2 Information Systems in the Enterprise After completing this chapter, you will be able to: 1. Analyze the role played by the six major types of information systems in organizations and their relationship to each other. 2. Describe the types of information systems supporting the major func- tional areas of the business. 3. Assess the relationship between organizations, information systems and business processes, including the processes for customer relationship management and supply chain management. 4. Explain how enterprise systems and industrial networks create new effi- ciencies for businesses. 5. Evaluate the benefits and limitations of enterprise systems and indus- trial networks. Alpina Mooves Faster with Enterprise Systems Alpina Productos Alimenticios is a privately owned dairy products company headquartered in Bogota, Colombia. It produces more than 400,000 liters of milk daily and sells more than 200 products in Colombia, Central America, and North America, including a wide array of cheeses, yogurts, milk-based beverages, fruit juices, and chilled desserts. Alpina has 21 sales agencies, plants in Venezuela and Ecuador, and 3,400 employees, which process 72 million orders and 400,000 invoices per year. The diversity of its products, the delivery volume, and the size of Alpina’s market creates enormous supply chain management tasks. Dairy products require con- stant refrigeration and have an average shelf life of only 21 days. The company must deliver prod- ucts directly to stores or distributors within 24 hours after an order has been placed. The company wants to expand into new regional and export markets by maintaining an exceptionally high level of product quality, service, and production efficiency. It must cope with a regional economic downturn, consumer demand for lower prices, and new global and local competitors. Although Alpina was doubling sales every two years, its information systems could not support its pace of growth. Alpina had built a series of systems itself that were not integrated 2 2 objectives
Transcript
2 InformationSystems in the
Enterprise
After completing this chapter, you will be able to:
1. Analyze the role played by the six major types of information systems inorganizations and their relationship to each other.
2. Describe the types of information systems supporting the major func-tional areas of the business.
3. Assess the relationship between organizations, information systems andbusiness processes, including the processes for customer relationshipmanagement and supply chain management.
4. Explain how enterprise systems and industrial networks create new effi-ciencies for businesses.
5. Evaluate the benefits and limitations of enterprise systems and indus-trial networks.
Alpina Mooves Faster with Enterprise Systems
Alpina Productos Alimenticios is a privately owned dairy products company headquartered inBogota, Colombia. It produces more than 400,000 liters of milk daily and sells more than 200products in Colombia, Central America, and North America, including a wide array of cheeses,yogurts, milk-based beverages, fruit juices, and chilled desserts. Alpina has 21 sales agencies,plants in Venezuela and Ecuador, and 3,400 employees, which process 72 million orders and400,000 invoices per year. The diversity of its products, the delivery volume, and the size ofAlpina’s market creates enormous supply chain management tasks. Dairy products require con-stant refrigeration and have an average shelf life of only 21 days. The company must deliver prod-ucts directly to stores or distributors within 24 hours after an order has been placed.
The company wants to expand into new regional and export markets by maintaining anexceptionally high level of product quality, service, and production efficiency. It must cope witha regional economic downturn, consumer demand for lower prices, and new global and localcompetitors. Although Alpina was doubling sales every two years, its information systems couldnot support its pace of growth. Alpina had built a series of systems itself that were not integrated
2
2
objectives
and the systems operated in isolation from each other. The firm had no way ofcommunicating or consolidating company-wide information.
To increase productivity and competitiveness, Alpina decided to install enter-prise resource planning software, embarking in 1995 on an ambitious project tocreate integrated systems for industrial processes, logistics management, adminis-trative and financial functions, and commercial functions. Alpina started its enter-prise project with pieces of software from a number of different vendors but even-tually used Oracle Consumer Packaged Goods (CPG) software to integrate thesefunctions. By December 1998 Alpina had installed the Oracle CPG software in itsproduction plants and sales agencies.
The new system has enabled Alpina to reduce its inventory through betterplanning and stocking of raw materials and finished products. Alpina has reducedturnaround in raw materials from 35 days to 25 days and has reduced turnaroundin finished products from 8 days to 5 days. Through better supply chain manage-ment, Alpina is saving $2.7 million each year. Alpina has also reduced costs byusing the information from its system to consolidate delivery loads and create moreefficient delivery routes. The system’s transportation planning capabilities havehelped the company reduce the number of trucks at each of its major distributioncenters by 15 percent, saving $200,000 annually in transport costs.
