Tuesday, December 28, 2010

Value Chain Modeling, Part 2: How a Value Chain Relates to Business Processes

This is a continuation of a series of articles on value chain modeling that started with “Value Chain Modeling: Part 1, Capability Analysis.”
Value chain models have been used to structure the development and refinement of business processes of an enterprise.  High-level activities are decomposed into more detailed activities.  These are then used to define more detailed, operational business processes.  This is helpful, but a value chain is not simply an abstraction of operational business processes. When I refer to business processes, I mean conventional, operational processes that might be modeled with BPMN (Business Process Model and Notation).
While sometimes a business process flow may align with a value chain flow, a business process defines controls that drive operations while a value chain defines the flow of deliverables between value-adding activities to deliver a product to a customer.  There are no loops in a value chain and no decisions for alternative actions.  A value chain depicts the incremental contribution of value toward the end product or service to be delivered.  A business process, on the other hand may define repetitive and alternative activities that optimize production and deal with exceptions.
For example, Figure 1, below, illustrates the relationship between a business process—the sequence of boxes, and a segment of a value chain—the sequence of circles (activities).  Note that these diagrams are for illustration only and do not represent a formal notation for the models. The value chain segment defines the acquisition of raw material, the production of parts, and the assembly of parts as activities leading to delivery to a customer.  The value chain metrics are based on the average work to produce a single product or service.  The business process supports the Produce Parts activity of the value chain and controls the production of batches of parts according to a production schedule.  The same production scheduling process may control a number of operations in support of different value chain activities.  The cost attributed to the value chain activity is the average cost per part with the setup cost pro-rated.
Figure 1, Alignment of process and value chain activities.
In the value chain segment, the trapezoid element (basket) depicts an inventory between the Produce Parts activity and the Assemble activity to hold the batch of parts until each part is needed.  This is important to the value chain analysis because there are time and cost factors involved.
In Part 1 of this series, I described how a capability may be implemented as a shared service in order to support activities in different value chains. In some cases, such a service may be invoked directly in support of a value chain activity.  However, the above example illustrates that a service may be engaged by a quite-different business process.  In this example, the service to produce a batch of parts is invoked to fulfill the production schedule.  The operations to produce parts are not driven by the completion of the Acquire Material activity as the value chain segment might suggest.
Another distinction between a value chain and a business process occurs where a business process engages a service that, in turn engages other services.  Figure 2 illustrates this in a somewhat unlikely but useful example.
Here the Process Order process invokes the Pick Parts service (depicted by the arrow between the boxes) to get parts from inventory, and then it engages the Ship Parts service that, in turn, engages the Package Parts service to prepare the parts for shipment.  The dashed lines indicate the correspondence of capability services to value chain activities.  This service-engagement control flow is quite different from the value chain deliverable flow from Process Order to Pick Parts to Package Parts to Ship Parts (the sequence of circles).

Figure 2, Service Engagement vs. Value Chain Flow
A best-practice, process design requirement for a capability is for the business processes to be bounded by the scope of the capability.  In the above example, the boxes represent services and the arrows between them represent invocation of services.  The process in the Fill Order service capability begins and ends within that capability.  It engages the Pick Parts service as another business sub-process that is bounded by the Pick Parts capability.  Similarly, business processes for Ship Parts and Package Parts are bounded by those capabilities.  This promotes the loose coupling of services so that a service can be engaged in different contexts, and the effects of changes to capabilities can more easily contained within each capability.  It enables local optimization and innovation.
In summary, a value chain model provides an abstract view of the operation of the business that is relatively independent of the details of how the business operations actually function and are controlled.  The value chain depicts WHAT the enterprise does to deliver value to the customer, but not HOW it does it.  The metrics of the value chain model provide a less complex and more customer-focused view of the business to help identify opportunities for improvement from an enterprise perspective.

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