Chapter 11 Information Systems Within an Organization Notes
Chapter 11 Information Systems Within an Organization Notes IS2080C
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Chapter 11 Information Systems Within The Organization 11.1 Transaction Processing Systems Transaction: Any business event that generates data worthy of being captured and stored in a database. Examples of transactions are a product manufactured, a service sold, a person hired, and a payroll check generated. In another example, when you are checking out of Walmart, each time the cashier swipes an item across the bar code reader is one transaction. Transaction Processing System (TPS): Supports the monitoring, collection, storage, and processing of data from the organization’s basic business transactions, each of which generates and collects data continuously, in real time. The TPSs are critical to the success of any enterprise because they support core operations. TPSs are inputs for the functional area information systems and business intelligence systems, as well as business operations such as customer relationship management, knowledge management, and ecommerce. TPSs have to efficiently handle both high volumes of data and large variations in those volumes. In addition, they must avoid errors and downtime, record results accurately and securely, and maintain privacy and security. TPS Methods: 1. Source Data Automation: A process in which organizations try to automate the TPS data entry as much as possible because of the large volume involved. 2. Batch Processing: The firm collects data from transactions as they occur, placing them in groups or batches and then prepares and processes the batches periodically (say, every night) 3. Online Transaction Processing (OLTP): Business transactions are processed online as soon as they occur. For example, when you pay for an item at a store, the system records the sale by reducing the inventory on hand by one unit, increasing sales figures for the item by one unit, and increasing the store’s cash position by the amount you paid. The system performs these tasks in real time by means of online technologies. 11.2 Functional Information Systems Functional Information systems: Supports a particular functional area in the organization by increasing each area’s internal efficiency and effectiveness. 5 different types of FIS are Accounting, Finance, Human Resources, Productions/Operations, and Marketing. 1. Information Systems in accounting and finance: A primary mission of the accounting and finance functional areas is to manage money flows into, within, and out of organizations. This mission is very broad because money is involved in all organizational functions. Financial planning and budgeting: a) Financial and economic forecasting is the knowledge about the availability and cost of money is a key ingredient for successful financial planning. Cash flow projections are particularly important because they inform organizations what fund they need, when they need them, and how they will acquire them. b) Budgeting allocates the organization’s financial resources among participants and activities. The budget allows management to distribute resources in the way that best supports the organization’s mission and goals. Managing financial transactions: Many accounting/finance software packages are integrated with other functional areas. For example, Peachtree by Sage offers a sales ledger, a purchase ledger, a cash book, sales ordering process, invoicing, stock control, a fixed assets register, and more. Organizations, business processes, and business activities operate with, and manage, financial transactions. Examples are: a) Global stock exchange: Financial markets operate in global, 24/7/365, distributed electronic stock exchanges that use the internet both to buy and sell stocks and to broadcast real time stock prices. b) Managing multiple currencies: Global trade involves financial transactions that are carried out in different currencies. The conversion ratios of these currencies are constantly in flux. Financial and accounting systems utilize financial data from different countries, and they convert the currencies from and to any other currency in seconds. c) Virtual close: Companies traditionally closed their books quarterly, usually to meet regulatory requirements. Today, many companies want to be able to close their books at any time, on very short notice. Information systems make it possible to close their books quickly in what is called a virtual close. This process provides almost real time information on the organizations financial health. d) Expense management automation: Refer to systems that automate the data entry and processing of travel and entertainment expenses. EMA systems are web based applications that enable companies to quickly and consistently collect expense information, enforce company policies and contracts, and reduce unplanned purchases as well as airline and hotel expenses. They also allow companies to reimburse their employees more quickly because expense approvals are not delayed by poor documentation. Investment management: Organization invest large amounts of money in stocks, bonds, real estate, and other assets. Managing these investments is a complex task, for several reasons. First, organizations have literally thousands of investment alternatives dispersed throughout the world to choose from. In addition, these investments are subject to complex regulations and tax laws, which vary from one location to another. Investment decisions require managers to evaluate financial and economic reports provided by diverse institutions, including federal and state