With information about past order history, Alpina’s system helps customersplan and stock their shelf space, providing them with information about whichproducts, flavors, and sizes are most in demand in their stores. Alpina is using thisinformation as well to help calculate customer demand as it introduces new prod-ucts in the sub-Andes region, Central America, and the United States.Sources: Michael Miley, “Fast Mooving,” Profit Magazine, February 2000 and www.alpina.com.co.
3
Increase serviceReduce costs
Short shelf life of productsRapid growthNew global and localcompetitors
4 Part I ❙ ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE
Businesses need different types of information systems to support decision making andwork activities for various organizational levels and functions.To respond to new competi-tive pressures, many are implementing enterprise-wide systems that integrate informationand business processes from different functional areas.Alpina, for instance, needed infor-mation systems that would allow it to move its products more efficiently through its sup-ply chain. It found a solution in building systems that could link important businessprocesses for sales, production, and logistics.The opening vignette presents the potentialrewards to firms with well-conceived systems linking the entire enterprise. Such systemstypically require a significant amount of organizational and management change and raisethe following management challenges:
1. Integration. Although it is necessary to design different systems serving differentlevels, functions, and business processes in the firm, more and more firms are findingadvantages in integrating systems. However, integrating systems for different organi-zational levels, functions, and business processes to freely exchange information canbe technologically difficult and costly. Managers need to determine what level of sys-tem integration is required and how much it is worth in dollars.
2. Enlarging the scope of management thinking. Most managers are trained tomanage a product line, a division, or an office.They are rarely trained to optimize theperformance of the organization as a whole, and often are not given the means todo so. But enterprise systems and industrial networks require managers to take amuch larger view of their own behavior to include other products, divisions, depart-ments, and even outside business firms. Investments in enterprise systems are huge,they must be developed over long periods of time, and they must be guided by ashared vision of the objectives.
In this chapter we examine the role of the various types of information systems in organiza-tions. First we look at ways of classifying information systems based on the organizational
level they support. Next we look at systems in terms of the organizational function theyserve. We then show how systems can support business processes, including processes span-ning more than one function, such as customer relationship management and supply chainmanagement. Finally, we examine enterprise systems and industrial networks, which enableorganizations to integrate information and business processes across entire firms and evenentire industries.
2.1 Key System Applications in theOrganization
Because there are different interests, specialties, and levels in an organization, there are dif-ferent kinds of systems. No single system can provide all the information an organizationneeds. Figure 2-1 illustrates one way to depict the kinds of systems found in an organization.In the illustration, the organization is divided into strategic, management, knowledge, andoperational levels and then is further divided into functional areas such as sales and market-ing, manufacturing, finance, accounting, and human resources. Systems are built to servethese different organizational interests (Anthony, 1965).
Different Kinds of SystemsFour main types of information systems serve different organizational levels: operational-level systems, knowledge-level systems, management-level systems, and strategic-level sys-tems. Operational-level systems support operational managers by keeping track of the ele-mentary activities and transactions of the organization, such as sales, receipts, cash deposits,payroll, credit decisions, and the flow of materials in a factory. The principal purpose of sys-tems at this level is to answer routine questions and to track the flow of transactions throughthe organization. How many parts are in inventory? What happened to Mr. Williams’s pay-
operational-level systemsInformation systems that moni-tor the elementary activities andtransactions of the organization.
Chapter 2 ❙ INFORMATION SYSTEMS IN THE ENTERPRISE 5
Figure 2-1 Types of informa-tion systems. Organizations canbe divided into strategic, man-agement, knowledge, and opera-tional levels and into five majorfunctional areas: sales and mar-keting, manufacturing, finance,accounting, and humanresources. Information systemsserve each of these levels andfunctions.
OperationalManagers
Knowledge and Data Workers
MiddleManagers
SeniorManagers
OperationalLevel
KnowledgeLevel
ManagementLevel
StrategicLevel
KIND OFINFORMATION SYSTEM
GROUPSSERVED
Sales andMarketing
FUNCTIONALAREAS
Manufacturing Finance Accounting Human Resources
knowledge-level systemsInformation systems that sup-port knowledge and data work-ers in an organization.
management-level systemsInformation systems that sup-port the monitoring, controlling,decision-making, and administra-tive activities of middle man-agers.
ment? To answer these kinds of questions, information generally must be easily available,current, and accurate. Examples of operational-level systems include a system to record bankdeposits from automatic teller machines or one that tracks the number of hours worked eachday by employees on a factory floor.
