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Item Essentials of Business Processes and Information Systems Simha R. Magal, PhD Grand Valley State University Jeffrey Word Manchester Business. This supplement text bridges the gap between the fundamentals of how businesses operate (processes) and the tools that business people use to accomplish. Essentials of Business Processes and Information Systems. Simha R. Magal, PhD. Grand Valley State University. Jeffrey Word. Manchester Business School.
Why did this structure evolve? Regardless of the reasons, however, the fact remains that over the last several years, organizations have relocated parts of their operations to places outside their home countries to take advantage of unique business efficiencies. Over the next decade SSB grew rapidly. At the same time, the amount of money the company has in the bank is reduced. Assembly, inspection, and packing are the required steps or activities.
Stage 1: Stand-Alone Mainframe System Slide 5. Stage 2: Client-Server Architecture Slide 8. Client-Server Architecture continued 3 layers of a software: Presentation layer — how you interact with an application examples: Application layer — what the application allows you to do examples: Data layer — where the application stores your work examples: Slide 10 Stage 2: Join our Facebook group for this title: Organizations, Business Processes, and Information Systems 1.
Enterprise Systems 2. The Procurement Process 3. The Fulfillment Process 4. The Production Process 5. The key is to exchange information efficiently and effectively. People in each step in a process must be informed when it is time for them to complete their step. This exchange of information takes place in a number of ways. In a manual environment, companies use paper documents to communicate information among different departments.
In the case of the fulfillment process, for instance, the salesperson completes a multipart sales order document, keeps one part, and sends the remaining parts of the document to the warehouse. The shipper in the warehouse updates the document to reflect her work, keeps a copy, and sends the remaining parts to the accounting department. This process includes many opportunities for error. For example, what happens if the salesperson forgets to send the paperwork to the warehouse? What if the warehouse ships the goods to the customer but forgets to send the paperwork to the accountant?
What if the paperwork gets lost? These examples illustrate the importance of coordination in executing processes. Unfortunately, in many organizations, the coordination of work across the process is not very efficient, is time consuming, and results in numerous problems: When an organization performs this coordination manually—for example, by using the multipart sales order document in our fulfillment process—delays are inevitable.
Further, requiring employees to complete, forward, and file paperwork wastes time that they could be devoting to their tasks. Finally, in addition to causing delays, this paperwork constitutes a significant cost incurred by the company. Delays occur in the form of increased lead times e. Increased lead times can cause a company to have an insufficient inventory of material when it is needed. Increased cycle times can prevent the company from producing goods and filling customer orders in a timely manner.
Both of these 12 Chapter 1. A paper-based process problems can lead to lost sales, as the case of Nintendo Wii illustrates see Business Processes in Practice In fact, it became so popular so quickly that Nintendo was unable to build enough units to keep up with the demand.
Nintendo had planned for the manufacturing capacity to meet demand, but it had failed to communicate the increased requirements to both their purchasing department and their raw material suppliers. The increased lead times for raw materials in turn led to a severe increase in the cycle times for production and delivery of finished goods to stores.
That is, it took Nintendo much longer to produce the Wii because the factories had to wait for suppliers to provide them with the necessary materials. As a result, Nintendo missed an opportunity to sell more products and meet the consumer demand. When the Internet boom started to crash, however, orders began to taper off quickly. Compiled from: April 16, Typically, the paperwork and information about process steps are not readily available to people in other departments.
Referring back to Figure 1. As a result, if the customer calls to inquire about the status of the order, the salesperson has to call the warehouse or the accounting department to track down this information.
A costly consequence of not having good visibility across the organization is illustrated in the case of Nike see Business Processes in Practice In this case, the problems were caused by a lack of visibility across multiple processes, not just across one process. The root cause of these three problems is the tendency to view work in terms of functional silos rather than in terms of cross-functional processes.
