Masaryk University

Faculty of Economics and Administration

USE OF MODELLING
FOR IMPROVEMENT OF A BUSINESS
PROCESS

Diploma work

Thesis Supervisor: Author:

Ondřej ČÁSTEK Tural ALIYEV

Brno, 2016

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 MASARYK UNIVERSITY
Faculty of Economics and Administration

MASTER’S THESIS DESCRIPTION

Academic year: 2015/2016
Student: Tural Aliyev

Field of Study: Business Management (Eng.)

Title of the thesis/dissertation: Use of modelling and simulation for improving a business
process

Title of the thesis in English: Use of modelling for improvement of a business process

Thesis objective, procedure and methods Aim of the thesis:

used:
To improve a chosen business process

Procedure and techniques used:

The thesis will consist of two parts: Theoretical part will contain
research of available methods and their evaluation with respect to
the aim of the thesis solved in the second (practical) part of the
thesis.

The second part will consist of application of chosen method(s)

onto a particular business process. This part will include a
proposal of an improvement and analysis and economical
assessment of proposed solutions.

There is expected the use of process approach and these methods:

description, analysis, modeling, simulation and optimization.

Extent of graphics-related work: According to thesis supervisor’s instructions

Extent of thesis without supplements: 60 – 80 pages

Literature: LAGUNA, Manuel and Johan MARKLUND. Business Process

Modeling, Simulation and Design. : Prentice Hall, 2005. 429 s.

JESTON, John and Johan NELIS. Management by process: a

roadmap to sustainable business process management. 1. vyd.
Amsterdam: Elsevier/Butterworth-Heinemann, 2008. 303 s.
ISBN 0-7506-8761-4.

MADISON, Dan. Process mapping, process improvement and

process management. : Paton Press, 2005. 313 s. Chico,
California. ISBN 1-932828-04-4.

GREASLEY, Andrew. Simulation Modelling Business. : Ashgate

Publishing, Ltd., 2004. 226 s.

Thesis supervisor: Ing. Ondřej Částek, Ph.D.

Thesis supervisor’s department: Department of Corporate Economy

Page 1 of 2

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Thesis assignment date: 2015/04/10

The deadline for the submission of Master’s thesis and uploading it into IS can be found in the academic year
calendar.

………………………… …………………………
Head of department prof. Ing. Antonín Slaný, CSc.
dean

In Brno, date: 2016/05/01

Page 2 of 2
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Abstract
The objective of this thesis is to model and analyze the existing operational business process
of the Ukrainian wholesale company, to develop recommendations on its improvement and to
assess the effectiveness of these recommendations.
In the first chapter the overview of the business process management essentials is provided. In
this chapter the definition, key features and classification of business process are considered,
Business Process Management essentials, advantages and disadvantages are disclosed, and a
Business process management life cycle is considered.
The second chapter is devoted to theoretical analysis of core stages of business process
management, namely: modeling, implementing, monitoring and improvement. The main
emphasis is on business process modeling and improvement. The essence and purposes of
business process modeling are explained in the part devoted to business process modeling,
key elements of a business process to be necessarily depicted in its model are named, levels of
business process models are described and the most widely used business process modeling
notations are characterized. In the part concerned to business process improvement two
different approaches are characterized: continuous and break-throw improvement. PDCA
cycle is described, the essentials of Lean and Six Sigma systems, Business Process
Benchmarking and Business Process Reengineering are disclosed.
Third chapter represents a case of ARMAX LLC, a Ukrainian wholesale company, selling
corrosion-proof flexible metal hose. The operational business process of this company and its
sales and ordering subprocesses are modeled and analyzed. Their disadvantages leading to
excessively long time of customer order fulfillment therefore to loss in sales are identified.
The measures to eliminate these disadvantages are recommended, namely: to locate producing
capacities in Ukraine, to divide the department of sales and procurement by two parts, to
implement Electronic Data Interchange system and 1C Warehouse module, to implement
barcode scanners at the warehouse, and to change the order of improved business processes.
Economic effect of the recommended measures is evaluated. Under the basic scenario, the
ARMAX LLC will earn 173 UAH thousands of the net profit annually as a result of the
recommended improvements.

Key Words: Business process, business process management, business process modeling,
business process improvement.

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Statement
I hereby declare that I worked out the Diploma work, “Use of modelling for improvement of a
business process” myself, under the supervision of Ing. Ondřej Částek, Ph.D., and that I stated
in it all the literary resources and other specialist sources used according to legislation,
internal regulations of Masaryk University and internal management acts of Masaryk
University and the Faculty of Economics and Administration.

In Brno, .............................
Tural Aliyev

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Acknowledgements
First of all I am grateful to the God for the good health and wellbeing that were necessary to
complete this thesis. I would like also to express my sincere gratitude to my supervisor to
Ing. Ondřej Častek, Ph.D for his patience and for the continuous support for writing this
thesis. Besides my supervisor, I would like to thank to ARMAX LLC for providing me their
internal information for writing this thesis.

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Special Dedication
Also, I must express my very profound gratitude to my parents and to Visegrad Fund for
providing me with unfailing and financial support and continuous encouragement throughout
my studies. This accomplishment would not have been possible without them.

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Intentionally left blank

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Contents

Introduction .................................................................................................................................. 12
The objective of the thesis ............................................................................................................. 12
Methodology ................................................................................................................................. 12
Chapter 1. Business process and Business process management ................................................ 13
1.1. The definition and key features of business process .............................................................. 13
1.2. Classification of business processes ...................................................................................... 16
1.3. Process approach to business management .......................................................................... 17
1.4. Business Process Management essentials ............................................................................. 18
1.5. Pros and cons in adopting BPM at a company ..................................................................... 19
1.6. Business process management life cycle ............................................................................... 22
Chapter 2. Core stages of business process management: modeling,
implementing, monitoring and improvement ............................................................................... 24
2.1. Modeling in business and management ................................................................................. 24
2.2. Types of models ...................................................................................................................... 25
2.3. Business process models ........................................................................................................ 25
2.4. Business process model levels ............................................................................................... 27
2.5. Business process modeling notations .................................................................................... 29
2.5.1. IDEF0 notation ................................................................................................................... 29
2.5.2. BPMN notation ................................................................................................................... 30
2.5.3. eEPC notation ..................................................................................................................... 32
2.5.4. Comparison of Business Process Modeling notations ........................................................ 33
2.6. Business process implementation .......................................................................................... 34
2.7. Business process monitoring ................................................................................................. 36
2.8. Business process improvement: the essence and main approaches ...................................... 41
2.8.1. Continuous and break-throw approaches to business process improvement .......................... 41
2.8.2. Continuous business process improvement ........................................................................ 42
2.8.3. Break-throw business process improvement....................................................................... 44
Chapter 3. Business process modeling and improvement: ARMAX LLC case ............................. 46
3.1. Overview of the ARMAX LLC ................................................................................................ 46
3.2. Modeling and analysis of existing operational business process of ARMAX LLC ................ 50
3.2.1. The business process description ........................................................................................ 50
3.2.2. The IDEF0 diagram of operational business process ........................................................ 50
3.2.3. The ARIS EPC diagram of the existing sales business process .......................................... 51
3.3. Improvement of operational business process of ARMAX LLC ............................................ 56

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3.3.1. The recommendations on improvement .............................................................................. 56
3.3.2. The working principles of the redesigned sales business process
and the model of improved operational business process in IDEF0 notation ............................. 58
3.3.3. The ARIS EPC diagram of the improved sales and ordering business processes .............. 59
3.3.4. Economic effect of business process improvement ............................................................. 64
Conclusion .................................................................................................................................... 69
References ..................................................................................................................................... 70
List of appendices ......................................................................................................................... 73
Appendix A: Description and graphic representation of basic BPMN elements ......................... 74
Appendix B: Description and graphic representation of basic eEPC model elements ................ 75
Appendix C: Formulas used in thesis ........................................................................................... 76

Figures
Figure 1. Key features of business process .................................................................................. 16
Figure 2. Survival rates of new establishments from second quarter of 1998 in USA ................. 17
Figure 3. A generic process .......................................................................................................... 18
Figure 4. Example of a generic process sequence as a part of organization activity .................. 18
Figure 5. BPM Life Cycle ............................................................................................................. 22
Figure 6. Types of models by level of abstractness ...................................................................... 25
Figure 7. APQC Process Classification Framework ................................................................... 27
Figure 8. Generic IDEF0 diagram ............................................................................................... 29
Figure 9. ARIS Analytical Views of the Process Model ............................................................... 33
Figure 10. The Balanced Scorecard Framework ......................................................................... 37
Figure 11. Business process monitoring procedure ..................................................................... 39
Figure 12. Example of CTQ matrix for car dealer ....................................................................... 40
Figure 13. Continuous and break-throw approaches to business process improvement ............. 42
Figure 14. Continuous business process improvement cycle ....................................................... 43
Figure 15. Organizational structure of the ARMAX LLC ............................................................ 48
Figure 16. The dynamics in sales volume during latest years, UAH thousands .......................... 49
Figure 17. IDEF0 diagram of existing operational business process at ARMAX LLC ............... 50
Figure 18. ARIS EPC diagram of sales business process ............................................................ 52
Figure 19. ARIS EPC diagram of ordering business process ...................................................... 55
Figure 20. IDEF0 diagram of improved operational business process at ARMAX LLC ............. 59
Figure 21. EPC diagram of the improved sales business process ............................................... 60
Figure 22. ARIS EPC diagram of an improved ordering business process ................................. 62

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Tables
Table 1. The morphological analysis of the term “business process” ......................................... 13
Table 2. Key drivers for adopting Business Process Management .............................................. 19
Table 3. Advantages and disadvantages of strategies for business process implementation ....... 35
Table 4. Differences between Lean and Six Sigma systems .......................................................... 43
Table 5. The difference between Business Process Improvement
and Business Process Reengineering ........................................................................................... 45
Table 6. Product range of ARMAX LLC ....................................................................................... 47
Table 7. The structure of the ARMAX LLC staff ........................................................................... 49
Table 8. ARMAX LLC losses caused by refusals of customer to wait for product
ordered in Turkish plant ............................................................................................................... 53
Table 9. Average duration of ordering business process steps .................................................... 54
Table 10. Costs of informational system improvement ................................................................. 58
Table 11. Expected duration of ordering business process steps after improvement................... 63
Table 12. Additional furniture and technique for the procurement department .......................... 63
Table 13. Monthly current costs for the procurement department ............................................... 63
Table 14. The structure of the ARMAX LLC staff after the implementation
of recommendations ...................................................................................................................... 64
Table 15. Scenarios for the economic effect estimations .............................................................. 66
Table 16. Additional furniture and technique for the procurement department
for the decreased Ukrainian hryvna exchange rate..................................................................... 66
Table 17. Calculation of the economic effect of recommended improvements ............................ 67

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INTRODUCTION
In a world where the only constant is changes, there is a need for tools and methods that could
help organizations to become more efficient. In conditions of increasing local and global
competition, there is a need to find ways to be the first, or catch up with the rest, before it is
too late. And this requires mechanisms which can simplify too complicated things.
Business processes is an integral part of the activities of any organization. And efficient
business process management requires a clear description of the business processes. This
description is vital for the certain business process team, for the owner of the process, for the
staff interacting with the business process, and sometimes even for suppliers and customers.
Interest in the description of the process is due to many reasons. But the most important of
them is the need in continuous improvement of business processes. In order to improve the
process its visualization and transparency must first be ensured, that is to visualize and
understand how the process works, where value added is created, and where losses occur.
Today continuous improvement in any form is a philosophy of life of any organization, if it
tries to survive and function well in the middle term and in the long term. This necessity is a
result of changing nature of the world around us, and that changes do not occur linearly, but
growing exponentially.
So any organization needs effective and efficient tools of business process management, i. e.
modeling, implementing, analyzing and optimizing of its processes.
Not all the scholars agree to use the term “optimization” when describing a set of measures
intended for making a business process better. The reason is that optimization means making
a business process optimal, but it is not always possible, especially under a step-by-step
improvement, when a company improves its processes continuously, but gradually. So in this
thesis the term “improvement” is used instead of “optimization”.
The objective of the thesis
The objective of this thesis is to model and analyze the existing operational business process
of the Ukrainian wholesale company, to develop recommendations on its improvement and to
assess the effectiveness of these recommendations.
Methodology
The thesis is divided into three chapters.
In the first chapter the overview of the essentials of a business process management will be
provided. In this chapter, international quality standards and literature on business process
management will be used in order to determine a generic methodology that is applicable in
business process management.
The second chapter will be devoted to core stages of business process management, namely:
modeling, implementing, monitoring and improvement. The main emphasis will be made on
business process modeling and improvement. In the second chapter, special literature and
business process modeling guidelines will be used.
In the third chapter, the IDEF0 and ARIS EPC notations will be used in order to model
existing business processes of the analyzed company. Comparative analysis will be used to
justify the effect of recommendations on a business process improvement.
In order to discover key disadvantages of existing business processes of the company the
detailed modelling, time study and evaluation of current losses of the company proved to be
quite demonstrative. So it was decided not to use business process simulation as an additional
analytical tool.

