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Supply Chain Application and Policy SCM470-001 and 002

Dr. Carol PRAHINSKI

SCM470 - 002

Michigan State University

Table of Contents

Process Fundamentals.....................................................................................................................5

Earth Buddy....................................................................................................................................23

McLeod Motors Ltd.........................................................................................................................27

Quinte MRI......................................................................................................................................33

Ranger Creek Brewing and Distilling..............................................................................................49

International Decorative Glass........................................................................................................63

The Home Depot, Inc......................................................................................................................79

Industrie Pininfarina: The New Customer Decision......................................................................107

VF Brands: Global Supply Chain Strategy....................................................................................127

Supply Chain Application and Policy SCM470-001 and 002 SCM470 - 002

Dr. Carol PRAHINSKI Michigan State University

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9-696-023 R E V : J U L Y 1 3 , 2 0 1 6

Professor Ann E. Gray and Research Associate James Leonard prepared this note as the basis for class discussion, with minor edits by Prof. Michael Toffel. It is a rewritten version of an earlier note by Prof. Paul W. Marshall, “A Note on Process Analysis,” HBS No. 675-038. Copyright © 1995, 1996, 1997, 1999, 2007, 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

A N N E . G R A Y

J A M E S L E O N A R D

Process Fundamentals

Imagine that, upon graduation, you take a job managing a business whose operating processes need improvement. Perhaps you need to help management understand how to increase the value that operations provides to customers and/or improve the profitability of the operation. Or imagine that, upon graduation, you take a job in marketing, and you need to understand how the decisions made to improve operations will affect your new marketing programs, or how your new marketing programs will affect the ability of operations to do what they need to do. Or, as an executive in a start-up, you are concerned with both sets of issues.

Operations Management is about designing, managing, and improving the set of activities that create products and services and deliver them to customers. The first half of the TOM course is concerned with the “creating”. We call these activities, the people, the resources (including technology and knowledge), and the procedures that dictate how work is organized the operating system. (In TOM, when we talk about operating systems, we’re usually not talking about DOS or Windows.)

The basic building block of operating systems is the process. Most operating systems consist of multiple processes. A process takes inputs (in the form of raw materials, labor, capital [equipment / technology], knowledge, and energy), and creates outputs that are of greater value to customers (and, thereby, of greater value to the organization itself).

This note is an introduction to process analysis, a set of concepts and tool that will allow you to describe, measure, and ultimately improve operating processes.

As a simple example, imagine that you are in charge of a project for a large bakery supplying supermarket chains with products ranging from breads to pies. Your mission is to improve the baking process.

How will you start? Well, you will first have to develop a good understanding of the current operation, the activities that take place to transform flour, water, yeast, and other ingredients into baked goods, and the effort involved in each activity—such as the labor, materials, and equipment required at each step. You will also need to understand the different products the bakery offers, as well as your business’ competitive priorities, i.e., the reasons that customers buy them from you and not your competitors. Do you have lower prices, faster delivery, higher quality, or a better product line

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that allows your customers to buy all their bakery needs from one source? Only after understanding the physical process itself, how it links to the performance of the bakery and the level of performance required by customers, can you begin to look for opportunities to improve the bakery’s profitability.

The goal of this overview is to provide tools that can help you understand operations, not just for a bakery, of course, but any type of operation. These tools are important not only for improving operations, but also for the daily management of an operation or for the design of a new operation.

This overview begins by discussing the activities that take place in a process. Analytical tools such as the process flow diagram are provided to help you walk into a new operation, such as your bakery, and understand how each of the process steps fits together. You’ll be introduced to the types of management choices for designing, operating, and improving processes. Next, measures of the performance of a process and basic process analysis, methods used to determine process performance, such as calculating what and how much a process is capable of producing, and how quickly, are introduced. You’ll see how different types of processes can be used to make the same product, and how managers choose which process to use. Finally, the note focuses briefly on the complexity stemming from uncertainty and variability in the process, factors that make managing operations particularly difficult.

