A Systems Model of a Process

A Systems Model of a Process

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A Systems Model of a Process "Would you tell me please which way I ought to go from here?"

"That depends a good deal on where you want to get to," said the Cat.

"I don't much care where… " said Alice.

"Then it doesn't matter which way you go," said the Cat.

"…so long as I get somewhere," added Alice as an explanation.

- Alice & the Cheshire Cat, Alice in Wonderland, Lewis Carroll

When one sees eternity in the things that pass away and infinity in
finite things, its only then that he has attained pure knowledge -
Bhagvad Geeta

A process is a structured, measured & controlled set of activities
designed to process the inputs and produce a specified output for a
particular customer or a market. However, this is a very myopic
definition of a process as it restricts the process as being
equivalent to a workflow and ignores the soft processes like
acquisitions by a company, succession within the controlling
structures, etc. which do not have any clear input - process - output
structure. Keen refines this definition as "… process is any work in
the organisation that meets the following criteria: it is recurrent,
it affects some aspect of organisational capabilities, it can be
accomplished in different ways that makes a difference to the
contribution it generates in terms of cost, value, service or quality
and it involves coordination."

Given below is perhaps the most basic view of processes -- the
well-known input-process-output model. Albert Einstein once advised
that "things should be made as simple as possible - but not too
simple." This model is too simple.

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Related Searches

It masks important details by
treating a process as a "black box."

ipo_model.gif (1569 bytes)

The Basic I-P-O Model

This is only a little more complex than the figure above but gives us
much more useful information.

work_and_work_control_system.gif (3738 bytes)

A Systems Model of a Process

In the diagram above that "process" is really a label for the
interactions between the Processor and the Inputs to be processed.
More important, these interactions define the process.

The processor is controlled by a "Controller." In some cases, control
is affected by way of instructions programmed into a processing
machine or other equipment. In other cases, the chief means of control
is supervision. Often, however, the "Processor" is a skilled person
who can operate under self-control but organisations usually employ
controllers (normally termed as 'managers') who supervise and direct
the actions/tasks of the processors.

Inputs come from a "Supplier". This supplier could be from within the
company e.g. a market researcher in the marketing department at BP
needs to know the sample of BP authorised dealers whom she can contact
for testing the market demand of the new lubricant launched by the
company. This information can be made available from the sales
department and thus in this case, sales department becomes the
supplier for the researcher. However, for the procurement department
at BP the supplier is one of the external agencies. Thus, this
supplier might be an earlier step in the process, another unit within
the company or an outside vendor. Analogously, outputs have a
destination or a buyer. It might be the next step in a larger process,
a different unit or an outside entity such as a customer or client.

Finally, the dotted lines and circles that link the Controller with
the Processor and with the Inputs and Outputs are "feed forward" and
"feedback" loops. Feed-forward loops control process initiation and
feedback loops controls process termination. In effect, the
feed-forward loop says to the processor, "It's time to start the
process" and the feedback loop says, "The process has been correctly
carried out and it's okay to end the process." The feedback loop also
controls progress toward the end result.

VALUE DERIVED FROM A PROCESS

Before reengineering a process in order to streamline the same and
achieve maximum possible benefit from it, it is important to identify
the present positioning of the process in the organisational system
and the value currently being derived from the process. Normally, the
first step in a typical organisational process analysis is mapping the
process on the Salience/Worth Matrix ® Peter Keen. Salience suggests
prominence and salient processes are the most prominent ones. Worth of
the process can normally be checked by identifying whether it's an
asset or a liability to the organisation; it's an asset if it returns
more money than it costs and if vice versa, it's a liability.

