Management requests your opinion on the emerging IT trends you believe will be most impactful on the company’s existing ERP system. Express your opinion(s) but justify your ideas with statements about how the trends will create business value.Chapter 8# of attached book.Can use the book for citation (usage of concepts of the book is important).! additional internet reference is fine, keep the simple essay (not more than 1 page).Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
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CONCEPTS IN ENTERPRISE
RESOURCE PLANNING
Fourth Edition
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CONCEPTS IN ENTERPRISE
RESOURCE PLANNING
Fourth Edition
Ellen F. Monk
University of Delaware
Bret J. Wagner
Western Michigan University
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States
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In memory of our colleague Majdi Najm.
His support and friendship are sorely missed.
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BRIEF CONTENTS
Preface
xv
Chapter 1
Business Functions and Business Processes
1
Chapter 2
The Development of Enterprise Resource Planning Systems
19
Chapter 3
Marketing Information Systems and the Sales Order Process
49
Chapter 4
Production and Supply Chain Management Information Systems
77
Chapter 5
Accounting in ERP Systems
117
Chapter 6
Human Resources Processes with ERP
159
Chapter 7
Process Modeling, Process Improvement, and ERP Implementation
183
Chapter 8
RFID, Business Intelligence (BI), Mobile Computing, and the Cloud
215
Glossary
243
Index
249
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T A B L E OF CO N T E N T S
Preface
Chapter 1
xv
Business Functions and Business Processes
Functional Areas and Business Processes
Functional Areas of Operation
Business Processes
Functional Areas and Business Processes of a Very Small Business
Marketing and Sales
Supply Chain Management
Accounting and Finance
Human Resources
Functional Area Information Systems
Marketing and Sales
Supply Chain Management
Accounting and Finance
Human Resources
Chapter Summary
Key Terms
Exercises
For Further Study and Research
Chapter 2
The Development of Enterprise Resource Planning Systems
The Evolution of Information Systems
Computer Hardware and Software Development
Early Attempts to Share Resources
The Manufacturing Roots of ERP
Management’s Impetus to Adopt ERP
ERP Software Emerges: SAP and R/3
SAP Begins Developing Software Modules
SAP R/3
New Directions in ERP
PeopleSoft
Oracle
SAP ERP
SAP ERP Software Implementation
Features of SAP ERP
ERP for Midsized and Smaller Companies
Responses of the Software to the Changing Market
Choosing Consultants and Vendors
The Significance and Benefits of ERP Software and Systems
1
2
2
3
6
6
7
7
8
8
9
10
12
13
16
16
16
17
19
20
21
22
22
23
25
26
26
27
27
28
28
31
33
34
34
35
36
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x
Table of Contents
Questions About ERP
How Much Does an ERP System Cost?
Should Every Business Buy an ERP Package?
Is ERP Software Inflexible?
What Return Can a Company Expect from Its ERP Investment?
How Long Does It Take to See a Return on an ERP Investment?
Why Do Some Companies Have More Success with ERP Than Others?
The Continuing Evolution of ERP
Chapter Summary
Key Terms
Exercises
For Further Study and Research
Chapter 3
Marketing Information Systems and the Sales Order Process
Overview of Fitter Snacker
Problems with Fitter Snacker’s Sales Process
Sales Quotations and Orders
Order Filling
Accounting and Invoicing
Payment and Returns
Sales and Distribution in ERP
Presales Activities
Sales Order Processing
Inventory Sourcing
Delivery
Billing
Payment
A Standard Order in SAP ERP
Taking an Order in SAP ERP
Discount Pricing in SAP ERP
Integration of Sales and Accounting
Customer Relationship Management (CRM)
Core CRM Activities
SAP’s CRM Software
The Benefits of CRM
Chapter Summary
Key Terms
Exercises
For Further Study and Research
Chapter 4
Production and Supply Chain Management Information Systems
Production Overview
Fitter’s Manufacturing Process
Fitter’s Production Sequence
Fitter’s Production Problems
Communication Problems
Inventory Problems
Accounting and Purchasing Problems
Exercise 4.1
36
36
37
38
39
39
40
41
44
44
45
45
49
50
51
52
53
55
55
56
56
56
57
57
57
57
58
58
64
65
66
67
68
72
74
74
75
76
77
78
79
79
80
80
80
81
82
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Table of Contents
The Production Planning Process
The SAP ERP Approach to Production Planning
Sales Forecasting
Exercise 4.2
Sales and Operations Planning
Sales and Operations Planning in SAP ERP
Disaggregating the Sales and Operations Plan in SAP ERP
Exercise 4.3
Demand Management
Exercise 4.4
Materials Requirements Planning (MRP)
Bill of Material
Lead Times and Lot Sizing
Exercise 4.5
Exercise 4.6
Materials Requirements Planning in SAP ERP
Detailed Scheduling
Providing Production Data to Accounting
Exercise 4.7
ERP and Suppliers
The Traditional Supply Chain
EDI and ERP
The Measures of Success
Exercise 4.8
Chapter Summary
Key Terms
Exercises
For Further Study and Research
Chapter 5
Accounting in ERP Systems
Accounting Activities
Using ERP for Accounting Information
Operational Decision-Making Problem: Credit Management
Industrial Credit Management
Fitter’s Credit Management Procedures
Credit Management in SAP ERP
Exercise 5.1
Product Profitability Analysis
Inconsistent Record Keeping
Inaccurate Inventory Costing Systems
Inventory Cost Accounting Background
ERP and Inventory Cost Accounting
Product Costing Example
Exercise 5.2
Product Cost Analysis in SAP ERP
Activity-Based Costing and ERP
82
83
84
85
85
88
93
95
95
97
97
97
98
101
101
101
105
107
108
108
109
110
112
112
114
114
114
115
117
118
121
123
123
124
124
127
127
127
128
128
129
130
131
131
132
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xi
xii
Table of Contents
Problems Consolidating Data from Subsidiaries
Currency Translation
Intercompany Transactions
Management Reporting with ERP Systems
Data Flows in ERP Systems
Document Flow for Customer Service
Built-In Management-Reporting and Analysis Tools
The Enron Collapse
Outcome of the Enron Scandal
Key Features of the Sarbanes-Oxley Act of 2002
Implications of the Sarbanes-Oxley Act for ERP Systems
Archiving
User Authorizations
Tolerance Groups
Financial Transparency
Exercise 5.3
Trends in Financial Reporting—XBRL
Chapter Summary
Key Terms
Exercises
For Further Study and Research
Chapter 6
Human Resources Processes with ERP
Problems with Fitter’s Human Resources Processes
Recruiting Process
The Interviewing and Hiring Process
Human Resources Duties After Hiring
Human Resources with ERP Software
Advanced SAP ERP Human Resources Features
Time Management
Payroll Processing
Travel Management
Training and Development Coordination
Additional Human Resources Features of SAP ERP
Mobile Time Management
Management of Family and Medical Leave
Management of Domestic Partner Benefits
Administration of Long-Term Incentives
Personnel Cost Planning
Management and Payroll for Global Employees
Management by Objectives
Chapter Summary
Key Terms
Exercises
For Further Study and Research
133
134
135
136
136
137
138
139
140
141
142
143
145
146
147
150
150
151
152
152
157
159
160
161
162
164
167
172
172
173
173
175
177
177
177
177
177
178
178
178
180
180
180
181
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Table of Contents
Chapter 7
Process Modeling, Process Improvement, and ERP Implementation 183
Process Modeling
Flowcharting Process Models
Fitter Expense-Reporting Process
Exercise 7.1
Extensions of Process Mapping
Event Process Chain (EPC) Diagrams
Exercise 7.2
Process Improvement
Evaluating Process Improvement Prior to Implementation
ERP Workflow Tools
Implementing ERP Systems
ERP System Costs and Benefits
Implementation and Change Management
Implementation Tools
System Landscape Concept
Chapter Summary
Key Terms
Exercises
For Further Study and Research
Chapter 8
RFID, Business Intelligence (BI), Mobile Computing, and the Cloud 215
Radio Frequency Identification (RFID) Technology
Business Intelligence/Business Analytics
In-Memory Computing
Mobile Computing
From Internet-Enabled to Cloud Computing
SAP and the Internet
NetWeaver
NetWeaver Tools and Capabilities
NetWeaver at Work for Fitter
Exercise 8.1
SaaS: Software as a Service
SAP Business ByDesign
Advantages of Using SaaS
Disadvantages of Using SaaS
Exercise 8.2
Option 1: Buying Computers and Software Rights for an ERP System
Option 2: Using an SaaS Provider to Deliver ERP Software
Calculate the NPV and Make a Recommendation
Chapter Summary
Key Terms
Exercises
For Further Study and Research
Glossary
Index
184
184
185
187
187
189
196
197
198
200
203
205
206
206
210
211
211
211
214
216
219
220
224
226
226
226
227
228
228
229
229
230
231
233
234
235
235
238
238
238
239
243
249
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xiii
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PREFACE
This is a book about Enterprise Resource Planning (ERP) systems; it is also about
how a business works and how information systems fit into business operations. More
specifically, it is about looking at the processes that make up a business enterprise
and seeing how ERP software can improve the performance of these business processes. ERP software is complicated and expensive. Unless a company uses it to
become more efficient and effective in delivering goods and services to its customers,
an ERP system will only be a drain on company resources.
