Unit 2

Management of Conversion System

Chapter 4: Product and process design

Lesson 13:- Process design Cont’d

Learning Objectives

After reading this lesson you will be able to understand

Vertical integration
Resource flexibility
Process reengineering

Dear students, all of us should appreciate that no organization in this

world is self sufficient to run the business independently. It has to depend
on others for:
Either raw materials or
For delivering the product.

It is hence time now to introduce the concept of vertical integration.

What is vertical integration?

All business buy at least some inputs to their processes, such as professional
services, raw materials, or manufactured parts, from other producers. An
organization which performs more processes in the supply chain by itself,
the more vertically integrated it is. If it doesn’t perform some processes
itself, it must rely on outsourcing. 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.

Let’s brush up our knowledge of two other integration processes, i.e.

Backward integration
Forward integration

Vertical integration can be in two directions, as shown in the Figure4.8.

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 by acquiring its
business customers.

Raw
materials

Backward integration
In-house
processes

Forward integration

Customers

Figure 4.8 Vertical integration

The advantages of vertical integration are the disadvantages of more
outsourcing. Similarly, the advantages of more outsourcing are
disadvantages of more vertical integration.
More vertical integration can sometimes improve market share and allow a
firm to enter foreign markets more easily than it could otherwise. Extensive
vertical integration is generally attractive when input volumes are high
because high volumes allow task specialization and greater efficiency.

For performing operations you need equipments as resources. In this regard

question arise – is the equipment needed are general purpose or special-
purpose? Should the workforce flexible enough? To answer these we need to
understand resource flexibility.

What is resource flexibility?

Flexible workforce – operations manager must decide whether to have

flexible workforce. A flexible workforce means workforce whose members
are capable of doing many tasks, either at their own workstations or as they
move from one workstation to another.

Equipment When products or services have a short life cycle and a high
degree of customization, low volumes mean that process managers should
select flexible, general-purpose equipment
Another vital question regarding process design is
how much customer involvement will be allowed in the process?
The amount of customer involvement may range from self-service to
customization of product to decide the time and place of the service to be
provided.
Customer involvement can be categorized as
Self service –
self-service is the process decisions of many retailers, particularly when
price is a competitive priority.
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
Time and location –
when services cannot 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 become part of process design.

Another question regarding process design is how much should a firm

depend on machinery and automated processes?
The operation manager must determine the amount of capital intensity
required.
Dear students, let us now examine the issue of capital intensity.
What is 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 equipment and human skills in the process; the
greater is the relative cost of equipment, the greater is the capital intensity.
Let us understand now the concept of fixed automation.
Fixed automation –
Fixed automation is a manufacturing process that produces one type
of part or product in a fixed sequence of simple operations. Operations
managers favour 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 must be
capable of handling many operations. However, fixed automation maximizes
efficiency and yields the lowest variable cost per unit volumes are high.
Let us ponder over the issue of Flexible automation now.
Flexible automation –
It is a manufacturing process that can be changed easily to handle
various products. The ability to reprogram machines is useful for both low
customization and high customization processes. In the case of high
customization, a machine that makes a variety of products in small batches
can be programmed to alternate between products. When a machine has
been dedicated to a particular product or family of products, as in the case of
low customization and 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.

How these decisions are coordinated for manufacturing process is

illustrated diagrammatically in Figure 4.10

Figure 4.11 illustrates the same for services

 Figure 4.11 Major process decision in services

Before 1970, many firms were willing to endure the additional complexities
that came with size. New products or services were added to a facility as a
better utilization of fixed costs and keeping everything under one roof. The
result was a jumble of competitive priorities, process choices, and
technologies.
In the effort to do everything, nothing was done well. Hewlett-Packard,
Richo and Mitsubishi are some of the firms that have created focused
factories splitting large plants that produced all the company’s products into
several specialized smaller plants. The theory is that narrowing the range of
demands on a facility will lead a workforce toward a single goal.

The five main process decisions discussed represent broad strategic

issues. The next issue in process management is determining exactly how
each process will be performed.
Three techniques – flow diagrams, process charts, and simulation –
are widely used to study current process and proposed changes.
We now focus on these three concepts.

What is a flow diagram?

A flow diagram traces the flow of information, customers, employees,
equipment, or materials through a process. There is no precise format, and
the diagram can be drawn simply with boxes, lines, and arrows. Figure 4.12
illustrates a flow diagram for a automobile repair.

Figure 4.12 Flow diagram for automobile repair

What is a process chart?

A process chart is an organized way of recording all the activities performed
by a person, by a machine, at a workstation, with a customer, or on
materials. These activities can be grouped to five categories.
Operation
Changes, creates, or adds something.
Transportation
Moves the study’s subject from one place to another. The subject can be
a person, a material, a tool, or a piece of equipment.
Inspection
 Checks or verifies something but does not change it.
Delay
Occurs when the subject is held up awaiting further action. Time spent
waiting for materials or equipment, cleanup time, and time that workers,
machines, or workstations are idle because there is nothing for them to do
are examples of delays.
Storage
Occurs when something is put away until a later time. Supplies unloaded
and placed in a storeroom as inventory, equipment put away after use,
and papers put in a file cabinet are examples of storage.

