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THE ROLE OF BUSINESS PROCESS MANAGEMENT IN A LEAN SUPPLY CHAIN – TWO CASE STUDIES VLOGA MANAGEMENTA POSLOVNIH PROCESOV V VITKI OSKRBOVALNI VERIGI – DVE ŠTUDIJI PRIMERA

Mojca Indihar Stemberger, Jurij Jaklic, Peter Trkman, Ales Groznik University of Ljubljana, Faculty of Economics, Slovenia [email protected], [email protected], [email protected], ales.- [email protected] Abstract In today’s global market the main focus of competition is not only between different companies but also between supply chains. As the satisfaction of the final customer is of utmost importance for the successfulness of the whole chain, effective management of those processes is crucial. The paper summarizes the most important concepts of supply chain management and specifically concentrates on the importance of business process integration in supply chains, because full advantages can be realized, when business processes in the supply chain are integrated. The preliminary condition for integration is that processes are known and well defined. The main purpose is to show that for successful supply chain management effective business process management is required. Both suitable information system and organizational changes are essential for effective integration. That leads to higher process maturity and to better supply chain performance. The paper also includes two case studies to illustrate presented concepts.

Keywords: supply chain management, information sharing, business process renovation, business process management, business process modelling, business process maturity, process integration. Povzetek Na današnjem globalnem trgu konkurenca ne poteka več samo med podjetji, ampak tudi med oskrbovalnimi verigami. Ker je zadovoljstvo končnega kupca najpomembnejše za uspešnost, je učinkovito managiranje oskrbovalne verige ključnega pomena. Prispevek podaja pregled najpomembnejših konceptov managementa oskrbovalne verige s poudarkom na pomenu integracije poslovnih procesov, saj koncepti in njihove prednosti za podjetja ne morejo biti v celoti realizirani, kadar procesi v verigi niso integrirani. Predpogoj za integracijo procesov je, da so procesi znani in dobro definirani. Glavni namen prispevka je pokazati, da je za uspešen management oskrbovalne verige potreben dober management poslovnih procesov. Za uspešno integracijo je bistven ustrezen informacijski sistem in organizacijske spremembe. To vodi k bolj zrelim poslovnim procesom in posledično uspešnejši oskrbovalni verigi. Prispevek vsebuje tudi dve študiji primera, s katerima so predstavljeni koncepti ilustrirani.

Ključne besede: management oskrbovalne verige, deljenje informacij, prenova poslovnih procesov, management poslovnih procesov, modeliranje poslovnih procesov, zrelost poslovnih procesov, integracija procesov.

1 1. Introduction

In today’s global market the main focus of competition is not only between different companies but also between supply chains. As the satisfaction of the final customer is of utmost importance for the successfulness of the whole chain, effective management of those processes is crucial. It is not sufficient to have efficient processes within a business, synchronized operations of all partners and integration of processes in the supply chain is required (Williamson et al., 2004). Many new organizational concepts and technological solutions have been developed in recent years, however, only a few companies are using them strategically in a supply chain to achieve full competitive advantage, while many others are developing and implementing inappropriate e- business solutions (Cox, Chicksand & Ireland, 2001). Practical experience has shown that the root cause for this is not technological problems, but is connected with organizational and process aspects (Jaklic, Groznik & Kovacic, 2003). The main purpose of this paper is to show that for successful supply chain management (SCM) effective business process management (BPM) is necessary. BPM should not only be applied loc- ally but also at the supply-chain level. SCM and BPM are interrelated, since process integration is prerequisite for management of the entire processes in supply chain that are performed in several connected companies. Full advantages can be realized, when business processes in the supply chain are integrated. The preliminary condition for integration is that processes are known and well defined. The integration is carried out by using inter-organizational information systems (Williamson et al., 2004), but other aspects of BPM, like organizational changes, have to be applied as well. That leads to higher process maturity and to better SCM process performance.

The structure of this paper is as follows: the next section analyses the main concepts and challenges of SCM. The role of business process management in effective SCM is analyzed it he third section. Special attention is paid to the importance of process maturity and integration. Section four illustrates the theoretical findings with two case studies from Slovene companies, while in the last section the main findings are summarized and discussed

2. Supply chain management

Supply chain (SC) is a linked set of resources and processes that begins with the sourcing of raw materials and extends through the delivery of end items to the final customer (Bridgefeld Group ERP/Supply Chain Glossary, 2004). It integrates suppliers, manufacturers, distributors and customers through the use of information technology to meet customer expectations efficiently and effectively (Vonderembse et al., 2005). SC encompasses every effort involved in producing and delivering a final product or service, from supplier of raw materials to the consumer (Muffatto & Payaro, 2004). In (Vonderembse et al., 2005) strategies and methodologies for designing supply chains that meet specific customer expectations are discussed. Three different types of supply chain are defined: . A lean supply chain, which employs continuous improvement efforts that focuses on elim- inating waste or non-value steps along the chain. . An agile supply chain, which respond to rapidly changing, continually fragmenting global markets by being dynamic, context-specific, growth-oriented, and customer focused. . A hybrid supply chain, which combines the capabilities of lean and agile supply chain to create a supply network that meets the needs of complex products.

2 The authors develop a framework for categorising the supply chain types according to product characteristics (standard, innovative and hybrid products) and stage of product life cycle (introduction, growth, maturity and decline). They claim that standard products, which tend to be simple and have limited amounts of differentiation, should be produced by lean SC. The most promising result of an effective lean supply chain management is long-term cost reduction via product or process reengineering by forming closer relationships with key suppliers (Choy, Lee, Lo, 2002). For innovative products, which may employ new and complex technology, agile SC is more suitable in early phases of life cycle, and lean SC in mature and decline phases. On the other hand, for hybrid products, which are complex, have many components and participating companies, hybrid SC is appropriate. In this paper most of the discussion will refer to a lean supply chain. According to the definition of supply chain management (SCM) by the Global Supply Chain For- um, SCM is “the integration of key business processes from end user through original suppliers that provide products, services, and information that add value for customer and other stakehold- ers” (Chan & Qi, 2003). It is the approach to designing, organizing and executing the processes in the supply chain (Vonderembse et al., 2005). In (Williamson et al., 2004) SCM is defined as “the management of the interconnection of organizations which relate each other through upstream and downstream linkages between the different processes that produce value in the form of products and services to the ultimate consumer”. As we can see from all the above definitions, integration of business processes in supply chain is on of the main characteristics and objectives of SCM.