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1 BUSINESS PROCESS AND BUSINESS PROCESS
MANAGEMENT
1.1. The definition and key features of business process
First of all, it is necessary to determine the definition of business process. The morphological
analysis of the term “business process” is represented in the table 1.

Table 1: The morphological analysis of the term “business process”

Definition Key word Features Author, source
1 2 3 4
set of interrelated or interacting set of interrelated or ISO (2008)
activities, which transforms inputs into activities interacting;
outputs activities; transforms
inputs into outputs
a structured, measured set of activities set of structured; Davenport
designed to produce a specific output activities measured; intended (1995)
for a particular customer or market. for obtaining the
output
It implies a strong emphasis on how
work is done within an organization, in
contrast to a product focus’s emphasis
on what.
A process is thus a specific ordering of
work activities across time and space,
with a beginning and an end, and
clearly defined inputs and outputs: a
structure for action...
Processes are the structure by which an
organization does what is necessary to
produce value for its customers.
a collection of activities that takes one a collection creates an output Hammer and
or more kinds of input and creates an of activities valuable for Champy
output that is of value to the customer customer (1993)

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 Continuation of table 1
1 2 3 4
a set of linked activities that take an set of linked create an output by Johansson
input and transform it to create an activities adding value to (1993)
output. Ideally, the transformation that input
occurs in the process should add value
to the input and create an output that is
more useful and effective to the reci–
pient either upstream or downstream.
A series of related business activities series of achieving business ITILv2
aimed at achieving one or more related objectives;
business objectives in a measurable business measurable
manner activities
A series of logically related activities A series of logically related Business
or tasks (such as planning, production, activity activities or tasks dictionary
or sales) performed together to produce
a defined set of results.
A series of operations complete in a series of complete in terms of Becker et al.
terms of content, time and logical operations content; complete in (2008)
sequence, required for processing terms of time;
economically important objects complete in terms of
logical sequence;
processing objects
A flow of work that is transmitted from a flow of is transmitted Robson and
one person to another (or from one work Ullah, 1995
department to another)
Source: Author
Thus, business process is described by most scientists as a sequence (set, series, collection) of
activities (operations of steps). This sequence of activities is aimed at the transformation of
inputs into the outputs (product). We agree these properties are the essential for business
process.
However, some scientists emphasize that a product must be of value to the customer. Thus,
Hammer (2003) believes that business processes should be customer-focused: "concept of
business process requires that companies consider themselves and their work through the eyes
of the client, not their own" (Hammer, 2003, p. 62). But it should be noted that this
requirement may relate only to ideal business process. In practice, in the papers related to
business process improvement (Andersen, Davenport, Harrington, Hammer and Champy)
there are numerous examples of business processes that are not customer-focused. Of course,
this fact is essential drawback of such business processes. That is the basis for their
improvement or even elimination, but it does not mean that these business processes are no
longer business processes. Rather, they are the business process that are performed "wrong".
So, we do not agree with that customer orientation is a necessary feature of the business
process, but it rather is a requirement.
Let’s analyze other features of business processes that are underlined in the definitions above:
 managed (ISO, 2008, p. 3). We agree this is the essential property of the business
process that might be included into definition, as in business practice not all processes can be

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managed. For example, natural processes, social processes (conflicts) that take place in
companies cannot be directly managed by its administration and, therefore, cannot be
considered business processes. Business processes are only those processes that can be
managed. But it’s necessary to clarify that the business process is a sequence of actions that
could potentially be managed, but not necessarily is actually operated as a separate, clearly
defined object of management. After all, any company has there are business processes,
regardless of whether they are identified and managed separately or within functional
departments;
 measured (ITILv2, Davenport, 1995) is very helpful feature, but we can’t agree that a
business process that is not measured becomes something another than a business process. So
measurability is rather a requirement for effective and efficient business process but not the
essential feature of a business process in general;
 the use of one or more inputs (resources) (Hammer and Champy, 1993, p. 55). In the
view, it is significant feature of the business process, as the essence of any process is
transformation and so inputs are those which is transformed;
 transition of work from one person to another (or from one department to another)
(Robson and Ullah, 1995, p. 9) As it is noted by Hammer and Champy (1993, p. 72), one of
the results of business process reengineering can be its "horizontal compression", i.e.
performing all the process by one person instead of several. Therefore, the business process is
not necessarily a work flow that is passed to anyone (another person or unit);
 steady (Repin, p. 29). It is another important characteristic of the business process,
because only activities which are carried out regularly, according to some more or less
formalized procedure (alternative set of procedures) can be considered business processes.
We believe if set of activities is not regular, but unique, it is rather project;
 purposeful (Hammer, 2003, p. 62 – 63). This property of the business process Hammer
considers as one of the most important: "Business processes are teleological (from the Greek
“Telos” – goal, mission), purposeful that is result-oriented, not work-oriented. In the process
based company all employees understand not only what they do but also what for.
Employees’ training and measure the effectiveness of their work is built with a focus on the
results of business processes";
 interdependence of activities within the business process (ISO, 2008, Johansson, 1993,
Business dictionary, ITILv2). It’s very important to understand that business process is a
sequence of related activities, that are performed with the common purpose;
 completeness in terms of content, time and logical sequence (Becker et al., 2008, p. 4).
Such completeness is an essential requirement for making the final or intermediate product
(service) within the business process.
So, summing up given definitions and features above, we can say that business process is a
logically complete, steady, purposeful and managed sequence of related activities that
transforms inputs into outputs intended for external or internal customers.
Key features of a business process are depicted on figure 1.

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Figure 1: Key features of business process

Business
process

Predictable and A linear, logical

definable inputs sequence or flow

A predictable and desired A set of clearly definable

outcome or result and manageable tasks or
activities

Source: Becker et al., 2003

It’s necessary to note that business process is a pattern, a model of activity. Specific set of
activities performed in a certain place in a certain moment is business process instance.

1.2. Classification of business processes

According to ISO 9001 (ISO, 2008, p. 4 – 5) there are such types of business processes:
1) Processes for the management of an organization (planning, communicating, ensuring
availability of resources).
2) Processes for managing resources such as purchase-to-pay (that includes defining
requirements, choice of source, choice of supplier, processing the order, control of delivery
and so on), processes of warehousing etc.
3) Realization processes, including manufacturing, assembling, packaging, delivering,
customer service.
4) Measurement, analysis and improvement processes. These include measuring, monitoring,
auditing, performance analysis and improvement processes (quality testing, activity based
costing and budgeting).
Measurement processes as a rule are documented while performing processes of 3 previous
types as an integral part of it.
Processes of analysis and improvement are performed as separate. So measurement processes
obtain, document and store the data on performance of management, resource and realization
processes and provide it to analysis processes. Analysis processes define deviations from
standards, requirements and define their causes. This information is provided to improvement
processes.

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 1.3. Process approach to business management
ISO quality standards insist that quality of an organization outputs depends on processes
which directly or indirectly relate to providing such outputs. So process approach to
management is recommended.
According to ISO 9001 standard (ISO, 2008, p. 4), Process Approach means “The application
of a system of processes within an organization, together with the identification and
interactions of these processes, and their management to produce the desired outcome“. It
requires management of business processes of organization.
According to the US Bureau of Labor Statistics, in USA (Knaup, 2005, p. 51 – 52) 34 percent
of new establishments fail in first 2 years, and another 22 percent additionally fail 2 years
after (see figure 2). The main reason is they don’t manage their processes properly.

Figure 2: Survival rates of new establishments from second quarter of 1998 in USA

Source: US Bureau of Labor Statistics

Business process management must be concentrated on 2 main points (ISO, 2008, p. 3):
 process effectiveness (ability to achieve planned results) and
 process efficiency (ratio of results achieved and resources used).
A generic process is depicted in figure 3.
A company can reach its business goals in an efficient and effective manner only if people
and other enterprise resources, such as information systems, equipment, are combined
together in an optimal way. Business process management is an important approach to
facilitating this effective collaboration.
Business process management includes concepts, methods, and techniques to support the
design, administration, configuration, enactment, and analysis of business processes. The
basis of business process management is the explicit representation of business processes with
their activities and the execution constraints between them. Once business processes are
defined, they can be subject to analysis, improvement, and enactment (Weske, 2007, p. 5).

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Figure 3: A generic process

Source: ISO, 2008, p. 3

1.4. Business Process Management essentials

Business Process Management (BPM) is the management processes that supports transactions
throughout their life cycle with a given organization policies and business models. For
example, transaction with customer basically begins with an order, which is followed by
supplying of necessary materials, product production, quality control, shipment and final
payment. All these stages must be aligned and properly managed, so special managerial
activity is necessary.
More generally, Business Process Management is a new philosophy of management, centered
on the processes integration and management to achieve business goals. It is based on
understanding the idea that activity of an organization is a set (sequence) of interrelated
business processes, and each process can be considered as supplier and / or customer of other
processes (figure 4).

Figure 4: Example of a generic process sequence as a part of organization activity

Source: ISO, 2008, p. 6

It’s important to note that BPM is focused not on management and improvement of individual
activities (functions), but rather on managing entire sequences of activities that generate
added value for a company and its customers. It helps management to understand what and

18
how should be done in order to achieve goals of an organization and to focus on final
outcome rather than on intermediate one. That increases effectiveness of organizations, its
responsiveness, improves quality of its products, helps to avoid repeating functions and so
decrease costs.
Davenport (1995) points out: “Taking a process approach implies adopting the customer’s
point of view”. But under the customer we understand not just a customer of an organization
as a whole, but also a customer of a business process which can be either internal business
process or external stakeholder.
Implementing the idea of focus on both external and internal customers, BPM makes
marketing philosophy orientated both outside and inside the company.

1.5. Pros and cons in adopting BPM at a company

Adopting BPM is mutually beneficial for a company, its employees, customers, suppliers and
partners (see table 2).

Table 2: Key drivers for adopting Business Process Management

Stakeholders Key drivers for adopting BPM
1 2
Enterprise Requirements for processes and tools to support organic and inorganic
growth such new products launch, company mergers and acquisitions etc.
Changes in organizational structure, both strategic and operational
Changes in business strategy
Legal compliance or regulation: for example, ISO standards
Needs for business agility to respond to market opportunities and threats
Management Need for reducing the “go to market” time
Improvement or development of a reliable performance measurement
system
Development of end-to-end visibility of processes
Need for centralization of process controls
Need for process standardization to reduce duplication and unnecessary
effort
Need for ability to produce more from less, especially in tough economic
times
Employees Improvement of low employee motivation due to duplicate processes
resulting in efforts being spent on unnecessary tasks
Encouragement for improvement of employee skills
Need for optimizing individual productivity
Need for an increase in employee empowerment
Clarification of an employee’s role and responsibilities
Provision for clear communications and understanding of the process
between employees

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 Continuation of table 2
1 2
Customers/ Improvement of service quality to customers
suppliers/
Improvement of lead delivery time
partners
Rate increase for “get it right first time”
Reduction of high costs associated with the processes which ultimately
result in savings for the customers
Source Panagacos, 2012, p. 12
At a holistic level, BPM offers the following benefits to the organization (Panagacos, 2012,
p. 16 – 18, Ryan, 2009, p. 13, Becker et al., 2008, p. 2 – 3):
1. By standardizing business processes, organizations are able to fixate the most optimal
way of process execution and reduce their operating costs because of decreasing wastes of
time, materials, energy etc. And processes that are standardized become stronger candidates
for automation.
2. Shift from local optimization of separate functions to general optimization of a
company’s activity.
3. Increased identification of potential areas of optimization. BPM helps to identify
excessive processes and eliminate duplication of functions. Process simulation as a part of
BPM allows identifying bottlenecks. Further elimination of bottlenecks increases productivity
of a process.
4. BPM creates an environment for continuous process improvement in an organization and
facilitates its ability to implement those improvements. It also helps to automate processes
through technology that almost always results in significant cost savings.
5. BPM improves business agility by enhancing an organization’s ability to sense potential
opportunities or threats and helps to prioritize its response strategy. It also allows
organizations to go to market with new products more quickly, reducing lead-times.
6. BPM enhances knowledge management. With effective recording and monitoring of
business processes, BPM offers the ability to track and locate essential information and
produce reports for senior management that provide insight into the performance of those
processes.
7. BPM provides better definition of duties and roles in company, improved operational
accountability: BPM provides high accountability to all departments within an organization
by providing the ability to track and monitor operations, budgets and deliverables.
Documentation of business process activity helps organizations to achieve a system of checks
and balances, thereby minimizing the potential for fraud, errors or loss.
8. BPM is a good tool for fraud prevention, auditing, and assessment of regulation
compliance. In today’s business environment there are a wide range of government rules and
regulations which organizations need to follow. Successful BPM implementation strives to
achieve effective, coherent controls at every process level. It involves tools, procedures,
policies, and business metrics across the company, which help the organization to keep track
of their obligations, and ensure they are compliant with applicable standards.
9. Performance visibility: BPM enhances the end-to-end visibility of a process that makes it
performance transparent to those staff members who are responsible for it. By monitoring the
performance of a process, a staff member can react accordingly and remediate any waste or

