Supply Chain Management: From Vision to Implementation

Chapter 3: Process Thinking: SCM’s Foundation

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Chapter 3: Learning Objectives

1. Identify and describe the challenges created by functional thinking.

2. Discuss the anatomy of a typical process. Describe the flows that comprise a process.

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Chapter 3: Learning Objectives

3. Explain the role of system’s thinking in process design and management. Discuss the requirements and impediments to system’s analysis.

4. Describe the company as a series of interactive decisions made across functional boundaries and resources types.

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Chapter 3: Learning Objectives

5. Explain process reengineering, describing how it can be used to design world-class processes.

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Process Management

It’s a shift from competing on what we make to how we make it.- David Robinson, President CSC Index

on the need for process thinking

Functional thinking limits cooperation and impedes creative thinking.

Process management promotes collaboration, facilitating customer satisfaction at low cost.

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Process Management

Process Management requires companies to:1. Recognize the limiting nature of functional

structures2. Instill process thinking throughout the company

Process integration remains rare Michael Hammer estimates less than 10% of

companies have made a serious and successful effort

Requires major changes to measurement, job design, management roles, and organizational structure

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Functional OrganizationGroups resources into specific departments which perform

specific tasks to help the company achieve desired goals. Research and Development - translates customer needs into tangible products.

The goal is to design appealing, easy-to-make products with shorter concept-to-market lead times.

Purchasing acquires the right materials at the right price for use in operations. Sourcing’s goal is to select the right suppliers and then build the right relationships with them.

Production transforms inputs into a more highly valued and desirable product or service. The goal: to use capital, energy, knowledge, and labor are used to build processes that make low-cost, high-quality goods.

Logistics moves and stores goods so they are available for use in operations or for sale to customers. Logistics seeks to leverage critical activities like transportation, warehousing, and order processing to make sure materials and products are where they need to be when they need to be at the lowest cost.

Marketing identifies customer needs and communicates to the customer how the company can meet those needs. Marketing’s objective is to perform a liaison role between the company and its customers.

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(Dys)Functional Behavior

Functional structures result in a failure to see beyond the department level to the end user.

Decisions are made to achieve local, functional optimum without regard to impact on the remainder of the company.

Due to inherent conflicts between department goals and measurements, departments are compelled to take dysfunctional actions.

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Functional Organization Goals

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Process Thinking

Process thinking aligns decisions with corporate strategy and coordinates actions across functions.

Each process consists of a set of flows and value-added activities. Information Flow Physical Flow Financial Flow

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Value-Added Process

New Product Development

Materials Acquisition

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Systems Thinking

Systems thinking is the holistic process of considering both the immediate local outcomes and the longer-term system-wide ramifications of decisions. It requires: A Holistic View Information Availability and Accuracy Cross-Functional and Interorganizational Teamwork Measurement Systems Analysis

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Holistic View

Managers do not see all of the interrelationships, nor do they understand all of the trade-offs that occur within organizations.

Process visibility is a prerequisite to systems thinking.

Holistic understanding of the system is more important when trying to coordinate the efforts of two or more companies.

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Information Availability and Accuracy

A tremendous amount of data must be collected, analyzed, and translated into knowledge before well-informed, holistic decisions can be made.

This is being facilitated by: Bar Codes and Radio Frequency Identification

(RFID) Data Warehousing and Data-Mining Enterprise Resource Planning (ERP)

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Cross-Functional Teams

Company, department, or sub-unit loyalty can make holistic decision making difficult across the supply chain.

Cross-functional and Interorganizational teams help to improve flow of information and builds trust between organizations and functional areas within organizations.

Co-location promotes spontaneous discussion and collaborative decision making.

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Measurement

Often times compensation, recognition, and reward systems are at odds with holistic long term decision making.

People will not make holistic decision when measured on local or functional outcomes.

Aligning measurement and compensation systems to support the organization's long term objectives is one of the biggest challenges companies face today.

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Systems Analysis

Systems thinking requires that companies and their employees understand their place in the larger chain. Therefore, the following must be addressed: Establish the Core Goal Define System Boundaries Determine Interrelationships Determine Information Requirements Perform Trade-Off Analysis Consider System Constraints

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Systems Analysis

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Systems Analysis Establish the Core Goal – to insure all participants

efforts lead to the same outcome a well-thought-out and communicated goal is required.

Define System Boundaries – defines who is and who is not a member of the collaborative group. This should be done at a level that can most effectively achieve the group’s goal.

Determine Interrelationships – different members of the collaborative group perform different tasks, it is important to explicitly identify how the actions at one location impact the performance at another.

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Systems Analysis Determine Information Requirements – without accurate,

relevant, and timely information good decision making is impossible. We must therefore identify what information is necessary and then design a system to capture, analyze, and provide it to the correct decision makers.

