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BUSINESS PROCESS
MODELING,
SIMULATION AND
DESIGN
SECOND EDITION

Manuel Laguna and Johan Marklund

BUSINESS PROCESS
MODELING,
SIMULATION AND
DESIGN
SECOND EDITION
BUSINESS PROCESS
MODELING,
SIMULATION AND
DESIGN
SECOND EDITION

Manuel Laguna
Johan Marklund
Front cover image: Modeling is abstracting reality and focusing on the essential parts of a system. Grey Tree by Piet
Mondrian is a perfect example of an abstraction where the nonessential parts of a tree are not depicted.

CRC Press
Taylor & Francis Group
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© 2013 by Taylor & Francis Group, LLC
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Version Date: 20130403

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Contents

Preface...............................................................................................................................................xi

1. Introduction to Business Process Design........................................................................... 1

1.1 What Is a Business Process?.........................................................................................1
1.1.1 Process Types and Hierarchies....................................................................... 3
1.1.2 Determinants of the Process Architecture.................................................... 4
1.1.2.1 Inputs and Outputs........................................................................... 5
1.1.2.2 Flow Units..........................................................................................5
1.1.2.3 Network of Activities and Buffers..................................................5
1.1.2.4 Resources............................................................................................ 8
1.1.2.5 Information Structure.......................................................................8
1.1.3 Workflow Management Systems....................................................................9
1.2 Essence of Business Process Design.......................................................................... 10
1.2.1 Incremental Process Improvement and Process Design........................... 12
1.2.2 Illustrative Example........................................................................................ 13
1.3 Business Process Design, Overall Business Performance, and Strategy............. 16
1.3.1 Business Process Design and Overall Business Performance.................. 16
1.3.2 Business Process Design and Strategy........................................................ 17
1.4 Why Do Inefficient and Ineffective Business Processes Exist?............................. 18
1.5 Summary....................................................................................................................... 20
Discussion Questions and Exercises.................................................................................... 21
References................................................................................................................................ 25

2. Process Management and Process-Oriented Improvement Programs....................... 27

2.1 Process Management and the Power of Adopting a Process View...................... 27
2.1.1 Phase I: Initialization...................................................................................... 29
2.1.1.1 Process Ownership......................................................................... 30
2.1.1.2 Analyzing Process Boundaries and Interfaces........................... 31
2.1.2 Phase II: Definition......................................................................................... 33
2.1.3 Phase III: Control............................................................................................34
2.1.3.1 Establishing Control Points...........................................................34
2.1.3.2 Developing and Implementing Measurements.......................... 35
2.1.3.3 Feedback and Control..................................................................... 36
2.1.4 Illustrative Example: Managing a Document Distribution Process........ 36
2.1.4.1 Assign Process Ownership............................................................ 37
2.1.4.2 Analyze Boundaries and Interfaces............................................. 37
2.1.4.3 Define the Process........................................................................... 39
2.1.4.4 Establish Control Points................................................................. 40
2.1.4.5 Develop and Implement Measures............................................... 40
2.1.4.6 Perform Feedback and Control..................................................... 41
2.1.4.7 Summary and Final Remarks....................................................... 41
2.2 Six Sigma Quality Programs......................................................................................42
2.2.1 Six Sigma Definitions.....................................................................................42
2.2.2 Six Sigma Cost and Revenue Rationale.......................................................44