2.1. Supply chain management challenges While the separation of supply chain activities among different companies enables specialization and economies of scale, there are many important issues and problems that need to be resolved for successful and efficient SC operation – this is the main purpose of SCM. Most of those problems stem either from uncertainties or inability to coordinate several activities and partners (Turban, McLean, & Wetherbe, 2004). One of the most common problems in supply chains is the so-called bullwhip effect. Even small fluctuations in the demand or inventory levels of the final company in the chain are propagated and enlarged throughout the chain. Because each company in the chain has incomplete information about the needs of others, it has to respond with the unproportional increase in inventory levels and consequently even larger fluctuation in its demand to others down the chain (Forrester, 1961; Forrester 1958). There are many practical examples from various industries that support this finding (Jones & Simmons, 2000; Williamson, 2004; Muffatto & Payaro, 2004; Naim, Dis- ney & Evans 2002). It was shown however that the production peak could be reduced from 45% to 26% by transmitting the information directly from the customer to the manufacturer (Forrester, 1961; Holweg & Bicheno, 2002). In recent years numerous studies have emphasized the importance of information sharing within the supply chain (e.g. Barrat, 2004, Lambert, & Cooper, 2000; Lau & Lee, 2000; Stank, Crum & Arango, 1999). Indeed information sharing is a prerequisite for successful operation of the SC (Mason-Jones & Towill, 1997). Information should be readily available to all companies in the supply chain and the business processes should be structured in a way to make full use of this information. Another problem is that the companies often tend to optimize their own performance, disregard- ing the benefits of a supply chain as a whole (local instead of global optimization). Sharing of information can obviously be a problematic issue as the companies in a supply chain may not be prepared to share their production data, lead times, specially when those companies are independ- ent of each other (Terzi & Cavalieri, 2004). Indeed, the lack of trust between business partners is

3 one of the main hindrances to collaboration in the supply chain context (Ireland & Bruce, 2000; Barrat, 2004). Additionally, human factors should also be studied: decision-makers at various points in the supply chain are usually not making perfect decisions (due to the lack of information or their person- al hindrances). Those two problems are also interconnected as employee reward systems often focus simply on growing sales or on gross margins (McGuffog & Wadsley, 1999). A detailed review of other SCM-related problems can be found in (Holweg & Bicheno, 2002).

2.2. Measures of SCM successfulness The most important measures of SCM successfulness can be the final level of service, customer satisfaction and SC competitiveness and profitability as a whole. However as these are difficult to measure or use as a guideline to monitor improvement, more operational measurement methods and indexes were developed. On a more operational level the key performance indicators are total costs, quality and lead times in the SC (Persson & Olhager, 2002). Survey of performance measures (Beamon, 1998; Beamon, 1999) showed that cost and customer responsiveness dominate as the most often mentioned measures. A survey of top management showed that throughput, lead-time, and utilization are considered among most important (Tatsiopoulos, Panayiotou, & Ponis, 2002). Different performance measures can be classified in resource (e. g. cost, inventory), output (most importantly customer service) and flexibility measures (ability to respond to changes in the environment) (Persson & Olhager, 2002). Similarly Chan (Chan & Qi, 2003) emphasizes the importance of measuring the inputs (time, costs) and outputs (quality, reliability and innovativeness of the products/services) of the process. Composite measures, which include all of the above, are productivity, efficiency and utilization of resources. As shown above, different authors emphasize slightly different aspects of those measures. How- ever the common conclusion from the above-summarized findings can be that achieving high customer satisfaction with low costs, combined with flexibility to react to unforeseen changes, is crucial. While the final customer is mostly interested in the total quality and effectiveness of the supply chain as a whole, changes in a single company should also be studied. A company is unlikely to participate in an integration project if it does not also bring benefit to that company. The performance measures should be integrated across different departments and all companies in the supply chain (Barrat, 2004; Lengnick-Hall, 1996). Otherwise the concentrated effort towards the realization of those goals is not possible. Ideal performance measures would both facilitate the improvements and enable the measurements of achieved results. A common approach to predict- ing and measuring the effects of SCM is the use of simulations (see Bosilj-Vuksic et al., 2002 for an example of simulating the effect of business process renovation and Terzi & Cavalieri, 2004 for a coherent review of literature about this topic). The performance of SC can also be measured by SCOR (Supply Chain Operations Reference) model, developed by Supply-Chain Council (www.supply-chain.org) as a cross-industry standard for SCM, like it was measured in (Lockney & McCormack, 2004) with the attention to invest- igate the connection between SC management process maturity and SC performance.

2.3. The role of IT in supply chain integration Internet and e-business offer many possibilities for effective information sharing that enable seamless flow of transactions in the supply chain. They can also facilitate relationships by their ability to transfer information (Wagner, Fillis & Johansson 2003). Newly developed relationships can drastically change the underlying business processes and different new approaches are emer-

