Chapter Two Process and Project Management

Chapter Two Process and Project Management TOTAL QUALITY MANAGEMENT... 2-1 SHARED SERVICES... 2-2 OUTSOURCING... 2-2 FOREIGN OPERATIONS... 2-3 IMPLEMENTING TOTAL QUALITY MANAGEMENT... 2-3 BUSINESS PROCESS ENGINEERING... 2-4 THEORY OF CONSTRAINTS... 2-5 SIX SIGMA... 2-5 PROJECT MANAGEMENT... 2-6 ERP, PERT 2-7 MULTIPLE CHOICE QUESTIONS...2Q-1 MULTIPLE CHOICE EXPLANATIONS...2S-1

Chapter 2 Process and Project Management This chapter focuses on the process and project management sections in the Business Environment & Concepts section of the CPA Exam. The first part of the chapter will focus on Process Management, whereas the second part will focus on the Project Management area. There are quite a few lists in this chapter that need to be learned and memorized. Part 1 Process Management Process Management can be defined as an all encompassing approach to obtain continuous fitness of product or service improvement in and through the actions performed in an organization. In other words it is the coordination of organizational activity in harnessing improvement and streamlining it to achieve greater profitability. There are many approaches to process management that can be taken. Initially the overall benefits of process management are decreasing customer product returns, decreasing warranty provisions made, decreasing amounts of capital tied to inventory, increasing perception of product value, decreasing processing costs and increasing reliance in process schedules. The key objective is to continually improve every element of an organization s supply chain, including purchasing, manufacturing and sourcing, quality control, logistics and distribution, sales and marketing, customer service and information technology. The ultimate objective is to create positive comparative advantage for consistent superior profit results and customer brand loyalty. This is the primary focus of the study of Strategic Mangement. 1. Total Quality Management (TQM) Total Quality Management (TQM) uses quantitative methods to constantly enhance organizational processes. It also involves coordination of managers and employees goals to those of the organization. In addition, TQM involves strategic planning due to the significant number of quality costs that compose product pricing and the lengthy implementation process. There are four objectives to TQM: a. Top notch consistent product quality. b. Instant and consistent reaction to customer desires. c. More adaptability in maintaining customers varying requirements. d. Lower costs through enhancements and removing non-value added work. Faulty processes are usually the reason for poor quality. An organization may require a paradigm shift in corporate style in order to improve faulty processes. Proactive management, corporate-wide training, and enabling all levels of employees to make decisions on product quality are ways to improve faulty processes. Preventive and not corrective action is encouraged. Improvement teams can be used to help focus on problem awareness. There are five key required aspects of TQM. These are: a. TQM should offer acute focus on customer satisfaction as job retention depends on it. b. Focus on internal and external customers (purchasing, receiving, assembly, shipping, sales) where each department is a customer to the succeeding department. c. Analyzing critical success factors (an organization can only improve if it knows what and how to measure). d. Constant improvement of finished goods and services. 2-1

e. Reliance on co-workers and departments across the organization. An organization s ability to measure its performance is an essential factor for improvement. Measurement aspects include the Deming cycle (plan-do-check-act). This cycle measures how processes are thought of, carried out, monitored and improved upon. Another familiar measurement aspect is benchmarking, which compares an organization s processes against the best in the class at a particular process, especially as it relates to its competitors. Other measurement aspects include: a. Statistical Control which uses charts to monitor defects b. The Taguchi quality loss function determines the financial loss due to quality defects in an organization s products and services c. A Pareto Diagram shows that just a few deficient processes create the majority of losses. d. The Ishikawa (cause and effect diagram) shows the cause of a certain event over a time period and isolates reasons for defects. Measurable quality costs can be segregated into two categories in an organization s quality reports. These are conformance costs and nonconformance costs. Conformance costs are those costs that occur before a product is shipped or a service is provided. Examples of these costs (preventative costs) can be training, evaluation and vendor costs. Appraisal costs such as inspections, testing by employees or departments are also examples of conformance costs. Nonconformance costs are those costs that occur after a process is completed internally, or after a product or service is provided to the customer. Examples of these costs are internal failure costs such as scrap or retooling of machines. External failure costs also fall into this category, examples being warranties, product returns, lawsuit and faulty product costs. 2. Shared Services An organization may decide to group non-required and support staff into one separate department, division or company to enhance already existing services. This streamlining action of shared services can improve consistency, core process concentration and tracking of common costs. There can be some pitfalls to utilizing shared services. These can include: a. A narrow focus on needs in the short term to spend needlessly. b. Lack of specialized knowledge to affect proper deployed shared sources. c. Faulty or too rapid of a rate of implementation. A slower implementation is often more effective. d. Administrative and financial failure due to lack of coordination with employees of different skill sets and the inability to set pricing for the services they provide. e. Lost internal control during the change process and inherent risks during the process should be monitored and mitigated immediately. f. Failure to properly manage resistance to change. 3. Outsourcing Outsourcing is acquiring a product or service instead of producing it. In today s business world some of the more common functions to be outsourced include information technology, human resources, customer service and transaction processing. An organization may gain some benefits by outsourcing. These include: a. Gaining outside knowledge and access to new technologies. 2-2

