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Production Processes

Garrett J. van Ryzin

Copyright c°2000 by Gar ret t J. van Ryzin. All rights reserved. December 2000

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Process Flow Analysis i

Contents

1 Introduction 1

2 The process view of production and service delivery 1

3 Production and service delivery processes 1

3.1 Typical stages of a manufacturing process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

3.2 S ervice delivery process es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

4 Process characteristics 4

4.1 E ±ciency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

4.2 Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

4.3 Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

4.4 Thr oughput time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

4.5 Flexibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

4.6 The interrelationship of process characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . 6

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Process Flow Analysis 1

1 Introduction

Manufacturing and service delivery processes typi-cally consist of a complex organization of technol-ogy, people and practices. Developed and operatede®ectively, they can provide a ¯rm with signi¯cantcompetitive advantage; if poorly conceived and mis-managed, they can saddle a ¯rm with ine±cienciesand performance problems that are di±cult to over-come. This note provides an overview of productionprocesses.

First, we discuss why it is important to view pro-duction activities as a process - an integrated whole

consisting of inputs, outputs, resources and activities- and examine some generic stages in a typical manu-facturing and service process. We then examine theirbasic characteristics and performance measures.

2 The process view of produc-

tion and service delivery

In this note, and throughout the course, we will viewproduction and service delivery not as a collection

of isolated activities, but as a process ; that is, as asystem of interrelated components that must be un-derstood and managed as a single entity.

The implications of this point of view are subtlebut signi¯cant: As a uni¯ed system, processes havetheir own characteristics, such as capacity, e±ciency,speed, °exibility, consistency, etc., that can be quiteindependent of the product or service they produceand often depends in complex ways on the inter-actions between all the various components of theprocess. As a s ingle system, the process itself mustbe designed, developed and improved over t ime to

achieve the mix of characteristics necessary to sup-port the b usiness objectives of the ¯rm. Processesalso have their own process technology distinct fromthe product technology of the product or service theyproduce. Finally, the activities of a production or ser-vice process span many functions of an organization { purchasing, manufacturing, human resources, ¯-nance, sales, marketing { and thus adopting a processview implies taking a point of view that spans tradi-tional functional boundaries.

3 Production and service deliv-

ery processes

Production and service delivery processes are diverse,but at their heart contain four basic elements:

² Inputs - Inputs are either consumed or trans-formed by a process. Automakers require sheetsteel, airlines require fuel, hospitals need med-ical supplies and energy, schools need students,news services need content (wire stories, photos,video), etc.

² Outputs - Outputs are the end product of theprocess (or service performed by t he process).The completed car, the transported passenger,the cured patient, the educated student, thecompleted news story, etc.

² Resources - Resources are the means by whichinputs are converted into outputs. Resources in-clude assets such as land, facilities, equipment,and also people, technology and knowledge. Theauto plant, the airport gates, the s pecializedknowledge of a physician, the classrooms, thenetwork of local reporters, etc.

² Activities - Activities involve a speci¯c use of resources to help convert inputs into outputs.Bolting a bumper onto a car, loading an airplanewith passengers, performing an operation, teach-ing a class, dispatching a reporter to cover anelection, etc.

While all this may seem painfully obvious, it is of-ten clarifying to explicitly identify these four basicelements when analyzing a ¯rm's operations. Askyourself: What exactly are the inputs to the process?

What are the o utputs? What resources does the ¯rmuse or have available to it? Which activities does itperform - or not perform? At its core, operationsmanagement is about managing these four compo-nents of production and service delivery - identify-ing the outputs that are required to be competitive,sourcing and e±ciently utilizing inputs, assemblingthe right mix of resource and then de¯ning, organiz-ing and managing the activities required to make theprocess operate e±ciently and e®ectively.

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While there is almost a limitless variety of typesof production and service processes, most follow a

few generic stages. We r̄st examine the basic stagesof a manufacturing process and then examine servicedelivery processes.

3.1 Typical stages of a manufacturing

process

Manufacturing, at its most basic level, involves trans-forming raw materials and/or components (inputs)into products (outputs) that provide value to a ¯rm'scustomers. This transformation usually involves ¯ve

major stages: procurement, fabrication, assembly,test and d istribution. We discuss each of these inturn.