agencies, universities, research institutions, and financial services firms. To monitor, interpret, and analyze the huge amounts of online financial data, financial analysts employ two major types of IT tools: 1.) internet search engines and 2.) business intelligence and decision support software. Control and auditing: One major reason why organizations go out of business is their inability to forecast and/or secure a sufficient cash flow. Underestimating expenses, overspending, engaging in fraud, and mismanaging financial statements can lead to disaster. Consequently, it is essential that organizations effectively control their finances and financial statements. Examples of financial control are: a) Budgetary control: After an organization has finalized its annual budget, it divides those monies into monthly allocations. Managers at various levels monitor departmental expenditures and compare them against the budget and the operational progress of corporate plans. b) Auditing: Auditing has 2 basic purposes: 1.) to monitor how the organization’s monies are being spent and 2.) to assess the organization’s financial health. Internal auditing is performed by the organization’s accounting/finance personnel. These employees also prepare for periodic external audits by outside CPA firms. c) Financial ratio analysis: Another major accounting/finance function is to monitor the company’s financial health by assessing a set of financial ratios. Included here are liquidity ratios (the availability of cash to pay debt), activity ratios (how quickly a firm converts noncash assets to cash assets), debt ratios (measure the firm’s ability to repay long term debt), and profitability ratios (measure the firm’s use of its assets and control of its expenses to generate an acceptable rate of return). 2. Information systems in marketing: It is impossible to overestimate the importance of customers to any organization. Therefore, any successful organization must understand its customers’ needs and wants and then develop its marketing and advertising strategies around them. Information systems provide numerous types of support to the marketing function. 3. Information systems for Human Resources: Initial human resources information system (HRIS) applications dealt primarily with transaction processing systems, such as managing benefits and keeping records of vacation days. As organizational systems have moved to intranets and the web, so have HRIS applications. For example, numerous organizations use their web portals to advertise job openings and to conduct online hiring and training. Examples of how organizations use IT to perform some key HR functions are: Recruitment: Recruitment involves finding potential employees, evaluating them, and deciding which ones to hire. Some companies are flooded with viable applicants; others have difficulty finding the right people. IT can be helpful in both cases. In addition, IT can assist in related activities such as testing and screening job applicants. With millions of resumes available online, it is not surprising that companies are trying to find appropriate candidates on the web, usually with the help of specialized search engines. Companies also advertise hundreds of thousands of jobs on the web. Online recruiting can reach more candidates, which may bring in better applicants. In addition, the cost of online recruitment are usually lower than traditional recruiting methods such as advertising in newspapers or in trade journals. Human resources development: After employees are recruited, they become part of the corporate human resources pool, which means they must be evaluated and developed. IT provides support for these activities. Most employees are periodically evaluated by their immediate supervisors. In addition, in some organizations, peers or subordinates also evaluate other employees. Evaluations are typically digitized, and they are used to support many decisions, ranging them rewards to transfers to layoffs. IT also plays an important role in training and retraining. Some of the most innovative developments are taking place in the areas of intelligent computer aided instruction and the application of multimedia support for instructional activities. Human resources planning and management: Managing human resources in large organizations requires extensive planning and detailed strategy. IT support is particularly valuable in three areas: a) Payroll and employees’ records: The HR department is responsible for payroll preparation. This process is typically automated, meaning that paychecks are printed or money is transferred electronically into employees’ bank accounts. b) Benefits administration: In return for their work contributions to their organizations, employees receive wages, bonuses, and various benefits. These benefits include healthcare and dental care, pension contributions, 401k contributions, wellness centers, and child care centers. Managing benefits is a complex task because multiple options are available and organizations typically allows employees to choose and trade off their benefits. In many organizations, employees can access the company portal to self register for specific benefits. c) Employee relationship management: In their efforts to better manage their employees, companies are developing ERM applications. A typical ERM application is a call center for employees’ problems. 