v
vi Contents

2.2.2.1 Cost or Efficiency Rationale...........................................................44

2.2.2.2 Revenue or Effectiveness Rationale.............................................. 46
2.2.3 Six Sigma in Product and Process Design................................................... 47
2.2.4 Six Sigma Framework..................................................................................... 48
2.2.4.1 Top-Management Commitment.................................................... 48
2.2.4.2 Stakeholder Involvement................................................................ 48
2.2.4.3 Training............................................................................................ 49
2.2.4.4 Measurement System...................................................................... 50
2.2.4.5 Improvement Methodology........................................................... 50
2.2.5 Concluding Remarks: Key Reasons for the Success of Six Sigma........... 51
2.3 Business Process Reengineering................................................................................ 52
2.3.1 Reengineering and Its Relationship with Other Earlier Programs.........54
2.3.2 Brief History of Reengineering..................................................................... 56
2.3.3 When Should a Process Be Reengineered?................................................. 58
2.3.4 What Should Be Reengineered?.................................................................... 60
2.3.4.1 Dysfunction...................................................................................... 61
2.3.4.2 Importance....................................................................................... 62
2.3.4.3 Feasibility......................................................................................... 62
2.3.5 Suggested Reengineering Frameworks.......................................................63
2.4 Revolutionary versus Evolutionary Change............................................................ 66
2.5 Summary....................................................................................................................... 69
Discussion Questions and Exercises.................................................................................... 71
References................................................................................................................................ 73

3. Framework for Business Process-Design Projects.......................................................... 75

3.1 Step 1: Case for Action and Vision Statements........................................................77
3.2 Step 2: Process Identification and Selection............................................................. 79
3.3 Step 3: Obtaining Management Commitment......................................................... 81
3.4 Step 4: Evaluation of Design Enablers....................................................................... 81
3.4.1 Example: Internet-Enabling Change at Chase Manhattan Bank.............83
3.4.2 Example: New Technology as a Change Enabler in the Grocery
Industry............................................................................................................84
3.5 Step 5: Acquiring Process Understanding............................................................... 86
3.5.1 Understanding the Existing Process............................................................ 86
3.5.2 Understanding the Customer........................................................................ 88
3.6 Step 6: Creative Process Design................................................................................. 89
3.6.1 Benchmarking................................................................................................. 91
3.6.2 Design Principles............................................................................................ 92
3.7 Step 7: Process Modeling and Simulation................................................................ 99
3.8 Step 8: Implementation of the New Process Design............................................. 101
3.9 Summary..................................................................................................................... 103
Discussion Questions and Exercises.................................................................................. 104
References.............................................................................................................................. 105

4. Basic Tools for Process Design.......................................................................................... 107

4.1 Process Flow Analysis............................................................................................... 109
4.1.1 General Process Charts................................................................................ 110
4.1.2 Process Flow Diagrams................................................................................ 111
4.1.3 Process Activity Charts................................................................................ 114
Contents vii

4.1.4 Flowcharts...................................................................................................... 115

4.1.5 Service System Maps.................................................................................... 117
4.2 Workflow Design Principles and Tools................................................................... 121
4.2.1 Establish a Product Orientation in the Process........................................ 121
4.2.2 Eliminate Buffers.......................................................................................... 124
4.2.3 Establish One-at-a-Time Processing........................................................... 125
4.2.4 Balance the Flow to the Bottleneck............................................................ 126
4.2.5 Minimize Sequential Processing and Handoffs...................................... 130
4.2.6 Establish an Efficient System for Processing of Work............................. 131
4.2.7 Minimize Multiple Paths through Operations......................................... 136
4.3 Additional Diagramming Tools............................................................................... 137
4.4 From Theory to Practice: Designing an Order-Picking Process......................... 138
4.5 Summary..................................................................................................................... 139
Discussion Questions and Exercises.................................................................................. 140
References.............................................................................................................................. 145

5. Managing Process Flows.................................................................................................... 147

5.1 Business Processes and Flows.................................................................................. 147
5.1.1 Throughput Rate........................................................................................... 149
5.1.2 Work-in-Process............................................................................................ 150
5.1.3 Cycle Time...................................................................................................... 152
5.1.4 Little’s Law..................................................................................................... 153
5.2 Cycle Time and Capacity Analysis.......................................................................... 154
5.2.1 Cycle Time Analysis..................................................................................... 154
5.2.1.1 Rework............................................................................................ 155
5.2.1.2 Multiple Paths................................................................................ 156
5.2.1.3 Parallel Activities.......................................................................... 157
5.2.2 Capacity Analysis......................................................................................... 160
5.2.2.1 Rework............................................................................................ 160
5.2.2.2 Multiple Paths................................................................................ 161
5.2.2.3 Parallel Activities.......................................................................... 162
5.3 Managing Cycle Time and Capacity....................................................................... 164
5.3.1 Cycle Time Reduction.................................................................................. 164
5.3.2 Increasing Process Capacity........................................................................ 166
5.4 Theory of Constraints................................................................................................ 168
5.4.1 Drum–Buffer–Rope Systems....................................................................... 173
5.5 Summary..................................................................................................................... 174
Discussion Questions and Exercises.................................................................................. 174
References.............................................................................................................................. 182

