MBA 570Summer 2011

Process and Product Strategies

McDonald’sover 95 billion served

McDonald’sover 95 billion served

Thinking ChallengeThinking Challenge

Consider McDonald’s restaurants. Fact #1: Franchisees of McDonald’s have to go to ‘Hamburger U.’ They protest, ‘But, I’ve been in the restaurant business 20 years – I know the restaurant business!’ ‘Yes, but you don’t know OUR business.’

© 1984-1994 T/Maker Co.

Thinking ChallengeThinking Challenge

Fact #2: A typical McDonald’s restaurant is run by unskilled teenagers, whose mothers can’t even get them to make their beds in the morning.What do these facts & your own experiences suggest about McDonald’s operations?

McDonald’sover 95 billion served

McDonald’sover 95 billion served

© 1984-1994 T/Maker Co.

McDonald’s is not in the business of selling haute cuisine, but ‘fuel’ – a standardized product.

The new franchisee has to learn the McDonald’s production system – a typical assembly line.

An assembly line requires low labor skills, but high mechanization. Hence, unskilled teenagers are used.

Solution*Solution*

Major factors in design strategy◦ Cost◦ Quality◦ Time-to-market◦ Customer satisfaction◦ Competitive advantage

Product and Service Design

Product and service design – or redesign – should be

closely tied to an organization’s strategy

Translate customer wants and needs into product and service requirements

Refine existing products and services Develop new products and services Formulate quality goals Formulate cost targets Construct and test prototypes Document specifications

Product or Service Design Activities

Reasons for Product or Service Design

Economic Social and demographic Political, liability, or legal Competitive Technological

Objectives of Product and Service Design Main focus

◦ Customer satisfaction Secondary focus

◦ Function of product/service◦ Cost/profit◦ Quality◦ Appearance◦ Ease of production/assembly◦ Ease of maintenance/service

Taking into account the capabilities of the organization in designing goods and services

Designing For Operations

Legal◦ FDA, OSHA, IRS◦ Product liability◦ Uniform commercial code

Ethical◦ Releasing products with defects

Environmental◦ EPA

Legal, Ethical, and Environmental Issues

Regulations & Legal Considerations

Product Liability - A manufacturer is liable for any injuries or damages caused by a faulty product.

Uniform Commercial Code - Products carry an implication of merchantability and fitness.

Order Losers, Qualifiers, and Winners

Order Loser: a product or service characteristic that repels customers.Order Qualifier: a product or service characteristic that is necessary, but not sufficient to win the order.Order Winner: a product or service characteristic most important to a particular customer.

Beware Order Winners Becoming Order Qualifiers!!

Other Issues in Product and Service Design

Product/service life cycles How much standardization Product/service reliability Range of operating conditions

Standardization

Standardization ◦ Extent to which there is an absence of variety in

a product, service or process Standardized products are immediately

available to customers

Advantages of Standardization Fewer parts to deal with in inventory &

manufacturing

Design costs are generally lower

Reduced training costs and time

More routine purchasing, handling, and inspection procedures

Advantages of Standardization (Cont’d)

Orders fillable from inventory Opportunities for long production runs

and automation Need for fewer parts justifies increased

expenditures on perfecting designs and improving quality control procedures.

• Delayed differentiation is a postponement tactic◦ Producing but not quite completing a

product or service until customer preferences or specifications are known

Delayed Differentiation

Reverse Engineering

Reverse engineering is thedismantling and inspecting of a competitor’s product to discover product improvements.

Introduction to Process StrategiesIntroduction to Process Strategies

Process Choice: The Product/Process Matrix

Process TypesProject – Unique, one-of-a-kind, products or customers. Generally large in size (building a bridge, installing a software system, implementing a major improvement effort)

Job Shop –Manufacturing and Service high customization and flexibility, but higher volume than project.

Batch Production – Groups of identical products or customers processed together through one step and then moved together to the next step. More limited product variety, higher production volume.

Process Choice: The Product/Process Matrix

Process TypesAssembly Line – Narrowly defined processes, made up of equipment with limited flexibility. Much higher volume. Still the possibility of some flexibility.

Continuous (Repetitive) Processing – Equipment and workstations dedicated to a single thing. Very high volume. Very low flexibility. Best chance for

automation.

Process DecisionsProcess Decisions Involve determining how to produce a

product or provide a service Objective

◦ Meet or exceed customer requirements◦ Meet cost & managerial goals

Has long-run effects◦ Product & volume flexibility◦ Costs & quality

Types of Process StrategiesTypes of Process Strategies

Continuum

Process strategies follow a continuum Within a given facility, several strategies may

be used

Types of Process StrategiesTypes of Process Strategies

Continuum

Product-Focused

Process-Focused

The strategies are often classified as:

Process-Focused StrategyProcess-Focused Strategy

Process-Focused StrategyProcess-Focused Strategy

Facilities are organized by process Similar processes are together

◦ Example: All drill presses are together Low volume, high variety products ‘Jumbled’ flow Other names

◦ Intermittent process◦ Job shop Oper.

