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Online Financial Courses - Process Improvement

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Course 5: Process Improvement

Chapter 1: Some Good Starting Points

Everything everyone does within an organization is part of a process. So invariably if you want to improve what the organization does, then you have to focus on improving the process. By putting your emphasis on the process, you avoid the typical trap that so many business leaders seem to fall prey to - looking to cut costs, they focus on trimming payrolls or pushing people to do more with less. This short-sided approach may get a brief bump in performance. However, in the long-run you end up increasing costs, reducing value to the customer, and making it harder for the company to compete.

Process improvement is a long-term approach to improving organizational performance with substantially less risks of destroying value when compared to short-term approaches. This short course will outline many of the concepts and tools people use to improve processes. The word "quality" will be used a lot since we will learn that variations are the opposite of quality and by reducing variation (improving quality), we can embark on the road to continuously improving a process.
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Two Important Pioneers

Process efficiency, especially in the name of quality, has been around for a long time. For example, back in 1950 W. Edwards Deming spoke before Japanese business leaders, outlining a roadmap for total quality management. Deming’s roadmap consisted of fourteen key points:

1. Create a constancy of purpose so that you are continuously improving your processes. This requires defining both short term and long term problems, allocating resources appropriately, and working to improve product and service design.
2. Adopt a new philosophy of quality management, constant learning, embracing change and focus on the customer.
3. Cease dependence on inspection as a means for ensuring quality. Instead, place much more reliance on statistical tools for assessing quality.
4. Don’t award simply on lowest price. Change your focus from lowest initial costs to lowest overall costs in the long run, incorporating quality, sole source, relationships, and other factors.
5. Search continuously to improve processes. Become innovative and look at the overall process flow or system in terms of design, inputs, materials, maintenance, supervision, automation, training, teams, waste, and other areas that generate innovation.
6. Invest in great training to keep your people productive and innovative. New skills bring about improvements. Therefore, you must fuel this process by empowering your people to do their best.
7. Institute leadership that goes beyond the numbers and instead, puts an emphasis on supporting and making sure people can execute. Leadership must be able to discern what’s important and what’s not to optimize how resources are applied.
8. Drive out fear and encourage people to participate and openly pursue needed improvements and change.
9. Break down the barriers with workers, suppliers, and everyone involved in the process. Promote communication across all players.
10. Eliminate slogans, exhortations, and targets that tend to be divisive and counterproductive to one group of players within the process.
11. Avoid numerical quotas since they impede quality, increase waste, and discourage productivity.
12. Allow pride of workmanship and do away with the traditional approaches of annual performance appraisals and management by objectives. Evaluate and reward performance in relation to quality.
13. Institute educational programs and self-improvement for life long learning and team building.
14. Make sure Senior Management is committed to improving quality and productivity. This may require changing the organizational structure and putting an Action Plan in place for the 13 other points.

Needless to say the Japanese took Deming very seriously, producing high quality products and capturing global markets for their products. So it is very clear that Deming was well ahead of his time and many of his principles are now widely practiced throughout the world.

A second pioneer behind the quality management movement is Joseph M. Juran. Juran, like Deming, advocated strong participation by everyone touched by the process. However, Juran took this concept one step further by including the customer. Juran argued that quality must be linked to the customer. Juran documented his principles in a landmark book, Quality Control Handbook, in which he put heavy emphasis on understanding and measuring the customer. Here is a list of Juran’s ten step process:

1. Identify your customers
2. Seek out and define their needs
3. Translate customer needs into your business language and requirements
4. Establish units of measure
5. Define appropriate performance measurements
6. Develop products and services
7. Optimize product and service design
8. Develop production processes
9. Optimize processes / fully capable
10. Transfer into operations

For those wanting to learn how to improve a process,W. Edwards Deming and Joseph M. Duran are two of the best sources.

"Production technique is pretty much a level playing field. Anyone can purchase identical equipment and facilities, hire and train qualified people, and purchase raw materials required to make a product. There are certain steps required to make a particular product and everyone does them the same way. The difference appears to be in the manufacturing technique - how we manage and balance people, materials, and machines." - Lean Manufacturing that Works by Bill Carreira
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Breaking it Down

A process is a series of activities, often repeated over and over with the basic flow of transforming inputs into outputs. The basic premise can be depicted as follows:

The activities that make up the process are not the same. Some activities add value to a process and other activities fail to add value. Therefore, one way to think "process improvement" is to think in terms of reducing non-value added activities.

The concept of value-added is not easy to pin down. We can borrow from lean thinking (which we will discuss later) to help define value added. Under lean, the activity needs to contribute in some way to adding value to the customer. So in order to understand if an activity is value-added, you must understand what adds to the customer experience. Maybe it’s something that gets the product to the customer sooner or perhaps it’s an after the sale phone call that makes the product or service more complete. We need to distinguish between value added vs. non value added in relation to the customer. This often boils down to getting the process to do only the right things in the right sequence at the right times and everything else is subject to the non-value added test.