4. Information systems for productions/operations management: The POM function in an organization is responsible for the processes that transform inputs into useful outputs as well as for the overall operation of the business. The POM function is also responsible for managing the organization’s supply chain. Examples of POM functions are: In house logistics and materials management: Logistics management deals with ordering, purchasing, inbound logistics, and outbound logistics activities. Related activities include inventory management and quality control. Inventory management determines how much inventory an organization should maintain. Both excessive inventory and insufficient inventory create problems. Overstocking can be expensive, because of storage costs and the costs of spoilage and obsolescence. However, keeping insufficient inventory is also expensive, because of last minute orders and lost sales. Quality control provides information about the quality of incoming material and parts, as well as the quality of in process semi-finished and finished products. These systems record the results of all inspections and then compare these results with established metrics. They also generate periodic reports that contain information about quality, for example, the percentage of products that contain defects or that need to be reworked. Quality control data, collected by web based sensors, can be interpreted real time. Alternatively, they can be stored in a database for future analysis. Planning production and operations: In many firms, POM planning is supported by IT. POM planning has evolved from material requirements planning (MRP) to manufacturing resource planning (MRP II), to enterprise resource planning (ERP). The planning process that integrates production, purchasing, and inventory management of interdependent items is materials requirements planning (MRP). Consider for example a company that makes three types of chairs, all of which use the same screws and bolts. In this case, the demand for screws and bolts depends on the total demand for al three types of chairs and their shipment schedules. MRP deals only with production scheduling and inventories. More complex planning also involves allocating related resources, such as money and labor. For these cases, more complex, integrated software, called manufacturing resource planning (MRP II). MRP II integrates a firm’s production, inventory management, purchasing, financing, and labor activities. Thus, MRP II adds functions to a regular MRP system. In fact, MRP II has evolved into enterprise resource planning. Computer integrated Manufacturing (CIM): An approach that integrates various automated factory systems. CIM has three basic goals: 1.) To simplify all manufacturing technologies and techniques, 2.) to automate as many of the manufacturing processes as possible, and 3.) to integrate and coordinate all aspects of design, manufacturing, and related functions via computer systems. Product lifecycle management: Even within a single organization, designing and developing new products can be expensive and time consuming. When multiple organizations are involved, the process can become very complex. Product lifecycle management is a business strategy that enables manufacturers to share product related data that support product design and development and supply chain operations. PLM applies web based collaborative technologies to product development. By integrating formerly disparate functions, such as a manufacturing process and the logistics that support it, PLM enables these functions to collaborate, essentially forming a single team that manages the product from its inception through its completion. FAIS & ERP Reports: All information systems produce reports: transaction processing systems, functional area information systems, ERP systems, customer relationship management systems, business intelligence systems, and so on. Reports are so closely associated with FAIS and ERP systems and they generally fall into three categories: 1. Routine Reports: Reports produced at scheduled intervals. They range from hourly quality control reports to daily reports on absenteeism rates. Although routine reports are extremely valuable to an organization, managers frequently need special information that is not included in these reports. At other times, they need information that is normally included in routine reports, but at different times. An example is, “I need the report today, for the last three days, not for one week.) 2. Ad-hoc Reports: Out-of-the routine reports. Drill-Down Reports: Displays a greater level of detail. For example, a manager might examine sales by region and decide to “drill down” by focusing specifically on sales by store and then by salesperson. Key Indicator Reports: Summarize the performance of critical activities. For example, a CFO might want to monitor cash flow and cash on hand. Comparative Reports: compare and contrast the performances of different business units or of a single unit during different time periods. 3. Exception Reports: Include only information that falls outside certain threshold standards. To implement management by exception, management first establishes performance standards. The company then creates systems to monitor performance, to compare actual performance to the standards, and to identify exceptions to the standards. The system alerts managers to the exceptions via exception reports. 11.3 Enterprise Resource Planning systems Enterprise Resource Planning (ERP) Systems: Systems designed to correct a lack of communication among the functional area IS and they adopt a business process view of the overall organization to integrate the planning, management, and use of all of an organization’s resources, employing a common software platform and database. ERP is designed around business processes. A business process is a set of related steps or procedures designed to produce a specific outcome. 