Elements of a Process

Again, the basic building block of an operating system, which we will spend much of TOM analyzing, is the process. Consider some examples of processes. An automobile assembly plant takes raw materials in the form of parts, components, and subassemblies. These materials, along with labor, capital, and energy, are transformed into automobiles. The transformation process is an assembly process and the output is an automobile. A restaurant takes inputs in the form of unprocessed or semi- processed agricultural products. To these, labor (a cook and a server, for example), capital equipment (such as refrigerators and stoves), and energy (usually gas and/or electricity) are added, and the output is a meal.

Both of the processes mentioned above have physical products as an output. However, the output of some operating systems is a service. Consider an airline: the inputs are capital equipment in the form of airplanes and ground equipment; labor in the form of flight crews, ground crews, and maintenance crews; and energy in the form of fuel and electricity. These inputs are transformed into a service, namely, a means of transportation between widely separated points. Processes with a service output also include those found in a hospital, in an insurance company, and in a consulting firm. In a hospital, for example, capital, labor, and energy are applied to another input (patients) in order to transform them into healthier or more comfortable people.

In order to understand a process, it is useful to have a simple method of describing the process and some standard definitions for its components. A convenient way to describe an operating system is a process flow diagram.

Returning to our bakery example, depicted in Figure 1, let’s assume that there are two distinct production lines in the bakery for making bread. Flour, yeast, and water enter at the left and are converted into loaves of bread through mixing, proofing (letting the dough rise), baking, and packaging. This is a bit of a simplification, but we’ll use it for illustration. There are two mixers, two proofers, and two ovens organized so that the ingredients mixed on the first mixer are automatically fed into the first proofer, and then sent to the first oven. All of the baked loaves of bread are packaged on the same packaging line. F or

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Tasks in this process are shown as small rectangles, flows as arrows, and the storage of goods as inverted triangles. We see two identical parallel lines for mixing, proofing, and baking. Within each line, the tasks of mixing, proofing, and baking are defined as being in a series relationship, because one step cannot start until the previous one is complete. The maximum capacity of the two parallel lines would be found by adding the capacity of each line. Work-in-Process Inventory (WIP) is shown before packaging because, at times, the bakery may produce different types of bread at the same time, one on each line, yet only one type can be packaged at a time. If there were parallel packaging lines, there may not be the need for holding WIP between baking and packaging except, perhaps, to allow the bread time to cool. Once packaged, the bread moves into Finished Goods Inventory, and from there is transported to grocery store customers.

Figure 1 Process Flow Diagram for Bread-Making with Two Parallel Baking Lines

If the mixers, proofers, and ovens were not set up as two distinct lines, and the product could flow from each mixer to either proofer and then to either oven, we would draw the process as in Figure 2. In this case, it is the individual tasks that operate in parallel, instead of two distinct parallel lines. (The distinction between these configurations will become important when performing a more detailed process analysis to determine the capacity of the system).

Figure 2 Process Flow Diagram for Bread-Making with Two Mixers, Proofers, and Ovens

We may also want to show, on a process flow diagram, tasks that are performed in parallel but that must both be completed before the process can continue. For example, our bakery makes filled croissants in addition to breads. For these, the mixing, proofing, rolling, and cutting of the pastry take place in parallel with the mixing of the filling as shown in Figure 3. All these tasks must be completed before the croissants can be filled and baked. Proofing the dough takes longer than any of the other pastry-making steps. Proofing also takes longer than mixing the filling. This means that the rate at which filling and folding takes place is limited by the rate at which the dough, not the filling, is ready. And the rate at which the dough is ready is limited by the rate at which proofing takes place. It is the rate of the proofing step, the longest task, that defines how much bread can be made per hour.

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Note that the nature of the parallel activities for making croissants is different from that of the two bread lines working in parallel as in Figure 1. To determine the capacity of the bread-making operation up until the dough is baked, we add the capacity of each of the parallel bread lines. To determine the capacity of croissant-making, however, we would take the minimum of the capacity of the two different parallel processes, in this case, the capacity of pastry making. This is because the output of the two lines must be combined to make the final product. We will revisit this issue in Section 1.2, when we do a formal capacity analysis.

