Process Choice

1. Process Choice

2. Duke Power • Duke Energy is the largest electric power holding company in the United States, supplying energy to approximately 7.2 million U.S. customers in the Carolinas, Ohio, the Midwest and Florida. • Headquartered in Charlotte, N.C., it is a Fortune 250 company traded on the New York Stock Exchange. • In 1995, when deregulation was looming, they realized that their processes needed to do a much better job of serving customers, but their existing structure was getting in the way. • They identified five core processes that comprised their essential work, and assigned process was assigned an owner who reports to the head of customer operations • Their customer service center is now ranked first or second in the nation, their rates are among the lowest in the nation, and in 2004 they won the EPA’s Clean Air Excellence Award. • They made the Dow Jones Sustainability North America Index for the last eight consecutive years.

3. Core Processes forDuke Power Most organizations have at least four core processes that bring value to external customers. Duke Power has identified a fifth core processes essential to their business. Calculating and Collecting Revenues Maintaining Customers “Providing Reliability and Integrity” Inputs Transformation Outputs Delivering Products And Services Developing Market Strategies

4. Major Process-Choice DecisionsDesigning production processes to fit the situation • Process Structure: How production resources are utilized • Productfocused (Line Flow), such as in a low-variety, linear-flow, production-line process. • Processfocused (Flexible Flow): Different products flow in a variety of patterns depending on what needs to be done. • Resource Flexibility: How much flexibility and where is production flexibility most needed; flexible people or flexible equipment or both? • Customer Involvement: To what extent are customers involved in the value-added process (if they are involved at all)? • Capital Intensity: The relative mix of people and equipment. • Vertical Integration: Scope of the firm’s involvement with the supply chain. (How many of their processes are in-house?)

5. What is the Supply Chain? Suppliers of resources and services Delivery of resources and services Receipt and Inspection of resources Transformation of resources (Adding Value) Finished goods and services Movement and storage of finished goods Shipment / Delivery of goods and services There are many “Processes” along this supply chain. This course is concerned primarily with the transformation processes.

6. When Do Process Decisions Arise? • When there are new or modified products • When the competitive priorities are changed. • When there are large changes in output • When current performance is inadequate • When competitors acquire a superior process • When a better technology becomes available • When changes occur in costs or availability of inputs (labor and/or resources) • When ethics or the environment make current processes inappropriate.

7. ServiceProcesses • Process strategy for service primarily focuses on • the type of service and • the degree of customer contactthat is needed. • Customer contactis the extent to which customers are present, actively involved, and receive personal attention during the process. • How much customer involvement should there be in the service process? • If customer involvement is appropriate or necessary, what is the nature of the customer involvement • What competitive priorities should be pursued?

8. Customer Contact in ServiceProcesses • Active Customer Contact: The customer is very much a part of the creation of the service, and their involvement affects the service process itself. • Passive Customer Contact: The customer is notdirectlyinvolvedin the process or in how the process is performed. • Process Complexity: The number of steps and the intricacy required by the process. • Process Divergence: The extent to which a process is highly customized for the customer, with considerable latitude as to how it is performed.

9. Service Process Structuring • Front Office Processes: Processes with high customer contact where the service provider interacts directly with the internal or external customer. • EG: Registration Advisement; doctor appointment • Hybrid Office: Processes with moderate levels of customer contact and standard services with some options available. • EG: Food court in the student center • Back Office Processes: Processes with little or no customer contact and little service customization. • EG: Processing insurance claims

10. Service Process Matrix Complex interactions Front Office Hybrid Office Process flows Back Office Linear flows Customer Involvement High Low

11. (1) (2) (3) High interaction with Some interaction with Low interaction with customers, highly customers, standard customers, standardized customized service services with some options services Process Characteristics (1) Flexible flows, complex work with many exceptions (2) Flexible flows with some dominant paths, moderate job complexity with some exceptions (3) Line flows, routine work easily understood by employees Front office Less Complexity, Less Divergence, More Line Flows Hybrid office Back office © 2007 Pearson Education Decreasing Customer Contact and Customization Service Package Service Process Matrix

12. Customer Involvement:Is it Good or Bad? • More customer involvement can mean better quality, faster delivery, greater flexibility, and even lower cost. • Customers can meet face-to-face with the service providers, ask questions, make special requests on the spot, and provide additional information. • However, customer involvement can be disruptive and make a process less efficient. • Greater interpersonal skills are required. • Quality measurement becomes more difficult. • Self-service is the choice of many retailers. • Emerging Technologies: Companies can now interact with customers in an active, on-line-dialogue with customers and make them partners in the service process.

