Business Management

Determining Missions and Strategies:

Mission: the reason for existence for an organization (present)

Mission Statement: the purpose of an organization

Vision: where the organization is headed (future) and what it intends

to be

Goals: provide detail and scope of mission

What is a Strategy:
Strategy is an “art”, not exactly a science, which means focusing on
the big picture and overall results of an effort.

According to Merriam-Webster: “The science and art of military command

exercised to meet the enemy in combat under advantageous
conditions.”

Strategy: a plan that integrates an organization's major goals,

policies, and action sequences into a cohesive whole

Strategic planning: the process of determining long-term goals,

policies, and plans for an organization as a result of hierarchical
decisions about goals, directions, and resources.

Tactics: methods and actions taken to accomplish strategies

Strategic Fit Porter introduces the concept of “fit”, which means that
activities are consistent with each other and reinforce each other to
create a competitive advantage and superior profitability.

Porter identified three types of “fit”, which “are not mutually

exclusive”:

• First order fit ensures that “competitive advantage of activities

cumulate and do not erode”
• Second Order fit “occurs when activities are reinforcing”
• Third order fit is “optimization effort”
Strategy is creating fit among a company’s activities
Successful strategy is a result of doing many things well, and
integrating them •
If there’s no fit among activities, there’s no distinctive strategy
and the strategy will be unsustainable

I. Operational Effectiveness Is Not Strategy

Operational Effectiveness Necessary but Not Sufficient

Operational Effectiveness: Performing similar activities better
than rivals perform them. Operational effectiveness includes but is
not limited to efficiency. It refers to many practices that allow a
company to better utilize its inputs.This concept of competition
based on operational effectiveness is illustrated via the
productivity frontier.
Strategy: Performing different activities from rivals’ or
performing similar activities in different ways.
Porter states that a company can outperform rivals only if it can
establish a difference it can preserve. It must deliver greater
value to customers or create comparable value at a lower cost, or
do both.

II. Strategy Rests on Unique Activities

"Competitive strategy is about being different. It means

deliberately choosing a different set of activities to deliver a
unique mix of value"
The Origins of Strategic Positions
Strategic positions emerge from three sources, which are not
mutually exclusive and often overlap.
1. Variety-based positioning
2. Needs-based positioning
3. Access-based positioning

III. A Sustainable Strategic Position Requires Trade-offs

According to Porter, a sustainable advantage cannot be guaranteed

by simply choosing a unique position, as competitors will imitate a
valuable position in one of the two following ways:
1. A competitor can choose to reposition itself to match the
superior performer.
2. A competitor can seek to match the benefits of a successful
position while maintaining its existing position (known as
straddling).
Thus, in order for a strategic position to be sustainable there
must be trade-offs with other positions. "A trade-off means that
more of one thing necessitates less of another".
A strategy steps:
AS YOU ANALYZE COMPANIES AND DEVELOP STRATEGIES, YOU NEED ANSWERS:
1. WHERE DO WE COMPETE?
2. WHAT UNIQUE VALUE DO WE BRING?
3. WHAT RESOURCES AND CAPABILITIES DO WE UTILIZE?
4. HOW DO WE SUSTAIN OUR VALUE?
Managers must do what we call closing the loop. Firms have developed
significant core competencies at the functional level. It makes sense,
then, for top managers to look for ways to exploit these strengths.
More generally, by closing the loop, top managers ensure that the
business strategy adequately considers the current capabilities—both
positive and negative—within the functional areas.

Strategies for Competitive Advantage:

Differentiation: better (or at least different)
Uniqueness can go beyond both the physical characteristics and service
attributes to encompass everything that impacts customer's perception
of value

Cost leadership:cheaper
Provide the maximum value as perceived by customer
Does not imply low quality

Response: faster
Flexibility is matching market changes in design innovation and
volumes
Reliability is meeting schedules
Timeliness is quickness in design, production, and delivery.

Strategy Canvas:
The Strategy Canvas is a tool that helps leaders visualize their
current strategic landscape so they can visualize where their business
fits in and what opportunities exist to expand into new markets.

Porter's Five Forces According to Porter, there are five forces

that represent the key sources of competitive pressure within an
industry They are:

● Competitive Rivalry.
● Supplier Power.
● Buyer Power.
● Threat of Substitution.
● Threat of New Entry.

According to Porter, there are 7 main sources that influence the

height of entry barriers:
1. Supply-side economies of scale
2. Network effect
3. Switching costs
4. Capital requirement
5. Unfair advantage
6. Unequal access to distribution channels
7. Government policy
PESTEL analysis is a tool that allows organizations to discover and
evaluate the factors that may affect the business in the present and
in the future. PESTEL is an acronym for Political, Economic, Social,
Technological, Legal, and Environment.

