week 1 additional readings bdmm chapter 2 (1)

7/31/2019 Week 1 Additional Readings BDMM Chapter 2 (1)

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Chapter

2Workflow and Process Analysis

What You Will Find Out About in This Chapter

Understand the objectives and the role of process analysis

Recognise the differences between a functional and a processual view oforganisations

Use a process map to describe a workflow system

Conduct process analysis for different types of businesses and for differentpurposes

Evaluate an existing process from different perspectives

Learn about some useful analytical tools


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Management Accounting for Change: Process Improvement and Innovation

24

2.1 INTRODUCTION ...................................................................................... ....................................................... 252.2 BUSINESS PROCESSES AND THE ORGANISATION.................................... ........................................... 26

2.2.1 What is a Process? ............................................................................ .......................................................... 262.2.2 The Systemic Context of Processes ........................................................................................................... 262.2.3 The Generic Value Chain of Organisations ............................................................................. .................. 282.2.4 Processes, Sub-processes and Activities ............................................................................. ....................... 29

2.2.5 Different Types of Processes.......................................... ............................................................................ 302.2.6 Workflow Management, Project Management and Process Analysis ...................................................... 312.2.7 Processual vs. Functional View of Organisations...................................................................................... 33

2.3 WHAT IS PROCESS ANALYSIS?.......................................................................................... ........................ 342.3.1 Objectives of Process Analysis ................................................................................... ............................... 35

Objective 1 - Understanding................................................................... ......................................................... 35Objective 2 - Monitoring ........................................................................................ ......................................... 36Objective 3 - Prioritising .......................................................................................... ....................................... 36Objective 4 - Problem Solving ............................................................................. ........................................... 36

2.3.2 Step 1 - Identify the Process............... ............................................................................. ........................... 362.3.3 Step 2 - Charting the Existing Process...... ......................................................................... ........................ 372.3.4 Step 3 - Evaluating the Existing Process.................................................................................................... 40

Value-added Versus Non-value Added Activities ................................................................................ .......... 41Performance Appraisal: Efficiency vs. Effectiveness..................................................................................... 44Evaluation of Value Parameters ......................................................................................................... ............. 45

2.3.5 Step 4 - Continuous Improvement and Business Process Re-engineering................................................ 492.4 SOME USEFUL TOOLS FOR PROCESS ANALYSIS ................................................................................. 51

2.4.1 Root Cause Analysis..................................................... .............................................................................. 512.4.2 Fishbone Diagrams .............................................................................. ....................................................... 512.4.3 Statistical Process Control .......................................................................... ................................................ 532.4.4 Pareto Diagrams................................................................... ....................................................................... 55

2.5 CONCLUSION..................... .............................................................................................. ............................... 57


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Chapter 2 Workflows and Process Analysis

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2.1 INTRODUCTION

In recent years, managers have become increasingly aware of the importance ofprocess analysis. In essence, process analysis is the link between strategic goalsand resourcing to achieve those goals. That is, by focusing on business processes,process analysis seeks to realign task performance and resource use so as to

realise desired strategic goals and enhanced customer value.

The reason for the linkage is that a firms processes possess certain attributes thatsupport (or constrain) its ability to meet the customer value parameters of time,quality and cost. These process attributes include (but are not limited to):

1. Responsiveness Capacity Flexibility

2. Productivity Efficiency

Consistency3. Linkages Coordination

4. Innovativeness Product design Process design

5. Empowerment

For example, higher capacity levels may increase responsiveness and reduce lead-time and thus increase the chance of on-time delivery (i.e. the time dimension ofcustomer value). However, on the other hand, unused capacity may be less efficientand lead to higher costs and hence prices (i.e. the cost dimension of customer

value).

Because of this linkage between process attributes and customer value parameters,processes become the active mechanisms through which change management ispursued. Improvements in process attributes are addressed by setting performancetargets for everyday practice (continuous improvement) or by a one-off radicalprocess change (process re-engineering). As such, managers are more likely toimplement change initiatives effectively if they can understand both the dimensionsand the dynamics of processes. In this chapter we will attempt to answer some keyquestions concerning workflows and process analysis and therefore gain thisunderstanding of both the dimensions and the dynamics of processes.

In particular, this chapter will address such questions as:

What is a process? What are the different types of processes? Why do managers need to conduct process analysis? What are the steps involved in process analysis?


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2.2 BUSINESS PROCESSES AND THE ORGANISATION

Before considering process analysis, it is necessary to gain an understanding ofwhat is meant by a process, the role of processes and the types of processes.

2.2.1 What is a Process?

A business process is a group of logically related (interdependent) activities which,when performed, utilise the resources of a business to produce a definite result.What do we mean by logically related activities? Brimson (1991) explains theinterrelationships between activities in a business process as follows:

The activities are related because a specified event initiates the firstactivity in the process, which in turns triggers subsequent activities. Anoutput or information flow occurs where two activities interact. Theexchange of an output or information flow draws a boundary betweendifferent activities within a process and links them in a strong cause-and-effect relationship. Activities are defined in terms of the informationelements necessary to perform them and to create their output. (p.47)

The definition and importance of activities and outcomes is further outlined in thischapter.

2.2.2 The Systemic Context of Processes

The first step in working with processes is to understand them and the systemiccontext in which the processes occur.

Exhibit 2.1 Systemic Context of an Organisations Value System

SYSTEMIC CONTEXT

INPUTS

TRANSFORMATION PROCESS

Inter-related Activities ConsumingHuman/Technical Resources

Methods & Procedures

OUTPUTS

SUPPLIERS CUSTOMERS

STRATEGY or MISSION

FEEDBACK SYSTEM

MEASURES

MEASURES

MEASURES


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Exhibit 2.1 shows that inputs are transformed into outputs via the transformationprocess. The transformation process is made up of a number of inter-relatedactivities, all of which will consume resources (or factors of production) such aspeople, plant and equipment, facilities, and computer systems. Inputsare factorsother than resources required to perform the process. Thus inputs act as triggers to

the process. Examples of inputs include sub-components and purchase orders.Inputs are acquired from suppliers. A supplier can be an internal producer of inputs(e.g. prior process) or an external supplier (e.g. supplier of raw materials). Theproducts of a process are the outputs. Outputs are what internal customers (e.g.subsequent processes) and external customers receive and what the organisationproduces (e.g. documents, components and final products).

Another important factor in the systemic context is the feedback system. Theprovision of feedback is only possible where there are specifications (or measures)of the inputs, transformation, and outputs of a process as well as supplierperformance and customer values. These feedback measures are considered inmore detail in later Chapters in this book.

Consider this Application of the systemic framework

By way of example to illustrate the systemic context in which processes are conducted, thediagram below explains the process of travelling in a taxi.

Inputs: Hand signals by customers, customers phone calls to taxi stations(Input measures: e.g. number of orders received by taxi station per night; percentage of no-show customers)

Suppliers: Service stations, car manufacturers, driver, insurance companies, garage(Supplier measures: e.g. insurance claim process time; warranties offered by car

manufacturer)

Resources: Petrol, labour, car maintenance, insurance(Resource measures: e.g. cost of petrol; frequency of car breakdowns)

Transformation process: Transportation of passengers to their destinations. This includes anumber of activities: e.g. driving, stopping at traffic lights, receiving payments, and in somecases, reading road maps or even asking passengers for directions!(Transformation process measures: e.g. response time; number of road accidents per year)

Customers: Passengers(Customer measures: e.g. number of complaints; average tip per passenger)

Outputs: Customers arrivals at their destinations(Output measures: e.g. number of trips per night; percentage of customers arriving at correctdestinations)


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2.2.3 The Generic Value Chain of Organisations

The next general consideration of processes is to consider the value chain oforganisations. Any organisation, whether it is a mining corporation, a retail companyor an accounting firm, is basically a collection of people, equipment and capital whichperform activities that provide goods and services to meet customers needs in order

to achieve its ultimate objective. Thus an organisation can be viewed as a system ofrelated activities with the common objective of enhancing value generation andhence competitive advantage. In other words, an organisation is really one giant,complex process comprising numerous interrelated sub-processes. This concept isbest illustrated by considering Porters value chain (see Exhibit 2.2).