Because the people in each functional area are focused on their own world, they do not easily see how significant the negative consequences of the little delays, small mistakes, and excess inventory can be to the process or to the organization as a whole. At the process level, small delays can accumulate to significantly extend the time required to fill a customer order or acquire raw materials.
Similarly, at the organizational level, small quantities of extra inventory can add up to cost the organization significant amounts of money in terms of storage and opportunity costs. The production planning department generated an incorrect demand forecast within their departmental information system for the shoe group.
Compounding this error, the manufacturing, procurement and sales departments never checked to see if the forecast matched what their customers were requesting in the sales department.
Instead, these departments simply took the demand forecast generated by the planning system and typed it into the manufacturing system, thereby generating the procurement requirements.
The information system in the sales department was never double-checked to determine what the actual customer order levels were. Organizations have historically accepted these negative consequences of the functional structure.
The early benefits of the functional structure—namely, the ability to better manage rapidly growing organizations—outweighed these consequences. Thus, the functional structure remains a common form of organizing.
Today, however, global competition is forcing organizations to become more efficient and effective. As a result, organizations are actively seeking to eliminate or reduce the problems of delays, excess inventories, and lack of visibility. To accomplish these goals, organizations must break out of silos and focus on processes. In other words, they need to substitute a process view for the traditional functional view.
Dell Corporation is a great example of an organization that is designed around a process rather than functional silos see Business Processes in Practice Dell largely operates on a business model that builds computers after the company receives an order from a customer, an approach known as make-to-order.
The process of building the computer begins as soon as Dell receives the customer order and usually the payment. This order triggers different steps, including procuring the components, building the computer to exact specifications, shipping the computer, and so on. In contrast, most other computer manufacturers try to forecast what customers will want and then procure the components needed to produce them. They then build the computers in advance and sell from their stock of finished goods.
Because Dell was a new company and did not have a historical functional organization to deal with, they could radically rethink their process for building and selling computers and then build their company around the new process. This process-based production model enabled Dell to become the leader in the personal computer industry and remain much more profitable than their competitors.
So many companies were acquiring companies in other countries and expanding operations globally that they were running into massive inefficiencies and operational issues.
The process view of the enterprise gave companies a powerful way to standardize the way they did their work across many countries and gain significant cost savings as a result. Because processes span multiple departments across companies—and in many cases across multiple countries—it is not possible to manage these processes manually; that is, using paperwork.
For this reason, ICT is an essential part of the process view of organizations. In particular, a class of ICT, known as enterprise systems ES or enterprise resource planning ERP systems, is essential to managing business processes.
At the same time as the process view came into popularity, software companies such as SAP introduced the first integrated enterprise systems.
It was the combination of a process view of the company and the capabilities of enterprise systems to manage global processes that brought about a huge shift in the productivity and profitability of many global companies.
In the next section, we will discuss the role of information and information systems in supporting business processes.
In addition, they organize these data into meaningful information that organizations use to support and assess these activities.
Examples of data are customer names, product numbers, and quantities of products sold. By themselves, these facts might not have much value. However, a report that uses these data to summarize product sales over time has tremendous value.
Data that are organized in a way that is useful to an organization are referred to as information. In this case, the organization can utilize this sales information to determine which products are doing well and which are not. That is, they do not easily share data and information with one another. Once again, this lack of integration arose from historical situations. Systems in organizations have evolved over the years in isolation.
That is, each functional area or department developed a system that suited its purposes well. Thus, sales developed order management systems, warehouses developed systems to track inventory of materials, accounting developed systems to track invoices and payments, and so on.
These functional information systems evolved independently of one another. Because the work was performed in functional silos, organizations gave little thought to sharing the data among functions or departments.
As a 16 Chapter 1. Warehouse Information System Sales Information System Receive Payment Accounting Information System A process supported by functional information systems result, although organizations have implemented systems to support the work of individual functional areas, exchanging information among them is often difficult. To make matters worse, information is often exchanged manually, as Figure 1.