20
problems in a much quicker mode. BPM provides the means to conduct performance
measurement across an organization and can display the results in management dashboards.
Process analysts can investigate further to isolate the root causes of bottlenecks such as time
delays and high processing costs.
BPM has to be governed by the following rules (Benner, 2003):
 major activities have to be properly mapped and documented;
 BPM creates a focus on customers through horizontal linkages between key activities;
 BPM relies on systems and documented procedures to ensure discipline, consistency and
repeatability of quality performance;
 BPM relies on measurement activity to assess the performance of each individual process,
set targets and deliver output levels which can meet corporate objectives;
 BPM has to be based on a continuous approach of improvement through problem solving
and reaping out extra benefits;
 BPM has to be inspired by best practice to ensure that superior competitiveness is
achieved;
 BPM is an approach for culture change and does not result simply through having good
systems and the right structure in place.
10. Effective measurement: BPM strives to quantify the outcomes of operational activities –
cost, quantity, cycle time, quality, customer satisfaction, or any other output – using
measurement tools. Effective measurement closes the feedback loop in the process
management cycle, and provides managers with crucial information they can leverage to
make further improvements.
11. Effective risk management: risk management is an integral component of any properly
designed process. In BPM, documented processes are reviewed and assessed by process
analysts from a risk perspective whereby effective controls are embedded in all processes and
for all levels of staff.
12. Effective operational management: Organizations that have successfully implemented
BPM usually demonstrate operational efficiency through shorter cycle times, lower costs, and
the ability to handle additional work with no linear increase in staff. This results from process
improvement and prevents lapses with former unproductive methods or practices. By having
an effective process management system, business leaders can maintain a comprehensive
understanding of their own processes, measure them effectively, and make sound decisions on
how to move their businesses forward.
So BPM makes company more customer oriented, more efficient and more agile. Managers
can better understand and monitor processes of a company. This makes it possible to improve
such processes faster, aligning them customer’s needs and with other processes.
But BPM implementation is not an easy process. Taking into account papers of Hammer
(2003), Becker et al. (2008), Amouyal and Black, Repin (2007) author can distinguish the
following difficulties and obstacles in implementation of BPM:
1. BPM is based on identification, modeling and description of a company processes. These
tasks are very labor consumptive and as a rule require engaging external consultants
collaborating with employees involved into the processes. So implementation of BPM is
expensive and can take several years.

21
2. Implementation of BPM faces strong resistance from employees. They believe if
processes will be improved, automated, unnecessary functions will be eliminated – these will
lead to dismissals of employees. Another point is that collaborating with BPM
implementation team distracts employees from their direct responsibilities.
3. BPM makes company operate by new rules, procedures, and responsibilities. That
frequently requires new skills and can lead to numerous mistakes during the initial period
after its implementation.
4. BPM frequently requires changes in organizational structure, making it more
complicated, two-dimensional: “horizontal” and “vertical”. Functional managers become
simultaneously process owners that spreads their attention and can lead to mistakes in
resource allocation.

1.6. Business process management life cycle

BPM consists of 5 major stages (figure 5).

Figure 5: BPM Life Cycle

Design Modeling

BPM
Life-Cycle
Improvement Execution

Monitoring

Source: Blokdijk (2008, p. 101)

Within a BPM cycle, Business Process Design is of particular significance. It enables to
create transparency regarding the current process quality. In the design phase, the first step is
to make an inventory of the current or projected process. The process steps, the workflow
sequence, the departments involved, and the IT systems employed must be documented
(Scheer et al, 2006, p. 119).
Once an initial design of a business process is developed, it needs to be validated. A useful
instrument to validate a business process is a workshop, during which the persons involved
discuss the process. The participants of the workshop will check whether all valid business
process instances are reflected by the business process model.
While Business process design defines business process and its components in general, its
results are not directly applicable for implementation. So next step is Business process

22
modeling that details design results by creating of diagrams to map out business processes.
Business process models are used in analysis of business operations and in business
requirements gathering (Siebel, 2003, p. 13). Another task of Business process modeling is to
describe process scenarios in order to define how the process might operate under different
circumstances.
After Business process model is developed, process can be implemented into a company in
order to execute it. Execution can be performed either manually or automatically by machine
and / or software. Automation reduces manual work, decreases lead times, and increases
straight-through-processing rates. But situations when business process can be completely
automated are rare (Singh, 2009, p. 46).
The execute phase is the period where the process model becomes “fully operational”. During
this phase, the analyst identifies problems that may cause interruptions in day-to-day
activities. The analyst will also make themselves available to business line staff in order to
answer any questions and provide technical support where required (Panagacos, 2012, p. 62).
When business process is implemented into a company’s activity, it must be monitored in
order to track its performance. Results of monitoring must be analyzed. If performance is
poor, business process must be improved. If performance is high, the positive practices of
business process must (if could) be deployed for other processes of a company.
So business process management consists of 5 major stages, and this diploma thesis will be
concentrated on 2 of them: modeling (chapter 2) and improvement (chapter 3).

23
2 CORE STAGES OF BUSINESS PROCESS MANAGEMENT:
MODELING, IMPLEMENTING, MONITORING AND
IMPROVEMENT
2.1. Modeling in business and management
Many business operations are too complex to be perceived, understood and managed in their
entirety. So managers and analysts strive to reduce this complexity by filtering out
nonessential details and allowing themselves to focus on only that which is relevant for
decision making at a particular business level. In order to reduce complexity of a subject of
consideration modeling is used (Siebel, 2003. p. 13).
In general model is a representation of something, either as a physical object which is usually
smaller than the real object, or as a simple description of the object which might be used in
calculations (Osterwalder, 2004, p. 14).
A model is characterized by three properties: mapping, abstraction, and fit for purpose. First,
a model implies a mapping of a real-world phenomenon – the modeling subject. For example,
a residential building to be constructed could be modeled via a timber miniature.
Second, a model only documents relevant, essential aspects of the subject, i.e. it abstracts
from certain details that are irrelevant. The timber model of the building clearly abstracts from
the materials the building will be constructed from.
Third, a model serves a particular purpose, which determines the aspects of reality to omit
when creating a model. Without a specific purpose, we would have no indication on what to
omit. Consider the timber model again. It serves the purpose of illustrating how the building
will look like. Thus, it neglects aspects that are irrelevant for judging the appearance, like the
electrical system of the building. So a model is a mean to abstract from a given subject with
the intent of capturing specific aspects of the subject.
A way to determine the purpose of a model is to understand the target audience of the model.
In the case of the timber model, the target audience could be a prospective buyer of the
building. Thus, it is important to focus on the appearance of the building, rather than on the
technicalities of the construction. On the other hand, the timber model would be of little use to
an engineer who has to design the electrical system. In this case, a blueprint of the building
would be more appropriate (Dumas et al, 2013, p. 66).
Models in business help to manage complexity. Business models are simpler than the world
they model. Only some of the complexity of the world is present in a model, a limited view of
what is most important. Even though they are simpler than the world they model, business
models can still have a lot of detail, too much for anyone to understand all at once. Good
business models are carefully designed to show only some of that detail in any one diagram,
allowing to explore the needed detail and to ignore the rest.
A good business model supports different views of the same underlying knowledge. Each
subject matter expert can see what they need to see, for their own purposes. Each can ignore the
detail needed for other subject matter experts. For example, a strategist can look at an
organization’s goals, strategies, and tactics, ignoring the business processes and interactions. A
sales specialist can examine the business processes supporting sales, ignoring the processes
supporting operations and maintenance.
Business models show the relationships between organizations, showing who interacts with
whom and how they interact. The interactions expose the dependencies and show the impact
of a change. Business models show the cause and effect relationships between organization’s
strategies and the influencers in the organization’s environment, influencers such as

24
competitor behaviors, customer purchases, and supplier innovations (Bridgeland and Zahavi,
2009, p. 9 – 10).

2.2. Types of models

Sozinov (Созинов), defines 3 types of models as it depicted on figure 6.

Figure 6: Types of models by level of abstractness

Analogical

Level of
abstractness

Detailed Abstract

Source: Созинов = Sozinov

Physical model is a model representing a physical object which is a reduced or enlarged copy
of the original, such as model of airplane or a timber miniature of a residential building.
Physical model can be easily observed and manipulated and which have characteristics
similar to key features of more complex systems in the real world.
Analogical model is a model with the original properties, but that differs significantly from it
in appearance, such as a map, organizational chart, a blueprint, a graph, a scheme of the
algorithm etc. An important type of analog models is a game model that allows to understand
the possible way of development of real events and to train staff to operate effectively and
interact in similar situations by organizing games, such as military exercises, management
games, process simulation etc.
Another important type of analog models is diagrams which help to visualize relations among
elements of a modeling subject.
Mathematical model is a model that uses mathematical symbols and methods to describe the
characteristics of the object, such as the formula for calculating revenue from sales through
the sales revenue and cost of sales.

2.3. Business process models

Business process modeling is the creating of diagrams to map out business processes, as
experienced by the users of a system. Business process models are used in analysis of
business operations and in business requirements gathering (Siebel, 2003, p. 13).

25
A business process model can be defined as more or less formal and more or less detailed
description of the all activities within the process, their linkages in a time frame, people and
documents involved in the execution of a business process, the rules governing their
execution (Cardoso and Aalst, 2009, p. 140).
Business process models are used for many purposes, including (Cadle, Debra and Turner,
2010, p. 106 – 107):
 to document an existing process (AS-IS process) for accreditation purposes;
 to analyze the process in order to understand how it works and where the problems lie;
 to provide a basis for business process improvement (to develop TO-BE process);
 to use as a basis for training the employees;
 to identify who is involved in the entire process;
 to show the sequence of process flow and the alternative flows.
In order to create a business process model, a decomposition technique is used.
Decomposition means breaking down a process on process steps, depicting relation among
them and related objects (inputs and outputs, employees, documents etc.).
For example, the business process for launching a marketing campaign contains high-level
steps that can be broken down into greater levels of detail and more specific tasks. One of
these more detailed tasks could be reviewing a list of address changes before sending out a
direct mailing. While this step is important to complete, it may not be necessary to keep in
mind when considering the high-level flow of activities in the business process for launching
a marketing campaign, and might simply be referred to as part of a step called validate
addresses in a model of the high-level flow (Siebel, 2003. p. 13).
Independently of the concrete modeling notation, it is well accepted that there are three main
aspects of business processes that need to be defined for a business process (Cardoso and
Aalst, 2009, p. 124):
 control;
 information;
 organization.
The control aspect defines the order in which the different tasks of a business process are
executed, where concurrent or parallel execution of different tasks is allowed.
The organization aspect defines the organization structure and the resources and agents that
are involved in the business process, and in which way they may or must participate in the
different tasks.
The information aspect defines the information and documents that are involved in a business
process, how it is represented, and how it is propagated among the different tasks.
Business process models show several of the key elements of a business process (Cadle,
Debra and Turner, 2010, p. 105 – 106):
 the business event that initiates the process;
 the tasks that make up the process (these are the pieces of work that are carried out by an
actor at a point in time, and are sometimes called ‘activities’ or ‘tasks’;
 the actors that carry out the tasks or activities (these actors may, in automated or semi-
automated processes – for example, workflow systems – include IT systems);

26
 the sequence or flow of the tasks;
 the decisions that lead to alternative process flows;
 the endpoint or outcome of the process;
 optionally, the timeline for the process.

2.4. Business process model levels

While discussing decomposition of business processes as a basic modeling technique, it is
important to define the extent to which business process can be decomposed. It depends on
the business process hierarchy accepted in a particular company.
The business process hierarchy (also known as a process architecture) is a list of all process
models organized in a hierarchical way. It is developed to categorize each process’s
models using a best-practice framework (Panagacos, 2012, p. 55).
One of the ways to organize the business process hierarchy is to follow APQC Process
Classification Framework (see figure 7).