Exhibit 2.2 Porters Value Chain

A value chainis a sequence of activities that creates a good or service in which eachstep of the sequence should provide attributes (perhaps tangible, perhaps intangible)of the product that the customer values. Value chain analysis divides anorganisations activities into two categories: the primary activities and the supportactivities. Primary activitiesare those activities that involve the physical creation ofthe product, its sale and transfer to the customer and after-sale service. Theseinclude activities such as operations, marketing and sales. The importance of thedifferent types of primary activities depends on the industry an organisation is in (e.g.inbound and outbound logistics are more important for a distributor than, say, abank; while operations and service are more important primary activities for arestaurant). Support activities, on the other hand, are activities that support primaryactivities and each other. Examples of support activities include technology

development in the steel industry, and human resource management withinaccounting firms. All primary activities and support activities are interrelated (this issometimes referred to as linkages between activities). For example, purchasinghigh quality materials (procurement) can simplify manufacturing and reduce scrap(operations). The value chain allows us to analyse and assess an organisationscompetitive position. Although the raw materials and the end products might be thesame for organisations operating in similar industries, the configuration of activitieswithin the value chain and the coordination/optimisation of linkages between


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activities differ between organisations, resulting in competitive advantages ordisadvantages.

2.2.4 Processes, Sub-processes and Activities

Depending on the scope and purpose of the process analysis being conducted, theanalysis can be conducted at varying levels of granularity (i.e. different levels ofdetails). For example, at the highest level of granularity, Porters Value Chain asdiscussed above, seeks to explore the largest process arrangements associated withthe value embedded in the organisation. At a lower level of granularity, primaryactivities of the organisation (e.g. procurement, operations, inbound logistics,marketing and sales) can be explored. Finally, at an even lower level of granularity,a primary activity can be decomposed into its sub-processes and activities. Exhibit2.3 illustrates some of the different levels associated with purchasing stationery.

As can be seen from Exhibit 2.3, the process of purchasing stationery can bedivided into a number of steps or sub-processes, one of which is ordering

stationery. This sub-process can in turn be decomposed into a series of activities,such as generating order forms, and faxing orders to suppliers. Finally, each activity(such as fax order to supplier) is made up of a number of interrelated tasks.

Exhibit 2.3 Sub-processes, Activities and Tasks: Purchasing Stationery

Step 1Monitor

stationery

Step 2Order

stationery

Step 3Processreceipt

Step 4Administerpayments

Fax orderto supplier

Generateorder form

Storedetails

Complete faxorder sheet

Set faxmachine &

transmit

Checkconfirmation

slip

File fax


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2.2.5 Different Types of Processes

In addition to classifying processes according to their level of granularity, businessprocesses can be classified in a number of other different ways. One of the morecommon ways is to classify processes as either operational (e.g. transferring cash orgoods, or delivering a service) or administrative (e.g. recording the transfer or

delivery). The operations process can in turn be sub-divided into manufacturingoperations and service operations. Manufacturing operations generally involvetransforming some tangible inputs into some tangible outputs (e.g. production offurniture, electronics). Service operations, or non-manufacturing operations, usuallyproduce purely intangible outputs (e.g. audits). The classification of operationalprocesses into manufacturing and service operations allows us to focus on theunique characteristics and the critical processes of different organisations. Forexample, a mail-order retail bookshop (which performs mainly non-manufacturingoperations) may place more emphasis on its marketing and logistics activities; whilea computer game manufacturer (which performs mainly manufacturing operations)may allocate more resources to technology development activities.

It is further possible to classify operational processes according to their degree offlexibility (see Exhibit 2.4). At one end, we have continuous flow processes. Theseare processes with fixed routings (i.e. the steps in the process are performed in afixed sequence), which produce high volume, standardised products. Examples ofcontinuous flow processes can be found in manufacturers of electronics andchemicals, and service providers such as telecommunication and electricitycompanies. Flexibility for these types of processes is usually less important. Forexample, the machines used in continuous production facilities are often specificpurpose machines performing the same activities repeatedly, with little or novariation. As a result, work-in-progress is usually low, and the flow of productiontends to follow a fixed path.

Exhibit 2.4 Operating Process Continuum: Degree of Flexibility

Adapted from Dilworth, J. B., (1995), Zeroing in on operations, Chapter 1 in Production and Operations Management, McGraw-Hill, 5

thed., pp.3-22

On the other end of the continuum are job-shop/customised processes. These are

processes that involve products that are made to order, with many job-specificcharacteristics (e.g. ship builder, engineering shop and professional services).These processes have flexible routings (i.e. each job may require a special set ofproduction steps), and produce products individually or in small batches. Flexibilityis extremely important in job-shop processes compared to continuous processes,and as such, they require general-purpose equipment as well as employees with abroad range of skills. Planning and scheduling activities becomes more challengingin this environment.

FlexibleSpecific

Job Shop,customised

Continuousprocesses


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The characteristics of continuous flow and job-shop/customised operations aresummarised in Exhibit 2.5

Exhibit 2.5 Continuous Flow Processes Versus Job-Order Processes

Continuous flow processes Job-shop processes

Low work-in-progress High work-in-progressLow material handling High material handling costsLess flexibility More flexibilitySingle breakdown often stops line Alignment with customer requirementsMaintenance is geared to preventative,outside of production hours

Planning and control more complex

Of course, not all processes sit at the extreme ends of the continuum. There are anumber of operational processes that fall somewhere in the middle (e.g. televisionsets which are manufactured in medium-sized batches), and require a moderatelevel of flexibility.

Mini Case Study 2.2 Example of a job-shop operationTeledyne Brown Engineering (TBE) has a job-shop manufacturing operation that produceslow-volume, unique products for aerospace companies and government agencies. Two ofTBEs most important customers are the National Aeronautics and Space Administration(NASA) and US Air Force. TBE produces a variety of complex and high-specificationproducts. For example, the size of a delicate telescope part produced by TBE must be withina few thousandths of an inch of the desired dimensions.

The production process in TBE usually starts with a blue print prepared by TBEs engineersaccording to customer specifications. A planner then determines the sequence of operationalsteps required, and produces a route sheet to tell the shop what work to do. The design,however, is often changed before the parts are completed (changes are made as aconsequence of engineering change orders (ECOs)). For this reason, estimating costs isoften very difficult.

Material handling, on the other hand, is an easier process. There is no need for automaticmaterial movement (such as conveyor belts) because the production volume is so low.Parts are usually carried by hand, although occasionally a forklift is required if the parts areparticularly heavy (e.g. a one-tonne block of aluminium) which can increase costs of materialhandling.

Because of the wide range of operations that must be performed, TBE requires versatileplant arrangement and equipment. Workers must be highly skilled and are trained tooperate sophisticated machinery. All processes are carefully inspected to ensure high qualityproducts and customer satisfaction.

Adapted from Dilworth, J. B., (1993), Tour of a job shop: Teledyne Brown Engineering Fabrication and Assembly Plant I,Supplement B in Production & Operations Management, McGraw-Hill, 5thedition, pp. 32-36

2.2.6 Workflow Management, Project Management and Process Analysis

Process analysis is crucial for both workflow management and project management.Workflow refers to the movements of work or products between workers within anorganisation. Unlike projects, which are usually one-off, workflow comprises theroutine, everyday processes performed by organisations. Examples of workflow


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include the assembly process in a car manufacturing plant, and the applicationapproval process within an insurance company. Workflow can therefore beconsidered as a sub-set of organisational processes. Analysing an organisationsworkflow systems (i.e. process analysis) improves managers understanding of abusinesss operations, and can assist them in making different types of decisions,such as capacity planning, inventory control, and the development of standard

operating procedures. Thus process analysis of workflow systems represents animportant step in continuous improvement.

