Spanning the Functional Boundaries Through HPM

By James Blayney Rice, Jr. -- Supply Chain Management Review, 9/1/1997

Recent developments in supply chain management and a spate of reengineering have brought intense focus on managing horizontal processes—processes that cut across the vertical functions, or "silos," of a business. No viable solutions exist for managing these horizontal processes, although some authors have recommended a complete process focus as a solution, at the expense of functional focus. ("Turn your organization on its side and manage the processes!") Though intriguing, this is far too radical a departure from the historical functional orientation of most businesses. Furthermore, it is simplistic to suggest that one organizational approach would work for all companies.

Some observers do recognize the need for situation-specific solutions. As George Stalk of The Boston Consulting Group wrote, "Different processes have fundamentally different characteristics—and they thrive in different structures. One size doesn't fit all."¹ Even with this acknowledgment, the key question still remains: How do you manage the supply chain processes that cut across the functions of the business?

The Integrated Supply Chain Management (ISCM) Program at the Massachusetts Institute of Technology conducted a study to better understand these issues and develop a way to manage supply chain processes across functions. The study included in-depth interviews and visits with Volkswagen and Xerox. It also incorporated interviews and data collection from six other ISCM sponsors.² Additional data were collected from more than 30 manufacturers and retailers who participated in the project.

Multiple Approaches to the Process Challenge

Upon analysis of the data, it became apparent that one approach to managing processes does not suit all business situations. The study discovered that companies were using a variety of approaches, mixing managing functions and managing processes. Some even were attempting to make process management dominant over function management. Overall, the companies studied also were in various phases of implementing new initiatives of process management, either as part of a supply chain initiative or a reengineering project.

The initial analysis of these varied situations led to a taxonomy—that is a breakdown and classification—of the problem. This exercise, in turn, led to the identification of a set of drivers and enablers for managing processes across the supply chain. The term used to define and describe the new concepts that emerged was Horizontal Process Management (HPM).

The study findings further suggested that there were several workable approaches to managing processes across the supply chain, the different approaches being a function of several variables. These approaches entail three levels of horizontal coordination and four options for organizational dominance. This article proposes a method that companies can use to determine the right approach for them. This proposed approach includes various levels of horizontal coordination and the relative priority of process and function appropriate for different situations. The method uses two factors—company strategy and functional interdependence—to identify the appropriate process/function role and level of horizontal coordination for a particular company. The HPM Matrix, an assessment and design tool presented later, will help companies select the appropriate level of coordination.

HPM, or Why Another Acronym?

Does supply chain management really need another definition and acronym? At the risk of confusing more than clarifying, Horizontal Process Management, or HPM, is offered as a different way of thinking about managing the processes that implicitly make up the supply chain. HPM may not be an entirely new concept, but it is an innovative way to think about a critical management challenge. The real importance of HPM lies in its emphasis on managing processes that make up the supply chain, not just integrating disparate functions. In addition, while most definitions of supply chain management fail to emphasize the customer, a customer focus is explicit when one thinks in terms of the horizontal processes of a business. All processes serve the end customer...or they should.

In short, HPM is "managing the processes across the supply chain." A more formal definition is useful in noting the importance of alignment in satisfying targeted customers' needs:

HPM is organizing and managing your company's horizontal supply chain through purposely designed and aligned processes (suitable for respective companies) that deliver products and services to optimally satisfy targeted customers' needs.

Because HPM should fit with each particular company's situation, considerable forethought is called for before embarking on "process management." In other words, HPM should act as a dimmer switch that connects functional and process management, providing different degrees depending on the appropriate levels of coordination and process/function dominance for your organization.

What does Horizontal Process Management really mean to the practitioner? Applied to the supply chain, it means managing the processes that span the company supply chain from end to end; connecting all the elements of the process; and working with suppliers and customers as part of the process. Infrastructure and decision-making should be designed to support and optimize the processes—all of which focus on and are designed to satisfy the customer. A collection of common practices make up the core components of HPM. Most are practices that the typical organization already is following to some degree. They include, but are not limited to:

• Cross-functional team-based organizational structure.
• Shared authority to span the horizontal process of the supply chain.
• Customer-focused processes.
• Customer-based performance measurement.
• Process optimization—the objective for companies desiring to be process-dominant.
• Process management by process teams, process leaders, and so forth.
• Infrastructure as an integral role in supporting the change and maintaining the change to process management.
• Planned evolution or revolution to an appropriate level of horizontal coordination.