6. Introduction to Queuing Modeling................................................................................. 183

6.1 The Basic Queuing Process, Queuing Systems, and Queuing Strategies.......... 185
6.1.1 The Basic Queuing Process......................................................................... 186
6.1.1.1 Calling Population........................................................................ 187
6.1.1.2 Arrival Process.............................................................................. 188
6.1.1.3 Queue Configuration.................................................................... 188
6.1.1.4 Queue Discipline........................................................................... 190
6.1.1.5 Service Mechanism....................................................................... 191
6.1.2 Strategies for Mitigating the Effects of Long Queues.............................. 191
viii Contents

6.2 Analytical Queuing Models..................................................................................... 192

6.2.1 The Exponential Distribution and Its Role in Queuing Theory............ 194
6.2.1.1 The Exponential Distribution, The Poisson Distribution,
and The Poisson Process.............................................................. 197
6.2.2 Terminology, Notation, and Little’s Law Revisited................................. 199
6.2.3 Birth-and-Death Processes.......................................................................... 203
6.2.4 The M/M/1 Model......................................................................................... 212
6.2.5 The M/M/c Model......................................................................................... 216
6.2.6 The M/M/c/K Model..................................................................................... 220
6.2.7 The M/M/c/∞/N Model.................................................................................223
6.2.8 Queuing Theory and Process Design........................................................ 228
6.2.8.1 Determining WC........................................................................... 230
6.2.8.2 Determining SC............................................................................. 230
6.2.8.3 Decision Model for Designing Queuing Systems.................... 231
6.3 Summary..................................................................................................................... 237
Appendix 6A: Mathematical Derivations and Models with Generally
Distributed Service Times������������������������������������������������������������������������� 238
Discussion Questions and Exercises.................................................................................. 242
References.............................................................................................................................. 252

7. Introduction to Simulation................................................................................................ 253

7.1 Simulation Models..................................................................................................... 255
7.2 Discrete-Event Simulation........................................................................................ 257
7.3 Getting Started in Simulation Modeling................................................................ 259
7.4 Illustrative Example................................................................................................... 264
7.5 Spreadsheet Simulation of a Process....................................................................... 271
7.6 Successful Simulation in Practice............................................................................ 273
7.7 When Not to Simulate............................................................................................... 275
7.8 Summary..................................................................................................................... 278
Discussion Questions and Exercises.................................................................................. 279
References.............................................................................................................................. 281

8. Modeling and Simulating Business Processes with ExtendSim............................... 283

8.1 Developing a Simulation Model: Principles and Concepts.................................284
8.1.1 Model Verification......................................................................................... 285
8.1.2 Model Validation........................................................................................... 286
8.2 ExtendSim Elements.................................................................................................. 286
8.3 ExtendSim Tutorial: A Basic Queuing Model........................................................ 290
8.4 Basic Data Collection and Statistical Analysis....................................................... 294
8.5 Adding Randomness to Processing Times and the Use of Attributes............... 298
8.6 Adding a Second Underwriting Team....................................................................305
8.7 Modeling Resources and Resource Pools............................................................... 307
8.8 Customizing the Animation..................................................................................... 310
8.9 Calculating Activity-Based Costs............................................................................ 312
8.10 Cycle Time Analysis.................................................................................................. 316
8.11 Modeling Advanced Queuing Features................................................................. 319
8.11.1 Blocking.......................................................................................................... 319
8.11.2 Balking........................................................................................................... 320
Contents ix

8.11.3 Reneging........................................................................................................ 321