McKinsey Framework, The Three Horizons Framework also known as the

Three Horizons of Growth, consists of three horizons:
Horizon 1: Maintain and defend the core business
Horizon 2: Nurture emerging business
Horizon 3: Create genuinely new business

Four Basic Operations Management Functions

Planning: Provides the basis for future activities by developing

strategies, goals and objectives and establishing guidelines, actions
and schedules to meet them

Organizing: The process of bringing together the resources (people,

material, equipment, technology, information and capital) necessary to
perform planned activities

Directing (Staffing/Leading): The process of turning plans into

realities by assigning specific tasks and responsibilities to
employees, motivating them and coordinating their efforts

Controlling: Evaluating performance and applying corrective measures

to ensure that plans are achieved

Product life-cycle
The product life cycle involves the stages through which a
product goes from the time it is introduced in the market till
it leaves the market. A product life cycle consists of four
stages: introduction, growth, maturity, and decline. A lot of
products continue to remain in a prolonged maturity state.
What is the difference between efficiency effectiveness and
economy?

Economy requires feedback on the cost of the inputs to a system.

Efficiency measures how successfully the inputs have been
transformed into outputs. Effectiveness measures how
successfully the system achieves its desired outputs.

Drivers and factors:

Drivers are the specific variables that directly impact outcomes and
are often actionable, while factors are broader elements or conditions
that contribute to shaping outcomes but may not be directly
controllable by the organization. Both drivers and factors play
important roles in understanding and managing the performance of a
business.

Business process vs. business procedure:

There are numerous concepts and corresponding terms to describe the
art and science of running a business, with business process being
only one of them. Business procedure and business function are two
other frequently used terms.
Although similar sounding, they each describe different organizational
ideas, as noted below:
A business process, as previously stated, is a series of related
tasks that result in a desired output; it is an established set of
repeatable activities.
A business procedure is a clearly stipulated way of undertaking a
business process; it details the teams and individual workers
responsible for each part of the process as well as the specifications
applicable to performing and completing each of those parts.

Customer Value But how should we define value? To begin, most

customers evaluate products and services based on multiple performance
dimensions, such as performance quality, delivery speed, after-sales
support, and cost. The organization that provides the best mix of
these dimensions will be seen as providing the highest value.

Value index A measure that uses the performance and importance scores
for various dimensions of performance for an item or a service to
calculate a score that indicates the overall value of an item or a
service to a customer.

The Value Creation Opportunity

Every organization must make a product or provide a service that
someone values.
Otherwise, why would the organization exist? Few organizations can—or
even want to—do everything themselves. This leads to supply chain
management to provide real value to customers.
When companies find ways to increase customer delight, employee
satisfaction, and supplier surplus, they expand the total amount of
value they create and position themselves for extraordinary financial
performance.
Value Proposition
It's a promise of value stated by a company that summarizes how the
benefit of the company’s product or service will be delivered,
experienced, and acquired. Essentially, a value proposition specifies
what makes the company’s product or service attractive, why a customer
should purchase it, and how the value of the product or service is
differentiated from similar offerings.

The value proposition=product+experience delivered to the customer

A business model
A business model is a framework used to design and depicts how a
business might create and capture value. The business plan is a
document explaining how a business might become profitable. creating,
delivering, and capturing value is the core process that underpins a
business model.
1. The value proposition of what is offered to the market;
2. The segment(s) of clients that are addressed by the value
proposition;
3. The communication and distribution channels to reach clients and
offer them the value proposition;
4. The relationships established with clients;
5. The key resources needed to make the business model possible;
6. The key activities necessary to implement the business model;
7. The key partners and their motivations to participate in the
business model;
8. The revenue streams generated by the business model (constituting
the revenue model);
Plan vs strategy
A plan is an arrangement, pattern, program or scheme for a definite
purpose. A strategy, on the other hand, is a blueprint, layout,
design, or idea used to accomplish a specific goal that is open for
adaptation and change when needed.
A Plan: A plan is the details: who, how, when, how much to achieve a
goal or objective. It aligns resources, timing, and expectations. A
plan has a more limited scope than a strategy, and the process to
develop it should be more focused and quicker, so you get into action
as soon as possible.
A Strategy: A strategy is the story of an exciting journey; it
explains how you plan to move from where you are today to where you
eventually want to end. A strategy outlines how you will overcome
challenges, confront vulnerabilities, and leverage all your assets and
favorable forces to prevail through the journey to arrive at your
ultimate destination.

Business Plan?
A business plan is a document that details a company's goals and how
it intends to achieve them. Business plans can be of benefit to both
startups and well-established companies.

Pricing strategies:
A pricing strategy is a plan for setting the best price for your
products or services. The goal is to set a price that will entice
customers to buy, but that isn't so low that you're not making a
profit.