The use of functional information systems has reduced delays associated with maintaining data within the functions. However, the delays associated with communicating with other departments persist because much of this communication still involves paper documents.
Therefore, in addition to moving from silos to processes, organizations must also move from functionally focused information systems to integrated enterprise systems ES. Enterprise systems support the entire process rather than parts of the process. Put differently, enterprise systems not only support the execution of individual activities in a process, they also help the organization coordinate work across functions.
This coordination further reduces delays, avoids excess inventory, and increases visibility. Consider the fulfillment process. When the sales department receives a customer order, it enters the order into the ES and authorizes delivery. People in the warehouse are automatically notified and have access to the information necessary to prepare and ship the order.
Recall that in a manual system, they would have to wait for 1. As soon as the order is shipped, accounting receives the information necessary to send the invoice. An ES can similarly streamline the procurement process. The purchase requisition created in the warehouse is immediately available to the purchasing department, which creates a purchase order and forwards it electronically to a suitable supplier.
When the shipment from the supplier is received and the receipt is entered into the system, accounting has immediate access to the information needed to process the invoice when it arrives from the supplier. Thus, there is no need to explicitly communicate this information among functions. In addition to eliminating the need to communicate explicitly among departments, enterprise systems make processes more efficient by automating some of the routine steps in the process.
In the procurement process, for example, when a purchase requisition is created, the ES automatically selects a suitable supplier, creates a purchase order, and sends it to the supplier, based on previously established rules. In the fulfillment process, the ES automatically generates an invoice as soon as a shipment is sent to the customer and electronically send it to the customer. A final benefit of enterprise systems is that they provide greater visibility across the process.
Each person involved in the process has almost instant access to the information about the process.
At any time, the system can be queried about the current state of the customer order or purchase requisition, for example, which part of the order fulfillment process is currently being executed, or when the purchase order was sent to the supplier. This increased visibility reduces uncertainty for all 18 Chapter 1.
Organizations, Business Processes, and Information Systems concerned parties. For instance, the anxious customer can be assured that the order was shipped this morning, and the anxious warehouse manager can rest easy with the knowledge that the shipment from the supplier will be arriving on time. The reduced delays and increased visibility have a positive impact on lead times, cycle times, inventory, lost sales, and customer service.
What does this information have to do with me? Very often students believe that this material is important only to IT majors. This belief is incorrect. Recall our discussion at the beginning of the chapter of the skills possessed by knowledge workers. One of these skills is the ability to think strategically and understand the big picture. At a very fundamental level, this skill requires you to understand the following aspects of an organization: How will you be effective in a cross-functional project team if you do not understand the role others play in the process and how what you do affects them?
A final skill is information literacy and the ability to utilize an information system to identify, obtain, and use the necessary information to do your job well. In the next three sections, we will develop a framework to understand processes, the role of enterprise systems, and the financial impact of processes.
We will then incorporate this framework throughout the book as we discuss specific processes in greater detail. This flow, which was represented in Figure 1. We previously explained that there are data associated with each step of the process, such as dates, quantities, locations, and amounts.
For example, when a shipment is made against a customer order, the quantity shipped is now associated with the process. Thus, a data flow is associated with a process. Going further, the data are often found in documents such as purchase orders and invoices that are created or modified in different steps of a process. These documents can be either physical or electronic. For instance, a customer order accompanies the process steps, and as various steps are completed, 1.
This is the document flow associated with a process. Processes are executed multiple times. For example, a company will process numerous customer orders in a day. Each execution of the process is an instance or occurrence of the process. The three flows discussed above are associated with each instance of a process. That is, each time the physical steps in a process are executed, data and documents are created or modified.
One additional flow, information flow, is associated with each instance of the process as well as at an aggregate level, that is, across multiple instances or executions of a process. Data generated in each step and across an entire process are accumulated over time. For example, data about numerous customer orders are collected and stored in the ES.
