Analysis of the Manzana

THE UNIVERSITY OF NEW SOUTH WALES

School of Mechanical and Manufacturing Engineering

Semester 1, 2013

GSOE9810 Process and Product Quality in Engineering

Assignment 1: Case Study

Manzana Insurance: Fruitvale Branch (Abridged)

Group Number: 13

Team Members:

Last Name First Name Student ID AKOMEAH Matilda 3447443

BASSAN Marco 3451903 HE Jie 3469345

KASIM Michael 3285455 OROMIEHIE Ebrahim 3314896

ZHANG Yan 3352792

Lecturer In-charge: Dr Eric van Voorthuysen

Tutor In-charge: Mr James Baulch

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1. Process Flow Diagram The Process Flow Diagram, or PFD, of Manzanas Fruitvale branch is shown in figure

1. Some important features of the PFD are as follow:

The coloured arrow is used in order to differentiate the origin of insurance

request. As shown in the diagram, the RUN, RAIN and RAP are originated

from the customer. On the other hand, the RERUN is originated from the

branch record.

The black arrow explains the path that each policy undergoes before being

delivered to branch record, customer and agent.

Automatic Renewal System represents the current computerised system to

produce RERUN request.

The Branch Record is assumed to store both hard copy and soft copy of the

policy, and the data is used as the input for Automatic Renewal System.

The elements involved in the PFD are used base on the general convention of process

flow diagram, which is discussed by Foster, 2013.

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Figure 1 PFD of Fruitvale branch

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2. Performance of Manzanas Fruitvale Branch The assessment of the branch performance is conduced based on two key measures.

These two key measures are financial and operational performance.

2.1. Financial Performance The data used in analysing the financial performance is taken from the Financial

Summary, Fruitvale Branch in Exhibit 5 of the case study. The key concept in

analysing this performance is based on the ability of the branch to achieve satisfactory

results or positive trend on some important economic data. The failure of meeting

these criteria indicates the existence of problems, or issues, that can be verified based

on the operational performance.

2.1.1. Branch Profit

The profit is an accounting measure, and the value is obtained by subtracting revenue

with expenses (Sullivan, 2012). In general, the revenue of a healthy company is more

than the expenses, and therefore profit is generated, otherwise there will be financial

losses. = [1]

The profit of the branch is shown in the following figure.

Figure 2 Branch profit

y = -244.21x + 2257.7

R = 0.94586

-500 0 500 1000

1500 2000 2500

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 1989 1990 1991

Pro$it in

Tho

usan

d ($)

Year

BRANCH PROFIT

5

Some key points based on figure 2 are as follow.

The trend of the profit is assumed to follow linear regression.

The reliability of the trend line is assessed based on the R-Squared value. A

reliable trendline commonly has R-Squared value of 1 or near 1 (Microsoft,

2013). The R-Squared value of the profit trendline is 0.94586, thus the

trendline is reliable.

The slope of the trendline is -244.21, thus the profit has a negative trend.

There are two significant financial losses in the last two quarters.

The negative trend and losses are mainly due to the gradual drop of revenue and not

because of increase in operating expenses. The operating expenses increased by

approximately 16.31% from the first quarter of 1989 to the first quarter of 1991,

mainly due to Finance Charge and introduction Salary/Plus program. This increase is

less significant in compare to the significant drop of gross underwriting result of

approximately 56%. The computation is summarised in the following table.

Financial

Data

Q1 1989

(A)

Q1 1991

(B)

Difference

(B-A)

Increase or

Decrease (%)

Operating

Expenses 1238 1443 205 16.56%

Gross

Underwriting

Result

3003 1322 -1681 -55.98%

Table 1 Revenue and expenses data

Furthermore, the significant elements that construct the gross underwriting result are

the net underwriting revenue and the ordinary losses. As can be seen in figure 3

below, there is minimum variation of net underwriting revenue throughout the period,

while the ordinary insured losses has been drastically grown over the period.