Mini Case Study 2.1 Process Analysis on a Manufacturing Workflow SystemH. B. Berger is a microbrewery in Colorado, USA. Berger operates in a growing niche marketmanufacturing microbrew beer (both specialty beer and standard beer). The beer productionprocess has four production functions: brewing, fermentation, lagering (secondary storage orageing) and finishing. In 1998 Berger decided to use a computer simulation package toanalyse the current workflows system. The modelling process has allowed Berger to answerseveral strategically important questions:

What is Bergers maximum production capacity? (Process analysis objective:understanding)

Is there any area in the brewing process that needs improvement? For example, is thereany room for cost reduction? (Process analysis objectives: understanding, monitoring)

With consistently increasing product demand, Berger wants to increase its productioncapacity. In what order should incremental capacity be added? In other words, shouldBerger increase its capacity in brewing, fermentation, lagering or finishing? (Processanalysis objective: prioritising)

What if analysis: for example, what will happen if Berger adds another secondaryvessel (for lagering) to the production process? (Process analysis objective: problemsolving)

Adapted from Weston Jr., Herrmann and Davidoff (1999), Capacity planning and process analysis in a simulation study of amicrobrewery, Production and Inventory Management Journal, 40(2), 48-52

Project management is another area that involves process analysis. One-offprojects, such as business process re-engineering projects, or the implementation ofa just-in-time system (JIT) or activity-based costing (ABC), are complex processesthemselves. To manage these projects, we need to make use of information gainedfrom workflow analysis (which provides us with an understanding of the existingprocesses and allows us to identify improvement opportunities), as well as tomanage the actual process of project implementation itself. More specifically,process analysis allows project managers to:

map the overview of the project; list and prioritise important project execution steps;

identify parallel activities and critical paths (these are discussed in Chapter 6); enhance understanding of the project by all parties involved; decompose a large, complex project into smaller, more manageable sub-

processes; co-ordinate the project implementation process between different departments; define key process variables to monitor the progress of the project; and undertake cause-and-effect analysis


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2.2.7 Processual vs. Functional View of Organisations

The final consideration to discuss before examining process analysis is the differentview of organisations that is required. The conventional view of organisationsdefines a business by its different business functions or departments, such asfinance, engineering, purchasing and production. Functional departments help

define the major responsibility areas within an organisation. As a result, theprovision of products and services and resource allocations are also defined byfunctional areas and departments. The finance function, for example, is responsiblefor managing the companys financial resources, while the production function isresponsible for utilising raw materials to produce goods and services for externalcustomers. The functional view of organisations is also known as the vertical view oforganisation.

However, as is apparent from the above discussion of processes and sub-processes, organisational work is often mobilised around and conducted throughactivities and activity sequences (or processes) that may flow across functionalboundaries. A focus on business processes and activities rather than departments

and functions is called the processual view (or horizontal view) of organisations.

To illustrate the processual view of organisations, let us consider a typicalprocurement process. The procurement process can be decomposed into a seriesof activities, for example, negotiation with suppliers for prices, quantities and deliveryschedules, preparation of purchase orders, and the inspection of purchased inputswhen received. As can be seen in the table below, while some activities areconducted by the purchasing department, some other activities in the procurementprocess are undertaken by, and are the responsibility of, other functional areas.

Exhibit 2.6 A Typical Procurement Process

ProcurementProcess

Functional Areas

Example Activities Purchasing Production Receiving Quality FinanceProducerequirementsschedule

X

Negotiate withsuppliers XPrepare purchaseorders

X

Receive goods XUpdate inventoryrecords X

Process supplierinvoice X

Inspect goods XContact supplier forreplacement XExpedite payments XApprove payments XPay supplier X


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Now imagine a manager is trying to improve the efficiency of the procurementprocess as depicted above. Under the conventional functional view of organisations,each functional department is considered separately. Yet given theinterdependencies between activities, little can be gained by improving one activity ina business process without considering other activities. For example, you may beable to convince the purchasing manager to improve the efficiency in preparing and

processing invoices by implementing a new computerised invoice processingsystem. The gains to the organisation, however, are limited if the finance departmentis slow to approve payments and to forward cheques to suppliers. Clearly, aprocessual view of the organisation is more appropriate in this situation.

This, however, does not mean that the functional view of organisations is alwaysinappropriate or altogether useless. Functional departments help to define theresponsibility areas within an organisation - but processes and activities are the sitesof action. It is the task of the management to align the two, culturally (in the way workis thought about) and practically (in the way work is conducted).

2.3 WHAT IS PROCESS ANALYSIS?

With this background on processes, the importance of processes and the differenttypes of processes, we can now consider process analysis. There are essentiallyfour steps (or activities) involved in conducting a typical process analysis procedure:

(1) identify the process of interest(2) chart the process(3) evaluate the process and(4) continuously improve or re-engineer the process (see Exhibit 2.7).

These stages or activities are all inter-related, with the common objective ofachieving UMPPS (understanding, monitoring, prioritising and problem solving).As you can see , process analysis is really a process in itself!


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Exhibit 2.7 Overview of Process Analysis

Before we start looking at each of the above steps in more detail, it is important tonote that these different steps are not always performed in sequence. For example,you may need to chart a generic process before you can recognise a critical activityor sub-process that requires improvement; or after evaluating the process you mayrealise that another process map needs to be drawn before opportunities forimprovement can be identified.

2.3.1 Objectives of Process Analysis

Defining the objective of process analysis is important in choosing the process andthe level of granularity to focus on in the analysis. For example, if improvement is tobe sought in your organisation you may need to determine strategically relevant orcritical processes, then decompose them into activities for detailed analysis andprioritise them for attention.

The four objectives of process analysis (UMPPS) are considered below.

Objective 1 - Understanding

Process analysis allows managers to decompose an organisations operations intoprocesses and activities. By doing so, it becomes easier for managers tounderstand the interrelationships, as well as the linkages with resourcing andstrategy. Although this may sound intuitive, it is not always appropriate to assumethat managers understand how business operates in their organisations. The rapidlychanging business environment often leads to corresponding changes in operations;and the increasingly complex, cross-functional nature of business processes meansthat departmental managers may not comprehend how their work affects subsequentactivities and other functional departments. A better understanding of the existing

Identify theProcess

Chart theprocess

Evaluate theprocess

CI & BPR

Objectives:

UMPPS

UnderstandingMonitoringPrioritisingProblemSolving

value-added vs. non-value added activities

efficiency/effectiveness value parameters: time,

cost, quality etc.


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processes encourages managers to challenge the status quo, and to devise ways tocontinuously improve/re-engineer business processes. One of the commonly usedtools to assist understanding is process mapping (refer to Section 2.3.3).

Objective 2 - Monitoring

Another important objective of process analysis is monitoring the performance ofprocesses. This involves establishing key process attributes, such as cycle time andproductivity. These variables can then be measured and compared with targets orbenchmark figures, and corrective action taken if required. Feedback obtained fromprocess monitoring can also be used as a basis for evaluating managersperformances, and the setting of targets and goals for improvement efforts.Statistical process control (SPC) (which is discussed later in this chapter) is anexample of a process-monitoring tool.

Objective 3 - Prioritising

Frequently managers are required to prioritise or rank a number of improvementopportunities. Process analysis enables managers to achieve prioritisation throughthe identification of critical business processes, and to differentiate betweenimportant (value-added) and less important (non-value added) activities.. A Paretodiagram (which is discussed later in this chapter) is a useful tool for prioritisingprocess improvement.

Objective 4 - Problem Solving

Process analysis can assist problem solving by recognising where and why aproblem occurs, and by suggesting approaches to correct these problems. Forexample, an analysis of the quality control process can help to pinpoint and

eventually solve the problem of increased customer complaints.With these objectives in mind, we can now examine the 4 steps in process analysis.

