PROCESS MANAGEMENT

Companies begin the process of organizing operations by setting competitive priorities. That is
they must determine which of the following eight priorities are to be emphasized as competitive
advantages:

1. Low-cost operations 2. High performance design

3. Consistent quality 4. Fast delivery time
5. On-time delivery 6. Development speed
7. Product customization 8. Volume flexibility
Although all eight are obviously desirable, it is usually not possible for an operation to perform
significantly better than the competition in more than one or two.

The five key decisions in process management are:

I. Process Choice
II. Vertical Integration
III. Resource Flexibility
IV. Customer Involvement
V. Capital Intensity

These decisions are critical to the success of any organization and must be based on determining
the best was to support the competitive priorities of the enterprise.

PROCESS CHOICE

The first choice typically faced in process management is that of process choice. Manufacturing
and service operations can be characterized as one of the following:

1. Project
2. Job Shop
3. Batch Flow
4. Line Flow
5. Continuous Flow

The nature of these processes are discussed below and summarized in the manufacturing
product-process matrix on page 8.

Project Process. Examples of a project process are building a shopping center, planning a major
event, running a political campaign, putting together a comprehensive training program,
constructing a new hospital, doing management consulting work, or developing a new
technology or product. A project process is characterized by a high degree of job customization,
the large scope of each project, and the release of substantial resources, once a project is
completed. A project process lies at the high-customization, low-volume end of the process-
choice continuum. The sequence of operations and the process involved in each one are unique
to each project, creating one-of-a-kind products or services made specifically to customer order.

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Although some projects may look similar, each is unique. Firms with project processes sell
themselves on the basis of their capabilities rather than on specific products or services. Projects
tend to be complex, take a long time, and be large. Many interrelated tasks must be completed,
requiring close coordination. Resources needed for a project are assembled and then released for
further use after the project is finished. Projects typically make heavy use of certain skills and
resources at particular stages and then have little use for them the rest of the time. A project
process is based on a flexible flow strategy, with work flows redefined with each new project.

Job Shop Process. Next in the continuum of process choices is the job shop process. Examples
are custom metal processing shop, hospital emergency rooms, custom plastic injection molding
shop, or making customized cabinets. A job shop process creates the flexibility needed to
produce a variety of products or services in significant quantities. Customization is relatively
high and volume for any one product or service is low. However, volumes aren't as low as for a
project process, which by definition doesn't produce in quantity. The work force and equipment
are flexible and handle various tasks. As with a project process, companies choosing a job
process often bid for work. Typically, they make products to order and don't produce them ahead
of time. The specific needs of the next customer are unknown, and the timing of repeat orders
from the same customer is unpredictable. Each new order is handled as a single unit--as a job. A
job shop process primarily involves the use flexible flow strategy, with resources organized
around the process. Most jobs have a different sequence of processing steps.

Batch Flow Process. Examples of a batch flow process are scheduling air travel, manufacturing
garments, furniture manufacturing, making components that feed an assembly line, processing
mortgage loans, and manufacturing heavy equipment. A batch flow process differs from the job
process with respect to volume, variety, and quantity. The primary difference is that volumes are
higher because the same or similar products or services are provided repeatedly. Another
difference is that a narrower range of products or services is provided. Variety is achieved more
through an assemble-to-order strategy than the job shop’s make-to-order strategy. Some of the
components for the final product or service may be produced in advance. A third difference is
that production lots or customer groups are handled larger quantities (or batches) than they are
with job shop processes. A batch of one product or customer group is processed, and then
production is switched to the next one. Eventually, the first product or service is produced again
Batch flow processes have average or moderate volumes, but variety is still too great to warrant
dedicating substantial resources to each product or service. The flow pattern is jumbled, with no
standard sequence of operations throughout the facility. However, more dominant paths emerge
than at a job shop and some segments of the process have a linear flow.

Line Flow Process. Products created by a line process include automobiles, appliances, personal
computers, and toys. Services based on a line process are fast-food restaurants and cafeterias. A
line flow process lies between the batch and continuous processes, volumes are high, and
products or services are standardized, which allows resources to be organized around a product
or service. Materials move linearly from one operation to the next according to a fixed sequence,
with little inventory held between operations. Each operation performs the same process over
and over with little variability in the products or services provided. Production orders aren't
directly linked to customer orders, as is the case with project and job processes. Manufacturers
with line flow processes often follow a make-to-stock strategy, with standard products held in

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inventory so that they are ready when a customer places an order. This use of a line flow process
is sometimes called mass production. However the assemble-to-order strategy and mass
customization are other possibilities with line flow processes. Product variety is possible by
careful control of the addition of standard options to the main product or service. The pacing of
production may be either machine-paced or worker-paced.