Knowledge-level systems support the organization’s knowledge and data workers. Thepurpose of knowledge-level systems is to help the business firm integrate new knowledge intothe business and to help the organization control the flow of paperwork. Knowledge-levelsystems, especially in the form of workstations and office systems, are the fastest-growingapplications in business today.
Management-level systems serve the monitoring, controlling, decision-making, andadministrative activities of middle managers. The principal question addressed by such sys-tems is: Are things working well? Management-level systems typically provide periodicreports rather than instant information on operations. An example is a relocation control sys-tem that reports on the total moving, house-hunting, and home financing costs for employ-ees in all company divisions, noting wherever actual costs exceed budgets.
Some management-level systems support nonroutine decision making (Keen andMorton, 1978). They tend to focus on less-structured decisions for which informationrequirements are not always clear. These systems often answer “what if ” questions: Whatwould be the impact on production schedules if we were to double sales in the month ofDecember? What would happen to our return on investment if a factory schedule weredelayed for six months? Answers to these questions frequently require new data from outsidethe organization, as well as data from inside that cannot be easily drawn from existing operational-level systems.
Strategic-level systems help senior management tackle and address strategic issues andlong-term trends, both in the firm and in the external environment. Their principal concernis matching changes in the external environment with existing organizational capability.What will employment levels be in five years? What are the long-term industry cost trends,and where does our firm fit in? What products should we be making in five years?
Information systems also serve the major business functions, such as sales and market-ing, manufacturing, finance, accounting, and human resources. A typical organization hasoperational-, management-, knowledge-, and strategic-level systems for each functional area.For example, the sales function generally has a sales system on the operational level to recorddaily sales figures and to process orders. A knowledge-level system designs promotional dis-plays for the firm’s products. A management-level system tracks monthly sales figures by salesterritory and reports on territories where sales exceed or fall below anticipated levels. A sys-tem to forecast sales trends over a five-year period serves the strategic level.
strategic-level systemsInformation systems that sup-port the long-range planningactivities of senior management.
6 Part I ❙ ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE
Figure 2-2 The six majortypes of information systems:TPS, office systems, KWS, DSS,MIS, and ESS, showing the level ofthe organization and businessfunction that each supports.
We first describe the specific categories of systems serving each organizational level andtheir value to the organization. Then we show how organizations use these systems for eachmajor business function.
Six Major Types of SystemsFigure 2-2 shows the specific types of information systems that correspond to each organiza-tional level. The organization has executive support systems (ESS) at the strategic level; man-agement information systems (MIS) and decision-support systems (DSS) at the managementlevel; knowledge work systems (KWS) and office automation systems (OAS) at the knowl-edge level; and transaction processing systems (TPS) at the operational level. Systems at eachlevel in turn are specialized to serve each of the major functional areas. Thus, the typical sys-tems found in organizations are designed to assist workers or managers at each level and inthe functions of sales and marketing, manufacturing, finance, accounting, and humanresources.
Table 2-1 summarizes the features of the six types of information systems. It should benoted that each of the different kinds of systems may have components that are used by orga-nizational levels and groups other than their main constituencies. A secretary may find infor-mation on an MIS, or a middle manager may need to extract data from a TPS.
Transaction Processing SystemsTransaction processing systems (TPS) are the basic business systems that serve the opera-tional level of the organization. A transaction processing system is a computerized systemthat performs and records the daily routine transactions necessary to conduct the business.Examples are sales order entry, hotel reservation systems, payroll, employee record keeping,and shipping.
At the operational level, tasks, resources, and goals are predefined and highly structured.The decision to grant credit to a customer, for instance, is made by a lower-level supervisor
transaction processing systems (TPS)Computerized systems that per-form and record the daily routinetransactions necessary to con-duct the business; they serve theorganization’s operational level.
Chapter 2 ❙ INFORMATION SYSTEMS IN THE ENTERPRISE 7
according to predefined criteria. All that must be determined is whether the customer meetsthe criteria.