● Value-based pricing
● Cost-plus pricing
● Competitive pricing
● Economy pricing
● Penetration pricing
 ● Dynamic pricing
● Hourly pricing
● skimming
● Project-based pricing
● High-low pricing
● Bundle pricing
● Psychological pricing
● Freemium pricing
● Geographic pricing
● Premium pricing

Margin vs Markup:
The basis for the markup percentage is cost, while the basis for
margin percentage is revenue. The cost figure should always be lower
than the revenue figure, so markup percentages will be higher than
profit margins.

Branding:
Branding is the process of creating a distinct identity for a business in
the minds of your target audience and the general population. At its core,
branding consists of a company's name and logo, visual identity design,
mission, values, and tone of voice.
Branding is a promise.
Structural element One of two major decision cat-egories addressed by
a strategy.
Includes tangible resources, such as buildings, equipment, and
computer systems.

Infrastructural element One of two major decision categories

addressed by a strategy. Includes the policies, people, decision
rules, and organizational structure choices made by a firm.

Mission statement A statement that explains why an organization

exists. It describes what is important to the organization, called its
core values, and identifies the organization’s domain.

Business strategy The strategy that identifies a firm’s targeted

customers and sets time frames and performance objectives for the
business.
Core competency An organizational strength or ability, developed over
a long period, that customers find valuable and competitors find
difficult or even impossible to copy.

Functional strategy A strategy that translates a business strategy

into specific actions for functional areas such as marketing, human
resources, and finance. Func-tional strategies should align with the
overall business strat-egy and with each other.
The operations and supply chain strategy is a functional strategy that
indicates how structural and infrastructural elements within the
operations and supply chain areas will be acquired and developed to
support the overall business strategy.

What constitutes the best mix of structural and infrastructural

elements is a subject of ongoing debate. Nevertheless, we can identify
three pri-mary objectives of an operations and supply chain strategy:

1. Help management choose the right mix of structural and

infrastructural elements, based on a clear understanding of the
performance dimensions valued by customers and the trade-offs
involved.
2. Ensure that the firm’s structural and infrastructural choices are
strategically aligned with the firm’s business strategy.
3. Support the development of core competencies in the firm’s
operations and supply chains.

These three objectives bring up a whole list of concepts: performance

dimensions and customer value, trade-offs, strategic alignment, and
core competencies in the operations and supply chain areas. In the
remainder of this chapter, we describe these concepts more fully.
Within these basic strategies there are many ways they may be
implemented
Understanding Customer Preferences & Requirements
Three classes of customer requirements:

Dissatisfiers: requirements that are expected in a good or service.

If these features are not present, the customer is dissatisfied,
sometimes very dissatisfied

Satisfiers: requirements that customers say they want

Exciters/delighters: new or innovative good/service features that

customers do not expect

Order qualifiers - basic customer expectations (dissatisfiers and

satisfiers) are generally considered the minimum performance level
required to stay in business

Order winners - goods/service features and performance

characteristics (satisfiers and exciters) that cause customers to
choose those features over of its competitors and

to win the customer's business

Order winners can be considered competitive advantages for the firm

Streamlining processes refers to the practice of identifying and

eliminating repetitive and unnecessary steps or activities in a
process in order to make it more efficient and effective. The goal of
streamlining processes is to reduce waste, improve efficiency, and
increase productivity.

Growth share matrix

SWOT Analysis The SWOT analysis, developed by Kenneth Andrews, is
used to categorize internal and external factors that influence
strategic decisions. SWOT is an easy way to have a structured
brainstorming session with a team to better understand the lay of the
land. SWOT stands for Strengths, Weaknesses, Opportunities and
Threats.
BUSINESS PROCESSES:

Organizations started as separate silo-ed functions or activities

spread out across different larger divisions, such as finance,
manufacturing, and marketing.
Some processes are particularly good at supporting a wide variety of
goods or services, while others are better at providing standardized
products or ser
vices at the lowest possible cost.
We pay particular attention to the roles that product standardization,
production volumes, and customization play in determining the best
process choice.

For our purposes, these outcomes can be physical, informational, or

even monetary in nature. Physical outcomes might include the
manufacture and delivery of goods to a customer; an informational
outcome might be registering for college courses; and a monetary
outcome might include payment to a supply chain partner for services
rendered. “value-added” because some customer is willing to pay for
the resulting outputs. The assumption was that if companies
concentrated on how these functions were organized, how individuals
were trained, and how the individual functional strategies lined up
with the overall business strategy (Chapter 2), then everything would
be fine. The problem was, however, that managing functions is not the
same as managing what a business does. Look again at the business
processes listed in Table 4.1. Nearly every one of these processes
spans multiple functional areas and even multiple supply chain
partners.For many business processes, no single function or supply
chain partner has a complete view or complete control of the
situation. Developing superior business processes, therefore, requires
a cross-functional and cross-organizational perspective that actively
looks at the logical flow of activities that make up a business
process.