Perform Trade-Off Analysis – decisions at one location will impact the performance at another, it is important that these trade-offs be explored before a decision is made.

Consider System Constraints – systems have constraints that limit their ability to obtain their goals. We must explicitly identify internal (policies, capacity, measures, etc.) and external (government regulations, customer requirements, supplier capabilities, etc.) that limit our abilities.

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A Process View of a Company

Decisions made throughout an organization should focus on using available resources to create customer value.

1. Customer focus defines the company’s value proposition and drives competency.

2. Competency guides functional decision making.3. Competency development dictates resource

allocation.4. Information and performance systems align efforts

on the system’s goal.

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Company as Value-Added System

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Strategic Linkage

The role of strategy is to direct the use of resources to develop the correct competencies to drive the firm’s value proposition. Value Proposition – the value that the firm

promises to deliver to the customer. Competencies – the skills and processes that

collectively deliver the promised value. Core Competency – what the company is so good

at that it drives competitive advantage.

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Generic Strategies

Cost Leadership – ability to deliver at a cost below competitors

Differentiation – ability to deliver some unique value which reduces price sensitivity Quality Delivery Flexibility Innovation

Survival often requires low cost and high quality.

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Cost Leadership Examples

Source Company Example

Economies of Scale Wal-Mart

Size creates unparalleled buying power

Uniquely Productive Processes

Southwest Airlines

15-minute “turnaround” to keep its planes flying and generating revenue

Low-cost Factor Inputs

McDonald’sGlobal sourcing network accesses low-cost resources around the world

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Global Operating Expenses Unit Price Inventory Holding Costs Risk of Obsolescence Cost of Rejects Cost of Money Letter of Credit Relationship Maintenance

Costs Language & Cultural

Training Costs

International Transportation Costs

Inland Freight Costs (Domestic & Foreign)

Insurance & Tariffs Export Taxes Damage in Transit Technical Support Brokerage Costs Employee Travel Costs

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Differentiation Examples

Source Company Example

Advanced Product Technology

Airbus

Pioneered the “fly-by-wire” technology

Advanced Process Technology

Schneider National Logistics

First motor carrier to employ global satellite positioning to track shipments

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Differentiation Examples

Source Company Example

Extensive Distribution Network

Coca Cola

Most ubiquitous producer worldwide; selling more than 130 beverages and found in almost every country worldwide

Better Designed Products

Apple

iPod was the first portable digital music player to use a miniature hard drive to hold songs; despite higher price, sophisticated design and user interface have made the iPod the market leader

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Aligning Strategy with Systems

Innovation

Delivery

Flexibility

Quality

Cost Leadership

Goals Value- Added System

Short concept-to-market cycle timeTechnologically advanced productsUnique service optionsAvailability despite demand uncertainty

Rapid, consistent deliveryAvailabilityHigh-quality product/serviceResponsiveness to customer i.e.; ability to handle small orders and expedited shipments

Minimum cost - but ensure an "acceptable" service level

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Aligning Strategy with Systems

Innovation

Delivery

Flexibility

Quality

Cost Leadership

Purchasing Identify and develop suppliers who can assure:Design expertiseTechnological supportFlexibility to changes in specsProcess capabilities

Identify and develop suppliers who can assure:Rapid, consistent deliveryCertified qualityFull line availabilityResponsiveness

Identify and develop suppliers who can assure:

Productivity/low prices

Learning curve efficiencies

Scale/scope economies

Quantity price discounts

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Aligning Strategy with Systems

Innovation

Delivery

Flexibility

Quality

Cost Leadership

Production Work closely with R&D; i.e., concurrent engineeringSupport process engineering

Shop floor control—due-date performanceShorten cycle timesCross-train workersExtensive process controlReduce inventories

Reduce inventories

Increase repetitiveness

Increase part commonality

Utilize low-cost labor

Increase worker productivity

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Aligning Strategy with Systems

Innovation

Delivery

Flexibility

Quality

Cost Leadership

Logistics Utilize technology including bar codes, satellite tracking, electronic data interchange, and automated picking/packing to offer customized services

Use private fleet or dedicated contract carrier to assure on-time deliveryUse information technology to increase responsiveness and ability to handle unexpected eventsImplement process control and other quality improvement approaches

Use low-cost transport

Use high utilization and/or multiple car rates

Use volume contracts

Minimize inventory

Centralize decision making

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Resource Management

Every company must manage five resources: People – determine the productivity and quality of the system;

provide the creativity and passion that determines success; requires education and training

Technology – includes hardware and software; used effectively improves productivity

Materials – all goods and services used in the value-added process for the creation of output

Infrastructure – physical bricks and mortar assets used in the value creating process.

Capital – necessary to finance continuing operations

Coordinated decision making regarding resource allocation across functions is the key to competitive advantage.