b. Acquiring less expensive services than those produced in-house. c. Avoiding inventory obsolescence. d. Minimizing administrative headcount and overhead. e. Enhancing quality in products or services. Outsourcing can also expose an organization to some risks. Risks include: a. Excess costs involved in specific unnecessary knowledge. b. Loss of human expertise. c. Internal control loss of quality. d. Loss of knowledge exclusivity. e. Strategic planning suffers due to reliance on outside expertise. f. Production rigidity may be experienced on supply chain loss. g. Potential of slower reaction to specific issues due to other client priorities. 4. Foreign Operations Off-shore (Foreign) operations offer the allure of cost savings as costs of doing business in the United States can appear to be prohibitive. Other gains that can be had by off-shore operations are: a. Quality of service can be maintained or improved. b. New sources of expertise acquired that may not be available domestically. c. The off-shore operation may turn into a strategic business unit for the foreign operation. d. Can offer a refocus on core domestic business operations. e. New processes are implemented quicker in a new operation. f. Drains on capital decreased if core business is profitable and off-shoring is done inexpensively. There are many different business and control problems associated with off-shore operations. Conditions such as language and cultural differences can have a substantial effect on the success (or failure) of off-shore operations. Problems include: a. The savings never materialize. b. Exorbitant training costs and language barriers. c. Unproductive staff. d. Inability to acquire productive staff due to competition abroad in particular services. e. Focus on tasks may shift from a foreign worker s standpoint. f. Cultural differences in work habits. g. Initiative to be proactive might not occur in order not to be disrespectful of the corporate office. h. Plateaued employees become unmotivated with mundane tasks. i. Lack of control over quality control, work processes and conditions. 5. Implementing Total Quality Management The implementation of TQM does not occur instantly. It involves careful consideration and patience to succeed in a procedural insertion. There are basic steps and organization should take when instituting TQM. The year one step is to prepare and plan. Organizations must develop a quality oversight committee and implementation team. This implementation team and their techniques must be approved by the Board of Directors and CEO for the TQM to work properly. Year one steps also include instilling training programs on TQM techniques in order to increase awareness of quality, determine common data recognition regarding quality 2-3

