BUSINESS PROCESS AND OPERATIONS

 

  1. Introduction
  2. Process Analysis & Process Management
  3. Operation: Management of Demand
  4. Quality of Operations
  5. Operation: Management of Supply
  6. Management of Capacity
  7. Localization Decisions

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I.              Introduction:

1.    Business process:

-       A biz process is a collection of activities that transform inputs into outputs that are of value to the customer.

-       A process is any part of an organization that takes inputs and transforms into outputs.

-       Characteristics of transformation:

+ Inputs & outputs

+ Flow units

+ Network of activities and buffers

+ Resources

+ Information structure

 

2.    Process flow managment:

-       A set of managerial policies that specify how a process should be operated over time and which resources should be allocated over time to the activities.

-       Nested process is the concept of a process within a process, splitting processes into subprocesses.

 

3.    Operation management:

-       OM is defined as the design, operation and improvement of the systems that create and deliver the firm’s primany products and services.

 

4.    Situating operations management:

-       OM as a set of decisions;

-       OM as a function;

5.    Operations as competitive advantage

-       Operation is a service: core service & value-added service.

-       Core services: Quality, Price, Speed, Flexibility

-       Value-added service: Problem solving, Sales support, Field support, Information.

 

6.    Determining an operation strategy

-       Operation strategy for service:

+ Standard services strategy

+ Assemble-to-order services strategy

+ Customized-services strategy

-       Operation strategy for product:

+ Make-to-stock (Central or local stock)

+ Assemble-to-order

+ Make-to-order

+ Engineer-to-order

-       Internal KPI and external KPI

-       SCOR mentions:

+ Reliability

+ Responsiveness

+ Flexibility

+ Cost

+ Assets

 

II.            Process Analysis & Process Management:

1.    Process Management:

-       Process management is the selection of inputs, operations, work flows and methods that transfrom inputs into outputs.

 

2.    Process decision – Process choice:

-       Project process: high degree of production to specification, a large scope and important liberation of resources once the project has ended. Ex: ERP implementation, CRM.

-       Job process: large flexibility in order to make a large variety of products in small quantities. Ex: internal consulting team within a company.

-       Batch process: differs from job process in terms of volume, variety and quality. Ex: order fullfilment process at a retailer.

-       Line process: high volumes and standardized products and services, allowing for organization of resources around a product or service. For ex: cars production.

-       Continuous process: high volumes and standardized production with fixed line flows. Ex: oil refinery.

 Process decision: vertical integration

-       Definition: the degree by which a company deals with her own production systems or service facilities within the total supply chain.

-       Advantages of vertical integration:

+ Increase market shares and quicker entry into a new market;

+ Costs saving if volumes, resources and capabilities are available or can be developed;

+ Quality completely under control and thereby sometimes better;

+ Processes completely under control and thereby sometimes quicker in realization.

-       Advantages of outsourcing:

+ Good for low volumes;

+ Can result in better quality and lower prices;

+ No taxation on capital costs, costs are only transactional;

+ Integration, specialization and technology of partners.

 

  1.       Process decision: resource flexibility

-       Definition: the ease with which workers and equipment can deal with a large variety of products, output levels, duties and functions.

 

  1.       Process decision: customer involvement

-       The way in which customers become a part of the process and their degree of their participation.

+ Self-service

+ Product selection: design for and with the customer.

+ Customers determine time and location on which a service is delivered.

 

  1.       Process decision: capital intensity

-       The mix of equipment and human capabilities in a process. The higher the relative cost of equipment, the higher the capital intensity.

-       Automation: a system, process or equipment that is self-guiding or self-steering.

 

  1.       Process decision: relations between decisions

-       High volumes in a service process typically mean:

  • A line process
  • More vertical integration
  • Less resource flexibility
  • Less customer involvement
  • More capital intensive and more automation

-       Lower volumes typically give:

  • A project or job process
  • Less vertical integration
  • More ressource flexibility
  • More customer involvement
  • Less capital intensiveness and less automation
  1. 3.    Process analysis

Terminology:

-       Process

-       Cycle time: is the average successive time between completions of successive units.

-       Utilization: is the ratio of the time that a resource is actually activated relative to the time that it is available for use.

 

4.    Process flow management and financial impact

4.1  What can we measure?

-       Productivity

-       Usage = ratio for used capacity versus available capacity

-       Performance = ratio of actual output versus standard output

-       Quality

4.2  Key measurements:

-       Flow time = total time that a flow unit spends within the borders of the process

-       Flow speed = number of flow units that pass through a specific point in the process, per unit of time.