1. ERP II Systems: Interorganizational ERP systems that provide Web-enabled links among a company’s key business systems—such as inventory and production—and its customers, suppliers, distributors, and other relevant parties. These links integrate internal facing ERP applications with the external focused applications of supply chain management and customer relationship management. Enterprise resource planning (ERP) modules: 1. Financial management modules: These modules support accounting, financial reporting, performance management, and corporate governance. They manage accounting data and financial processes such as general ledger, accounts payable, accounts receivable, fixed assets, cash management and forecasting, product cost accounting, cost center accounting, asset accounting, tax accounting, credit management, budgeting, and asset management. 2. Operations management: These modules manage the various aspects of production planning and execution such as demand forecasting, procurement, inventory management, materials purchasing, shipping, production planning, production scheduling, materials requirements planning, quality control, distribution, transportation, and plant and equipment maintenance. 3. Human resources management: These modules support personnel administration (including workforce planning, employee recruitment, assignment tracking personnel planning, and development, and performance management and reviews), time accounting, payroll, compensation, benefits accounting, and regulatory requirements. 4. Customer relationship management: These modules support all aspects of a customer’s relationship with the organization. They help the organization to increase customer loyalty and retention, and thus improve its profitability. They also provide an integrated view of customer data and interactions, helping organizations to be more responsive to customer needs. 5. Supply chain management: These modules manage the information flows between and among stages in a supply chain to maximize supply chain efficiency and effectiveness. They help organizations plan, schedule, control, and optimize the supply chain from the acquisition of raw materials to the receipt of finished goods by customers. 6. Business intelligence: These modules collect information used throughout the organization, organize it, and apply analytical tools to assist managers with decision making. 7. E-business: Customers and suppliers demand access to ERP information including order status, inventory levels, and invoice reconciliation. Furthermore, they want this information in a simplified format that can be assessed via the web. As a result, these modules provide two channels of access into ERP system information – one channel for customers (B2C) and one for suppliers and partners (B2B). On premise ERP implementation: 1. The vanilla approach: In this approach, a company implements a standard ERP package, using the package’s built in configuration options. When the system is implemented in this way, it will deviate only minimally from the package’s standardized settings. The vanilla approach can enable the company to perform the implementation more quickly. However, the extent to which the software is adapted to the organization’s specific processes is limited. Fortunately, a vanilla implementation provides general functions that can support the firm’s common business processes with relative ease, even if they are not a perfect fit for those processes. 2. The custom approach: In this approach, a company implements a more customized ERP system by developing new ERP functions designed specifically for that firm. Decisions concerning the ERP’s degree of customization are specific to each organization. To utilize the custom approach, the organization must carefully analyze its existing business processes to develop a system that conforms to the organization’s particular processes. In addition customization is expensive and risky because computer code must be written and updated every time a new version of the ERP software is released. Going further, if the customization does not perfectly match the organization’s needs, then the system can be very difficult to use. 3. The best of breed approach: This approach combines the benefits of the vanilla and customized systems while avoiding the extensive costs and risks associated with complete customization. Companies that adopt this approach mix and match core ERP modules as well as other extended ERP modules from different software providers to best fit their unique internal processes and value chains. Thus, a company may choose several core ERP modules from an established vendor to take advantage of industry best practices. Software as a service ERP implementation): In this business model, the company rents the software from an ERP cloud vendor who offers its products over the Internet. The ERP cloud vendor manages software updates and is responsible for the system’s security and availability. Cloud based ERP systems can be a perfect fit for some companies. For instance, companies that cannot afford to make large investments in IT, yet already have relatively structured business processes that need to be tightly integrated, might benefit from cloud computing. 3 advantages of using a cloud based ERP system: 1. The system can be used from any location that provides internet access. Consequently, users can work from any location using online shared and centralized sources (data and databases). Users access the ERP system via a secure virtual private network connection with the provider. 