The Salience / Worth Matrix ® Peter Keen

[IMAGE]

[IMAGE]




SALIENCE WORTH

[IMAGE]

[IMAGE]




Assets Liabilities

[IMAGE]




Identity

[IMAGE]




Priority

[IMAGE]

[IMAGE]Background

[IMAGE]Mandated

An Identity process is the one that defines the company for itself
differentiating it from its competitors and forming the heart of the
company's existence e.g. customers identify BP as a company that
consistently provides high quality products at nominal costs. Priority
processes are the engines of corporate activity and effectiveness;
normally hidden or taken for granted they are conspicuous only by
their absence. e.g. everyone (customers, investors, govt. agencies and
all other internal and external stakeholders) would expect BP to drill
oil from the ground and refine & market it; however, if BP stops doing
it only then would they give this process a thought. The product
pricing and costing function carried out at the Financial Control
Dept. of BP is another important example of a priority process.
Background processes form necessary support to daily operations though
their absence may not threaten the survival of the company; however,
its competence may, in long run, be affected due to their absence or
underperformance. e.g. reprographics / printing services at BP or
housekeeping services at BP or the advertising and promotions process
performed at the Marketing Dept. of BP. They are often the core of the
operations at any organisation but it would be myopic to make their
clear visibility a main target for management attention and investment
as their improvement rarely generates much EVA. Finally, Mandated
processes are those that are legally required to be performed or are
justified as necessary by the company philosophy e.g. the health &
safety training process for new employees at BP and maintenance of
necessary fire-fighting equipment at the BP refinery.

All processes may move within the salience levels, periodically,
depending on the internal and external environment requirements of the
organisation; however, any process that does not form a part of the
Salient set is a futile exercise for the organisation.

Moving on to the worth of the process, in simple terms a worth of the
process is the EVA it contributes to the firm. A process should be
undertaken by the organisation if it directly or indirectly
contributes to the increase in its EVA (CFAT or PAT - CE*Discount
Rate) and thereby the Shareholder Value. However, it would be wrong
for the organisation to evaluate process viability only on its EVA
contribution aspect; this is because there are a few processes that
almost always consume more capital than the financial returns they
generate. e.g. Research and Development. However, they are normally
priority processes necessary for the long run survival and may
currently have a negative EVA contribution but definitely lead to a
positive NPV in the long run.

e.g.

Assume a typical process of laptop sourcing in an organisation. Let us
first have a look at all the capital that is trapped inside this
process

Suppose there are 5 people in the procurement team and their only job
is to source, negotiate and create purchase contracts for laptops
purchased. One for search/sourcing, one for negotiating, one for
designing the contract, and 2 secretaries. Suppose they, on an average
earn, £30,000 p.a. Thus the total capital trapped in employees in this
department is £150,000. Suppose the other fixed capital being used
solely by this team is:

[IMAGE]-Building/Office £5,000,000

at replacement cost

-Capital Equipment

(incl. laptops, printers, furniture, etc.) £500,000

-Stationery, Food for employees,

Travel and other revenue expenditure £200,000 p.a.

TOTAL CAPITAL EMPLOYED IN THE

DEPT. FOR THE YEAR IS £5,850,000

Suppose the WACOC of the organisation is 12%; then this means that
sustenance of this department requires a diversion of £702,000 from
the free cash flow. Suppose the process is improved whereby the
negotiator and the contract designer are replaced only by one person
and one secretary is made redundant. Also suppose the team negotiates
with Ryanair and the travel costs are reduced; negotiates with the
caterer and food costs are reduced; replace 3 small printers with one
large printer; sells all PCs as the team can work on their laptops all
the time and thereby effectively, through all these changes, manages
to reduce the capital employed in the process to £4,900,000. This
means that sustenance of the process now requires costs only £588,000.
This means that the value created from process improvement is
£114,000, a direct contribution to the increase in EVA of the
organisation.

Another method by which value increase in the process can be measured
is to assign financials to the improvement in the KPIs of the process.
One such KPI for procurement at BP is Time Taken to Award the
Contract. With the total annual capital employed of £5,850,000,
capital employed by this dept. per day is £16,250. With the help of
the costing department, let us assume that the amount of resources
allocated to finalisation, preparation and award of the contract, one
of the major activities of the Procurement Department, is £7,000 per
day. Assume it takes 20 days to award the contract. Hence, an implicit
cost of awarding the contract is £140,000 per contract or £2,520,000
per year. If we assume that the department works only on one contract
at a time then it can award 18 contracts per year and these are enough
to fulfil BP's requirements. Suppose by process improvement we reduce
this time taken to 15 days, a saving of 5 days. The total implicit
cost of awarding a contract now reduces to £105,000. With 18 contracts
per year, the total implicit cost is now £1,890,000; a net saving of
£630,000 p.a. If we assume that the WACOC of 12% p.a. then this
results in addition of £75,600 to the EVA of BP.