13. Process Choice In Manufacturing • Should resources be organized around the product? (ProductFocused/ Line Flow) … or organized around the process?(ProcessFocused/ Flexible Flow) • The preferred process depends on… • High or low volume? (Line flow is better for high volume.) • Degree of process flexibility? (Flexible flow is best if product variety is needed.) • Role of quality (high, medium, consistent)? • Degree of automation? (Automated processes are line flows)

14. ManufacturingWhich type of Process? • Flexible Flow (Process Focused): The materials, products and/or information move in diverse ways, with intersecting paths. • The product moves to different locations depending on what is needed. Resources are grouped by function. • EG: Car service center • Line Flow (Product Focused): The materials, products and/or information move linearly from one operation to the next, according to a fixed sequence. Can be assembly line or continuous flow. • All production lines are product focused. Resources are arranged linearly for high-volume, efficient production. • EG: Automobile production

15. FLEXIBLE FLOW PROCESS FOCUSED Resources are grouped around the process. Better for Lower Volume High quality / custom quality Product/Service Flexibility Longer production times Volume Flexibility Low Utilization of equipment LINE FLOW PRODUCT FOCUSED Resources grouped around the product. Better for Higher Volume Consistent Quality Standardization of products Faster production times Less volume flexibility High utilization of equipment Flexible Flow Vs. Line Flow

16. Flexible(Process-Focused) Flows in Manufacturing • Flexible processes are used for making a wide variety of products in small or moderate quantities. (Low to medium volume production). There are several types of Flexible flow processes. • Job Process (Job shop): Making one or a very few unique items • A project process usually involves only one complex item. • EG: Building a bridge or a space shuttle. • Batch process: A job process with some characteristics of a line flow. Higher volume than a Job Process but less volume than a line flow. • EG: A bakery • Make-to-Order and Assemble-to-Order are also low-volume, flexible processes based on pre-orders from customers. • EG: An order for 100 custom T-shirts is a make-to-order, batch process.

17. Linear-Flow Processes In Manufacturing • Line-Flow process: A process that lies between the batch and continuous processes.Volumes are high and products are standardized, which allows resources to be organized around particular products with standardized processes. • Typical of mass-produced consumer items • Continuous Flow: The extreme end of high-volume, standardized production and rigid line flows, with production continuing for long time intervals. • EG: Power generation, oil refining, or any production line that rarely stops.

18. High Increasing Customer Involvement and Resource Flexibility Flexible Flow Job Process Intermediate Flow Small Batch Customization Large Batch Line Flow Line Process Continuous Process Increasing Capital Intensity and Vertical Integration Low Low High Volume ManufacturingProcesses

19. © 2007 Pearson Education Less Customization and Higher Volume Product Design (2) Multiple products with low to moderate volume. (1) Low-Volume products made to \order. (3) Few products Higher volume (4) Single product with high standardization Process Characteristics Matrix for Manufacturing Processes (1) Complex and highly customized process, unique sequence of tasks (2) Disconnected line flows, moderately complex work (3) Connected line, highly repetitive work (4) Continuous flows Job process Small batchprocess Less Complexity, Less Divergence, More Line Flows Batch Processes Large batch process Line process Continuous process

20. Three Production &Inventory Strategies • Make-to-stock strategy: High-volume, line flow production. Completed items are held in inventory for immediate delivery, thereby minimizing customer wait time. • Mass production: A term frequently used for a line process that uses the make-to-stock strategy for high volume output. • Assemble-to-order strategy: A strategy for producing a wide variety of products from relatively few assemblies and components. Products are assembled “after” customer orders are received. • Make-to-order strategy: Making products to customer specifications. Usually lower volume than assemble-to-order. Volume

21. Production &Inventory Emphasis(The smaller level of inventory is emphasized) Inventory Quantity • Make-to-Stock • Assemble-to-order • Make-to-Order Raw materials Sub Assemblies Finished goods Raw materials Sub Assemblies Finished goods Raw materials Sub Assemblies Finished goods

22. Make-To-Stock • Typical of most Line-Flow situations • Mass production of a few standardized products (most consumer products) • no custom-made items • special orders are rarely allowed. • The variety of raw materials is greatest, so the majority of inventory costs are in raw materials. • The variety of final products is low in relation to the variety of raw materials and parts needed, so the inventory emphasis is on finished goods. • Highly efficient production, competing on low cost, and providing consistent quality is normal.

23. Assemble-To-Order • A large variety of raw materials are used to make a relatively fewer number of parts and subassemblies. (Computers, modular homes…) • Many end products can be made from a relatively few major components or parts. • Typical customizing or small batch processing • Products are “assembled” from stocked parts according to the customer’s specifications. • An inventory of major sub-assemblies and parts, rather than final products, is maintained.

24. Make-To-Order • Firms that manufacture unique items to customer specifications. • EG: Having a suit made or a custom home built • Inventory focuses on the relatively few raw materials • Many product models and variations from relatively few raw materials. • Almost always requires Flexible Flows • Definitely individual items or small batch

25. HIGH-VOLUME PRODUCTION SITUATIONS • High volume reduces the flexibility you have to deal with suppliers and customers. • You can’t afford late deliveries from suppliers. • High volume increases the need to have control over supply channels through vertical integration. • More competitive & lower profit margins • Purchasing costs and production efficiency become critical. • Need for cost control in purchasing and production.