2. Companies using cloud based ERP avoid the initial hardware and software expenses that are typical of on premise implementations. For instance, to run SAP on premise, a company must purchase SAP software as well as a license to use SAP. The magnitude of this investment can hinder small to medium sized enterprises from adopting ERP. 3. Cloud based ERP solutions are scalable, meaning it is possible to extend ERP support to new business processes and new business partners by purchasing new ERP modules. 3 disadvantages of using a cloud based ERP system: 1. It is not clear whether cloud based ERP systems are more secure than on premise systems. 2. Companies that adopt cloud based ERP systems sacrifice their control over a strategic IT resource. For this reason, some companies prefer to implement an on premise ERP system, utilizing a strong in house IT department that can directly manage the system. 3. A third disadvantage is a direct consequence of the lack of control over IT resources. This disadvantage occurs when the ERP system experiences problems; for example, some ERP functions are temporarily slow or are not available. In such cases having an internal IT department that can solve problems immediately rather than dealing with the cloud vendor’s system support can speed up the system recovery process. Benefits of ERP systems: 1. Organizational Flexibility and Agility: ERP systems break down many former departmental and functional silos of business processes, information systems, and information resources making organizations more flexible, agile, and adaptive. The organizations can therefore respond quickly to changing business conditions and capitalize on new business opportunities. 2. Decision Support: Provide essential information on business performance across functional areas which significantly improves managers’ ability to make better, more timely decisions. 3. Quality and Efficiency: ERP systems integrate and improve an organization’s business processes, generating significant improvements in the quality of production, distribution, and customer service. Specific ERP Benefits: Tangible Benefits 1. Inventory Reduction 2. Personnel Reduction 3. Productivity Improvements 4. IT costs Reduction 5. Transportation/logistics 6. Revenue/profit increases Intangible Benefits 1. Information Visibility 2. New/Improved process 3. Customer responsiveness 4. Standardization 5. Flexibility ERP Limitations 1. Business Processes Predefined by Best Practices: Best practices are the most successful solutions or problem solving methods for achieving a business objective. As a result, companies may need to change their existing business processes to fit the predefined business processes incorporated into the ERP software. For companies with well established procedures, this requirement can create serious problems, especially if employees do not want to abandon their old ways of working and therefore, resist the changes. 2. Difficult to Implement: ERP systems can be extremely complex, expensive, and time consuming to implement. In fact, the costs and risks of failure in implementing a new ERP system are substantial. Quite a few companies have experienced costly ERP implementation failures. Specifically, they have suffered losses in revenue, profits, and market share when core business processes and information systems failed or did not work properly. In many cases, orders and shipments were lost, inventory changes were not recorded correctly, and unreliable inventory levels cause major stock outs. Major Causes of ERP Implementation Failure: 1. Failure to involve affected employees in the planning and development phases and in change management processes 2. Trying to accomplish too much too fast in the conversion process 3. Insufficient training in the new work tasks required by the ERP system 4. Failure to perform proper data conversion and testing for the new system Enterprise Application Integration (EAI) System: integrates existing systems by providing software, called middleware, that connects multiple applications. In essence, the EAI system allows existing applications to communicate and share data, thereby enabling organizations to utilize existing applications while eliminating many of the problems cause by isolated information systems. 11.4 ERP Support for Business Processes The procurement, fulfillment, and production processes o Procurement Process: Originates when a company needs to acquire goods or services from external sources, and it concludes when the company receives and pays for them. Example of a procurement process: 1. The process originates in the warehouse department, which generates a purchase requisition to buy the needed products 2. The warehouse forwards the requisition to the purchasing department, which creates a purchase order, and forwards it to the vendor. 3. After the company places the order, it receives the goods in its warehouse department, where someone physically checks the delivery to make certain that it corresponds to what the company ordered. 4. If the shipment matches the order, then the warehouse issues a goods receipt document. 5. At the same time or shortly after, the account department receives an invoice from the vendor. Accounting then checks that the purchase order, the goods receipt document, and the invoice match. This process is called the three way match. After accounting verifies the match, it processes the payment and send it to the vendor. o Order Fulfillment Process: (order-to-cash process) Process in which the company sells goods to a customer originating when the company receives a customer order, and concluding when the company receives a payment from the customer. Example of order fulfillment process: 1. The sales department receives a customer inquiry, which essentially is a request for information concerning the availability and price of a specific good. 2. After sales receives the inquiry, it issues a quotation that indicates availability and price. 