This document provides an overview of business process design. It defines a business process as a network of connected activities that transform inputs into outputs to satisfy customer needs. Process design aims to configure this network efficiently. Inefficient processes often exist because they emerge through incremental changes rather than careful design. Classifying activities as value-adding, non-value adding, or necessary for business is important for identifying areas for improvement. An insurance claims handling example illustrates potential benefits of redesign like reducing customer wait times from 10 days to 1 day.

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

2. 2
Overview
• What is a business process?
– Three definitions
– Process types and hierarchies
– Components of process architectures
• The essence of Business Process Design (BPD)
• Why is BPD important?
– BPD and overall business performance
– BPD and strategy
• Why do inefficient processes exist?
• Activity classification and BPD

3. 3
What is a Business Process?
1. A pragmatic definition
A Business Process describes how something is done in
an organization
In general terms…
Business - Organizational entity that deploys resources to provide
customers with desired products and services
Process (Merriam-Webster’s Dictionary)
(i) A natural phenomenon marked by gradual changes that
lead to a particular result
(ii) A natural continuing activity or function
(iii) A series of actions and operations conducing to an end

4. 4
What is a Business Process?
2. Traditional Process definition in OM literature
A process specifies the transformation of inputs to outputs
Different types of transformations
• Physical (Ex. raw material  finished product)
• Locational (Ex. flying from Denver to L.A.)
• Transactional (Ex. depositing money in a bank)
• Informational (Ex. accounting data  financial statement)
The transformation model of a process
Inputs Outputs
Process

5. 5
What is a Business Process?
The Process View
 Any organization entity or business can be
characterized as a process or a network of processes
 Based on the simple transformation model of a process
 Has its origin in the areas of manufacturing and quality
The transformation model of a process
Inputs Outputs
Process

6. 6
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
Process
Customers
Suppliers
Resources
Inputs Outputs

7. 7
Process Types and Hierarchies
1. Individual processes
– Carried out by a single individual
2. Vertical or Functional processes
– Contained within one functional unit or department
3. Horizontal or Cross Functional processes
– Spans several functional units, departments or
companies
Make up
Make up

8. 8
Marketing Operations Accounting
CEO
Order Request Order Fulfilled
Production planning
Vertical process Horizontal process
Individual process
Buying a TV
commercial
Illustration: Process Types and Hierarchies

9. 9
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

10. 10
Components of the Process Architecture
Inputs and Outputs
Flow units
Information structure
Resources
The network of
activities and buffers
Process
Architecture

11. 11
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

12. 12
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

13. 13
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!

14. 14
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

15. 15
The Essence of Business Process Design
• An efficient process which does not deliver customer value is useless
“How to do things in an efficient and effective way”
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

16. 16
The Essence of Business Process Design
• BPD often most valuable when considering complex cross
functional processes
– Challenging coordination issues
– Process inefficiencies often related to handing off work from one
station or person to the next – introduces delays and errors
• The functional organization and division of labor paradigm
dates back to Adam Smith and the late 1700’s
• Division of labor rationale: by focusing on fewer tasks 
– Workers’ skill level goes up  work faster
– No time lost when workers switch between tasks
– Workers well positioned to help develop better techniques and tools
• Drawback: more complex coordination issues when
– More complex products and services
– Customers demand more variety

17. 17
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

18. 18
Improvement
Time
Incremental
Improvement
Radical
Improvement
Theoretical
Capability
Statistical
Process
Control
Incremental vs. Radical Design Improvement

19. 19
Example 1 – Claims Handling in a
Large Insurance Company
• Pilot project – claims handling for replacement of
automobile glass
• Springboard for later, more ambitious redesign efforts
• Set up procedure
1. The CEO appoints an executive sponsor to lead the project
2. Team members are handpicked by the CEO and the sponsor
3. The team creates a flowchart of the existing process
• Under the existing process the client may have to wait 1-2
weeks before being able to replace the damaged auto glass
 Goal – A radical overhaul and improvement of the process
to shorten the client waiting time

20. 20
Example 1
Flowchart of the existing claims process
Client
Local
independent
agent
Approved
glass
vendor
Claims
processing
center
Request additional information
Pay
Notify agent
File claim
Give instructions
Forward
claim
Request quote
Provide quote
Pay

21. 21
Example 1
Explanation of existing claims process
1. Client notifies a local agent that she wishes to file a claim. She is given a claims
form and is told to obtain a cost estimate from a local glass vendor.
2. When the claims form is completed the local agent verifies the information and
forwards the claim to a regional processing center.
3. The processing center logs the date and time of the claim’s arrival. The data is
entered into a computer-based system (for record keeping only) by a clerk. The
claim is then placed in a hard copy file and passed on to a claims representative.
4. a) If the claims representative is satisfied with the claim it is passed along to
several others in the processing chain and eventually a check is issued and sent
to the client.
b) If there are problems with the claim the representative mails it back to the
client for necessary corrections.
5. When the client receives the check she can go to the local glass vendor and
replace the glass.

22. 22
Example 1
New Design Recommended by the Team
Client
Claims
processing
center
Approved
glass
vendor
Call in claim
Schedule repair
Pay
Notify

23. 23
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.

24. 24
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.

25. 25
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

26. 26
Linking BPD to overall Business Performance
• Overall business performance?
– Detailed definition is company specific
– Generally, performance must be measured against the stated objectives
Maximize revenues and
minimize costs
Must use resources efficiently while
understanding customer needs
Satisfying customer needs in an efficient way
Profit maximizing firms Non-profit organizations
Overarching objective is usually to
maximize long term shareholder value
A common objective is survival and
growth while satisfying customer needs
Well designed business processes

27. 27
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

28. 28
Linking BPD to Strategy
• An effective business strategy is based on understanding the
organization’s
 Internal environment – its strengths and weaknesses
 External environment – the opportunities and threats
• Links between BPD and the internal environment
 Weaknesses – often relate to poorly designed processes
 Strengths – often relate to well designed processes
• Links between BPD and the external environment
 Prerequisite for designing effective processes is to understand the
external environment (suppliers, customers and competitors) and
its opportunities and threats

29. 29
Linking BPD to Strategy
• Strategic fit
 Match between the strategic position the firm wants to occupy in
the external market and the internal capabilities to get there
 Effective BPD is needed to achieve this fit
• Market driven strategy to achieve strategic fit
1. Identify desired strategic position
2. Design processes to support this position
• Flexibility, adaptability
• Time to market considerations
• Process driven strategy to achieve strategic fit
1. Identify process capabilities offering a competitive advantage
2. Leverage these capabilities to reach a desirable strategic position

30. 30
• 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
Why are Inefficient Processes Designed?

31. 31
Activity Classification and BPD
 A key issue in process design and analysis is classification of
the process activities
– Crucial in identifying waste and inefficiencies in existing processes
Two basic classification approaches:
Activity
Value-Adding
Non-Value Adding
Handoff
Delay
Rework
Control
Policy compliance
Activity
Value-Adding
Non-Value Adding
Handoff
Delay
Rework
Business Value Adding
Control
Policy compliance

32. 32
• Value adding activities
– Essential in order to meet customer expectations
– Activities the customer would be willing to pay for
– Involves doing the right things right
– Performing the right activities
– Doing them correctly, with high efficiency
• Business value adding activities
– Control activities
– Do not directly add customer value but are essential to conducting
business
• Non-value adding activities
– Activities the customer is not willing to pay for
Activity Classification and BPD

33. 33
• 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
Activity Classification and BPD