Figure 7: APQC Process Classification Framework

Source: Panagacos, 2012, p. 57

Jeston and Nelis (Jeston and Nelis, 2006, p. 359 – 364) describe another approach to the
business process hierarchy. They define six levels of process models:
Level 0 – Organizational relationship map. The organizational relationship map shows the
organization within its context with its partners: customers, vendors and third parties. This
gives the context in which the business can view its processes.
Level 1 – Organization process view. The organization process view represents the highest-
level view of the organization from a ‘process perspective’. The depiction or grouping of the
processes is usually shown in three sublevels:
1. Strategic processes, which represent the strategic processes that must ensure that the
underlying processes are meeting, and continue to meet, the specified objectives.

27
2. Core processes, which represent the core, or main, business activities of the organization.
3. Support processes, which are the non-core processes which support the core processes of
the organization.
The benefits of an organization process view are as follows:
 it provides a high-level view of the organization – all other processes will link to this
process view;
 it is an excellent way to involve senior management in the process modeling exercise and
provides a process view of the organization a process-oriented schematic like this can support
process thinking in an organization;
 if used consistently, it has the potential to replace an organization chart as the only
schematic in the organizational context.
Level 2 – List of end-to-end processes. It’s important to notice that end-to-end process is a
process that starts with the customer and ends with the customer (Panagacos, 2012, p. 115).
For each of the group of processes identified in the organization process view, a list of end-to-
end processes should be created. The benefits of this list of end-to-end processes are that it
(Jeston and Nelis, 2006, p. 359 – 364):
 provides a link between the organization process view and the individual end-to-end
processes;
 ensures that the organization focuses on end-to-end processes rather than on functional
silos.
Level 3 – End-to-end process model. An end-to-end process model describes all the main
activities that need to be performed in an end-to-end process. It normally crosses various
functional areas of the organization. It will include any high-level choices within the end-to-
end process – for example, the approval or rejection of a claim.
The benefits of an end-to-end process model are that it:
 provides a simple overview of the main activities;
 provides context when preparing the detailed process models;
 allows selection of which processes need further investigation and determination of the
scope of a project.
Level 4 – Detailed process models. This is the first level for modeling at the individual
process level. It is also the level where positions/organization units, documents, systems and
external entities are specified. At this level it is possible to include more variety (e.g. sales by
telephone, email/fax or face-to-face) and more dependencies (e.g. send order only after
contract is signed and money received). In some cases, certain activities will be specified in a
more detailed model.
The main benefits of detailed process models are that they:
 clearly document process flows;
 allow easy integration with the main processes in higher levels and other process models.
Level 5 – Procedures. This level provides a step-by-step description of each individual task.
The main benefits of procedures are that they:
 provide a clear step-by-step description of the activities;

28
 provide a good guide to train new people on the job.
It is important to note that process models should only be developed as long as they make
sense. Sometimes the procedure level is most effectively executed by the completion of a text
document.

2.5. Business process modeling notations

There are many different ways how to actually model a business process. Such ways are
called business process modeling notations; and if the meaning of a notation is precisely
defined, the notation along with that meaning can be called a business process modeling
formalism. The same notation can have different interpretations, which, strictly speaking,
makes them different formalisms based on the same notation (Cardoso and Aalst, 2009, p.
124).
This subchapter is devoted to 3 most frequently used business process modeling notations:
 IDEF0;
 BPMN;
 eEPC.

2.5.1. IDEF0 notation

IDEF0 was derived from a well-established graphical language, the Structured Analysis and
Design Technique (SADT). It is a standard for function modeling that is frequently used for
modeling the top-level processes of an organization.
IDEF0 syntax is simple (see figure 8).

Figure 8: Generic IDEF0 diagram

Source: IDEF0

29
Activity (a process or a process step, also called function in IDEF0 context) is depicted by a
box. It must be named by verb or noun that means action (e. g. to manufacture or
manufacturing).
Inputs, outputs, controls and mechanisms are depicted by arrows. But there is a strict
requirements about arrows placement:
 input (materials or information transformed by an activity) is directed to the left side of a
box;
 output (result of an activity that can be of material or informational nature) is directed
from the right side of a box;
 control (information that regulates activity, e. g. plans, budgets, instructions, rules,
legislation etc.) is directed to the top of a box;
 mechanism (employees, equipment, software that execute an activity) is directed to the
bottom of a box.
The primary strength of IDEF0 is that the method has proven effective in detailing the system
activities for function modeling, the original structured analysis communication goal for
IDEF0. Activities can be described by their inputs, outputs, controls, and mechanisms.
Additionally, the description of the activities of a system can be easily refined into greater and
greater detail (Source: IDEF0).
But there is one feature of IDEF0 notation that can confuse diagram users: the IDEF0 models
can be interpreted as representing a sequence of activities, while IDEF0 is not intended to do
so. In any diagram, the boxes are generally laid out from the top left to the bottom right, in
order of dominance, where a higher dominance box has a greater influence over a lower
dominance box.
But if it is necessary, IDEF0 can be used for modeling activity sequences. The activities may
be placed in a left to right sequence within a decomposition and connected with the flows. It
is natural to order the activities left to right because, if one activity outputs a concept that is
used as input by another activity, drawing the activity boxes and concept connections is
clearer. Thus, without intent, activity sequencing can be imbedded in the IDEF0 model
(Source: IDEF0).

2.5.2. BPMN notation

Until middle 2000-s companies were using a variety of different notations to develop
business process models. So it was very important to develop a commonly accepted
international standard for business process modeling. Such a task was solved by the Object
Management Group (OMG) – IT vendors consortium collaborated to design universal
standard known as Business Process Model and Notation (BPMN).
So today BPMN is considered among the business process management community as the
preferred standard or providing a graphical representation of processes within an organization
(Panagacos, 2012, p. 44).
The primary goal of BPMN is to provide a notation that is readily understandable by all
business users:
 business analysts that create the initial drafts of the processes,
 technical developers responsible for implementing the technology that will perform those
processes,

30
 business people who will manage and monitor those processes.
Thus, BPMN creates a standardized bridge for the gap between the business process design
and process implementation. Also BPMN is intended to ensure that XML languages designed
for the execution of business processes, such as WSBPEL (Web Services Business Process
Execution Language), can be visualized with a business-oriented notation (OMG, 2013, p. 1).
There are three basic types of sub-models within an end-to-end BPMN model (OMG, 2013, p.
21):
1. Processes (Orchestration).
2. Choreographies.
3. Collaborations.
Process is a sequence or flow of Activities in an organization with the objective of carrying
out work. In BPMN, a Process is depicted as a graph of Flow Elements, which are a set of
Activities, Events, Gateways, and Sequence Flow that adhere to a finite execution semantics.
Choreography is defined as an ordered sequence of B2B message exchanges between two or
more Participants. In a Choreography there is no central controller, responsible entity, or
observer of the Process.
Collaboration is the act of sending messages between any two Participants in a BPMN model.
The two Participants represent two separate BPML processes (OMG, 2013, p. 499 – 502).
BPMN’s specification is very complicated. There are 5 basic element categories (OMG, 2013,
p. 25):
1. Flow Objects
2. Data
3. Connecting Objects
4. Swimlanes
5. Artifacts
Flow Objects are the main graphical elements that define a Business Process. There are 3
types of Flow Objects:
1. Events.
2. Activities.
3. Gateways.
Flow objects are core elements in a BPMN notation. They consist of three types of elements:
events, activities, and gateways. An event usually represents either the start or completion of
the process or its part, whereas activities represent tasks that have to be completed as a part of
the process. Activities are therefore always triggered by an event and generate an event.
Gateways denote either the merging or the splitting of one or more activities (Panagacos,
2012, p. 45).
Data Objects can represent a singular object or a collection of objects providing information
about what Activities require to be performed and/or what do they produce. Data Objects are
represented with the fthe elements (OMG, 2013, p. 26):
1. Data Objects.
2. Data Inputs.

31
3. Data Outputs.
4. Data Stores.
Connecting objects are used to connect multiple tasks or activities to one another. There are
four ways of connecting the Flow Objects to each other or other information:
1. Sequence Flows.
2. Message Flows.
3. Associations.
4. Data Associations.
In order to categorize activities based on their position within an organization Swimlanes are
used. There are two types of Swimlanes (OMG, 2013, p. 26):
1. Pools.
2. Lanes.
Eventually Artifacts are used to provide additional information about the Process. There are
two standardized Artifacts, but modelers or modeling tools are free to add as many Artifacts
as necessary. The current set of Artifacts includes:
 group;
 text annotation.
Description and graphic representation of basic elements are given in the Appendix A.
But it’s important to note that one of the essential drawbacks of BPMN is its complexity. So
most business analysts only use a small portion of the notation when modeling a particular
process (Panagacos, 2012, p. 44).

2.5.3. eEPC notation

Architecture of integrated Information Systems (ARIS) was developed by Prof. Scheer. This
architecture concept serves as an orientation framework for complex development projects
because in its structuring elements it contains an implicit procedural model for the
development of integrated information systems. Having a library from more than 100 of
models, ARIS enables comprehensive description of an organization, including process
models.
In order to reduce complexity, the general context is divided into individual views (see Figure
9) that represent separate modeling and design aspects.
A product / service is either a physical product or an intangible service. Financial resources
and performance indicators is also included in products / services. So relationships among
mentioned objects are described in the ARIS product / service view.
The functions or processes to be performed and their relations are the subject for a a second
view, the function view.
The organization view represents a combination and relationships among users and the
organizational units.
Information resources and technologies constitute the fourth area of analysis, the resource
view.

32
Breaking down the process into individual views reduces its complexity but it hinders to
observe relationship among the process components belonging to different views. For this
reason, the control view is introduced as an additional view in which the relationships
between the views are described (Software AG, p. 2-5).

Figure 9: ARIS Analytical Views of the Process Model

Source: Software AG, p. 2-6

In ARIS the sequence of functions (activities) in the sense of business processes is
represented in process chains. Process chain models belong to the control view as they
include not just sequence of functions, but also inputs and outputs, data, informational
systems, organizational units and individual process participants, risks, etc.
One of the most widely used notation in ARIS is event-driven process chain (eEPC). This
means that the start and end events can be specified for each function. Events not only trigger
functions but are also results of functions (Software AG, p. 4-102).
Description and graphic representation of basic eEPC model elements are given in Appendix
B.
ARIS and namely eEPC business process models are widely used. One of the use of ARIS is
development of business process models for the world leading ERP systems vendor – SAP
AG.

2.5.4. Comparison of Business Process Modeling notations

Each of notations mentioned has its strengths and weaknesses. IDEF0 notation is easily
applicable for modeling of business processes at top levels: organization process view, list of

33
end-to-end processes, end-to-end process models. Simple design of IDEF0 diagrams makes it
easy to understand and to use it.
But IDEF0 does not imply to show different alternative process runs onto one diagram. For
this purpose scenarios can be used, but it is not so convenient. Objects important for process
management (such as events, rules, databases etc) can’t be shown at a diagram due to simple
design. Another important disadvantage is that IDEF0 diagrams do not show the sequence of
functions – it show the order of dominance instead.
In turn, ARIS EPC and BPMN notations are intended to provide detailed business process
models. These notations imply to use a rich set of additional objects: events, rules (gateways),
roles and organizational units (swim lanes and pools), documents, databases, risks etc. If to
compare ARIS EPC to BPMN, ARIS has much more additional objects that a well visualized
(having appropriate shape and color). Moreover, ARIS EPC allows to use several resources of
each type for an activity (for example, different executors) providing different types of
connections. So it better shows different aspects of enterprise architecture integrated to a
business process.
But ARIS EPS is poorly standardized. That makes it almost not executable unlike BPMN
which can be transformed into executable code.
So ARIS EPC exceeds BPMN in terms of modeling business processes as a part of enterprise
architecture, but BPMN is more appropriate for business process automation.

2.6. Business process implementation

When business process model is developed it can be embodied into a company activity. In
general, implementation of business process implies some changes inside a company, so it
can be provided by techniques of change management.
A company can face two different situations:
1) just one separate business process is to be implemented;
2) several interconnected business process are to be implemented.
Second case is also applicable for situations when a company just begins to implement
Business Process Management. So this case will be considered below due to its complexity.
Becker et al. (2008, p. 206 – 207) define three options of new business processes
implementation:
1) implementation of new business processes followed by adaptation of an organizational
structure;
2) implementation of new organizational structure followed by implementation of new
business processes;
3) simultaneous implementation of new business processes and organizational structure.
In spite of first two variants are easier to realize and control, the third one is more preferable.
The reason is that processes and structure are tightly related.
Welti (1999) defines three strategies of business processes implementation:
1) piloting;
2) step by step;
3) big explosion.