8.11.4 Priorities and Priority Queues.................................................................... 323
8.12 Modeling Routing in Multiple Paths and Parallel Paths...................................... 325
8.12.1 Multiple Paths................................................................................................ 325
8.12.2 Parallel Paths................................................................................................. 329
8.13 Model Documentation and Enhancements............................................................ 331
8.14 Summary..................................................................................................................... 333
Discussion Questions and Exercises..................................................................................334
References..............................................................................................................................343

9. Input and Output Data Analysis......................................................................................345

9.1 Dealing with Randomness.......................................................................................346
9.2 Characterizing Probability Distributions of Field Data....................................... 347
9.2.1 Goodness-of-Fit Tests................................................................................... 351
9.2.2 Using Stat::Fit for Distribution Fitting....................................................... 351
9.2.3 Choosing a Distribution in the Absence of Sample Data....................... 354
9.3 Random Number Generators................................................................................... 358
9.3.1 Runs Test........................................................................................................ 359
9.4 Generation of Random Variates............................................................................... 361
9.5 Analysis of Simulation Output Data.......................................................................364
9.5.1 Nonterminating Processes.......................................................................... 366
9.5.2 Terminating Processes................................................................................. 368
9.5.3 Confidence Intervals..................................................................................... 370
9.5.3.1 Confidence Interval for a Population Mean.............................. 371
9.5.4 Sample Size Calculation............................................................................... 375
9.5.5 Comparing Output Variables for Different Process Designs................. 376
9.6 Modeling and Analysis of Process-Design Cases................................................. 379
9.6.1 Process Design of a Call Center for Software Support............................ 380
9.6.1.1 Modeling, Analysis, and Recommendations............................ 381
9.6.2 Design of a Hospital Admissions Process.................................................384
9.7 Summary..................................................................................................................... 394
9.8 Training Cases............................................................................................................ 394
9.8.1 Case 1: Improving the X-Ray Process at County Hospital...................... 394
9.8.2 Case 2: Process Modeling and Analysis in an Assembly Factory......... 398
9.8.3 Case 3: Redesign of a Credit Applications Process.................................. 401
9.8.4 Case 4: Redesigning the Adoption Process in a Humane Society......... 402
9.8.5 Case 5: Performance Analysis and Improvement of an Internet
Ordering Process�����������������������������������������������������������������������������������������404
Appendix 9A: Hypothesis Testing, Confidence Intervals, and Statistical Tables........ 407
Exercises................................................................................................................................. 419
References..............................................................................................................................423

10. Optimizing Business Process Performance...................................................................425

10.1 Business Process Optimization................................................................................425
10.2 Role of Simulation–Optimization in Business Process Management................ 427
10.3 Simulation–Optimization with ExtendSim...........................................................430
10.3.1 Tutorial: Process Optimization with ExtendSim......................................434
10.3.2 Alternative Optimization Models.............................................................. 441
x Contents

10.4 Optimization of Process Simulation Models.........................................................443

10.4.1 Configuring a Hospital Emergency Room Process.................................443
10.4.2 Staffing Levels for a Personal Insurance Claims Process.......................446
10.5 Summary.....................................................................................................................448
Appendix 10A: Evolutionary Computation.....................................................................448
References.............................................................................................................................. 457

11. Business Process Analytics................................................................................................ 459

11.1 Competing on Analytics........................................................................................... 461
11.2 Business Process Management Systems................................................................. 465
11.2.1 Business Rules............................................................................................... 466
11.2.2 Data Mining................................................................................................... 468
11.2.3 Monitor and Control..................................................................................... 474
11.2.4 Process Mining.............................................................................................. 474
11.3 Process Benchmarking.............................................................................................. 476
11.3.1 Graphical Analysis of the Ratio Model...................................................... 479
11.3.1.1 Efficiency Calculation................................................................... 481
11.3.2 Linear Programming Formulation of the Ratio Model...........................483
11.3.3 Learning from Best-Practice Organizations............................................. 485
11.4 Final Thoughts............................................................................................................ 486
Appendix 11A: Excel® Add-In for Data Envelopment Analysis.................................... 487
Discussion Questions and Exercises.................................................................................. 493
References.............................................................................................................................. 497
Appendix: Instructions for Downloading ExtendSim Demo or LT................................. 499
Preface

