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Business analysis metrics for business process redesign

George Valiris
Department of Business Administration, University of Aegean, Chios, Greece, and

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Michalis Glykas
Information Engineering Division, Engineering Department, Cambridge University, Cambridge, UK
Keywords Business process re-engineering, Business analysis, Modelling, Optimization techniques Abstract In the existing BPR methodologies there exists a big division in business analysis techniques due to the black and white approach used in most cases. In some of them, cost is the central issue, in others generic management or the successful use of IT. As a result business analysis techniques are directed towards this central issue ignoring any other means of analysis. Agent relationship morphism analysis (ARMA) is a BRP methodology that applies different analysis techniques from various disciplines in different perspectives. These techniques are inuenced from organizational theories, IS development and existing work in BPR giving business analysis a more holistic approach. The main focus of business analysis in ARMA is the analysis of the business models with a view of developing solutions for the subsequent stage of redesign. The emphasis is on why the operations and processes of the organization are performed the way they are performed. The aim is to develop solutions that enhance the levels of efciency and effectiveness in these operations and processes. The dimensions of improvement include service, quality, timeliness or cost.

1. Introduction Process thinking has expanded in recent years mainly due to the need for improved quality of operations. Once an organization perceives its business in terms of business processes there is usually considerable scope in which these processes may be redesigned to yield drastic improvements. If one would try to nd a redesign process that satises most of the existing BPR methodologies the result would be as follows: (1) Establishment of the business vision and objectives. (2) Identication and focus on the core business processes that support them. (3) Modelling and analysis of the business environment. (4) Streamlining. (5) Continuous control and improvement of previous steps. A plethora of BPR methodologies have been identied in the literature. These can be classied into three main categories depending on the perspective they take in BPR: management accounting, information system (IS) development and organizational theoretic categories. Management accounting BPR methodologies, which has been considered by the management accounting community (Adnum, 1993; Butler-Cox, 1991; Davenport, 1993; Eccles, 1993; Hammer, 1993; Lewis, 1993; Morris and Brandon, 1993; Petrozzo and Stepper, 1994; Smith, 1993) views the organization from a process perspective. In the

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management accounting perspective, the analysts attempt to reorganize business processes and uses IT as an enabler in their effort. Accounting methodologies focus on steps 1, 2, 4 and 5 of the above-mentioned redesign process and are primarily case study driven. In step 3, they concentrate more on business analysis rather than business modelling which is performed using very simplistic modelling techniques such as process diagrams and owcharts. In the IS development perspective, IS developers need to understand and possibly reorganize business processes so that the introduction of IT has the highest possible impact on them. Researchers in the eld of IS development have started realising the need for understanding the wider organizational environment within which the IS is going to operate (Curtis, 1989). Recently, a number of IS development methodologies have started incorporating enterprise modelling or business analysis as an initial stage in IS development (Avison and Fitzgerald, 1988). Enterprise modelling constitutes steps 1-3 of the general redesign process. IS methodologies usually add one more perspective to the process perspective of the accounting BPR methodologies. This is the structural (or data) perspective where static business elements are identied. IS methodologies which use modelling techniques that support both process and data perspectives are called structured methodologies (Avison, 1985; Avison and Fitzgerald, 1988; Gane and Sarson, 1977; Jones, 1980; Verjin-Stuart, 1987). A characteristic example of structured methodologies is SADT (Marco, 1988) used by the IDEF0 method that has, in many instances, been used for business process modelling and analysis. A third perspective called the behavioural perspective has also been identied by the IS community. In the behavioural perspective, the life-histories of entities in the data perspective are dened (Brodie, 1982). In comparison with the accounting methodologies, IS methodologies provide richer organizational models by incorporating the two additional perspectives. However, IS methodologies which try to model all three of these, currently face the problem of their integration. The most signicant problem comes from the fact that different modelling techniques that were built in different points in time and for different purposes are amalgamated. The organizational theoretic perspective concentrates more on the understanding and analysis of the organization based on principles like accountabilities and the roles of individuals that take part in business processes. The organizational theory based methodologies add more elements to business modelling and analysis by addressing the need to focus on people (agents), their accountabilities, roles, interactions, activities and use of available resources. They emerged in order to resolve the confusion created from IS methodologies and as a result focus on steps 1-3 of the redesign process. In IS methodologies, techniques like entity relationship (Chen, 1976), dataow diagrams, Jacksons (1983) data streams, etc., were promoted to business analysis techniques. These actually represent a model of some business situation, but lack sufcient level of abstraction to represent the business independent of IS design and implementation issues. Employees and their roles, for example, appear as data entities in entity relationship diagrams. Peoples actions and interactions appear as processes and data ows, respectively, in data ow diagrams (Zachman, 1987). The three categories of BPR methodologies presented above have been working in relative isolation for some years. A BPR methodology called agent relationship morphism analysis (ARMA) has been developed (Glykas et al., 1993a, 1994a), aiming to combine accounting BPR principles (efciency, effectiveness, cost, etc.) with

organizational theoretic concepts (roles, accountabilities, etc.) and some powerful modelling techniques from IS development (Figure 1). The methodology is composed of the following stages: (1) Establishing the vision and objectives, the scope and mode of BPR. (2) Business modelling. (3) Business analysis. (4) Redesign. (5) Continuous improvement. In the remainder of this paper we present ARMAs framework for business analysis as well as the essential concepts for modelling organizational structure and dynamics. 2. Business modelling in ARMA Business modelling in ARMA (Glykas et al., 1993a, 1994b) is achieved with the use of the three perspectives identied: structural, behavioural and process. The use of these three perspectives provides insight into the relationship between organizational structure and processes. Structural aspects are described in the structural perspective whereas organizational dynamics are described in the behaviour and process perspectives. In addition, systems thinking, object oriented and organizational theory concepts are applied to the three perspectives. The connection between structure and processes in business modelling in ARMA is shown in Figure 2. A technique called agent relationship modelling (ARM) has been developed for modelling the structural perspective. The behavioural and process perspectives are modelled in a technique called agent/object lifecycles (ALCs/OLCs). The notion of ALCs/OLCs allows the modelling of the organization from both individualistic and holistic viewpoint. Most BPR methodologies lack the formal underpining to ensure the logical consistency of their business models. The conceptual models developed in ARM and

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Figure 1. The inuence of existing methodologies in ARMA

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Figure 2. The three perspectives in ARMA