techniques, and develop appropriate goals and minimum standards. These training programs should occur at all organization levels. In addition, year one activities include conducting quality audits. These audits will review and compare organizational steps against those of best practice organizations. The first year audits will also determine organizational assets and liabilities regarding quality. Gap analysis should also be conducted to pinpoint the exact areas where quality enhancements are needed in an organization s process. The organization should then develop a plan to improve quality in the short and long term. The short term plan should use smaller implementation projects and gradually build to larger ones in the long term. Year two steps are to teach and deploy employee training sessions conducted by qualified instructors in TQM techniques. Quality teams should also be developed. These teams should have a member from each applicable area of the organization participate in order to monitor the results of improvements throughout the organization. These members become owners of the quality process. Year two steps also include creating a gauging system of performance that would revamp the accounting system to communicate and pinpoint accuracies in appropriate tasks that may entail many general ledger accounts. In year three the steps will examine, make decisions and change the TQM program. These steps include: a. Compensating and reinforcing TQM enhanced improvement and employee behavior (morale boosting). b. Involve vendor participation to ensure reasonable expectations of quality, timeliness of product delivery, commitments as colleagues of TQM, and consistency of products. c. Update TQM techniques on regular basis 6. Business Process Engineering (BPR) Business Process Engineering (BPR) is the intricate scrutiny and complete makeover of business and production activities in an organization. It is done to increase quality and cut costs. Key considerations of BPR are: a. Asking why we are doing this? Is there a reason we are performing this task this way? b. Creating new thoughts regarding work patterns. c. Upheaval of processes needed. d. Linking all process together in a cause and effect relationship. e. Creating a culture to welcome and seek out change. BPR requires that some steps be taken in order to support it. First, emphasis should be placed on the process and not the organization in review of the workflow. Second, BPR supports paradigm shifts and large changes over time versus a few incremental changes in work flow processes. Previous thought processes regarding workflow are eliminated. Technology may be used to drive the change in thought process. Positive accelerated change can be taught to be pursued. 7. Management Schools of Thought There are several management schools of thought that may be asked on the CPA Exam. One of these thoughts is the Just-In-Time Inventory System that has the following characteristics: a. Demand-pull in nature. Customer orders trigger activity. b. Work teams are multiskilled across manufacturing functions to get the work accomplished. c. Inventory is reduced or eliminated as it is worked on as soon as it arrives from a vendor. This is also known as lean production, no waste or inventory is allowed. d. Vendors must adhere to on-time quality product delivery. 2-4

e. Operates on Kanban or ticket system to move inventory between workstations to attain a finished product. 8. Process (Demand Flow) Process (or demand flow) is the study of activities that combine to take a raw material and turn it into a finished good. There are value added steps throughout the process that should encompass effectiveness, efficiency and adaptability. The process should address the following: a. Does the work involved improve the product? b. Does the output end up when and where a customer would want it? c. Does the product cost too much compared to other products? d. Is the workflow process adaptable to customer requirements should those requirements change? e. Do we have the right product available to the right customer at the right time? 9. Theory of Constraints (TOC) Theory of Constraints (TOC) is based upon the premise that time is money. It focuses on quickening of the manufacturing process. Time is measured in cycles and the main cycle is the time between receipt of a customer purchase order to the shipment of that order. Imbedded in the cycle are non-value added activities. This subset of cycle time is called processing, or value added time. The percentage of processing time that encompasses the cycle time is called manufacturing cycle efficiency. The manufacturing cycle efficiency percentage should be monitored by management and should be as high as possible. In manufacturing processes TOC views all costs except raw materials as fixed costs. The reason is that the processes can be delayed (bottlenecked) because of labor, overhead and machinery (not the raw material). The process of TOC Review involves these aspects: a. Determine constraints using a workflow diagram. b. Decide which products should be manufactured given the constraints. Those with the greatest throughput margin offer the greatest opportunities for future sales. This margin is (Sales minus Raw Materials Costs). The costs are deemed supervariable. c. Optimize process flow through the constraint by determining a proper time amount for the process. This is done while keeping the flow constant and identifying the steps in the process right up to the constraint. d. Add labor, overhead or fixed assets to alleviate the constraint and improve cycle time. e. Reengineer the workflow process if necessary for flexibility and cycle time improvement. f. Can also work for overhead management and adopting activity based costing to properly allocate activity costs. 10. Six Sigma Six Sigma is a management technique to eradicate defects and minimize variations in a manufacturing process. It uses experts (sometimes call black belts) to keep improving the process using quantifiable measures such as increased income and decreased costs. Six standard deviations from a man in a population is where the term Six Sigma is derived. It means that near 100% of product contains no defects. The goals and aspects used are quite similar to those of TQM and were inspired by William Edward Deming s model of quality improvement. Six Sigma has two main processes. The first one enhances existing product and follows the following steps: a. Define a problem from a customer s viewpoint. 2-5

