Supply Chain

Management: From Vision to

Implementation

Chapter 3: Process Thinking: SCM’s

Foundation
Learning Objectives
1. Identify and describe the challenges created
by functional thinking.
2. Discuss the anatomy of a typical process.
Understand the flows that comprise a
process.
3. Learn the role of system’s thinking in
process design and management.
4. Describe the company as a series of
interactive decisions made across functional
boundaries and resources types.
5. Understand process reengineering, 2
Process Management
It’s a shift from competing on what we
make to how we make it.
- David Robinson, President CSC Index
on the need for process thinking

■ Functional thinking limits cooperation

and impedes creative thinking.
■ Process management promotes
collaboration, facilitating customer
satisfaction at lower costs.
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Process Management
Process Management requires
companies to:
1. Recognize the limiting nature of
functional structures
2. Instill process thinking throughout the
company
■ Process integration remains rare
■ Experts estimates less than 10% of
companies have made a serious and
successful effort
■ Requires major changes to
measurement, job design,
management roles, and 4
 Functional Organization
■ Groups resources into specific departments which
perform specific tasks to help the company achieve
desired goals.
■ Research and Development - translates customer needs
into tangible products. The goal is to design appealing, easy-
to-make products with shorter concept-to-market lead times.
■ Purchasing acquires the right materials at the right price
for use in operations. Sourcing goal is to select the right
suppliers and then build the right relationships with them.
■ Production transforms inputs into a more highly valued
and desirable product or service. The goal: to use capital,
energy, knowledge, and labor are used to build processes
that make low-cost, high-quality goods.
■ Logistics moves and stores goods so they are available for
use in operations or for sale to customers. Logistics seeks to
leverage critical activities like transportation, warehousing,
and order processing to make sure materials and products
are where they need to be when they need to be at the
lowest cost. 5
(Dys)Functional Behavior
■ Functional structures result in a
failure to see beyond the department
level to the end user.
■ Decisions are made to achieve local,
functional optimum without regard to
impact on the remainder of the
company.
■ Due to inherent conflicts between
department goals and measurements,
departments are compelled to take 6
Functional Organization
Goals

7
Process Thinking
■ Process thinking aligns decisions with
corporate strategy and coordinates
actions across functions.
■ Each process consists of a set of flows
and value-added activities.
■ Information Flow
■ Physical Flow
■ Financial Flow

8
Anatomy of Value-Added
Process

Materials Acquisition

New Product Development

9
 Systems Thinking
■ Systems thinking is the holistic process of
considering both the immediate local
outcomes and the longer-term system-wide
ramifications of decisions. It requires:
■ A Holistic View
■ Information Availability and Accuracy
■ Cross-Functional and Inter-organizational
Teamwork
■ Measurement
■ Systems Analysis/Thinking (separate slides)
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Holistic View
■ Managers do not see all of the
interrelationships, nor do they
understand all of the trade-offs that
occur within organizations.
■ Process visibility is a prerequisite to
systems thinking.
■ Holistic understanding of the system
is more important when trying to
coordinate the efforts of two or more
companies.
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Information Availability and
Accuracy
■ A tremendous amount of data must be
collected, analyzed, and translated
into knowledge before well-informed,
holistic decisions can be made.
■ This is being facilitated by:
■ Bar Codes and Radio Frequency
Identification (RFID)
■ Data Warehousing and Data-Mining
■ Enterprise Resource Planning (ERP) (typically
a suite of integrated applications—that a company can use to collect,
store, manage and interpret data from many business activities,
including: Product planning, Cost. Manufacturing or Service Delivery,
Marketing and Sales, Inventory Mgt, Shipping & Payment)
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Cross-Functional Teams
■ Company, department, or sub-unit
loyalty can make holistic decision
making difficult across the supply
chain.
■ Cross-functional and
Interorganizational teams help to
improve flow of information and
builds trust between organizations
and functional areas within
organizations.
■ Co-location promotes spontaneous 13
Measurement
■ Often times compensation,
recognition, and reward systems are
at odds with holistic long term
decision making.
■ People will not make holistic decision
when measured on local or functional
outcomes.
■ Aligning measurement and
compensation systems to support the
organization's long term objectives is
one of the biggest challenges 14
 Systems Analysis
■ Systems thinking requires that companies
and their employees understand their place
in the larger chain. Therefore, the following
must be addressed:
■ Establish the Core Goal
■ Define System Boundaries
■ Determine Interrelationships
■ Determine Information Requirements
■ Perform Trade-Off Analysis
■ Consider System Constraints
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Systems Analysis