The concept of Lean tends to "flag" non value added activities into seven categories:

1. Overproduction - The application of work that is not really needed.
2. Waiting - Time spent where resources are idle, not used for anything.
3. Transportation - Having to move resources from one location to another which introduces delay and inefficiency.
4. Nonessential activity - Performing an activity that makes no contribution to putting value into the hands of the customer.
5. Inventory - Holding resources until they can be used or sold.
6. Variation - Changes or deviations from the expected outcome of the process.
7. Defects - Errors or nonconformities produced during the process.

You can also flag a non value added activity by asking if the activity is a "Re" type activity; such as Rework, Reschedule, Resubmit, and so forth. Regardless of how you go about it, you need to squeeze non value activities out of a process. A few non value activities may be required, such as regulatory requirements within a process; but we want our processes to be lean and this will require very few, if any, non-value added activities.
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Compress the Handoffs

One of the more common practices for improving a process is to reduce the handoffs or transfers that take place. This is usually accomplished by first understanding and mapping out the process using a flowchart. Once the process is mapped out, the trick is to compress the handoffs out of the flowchart, streamlining and making the process more efficient.

For example, large bureaucratic organizations transfer information, products, and other outputs between functions, departments, divisions, and other hierarchies that inject handoffs along the way. With each handoff, there is delay involved, not to mention the introduction of errors. Consolidating these activities around the process flow can help reduce cycle times and lower the resources consumed (costs). The following example highlights the difference between organizing around functions vs. organizing around the processes:

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Fundamental Principles

Many organizations recognize certain practices as part of improving a process. Here are some examples:

- Technology - The use of technology is often an enabler for improving a process. This is particularly important when it comes to innovation or rapid transformation of a process, commonly referred to as Business Process Redesign (BPR). For example, the use of Radio Frequency Identification or RFID’s to track inventory items is transforming how company’s manage high value items moving through the supply chain. Technology can often help improve the efficiency or effectiveness of a process by introducing innovative approaches for doing things differently.

- Outsourcing - Non core processes where control by the organization is not critical are sometimes outsourced. Outsourcing relies on outside expertise to take control over some non-core function, especially functions that are redundant and generic in nature. Outsourcing can quickly eliminate unnecessary activities, lower overall costs, and introduce better ways of how things should get done. There are some downsides to outsourcing, such as loss of control, initial costs of changeover, and possible loss of jobs to those whose positions have been outsourced.

- Benchmarking and Best Practices - One of the fastest ways to gain insights into how to improve a process is to benchmark your performance in relation to best in class practices. You instantly see real world examples that highlight your strengths and weaknesses in relation to your peers. Many best practices cut across companies and industries, such as web enabled processes to service customers or procurement cards for consolidating payable processing. Additionally, best practices are often not overly complicated, such as forming teams for project based work or using an intranet web site for knowledge sharing.

- Supply Chains - For many organizations, the supply chain is at the core of major processes and since supply chains involve lots of movement and complexity, they invariably are ripe for process improvement. For example, most supply chains move things from one point to another and anytime you move something, it ends up sitting around waiting for the next activity to kick-in. Another problem is a fixation with lowest costs suppliers. There is much more to the value equation than simply price. Consequently, many supply chains are very poorly managed.

"Supply chains are as old as commerce, but the opportunities they now present are without precedent. Modern manufacturing has driven so much time and cost out of the production process that there is only one place left to turn for competitive advantage. As business engineering guru Michael Hammer recently put it in his new book, The Agenda, the supply chain is the last untapped vein of business gold."
- Supply Chains: A Manager’s Guide byDavid A. Taylor, Ph.D.
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Measurement and Control

One of the universal principles for a sustained approach to improving a process is to measure the process. And once you measure the process, you now have an opportunity to get control over the process. Measurement and control is particularly important where organizations want to continuously pursue process improvement in a very rigorous way. Process measurement typically takes three forms:

1. Quality - Measuring a process in relation to qualitative characteristics (reliability, appearance, color, weight, length, etc). Examples include: # of Breakdowns, # Service Requests by Product, # of Power Failures, % of Orders Rejected, # of Invoices Disputed, Write Offs as a % of Sales, etc.

2. Time - Measuring a process in relation to speed, response, turnaround, cycles, etc. Examples include Wait Time in Minutes, Round Trip Hours, Cycle Time, etc.

3. Productivity - Measuring a process in relation to actual outputs vs. what you desire in terms of outputs. Examples include % of orders shipped within 3 days, % of invoices entered within 24 hours, # of customers serviced, # of claims processed, % requests sent the same day, etc.