Figure 2-3 depicts a payroll TPS, which is a typical accounting transaction processingsystem found in most firms. A payroll system keeps track of the money paid to employees.The master file is composed of discrete pieces of information (such as a name, address, oremployee number) called data elements. Data are keyed into the system, updating the dataelements. The elements on the master file are combined in different ways to create reports ofinterest to management and government agencies and to send paychecks to employees. TheseTPS can generate other report combinations of existing data elements.
Other typical TPS applications are identified in Figure 2-4. The figure shows that thereare five functional categories of TPS: sales/marketing, manufacturing/production, finance/
TABLE 2-1Characteristics of Information ProcessingSystems
Type of System Information Inputs Processing Information Outputs Users
ESS
DSS
MIS
KWS
Office systems
TPS
Senior managers
Professionals; staff managers
Middle managers
Professionals; technical staff
Clerical workers
Operations personnel;supervisors
Projections; responsesto queries
Special reports; decisionanalyses; responsesto queries
Summary and exceptionreports
Models; graphics
Documents; schedules;mail
Detailed reports; lists;summaries
Graphics; simulations;interactive
Interactive; simulations;analysis
Routine reports; simplemodels; low-levelanalysis
Modeling; simulations
Document management;scheduling; communication
Sorting; listing; merging;updating
Aggregate data; external, internal
Low-volume data or massivedatabases optimized for dataanalysis; analytic models anddata analysis tools
Figure 2-3 A symbolic representation for a payroll TPS.
Data elements inpayroll master fileEmployee Number
NameAddressDepartmentOccupationPay rateVacation timeGross payEarnings(year to date)
WithholdingsFederal income taxState taxFICAOther
Payrollmaster
file
Managementreports
Payroll
Employeenumber
46848
Employeename
Stoker, K.
Grosspay
2000.00
Federaltax
400.00
Statetax
50.00
FICA
140.00
Earnings(year to date)
6000.00
On-linequeries:earnings
Government documents
Employee checks
Employee data (various departments) To general ledger: wages and salaries
Payrollsystem
8 Part I ❙ ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE
Figure 2-4 Typical applications of TPS.There are five functional categories of TPS: sales/marketing,manufacturing/production, finance/accounting, human resources, and other types of systems specific toa particular industry.Within each of these major functions are subfunctions. For each of these subfunc-tions (e.g., sales management) there is a major application system.
Sales/marketingsystems
Manufacturing/production systems
Finance/accounting systems
Human resources systems
Other types (e.g., university)
Major functions of system
Budgeting Personnel records AdmissionsSales management Scheduling
TYPE OF TPS SYSTEM
General ledger Benefits Grade recordsMarket research Purchasing
General ledger Payroll Registration systemSales orderinformation system
Machine controlsystems
Accounts receivable/payable
Employee records Student transcript system
Market researchsystem
Purchase order systems
Benefit systems Curriculum classcontrol systems
Sales commissionsystem
Funds managementsystems
Career path systems
Alumni benefactorsystem
Quality control systems
knowledge work systems(KWS)Information systems that aidknowledge workers in the cre-ation and integration of newknowledge in the organization.
office systemsComputer systems, such asword processing, electronic mailsystems, and scheduling systems,that are designed to increase theproductivity of data workers inthe office.
accounting, human resources, and other types of TPS that are unique to a particular indus-try. The UPS package tracking system described in Chapter 1 is an example of a manufac-turing TPS. UPS sells package delivery services; the system keeps track of all of its packageshipment transactions.
Transaction processing systems are often so central to a business that TPS failure for afew hours can spell a firm’s demise and perhaps other firms linked to it. Imagine what wouldhappen to UPS if its package tracking system were not working! What would the airlines dowithout their computerized reservation systems?
Managers need TPS to monitor the status of internal operations and the firm’s relationswith the external environment. TPS are also major producers of information for the othertypes of systems. (For example, the payroll system illustrated in Figure 2-4, along with otheraccounting TPS, supplies data to the company’s general ledger system, which is responsiblefor maintaining records of the firm’s income and expenses and for producing reports such asincome statements and balance sheets.)
Knowledge Work and Office SystemsKnowledge work systems (KWS) and office systems serve the information needs at theknowledge level of the organization. Knowledge work systems aid knowledge workers,whereas office automation systems primarily aid data workers (although they are also usedextensively by knowledge workers).