b. Measure job flow tasks and gather data. c. Analyze the data to discover problems in job flows. d. Improve the process by experimenting with new process flows. e. Control future work flows by creating control points in the new work flow patterns and monitor improvements. The second Six Sigma Process determines new work flow processes for a product. This second Six Sigma process will: a. Define goals consistent with customer desire and international. b. Measure steps and procedures that are essential to product quality, capability and risks. c. Analyze different work flow patterns and decide on the ideal one. d. Design the detail of the new work patterns and roll it out incrementally. e. Verify the ideal design will work properly, prepare a trial run and deliver it to the new process owners. 11. The International Standard Organization (ISO) The International Standards Organization (ISO) developed areas of quality control standards that are used throughout the world in many companies and provide common databases of knowledge for constant improvements by gauging efforts within organizations and steps to alleviate environmental issues. The different ISO Series are: a. ISO 9000 Series covers quality management standards b. ISO 14000 Series covers management of environmental systems c. ISO 25000 and 27000 relate to software and security quality in information systems Part 2 Project Management Project Management is a procedure to plan, organize, direct and control organizational assets in order for goals to be accomplished within a specific time period and a specified monetary figure. Organizational assets include human capital, fixed assets, funding and time. A project s life expectancy encounters four phases. These phases are: a. Contemplating the start of a project by determining goals, scope, funding, management and participants. b. Determine work quality specifications, milestones, finished product details and amount of work required. c. Carry out the project as well as monitor, adjust and document it as necessary. d. Finish the project; turn it in for evaluations and recommendations. e. Modify as is necessary. 2-6

The project management environment can be depicted by a triangle show below. Scope & Quality Time Constraints Monetary The most important of these constraints is the quality of the items given to the organization at the end of the project. The Project Management Environment includes as part of the three constraints: a. Monetary Budgets b. Time Budgets c. Work parameters to guard against Scope Creep, where non essential tasks are included in the actual performance of the project. d. All of the constraints work either conversely or inversely with one another. 1. Enterprise Resource Planning (ERP) is used to manage a project throughout all of an organization s departments. This is the use of one database for all of the required information to complete the project (SAP, Oracle). Customizing ERP is a costly, cumbersome process and it may be easier to change certain business processes than to update ERP software. 2. Project Management techniques include Gantt charts that depicts starting and ending times of projects noted on a calendar. Gantt charts show the interrelationships of tasks within a project. Histograms are bar charts used to determine the number of instances for certain events. Network analysis determines the quickest route through a project by detailing each event involving work steps within a project. 3. Performance Evaluation Review Technique (PERT) is used when constructing a large asset such as an airplane, skyscraper, etc. Each project has a starting and ending point with milestones and accomplished tasks interspersed though the diagram. Connecting lines between the milestones depict time spent to accomplish a certain task. By mapping out and measuring the time required to accomplish tasks, the longest time to complete a project can be determined. This is called the Critical Path. The critical path has no slack time on it, thus all of the tasks on the critical path cannot be delayed, or the entire project is delayed. PERT is also known as the critical path method since the concepts are intertwined. Since there is no slack time on the critical path, if the time to complete a project is shortened, the first place to crash the project are the tasks on the critical path. The tasks that alleviate the greatest time constraints or are the least costly should be crashed first. Using PERT s Critical Path Method will also identify: a. Idle or slack time. b. Where additional personnel are required. c. The need for lead time to receive outside inventory or labor. 2-7

d. Tasks that can be completed simultaneously. PERT does not clearly depict relationships of one task to another as clearly as a Gantt Chart. PERT uses a weighted average of time expected to perform each task. One sixth of the weight is given each to the shortest possible and longest possible expected times to complete the tasks. Two-thirds of the weight is given to the most suitable amount of time needed to complete a task. Critical Path Method is helpful when times to complete tasks are previously known and incentive is given to shorten times for future tasks. 4. Other Models used in Project Management There are other models that are used in Project Management. Algorithms are used to determine shortest routes for scheduling in transportation situations. This can be used to determine movement of products by trucks or the flow of a product such as oil. 5. Job Responsibilities for Project Personnel A Steering Committee oversees the entire project. They are specifically responsible for: a. Alleviating disputes between organization management and project members. b. Making sure the project stays within budget and on time. c. Funding is made to the project in a timely manner. d. Representing stakeholders in negotiations with management. Stakeholders can be one person or an organization within or external to the project organization. The stakeholders have a financial interest in the success and completion of a project. Managers, sponsors, suppliers, customers and team members can be stakeholders. Whereas sponsors provide monetary backing for the projects, managers actually lead the team members of the project. The manager s primary goal is to manage people, deal with and resolve conflict within and between teams. Managers do not need to be experts in every aspect of the project. Team members carry out the tasks required to complete the specific tasks of a project. They enter and leave the project as requested. 2-8