discrete
goods, credit cards, online Web-based parts, very high volumes in a fixed processing
courses, and bus service. sequence, high investment in system, 24-hour/7-day
Four Types of Processes continuous operation, automated, dedicated to a
small range of goods or services.
1. Projects are large-scale, customized initiatives
that consist of many smaller tasks and activities that Examples: chemical, gasoline, paint, toy, steel
must be coordinated and completed to finish on factories; electronic funds transfer, credit card
time and within budget. authorizations, and automated car wash.

Characteristics: one-of-a-kind, large scale, Characteristics of Different Process Type

complex, resources brought to site; wide variation in
specs and tasks.

Examples of projects: legal defense

preparation, construction, customer jewelry,
consulting, and software development.

2. Job shop processes are organized around

particular types of general-purpose equipment that
are flexible and capable of customizing work for
individual customers.

Characteristics: Significant setup and/or

changeover time, batching, low to moderate volume,
many routes, many different products, high
work-force skills, and customized to customer’s
specs.

Examples: Many small manufacturing

companies are set up as job shops, as are hospitals,
legal services, and some restaurants.
Product-Process Matrix The service encounter activity sequence
consists of all the process steps and associated
service encounters necessary to complete a service
transaction and fulfill customer’s wants and needs.

Customer-routed services are those that

offer customers broad freedom to select the
Process Choice in Services pathways that are best suited for their immediate
needs and wants, from many possible pathways
The product-process matrix does not transfer
through the service delivery system.
well to service businesses and processes.
The customer decides what path to take
In the product-process matrix, product
through the service delivery system with only
volume, the number of products, and the degree of
minimal guidance from management.
standardization/customization determine the
manufacturing process that should be used. Examples include searching the Internet,
museums, health clubs, and amusement parks.
This relationship between volume and
process is not found in many service businesses. Provider-routed services constrain
customers to follow a very small number of possible
For example, to meet increased volume,
and predefined pathways through the service
service businesses such as retail outlets, banks, and
system.
hotels have historically added capacity in the form
of new stores, branch banks, and hotels (i.e., bricks A newspaper dispenser is an extreme
and mortar) to meet demand, but do not change example of a service system design with only one
their processes. pathway, thus allowing a single service encounter
activity sequence.
So, new ways to think about services and
their processes are needed, such as the Service Logging on to your secure online bank
Positioning Matrix. account is provider-routed.

A pathway is a unique route through a The position along the horizontal axis of the
service system. Pathways can be customer- or Service-Positioning Matrix is described by the
provider-driven, depending on the level of control sequence of service encounters. It depends on two
that the service firm wants to ensure. things:

Service Positioning Matrix 1. The degree of customer discretion,

freedom, and decision-making power in
 selecting their service encounter activity
sequence.

Customers may want the opportunity to

design their own unique service encounter
activity sequence, in any order they choose.

2. The degree of repeatability of the service

encounter activity sequence.

Service encounter repeatability refers to the

frequency that a specific service encounter
activity sequence is used by customers.

The position along the vertical axis of the

Service Positioning Matrix reflects the number of
A process map (flowchart) describes the
pathways built into the service system design by
sequence of all process activities and tasks
management. It depends on two things:
necessary to create and deliver a desired output or
1. The number of unique pathways (routes) outcome.
that customers can take as they move
A process map can include the flow of goods,
through the service system during delivery
people, information, or other entities, as well as
of the service.
decisions that must be made and tasks that are
2. Management’s degree of control designed
performed.
into the service delivery system.
Process maps document how work either is,
The hierarchy of work is defined as:
or should be, accomplished, and how the
(1) Task transformation process creates value.

(2) Activity Process maps delineate the boundaries of a

process. A process boundary is the beginning or
(3) Process
end of a process.
(4) Value Chain
A process flowchart is the basis for value
A task is a specific unit of work required to create stream mapping, service blueprinting, and service
an output. An example is drilling a hole in a steel maps.
part or completing an invoice.
Service blueprints add a “line of visibility”
An activity is a group of tasks (sometimes called a that separates the back and front office (rooms) as
workstation) needed to create and deliver an shown in Exhibit 7.5.
intermediate or final output. Workstations might be
Many names are used for the analysis and
a position on an assembly line, a manufacturing cell,
development of process flowcharts, so don’t let
or an office cubicle.
corporate fads and buzzwords confuse you—the
Value chain and process have been previously basics of process analysis don’t change, just the
defined. buzzwords and consultant’s sales pitch!

Automobile Repair Flowchart

 However, the difference between VSM and
these other flowcharting and analysis approaches
lies in that value stream maps highlight
value-added versus non-value-added activities,
and include costs associated with work activities for
both value- and non-value added activities.

That is, VSM tries to include the economics of

the process on the flowcharts.

There are many formats for VSM, such as

Exhibit 7.7.