Your first reaction may be, "Big deal, we've been using these practices for years!" Although these practices are surely not new, it is safe to say that most companies adopting them are not yet enjoying the full benefits expected. All too often, they have been applied piecemeal without considering the requirements of a specific situation or without selecting the highest-leverage activities. The end result is poor performance.³ High-impact results come from choosing the high-leverage practices to deliver a selected level of process coordination.

Eight Key Drivers and Enablers

Eight factors surfaced from our study as key in managing horizontal processes across the supply chain. These have been categorized as "drivers" or "enablers" of HPM. The drivers (organization structure, measurement systems, incentive systems, authority/responsibility connection, implementation/change management) provide primary and direct impact on the organization's ability to implement HPM. The enablers (communication systems, organization systems, information systems) play a less direct and less significant role.

1. Driver: Organization Structure

The choices associated with organization structure offer great leverage in driving HPM. These include the use of cross-functional teams (formal, informal, ad-hoc); the composition of the teams (peers, multiple levels, various functions); the mixture of process and functional teams; and the use of central staff groups (process-management leadership, process-management facilitators, support for cross-functional teams, process-management start-up leadership).

A cautionary word about organization structure is in order here. Organization structure should not be the primary and driving factor in a transition to process management. Many companies mistakenly depend on organization structure as the cornerstone of their change efforts. Yet this brings the risk that organization structure will become an obstacle or an all-consuming preoccupation, drawing the company away from the real focus of the HPM effort. In the words of Fred Hewitt, a former logistics executive with Xerox, "Reorganization is insufficient to produce true integration, and should be undertaken only as a natural result of redesigned business processes, and after individuals have internalized the new process objectives."⁴

Organization should be structured with a mix of horizontal and vertical elements, just how much of each depending on the specific company situation. Understanding and managing a horizontal (process) and vertical (functional) organization can be difficult for many companies, even those that may be familiar with the related concept of matrix management.

2. Driver: Measurement Systems

Measurement systems help connect the organization structure with the process objective. Choices here include the selective use of process measures for teams, individuals, and central staff. Different types of process measures include full end-to-end process measures such as "perfect orders," sub-process measures such as "delivered on time," or broader customer measures such as "customer satisfaction."

As the saying goes, "You won't get what you don't measure." For managing processes, the organization must strive to develop—and actively use—end-to-end measures.

3. Driver: Incentive Systems

Whereas measurement systems help connect the organization structure with the process objective, the incentive systems connect the process objective with the work required to achieve the objective. Incentive system choices include the design of compensation and reward systems for cross-functional teams, individuals on cross-functional teams, process owners, and senior executives responsible for process and functional results. Incentive systems should be part of an integrated system that is designed to be consistent with the organization's goals and measures.

4. Driver: Authority/Responsibility Connection

This driver refers to the common problem associated with managing a supply chain. Namely, a single individual or group is charged with full responsibility for delivering supply chain results, but has no authority or control over the elements that deliver the results.

The choices here relate to how organizations connect responsibility for supply chain results to authority over the supply chain's component functions. The connection can be made choosing degrees of "shared authority" and selecting different decision-making processes and criteria.

Different degrees of shared authority on a cross-functional team should be used to align the authority and the responsibility across the horizontal supply chain process—for instance, vary the level of formality or vary the priority of using shared authority to manage the horizontal supply chain process. In some cases, functional leadership may be the best choice. A high-volume, capital-intensive manufacturing operation, for example, may be best served by manufacturing's leading the supply chain decision-making process. In other cases, more process-oriented leadership may be more appropriate.

The point is to use what fits the specific situation. Select a decision-making process that is consistent with the use of shared authority and the level of HPM. Numbered among the options for decision making are single-point, group, functional team, supply chain leader, cross-functional team, and functional leader.

5. Driver: Implementation/Change Management

Will the change to HPM be an evolution or a revolution? Given that evidence exists to support either answer, it may be most accurate to respond "it depends." Additional research is needed to provide any more definitive answer. A few examples highlight the dichotomy. Procter & Gamble has been developing its supply chain into an industry leader over the past 10 years. American Standard has drastically and successfully changed to HPM-Process Dominance in a comparatively short three years. Is change in a crisis situation sustainable? Core values and principles, existing skill levels, sense of urgency, and specific company situation are key determinants of whether the change to HPM will be an evolution or a revolution.

