Introduction To Business Process Design Chapter 1 Business Process Modeling, Simulation and Design

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

What is a Business Process? A pragmatic definition A Business Process describes how something is done in an organization 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 of actions and operations conducing to an end

What is a Business Process? 2. Traditional Process definition in OM literature A process specifies the transformation of inputs to outputs The transformation model of a process Inputs Outputs Process Different types of transformations Physical (Ex. raw material  finished product) Locational (Ex. flying from Denver to L.A.) Transactional (Ex. depositing money in a bank) Informational (Ex. accounting data  financial statement)

What is a Business Process? The Process View Any organization entity or business can be characterized as a process or a network of processes Based on the simple transformation model of a process Has its origin in the areas of manufacturing and quality The transformation model of a process Inputs Outputs Process

What is a Business Process? 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 resources to transform inputs into outputs with the purpose of satisfying customer requirements Process Customers Suppliers Resources Inputs Outputs

Process Types and Hierarchies Individual processes Carried out by a single individual Make up 2. Vertical or Functional processes Contained within one functional unit or department Make up 3. Horizontal or Cross Functional processes Spans several functional units, departments or companies

Illustration: Process Types and Hierarchies CEO Marketing Operations Accounting Buying a TV commercial Order Fulfilled Order Request Production planning Individual process Vertical process Horizontal process

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

Components of the Process Architecture Inputs and Outputs Information structure Process Architecture Flow units Resources The network of activities and buffers

Components of the Process Architecture Inputs and Outputs Establish interaction between the process and its environment Identify the process boundaries  easy to identify the Input consumed from the environment in order to produce the desired Output Process inputs and outputs can be Tangible (Ex. raw material, cash, products, customers) Intangible (Ex. Information, time, energy, services) Flow units A flow unit is a transient entity or a job that proceeds through the network of activities and buffers and exits the process as a finished output Typically, the identity of a flow unit changes across the process Examples of common flow units: materials, orders, files, documents, customers, products, cash, transactions… Flow rate – The number of jobs flowing through the process per time unit

Components of the Process Architecture The network of activities and buffers The work performed on a job moving through a process can be divided into an ordered sequence of activities The buffers represent storage or waiting points where the job waits before moving to the next activity (queues, waiting rooms, etc.) Different types of jobs  different paths through the network Defining activities is crucial in process analysis Tradeoff between process and activity complexity Process Complexity Individual Activity Complexity

Components of the Process Architecture Resources Tangible assets utilized to perform activities in a process Can be divided into: Capital assets – real estate, machinery, equipment, IT systems… Labor – people and their knowledge and skills Resources are utilized while inputs are consumed 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!

Workflow Management Systems Management of administrative processes in the field of Information Systems is often referred to as workflow management 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

The Essence of Business Process Design “How to do things in an efficient and effective way” 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

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 dates back to Adam Smith and the late 1700’s Division of labor rationale: by focusing on fewer tasks  Workers’ skill level goes up  work faster 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 products and services Customers demand more variety

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 the fundamental assumptions and rules that define the current process design Deductive approach Business Process Design Creative in its nature Questions existing assumptions and rules Requires new perspectives to generate innovative solutions with potential for breakthrough improvements Inductive approach

Incremental vs. Radical Design Improvement Time Incremental Radical Theoretical Capability Statistical Process Control

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 The CEO appoints an executive sponsor to lead the project Team members are handpicked by the CEO and the sponsor 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 waiting time

Flowchart of the existing claims process Example 1 Flowchart of the existing claims process Client Local independent agent Approved glass vendor Claims processing center Request additional information Pay Notify agent File claim Give instructions Forward claim Request quote Provide quote

Explanation of existing claims process Example 1 Explanation of existing claims process 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. When the claims form is completed the local agent verifies the information and forwards the claim to a regional processing center. The processing center logs the date and time of the claim’s arrival. The data is entered into a computer-based system (for record keeping only) by a clerk. The claim is then placed in a hard copy file and passed on to a claims representative. 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 for necessary corrections. 5. When the client receives the check she can go to the local glass vendor and replace the glass.

New Design Recommended by the Team Example 1 New Design Recommended by the Team Client Claims processing center Approved glass vendor Call in claim Schedule repair Pay Notify

Procedural changes to the new process Example 1 Procedural changes to the new process The Claims representative is given final authority to approve the claim. Long term relationships with a limited number of glass vendors enables the insurance company to leverage 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 instead of going via a local agent.

Structural changes to the new process 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. The claims representative gathers data over the phone, enters the data into the computer and resolves any 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 the check and send it to the vendor.

Benefits with the new redesigned process Example 1 Benefits with the new redesigned process The client can have the glass replaced 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 Long term relationships with glass vendors 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

Linking BPD to overall Business Performance Detailed definition is company specific Generally, performance must be measured against the stated objectives Profit maximizing firms Non-profit organizations Overarching objective is usually to maximize long term shareholder value A common objective is survival and growth while satisfying customer needs Maximize revenues and minimize costs Must use resources efficiently while understanding customer needs Satisfying customer needs in an efficient way Well designed business processes

Linking BPD to Strategy A unifying theme that helps align decisions made in an organization Guides a business towards its stated goals Two strategy levels Corporate strategy – Which industry should the business be in? Business strategy – How should we compete in a given industry? Intensified competition in all industries  a prerequisite for success is to be highly competitive, i.e. to have an effective business strategy True also for many non-profit organizations that compete for funds

Linking BPD to Strategy An effective business strategy is based on understanding the organization’s Internal environment – its strengths and weaknesses External environment – the opportunities and threats Links between BPD and the internal environment Weaknesses – often relate to poorly designed processes Strengths – often relate to well designed processes Links between BPD and the external environment Prerequisite for designing effective processes is to understand the external environment (suppliers, customers and competitors) and its opportunities and threats

Linking BPD to Strategy Strategic fit Match between the strategic position the firm wants to occupy in the external market and the internal capabilities to get there Effective BPD is needed to achieve this fit Market driven strategy to achieve strategic fit Identify desired strategic position Design processes to support this position Flexibility, adaptability Time to market considerations Process driven strategy to achieve strategic fit Identify process capabilities offering a competitive advantage Leverage these capabilities to reach a desirable strategic position

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: see Laguna & Marklund Section 1.4

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

Activity Classification and BPD Value adding activities Essential in order to meet customer expectations Activities the customer would be willing to pay for Involves doing the right things right Performing the right activities Doing them correctly, with high efficiency Business value adding activities Control activities Do not directly add customer value but are essential to conducting business Non-value adding activities Activities the customer is not willing to pay for

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