These data are then organized in a manner that is meaningful and useful for some purpose, such as creating a report summarizing sales for the previous month. Once the data have been organized into a sales report, managers and employees can analyze problem areas and work together to improve them.
They facilitate communication and coordination among different functions, and they allow easy exchange of, and access to, data across the process. More specifically, ES play a vital role in the following three areas: Execute the process 2.
Capture and store process data 3. Monitor process performance 20 Chapter 1. Organizations, Business Processes, and Information Systems In this section we discuss each of these roles. In some cases the role is fully automated; that is, it is performed entirely by the system. ES are embedded into the processes, and they play a critical role in executing the processes.
In other words, the system and the process are intertwined. If the system stops working, the process cannot be executed. Enterprise systems help execute processes by informing people when it is time to complete a task, by providing the data necessary to complete the task, and in some cases by providing the means to complete the task.
In the fulfillment process, for example, the system will inform people in the warehouse that orders are ready for shipment and provide them with a listing of what materials must be included in the order and where to find the materials in the warehouse. In the procurement process, the system generates the purchase requisitions and then informs the purchasing department that they need to act on these requisitions.
The accountant will be able to view all shipments received to match an invoice that has been received from a supplier and verify that the invoice is accurate. Without the system, these steps, and therefore the process, cannot be completed.
For example, if the system is not available, how will the warehouse know which orders are ready to pack and ship? As you might have concluded by now, because organizations rely so heavily on ES, they must make certain that these systems are functioning all the time so that the work is not interrupted. They also should have extremely good backup systems in case of failure. Business Processes in Practice illustrates the dependence of processes on systems in the case of Amazon. Enterprise systems capture and store these data, commonly referred to as process data or transaction data.
Some of these data are generated and automatically captured by the system. These are data related to who, when, and where an activity is completed.
COM Earlier in the chapter we explained that, rather than manufacture its own products, Amazon. Significantly, the company receives most of their orders via their Web site, their online storefront.
This Web site is connected to an enterprise system that supports the fulfillment process. When an order is received, the system communicates this information to the warehouse, where the order is packed and shipped.
If the online store stops working, then Amazon. This data entry can occur in various ways, ranging from manual data entry to automated methods involving data in forms such as bar codes that can be read by machines. In the fulfillment process, for example, when a customer order is received by mail or over the phone , the person taking the order must enter data such as the name of the customer, what they ordered, and how much they ordered. Data such as the name of the person entering the data who , at which location they are completing this task where , and the date and time when are automatically included by the system when it creates the order in the system.
The data are updated as the process steps are executed. When the order is shipped, the warehouse will provide data about what products were shipped and how many, whereas the system will automatically include data related to who, when, and where.
An important advantage of using an ES compared to a manual system or multiple functional systems is that the data need to be entered into the system only once. Moreover, once they are entered, they are easily accessible to other people in the process, and there is no need to reenter them in subsequent steps.
The data captured by an ES, along with data already in the system, provide immediate feedback. For example, they can be used to create a receipt or to make recommendations for additional or alternate products. The data are also stored for later use and analysis.
Business Processes in Practice illustrates the immediate feedback capabilities of an ES. An ES performs this role by evaluating information about the process. This information can be created either at the instance level i. At the instance level, for example, a company might be interested in the state of a particular customer order.
Where is the order within the fulfillment process? When was it shipped? Was the complete order shipped? If it has not been shipped, then when can we expect it to be shipped? Or, for the procurement process, when was the purchase order sent to the supplier? What will be the cost of acquiring the material? At the aggregate level, the ES can evaluate how well the procurement process is being executed by calculating the lead time, or the time between sending the purchase order to a vendor and receiving the goods, for each order and each vendor over time.
COM When a customer purchases something on Amazon. In addition, the data in the current order are combined with historical sales data to recommend additional products that may be of interest to the customer—resulting in higher sales. It also graphically depicts reasons for delays in processing the orders. Not only can the ES help monitor a process, it can also detect problems with the process. It performs this role by comparing the information with a standard—that is, what the company expects or desires—to determine if the process is performing within expectations.