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Figure 3 Gross underwriting results analysis

2.1.2. Market Share

The drastic growth of ordinary insured loss shows contradiction between market share

and amount paid to the customer in term of ordinary insured loss. The amount of

ordinary insured loss is commonly increased if the market share is increased as well,

or there is a positive correlation. In the case of Fruitvale branch, the ordinary

insurance loss increased, but the market share decreased due to high renewal loss.

This issue can be addressed by analysing the ratio between ordinary insured loss and

the total policy. The analysis is summarised in the following figure.

Figure 4 Ratio between ordinary insured losses and total policies

0 2000 4000 6000 8000 10000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 1989 1990 1991

$ Va

lue (in Th

ousand

)

Year

GROSS UNDERWRITING RESULTS ANALYSIS

Gross Underwriting Results Ordinary Insured Losses Net Underwriting Revenue

0.00 2.00 4.00 6.00 8.00 10.00

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 1989 1990 1991

Ratio

Year

Ordinary Losses/Total Policies

7

The increasing ratio in figure 4 indicates the existence of problem in regard to the

quality of the customer, performance of the agent and the companys underwriting

standard. These issues will be addressed in the later section of this assignment.

2.1.2. Renewal Loss

The lack of ability of the company to maintain their existing customer is represented by the

high renewal loss. The renewal loss has a significant impact toward the profitability of the

branch. The revenue generated by the renewals is shown in the figure 5 below. The revenue

generated by the renewal starts to decrease from the first quarter 1990, and it cancels out the

revenue generated by the new policies. Thus, it has a direct effect toward the profitability of

the branch.

Figure 5 Renewal (Dollar Value)

2.2. Operational Performance The operational performance of the branch is assessed based on three main measures.

These measures include customer satisfaction level, employee attitudes toward

companys strategy and day-to-day operation performance.

2.2.1. Customer Satisfaction

The performance measures in regard to customer satisfaction in this case study are the

turnaround time, late number and renewal loss rate.

6100 6300 6500 6700 6900 7100 7300

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 1989 1990 1991

$ Va

lue (in thou

sand

)

Year

Renewal

8

Turnaround Time (TAT)

As indicated in the case study, the TAT has increased from three days to more than

five days. This is a significant competitive disadvantage for Fruitvale branch knowing

that agents typically send their clients to the company with the shortest TAT, mainly

due to the opportunity for obtaining commission earlier or selling more policies. It is

clear that in the insurance industry the TAT is a key item. The situation is worsens

due to the fact that Golden Gate, Manzanas main competitors, has decided to

implement a guaranteed TAT of one day. Thus, a significant change toward

improvement of TAT is necessary if Manzana want to stay competitive in the

business.

Late Number

Pareto Analysis is conducted in order to justify that the RERUN has the most

significant affect toward the total late figure. The data for the analysis is taken from

Exhibit 6, and the result is shown in the figure 6 below. The result shows that RERUN

contributes to more than 80% of the total late figure. The high late figure on the

RERUN indicates poor service toward the current customer, and thus it lead to poor

customer satisfaction level.

Figure 6 Pareto analysis in late policy

Furthermore, the reason behind the high renewal late is due to the priority that is

given to new policy. The summary in Exhibit 6 shows that the late figure of RUN and

RAP is zero, while RAIN and RERUN increase throughout the year. This issue is

strongly related to the profit generated by new policy and the employee attitude

99.60 99.70 99.80 99.90 100.00

0 500 1000 1500 2000 2500 3000

RERUN RAIN RUN RAP Percentage (%

)

Num

ber of Late

Type of Policy

Pareto Analysis on Late Policy

Frequency Cummulative Frequency

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toward the implementation of Salary/Plus system, which will be discussed in detail in

the later section of this assignment.

Renewal Loss Rate

The high number of renewal late leads to high renewal loss rate. As shown in the case

study, the renewal loss rate increased from 33% in the second quarter of 1990 to 47%

in the second quarter of 1991. On the other hand, the renewal loss rate of Golden

Gate, Manzanas main competitor, is 15%. Although renewals do not generate high

profit for the company, losing some market share each year is a major problem.