4 ging, such as vendor managed inventory (VMI), computerized point-of-sale (POS) systems, ma- terial requirements planning (MRP), manufacturing resource planning (MRP II), enterprise resource planning (ERP), etc. (see Turban, McLean, & Wetherbe, 2004 for more details). The efficiency of supply chains can generally be improved by e.g. reducing the number of manufacturing stages, reducing lead-times, working interactively rather than independently between stages, and speeding up the information flow (Persson & Olhager, 2002). It was shown that electronic data interchange (EDI) could reduce swings in inventory and safety stock levels. The simulation results showed that (among other improvements) the standard deviation of the stock level was reduced by 64%, leading to 400,000 $ annual savings (Owens & Levary, 2002). Muffatto and Payaro (2004) analyse the impact of the Internet on company business, in particular on procurement and fulfilment process. Four case studies regarding large Italian companies are considered and compared and an evolutionary model for e-business strategy is proposed. The model shows how IT can evolve from being an instrument which coordinates company processes through five stages: traditional communication tools, internal integration, Web-based communication tools, XML Web-based platform, and integrated enterprise. In (Williamson et al., 2004) the role of IT is analysed in the sense of the development of inter-organizational IS, defined as collections of IT resources, including communication networks, hard- ware IT applications, standards for data transmission, and human skills and experiences. The development can be categorized into four phases, from paper-based documentation, through development of EDI, and integration of information systems to strategic partnerships. The authors con- clude that although IT improves information flows and allows better communication between parties, organizational and system factors such as process definitions and legacy systems are also important. It should be noted that the use of information technology, networks and e-business applications alone is a solution for all SC problems and is not sufficient to realize the benefits. Even more: the most often quoted problems of online purchasing are not related to technology but rather to logistic and supply chain problems (Hoek, 2001; Williamson, 2004). This is even truer for traditional companies that are usually even less prepared for new e-business related challenges. It was found that Internet adoption alone has demonstrated no benefits in terms of reduced trans- action costs or improved supply chain efficiency in Scottish small and medium enterprises (Wag- ner et al., 2003), and has not led to a decrease in the inventory level in Slovenian small and middle-size enterprises (Trkman, 2000). The key issue for successful SCM is integrating work processes, such as purchasing and customer relations, across disparate computing platforms, applications and operating systems (Williamson et al., 2004). Of course, careful planning and designing of supply chain is required. The approach, when companies try to improve the coordination and collaboration of the partners involved in the same SC, is called supply chain integration (Muffatto & Payaro, 2004). In (Stone- braker & Liao) a model, in which environmental turbulence and strategic orientation have a direct impact on the degree, stages, and breath of supply chain integration, is developed. They state that a strategic fit must exist between environmental, integration, and operations variables. That fit would attenuate “bullwhip” inefficiencies and reduce inventory costs and improve customer service. Electronic linkages (and consequently better information flow) in the value chain have fundamentally changed the nature of inter-organizational relationships (McIvor, Humphreys, Huang, 2000). Information networks are the main enablers of simplifying organizational and inter-organizational business processes. The study by (Bhatt, 2000) showed the positive effect of network infrastructure on business process improvement.

5 The barriers to the adoption of inter-organizational information systems do not lie primarily with the technology but with business processes (McIvor, Humphreys, Huang, 2000). Even in the most successful companies there are few processes that are fully integrated. Optimization of a supply chain is therefore based on fully integrated business architecture and technology infrastructure of SC entities.

3. The Role of Business Process Renovation in SCM

3.1. Business Process Integration and Renovation Regardless of the industry, the number of companies involved or the technological solution used in integrating a supply chain, it should be emphasized that successful implementation of SCM is not possible without integration and related extensive change of business processes. As discussed in the previous section the fundamental of SCM is to manage and integrate business processes. Business process orientation is crucial for reducing conflict and encouraging connectedness in the SC, while improving business performance (McCormack & Johnson, 2000). Enhanced SCM can then lead to cost savings across a wide range of business processes (Horvath, 2001). Studies have shown that successful supply chain projects can lead to 10-50% overall supply chain cost improvement (Cross, 2000). Process is one or more tasks that add value by transforming a set of inputs into a specific set of outputs (goods or services) for another person (customer) by a combination of people, methods, and tools (Tenner, DeToro, 1997). Procurement and fulfilment are the key processes in the supply chain and with the advent of the Internet those, which have had to be redesigned and reorganized (Muffato, Payaro, 2004). The redesign of processes must not only include internal organizational processes, as an organization is just one entity in a value system carrying out processes which ex- tend beyond the boundaries of the organization. Therefore the traditional business process redesign is now extended to what is usually referred to as business network redesign (McIvor, Humphreys, Huang, 2000). Business Process Renovation integrates the radical strategic method of Business Process Re-engineering (Hammer & Champy, 1993) and more progressive methods of Continuous Process Im- provement (CPI) with adequate Information Technology (IT) infrastructure strategies. Business process reengineering on one side is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical measures of performance, such as cost, quality, service and speed (Hammer, Champy, 1993). On the other end of the spectrum, CPI integrates methods such as industrial engineering, systems analysis and design, socio-technical design and total quality management (Davenport, 1993; Gal- liers, 1998). Continuous improvement refers to programmes and initiatives that emphasize incre- mental improvement in work processes and outputs over an open-ended period of time (Daven- port & Beers, 1995). Several researchers (Tenner & DeToro, 1997) suggest that using CPI techniques dramatically increases competitive advantage. Furthermore, it is particularly suggested that TQM should be integrated with BPR (Al-Mashari & Zairi, 1999). The main difference of both methods is in the level of changes which can vary from improvement which essentially relies on a problem-solving approach to reengineering,which relies on recon- ceptualizing how a business process should work. Most process renovation projects fall between these extremes (Harmon, 2003). Process renovation is a strategy that critically examines current business policies, practices and procedures, rethinks them and then redesigns the mission-critical products, processes, and services (Prasad, 1999). It is also a method of improving the operation and therefore the outputs of

