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Step 7: Re-design (Reengineering II)

by

Arthur M. Schneiderman

Over time, incremental improvement yields diminishing absolute returns.  This results from both the technological and organizational constraints imposed upon the process.  Here are two example:
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a process that cuts circles of fixed diameter d, out of sheet stock.  At first blush, it looks as if the minimum possible waste (called offal in that business) is (1-p/4) or 21.5%, based in simple geometry.  However, that assumes that the centers of the circles are at the corners of a square of side d.  It is quickly recognized though, that by offsetting the rows by d/2, the offal can be reduced further to an absolute minimum of 15.2%, but that's it.  Only with a new technology, for example shearing the circles from bar stock, can yield be further improved.  

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A step in processing all insurance application called for it to be reviewed by an outside underwriter.  This added on average 3.3 days to the processing cycle time, a critical results metric for winning more market share.  That level of performance had been achieved through successive technology changes: regular mail to FedEx to fax to Email, but it could not be reduced further because of regulatory steps in the independent underwriters review process.  However, the vast majority of applications were eventually approved.  By establishing criteria for which applications need to be reviewed by an underwriter and by forward integrating to create an internal underwriting function the barrier was broken.

In both of these examples, incremental improvement can exponentially gnaw away at the gap between current performance and these process limits.  If organizational success requires breaching these barriers, only process redesign holds the answer: new technology or new organization (in- or out-sourcing, functional to process re-organization, risk taking or shedding, etc.).

There is much mystique associated with process re-design.  Yes, there may be some cases where "thinking outside the box" is required, but in the vast majority of cases, the next wave is well known to both the process owners and their suppliers.  Whether it's through vendors, the trade press or benchmarking activities, we usually know what's coming next.  The issue really is a resource allocation question:  where should we invest our scarce human and capital resources?

Sometimes process redesign is justifiable on the basis of cost savings alone.  Redesigns involving automation (replacing labor with capital) usually fall into this category.  The more challenging redesign decisions, however, flow from strategic imperatives.  Here, it's the revenue side of the equation, maintaining or gaining market share, that swings the cost benefit analysis.  Unfortunately, most organizations rely on executive instinct rather than thoughtful analysis to make these redesign decisions.  We are fast approaching the time when increasing business complexity will outstrip even the best intuitive decision makers.

The half-life method provides another important link between incremental improvement and process redesign.  The half-life, which depends on process complexity, tells us the rate at which the gap between current and potential performance can be closed.  It allows us to easily predict where we will be at any future point in time if we improve incrementally.  What if that's not good enough to beat the competition?  The only remaining choice is process redesign.  Keeping in mind though that the competition usually has access to the same technology and organizational alternatives, this often points to outsourcing, since leapfrogging the leader usually implies complacency on their part.

This step is the focus of much of my current writing and research.

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1999-2006, Arthur M. Schneiderman  All Rights Reserved

Last modified: August 13, 2006