2.3.2 Step 1 - Identify the Process

The first stage of process analysis involves identifying the process of interest(usually the critical business process). There are various ways to identify andprioritise critical processes for improvement efforts. One way is to use value chainanalysis and benchmarking. This form of analysis probes key processes andactivities that appear to create comparative advantages or disadvantages. Byfocusing on customer needs, managers can identify areas where the organisationsperformance is less than adequate, inefficient/ineffective or where costs of the

process are not in line with other processes.

Critical processes or activities may be identified by asking the following questions:

Which activities add most value in meeting customer expectations? Is the activity wasteful? Does it contribute to strategic objectives? Why do delays occur? Which activities have the most problems?


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Which activities require the most resources? Which activities cost the most?

If, for example, reducing cycle time is critical to the business, then a focus on thoseactivities with the greatest scope for such improvement (such as machinery set-ups,materials handling and production scheduling) will be appropriate. In this way

priorities for improvement can be strategically directed and set.

Benchmarks can be set for key processes and activities, allowing for comparisonsand setting goals for improvement. Benchmarking involves comparing activities tobest practices either externally (e.g. other companies in similar anenvironment/industry) or internally (e.g. the best performing division within theorganisation). Benchmarking seeks to answer questions such as:

How do we carry out these activities? How do the best practicecompanies/divisions carry out the same activities?

Can we do the same? Or better?

Once a process is selected, the next step is usually to chart the existing process.

2.3.3 Step 2 - Charting the Existing Process

Before improvements can be suggested and implemented, we need to understandwhat the existing process looks like. This can be achieved by drawing a processmap. Process mapping involves decomposing the process to be analysed into itscomponent activities and arranging them into a logical or sensible sequence. Whendrawing a process map, it is important to bear in mind the objective of your analysis.While a process map should produce sufficient detail to identify key processvariables and opportunities for improvement, it also has to be simple enough to be

understood and used by all parties involved (which often includes a cross-functionalteam).


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Exhibit 2.8 Simple Process Map: Processing Customer Orders

Diagram Adapted from Kammlade, J. G., Mehra, P. & Ozan, T. R., (1989) A process approach to overhead management,Journal of Cost Management for the Manufacturing Industry, pp.5-10

There are various types of process maps. A basic process map can look like asimple flow chart above. This map illustrates the activities involved in processingcustomer orders. Although this is a very basic process map, it does highlight somepotential areas for improvement. For example, it can be seen that the process ofreceiving customer orders has been complicated by the existence of rejectedorders. Rejected orders have to go through the added activities of communicatewith customers and editing and correcting before being scanned and sent to thewarehouse. These two activities consume valuable resources (e.g. labour hours,

Customers

Customerorders

Scanningorders intocomputer

Warehouse

Rejectedorders

Communicatewith customers

Acceptedorders

Rejectedorders

Customers

Editing andcorrections

Ordersediting

Customer/supplier

Document

Activity

Note: you do not

have to follow thesenotations whendrawing processmaps


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phone calls to customers) yet they can be considered as non-value added (theconcept of non-value added activities is discussed in Section 2.3.4). Thus furtherinvestigation is required to ascertain the reasons for these procedures (e.g. non-standardised or complicated order forms) and ways of reducing or eliminating them.

Sometimes it is desirable to use a process map to illustrate how the process flows

through different functional departments. This type of process map is demonstratedin Exhibit 2.9, which shows the activities involved in replenishing raw materials. Thehorizontal rows indicate the functional departments involved in performing theactivities. For example, production planning, which is conducted by the productiondepartment, will be passed on to the raw material warehouse to allow raw materialsexpedition.

Exhibit 2.9 Cross-Functional Process Map: Replenishing Raw Materials

Production

Raw Materials Warehouse

Purchasing

Receiving

Quality Control

Finance

Such a process map highlights the need to sometimes conduct interviews withrepresentatives from all relevant departments in order to gather sufficient information

Productionplanning

Expediteraw

materials

Rawmaterialsrequisition

Preparepurchase

order

Store copyof purchase

order

Store copyof purchase

order

Vendor

Receiveraw

materials

Qualityinspection

Processpaymentsto vendor

Maintainstorage

database


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for process mapping. In doing so, it may be necessary to consider questions suchas:

What activities are performed by the department? Where does work come from (e.g. another department)? Where does work go from this department after the relevant activities are

performed?

2.3.4 Step 3 - Evaluating the Existing Process

Once we have mapped out the process, we can evaluate the existing process.Process evaluation is multi-dimensional: this means that a process can be evaluatedin a number of ways as can be seen from Exhibit 2.10 below, including

the assessment of important value parameters (e.g. time, cost, quality), efficiency/effectiveness appraisal and value analysis (identification of value-added and non-value added activities).

Exhibit 2.10 Multi-Dimensional Process Evaluation

These different dimensions of process evaluation will be discussed in the nextsections.

Animal FeedingProcess

0

0.2

0.4

0.6

0.8

1

1.2

1

Internal staff complaints

Numberofcases

Series1

Series2

Series3

Series4


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Value-added Versus Non-value Added Activities

Activities performed by an organisation can be classified into value-added activitiesand non-value added activities (see Exhibit 2.11). The distinction between valueadded and "non-value added, however, may not be quite as simple as it first

appears.

Exhibit 2.11 Activities/value Analysis

When defining "value adding", some writers focus on an external customer(marketing) perspective; others consider both external customer and internal processperspectives.

For example, according to Morrow (1992),

value-added activities are those in the manufacturing processwhich add to customer satisfaction with the product. Non-value-added activities are those that do not, and are therefore waste.The distinction between the two is simply one of whether theactivity directly adds to meeting the customers expectation ofwhat the product will do.

Under Morrows approach value-added is focused on customer value. An activity orcost is value added if it results in higher customer satisfaction with the product orservice, leading to price premiums or customer loyalty.

In a similar vein, Atkinson, Banker, Kaplan & Young (1997) argue:

A value-added activity is an activity that if eliminated, would inthe long run reduce the products service to the customer. Anyactivity that cannot be classified as value-added is anonvalued-added activity. A non-value added activity presentsan opportunity for cost reduction without reducing the productsservice potential to the customer.

VA

NVA

GreyPerformanceappraisal

Value parameters

Value-added activities: e.g.mixing ingredients, assembling

Grey areas: e.g. complianceactivities, scheduling production

Non-value added activities:e.g. inventory storage, waiting,expediting


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On the other hand, other writers consider both external and internalperspectives which defining value added and non-value added activities. Forexample, Langfield-Smith, Thorne & Hilton (1998) state:

Value-added activities provide essential value to the customer,or are essential to the functioning of the business Non-value-

added activities do not add value to a product or service fromtheir customers perspective or for the business and, thereforecan be eliminated without detriment to either.

Similarly, Hansen & Mowen (1995, p.853) state

Value-added activities are necessary activities activities thatare necessary to remain in businessNon-value-addedactivities are unnecessary all activities other than those thatare absolutely essential to remain in business.

These writers include reference to the notion of essential to the functioning of the

business or essential to remain in business. But how do we determine what isessential to remain in business? Morrow identifies some administrative typefunctions as having a main responsibility, but also carrying out negative activitiesthat arise in a reactive way in response to problems (p.173). For example, the mainresponsibility of the production-scheduling department may be planning production.This department may also reschedule production and expedite in response toproblems that arise, perhaps due to ambitious delivery promises, machinebreakdowns, or failure in the supply chain.

Let us now consider some specific examples. Many activities are clearly value-added, regardless of the definition you use. For example, mixing ingredients duringbiscuit production, assembling components of a PC and preparing an audit report.Biscuits will not taste the same if the ingredients are not mixed together; a computerwill not be functional if some parts are missing; and an audit is not complete withouta written audit report. All these activities add something that is valuable to thecustomer and, in doing so, also create value for the business. Other activities aretypically classified as non-value added. A good example is the inspection ofincoming raw materials. This activity does not enhance customer value, since thefinished product will remain the same whether the inspection was carried out or not(this is assuming that the defects of these raw materials will not be carried over tothe final product). Customers do not value inspection, but only the quality of theproduct. Inspection of incoming raw materials is not an essential activity to thebusiness either the business can continue to operate even if this activity is

eliminated. Another example is inventory storage. Inventory storage is notabsolutely essential to most businesses (e.g. the company can adopt a Just-in-Time inventory system), and if it is eliminated, the finished products service potentialwill not be affected. Other activities that are often classified as non-value addedinclude rework (not necessary), materials handling (moving products around do notmake them more valuable) and waiting (for obvious reasons!).

