Introduction To Business

Process Design

Chapter 1
Business Process Modeling,
g, Simulation and
Design

1
 Overview

• What is a business process?

– Three definitions
– Process types and hierarchies
– Components of process architectures
• The essence of Business Process Design (BPD)
• Why is BPD important?
– BPD and overall business performance
– BPD and strategy
• Why do inefficient processes exist?
• Activity classification and BPD

2
 What is a Business Process?

1. A pragmatic definition
A Business Process describes how something is done in
an organization
g

In general terms…

Business - Organizational entity that deploys resources to provide

customers with desired products and services

Process (Merriam-Webster’s Dictionary)

(i) A natural phenomenon marked by gradual changes that
lead to a particular result
(ii) A natural continuing activity or function
(iii) A series
i off actions
ti andd operations
ti conducing
d i to t an endd
3
 What is a Business Process?

2. Traditional Process definition in OM literature

A process specifies the transformation of inputs to outputs

Inputs Process Outputs

The transformation model of a process

Different types of transformations

• Physical
y (Ex.
( raw material ⇒ ffinished product)
p )
• Locational (Ex. flying from Denver to L.A.)
• Transactional (Ex. depositing money in a bank)
• Informational (Ex. accounting data ⇒ financial statement)
4
 What is a Business Process?

The Process View

™ Any organization entity or business can be
characterized
h t i d as a process or a network
t k off processes
¾ Based on the simple transformation model of a process
¾ Has its origin in the areas of manufacturing and quality

Inputs Process Outputs

The transformation model of a process

5
 What is a Business Process?
3. A more comprehensive process definition
A business process is a network of connected activities and buffers
with well defined boundaries and precedence relationships, which
utilize
tili resources tto ttransform
f iinputs
t iinto
t outputs
t t with
ith th
the purpose
of satisfying customer requirements

Resources

Process

Suppliers Inputs Outputs Customers

6
 Process Types and Hierarchies

1 Individual processes
1.
– Carried out by a single individual

M k up
Make

2. Vertical or Functional pprocesses

– Contained within one functional unit or department

Make up

3. Horizontal or Cross Functional processes

– Spans several functional units, departments or
companies

7
Illustration: Process Types and Hierarchies

CEO

Marketing Operations Accounting

Buying a TV
commercial

Order Request Production planning Order Fulfilled

Individual process Vertical process Horizontal process

8
 Process Types and Hierarchies

Core cross-functional processes often have highest

improvement potential
• Core processes – essential for meeting market place demand
through a specific strategy
• Especially high improvement potential if a significant amount
of non-manufacturing/service related activities
• Reasons
– Difficult to coordinate
– Have not kept up with improvements in manufacturing
– Difficult to detect waste and inefficiencies
– Often as little as 5% of the time considered adding customer value
– Customers more likely to abandon business because of “poor”
service than “poor” products
9
Components of the Process Architecture

Inputs and Outputs Information structure

Process
Flow units Resources
A hit t
Architecture

Thee network
etwo ofo
activities and buffers

10
Components of the Process Architecture
Inputs and Outputs
• E
Establish
t bli h interaction
i t ti between
b t the
th process andd its
it environment
i t
• Identify the process boundaries ⇒ easy to identify the Input consumed
from the environment in order to pproduce the desired Output
p
• Process inputs and outputs can be
– Tangible (Ex. raw material, cash, products, customers)
– Intangible (Ex. Information, time, energy, services)
Flow units
• A fl
flow unitit is
i a transient
t i t entity
tit or a job
j b that
th t proceeds
d through
th h the
th network
t k
of activities and buffers and exits the process as a finished output
• Typically,
yp y, the identity
y of a flow unit changes
g across the pprocess
• Examples of common flow units: materials, orders, files, documents,
customers, products, cash, transactions…
• Flow
Fl rate t – The
Th number b off jobs
j b flowing
fl i through
th h the
th process per time
ti unit
it
11
Components of the Process Architecture
The network of activities and buffers
• Th
The workk performed
f d on a job
j b moving
i through
th h a process can be
b divided
di id d into
i t
an ordered sequence of activities
• The buffers represent
p storage
g or waitingg points
p where the job
j waits before
moving to the next activity (queues, waiting rooms, etc.)
• Different types of jobs ⇒ different paths through the network
• Defining
D fi i activities
ti iti is
i crucial
i l in
i process analysis
l i
– Tradeoff between process and activity complexity

Process Complexity

Individual Activity Complexity

12
Components of the Process Architecture

Resources
esou ces
• Tangible assets utilized to perform activities in a process
• Can be divided into:
¾ Capital assets – real estate, machinery, equipment, IT systems…
¾ Labor – people and their knowledge and skills
• Resources
R are utilized
tili d while
hil inputs
i t are consumed d

Information structure
• Specifies the information required for making decisions and performing
activities in a process
• Limited information availability is a common cause for process
inefficiencies
– Information enables coordination!