The performance level of most processes tends to decrease over time

unless forces are exerted to maintain it. In addition, even if an
organization does not feel a need to improve its business processes,
it may be forced to due to competitive pressures.

Today's customers are becoming more and more demanding; what a

customer might have considered quite satisfactory a few years ago
might not meet his or her requirements today.

Process According to APICS, “A set of logically related tasks or

activities performed to achieve a defined business outcome.”

Usually but not always the goal of the process is to provide exactly
the same output each time.

Primary process A process that addresses the main value-added

activities of an organization. Support process A process that
performs necessary, albeit not value-added, activities. Development
process A process that seeks to improve the performance of primary and
support processes.
Mapping The process of developing graphic representations of the
organizational relationships and/or activities that make up a business
process.

Keep in mind that the idea is to document the process as it is—not

the way people remember it. Areas that are beyond a manager’s control
or are not directly related to the problem at hand can be omitted from
the process mapping effort.

Process map A detailed map that identifies the specific activities

that make up the informational, physical, and/or monetary flow of a
process.

1. Identify the entity that will serve as the focal point.

2. Identify clear boundaries and starting and ending points.
3. Keep it simple.

Swim lane process map A process map that graphically arranges the
process steps so that the user can see who is responsible for each
step
Sometimes we are interested in understanding not only the steps in a
process but who is involved and how these parties interact with one
another.

MANUFACTURING PROCESSES

Process Strategies

Process strategies: an organization's approach to transforming

resources into goods and services

Four process strategies:

1. Process focus

2. Repetitive focus

3. Product focus

4. Mass customization

1. Process Focus

• Process focus: a production facility organized around processes to

facilitate low-volume, high variety production

• Features:

• Facilities are organized around specific activities or processes

• General purpose equipment and skilled personnel

High degree of product flexibility

• Typically high costs and low equipment utilization

• Product flows may vary considerably making planning and scheduling a

challenge

• Example:

Arnold Palmer Hospital

2. Repetitive Focus

• Repetitive focus: a product-oriented

production process that uses modules

• Modules: parts or components of a product previously prepared, often

in a continuous process

• Features:

• Facilities often organized as assembly lines

• Characterized by modules with parts and assemblies made previously

• Modules may be combined for many output options

• Less flexibility than process- focused facilities but more efficient

Example: Harley-Davidson

.3. Product Focus

• Product focus: a facility organized around products; a

product-oriented, high-volume, low variety process

• Features:

• Facilities are organized by product

• High volume but low variety of products

• Long, continuous production runs enable efficient processes

• Typically high fixed cost but low variable cost

• Generally less skilled labor

• Example:

Frito-Lay

4. Mass Customization

Mass customization: rapid, low- cost production that caters to

constantly changing unique customer desires

Features:

Imaginative and fast product design

. Rapid process design

Tightly controlled inventory management

. Tight schedules

Responsive supply chain partners

Example: Dell Computer

Selecting an effective manufacturing process means much more than just
choosing the
right equipment. Manufacturing processes also include people,
facilities and physical layouts, and information systems.quick point
nowadays many customers are demanding smaller quantities, more
frequent shipments, and shorter lead times

PRODUCT CUSTOMIZATION WITHIN THE SUPPLY CHAIN

● Make-to-stock (MTS) products

● Assemble-to-order (ATO) or finish-to-order products
● Make-to-order (MTO) products
● Engineer-to-order (ETO) products

To manufacturing personnel, the key difference between these four

product types is not so
much the degree of customization but the point at which it occurs.The
Customization Point
We refer to activities that take place prior to the customization
point as upstream activities,
while those that occur at or after the customization point are called
downstream activities.
Completing activities offline has two advantages. First, it reduces
lead time to the
customer, as only the downstream activities remain to be completed.A
second advantage has to do with the law of variability,
To summarize, when customization occurs early in the supply chain:
● Flexibility in response to unique customer needs will be greater.
● Lead times to the customer will tend to be longer.
● Products will tend to be more costly.
When customization occurs late in the supply chain:
● Flexibility in response to unique customer needs will be limited.
● Lead times to the customer will tend to be shorter.
● Products will tend to be less costly
SERVICE PROCESSES

