Throughout our course we will provide you with real world examples to help you understand the concepts we are explaining. One we will use often is the case of a wholesale company that buys supplies, stocks them in a distribution centre and then sells the stock to retailers. We begin by looking at the activities in such an organisation and follow it up with a visit to a restaurant to develop your understanding of what a process is.
1-1- Activities in a modern organisation
Modern organisations are, to say the least, very complex systems. If we could have x-ray lenses, and we would be able to see through them, we would see a number of people interacting with each other and using computers running complex applications.
Perhaps the most complex aspect of an organisation is the large volume and variety of activities that are performed within its confines.
A wholesaler is an organisation that buys supplies from suppliers, for example, in the case of the food supply chain, buys fresh produce from local producers, stocks them in distribution centres, and then sells them to retailers such as local groceries. So, if we would look inside a distribution centre of a wholesaler, we would see a number of activities being performed, some dealing with purchase orders, for example, receiving a purchase order from a retailer, confirming the purchase order, accepting any change to that purchase order, following up with customers on given purchase orders. Other activities will be dealing with invoices. So, for example, issuing an invoice, accepting or rejecting an invoice, matching an incoming payment with an invoice, following up on an unpaid invoice. Other activities, again, would deal with goods, for example, receiving goods, packaging goods, counting goods, shipping goods, etc.
This complexity is also evident, though to a lesser extent, in small businesses such as the restaurant down the street. So, in a restaurant, again, we would have a number of activities that are performed. For example, activities to serve the customer, like greeting and seating the customer, providing the menu, serving drinks and meals, billing the customer, and receiving payment from the customer. In the kitchen, we would have other activities that are required to maintain the kitchen, such as brushing the grills, sweeping and mopping the floor, loading and unloading the dishwasher, collecting the laundry etc.
So, in order to manage the complexity of a modern organisation, we need to be able to grasp a solid understanding of its inner workings, so we need to understand how the organisation intimately works. However, looking at activities in isolation is not going to help, we need something more.
1-2- What is a business process?
Business processes provide a structure over the activities that are performed in an organisation. Now, to understand what a business process is, it helps to conceive the organisation as a complex system that is made up of a number of organisational functions, whereby a function is a logical grouping of activities.
For example, a very common function within organisations is accounts payable, that collects all activities that have to deal with payments. So, for example, receiving an invoice, approving an invoice, making the payment. This is what the wholesaler would do with respect to invoices that are received by the suppliers. Another typical function is accounts receivable, that collects activity that has to deal with getting money out of customers. So, coming back again to the example of the wholesaler, this would be all those activities that deal with the payment being received from the retailers. For example, issuing an invoice, receiving a payment, matching an incoming payment to an invoice, following up on an unpaid invoice. Other typical functions within a wholesaler are inbound and outbound logistics. The former, inbound logistics, deals with receiving goods into the distribution centre, whereas the latter, outbound logistics, deals with shipping goods to retailers.
So, in an organisation we also have to consider the partners and the suppliers that provide assets and resources for the organisation to operate – financial resources provided by the capital market, human resources provided by the labour market, technology and materials. And we have, on the other hand, customers. We need to generate value for our customers, and this is where business processes kick in. Business processes take input from partners and suppliers, they utilise the assets that are within and outside the company, to provide value to customers by chaining a number of activities originating from different organisational functions.
So, for example, in order to provide value to a retailer, in the case of a wholesaler, we need to fulfil a purchase order, and that means executing a number of activities that originate from sales, like all activities dealing with the selling of goods to the retailers. With the logistics – all activities that have to deal with shipping the goods to the retailer, and accounts receivable – all activities that have to do with the collection of the payment from the customer. So, coming back to our distribution centre, we can identify two main business processes executed within. One is about dealing with their retailers. We receive a purchase order from the retailer, and once we receive the purchase order, we perform a number a number of activities in order to fulfil that order, such as checking and confirming the purchase order, packaging the goods, loading the truck, notifying the shipment, issuing invoices, and finally matching the payment we receive. So, once the payment has been made and matched, then this process completes. The dual of this process is between the wholesaler and a supplier. It starts when a purchase order is issued by the wholesaler, and it completes once the goods have arrived in a distribution centre, involving activities such as obtaining purchase order confirmation, scheduling the delivery, unloading trucks, etc.
1-3- Our definition of a business process
We can see that there are chains of activities, events and decisions that are being performed. Events that trigger an activity such as the receipt of a purchase order, and activities like confirm purchase order or accept purchase order change, and decisions that have to be taken, for example, assess an invoice, and in case there are mismatches, then an invoice needs to be blocked, or if there aren’t any mismatches, then the invoice can be approved.
So, these chains of events, activities and decisions involve a number of actors. There are both human actors, so the process participants, the human resources that participate in the execution of the process by actively performing the activities, such as a financial officer that matches an incoming payment with an invoice, or a warehouse worker that unloads the truck, or a sales representative that gets in touch with a retailer with regard to a particular purchase order, and clearly involve business subjects such as the purchase order itself, which could be an electronic purchase order, or an electronic invoice, or physical objects such as the goods, the products. They are triggered by an event that represents a need, such as the customer arriving, representing the need for eating, for being entertained in a restaurant, or a purchase order that is received, representing the need of a retailer to receive some goods. And these chains of events, activities and decisions lead to an outcome that is meant to be of value to a customer. So, for example, the outcome for a retailer would be to obtain the goods. The outcome for a customer in a restaurant would be to eat well.
So, there are a number of business processes that are typically occurring in organisations. One of those is the order-to-cash process, also known as order fulfilment, and we’ve seen that in the context of the wholesaler. It’s the process that involves the wholesaler and the retailer. The wholesaler receives a purchase order from the retailer, and this process completes once the wholesaler has shipped the goods to the retailer, meaning that the order has been fulfilled, so cash has been generated.
The dual of this business process is the procure-to-pay, also known as the purchase-to-pay business process, and again, we’ve seen this in the context of the wholesaler interacting with a supplier. It starts from the time a purchase order is issued, and completes once the goods have been received. So the procure-to-pay process is a process that is performed in organisations in order to acquire resources likes goods and stock for the wholesaler to be able to operate properly.
Another example of a process that is very common, is the application-to-approval process. This is typical in government agencies, but also in some private organisations. For example, this starts from the receipt of an application, like a loan application, and then it ends with the approval or rejection of the application.
Another example, to conclude, is a fault-to-resolution process. It starts with the identification of a fault, and then it completes once that fault has been resolved.