Procurement

Procurement is the act of acquiring the basic inputsrequired to manufacture a product. Procurement ac-tivities may involve securing mineral rights and leasesfor n atural resources, purchasing components andraw materials, developing supplier networks, oversee-ing the component design activities of one's suppliers,certifying supplier quality, coordinating inbound lo-gistics, etc. In some industries such as oil and gas,coal and f orest products, procurement is the cen-tral operations activity; in others, e.g. semiconduc-tor manufacturing, it is much less important. As weshall see later in the course, however, clever man-agement of the procurement function is increasinglybeing viewed as an important means to achieving op-erational advantages.

Fabrication

Fabrication refers to the basic processes used to formparts, components and m aterials required in laterstages of p roduction. Fabrication processes are usu-ally among the ¯rst steps required in making a prod-uct. Examples of fabrication processes include mold-ing p lastic p arts from resins, stamping automobilebody panels from sheet metal, die casting aluminumvalve covers, weaving and dyeing fabric, extrudingmolten steel into bars or rods, etc. We will see spe-

ci¯c examples of fabrication processes in many of thecases we look at throughout the course.

Again, the degree to which a ¯rm engages in fab-rication varies widely. For some ¯rms, such as anautomotive parts supplier, it may be the primary ac-tivity. Other ¯rms do n o fabricating of parts at all.For example, a company like Dell Computer makes apoint of doing little more than designing and assem-bling. We will examine reasons for each approach tofabrication later o n in t he course.

Assembly

Assembly is the process of putting together compo-nents to produce more complex intermediate compo-nents (called subassemblies ) or to produce the ¯nalproduct (called a ¯nal assembly ). In a ssembly, partsare snapped, bolted, welded, glued, etc. together toproduce the required subassembly or product. Asdistinguished from fabrication, an assembly processusually does not alter the form of incoming parts.

The classic example of an assembly process is anautomotive assembly line, in which body panels arespot welded together to form a shell, the shell ispainted and dried, major subassemblies, such as the

engine, transmission, suspension system and steer-ing column are bolted to the shell, wiring harnesses,windows and seats are installed, etc., the ¯nal re-sult being a ¯nished automobile ready for distribu-tion to dealer lots. Indeed, many automobile plantsdo very little \manufacturing" { in the sense of fabri-cating parts { at all, and serve merely as points wherecomponents are consolidated and combined to forma ¯nished automobile. Other examples of assemblyprocesses include sewing garments, assembling tele-visions and the ¯nal stage of assembling hamburgersat a fast food restaurant.

Test

Testing of some sort is usually part of any manufac-turing process. Sometimes only testing of the ¯nalproduct is performed. More often, testing is per-formed at a variety of stages within both fabricationand assembly. In some industries, testing is a sig-ni¯cant and time consuming part of the entire pro-

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duction process. For example, complex s emiconduc-tors, such as microprocessors, require extensive tests

of their basic functionality, which are time consum-ing owing to the tremendous complexity of these de-vices. Military electronic parts often require a \burnin" period at high temperatures and/or extreme volt-ages, to eliminate parts that are subject to earlyfailures (infant mortality ). By law, pharmaceuticalcompanies must test and certify each batch (lot ) of drugs produced, which again can consume signi¯cantamounts of time.

Packaging and distribution

Packaging involves placing products into boxes, bot-tles, cans, pallets 1 or other containers for delivery tocustomers. In some operations, such as the produc-tion of household cleaners, cosmetics and many foodproducts, packaging is a critical part of the process.For example, in a mineral water or soft drink bottlingoperation packaging is the core production activity.In other cases, e.g. automobile production, it may bea relatively minor activity, involving only a few sim-ple steps to ready a product for shipment.

Distribution { the shipment of ¯nal p roducts to

a ¯rm's customers { is usually the ¯nal stage of amanufacturing process. Distribution is often a com-plex process in itself, involving processing customerorders, managing distribution centers, controlling in-ventories, picking and assembling orders for ship-ment, selecting shipment modes, routing and schedul-ing trucks, and increasingly due to \green" laws, han-dling return °ow of product and packaging waste.

Some ¯rms choose to outsource many of these dis-tribution activities, either by selling only to largewholesalers or by subcontracting distribution to athird party. However, for many ¯rms it is a vital

activity. For example, f or grocery store chains andmany other retailing businesses it is a central activ-ity. Indeed, op erationally retailing is essentially abusiness of procurement and distribution.

