Friday, February 04, 2005

Business Process Optimization- How To Start?

As I have mentioned in previous posts, the second half of my career is dedicated to business process management (BPM).

Now, before you think that my early life was logistics and my current one BPM, let me stop you there and explain that as a systemic thinker my whole life is process improvement and supply chain/logistics has always been process management. So the two are current and in harmony and that is “Living The Dream.”

In this weeks “Business Process Trends Email Advisor” from (, Paul Harmon wrote an article, “Centralizing Control in a Decentralized Company” where he speaks to companies that are opening offices, plants and sales presence in more geographies as globalization impacts their markets. In that mix is outsourcing, contracting and the overall desire to improve efficiency.

As this trend continues companies are “struggling” according to Harmon, with the decisions of insource, outsource, offshore, governance and accountability across the enterprise which used to be nice and simple in one or a few places. In one city or two states but now is increasingly complex landing in multiple countries and/or on multiple continents.

As referenced several times within posts on this page, optimization and sub-optimization are important to understand in normal situations, and become critical in distributed organizations where the path of least resistance is to optimize each location. As described in the article “In traditional, departmentally focused organizations, department managers tend to optimize the work of their departments to achieve the kinds of goals that their traditional mangers assign them. …When an individual department optimizes to achieve its goals (and its managers bonuses), the overall effect is the sub-optimization of the organization as a whole.” My parenthesis.

Supply Chains have failed or succeeded by the optimization or sub-optimization thereof. Let me use one of my favorite logistics stories of sub-optimization for those of you not as familiar, and those of you who are financial types, especially CFO’s.

A traffic manager is told by his VP operations that she must reduce transport spending this year by $450,000 to achieve their department’s goals and for her to make her bonus. For the sake of making the math easy, lets say that this company costs $2 million per day to operate (the entire company, not just the operations department). Today, the cash-to-cash cycle of the business (cash for materials until they get paid for the products they produce) is 80 days.

The traffic manager calls all the carriers and says they have to reduce their rates by $0.50 per kilo. All the carriers agree and the traffic manager reduces the spend by something north of $450K. Now comes the fun part.

While reducing the cost of the transport, the carriers now have to lower their costs and so they hold the freight for a day or two longer, or don’t use team drivers and deliver with singles. All this adds up to adding 3 days to the cash cycle (these are all assumptions). That costs the Company $6 MILLION DOLLARS, to save the $450K. The CFO and treasury people cannot figure out why the working capital is reduced and they struggle with cash flow, but the operations department saved their target and they all got their bonuses.

This is a simplified example of the problem, but in reality it happens a lot. Think about your department’s priorities and objectives and view them in the light of other departments or the corporate objectives. Too many times they are in conflict. In the logistics business we see this kind of sub-optimization every day.

In creating a distributed organization the departments, functions and processes have to be deconstructed and reconstructed. The article refers to Daniel Yellin of IBM Research and a presentation he gave on Industry Deconstruction and Enterprise Reconstruction ( that shows the transition process that businesses are seeing or should see in globalization.

Mr. Harmon notes, “If senior management creates a distributed organization and outsources processes but is subsequently unable to control the resulting organization, it is doomed to failure. I believe that for many who have attempted to go global and failed this is the primary problem.

Whether a company insources or outsources, adds an office in Poughkeepsie or Dusseldorf or Beijing, where must it begin? How do we start? The article takes us to a high level business process architecture to have an overview of all processes to make and deliver the products of the company as the starting point.

I agree that all companies should have just such knowledge in a high level business process architecture, but I don’t think that is the starting place for a distributed business. For regular readers I apologize but here it comes again.

The place to start is the one place of value in your business, your customer’s order (please see post Rules Part 1 and others). If you process flow your customer’s order cycle (which goes across departments and maybe several geographies) you will be sure to be designing a distributed process that takes care of priority number one! THE CUSTOMER

Let me close by saying that whether you are going global or are staying on Main Street you should have a process map of your customer’s order cycle. Too many managers, owners and senior executives THINK they know what happens but they don’t KNOW THAT THEY KNOW.

Your subordinates don’t know either and they will tell you what they think should be happening, another dangerous scenario. (No one likes to tell the boss that things are not what they think they are, not trying to say bad things about anyone, but not many managers are in the details enough to know these days).

There are great tools out there to do business process modeling. I use a particular tool, first introduced to me as visio on steroids. If you don’t have a tool, get one.

If you don’t want to get one, hire a consultant with one and get your customer order flow modeled and once it is you will find opportunities to make it better, to make it cost less, and to make it easier for your customer to do business with you and you want that no matter where or how many you are.

(should you want to know what I use, please email me)



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