Our experience in teaching about ERP systems has revealed that undergraduate
business students do not always understand how businesses operate, and advanced
undergraduate students—and even many MBA students—do not truly grasp the problems inherent in unintegrated systems. These students also do not comprehend
business processes and how different functional areas must work together to achieve
company goals. As a result, many students do not understand how an information
system should help business managers make decisions.
Consequently, we set out to write a book that does the following:
•
•
•
Describes basic business functional areas and explains how they are related
Illustrates how unintegrated information systems fail to support business
functions and business processes that cut across functional area boundaries
Demonstrates how integrated information systems can help a company prosper by improving business processes and by providing business managers
with accurate, consistent, and current data
We have found that our focus on business processes has been well received.
The Approach of This Book
A key feature of our book is the use of the fictitious Fitter Snacker Company, a manufacturer of nutritious snack bars, as an illustrative example throughout the book. We
show how Fitter Snacker’s somewhat primitive and unintegrated information systems
cause operational problems. We intentionally made the systems’ problems easy to
understand, so the student could readily comprehend them. Potential solutions for
solving integration problems are illustrated using SAP’s ERP software.
The fourth edition of Concepts in Enterprise Resource Planning reflects the
current state of the ERP software market and other areas of the information technology market that affect ERP systems, while adding updated examples of how companies are using integrated systems to solve business problems and achieve greater
success. The book has eight chapters:
•
Chapter 1, “Business Functions and Business Processes,” explains the purposes for, and information systems requirements of, main business functional
areas—Marketing and Sales, Supply Chain Management, Accounting and
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xvi
Preface
•
•
•
•
•
•
•
Finance, and Human Resources. This chapter also describes how a business
process cuts across the activities within business functional areas and why
managers need to think about making business processes work.
Chapter 2, “The Development of Enterprise Resource Planning Systems,”
provides a short history of business computing and the developments that led
to today’s ERP systems. Chapter 2 concludes with an overview of ERP issues
and an introduction to the SAP ERP software.
Chapter 3, “Marketing Information Systems and the Sales Order Process,”
describes the Marketing and Sales functional area, and it highlights the problems that arise with unintegrated information systems. To make concepts easy
to understand, the Fitter Snacker running example is introduced. After
explaining Fitter Snacker’s problems with its unintegrated systems, we show
how an ERP system can help a company avoid these problems. Sample SAP ERP
screens are used to illustrate the concepts. Because using ERP can naturally
lead a company into ever-broadening systems’ integration, a discussion of
customer-relationship management (CRM) software concludes the chapter.
Chapter 4, “Production and Supply Chain Management Information Systems,”
describes how ERP systems support Supply Chain Management—the coordinated activities of all the organizations involved in converting raw materials
into consumer products on the retail shelf. As in Chapter 3, the problems
caused by Fitter Snacker’s unintegrated information system are explored,
followed by a discussion of how ERP software could help solve these problems.
Chapter 5, “Accounting in ERP Systems,” describes accounting processes and
how ERP systems support those processes. This chapter clearly distinguishes
between financial accounting (FI) and managerial accounting (CO) issues.
Included is an overview of the Enron collapse and the resulting SarbanesOxley Act along with the act’s impact on information systems, specifically
management controls and audit capabilities. XBRL—and its relationship to
ERP systems and financial reporting—is explored, along with the transition to
the IFRS accounting standards.
Chapter 6, “Human Resources Processes with ERP,” covers human resource
management. While the Human Resource software module is the least
integrated component of all ERP systems, it includes numerous processes
that are critical to a company’s success, including strategic issues like
succession planning.
Chapter 7, “Process Modeling, Process Improvement, and ERP Implementation,”
first presents flowcharting basics, followed by the highly structured EPC process
model. Implementation issues conclude the chapter. We believe that process
improvement, not large-scale implementation, should be the focus in an introductory ERP course.
Chapter 8, “RFID, Business Intelligence (BI), Mobile Computing, and the
Cloud,” covers current technologies that are impacting ERP systems. In this
edition, the text covers radio frequency identification (RFID), business intelligence (BI) and in-memory computing, mobile computing, and the cloud.
Because technology changes rapidly, this chapter provides an introduction to
these current topics, rather than an exhaustive treatment of the subjects, and
the instructor will likely want to provide current supplements.
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Preface
xvii
How Can You Use This Book?
This fourth edition continues our goal of keeping the text at an introductory level.
The book can be used in a number of ways:
•
•
•
•
The book, or selected chapters, could be used for a three-week ERP treatment in undergraduate Management Information Systems, Accounting
Information Systems, or Operations Management courses.
Similarly, the book or selected chapters could be used in MBA courses, such
as foundation Information Systems or Operations Management courses.
Although the concepts presented here are basic, the astute instructor can
build on them with more sophisticated material to challenge the advanced
MBA student. Many of the exercises in the book require research for their
solution, and the MBA student could do these in some depth.
The book could serve as an introductory text in a course devoted wholly to ERP.
It would provide the student with a basis in how ERP systems help companies to
integrate different business functions. The instructor might use Chapter 8 as
the starting point for teaching the higher-level strategic implications of ERP and
related topics. The instructor can pursue these and related topics using his or
her own resources, such as case studies and current articles.
Because of the focus on fundamental business issues and business processes,
the book can also be used in a sophomore-level Introduction to Business course.
Except for a computer literacy course, we assume no particular educational or
business background. Chapters 1 and 2 lay out most of the needed business and
computing groundwork, and the rest of the chapters build on that base.
Features of This Text
To bring ERP concepts to life (and down to earth) this book uses sales, manufacturing, purchasing, human resources, and accounting examples for the Fitter Snacker
company. Thus, the student can see problems, not just at an abstract level, but within
the context of a company’s operations. We believe this approach makes business problems and the role ERP can play in solving them easier to understand.
