Chipotle Project

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All organizations thrive by producing and delivering a good or a service deemed to be of value to customers. Value is the tangible and intangible benefits that customers derive from consuming a good or service at a price they are willing to pay. I often say McDonald’s makes the best hamburger in the fast food industry and students are fast to disagree because they immediately assume that I am focusing my statement only on “taste.” I immediately expand my previous statement by adding that McDonald’s does not sell customers a tasty hamburger, they sell a fast service, consistent quality, and low priced hamburger. It’s those three characteristics that customers determine are of “value” to them, more than the taste of the hamburger.

Cross-functional teams (subject matter experts from across the organization’s departments) help define and set metrics to each value. The operations function of McDonald’s turns “fast service” into a series of processes (steps 1, 2, and 3) when converting their inputs into outputs that can be delivered to their customers in a timely manner that is of value. As we progress through this course we will discuss value adding and non-value adding steps. Learn now that customers will pay for value added activities. Non-value adding activities are considered wasteful and non-efficient.

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A success business plan turns $1.50 into $5.00 by converting inputs like raw materials sourced from suppliers into a finished good or service. The conversion of the input to the output is the cost ($1.50) of doing business and can be found on a company’s profit and loss statement under “expenses.” The $5.00 (revenue) is the sale price a customer is willing to pay for the good or service. The metrics used in the production process can be seen as standards or specifications operations managers focus on to decide how customer’s value needs will be met.

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When you read the word “process” I want you to think “steps.” What steps (1, 2, 3, etc…) are needed to complete the process. Will the company produce 100% of its product or outsource 90% of the production and assemble raw materials into a finished product to complete the remaining 10% of production. What are the quality standards (or metrics) that will be set? If the goal is to produce only what you can sell (over and under production is wasteful and non-value adding activities that increase cost under expenses on the PNL) so determining the right capacity is critical to lean manufacturing. I call inventory “money sitting on a shelf.” Remember you spend a $1.50 to make $5.00, but until the product is sold or the service is delivered, inventory is $1.50 sitting on a shelf waiting to become revenue. Inventory turner is critical to the company’s success. When you convert $1.50 into $5.00, you earn a gross profit of $3.50. Your company’s goal should be to convert inputs into outputs (inventory turnover) as many times as possible to realize greater profits. The supply chain is the network of suppliers, subcontractors, distributors, and retailers used within your conversion or transformation processes. Every organization across the supply chain network will plan and control the flow of materials, money, and information to and from each other.

Think of two separate companies that make the same product. Now think of their internal operations. Do these two companies convert their raw materials into a finished good using the same procedures? If you were to walk into a taco shop, the standard ordering, making, and delivering processes might be different than that of Chipotle’s fast food chain. In standard taco shop, you walk up to an order taking employee who takes your order first and charges you next. The order is then sent to the kitchen to fulfill your order request. The kitchen has the option of making your order from scratch before delivering it to your table or calling out your order number for pick up. At Chipotle’s, you enter on one side of the counter, place your order directly to the employee who will start an assembly process. This assembly process will follow a linear flow of adding pre-determined ingredients to complete the finished good (output).

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As previously discussed, because customers determine value, time over taste, the metrics used in the operations process must focus on delivering a finished good to the customer in a timely manner. If the customer values costs, then the metrics or standards used will normally have a quality tradeoff. Because you want to “hear” what the customer is saying to determine what metrics or standards to set, it’s important that cross-functional teams that include marketing personnel or SMEs use the “voice of the customer” as their bases in the decision-making process. These decisions will be spread over the entire supply chain network, both externally and internally to meet delivery expectations. The external network can cover local, regional, national, and now global environments and must strive to minimize the negative impacts on our ecosystem and not endangering the ability to meet the needs of future generations.

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