ALCs/OLCs are given a formal underpining in order to ensure their logical consistency (Glykas et al., 1993b,c; Holden et al., 1994). 2.1 The ARM technique: modelling the structural perspective The basic constructs of ARM are agents and objects. Agents represent the participants in contractual relationships and always include people. Objects on the other hand represent either transactions between agents or the resources that the agents utilise to discharge their responsibilities. A relationship is a general n-ary association between agents and objects. Relationships, objects and agents can be generalised to form classes that must have unique names. One or both participating agent/object classes in a binary relationship must have a responsibility. Cardinality constraints (min, max) have to be specied for both ends of a relationship. In ARM, the agency concept is used in varying organizational levels. In its general form, it is a collection of humans that constitute one of the parties in a contract. The essence of a contractual relationship is that one or more people employ one or more other persons as agents. According to agency theory (Bromwich, 1992; Kaplan and Atkinson, 1991), those who employ others are called principals and those who work for others are called agents. Following Johansson (1989) the whole organization, for example, can be represented as one agent (macroagent). In ARMA, agencies can be decomposed into further agents and resources. However, in their atomic form (not further decomposable) an agent represents a person. Relationships between agencies are called contractual relationships. ARM objects are either parts of organizational agencies or the subject of transactions between agencies during the existence of the contract. They are subdivided into two types:

physical and logical. Physical objects are tangible entities like computer terminals, printers, etc., whereas logical objects include concepts like information, time, etc. Objects are related to agents through functional and ownership relationships. In functional relationships, the agent creates, destroys, reads or modies the state of an object while performing an activity. An ownership relationship occurs when a resource is utilised to carry out some of the agents activities. In ARMA, we believe that the existence of every object should be linked to a specic contractual relationship so that its existence is justied. The functional, ownership and contractual relationships are related to intentionality. Following Johanssons (1989) ideas, intentionality is a special form of connection between subjects (agents) and objects or between subjects and subjects. Functional and ownership relationships fall in the former category whereas the contractual relationships between agents fall in the latter. In ARM, objects and agents are represented by boxes and relationships between them by rhomboids. Binary relationships do not need to be given a name. Complex agents (macroagents) are the result of the aggregation of some other agents (which again may be complex) called participant agents. Similarly, complex objects result from the aggregation of other objects called component objects. Double lined boxes represent complex objects and agents. Double lined rhomboids represent complex relationships. For example, Figure 3 shows the top level ARM diagram for a manufacturing company (cigarettes) as a complex agency with its six participants that are in turn complex. The new product development, the control and support, the production, the preparation for production, the sales acquisition and customer support. This is denoted by the has_part, is_part_of responsibilities undertaken by the manufacturing company and the participant agents, respectively. The agencies with which the manufacturing company interacts are of three kinds, namely the suppliers, customers and authorities. Its participants are engaged with these external agencies in a number of different contractual relationships presented as complex relationships. The contractual relationship Consumable Goods Supply, for example, has two agencies as participants, the Consumable Good Supplier and the Preparation for Production. The transaction that is exchanged in the contractual relationship is the Consumable Good. The responsibilities of the consumable good supplier in this contract are to supply consumable good to the preparation of production agency and to nd the consumable good. The preparation for production agency, on the other hand, is responsible to pay consumable good to the supplier and to transfer/store the consumable good. The cardinality constraint 1.N in these responsibilities denotes the fact that any number of such payments and transfers can happen. Following Checklands (1981) denition of emergence some relationships between a complex agent/object and other agents/objects can only be meaningful if the complex agent/object is considered as a whole. The responsibility of the complex agent/object is then known as an emergent responsibility (abbreviated as E). In Figure 3, for example, the responsibility calls for inspection in case of legal problems is meaningful only when the manufacturing company is considered as a whole. A complex agent/object might participate in some relationships only because one of its participants/components participates in it. These responsibilities are called delegated (abbreviated as D). An emergent responsibility obviously cannot be delegated. The responsibilities of participants of the manufacturing company in

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Figure 3. The ARM model of the manufacturing company

Figure 3 are all delegated to their own participants. For example, the responsibility pays consumable good of the preparation for production agent is delegated to the production material purchasing department agent that is one of its participants. 2.2 The ALC/OLC technique: modelling the behavioural and process perspectives 2.2.1 Modelling behaviour in ARMA. A technique called ALCs/OLCs has been developed for modelling the behaviour of organizational agents and objects. An OLC can be constructed for every object class dened in ARM. In Figure 4, the OLC for the cigarette box is shown. Every object in the object class must be in a certain state represented by circles. There are two special states in every OLC, the never-exist and cease-to-exist. Every complete OLC should start from the former and end in the latter. Every object can be transformed from one state to another by an operation (represented by round cornered rectangles). An operation can have more than one input and output

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Figure 4. The object lifecycle for Cigarette Box

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states. If they are the same, a double arrowed link is used (the operation Special-order-preparation in Figure 4). Some operations can operate on any state without modifying it, these operations are modelled with a double lined double arrowed line (the operation inspect in Figure 4). The operation New is an operation that is performed by the object class for the creation of the object instance represented by the OLC. ALCs are represented in the same way as OLCs, but the concept of a state is substituted by the concept of an agents role. The ALC operations are the actions through which the agent discharges its obligations to other agents (through access to relevant resources) by maintaining or changing the state of affairs. Figures 5 and 6 show we the life cycle for the driver and the deliverer of the manufacturing company products. 2.2.2 Modelling processes in ARMA. The process perspective in ARMA is concerned with the identication and modelling of processes of importance in the organization

Figure 5. The agent lifecycle for the Driver of the manufacturing company

Figure 6. The agent lifecycle for the Deliverer of the manufacturing companys products

(business processes). The process perspective is based on functional composition of activities from the life cycles of the agencies and objects. Functional composition in ARMA is achieved with the use of operation schemata. We use the convention Agency/Object Name. Operation Name to describe an operation in the operation schemata. We assume that there must be an aggregation relationship between component classes and an aggregate class before operations of the aggregate class can be composed by operations of the component classes. For example, the operation delivery-to-customers in Figure 7 of the product delivery agent in Figure 3 is composed of activities from the cigarette box, the driver and driver-assistant life cycles in Figures 4-6, respectively. The ordering of operations in the operation schema may or may not be specied. In the former case, the ordering of operations of component classes that are composed to produce operations of their composite class is shown in a top down ascending order. For example, in the operation schema describing the operation delivery-to-customers rst the product will be depalletised, then in some cases a special order might be prepared, etc. In cases of multiple operations occurring at the same stage, simple and/or constructs form logic theory. 3. Business analysis in ARMA As explained in the previous sections, ARM technique is inuenced from agency theory and transaction cost economics and deals with what happens in the organization. The ALCs/OLCs are dealing with how the agencies and objects identied in ARM full their responsibilities and purposes and how their activities are coordinated to produce business processes. Business analysis is concerned with the analysis of the business models developed in ARM and ALCs/OLCs with the aim of developing solutions for redesign. The emphasis is on why the contractual relationships, transactions, operations and processes at both individualistic and holistic view of the organization are performed the way they are performed. In ARMA we have identied a number of business analysis techniques that proved to be very useful for analysing business models. These techniques have been mainly used in the manufacturing industry case study in the incremental BPR mode (Appendix 1). Some of these modelling tools were selected from the existing literature (Davenport, 1993; Douma and Schreuder, 1992; Fama and Jensen, 1983a,b; Harrington,