6 organization (Kettinger & Grover 1995). It means analyzing and altering the business processes of the organization as a whole and requires careful change management. In SCM terms another important aspect is to guide BPR with the idea to simplify and improve processes in such a way that they can be easily integrated with other companies. Business process management (BPM) combines business process renovation with automation of activities and workflow systems. It is a blending of process management, usage of workflow management systems and applications integration (Smith, Fingar, 2003). In the 90s, BPR focused on internal benefits such as cost reduction, the downsizing of a company and operational efficiency, which are more tactical than strategically focused. Nowadays, e-business renovation strategies focus on the processes between business partners and the applications supporting these processes. These strategies are designed to address different types of processes with the emphasis on different aspects (Phipps, 2000), (Kalakota & Robinson, 2001): customer relationship management, supply chain management, selling-chain management, and enterprise resource planning. BR research papers demonstrate the critical role of information technology in business process restructuring (Grant, 2002; Arora & Kumar, 2000). Many authors and researchers tackled the subject of business process renovation and developed their own understanding and management guidelines on the issue. As a result there are many terms that describe the same general idea. O’Neil and Sohal (1999), reviewing the literature on the subject of business process reengineering, cited the following variations: . Business process improvement, . Core process redesign, . Process innovation, . Business process transformation, . Breakpoint business process redesign, . Organizational reengineering, . Business process management, . Business scope redefinition, . Organizational change ecology, and . Structured analysis and improvement. Putting the terminology aside, all of the ideas provided above had the basic aim of bridging the problems organizations faced and improving their performance. Selection of the improvement approach that is appropriate for each process at any given time is based on three factors: the importance and opportunity associated with closing a performance gap and the feasibility of the improvement effort. Wide areas of organizational changes span from an ongoing continuous improvement efforts (e.g. TQM) to occasional breakthrough reengineering projects (e.g. BPR). McIvor, Humphreys, & Huang (2000) analysed the importance of electronic commerce in enabling the redesign of both the internal and external organizational processes. Presented cases also showed that the information technology is not only an enabler of redesign but also brings the necessity for redesign. Not only that the activities are changed, the roles and responsibilities of the partners may be fundamentally changed. Inter-organizational processes need to be jointly designed and managed. The development of strong business partnerships is one of the most difficult aspects.

7 3.2. From functions to processes and from organizations to supply chain processes To cope with the challenges organizations must accept process-based management principles. The process paradigm implies a new way of looking at organizations based on the processes they perform rather than the functional units, divisions or departments they are divided into. The per- ceived need for such a shift in organizational design stems from the fact that, despite the changes in contemporary economic and social environments, management values and principles from the industrial revolution still determine the organizational structure of many modern firms. This has resulted in companies being organized around functional units (departments or divisions), each with a highly specialized set of responsibilities. In such form of vertical organization units be- come centers of expertise that build up considerable bodies of knowledge in their own subjects, but even the simplest business tasks tend to cross functional units and require the co-ordination and co-operation of different parts of the organization (Giaglis, Paul, Hlupic, 1999 taken from Blacker, 1995). To be a truly world-class organization, the company needs to work as a team and all the functional areas of the business need to be properly integrated, with each understanding the importance of cross functional processes. As the basis of competition changes from cost and quality to flexibility and responsiveness, the value of process management is now being recognized (O’Neill, Sohal 1999). SCM initially emphasized local optimization of each supply chain activity, or more specifically, minimization of costs and maximization of services at each stage. (Stonebraker, Liao, 2004). However, the connection of existing processes in different companies is rarely possible without thorough redesign, realignment, simplification and standardization of current business processes. As the ultimate customer perceives the output of an entire SC as a unique product and/or service similar transition as inside companies from functional to process view, also from inter-organizational linkages to truly integrated and managed inter-organizational processes has to be done at the SC level. Inter-organizational or SC processes have to be designed in such a way that the SC can react to the changing needs of their customers, to new business models of their competitors, and opportunities afforded by new technologies (Williamson, 2004). The difficulties of formulat- ing and adopting new process, a lack of cooperation between vendors, and the difficulty of inter- -organizational coordination present the major difficulties in SCM. A survey by IBM shows that less than 5 % of companies have integrated their information systems with their partners’ (Willi- amson et al., 2004). Supply chains that will be able to find better answers to these challenges will achieve considerable competitive advantage. Implementing an information system facilitates information sharing and coordination between partners and enables global optimization of the SC. Only sharing of information enabled by inter- organisational information systems will not lead to improvements, but also coordination of activities is crucial (Disney, Naim & Potter, 2004). Redesign of the whole supply chain and examining the linkages between internal and external functions is required. Appropriate business processes are a prerequisite for the strategic utilization of information, otherwise sharing of information can only lead to an overload of information without full benefits for anyone involved. (Stonebraker, Liao, 2004) have analysed four dimensions of SC integration: . Stages refers to the number of steps in the chain from raw materials to the final customer. . Breadth of integration is the number of activities that organizations perform in-house at any level of the SC. . Degree of integration is defined as the percentage of total production outputs exchanged with partners in the SC.

8 . Form of integration means ownership of integrated units to control a business unit. Supply chain flows are both forward and backward; products usually flow forward, while information flows backward and forward (Stonebraker, Liao, 2004). SCM emphasizes non-ownership and the lesser formality of applied linkages at all stages. The transition from inter-organizational linkages to process-orientation takes many forms. Busi- ness process (re)design is one of the most common forms of organizational change (Smith 2003). The transition to process-orientation starts with the understanding of business processes. Al- though majority of organizations have some sort of documentation describing their processes (Škerlavaj, 2003) it is mainly in the function of ISO9000 quality standard. This documentation is of limited real value for the organizational redesign purposes. Furthermore, it does not enlighten the true functioning of the organization and in that respect does not help managers and employees better understand the business processes within the organization. To analyze firm’s and SC’s understanding of their processes we propose the use of the Capability Maturity Model (CMM) (Harmon, 2003) that was designed as a reference model of the stages that organizations go through as they move from immature to mature in their understanding and management of processes. CMM identifies five levels or steps that describe how organizations typic- ally evolve from immature organizations with initial level of process maturity (ad hoc, few activities are explicitly defined and success depends on individual effort and heroics) to mature organization with optimized processes (managers and employees are expected to routinely improve processes). The purpose of the model is to assess at which stage the organization and/or the SC is and to assist in developing a road map to help them where they want to go. Process maturity is the founda- tion for process-oriented organization and SC integration as processes themselves take the central role in it.