As the title suggests, this book is about analytical business process modeling and design. It is
the result of several years of teaching undergraduate and graduate process design and simu-
lation courses to business students at the Leeds School of Business (University of Colorado
Boulder) and engineering students at the Department of Industrial Management and Logistics
(Lund University). The main motivation for writing this textbook stems from our struggle to
find a book that approaches business process design from a broad, quantitative modeling
perspective. The main objective of this book is thus to provide students with a comprehensive
understanding of the multitude of analytical tools that can be used to model, analyze, under-
stand, and ultimately design business processes. We believe that the most flexible and power-
ful of these tools, although not always the most appropriate, is discrete event simulation.
The wide range of approaches covered in this book include graphical flowcharting tools,
deterministic models for cycle time analysis and capacity decisions, and analytical queuing
methods, as well as data mining. What distinguishes this textbook from general operations
management (OM) books, most of which cover many of the same topics, is its focus on busi-
ness processes, as opposed to just manufacturing processes or general OM problems, and
its emphasis on simulation modeling using state-of-the-art commercial simulation software.
Essentially, Business Process Modeling, Simulation, and Design can be thought of as a hybrid
between traditional books on process management, OM, and simulation. Although it would
be desirable for all students in OM to take several courses in each of these topics, the reality is
that few business school curricula today allow that. In our experience, simulation especially
tends to be shoved to the side simply because it is perceived to be too technical. However, our
firm belief, manifested by our writing of this book, is that this need not and should not be the
case. The rapid development of user-friendly simulation software with graphical interfaces
has made the use of simulation accessible even to those lacking computer programming skills,
and it provides a great medium for illustrating and understanding implications of capacity
restrictions and random variation on process performance. Furthermore, the growing inter-
est in simulation-based tools in industry suggests that an understanding of simulation mod-
eling and its potential, as well as its limitations for analyzing and designing processes, is of
key importance for students looking for a future career in OM.
Before proceeding with a discussion of how we picture this book being used, it is worth-
while to summarize what the book is not. It is not a traditional, qualitatively oriented book on
process management, although we address these important issues throughout the book. It is
not a traditional book on OM, although it covers some of the traditional tools found in most
OM books. Furthermore, it is not a traditional book on simulation, although discrete event
simulation is used extensively. It is a book that attempts to bring these topics together by
placing an analytical modeling perspective on process design, particularly emphasizing the
power of simulation modeling as a vehicle for analyzing and designing business processes.
This textbook is ideal for a one-semester undergraduate or MBA course within an OM
business school curriculum. The MBA course typically would cover some of the more
advanced topics in greater depth, such as process analytics (which does not require that
students have some previous exposure to linear programming, but it is helpful), simu-
lation optimization, and queuing. The MBA course could also include a more involved
simulation project. In addition, we envision this book being used for an undergraduate
course in industrial engineering or within an engineering management program.

xi
xii Preface

In terms of requirements, the textbook assumes that students have taken a basic course
in business statistics. However, if students have been exposed to a basic course in OM and
have some prior knowledge of quantitative techniques, this gives an additional opportu-
nity to explore some of the topics covered in this textbook in more detail. In terms of how
to cover the material, we recommend following the chapter sequence.
The book is organized as follows:

• Chapter 1 sets the stage by defining what we mean by a business process and
business process design. It also points to the importance of these issues for overall
business performance and the organization’s strategic positioning.
• Chapter 2 explains some fundamental principles for successful process management
and also takes a closer look at two of the more influential, process-oriented improve-
ment programs in recent years: Six Sigma and Business Process Reengineering. The
rationale is that although the focus of the book is on analytical modeling and design
rather than on implementation and change management, even the best possible
design is of little use if it is not implemented and managed properly.
• Chapter 3 presents a methodology for business process design projects. The approach
identifies a number of steps or issues that typically need to be dealt with during a pro-
cess design project from initialization to implementation. The approach can be seen as
a roadmap to the remainder of the book in the sense that the tools and methods dis-
cussed in the following chapters can be used to address some of the specified issues.
• Chapter 4 deals with a range of basic tools for analyzing and designing processes
that display limited variability in demand and activity times (i.e., deterministic as
opposed to stochastic models). The first part of the chapter discusses several graphi-
cal tools for charting and describing processes. These tools are particularly useful for
understanding existing processes. The second part of the chapter investigates seven
fundamental process design principles and associated methods of analysis.
• Chapter 5 focuses on how to manage process flows, particularly with regard to cycle
time and capacity analysis. As in Chapter 4, we consider only deterministic situations
with perfect information regarding demand, resource availability, and activity times.
• Chapter 6 introduces queuing as means for explicitly incorporating randomness
and variability into the process analysis. The chapter discusses queuing strategies,
properties of the exponential distribution, the Poisson process, traditional birth
and death processes, and the corresponding queuing models including single and
multiple servers with and without restrictions on the queuing population and/or
the queue lengths. A discussion of waiting/shortage costs and applications to pro-
cess design situations is included.
• Chapter 7 introduces the notion of simulation, in general, and the area of discrete
event simulation, in particular. A detailed illustrative example is used to intro-
duce the elements of this simulation technique. Practical issues associated with
successful simulation projects are discussed. The important question of when not
to simulate is also addressed in this chapter.
• Chapter 8 provides an introduction to the simulation software ExtendSim that is
used for simulation modeling. The focus of the first part of the chapter is on how to
get a model up and running, including working with simple animation, modeling
random processing times, and limited labor resources. The latter part of the chapter
Preface xiii

discusses advanced modeling techniques and how to collect data and use the built-in
tools for statistical analysis. In addition, the chapter explores how to use ExtendSim
to model more complex business processes and capture features such as prioritiza-
tion, attribute assignment, blocking, balking and reneging queues, routing through
multiple and parallel paths, batching, resource allocation, a­ ctivity-based costing,
and cycle time analysis.
• Chapter 9 deals with the important issue of statistical analysis of input and output
data. Topics covered include determination of input data distributions, random
number generation, and how to analyze output data. Of particular importance is
how to compare the performance of alternative process designs.
• Chapter 10 discusses state-of-the-art methods for optimizing design parameters
using simulation.
• Chapter 11 starts with a discussion of business analytics in relation to process
design and improvement. Relevant issues related to business process management
systems, business rules, and the application of data mining are discussed. The
chapter ends by showing how to use data envelopment analysis for ­benchmarking
purposes.
• The appendix at the end of the book contains instructions for downloading lim-
ited versions of the simulation software ExtendSim (ExtendSim Demo or LT) that
is used in Chapters 8 through 10.

The simulation modeling is done entirely with the ExtendSim software, enabling the students
to work hands-on with models of their own. A potential criticism associated with this soft-
ware-integrated approach is that the acquired knowledge may be thought of as being software
dependent. However, our experience is that after initially investing some time in understand-
ing the software, the main challenge and learning lie in creating abstract models of processes,
a conceptual framework that is software independent. Furthermore, because the functionality
of most modern simulation software is very similar, exposure to one product promotes a valu-
able understanding of the potential and limitations of simulation modeling in general.
The textbook includes online access to ExtendSim. The appendix at the end of this book
provides instructions for how restricted versions of the software can be downloaded.
Instructors have additional access to materials such as Power Point slides, solutions to end-
of-chapter problems, prebuilt Extend models, and some additional simulation exercises/
projects with suggested solutions.
There are many individuals among our colleagues, families, and friends who have con-
tributed to this book as sources of inspiration, encouragement, and support. Our deepest
gratitude goes to all of you. Others have had a more direct influence on this book, and we
take this opportunity to express our appreciation for their valuable help. Special thanks
go to Dave Krahl at Imagine That Inc., who worked with us on the simulation models. We
would also like to thank two anonymous reviewers who provided many valuable sug-
gestions in shaping this textbook. Our gratitude also goes to past and present students
in the undergraduate and graduate programs at the Leeds School of Business and Lund
University who have helped shape this book into what it is today. Special thanks go to
Marco Better for helping us put together the instructor’s manual.
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