Value Stream Map for Restaurant Order

Posting and Fulfillment Process

Value Stream Mapping

The value stream refers to all value-added

activities involved in designing, producing, and
delivering goods and services to customers.

A value stream map (VSM) shows the process

flows in a manner similar to a traditional process
flowchart or service blueprint.

Traditional flowcharting, service blueprinting,

and value stream mapping all try to analyze wait
and process times, bottleneck work stations, process
throughput, and so on.
Examples of non-value-added activities
include:

● transferring materials between two

nonadjacent workstations
● overproducing
● waiting for service or work to do
● not doing work correctly the first time
● requiring multiple approvals for a low
cost electronic transaction
 Eliminating non-value-added activities in a ● Increasing revenue by improving process
process design is one of the most important efficiency in creating goods and services and
responsibilities of operations managers (see Chapter delivery of the customer benefit package.
17 on Lean Operating Systems). ● Increasing agility by improving flexibility and
response to changes in demand and
Process Design Methodology
customer expectations.
1. Define the purpose and objectives of the
Management strategies to improve process
process.
designs usually focus on one or more of the
2. Create a detailed process or value stream
following (continued from previous slide):
map that describes how the process is
currently performed. ● Increasing product and/or service quality by
3. Evaluate alternative process designs. Identify reducing defects, mistakes, failures, or
and define appropriate performance service upsets.
measures for the process. ● Decreasing costs through better technology
4. Select the appropriate equipment and or elimination of non-value-added activities.
technology. ● Decreasing process flow time by reducing
5. Develop an implementation plan to introduce waiting time or speeding up movement
the new or revised process design. through the process and value chain.

ProcessMapping Improves Pharmacy Service Reengineering and Creative Destruction

Metro Health Hospital in Grand Rapids, Reengineering has been defined as “the
Michigan, applied process mapping reducing the fundamental rethinking and radical redesign of
lead time for getting the first dose of a medication business processes to achieve dramatic
to a patient in its pharmacy services operations. The improvements in critical, contemporary measures of
lead time was measured from the time an order performance, such as cost, quality, service, and
arrived at the pharmacy to its delivery on the speed.”
appropriate hospital floor. A process improvement
Process Design and Resource Utilization
team carefully laid out all the process steps involved
and found that it had a 14-stage process with some Utilization is the fraction of time a workstation or
unnecessary steps, resulting in a total lead time of individual is busy over the long run.
166 minutes. During the evaluation process, the
pharmacy calculated that technicians were spending Understanding resource utilization is an important
77.4 percent of their time locating products; when a aspect of process design and improvement.
pharmacist needed a technician for clinical
activities, the technician was usually off searching
for a drug. --- Overall, the pharmacy at Metro
realized a 33-percent reduction in time to get
medications to patients, and reduced the number of
process steps from 14 to nine simply by removing
non-value-added steps. Patients have experienced a
40-percent reduction in pharmacy-related
medication errors, and the severity of those errors
If you know any three of the four variables in
has decreased.
Equation 7.2, you can solve for the 4th!
Process Analysis and Improvement
Solved Problem
Few processes are designed from scratch.
An inspection station for assembling printers
Many process design activities involve redesigning
receives 40 printers/hour and has two inspectors,
an existing process to improve performance.
each of whom can inspect 30 printers per hour. What
Management strategies to improve process designs
is the utilization of the inspectors? What service rate
usually focus on one or more of the following:
would be required to have a target utilization of 85
percent?
Solution Revised Utilization Analysis of Restaurant Order
Posting and Fulfillment Process (4 chefs)
The labor utilization at this inspection station is
calculated to be 40/(2 × 30) = 67%. If the utilization
rate is 85%, we can calculate the target service rate
by solving the equation:

85% = 40/(2 × SR)

1.7 × SR = 40 Revised Utilization Analysis of Restaurant Order

SR = 23.5 printers/hour Posting and Fulfillment Process (4 ovens)

Restaurant Order Posting and Fulfillment Process

Simplified Restaurant Fulfillment Process

Utilization Analysis of Restaurant Order Posting

and Fulfillment Process

Little’s Law

Little’s Law is a simple formula that explains the

relationship among flow time (T), throughput (R) and
work-in-process (WIP).

WORK-IN-PROCESS = THROUGHPUT × FLOW

TIME
Throughputand Bottlenecks
or
The average number of entities completed per unit
time—the output rate—from a process is called WIP = R × T[7.3]
throughput.
Flow time, or cycle time, is the average time it
Throughput might be measured as parts per day, takes to complete one cycle of a process.
transactions per minute, or customers per hour,
depending on the context. Little’s Law provides a simple way of evaluating
average process performance.
A bottleneck is the work activity that effectively
limits throughput of the entire process. If we know any two of the three variables, we can
compute the third using Little's Law.
Where’s the bottleneck work activity in Exhibits 7.6
and 7.8?
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on-design-and-analysis