Figure 3 Process Flow Diagram for Croissant-Making

Once a process has been described using a process flow diagram, its components must be analyzed in order to draw some conclusions about its performance as a whole. In the following sections we will discuss each component of the process—the inputs, outputs, tasks, flows, and storage of goods—and begin to develop measurement and analysis methods along the way.

Inputs

As described above, the inputs to a process can be divided into at least four categories: labor, materials, energy, and capital. To analyze an operating system we must measure these inputs and determine the amount of each needed to make some amount of output. Usually we use physical units to measure the inputs – for example, hours for labor and joules for energy. It is sometimes more useful to measure the input in dollars by determining how much it would cost to purchase these units. Thus, in many analyses it will be necessary to consider the economic conditions influencing the cost of labor, materials, energy, and capital. Measuring the cost of inputs becomes more difficult and requires additional care as the time horizon lengthens.

Determining how much of any input is needed to make a given output entails varying degrees of difficulty. Some inputs (e.g., labor and materials) are fully consumed to produce an output and thus are easy to assign to that unit of output. For example, it is easy to measure how much energy the oven uses to bake a batch of bread. Other inputs, however, are utilized in the production of an output, but are not fully consumed—the oven itself, for instance. The capital input is often the most difficult of the four categories to assign to a specific output because it is almost impossible to measure how much capital is consumed at any point in time. Generally accepted accounting rules are often used to allocate fixed costs, such as capital, to each unit of output.

Outputs

The output of a process is either a good or a service. The process flow diagram in Figure 1 shows that the product is stored in Finished Goods Inventory (FGI) before leaving the system. In some organizations, the finished goods inventory is kept apart from the operating system producing the good and is managed separately. In others, the finished goods inventory does not exist at all: the

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process produces the output directly for distribution. In fact, this is an important characteristic of most processes providing services; it is often not easy (or possible) to store it for later distribution.

Although it is a simple matter to count the number of loaves of bread produced by the bakery, or to count the number of patients served by a hospital, it may not be simple to place a value on this output. The question of valuing the outputs can be approached from an economic point of view if a market will place a value on the output through the pricing mechanism. So, if we know the revenue that can be obtained from selling the good or service, that should serve as a measure of its value. For this reason, we must have a good understanding of the economic environment within which the process exists. “What are the market conditions?” and “What is the competition doing?” are thus important questions to address when analyzing a process.

For a new product, or one that has some improved characteristics, however, the question of what price will be paid for the output is difficult to answer unless some other information is known about the output. Here, we will consider three output characteristics: the cost of providing the output, the quality of the output, and the timeliness of the output. It is often the case that none of these measures is easily obtained, but they can serve as a checklist in our analysis of operating systems. If we are going to consider making a new type of bread, or increasing the quality of the bread, we may not know the price we can get for it. However, we do know that to value the new product, it is important to take into account the new product’s characteristics, market conditions (is there an oversupply of specialty or high-end breads?), and the competitive situation (should we match the price of a competitor’s similar product?)

Tasks, Flows, and Storage

So far we have discussed what goes into and what comes out of a process. We must also understand what goes on inside a process. The specifics of every process are different, but there are three general categories for all activities within the process: tasks, flows, and storage.

A task typically involves the addition of some input that makes the product or service more nearly like the desired output. Some examples of tasks are (1) operating a drill press to change a piece of metal; (2) inspecting a part to make sure it meets some standard; (3) flying an airplane; and (4) anesthetizing a patient before an operation. A task quite often takes the form of added labor and capital; in processes with some form of automation, capital and/or material may be substituted for labor in a task.

There are two types of flows to be considered in each process: the flow of goods and the flow of information. Figure 4 depicts a process flow diagram with the flow of information shown explicitly— the flow of physical goods is indicated by solid lines and the information flow by broken lines.

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Figure 4 Information and Physical Process Flow Diagram for the Bread-Making Process

Information flows in the bread-making process depicted in Figure 4 are quite simple; they take the form of recipes and production orders. The list of ingredients and quantities for the type of bread that will be made next must go the operators or material handlers in charge of getting the raw material ingredients to each mixer. Information on mixing times and methods must go to the operators of the mixers, and baking temperatures and times must go to operators of the ovens. We will also have to inform packaging of what types and quantities of breads will be arriving to the packaging area so that they can set up their equipment with the correct bags.