The book’s exercises have the student analyze aspects of Fitter Snacker’s information systems in various ways. The exercises vary in their difficulty; some can be
solved in a straightforward way, and others require some research. Not all exercises
need to be assigned. This gives the instructor flexibility in choosing which concepts to
emphasize and how to assess students’ knowledge. Some exercises explore Fitter
Snacker’s problems, and some ask the student to go beyond what is taught in the
book and to research a subject. A solution might require the student to generate a
spreadsheet, perform calculations, document higher-level reasoning, present the
results of research in writing, or participate in a debate.
The book includes an additional element designed to bring ERP concepts to life:
Another Look features, which are short, detailed case studies that focus on problems
faced by real-world companies.
We have illustrated ERP concepts and applications by showing how SAP ERP
would handle the problems discussed in the book. Screen shots of key SAP ERP tools
are shown throughout to illustrate ERP concepts. Many of the book’s exercises ask the
student to think about how a problem would be addressed using ERP software.
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xviii
Preface
Instructor Materials
The following supplemental materials are available when this book is used in a classroom setting. All of the teaching tools available with this book are provided to the
instructor on a single CD-ROM. Most can also be found online at www.course.com.
Instructor materials are password-protected.
•
•
•
•
•
•
•
•
Electronic Instructor’s Manual—The Instructor’s Manual assists in class preparation by providing suggestions and strategies for teaching the text, chapter
outlines, technical notes, quick quizzes, discussion topics, and key terms.
Solutions—Answers to end-of-chapter questions and exercises are provided.
Sample syllabi—The sample syllabi and course outlines are provided as a
foundation to begin planning and organizing your course.
ExamView Test Bank—ExamView allows instructors to create and administer
printed, computer (LAN-based), and Internet exams. The Test Bank includes
hundreds of questions that correspond to the topics covered in this text,
enabling students to generate detailed study guides that include page references for further review. The computer-based and Internet testing components
allow students to take exams at their computers, and also save the instructor
time by grading each exam automatically. The Test Bank is also available in
Blackboard and WebCT versions posted online at www.course.com.
PowerPoint Presentations—Microsoft PowerPoint slides for each chapter are
included as a teaching aid for classroom presentation, to make available to
students on the network for chapter review, or to be printed for classroom
distribution. Instructors can add their own slides for additional topics they
introduce to the class.
Distance learning—Course Technology is proud to present online test banks
in WebCT and Blackboard to provide the most complete and dynamic learning experience possible. Instructors are encouraged to make the most of the
course, both online and offline. For more information on how to access the
online test bank, contact your local Course Technology sales representative.
Figure files—Figure and table files from each chapter are provided for your
use in the classroom.
Hands-on SAP exercises—Exercises are available for member institutions
through the SAP University Alliance. These exercises use a database that was
built for the fictitious Fitter Snacker company.
ACKNOWLEDGMENTS
Our thanks go out to our development editor, Mary Pat Shaffer, whose attention to detail
made much more work for us, but resulted in a much-improved text for this edition. We
are grateful for the support and guidance of the entire MIS team at Course Technology,
particularly Kate Mason, Senior Product Manager, and Aimee Poirier, MIS Product
Manager, for working with authors who frequently had problems meeting deadlines. We
would not have been able to continue on our journey to understand ERP systems without
the continued support of SAP America through its University Alliance program, especially
Heather Czech Matthews, John Baxter, Gale Corbitt, and Alex McLeod, Jr. And finally, we
thank our students, whose honesty and desire to learn have inspired us.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
CHAPTER
1
BUSINESS FUNCTIONS AND
BUSINESS PROCESSES
LEARNING
OBJECTIVES
After completing this chapter, you will be able to:
•
Name the main functional areas of operation used in business
•
Differentiate between a business process and a business function
•
Identify the kinds of data each main functional area produces
•
Identify the kinds of data each main functional area needs
•
Define integrated information systems, and explain why they are essential
in today’s globally competitive business environment
INTRODUCTION
Enterprise Resource Planning (ERP) systems are core software programs used by companies to
integrate and coordinate information in every area of the business. ERP (pronounced “E-R-P”)
programs help organizations manage company-wide business processes, using a common database
and shared management reporting tools. A business process is a collection of activities that takes
one or more kinds of input and creates an output, such as a report or forecast, that is of value to the
customer. ERP software supports the efficient operation of business processes by integrating tasks
related to sales, marketing, manufacturing, logistics, accounting, and staffing—throughout a
business. In addition to this cross-functional integration, which is at the heart of an ERP system,
companies connect their ERP systems, using various methods, to coordinate business processes
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Chapter 1
2
with their customers and suppliers. In later chapters, you will learn how successful businesspeople
use ERP programs to improve how work is done within a company and between companies.
Chapter 1 provides a background for learning about ERP software.
FUNCTIONAL AREAS AND BUSINESS PROCESSES
To understand ERP, you must first understand how a business works. Let’s begin by
looking at a typical business’s areas of operation. These areas, called functional areas of
operation, are broad categories of business activities.
Functional Areas of Operation
Most companies have four main functional areas of operation: Marketing and Sales (M/S),
Supply Chain Management (SCM), Accounting and Finance (A/F), and Human Resources
(HR). Each area is composed of a variety of narrower business functions, which are
activities specific to that functional area of operation. Examples of the business functions
of each area are shown in Figure 1-1.
Functional
area of
operation
Marketing and
Sales
Supply Chain
Management
Accounting and
Finance
Human
Resources
Marketing a
product
Purchasing
goods and raw
materials
Financial
accounting of
payments from
customers and
to suppliers
Recruiting and
hiring
Taking sales
orders
Receiving
goods and raw
materials
Cost allocation
and control
Training
Customer
support
Transportation
and logistics
Planning and
budgeting
Payroll
Customer
relationship
management
Scheduling
Cash-flow
production runs management
Benefits
Sales
forecasting
Manufacturing
goods
Government
compliance
Advertising
Plant
maintenance
Business
functions
Source Line: Course Technology/Cengage Learning.
FIGURE 1-1
Examples of functional areas of operation and their business functions
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Business Functions and Business Processes
Historically, businesses have had organizational structures that separated the
functional areas. Business schools have been similarly organized, so each functional area
has been taught as a separate course. In a company separating functional areas in this
way, Marketing and Sales might be completely isolated from Supply Chain Management,
even though the Marketing and Sales staff sell what the employees in Supply Chain
Management procure and produce. Thus, you might conclude that what happens in one
functional area is not closely related to what happens in others. As you will learn in this
chapter, however, functional areas are interdependent, each requiring data from the
others. The better a company can integrate the activities of each functional area, the
more successful it will be in today’s highly competitive environment. The Association to
Advance Collegiate Schools of Business (AACSB)—the accreditation board of university
business schools—is now promoting integration between functional areas of business for
higher education.
Integration also contributes to improvements in communication and workflow. Each
area’s information system depends on data from other functional areas. An information
system (IS) includes the people, procedures, software, and computers that store, organize,
analyze, and deliver information. This chapter illustrates the need for information sharing
between functional areas and the effects on the business if this information is not
integrated. In later sections, you will also see some examples of typical business processes
and how these processes routinely cross functional areas.
3
Business Processes
More managers are now thinking in terms of business processes rather than business
functions. Recall that a business process is a collection of activities that takes one or more
kinds of input and creates an output that is of value to the customer. The customer for a
business process may be a traditional external customer (the person who buys the finished
product), or it may be an internal customer (such as a colleague in another department).
For example, what is sold through Marketing and Sales is linked to what is procured and
produced by Supply Chain Management. This concept is illustrated in Figure 1-2.
Source Line: Course Technology/Cengage Learning.