Classification, however, is not always easy. Activities often fall into a grey area.Consider the following activities:


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Billing customers; Production scheduling; and Inspection of finished products

Is billing customers a value-added activity? Your answer is likely to vary according

the definition of value-added you choose. According to Hansen and Mowen (1995),billing is value-added. A business cannot survive without some form of billing activity it is certainly a necessary activity to remain in business! Yet billing does not affectthe products service potential to external customers in any way. Another debatableactivity is production scheduling, that is, the activity carried out to determine theaccess of products to different processes, the sequence of sub-processes and howmuch to produce. Product scheduling is usually considered non-value added, yet itremains a crucial aspect of many manufacturers. What about production re-scheduling? Re-scheduling could be the result of changing customer demands andraw materials availability, in which case, it can be argued that production re-scheduling adds customer value by increasing operational flexibility. A third exampleof a grey area is finished goods inspection. Finished goods inspection is notrequired if we can get the product right during the production process. Customers donot care how much time and how many resources are consumed in the inspectionprocess. Yet finished goods inspection adds value indirectly by ensuring that nodefective products will be shipped to the customers.

For our purposes, we will adopt a definition of value-added that is similar toAtkinson et als, thus: A value-added activity is an activity that adds something ofvalue to customers, and that if eliminated, will have detrimental effects on theproducts service potential in the long run. A non-value added activitydoes not addvalue to final product, but may actually degrade product potential perceived bycustomers, and consequently, represents the opportunity for reduction or elimination.

For example, reworking a product which initially fails to meet specifications willincrease cycle time, and may result in the product not being delivered to thecustomer on time.

Consider this What About Other Stakeholders?

The definition of a value-added activity we adopted in the previous paragraphs definesvalue from the customers point of view, but what about other stakeholders in thecompany? Will activities be classified differently if we consider shareholders/owners,suppliers, employees and the community? Consider the following activities:

Taking afternoon tea breaks in the office; Sponsoring charity events; Preparing annual reports; and Buying corporate gifts for suppliers and associates

It is important to note that activity improvements are not only restricted to non-valueadded activities. Value-added activities may also be improved via activity sharing,reduction, selection or even elimination (see Section 2.3.5).


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Performance Appraisal: Efficiency vs. Effectiveness

A second dimension to process evaluation is to appraise the efficiency andeffectiveness of the existing processes and activities. But what is efficiency andeffectiveness? Efficiency is the ability of activities or processes to use the fewestpossible resources to meet customer needs and is usually determined by both the

design of the processes or activities, and how they operate (e.g. low waste).Effectiveness, on the other hand, refers to the ability of a process or activity to meetcustomer needs, and is determined by activity design (e.g. goal attainment) (seeExhibit 2.12).

Exhibit 2.12 Performance Appraisal

Efficiency is measured by resource usage - that is, the amount of resources beingconsumed relative to the quantity of outputs produced by a process (the yield orproductivity of a process). For example, you can measure the number of pizzadelivery trips a driver makes per night, the units of CD players produced per machinehour, or how many metal sheets one kilogram of alloy metal can produce. Theobjective of increased efficiency is to reduce the amount of waste (e.g. idle labourhours, machine breakdowns, and metal scrap). Effectiveness, on the other hand, ismeasured by the degree of goal attainment. A pizza delivery driver may be highlyefficient in making 10 deliveries per hour, yet the delivery process may not be

Objective: High attainment

High Waste

Low Waste

High attainment

Low attainment

Objective: Low waste

Resource Goal

Efficiency

Effectiveness

Value parameters

Activities and value analysis

Efficiency Effectiveness


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effective if the goal of customer satisfaction is not achieved (e.g. if the driver abusescustomers who do not tip, or if ordered items are often missing). Thus appropriatemeasures for effectiveness will include customer satisfaction ratings and the numberof problem-free deliveries. Exhibit 12.13 lists some common examples ofeffectiveness and efficiency measures.

Exhibit 2.13 Effectiveness and Efficiency Measures

Effectiveness EfficiencyCustomer satisfaction rating/complaints Material yield and productivityPercentage of sub-components accepted bythe subsequent process

Manufacturing cycle time

Percentage of on-time deliveries Machine set-up timesPercentage of problems-free deliveries Number of invoices processed per hourNumber of returned goods Chargeable hours per employee

Often more resources are required to achieve a higher level of goal attainment,resulting in a trade-off between efficiency and effectiveness. Again using the pizzadelivery example, higher customer satisfaction may be attained by the driverspending time checking the list of food items to be delivered against the order sheetto ensure correct deliveries. This, however, may reduce the number of deliveries perhour. One of the goals of continuous improvement or re-engineering is therefore tosimultaneously increase the efficiency and effectiveness of processes (e.g. by re-designing the processes or products).

It is important to distinguish the concepts of efficiency/effectiveness from valueadding. Some value-added activities may be inefficient/ineffective, while some non-value added activities might be performed in a highly efficient/effective manner. Thisraises the question: why would organisations seek to perform non-value addedactivities efficiently? While non-value added activities do not contribute to customer

value, it may not be possible to eliminate these activities in the short run. Byincreasing the efficiency of these activities, the company can at least lower theamount of resources consumed by these activities while seeking ways to eliminatethem.

Evaluation of Value Parameters

The third dimension to process evaluation is to assess the customer valueparameters of time, cost and quality. In addition to these primary process valueparameters of time, cost and quality, other secondary process value parameters(that is, process attributes) are also crucial in supporting and monitoringimprovement efforts, including (but not limited to) responsiveness, productivity,

linkages, innovativeness and empowerment. For example, higher productivity maybe translated into lower costs for the production process, and hence lower costs forthe customers. Similarly, better linkages between departments can improve cycletime and in doing so, ensure on-time delivery of products/services to customers.


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Exhibit 2.14 Linking Process Attributes and Value Parameters

Time

Time has two dimensions, duration (how long?) and timeliness (when?). Time as avalue parameter has been receiving increasing attention from managers. This is notsurprising as reduction in process time can increase the companys responsivenessand flexibility, as well as reducing product costs. Further, an understanding of theamount of time it takes to perform each activity helps managers to recognise anybottlenecks that may exist in the process, as well as to identify the critical paths inproject management (the concepts of bottlenecks and critical paths are discussedin Chapter 5 and Chapter 6 respectively). One of the most common measures oftime is cycle time (CT). CT is the amount of time required to perform a cycle ofactivities or a process. Examples of CT include the development time it takes tobring a new product to the market, the length of time it takes to manufacture aproduct or the time required to deliver goods from the warehouse to the retailer.

Manufacturing cycle time (MCT) is a specific measure of cycle time, and is the sumof four elements:

processing time (the time actually spent in converting raw materials, parts andcomponents into finished product);

waiting time (the time spent by raw materials, sub-components and work inprocess waiting between processes);

moving time (the time spent by raw materials, sub-components and work inprocess moving between processes); and

inspection time (the time spent ensuring that the intermediate and final productsmeet required quality standards).

Of these four elements, only processing time adds value to the final product. Thus auseful measure when evaluating the process is Manufacturing Cycle Efficiency(MCE), which is a ratio of processing time to MCT. That is:

MCE = Processing time/(Processing time + waiting time + moving time + inspection time)

Customer value parameters:Time, cost, quality

Process value parameters:Time, cost, quality

Process attributes:Responsiveness Productivity

LinkagesInnovativeness Empowerment


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The closer the ratio of MCE is to 1, the smaller the non-value added component ofMCT. Continuous improvement of the manufacturing process can therefore beachieved by reducing MCT and improving the MCE at the same time.

