2 DESIGNING BUSINESS PROCESSES Conceptual model of operations management

Introduction

This chapter discusses the options available for the decision maker when considering the Design of Business Processes (e.g. capacity, location and choice of operations facilities). Large capital investments are frequently involved when designing operations systems and often choices made are not easily reversed. In such circumstances it is important that the decision maker be aware of the consequences of specific process choices and have a thorough understanding of the process of developing new systems. Often a move to increase productivity will result in reduced flexibility and high capital outlay in advanced technology. On the other hand, the desire to develop a truly flexible system, in terms of its response and adaptability to the market or in the range of services/products it can produce, can result in low productivity, high costs and thus strategic disadvantage. Process design, therefore, is frequently a process of adopting appropriate systems for particular circumstances and of balancing the productivity/flexibility dilemma outlined above.  
Following the introduction of capacity and a discussion of location choice, conventional systems designs will be reviewed and a classification for general types of operations will be offered distinguishing between ‘job, batch and flow’. The choice of systems, however, is wider than these three ideal types and so contemporary forms of systems design are introduced based upon the principles of Group Technology and Autonomous Group Working.

Capacity management

Capacity can be defined as the ability of a process or operation to produce a given volume and is very much determined by the process choices made at the system design stage. Operations need to be planned and controlled within capacity constraints. It is worth noting, however, that some companies plan to hold a relatively large ‘capacity cushion’ (the ability to serve many more customers of make more product) to enable flexibility in operations. A large capacity cushion may be maintained where operations are subjected to uneven demand rates, uncertain demands, a changing product mix, uncertain capacity losses, or where capacity comes in large portions and cannot be increased or decreased incrementally. These advantages must be balanced, however, against the high capital costs of holding surplus capacity. For example, consider the major supermarkets and the ‘extra’ checkouts that are available but unstaffed. Why do they have them?  
The ‘appropriateness’ of capacity planning in any part of the operation can be judged by the extent to which the plan: • minimizes costs; • maximizes revenues; • minimizes working capital requirements; • avoids quality problems; • increases speed; • improves dependability; • enhances flexibility . . . etc. Capacity measures must be expressed in terms that are useful. They have to be accurate and should give indication of relative uncertainty. Seasonality is sometimes an issue and they should take account of weekly/daily demand fluctuation. But is capacity best expressed in the form of: input measures (amount of resource input) or output measures (number of units produced)? Also, for capacity, the concept of ‘utilization’ is useful as a capacity measure, e.g. ‘room occupancy levels’ in hotels; ‘load factor’ for aircraft seats, etc. See Table 2.1 for a variety of capacity measures. Table 2.1 Some capacity measures

Aggregate planning

Capacity is normally fixed and determined at the process decision stage through the choice of facilities and investment in appropriate technologies. This is part of long term planning. Aggregate planning is, in effect, the medium term planning of operations. It establishes feasible operations plans to meet demand and/or agreed output where capacity is considered relatively fixed. The steps in aggregate planning have been identified by Hill as follows (Hill, 1991): 1. Forecast sales. 2. Make-or-buy decision. 3. Select common measures of aggregate demand. 4. Develop aggregate plans. 5. Select planning horizon. 6. Smooth out capacity. 7. Identify the means to enable short term capacity changes to meet demand fluctuations. 8. Select aggregate plan. Forecasting is a necessary prerequisite for the management of operations because without some reasonable estimate of future requirements it is impossible to plan. The concept for all types of forecasting is one of looking back at past values (normally demand) and then extrapolating these into forecasts for the future. ‘Short term forecasting’ is most commonly employed in the management of operations. The two most common short term forecasting techniques used are the ‘moving average’ and the ‘exponentially smoothed average’ methods.

Three ways of reconciling capacity and demand

1. Level capacity = capacity remains at a predetermined level throughout, regardless of demand. For example, we decide we have capacity to make 12 tables per week. The forecast predicts little demand at the beginning of the year but a peak later on; we therefore plan to store the initial surplus and sell them later in the year when demand exceeds the capacity. 2. Chase demand = we alter our capacity to chase the demand. For example supermarkets use this approach with their checkouts staffing; not all checkouts are constantly open, when a peak in demand occurs the store takes people from other areas and put them on the checkouts. It is all about chasing the demand; re-arranging your resources to meet the needs. 3. Manage/change demand = using simple pricing mechanisms such as special offers to increase sales or increasing the price to preclude people from purchasing. This controls the demand. Figure 2.1 Basic capacity plans The three ways of reconciling capacity and demand (see Figure 2.1) are seldom used in isolation. In reality companies typically use two or more, often at different times of the year. For example, in the UK supermarkets have different manning levels throughout the summer holiday months when compared to the lead-up to Christmas. During the summer holiday period fewer people shop compare to Christmas, when increased customer numbers are matched by increased staffing levels.

Location choices

Choice of location is a senior management decision. It is vital that organizations carefully consider the implications of selecting the correct geographical region/location. Operations personnel can, and often do, participate in this decision process and a number of factors, which might influence the eventual choice, should be thought through.  
When choosing a new location it is important to consider where the facility under question lies within the physical distribution (or logistics) chain. The distribution systems of different products and services can vary considerably, but a typical manufacturing and distribution system would comprise a number of levels including raw materials processing, component processing, manufacturing, wholesale and retail. The further back a particular operation is in the logistics chain, the closer to the source of raw materials the location will probably be. Likewise the further downstream the operation, the nearer it tends to be to the customer.  
The features of a typical distribution system are as follows: • Processing separated from warehousing, retailing, etc.: each organization can develop and use its own expertise. • Economies of scale by concentrating operations away from customers and suppliers. • Wholesalers keep large stocks from many suppliers, allowing retailers a choice of goods. • Wholesalers are close to retailers and have a short lead-time. • Manufacturers need not carry large stocks of finished goods. • Retailers carry less stock as wholesalers offer reliable delivery times. • Wholesalers place large orders and reduce unit prices.

Classification and features of operations systems

Service and production operations cover a wide range of different situations. One could say that each operations system has its own distinctive features and so generalization to develop any form of systems design theory is impossible. However there exists a need to develop a rationale for classifying systems so that each case is not treated as separate and unique. Consequently, an approach has been developed which identifies common features as a means of classifying operations systems. The parameters shaping systems design have been identified as ‘human resources’ (the organization of work), ‘physical facilities’ (the layout and arrangement of facilities) and ‘demand’ (its level and pattern). This, in turn, has enabled the development of generalized approaches in their design, planning and control.  
The parameters of human resources, physical facilities and demand have given rise to the widely agreed categorizations of ‘job’, ‘batch’ and ‘flow’ for conventional operations systems. These categories are summarized in Figure 2.2 and put into perspective within Figure 2.3 regards...