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14 June 2016

How Business Processes Affect Company’s Productivity

Today you can find many articles about business processes modeling. There are several modeling methodologies, such as idef0, idef3, dfd, and BPMN 2.0. The latter is used for describing business processes in ELMA. Our website offers a BPMN tutorial for beginners, which can help you learn how to model business processes on your own. But how do you use the process model?

What can you tell about a business process, by looking at its map?

  • Where are the bottlenecks of the process?
  • Which metrics allow estimating its efficiency?
  • How to improve the business process?

A simple description of a business process, does not answer these questions, but the answers are much needed.

Let us talk about methods of analyzing business processes, and the ways processes affect the company’s performance.

Three Key Process Metrics

Business process is a collection of related, structured activities or tasks that produce a specific service or product (serve a particular goal) for a particular customer or customers. Any company has tens, hundreds and even thousands of processes, both simple and elaborate.

To make our examples more understandable, instead of complex process schemes we will refer to an abstract model, which represents a process as a sequence of several activities. However, everything you are about to read can be applied to processes of any complexity (main, supporting, etc.).

Business process

There is an object in any business process, which moves with it from the start to the end. That is a flow unit. To name a few examples, a café visitor, credit card request, call-center request are flow units.

To get the initial information on how a process works, you have to measure the three key metrics:

Flow rate is the number of flow units, going through the business process per unit time, e.g. served customers per hour or produced parts per minute.

Flow time is the amount of time a flow unit spends in a business process from beginning to end. E.g., the time a visitor spends in a café, or the time to handle one request to issue a credit card.

Inventory is the number of flow units that are currently handled by a business process. E.g., the number of visitors in a café at 12 o’clock.

Here are some examples of the metrics in different companies:

Metrics table

We recommend that you start analyzing any business processes with the three key metrics. Thus, you will be able to look at the process as a whole, and understand how it works. After that, you can evaluate separate process participants and operations.

Business Process Bottleneck

The only parameter you need to measure in order to find the bottleneck of any process is the handling time.

Manually measuring different process metrics would take a lot of time. While you can record the handling time or just ask your employees about it.

For example:

In our hypothetical process, the handling time for each operation is 10, 23, 15 and 10 minutes. Let us assume that one employee performs each of the operations.

Operations duration table

With the data we possess, it is possible to estimate capacity of each operation. As you can see, the handling time of the first operation is 10 minutes; therefore, the capacity is 6 flow units per hour. While the capacity of the second operation is only 2.6 units per hour. Using this principle, you can calculate the process capacity in flow units per day, week, month and so on.

The operation with the lowest capacity is the bottleneck of the business process. It defines the capacity of the entire process. Whatever is the capacity of the operations 1, 3 and 4, the bottleneck will slow down the flow.

A bottleneck in a process may lead to different consequences for the business. They depend on the demand, i.e. the number of flow units in the process input for a certain period. In our example, the demand is three flow units per hour:

Bottleneck table

We have calculated that our process can handle only 2.6 flow units per hour. That is its capacity. While the demand is 3 flow units. As the result, the demand is met only partially. We cannot serve all the customers.

There is also the question of how the resources are utilized in each operation. What is the load on the employees/assembly line/equipment? Obviously, the process’s bottleneck has a greater load, than the other operations.

In this situation, when the demand is greater than the capacity, we have to eliminate the bottleneck. As soon as we increase the capacity of this operation (e.g. hire another worker), the capacity of the business process will increase.

Another option is that the demand is lower. The process capacity is enough to meet it. However, when the company starts to invest in marketing to increase the demand, the bottleneck starts taking its toll. In the end, all the investments are wasted.

Little’s Law

We have figured out, what are the three key process metrics and how to find a bottleneck in a business process. Now we will contemplate on how process metrics affect each other and how you can use it to analyze a process and enhance your business.

Interrelation of process metrics was proved by John Little. Little’s Law can be represented as the following formula:

Inventory = Flow Time * Flow Rate

Evidently, we only need to know two process metrics, in order to calculate the third. How to apply that?

Let us take the process of handling a loan request in a bank as an example.

1. There is no trick in learning the flow time of this process – you can check it in the accounting system or ask the loan manager. Let us say, the time of handling a request from the moment a customer comes to the bank until they receive money is 2 days.

2. We can also learn the process inventory – the number requests per day. For example, it is 160 requests.

3. Using the formula, we can calculate the flow rate. The business process handles 80 requests per day. The question arises: 80 flow units is the maximum value, or the bottleneck of the process does not let more requests through.

In the same way, you can calculate any of the three metrics, knowing the other two:

Little's law table

By analyzing these calculations, you can learn a lot about the company’s processes. For example:

Little's law and bottleneck table

We can measure the effective inventory (how many customer requests were received by this moment), e.g. three. We can also learn the effective flow time (required to handle one request), e.g. two hours. According to the Little’s Law, the effective flow rate is 1.5 requests per hour. That is the case, when the bottleneck does not yet affect the process, since the flow rate is lower than the process capacity.

We can also calculate utilization of the resources on each process step – 25%, 57%, 37% and 25%. In this case, buying a new machine or hiring a new worker would be pointless.