The methodology changes a bit depending on the type of process being
studied. E.g. procurement department is a cost centre hence the
benefits achieved from process improvement can be measured in term of
cost savings made. For revenue centre processes, this value can be
measured as additional revenue generated by process improvement or for
profit centre processes, the additional profits generated by process
improvement.

In the last departmental meeting, Ian mentioned the possibility of
Maintenance becoming the 5th or perhaps the 6th Process Accelerator.
With a few assumptions and conceiving a simple yet typical maintenance
process, which is a background process, the worth of the same can be
calculated as follows.

1. Suppose there are 100 workers currently in the production
department, each paid about £28,800 p.a. (£10 per hr for an 8 hr
shift) on average. Thus the total cost of direct labour is £2,880,000.
Assume one supervisor is required for every 20 workers. Thus a total
of 5 supervisors will be required. If each is paid £35,000 p.a. then
the total cost of supervisors is £175,000.

2. Suppose the inventory required is £300,000 per annum and there are
3 inventory turns in a year. Thus the direct material cost for
maintenance process is £300,000

3. Suppose the downtime minutes for maintenance are 1000 and revenue
per minute from the machine undergoing maintenance is £500 per minute.
Thus the downtime cost is £500,000.

4. If the machine undergoes a rework, which is a part of preventive
maintenance, for 100 minutes per annum then the cost of rework per
annum is £50,000.

Let us assume that during maintenance only 10 workers and 1 supervisor
are required. Thus during the time of maintenance 90 workers and 4
supervisors are idle and one supervisor is working half of his normal
working capacity. Thus the total cost incurred during the maintenance
process is

Workers = (1000 mins/60 mins)*£10*90 = £15,000

Supervisors = {35000 / (20*360*8*60)} * 1000 * 20 * 4.5 = £9,11.458

Thus total manpower costs during maintenance are £16,826.04

Thus total cost of maintenance is £866,826.04

Suppose there is no maintenance done at the organisation. Assume when
the machine breaks down a replacement machine (assume again that it
cannot be repaired if it breaks down) is required and to get the
production process back online again to the original state takes 6000
minutes. The total cost incurred during this process will be:

Replacement cost of a new machine = £8,000,000

Worker manpower loss = (6000 mins/60 mins) *£10*100 = £100,000

Supervisor loss = {35000 / (20*360*8*60)} * 6000 * 20 * 5 = £6,076.39

Rework, Inventory and Maintenance savings = £850,000

Thus the total cost of not carrying out any maintenance is £
7,256,076.39

Assume the probability of the machine breaking down in a year is 20%
if the maintenance is not carried out at all (for the time being let's
assume that the probability of machine breaking down despite
maintenance is 0). Hence there is a 20% chance that a cost of
£7,256,076.39 will be incurred i.e. £1,451,215.28 will be the cost
incurred if no maintenance is carried out during the year. However, on
the other hand if maintenance is done, the cost incurred is only
£866,826.04. Thus there is a cost savings of £584,389.29 if
maintenance is done. If ROCE is 20 % then maintenance adds £116,877.85
to the EBIT.

A freeing up of cash-flow as a result of improvement in the
maintenance process can be shown as below.

No. of workers = 100

Annual pay per worker = £28,800

Current productivity level = 50%

Productivity level (goal) = 80%

Supervisor salary = £35,000

Inventory = £300,000

Inventory turns = 3

Inventory turns (goal) = 6

Downtime cost = £500,000

Downtime = 10% of the time

Downtime (goal) = 5% of the time

Cost of rework = £50,000

Rework as % of revenue = 5%

Rework as % of revenue (goal) = 2.5%

Worker Manpower = 50/80 * 100 = 63 workers required at 80 %
productivity level

Saving of 100 - 63 = 37 workers i.e. £1,065,600

Supervisor Manpower = 37/20 = 2 supervisors can be laid off at 80%
productivity levels

Saving of £70,000

Inventory = £300,000 * 3/6 = £150,000

Saving of £150,000

Downtime = £500,000 * 5/10 = £250,000

Saving of £250,000

Rework = £50,000 * 2.5/5 = £25,000

Saving of £25,000

Total Savings achieved from process improvement = £1,560,600
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