-       Inventory = the total number of flow units that is present within the borders of the process.

-       Operation time = Setup time/run time

-       Throughput time = average time for a unit to pass through the system.

-       Velocity = Throughput time/ Value added time (useful time spent at the process or on the unit); also called throughput ratio.

-       Cycle time = average time between completion of units

-       Throughput rate = 1/ Cycle time

-       Efficiency = Actual output/ Standard output

-       Process throughput time reduction:

+ Perform activities in parallel

+ Change the sequences of activities

+ Reduce interruptions

 

5.    SCOR – Supply Chain Operations Reference

5.1  Definition:

-       SCOR is a model that links standard processes to performance measurement, best practices, and supporting technologies.

-       Process reference models integrate the well-known concepts of business process reengineering, benchmarking and process measurement into a cross-functional framework.

 

5.2  A process reference model contains:

-       Standard descriptions of management processes

-       A framework of relationships among the standard processes

-       Standard metrics to measure process performance

-       Management practices that produce best-in-class performance

-       Standard alignment to features and functionality

 

5.3  SCOR spans:

-       All suppliers/customers interactions;

-       All physical material transaction;

-       All market interactions;

-       Returns.

 

5.4  SCOR does not include:

-       Sales admin process;

-       Technology development process;

-       Product and process design and development;

-       Some post-delivery technical support processes.

 

5.5  SCOR assumes but does not explicitly address:

-       Training

-       Quality

-       ICT

 

5.6  Scope of SCOR processes:

-       Plan

-       Source

-       Make

-       Deliver

-       Return

 

5.7  Total supply chain management costs:

-       Order management cost

-       Material acquisition cost

-       Planning and finance cost

-       Inventory carrying cost

-       IT cost for supply chain

 

 

III.           Management of Demand:

1.    Tactical decisions:

-       Commercial links;

-       Forward integration with customers;

-       Outsource or own operation.

 

1.1  Service lead time decisions:

-       Trade-off: more volume or higher margin; more expensive operation vs more revenue/ higher margin.

1.2  Lead time:

-       Customer-to-customer lead time: from order till reception of product.

-       Survival of the fastest.

-       Effect on business model.

1.3  Forecast:

-       Commercial: sales people know the customers and the markets, know the trends and know what actions are planned or running. They can better set the trends.

-       Operational: forecasting requires a statistical/mathematical approach and must be in the hands of specialist

-       Best practice is mutual responsibility:

  • Sales make previsions, aggregate them and hand them over to operation;
  • Operation puts the sales previsions next to the calculated previsions and asks for explanations if the deviance is big;
  • Based on discussions the forecast is validated and entered into the “MRP” in order to simulate stock consumptions based on the forecast.

 

1.4  Forward integration:

-       EDI of orders, orders confirmation and packlists;

-       Collaborative forecasting and planning;

-       Collaborative replenishment;

-       Consignment stock, VMI (Vendor Managed Inventory):

+ VMI is a planning process used to move product through the supply chain to meet the objectives of getting the right product at the right place at the right time and in the right quantity.

+ VMI puts the vendor in excellent position to effectively manage inventory for retailers because vendor is typically the middle in the supply chain.

 

1.5  Efficient Replenishment: Basic function of a VMI application:

-       CRP: Continuous Replenishment Program

-       CRP – System Overview

+ Inventory report

+ Data integrity

+ Define forecasting model

+ Forecast calculation: is based on current demand and previous week’s forecasts

Ft = { SC * St-1 + (1-SC) * Ft-1 }

New forecast = Smoothing Constant x Previous week’s Sales + (1-Smoothing Constant) x Previous week’s Forecast

Example :

SC = 20 %

Sales t-1 = 80

Forecast t-1 = 100

ð  (0.20 x 80) + (1-0.20)x100 = 96

 + Smoothing constant:

  1. SC = 20% => forecast moderately reactive to demand (default)
  2. SC = 50% => forecast very reactive to demand
  3. SC = 80% => forecast extremely reactive to demand
  4. The higher the SC, the more the previous weeks sales are reflected;
  5. The lower the SC, the more the previous weeks forecast is reflected.