In some types of operations, the information flows take place with the physical flows, often in the form of a routing slip attached to a single product or a batch of products. The analogy here would be the entire recipe and the production order moving with the bread. The oven operator, for instance, would receive baking instructions with the proofed dough as it arrives at the oven. If the operator could not or would not need to adjust the oven in advance, not providing this information in advance would not cause any production delay and would simplify the information flows. Other information that might be included on the routing slip includes the packaging lines that the loaves should be sent to (if there are multiple packaging lines), the appropriate bags to use for packaging, the supermarket name and location, the delivery date and time, and possibly even the truck into which the finished product should be loaded.

When the information does not physically move through the process with the goods, the worker may need to go to a central location to obtain the information before performing the task, or the worker may have the necessary information at the workstation or in his or her head. In analyzing a process, it is often important to consider the information flows in addition to the physical flow of goods or services.

Storage (the holding of inventory) is the last of the three activities within a process. Storage occurs when no task is being performed and the good or service is not being transported. In Figures 1 – 4, we have shown the storage of goods as inverted triangles. While the bakery is operating, there will usually be work-in-process inside the mixers, proofers, and ovens, at the packaging machines, as well as some work-in-process inventory between each step, and raw materials and finished goods inventory in the warehouse. If there is no storage between two connected tasks, there must be a planned continuous

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flow between these tasks to allow the receiving task to operate continuously. Figures 1 and 2 show only one work-in-process storage, whereas Figure 3 shows two. In many processes that are considered continuous, there are at least a few units of work-in-process inventory on a rack or chute waiting to be fed into a machine. Although these units are technically in storage and could be depicted on the process flow diagram as inverted triangles between processing steps, they are often left off of the diagram when they represent just a few minutes of processing time. Similarly, the transport of goods from step to step within the process could be shown as another set of tasks, but unless the necessary times are long, we will generally omit these in process flow diagrams for simplicity.

It is also possible, and in fact necessary, to store information. This storage is shown as a circle in Figure 4, with an arrow coming in from the environment to start the process. In this case, there are two kinds of information: records and control. The term records typically refers to general instructions, such as blueprints and instructions of how a product should be made (i.e., the “recipe”). These records are product-specific. Records may also be machine-specific, tracking repair and preventative maintenance histories, for example. The term control usually refers to information specific to a given order, such as the order quantity, customer name or number, due date and routing procedure for the order, or special instructions that make the order different from the generally accepted procedures outlined in the records.

Measuring the Performance of a Process

So far we have defined the process in general terms and given names to various components of the process, namely the inputs, the outputs, and the tasks, flows, and storage within the process. We have also noted that the process does not exist in isolation. Economic conditions influence the values of inputs and outputs, and the state of technology influences the nature of the tasks and flows. Using these concepts as a base, we can now explore some process characteristics, concentrating on four: capacity, efficiency, flexibility, and quality.

Capacity

Capacity is the maximum output rate from the process and is measured in units of output per unit of time: a steel mill, for instance, can produce some number of tons of steel per year, or an insurance office can process some number of claims per hour. Capacity is easy to define and hard to measure. It is often possible to determine the theoretical capacity of a process—the most output it could generate under ideal conditions over some period of time. For planning purposes and management decisions, however, it is more useful to know the effective capacity of a process – and to measure effective capacity, we must know a great deal about the process, carefully analyzing the particular situation at hand.

Managers often believe that the capacity of a process is an absolute fixed quantity. This is rarely true. The capacity of a process can change for many reasons, and we will encounter several cases where this is a key factor. The steel mill, for instance, may be designed for some ideal capacity, but its effective capacity may be different due to a variety of internal and external factors, as well as management decisions. The nature and availability of the raw materials being utilized, the mix of products being produced, the quantity and nature of the labor input, and the number of shifts of operation will all impact the effective capacity. The yield of the process is also important. In most instances, the rate of good units produced is the relevant capacity measure.