Continuous Flow Process. Examples are petroleum refineries, chemical plants, and plants
making beer, steel, and processed food items. Firms with such facilities are also referred to as the
process industry. An electric generation plant represents one of the few continuous processes
found in the service sector. A continuous process is the extreme end of high-volume,
standardized production with rigid line flows and tightly linked process segments. Its name
derives from how materials move through the process. Usually one primary material, such as a
liquid, gas, wood fibers, or powder, moves without stopping through the facility. The process
often is capital intensive and operated round the clock to maximize utilization and to avoid
expensive shutdowns are start-ups.

VERTICAL INTEGRATION

All businesses buy at least some inputs to their processes, such as professional services, raw
materials, or manufactured parts, from other producers. Management decides the level of
vertical integration by looking at all the activities performed between acquisition of raw
materials or outside services and delivery of finished products or services. The more processes in
the supply chain that the organization performs itself, the more vertically integrated it is. If it
doesn't perform some processes itself, it must rely on outsourcing, or paying suppliers and
distributors to perform those processes and provide needed services and materials. When
managers opt for more vertical integration, there is by definition less outsourcing. These
decisions are sometimes called make-or-buy decisions, with a make decision meaning more
integration and a buy decision meaning more outsourcing. After deciding what to outsource and
what to do in-house, management must find ways to coordinate and integrate the various
processes and suppliers.

Vertical integration can be in two directions. Backward integration represents movement

upstream toward the sources of raw materials and parts, such as a major grocery chain having its
own plants to produce house brands of ice cream, frozen pizza dough, and peanut butter.
Forward integration means that the firm acquires more channels of distribution, such as its own
distribution centers (warehouses) and retail stores. It can also mean that the firm goes even
further, acquiring its industrial customers.

The advantages of more vertical integration are disadvantages of more outsourcing. Similarly,
the advantages of more outsourcing are disadvantages of more vertical integration. Managers
must study the options carefully before making choices

Advantages of Vertical Integration. More vertical integration can sometimes improve market
share and allow a firm to enter foreign markets more easily than it could otherwise. A firm can
also achieve savings if it has the skills, volume, and resources to perform the processes at lower
cost and produce higher quality goods and services than outsiders can. Doing the work in-house

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may mean better quality and more timely delivery--and taking better advantage of the firm's
human resources, equipment, and space. Extensive vertical integration is generally attractive
when input volumes are high because high volumes allow task specialization and greater
efficiency. Stability of process technology also favors vertical integration. It is also attractive if
the firm has the relevant skills and views the processes into which it is integrating as particularly
important to its future success. Management must identify, cultivate, and exploit its core
competencies to prevail in global competition. Core competencies are the collective learning of
the firm, especially how to coordinate diverse production processes and integrate multiple
technologies. They define the firm and provide its reason for existence. Management must look
upstream toward its suppliers and downstream toward its customers, and bring in-house those
processes that give it the right core competencies--those that allow the firm to organize work and
deliver value better than its competitors can. Management should also realize that if the firm
outsources a process that's crucial to its mission, it may lose control over that area of its business
and may even lose the ability to bring the work inhouse later.

Advantages of Outsourcing. Outsourcing offers several advantages to firms. It is particularly

attractive to those that have low volumes. For example, most small restaurants need only small
volumes of hard-boiled eggs for their salad bars. Instead of preparing their own, most turn to
suppliers such as Atlantic Foods where six employees can peel 10,000 eggs in one shift.
Obviously, a small restaurant can't match the efficiency of Atlantic Foods in boiling and peeling
eggs. Rapidly changing process technology and an emphasis on product customization also
favors outsourcing. Outsourcing can also provide better quality and cost savings.

RESOURCE FLEXIBILITY

The choices that management makes concerning competitive priorities determine the degree of
flexibility required of a company's resources--its employees, facilities, and equipment. For
example, when new products and services call for short life cycles or high customization,
employees need to perform a broad range of duties and equipment must be general purpose.
This type of flexibility is product customization. A second type of flexibility is volume
flexibility and refers to the ability to operate a facility profitably over a wide range of demand
volumes. A good example, is a fast food restaurant that is open 24 hours a day.

Work Force. Operations managers must decide whether to have a flexible work force. Members
of a flexible work force are capable of doing many tasks, either at their own workstations or as
they move from one workstation to another. However, such flexibility often comes at a cost,
requiring greater skills and thus more training and education. Nevertheless, benefits can be large:
Worker flexibility can be one of the best ways to achieve reliable customer service and alleviate
capacity bottlenecks. Resource flexibility is particularly crucial with a flexible flow strategy,
helping to absorb the feast-or-famine workloads in individual operations that are caused by low-
volume production, jumbled routings, and fluid scheduling.