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Figure 7. The operation schema for Product Delivery. Delivery-to-Customers

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1991; Ip and Holden, 1992; Williamson, 1975, 1986), and others were developed to satisfy specic management needs. Different analysis techniques are applied to the structural and behavioural/process perspectives. These techniques are the subject matter of the following sections. 3.1 Analysis of the structural perspective 3.1.1 Analysis of the abstraction levels of the business models. The rst kind of analysis focuses on the abstraction levels of the resulting ARM models in the structural perspective. It was also found to be useful in analysing the abstraction levels that were created from functional decomposition in the behavioural and process perspectives. According to Ip and Holden (1992)), in order to assess the usefulness and effectiveness of abstraction levels that organize IS conceptual models some tests are derived: . Test of clarity. An abstraction should bear a clear and well dened relationship to its renement. If abstractions of a very diversied nature are grouped into one single entity the use of this entity becomes very ambiguous and even meaningless. . Test of generality. An abstraction should be general enough to allow extensive use in different parts of a model and in different kinds of models. Fewer entitled will then be required and less confusion caused. . Test of transparency. Both modellers and end-users should be able to understand any part of the model without being aware of the level of abstraction of the particular constructs being used. Hierarchies of abstraction levels can then be readily built and understood. There are potential conicts among the tests mentioned above. Therefore, the design of a good abstraction level always involves a trade-off between these criteria. Each one of the above tests was to be relevant to business modelling as well. The test of clarity is a very useful test for the logical grouping of agencies in the structural perspective. If there is no clear relationship between the participant agencies and the aggregate agency then the aggregate agency will fail the test of clarity. The test of generality was particularly useful in the use of perspectives in cases of overlapping responsibilities. The test of transparency is particularly useful in the subsequent stage of redesign. In redesign, the resulting models are shown to the company employees. If the business models fail the set of transparency, the models will not be easily understood and extra effort will be required. 3.1.2 Analysis of the dimensions of transactions. The ARM models contain the transactions that are exchanged between agencies that participate in contractual relationships. Transaction costs for a particular transaction, according to transaction cost economics, depend on the critical dimensions of that transaction (Williamson, 1975, 1979). There are three critical dimensions of transactions: (1) Asset specicity. (2) Uncertainty/complexity. (3) Frequency. The asset specicity of a transaction refers to the degree to which the transaction needs to be supported by transaction specic assets. An asset is transaction specic if it cannot be redeployed to an alternative use without a signicant reduction in the value

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of the asset (human or physical). For transactions with high asset specicity, the costs of market transactions are high. Bounded rationality poses problems only when environments are characterised by uncertainty and/or complexity. If the uncertainty of a given contract is high then it makes it costly to maintain transactions whose costs might exceed their returns. When asset specicity is high we expect transactions to be carried out within the organization rather than across markets. However, to set-up a governance structure involves certain xed costs. The costs of a specialised governance structure are more easily recovered for high frequency transactions. This kind of analysis was performed in the manufacturing industry case study. Many governance structures in various parts of the company were developed after 1991. In particular, the purchasing maintenance and production departments appeared to have built governance structures with high asset specicity and low frequency of transactions. Moreover, before 1991 the company was in a position to handle the same amount of production levels with a much leaner organization. For this reason, the opportunity presented in Section 3 of Appendix 2 was proposed. In one instance, however, the high degree of asset specicity was justied due to the high uncertainty of the alternative options. The printing department of the manufacturing company was considerably overstuffed and its activities were too expensive compared to the companys competitors. Asset specicity was high since employees in the printing department could not be redeployed to an alternative use. However, the option of subcontracting of the printing services to outside vendors presented a high degree of uncertainty since subcontractors in many cases could not respond to orders that have to be produced in a very short period of time. In order to minimise the degree of asset specicity, in this instance, we proposed the development of external printing business presented in Section 7 of Appendix 2. 3.1.3 Principal-agent analysis. One of the central themes in agency theory is the separation of security ownership and control (Douma and Schreuder, 1992). According to Fama and Jensen (1983a,b) the decision process has the following four steps: (1) Initiation generation of proposals for resource utilisation and structuring of contracts. (2) Ratication choice of the decision initiatives to be implemented. (3) Implementation execution of ratied decisions. (4) Monitoring measurement of performance of decision agents and implementation of rewards. Functions 1 and 3 should be usually allocated to the same agents. These functions are combined under the term decision management. Likewise, decision control includes functions 2 and 4. In ARMA, we use this approach to analyse principal-agent and agent-agent relationships. In the case of principal-agent relationships, decision management should be assigned to the agent and decision control to the principal. In the case of agent-agent relationships, decision management and control can be assigned to any one of the two agents. In the manufacturing industry case study, in most cases, both decision management and decision control were performed by top management in most cases. The result was the lack of planning and setting goals and objectives at all levels of the organization. In most cases, principals had no decision control power over agents. This was

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experienced during the interviews with managers and during the analysis of the business models. This led us to propose the opportunity for improvement presented in Section 6 of Appendix 2. Dimensions of transactions analysis and principal agent analysis have been applied for the rst time in BPR. These two kinds of analysis were found to be very useful in practice in creating a market metaphor for organizational behaviour in the manufacturing industry case study. 3.1.4 Management structure analysis. Management structure analysis focuses on evaluating structural efciency and leveraging of management resources. This is a simple technique that was used in order to analyse the organizational structure of the organization. This kind of technique is used in organizations for many years (Butler-Cox, 1991). There are some key calculations that play a signicant part in this kind of analysis: . Span of control. This is how a manager supervises many employees excluding secretaries (or administrative support personnel). . Cost to manage. This represents the managers salary cost spread across all subordinate salary costs. . Layers of management. This represents the number of management layers in the organization. This analysis counts the depth of managers who report to other managers. There is an inverse relationship between span of control and cost to manage. The wider the span of control the lower the cost to manage and vice versa. In Figure A3 of Appendix 1, we show the number of managers according to the number of workers they supervise. This was performed in ve departments. Benchmarking data revealed that a number between three and eight employees per manager is most appropriate. A small number makes management expensive and can only be justied for control purposes. A high number, on the other hand, makes communication, coordination and control inefcient in most cases. However, this applies more to business processes rather than production processes where standardisation of work allows higher numbers of employees per manager. The layers of management technique is used as a guide during redesign. The higher the number of layers of middle management in the company, the higher the expected resistance during redesign, since these managers are likely to be assigned more operational roles. Many layers of management are justied for control purposes. However, they are unjustied in cases where their purpose is to facilitate information exchange, as this can be substituted by technology. Although these techniques have existed in management science for some time, their application was aimed only at evaluating the cost of management structures in organizations (Woolfe, 1991). In ARMA, this technique is applied from a different perspective as it is used as a means of identifying the scope of organizational change and the level of implementation difculty during redesign. In the manufacturing industry case study, for example, these techniques provided the necessary data to reason about the implementation timing and implementation difculty of the proposed opportunities for improvement presented in Appendix 2. These techniques also provide insight into the level of communication, coordination and control existent in the company before redesign. For example, in Figure A3 a