Management establishes standards based on organizational goals. If the information provided by the ES indicates that the process is falling short of the standards, then the company assumes that some type of problem exists. Some problems can be routinely and automatically detected by the system, whereas others require a person to review the information and make judgments.
For example, the system can calculate the expected date that a specific order will be shipped and determine whether this date will meet the established standard. Or, it can calculate the average time taken to fill all orders over the last month and compare this information to the standard to determine if the process is working as expected. Monitoring the process, then, helps detect problems with the process. In such cases the ES can help diagnose the cause of the symptoms by providing 1.
COM By capturing detailed data on each activity in their organization, Amazon can assess multiple factors that cause problems or reduce performance.
In many cases the company must look at a problem from many angles to determine how to address it. By comparing similar processes across multiple locations, managers can identify higher-performing teams to determine the key factors for their success. They can also identify lower-performing teams to find areas for improvement. For example, if the average time to process a customer order appears to be increasing over the last month, this problem could actually be a symptom of a more basic problem.
A manager can then dig deeper, or drill down, into the information to diagnose the underlying problem. To accomplish this, the manager can request a breakdown of the information by type of product, customer, location, employees, day of the week, time of day, and so on. After reviewing this detailed information, the manager might determine that there has been a high employee turnover in the warehouse over the last month and that the delays are occurring because new employees are not sufficiently familiar with the process.
The manager might conclude that this problem will work itself out in time, in which case there is nothing more to be done. Alternatively, the manager could conclude that the new employees are not being adequately trained and supervised. In this case, the company must take some actions to correct the problem. Business Processes in Practice illustrates the performance monitoring capabilities of an ES.
For example, when a company receives a shipment of material from a vendor, it assumes an obligation to pay the vendor. At the same time, the value of the material inventory in the warehouse increases. When the company pays the vendor, the obligation to pay no longer exists. At the same time, the amount of money the company has in the bank is reduced. Significantly, not all activities have a financial impact.
Nevertheless, to develop a complete understanding of processes—the first step in developing strategic thinking skills—it is necessary to understand their financial impact.
An income statement shows how much money the company made revenue , how much money the company had to spend to produce and sell its goods expenses , and 1 An in-depth discussion of financial statements is beyond the scope of this book. We provide very simple definitions and explanations necessary to understand the financial impact of processes. Typical expenses include the cost of goods sold what the products that were sold cost the company , advertising, wages, insurance, and utilities.
Net income is the difference between revenue and expenses. In this book we will concern ourselves only with the highlighted elements of the income statement—revenue from sales and cost of goods sold. It shows what the company owns assets , what it owes to others liabilities , and how much money shareholders have invested in the company equity.
Assets include cash, accounts receivable or money owed to the company by customers, value of the inventory of finished goods and raw material, fixed assets such as buildings and machinery, and so on. Liabilities include any monies that the company owes to vendors as well as any loans the company must repay. They are also liabilities in the sense that they are owed to shareholders. In this book we will concern ourselves only with the highlighted elements of the balance sheet—cash, accounts receivables, the various inventory accounts, accounts payable, and retained earnings.
The collection of these accounts is called a chart of accounts. Key accounts relevant to the processes discussed in this book are highlighted in Figure 1. Processes affect the financial position of an organization by offsetting an increase or decrease in one account with a corresponding increase or decrease in a different account or accounts.
These could be two accounts in the balance sheet or one each in the income statement and the balance sheet. For example, when the organization receives payment from a customer, accounts receivable is reduced by the amount of the payment, and cash assets or money in the bank are increased by that same amount.
When there is a sale to a customer on credit, the accounts receivable account is increased, and the sales revenue account is also increased. Thus, there is not always an increase in one account and a decrease in another. Organizations, Business Processes, and Information Systems For a process to have a financial impact, it must involve two basic elements: You will learn a great deal more about the financial impact of processes in your accounting courses.
