Introduction To Business

Process Design

Chapter 1
Business Process Modeling, Simulation and
Design

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 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?

1. 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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 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 (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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 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

Inputs Process Outputs

The transformation model of a process

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 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 resources to transform inputs into outputs with the purpose
of satisfying customer requirements

Resources

Process

Suppliers Inputs Outputs Customers

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 Process Types and Hierarchies

1. 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

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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

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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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Components of the Process Architecture

Inputs and Outputs Information structure

Process
Flow units Resources
Architecture

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 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
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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

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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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Incremental vs. Radical Design Improvement

Theoretical
Capability
Improvement

Statistical
Process
Incremental Radical Control
Improvement Improvement

Time

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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
1. The CEO appoints an executive sponsor to lead the project
2. Team members are handpicked by the CEO and the sponsor
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 waiting time
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 Example 1
Flowchart of the existing claims process

Request additional information

Pay

Notify agent
Forward
Give instructions Local claim Claims
Client independent processing
File claim agent center

Request quote

Provide quote Approved

glass
Pay vendor

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 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. 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 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.
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 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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 Example 1
New Design Recommended by the Team

Call in claim
Claims
Client processing
center

Notify Pay

Schedule repair
Approved
glass
vendor

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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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Linking BPD to overall Business Performance

• 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 A common objective is survival and
maximize long term shareholder value growth while satisfying customer needs

Maximize revenues and Must use resources efficiently while

minimize costs understanding customer needs

Satisfying customer needs in an efficient way

Well designed business processes

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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

1. Corporate strategy – Which industry should the business be in?
2. 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

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

• Process driven strategy to achieve strategic fit

1. Identify process capabilities offering a competitive advantage
2. 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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 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

Activity Non-Value Adding Activity

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