34
Piloting is the most careful strategy and it means implementation of a single process in a
single business unit (single location, branch etc.). It allows to test new process on a small
scale.
Step by step strategy can be used in two ways (Becker at al., 2008, p. 208):
 consequent implementation of business processes (functions) simultaneously in all
business units (locations, branches), or
 comprehensive implementation of business processes in one-after-another business units
(locations, branches).
Big explosion strategy means simultaneous implementation of business processes in all
business units (locations, branches) together.
Advantages and disadvantages of the mentioned strategies are mentioned below.

Table 3: Advantages and disadvantages of strategies for business process

implementation
Strategy Advantages Disadvantages
Piloting  Mistakes are not repeating  High duration of implementation
 Very high safety  Non conformed expectations are
possible
 Need in resources is low and equal
over the time
Step by step  Gradual accumulation of  High duration of implementation
experience
 Non conformed expectations are
 Gradual optimization possible
 Need in resources is low and equal  For the first variation of a step by
over the time step strategy: need in synchronizing
of business units
 Learning from colleagues who has
already implemented a process in
their business unit
 Low risk
 Simplified management of an
implementation project
Big  Fast implementation  High risk
explosion
 Low disturbances in a company  Huge resources are required in the
same time
 High motivation
 Mistakes can be repeated
 Implementation of processes
considers relations among them  Difficult management of an
implementation project
 Fast obtaining of benefits from
integration
Source: Welti, 1999, p. 7

35
Becker at al. (2008, p. 205) defines three stages of business process implementation:
1) implementation planning (developing a plan for changes in order to prevent breakdowns
during the implementation phase; developing a staff retraining plan, new job descriptions
etc.);
2) implementation;
3) control (if process is implemented in accordance to the plan).
An important point during the business process implementation is communication. Seebacher
(1999) states that 75% of mistakes in business process optimization are caused by lack of
information and poor integration of employees.
A big problem for the project can be caused by employees’ resistance. They can expect
changes in their responsibilities, changes in organizational procedures and even dismissals as
a result of a new business process implementation. That’s why internal communications
(internal marketing of the implementation project) are quite important.
Internal marketing can be based on several communications channels (Schmidt, 2001):
 meetings, round tables etc in order to discuss a project concept and details with
employees;
 private talks to employees;
 publications: internal (informational letters, newspapers etc.) and external;
 presentations.
Internal communications on the implementation project must be supported by technical
means. Variant of technical support can be chosen according to the following criteria (Becker
at al., 2008, p. 219 – 220):
 whether information will be transmitted in one direction (from working group to
employees) or in two directions;
 which portions of information can be available to which groups of users;
 whether existing technical infrastructure can be used for these purposes.
Depending on this criteria such means of communications as internet applications, Ethernet,
corporate portal etc. can be chosen.

2.7. Business process monitoring

Business process monitoring involves tracking of individual processes to determine their
progress and obtain statistical data on their performance (Blokdijk, 2008, p. 102).
In order to help a company with the monitoring of a business process, Key Performance
Indicators (KPIs) should be laid down to assess and determine the present state of the
business, and recommend the best possible course of action for business growth and
development (Blokdijk, 2008, p. 9).
In order to monitor a process, first it is necessary to determine indicators (key performance
indicators, or KPI).
Panagacos (2012, p. 118) defines KPI as a type of performance measurement that is used by
an organization to evaluate its success or the success of a particular activity. However, KPIs
can be attached to all levels of the organization, including individual staff members. In BPM,
KPIs are attached to each activity within an end-to-end process model.

36
As far as business process is a part of whole activity of a company, KPI of a process must
derive from goals of a company, which concern to a specific process. An approach to select
KPI was suggested by Norton and Kaplan (1996) as a part of the Balanced Scorecard (BSC)
concept (see Figure 10).

Figure 10: The Balanced Scorecard Framework

Source: Norton and Kaplan, 1996, p. 9

So objectives of a company are developed in four perspectives. Indicators (measures) derive
from objectives.
BSC then is decomposed on a process (employees) level, so each business process receives its
own BSC with KPI.
There are several principles of selecting KPI (Blokdijk, 2008, p. 10):
1. KPI should be consistent and correct;
2. KPI must be accessible for calculation at all times;
3. KPI must directly reflect the effectiveness and efficiency of a business; and
4. KPI must provide aid in proper decision-making for top management officials.
Phusavat (2010, p. 9) demonstrates some of the most wide-spread ratio-format key
performance indicators:
1. Profitability Criterion
(1.1) Revenue ÷ Total cost
(1.2) Rate of change in revenue ÷ Rate of change in cost
(1.3) Profit ÷ Revenue

37
(1.4) % of sale revenue from rework
2. Quality Criterion:
(2.1) % Delay in delivery
(2.2) % Delivery error
(2.3) % Rework (relatively to output value)
(2.4) % Return (relative to output value)
(2.5) % of rejects on incoming materials
3. QWL Criterion
(3.1) % Injury cost at the workplace (relative to operating cost)
(3.2) Unplanned absent period ÷ Working period
(3.3) Work stoppage period ÷ Working period
4. Innovation Criterion:
(4.1) % Revenue from new design
(4.2) % Revenue from new customers
(4.3) Cycle time for new work-design completion (after receiving a drawing order from a
customer)
In order to execute monitoring process, Lunau (2008) suggests such a procedure (figure 11).

38
Figure 11: Business process monitoring procedure

Source: Lunau, 2008, p. 55

First step is the specification of parameters critical to quality (CTQ) and critical to business
(CTB). These parameters are collected from different sources (complaints, solutions, technical
specifications etc.) and are depicted in matrices (CTQ matrix and CTB matrix respectively).
An example of CTQ matrix is given on figure 12.

39
Figure 12: Example of CTQ matrix for car dealer

Source: Lunau, 2008, p. 43

After parameters critical for the process are depicted, respective indicators must be chosen. In
order to do that, a Measurement Matrix is created. Rows of a matrix are represented by CTQ
and CTB parameters and columns are represented by possible indicators. Cells are used for
estimation the degree of fitting indicator and parameter.
Next step is creating a data collection plan (Lunau, 2008, p. 59). Its purpose is to answer the
questions:
1) What?
2) How?
3) When?
4) Where? will be collected

40
5) and by Whom?
The next step (Measurement System Analysis) is performed in order to check the quality of
the measurement system, before data collection. Measurement system is checked for (Lunau,
2008, p. 71 – 73):
 accuracy;
 repeatability;
 reproducibility;
 stability;
 linearity;
 granularity or discrimination / resolution.
After measurement system is analyzed, data on a process performance can be collected, then
depicted on charts (run / control chart, pie chart, histogram, Pareto chart etc.). After that data
is to be aggregated in order to calculate KPI and report it to process owner.

2.8. Business process improvement: the essence and main approaches

2.8.1. Continuous and break-throw approaches to business process improvement
The last stage of a business process management cycle is business process improvement.
Basically, business processes with a poor performance are to be improved. But later scholars
had formulated the idea that Business Process Improvement shouldn’t be concentrated just on
problem solving because of several reasons (Hammer and Champy, 1993, Imai, 1997):
 company could improve its processes not only in case of poor performance, but also
preparing to expected changes of environment in advance;
 even if changes are not expected and company is a market leader, improving business
processes that are seemingly perfect will lead to increase of a gap between the company and
its followers;
 focusing just on problems turns business process improvement to a non-regular practice,
while under the concept of continuous business process improvement it shouldn’t stop and
each employee should be always involved in the improving practices.
Basically 2 main approaches to the business process improvement are defined:
 break-throw business process improvement;
 continuous business process improvement.
Figure 13 illustrates the difference between these approaches.

41
Figure 13: Continuous and break-throw approaches to business process improvement

Source: Repin, 2007

So break-throw business process improvement is based on a standard project approach: a
company operates according to some standardized practices and if in some moment of time
performance becomes relatively low, it starts to develop an improvement project.
Development and implementation of such projects is a long end expensive process, often
requiring investments or external loans. So improvement projects are rare, but their effect can
be significant.
Continuous business process improvement is based on a quite another idea. Company
shouldn’t wait for an opportunity to implement “a big project”, it rather must improve its
activity every day by small portions. So improvement steps are often but effect of each single
improvement is relatively small.

2.8.2. Continuous business process improvement

The key point of continuous business process improvement is the way how it is organized,
namely the continuous business process improvement cycle, also known as PDCA, Deming
Cycle, Shewhart Cycle, Deming Wheel (see figure 14).
So improvement starts with Planning stage which includes choosing the process for
improvement, analyzing it and developing the improvement recommendations.
Next stage (Do) means implementing this improvement on a small scale.
Small scale improvement is followed by Check – the testing stage which determines if the
improvement results meet expectations. If so, next stage (Act) is focused on the
implementation of the improvement for all the processes it is applicable for. If not, company
plans another improvement.
Actually, next improvement is planned even if a previous one is successful. That’s why this
approach is called continuous.

42
Figure 14: Continuous business process improvement cycle

Source: Imai, 1997

There are 2 main systems of Continuous process improvement: Lean and Six Sigma (Lunau,
2008). Lean was originally developed the automotive industry in order to decrease assets
(primarily inventories) and costs for a small and middle scale production systems. Six Sigma
was originated by Motorola corporation and is focused on quality improvement by reducing
variability of a business process parameters (such as linear parameters of output, cycle time,
costs etc.). Actually, sigma is a statistical parameter that reflects variation of a process.
Difference between Lean and Six Sigma systems is shown in table 4.
Six Sigma is not just a method of defining the process variation but it is a comprehensive
business process improvement approach. The sequence of actions under the Six Sigma
approach is called Six Sigma cycle and abbreviated as DMAIC (Define, Measure, Analyze,
Improve, Control).

Table 4: Differences between Lean and Six Sigma systems

Lean
The main emphasis of Lean is reducing the
length of each cycle and removing waste
from business processes. Eliminating
unnecessary steps and speeding up the
important ones puts businesses in a position
to create the maximum number of products in
the shortest time possible.
Source: Mann
Six Sigma
the primary focus of original Six Sigma is to
minimize the amount of errors in business
processes.
Consequently, this original version aims to
pinpoint any variations that could
compromise quality and make the necessary
adjustments.

43
Let’s consider the DMAIC cycle (Lunau, 2008):
1. Define consists of such steps:
 Describe the specific problem, identify the project's goal and exact scope.
 Determine the key customers of the process to be optimized as well as their critical to
quality parameters.
 Ensure that the project gains acceptance of top management.
2. Measure includes:
 Collect data with a view to the specifications needed for meeting customer requirements.
 Ensure that measurements are accurate.
 Quantify the problems depicted in the starting situation based on figures and data on the
process output.
 Use graphs and charts as a descriptive statistics to analyze the key output measurements
and identify their specific characteristics.
3. Analyze has such components:
 Collect and verify the suspected causes.
 Identify the relationships between output, process, and input.
 Deduce the root causes for the problem handled.
4. Improve includes such steps:
 Generate solutions based on the root causes.
 Select the best solutions taking into consideration benefit and effort.
 Secure the implementation of the measures derived from the solutions.
5. Control implies such activities:
 Control the optimized process using the essential measurements.
 Secure the project's sustainable and long-term success.
Continuous business process improvement is a bottom-up approach which employs all the
staff of an organization into the improvement initiatives.

2.8.3. Break-throw business process improvement

As it was mentioned before, break-throw business process improvement is based on
development and implementation of big scale projects aimed on significant improvement of a
company’s characteristics. Such improvements can cover either several interconnected
business processes or all the company’s activity. As far as expected results and investments
are significant, break-throw business process improvement requires involvement of top
management.
In this subchapter 2 break-throw business process improvement techniques will be
considered: Business Process Benchmarking and Business Process Reengineering (BPR).
Business Process Benchmarking is a systematic method of defining, understanding and
creative development of products, services, projects, equipment, processes and procedures
(set of principles) for improving the current activities of the organization through the study of

44
how different organizations perform the same or similar operations (Harrington, 1997).
Generally it consists of four steps:
1) identifying he key processes;
2) defining several organizations that operate better than our;
3) the benchmarking team evaluates the processes of other organizations to determine why
they are performed better than the processes in the organization;
4) development and implementation of improved processes that combine the best features of
the processes of “template" organizations.
But benchmarking is a “follow-up” business process improvement technique as far as a
company can improve its processes just to the same extent as a benchmarked company has. It
is not applicable for revolutionary improvement when a company wants to innovate its
business processes basing on its own ideas.
The most radical among all business process improvement techniques is Business Process
Reengineering. Business Process Reengineering is defined by its originators Hammer and
Champy (Hammer and Champy, 1993) as a fundamental rethinking and radical redesign of
business processes to achieve dramatic improvements in critical contemporary measures of
performance, such as cost, quality, service, and speed. In their first book Hammer and
Champy emphasized on such BPR properties as fundamental and radical. As a fundamental
rethinking, BPR is focused on “doing the right things” first and only then – on “doing things
right”. Radical redesign means changing things in their root, without grounding on existing
procedures, rules and structures. So Hammer and Champy strongly differed BPR from simple
business process improvement (see table 5).