9 Figure 1: Relationships between Business Process Orientation and Maturity Level (Lockney & Mc- Cormack, 2004)

In (Lockney & McCormack, 2004) the relationship between SCM process maturity and performance is examined. A supply chain maturity model is described that had been developed upon the process maturity model. The following SCM maturity levels were defined: . Level 1 – Initial: The supply chain and its practices are unstructured and ill-defined. Pro- cesses, activities and organizational structures are not based on horizontal processes, process performance is unpredictable. SCM costs are high, customers satisfaction is low, functional cooperation is also low. . Level 2 – Defined: Basic SCM processes are defined and documented, but activities and organization basically remain traditional. SCM costs remain high, customer satisfaction has improved, but is still low. . Level 3 – Linked: This level represents the breakthrough. Cooperation between company departments, vendors and customers is established. SCM costs begin decreasing and customer satisfaction begins to show marked improvement. . Level 4 – Integrated: The company, its vendors and suppliers, take cooperation to the process level. Organizational structures and are based on SCM procedures, SCM performance measures and management systems are applied. Advanced SCM practices, like collaborative forecasting with other members of supply chain, take shape. As a consequence, SCM costs are dramatically reduced. . Level 5 – Extended: Competition is based on supply chains. Collaboration between companies is on the highest level, multi-firm SCM teams with common processes, goals and broad authority take shape. The research conducted by (Lockney & McCormack, 2004) showed that SCM process performance is strongly related to SCM maturity (see Figure 1). Additionally, the research indicates that direct process measures like cycle times and inventory levels are also related to SCM maturity. However, the process of integration of business processes is not smooth. On contrary, it is difficult because integrated supply chains usually develop initially as “chained pairs” of activities, and later are broadened to multi-stage or fully integrated chains. The activities, processes, risks, and cost are often differentially defined by each activity. Ultimately, these differences create a complex web of both formal and informal relationships among the entities of the SC, all of which must be satisfied by the overall balancing of interests. (Stonebraker, Liao, 2004) During the 1990s many firms undertook the BPR projects and despite its promising scheme the success rate was well below the desired one. Different studies report different failure rates of BPR project up to close to 80% (Smith, 2003) failure rate. Such results fuelled new studies in order to identify reasons for failure. Determining the critical success factors (CSF) of business process redesign emerged as a response to low success rates of BPR projects. Many authors approached the subject and the list of CSFs appeared. As the list grew so did the need to synthesize the CSF framework. Guimaraes (1997) categorizes CSF into 6 categories: [1] External, [2] Employee empowerment, [3] Opera- tional, [4] Communication, [5] Methods and Tools, [6] Leadership. Sung and Gibson (1998) seg- ment CSF as [1] Strategic, [2] Organizational [3] Methodological [4] Technological and Educa- tional. Al-Mashari and Zairi (1999) cite 5 dimensions. What the majority of practitioners and academics have overlooked or barely touched upon we be- lieve to be one of the key reasons for BPR and integration project failures. The redesign and in-

10 tegration of processes raises not just technological questions but rather strategic, cultural and organizational (McIvor, Humphreys, Huang, 2000). In their empirical study of Korean firms Sung and Gibson (1998) found that managers attribute the least importance to organizational factors. Further more, they are the least prepared for organizational changes needed to support the BPR project and maintain the redesigned processes. Based on several case studies (Muffato, Payaro, 2004) identified the main factors that influence the adoption of e-business strategies, particularly e-procurement and e-fulfilment. As SCM can be considered as a form of e-business, it can be concluded that the same factors influence the possibility for through integration and redesign of business processes: . number of partners (suppliers and customers), . product and design complexity, . type of sales contracts, . numbers of product codes.

3.3. Business process modelling While different approaches to BPM and BPR are possible, none of them is feasible without prior detailed knowledge about an internal and external business process. Models of business processes play an important role in different phases of business process (re)design regardless of the methodology used (Desel & Erwin, 2000). For efficient and effective integration of business processes in the supply existing processes have to be fully understood and documented, i.e. they should be at least at the level 2 of the previously described SCM Maturity Level model developed by Lockney & McCormack (2004). This is especially important since lack of understanding of core processes throughout the SC causes distor- tion of both demand and supply patterns. Process and demand visibility is a prerequisite for supply chain synchronization (Holweg & Bicheno, 2002). Business process modelling and the evaluation of different alternative scenarios for improvement are usually the driving factors of the business renovation process (Bosilj-Vuksic et al., 2002). Techniques that enable modelling business processes, evaluation of their performance, experi- menting with alternative configurations and process layouts, and comparing between diverse pro- posals for change, are highly suitable for organizational design. Computer based simulation models of business processes can help overcome the inherent complexities of studying and analyzing organizations and therefore contribute to a higher level of understanding and designing organizational structures (Giaglis, Paul, Hlupic, 1999). Simulation of business processes creates added value in understanding, analyzing, and designing processes by introducing dynamic aspects. It enables the migration from a static towards a dynamic process model (Aguilar, Rautert, Alexander, 1999). Process modelling tools must be capable of showing interconnections between the activities and conducting a decomposition of the processes. These tools must help users to conduct “what-if” analyses and to identify and map no-value steps, costs, and process performance (bottleneck analysis). They should be able to develop AS-IS and TO-BE models of business processes, which represent both existing and alternative processes. They must be validated and tested prior to implementation. They can be used to predict characteristics that cannot be directly measured, and can also predict performance of the processes that would otherwise be too expensive or im- possible to acquire. Many different methods and techniques can be used for modelling business processes in order to give an understanding of possible scenarios for improvement (Ould, 1995). IDEF0, IDEF3, Petri

11 Nets, System Dynamics, Knowledge-based Techniques and Discrete-Event Simulation are only some examples of widely used business process modelling techniques (Eatock et al, 2000). As noted by (Hommes & van Reijswound, 2000) the increasing popularity of business process modelling results in a rapidly growing number of modelling techniques and tools. The list of the available business process modelling tools supporting simulation includes over 50 names (Hommes, 2001). This makes the selection of the proper tool very difficult. In (Kettinger, Teng & Guha, 1997), an empirical review was made of the existing methodologies, tools, and techniques for business process renovation. The authors also developed a reference framework to assist the posi- tioning of tools and techniques that improve re-engineering strategy, people, management, structure, and the technology dimensions of business processes (Kettinger et al., 1997).