manager was responsible for 37 employees. The coordination of activities in this case was found to be nearly non-existent and dependent on the relationship between the employees. The control was also very loose and resulted in many incidents of irregularities and idle time. This was of the cases that led us to propose the opportunity presented in Section 3 of Appendix 2. The data for this technique were gathered from the cardinality constraints of the ARM authority relationship. The need for this technique also emerges from the absence of formal organizational structure in the ARM models since authority relationships are blended with other kinds of relationships. 3.2 Analysis of the behavioural/process perspectives 3.2.1 Mission/non-mission (primary/secondary) analysis. According to Davenport (1993), creating a strong and sustained linkage between strategy and the way work is done is an enduring challenge in complex organizations. Business processes in BPR dene how work is done and must be redesigned in a way that is consistent with organizational strategy. In ARMA, we use a technique called mission/non-mission analysis to analyse the extent to which agents activities and organizational processes are secondary to the attainment of the organizations objectives or mission. The major benet of this analysis is the ability to isolate and quantify non-missionary effort in selected work groups as well as the probable causes of it (Harrington, 1991). However, for this analysis to work, the denition of mission/primary activity must be clear and consistent. An activity can be classied as non-mission according to the following criteria: . the activity is organizationally misplaced; . the activity is being duplicated because of a do it by ourselves is better attitude; and . the wrong skill level is being applied to the activity. In Figure A5 of Appendix 1, we show the percentages of mission and non-mission activities in the ve departments analysed. In this analysis, we found that high percentages of non-missionary effort appeared in the domestic sales, export sales and purchasing departments. These percentages led us to propose the opportunity described in Section 1 of Appendix 2. There was an activity and responsibility overlap between marketing activities performed by the marketing, domestic sales and export sales departments. These activities should, in future, be performed, coordinated and controlled by the marketing department since these are missionary for it and non-missionary for the other two departments. This technique is also suitable for process analysis. In this case, the alignment between the companys process and strategy is examined. One of the objectives of the manufacturing company, for example, was to have the best inventory management process in the domestic market. (Inventory management is one of the contractual relationships shown in Figure 3.) However, during business modelling it was found that little effort was devoted for warehouse and distribution management. As a result, the process was far from fullling this objective since warehouse and distribution management was dispersed in several departments without any overall coordination and control. The result was that the inventory levels in most warehouses were much higher than multinational competitors. For this reason we proposed the opportunities for improvement presented in Sections 5 and 8 of Appendix 2.

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3.2.2 Activity value added analysis. In this analysis, the focus is on the determination of each activitys (or set of activities) value to the customers and to the organization as a whole (Davenport, 1993; Harrington, 1991; Morris and Brandon, 1993). Evaluations can be used to: . identify activities providing insufcient value (obsolete activities, activities whose costs exceed the customers willingness to pay); . determine the ratio of value added versus non-value added activities; and . evaluate outsourcing of non-value added activities in cases where internally executed activities can be compared with those purchased externally. According to Harrington (1991), in a broad sense, activities can be classied into three primary types: (1) High value added activities. These activities are critical to the achievement of existing organizational strategies and have high impact on product quality and customer satisfaction. (2) Business value added activities. These activities are critical to the attainment of general business operations and usually support high value added activities. (3) Low value added activities. Activities which provide how or negligible the overall value from product, customer and organizational strategy perspective. The main objective of the value added analysis is the reallocation of resources within the organization. In the case of high value added activities, the aim is to maintain and even enhance their effectiveness. This might require the addition of extra resources. However, high value added did not necessarily imply that the activity is being performed efciently. In the case of business value added activities, the primary focus is primarly on effectiveness and secondly on efciency. The resources allocated on these activities should be minimised but not eliminated. In the case of low value added activities the focus is only on efciency. The aim is the elimination of as many low value added activities in the short run as possible. If this is not possible, the effort concentrates on the progressive minimisation of resources that are utilised by the low value added activities. In Figure A6 of Appendix 1, we show the percentages of the high, business and low value added activities of the ve departments analysed. The domestic sales and purchasing departments presented a high percentage of low value added activities. This was an extra evidence that led us to propose the opportunities presented in Sections 5 (the domestic sales department handles outbound logistics where most low value added activities were identied) and 3 (the purchasing department was overstuffed with many bureaucratic activities) of Appendix 2. In contrast to mission/non-analysis that analyses the organization by assessing the alignment of structures or processes to the companys objectives, value added analysis, focuses more on the determination of each activitys (or set of activities) value to the customers. The combination of these two analytical tools revealed many opportunities for improvement in reorganizing departments and processes in practice. For example, in the manufacturing industry case study we proposed that redesign should be performed in the domestic sales, export sales and purchasing departments as well as the sales acquisition, customer service and preparation for production processes they participate since they represent high levels of non-missionary and low value added work.

3.2.3 Fragmentation/concentration analysis. Fragmentation is the degree to which effort applied towards an activity is dispersed within a unit, a department, of the entire organization. It is expressed in terms of the number of employees it takes to generate one full-time equivalent (FTE) and is expressed in the following ratio: number of actual employees involved in an activity number of FTEs The higher this ratio the higher the degree of fragmentation. Concentration is the inverse of fragmentation. It is the average amount of time employees spend on a particular activity and is expressed in the following ratio: number of FTEs actual number of employees involved The lower this index, the lower the concentration or the higher the degree of fragmentation. This analysis is used to identify opportunities for improvement in efciency and effectiveness (Butler-Cox, 1991; COBRA, 1994; Davenport and Short, 1990; Hammer, 1990). Its main aim is to provide insight into reorganizing the work effort both horizontally (across departments) and vertically (up and down organizational levels) by identifying: . lack of acceptability for work and a resultant quality of service that is lower than desired; . large numbers of groups involved in performing an activity or sets of activities that result in the creation of duplication, redundancy and inefciencies; . excessive effort spent on coordination and control of similar activities; and . decentralised staff functions (e.g. each division has a marketing group) resulting in duplication of some activities. In Table AIII of Appendix 1, we present the employee concentration for the sales acquisition process of the manufacturing industry. The employee concentration in order acquisition, order processing, credit control and invoicing appeared to be very low. This provided extra evidence for proposing the redesign of the sales acquisition process and the domestic and export sales departments as presented in the opportunity discussed in Section 1 of Appendix 2. In ARMA, in contrast to other methodologies, concentration analysis is a business analysis technique that is considered of central importance. The main reason is its link to business strategy. The more critical a process with respect to the companys objectives, the higher the expected concentration of the employees in the process and vice versa. This analysis is also integrated with value added and mission/non-mission analysis since the concentration of missionary and high value added activities should be expected to be high. 3.2.4 Equivalent salary analysis. The purpose of equivalent salary analysis (COBRA, 1994; Harrington, 1991; Woolfe, 1991) is to determine if work can be performed at a lower cost to the organization, either through internal reallocation to less expensive employees or through outsourcing. It is expressed in the following ratio:

