Introduction to business process design
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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?

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Introduction to business process design l.jpg

Introduction To Business Process Design

Chapter 1

Business Process Modeling, Simulation and Design


Overview l.jpg
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


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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


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Outputs

Process

Inputs

The transformation model of a process

What is a Business Process?

2. Traditional Process definition in OM literature

A process specifies the transformation of inputs to outputs

  • 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)


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Outputs

Process

Inputs

The transformation model of a process

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


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Resources

Process

Customers

Suppliers

Inputs

Outputs

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


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Make up

Make up

Process Types and Hierarchies

  • Individual processes

    • Carried out by a single individual

  • 2. Vertical or Functional processes

    • Contained within one functional unit or department

  • 3. Horizontal or Cross Functional processes

    • Spans several functional units, departments or companies


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Illustration: Process Types and Hierarchies

CEO

Marketing

Operations

Accounting

Buying a TV commercial

Order Fulfilled

Production planning

Order Request

Individual process

Vertical process

Horizontal process


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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


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Process

Architecture

Components of the Process Architecture

Inputs and Outputs

Information structure

Resources

Flow units

The network of activities and buffers


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Components of the Process Architecture

  • Inputs and Outputs

  • Establish interaction between the process and its environment

  • Identify the process boundaries  easy to identify the Inputconsumed 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


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Process Complexity

Individual Activity Complexity

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


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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!


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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


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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


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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


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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


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Theoretical

Capability

Improvement

Statistical

Process

Control

Incremental

Improvement

Radical

Improvement

Time

Incremental vs. Radical Design Improvement


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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


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Request additional information

Pay

Notify agent

Forward

claim

Client

Local

independent

agent

Claims

processing

center

Give instructions

File claim

Request quote

Approved

glass

vendor

Provide quote

Pay

Example 1

Flowchart of the existing claims process


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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.


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Client

Claims

processing

center

Call in claim

Notify

Pay

Approved

glass

vendor

Schedule repair

Example 1

New Design Recommended by the Team


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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.


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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.


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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


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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

Well designed business processes

Linking BPD to overall Business Performance

  • Overall business performance?

    • Detailed definition is company specific

    • Generally, performance must be measured against the stated objectives

Maximize revenues and

minimize costs

Must use resources efficiently while

understanding customer needs

Satisfying customer needs in an efficient way


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Linking BPD to Strategy

  • 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


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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


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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


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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


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Value-Adding

Activity

Non-Value Adding

Handoff

Delay

Rework

Business Value Adding

Control

Policy compliance

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

Activity

Non-Value Adding

Handoff

Delay

Rework

Control

Policy compliance


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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


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    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


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