The role of senior management support is uncertain as well. Examples exist of supply chain management change taking place both with senior management support (American Standard) and without (Ford Motor Co.). Additional study is required to better understand the leverage and drawbacks of top management's role in effecting a change to HPM. Furthermore, more research is needed into what exactly constitutes senior management support.

Shifting to formal horizontal supply chain coordination with a process-dominant organization requires a fundamental change in that organization. This transition, which sometimes is accomplished more easily during periods of stress, cannot be another "program of the month." It will require employees to act and work differently long into the future.

In any case, HPM implementation should be preceded by a detailed plan identifying the specific practices to be adopted. Organizations will have more impact when implementing a set of practices instead of individual practices. Recent studies⁵ note that complementary HPM practices produce major impacts on workforce productivity, whereas changing individual employment practices has little to no effect. Productivity also is higher with an incentive system supported by innovative work practices such as flexible job design, employee participation in problem-solving teams, and training to help workers develop multiple skills.⁶

6. Enabler: Communication Systems

Communication systems support an HPM implementation by providing business and process-management information to selected groups via different media and different frequency as required by the situation. Co-location of personnel and groupware or other technology can be helpful. But these cannot replace broad principles of openness, trust, and progressive communication associated with successful HPM companies.

7. Enabler: Information Systems

Identifying Information Systems as an enabler will surely create a stir in the IS community, which tends to believe that IS should be the driver. Although there's no question IS is an important factor in integrating different functions, it was not really the driver among those organizations that had successfully implemented HPM.

The choices for IS relate to supporting the various requests from the process teams, process owners, or ad-hoc teams for IS support.

8. Enabler: Infrastructure

Much of the current literature highlights infrastructure as an important part of managing processes. As George Stalk has written, "Sustaining process management is more about new and better ways of managing infrastructure, more so than structure."⁷

Infrastructure-related activities include:

• Transitioning to a cross-functional team-based organization.
• Educating the organization in process management.
• Planning for transition to HPM.
• Training in the new skills at all organization levels (including senior management and especially middle management) and creating continuing training systems.
• Establishing process-driven and customer-focused performance measures and compensation systems.
• Developing process-based promotion and career-advancement opportunities.
• Hiring for cross-functional team skills and initiative to support the needs of the HPM organization.

The choices for implementation and change management vary depending on the degree of emphasis on these items. There is always some value to having better-educated and well-trained employees who fully understand business operations. This becomes far more important, however, when those employees manage the processes that deliver business results, as opposed to simply overseeing a function.

Choosing the Right HPM Level of Process Coordination

Currently, many companies in search of process coordination merely overlay a process organization on top of an existing functionally dominant organization⁸. Other companies use the "Lewis and Clark" method of trial and error, trying different approaches to managing processes across the supply chain. Both approaches lack a clear direction and commitment to change. They result in stress over conflicting priorities for the organization, sub-optimized processes, and unsatisfied customer needs.

These less-than-successful approaches constitute the "typical path" that most organizations follow. Successful companies, by contrast, when transitioning either choose the "ideal path" or the "change path," after determining that the typical path does not serve them well. (Exhibit 1 depicts these paths to HPM.)

Instead of a wave-the-magic-wand approach to implementing HPM ("Jackson! I've just read Michael Hammer's book⁹ about process management; we must have that. You are now in charge and I want process management in place by the end of the month!"), choose a level of coordination appropriate for your business situation. The HPM Matrix shown in Exhibit 2 helps organizations do that. The principle of the HPM Matrix is that the proper level of coordination depends upon the situation, as there are several different levels of coordination for managing processes.

The matrix characterizes various company situations as a function of the selected primary strategy and the degree of functional interdependence. The strategy choices are adaptations of the Porter¹⁰ strategic model (differentiated product, differentiated service, and low cost). The strategic choices more recently suggested by Treacy and Wiersma¹¹ can be readily substituted (exchange product leadership for differentiated product, customer intimacy for differentiated service, and operational excellence for low cost). Functional interdependence is a subjective descriptor of how closely the various supply chain elements are connected. Do the functions operate independently of each other and are there lags between the time an impact on one function is felt on another? Consider that low functional interdependence. Alternatively, is there rapid, near-immediate impact of one function's results on another function? Consider that high functional interdependence. Large amounts of inventory and long leadtimes may suggest low functional interdependence; low inventory levels and quick response are more indicative of high functional interdependence.