The lost of market share can be measured quantitatively by analysing the renewal rate

figure, which is derived from the data given in Exhibit 7. In 1989, renewal rate was

85.9% and it decreases to 69.2% in 1991. The computation is summarised in the

following table.

Request Summary 1989 1990 1991 (6 months)

RERUNs 5166 4987 2081

Renewal Lost 849 1717 926

Total 6015 6704 3007

Renewal Rate (%) 85.89% 74.39% 69.21%

Table 2 Summary of renewal rate

2.2.2. Inconsistency in Following Company Policy

The company has used first-in-first-out (FIFO) system as a policy for considering

requests. However, this policy is not support by employees. As mentioned before, the

employees tend to give priority to new policy. The discussion of the violation of

company policy, which includes the cause and the affect, will be included in the next

section of this assignment.

2.2.3. Uncontrolled Day-to-Day Operation

The data on policy processing time in Exhibit 4 shows that there is a lack of

standardisation in performing a task. This issue is justified based on the high number

of standard deviation, which mean there is a significant variation in performing a task.

The worse case scenario is taken from the processing of RERUN in the underwriting

department. The mean in performing the tasks is 18.7, while the standard deviation is

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19.8. This issue will be further analysed in detail in the next section by using the

statistical concepts known as coefficient of variation.

2.3. Outcome The outcome of this analysis is that the branch performance is poor in term of both

financial and operational. In term of financial performance, the branch profit has a

negative trend and there is a significant loss in the last two quarters. Next in term of

operational performance, the ineffective day-to-day operation and poor attitude of

employee toward company policy adversely affects the customer satisfaction level.

The TAT has increased recently, and the renewal late and loss rate also increase

recently which indicates poor customer satisfaction and lost of market share.

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3. Issue Analysis This section focuses on the issues that have been addressed in the previous section as

well as the causes of these issues. The following figure summarised the issue analysis

of the Fruitvale branch.

Figure 7 Issue tree

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3.1. Relationship Among Problems

3.1.1. TAT and Renewals

The main relation of TAT toward renewal late and loss are mainly the use of TAT to

set the due date of new policy. The new policy is currently prioritised in different

department, thus the renewal process will be further delayed. This delay will increase

the renewal late, in which turns out to be renewal loss.

3.1.2. TAT and Profit

The main relation of TAT and profit is that the agents use TAT as the main criteria to

measure the branchs capability. The high TAT leads to competitive disadvantages,

thus it will be less attractive to the agents. Furthermore, it will lead to lower incoming

customer, thus lowering the profitability of the company.

3.2. The Causes of High TAT

3.2.1. Inconsistent Implementation of Operational Strategy

The original operational policy in each stage of the underwriting process is First-In-

First-Out (FIFO) system in which orders are processed in the same order in which

they arrive (Mieghem, 2005) . The FIFO system in Manzanas operational context can

be defined as the documents, or requests, are processed in order of their arrival,

regardless of the importance and the complexity of the requests. However, the

implementation of this policy is considered to be ineffective. The ineffective

implementation of FIFO system is caused by the lack of supervision, the shortage of

leadership and authority as well as the implementation of Salary/Plus system.

The manger of each department shows a negative attitude toward correct

implementation of FIFO policy. The manager in the underwriting department prefers

to prioritise RUN and RAP due to its profitability, while the manager of the policy

writing prefers to priorities simple task for the purpose of reducing the backlog.

Furthermore, the lack of authority and leadership is shown in the attitude of manager

of rating department. The manager recognise the issue and the affect of violating the

FIFO policy, but the manager could not fix the problem due to the order given by the

higher management.

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The second cause of violation of FIFO policy is the company's strategy of giving

incentive for each new policy completed and such incentive was not applied for the

renewals. This quantitative performance measure leads to prioritisation of request,

thus the FIFO policy is violated. Furthermore, the main outcome of this issue is the

non-value added activity, which is sorting the document by priority. This activity

leads to high backlog number, which adversely affect the computation of TAT.

