1. PROCESS MANAGEMENT, COST OF POOR QUALITY AND PRODUCTIVITY Prof. Teemu Malmi 2015

2. VALUE CHAIN Aalto School of Business 2015 / T. Malmi

3. VALUE CHAINS First introduced by Porter 1985; initially a business unit level concept Later applied to supply chains; Value Systems Value is created in each step and/or by managing the interfaces of activities Classic Strategy Consultant analysis: Where the money comes from, where it goes and where do we tie it up in the value chain => Process Management Aalto School of Business 2015 / T. Malmi

5. PROCESS MANAGEMENT Process management has been said to be the most important managerial innovation during the past 25 years Many process management schools, e.g TQM, ABM, TBM and BPR No single definition of a process “a set of activities, that starts from an input and produces an output that has value to the customer” Customer driven, horizontal view across functional boundaries, repeatable and time essential concepts

6. Aalto School of Business 2015 / T. Malmi MANAGE PROCESS PERFORMANCE 1) Process development (decision-making) 2) Organize management according to business processes and/or develop proper process measures and incentives (control)

7. Aalto School of Business 2015 / T. Malmi Start from scratch = Re-engineering Developing existing processes -Analysis of activities and business processes -Eliminating non-value adding activities When processes and activities are basically OK, measurement - cost, time, quality - to ensure continuous improvement IMPROVING THE PERFORMANCE OF PROCESSES Decision Making Control

8. Aalto School of Business 2015 / T. Malmi PROCESS DEVELOPMENT

9. Aalto School of Business 2015 / T. Malmi DEVELOPING EXISTING PROCESSES Identify the process objectives and set ambitious targets Chart activities Classify to value adding and non-value adding Try to eliminate non-value adding activities (-> reduce costs) Try to improve the efficiency of remaining activities, focus on drivers of work-load (reduced work-load leads to spare capacity or reduced costs) Measure performance and identify accountabilities

10. Aalto School of Business 2015 / T. Malmi EXAMPLE: SALE, TRANSFER AND ASSEMBLY OF A LAND LINE TELEPHONE / INTERNET CONNECTION CUSTOMERCUSTOMER Sale or transfer of a connection Provision of connecting information Assembly and connection of telephone Approval of job orders for invoicing

11. Customer Sales servant Foreman Fitters Directory clerk Record clerk Information system Makes an order Prepares a contract, checks time tables, enters basic information to information system and supplies directory information Sets time tables Updates information Directory information Administration of orders and jobs (AOJ) Checks connections from the register and records an order Assigns jobs Perform jobs and return the lists Enters information to net register, records jobs and hours Updates register AOJ Aalto School of Business 2015 / T. Malmi

12. CUSTOMER SERVICE FITTER INFORMATION SYSTEM Makes an order Prepares a contract, enters directory information, sets time tables for assembly AOJ Directory information Performs a job Net register Records jobs, hours and materials AOJ Net register Aalto School of Business 2015 / T. Malmi

13. A "TRADITIONAL" ALLOCATION OF RESPONSIBILITIES IS BASED ON FUNCTIONS The emphasis is on (a) the frontiers of each «box», (b) the name in the box and (c) the (generally vertical) relationships connecting boxes.

14. WHAT DOES THE CUSTOMER WANT? The problem comes from the "white spaces" (i.e. interfaces) on the organizational chart Research shows that the “white spaces” generate between 10 and 20% of any business’ costs! Aalto School of Business 2015 / T. Malmi

15. CREATING PERFORMANCE REQUIRES EXPLICIT MANAGEMENT OF INTERFACES Think of providing “service” to customers as a relay race. Each person focuses, not only on their leg of the race, but on efficiently and effectively handing over the baton (i.e. crossing the "white space") to the next player Can this management of interfaces be supported by performance measurement? If so, how?

16. SUMMARY Accounting and performance measurement can help both when analysing processes and deciding on improvements, as well as managing processes on on- going bases Remember the Nokia 1990’s logistics case Measurement is only one essential ingredient in successful process management – how money and associated decision rights are distributed are the key aspects to get right Aalto School of Business 2015 / T. Malmi

17. QUALITY MANAGEMENT AND COST OF POOR QUALITY –Managers find it difficult to justify investments in improving quality (Ittner & Larcker, 1996) –Ittner (1999) considers the reason being lack of adequate methods for determining financial consequences of poor quality –What is the traditional framework to asses the cost of poor quality? How would you try to assess in a firm how much poor quality costs for an organization? –Why would this traditional method be difficult to use in project business? Aalto School of Business 2015 / T. Malmi

18. NOKIA NETWORKS CASE –Initially the aim was to develop cost of poor quality measure to be used in Networks level BSC –We studied four mobile phone network projects (from 150 MEUR upwards) –In project business two types of poor quality elements Some fairly constant and independent of project constraints (e.g. changes in time schedules), others heavily dependent on project constraints (e.g. design, subcontractors) – A single measure of cost of poor quality is bound to be worthless in such an environment –Focus was shifted to develop tools to manage project level cost of poor quality Aalto School of Business 2015 / T. Malmi

19. A set of poor quality elements and their magnitudes in two projects Aalto School of Business 2015 / T. Malmi

21. PRODUCTIVITY Paul Krugman: ”Productivity isn’t everything, but in the long run it is almost everything” The age of diminished expectations, 1990 © Aalto University Executive Education 2015

22. SOME CONCEPTS RELATED TO PRODUCTIVITY Cost Cost efficiency Productivity Effectiveness Effect Output Input © Aalto University Executive Education 2015

23. ”Figures on productivity in the U.S. do not help to improve productivity in the U.S. Measures on productivity are like statistics on accidents: they tell you all about the number of accidents in the home, on the road, and at the work place, but they do not tell you how to reduce the frequency of accidents” W. Edwards Deming Remember that measuring and managing productivity are different things! © Aalto University Executive Education 2015

24. FEW QUESTIONS Do you agree with Deming? In which kind of circumstances productivity measurement is easy? When it is likely to be difficult? If the measurement is difficult, should we still try to measure productivity? Aalto School of Business 2015 / T. Malmi