FIGURE 1-2
Sample business processes related to the sale of a smartphone
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Chapter 1
4
Thinking in terms of business processes helps managers look at their organization
from the customer’s perspective. Consider the example illustrated in Figure 1-2 of a
customer who wants to purchase a new smartphone. The customer wants information
about the company’s products so she can select a smartphone and various high-tech
accessories for the phone. She wants to place her order quickly and easily, and perhaps
even arrange for financing through the company. She expects quick delivery of the correct
model of smartphone, and she wants 24-hour customer support for any problems. The
customer is not concerned about how the smartphone was marketed, how its components
were purchased, how it was built, or how the delivery truck will find the best route to her
house. The customer wants the satisfaction of having the latest in mobile phone
technology at a reasonable price.
Businesses must always consider the customer’s viewpoint in any transaction. What is
the difference between a business function and a business process from the customer’s
point of view? Suppose the customer’s mobile phone is damaged during shipment. Because
only one functional area is involved in accepting the return of the damaged item, receipt
of the return is a business function—specifically, it is part of the customer relationship
management function of Marketing and Sales. Because several functional areas are
involved in the repair and return of the mobile phone back to the customer, the handling
of the repair is a business process. Thus, in this example, the customer is dealing
with many of the company’s functional areas in the process of buying and obtaining
a smartphone.
A successful customer interaction is one in which the customer (either internal or
external) is not required to interact separately with each business function involved in the
process. If companies are not coordinating their business functions, a customer could
receive conflicting information and likely would quickly become dissatisfied. Successful
business managers view their business operations from the perspective of a satisfied
customer and strive to present one consistent (and positive) “face” to the customer.
For the mobile phone company to satisfy its customers, it must make sure its
functional areas of operation are integrated. Mobile phone technology changes rapidly,
and the devices the phone company sells change frequently. To provide customers with
accurate information, people performing the sales function must have up-to-date
information about the latest mobile phones available for sale; otherwise, a customer
might order a smartphone that the company’s manufacturing plant no longer produces.
People performing the manufacturing function need to receive the details of a customer’s
smartphone order quickly and accurately from the employee (or online ordering system)
performing the sales function, so the right phone can be packaged and shipped on time
to the customer. If the customer is financing the smartphone through the mobile phone
company, the employees performing the sales order function must gather information
about the customer and process it quickly, so financing can be approved in time to
support shipping the phone.
Sharing data effectively and efficiently between and within functional areas leads to
more efficient business processes. Information systems that are designed so functional
areas share data are called integrated information systems. Working through this textbook
will help you understand the benefits of integrated information systems and the problems
that can occur when information systems are not integrated. Research has shown that
integrated information systems can help managers better control their organizations.
With enhanced information flow, communication between parts of the company improves,
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Business Functions and Business Processes
productivity increases, and costs decrease. In effect, integrating the information systems
can make for a more effective overall organization—hence, more efficient business
processes. Figure 1-3 illustrates the process view of business operations.
5
Logistics
function
Production
function
Purchasing
function
Accounting
function
Sales
function
Customer order process
Material order process
Source Line: Course Technology/Cengage Learning.
FIGURE 1-3
A process view of business operations
Businesses take inputs (resources) in the form of material, people, and equipment,
and transform these inputs into goods and services for customers. Effectively managing
these inputs and business processes requires accurate and up-to-date information. For
example, the sales staff takes a customer’s order, and production employees schedule the
manufacturing of the product. Logistics employees schedule and carry out the delivery of
the product. If raw materials are needed to make the product, production prompts
purchasing staff to arrange for their purchase and delivery. Logistics will receive the raw
material, verify its receipt to accounting so the vendor can be paid, and deliver the goods
to production. Throughout, accounting keeps appropriate transaction records.
ANOTHER
LOOK
Integrated Information Systems
The world today is information driven. Getting the right information to the right person
can make a huge difference in terms of a company’s bottom line. But are some systems
just too complicated to be fully integrated? Although the financial services industry
spends more on information technology than any other industry ($500 billion worldwide
in 2009), many financial institutions do not have fully integrated information systems.
Why is this so? The reasons are many. Banks were the first organizations to adopt
information systems, so many of their systems are legacy (old) systems that would be
difficult and expensive to update. In addition, many banks have gone through multiple
phases of acquisition, which in itself results in duplicate information systems.
Government regulations on financial institutions have also brought about additional
(continued)
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Chapter 1
6
systems. And many financial organizations write their own proprietary systems for
market trading, thinking that gives them a leg up on their competition. Some of the
more sophisticated financial products, such as hedge funds and derivatives, are
generated via complex programs. In addition, a great deal of financial tracking is
performed on spreadsheets, which may not be connected to any integrated system.
The end result of these unintegrated systems is a lack of consistent data across
systems, which can lead to an inaccurate assessment of risk. Most financial systems
written today are honed for rapid trading, not for regulation or for tracking anomalies
that could lead to problems. Some IT experts claim that the global financial networks are
now unstable and that the fast quantitative trading programs in place could lead rapidly
to potentially disastrous outcomes.
Question:
1.
Do you think some of the problems associated with the financial crisis of 2008
could have been avoided if financial firms had more integrated information?
If so, how, or if not, why not?
FUNCTIONAL AREAS AND BUSINESS PROCESSES
OF A VERY SMALL BUSINESS
Next, we will look at the way business processes involve more than one functional area,
using a fictitious small business as an example—a coffee shop that you own. We will
examine the business processes of the coffee shop and see why coordination of the
functional areas helps achieve efficient and effective business processes. You will see the
role that information plays in this coordination and how integration of the information
system improves your business.
Even though just a few people can run a small coffee shop, the operation of the
business requires a number of processes. Coordinating the activities within different
functional areas requires accurate and timely information.
Marketing and Sales
Marketing and Sales (M/S) functions include developing products, determining pricing,
promoting products to customers, and taking customers’ orders. Marketing and Sales also
helps create a sales forecast to ensure the successful operation of the coffee shop.
For the most part, this is a cash business, but you still need to keep track of your
customers so you can send flyers or occasional thank-you notes to repeat customers. Thus,
your records must not only show the amount of sales, but also identify repeat customers.
Product development can be done informally in such a simple business; you gather
information about who buys which kind of coffee and note what customers say about each
product. You also analyze historical sales records to spot trends that are not obvious.
Deciding whether to sell a product also depends on how much it costs to produce the
product. For example, some customers might be asking for a fair-trade decaffeinated coffee
or a chai tea. To determine whether the new product could be profitably produced and
sold, you could analyze data from Supply Chain Management, including production
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Business Functions and Business Processes
information (such as the cost of purchasing an extra coffee machine to make the special
fair-trade decaffeinated brew) and materials management data (the cost of decaffeinated
coffee beans and chai tea).
This is a very small coffee shop, and you know most of your clientele. Therefore,
although you run a cash business, good repeat customers are allowed to run up a tab—up
to a point. Thus, your records must show how much each customer owes as well as his or
her available credit. It is very important that the data be available and accurate at the
time of a customer’s credit request. Since Accounting and Finance records must be
accessed as a part of the selling process, the accounting function has a critical role to play
in the sales process.
7
Supply Chain Management
The functions within Supply Chain Management (SCM) include developing production
plans, ordering raw materials from suppliers, receiving the raw material into the facility,
manufacturing products, maintaining facilities, and shipping products to customers. In our
coffee shop example, Supply Chain Management functions involve making the coffee
(manufacturing/production) and buying raw materials (purchasing). Production is planned
so that, as much as possible, coffee is available when needed, without excess that must be
disposed of. This planning requires sales forecasts from the Marketing and Sales functional
area. Sales forecasts are estimates of future product demand, which is the amount of a
product customers will want to buy. A forecast’s accuracy will be improved if it is based on
historical sales figures (for example, factors such as cold weather or local downtown social
events would impact the forecast for a given time period). Thus, forecasts from Marketing
and Sales play an important role in the production planning process.
