Hi @dheerules,
1. Looking at the process diagram, it seems that steps are dependant from each other, meaning the inputs for step 2 are independant inputs and outputs from step 1. Because of this "cascading" process, you have in-process outputs that are considered as potential causes.
2. It might be difficult to answer to this question without more information from the process (is it a process from a single machine that do an operation in several steps ?). But if you have your Y's that are off-target, you might need to investigate why they are off-target and what might be the root cause. For this, having a process map/diagram might help to investigate the several steps of the process, by running analysis of historical results and planning experiments (through DoE) to establish causal relationships between X's and Y's and build a model of the process.
Hope this quick answer will help you,
Victor GUILLER
L'Oréal Data & Analytics
"It is not unusual for a well-designed experiment to analyze itself" (Box, Hunter and Hunter)