16
Systems Analysis
■ Establish the Core Goal – to insure all
participants efforts lead to the same
outcome a well-thought-out and
communicated goal is required.
■ Define System Boundaries – defines who is
and who is not a member of the
collaborative group. This should be done at a
level that can most effectively achieve the
group’s goal.
■ Determine Interrelationships – different
members of the collaborative group perform
different tasks, it is important to explicitly
identify how the actions at one location 17
Systems Analysis
■ Determine Information Requirements – without
accurate, relevant, and timely information good
decision making is impossible. We must therefore
identify what information is necessary and then
design a system to capture, analyze, and provide it to
the correct decision makers.
■ Perform Trade-Off Analysis – decisions at one
location will impact the performance at another, it is
important that these trade-offs be explored before a
decision is made.
■ Consider System Constraints – systems have
constraints that limit their ability to obtain their
goals. We must explicitly identify internal (policies,
capacity, measures, etc.) and external (government
regulations, customer requirements, supplier 18
A Process View of a Company
■ Decisions made throughout an
organization should focus on using
available resources to create customer
value.
1. Customer focus defines the company’s
value proposition and drives
competency.
2. Competency guides functional
decision making.
3. Competency development dictates
resource allocation.
4. Information and performance 19
Company as Value-Added
System

20
Strategic Linkage
■ The role of strategy is to direct the use
of resources to develop the correct
competencies to drive the firm’s value
proposition.
■ Value Proposition – the value that the
firm promises to deliver to the customer.
■ Competencies – the skills and processes
that collectively deliver the promised
value.
■ Core Competency – what the company is
so good at that it drives competitive 21
Generic Strategies
■ Cost Leadership – ability to deliver at a
cost below competitors
■ Differentiation – ability to deliver some
unique value which reduces price
sensitivity
■ Quality
■ Delivery
■ Flexibility
■ Innovation
■ Survival often requires low cost and high
quality.
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Cost Leadership Examples
Source Company Example
Economie Company’s size creates
s of Scale Wal-Mart unparalleled buying
power
Uniquely 15-minute
Productiv Southwest “turnaround” to keep
e Airlines its planes flying and
Processes generating revenue
Low-cost Global sourcing
Factor McDonald’ network accesses low-
Inputs s cost resources around23
Global Operating Expenses
■ Unit Price ■ International
■ Inventory Holding Transportation Costs
Costs ■ Inland Freight Costs
■ Risk of Obsolescence (Domestic & Foreign)
■ Cost of Rejects ■ Insurance & Tariffs
■ Cost of Money ■ Export Taxes
■ Letter of Credit ■ Damage in Transit
■ Relationship ■ Technical Support
Maintenance Costs ■ Brokerage Costs
■ Language & Cultural ■ Employee Travel Costs
Training Costs
24
Differentiation Examples
Source Company Example
Advanced Pioneered the “fly-by-
Product wire” technology
Airbus
Technolog
y
Advanced First motor carrier to
Schneider
Process employ global satellite
National
Technolog positioning to track
Logistics
y shipments

25
Differentiation Examples
Source Company Example
Most omnipresent
Extensive producer worldwide;
Distributi selling more than 130
Coca Cola beverages and found in
on
Network almost every country
worldwide
iPod was the first portable
digital music player to use
Better a miniature hard drive to
hold songs; despite higher
Designed Apple price, sophisticated design 26
Products and user interface have
Aligning Strategy with Value Added
Systems
Delivery/
Different Innovation Flexibility/ Cost Leadership
iation Quality
Goals of ■ Short concept-to- ■ Rapid, consistent ■ Minimum cost
Value- market cycle time delivery - but ensure
Added ■ Technologically ■ Availability an
System advanced products ■ High-quality "acceptable"
■ Unique service product/service service level
options ■ Responsiveness to
■ Availability despite customer i.e.; ability
demand uncertainty to handle small
orders and expedited
shipments

27
 Aligning Strategy with
Systems
Delivery/
Different
Innovation Flexibility/ Cost Leadership
iation
Quality

Purchasi Identify and develop Identify and develop Identify and

ng suppliers who can suppliers who can develop
assure: assure: suppliers who
■ Design expertise ■ Rapid, consistent can assure:
■ Technological delivery ■ Productivity/
support ■ Certified quality low prices
■ Flexibility to ■ Full line availability ■ Learning
changes in specs ■ Responsiveness curve
■ Process capabilities efficiencies
■ Scale/scope
economies
■ Quantity price
discounts 28
 Aligning Strategy with
Systems
Delivery/
Different
Innovation Flexibility/ Cost Leadership
iation
Quality

Producti ■ Work closely with ■ Shop floor ■ Reduce

on R&D; i.e., concurrent control—due-date inventories
engineering performance ■ Increase
■ Support process ■ Shorten cycle times repetitiveness
engineering ■ Cross-train workers ■ Increase part
■ Extensive process commonality
control ■ Utilize low-
■ Reduce inventories cost labor
■ Increase
worker
productivity

29
 Aligning Strategy with
Systems
Delivery/
Different
Innovation Flexibility/ Cost Leadership
iation
Quality

Logistics■ Utilize technology ■ Use private fleet or ■ Use low-cost

including bar codes, dedicated contract transport
satellite tracking, carrier to assure on- ■ Use high
electronic data time delivery utilization and/
interchange, and ■ Use information or multiple
automated picking/ technology to car rates
packing to offer increase ■ Use volume
customized services responsiveness and contracts
ability to handle ■ Minimize
unexpected events inventory
■ Implement process ■ Centralize
control and other decision
quality improvement making 30
approaches
Resource Management
Every company must manage five resources:
■ People – determine the productivity and quality of the
system; provide the creativity and passion that
determines success; requires education and training
■ Technology – includes hardware and software; used
effectively improves productivity
■ Materials – all goods and services used in the value-
added process for the creation of output
■ Infrastructure – physical bricks and mortar assets used
in the value creating process.
■ Capital – necessary to finance continuing operations