For now, we will keep things very simple so that you can focus on the impact of the process rather than the accounting rules for revenues, expenses, and income. The key ideas in this chapter are 1.
Work in organizations is completed by business processes that consist of various steps that are executed in different parts of the organization. Key processes in an organization are procurement, fulfillment, and production. Working within functions has severe limitations and negative consequences that cannot be tolerated in the current global competitive climate. Common problems are delays, excess inventory, and a lack of visibility across processes.
Physical, data, and document flows are associated with instances or occurrences of processes. Information flow is associated with both the instances of processes and the aggregate process level. Enterprise systems are essential in viewing organizations from a process perspective. Enterprise systems connect the work that is done across the organization and provide coordination, data access, and visibility across the process. They capture process data and help monitor the performance of processes, which can help the organization detect and diagnose problems.
Processes have a financial impact on the organization. Financial impact is measured by the impact on financial statements such as the income statement and balance sheet. The next three chapters will discuss the three key processes: The final chapter will provide an integrated view of the end-to-end business processes in action.
There can be an exchange of value internally. For example, paying employee salaries and wages a human resources process has an impact on the financial position of the firm.
In this book we will only discuss the financial impact due to an exchange in value with an external entity. What are the reasons for increased global competition? What are the consequences of global competition to organizations? What are the drawbacks of a functional organizational structure?
What negative consequences do they lead to? What caused this revolution? What are the implications of the information revolution for you?
What are functional information systems? What is their value to organizations? What are their main drawbacks? What are knowledge workers? What skills do they possess? Why are they important to organizations? What are enterprise systems? How do they differ from functional information systems? What is the value of enterprise systems to organizations? Explain the difference between the functional view and the process view of organizations.
Why is the process view important today? What is a business process? What are some of the key business processes in an organization? Do all companies have the same key processes? Why or why not? Describe two key financial documents. What is a common organizational structure?
Why did this structure evolve? What are the benefits of such a structure? Explain how processes affect the two key financial documents. What is a chart of accounts? How is this related to the two key financial documents? What are the typical functions or departments in an organization?
What type of work is done in each of these functions? Research some jobs online or by talking to people in companies that require knowledge workers. Describe these jobs and explain how and why knowledge workers are needed to fill these jobs. In this chapter we introduced three key processes— procurement, fulfillment, and production.
There are a number of other processes in an organization, such as those related to product development, and managing people. Identify one additional process that is typical in organizations. You may consider an organization you have worked in or the educational institution you are attending.
For the process provide the following: Identify other enterprise systems that are available to organizations, and highlight the relative advantages and disadvantages of each one. In Chapter 1, we briefly introduced enterprise systems ES in the context of the business processes that are discussed in this book.
In this chapter, we will explain enterprise systems in greater detail, and we will illustrate their role in managing and executing business processes. We will also describe different types of ES, explain the architecture of a typical ES, and identify the major ES software vendors in the market today. Next, we will discuss the various types of data in an ES and how they relate to business processes.
Finally, we will explain the simulated SAP environment that will be used for the chapter exercises in this book to help you understand how ES support business processes. Beginning in the s, ES began to play a critical role in automating and managing repetitive, manual activities in large businesses. These systems have evolved from stand-alone systems running on large, expensive computers to packaged applications to distributed systems using cheaper, smaller systems.
This evolution is briefly described next and is depicted in Figure 2. The three broad stages of evolution include the mainframe environment, 28 29 2.
Each of the stages in this evolution is discussed next. In the early days of ES, hardware typically consisted of large, expensive mainframe computers.
Software includes specialized operating system software needed to execute operations from the applications on the hardware and custom applications that provide capabilities needed to complete specific tasks, such as filling a customer order.
Databases are used to store the data associated with the ES. Early databases were extremely complex and difficult to manage.