 + Forecast confidence:

  1. U/LCL = Sum of the sales of the last 10 weeks divided by 10

plus or minus 2.082 times the absolute value of forecast minus sales of the last 10 weeks divided by 10;

  1. the value of 2.082 corresponds with the 98% variance confidence percentage. This default value can be changed in the customer Ship to ship Group DB. (See Gauss Kurve: that indicates the 98% certainty that the forecast will fall between the 2 contol limits)

 + Trending:

  1. is when for a product during 3 consecutive weeks a forecast exception appears; CRP recognizes a trend and automatically adapts forecast and control limits to reflect the trend in demand.
  2. UCL and LCL are the statistical calculated forecast control limits that verify the forecast confidence.
  3. Trending is in fact the case, when after 3 consecutive weeks the forecast falls outside these control limits. After this 3 consecutive weeks (where 3 is user-defined), CRP recognizes automatically a trend and adapts the forecast accordingly.

 + Daily weighting: The feature of daily weighting allows to cope with the consumer's light or heavy pull day.

+ Seasonality: is an optional feature within CRP. It allows the user to adjust the expected demand for a given week based on seasonal influences. This results in better inventory control throughout the year and more accurate ordering during seasonal periods.

+ Extended weekly forecast

+ Define ordering model: order point is calculated based on:

  1. Forecast;
  2. Projected Sales;
  3. System Selection.

 + Ordering

+ Projected sales:

  1. The standard formula :

PS = Sales+outs received during the week multiplied by the number of transmissions expected, divided by the number of transmissions already received.

  1. Or the formula with daily weighting :

PS = Sales+outs received during the week divided by the sum of the weights of the days already received;

  1. The weight is expressed in %.

 + Shipment building

+ Multistop & Consolidator setup

+ Promotion handling

+ Own operation or outsourcing.

 

Exercise: Name each time one performance indicator to evaluate management of demand for:

-       Productivity: Input of orders/hour

-       Quality/Reliability: % input errors

-       Responsivity: % orders in system within 02 hours after reception

-       Cost: cost of goods sold

 2.    Operational decisions

-       Tasks are diverse and sometimes difficult to quantify.

 3.    Organization

-       Customer Service Department: a part of commercial or operational department. It depends!

 4.    Performance measurement

-       Productivity;

-       Quality, reliability;

-       Responsivity;

-       Cost.

IV.          Quality Management

  1. Quality specifications:

-       Design quality

-       Conformance quality

2.    Cost of quality:

-       Prevention costs: costs linked to trying to prevent that defects will occur

-       Appraisal costs: costs linked to reaching a certain quality level in an operation.

-       Internal failure costs: cost that are the result of defects discovered during the production of a product or service.

-       External failure costs: costs that can occur after reception by the customer of a product or service. This contains warranty exchange, loss of goodwill from customers, complaint treatment and product repairs (legal obligations!).

3.    TQM:

-       Definition: Total quality management is defined as managing the entire organization so that it excels on all dimensions of products and services that are important to the customer.

-       TQM is more than certifications and awards. It requires rethinking of processes.

-       TQM aims at customers’ satisfaction, employers’ involvement and continuous improvement.

-       TQM tools:

+ SPC (Statistical Process Control) for continuous improvement;

+ Quality function;

+ Quality department having SQC (Statistical Quality Control)

4.    Continuous improvement:

-       Improvement approach: PDCA (Plan – Do – Check – Act).

-       Aids:

  1. UGL – Unsatisfying situation, Goal, Limitations
  2. Brainstorm – generate ideas
  3. Tree diagram – find causes
  4. Fishbone – sort ideas (04 M’s: Man, Machine, Material, Method)
  5. Process – how what happens (flowchart, proces analysis)
  6. 6W+H - Who, What, When, Where, Which manner, Why & How
  7. Facts and figures – enquiries, audits, cost/benefit, tables
  8. Analyze – what is important (pareto, grafics)
  9. Choose – vote, selection table, double comparison, situational analysis
  10. Action – checklists, affinity diagram

5.    Statistical Process Control

-       P-chart: is used to monitor the number of defects per unit.

-       Calculation:

UCL = p + z*sp

LCL = p – z*sp

-       Acceptance sampling is used to estimate whether or not the entire lot is of acceptable quality.

-       SPC uses sampling to determine if the process is within acceptable limits.

6.    Risks

-       Acceptable Quality Level (AQL): is the maximum acceptable percentage of defectives defined by producer.

-       α (Producer’s risk): is the probability of rejecting a good lot.

