Supply Chain Management:

From Vision to Implementation

Chapter 3: Process Thinking: SCM’s

Foundation
Chapter 3: Learning Objectives
1. Identify and describe the challenges created
by functional thinking.

2. Discuss the anatomy of a typical process.

Describe the flows that comprise a process.

2
Chapter 3: Learning Objectives
3. Explain the role of system’s thinking in
process design and management. Discuss the
requirements and impediments to system’s
analysis.

4. Describe the company as a series of

interactive decisions made across functional
boundaries and resources types.

3
Chapter 3: Learning Objectives
5. Explain process reengineering, describing
how it can be used to design world-class
processes.

4
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 low cost.
5
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
 Michael Hammer estimates less than 10% of
companies have made a serious and successful
effort
 Requires major changes to measurement, job
design, management roles, and
organizational structure
6
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’s 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.
 Marketing identifies customer needs and communicates to the customer how the
company can meet those needs. Marketing’s objective is to perform a liaison role
between the company and its customers.

7
(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 dysfunctional actions.

8
Functional Organization Goals

9
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

10
Value-Added Process

Materials Acquisition

New Product Development

11
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 Interorganizational Teamwork
 Measurement
 Systems Analysis

12
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.

13
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)

14
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 discussion
and collaborative decision making.

15
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 companies face today.

16
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

17
Systems Analysis

18
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 impact the performance at another.
19
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 capabilities, etc.) that limit our abilities.

20
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 systems align efforts
on the system’s goal.

21
Company as Value-Added System

22
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 advantage.

23
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.

24
Cost Leadership Examples
Source Company Example
Economies Size creates unparalleled
of Scale Wal-Mart buying power
Uniquely 15-minute “turnaround” to
Southwest
Productive keep its planes flying and
Airlines
Processes generating revenue
Low-cost Global sourcing network
Factor McDonald’s accesses low-cost resources
Inputs around the world
25
Global Operating Expenses
 Unit Price  International
 Inventory Holding Costs Transportation Costs
 Risk of Obsolescence  Inland Freight Costs
 Cost of Rejects (Domestic & Foreign)
 Cost of Money  Insurance & Tariffs
 Letter of Credit  Export Taxes
 Relationship Maintenance  Damage in Transit
Costs  Technical Support
 Language & Cultural  Brokerage Costs
Training Costs  Employee Travel Costs

26
Differentiation Examples
Source Company Example
Advanced Pioneered the “fly-by-wire”
Product Airbus technology
Technology
Advanced First motor carrier to
Schneider
Process employ global satellite
National
Technology positioning to track
Logistics
shipments

27
Differentiation Examples
Source Company Example
Most ubiquitous producer
Extensive
worldwide; selling more than
Distribution Coca Cola 130 beverages and found in
Network almost every country worldwide
iPod was the first portable
digital music player to use a
Better miniature hard drive to hold
Designed Apple songs; despite higher price,
Products sophisticated design and user
interface have made the iPod the
market leader 28
 Aligning Strategy with Systems
Delivery
Innovation Flexibility Cost Leadership
Quality
Goals Short concept-to-market Rapid, consistent  Minimum cost -
Value- cycle time delivery but ensure an
Added Technologically Availability "acceptable"
System advanced products High-quality service level
Unique service options product/service
Availability despite Responsiveness to
demand uncertainty customer i.e.; ability to
handle small orders and
expedited shipments

29
 Aligning Strategy with Systems
Delivery
Innovation Flexibility Cost Leadership
Quality
Purchasing Identify and develop Identify and develop Identify and develop
suppliers who can assure: suppliers who can assure: suppliers who can
Design expertise Rapid, consistent assure:
Technological support delivery  Productivity/low
Flexibility to changes in Certified quality prices
specs Full line availability  Learning curve
Process capabilities Responsiveness efficiencies
 Scale/scope
economies
 Quantity price
discounts

30
 Aligning Strategy with Systems
Delivery
Innovation Flexibility Cost Leadership
Quality
Production Work closely with R&D; Shop floor control—  Reduce
i.e., concurrent due-date performance inventories
engineering Shorten cycle times  Increase
Support process Cross-train workers repetitiveness
engineering Extensive process  Increase part
control commonality
Reduce inventories  Utilize low-cost
labor
 Increase worker
productivity

31
 Aligning Strategy with Systems
Delivery
Innovation Flexibility Cost Leadership
Quality
Logistics Utilize technology Use private fleet or  Use low-cost
including bar codes, dedicated contract carrier transport
satellite tracking, to assure on-time delivery  Use high
electronic data Use information utilization and/or
interchange, and technology to increase multiple car rates
automated picking/packing responsiveness and ability  Use volume
to offer customized to handle unexpected contracts
services events  Minimize
Implement process inventory
control and other quality  Centralize
improvement approaches decision making

32