13
 Workflow Management Systems

• Management of administrative processes in the field of

Information Systems is often referred to as workflow
management
g
• Workflow management systems
– Control actions taken on documents moving through a business
process
– Workflow management software/systems are used to control
who does what to a specific document
• Using our comprehensive process definition
⇒ Process = Workflow

14
 The Essence of Business Process Design

“How
ow too do things
gs in an eefficient
c e andd effective
e ec ve way”
w y

• An efficient process which does not deliver customer value is useless

A well designed process does the right things, right!

More formally…
• BPD is concerned with configuring the process architecture to satisfy
customer desires in an efficient way
– Customers can be both internal and external
• Internal customer requirements must be aligned with the desires of the
external customers in the business strategy

We make a clear distinction between process design and implementation

15
The Essence of Business Process Design
• BPD often most valuable when considering complex cross
functional processes
– Challenging coordination issues
– Process inefficiencies often related to handing off work from one
station or person to the next – introduces delays and errors
• The functional organization and division of labor paradigm
d
dates back
b k to Adam
Ad S Smith
i h and
d the
h llate 1700’s
1700’
• Division of labor rationale: by focusing on fewer tasks ⇒
– W
Workers’
k ’ skill l l goes up ⇒ work
kill level k faster
f t
– No time lost when workers switch between tasks
– Workers well positioned to help develop better techniques and tools
• Drawback: more complex coordination issues when
– More complex
p products
p and services
– Customers demand more variety
16
Incremental Improvement vs. Process Design

• Subtle difference – both approaches concerned with how to

do things better
– Complement each other
• Incremental process improvement: (continuous improvement)
– Change that brings a process closer to its normal operating standards
– Does not question
q the fundamental assumptions
p and rules that define
the current process design
– Deductive approach
• Business
i Process Design
i
– Creative in its nature
– Questions existing assumptions and rules
– Requires new perspectives to generate innovative solutions with
potential for breakthrough improvements
– Inductive approach
17
Incremental vs. Radical Design Improvement

Theoretical
Capability
nt
Improvemen

Statistical
Process
Incremental Radical Control
Improvement Improvement

Time

18
 Example 1 – Claims Handling in a
Large Insurance Company
• Pilot project – claims handling for replacement of
automobile glass
• Springboard for later, more ambitious redesign efforts
• Set up procedure
1. The CEO appoints an executive sponsor to lead the project
2. Team members are handpicked by the CEO and the sponsor
3
3. The team creates a flowchart of the existing process
• Under the existing process the client may have to wait 1-2
weeks before being able to replace the damaged auto glass
⇒ Goal – A radical overhaul and improvement of the process
to shorten the client waitingg time
19
 Example 1
Flowchart of the existing claims process

Request additional information

Pay

Notify agent
Forward
Give instructions Local claim Claims
Cli t
Client i d
independent
d t processing
i
File claim agent center

Request quote

Provide quote Approved

glass
Pay vendor

20
 Example 1
Explanation of existing claims process

1. Client notifies a local agent that she wishes to file a claim. She is given a claims
form and is told to obtain a cost estimate from a local glass vendor.
2
2. When the claims form is completed the local agent verifies the information and
forwards the claim to a regional processing center.
3. The processing center logs the date and time of the claim’s arrival. The data is
entered into a computer-based
computer based system (for record keeping only) by a clerk.
clerk The
claim is then placed in a hard copy file and passed on to a claims representative.
4. a) If the claims representative is satisfied with the claim it is passed along to
several others in the processing chain and eventually a check is issued and sent
to the client.
b) If there are problems with the claim the representative mails it back to the
client
li t for
f necessary corrections.
ti
5. When the client receives the check she can go to the local glass vendor and
replace the glass.

21
 Example 1
New Design Recommended by the Team

Call in claim
Claims
Cl i
Client processing
center

Notify Pay

Schedule repair
Approved
glass
vendor

22
 Example 1
Procedural changes to the new process

• The Claims representative is given final authority to approve

the claim.
claim
• Long term relationships with a limited number of glass
vendors enables the insurance company
p y to leverage g its
purchase power to pre-negotiate low prices.
⇒ Clients no longer have to collect estimates.
⇒ Vendors are certified for quality, price, reliability, etc.
• The Client now contacts the claims representative directly
i t d off going
instead i viai a local
l l agent. t