1A pallet is a standardized, square wood platform on whichproducts, boxes, drums, etc. are stacked for shipping. Thecargo is usually wrapped with steel bands or plastic (shrink wrap), to secure it to the platform. Pallets allow fork-lift trucksand other material handling equipment to easily lift and moveproducts in and out of warehouses, trucks, etc.

Again, we will discuss the variety of issues thatarise in managing the distribution function in some

detail later on in the course.

3.2 Service delivery processes

Services too are provided through a productionprocess. For example, when your car has troublestarting you may take it to an auto repair shop, wherethe problem will b e diagnosed, a repair estimate willbe made, and you will decide whether to proceed withthe repair. If you proceed, parts will be ordered, therepair performed and ¯nally the car will be returned

to you. While the stages of a service process tendto be more diverse than those of a manufacturingprocess, there are some generic features worth point-ing out.

The most important feature of service operations isthat the output { or service o®ering { and the deliveryprocess that provides it are often indistinguishable {in a sense, the service is the process.

Consider the automobile repair example a bove.What, exactly, is the service o®ering? Essentially, itis the process we described above: visiting the shop,getting an estimate, waiting for the repair and taking

delivery. The entire sequence { the service experience { really de¯nes a ¯rm's service o®ering. Similarly,consider a t rip on a commercial airline. The serviceis the entire transportation experience: arriving atthe gate, checking in baggage, boarding the aircraft,in-°ight service and meals, connecting through a hub,retrieving your bags. Again, the service o®ering is re-ally the process of transporting you from one locationto another. What distinguishes one airline's servicefrom another is not so much the transportation part(moving you from A to B), but all the design choicesand execution surrounding your experience from thetime you make a reservation to the time you pick up

your bag u pon arrival. Contrast this with the caseof a clothing manufacturer, where you as a customerexperience only the result of the production process(the ¯nished garment and its various characteristics)and not the process of making the garment itself.

The consequences of this di®erence are signi¯cant.It means that in service operations, managers haveto pay attention to attributes such as the cleanlinessof facilities, the perceived order and e±ciency of the

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process, the courteousness and appearance of employ-ees, etc. that would be relatively unimportant in a

manufacturing process. As a result, careful attentionto details in the design and management of the pro-duction process can be even more critical in servicebusinesses.

Of course there may be other activities that takeplace b ehind the scenes in order to provide a ser-vice. The p arts of a service delivery process thatcustomer's experience directly are often referred toas front o±ce operations, while those that are largelyhidden from customers are referred to as back o±ce

operations. It is in a ¯rm's front o±ce operationsthat the di®erences between manufacturing and ser-

vice processes are most acute; back o±ce operationsare, to a large extent, more like the operations of amanufacturing ¯rm.

4 Process characteristics

What characteristics of a particular process are im-portant to a ¯rm? In this section, we de¯ne ¯ve im-portant characteristics: e±ciency, capacity, quality,throughput time and °exibility. Speci¯c techniquesfor measuring these quantities are discussed later.

4.1 E±ciency

E±ciency , in the simplest terms, is a measure of howmuch input is required to generate a unit of output- the input/output ratio. If one measures inputs inmonetary terms, for example by converting the labor,material, energy, etc. to their monetary equivalent,then e±ciency is a measure of the cost of producinga unit of output.

For obvious reasons, e±ciency is an importantcharacteristic of a production process. Unfortu-nately, e±ciency can be somewhat di±cult to mea-sure. Why? First, a good measure depends on aproper allocation of costs to the various activities of a ¯rm. In this course, we will primarily be concernedwith identifying which costs are ¯xed , i.e. they do notincrease with the output volume, and those that arevariable , i.e. they increase with the level of output.This separation helps identify the marginal cost of an

activity, which is important information for makinggood economic decisions. Such cost allocation is the

domain of managerial accounting, and in this coursewe will depend on your knowledge of this disciplinein making proper assessments of costs.