3.2.2. Poor Resource Scheduling and Allocation

The poor resource scheduling is justified based on the unbalance workload throughout

the period, and it results in either overtime or idle period. Next, the poor resource

allocation can be analysed based on the utilisation rate in each department. The

computation summary of the utilisation rate is shown in the following table. The

utilisation rate shows that the rating and policy-writing department are overstaffed,

which result in low utilisation rate.

Table 3 Utilisation rate

The significant cause of this problem is the outdated data of processing time required.

The inaccurate data leads inaccurate estimation of the resource and time required to

complete the job. Further, the affect of poor resource allocation and scheduling is

mainly due to the backlog that it creates. The large number of backlog affects the

computation of TAT.

3.2.3. Unstandardized Working Procedure

The data provided in Exhibit 4 shows that the 95% SCTs are derived based on the

policy processing time, and inconsistent processing time will lead to inaccurate SCTs.

Distribution Underwriting Rating Policy Writing

Daily Activity 40 Requests 40 Requests 40Requests 40Requests

Average Time

Required 40min 30min 70min 55min

Total Time Needed 26.7hours 20hours 46.7hours 27.5hours(75% of

daily requests)

Capacity Available 30hrs 22.5hrs 60hrs 37.5hrs

Utilization rate 89% 89% 78% 73%

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The inconsistent processing time is justified based on the high standard deviation

values in some of the process stages. The selected quantitative analysis in order to

provide an objective measure of the inconsistency is coefficient of variation.

The coefficient of variation, or CV, is the relative dispersion, and it is computed as

the percentage ratio of the standard deviation to the mean. The general interpretation

of CV is that data with CV of 30% or more indicates lack of process control (Brown,

1998). The mathematical equation for CV is as below. Next, the CV for policy

processing time in each stage is calculated using the CV equation, and the result is

summarised in table 4 below.

% = 100%

Coefficient of

Variation

Type of Policy

RUNs RAPs RAINs RERUNs

Distribution 44.8% 49.8% 21.1% 22.1%

Underwriting 73.4% 64.5% 51.8% 105.9%

Rating 27.2% 21.0% 24.3% 12.8%

Policy Writing 14.5% - 15.9% 19.0%

Table 4 Coefficient of Variation Result

The computation shows that the process variation in Distribution and Underwriting

department is mostly out of control with respect of 30% limit as specified by Brown,

1998. The variation of rating department is relatively high, while the processing time

in Policy Writing department is relatively in control.

Furthermore, in relation to the computation of TAT, the uncontrolled process leads to

high variation and SCT, and therefore the TAT will be overestimated. The

introduction of standardised procedure may be able to provide better process control,

and therefore the TAT will be more accurate. The relation is shown in Figure 1 below.

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Figure 8 Relation between process control and TAT

3.3. The Causes of High Renewal Late and Losses

3.3.1. Unreasonable RERUN Processing and Due Date

The renewal losses and late rate are related to unreasonable RERUNS processing and

due date. A computer automatically generated a RERUN 30 days before the

anniversary of the policy and the anniversary became the due date. However, the

RERUNS will be released at the last day before the due date which leads to the

congestion of RERUNS and less flexibility of process, and this will ultimately cause

the high rate of renewal late and losses and long time TAT.

3.4. The Causes of Negative Profit

3.4.1. Poor Originating Agent Performance

The number of new policy written and the ordinary insured losses are the two main

parameters that can be used to measure the performance of originating agent. Based

on the financial summary in Exhibit 5, the net underwriting revenue is relatively

stable while the number of ordinary insured losses increases rapidly from $4,176,000

in the first quarter of 1989 to $6,453,000 in the second quarter of 1991. The total

number of policies is decreasing in this period so the rise of the ordinary insured

losses can be explain with the selection of bad customers by the agent. In addition, the

poor relationship and lack of communication between the branch and agents is one of

the contributing factors of this issue. Thus, the agents might prefer other property-

insured company due to lower TAT and result in a rapid increase of ordinary insured

losses.