Table 5. The difference between Business Process Improvement and Business Process
Reengineering
Business Process Business Process
Parameter
Improvement Reengineering
Level of changes Incremental Radical
Starting point Existing process Blank sheet
Changes duration Short Long
Changes direction Bottom Up Top Down
Risk Moderate High
Source: Hammer and Champy
But practice have shown that about 50% to 80% of BPR projects fail (Dorsey, p. 1). So
Hammer and Champy changed focus and stated that the key property of BPR is emphasis on
business processes rather than on functions or organizational structures.

45
3 BUSINESS PROCESS MODELING AND IMPROVEMENT:
ARMAX LLC CASE
3.1. Overview of the ARMAX LLC
ARMAX LLC is a young and dynamically developing wholesale company. During the last
four years, the company became one of the leaders in the Ukrainian market of corrosion-proof
flexible metal hose. Metal hoses are applied for connection of gas, heat, engineering and
sanitary pipes and equipment.
ARMAX flexible metal hoses are safe corrugated hoses from stainless steel with the fittings
made from corrosion-proof carbonated steel or brass. Today such connection of pipes and
equipment is the most convenient, reliable and cheap.
ARMAX LLC products are described below:
1. For domestic use: hose for transporting the gas to boilers, geysers and gas stoves; hose
for transporting water to water heaters, geysers, boilers, toilet bowls and mixers; PROFI
Mounting Kit for customization of the hoses length.
2. For construction: hoses for gas meters, regulators and candles, hoses for connection of
fan coils, solar collectors and another heat engineering equipment, compensating hoses and so
on.
3. For industries with special requirements to heats, pressure or corrosion stability: flexible
metal hoses with or without stainless steel braid. These are pressure hoses, heat exchangers,
pipelines and jacks.
ARMAX LLC distributes gas hoses of different lengths and diameters. The table below
describes a range of products which are distributed by the company.
The price level represents how high the price is comparing to rival products on the market.
ARMAX LLC is the Ukrainian trademark, but the products are manufactured in Turkey at the
factory certified according to the ISO 9001–2000 quality standards. Products of the factory
are also supplied to Western and Eastern Europe, Asia and Africa.
Customers of the ARMAX LLC are the wholesale trading companies, networks of
supermarkets, gas services, installation and construction organizations, heating equipment
manufacturers as well as industrial companies. Flexibility and active efforts of the company
have gained recognition not only among the customers but also among experts in the field of
gas, heat engineering and sanitary equipment.

46
Table 6: Product range of ARMAX LLC
Product name Description Price
GAS Flex gas flex hoses are standard pitch-corrugated corrosion- Low/
proof flexible connectors with welded fittings for gas medium
equipment, such as boilers, geysers, stoves.
GAS Flex with gas flex hoses with PVC are standard pitch-corrugated Medium/high
PVC corrosion-proof flexible connectors with welded fittings
for gas equipment. PVC covering in such hose serves as
additional protection against mechanical damage and
against influence of aggressive cleansers.
GAS/EURO European standard EN 14800–2007 sets the highest High
requirements to gas hoses in the European Union.
Stainless steel hose is protected from stainless steel,
metal braiding and thick fire-preventive PVC covering.
WATER Flex water flex hoses are wide pitch-corrugated flexible Low/
connectors that are used for sanitary engineering, medium
mixers, water heaters, washing machines, gas boilers,
geysers and radiators. Wide pitch provides some
rigidity and prevents vibration and noise. Absence of
corrosive materials makes this kind of hoses almost
perpetual in use.
MIXER Flex mixer flex water hoses are wide pitch-corrugated Low/
flexible connectors for mixers. Absence of corrosive medium
materials makes this kind of flex almost perpetual in
use.
PROFI Mounting profit mounting kit consists of standard pitch flexible High/
Kit hose, set of brass nuts, stainless steel restrictive medium
segments, gaskets, nipple instrument for hose
expansion, cutter and manual for making hoses of
necessary lengths. Kits are good for fast and safe
installation of water pipes, heat systems, floor heating,
pool heating, for making hoses of necessary lengths to
connect equipment in systems of gas, water and heat
supply.
Pre–Insulated hoses for solar collectors are corrugated flexible High
corrosion-proof hoses with insulation from specially
Hoses for solar
foamed rubber.
collectors
Source: ARMAX LLC trade offers
ARMAX LLC metal hoses for gas and water are made from corrosion-proof corrugated
materials. Metal hoses are certified in Ukraine according to the DBN B.2.5.–20–2001
(regulations issued by the state construction supervision body).
The organizational structure of the ARMAX LLC is represented on the figure 15.

47
Figure 15: Organizational structure of the ARMAX LLC

The Director

Sales and
procuring
Accounting department
department

The warehousing Distributing

department Corporate sales
department

Source: internal documentation of the ARMAX LLC

The structure contains two hierarchical levels, which means that departments are reporting
mostly to the director. The sales, accounting, purchasing and procuring, warehousing and
production departments report directly to the director, but the sales department is divided on
two departments due to the difference of markets, in which the enterprise works.
The director of ARMAX LLC has the following functions:
 to develop the strategy of the company;
 to control the implementation of the company’s plans in accordance with its strategy;
 to organize working processes and to staff the company;
 to ensure that expenses of the company are within the annual budget;
 to develop and manage the relations with key customers.
The functions of the sales and procuring department are:
 to find and acquire new customers;
 to choose the most appropriate distribution channels and to distribute goods among the
existing customers of the company;
 to develop and maintain partner relationship with customers and suppliers;
 to control the quality of goods sold;
 to manage the logistics of the company;
 to negotiate with suppliers to maintain affordable purchasing costs;
 to maintain prompt payments to suppliers.
The functions of accounting department are:
 to record sales and money inflows;
 to handle payments to employees, suppliers, creditors, tax administration etc.;
 to control receivables;
 to prepare managerial reports for internal use and financial reports for governmental
institutions.

48
The functions of the warehousing department are:
 to receive procured materials and items, ensuring they match the purchase order;
 to store materials and items according to storing rules;
 to complete and pack materials and items according to the orders of sales and procuring
department, and to prepare them for shipment;
 to monitor stock level, and to report the items that have reached the replenish level;
 to ensure the quality of produced goods meets all required standards and approved
specifications.
The structure of the ARMAX LLC staff is represented in the table 7.

Table 7: The structure of the ARMAX LLC staff

Department Employees
Director 1
Accounting department 2
Sales and procuring department, including 10
Distributing department 6
Corporate sales department 4
Warehousing department 15
Total 28
Source: ARMAX LLC staff report
It is important to investigate the dynamics of sales for ARMAX LLC during the years 2010–
2014 (see figure 16).

Figure 16: The dynamics in sales volume during latest years, UAH1 thousands
8000

6000

4000

2000

0
2010 2011 2012 2013

Source: income statements of ARMAX LLC

As it can be seen, the overall sales revenue has significantly increased since 2010. It can be
considered as a great success taking into account the fact that overall market size has not
changed significantly since 2010. So dynamics of sales revenue of ARMAX LLC is similar
with the dynamics of its market share.
As a conclusion, it can be said that ARMAX LLC belongs to small business, however it has
very good potential to become a middle business firm as sales revenue continues to grow.

1
UAH – Ukrainian hryvna

49
3.2. Modeling and analysis of existing operational business process of ARMAX LLC
3.2.1. The business process description
Let us consider the basic points of the existent sales business process:
1) The sales and procurement department creates initial offer to a potential customer,
which can be identified via the market research and contacted via email or phone call. The
customers usually contacts the company first, if they know about the product and they suggest
that product fits their needs. In case of the specific product offer, the company tries to
investigate more fields of product application and contacts the possible customers first.
2) The sales and procurement department receives an order from a customer and
responses the customer with an offer. As the price per piece can vary depending on the
amount ordered, the target margin is planned by the top management first.
3) The sales subdivision (which is not the autonomous organization unit but a part of sales
and procurement department) transfers order specifications to the procurement subdivision,
which makes an inquiry and contacts the warehouse manager in order to be ensured in the
presence or absence of the specific product and its sufficient amount. The procurement
subdivision is ruled by the procurement plan, according to which the warehouse capacity
loading is strictly standardized.
4) After the inquiry is made, the warehouse manager checks the availability of the
ordered product and its amount. Then the warehouse workers load the transport to ship a
product to the customer.
5) The procurement subdivision has to maintain stock of products in the warehouse. So it
makes an order for additional product to the Turkish plant.

3.2.2. The IDEF0 diagram of operational business process

For modeling a top level of the operational business process it is appropriate to use IDEF0
notation. IDEF0 diagram of existing business process is represented on figure 17.

Figure 17: IDEF0 diagram of existing operational business process at ARMAX LLC

Source: Author

50
3.2.3. The ARIS EPC diagram of the existing sales business process
The key part of ARMAX LLC operations is business process of sales. In order to analyze it
deeply it is necessary to model it in ARIS EPC notation (figure 18).
The existent sales business process (BP) has the following disadvantages:
1) The flexibility of product range is absent. As ARMAX LLC is limited in warehousing
capacities, its strategy is to keep significant volumes of the most required (mass) products.
These covers about 40 – 50% of the product range of the Turkish plant. If customer requires
either specific product that is not regularly stored in the ARMAX LLC warehouse or the mass
product in amounts that exceed the existing stock, ARMAX LLC has the only option – to
order required product directly from the Turkish plant. It takes 1.5 to 2 months to deliver
products from Turkey that is not acceptable for part of customers.
2) The sales business process is mostly targeted to the mass production. If customer
requires specific product that is not regularly stored in the ARMAX LLC warehouse, it is
ordered from the Turkish plant. But delivering a single ordered batch from Turkey is very
expensive, so separate specific orders are collected to order pools. Such approach has several
disadvantages: waiting time for a customer is increasing and there is a risk of “forgotten
orders” (some orders can be forgotten to be included to an ordering pool).
3) The sales and procurement department is very small (10 employees), the same people
are involved in different activities (sales and procurement), therefore, they are often
overloaded. Sales department has two subdivisions:
 Corporate sales department aimed on construction and retail sectors;
 Distributing department aimed on other customers.
Each sales and procurement manager makes inquiries to the warehouse for the products
ordered by his / her clients, contacts Turkish plant concerning features and availability of
products. And once a week the head of the sales and procurement department assigns a
manager to collect all the requirements from the department and from warehouse and to make
an order to the Turkish plant. But all the managers try to avoid involvement in such activity as
their motivation system is mainly built on sales revenue they generate. That leads to delays in
ordering to Turkish plant (approximately 1 – 2 days in average) and to conflicts inside the
department.
4) There is no online system at the enterprise, purposed to monitor the warehouse
capacity. There is just the accounting system (standard accounting software 1C); therefore,
the inquiries to the warehouse and their responds take much time for registering the shipped
and brought products. So information on the shipped and brought products becomes available
in the central office in 1 – 2 days.
5) The respond of the Turkish plant and the delivery takes too much time (up to 2 months)
and many of customers disagree to wait for products in case if certain product or amounts are
absent at warehouse.

51
Figure 18. ARIS EPC diagram of sales business process (part 1)

Source: author

52
Figure 18: ARIS EPC diagram of sales business process (part 2)

Source: author
Table 8 represents ARMAX LLC losses caused by refusals of customer to wait for
product.

Table 8: ARMAX LLC losses caused by refusals of customer to wait for product
ordered in Turkish plant
Number of orders cancelled because of too Lost sales revenue, UAH
Year
long delivery time thousands
2010 31 420
2011 46 550
2012 49 638
2013 47 690
2014 54 712
Source: sales reports of ARMAX LLC

53
6) Another weak point is a business process of ordering goods from a Turkish plant. Each
Friday head of sales & procurement department assigns one of the sales & procurement
managers to compile and make an order. Sales & procurement manager collects the information
about goods shipment during the current week and the information about orders from
customers. Then he checks if these requirements can be covered by upcoming orders from
Turkey which are on the way. So just uncovered requirements are included to the final order.
After that an order is checked by the head of a department. If it’s incorrect, manager corrects it
and the head checks it again. Then manager sends an order to the Turkish plant and receives its
confirmation.
ARIS EPC diagram of ordering business process is represented on the figure 19.
Average duration of ordering business process steps, calculated during the time study, is
represented in table 9.