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Function/Resource Matrix

Value Added Functions

Resources R&D Purchasing Production Logistics Marketing

Infrastructure

Materials

Technology

People

Information and Performance Measurement Systems

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Information Sharing

Communicates strategic objectives and organizational roles. Typical types and uses of data are:

Customer-related - defines goals, value propositions, and competencies Firm capabilities and processes - strengths and weaknesses so that an

effective strategy can be developed and implemented Competitors' strategies and capabilities - anticipate competitive threats as

well as competitors’ reactions to the company’s own strategic moves External operating environment - identify potential threats and

opportunities such as new markets or the emergence of a new technology SC operating information - used to make good day-to-day decisions: how

many and type of suppliers needed to support the production schedule "Success stories" - creates momentum for process integration

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Performance Measurement

Performance measurement systems must:1. be aligned with strategic objectives; and2. clearly communicate expectations and responsibilities.

Well designed performance systems: create understanding of strategic and tactical objectives promote behaviors consistent with achieving objectives document actual results, monitoring progress toward goals benchmark capabilities vis-à-vis competitors’ abilities and

customers’ expectations motivate continuous improvement

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Information-Measurement Integration

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Process Reengineering

Reengineering is the radical redesign of business processes using systems thinking and information technology. Reengineering builds the process from scratch

focusing on desired customer outcomes. Restructuring replaces resources with technology

changing the basic process design or challenging whether the process should be done.

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Steps to Process Reengineering

1. Identify Desired Outcomes – processes are redesigned to fulfill specific customer needs.

2. Make Processes Visible – process mapping identifies activities, resources, and performance dimensions helping management to understand the as-is process.

3. Assign Responsibility for Work – responsibility for redesign should be at the level where work is done; employees understand the process and have untapped ideas for improving it.

4. Leverage Technology – technology makes it possible to achieve outcomes in new ways.

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Reengineering SystematicallyMichael Hammer suggests that companies:1. Look for role models outside your industry. 2. Identify and defy a constraining assumption. 3. Make the special case into the norm. 4. Rethink the following dimensions of work:

1. What results the work delivers2. Who performs the work3. Where work is done4. When work is performed5. Whether the work should be done6. What information the work requires7. How thoroughly the work is performed

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Reengineering Example - Progressive

Dimensions of Work Progressive’s Immediate Response Claims Handling

What results the work delivers

Fast, convenient claims processing

Who performs the work Call center representative works with a claims

Where work is done On site at the customer’s location

When work is performed Within nine hours of the initial claim

Whether the work should be done

Yes—claims processing drives customer

What information the work requires

Accurate repair costs for the vehicle in the specific market

How thoroughly the work is performed

Repair costs are a major expense; therefore, damage estimates must be complete and accurate

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A Return to the Opening StoryBased on what you have now read and discussed: What do Joe Andrus’ words, “We’ll trust you on this one”

really mean? How can Doug use a challenging competitive environment

to motivate change? In what ways might a functional organization make SCM

difficult to implement? Who should Doug include on the task force? What

characteristics would you want people on your team to possess?

How should Doug assess and document SCM’s competitive viability?

Supply Chain Management: From Vision to Implementation

Supplement C: Decision Making Under Uncertainty

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Decision Making Under Uncertainty

Managers generally do not have perfect information when making decisions. Thus, decisions often include elements of risk. To manage that risk, probabilistic models are often developed. Expected Value Analysis Decision Trees

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Expected Value Analysis

In situations where an outcome and probability of that outcome can be determined for various alternatives, expected value analysis can be employed.

Expected Value is the sum of the probability of an outcome times the value of that outcome

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Expected Value - Example

Managers are deciding between two alternatives with the following payoffs, state of nature, and probabilities. Which alternative should be chosen?

15,250 EV

00)(.20)(47,500)(.55)(15,0000)(.25)(-10, EV

17,825 EV

00)(.20)(28,500)(.55)(17,500)(.25)(10,0 EV

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2

1

1

AlternativePoor Market

Good Market

Great Market

1 10,000 17,500 28,500

2 -10,000 15,000 47,500

Probability 25% 55% 20%

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Decision Trees Decision Trees are an effective means to convey

decision information, especially when decisions are sequential in nature.

Decision Trees are comprised of three elements: Decision Nodes - points where managers can take action States of Nature - uncertainty in the environment over

which the manager has no control Arcs – branches linking decision and state of nature nodes

Branches stemming from decision nodes represent the alternatives available to managers

Branches stemming from states of nature represent the possible outcomes

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Decision Tree

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Decision Tree

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Decision Robustness

Using sensitivity (what-if) analysis managers can challenge the robustness of their decisions. If small input changes result in different

outcomes/decisions, the decision is not robust. If small input changes result in similar

outcome/decision, the decision is robust.

Managers can have more confidence in robust decisions.