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(total activity cost divided by the total FTEs allocated to the activity). This kind of analysis is appropriate for: . identifying trivial activities that are performed by highly qualied employees and vice versa; and . evaluating whether compensation for activities, products or services is competitive with the marketplace, as in weighing a decision to outsource a particular product or service. In Table AIV of Appendix 1, we present the equivalent salaries of the activities of the employees in the IT department. During our interviews, many users of the IT services expressed complaints about the IT support they received from the IT department. As seen in Table AIV of Appendix I, this was mainly due to the fact that the IT department used to devote a small number of its junior staff in activities like user support and failure recoveries. The problem, however, was more complicated since this department was signicantly understaffed. For this reason, we proposed the opportunity presented in Section 2 of Appendix 2. Also by comparing the cost of activities in the printing process of the manufacturing company with benchmarking data we discovered that the cost of these activities was considerably higher than that of the companys competitors. This fact was reinforced by top managements acceptance that the department was considerably overstaffed and a lot of idle time was detected. For this reason, we proposed that the company should pursue the opportunity to develop external printing business (presented in Section 7 of Appendix 2). In ARMA, the aim of equivalent salary analysis is different from the one used in other methodologies. The aim here is twofold. First, to ensure that the equivalent salaries of high value and missionary activities are at the appropriate level and second, to create the sense of a market metaphor in the organization. If the equivalent salaries of low value added and non-missionary activities are high then organization effort is misplaced. Also, by continuously comparing the value of internal activities and services to their market value implants a sense of continuous improvement in the company. Equivalent salary analysis is related to the analysis of the dimensions of transactions, presented in Section 3.1.2, of the structural perspective since they both try to implant a sense of market metaphor in the organization. 3.2.5 Fractionalisation analysis. Fractionalisation is the degree to which an individual employees work is fragmented. The higher the number of activities an employee is involved in, the higher the degree of fractionalisation. In fractionalisation analysis, we examined the number of activities and the percentage of effort per activity reported by individual employees. The number of activities was gathered from the employees life cycle. Percent of effort per activity data were gathered in questionnaires that were developed by the redesign team. Fractionalisation analysis was developed as a business analysis technique in ARMA for performing analysis at the individualistic view of the organization. In contrast to concentration analysis that analyses the employee concentration at the

process (holistic) view fractionalisation reasons about the fragmentation of employees work. The main emphasis of this analysis is to ensure that employee objectives and effort are aligned with the objectives of the processes they participate that are in turn aligned with the business objectives. During this analysis the emphasis is to direct the employees towards high value added and missionary activities. 3.2.6 Process cycle time analysis. This analysis is designed to promote understanding of the effort surrounding major processes in which major organizational units participate. This analysis is appropriate when activity effort data are collected and there is a desire to focus on cross functional process optimisation (Butler-Cox, 1991; COBRA, 1994; Davenport, 1993; Woolfe, 1991). Analysis begins by dening the cross functional processes to be analysed. The analysis may disclose: . misplaced effort among processes or organizational units; . excessive effort in undesirable processes; or . too little effort in highly leveraged processes. Often, the most powerful impact can be made by optimising cross-functional business processes, which were previously sub-optimised due to functional or departmental barriers. This analysis identies which steps in a business process are critical to the timely completion of the process. By mapping work-step interdependencies the analysis identies a critical path, a set of work steps which, when shortened, will compress the process duration. This kind of analysis is often iterative. When a work step is shortened, a resultant critical path may include a different set of work steps. This path is repeatedly rened as part of the overall redesign process. When the critical path in a process is identied, the improvement of the efciency of any individual work step in the critical path might result in big improvements on the efciency of the process. In the manufacturing industry case study, we identied serious delays in the production process while it was crossing the printing and cutting departments, as we explain in Section 4 of Appendix 2. The main problem was the lack of coordination of the activities of the two departments mainly due to the fact that the production of the printing department was not driven by the need of the cutting department. The result was the creation of high levels of printed paper that could not be absorbed by the cutting department. For this reason we proposed that the production of printed material should be driven by their internal customer, the cutting department. In ARMA, this kind of analysis is particularly useful when analysing a complex process which has multiple interrelated steps of sub-processes being executed concurrently. The main emphasis is the improvement of communication, coordination and control across departments. ARMAs capability of reasoning about the relationship between organizational structure and organizational processes in business modelling is also carried through in business analysis. Management structure analysis, presented in Section 3.1.4, assesses the level of communication, coordination and control from the structural perspective whereas the process cycle time analysis assesses the same levels from the process perspective. In many cases, these two kinds of analysis are interrelated. Loose coordination and control in management structures might create uncoordinated processes and vice versa. In the example of the printing and cutting departments there was loose control in the

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management structures of both departments that created coordination problems of the departments activities. In many cases, loose control enhances exibility and is a desired property in BPR; however, in this example it harmed the coordination of activities at the process level. 4. Discussion The ARM and ALCs/OLCs techniques constitute an integrated business modelling tool-set that has not been found in any other methodology and is considered to be one of the major contributions of ARMA in BPR. Most management accounting methodologies use poor graphical notations like owcharts and generally they pay little attention to business modelling. The IS development and organizational theoretic methodologies, on the other hand, use more advanced modelling techniques. However, most of these techniques present serious limitations mainly due to their lack of concepts that are powerful in describing the organization in a way that is free from implementation details and considers organizational theoretic principles. In ARMA, different analysis techniques from various disciplines are applied in different perspectives. These techniques are inuenced from organizational theories, IS development and existing work in BPR, giving business analysis a more holistic approach. For example, principal agent analysis and the analysis of the dimensions of transactions are inuenced from agency theory and transaction costs economics, respectively. Mission/non-mission analysis and value added analysis from the existing BPR work and abstraction level analysis from the IS development methodologies. The application of some of the techniques like principal-agent and dimensions of transactions are novel to BPR. Other techniques like management structure analysis, concentration analysis, equivalent salary analysis and fractionalisation analysis are performed from a different viewpoint. For example, management structure analysis is considered as unnecessary since the focus of BPR is on business process rather than organizational structures. However, in ARMA this technique is considered necessary in the structural perspective since it provides insight into the level of communication, coordination and control in the company before redesign. The major contribution of ARMA in business analysis is the ability to analyse the resulting business model much more holistically compared to other BPR methodologies. Business analysis in ARMA allows the redesigned process to: . analyse the organization from both holistic and individualistic view; . explore the relationship between organizational structure and processes; . examine the alignment between business strategy, business processes and employee objectives; . examine the level of communication, coordination and control in existing structure and processes; . analyse the impact of creating a market metaphor for organizational behaviour; . analyse the level of effectiveness of activities and processes; . analyse the level of efciency of activities and processes; and . analyse the conceptual models. In Table I, we present how the business analysis techniques presented contribute to the achievement of the above results.