Differences between Service and Product Design

Products are generally tangible, services intangible

Services are created and delivered at the same time

Services cannot be inventoried

Services are highly visible to consumers

Some services have low barriers to entry and exit

Location is often important to service design, with

convenience as a major factor

Service systems range from those with little or no customer

contact to those that have a very high degree of customer
contact

Demand variability alternately creates waiting lines or idle

service resources

three dimensions on which services can differ: the nature of the

service package, the degree of customization, and the level of
customer contact.
Service package A package that includes all the value-added physical
and intangible activities that a service organization provides to the
customer.
The greater the emphasis on physical activities, the more management’s
attention will be directed to capital expenditures (buildings, planes,
and trucks), material costs, and other tangible assets.
Knowledge assets generally refer to the intellectual capital of the
firm, which may be embedded in the people, the information systems, or
the copyrights and patents owned by a firm.
Service Customization As the degree of customization decreases, the
service package becomes more standardized.
Customer Contact The degree of customer contact determines the
relative importance of front-room and back-room operations in a
service process. either physical or virtual
Front room The physical or virtual point where the customer interfaces
directly with the service organization. Back room The part of a
service operation that is completed without direct customer contact.
Service blueprinting is a specialized form of business process
mapping that allows the user to better visualize the degree of
customer contact. this in two ways. First, it lays out the service
process from the viewpoint of the customer. It then parses out the
organization’s service actions based on (1) the extent to which an
action involves direct interaction with the customer and (2) whether
an action takes place as a direct response to a customer’s needs.
LAYOUT DECISION MODELS We have already described four types of layouts
in this chapter: product-based, functional, cellular, and
fixed-position layouts.
Takt time In a production line setting, the available production time
divided by the required output rate. Takt time sets the maximum
allowable cycle time for a line.

MANAGING AND IMPROVING BUSINESS PROCESSES

• How do we know if a business process is meeting customers’ needs?

Even if customers’ needs are being met, how do we know whether the
business process is being run efficiently and effectively? • How
should we organize for business process improvement? What steps should
we follow? What roles should people play? • What types of tools and
analytical techniques can we use to rigorously evaluate business
processes? How can we make sure we manage based on fact and not
opinion?

Measuring Business Process Performance

There are countless possible measures of process

performance,Quality—. Cost—Time—Flexibility

Productivity A measure of process performance; the ratio of outputs

to inputs.

Productivity = outputs/inputs

Single-factor productivity A productivity score that measures output

levels relative to single input. Multifactor productivity A
productivity score that measures output levels relative to more than
one input.

Efficiency A measure of process performance; the ratio of actual

outputs to standard outputs. Usually expressed in percentage terms.

Efficiency = 100% (actual outputs/standard outputs)

Standard output An estimate of what should be produced, given a

certain level of resources.

Utilization measures inputs compared to some norm (capacity, standard,

etc.)

Utilization= actual input/normal input

in the case of an uncertain demand and process time, it is

managerially unsound to go for 100 percent utilisation.

Cycle time The total elapsed time needed to complete a business

process. Also called throughput time. In order to reduce cycle times,
organizations and supply chains typically must perform well on other
dimensions, such as quality, delivery, productivity, and efficiency.

Percent value-added time A measure of process performance; the

percentage of total cycle time that is spent on activities that
actually provide value.

Percent value-added time = 100% (value-added time)/(total cycle time)

Benchmarking According to Cook, “The process of identifying,

understanding, and adapting outstanding practices from within the same
organization or from other businesses to help improve performance.”
Competitive benchmarking The comparison of an organization’s
processes with those of competing organizations. Process benchmarking
The comparison of an organization’s processes with those of
noncompetitors that have been identified as superior processes.

Six Sigma methodology According to Motorola, a business improvement

methodology that focuses an organization on understanding and managing
customer requirements, aligning key business processes to achieve
those requirements, utilizing rigorous data analysis to understand and
ultimately minimize variation in those processes, and driving rapid
and sustainable improvement to business processes. The term Six Sigma
refers to both a quality metric and a methodology. In statistical
terms, a process that achieves Six Sigma quality will generate just
3.4 defects per 1 million opportunities (DPMO). As a methodology for
process improvement, Six Sigma has a much broader meaning. A business
improvement methodology that focuses an organization on: •
Understanding and managing customer requirements • Aligning key
business processes to achieve those requirements • Utilizing rigorous
data analysis to understand and ultimately minimize variation in those
processes • Driving rapid and sustainable improvement to business
processes Let’s consider this definition for a moment. The first two
points reinforce the idea that business process improvement efforts
need to be driven by the needs of the customer. In this case, the
“customer” can be someone inside the organization as well as someone
from outside the organization.

DMAIC (Define–Measure– Analyze–Improve–Control) A Six Sigma

process that outlines the steps that should be followed to improve an
existing business process.
DMADV (Define–Measure– Analyze–Design–Verify) A Six Sigma process
that outlines the steps needed to create completely new business
processes or products.