4. Case studies

The main concepts of business process integration in the SCM context can be illustrated by the following two case studies. The goal of the case studies is to show the practical implementation of most important concepts explained in the previous sections, especially business process management and importance of information sharing. In a similar research (Muffatto, Payaro, 2004) four leading Italian companies were taken into consideration: Aprillia, Carraro Group, Ducati, and Fischer Italia. The analysis showed that an evolutionary path could lead from traditional communications through Web-based communication to an integrated enterprise. By analysing the cases we want to show which the main problems are when processes in the SC are not integrated, identify the key prerequisites and problems when increasing the level of SCM maturity level, and present the consequences (benefits) of the inter-organizational business process management. The supply chain management maturity is currently in both cases at the level 2. Processes are defined and documented but not truly integrated and managed (optimized and continuously improved). It can be said that SCM remains traditional. The integration and management of the two processes have to some extent different focuses. The first case presents full integration and management of a procurement process of a large grocery chain (or the fulfilment process of a food producer). The second case emphasises information flow improvement between an oil company and transport company, which enables global optimization of the SC process instead of local optimization for each partner, and consequently considerable savings in terms of time and costs. There are only two companies participating in both analysed supply chains, however the analysis is essentially not dependent on the number of participating companies and could be extended to supply chains with more levels. In the case studies analysis the Process Maps modelling technique was used for business process modelling (current, i.e. AS-IS, and integrated, i.e. TO-BE). One of the major advantages of Pro- cess Maps is that little training is required for people to create and evaluate the process models (Chen, 1999). The experience of using different business process modelling and simulation tools (ARIS, Income, iGrafx Process) shows that due to the high insensitivity of communication with employees, simplicity and understandability could be assumed as one of the most important advantages of the modelling technique. This advantage is even more crucial, when modelling the processes across the whole supply chain, as it is important that all the involved fully understand the whole process in question. Another major advantage of this technique is that it helps identify the crossing of organizational boundaries, as it shows which company and which organizational unit is responsible for each activity. Symbol Indicates Examples

12 Receive sales re- Start / fin- 1 port ish Customer arrives Check merchandise 2 Activity Prepare customer invoice Approve / Disap- Decision 3 prove point Accept / Reject Waiting for custom- 4 Delay er’s response Sub pro- 5 Ship merchandise cess Organiza- Sales department 6 tional unit Marketing Process 7 flow

Figure 2: Basic modelling elements of the Process Map technique

Process Maps are described by activities placed in one or more departments e.g. the organizational units performing these activities. Each activity can set or determine information regarding inputs, resources, tasks and outputs. The activities could be defined in detail by several attributes, such as: types and number of resources performing the activity, duration of the activities (constant or stochastic) and different types of costs. The costs of the resources utilization can be defined by different elements, such as hourly rates, rates per use, and overtime rates. All the above-mentioned and other possibilities offer a detailed cost and time analysis of business processes (Indihar Stemberger et al., 2004). Figure 2 shows the modelling elements of the Process Map technique.

4.1. Fulfilment/Procurement Process This case study includes two participating companies – the retailer (e. g. a large grocery store) and the supplier (that supplies the needed product). It is a typical fulfilment/procurement process that consisted of two separate processes at the supplier and retailer side and has been integrated into a single process. This study refers to a generic fulfilment/procurement procurement process with two participating companies: a retailer is a grocery chain and a supplier is a producer) and daily-based fulfilment of stores (e.g. diary products). The models of processes are developed based on the literature survey and analysis of several real fulfilment/procurement processes. We have analysed several processes based on processes documentation, interviews, and data taken from IS reports. The AS-IS model was developed in several iterations, as the model had to be checked with employees performing the process. The processes are deliberately generalized and simplified in order to emphasize the most important aspects of SCM maturity levels, necessity for integration and BPM. For the purposes of business process renovation more detailed modelling can be used if needed – see Bosilj-Vuksic et al, 2002 as an example). The presented models can easily be extended with the inclusion of additional companies or processes and analyzed with the same methodology, too.

13 As can be seen from figure 3 and 4 the AS-IS model (i.e. the current state of the inter-organizational processes) consists of two separate processes – the procurement process at the retailer's and the order-fulfilment process at the supplier's. While both processes are certainly interconnected (e.g. the activity No. 12 in the retailer model is a direct consequence of activity No. 15 in the supplier model) and some exchange of information between those two processes exist, it is evident from those two models that: . There are several unnecessary delays in the process (for example the process at the supplier's can only start after the end of activity No. 4 at the retailer's). . Relevant information is not readily available and several delays and unnecessary activities are needed as a consequence. The typical example is that the retailer has to wait for the supplier to confirm the order. This is a consequence of limited information (the retailer is unaware of current supply capabilities of its partner) and leads to severe delays in the process, especially if the supplier cannot fulfil the order, as reconciliation is then needed. . Quick and flexible responses to changes in end customer’s demand are either not possible or very costly. This is due to long cycles (from identification to fulfilment of the need), higher inventory levels and insufficient information about customer needs and changes in these needs at all levels in the supply chain. . One company has no possibility to influence the processes of the other one, although they are mutually dependent on each other. . It is much harder to measure (and optimize) cycle times, costs, and processes in general of the supply chain as a whole than at each single company.