Another example. We measure the process inventory and the flow rate, and calculate the flow time, according to the Little’s Law:

Little's law and bottleneck table 2

As you can see, the effective flow time is 90 minutes, while the total handling time is 58 minutes. It means that nothing happens to the flow unit for 32 minutes. Idle periods occur between operations. Removing or reducing them will significantly improve the process.

Take a look at some calculations on the Request for Quotation process, used by one of ELMA’s clients. In this process, a representative sends a request to the supply department, receives information on the prices of certain products, and then discusses it with a customer.

Table with calculations of process metrics

We have measured the handling time at each process step, calculated the capacity and found the bottleneck (8 requests per day).

We have asked the company’s representatives to find out the average flow time (from sending a request to the supply department, to receiving a customer’s decision) – 3 days. The number of active requests in the company defined the process inventory – 6 requests. According to the Little’s Law, we have calculated the flow rate – 2 requests per day. While the bottleneck allows handling 8 requests per day.

It means that the process bottleneck has the necessary capacity in case the demand rises. The company can stimulate the demand and think through the strategy of increasing the capacity of the bottleneck. In prospect, it can reduce the handling time and idle period. It can be achieved by automating processes and implementing a BPM system.

Six Sources of Losses in Productivity

Company’s productivity is the correlation between the amount of produced goods or services to the resources spent. You can evaluate productivity of any company’s assets, such as employees, assembly lines and debt capital.

Productivity = amount of produced goods or services / resources spent

The amount of produced goods is the flow rate and the process capacity. By analyzing processes, we can take measures for increasing the amount of produced goods (productivity of employees, assembly lines, etc.). Now we have to figure out, what costs we bear and how to reduce them.

Any company has six types of losses:

  • Overproduction – reserves, accumulated due to the gap between the demand and supply;
  • Excessive movement and transportation – unreasonable movement of workers, products, assembly units;
  • Remaking – fixing mistakes and faulty goods by remaking;
  • Product’s redundancy – redundant development of the product, which is of no value to the consumers;
  • Process inventory – the number of flow units in a process;
  • Idle periods – total idle time of a process.

These six types can be arranged into two groups. The first four types are related to using certain resources. The process logic is important for them. The last two types are about the process organization, flow units and flow time. Process metrics are more important here.

1. Group of losses on using a resource. Potential increase in productivity

To calculate the potential increase in productivity, you have to monitor the effective resource utilization time:

Potential increase in productivity table

The idea is that you subtract the periods, when equipment has no effective utilization from the total working time. Examples of such periods are maintenance and idle periods, caused by poor process organization, untrained personnel. The resulting time is the potential increase in productivity.

2. Group of losses on the process structure. Potential increase in productivity

In this case, we base on the handling time, i.e. the time spent on each operation of the process.

Work redistribution table

If we know the demand, which is 5 flow units per hour in this case, we can calculate the takt time – 12 minutes. Handling time of each operation has to be within this limit.

Obviously, the operation 2 is the bottleneck. We can redistribute work between operations 2 and 1, or add resources and redistribute work between operations 3 and 4. Thus, the flow unit will move evenly through the business process, the flow rate will increase. As the result, the demand will be met and the company’s productivity will rise.

Economic Value of Productivity

Let us do some math, to see how analyzing metrics and increasing process capacity affects the company’s profit.

Say, we have a process, which includes one operation – order handling.

We know:

Handling time

5

min./order

Demand

15

orders/hour

Average cost

2000

usd/order

Average prime cost

600

usd/order

Number of employees

4

people

Payroll expenses

150

usd/hour

Committed cost

1200

usd/hour

We can calculate:

Process capacity

(1/handling time)

12

orders/hour

Flow rate

(Min {demand and capacity})

12

orders/hour

Total income per hour

(flow rate * average order cost)

24000

usd/hour

Prime cost of sold goods

(order prime cost * flow rate)

7200

usd/hour

Payroll expenses per hour

(Payroll expenses * number of employees)

600

usd/hour

Committed cost

1200

usd/hour

Income of the current process is:

Income (As-is)

15000

usd/hour

How to increase profits?

The first thing that comes to mind is to lower the prime cost. Say, we managed to lower the prime cost by 10%. After doing some calculations, we can see that the company’s profit rises by 3.2%.

Profit after lowering the prime cost by 10%

15480

usd/hour

3,2%

However, if we take another path and shorten the handling time, thus increasing the process capacity by the same 10%, the company’s profit will increase by 12.4%.

Profit after shortening the handling time by 10%

16866

usd/hour

12,4%

Thus, after analyzing the process and enhancing its capacity, the company increases its profit by 12.4%. It is much more beneficial for the business, than lowering the prime cost of a flow unit.

To sum up:

  • We have covered the three key metrics of any business process;
  • Learned, how to find the bottleneck of a process;
  • Learned, how to calculate metrics, using the Little’s Law;
  • Considered, how business process analysis allows increasing a company’s productivity and profit.

We hope that you have found this article useful.

 
 
 

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Alexander Khodyrev
Alexander
Khodyrev
Localization Specialist