Production plans are also used to develop requirements for raw materials (coffee
beans, tea bags, sweeteners, cream, and milk) and packaging (cups, stirrers, straws, plates,
and napkins). You must generate raw material and packaging orders from these
requirements. If the forecasts are accurate, you will not lose sales because of material
shortages, nor will you have excessive inventory that might spoil.
Supply Chain Management and Marketing and Sales must choose a recipe for each
beverage product sold, such as the quantity of coffee beans used to brew each pot of
coffee. The standard recipe is a key input for deciding how much to order of each raw
material, which is a purchasing function. Access to this recipe is also necessary for
keeping good manufacturing records, allowing managers within the Supply Chain
Management functional area (working with those in Accounting and Finance) to break
down the costs to a per-cup cost. Managers can then compare how much it actually costs
to make a cup of coffee, versus how much the recipe should have cost.
Accounting and Finance
Accounting and Finance (A/F) performs financial accounting to provide summaries of
operational data in managerial reports, and it is also responsible for tasks such as
controlling accounts, planning and budgeting, and cash-flow management. Accounting and
Finance functions include recording raw data about sales transactions, raw material
purchases, payroll, and receipt of cash from customers. Raw data are simply numbers
collected from sales, manufacturing, and other operations—without any manipulation,
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Chapter 1
8
calculation, or arrangement for presentation. Those data are then summarized in
meaningful ways to determine the profitability of the coffee shop and to support
decision making.
Note that data from Accounting and Finance are used by Marketing and Sales as well
as by Supply Chain Management. The sales records are an important component of the
sales forecast, which is used in making staffing decisions and in production planning. The
records from accounts receivable, which you use to determine whether to grant credit to a
particular customer, are also used to monitor the overall credit-granting policy of the
coffee shop. You need to be sure you have enough cash on hand to purchase raw materials,
as well as to finance the purchase of new equipment, such as an additional coffee machine
for the fair-trade decaffeinated coffee.
Human Resources
Even a simple business needs employees to support the Marketing and Sales and Supply
Chain Management functional areas, which means the business must recruit, train,
evaluate, and compensate employees. These are the functions of Human Resources (HR).
At the coffee shop, the number of employees needed and the timing of hiring depend
on the level of coffee and tea sales. Human Resources uses sales forecasts to plan
personnel needs. A part-time helper might be needed at forecasted peak hours or days, but
how much should a part-time helper be paid? That depends on prevailing job market
conditions and state laws, and it is Human Resources’ job to monitor those conditions.
Would increased sales justify hiring a part-time worker at the prevailing wage? Or,
should you think about acquiring more automated ways of making coffee, so a person
working alone could run the shop? Resolving these questions requires input from
Marketing and Sales, Supply Chain Management, and Accounting and Finance.
The coffee shop, while a relatively simple business, has many of the processes needed
in larger organizations, and these processes involve activities in more than one functional
area. In fact, it is impossible to discuss the processes in one functional area without
discussing the links to other functional areas—connections that invariably require the
sharing of data. Systems that are integrated using ERP software provide the data sharing
that is necessary between functional areas.
FUNCTIONAL AREA INFORMATION SYSTEMS
This section will describe potential inputs and outputs for each functional area of a
business (refer back to Figure 1-2 to review sample inputs and outputs related to the sale
of a smartphone). Note the kinds of data needed by each area and how people use the
data. Also note that the information systems maintain relationships between all functional
areas and processes.
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Business Functions and Business Processes
Marketing and Sales
9
As shown in Figure 1-4, the Marketing and Sales (M/S) area needs information from all other
functional areas to effectively complete the business activities for which it is responsible.
Legal requirements
and job information
Customer
HR
Sales orders
Hiring needs and
personnel information
Order status
M/S
Sales forecasts
and sales orders
Product
availability data
and order status
Sales order
data
Cost/profit
analysis
A/F
SCM
Source Line: Course Technology/Cengage Learning.
FIGURE 1-4
The Marketing and Sales functional area exchanges data with customers and with
the Human Resources, Accounting and Finance, and Supply Chain Management
functional areas
Customers communicate their orders to sales staff in person or by telephone, email,
fax, the Web, and so on. In the case of Web-based systems, customer and order data are
stored automatically in the information system; otherwise, data must be entered manually,
by typing data into a computer keyboard or point-of-sale system, or by using a bar-code
reader or similar device. Sales orders must be passed to Supply Chain Management for
planning purposes and to Accounting and Finance for billing. Sales order data are also
valuable for analyzing sales trends for business decision making. For example, Marketing
and Sales management might use a report showing the trend of a product’s sales to
evaluate marketing efforts and to determine strategies for the sales force.
Marketing and Sales also has a role in determining product prices, which requires an
understanding of the market competition and the costs of manufacturing the product.
Pricing might be determined based on a product’s unit cost, plus some percentage markup.
For example, if a product costs $5 per unit to make, and management wants a 40 percent
markup, the selling price must be $7 per unit. Where does the per-unit cost data come
from? Determining the cost of manufacturing a product requires information from
Accounting and Finance, which, in turn, relies on Supply Chain Management data.
People are a valuable asset to the firm, and Marketing and Sales needs to interact with
Human Resources to exchange information on hiring needs, legal requirements, and other
matters. For example, when Marketing and Sales has an opening for a junior salesperson,
Human Resources will do the advertising for the job vacancy. Human Resources might also
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Chapter 1
10
communicate information about expense reimbursement policies to salespeople whose
jobs require travel.
To summarize, inputs for Marketing and Sales could include the following:
•
•
•
•
•
Customer data
Order data
Sales trend data
Per-unit cost
Company travel expense policy
Outputs for Marketing and Sales could include the following:
•
•
•
Sales strategies
Product pricing
Employment needs
Supply Chain Management
Supply Chain Management (SCM) also needs information from the various functional
areas, as shown in Figure 1-5.
Raw materials
availability and
delivery
Legal requirements
and job information
HR
Orders for raw
materials and
packaging
Hiring needs and
personnel information
Production
plans, materials,
and inventory
SCM
Sales data and
manufacturing
cost analysis
Product
availability
data and
order status
Sales forecasts
and sales
orders
M/S
A/F
Source Line: Course Technology/Cengage Learning.
FIGURE 1-5
The Supply Chain Management functional area exchanges data with suppliers and
with the Human Resources, Marketing and Sales, and Accounting and Finance
functional areas
Manufacturing firms often develop production plans of varying length and detail, such as
short-range, medium-range, and long-range plans. Plans could be developed for expanding
manufacturing capacity (based on sales forecasts), hiring new workers, and paying extra
overtime for existing workers.
Production plans are based on information about product sales (actual and projected),
which comes from Marketing and Sales. The purchasing function bases its orders of raw
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Business Functions and Business Processes
materials on production plans, expected shipments, delivery lead times, and existing
inventory levels. With accurate data about required production levels, raw material and
packaging can be ordered as needed, and inventory levels can be kept low, saving money.
On the other hand, if data are inaccurate or not current, manufacturing may run out of
raw material or packaging; such a shortfall is called a stockout. Shortages of this type can
shut down production and cause the company to miss delivery dates. To avoid stockouts,
management might choose to carry extra raw material and packaging, known as safety
stock, which can result in an overinvestment in inventory. If certain time-sensitive goods
are held too long, they can spoil and will have to be destroyed rather than sold for profit.