Product A

Product B

11 22 33

Process-Focused Strategy ExamplesProcess-Focused Strategy Examples

Machine Shop

Hospital

Bank

© 1995 Corel Corp.© 1995 Corel Corp.

© 1995 Corel Corp.

Process-Focused Strategy Pros & ConsProcess-Focused Strategy Pros & Cons

Advantages◦ Greater product flexibility◦ More general purpose equipment◦ Lower initial capital investment

Disadvantages◦ More highly trained personnel◦ More difficult production planning & control◦ Low equipment utilization (5% to 25%)

Process Oriented LayoutProcess-oriented (“functional”) Layout

Organized by function

Steps completed in any sequence

AdvantagesFlexibility and customization

DisadvantagesHigher cost per unit

Higher skilled, high cost employees

Transport/wait time between departments Less consistency across products or services

Product-Focused StrategyProduct-Focused Strategy

Product-Focused StrategyProduct-Focused Strategy

Facilities are organized by product High volume, low variety products Other names

◦ Line flow production◦ Continuous production

Where found◦ Discrete unit manufacturing◦ Continuous process manufacturing

Oper.Products A & B11 22 33

Product-Focused Strategy ExamplesProduct-Focused Strategy Examples

Paper (Continuous)

Soft Drinks (Continuous, then Discrete)

© 1995 Corel Corp.© 1995 Corel Corp.

Light Bulbs (Discrete)

© 1984-1994 T/Maker Co.

McDonald’sover 95 billion served

McDonald’sover 95 billion served

Fast Food(Discrete)

Product Oriented Layout

AdvantagesEfficient production of standardized goods and servicesHigh processing speedLow cost per unit

DisadvantagesLack of flexibility or customizationEmployee boredom/ dissatisfactionQuality problems

Product-Focused StrategyPros & ConsProduct-Focused StrategyPros & Cons

Advantages◦ Lower variable cost per unit◦ Lower but more specialized labor skills◦ Easier production planning & control◦ Higher equipment utilization (70% to 90%)

Disadvantages◦ Lower product flexibility◦ More specialized equipment◦ Usually higher capital investment

Product vs. Process LayoutsTransition from Process to Product Layout may be triggered by age of the product

Early in life-cycle Not much information

on what customers want

Adopt process-orientation to remain flexible and produce many varieties

Late in life-cycle Much better

understanding of what customers want

Shift to product-orientation with fewer options

Process Continuum

Process Focused(intermittent process)

Repetitive Focus(assembly line)

Product Focused (continuous process)

Continuum

High variety, low volumeLow utilization (5% - 25%)

General-purpose equipment

Low variety, high volumeHigh utilization (70% - 90%)

Specialized equipment

ModularFlexible equipment

Factors Affecting Process AlternativesFactors Affecting Process Alternatives

Production flexibility◦ Product volume◦ Product variety

Technology Cost Human resources Quality Reliability

These factors reduce the number of alternatives!

These factors reduce the number of alternatives!

© 1984-1994 T/Maker Co.

Process Investment EvaluationProcess Investment Evaluation

Long-term factors◦ Fit with company strategic plan◦ Competitive advantage◦ Product life cycle◦ Operating factors (e.g., scrap, training)

Financial return◦ Break-even analysis◦ Cash flow analysis (IRR, NPV)

Questions for Process Analysis and Design

Is the process designed to achieve competitive advantage in terms of differentiation, response, or low cost?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?

Volume and Variety of Products

Volume andVariety ofProducts

Low Volume HighVariety Process

(Intermittent)

RepetitiveProcess

(Modular)

High VolumeLow Variety

Process(Continuous)

One or very fewunits per lot

Projects

Very small runs, highvariety

Job Shops

Modest runs, modestvariety

DisconnectedRepetitive

Long runs, modestvariations

ConnectedRepetitive

Very long runs,changes inattributes

Continuous

Equipment utilization 5%-25% 20%-75% 70%-80%

Poor Strategy(High variable

costs)

Mass Customization

• Mass customization:◦ A strategy of producing standardized

goods or services, but incorporating some degree degree of customization

◦ Delayed differentiation◦ Modular design

Mass Customization

Mass Customization

Using technology and imagination to rapidly mass-produce products that cater to sundry unique customer desires.Under mass customization the three process models become so flexible that distinctions between them blur, making variety and volume issues less significant.

Service-System Design Matrix

Mail contact

Face-to-faceloose specs

Face-to-facetight specs

PhoneContact

Face-to-facetotal

customization

Buffered core (none)

Permeable system (some)

Reactivesystem (much)

High

LowHigh

Low

Degree of customer/server contact

Internet & on-site

technology

SalesOpportunity

ProductionEfficiency

Phases in Service Design1.Conceptualize2. Identify service package components3.Determine performance specifications4.Translate performance specifications into

design specifications5.Translate design specifications into

delivery specifications

Service BlueprintingProcess Mapping

Service blueprinting◦ A method used in service design to describe

and analyze a proposed/existing service A useful tool for conceptualizing a service

delivery system Excellent tool for continuous

improvement

Process mapping provides a graphical representation of a process, using arrows, boxes and other tools to indicate the ‘flow’ of the process, what steps are taken, what decisions are made and what records are created. It is a methodology used in systems design.