23
 Example 1
Structural changes to the new process

• A new 24 hour hotline enables the client to speak directly to

a claims representative at the regional processing center.
center
• The claims representative gathers data over the phone, enters
the data into the computer
p and resolves any
y issues on the
spot. He tells the client to expect a phone call from a certain
glass vendor to arrange the replacement.
• The claims information is immediately available for
accounting via a LAN system and they can start processing
th check
the h k andd sendd it to
t the
th vendor.
d

24
 Example 1
Benefits with the new redesigned process
• The client can have the gglass replaced
p within 24 hours
– As opposed to 10 days
• The client has less work to do
– Only one phone call, no need for a cost estimate
• Problems are handled immediately when the claim is filed
• Problems with lost or mishandled claims virtually disappear
• Fewer people are involved in the process ⇒ lower op. costs
• L
Long term
t relationships
l ti hi with ith glass
l vendors
d
⇒ Savings of 30-40% on paid claims due to special discounts
⇒ Consolidated monthly payments ⇒ lower handling costs
⇒ More consistent and reliable service
• Claims representative feels ownership of the process
⇒ Does a better job
25
Linking BPD to overall Business Performance

• Overall business performance?

– D
Detailed
t il d ddefinition
fi iti isi company specific
ifi
– Generally, performance must be measured against the stated objectives

Profit maximizing firms Non-profit organizations

Overarching objective is usually to A common objective is survival and
maximize
i i long
l term
t shareholder
h h ld value l growth
th while
hil satisfying
ti f i customer
t needs
d

Maximize revenues and Must

ust use resources
esou ces eefficiently
c e t y while
w e
minimize costs understanding customer needs

S ti f i customer
Satisfying t needs
d iin an efficient
ffi i t way

Well designed
g business processes
p

26
 Linking BPD to Strategy

™ Strategy
¾ A unifying
if i theme
th that
th t helps
h l align
li decisions
d ii made
d in
i an organization
i ti
¾ Guides a business towards its stated goals

• Two strategy levels

1. Corporate strategy – Which industry should the business be in?
2 Business strategy – How
2. Ho should
sho ld wee compete in a gi
given
en ind
industry?
str ?

• Intensified competition in all industries ⇒ a prerequisite for

success is
i to be
b highly
hi hl competitive,
i i i.e.
i to have
h an effective
ff i
business strategy
– True also for many non-profit
non profit organizations that compete for funds

27
 Linking BPD to Strategy

• An eeffective
ec ve business
bus ess strategy
s egy iss based
b sed oon uunderstanding
de s d g thee
organization’s
9 Internal environment – its strengths and weaknesses
9 External environment – the opportunities and threats

• Links between BPD and the internal environment

¾ Weaknesses – often relate to poorly designed processes
¾ Strengths – often relate to well designed processes

• Links between BPD and the external environment

¾ Prerequisite for designing effective processes is to understand the
external environment (suppliers, customers and competitors) and
its opportunities and threats

28
 Linking BPD to Strategy

• Strategic
S eg c fit
¾ Match between the strategic position the firm wants to occupy in
the external market and the internal capabilities to get there
¾ Effective BPD is needed to achieve this fit

• Market driven strategy to achieve strategic fit

1. Identify desired strategic position
2. Design processes to support this position
• Flexibility,
Fl ibili adaptability
d bili
• Time to market considerations

• Process driven strategy to achieve strategic fit

1. Identify process capabilities offering a competitive advantage
2
2. L
Leverage these
th capabilities
biliti tot reachh a desirable
d i bl strategic
t t i position
iti
29
Why are Inefficient Processes Designed?

• They are usually not designed - They just emerge

– Circumstances and the process environment change and
processes are incrementally adapted, but often without
careful analysis of the overall effects
– Examples:
p see Laguna
g & Marklund Section 1.4

30
 Activity Classification and BPD
™ A key issue in process design and analysis is classification of
the process activities
– Crucial in identifying waste and inefficiencies in existing processes

Two basic classification approaches:

Value-Adding
Value Adding
Value-Adding

Activity Non-Value Adding Activity

Handoff
Delay Non-Value Adding
Rework Handoff
Delay
Business Value Adding Rework
Control Control
Policy compliance Policy compliance

31
 Activity Classification and BPD

• Value adding activities

– Essential in order to meet customer expectations
– Activities the customer would be willing to pay for
– Involves
l doing
d i the h right
i h things
hi right
i h
– Performing the right activities
– Doingg them correctly,
y, with high
g efficiencyy
• Business value adding activities
– Control activities
– Do not directly add customer value but are essential to conducting
business
• N
Non-value
l adding
ddi activities
ti iti
– Activities the customer is not willing to pay for

32
 Activity Classification and BPD

• Elimination of non-value adding activities is a key first step

in redesigning business processes
– Often achieved through task or activity consolidation

• Task and activity consolidation reduces

– Hand-offs
– Need for control activities
– Process complexity

33