In general, knowledge workers are people who hold formal university degrees and who areoften members of a recognized profession, such as engineers, doctors, lawyers, and scientists.Their jobs consist primarily of creating new information and knowledge. Knowledge worksystems (KWS), such as scientific or engineering design workstations, promote the creationof new knowledge and ensure that new knowledge and technical expertise are properly inte-grated into the business. Data workers typically have less formal, advanced educationaldegrees and tend to process rather than create information. They consist primarily of secre-taries, accountants, filing clerks, or managers whose jobs are principally to use, manipulate,or disseminate information. Office systems are information technology applicationsdesigned to increase data workers’ productivity by supporting the coordinating and commu-
Chapter 2 ❙ INFORMATION SYSTEMS IN THE ENTERPRISE 9
word processingOffice automation technologythat facilitates the creation ofdocuments through computer-ized text editing, formatting,storing, and printing.
desktop publishingTechnology that produces professional-quality documentscombining output from wordprocessors with design, graphics,and special layout features.
document imaging systemsSystems that convert documentsand images into digital form sothat they can be stored andaccessed by the computer.
management informationsystems (MIS)Information systems at the man-agement level of an organizationthat serve the functions of plan-ning, controlling, and decisionmaking by providing routinesummary and exception reports.
Graphics designers use desktoppublishing software to design apage for “La Opinion.”Desktop pub-lishing software enables users tocontrol all aspects of the design andlayout process for professional-looking publications.
nicating activities of the typical office. Office systemscoordinate diverse information workers, geographicunits, and functional areas: The systems communi-cate with customers, suppliers, and other organiza-tions outside the firm and serve as a clearinghouse forinformation and knowledge flows.
Typical office systems handle and manage docu-ments (through word processing, desktop publishing,document imaging, and digital filing), scheduling(through electronic calendars), and communication(through electronic mail, voice mail, or videoconfer-encing). Word processing refers to the software andhardware that creates, edits, formats, stores, andprints documents (see Chapter 6). Word processingsystems represent the single most common applica-tion of information technology to office work, in partbecause producing documents is what offices are allabout. Desktop publishing produces professional,publishing-quality documents by combining outputfrom word processing software with design elements, graphics, and special layout features.Companies are now starting to publish documents in the form of Web pages for easy accessand distribution. We describe Web publishing in more detail in Chapter 12.
Document imaging systems are another widely used knowledge application.Document imaging systems convert documents and images into digital form so that they canbe stored and accessed by the computer.
Management Information SystemsIn Chapter 1, we defined management information systems as the study of information sys-tems in business and management. The term management information systems (MIS) also des-ignates a specific category of information systems serving management-level functions.Management information systems (MIS) serve the management level of the organization,providing managers with reports and, in some cases, with on-line access to the organization’scurrent performance and historical records. Typically, they are oriented almost exclusively tointernal, not environmental or external, events. MIS primarily serve the functions of plan-ning, controlling, and decision making at the management level. Generally, they depend onunderlying transaction processing systems for their data.
MIS summarize and report on the company’s basic operations. The basic transactiondata from TPS are compressed and are usually presented in long reports that are produced ona regular schedule. Figure 2-5 shows how a typical MIS transforms transaction-level datafrom inventory, production, and accounting into MIS files that are used to provide managerswith reports. Figure 2-6 shows a sample report from this system.
MIS usually serve managers interested in weekly, monthly, and yearly results–not day-to-day activities. MIS generally provide answers to routine questions that have been specifiedin advance and have a predefined procedure for answering them. For instance, MIS reportsmight list the total pounds of lettuce used this quarter by a fast-food chain or, as illustratedin Figure 2-6, compare total annual sales figures for specific products to planned targets.These systems are generally not flexible and have little analytical capability. Most MIS usesimple routines such as summaries and comparisons, as opposed to sophisticated mathemat-ical models or statistical techniques.
Decision-Support SystemsDecision-support systems (DSS) also serve the management level of the organization. DSShelp managers make decisions that are unique, rapidly changing, and not easily specified inadvance. They address problems where the procedure for arriving at a solution may not befully predefined in advance. Although DSS use internal information from TPS and MIS,they often bring in information from external sources, such as current stock prices or prod-uct prices of competitors.
decision-support systems(DSS)Information systems at the orga-nization’s management level thatcombine data and sophisticatedanalytical models or data analysistools to support semistructuredand unstructured decision making.
10 Part I ❙ ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE
Figure 2-6 A sample reportthat might be produced by theMIS in Figure 2-5.
