SYST4060 Business Process Design

Introduction to BPD
Professor Stephen Lawrence
Leeds School of Business
University of Colorado Boulder

SYST4060 Business Process Design

Course Outline
Business Process Design
I. Business Process Design Principles
II. Queueing and Simulation Analysis
III. Application of Business Process Design

BPD Overview Outline

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

3

What is a Business Process?

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-Websters 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

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)
6

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

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

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
9

Illustration: Process Types and Hierarchies

CEO
Marketing

Operations

Accounting

Buying a TV
commercial

Order Request
Individual process

Production planning
Vertical process

Order Fulfilled

Horizontal process

10

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
11

Components of the Process Architecture

Inputs and Outputs

Flow units

Information structure

Process
Architecture

Resources

The network of
activities and buffers

12

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
13

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

14

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!
15

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

16

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
17

The Essence of BPD

18

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 1700s
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

19

IBM Example

20

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

21

Improvement

Incremental vs. Radical Design Improvement

Theoretical
Capability

Incremental
Improvement

Radical
Improvement

Statistical
Process
Control

Time
22

Why is BPD Important?

23

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.
2.
3.

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
24

Example 1

Flowchart of the existing claims process

Request additional information
Pay
Notify agent
Client

Give instructions
File claim

Local
independent
agent

Forward
claim

Claims
processing
center

Request quote
Provide quote
Pay

Approved
glass
vendor

25

Example 1

Explanation of existing claims process

1.
2.
3.

4.

5.

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 claims 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.
When the client receives the check she can go to the local glass vendor and
replace the glass.
26

Example 1

New Design Recommended by the Team

Call in claim
Client

Claims
processing
center

Notify

Schedule repair

Pay

Approved
glass
vendor

27

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.

28

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.

29

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

30

BPD and 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

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
31

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

32

Linking BPD to Strategy

An effective business strategy is based on understanding the

organizations
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
33

Linking BPD to Strategy

Strategic fit

Market driven strategy to achieve strategic fit

1.
2.

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

Identify desired strategic position

Design processes to support this position
Flexibility, adaptability
Time to market considerations

Process driven strategy to achieve strategic fit

1.
2.

Identify process capabilities offering a competitive advantage

Leverage these capabilities to reach a desirable strategic position
34

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

35

Activity Classification

36

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
Handof
Delay
Rework
Business Value Adding
Control
Policy compliance

Activity
Non-Value Adding
Handof
Delay
Rework
Control
Policy compliance
37

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
38

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

39

BPD Overview summary

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

40