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Business analysis techniques # p p p p p p p p p p p p p p p p p p p p p p p p p

Alignment between business processes and strategy

Relationship between organizational structure and processes

Level of efciency of Analysis Level of Level of Holistic and of the activities effectiveness individualistic communication conceptual and of activities coordination Market view of the models and control metaphor and processes processes organization p p p p

Analysis of the abstraction levels of the business models

Analysis of the dimensions of transactions

Principal-agent analysis Management structure analysis

Mission/non-mission analysis Activity value added analysis

Fragmentation/concentration analysis

Equivalent salary analysis

Fractionalisation analysis

Process cycle time analysis

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Table I. The contribution of ARMAs business analysis techniques

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References Adnum, D. (1993), Using performance indicators for effective public sector management, Management Accounting. Avison, D.E. (1985), Information Systems Development: A Database Approach, Blackwell Scientic Publications, Oxford. Avison, D.E. and Fitzgerald, G. (1988), Information Systems Development: Methodologies, Techniques and Tools, Blackwell Scientic Publications, Oxford. Bromwich, M. (1992), Financial Reporting, Information and Capital Markets, Pitman Publishing, London. Butler-Cox (1991), Foundation: The Role of Information Technology in Transforming the Business: Management Summary, Report 79, Butler-Cox plc. Checkland, P.B. (1981), Systems Thinking, Systems Practice, Wiley, Chichester. Chen, P.P. (1976), The entity-relationship model: toward a unied view of data, ACM Transactions on Database Systems, Vol. 1 No. 1. COBRA (1994), The COBRA Methodology Manual, prepared by the COBRA ESPRIT Project Participants. Curtis, G. (1989), Business Information Systems: Analysis, Design and Practice, Addison-Wesley, Wokingham. Davenport, T.H. (1993), Process Innovation: Re-engineering Work through Information Technology, Harvard Business School Press, Boston, MA. Davenport, T.H. and Short, J.E. (1990), The new industrial engineering: information technology and business process redesign, Sloan Management Review, Vol. 11. Douma, S. and Schreuder, H. (1992), Economic Approaches to Organisations, Prentice-Hall, Hemel Hempstead. Eccles, P. (1993), Planning for improved performance, Management Accounting. Fama, E.F. and Jensen, M.C. (1983a), Separation of ownership and control, Journal of Law and Economics, Vol. 26 No. 2, pp. 301-26. Fama, E.F. and Jensen, M.C. (1983b), Agency problems and residual claims, Journal of Law and Economics, Vol. 26 No. 2, pp. 327-50. Gane, C. and Sarson, T. (1977), Structured Systems Analysis: Tools and Techniques, Prentice-Hall, Englewood Cliffs, NJ. Glykas, M., Holden, T. and Wilhelmij, P. (1993a), Modelling the collective behaviour of organizational agents in the petrochemical industry using the agent relationship morphism analysis (ARMA) methodology, Proceedings of the OOPSLA 93 Workshop on Modelling the Collective Behaviour of Organisational Agents. Glykas, M., Holden, T. and Wilhelmij, P. (1994a), Modelling organizational processes using the agent relationship morphism methodology, Proceedings of the 14th Hawaii International Conference on Systems Science, Hawaii, IEEE Computer Society Press, Washington, DC, 1-4 January. Glykas, M., Wilhelmij, P. and Holden, T. (1993b), Formal methods in object orientation, Proceedings of the European Conference on Object-Oriented Programming (ECOOP) 93, Workshop on Applications of Object-Oriented Formal Methods, Kaiserslautern, 26-30 July. Glykas, M., Wilhelmij, P. and Holden, T. (1993c), Veriable object-oriented designs, Technology of Object-Oriented Languages and Systems 93, Conference Proceedings, 1-6 August, Prentice-Hall, Santa Barbara, CA.

Glykas, M., Wilhelmij, P. and Holden, T. (1993d), Object-oriented information systems development, Proceedings of the 4th Hellenic Conference, Patras, 1 November. Glykas, M., Newton, A., Wilhelmij, P. and Holden, T. (1994b), Information integration for intelligent petrochemical asset management, IEEE Journal Transactions on Engineering Management. Hammer, M. (1990), Re-engineering work: dont automate, obliterate, Harvard Business Review, July/August. Hammer, M. (1993), Re-engineering The Corporation: A Manifesto for Business Revolution, N. Brealey Publishing, London. Harrington, H.J. (1991), Business Process Improvement, McGraw-Hill, New York, NY. Holden, T., Glykas, M., Wilhelmij, P. and Reynolds, B. (1994), Lifetrack: organizational modelling for safety-critical decision-support, in Redmill, F. and Anderson, T. (Eds), Technology and Assessment of Safety-Critical Systems, Springer-Verlag, London. Ip, S. and Holden, T. (1992), A knowledge-based technique for the process modelling of information systems: the object life-cycle diagram, in Loucopoulos, P. (Ed.), Proceedings of the 4th Conference in Advanced Information Systems Engineering, Springer-Verlag, Manchester. Jackson, M.A. (1983), Systems Development, Prentice-Hall, Englewood Cliffs, NJ. Johansson, I. (1989), Ontological Investigations: An Inquiry into the Categories of Nature, Man and Society, Routledge, London. Jones, C.B. (1980), Software Development: A Rigorous Approach, Prentice-Hall, Englewood Cliffs, NJ. Kaplan, R.S. and Atkinson, A.A. (1991), Advanced Management Accounting, Prentice-Hall, Englewood Cliffs, NJ. Lewis, C. (1993), A source of competitive advantage, Management Accounting. Morris, D. and Brandon, J. (1993), Re-engineering Your Business, McGraw-Hill, New York, NY. Petrozzo, D.P. and Stepper, J.C. (1994), Successful Re-engineering, Van-Nostrand Reinhold, New York, NY. Smith, P. (1993), Business process re-engineering minitrack, Proceedings of the 26th Annual Hawaii International Conference on Systems Sciences (HICSS), IEEE Computer Society Press, Washington, DC. Verjin-Stuart, A.A. (1987), Themes and trends in information systems, Computer, Vol. 30 No. 2. Williamson, O.E. (1975), Markets and Hierarchies: Analysis and Antitrust Implications, The Free Press, New York, NY. Williamson, O.E. (1979), Transaction cost economics: the governance of contractual relationships, Journal of Law and Economics, Vol. 22 No. 2, pp. 231-61. Williamson, O.E. (1986), Economic Organisation, Harvester Wheatsheaf, Hemel Hempstead. Woolfe, R. (1991), Managing and redesigning business processes to achieve dramatic performance improvements, European Business Journal. Zachman, J.A. (1987), A framework for information systems architecture, IBM Systems Journal, Vol. 26 No. 3, pp. 276-92. Further reading Ciborra, C.U. (1987), in Ciborra, C.U., Galliers, R., et al. (Eds), Information Analysis: Selected Readings, Addison-Wesley, Sydney.