Six Sigma DMAIC Methodology

DMAIC: Five-step process improvement model - focus on understanding

and achieving what the customer wants

Define: identify customers and their priorities

Measure: determine how to measure the process and how it is performing

Analysis: determine the most likely causes of defects

Improve: identify means to remove the causes of defects

Control: determine how to maintain the improvements

TQM: #2 Six Sigma

Two meanings

Statistical definition of a process that is 99.9997% capable, having

no more than 3.4 defects per million opportunities (DPMO)

Defects: any mistakes or errors that are passed on to the customer

(many people also use the term “non-conformance")

Unit of work: the output of a process or an individual process step

A program designed to reduce defects, lower costs, and improve

customer satisfaction

Process Analysis and Design

. When analyzing and designing processes, ask

. Is the process designed to achieve competitive advantage?

. Does the process eliminate steps that do not add value?

. Does the process maximize customer value as perceived by the

customer?
. Will the process win orders?

And focus on

● Activities
● Technological and Logical Constraints
● Process Time
● Resources Available

Performance Measures

● Quality
● Cost
● Delivery
● Flexibility
● Responsiveness
● Innovation
● Learning & Improvement

Reducing process variabililty by

● Automation
● Training
● Policies
● Authorisation
● Right Information
● Well designed process

Process analysis and design tools

Flow charts

. Time-function mapping

. Value-stream mapping

Process charts
Service blueprinting

wandering bottleneck refers to a situation in which the bottleneck,

or the point in a process where work flow is most constrained, moves
within the process over time, leading to inefficiencies and
disruptions in production.

Continuous Improvement Tools

Root cause analysis /Five Ms/ Five Whys /Pareto chart/ Scatter
plot/ Run chart/ Bar graph/ Histogram /Cause-and-effect diagram
/Check sheet/Customer Survey Card

Root cause analysis A process by which organizations brainstorm about

possible causes of problems (referred to as “effects' ') and then,
through structured analysis and data gathering efforts, gradually
narrow the focus to a few root causes.

Organizations often divide root cause analysis into three distinct

phases: open, narrow, and closed. The open phase is devoted to
brainstorming. All team members should be free to make suggestions, no
matter how far-fetched they might seem at the time.

the narrow phase. Here participants pare down the list of possible
causes to a manageable number.

In the closed phase of root cause analysis, the team validates the
suspected root cause(s) through the analysis of available data.

Five Ms The five main branches of a typical cause-and-effect diagram:

manpower, methods, materials, machines, and measurement

Five Whys An approach used during the narrow phase of root cause
analysis, in which teams brainstorm successive answers to the question
“Why is this a cause of the original problem?” The name comes from the
general observation that the questioning process can require up to
five rounds.

Check sheet A sheet used to record how frequently a certain event

occurs.

Business process reengineering (BPR)

An alternative approach to Six Sigma and the DMAICAccording to APICS,
“A procedure that involves the fundamental rethinking and radical
redesign of business processes to achieve dramatic organizational
improvements in such critical measures of performance as cost,
quality, service, and speed.”

To help managers understand when they should and shouldn’t try to

standardize processes, Joseph Hall and M. Eric Johnson developed a
framework that divides processes into four main types based on

(1) how much variability there is in the process.

(2) whether customers actually value variability in outputs.

Mass processes Here, the goal of the process is to provide exactly

the same output each time.

Mass customization is controlled variation.

Artistic processes where both variability in the process and outputs

are valued.

Nascent, or Broken process. processes that fall into this group have
a fundamental mismatch between what the customer wants (standardized
output) and what the process is currently capable of providing.
Managers have two choices here: Reduce the variability of the process
or switch to customers that value output variability.

To help managers understand when they should and shouldn’t try to

standardize processes, Joseph Hall and M. Eric Johnson developed a
framework that divides processes into four main types based on (1) how
much variability there is in the process and (2) whether customers
actually value variability in outputs.13 Mass processes are perhaps
the easiest to understand. Here, the goal of the process is to provide
exactly the same output each time. The key to mass customization is
controlled variation.

artistic processes where both variability in the process and outputs

are valued.

nascent, or broken process. Unlike the other three types, processes

that fall into this group have a fundamental mismatch between what the
customer wants (standardized output) and what the process is currently
capable of providing. Managers have two choices here: Reduce the
variability of the process or switch to customers or markets that
value output variability

Coordinating Process Management Efforts across the Supply Chain firms

must extend their efforts to include external supply chain partners.
Extending process management to include external partners is an
important step, as significant opportunities for improvement often lie
at the interfaces between various partners.

Quality:
covering everything from company wide practices to the application of
specific statistical tools.

While the value-based perspective on quality focuses on accurately

capturing the end user’s needs, Conformance quality is typically
evaluated by measuring the actual product or service against some
preestablished standards.