The accuracy of the forecast determines the amount of safety stock required to reduce the
risk of a stockout to an acceptable level. The less accurate the forecast, the more safety
stock is required. Accurate forecasting and production planning can reduce the need for
extra inventory and manufacturing capacity. In addition, Supply Chain Management can
share its planning information with the company’s suppliers so they can plan their
operations more efficiently, which should allow the suppliers to reduce the price they
charge the company for their products.
Supply Chain Management records can provide the data needed by Accounting and
Finance to determine how much of each resource (materials, labor, supplies, and
overhead) was used to make completed products in inventory.
Supply Chain Management data can support the Marketing and Sales function by
providing information about what has been produced and shipped. For example, online
retailers such as Amazon provide detailed information on customer orders through their
Web sites, and some send automated emails to notify customers when their orders have
shipped. Shipping companies, such as UPS and FedEx, provide online shipment-tracking
information. By entering a tracking number, the customer can see each step of the shipping
process by noting where the package’s bar code was scanned. Domino’s Pizza allows
customers who order through their Web site to track the progress of their pizza order—
from preparation to baking to delivery. Thus, accurate and timely production information
supports the sales process and can increase customer satisfaction. In fact, Amazon ranked
number one in the Temkin Group’s 2011 survey of customer experience. Two of the three
survey components relate to business process: functional experience (how well the
customer was able to do what they wanted to do) and accessiblility experience (how easy it
was to interact with the company). Performing well in such a survey requires a smooth
integration of the Marketing and Sales and Supply Chain Management processes.
Supply Chain Management also interacts with Human Resources. For instance, Supply
Chain Management passes hiring information to Human Resources, and Human Resources
informs Supply Chain Management of the company’s layoff and recall policy, which might
pertain to workers in the plant.
To summarize, inputs for Supply Chain Management could include the following:
•
•
•
•
11
Product sales data
Production plans
Inventory levels
Layoff and recall company policy
Outputs for Supply Chain Management could include the following:
•
•
Raw material orders
Packaging orders
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 1
12
•
•
•
Resource expenditure data
Production and inventory reports
Hiring information
Accounting and Finance
Accounting and Finance (A/F) needs information from all the other functional areas to
complete its tasks accurately, as shown in Figure 1-6.
Legal requirements
and job information;
payroll and benefit
expense data
Payments
Customer
HR
Invoices and
credit memos
Hiring needs and
personnel information
Sales data and
manufacturing
cost analysis
A/F
Cost/profit
analysis
Production plans;
materials and
inventory data
Sales order
data
SCM
M/S
Source Line: Course Technology/Cengage Learning.
FIGURE 1-6
The Accounting and Finance functional area exchanges data with customers and with
the Human Resources, Marketing and Sales, and Supply Chain Management
functional areas
Accounting and Finance personnel record the company’s transactions in the books of
account (which often are computerized records). For example, they record accounts
receivable when sales are made and cash receipts when customers send in payments. In
addition, they record accounts payable when raw materials are purchased and cash
outflows when they pay for materials. Finally, Accounting and Finance personnel
summarize the transaction data to prepare reports about the company’s financial position
and profitability.
Employees in other functional areas provide data to Accounting and Finance:
Marketing and Sales provides sales data, Supply Chain Management provides production
and inventory data, and Human Resources provides payroll and benefit expense data. The
accuracy and timeliness of Accounting and Finance data depend on the accuracy and
timeliness of the data from the other functional areas.
Marketing and Sales personnel require data from Accounting and Finance to evaluate
customer credit. If an order will cause a customer to exceed his or her credit limit,
Marketing and Sales should see that the customer’s accounts receivable balance
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Business Functions and Business Processes
(the amount owed to the company) is too high and hold new orders until the customer’s
balance is lowered. If Accounting and Finance is slow to record sales, the accounts
receivable balances will be inaccurate, and Marketing and Sales might approve credit for
customers who have already exceeded their credit limits and who might never pay off
their accounts. If Accounting and Finance does not record customers’ payments promptly,
the company could deny credit to customers who actually owe less than their credit limit,
potentially damaging the company’s relationship with those customers.
To summarize, inputs for Accounting and Finance could include the following:
•
•
•
•
•
•
13
Payments from customers
Accounts receivable data
Accounts payable data
Sales data
Production and inventory data
Payroll and expense data
Outputs for Accounting and Finance could include the following:
•
•
•
Payments to suppliers
Financial reports
Customer credit data
Human Resources
Like the other functional areas, Human Resources (HR) needs information from the other
departments to efficiently complete its business activities, as shown in Figure 1-7.
Hiring needs and
personnel information
A/F
Payroll and
benefit expense data;
legal requirements and
job information
Legal requirements
and job information
Hiring needs
and personnel
information
SCM
Legal requirements
and job information
HR
Hiring needs
and personnel
information
M/S
Source Line: Course Technology/Cengage Learning.
FIGURE 1-7
The Human Resources functional area exchanges data with the Accounting and
Finance, Marketing and Sales, and Supply Chain Management functional areas
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Chapter 1
14
Tasks related to employee hiring, benefits, training, and government compliance are
all the responsibilities of a human resources department. Human Resources staff need
accurate forecasts of personnel needs from all functional units. In addition, Human
Resources needs to know what skills are required to perform a particular job and how
much the company can afford to pay employees. These data also come from all
functional units.
State and federal laws require companies to observe many governmental regulations
in recruiting, training, compensating, promoting, and terminating employees—and these
regulations must be observed company-wide. Usually, it is also Human Resources’
responsibility to ensure that employees receive training in a timely manner and that they
get certified (and recertified) in key skills, such as materials handling and equipment
operation. Human Resources must also disburse wages, salaries, raises, and bonuses. For
these and other reasons, corporate Human Resources needs timely and accurate data from
other areas.
Human Resources must create accurate and timely data and reports for management
use. For example, Human Resources should maintain a database of skills required to do
particular jobs as well as the prevailing pay rate for each position. When the company
evaluates employees’ performance and compensation, analysis of these data can help to
prevent the loss of valued employees because of low pay.
To summarize, inputs for Human Resources could include the following:
•
•
Personnel forecasts
Skills data
Outputs for Human Resources could include the following:
•
•
•
•
Regulation compliance
Employee training and certification
Skills database
Employee evaluation and compensation
As shown in Figure 1-4 through Figure 1-7, a significant amount of data is maintained
by and shared among the different functional areas. The timeliness and accuracy of these
data are critical to each area’s success and to the company’s ability to make a profit and
generate future growth. ERP software allows all the functional areas to share a common
database so accurate, real-time information is available. In Chapter 2, we will trace the
evolution of data management systems that led to ERP.
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Business Functions and Business Processes
ANOTHER
LOOK
15
Integrated Information Systems
Large organizations dealing with hundreds or thousands of suppliers have a difficult task
in keeping information flowing to the right person at the right time. At one point,
Lockheed Martin Aeronautics, with $13.2 billion in sales (2010) and over 29,000
employees, was running 75 legacy systems, some dating from the 1970s. To stay efficient
while keeping customers happy and taking on more aircraft orders, the company
decided to implement an Enterprise Resource Planning system.
Lockheed Martin’s final system allows suppliers to handle more of their own
transactions by accessing the new ERP system through an existing secure Web portal.
For example, using the portal, a supplier can now track each step of an order. In
addition, the supplier can see the production trends at Lockheed Martin, and plan its
own production to satisfy Lockheed Martin’s needs—in effect, anticipating orders.
Through this integration of many systems into one large ERP system, Lockheed Martin
was able to cut costs and connect suppliers worldwide into its system, enabling the
company to become more efficient.