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Cohen, B. (1982), Justication of formal methods for system specication, Software and Microsystems, Vol. 1 No. 5, p. 119. Glykas, M., Wilhelmij, P. and Holden, T. (1993), Object orientation in enterprise modelling, Proceedings of IEE Colloquium on Object-Oriented Development, 14 January. Hoydalsvik, G.M. and Sindre, G. (1993), Object-oriented role modelling for the analysis and design of organizational information systems, Proceedings of the 26th Annual Hawaii International Conference on Systems Sciences, IEEE Computer Society Press, Washington, DC. Zuboff, S. (1989), In the Age of the Smart Machine, Heinemann, Oxford.

Appendix 1. Benchmarking, customer survey, management aspiration and business analysis results in the manufacturing industry case study

Figure A1. The identied opportunities relative to their size (small ,10 mn drs, 10 mn drs , medium , 20 mn drs, high .20 drs)

Figure A2. The identied opportunities relative to the duration of their implementation (6 six months; 1 one year)

Issue 10 10 9 10 9.5 10 10 9.5 9.5 9 10 10 10 10 10 10 10 10 10 10 10 10 7.5 10 10 10 9.5 10 9.5 10 10 10 10 10 10 10 10 9 10 10 9 9.5 7.5 10 10 10 9.5 9.5 9 6.5 10 8 8 5 8 8 10 4 5 3 9.5 10 9.5 10 10 10 10 9.5 9 8 10 10 10 8 9 9 10 7 5 6

Signicance Customer C. man

Cig. Man. Customer C. man

Competitor 1 Customer C. man

Competitor 2 Customer C. man

Competitor 3 Customer C. man 10 10 7.5 9 7.5 10 9.5 9 7 3 10 8 6 5 5 8 10 4 2 1

On time delivery Delivery according to order Response to urgent orders Product quality Product variety Mistakes during invoicing Credit policy Packaging attractiveness Salesmens willingness to help Salesmens visit frequency

Note: Values in italics indicate the difference between Cig. man sales department and customer estimation .20 per cent.

Table AI. The results of the 25 customers surveyed

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Topics Number of employees IT department staff Marketing department staff Domestic sales staff Number of staff in order processing/warehouse Export sales staff Purchasing staff Staff dealing with import/export Number of terminals Number of virtual terminals (PCs) Online connection with other company premises Printers in every department Percentage of in-house software development IT support in purchasing Centralised management of company-wide distribution Points of work for salesmen Cycle time for the delivery process

Cig. man 1,297 9 11 29 63 5 23 0 45 20 . No No Large Small Non-existent Wholesalers Athens 24 h, countryside 48 h Yes . 12

Other company 850 8 8 45 15-20 0 5 6 60-80 10 Yes Yes Medium Large Manager of the warehouse Wholesalers and supermarkets Athens 24 h, countryside 48 h No 2

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Table AII. The results of benchmarking

Use of driver assistants Average number of people occupied in the warehouse

Figure A3. The number of managers according to the number of workers they supervise in the ve departments

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Figure A4. The cost of the top ten most expensive activities

Figure A5. The percentage of missionary and non-missionary activities in the ve departments analysed

Figure A6. The ratio of high, low and business value added activities in the ve departments analysed

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Activity cost in mn drs Number of employees involved FTEs Concentration

Table AIII. The employee concentration of the sales acquisition process Management 96.00 43 8.04 18.70 per cent 120.00 38 20.73 54.55 per cent 41.20 38 7.39 19.45 per cent Marketing Order-acquisition Order-processing 59.00 55 10.13 18.42 per cent Credit-control 3.3 5 0.43 8.60 per cent Invoicing 11.4 12 2.23 18.58 per cent

Activity name Coordination and control of IT department Data manipulation on the hard disk Development of MENUs for END USERS Cut off Maintenance Requirements elicitation Design Programming User support Data security Hardware spare parts Failure recovery

Equivalents 1.00 0.13 0.13 0.36 0.41 0.59 0.59 1.42 1.91 0.82 0.82 0.82

Activity cost 11015 1129 1129 3075 3315 4450 4450 8833 11311 4395 4395 4395

Cost per FTE 11015 8681 8681 8541 8085 7542 7542 6220 5921 5360 5360 5360

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Table AIV. Equivalent salaries of the activities in the IT department

Appendix 2. The proposed opportunities for improvement in the manufacturing industry case study In this Appendix, we present the major opportunities for improvement that were identied in our manufacturing industry case study. These opportunities were produced during business modelling and analysis. The format of presentation of each opportunity is identical to the one used during the presentation to top management. Restructure the marketing and sales departments Discussion . Activity and responsibility overlap. Currently, there is considerable overlap between activities performed by marketing, external sales and domestic sales. General sales activities are performed by all three departments; however, these activities are not well coordinated since three different departments are directing the activities. The problem is shown in Figure A7. Alternative solutions . Move domestic and export sales marketing activities under the control of the marketing department. . Centralise order processing and distribution preparation to reduce overlap of domestic sales and export sales.

Figure A7. The elimination of 30 percent of the marketing activities that fall out of the control of the marketing department will yield cost benets of 24.65 mn drs per year

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Benets . elimination of redundant activities; . improved coordination of sales and marketing activities; and . improved priority setting of initiatives due to elimination of conicting objectives. Impact . potential annual cost savings of . 30 mn drs; and . overall impact to organization assessed as Medium. Implementation timing: near-term Implementation difculty: minimal. Upgrade information technology systems and department Discussion . Limited systems utilisation. IS use is very limited. Common manufacturing systems such as an integrated materials management and production systems are readily commercially available and could be effectively employed to reduce materials purchasing levels and improve production scheduling. Other commercial systems such as integrated accounting, pay-roll and human resources systems would similarly impact other departments. The current systems used are relatively primitive and provide minimal support (versus the potential support) to the organization. However, as shown in Figure A8 the introduction of a CIM system in the company should be performed only after the redesign of its processes. . Internal programming. Technology systems employed are internally programmed versus employing commercially available systems. . Under-staffed. The IT department is considerably smaller than comparable manufacturing companies of the companys size.

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Figure A8. The introduction of CIM in the cigarette manufacturing company

Limited technology skills. Personnel within the IT department have less systems education and experience than would typically be seen in the manufacturing companies of similar size.

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Alternative solutions . Increase IT department size and skill level via strategic hires potentially including an department head with experience and knowledge implementing integrated manufacturing, accounting and management information systems. . Conduct detailed systems review to assess full limitations of current systems and applicability of manufacturing commercially available packages. The resulting IT infrastructure will enable the company to achieve full connectivity with its customers, suppliers, commercial partners, etc., as shown in Figure A9. Benets . timely and accurate information; . reduced materials procurement costs; . improved production scheduling; and . improved and facilitated management reporting.

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An example of these benets is the purchasing process that is very paper intensive and occupies a high percentage of personnel (Figure A10).
Impact: . potential annual cost savings of . 100 mn drs; and . overall impact to organization assessed as High.