You can also think in terms of efficiency and effectiveness when it comes to understanding what should get measured. Listed below is a rating scale regarding process efficiency and effectiveness:

Once you know what to measure, the next step is control. Control often takes the form of a control chart. If you took statistics, you should remember something called the Normal Distribution curve:

Now flip the curve sideways and extend it out over measurable intervals. The upper and lower control limits define variation from the mean (average). This is the basic structure of a control chart for monitoring variation, sometimes described as Statistical Process Control (SPC).

We can take this one step further by experimenting with our inputs whereby we carefully alter or change the input variables to see how it changes the process and final outputs. This is one of the most common techniques for continuously improving a process - Design of Experiments (DOE).We will dig deeper into these statistical concepts (SPC and DOE) when we explore Six Sigma.
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Formal Programs

Some organizations use formal programs for making process improvement happen. Two notable examples are the Malcolm Baldrige National Quality Award and ISO (International Organization for Standardization) 9000 Registration. The Malcolm Baldrige Program was established to promote quality management and performance excellence for businesses in the United States. Malcolm Baldrige requires a business to focus on the following areas, totaling up to 1,000 points:

1 Leadership (125 points)
1.1 Organizational Leadership (85)
1.2 Public Responsibility & Citizenship (40)

2 Strategic Planning (85)
2.1 Strategy Development (40)
2.2 Strategy Deployment (45)

3 Customer and Market Focus (85)
3.1 Customer & Market Knowledge (40)
3.2 Customer Satisfaction & Relationships (45)

4 Information and Analysis (85)
4.1 Measurement of Organizational Performance (40)
4.2 Analysis of Organizational Performance (45)

5 Human Resource Focus (85)
5.1 Work Systems (35)
5.2 Employee Education, Training, and Development (25)
5.3 Employee well-being and Satisfaction (25)

6 Process Management (85)
6.1 Product and Service Processes (55)
6.2 Support Processes (15)
6.3 Supplier and Partnering Processes (15)

7 Results (450)
7.1 Customer Focused Results (115)
7.2 Financial and Market Results (115)
7.3 Human Resource Results (80)
7.4 Supplier and Partner Results (25)
7.5 Organizational Effectiveness Results (115)

the International Organization for Standardization (ISO) in Geneva, Switzerland. These standards cover eight management principles:

1. Customer Focus - Organizations depend on their customers and therefore should understand current and future customer needs, striving to exceed customer expectations.

2. Leadership - Leaders establish unity of purpose and direction of the organization. They should create and maintain the internal environment in which people can become fully involved in achieving the organization's objectives.

3. Involvement of People - People at all levels are the essence of an organization and their full involvement enables their abilities to be used for the organization's benefit.

4. Process Approach - A desired result is achieved more efficiently when activities and related resources are managed as a process.

5. System Approach in Management - Identifying, understanding and managing interrelated processes as a system contributes to the organization's effectiveness and efficiency in achieving its objectives.

6. Continual Improvement - Continual improvement of the organization's overall performance should be a permanent objective of the organization.

7. Factual Approach to Decision Making - Effective decisions are based on the analysis of data and information.

8. Mutually Beneficial Supplier Relationships - An organization and its suppliers are interdependent and a mutually beneficial relationship enhances the ability of both to create value.

Most ISO standards are very specific to products and services, such as Shipbuilding, Packaging, Mining, and Metallurgy. ISO also has a generic set of standards, grouped by certain categories: ISO 9000:2000 (vocabulary and definitions), ISO 9001:2000 (registration requirements), ISO 9004:2000 (guidelines for improving the quality management system) and ISO 14000 (environmental management system). ISO Registration is often considered a pre-requisite for getting certain international business. Registration requires documentation of processes followed by a formal review conducted by auditors.

Although Baldrige and ISO 9000 are solid frameworks for rapidly putting a quality program together, they sometimes can be more show than substance. For example, some companies spend most of their efforts filling up notebooks with paper, documenting everything and using the right buzz words to satisfy auditors. In reality, it can be more important to apply the concepts associated with these programs as opposed to jumping through the hoops to win the award. Also, many organizations seem to get more bang for their buck by pursuing process improvement methodologies such as Six Sigma. Therefore, you should not view programs such as Malcolm Baldrige or ISO 9000 as panaceas for process improvement, but instead look to them for concepts and principles that fit and work within your organization.
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Chapter 1: Some Good Starting Points
Chapter 2: Fundamental Tools of the Trade
Chapter 3: Capability Maturity Model (CMM)
Chapter 4: Six Sigma
Chapter 5: Lean Thinking
Chapter 1 points
Two Important Pioneers
Breaking it Down
Compress the Handoffs
Fundamental Principles
Measurement and Control
Formal Programs

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