Measurement of cycle time can be incorporated in a process map by simply listingthe time it takes for each activity Exhibit 2.15 illustrates a process map that has

incorporated the time dimension.

Apart from the amount of time consumed, there is a second dimension to timemanagement, namely, timing or timeliness. When is an activity performed? Whenare resources acquired/consumed? Timing is particularly important in managing just-in-time systems. A common timing measure is the number of on-time deliveries.

Cost

Cost is another value parameter for obvious reasons: most organisations are undercontinuous pressure to reduce the costs of goods and services provided tocustomers. Costs represent the amount of resources consumed in a process, and

improvement can be achieved if the same process can be carried out with lowerlevels of resource consumption. Measurement of process costs can be incorporatedin a process map in a similar manner to Exhibit 2.15 (simply by replacing the amountof time it takes to perform an activity by the costs associated with performing thatactivity). Accurate costing of activities enables managers to identify areas wherecost reduction is possible. Costs associated with non-value added activities arecalled non-value added costs and should be eliminated, as they represent costs thatcustomers are not willing to pay for (e.g. rework costs, scrap costs). Costsassociated with value-added activities are value-added costs and should be reducedif possible. The techniques involved in allocating costs to different activities arediscussed in Chapter 7.


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Exhibit 2.15 Cycle Time and a Simplified Process Map for a Retailers CreditCard Approval Process

Quality

A more detailed discussion of quality is presented in Chapter 4. At this stage, youneed to know that continuous improvement of product quality can be seen as avalue-added activity, and that quality should not be compromised when improvingthe other value parameters (e.g. cost, time).

Responsiveness

As customers seek greater customisation of products, in terms of productspecification and availability, processes need to be configured so that they canflexibly and efficiently cope with changing patterns of demand. This may requireinvestment in flexible manufacturing systems, computer aided design andmanufacturing (CAD/CAM) and multi-skilled employees.

Productivity

Productivity is closely related to the concept of efficiency (discussed earlier). While itmay sound like a simple concept, how to improve productivity without adverselyaffecting quality remains a difficult task. Increased consistency (reduced variability)enhances productivity. Process variability increases time, cost and complexityrelating to non-value adding activities such as planning and coordination, production

Customers fill inapplication forms

Customers send informs via mail

(2 days)

Forms accumulated towait for approval

(1 day)

Initial approval byfinance officer

(1 da )

Data entry to computersystem(1 day)

Some applications arechecked by seniorofficer (1 day)

Send confirmationletters to customers

(2 days)

Moving time

Waiting time

Processing time

Inspection time

Moving time

Moving time


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scheduling, monitoring and machine set-ups. For example, imagine how much easierlife would be for the bank employee on a counter that is cash deposit only.Queuing (a non-value activity!) and waiting time (a non-value added component ofcycle time!) will be shorter because there is less variability the employee will notneed to fill in different forms, call a supervisor for approvals or perform anythingother than standard procedures. Productivity will be much higher and the process

map will also look a lot simpler!

Linkages

Linkages refer to the interdependencies between activities, and are best illustratedby a process map all activities within a process are interdependent (that is why weneed to adopt a processual view of organisations). Work done in one part of theorganisation is often related to work done in other areas. Thus when consideringimprovement efforts, we must recognise the linkages between activities: a change inthe way work is done in one functional area may have an adverse or no impact onwork in other areas, and therefore on the process as a whole. As a result, theimprovement goal may not be achieved, as customers usually do not see the value

of an improvement in isolation from the process as a whole. Further, a reduction inthe cost of one activity may increase costs in other activities, and an improvement inquality or time in one activity may be wasted if preceding activities continue toproduce poor quality or adhere to the existing timetable. The existence of linkagesmeans that we must implement performance measures that have a global ratherthan local focus. Hence, co-ordination between departments is crucial.

Empowerment and Innovativeness

Employee empowerment (that is, delegating decision rights to employees at alllevels) is the key to innovativeness, which in turn is critical to the long-term successof the organization. Innovativeness relates not only to products (i.e. to design

products that can meet customer value better), but also to the processes. Processanalysis is a tool that enhances understanding and so supports empowerment,leading to the identification and implementation of improvement initiatives.

2.3.5 Step 4 - Continuous Improvement and Business Process Re-engineering

The final (and arguably the most value-adding) step in process analysis is to utilisethe insights we have gained and information gathered from the previous steps toachieve continuous improvement (CI) and business process re-engineering (BPR)(as discussed in Chapter 1). This can be achieved through Activity Management.

Activity-based improvement efforts can be achieved by activity elimination, activity

selection, activity reduction or activity sharing. Activity elimination aims to saveorganisational resources by eliminating activities, and in doing so, reduce resourceusage. Both value-added and non-value added activities may be eliminated;however it is more important to eliminate non-value added activities as they areactivities that cause organisations to incur unnecessary costs. Activity selectionmeans choosing an activity with the lowest cost that matches the chosen strategy (allother things being equal). Activity reductionrefers to the reduction of the resourcesconsumed by an activity. Activity sharing makes use of economies of scale by


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choosing or designing an activity that permits sharing between different products.These improvements can be accomplished via changes to product design (e.g.designing products to allow the sharing of sub-components) or process design (e.g.changing the way machines are set-up), and assisted by the use of root causeanalysis (see 2.4.1). Examples of these four methods of process improvement arepresented in Exhibit 2.16.

Exhibit 2.16 Examples of Process Improvement

Mini Case Study 2.3 Re-engineering Customer Order Processing

To further illustrate the use of these four methods, let us take another look at the activitiesinvolved in customer orders processing depicted in the process map in Exhibit 2.8. One ofthe activities involved in this process is orders editing, which is required before customerorders can be scanned by the computer. A root cause analysis reveals that the reason forthis activity is the design of the order forms. The format of the order forms varies betweencustomers with different status (e.g. VIP customers, new customers) and as a resultincoming orders must be sorted and edited before they can be recognised by thecomputer. Thus by re-designing and standardising the order forms this non-value addedactivity is eliminated (activity elimination). Further, after an interview with staff responsiblefor handling reject orders, it was revealed that the catalogues and order forms sent tocustomers are often outdated, resulting in customers ordering products that no longer exist.Having recognised this, the company managed to cut more than 80% of rejected orders, andin doing so reduced the non-value added activities of communicating with customers and

editing and corrections significantly (activity reduction). Further savings in resources wereachieved by the acquisition of new computer software that increases the speed ofprocessing, and allows different kinds of orders (i.e. orders for different kinds of products) tobe scanned simultaneously (activity selection/activity sharing).

Product Design Process Design:consider inputs,

transformation process

Activityelimination:

e.g. eliminateincoming material

inspections

Activity selection:e.g. choose an

automatic ratherthan manual

drilling process

Activity reduction:e.g. reduce set-up time through

employeetraining

Activity sharing:e.g. design

products withcommon parts


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2.4 SOME USEFUL TOOLS FOR PROCESS ANALYSIS

The following sections discuss several useful analytical tools that can be applied toprocess analysis (as well as a range of managerial situations).

2.4.1 Root Cause Analysis

Root cause analysis is also known as driver analysis. A root cause is the mostfundamental reason why something happens. Consider the example of amanufacturing company who regularly uses forklifts to move raw materials from onepart of the production plant to another. The costs of this activity material handling obviously relate to the demand of this activity, that is, the number of forklift tripsrequired. This factor, however, is an output measure and therefore represents theconsequence of the activity, not the root cause. Thus even though the companymay increase the efficiency of materials handling by acquiring a higher capacity,more fuel-efficient forklift, the company has only treated the symptoms, not thecause of the high material handling costs. Root cause analysis relates to theidentification of the reasons for activity costs. The most important question to ask ina root cause analysis is why? Why is the activity carried out this way? Why do wehave to spend so much time and resources moving raw materials around? Why dowe need to perform this activity at all? A root cause for material handling could beplant layout. By re-organising the plant, the number of forklift moves required may besignificantly reduced, or even eliminated (after all, materials handling is a non-valueadded activity and therefore does not contribute to the final products servicepotential).