3 6 2 Preparing 4 5 1 Identify a Sending PO Waiting for PO No Start purchase need to supplier acknowledgement acknowledged? order (PO)

Yes 18 Reconciliation

Retailer - 8 Accepting 9 Inbound 7 17 Waiting for delivery No Logistics Agreement? Reconciliation delivery (quality and quantity) Yes

10 Signing delivery note, filling in acceptance slip

14 Retailer - 13 Creating and 11 12 Confirming 15 Finance, Waiting for Accepting transmitting Booking 16 invoice for End Accountig invoice invoice payment (automatic) payment orders

Figure 3: Retailer AS-IS model

14 3 4 2 Checking 20 1 Accepting Delivery No Start delivery Reconciliation order possible possibility 13 14 15 Accepting Collecting Preparing and signed signed Yes sending invoice delivery note delivery notes Supplier - 5 Sales Confirming 6 delivery Sending the order to 19 outbound Reconciliation logistic

Supplier - Yes Outboun 11 7 8 9 Accepting 12 d Waiting for Preparing Preparing 10 delivery No Logistics products, deli products delivery Delivering Agreement? (quality and very due .. for delivery note quantity)

Supplier - Finance, 16 17 Waiting for 18 Accountig Booking End payment

Figure 4: Supplier AS-IS model

Therefore the current processes have to be renovated and integrated in order to achieve greater efficiency. The renovated processes are then strongly supported with effective use of information technology as shown in the continuation. The TO-BE model (Figure 5) shows the integration of both processes into one process that spans across various departments of both companies. The main changes enabling this integration are: . long-term contracts and e-business connections are established between the retailer and the supplier – long-term partnership is definitely a prerequisite for the necessary investment in business renovation and new solutions, as these investments can be quite costly and the re- turn period can be considerably longer than the usual length of short or medium-term com- mercial contracts, . an integrated SCM system is introduced supporting the entire process and is available to all involved departments at the supplier's and retailer's side, . vendor-managed inventory (VMI) (similar approaches are sometimes described as co-managed inventory (CMI), distribution requirements planning (DRP), and continuous or efficient replenishment planning (CRP/ERP) (McGuffog & Wadsley, 1999)) is introduced in the process. The supplier has full information about the inventory state and future needs of the retailer and is therefore in charge of timely deliveries, . consequently the starting point of the integrated process is different and is in the supplier's company. The supplier identifies the procurement need and starts the process of fulfilling it, . the final solution is an integrated supply-chain management system that supports the entire process and is available to all involved departments at the supplier's and the retailer's side.

15 Supplier - S Identifying Delivering ales Start a need confirmation

Supplier - O R e c

utbound o

Waiting for Preparing Preparing n

Logistics c i

products, deli products delivery Delivering l i a t

very due ... for delivery note i o n

Accepting No delivery Agreement? (quality and Retailer - In quantity) Yes bound Logistics Signing delivery note

Waiting for Preparing and Supplier - Fi agreed sending Booking nance, paying time? invoice (aut (automatic) Accountig omatic)

Retailer - Fi Confirming Creating and nance, Accepting Booking invoice for transmiting Accountig invoice (automatic) payment payment orders

Figure 5: TO-BE model

Those changes lead to the radically improved process with considerable benefits for all involved companies and improve the added value for the final customer and consequently also the competitiveness of the supply chain as the whole. They also considerably reduce the lack of information and enable much better coordination. Other possible improvements on a more tactical/operational level can be (these are the changes that are more technologically than process-oriented and can also bring some benefits to all companies involved): . Automatic performance of some activities (such as preparing invoice, delivery note or booking), that can also reduce costs, times and number of mistakes. . Providing electronic delivery tracking that further enhances available information to all companies in the supply chain – information is available more timely and in a cheaper way, quicker response to changes or unforeseen problems are possible. . Introduction of e-payment system that considerably reduces the time and effort needed for billing. While the TO-BE process enables shorter cycle-time and lower costs of transactions, it also means the reduction in inventory levels (safety stock) for both (all) companies in the supply chain without increasing the danger of stock-outs. Because many activities were eliminated from the process and others were considerably shortened, the amount of employees´ work is considerably reduced, allowing them to focus on other more strategic or value-adding activities. Beside these advantages on the operational/tactical level, some strategic advantages can also be realized. Quicker identification and response to long-term changes in demand patterns, improved

16 customer service, better and quicker response to unexpected events and also introduction of new products or services are much easier in the new model. Once again it has to be emphasized that the main cause for those improvements is not the implementation of IT solutions itself, but rather change and integration of business processes that can be enabled by e-business solutions.

4.2. Fuel Supply Process The case deals with the integration of fulfilment/procurement process in supply chain that con- tains the oil company (with multiple gas stations) and the transport company that transport fuel from a few larger warehouses owned by the oil company. The main goals of the process, that is modelled in Figure 6, are similar to the usual goals in supply chain: to provide the final customer with the best service possible (in this case the low possibility of stock-outs), while reducing total costs (costs connected with stocks at the gas station, total transportation expenses and the costs for execution of this process). While the process models in all figures concentrate on the process for one typical gas station, the inputs from other stations are also taken into account at various points of the model. Most importantly (in both models) the capacity of the truck is considerably higher than the needs of one station so orders from different gas stations are usually merged into one. In the current model (AS-IS model) the main decisions are taken at the oil company with the transport company mainly in the operational role. The process starts daily by measuring the level of fuel at the gas station. This activity is performed manually by the employee who uses a special stick to measure the level in the tank. The result is then sent by fax to the purchasing department that analyzes the stock level and approximately estimates future demand by taking season and cyclical movements, weather etc. in the account. If necessary, additional consultations with the gas station personnel take place. Based on those results the decision whether to order more fuel takes place. After that the fuel needs from different gas stations are merged into one order. Some manual optimization of transportation is also done. Before the final order confirmation, the analytical department controls the demand and supply patterns as well as the transportation paths and makes the necessary adjustments to the orders. Or- der is corrected if necessary. After that, the final order is sent to the transport company that has to fulfil this order with its truck fleet. Financial compensation is paid to the transport company for its services. The main problems regarding the process are: . The communication between various departments and companies is costly (using tele- phones, fax machines) and as the result the flow of information in the process is slow and costly. . Full information is not available when making a decision, e.g. the purchasing department does not have much information about the truck fleet. On the other hand, first time the transport company gets the information about the fuel needs is when it gets the order, and does not have any chance to modify it. Because of that the trucks of the transport company are not fully utilized and the transportation can not be optimized. . The predictions of future demands are approximate, based on humans tacit knowledge. Hu- man limitations prevent the decision-maker from using even all available information, e. g. the stock levels at all gas stations.