In another industry, Tumi, Inc., the luggage and travel products company, was
running several legacy systems that were written “in-house,” meaning they were
programmed by company staff. The different systems covered processes such as taking
an order, running the warehouse, and completing financial statements. None of the
systems were linked; therefore, passing information from one system to another was a slow
and cumbersome process. Tumi could not fill its orders on time, had excess inventory in
the warehouse, and was frequently unable to meet customers’ shipping deadlines. To
address these issues—and to better support the company’s expansion plans—Tumi made
a conscious effort to make information technology a business driver, and the company
brought in an ERP system to integrate the business functions.
With the new integrated ERP system, Tumi has been able to expand its business,
decrease inventory by 30 percent, cut its warehouse space by 38 percent, and increase
sales by 25 percent. Tumi’s management believes that one of the company’s primary
strengths lies in its integrated systems. Manufacturing is now quick to react when
demand increases, and forecasting is more accurate.
Question:
1.
Using the Internet, research how many suppliers are typically used for
manufacturing large commercial aircraft. List 10 such suppliers and what they
do. How would an integrated ERP system, such as the one at Lockheed Martin,
help manage all those suppliers?
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 1
16
Chapter Summary
•
Companies that make and sell products have business processes that involve four main
functional areas: Marketing and Sales (M/S), Supply Chain Management (SCM),
Accounting and Finance (A/F), and Human Resources (HR). These areas of operation
perform the following functions:
•
Marketing and Sales develops products, sets product prices, promotes products
through advertising and marketing, takes customer orders, supports customers, and
creates sales forecasts.
•
Supply Chain Management develops production plans, orders raw materials from
suppliers, receives the raw material into the facility, manufactures products, maintains
facilities, and ships products to customers.
•
Accounting and Finance performs financial accounting to provide summaries of
operational data in managerial reports, and also is responsible for tasks such as
controlling accounts, planning and budgeting, and cash-flow management.
•
Human Resources recruits, hires, trains, and compensates employees, ensures
compliance with government regulations, and oversees the evaluation of employees.
•
Each functional area is served by an information system. Information systems capture,
process, and store data to provide information needed for decision making.
•
Employees working in one functional area often need data from other functional areas. Ideally,
functional area information systems are integrated, so shared data are accurate and timely.
•
Today, business managers try to think in terms of business processes that integrate the
functional areas, thus promoting efficiency and competitiveness. An important aspect
of this integration is the need to share information between functional areas, and with
business partners. ERP software provides this capability by means of a single common
database.
Key Terms
Accounting and Finance (A/F)
integrated information system
business function
Marketing and Sales (M/S)
business process
raw data
Enterprise Resource Planning (ERP)
safety stock
functional areas of operation
sales forecast
Human Resources (HR)
stockout
information system (IS)
Supply Chain Management (SCM)
Exercises
1.
Distinguish between a business function and a business process. Describe how a business
process cuts across functional lines in an organization. How might a manager organize
his or her staff in terms of business processes rather than functional departments? What
benefits would there be with this type of organization? What challenges would it pose?
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Business Functions and Business Processes
2.
How could a university organize its business education around business processes rather
than business functions? What would be the benefits to students?
3.
Assume your uncle raises bees for honey on his farm. You help him package the honey
and sell it on the Internet. Reproduce Figure 1-1 for this small business example. Add a
one-sentence description for each function as it relates to selling this artisan honey online.
4.
Go to the Amazon Web site (http://www.amazon.com), and step through the process of
buying an item without actually purchasing the item. Based on this experience, describe the
flows of information between Marketing and Sales, Accounting and Finance, and Supply
Chain Management at Amazon. How easy is it to buy that item?
5.
Using the Internet, research your state’s regulations for employing teenagers—such as
minimum age of employment. Do the same for a neighboring state. Are the two state
regulations the same? Why would it be important for Human Resources to communicate
this information to a hiring department?
6.
Think of the last time you bought a high-tech electronic item. How does the process of
buying that item cut across the store’s various functional lines? What information from
your receipt would need to be available to the business functions? Which business
functions would need that information? How could your receipt help in the process of
returning that item?
7.
Assume you own and run a small ice cream shop located on the grounds of a private pool.
You want to maximize sales and decide that allowing customers to buy on credit could be a
big driver of sales since most people come to the pool without cash. What information do
you need to keep track of to make sure a given customer doesn’t go over their $20 credit
limit. What problems might occur?
17
For Further Study and Research
Amrani, Radouane E., Frantz Rowe, and Bénédicte Geffroy-Maronnat. “The Effects of Enterprise
Resource Planning Implementation Strategy on Cross-Functionality.” Information Systems
Journal 16, no. 1 (January 2006): 79.
Aurand, Timothy W., Carol DeMoranville, and Geoffrey L. Gordon. “Cross-Functional Business
Programs: Critical Design and Development Considerations.” Mid-American Journal of
Business 16, no. 2 (Fall 2001): 21–30.
Economist. “Silo But Deadly.” December 5, 2009. http://www.economist.com/node/15016132.
Hannon, David. “Lockheed Martin Aeronautics Revolutionizes Its Supply Chain.”
InsiderPROFILES 2, no. 2 (April 2011). http://insiderprofiles.wispubs.com/article.aspx?
iArticleId=5706.
Hannon, David. “How TUMI, Inc. Cut Inventory by 30\% and Increased Sales by 25\%.”
InsiderPROFILES 2, no. 1 (January 2011). http://insiderprofiles.wispubs.com/article.aspx?
iArticleId=5600.
Temkin Group. “2011 Temkin Experience Ratings.” March 29, 2011. http://www.temkingroup.
com/news/2011-temkin-experience-ratings.
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
CHAPTER
2
T H E DE V E L O P M E N T O F
ENTERPRISE RESOURCE
PLANNING SYSTEMS
LEARNING
OBJECTIVES
After completing this chapter, you will be able to:
•
Identify the factors that led to the development of Enterprise Resource
Planning (ERP) systems
•
Describe the distinguishing modular characteristics of ERP software
•
Discuss the pros and cons of implementing an ERP system
•
Summarize ongoing developments in ERP
INTRODUCTION
In today’s competitive business environment, companies try to provide customers with goods and
services faster and less expensively than their competition. How do they do that? Often, the key is
an efficient, integrated information system. Increasing the efficiency of information systems results in
more efficient management of business processes. When companies have efficient business
processes, they can be more competitive in the marketplace.
An Enterprise Resource Planning (ERP) system can help a company integrate its operations by
serving as a company-wide computing environment that includes a shared database—delivering
consistent data across all business functions in real time. (The term real time refers to data and
processes that are always current).
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 2
This chapter will help you to understand how and why ERP systems came into being and what
20
the future might hold for business information systems. The chapter follows this sequence:
•
Review of the evolution of information systems and related causes for the recent
development of ERP systems
•
Discussion of the few ERP software vendors that dominate the market; the current industry
leader, German software maker SAP AG’s industry-leading software product, SAP ERP, is
discussed as an example of an ERP system.
•
Review of the factors influencing a company’s decision to purchase an ERP system
•
Description of ERP’s benefits
•
Overview of frequently asked questions related to ERP systems
•
Discussion of the future of ERP software, including the emphasis being placed on mobile
applications and accessibility of data
THE EVOLUTION OF INFORMATION SYSTEMS
Until recently, most companies had unintegrated information systems that supported only
the activities of individual business functional areas. Thus, a company would have a
marketing information system, a production information system, and so on—each with its
own hardware, software, and methods of processing data and information. Information
systems configured in this way are known as a silos because each department has its
own stack, or silo, of information that is unconnected to the next silo; silos are also known
as stovepipes.
Such unintegrated systems might work well within each individual functional area,
but to be competitive, a company must share data among all the functional areas. When a
company’s information systems are not integrated, costly inefficiencies can result. For
example, suppose two functional areas have separate, unintegrated information systems.