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Efficiency

Efficiency is a measure that relates the amount or value of the output of the process to the amount or value of the input. “Efficiency” is widely used to measure physical processes. Every engine has an efficiency, expressed as a ratio of output energy to input energy. So, an engine with 75% efficiency can deliver 75% of the input energy as useful output energy. The energy efficiency of physical systems cannot exceed 100%; the useful output energy is always less than the energy input. This is not generally true of economic processes, however. For example, if the process is going to generate sufficient resources to support its own continued operation, the value of the output should exceed the value of the input. If we measure the value of output by the revenues it will bring in the market, and if we measure the value of inputs by their costs, the measure of efficiency is profit, i.e., revenue minus cost. Thus, the profit is the value of output minus the value of input. Profit, however, is a very simplistic definition of efficiency; measuring efficiency is generally much more complex.

In some cases, the price received for the product is not a good representation of the economic value of the output. In certain markets, for example, it may be possible initially for a company to sell a product of low quality at a standard price. Over time, however, the company’s reputation may be hurt by doing this, and all of the company’s products, not just the low quality product, might become less desired by the market. The long-term loss in revenue should have been considered when establishing the cost and quality level of the original product. When determining the efficiency of a process as measured by profitability, it is important to look at long-run profits, not just the profit generated from any short-run action.

Utilization is another common measure. Utilization is the ratio of the input the process actually used in creating the output to the amount of that input available for use. In a labor-intensive process, for instance, direct labor utilization is often an efficiency measure. If, say, 100 workers are employed in a given process over an eight-hour shift, and 700 hours of labor were consumed in the actual manufacture of product, then the direct labor utilization during that shift was 87.5% ([700 hours/(100 X 8 hours)] = 0.875). In a similar way, to measure capital efficiency, companies often pay a great deal of attention to machine utilization, which measures the percentage of time the machinery is used. Typically, this includes machine setup time as well as the time the machine is actively producing output.

In a small bakery where workers mix the dough, form loaves, and move the product from one step to another by hand, labor utilization is a critical measure of bakery performance. In an automated bakery, machine utilization may be more relevant.

Flexibility

A third characteristic we want to consider in analyzing a process is its flexibility. This is a measure of how long it would take to change the process so that it could produce a different output, or could use a different set of inputs. Flexibility, which allows a process to respond to changes in its environment, is also the least precise and hardest to define of the characteristics we have considered thus far. Flexibility must often be described in qualitative terms; doing so, however, does not make it any less important to managers.

Returning to our bakery, its flexibility may be described by the different types of bread that can be produced on a given line, or whether pastry products can also be made on the same line as bread

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products. Another type of flexibility may further be measured by the time required to switch the line from producing one type of product to another.1

Quality

Like flexibility, quality may be described in different ways. Product quality can be evaluated using external measures—comparing the product with others available in the marketplace—or using internal measures—comparing individual units with one another or with the product design specification. External quality measures generally assess how well the product design satisfies the wants and needs of customers. Product performance, features, reliability, durability, serviceability, and design aesthetics may all be components of product quality. Internal measures of product quality generally assess whether individual units meet design specifications.

In addition to designing, measuring and controlling product quality, a manufacturer also designs, measures and controls process quality. In order to produce a product with certain specifications, the process must be operating within certain tolerances. Process measures, such as the temperature in a kiln or the amount of force applied by a punch press, are generally used in assessing process quality. Any piece of processing equipment has specific capabilities defined by the range of process specifications it is able to achieve. A piece of equipment may not be able to perform a certain type of operation, such as grinding a piece of metal to a certain smoothness, if doing so requires operating outside this range or it may not be able to consistently perform the operation properly. In other circumstances, the equipment is capable of consistently operating within certain specifications, but is not operating consistently within these specifications because of poor equipment control. Both the design of the process and the way in which the process is operated are important determinants of process, and thus, product quality.2

Within the plant, the impact of poor quality can be increased scrap, rework, yield losses resulting in lost capacity, downtime, additional testing, and lost management and worker time. If poor quality product leaves the factory, the impact can include a loss of goodwill toward the company and its brands, time and cost responding to customer complaints, and repair costs.