A second di±culty in measuring e±ciency is thatdi®erent ¯rms (or di®erent operating units of a sin-gle ¯rm) may use di®erent mixes of inputs and re-sources to produce the same output. For example,some ¯rms may use lots of equipment and minimal la-bor, while others may use less equipment but more la-bor. To talk only of a single ratio (labor-hrs./outputor machine-hrs./output) in such cases can be mislead-ing, since a ¯rm (or operating unit) may be economiz-

ing on the use of one resource but wasteful in its use of other resources. Converting everything to monetaryunits might appear to solve the problem, but such anaccounting measure of e±ciency risks obscuring thetrue technical e±ciency of the process. For exam-ple, a producer in a low-cost labor market may look\e±cient" in accounting terms (e.g. have low cost)compared to a producer in a high-labor-cost market,when in fact they may be using much more labor perunit of output.

Both cost and technical e±ciency are important.Technical e±ciency matters because it shows which

methods and processes make the best use of inputsand resources - regardless of their cost. Understand-ing it helps pinpoint the best organization of produc-tion, best work methods and technologies, etc. Buteven the most e±cient use of an input or resourcemay result in an unpro¯table business if its cost is toohigh. Conversely, a technically ine±cient process maybe pro¯table provided its input and resource costs arelow enough. Thus, one needs to keep an eye on bothtechnical e±ciency and cost.

4.2 Capacity

Capacity is a measure of the maximum output aprocess is capable of sustaining. It is usually ex-pressed as a rate, such as the number of parts perhour a machine can produce, the number of kilowattsper hour an electric plant can provide, or the numberof passengers per trip that a plane can transport.

The capacity of a process is important for a varietyof reasons. First, insu±cient capacity can limit the

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total demand that a ¯rm is able to satisfy, resulting inlost sales if demand is high. On the other hand, excess

capacity, that i s capacity that exceeds the currentdemand rate, is wasteful because it often means a ¯rmis incurring extra costs for idle equipment, buildingspace, labor, etc. that are not needed for its currentlevel of output. The output expressed as a fraction of capacity de¯nes the utilization of a process. (Oftenexpressed as a percentage.) Utilization is a carefullywatched measure in most operations.

Generally, ¯rm's like to maintain high utilizationto spread ¯xed costs over the largest number of unitspossible; however, high utilization can degrade othermeasures of operating performance such as product

availability and delivery time. Managing capacityand these various performance trade-o®s is one of thekey responsibilities of operations managers.

Again, however, capacity is often not an easy quan-tity to measure, since it can depend on the mix of products or services that a process produces. We dis-cuss capacity measurement in more detail later in thecourse.

4.3 Quality

Another important characteristic of a productionprocess is the quality of its output. Poor quality cansigni¯cantly a®ect production costs, due to scrap, re-work and warranty costs. It also a®ects b oth theprice customers are willing to pay for a ¯rm's outputand their long-term loyalty. As we will see later inthe course, quality refers to a broad range of char-acteristics that are often di±cult to precisely de¯ne,measure and control.

A basic de¯nition of quality, and one that will suf-¯ce for now, is that it is a measure of conformance

with a product's design standards. Taking this view-point, one is often interested in the fraction or per-centage of defective parts or products (those that donot meet the design standards) as a measure of theoutput quality of a process. The fraction of out-put that is acceptable is referred to as the yield of a process. In a service operation, one may de¯neservice standards and hence measure the quality of a service delivery process in terms of the fraction of customers who are s erved within these standards.

4.4 Throughput time

An important characteristic of almost and manufac-turing and service process is the time it takes toprovide a product or service. Most customers valuespeedy service and fast delivery times - and manyare willing to pay a premium to ¯rms that providespeed. Indeed, entire industries, such as fast food andovernight package delivery, have evolved precisely tomeet consumers' desires for the speedy provision of goods and services.

Throughput time is de¯ned as the elapsed time ex-perienced by a order, product or customer betweenentering and exiting a given process (or part of aprocess). Think of throughput time as being mea-sured by spray-painting a widget red, putting it inthe process and measuring the elapsed time until thered widget appears as output. For example, the orderthroughput time of an on-line retailer is the elapsedtime you experience between submitting an order onthe web site and receipt of the goods at your home.The manufacturing throughput time of an auto plantis the time it takes for a car to work its way - startto end - through the plant. Transportation through-put time is the time it takes to move something fromlocation A to location B, etc.

Throughput time is important at intermediatestages of production as well. We will see later inthe course that shortening supplier throughput timescan signi¯cantly reduce the operating costs of a man-ufacturer. Thus, speedy suppliers are able to chargea premium, even though their throughput times mayhave a negligible e®ect on the throughput time expe-rienced by the ¯nal consumer.