To share data, a clerk in one functional area needs to print out data from another
area and then enter the data into her area’s information system. Not only does this data
input take twice the time, it also significantly increases the chance for data entry errors.
Alternatively, this process might be automated by having one information system write
data to a file to be read by another information system. This would reduce the probability
of errors, but it could only be done periodically (usually overnight or on a weekend) to
minimize the disruption to normal business transactions. Because of the time lag in
updating the system, the transferred data would rarely be up to date. In addition, data
can be defined differently in different data systems; for instance, products might be
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
The Development of Enterprise Resource Planning Systems
referred to by different part numbers in different systems. This variance can create
further problems in timely and accurate information sharing between functional areas.
It seems obvious today that a business should have integrated software to manage all
functional areas. An integrated ERP system, however, is an incredibly complex hardware
and software system that was not feasible until the 1990s. Current ERP systems evolved
as a result of three things: (1) the advancement of the hardware and software technology
(computing power, memory, and communications) needed to support the system, (2) the
development of a vision of integrated information systems, and (3) the reengineering of
companies to shift from a functional focus to a business-process focus.
21
Computer Hardware and Software Development
Computer hardware and software developed rapidly in the 1960s and 1970s. The first
practical business computers were the mainframe computers of the 1960s. Although these
computers began to change the way business was conducted, they were not powerful
enough to provide integrated, real-time data for business decision making. Over time,
computers got faster, smaller, and cheaper—leading to today’s proliferation of mobile
devices. The rapid development of computer hardware capabilities has been accurately
described by Moore’s Law. In 1965, Intel employee Gordon Moore observed that the
number of transistors that could be built into a computer chip doubled every 24 months.
This meant that in the 1960s and 1970s the capabilities of computer hardware were
doubling every 24 months, and this trend has continued, as shown in Figure 2-1.
Intel Processors
1,000,000,000
Core i7
Itanium 2
100,000,000
Number of Transistors
Pentium 4
10,000,000
Pentium II
Pentium
80486
1,000,000
80386
80286
100,000
8086
10,000
4004
8080
1,000
1970
1975
1980
1985
1990
1995
2000
2005
2010
Year
Source Line: “The Evolution of a Revolution,” ftp://download.intel.com/pressroom/kits/Intel
ProcessorHistory.pdf,” Intel.
FIGURE 2-1
The actual increase in transistors on a chip approximates Moore’s Law
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Chapter 2
22
During this time, computer software was also advancing to take advantage of the
increasing capabilities of computer hardware. In the 1970s, relational database software
was developed, providing businesses with the ability to store, retrieve, and analyze
large volumes of data. Spreadsheet software, a fundamental business tool today, became
popular in the 1980s. With spreadsheets, managers could perform complex business
analyses without having to rely on a computer programmer to develop custom
programs.
The computer hardware and software developments of the 1960s, 1970s, and 1980s
paved the way for the development of ERP systems.
Early Attempts to Share Resources
As PCs gained popularity in business in the 1980s, it became clear that users needed a
way to share peripheral equipment (such as printers and hard disks, which were fairly
expensive in the early 1980s) and, more importantly, data. At that point, important
business information was being stored on individual PCs, but there was no easy way to
share the information electronically.
By the mid-1980s, telecommunications developments allowed users to share data and
peripherals on local networks. Usually, these networks were groups of computers
connected to one another within a single physical location. This meant that workers could
download data from a central computer to their desktop PCs and work with the data at
their desks.
This central computer–local computer arrangement is now called a client-server
architecture. Servers (central computers) became more powerful and less expensive
and provided scalability. Scalability means that the capacity of a piece of equipment
can be increased by adding new hardware. In the case of a client-server network, the
ability to add servers makes the network scalable—thus extending the life of the
hardware investment. Scalability is a characteristic of client-server networks, but
usually not of mainframe-based systems.
By the end of the 1980s, much of the hardware and software needed to support the
development of ERP systems was in place: fast computers, networked access, and
advanced database technology. Recall from Chapter 1 that ERP programs help
organizations manage company-wide business processes using a common database, which
holds a very large amount of data. The software that holds that data in an organized
fashion, and that allows for the easy retrieval of data, is the database management system
(DBMS). By the mid-1980s, the DBMS required to manage the development of complex
ERP software existed. The final element required for the development of ERP software was
understanding and acceptance from the business community. Many businesspeople did
not yet recognize the benefits of integrated information systems nor were they willing to
commit the resources to develop ERP software.
The Manufacturing Roots of ERP
The concept of an integrated information system took shape on the factory floor.
Manufacturing software advanced during the 1960s and 1970s, evolving from simple
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The Development of Enterprise Resource Planning Systems
inventory-tracking systems to material requirements planning (MRP) software. MRP is
a production-scheduling methodology that determines the timing and quantity of
production runs and purchase-order releases to meet a master production schedule.
MRP software allowed a plant manager to plan production and raw materials
requirements by working backward from the sales forecast, the prediction of future
sales. The plant manager first looked at Marketing and Sales’ forecast of customer
demand, then looked at the production schedule needed to meet that demand,
calculated the raw materials needed to meet the required production levels, and finally,
projected the cost of those raw materials. For a company with many products, raw
materials, and shared production resources, this kind of projection was impossible
without a computer to keep track of various inputs.
The basic functions of MRP could be handled by mainframe computers; however, the
advent of electronic data interchange (EDI)—the direct computer-to-computer exchange
of standard business documents—allowed companies to handle the purchasing process
electronically, avoiding the cost and delays resulting from paper purchase order and
invoice systems. The functional area now known as Supply Chain Management (SCM)
began with the sharing of long-range production schedules between manufacturers and
their suppliers.
23
Management’s Impetus to Adopt ERP
The hard economic times of the late 1980s and early 1990s caused many companies to
downsize and reorganize. These company overhauls were one stimulus for ERP
development. Companies needed to find some way to avoid the following kind of situation
(which they had tolerated for a long time):
Imagine you are the CEO of Mountaineering, Inc., an outdoor outfitter catering to the
young and trendy sportsperson. Mountaineering, Inc. is profitable and keeping pace
with the competition, but the company’s information systems are unintegrated and
inefficient (as are the systems of your competitors). The Marketing and Sales
Department creates a time-consuming and unwieldy paper trail when negotiating and
closing sales with retailers. To schedule factory production, however, the manager of
the Manufacturing Department needs accurate, timely information about actual and
projected sales orders from the Marketing and Sales manager. Without such
information, the Manufacturing manager must make a guess about which products
to produce—and how many—in order to keep goods moving through the production
line. Sometimes a guess overestimates demand, and sometimes it underestimates
demand.
Overproduction of a certain product might mean your company is stuck with a
product for which there is a diminishing market due to style changes or changes in
seasonal demand. When your company stores product—such as hiking boots—as it
waits for a buyer, you incur warehouse expense. On the other hand,
underproduction of a certain style of boot might result in product not being ready
for a promised delivery date, leading to unhappy customers and, possibly, canceled
orders. If you try to catch up on orders, you’ll have to pay factory workers overtime
or resort to the extra expense of rapid-delivery shipments.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 2
Finance and Accounting
Information flow
Logistics
Information flow
Manufacturing
Information flow
Sales
Information flow
Marketing
Top management
Information flow
24
Eventually, the management of large companies decided they could no longer afford
the type of inefficiencies illustrated by the Mountaineering example—inefficiencies caused
by the functional model of business organization. This model had deep roots in U.S.
business, starting with the General Motors organizational model developed by Alfred P.
Sloan in the 1930s. The functional business model shown in Figure 2-2 illustrates the
concept of silos of informatio…
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