Using a process map may assist in graphically documenting your analysis of the work flow produced by different activities. The value of a process map is in building a picture of activities with which you are less familiar, helping you to identify the different steps in the process and what records should result.

Creating a Process Map

To create a process map, it is important to determine the start and stop points because you will create the process map between those points. The Once you have determined the beginning and ending activity steps, start mapping what is done between the two. Make sure to:

Keep it simple. Start at a high level first. Involve the people closest to the process. Walk through the process yourself. Think end to end. Work with a small group of 3-7 people. A larger

group can make the activity unwieldy.

Major Steps in Service Blueprinting/Mapping

Choose a process. You have to first decide what you want to improve. Some examples are the process of making reservations at a corporate travel center, handling a customer's repair order at a car dealership, or registering students at a college. The best bet is a process which is time-consuming, error-prone, or critical to success; starting where there is a strong potential for improvement will build morale and help launch later mapping projects.

Assemble a team. Preferably, the team will include people from the lowest and highest levels directly involved in the operation, such as customer service agents, their supervisors and managers, and the head of operations. The team must be empowered (given the responsibility and sufficient authority or leeway) to make significant changes in the work flow.

Map out the way work is currently done. Diagram each step, showing decision branches, time spent, any distances traveled or people contacted, and other important aspects of the work. It is often be easier to sketch out the individual tasks first, then go back and fill in the details.

Identify problem areas. These are areas where people feel there are currently major issues to be resolved, such as poor customer satisfaction, "dropping the ball," large expenses, or significant delays. Where there are many areas to choose from, try to follow the 80/20 rule: work on the 20% of the areas that cause 80% of the problems.

Brainstorm solutions. Identify all possible action steps for each problem area, without evaluating them.

Evaluate action steps. Set up a set of "final" action steps by group consensus.

Assign responsibilities. Ask people to volunteer to take responsibility for each action step judged to be worthwhile by the group, and to set deadlines.

Create a master plan. Summarize who has responsibility for what actions and the deadlines. Distribute the plan and make sure everyone agrees with it and that it accurately reflects the decisions made during the sessions.

Follow through. The meetings are useless without appropriate follow-through. Try meeting again every two weeks to see what went well and what did not. When the time is right, try having another brainstorming session. This is where having a detailed, clear, and well communicated master plan is invaluable.

Characteristics of Well Designed Service Systems

1. Consistent with the organization mission

2. User friendly3. Robust4. Easy to sustain5. Cost effective6. Value to customers7. Effective linkages between back

operations8. Single unifying theme9. Ensure reliability and high quality

Challenges of Service Design

Variable requirements Difficult to describe High customer contact Service – customer encounter

Mapping Tools

Tools Continued

Example of Service Blueprinting

Brushshoes

Applypolish

Failpoint

BuffCollect

payment

Cleanshoes Materials

(e.g., polish, cloth)

Select andpurchasesupplies

Standardexecution time

2 minutes

Total acceptableexecution time

5 minutes

30secs

30secs

45secs

15secs

Wrongcolor wax

Seen bycustomer 45

secs

Line ofvisibility

Not seen bycustomer butnecessary toperformance

Process Map of Training Authorization

Service Blueprint of Luxury Hotel

Service Blueprinting (Bank Lending Operation

Example) Loan application Branch Officer Pay book 30min--1hr.

Line of visibility

Deny

1 day 2 days 3 days

Fail point Customer wait Employee decision

===========

===== $ 0 $ ==== =====

Receive Payment

Final paymentDecline Notify

customerIssuecheck

Confirm

Creditcheck

AcceptPrint

paymentbook

DelinquentClose

account

Verifyincome

dataInitial

screening

Verifypayer

Employer Creditbureau Branch

recordsBank

accounts Accounting

Data baserecords

F W

Con

firm

ww

F

F

F

F

F

F

Process Mapping Mistakes

Map all the details, losing track of the big picture.  

Focus on the seller, instead of the customer.  

Map the process without showing how the results will be measured.  

Buy somebody else's "ideal" process. 

Strategic Positioning Through Process Structure

Degree of Complexity: Measured by the number of steps in the service blueprint. For example a clinic is less complex than a general hospital. Degree of Divergence: Amount of discretion permitted the server to customize the service. For example the activities of an attorney contrasted with those of a paralegal.

Customer Contact View of Services

Degree of Customer Contact Influences Potential Efficiency of Service

Separate High- and Low-Contact Operations

Consider Sales Opportunity and Production Efficiency Tradeoff