4.5 Flexibility

Flexibility is a characteristic that is sometimes dif-¯cult to de¯ne precisely, but is nevertheless criticalto understand and manage. Roughly speaking, aprocess is said to be °exible if its operating cost andperformance is not adversely a®ected by changes inthe outputs it produces.

The two main dimensions to °exibility are volume

°exibility and product mix °exibility. Volume °exi-bility refers to the ability of a process to change its

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output rate without h aving s igni¯cant negative ef-fects on other characteristics such as e±ciency, qual-

ity, throughput time, etc. The more volume °exibil-ity a process has, the easier it is to match short-term,erratic changes in demand. Volume °exibility is es-pecially valuable in businesses that have volatile anduncertain demand (e.g. fashion apparel) or stronglyseasonal demand (e.g. agricultural chemicals).

Volume °exibility implies roughly constant aver-age unit costs of production (no economies or disec-onomies of scale), so that cost and pro¯t per unitremain the same regardless of the level of output.But it further implies that other performance mea-sures - such as quality and throughput time - remain

the same at di®erent levels of output as well. Of-ten, a volume-°exible process will not be the mostcost-e®ective one at any given volume, but may stillbe preferred because volumes change frequently. Forexample, a p rocess based on manual labor may bemore expensive at high volumes than an automatedprocess. However, when sales volumes drop, the laborforce can be reduced proportionately while it is oftendi±cult to reverse a big investment in automation.

Product mix °exibility refers to the ability toswitch production among a range of products or ser-vices { again without detrimental impact on operat-

ing costs and performance. A process with high prod-uct mix °exibility makes it possible to o®er a widerange of product types and to customize products orservice o®erings to satisfy small market niches. Prod-uct mix °exibility also allows a ¯rm to introduce newproducts more easily and to quickly adapt to changesin consumer preference.

Mix °exibility implies unit costs that are largely in-dependent of the which product variant is produced.Again, a mix-°exible process may not be the mostcost-e®ective one for producing any one product vari-ant. For example, a computer can be produced at

lower cost if a ¯xed number of memory chips areinstalled on the mother board. Adding connectorsand making the memory modular { so that di®er-ent amounts can be installed on the same board {increases cost but allows the computer to be con¯g-ured with di®erent amounts of memory. Such modu-lar design is typically more costly for a given productcon¯guration, but allows a ¯rm to produce many vari-ations of the product and change variations withoutadversely a®ecting either the cost, quality or timeli-

ness of the process. Services too can be modularized,for example banks can often con¯gure di®erent ac-

count features for di®erent customers within a com-mon information and reporting system.

4.6 The interrelationship of process

characteristics

If all these ¯ ve characteristics were independent, thenmanaging production processes would be consider-ably simpli¯ed; one would simply choose to make aprocess as good as possible along each dimension, i.e.make a cost e±cient, high quality, fast and °exible

process of unlimited capacity. In practice, of course,this is not possible. Indeed, there are often very clear { and sometimes not so clear { tradeo®s that mustbe made among the various attributes of a productionprocess.

For example, we already mentioned that a processwith extra capacity is often not very cost e±cientbecause it incurs many unnecessary ¯xed costs. Weshall see shortly that a heavily utilized process typ-ically has longer throughput times owing to the ef-fects of congestion, so that throughput time and uti-lization are often at o dds. Similarly, as mentioned,

a °exible process that can produce a wide variety of products is often less cost e®ective than a process thatis specialized to one product only. Finally, achievinghigh quality may mean sacri¯cing some cost e±ciencyand/or °exibility, though a more contemporary viewsuggests that improving quality often decrease costsowing to savings in s crap, rework, warranty costs, lostcapacity, etc.

Understanding the interrelationships among thesevarious process characteristics and d eveloping andmanaging a process to deliver an e®ective mix of characteristics for the particular competitive environ-ment in which a ¯rm operates is a major managementchallenge. Further, new production technologies andmethods continually rede¯ne the \e±cient frontier"of these various trade-o®s, meaning that ¯rms areincreasingly able to achieve world-class performanceon several dimensions simultaneously. As a result,these trade-o®s have to be actively managed, keep-ing a keen eye on new technologies and managementtrends both inside and outside one's own industry.

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