A defect or mistake, by definition, means that the product or service

failed to meet specifications.
organization must: 1. Understand what dimensions of quality are most
important to users. 2. Develop products and services that will meet
the users’ requirements. 3. Put in place business processes capable of
meeting the specifications driven by the users’ requirements. 4.
Verify that the business processes are indeed meeting the
specifications.
The dichotomy in its two-part definition of quality:
1. The characteristics of a product or service that bear on its
ability to satisfy stated or implied needs [the value perspective]
2. A product or service that is free of deficiencies [the conformance
perspective]

Quality (a) The characteristics of a product or service that bear on

its ability to satisfy stated or implied needs. (b) A product or
service that is free of deficiencies.

Value perspective A quality perspective that holds that quality must

be judged, in part, by how well the charac-teristics of a particular
product or service align with the needs of a specific user.
value-based perspective on quality focuses on accurately capturing the
end user’s needs,

Conformance perspective A quality perspective that focuses on

whether or not a product was made or a service was performed as
intended. Conformance quality is typically evaluated by measuring the
actual product or service against some pre established standards.

David Garvin of the Harvard Business School identified eight

dimensions on which users evaluate the quality of a prod-uct or
service:

1. Performance. What are the basic operating characteristics of the

product or service?

2. Features. What extra characteristics does the product or service

have, beyond the basic performance operating characteristics?

3. Reliability. How long can a product go between failures or the

need for maintenance?

4. Durability. What is the useful life for a product? How will the
product hold up under extended or extreme use?

5. Conformance. Was the product made or service performed to

specifications?

6. Aesthetics. How well does the product or service appeal to the

senses?

7. Serviceability. How easy is it to repair, maintain, or support the

product or service?

8. Perceived quality. What is the reputation or image of the product

or service?

A defect or mistake, by definition, means that the product or service

failed to meet specifications.

organization must:

1. Understand what dimensions of quality are most important to users.

2. Develop products and services that will meet the users’
requirements.
3. Put in place business processes capable of meeting the
specifications driven by the users’ requirements.
4. Verify that the business processes are indeed meeting the
specifications.

TOTAL COST OF QUALITY:

One such pioneer was Joseph Juran, who edited the widely recognized
Quality Hand-book.4 Juran argued that there are four quality-related
costs: internal failure costs, external failure costs, appraisal
costs, and prevention costs.

Internal failure costs Costs caused by defects that occur prior to

delivery to the customer, including money spent on repairing or
reworking defective products, as well as time wasted on these
activities.

External failure costs Costs incurred by defects that are not

detected until a product or service reaches the customer.

Appraisal costs Costs a company incurs for assessing its quality

levels.

Prevention costs The costs an organization incurs to actually prevent

defects from occurring to begin with.

Total cost of quality curve A curve that suggests that there is some
optimal qual-ity level, Q*. The curve is calculated by adding costs of
internal and external failures, prevention costs, and appraisal costs.

TOTAL QUALITY MANAGEMENT

1. Customer focus

2. Leadership involvement
3. Continuous improvement

4. Employee empowerment

5. Quality assurance

6. Supplier partnerships

7. Strategic quality plan

In some cases, an employee might not have direct contact with an

external customer. But every employee has a “customer” whose
expectations must be met, even if that customer is internal to the
organization.

The traditional business view has been that the executives at the top
of a company do the thinking, the middle managers do the supervising,
and the remaining employees are paid to work, not to think.

“error proofing,” which is the deliberate design of a process to

eliminate the possibility of an error, and quality auditing of
suppliers by carefully trained teams

STATISTICAL QUALITY CONTROL

Quality Metrics

Continuous metric: one that is calculated from data that is

MEASURED as the degree of conformance to a specification on a

continuous scale of measurement

Examples: Length, volume, weight, height, time, color (spectrum),

sound pitch (frequency), sound intensity or noise level (dB/square
meter)

Discrete metric:

one that is calculated from data that is COUNTED

Examples: Number of flaws, years, accidents, students,

satisfied/dissatisfied, good/bad
Process capability ratio (Cp) A mathematical determination of the
capability of a process to meet certain quality standards. A Cp Ú 1
means the process is capable of meeting the standard being measured

Upper tolerance limit (UTL) The highest acceptable value for some
measure of interest. Lower tolerance limit (LTL) The lowest
acceptable value for some measure of interest.

Six Sigma quality A level of quality that indicates that a process is

well controlled. The term is usually associated with Motorola, which
named one of its key operational initiatives Six Sigma Quality.