-       Lot Tolerance Percent Defective (LTPD): is the % of defectives that defines consumer’s rejection point.

-       β (Consumer’s risk): is the probability of accepting a bad lot.

7.    Sig Sigma

-       Six Sigma starting point is that customers and customer desires are important. Besides this it is also oriented towards a quantitative approach.

-       Six Sigma aims at the customer wishes and customer satisfaction. Via statistical analysis of different data within the company one tries to eliminate errors or waste within the processes of a company, and avoid double work. Six Sigma will normally allow for increasing customer satisfaction and a decrease of shortages within the company. This will not only positively influence the results, but also the ROI and the ROT(alent).

V.           Integration

1.    Internal integration

1.1  CODP: Customer Order Decoupling Point

-       The point till where customer order flows into operation/logistics chain.

-       The point where activities based on planning and activities oriented towards customers meet each other.

-       The point in the chain where products are made customer specific.

 

1.2  What determines CODP?

-       Customers/market

-       Product

-       Process

 

1.3  Pull & Push system:

-       Pull: based on real demand.

-       Push: based on expected demand.

 

1.4  Logistics predictability

-       CODP

-       Availability of reliable norms

-       Predictability of demand

-       Reliability of processes

-       Specification known

 

2.    External integration

2.1  The bullwhip effect:

-       Every shackle in the chain is independent, no integration

-       Every shackle does its own forecast

-       Every shackle orders itself (time and quantity) and groups orders

-       Order variability

-       Variability increases upstream

-       Uncontrollable stocks

-       Lots of missed sales

 

2.2  How to avoid the bullwhip effect:

-       Improve information flow;

-       Only forecast independent demand;

-       Move the CODP upstream;

-       Avoid grouping orders (batching).

 

2.3  SCM targets:

-       Integration of links in the supply chain;

-       Treat external links with customers, suppliers and third parties as internal links;

-       Manage the links as a whole;

-       Global optimisation;

-       Improved collaboration for faster flow of goods.

 

2.4  Why SCM?

-       Shorter PLC’s;

-       Faster changes in business environment;

-       Increasing product variety;

-       Customer needs more difficult to fulfill;

-       Customer dominates suppliers.

 

2.5  NB:

-       Integrated logistics concept is correct approach;

-       Firm logistics targets linked to strategy;

-       Logistics concept determines service level and costs;

-       Logistics control, ICT and organizations make the logistics concept work in reality;

-       Logistics concept is not complete without logistics performance indicators.

 

2.6  ATP & CTP:

-       Available to promise (ATP): involves time-phased functionality where a manufacturer is able to consider available finished goods inventory as well as work in process in determining ability to deliver products by a specific date.

-       Capable to promise (CTP): involves time-phased functionality used by some manufacturing systems that will check component availability far down the supply chain as well as available materials to determine if delivery of a particular product can be made by a specific date.

 

 

VI.          Capacity

1.    Concept

-       Capacity is the maximum rate of output for a process.

-       Capacity = available time * efficiency * usage

-       Efficiency = how well are standard hours met?

-       Usage = how intensively is a resource used?

2.    Measuring capacity

-       Output management

-       Input management

3.    Types of capacity

-       Peak capacity: the maximum output a process or facility can deliver under ideal circumstances

-       Rated capacity: calculated yearly maximum output supposing a continuous operation, except normal maintenance and repairs

-       Effective capacity: maximum output that an organization or process can economically maintain, under normal circumstances

4.    Capacity strategies

-       Capacity buffer: the quantified spare capacity that an company keeps to be able to cope with sudden changes in demand or temporary loss in production.

Average is 18% but

  1. Capital intensive industry below 10 %
  2. Non capital intensive industry 30 to 40 %

-       Expansion in time and size.

5.    Tool for capacity planning

  1. Waiting line management
  2. Simulation
  3. Decision tree

VII.         Network Design & Location Decisions

1.    Operations in production and distribution network

-       The optimal planning of locations in the supply chain can result in considerable cost savings;

-       Restructuring the distribution network means solving all optimization goals simultaneously ;

-       Localization decisions are complex;

-       Characteristics of localization decisions:

+ Long term strategic decision;

+ Commercial effect of location is important;

+ Gathering of a lot of information around goods flows;

+ To determine knots in a network;

+ And to decide for each knot which location will be choosen, or only one central knot.