PRODUCTCODE
PRODUCT DESCRIPTION
SALESREGION
Carpet Cleaner
TOTAL
NortheastSouthMidwestWest
4469
Consolidated Consumer Products CorporationSales by Product and Sales Region: 2001
ACTUALSALES
4,066,7003,778,1124,867,0014,003,440
16,715,253
PLANNED
4,800,0003,750,0004,600,0004,400,000
17,550,000
ACTUAL VS.PLANNED
0.851.011.060.91
0.95
Room Freshener
TOTAL
NortheastSouthMidwestWest
5674 3,676,7005,608,1124,711,0014,563,440
18,559,253
3,900,0004,700,0004,200,0004,900,000
17,700,000
0.941.191.120.93
1.05
Clearly, by design, DSS have more analytical power than other systems. They are builtexplicitly with a variety of models to analyze data, or they condense large amounts of datainto a form where they can be analyzed by decision makers. DSS are designed so that userscan work with them directly; these systems explicitly include user-friendly software. DSS areinteractive; the user can change assumptions, ask new questions, and include new data.
An interesting, small, but powerful DSS is the voyage-estimating system of a subsidiaryof a large American metals company that exists primarily to carry bulk cargoes of coal, oil,ores, and finished products for its parent company. The firm owns some vessels, charters oth-ers, and bids for shipping contracts in the open market to carry general cargo. A voyage-estimating system calculates financial and technical voyage details. Financial calculationsinclude ship/time costs (fuel, labor, capital), freight rates for various types of cargo, and portexpenses. Technical details include a myriad of factors such as ship cargo capacity, speed, portdistances, fuel and water consumption, and loading patterns (location of cargo for differentports). The system can answer questions such as the following: Given a customer deliveryschedule and an offered freight rate, which vessel should be assigned at what rate to maximize
Figure 2-5 How management information systems obtain their data from the organization’s TPS. Inthe system illustrated by this diagram, three TPS supply summarized transaction data at the end of thetime period to the MIS reporting system. Managers gain access to the organizational data through theMIS, which provides them with the appropriate reports.
Transaction Processing Systems Management Information Systems
Orderfile
Productionmaster
file
Accountingfiles
Reports Managers
MIS FILES
Salesdata
Unitproductcost data
Productchangedata
Expensedata
MIS
Orderprocessing
system
Materialsresourceplanningsystem
Generalledgersystem
Chapter 2 ❙ INFORMATION SYSTEMS IN THE ENTERPRISE 11
Figure 2-7 Voyage estimatingdecision-support system. ThisDSS operates on a powerful PC.It is used daily by managers whomust develop bids on shippingcontracts.
Ship file (e.g.,speed capacity)
Analyticalmodelsdatabase
Reports
Graphics
Port distancerestrictions file
Fuel consumptioncost file
Ship charter hirehistory cost file
Portexpense file
PC
profits? What is the optimum speed at which a particular vessel can optimize its profit andstill meet its delivery schedule? What is the optimal loading pattern for a ship bound for theU.S. West Coast from Malaysia? Figure 2-7 illustrates the DSS built for this company. Thesystem operates on a powerful desktop personal computer, providing a system of menus thatmakes it easy for users to enter data or obtain information. We describe other types of DSSin Chapter 13.
Executive Support SystemsSenior managers use executive support systems (ESS) to make decisions. ESS serve thestrategic level of the organization. They address nonroutine decisions requiring judgment,evaluation, and insight because there is no agreed-on procedure for arriving at a solution.ESS create a generalized computing and communications environment rather than provid-ing any fixed application or specific capability. ESS are designed to incorporate data aboutexternal events such as new tax laws or competitors, but they also draw summarized infor-mation from internal MIS and DSS. They filter, compress, and track critical data, emphasiz-ing the reduction of time and effort required to obtain information useful to executives. ESSemploy the most advanced graphics software and can deliver graphs and data from manysources immediately to a senior executive’s office or to a boardroom.
Unlike the other types of information systems, ESS are not designed primarily to solvespecific problems. Instead, ESS provide a generalized computing and telecommunicationscapacity that can be applied to a changing array of problems. Whereas many DSS aredesigned to be highly analytical, ESS tend to make less use of analytical models.