3. If the customer agrees to the price and terms, then Sales creates a customer purchase order and a sales order 4. Sales forwards the sales order to the warehouse. The sales order is an interdepartmental document that helps the company keep track of the internal processes that are involved in fulfilling a specific customer order. In addition, it provides details of the quantity, price and other characteristics of the product. 5. The warehouse prepares the shipment and produces two other internal documents: the picking document, which it uses to remove goods from the warehouse, and the packaging list, which accompanies the shipment and provides details about the delivery. 6. At the same time, accounting issues an invoice for the customer 7. The process concludes when Accounting receives a payment that is consistent with the invoice. o Production Process: A cross functional business process in which a company produces physical goods. This process follows one of two strategies: make-to-stock and make-to-order. Make to stock occurs when the company produces goods to create or increase an inventory; that is, finished products that are stored in the warehouse and are available for sales. Make to order occurs when production is generated by a specific customer order. Example of a production process: The warehouse department issues a planned order when the company needs to produce a finished product, either because the warehouse has insufficient inventory or because the customer placed a specific order for goods that are not currently in stock. Once the planned order reaches production, the production controller authorizes the order and issues a production order, which is a written authorization to start the production of a certain amount of a specific product. To assemble a finished product, production requires a number of materials. To acquire these materials, production generates a material withdrawal slip, which lists all of the needed parts, and forwards it to the warehouse. If the parts are available in the warehouse, then the warehouse delivers them to production. If the parts are not available, then the company must purchase them via the procurement process After production has created the products, it updates the production order specifying that, as planned, a specific number of units of product can now be shipped to the warehouse. As soon as the warehouse receives the finished goods, it issues a goods receipt document that certifies how many units of a product it received that are available for sales. A number of events can occur that create exceptions or deviations in the procurement, fulfillment, and production process. Deviations may include the following 1. A delay in the receipt of products 2. Issues related to an unsuccessful three way match regarding shipment and its associated invoice 3. Rejection of quotation 4. A delay in shipment 5. A mistake in preparing the shipment or in invoicing the customer (fulfillment) 6. Overproduction of a product 7. Reception of parts that cannot be used in the production process 8. Non-availability of certain parts from a supplier Interorganizational processes: Although procurement and the fulfillment processes involve suppliers and customers, they are considered intraorganizational processes because they originate and conclude within the company. However, ERP systems can also manage processes that originate in one company and conclude in another is called interorganizational processes and they typically involve supply chain management (SCM) and customer relationship management (CRM). o SCM and CRM Processes: Help multiple firms in an industry coordinate activities such as the production-to-sale of goods and services. Let’s consider a chain of grocery stores whose supply chain must properly manage perishable goods. On the other hand, store managers need to stock only the amount of perishable goods that they are reasonably sure they will sell before the product’s expiration dates. On the other hand, they do not want to run out of stock of any products that customers need. o ERP SCM Systems: Have the capability to place automatic requests to buy fresh perishable products from suppliers in real time. That is, each perishable product is purchased, the system captures data on that purchase, adjusts store inventory levels, and transmits these data to the grocery chain’s warehouse as well as the products’ vendors. The system executes this process by connecting the point of sale barcode scanning system with the warehouse and accounting departments, as well as with the vendors’ systems. In addition, SCM systems utilize historical data to predict when fresh products need to be ordered before the stores’ supply becomes too low. o ERP CRM Systems: These systems also benefit businesses by generating forecasting analyses of product consumption based on critical variables such as geographical area, season, day of the week, and type of customer. These analyses help grocery stores coordinate their supply chains to meet customer needs for perishable goods. Going further, CRM systems identify particular customer needs and then utilize this information to suggest specific product campaigns. These campaigns can transform a potential demand into sales opportunities, and convert sales opportunities into sales quotations and sales orders. This process is called the demand to order process.
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