17 . Each member in the chain is trying to attain his local optimum instead of global chain optimization. Consequently both the stock levels and transportation costs are considerably higher than needed.

sending the measurement of results to Start gas station gas level purchasing consultation with acceptance of department gas station delivery

Yes acceptance of consulati results from prediction of on different gas future needs needed? stations

purchasing Yes supply department End1 level high enough?

No aggregation and sending the creation of optimization of order correction order to transport purchase orders purchase orders company

final check of Yes order order OK? analytic created order confirmation department

acceptance of obdelava waiting/preparati transport of fuel unloading End2 transport order naročiila tion of delivery to gas station company

Figure 6: Fuel company AS-IS model

aggregation of identification of purchasing order Yes optimization of Start the needs orders needed? transportation (automatic) (automatic) order waiting/preparati acceptance tion of delivery transport No company informing the analytic End1 departmment

transport of fuel to the gas station order correction

is Yes order confirme analytic confirmation d? department

acceptance of gas station End unloading delivery

Figure 7: TO-BE model

18 The TO-BE model shows the drastically improved situation. The processes are renovated in such a way that the flow of information is instant and the decisions are taken at the time moment and in the department where most information is available. The transport company is now not considered as a normal supplier of fuel but rather as a strategic partner in providing the service to the fi - nal customers. It takes almost full responsibility for timely distribution of fuel and also makes most of the critical decisions. The main changes are: . The measurement of gas level is now supported technologically and fully automatically; the information about stock level is exact. . The stock levels from all gas stations are instantly available to the transport company. . The future demand level is predicted using the model based on neural networks. . The system automatically identifies the needs and suggests the possible orders and order distribution among various gas stations. . The final decision is made daily by the employee in the transport company. . Operations research methods (e.g. travelling salesman problem) are used to optimize the transportation paths and times. . The order is finally confirmed by the purchasing department at the gas company. . After that the transport company prepares the order and sends truck on its way. . Both preparation and transport time are considerably lower due to both more available information and better utilization of it. . The order arrives at the gas stations and is unloaded.

5. Discussion and conclusions

In the first case of fulfilment/procurement process the current (AS-IS) processes in both companies are obviously not integrated. They are at the level two on the five-level scale of the SCM maturity model (Lockamy & McCormack, 2004), as they are defined and documented, as shown on figures 3 and 4 above, but there is no real cooperation between two companies at the process level which would lead to optimization of the processes. The proposed changes enable to increase the SCM maturity level to the fourth level. It can be seen from the renovated (TO-BE) process model (see Figure 5) that a true integration of two processes into a single intra-organizational business process is proposed. The renovated TO-BE model enables a quicker, more efficient and better execution of one business process that is crucial for the successfulness of both companies. The renovated process is optimized from the point of view of the entire process (i.e. global optimization) opposed to the previous situation in which each company optimized its own part of the process. However, for achieving the fourth level of SCM maturity i.e. to integrate the two processes into one it is crucial to implement other changes like long-term partnership between the companies with the required trust development, organizational changes in both companies, and extensive information flow based on an integrated information systems. Both new organizational structures and jobs are based on processes. All the benefits can be sustainable only when the integrated process is continuously managed and changed according to the business needs. All companies involved in the supply chain have to be constantly alert and react proactively to changes in the business environment with constant improvements. Continuous business process monitoring, analysis and improvement are possible and necessary when the integration is implemented.

19 The transformation to the 5th level (Extended) is not immediately possible as deep mutual trust is a prerequisite, although the investment in site-specific assets can increase mutual trust between parties (see e. g. (Handfield & Bechtel, 2002) for both literature review and further research on the impact of mutual trust on cycle times and supply chain effectiveness as a whole). It has to be noted that other benefits beside the benefits in terms of more efficient business process performance (cycle time reduction, cost savings) have to be considered. The integration of the processes also enables the supplier to better plan its internal processes, avoid bottlenecks in production and reduce safety stocks, as the information of future demand is more readily available. Consequently the supplier also realizes considerable benefits. In the second case of the fuel supply process the benefits are mainly realized in the above men - tioned terms of better information flow between the two companies and consequently improved decision making. The stock levels can be better planned and transportation optimized based by the transport company based on the available data. It can be seen from the analysis of both cases that the involved companies could not realize such benefits, if they optimized their processes at the local level, i.e. inside the company. A simple linkage of processes is less effective than moving to the fourth or the fifth level of SC process maturity, which requires more efforts in terms of achieving higher level of trust between the companies. Both cases show that radical changes of roles of both companies and of organizational structure in both companies are necessary for considerable improvements of SCM effectiveness. A necessary condition for growing of both SCM in terms of supply chain process orientation levels is an inter-organizational information system development. Sharing of information enables changes of responsibilities of the involved companies, improve customer service, shortens the process cycle times decreases the utilization of resources, reduces the “bullwhip” effect, improves decision making which now looks for the globally optimal solutions, and reduces inventory costs. The former effects can be very explicit in the second case of the fuel supply process. Inter-organizational information systems also support the derivation of key business metrics that are a prerequisite for an effective business process management with continuous improvement of inter-organizational business processes. Implementation of the presented concepts and possible benefits of integration of a supply chain may vary on the current process maturity level in the participating companies (including the IS maturity) and may differ in various industrial and service branches. Nevertheless, the main supply chain process integration and management concepts, presented in the paper, can be applied with minor modifications regardless of the industry in question. It has to be noted that that the supply chain process management issues were presented with two two-tier supply chain studies. Most of the discussion could be easily extended to several tiers. Nevertheless, companies organized in value chains or networks are usually of different business process orientation maturity level (from ad-hoc up to integrated). Accordingly, a serious chal- lenge is to achieve business process compatibility (McCormak, Johnson, 2001) among these companies during the integration. Otherwise, an inter-organizational supply chain process has to be tuned to the lowest level of compatibility.

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