3.4.2. Implementation of Incorrect Strategy

The new management implement a new strategy in which the branch was divided into

three territories based on the geographic position. The main purpose of this strategy is

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to improve the responsiveness toward the agent. Nevertheless, from Exhibit 7, it is

clearly shown that from 1989 to 1991, the number of lost renewals increased from

849 to 1852 (two times of 926 in first 6 months in 1991) and the Gross premium was

nearly constant during two years. As a result, it seems that the geographical

restructuring is ineffectiveness and it has a significant impact to the companys

profitability.

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4. Problem in Turnaround Time (TAT) Calculation The Turnaround Time, or TAT, is defined as the number of days between the receipt

of a new commercial policy, or RUN, and the issuance of a final policy. The

calculation of TAT by Fruitvale branch is included on Exhibit 3. The context of this

calculation is based on the ending week of September 6, 1991.

There are some problems identified in regard to the current calculation of TAT. The

following are a brief list of the identified problems:

1. Obsolete input data from Exhibit 4

2. Incorrect assumption of process start-up

3. Incorrect assumption of requests transfer procedure

4.1. Obsolete Data The TAT calculation in Exhibit 3 is taken from 1991 context, and it utilised the

Standard Completion Time, or SCT that is constructed based on the policy processing

time in 1986. These SCTs are considered to be obsolete due to the installation of

computer system in Rating and Policy Writing Department during late 1980s and

early 1990s. The installation of computer system has significantly reduced the

processing time required to complete activities in these two departments. Therefore,

the utilisation of the 95% SCTs of Rating and Policy Writing Department is not valid,

and it leads to overestimation of TAT. Furthermore, the utilisation of the old data in

the TAT calculation shows that the company does not have a clear strategy in

managing their data.

4.2. Inaccurate Assumption of Process Start-up The computation of TAT in Exhibit 3 is conducted based on the assumption that, the

process in the next department can only start once the process in the previous

department has been completed, regardless of the requests that are currently in the

queue. For example, the requests in the Underwriting Departments (3 RUNs, 7 RAPs,

6 RAINs and 36 RERUNs) cannot be processed until the requests in Distribution

Department have been completed, or in other word the Underwriting Department

needs to wait for approximately 0.6 days before they can start the process. The

graphical representation of this issue is shown in figure 9 below.

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Figure 9 Sequential process start-up assumption

The assumption of the sequential process start-up leads to overestimation of TAT.

The alternative assumption that can be used to estimate TAT is by assuming processes

in a different department start in a parallel manner. It means that each department will

immediately process requests that are currently in the queue and does not wait for the

previous department to complete their tasks. This assumption will reduce the

estimation of TAT as well as improving its accuracy. The graphical representation of

this assumption is shown in the following figure.

Figure 10 Parallel process start-up assumption

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4.3. Incorrect Assumption on Requests Transfer Procedure The current computation of TAT assumes that the requests are transferred in batch.

This assumption is incorrect since the company does not implement a batch transfer

policy, and it also results in overestimation of TAT. Thus, the individual transfer is

preferable and the use of this assumption may improve the reliability of TAT.

Furthermore, the utilisation of individual transfer required addition delay period to

prevent underestimation of TAT.

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5. Recommendation to Fruitvale The availability of information ranging from the companys background,

organizational structure, operating procedures and the companys performance is

utilised for revising and modifying the company strategy and policy. This information

serves as roadmap for the recommendation for further improvement.

The proposed recommendations for solving the identified issues are discussed in

detail in this section. The discussions for each recommendation include the related

issue, the recommendation proposal and its effect toward further improvement.

Lastly, a matrix diagram is included as the basic guideline on the significance of

recommendation toward further improvement.

5.1. FIFO System and Penalty Related issue:

The teams in different department are currently prioritising the incoming

request, thus the policy is violated.