Mini Case Study 2.4 Root Cause Analysis: a Detective Story

Sometimes finding the root cause of an activity requires a bit of detective work. ConsiderForest Creature, a candle maker, which manufactures a variety of novelty candles of allshapes and colours. The company spends a lot of time and company resources on theinspection of semi-finished product. Why? Because the finished candles are often defective.Why are these candles defective? It seems that the root cause of the defects is theimpurities in the wax, which often lead to an uneven distribution of colours on the candles,and complexities with moulding. But why do impurities exist? It may be that the companyneeds to negotiate with its suppliers to ensure a more stringent input control. Thus the trueroot cause for finished goods inspection may be the quality of supplies. In turn, this may bedriven by the adequacy of the supplier selection process. The quality of supplies may alsobe the root cause for another related activity, namely, rework required after defects arediscovered. By improving the quality of the supplies, the entire production process can beimproved.

2.4.2 Fishbone Diagrams

Root cause analysis can be assisted by another useful problem-solving tool, namelyFishbone diagrams. Fishbone diagrams are also known as cause-and-effectdiagrams or Ishikawa diagrams, after their Japanese originator Kaoru Ishikawa. In afishbone diagram, the horizontal line (the spine of the fish) represents the primaryproblem to be solved (or the primary effect). Main potential causes of this problemor effect are then added as the major ribs of the fish. The more commonly used


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ribs are machinery, material, method and manpower/labour (the four Ms).Sometimes other categories of potential causes are more appropriate (e.g. time,cost, quality, consistency) it depends on the problem/effect you are interested in.The number of categories are not restricted to four either, you can add other ribssuch as tools, environment, and money; but too many ribs will make the diagramhard to read, and defeat the purpose of fishbone diagrams (the usual number of ribs

is between 4 to 6). Finally, smaller bones are attached to each of the ribs toidentify possible causes of the ribs/main causes. An example of a fishbone diagramis provided in Exhibit 2.17, which illustrates the possible causes of finding spoilt milkin the fridge.

A fishbone diagram is a very useful problem-solving tool. In process analysis, afishbone diagram allows us to identify the reasons for poor performance ofprocesses, and opportunities to improve the efficiency and effectiveness ofprocesses.


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Exhibit 2.17 Fishbone Diagram for Spoilt Milk in the Fridge

2.4.3 Statistical Process Control

Statistical process control (SPC) is a technique that relies on the use of statisticalanalysis and control charts to understand, monitor and reduce variability in aprocess. SPC can be very complex: usually you need someone with a high level ofstatistical knowledge to implement it. The roles of management accountants are tounderstand the concept of SPC and to use it as a tool to improve processes.

The idea behind SPC is that most processes are subject to fluctuations or variations.There are generally two types of variations: common variations and uncommonvariations. Common variations are caused by purely random disturbances. Nomatter how precise the machines, or how well trained the workers, there are alwayssome natural fluctuations within a process (e.g. employees being interrupted byoccasional phone calls). The other type of fluctuation is uncommon variation, whichis the result of assignable causes. Assignable causes are special causes that leadto large fluctuations in the process (e.g. machine breakdowns). A process is said tobe stable or in-control if it is subject only to common variations; while a process thatis subject to both common and uncommon variations is unstable or out-of-control.

So how do we decide whether the fluctuations observed in a process are common or

uncommon variations? A useful tool is a SPC chart. Consider the example in Exhibit2.18, which is an SPC chart for a paper clip manufacturing process. The companymakes 13 production runs per day, and a manager is interested in the variability ofthe number of paper clips contained in each box of paper clips. A sample (of 10boxes) is selected from every production run (i.e. a total of 13 samples), and theaverage number of paper clips per box in each sample is plotted in the chart inExhibit 2.18.

X

Machinery

fridge door not

shut properly

Method

contemination:

drinking mik straightfrom carton

milk not put back

to the fridge after

use

Material

fridge not cold

enough

milk past expiry

date

Labour

no one bothered

to replace spoilt

milk

Spoilt milk in the fridge

lack of training on

milk storage &

personal hygiene


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Exhibit 2.18 Statistical Process Control Chart for Paper Clips ManufacturingProcess: Unstable Process

The centre line (c) is the mean of all observations (i.e. the average number ofpaper clips per box for the 13 samples; in this case, c = 152 paper clips). The uppercontrol limit(UCL) is set at three standard variations above the centre line (e.g. if onestandard deviation is 10, then UCL=152 + (10 x 3) = 182 paper clips). The lowercontrol limit(LCL) is three standard deviations below the centre line (thus LCL in ourexample is 152 (3 x 10) = 122 paper clips). According to mathematical statisticalcalculations, on average, the chance that a box of paper clips contains more than182 paper clips (UCL), or less than 122 paper clips (LCL), is only 0.3%. Thus if theprocess is in control, it will be very rare indeed to see an observation lie outside thecontrol limits. As can be seen from Exhibit 2.18, the number of paper clips recordedin sample 9 is just outside the UCL. This means that the process depicted in Exhibit

2.18 is out-of-control: the cause for the variation in sample 9 is likely to be somethingother than a natural occurrence. This is a signal that management shouldinvestigate and reduce or eliminate the special cause for this variation. In contrast,the process depicted in Exhibit 2.19 is stable and in-control, as all values recordedare within the control limits. However, while stable, it does not mean that theprocess cannot be improved; however this will involve a fundamental change of theprocess itself (e.g. by shifting the centre line, or reducing overall variability).

SPC charts are also useful for identifying patterns of variations. For example, Exhibit2.18 shows a run of 6 consecutive points above the centre line (from samples 8 to13). This may indicate that the machines need adjustment after 8 production runs,or that operator fatigue starts to have an effect after the 7th production run.

c = 152

UCL = 182

LCL = 122

1Sample no. 3 5 7 9 11 13

Averageno.ofpaperclipsperbox

2 4 6 8 10 12


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Exhibit 2.19 Statistical Process Control Chart for a Paper Clip ManufacturingProcess: Stable Process

2.4.4 Pareto Diagrams

Pareto analysis (sometimes known as the 80/20 rule) is named after the 19th centuryItalian economist Vilfredo Pareto who noted that 20% of the population controlledapproximately 80% of its wealth. This concept is applied by managementresearchers to suggest that a small number of causes are responsible for a largepercentage of quality problems in an organisation; and that the majority of problemsin process management can be traced to only a few parts of the process. A Paretodiagramis basically a graphical representation of this concept where a bar chart isused to plot the causes of a problem according to the frequency of their occurrences.For example Exhibit 2.20 lists the major staff concerns with the animal feeding

process in a local zoo. A line graph is then added to indicate the cumulativepercentage represented by each category (of staff concerns). Note that in order toaccommodate the percentage line, the y-axis in Exhibit 2.20 has a scale that goesup to the total number of observations (in our example, 85 staff complaints arerecorded, resulting in a y-scale that goes from zero to 85). Pareto diagrams allowmanagers to prioritise improvements by focusing on the problem that occurs mostfrequently (i.e. inadequate training in our example). Once the improvement effortshave been implemented, managers can re-draw a post-improvement Pareto chart toidentify and focus on a new main concern.

c = 152

UCL = 182

LCL = 122

1Sample no. 3 5 7 9 11 13

Averageno.ofpaperclipsperbox

2 4 6 8 10 12


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Exhibit 2.20 Pareto Diagram: Problems with Animal-Feeding Process in a LocalZoo