The type of work force required also depends on the need for volume flexibility. When
conditions allow for a smooth, steady rate of output, the likely choice is a permanent work force
that expects regular full-time employment. If the process is subject to hourly, daily, or seasonal
peaks and valleys in demand, the use of part-time or temporary employees to supplement a

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smaller core of full-time employees may be the best solution. However, this approach may not be
practical if knowledge and skill requirements are too high for a temporary worker to grasp
quickly.

Equipment. When a firm's product or service has a short life cycle and a high degree of
customization, low production volumes mean that a firm should select flexible, inexpensive,
general-purpose equipment. When volumes are low, the low fixed cost more than offsets the
higher variable unit cost associated with this type of equipment. Conversely, specialized, higher-
cost equipment is the best choice when volumes are high and customization is low. Its advantage
is low variable unit cost. This efficiency is possible when customization is low because the
equipment can be designed for a narrow range of products or tasks. Its disadvantage is high
equipment investment and thus high fixed costs. When annual volume produced is high enough,
spreading these fixed costs over more units produced, the advantage of low variable costs more
than compensates for the high fixed costs.

CUSTOMER INVOLVEMENT

The fourth significant process decision is the extent to which customers interact with the process.
The amount of customer involvement may range from self-service to customization of product to
deciding the time and place that the service is to be provided.

Self-Service. Self-service is the process decision of many retailers, particularly when price is a
competitive priority. To save money, some customers prefer to do part of the process formerly
performed by the manufacturer or dealer. Manufacturers of goods such as toys, bicycles, and
furniture may also prefer to let the customer perform the final assembly because production,
shipping, and inventory costs frequently are lower, as are losses from damage. The firms pass the
savings on to customers as lower prices.

Product Selection. A business that competes on customization frequently allows customers to

come up with their own product specifications or even become involved in designing the
product. A good example of customer involvement is in custom-designed and -built homes: The
customer is heavily involved in the design process and inspects the work in process at various
times.

Time and Location. When services can't be provided in the customer's absence, customers may
determine the time and location that the service is to be provided. If the service is delivered to
the customer, client, or patient by appointment, decisions involving the location becomes part of
process design. Will the customer be served only on the supplier's premises, will the supplier's
employees go to the customer's premises, or will the service be provided at a third location?
Although certified public accountants frequently work on their clients' premises, both the time
and the place are likely to be known well in advance.

CAPITAL INTENSITY

For either the design of a new process or the redesign of an existing one, an operations manager
must determine the amount of capital intensity required. Capital intensity is the mix of

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equipment and human skills in the process; the greater the relative cost of equipment, the greater
is the capital intensity. As the capabilities of technology increase and its costs decrease,
managers face an ever-widening range of choices, from operations utilizing very little
automation to those requiring task-specific equipment and very little human intervention.
Automation is a system, process, or piece of equipment that is self-acting and self-regulating.
Although automation is often thought to be necessary to gain competitive advantage, it has both
advantages and disadvantages. Thus the automation decision requires careful examination.

One advantage of automation is that adding capital intensity can significantly increase
productivity and improve quality. However, the disadvantage of capital intensity can be the
prohibitive investment cost for low-volume operations. Generally, capital-intensive operations
must have high utilization to be justifiable. Also, automation doesn't always align with a
company's competitive priorities. If a firm offers a unique product or high-quality service,
competitive priorities may indicate the need for skilled servers, hand labor, and individual
attention rather than new technology.

Fixed Automation. Manufacturers use two types of automation: fixed and flexible (or
programmable). Particularly appropriate for line flow and continuous flow process choices, fixed
automation produces one type of part or product in a fixed sequence of simple operations. Until
the mid 1980s most U.S. automobile plants were dominated by fixed automation--and some still
are. Chemical processing plants and oil refineries also utilize this type of automation.

Operations managers favor fixed automation when demand volumes are high, product designs
are stable, and product life cycles are long. These conditions compensate for the process's two
primary drawbacks: large initial investment cost and relative inflexibility. The investment cost is
particularly high when a single, complex machine (called a transfer machine) must be capable of
handling many operations. Because fixed automation is designed around a particular product,
changing equipment to accommodate new products is difficult and costly. However, fixed
automation maximizes efficiency and yields the lowest variable cost per unit.