Questions ESS assist in answering include the following: In what business should we be?What are the competitors doing? What new acquisitions would protect us from cyclical busi-ness swings? Which units should we sell to raise cash for acquisitions (Rockart and Treacy,1982)? Figure 2-8 illustrates a model of an ESS. It consists of workstations with menus,interactive graphics, and communications capabilities that can access historical and compet-itive data from internal corporate systems and external databases such as Dow JonesNews/Retrieval or the Gallup Poll. Because ESS are designed to be used by senior managerswho often have little, if any, direct contact or experience with computer-based informationsystems, they incorporate easy-to-use graphic interfaces. More details on leading-edge appli-cations of DSS and ESS can be found in Chapter 13.
Relationship of Systems to One AnotherFigure 2-9 illustrates how the systems serving different levels in the organization are related toone another. TPS are typically a major source of data for other systems, whereas ESS are pri-marily a recipient of data from lower-level systems. The other types of systems may exchangedata with each other as well. Data may also be exchanged among systems serving different func-tional areas. For example, an order captured by a sales system may be transmitted to a manu-facturing system as a transaction for producing or delivering the product specified in the order.
It is definitely advantageous to have some measure of integration among these systems sothat information can flow easily between different parts of the organization. But integration
executive support systems(ESS)Information systems at the orga-nization’s strategic level designedto address unstructured decisionmaking through advanced graph-ics and communications.
12 Part I ❙ ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE
Figure 2-9 Interrelationshipsamong systems. The varioustypes of systems in the organiza-tion have interdependencies.TPSare a major producer of informa-tion that is required by the othersystems which, in turn, produceinformation for other systems.These different types of systemsare only loosely coupled in mostorganizations.
Executivesupportsystems(ESS)
Managementsystems
(MIS)
Managementsystems(DSS)
Transactionprocessing
systems(TPS)
Knowledgesystems
(KWS andOffice
Systems)
Figure 2-8 Model of a typicalexecutive support system. Thissystem pools data from diverseinternal and external sources andmakes them available to execu-tives in an easy-to-use form.
• Menus• Graphics• Communications• Local processing
ESSworkstation
• Menus• Graphics• Communications• Local processing
ESSworkstation
• Menus• Graphics• Communications• Local processing
• Dow Jones• Internet News Feeds• Standard & Poor’s
costs money, and integrating many different systems is extremely time consuming and com-plex. Each organization must weigh its needs for integrating systems against the difficultiesof mounting a large-scale systems integration effort. The discussion of enterprise systems inSection 2.3 treats this issue in greater detail.
2.2 Systems from a FunctionalPerspective
Information systems can be classified by the specific organizational function they serve aswell as by organizational level. We now describe typical information systems that supporteach of the major business functions and provide examples of functional applications foreach organizational level.
Sales and Marketing SystemsThe sales and marketing function is responsible for selling the organization’s product or ser-vice. Marketing is concerned with identifying the customers for the firm’s products or ser-vices, determining what they need or want, planning and developing products and services to
Chapter 2 ❙ INFORMATION SYSTEMS IN THE ENTERPRISE 13
TABLE 2-2Examples of Sales andMarketing Information Systems
System Description Organizational Level
Order processing Enter, process, and track orders Operational
Market analysis Identify customers and markets using Knowledgedata on demographics, markets, consumer behavior, and trends
Pricing analysis Determine prices for products Managementand services
sales and marketing information systemsSystems that help the firm iden-tify customers for the firm’sproducts or services, developproducts and services to meetcustomer’s needs, promoteproducts and services, sell theproducts and services, and pro-vide ongoing customer support.
meet their needs, and advertising and promoting these products and services. Sales is con-cerned with contacting customers, selling the products and services, taking orders, and fol-lowing up on sales. Sales and marketing information systems support these activities.
Table 2-2 shows that information systems are used in sales and marketing in a numberof ways. At the strategic level, sales and marketing systems monitor trends affecting newproducts and sales opportunities, support planning for new products and services, and mon-itor the performance of competitors. At the management level, sales and marketing systemssupport market research, advertising and promotional campaigns, and pricing decisions.They analyze sales performance and the performance of the sales staff. Knowledge-level salesand marketing systems support marketing analysis workstations. At the operational level,sales and marketing systems assist in locating and contacting prospective customers, trackingsales, processing orders, and providing customer service support.