-       Competitive considerations when deciding on localization

  1. The need to produce or store close to the customer based on lead time driven competition, trade agreements and transportation costs.
  2. The need to be close to suitable labor pools to profit from low labor rates or high training and skills.

2.    Factors influencing the localization of operations

-       ETO: Economic Trade Off: A trade off appears when an increase of a certain cost is over compensated by a decrease of another cost. Total resulting in lower costs.

-       Costs are important when developping a (distribution) network: determines the cost structure in the long term;

-       ABC costing a a good instrument but must be combined with other approaches: think bottom-line and possible suboptimizations;

-       ETO’s create cost transparancy for management;

-       Cost and volume data must be reliable: m3, kg, pallet, box, days stock;

-       Evaluate what-if’s for tactical/strategic ETO’s;

-       Distribution is about ‘customer satisfaction’, not only about costs.

3.    Localization decisions

-       To be analyzed when taking location decisions:

  1. Customer closeness
  2. Business climate
  3. Total costs
  4. Infrastructure
  5. Quality of labor
  6. Suppliers
  7. Other facilities
  8. Subsidies
  9. Free trade zones
  10. Political risks
  11. Government limitations
  12. Trade limitations
  13. Environmental legislation
  14. Hospitality
  15. Competitive advantage

4.    Localization methods

-       Choice of number of DCs:

+ Relation with transport costs;

+ Relation with stock: the more DCs, the more safe stock in the total supply chain;

+ DC’s costs: building, overhead, equipment, manpower,…

-       Ideal location: is the point where the combination of transport cost, inventory cost and DC cost is minimal.

Plant location methodology: Center of gravity method

-       The center of gravity method is used for locating single facilities that considers existing facilities, the distances between them, and the volumes of goods to be shipped between them.

-       This methodology involves formulas used to compute the coordinates of the two-dimensional point that meets the distance and volume criteria stated above.

 


  1. Cx = X coordinate of center of gravity
  2. Cy = Y coordinate of center of gravity
  3. dix = X coordinate of the ith location
  4. diy = Y coordinate of the ith location
  5. Vi = volume of goods moved to or from ith location

  

VIII.       Calculation:

1.    Process flow management:

  1. Usage
  2. performance
  3. flow time
  4. flow speed
  5. throughput time, throughput ratio, throught put rate
  6. cycle time
  7. efficiency
  8. inventory, operation time
  9. velocity

2.    CRP – Continuous Replenishment Program:

  • Forcast calculation (based on current demand and previous week’s forecast)

 

Ft = { SC * St-1 + (1-SC) * Ft-1 }

New forecast = Smoothing Constant x Previous week’s Sales + (1-Smoothing Constant) x Previous week’s Forecast

Example :

SC = 20 %

Sales t-1 = 80

Forecast t-1 = 100

ð  (0.20 x 80) + (1-0.20)x100 = 96

 

+ Smoothing constant:

  1. SC = 20% => forecast moderately reactive to demand (default)
  2. SC = 50% => forecast very reactive to demand
  3. SC = 80% => forecast extremely reactive to demand

 

  • Forecast confidence:
  1. U/LCL = Sum of the sales of the last 10 weeks divided by 10

plus or minus 2.082 times the absolute value of forecast minus sales of the last 10 weeks divided by 10;

  1. the value of 2.082 corresponds with the 98% variance confidence percentage. This default value can be changed in the customer Ship to ship Group DB. (See Gauss Kurve: that indicates the 98% certainty that the forecast will fall between the 2 contol limits)

3.    SPC (Statistical Process Control)

  1. P-chart: is used to monitor the number of defects per unit.
  2. Calculation:

UCL = p + z*sp

LCL = p – z*sp

4.    Center of gravity method

-       The center of gravity method is used for locating single facilities that considers existing facilities, the distances between them, and the volumes of goods to be shipped between them.

-       This methodology involves formulas used to compute the coordinates of the two-dimensional point that meets the distance and volume criteria stated above.

 

  1. Cx = X coordinate of center of gravity
  2. Cy = Y coordinate of center of gravity
  3. dix = X coordinate of the ith location
  4. diy = Y coordinate of the ith location
  5. Vi = volume of goods moved to or from ith location

 

5.    Process Capability Index

-       Capability Index shows how well parts being produced fit into design limit specifications.

-       E.g. Products with diameter specification: 1 ± 0.01 mm. On the basis of different measurements an average of 1,002 is calculated with s.d. of 0.003 mm.

 

 
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