The Wealth of Nations by Adam Smith is perhaps one of the most influential books on Economics in all history. However, not many people know that it is in this book that the idea of improving processes to increase productivity and therefore profit was born.
Although Adam Smith called it “division of labor†and not business process management, he was referring to the same idea. The concept is illustrated with the help of a pin factory example as follows:
The Pin Factory Example
Adam Smith spoke about an old pin factory where each laborer would produce the whole pin i.e. from raw material to finished product himself. Smith realized that a lot of time of such a laborer was spent in moving from one job to another and switching tools required for different jobs. This time, he concluded, was being spent in an unproductive manner.
He then saw that in the same factory, when different people were doing different activities i.e. one man was drawing the wire, the second was shaping it, the third making only pin heads and the fourth assembling the pin to complete the product, this time was being used much more effectively. Productivity went through the roof and costs were cut into a fraction of what they were. The concept of process was born and was taking the developed western world by storm.
Adam Smith also realized that such simplification of individual tasks made it possible for the workers to increase their dexterity. The productivity increased even more as workers went faster up the learning curve. Lastly as the jobs were being reduced to simple tasks, it gave an impetus to mechanization. It is much simpler to make a machine to do one part of the process, rather than to make a machine to do the entire process.
Corporations Adapt the Business Process Paradigm
The above example by Adam Smith showed that it was possible to increase the productivity by a factor of 10 or more if processes were efficient enough. Corporations of the day realized this revolutionary idea and soon it became the bedrock of the industrial revolution. All business endeavors today try to compete with each other by building more efficient processes to meet the needs of their customers. Every Fortune 500 companies today claim to be process driven. The study of processes has today become a separate science which we call Business Process Management (BPM).
The idea of processes might be old, but it is still very much valid. Almost all business organizations that have become big have adopted the process paradigm. Some of the famous names are as follows:
Ford Motors: Henry Ford’s idea of assembly line is a text book representation of an efficient process. It is no wonder than Henry Ford could therefore pay his employees more wages than his competitors and still make more profits. This was a large scale proof of the ideas propounded by Adam Smith in his 1776 seminal.
Wal-Mart: Wal-Mart turned the tables on some of the big retailers of their day with process improvement. Wal-Mart’s use of RFID chips which help in automating the purchasing process and saving a lot of clerical effort, inefficiency and costs is a case study every student of business must go through. This too can be traced back to Adam Smith’s idea of mechanization. In today’s world we call it automation, but the basics remain the same.
Dell: The story of Michael Dell’s innovation is well known today. Instead of producing and then hoping to sell, Dell’s model would initiate production only after the order was received. This helped them cut a lot of inventory and storage costs which don’t add any value. With a better process a newcomer like Dell could beat behemoths like Hewlett Packard, IBM and Compaq.
These examples show how some entrepreneurs learned the power of processes and later unleashed them to create history. Each of these entrepreneurs is a first generation entrepreneur but was able to amass far more wealth than many rich families had done over the period of many years. Process management and improvement therefore remains an important tool and organizations of all sizes pay attention to maintain and improve it. They know it can make or break their future.