Table 9: Average duration of ordering business process steps

Activity Average duration, minutes
Collect all goods requirements 90
Check the upcoming orders (from Turkey) 30
Complete an order 20
Check an order 40
Correct an order 10
Send an order 10
Receive an order confirmation 10
Total 210
Source: time study made by author
So ordering takes about 3.5 hours, from which almost 3 hours are spent by sales &
procurement manager and 40 minutes – by the head of department. Existing ordering business
process is a source of several problems:
a) Sales & procurement managers’ compensation system is based on sales revenue they
generate. So any manager always tries to avoid spending about 3 hours on goods ordering
instead of selling. But if a manager is assigned by the department’s head for doing this job
(ordering), he tries to do it as quickly as possible. This is a cause of a number of mistakes in
order: by some items order exceeds actual needs so stock rises unjustifiably; by other items
ordered number is less than required and so this leads to lack of goods. Such mistakes are one
of a major reason of orders cancellations considered in table 8.
b) Another cause of mistakes in orders is that basically order includes information from the
previous Friday till Thursday (the day before ordering which is made on Friday). But while
order is compiled information about current day shipments and customer orders is coming to
the database. So this information can be included to the current order by mistake and also it
will be doubled in the next week’s order.
c) The necessity to check an order by the head of department leads to delays in ordering
when he is out of a central office.
So according to the study 7.9% of ordered items contain mistakes which lead either to
excessive stock (approximately 120 thousands UAH) or to lack of goods and losses in sales.

54
Figure 19: ARIS EPC diagram of ordering business process

Source: author

55
So existing operational business process of ARMAX LLC and its most essential parts
(business process of sales and business process of ordering) have significant disadvantages
and must be improved.

3.3. Improvement of operational business process of ARMAX LLC

3.3.1. The recommendations on improvement
The first problem to be addressed is delivery terms of a product. The best recommendation
to decrease it significantly is to locate producing capacities in Ukraine. Turkish partners
are willing to withstand the rivalry with Chinese hoses suppliers so they agreed to locate a
factory near Kiev.
According to recommendations, the new factory must be relatively small and must be
mostly concentrated on producing the specific products and on adjustment (cutting) the
hoses for a specific buyer. The most required (mass) products will be still ordered from the
Turkey.
Factory will bring strong benefits because of:
a) increase in sales as a result of increased products availability and decreased delivery
terms for the customers;
b) decrease in labor costs (approximately in 3 – 5 times);
c) decrease in logistics costs.
But as Turkish partners are willing to keep their technologies in secret, the new factory
near Kiev will be built and operated under their direct control. So all the costs and profits
concerned to this factory will belong to the Turkish partners.
The second recommendation is the redesign of the department of sales and procurement.
After the planned production capacity installation near Kiev, the range of products
supplied by the company will rise up and, therefore, tasks of sales managers will become
more numerous and sophisticated as the company will grow.
The ARMAX company points its direction mostly to the specialized products, purposed for
various needs. In order to sell the new range of products, the sales department should be
reengineered, so that the sales staff will be completely dedicated directly to the process of
sales, not to the process of procurement anymore. So the procurement department will appear
as an independent unit with its own head.
According to time studies, sales managers spend about 30% of their time on procurement
activities (including procurement of minor items like stationery, sanitary accessories etc.).
As current number of sales managers is 10, in order to perform procurement duties,
basically it is necessary to hire 2 procurement managers (head of department and
manager).
The changes in the structure can be seen on the line coming below to the processes
involved in the sales business process (built as a mechanism according to IDEF0 notation).
The most crucial and influential change is the production process implementation. This
process was completely absent in the company before the production line installation. The
production capacity will be installed and operated by Turkish partners next to Kiev. But it
will be aligned with the warehouse in Kiev. In the IDEF0 diagram the warehousing and
production processes are considered as the two last steps of the sales business process, as
the production is the beginning and the end of the cycle.

56
The installation influences the marketing approaches of the enterprise, changes its
production portfolio, and the nature of potential customers comes different.
The current mass production does not fulfill the margin requirements, as it is very small
due to the overheads and logistics. As the ARMAX LLC is not that big, every department
is involved into the sales business process, as it is the most important in the enterprise.
Another recommended improvement concerns to the informational system used by
ARMAX LLC. Now the company uses accounting system 1C which is wide spread in CIS
countries. The current configuration includes such modules:
a) accounting;
b) trade;
c) warehouse;
d) salaries;
e) staff.
But accounting and warehouse modules are not integrated that makes problems as
warehouse and main office are situated on different locations in Kiev. So delivery terms
were increased by 1 – 2 days. But this problem was considered minor as total delivery
terms could be 1.5 or even 2 months.
After the implementation of product line delivery terms will be significantly decreased (2 –
8 days). So it is recommended to integrate warehouse and accounting modules of 1 C
system.
In order to connect production capacities next to Kiev with warehouse and to avoid
mistakes in ordering from the Turkish plant the Electronic Data Interchange (EDI) system
is recommended to implement. Current number of messages is 20 – 30 a day or 400 – 600
a month. So the B2B integration platform Babelway can be implemented. It is provided by
the SaaS model (software as a service) and requires monthly fee without any installation
and initial costs. Once registered, it is possible to immediately configure the first channel
and to start exchanging messages. Vendor will provide full support with the set-up of the
first channel as well as a 2-hour personalized training for each user.
“Not so small” option of Babelway solution will cover all the data interchange needs of
ARMAX LLC, permitting to connect 5 users and to receive 20 support tickets per year.
But in order to align databases of Turkish supplier and ARMAX LLC additional costs will
be required.
Another recommendation is the implementation of barcode scanners at the warehouse
which will help to avoid mistakes while shipping and receiving products and also to
decrease duration of these operations.
Costs of informational system improvement are provided below (see table 10).

57
Table 10: Costs of informational system improvement
Item Costs, UAH Comments
Hardware
Server 28600 Dell PowerEdge R220 (210-
ACIC-A1)
Cables and net equipment 11000
Barcode scanners 7680 3 units
Software
Babelway “Not so small” EDI system free 16 200 UAH / month
Databases integration 32000 Integration of Turkish plant
and ARMAX LLC
databases
1 C accounting and warehouse modules 6 500
integration
Training
1 C warehouse training 10000 2 groups, 17 employees in
total
Babelway “Not so small” EDI system free
training
Total 95780
Source: vendors’ websites
So the main changes in IDEF0 diagram of the sales business process are:
1) The production line installation by Turkish partners. It becomes a new separate
activity shown in the model of sales business process. The production line will work in a
collaboration with warehouse.
2) The sales and procurement department is now divided onto 2 separate units, amount
of employees becomes bigger. The company hires new procurement staff.
3) At the point of sales of mass production products, the model remains unchanged.
4) The sales proportions (mass/specific production) is not shown on the IDEF0
diagram but is significantly changed from now.

3.3.2. The working principles of the redesigned sales business process and the model
of improved operational business process in IDEF0 notation
1) The first point to be changed is the offering process. As the amount of the
application fields of company’s products rises, the company has to develop a new
marketing research and try to attract customers on its own. It will not be seen at the
business process model as the company makes an initial proposal, and the customers find it
as well. The sales department makes an offer and receives an order.
Costs of a market research is 15 000 UAH, expected result is acquiring the customers from
new sectors.

58
2) The specifications for the mass products are transferred to procurement department
in order to make an offer to the warehouse. If the product is unique, the specifications are
transferred to the production line, and the production line produces the specific products.
3) If the needed mass product is absent, the procurement department makes an order
from the Turkish plant. This part of the business process will be improved in details as
informational system will be implemented. But at large as it is represented on IDEF0
diagram this part of the business process remains the same as before the improvements.
4) The previously stored mass products or just finished specific products are shipped
and the company waits for payment.
5) The products are shipped at the warehouse and the deal is closed.
The IDEF0 diagram of the improved operational business process at ARMAX LLC is
represented on the figure 20.

Figure 20: IDEF0 diagram of improved operational business process at

ARMAX LLC

Source: Author

3.3.3. The ARIS EPC diagram of the improved sales and ordering business processes
If production line will be implemented, business process of sales will also be changed. The
diagram of the improved business process is represented on figure 20.
Ordering business process also will be improved. Implementation of 1C Warehouse module and
its integration with Electronic Data Interchange platform Babelway will allow:
 to collect all goods requirements, to check the upcoming orders from Turkey and to
complete an order automatically;
 to check and correct an order by a manager (the department’s head can check it any time
from any location online, and it will not delay a process);
 to send an order faster and in the format, that is more convenient for Turkish partners.

59
Figure 21: EPC diagram of the improved sales business process (part 1)

Source: author

60
Figure 21: EPC diagram of the improved sales business process (part 2)

Source: author

61
ARIS EPC diagram of ordering business process is represented on the figure 22.

Figure 22: ARIS EPC diagram of an improved ordering business process

Source: Author
Automation of some steps of ordering business process will decrease their duration.
Expected duration of ordering business process steps after improvement is represented in
table 11.

62
Table 11: Expected duration of ordering business process steps after improvement
Activity Average duration, minutes
Complete an order 1
Check an order 20
Correct an order 10
Send an order 2
Receive an order confirmation 10
Total 43
Source: Author
So after the improvement duration of an order business process will decrease from 210 to 43
minutes, and number of employees involved – from 2 to 1. Also it is expected to eliminate
mistakes in order, that will allow to optimize stock (to avoid excessive stock) and to sell
more as all the required goods will be properly ordered.
In order to organize a procurement department it is necessary to buy additional furniture
and technique for its employee.

Table 12. Additional furniture and technique for the procurement department
Item Quantity Price, UAH / unit Costs, UAH
Desk 1 1500 1500
Armchair 1 1200 1200
Chair 2 450 900
Cabinet 1 2200 2200
Computer 1 9000 9000
Multifunctional device 1 4700 4700
Total - - 19500
Source: vendors’ websites
Monthly current costs for the procurement department are represented in table 13.
In the same time, as after the installation of production capacity next to Kiev it is expected
to increase sales, it is not planned to decrease the number of sales managers, so their
number will not change.

Table 13: Monthly current costs for the procurement department

Costs item Monthly costs, UAH
Salary of the department’s manager 10 000
Social tax rate 38%
Social tax 3 800
Mobile operator fee 100
Stationery 150
Other costs 500
Total 14 550
Source: author
So the structure of the ARMAX LLC staff after the implementation of recommendations is
represented in the table 14.

63
Table 14: The structure of the ARMAX LLC staff after the implementation of
recommendations
Department Employees
Director 1
Accounting department 2
Sales department, including 10
Distributing department 6
Corporate sales department 4
Procurement department 1
Warehousing department 15
Total 29
Source: author
So we can see that instead sales and procurement departments which accounted 10
employees who combined sales and procurement activity, the company will have sales
department with 10 sales managers who will concentrate on sales activity only, and
procurement department. Procurement department will consist just of one manager instead
of two as new IT system will save time to order goods from the plants.
It is expected that implementation of the recommended measures will be accepted by
employees because of the following reasons:
1. The existing accounting system doesn’t allow to check availability of goods in the
warehouse automatically so it takes a lot of time to collect all the necessary information
(customer requirements, upcoming orders and existing stock at the warehouse) to complete
the order. This is the reason of a plenty of mistakes that lead to loss in sales (see table 8). As
sales managers are directly interested in increase in sales, the new system which allows to
avoid such mistakes, will be accepted by them.
2. Currently order is made by one of the sales and procurement managers assigned by the
head of department. While making the order, this manager must pause his sales activity
(which directly generates his compensation). So all the sales and procurement managers try
to avoid the assignment for the procurement activity and they will be happy if it’s duration
and complexity will be decreased. In this context implementation of a separate procurement
department will meet the interests of sales managers who since this moment could be
focused on the sales activity only.
3. The new EDI Babelway system is easy in use, and new warehouse software is just a
module of the existing accounting system (1C Warehouse) so it doesn’t require much efforts
to learn how to use it.
So no resistance to the business process improvement is expected as it completely meets the
interests of sales managers.