Control chart A specialized run chart that helps an organization

track changes in key measures over time.
1. Take m samples of size n each while the process is in control. 2.
Use the sample results to set up the control chart, using the tables
or formulas provided. 3. Continue to take samples of size n and plot
them against the control charts. 4. Interpret the results and take
appropriate action. We cannot overemphasize two points about control
charts. First, control charts should not be employed until the process
is capable of providing acceptable performance on a regular basis.
Second, control charts, by themselves, will not result in improved
quality levels. Rather, control charts are used to catch quality
problems early, before they get out of hand. Therefore, the use of
control charts falls under the appraisal activities of a firm’s
quality efforts

If a sample p value falls outside these limits, management should

immediately investigate to determine whether or not the underlying
process has somehow changed.

Acceptance Sampling

One way to determine the quality levels is through 100% inspection

(i.e., inspection of each and every item). While this may be necessary
in some critical circumstances (e.g., donated blood), it has
drawbacks.

as long as there is any variability in the process,

ISO 9000 A family of standards, supported by the International

Organization for Standardization, representing an international
consensus on good quality management practices. ISO 9000 addresses
business processes rather than specific outcomes

Capacity The capability of a worker, a machine, a workcenter, a

plant, or an organization to produce output in a time period.

They need measures of capacity. Such measurements vary widely. In

general, though, companies measure capacity in terms of inputs,
outputs, or some combination of the two.

In organizations that provide standard products or services, capacity

is likely to be expressed in terms of outputs because the output
doesn’t change radically from one period to the next. In organizations
that provide customized services or products, capacity is more likely
to be expressed in terms of inputs.

reactive “fire fighting”

THREE COMMON CAPACITY STRATEGIES Oftentimes capacity decisions are

made to accommodate expected growth in demand or product lines. The
question managers must deal with is how quickly to increase capacity.
Three common strategies for timing capacity expansions are the lead,
lag, and match strategies

Lead capacity strategy A capacity strategy in which capacity is

added in anticipation of demand. Lag capacity strategy A capacity
strategy in which capacity is added only after demand has
materialized. Match capacity strategy A capacity strategy that
strikes a balance between the lead and lag capacity strategies by
avoiding periods of high under- or overutilization. Virtual supply
chain A collection of firms that typically exists for only a short
period. Virtual supply chains are more flexible than traditional
supply chains, but they are also less efficient.
demand is uncertain is to use a decision tool

Expected Value

1. Identify several different demand-level scenarios. These scenarios

are not meant to identify all possible outcomes. Rather, the intent is
to approximate the range of possible outcomes. 2. Assign a probability
to each demand-level scenario. 3. Calculate the expected value of each
alternative. This is done by multiplying the expected financial result
(cost, revenue, or profit) at each demand level by the probability of
each demand level and then summing across all levels. The equation is:

Decision tree A visual tool that decision makers use to evaluate

capacity decisions. The main advantage of a decision tree is that it
enables users to see the interrelationships between decisions and
possible outcomes.

Break-even point The volume level for a business at which total

revenues cover total costs.

Learning curve theory A body of theory based on applied statistics

which suggests that productivity levels can improve at a predictable
rate as people and event systems “learn” to do tasks more efficiently.
In formal terms, learning curve theory states that for every doubling
of cumulative output, there is a set percentage reduction in the
amount of inputs required.

Other Considerations Not all capacity problems can be solved using the
quantitative models just described. Other considerations that will
affect a firm’s choice include: • The strategic importance of an
activity to the firm • The desired degree of managerial control • The
need for flexibility

The more strategically important an activity is to a firm, the more

likely the firm is to develop the internal capacity to perform the
activity. Strategic activities are often called core activities
because they are a major source of competitive advantage.
Theory of Constraints (TOC) An approach to visualizing and managing
capacity which recognizes that nearly all products and services are
created through a series of linked processes, and in every case, there
is at least one process step that limits throughput for the entire
chain.

first-come, first-served (FCFS)

SIMULATION MODELING

1. Offline evaluation of new processes or process changes.

2. Time compression

3. “What-if” analyses.

This is related to the first point. Model developers must strike a

balance between cost, ease of use, and realism.
Tools of Total Quality Management: The 7 QC Tools

Tools for generating ideas

1. Check sheets

2. Scatter diagrams

3. Cause-and-effect diagrams

Tools to organize the data

4. Pareto charts

5. Flowcharts

Tools for identifying problems

6. Histogram
7. Statistical process control chart

Flexibility: ability to respond with little penalty in time, cost or

customer value

Service Blueprinting

Service blueprinting: a process analysis technique that lends itself

to a focus on the customer and the provider's interaction with the
customer

Focuses on the customer and provider interaction

Defines three levels of interaction

• Level 1: customer is in control

• Level 2: customer may interact with service provider

• Level 3: service is removed from customer's control and interaction

Each level has different management issues

Identifies potential failure points

• Poka-yokes: literally translated "foolproof"; a procedure that

blocks the inevitable mistake from becoming a defect