Figure 4.13 illustrates process chart for emergency room admission

Fig 4.13 Process chart for emergency room admission

The third one is simulation model.
Simulation model
Simulation is an act of reproducing the behaviour of a process using a
model that describes each step of the process. Once the current process is
modeled, the analyst can make changes in the process to measure the impact
on certain performance measures, such as response time, waiting lines,
resource utilization, etc.

Flow diagrams, process charts, and simulation models are means to an end –
continually improving the process. After a chart has been prepared for either
a new or existing process, brainstorming is needed for improvement ideas.
To make a process more efficient, the analyst should question each delay
and then analyze the operation, transportation, inspection, and storage
activities to determine whether they can be combined, rearranged, or
eliminated. There is always a scope of doing things in better way.
Improvements in productivity, quality, time, and flexibility can be
significant.

Once the process is designed next comes to evaluate the process and see is
there any scope for improvement or is there any need to change the process?
Process reengineering addresses these questions.
What is process reengineering?
Process reengineering
Process reengineering is the fundamental rethinking and radical redesign of
business processes to bring about dramatic improvements in performance.
Reengineering asks questions as:
Is the process designed to create customer value?
 Do we achieve competitive advantage in terms of quality, product,
speed of delivery, or price?
Does the process help us to win orders?
Does the process maximize the customer’s perception of value?

Process reengineering means revaluating the purpose of the process and

questioning those purposes and assumptions. Process reengineering only
works if the basic process and objectives are reexamined. Often a firm finds
that the initial assumptions of its process are no longer valid. Reengineering
focuses on dynamic improvements in cost, time, or customer service
irrespective of how the process is currently being done. Any process can be
considered for radical redesign. It could be a factory layout, a purchasing
procedure or a new way of processing credit applications as described in the
POM in practice below.

POM in Practice – IBM credit application*

The traditional IBM credit application process took many steps. The first
step consisted of 14 people answering phones and logging calls from field
sales personnel who were requesting credit for their customers. After
receiving the calls, the phone personnel made paper notations that they sent
upstairs to credit personnel for a credit check. Then the paper went down the
hall to the business practice’s group where they entered the data into a
computer for determination of terms and interest rates. From there the packet
of data went to a clerical group. A week or two after the request, the results
of the request were available.
IBM tried to fix the process by keeping a log of each step of every request.
But while this logging allowed them to know where in the process the
application was, it added a day to the turnaround. Finally, two managers
tried a radical approach. They walked a loan request through each step from
office to office, and found that it took only 90 minutes of actual work. The
additional week was spent shuttling the paperwork among the departments.
This means that the work along the way was not the problem. Instead, the
process was at fault. Reengineering resulted in IBM replacing all of its
specialists with generalists, called case workers, who process an application
from start to finish. The firm also developed software that uses the expertise
of specialists to support case workers. The reengineered process reduced the
number of employees and achieved better results. The week-plus turn-
around time for a credit request is down to four hours. The company now
handles 100 times the number of loan request than it did under the old
system.

*Taken from: Principles of Operations management, Barry Render and

Jay Heizer, Prentice Hall, pp. 179-180
Dear students, towards the end of the discussion, let us examine the process
of Choosing a service process strategy

Choosing a service process strategy

Five processes choice considered are applicable to service as well as
manufacturing. In process-focused facilities (project and job process)
equipment utilization is low – perhaps as low as 5%. This is true not only for
manufacturing but also for services. An x-ray machine in a dentist’s office
and much of the equipment in a fine dining restaurant have low utilization.
Hospitals can also be expected to be in that range, which would suggest why
their costs are considered high.
Why such low utilization?
In part because excess capacity for peak loads is desirable. Hospital
administrators, as well as managers of other service facilities and their
patients and customers, expect equipment to be available as needed. Another
reason of low utilization is poor scheduling.
The service industry moves to apply continuous process by establishing fast-
food restaurants, auto lubrication shops, and so on. As the variety of services
is reduced, per –unit cost is also expected to drop. The following figure
provides more insight into service processes.

Mass Service: Professional Service

High labour intensity High labour intensity
Low customer interaction High customer interaction
Low product customization High product customization

Examples:
- Retailing, wholesaling
- Retail aspects of
commercial banking
Service Factory:
Low labour intensity
Low customer interaction
Low product customization
Examples:
- Doctors, lawyers, tax
accountants
- Architects, financial advisors
Service shop
Low labour intensity
High customer interaction
High product customization

Examples: Examples:
 - Airlines, trucking - Hospitals
- Hotels, recreation - Auto repair, other repair
- Fast-food restaurants services
- Fine dining restaurants

Points to ponder