3.3.4. Economic effect of business process improvement

It can be expected that recommended improvement of the operational business process of
ARMAX LLC will bring several positive effects:

64
1) Being produced locally, products will become cheaper that will lead to increase in sales
volumes. Additionally sales volume will be increased because of acquiring the customers
from new sectors. According to forecasts of the head of sales and procurement department,
sales volume can increase by 10 – 30 % with no change in margin per unit. Change of a
producer’s margin because of decrease in production expenses is not considered as all the
costs and benefits of introducing the production line will belong to the Turkish partners.
2) Local production will allow decreasing order-to-delivery terms from 1.5 – 2 months to 2
– 8 days depending on whether the product is already stored at warehouse or it will be
produced at a new production capacity near Kiev. It will make waiting time acceptable for
customers. But as far as Ukrainian factory will be capable to produce about 40% of product
range (other models will be still supplied from Turkey), it can be expected that just 70% of
orders will not be cancelled because of too long waiting time.
Positive effects mentioned above are possible just together with the improvement of IT
system. New IT system will help to make, organize and track orders to the Turkish and
Ukrainian plans without mistakes. If IT system will not be improved, company will continue
to make such mistakes, and their number can even increase as after the creation of Ukrainian
plant orders will be distributed between two different locations instead of one. Rise in
number of mistakes might cause reputation losses, which in turn might lead to decrease in
sales, which will eliminate all the positive effects mentioned above.
So all the recommended improvements must be considered not separately, but as a complex
of related measures of a business process improvement.
In order to calculate the economic effect of the business process improvement (extension),
the following data must be taken to the consideration:
1) Sales revenue of ARMAX LLC in 2014 is 6853 UAH thousands
2) Cost of products sold in 2014 is 3918 UAH thousands
3) Gross profit of ARMAX LLC in 2014 is: 6853 – 3918 = 2935 UAH thousands
4) Gross profit margin is 2935 / 6853 * 100% = 42.8%
In order to predict the economic effect of recommended measures 3 scenarios will be taken
into account (see table 15).
It is important to note that changes in basic demand (increase under the optimistic scenario
and decrease under the pessimistic one) are not considered as an effect of the recommended
improvements.
For the pessimistic scenario it is necessary to recalculate additional furniture and technique
for the procurement department if Ukrainian hryvna exchange rate to US dollar and Euro
will decrease in 1.5 times (see table 16).
Costs of informational system improvement (calculated in the table 10) will be increased
by 1.5 times as all the hardware, software and services are imported. So in case of
Ukrainian hryvna exchange rate decrease these costs will amount
95780 * 1.5 = 143670 (UAH)

65
Table 15: Scenarios for the economic effect estimations
Scenario Characteristics
Pessimistic Ukrainian economy will continue to fall in 2016. It will lead to decrease in
construction sector and retail at about 10%. So basic demand for hoses will
also decrease by approximately 10%.
Crisis will push Ukrainian currency down so its exchange rate to US dollar
and Euro will decrease in 1.5 times. It will result in increase of the most of
initial expenses as they consist of imported items.
Business process improvement will result in sales volume increase by 10%
(lower level of the sales and procurement department head’s estimation) as
products will become cheaper and because of acquiring the customers from
new sectors. Additional effect will be obtained because of avoiding the
orders cancellation.
Neutral According to the IMF and Ukrainian government’s forecasts, Ukrainian
economy will demonstrate slight growth (1 to 2%). So basic demand will
not change. Business process improvement will result in sales volume
increase by 20% (average of the sales and procurement department head’s
estimation) as products will become cheaper and because of acquiring the
customers from new sectors. Additional effect will be obtained because of
avoiding the orders cancellation.
Optimistic If economy will grow, war at the Eastern part of Ukraine will be finished,
Ukrainian government will start economic reforms and will improve
investment climate, it will result in growth of the construction sector. So
basic demand for hoses can grow by approximately 10%.
Business process improvement will result in sales volume increase by 30%
(higher level of the sales and procurement department head’s estimation) as
products will become cheaper and because of acquiring the customers from
new sectors. Additional effect will be obtained because of avoiding the
orders cancellation.
Source: author

Table 16: Additional furniture and technique for the procurement department for the
decreased Ukrainian hryvna exchange rate
Price, UAH / unit Costs
Quan- with decreased
Item with current with decreased
tity exchange rate,
exchange rate exchange rate
UAH
Desk 1 1500 1500 1500
Armchair 1 1200 1200 1200
Chair 2 450 450 900
Cabinet 1 2200 2200 2200
Computer 1 9000 13500 13500
Multifunctional device 1 4700 7050 7050
Total - - - 26 350
Source: author

66
Calculation of the economic effect of recommended business process improvements is
represented in table 17.

Table 17: Calculation of the economic effect of recommended improvements

Scenario
№ Item
Pessimistic Neutral Optimistic
1 2 3 4 5
Sales revenue of ARMAX LLC in 2014, UAH
1 thousands 6853
Expected increase in basic sales revenue in
2 2016, % -10% 0 10%
Expected basic sales revenue of ARMAX LLC
in 2016, UAH thousands
3 (1) * [100% + (2)] / 100% 6 167.7 6 853.0 7 538.3
Expected sales revenue increase as a result of
4 business process improvement, % 10% 20% 30%
Expected sales revenue increase as a result of
business process improvement, UAH thousands
5 (3) * (4) / 100% 616.8 1 233.5 1 850.3
Gross profit margin of ARMAX LLC in 2014,
6 % 42.80%
Expected increase in gross profit as a result of
business process improvement, UAH thousands
7 (5) * (6) / 100% 264.0 528.0 791.9
Lost sales revenue because of the orders
8 cancellation in 2014, UAH thousands 712
Expected increase in gross profit as a result of
avoiding the orders cancellation, UAH
thousands
9 (8) * (6) * 0.7 / 100% 213.3 213.3 213.3
Expenses for the additional furniture and
technique for the procurement department,
10 UAH thousands 26.4 19.5 19.5
Costs of informational system improvement,
11 UAH thousands 143.7 95.8 95.8
Total initial investments in tangible and
intangible assets, UAH thousands
12 (10) + (11) 170.1 115.3 115.3
Expected duration of use of tangible and
13 intangible assets, years 4 4 4
Depreciation and amortization rate of tangible
and intangible assets, %
14 100% / (13) 25% 25% 25%
Annual depreciation and amortization of
tangible and intangible assets, UAH thousands
15 (12) * (14) / 100% 42.5 28.8 28.8
Monthly current costs for the procurement
16 department, UAH thousands 13.1 14.6 16.1

67
 Continuation of table 17
1 2 3 4 5
Annual current costs for the procurement
department, UAH thousands
17 (16) * 12 157.2 175.2 193.2
18 Costs of a market research, UAH thousands 15 15 15
Babelway “Not so small” EDI system monthly
19 fee, UAH thousands 16.2 16.2 16.2
Babelway “Not so small” EDI system annual
fee, UAH thousands
20 (19) * 12 194.4 194.4 194.4
Expected total increase of gross profit as a
result of recommended improvements, UAH
21 thousands (7) + (9) 477.3 741.3 1005.2
Expected additional costs of recommended
improvements, UAH thousands
22 (15) + (17) + (18) + (20) 409.1 413.4 431.4
Expected increase of profit before tax as a
result of recommended improvements, UAH
23 thousands (21) - (22) 68.2 327.9 573.8
24 Corporate income tax rate in Ukraine, % 18%
Income tax from (23)
25 (23) * (24) / 100% 12.3 59.0 103.3
Expected increase of net profit as a result of
recommended improvements, UAH thousands
26 (23) - (25) 55.9 268.9 470.5
Source: author
So recommended business process improvements bear no risk of losses even under the
pessimistic scenario, which is not likely as today Ukrainian economics starts to recover and
international organizations as IMF predict this recovery to be continued in future.

68
CONCLUSION
So business process management is one of the promising managerial approaches as it helps a
company to focus on its key activities as a whole rather than on separate functions. As a result
a company can founds and eliminate unnecessary activities, delays, sources of mistakes and
wastes, increasing productivity, quality and profitability.
Case of the ARMAX LLC, Ukrainian wholesale company specializing on sales of corrosion-
proof flexible metal hose, has shown that the company’s business processes are far from
optimal. Long delivery terms lead to frequent refusals of customers to wait for the delivery.
Lack of informational support (not integrated informational system) leads to mistakes and
delays in communications between sales and procurement department, from the one hand, and
warehouse department – from the another hand. Limited product range hinders to satisfy
customers’ needs completely and to cover other sectors with products sold.
In order to address these problems it was suggested to improve the existing operational
business process by implementing the production capacity in Ukraine under the control of
Turkish partners. Also it was suggested to divide the sales and procurement department by
two parts: sales department and procurement department. It will increase productivity of sales
staff and set the procurement activity in order.
Another improvement is concerned to integration of the company’s informational system and
implementation of EDI system to communicate with the Turkish producer.
Under the neutral (basic) scenario the ARMAX LLC will earn 173 UAH thousands of the net
profit annually as a result of the recommended improvements. Pessimistic scenario suggests
55.9 UAH thousands of additional net profit and optimistic scenario suggests 470.5 UAH
thousands of additional net profit. So the recommended improvements are acceptable for the
company.

69
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LIST OF APPENDICES

Appendix A:Description and graphic representation of basic BPMN elements

Appendix B: Description and graphic representation of basic eEPC model elements
Appendix C: Formulas used in thesis

73
Appendix A: Description and graphic representation of basic BPMN elements

Source: OMG, 2013, p. 26 – 28

74
Appendix B: Description and graphic representation of basic eEPC model elements

Source: Software AG

75
Appendix C: Formulas used in thesis
1) Total costs for items necessary to implement recommended measures are calculated by
formula:

𝑇𝐶 = ∑ 𝑄𝑖 × 𝑃𝑖
𝑖=1

where Qi – quantity of ith item;

Pi – price for a piece of ith item.

2) Social tax is calculated by formula:

𝑅𝑆𝑇 × 𝑊&𝑆
𝑆𝑇 =
100%

where RST – social tax rate, %;

W&S – wages and salaries, UAH.

3) Gross profit is calculated by formula:

𝑃𝐺 = 𝑆𝑅 − 𝐶𝑂𝐺𝑆

where SR – sakes revenue;

COGS – costs of goods sold.

4) Gross profit margin is calculated by formula:

𝑃𝐺
𝐺𝑃𝑀 = × 100%
𝑆𝑅

5) Expected basic sales revenue is calculated by formula:

𝑆𝑅14 × (100% + 𝐼)
𝑆𝑅𝐵 =
100%

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where SR14 – sales revenue of ARMAX LLC in 2014, UAH thousands;
I – expected increase in basic sales revenue in 2016, %.

6) Expected sales revenue increase as a result of business process improvement in absolute

values is calculated by formula:

𝑆𝑅𝐵 × (100% + 𝛥𝑆𝑅%)

𝛥𝑆𝑅 =
100%

where ΔSR% – expected sales revenue increase as a result of business process improvement
in relative values, %.

7) Expected increase in gross profit as a result of business process improvement in absolute

values is calculated by formula:

𝛥𝑆𝑅 × 𝐺𝑃𝑀
𝛥𝐺𝑃𝑖𝑚𝑝 =
100%

8) Expected increase in gross profit as a result of avoiding the orders cancellation is

calculated as 70% of loss in sales revenue by this reason:

𝑆𝑅𝐿 × 𝐺𝑃𝑀 × 0.7

𝛥𝐺𝑃𝑐𝑎𝑛𝑠 =
100%

where SRL – lost sales revenue because of the orders cancellation in 2014, UAH thousands.

9) Depreciation and amortization rate of tangible and intangible assets is set by linear
method according to duration of their use:

100%
𝐷&𝐴𝑅 =
𝐷

where D – expected duration of use of tangible and intangible assets, years.

10) Annual depreciation and amortization of tangible and intangible assets is calculated by
formula:

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 𝑉𝐼 × 𝐷&𝐴𝑅
𝐷&𝐴 =
100%

where VI – total initial investments in tangible and intangible assets, UAH thousands.

11) Expected total increase of gross profit as a result of recommended improvements is

calculated by formula:

𝛥𝐺𝑃𝛴 = 𝛥𝐺𝑃𝑖𝑚𝑝 + 𝛥𝐺𝑃𝑐𝑎𝑛𝑠

12) Expected increase of profit before tax as a result of recommended improvements is

calculated by formula:

𝛥𝑃 = 𝛥𝐺𝑃𝛴 − 𝐶

where C – expected additional costs of recommended improvements, UAH thousands.

13) Income tax from increase of profit as a result of recommended improvements is

calculated by formula:

𝑅𝐼𝑇 × 𝛥𝑃
𝐼𝑇 =
100%

where RIT – corporate income tax rate in Ukraine, %

14) Finally, expected increase of net profit as a result of recommended improvements is
calculated by formula:
𝛥𝑁𝑃 = 𝛥𝑃 − 𝐼𝑇

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