How should use of a preprint server be incorporated into the publishing workflow?
Workflow may be different, but the one I am familiar with is:


put preprint on arXiv along with sending it to a journal
after the final version is confirmed, update the arXiv with the newest version of text (with your formatting)
(in case there are serious mistakes or omissions, update arXiv at anytime)


Sometimes version on arXiv is put before the submission to a journal, for example:


there is some work that need to be done before the submission, but we want to have it before a conference we are attending, or a talk at another department (so we can point the preprint to the reader),
we haven't decided yet where or if we want to send it.


And in some cases, arXiv is used instead of a journal, especially if:


the work is not suitable for publication in a journal (e.g. a PhD Thesis, textbook), but we want to disseminate it, preserve it and make it easily citable,
the author prefers it that way (e.g. it is a short note, or the topic is unconventional and the author prefers to avoid struggling with editors).