Recommendations toward the issue:

Emphasise the criticality of FIFO policy

Emphasise the importance of customer satisfaction, not the premium

generated by the policy

Introduce supervision system to ensure the policy is followed, and allocate

penalty

Effects toward improvement:

Reduces the non-value added activities, such as sorting

Reduces the renewal late and lost due to the elimination of prioritisation.

Reduces TAT

Improve the net income

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5.2. Revaluate Turnaround Time Computation Related issue:

The high turnaround time is a main competitive disadvantage for the branch.

Recommendations toward the issue:

Revaluate the method in estimating TAT due to some issues in the

computation that have been addressed previously. The additional information

for correct TAT computation can be obtained by benchmarking the

computation.

Revaluate the input data for estimating TAT.

The effect toward improvement:

Improvement of TAT in term of low TAT and its accuracy

5.3. Revaluate Salary/Plus System Related issue:

The introduction of Salary Plus system leads prioritisation of new policy since

the incentive will be paid only for each new policy written about quota.

Recommendation toward the issue:

The incentive will be paid for all policy written above quota. This action will

increase the operating expenses, but the benefits, in term of improvement in

revenue, will overcome the increase in expenses.

Effects toward improvement:

Enhancing the FIFO policy

Reduces the renewal late rate

5.4. Revise the Agents Commission Related issue:

The significant gap of renewal commission (7%) and new policy (25%)

motivates the agent to focus on getting a new customer despite of the quality

of the client.


Decrease the gap between the commissions by increasing the commission of

renewal policy.

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Effect toward improvement:

The good quality customer will reduce ordinary insured losses, thus improving

the branchs profitability.

5.5. Revise the Terrorise Strategy Related issue:

The division of territory strategy is introduced to improve the responsiveness,

but this strategy in fact increases the renewal lost, thus it is ineffective.


Bringing the underwriting teams together in order to centralised the policy

processing.


Even and balance workload for employee

Reduce the TAT due to better resource utilisation

5.6. Guideline for Computerised System Related issue:

The implementation of computerised system to ensure on time RERUN

processing is not effective due to lack of guideline.


Establish the clear guideline in regard to receiving and processing RERUNs

that are generated by the computerised system


Prevent unnecessary delay of RERUN process, thus reducing the renewal late.

5.7. Data Management System Related issue:

The out-dated data used in the TAT calculation leads to inaccurate estimation,

thus a proper data management system needs to be implemented for the

purpose of regular data update.


Implementation of data management system such that regular update from the

main company can be obtained in a real time manner.

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Improve the accuracy and reliability of TAT calculation and other related

computation.

5.8. Standardise Working Procedure Related Issue:

The large variation of the process in each department leads to high TAT

computation.


Establishing a standard working procedure that provides clear guideline of the

step-by-step procedures that need to be done for different policies in different

department. The use of graphical representation, such as flowchart, can be

implemented to improve the effectiveness.


The low variation of process leads to lower Standard Completion Time (SCT),

thus it reduces the overall TAT estimation.

5.9. Outcome The matrix diagram is constructed in order to show the priority of the

recommendation and inform the management regarding the significance of each

recommendation. The matrix diagram is shown in the following figure.

Figure 11 Matrix diagram

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Bibliography Brown, C. E. (1998). Coefficient of Variation. Applied Multivariate Statistics in

Geohydrology and Related Science, 1998, pp 155-157

Foster, S. T. (2013). Managing Quality: Integrating the Supply Chain (5th ed).

Pearson Education Limited, Harlow

Microsoft Corp. (2013). Choosing the best trendline for your data. Retrieved on April

29, 2013 from http://office.microsoft.com/en-au/help/choosing-the-best-trendline-for-

your-data-HP005262321.aspx

Mieghem, P.V. (2005). General Queuing Theory. Retrieved on April 29, 2013 from

http://www.nas.its.tudelft.nl/people/Piet/CUPbookChapters/PACUP_queueing.pdf

Sullivan, W.G., Wicks, E.M. & Koelling, C.P. (2012). Engineering Economy (15th

ed). Pearson Higher Education, Upper Saddle River, New Jersey

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