26. Vertical Integration Backward • Backward Integration is the acquisition of supply-chain processes that flow into your operation.(Owning suppliers, receiving delivery systems...) Forward • Forward Integrationis the acquisition of supply-chain process that connect you with the customer. Owning outlets, customer delivery systems…

27. Outsourcing • Reduces your control of the supply chain • Using other firms that can do it cheaper, better or quicker. • You give up some control by outsourcing (paying others to do some of the processes). • Outsourcing includes off-shore locations. • Outsourcing is on the increase... • Because there are more supplier options. • Information technology enables a virtual corporation

28. The Virtual Corporation • Also called a Modular or Networked Company • Outsourcing all or most of its functional areas • Requires a high degree of interaction with outsourced companies as if they were internal. • You lose considerable control since these outsourced functions are not under your direct supervision.

29. Resource Flexibility(A process decision) • How much process flexibility do you need? • It depends on your competitive priorities. • More product variety requires more process flexibility. • Higher volume usually means less product/service flexibility. Less customization, etc. • What type of Flexibility? • Work force flexibility? • Workers capable of doing a wide variety of things • Equipment flexibility? • Need for customization and general purpose equipment.

30. Resource Flexibility • Flexible workforce: A workforce capable of doing many tasks, at one or more workstations. • Worker flexibility can be one of the best ways to achieve reliable customer service and alleviate capacity bottlenecks. • This comes at a cost, requiring greater skills, more training and education, and higher salaries. • Flexible equipment: Low production volumes mean that process designers should select flexible, general-purpose equipment. • Resource Flexibility and Customer Involvement are often related. • High flexibility is needed to customize products and services. • Customer involvement is often high in these situations.

31. Flexible Automation at R.R. Donnelley • R.R. Donnelley is the largest commercial printer in the United States. ($10.2 billion in sales) • It uses a make-to-order strategy • Orders often are as high as 100,000 books. • High set-up times for new orders and time-consuming change-over of the printing presses was costly. • Flexible automation allowed them to reduce their setup times from several hours to 12 minutes. • Throughput increased 20% without having to purchase any additional printing presses. • Productivity also increased 20%.

32. Capital Intensity(A process decision) Capital Intensity refers to the mix of equipment and human labor. The higher the cost of equipment relative to labor costs, the greater the capital intensity. • Automation is a self-acting and self-regulating system, process, or piece of equipment. • Fixed automation is a manufacturing process that produces one type of part or product in a fixed sequence of automatic operations. (Line flow) • Flexible (programmable) automation is a manufacturing process that can be easily changed to handle product variety. (A flexible Line-flow)

33. What Degree of Capital Intensity? • What mix of people and equipment? • High-cost equipment is considered capital intensive, even if there are a lot of workers relative to the quantity of equipment. • The real determinant of capital intensity is the cost of equipment relative to labor cost. • High Volume leads companies to seek the cost-reduction measures and the greater efficiency that automation provides. (Economies of scale) • Automationis more expensive (higher fixed cost) and thus is more capital intensive, but has lower variable costs.

34. High Customer Involvement Resource Flexibility Flexible Flow Job Process Intermediate Flow Small Batch Customization Large Batch Line Flow Line Process Capital Intensity Vertical Integration Continuous Process Low Low High Volume High Capital Intensity High capital intensity is associated with... - High vertical integration - Low customer involvement - Low resource flexibility - High volume Product-Focused Firms(Line Flows)

35. Break-Even And Capital Intensity PROCESS “B”Less Automated Process (Less Capital Intensity) Costs more at high volume PROCESS“A”More AutomatedProcess (Greater Capital Intensity) Costs more at lower volume Break-Even Point Total Process Cost Volume of Output (Q)

36. Demand is the Key! • Demand determines Volume. • Volume influences the processused • Higher volumes tend to require . . . • greater vertical integration • line flows (a more capital intensive process) • less customer involvement • less process flexibility

37. Services can be Capital Intensive Labor Intensity Professional Services Service Shop • Hospitals • Schools • Resorts • Doctors • Barbers • Consultants Customer Involvement Service Factory Mass Service • Insurance • Postal Service • Mail Order • WalMart • Malls • Sports Events Capital Intensity

38. Economies of Scale • Achieving a low-cost per unit is known as economies of scale. • Usually only larger companies can achieve it using line-flow processes and automation. • Service can also have relative economies of scale. • The primary sacrifice usually means giving up process flexibility. • Process-focused processes are more flexible. • Traditionally capital intensity and resource flexibility were mutually exclusive. • Flexible automation is changing that.

39. Economies of Scope • Having Economies of Scale andProduct Flexibilityon a high-volume line flow. • Achieved through Computer Integrated Manufacturing(Also called Flexible AutomationorProgrammable Automation) • These are High-Volume, Line-Flow processes that are highly automated and flexible. • Tend to be very expensive to implement. • Very capital intensive

40. The Value of Automated Flexible Technology It is very costly to install, but its benefits are ... • It brings flexibility to a line-flow process • Reduces labor costs but requires higher initial capital expenditures • Can produce more product varieties at high volume with lower per/unit costs • Enables consistent quality

41. Focused Factories • Bureaucracies that get too big are inefficient. • Production facilities have the same problem. • Economies of scale have limits that many firms exceeded. (You can be too big as well as too small) • Focused factories means downscaling the range of products and/or services being produced in any one facility. • Split a large factory into several smaller ones, either using separate facilities or within one large facility.