Each block of the matrix identifies a level of process coordination (PO, PC-I [PC-Informal], and PC-F [PC-Formal]) and functional/process focus. The matrix asserts even companies pursuing function-dominant, low-cost strategies can take advantage of certain process-coordination opportunities. These would be selectively chosen to maintain the low-cost, function-dominant approach.

PO, or Process Opportunities, indicates a low level of coordination that is opportunistic in nature. Functions remain as the prevalent management focus, and supply chain process opportunities (e.g., cost reduction, reduced inventory levels, faster time to market) can be realized with limited effort and without compromise to existing operations. The focus for process management should be exploiting the low-hanging fruit without disrupting the current business operation. A company with autonomous departments that consolidates some purchase requirements to create bulk purchasing power is a good example.

^{PC-I, or Informal Process Coordination,} describes efforts to coordinate through informal processes and structures. Cross-functional teams operate with no explicit authority for the supply chain, only that which the leaders create through persuasion. Often, a central group has full responsibility for the entire supply chain, although as noted, no authority to exercise control or explicit influence on the supply chain. A division establishing a supply chain management initiative or a central group creating an informal team of representatives from distribution, manufacturing, purchasing, and marketing are examples of PC-I. Participation on the team is encouraged by management, but not at the expense of the formal functional goals.

^{PC-F, or Formal Process Coordination,} indicates a high level of coordination through formal processes and structures. These include cross-functional teams at various levels that operate with shared authority for the entire supply chain. Supply chain measures and incentives are used to provide alignment for achieving supply chain process objectives. Example: A company's leaders agree to set businesswide goals for the supply chain process, establish cross-functional teams at several different levels, and compensate the teams based on achievement of those goals.

Process Dominant (PD), Function Dominant (FD), or Process and Function in Balance (PFB) suggest that a conscious choice must be made as to the relative priority assigned to process and function. It is natural for the function to be dominant, but there are cases where the process should be in balance with the function. (One company studied reorganized to create a leadership team composed of representatives from the different functions. The team was charged with decision making that used to be marketing's sole domain.)

Similarly, the other focus suggestions—Optimize Cost Driver, Focus on KSF (Key Success Factor), and Focus on Customer—encourage the organization to choose the right focus for the particular situation. The efforts to manage the supply chain processes should support these respective focus areas.

Different Practices for Different Levels of Coordination

You've selected a suitable level of coordination. Now what? Applying the taxonomy to these different levels of coordination provides a general guide contrasting the different approaches and associated practices. Exhibit 3 offers a general idea of how to selectively apply the different practices to create the different levels of coordination.

The HPM Matrix can be applied in a number of valuable ways. For example, it can be used to identify the set of practices appropriate for your company if the business strategy changes or if the industry-operations structure changes—that is, as functional interdependency increases or decreases within your company or industry.

Adding examples to the matrix provides new insights. The sidebar appearing on Pages 62 and 63 shows how several companies have transitioned to a more coordinated approach to supply chain management to take advantage of horizontal or process opportunities.

What Works Best for You?

These are new ideas to address the challenge of managing processes across the supply chain, addressing the limits of current, traditionally functional organizations. The proposed solution is clearly more realistic than one-size-fits-all "manage processes" solutions. Even so, more work needs to be done to further refine these ideas.

Although more research may be needed, our study does show that organizations that have successfully adopted HPM to their particular situation exhibit some common characteristics. These are among the more notable:

• Process performance is measured and employees are rewarded on results.
• Processes become part of decision criteria, possibly sub-optimizing functions in order to optimize an entire process.
• Career paths move from climbing the ladder to "playing volleyball," as people gain experience in multiple positions and develop multiple skills.
• Companies compete on process capabilities.
• New skills—both process and functional—will be required at all levels of the organization.
• Job responsibilities are broadening for individuals.
• There's more focus on roles, less on jobs.
• The emphasis is on satisfying the customer and not on optimizing individual functions.
• The organization is driven by the process and not the function.

