Reducing Coordination Costs

When a firm’s processes don’t work well together, the firm incurs increased costs due to poor coordination. It is not enough for an organization’s processes to work well – they must work well together, so that value can flow through the organization without delay or interruption, unimpeded out to the customer.

Customers should be able to pull the value they require from an organization. Enabling customers to easily pull the value they require requires giving thought to not only the design of customer facing processes, but also to their connections.

Process connections are the pathways through which value flows. Where these pathways are not well designed, or don’t function well, the flow of value is delayed or interrupted. What causes delays or interruptions to a flow? Such things as poor quality (defects, errors), a lack of synchronization between coupled processes (i.e., an upstream process working faster than its downstream neighbour), or poor process design where large batches of work move between “process islands”.

The costs of mis-coordination resulting from poor process coupling can be significant. When processes are poorly coupled, some resources can be idled awaiting work while others are working much too hard. Or, resources can be misused: when failure demand (the extra demand imposed upon a system due to the failure to fully meet customer requirements) is present, resource time is expended fixing what should have been done right the first time. In these cases, a firm’s unit average costs of production increase due to the lowered output resulting from lower productivity and efficiency. This, in turn, depresses profitability.

Many organizations do not design their business systems from the outside-in, where the system is designed to allow customers to easily access the value they require. Rather, functions or departments are emphasized and the firm organizes its workflows around these structures. Firms which organize their workflows in this way are usually paying a significant penalty in coordination costs – costs that can be reduced by moving to process-based structures designed to serve customers.

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