Process Terminology and Process Analysis

As the new manager of the bakery, once you understand its products and the process steps, and you have created a process flow diagram, you may want to determine the capacity of your operation. To do this, let’s further simplify the bread-making example, as illustrated in Figure 5. Here, there are two steps required to prepare bread. The first is bread-making, which includes preparing the dough and baking the loaves, and the second is packaging the loaves. There is only a single line for mixing, proofing, and baking, and it is illustrated by a box representing the entire bread-making line.

1 A more detailed description of different types of process flexibility and how they can be managed can be found in: Upton, David, “The Management of Manufacturing Flexibility,” California Management Review, Winter, 1994, or Upton, David, “What really makes factories flexible?,” Harvard Business Review, July–August, 1995.

2 A more detailed description of different measures of quality can be found in: Garvin, David A., “Competing on the eight dimensions of quality,” Harvard Business Review, November-December, 1987, or Garvin, David A., and Artemis March, “A Note on Quality: The Views of Deming, Juran, and Crosby,” Harvard Business School Note 9-687-001, 1987.

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696-023 Process Fundamentals

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Figure 5

Based on the size of the mixers in the bakery, bread is made in batches of 100 loaves each. Bread- making completes a batch of 100 loaves every hour; thus, the bread-making cycle time for a batch of 100 loaves is one hour. Although packaging needs only ¾ of an hour to place the 100 loaves in bags (its cycle time), the rate at which the entire process can operate is paced by the bread-making step. Thus, over the course of a day, packaging will incur idle time during the ¼ hour periods in which the next batch of bread is still being made but packaging has already completed bagging the previous batch. Bread-making is the bottleneck of the operation. The cycle time for the entire process is 1 hour, the maximum of the cycle times of the two operations in series. Given the cycle time for the entire process, we can determine its capacity. Simply put, if the cycle time is 1 hour per 100 loaves, the line has a capacity of 100 loaves per hour, the inverse of the cycle time. To determine the daily capacity, we would need to know the number of hours the bakery is in operation per day. With any of these terms of measurement, it is important to be very explicit about the units (i.e., loaves per hour, minutes per loaf), particularly when performing calculations.

To perform our analysis of the capacity of the bread-making line above, we introduced some new terms and concepts. While we have provided formal definitions below, we must also stress that calculating these measures requires close attention to the specifics of a particular process. In addition, different firms sometimes define these terms in different ways for their own internal use. This variation is reflected in some of our case materials. However, for the purposes of class discussion, it makes sense to try to adhere to a common vocabulary.

Cycle Time (CT): The cycle time of a process is the average time between completion of successive units. In other words, cycle time answers the question, “How often does a unit complete the process?” Cycle time can be similarly defined for an individual task or for portions of a process.

Often a process or portion of a process is not operated at its theoretical capacity. In those instances, you may need to distinguish between the minimum amount of time that could elapse between the completion of successive units (the minimum cycle time of the process) and the amount of time required for the process to actually complete successive units (the actual cycle time). For example, in the process depicted in Figure 5, because bread-making, the process bottleneck, requires an hour to finish a batch, packaging will only receive batches of bread every hour. Thus, while its task time is ¾ of an hour, it could be operated more slowly. As long as it is operated so that it can package a batch of bread in no more than an hour, there will be no loss of capacity.

Bottleneck: The bottleneck of a process is the factor which limits production. Usually, we will speak of the task with the longest cycle time as a bottleneck, such as bread-making in Figure 5. In other situations, the available labor may be the bottleneck. In some settings, information, raw materials flow, or even a specific order may be a bottleneck. Just as the neck of a bottle limits the rate at which the liquid inside can be poured, a process bottleneck limits how quickly products can move through the process, and thus determines the process cycle time. The bottleneck may shift depending on what products are being produced or what labor or equipment is available at any point in time. Because bottlenecks pace a process and limit its capacity, they are important focal points for management attention.