These characteristics still may not be as specific as we all would like. In fact, this whole proposal could be criticized as being too vague or not providing the answer...both valid criticisms. But that is precisely the point: There is no one answer. To get the answer that's right, you have to work to identify what is best for your organization. The analytical tools proposed here can help in that endeavor.

Horizontal Process Management provides a way to connect company strategy with the business situation and take advantage of process opportunities. Any company can apply these concepts. Some may use formal coordination for higher impact, while others exploit process opportunities for selective impact. Which works for your company is a function of strategy, situation, and willingness to change. The HPM Matrix offers a new solution to managing across the supply chain. But it will require honest reflection by each company and careful application to avoid becoming just another program of the month.

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Author Information

James Blayney Rice, Jr. is director of the Integrated Supply Chain Management Program at the Center for Transportation Studies, Massachusetts Institute of Technology.

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Footnotes

1 Stalk, Jr., George and Black, Jill E. "The Myth of the Horizontal Organization," Canadian Business Review, Winter 1994, pp. 26–30.

2 Amoco, Caliber Logistics, Lucent Technologies, Monsanto, Procter & Gamble, Siemens, Volkswagen, and Xerox each provided in-depth data for this study.

3 Research indicates that organization practices implemented as a system deliver significant results whereas individual organization practice implementation fails to deliver. (Ichniowski, Casey, et al. The Effects of Human Resources Management Practices on Productivity, Cambridge, Massachusetts: Massachusetts Institute of Technology, 1996).

4 Hewitt, Fred. Presented at the Council of Logistics Management's Annual Conference. CLM Annual Conference Proceedings, 1992.

5 See reference # 3, and Ichniowski , C., and Kochan, T.A. What Have We Learned from Workplace Innovation? (Cambridge, Massachusetts: Massachusetts Institute of Technology), 1996.

6 See reference #5.

7 See reference #1.

8 Byrnes, Dr. Jonathan. Presentation to CLM New England Roundtable, April 13, 1997.

9 Hammer, Michael. Beyond Re-engineering; (New York: Harper Business), 1996.

10 Porter, Michael E. Competitive Strategy; (New York: The Free Press), 1980.

11 Treacy, Michael and Wiersma, Fred. The Discipline of Market Leaders; (Massachusetts: Addison Wesley), 1995.

12 Gavin, David A. "Leveraging Processes for Strategic Advantage: A Roundtable with Xerox's Allaire, USAA's Herres, SmithKline Beecham's Leschly, and Pepsi's Weatherup," Harvard Business Review, September/October 1995, pp. 76–90.

Horizontal Process Management (HPM) offers a new way of thinking about supply chain management. It gives companies a means of aligning and managing the processes that cut across those functional boundaries that exist in most organizations today. The HPM Matrix presented here enables organizations to choose the level of integration and process/function mix that is right for them—and in doing so, find new opportunities to use the supply chain for competitive advantage. How Companies Move Across the Matrix As industries mature, companies may begin to compete more on a differentiated service strategy, which results in movement across the HPM Matrix. Some prominent examples, depicted in the accompanying graphic, include the following: American Standard adopted Demand Flow Technology (DFT) as a rigorous corporate process. The company credits this shift toward process management with its business turnaround. Corning Consumer, though still functionally oriented, reengineered its operations and moved to a process-aware orientation. Process improvements are managed by an informal cross-functional supply chain team with regular participation from the senior vice president who chartered the reengineering. Kaytok (name disguised) went from traditional make-to-inventory to make-to-order (MTO) as the market shifted and cost pressure increased. To support MTO, Kaytok coordinated supply and planning through an informal central supply chain group and matrixed supply chain leaders in the various divisions. Partco (name disguised) created a formal linkage and organization of cross-functional teams to implement and manage a revised distribution system from procurement through to distribution. This resulted in market leadership in the parts-distribution field. Pharmco (name disguised) shifted from a functional to a cost focus as a critical patent expiration neared. A central supply chain organization helps align the functions to the new pressures of market competition. Procter & Gamble moved from a functional focus in the early 1980s toward a more balanced approach through creation of a product-supply system and progressive teamwork with customers. Wal-Mart gained market dominance on low costs and aggressive coordination with suppliers. Xerox progressively implemented informal, and then more formal, coordination approaches to supply chain management. It assigned a process owner and a process champion for each of the four key processes (market to collection, time to market, integrated supply chain, and customer service).12

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