Flexible Automation. Flexible (or programmable) automation can be changed easily to handle
various products. The ability to reprogram machines is useful with both flexible flow and line
flow strategies. A machine that makes a variety of products in small batches, in the case of a
flexible flow, can be programmed to alternate between the products. When a machine has been
dedicated to a particular product or family of products, as in the case of a line flow, and the
product is at the end of its life cycle, the machine can simply be reprogrammed with a new
sequence of operations for a new product.

SERVICE OPERATION RELATIONSHIPS

The five process types described earlier provide meaningful insights into both manufacturing and
service operations. Additional insights regarding service operations, however, may be gained by
focusing on two dimensions:

1. amount of customer involvement requiring customized service, and

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 2. the degree of capital intensity

The service-process matrix on page 9 shows the relationships of these two dimensions to four
service processes: professional service, service shop, mass service, and service factory.

Professional Service. The professional service process demands high customization. Examples
of such services include management consultants, lawyers, physicians, and corporate bankers.
Professionals interact frequently with customers, often one-to-one, to understand and diagnose
each customer's individual needs. They must be able to relate well with the public, not just have
technical skills. Exercising judgment as they provide new or unique services and solutions is
commonplace. Because of the infinite variability of problems confronted, the mental and
physical requirements of these services are difficult to automate. Capital intensity is low, which
means high labor intensity; the high skill levels required are very expensive. The professionals
have a great deal of operating discretion and relatively loose superior-subordinate relationships.

Service Shop. The work force and customer also interact frequently in the service shop.
Considerable attention is given to a customer's unique requirements and preferences. Hospitals,
repair shops, and gourmet restaurants are examples of such services. In contrast to professional
service, capital intensity in the service shop tends to be high and thus labor intensity low.
Equipment often is crucial for handling diverse and specialized service requirements. Because
customization of services continues to be high with this process, work-force skill levels also
must be high, compared to a mass service or service factory process. Workers must be able to
handle new or unique services on demand. When they are in close contact with the customer,
they also must have the training and people skills to deal effectively with customers.

Mass Service. Mass service processes are quite different from the first two processes because
customized customer involvement is low. Examples of such services include wholesalers, full-
service retailers, spectator sports, and large classes at schools. Service specifications are tightly
controlled. Standardizing services increases volumes and process repeatability. Line flows are
preferred, although the customer often moves through the facility. Capital intensity is low
because automation is difficult to achieve, so labor intensity is high. Skill levels may vary but
often are low to moderate because the need for customized service is less.

Service Factory. The service factory involves the least customized customer involvement.
Examples of such services include public transportation; movie theaters; the back-room
operations in banking, insurance, and postal service facilities; dry cleaners; airport baggage
handling; and catalogue stores. The little contact that occurs between workers and customers is
for standardized services. If the customer is involved in the process, it is in doing self-service

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 The Manufacturing Product-Process Matrix
PRODUCT MIX
MANAGEMENT
PROCESS CHALLENGES
PATTERN One of a Low volume custom High volume standard Very high volume
kind products products commodity products

Very jumbled flow, Scheduling, material

process segments loosely handling, shifting
linked PROJECT bottlenecks

JOB SHOP
Jumbled flow with Worker motivation,
dominant line maintaining capacity
balance and flexibility
BATCH
FLOW
Process built around a
pacing line LINE
FLOW Capital expenses for
big chunk capacity,
technological change,
Highly automated,
CONTINUOUS vertical integration
continuous process FLOW
flow with tightly linked
segments

MANAGEMENT Bidding, delivery, Product differentiation, Price

CHALLENGES product customization volume flexibility

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 The Service-Process Matrix
CUSTOMIZATION CAPITAL INTENSITY MANAGEMENT
AND CUSTOMER LOW HIGH CHALLENGES
INVOLVEMENT

Fighting cost increases,

maintaining quality, reacting
to customer interventions in
HIGH process, managing employee
PROFESSIONAL SERVICE SHOP advancement, managing flat
SERVICE hierarchy with loose
subordinate-superior
relationships, binding
employees to firm

Marketing, making
service “warm”, attention
MASS SERVICE to physical surroundings,
LOW SERVICE FACTORY managing rigid hierarchy
with need for standard
operating procedures

Hiring, training, methods development Capital decisions, technological

MANAGEMENT and control, employee welfare, advances, scheduling delivery of
CHALLENGES scheduling workforces, start-up of new service, leveling demand
units

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 PRODUCT FLOWS BY PROCESS TYPE
PRODUCT A PRODUCT B PRODUCT C

JOB SHOP

BATCH FLOW PROCESS

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 PRODUCT FLOWS BY PROCESS TYPE
PRODUCT A PRODUCT B PRODUCT C

LINE FLOW PROCESS

CONTINUOUS FLOW PROCESS

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