Figure A9. The future state that the company will achieve with proper investment in IT

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Figure A10. The purchasing process as it should be performed

Implementation timing: long-term Implementation Difculty: difcult. Rightsize organization Discussion . Signicant free time, over-staffed departments. Many departments appear to be over-staffed based on stafng levels over time and levels in comparable organizations. Specic departments that have not decreased in size, commensurate with the recent decrease in revenues include: purchasing, maintenance and production. Alternative solutions . Conduct detailed review of stafng levels and work performed. Identify means to revise work processes. Develop new stafng levels. Benets . Immediate cost reduction; and . Potential annual cost savings of .790 mn drs. Impact. . Overall impact to organization assessed as High. Implementation timing: near-term Implementation difculty: medium (some issues will need to be resolved with unions, interim solution may be long-term hiring freeze) (see Table AV). Integrate printing and cutting departments Discussion . Printing and cutting departments not coordinating production levels. Printing is not closely coordinating their production process with the cutting requirements of production, resulting in an unnecessary build-up of printed materials (Figure A11).

Payroll cost per month (in mn drs) October 1991 Target Difference Production Maintenance Lab Quality control Purchasing Tobacco purchasing Personnel Accounting IT General secretary Planning Domestic sales Export sales Total 263.10 83.60 4.30 12.90 8.10 31.70 9.40 10.30 4.30 4.70 5.40 41.10 8.30 487.20 237.70 71.60 3.30 8.00 7.00 26.40 8.60 7.80 4.30 3.30 7.30 31.10 4.90 421,30 25.40 12.00 1.00 4.90 1.10 5.30 0.80 2.50 0.00 1.40 21.90 10.00 3.40 65,90

Number of employees October 1991 Target Difference 778 199 9 37 22 85 23 21 8 13 14 107 17 1,333 700 169 7 23 19 73 21 16 8 9 11 84 10 1,150 78 30 2 14 3 12 2 5 0 4 3 23 7 183

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Table AV. The savings per year if the company achieves the 1991 stafng levels

Figure A11. The problem of coordination between the printing and cutting departments

Alternative solutions
. . .

Improve coordination of printing with cutting. Merge departments to better coordinate printing and cutting with production needs. Implement production scheduling system incorporating printing and cutting departments.

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Benets . Work-in-progress cost reduction. Impact . Overall impact to organization assessed as Low.

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Implementation timing: near-term. Implementation difculty: minimal (merger of departments). Consolidate warehouse and distribution management Discussion . Multiple warehouse management. There are multiple warehouses for non-tobacco materials that are managed by many different departments including sales, production, purchasing tobacco with varying levels of warehouse management experience. . Distribution management. Outbound logistics distribution is managed by domestic sales, and internal logistics distribution (moving goods from warehouse to production, etc.) is managed by production and inbound logistics and distribution is managed by tobacco and purchasing departments. Coordination of trucks and oversight of the full distribution process is fragmented as shown in Figure A12. Alternative solutions . Merge departments to more effectively manage all warehousing and distribution functions. . Consider a distribution and logistics review to evaluate the costs of current warehouse and distribution methods and potential logistical improvements; a potential solution to the creation of the distribution and logistics department might be the one shown in Figure A13. Benets . Cost reduction. . Improvement in service. . Potential annual cost savings of .100 mn drs. Impact . Overall impact to organization assessed as High. Implementation timing: medium-term. Implementation difculty: medium. Establish annual goals and objectives and a clear performance measurement system Discussion . Lack of setting annual goals and objectives. Annual goals and objectives are not set at any level in the organization. Department managers are operating more from a thats how we did it last year than from annually established and agreed-upon goals and objectives. Therefore, managers are not fully certain what is expected of them, strong or weak performance is not well understood (nor documented), and upper management does not have clear and established targets to measure the performance of managers against plans. . Lack of planning. There is no annual strategic or operational plan. The strategic direction set by upper management is not well understood nor communicated to the organization.

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Figure A12. The distribution and logistics process in the company was found to be dispersed in many departments

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Figure A13. The solution to the distribution and logistics problem

.

Lack of budgeting. Department managers are not held accountable for monthly budgets, which limits upper managements ability to control the budget departmentwise and to expeditiously evaluate cost trends. Lack of compensation incentive structure. Performance is neither well documented nor is there a system that is well understood that rewards outstanding performance. Managers do not feel that the compensation structure rewards strong performance. For a proper performance measurement system in the future, the organization could follow the steps shown in Figure A14.

Alternative solutions . Develop planning and budgeting goal-setting process. . Develop personnel performance goal-setting and incentive system. Benets . Cost reduction (via increased attention to plan and budget). . Improved personnel morale (from clearer understanding of upper-management expectations and feeling of compensation linked to performance). . Increased personnel output and performance. . Improved upper-management ability to quickly identify issues and variances to plans. . Potential annual cost savings of .100 mn drs. Impact . Overall impact to organization assessed as High. Implementation timing: medium-term. Implementation difculty: medium.

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Figure A14. The stages of evolution that the organization has to go through before it achieves a proper performance measurement system

Develop external printing business Discussion . Printing operating at 70 per cent of capacity. Printing is operating at 70 per cent of capacity on equipment that is relatively advanced and sophisticated. There may be potential to take on external printing business and utilise excess capacity. Alternative solutions . Develop business plan to assess market for printing services, identify potential customers, determine operational constraints and project nancial performance of new business. . Cross-train printing and cutting staff to more effectively utilise staff. Benets . Revenue enhancement (new business plan). . Diversication (new business plan). . Cost reduction (cross training) . 68 mn drs. Impact . Overall impact to organization assessed as Low. Implementation timing: medium-term. Implementation difculty: medium. (New business plan require managers capable of developing and growing a business very different prole versus managing an established operation. Requires a manager who is entrepreneurial, creative and relatively independent.)

Reduce average inventory levels (freeing additional working capital) Discussion

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Work in progress, materials and prepaid stock levels have all increased since 1990. Work in progress, raw materials and prepaid stock levels have all increased signicantly since 1990 (the lowest level in the last four years) when examined as a percent of net revenues. This potentially indicates that while Papastratos experienced a high growth period, stock levels were not closely monitored and grew at an even higher rate.

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Alternative solutions . Develop a report that monthly reports balance sheet levels and target levels. . Conduct working capital reduction engagement to review all components of working capital and develop reduction plan (likely to include recommendation for manufacturing production integration system). Benet . Potential one-time cost savings of 1.5 billion drachmas and annual savings of 300 mn drs (inventory carrying cost) if able to return stock levels to 1989 level. Savings can be 2-3 times more if able to achieve 1990 level or better. Impact . Overall impact to organization assessed as High due to signicant cost savings. Implementation timing: long-term. Implementation difculty: difcult (requires additional study for full detail and quantication of potential savings and implementation of integrated production manufacturing system).