■ Coordinated decision making regarding

resource allocation across functions is the
key to competitive advantage.
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Function/Resource Matrix
Value Added Functions

Purchasi Producti Logistic Marketin

Resources R&D
ng on s g
Infrastruct
ure

Materials

Technology

People

Information and Performance Measurement Systems

32
 Information Sharing
■ Communicates strategic objectives and
organizational roles.
■ Managers collect following types of
information and data to formulate strategy,
build competencies and manage day-to-day
operations efficiently:
■ Customer-related - defines goals, value propositions, and
competencies
■ Firm capabilities and processes - strengths and weaknesses
so that an effective strategy can be developed and
implemented
■ Competitors' strategies and capabilities - anticipate
competitive threats as well as competitors’ reactions to the
company’s own strategic moves
■ External operating environment - identify potential threats
and opportunities such as new markets or the emergence of a
new technology 33
■ SC operating information - used to make good day-to-day
Performance Measurement
Performance measurement systems must:
1. be aligned with strategic objectives; and
2. clearly communicate expectations and
responsibilities.

Well designed performance systems:

■ create understanding of strategic and tactical objectives
■ promote behaviors consistent with achieving objectives
■ document actual results, monitoring progress toward
goals
■ benchmark capabilities vis-à-vis competitors’ abilities
and customers’ expectations
■ motivate continuous improvement
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Information-Measurement
Integration

35
Process Reengineering
■ Reengineering is the radical redesign
of business processes using systems
thinking and information technology.
■ Reengineering builds the process from
scratch focusing on desired customer
outcomes.
■ Restructuring replaces resources with
technology changing the basic process
design or challenging whether the
process should be done.
36
Steps to Process
Reengineering
1. Identify Desired Outcomes – processes
are redesigned to fulfill specific customer
needs.
2. Make Processes Visible – process
mapping identifies activities, resources,
and performance dimensions helping
management to understand the as-is
process.
3. Assign Responsibility for Work –
responsibility for redesign should be at the
level where work is done; employees
understand the process and have
untapped ideas for improving it.
4. Leverage Technology – technology makes 37
Reengineering Systematically
Michael Hammer suggests that companies:
1. Look for role models outside your industry.
2. Identify and defy a constraining assumption.
3. Make the special case into the norm.
4. Rethink the following dimensions of work:
1. What results the work delivers
2. Who performs the work
3. Where work is done
4. When work is performed
5. Whether the work should be done
6. What information the work requires
7. How thoroughly the work is performed

38
Reengineering Example -
Progressive
Progressive’s Immediate Response Claims
Dimensions of Work
Handling
What results the Fast, convenient claims processing
work delivers
Who performs the Call center representative works with a claims
work
Where work is done On site at the customer’s location

When work is Within nine hours of the initial claim

performed
Whether the work Yes—claims processing drives customer
should be done
What information the Accurate repair costs for the vehicle in the
work requires specific market

How thoroughly the Repair costs are a major expense; therefore,

work is performed damage estimates must be complete and 39
Supply Chain
Management: From Vision to
Implementation

Supplement C: Decision Making Under

Uncertainty
Decision Making Under
Uncertainty
■ Managers generally do not have
perfect information when making
decisions. Thus, decisions often
include elements of risk. To manage
that risk, probabilistic models are
often developed.
■ Expected Value Analysis
■ Decision Trees

41
Expected Value Analysis
■ In situations where an outcome and
probability of that outcome can be
determined for various alternatives,
expected value analysis can be
employed.
■ Expected Value is the sum of the
probability of an outcome times the
value of that outcome

42
Expected Value - Example
Managers are deciding between two
alternatives with the following payoffs, state
of nature, and probabilities. Which alternative
should be chosen?
Alternati Poor Good Great
ve Market Market Market

1 10,000 17,500 28,500

2 -10,000 15,000 47,500

Probabili
25% 55% 20%
ty

43
Decision Trees
■ Decision Trees are an effective means to
convey decision information, especially
when decisions are sequential in nature.
■ Decision Trees are comprised of three
elements:
■ Decision Nodes - points where managers can
take action
■ States of Nature - uncertainty in the
environment over which the manager has no
control
■ Arcs – branches linking decision and state of
nature nodes
□ Branches stemming from decision nodes represent the
alternatives available to managers 44
Decision Tree

45
Decision Tree

46
Decision Robustness
■ Using sensitivity (what-if) analysis
managers can challenge the
robustness of their decisions.
■ If small input changes result in different
outcomes/decisions, the decision is not
robust.
■ If small input changes result in similar
outcome/decision, the decision is robust.
■ Managers can have more confidence
in robust decisions.
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 Quiz - 1

■ Week - 5
■ Dated 15th October 2019
■ Lecture 1 & 2
■ Time 15 Minutes
■ All to attend, no one is
excused and hence no redo

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