Mini Case Study 2.5 The Combined Use of Fishbone Diagrams, SPC Chartsand Pareto DiagramsThe Zebra Internet Provider (ZIP) has decided to improve the performance of its customerservices division, in particular, the critical process of answering customers queries over thephone. ZIPs main concern is the response time, which seems to be increasing over the last6 months. Many customers have been complaining about the long wait before their phone

calls are answered. During a brainstorming session the team leaders of the phone operatorscome up with a Fishbone diagram, listing a range of possible causes of the lengthy waitingtime. These possible causes are put together as a survey and sent to each of ZIPs 40phone operators. The survey results are then plotted on a Pareto diagram, which indicatesthat the two most frequently quoted concerns by phone operators are telephone call rushand slow system response time. One of the team leaders attending the discussion sessionsuggests that variability may be a root cause. As a result, a statistical process control chartis used to analyse the number of phone calls over the previous 3 months. The SPC chartclearly demonstrates that the process is out-of-control: the number of phone calls received is

Cumulative %

No. of CumulativeProblem areas complaints %

Inadequate training 34 40

Lack of internal transportation 20 64

Lack of safety equipment 15 82Scheduling 9 92

Too much paperwork 5 98

Other 2 100Total 85

Animal Feeding Process

0

10

20

30

40

50

60

70

80

Inadequatetraining

Lackofinternal

transportation

Lackofsafetyequipment

Scheduling

Toomuchpaperwork

Other

Staff concerns/Problem areas

Numberofcases

0

10

20

30

40

50

60

70

80

90

100


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unusually large at the end of each month, well above the 3-standard deviation upper controllimit. Further investigation notes that most of these end-of-month phone calls are queries oninvoices, as customers are billed on the 27th day of each month. The phone call rush in turnslows down the accounts query system, causing further delays. Accordingly, action plans aredrawn up to (1) improve the billing system and (2) rather than billing all customers at the endof each month, reduce variability by billing customers at different times. However, this maycreate a whole new set of problems, so the process starts again!

2.5 CONCLUSION

Process analysis is an essential tool in understanding and monitoring theperformance of a businesss operations, in order to prioritise improvement efforts aswell as solving problems. Even more importantly, process analysis highlights theconcept of linkages/interdependencies, which is a key theme throughout thesubsequent topics (such as project planning, Theory of Constraints (TOC) andperformance evaluation). This chapter has also introduced several importantdecision-making tools, which are applicable not only in process analysis, but also in

other management scenarios discussed in subsequent chapters.


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2.1Are the following value-added or non-value added activities? Explain.

1. Training seminars on workplace discrimination and harassment in an

accounting firm.2. Monthly safety inspection in a production plant.3. Compliance costs (e.g. environmental inspections, audits).4. Dry-cleaning carpets in a car hire company.

2.2Mars chocolates are made based on the following process as reported atwww.cocoapro.com on 21/8/02.

Activity 1: Harvesting cocoa pods, removing cocoa beans and fermentationThe cocoa plant is still grown and harvested much as it was centuries ago.Harvesting pods by hand at the peak of ripeness, combined with proper

fermentation, improves quality and flavour and retains the natural goodness.

Activity 2: Drying, inspection, cleaning, and blendingAfter fermentation, the cocoa beans are dried and inspected, selecting only the bestquality beans for Mars, Incorporated. Then they are cleaned thoroughly and avariety of cocoa beans are blended to create high quality, signature flavourchocolate.

Activity 3: Roasting, winnowing, milling and screeningCarefully roasting the beans to just the right temperature for just the right time helpsto retain the natural goodness. In addition to roasting, winnowing (removing thehulls) and milling (grinding) are also key steps in creating a high quality chocolate.Throughout the process, Mars, Incorporated experts test and taste samples toensure a consistently flavourful chocolate.

Activity 4: Mixing, refining and temperingToday at Mars, Incorporated, we typically use three blending techniques: dry mix (forstronger milk chocolate), white crumb (for a milder milky flavour) and oven crumb (fora caramelised flavour). By varying the proportion of ingredients and mixing methods,we create the rich complexity of the food we call "chocolate." Once mixed, the


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ingredients are refined and tempered to ensure a good gloss and create that silkysmooth texture. Finally, the chocolate is formed into your favourite Mars,Incorporated brands.

Required:

1. Draw a process map.2. Identify non-value added activities in the chocolate making process.

2.3Choose an everyday process that you are familiar with (e.g. travelling to university,studying for final exams, cooking dinner).

Required:1. Draw a process map.2. Identify two non-value added activities in the process. What is the root cause of

each of these non-value added activities?3. Identify the important value parameters associated with this process.

2.4Consider the following situations:

(a) Three Hands Co. manufactures metal candleholders. Using a traditionalmanufacturing technique, Three Hands can produce a batch of five hundredWhite Gothic candleholders using 500 kg of alloy metal, 100 hours of labourtime, and 3 hours of set-up time. After a re-engineering study Three Handscan now produce the same size batch of candleholders with only 300 kg ofalloy metal, 60 hours of labour time, and 2 hours of set-up time. The labourcost for Three Hands is $15 per hour, and the cost of alloy metal is $10 perkg. Machine set-ups cost $20 per hour.

(b) Twister Co. Ltd produces electric fans. The company used to employ twoquality inspectors (with annual salary of $35,000) to ensure that the finalproduct meets customer specifications. In addition, each month 50 hours ofdirect labour hours were spent reworking defective products. After a carefulstudy of the manufacturing process and the acquisition of an improvedassembling machine, quality inspection is no longer necessary and productsrequiring rework has been reduced by half.

(c) Argus Pet Food has recently conducted a process analysis, which resulted inthe adoption of the same kind of packaging technique for the companys largevariety of pet foods. Subsequent cost-savings will come from the scrapping oftwo packaging machines (each costs $5,000 per month to run).

Required:For each of the companies described above:

1. What are the non-value added costs before the cost reduction initiatives?2. Identify the type of improvement (i.e. activity elimination, reduction, selection or

sharing).

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Having completed your Accounting degree you have applied for a position as amanagement consultant with the Boston Consulting Group. You have progressedthrough the preliminary interview rounds, and in the final interview the Partnerinterviewing you gives you the case presented below.

Generals Engine Company (GEC)

The Generals Engine Company assembles engines for cars and light commercialvehicles. These engines are sold to motor vehicle plants in both domestic andexport markets. A major part of the process is to assemble pistons into the enginecylinders. The outside diameter of the piston must nearly match the inside diameterof the cylinder, to ensure smooth engine operation with no damage to the cylinderwalls. The specified tolerance for the gap between the cylinder walls and the pistonis very tight.

The assembly operatives find that the cylinders and pistons do not always match

perfectly. In order to facilitate assembly the pistons are sorted into diametercategories that differ by only fractions of centimetres. There are ten differentcategories ranging from 10.5 cm. to 10.7 cm. The sorting process requires foursorting operatives, who are paid annual salaries of $30,000 each.

In addition, cylinders are not exactly the same. Because of the subtle variations inboth cylinders and pistons, six assembly operatives (on annual salary of $35,000each) physically match pistons with cylinders to get a proper fit. Some experiencedoperatives are sometimes able to judge a match between cylinders and pistons bysight, but in most cases the process is very much like a jigsaw puzzle where differentpieces are tried before a correctly fitting piston is found. The actual assembling ofthe engines take 50% of the total time spent by the assembly operatives. Thissorting and matching process is quite time consuming, but is necessary in order tobuild engines that maintain their compression. The annual rent of the space used forsorting and matching is $15,000 of which $9,000 is charged to sorting. Also, theannual running cost of the assemble plant is estimated at $250,000 (this excludesthe cost of rework and assembly operatives salaries).

When each engine is completed, it is tested by running the engine for one hour, toensure it functions well. The annual cost of testing the engines is $10,000. About5% of the engines fail this test. When an engine fails, it is disassembled and thenreassembled. The annual estimated cost of disassembling and reassembling is$45,000. Generals believe that the engine rebuilding process is cost-effective

compared with scrapping the engine. Of the rebuilt engines about 25% must againbe disassembled and rebuilt to eliminate defects at an average annual cost of$5,000.

Generals' manageme

week 1 additional readings bdmm chapter 2 (1)

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