Review Figure 2-6. It shows the output of a typical sales information system at the man-agement level. The system consolidates data about each item sold (such as the product code,product description, and price) for further management analysis. Company managers exam-ine these sales data to monitor sales activity and buying trends. The Window onManagement describes some typical sales and marketing systems that might be found in asmall business.
Manufacturing and Production SystemsThe manufacturing and production function is responsible for actually producing the firm’sgoods and services. Manufacturing and production systems deal with the planning, develop-ment, and maintenance of production facilities; the establishment of production goals; theacquisition, storage, and availability of production materials; and the scheduling of equip-ment, facilities, materials, and labor required to fashion finished products. Manufacturingand production information systems support these activities.
Table 2-3 shows some typical manufacturing and production information systemsarranged by organizational level. Strategic-level manufacturing systems deal with the firm’s
manufacturing and produc-tion information systemsSystems that deal with the plan-ning, development, and produc-tion of products and servicesand with controlling the flow ofproduction.
TABLE 2-3Examples of Manufacturing andProduction Information Systems
System Description Organizational Level
Machine control Control the actions of machines Operationaland equipment
Computer-aided design (CAD) Design new products using Knowledgethe computer
Production planning Decide when and how many Managementproducts should be produced
Facilities location Decide where to locate new Strategicproduction facilities
14 Part I ❙ ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE
New caption to come
How Southstream Seafoods Lands the Big Customers
management
According to Mark Soderstrom,president of Southstream Seafoods,anyone can sell fish. He believesthat his company does it betterthan anyone else, thanks to power-ful customer contact and sales
information systems. Southstream Seafoods is based in Warwick,Rhode Island, and is an importer and wholesaler of frozenseafood that sells primarily to food-service distributors andrestaurant chains.The company has been in business for morethan 10 years and has 20 employees.
To stay ahead of competitors in a tough business,Southstream installed a customer relationship management(CRM) system with software from Sage Inc.The system keepstrack of Southstream’s customers, phone calls, and sales trans-actions and helps management measure the efficiency and pro-ductivity of the sales force.
Selling fish is challenging for both wholesalers and retailersbecause fish prices constantly go up and down, with factorssuch as weather or availability affecting the business within afew days. Soderstrom turned this problem into an opportunityto serve his customers better than competitors by broadcastinginformation about changing market prices to customers so theycan make better business decisions. Southstream configured thecontact management portion of the system so that with a clickof a button, sales staff could send out information only to spec-ified customers. The customer records in the system includecheck boxes indicating which types of fish they purchase. Thecheck boxes enable Southstream to locate only those cus-tomers, for instance, who purchase Alaskan cod. Southstreamcan then send a fax about changes in Alaskan cod prices only tothose customers who actually use the product. Southstreamuses the system to fax market information to about half of its1,000 customers each week.
The average Southstream sales representative handlesbetween 75 and 125 active accounts.When making each call, thesalesperson enters sales information, including quantity, price,and shipping information into the system.The salesperson canalso use the system to set callback dates and reminder alarms.The system records the duration of each call and makes all ofthe information available to a manager or Southstream’s ship-ping department. If the shipping department gets a call indicat-ing that a customer’s fish hasn’t arrived on time, the shippingdepartment can enter the customer’s name and immediatelysee what that customer has just purchased and when delivery isexpected.
Soderstrom can generate reports from the system to ana-lyze the efficiency of his sales staff and find ways of better ser-vicing customer accounts. The system can show him exactlywhat each salesperson has done, showing all of his or her phonecalls, sales, and the results of phone calls. Using this information,Soderstrom might find that one sales representative is spendingtoo much time on a customer with a historically low volume ofpurchases and recommend that the salesperson allocate moretime to a customer with more purchasing potential. Using only10 sales representatives and 2 people in the shipping depart-ment, Southstream sells and ships about one million pounds offish each week.Without the system, the company would need astaff twice as big to do the job.
To Think About: What kinds of systems for sales and mar-keting are described here? How do these systems support thesales function? What organizational levels are supported bythese systems?
Sources: Angela R. Garber, “Hook, Line, and Sinker,” Small Business Computing,February 2000; and www.southstream.com.
Chapter 2 ❙ INFORMATION SYSTEMS IN THE ENTERPRISE 15
finance and accountinginformation systemsSystems keep track of the firm’sfinancial assets and fund flows.
long-term manufacturing goals, such as where to locate new plants or whether to invest innew manufacturing technology. At the management level, manufacturing and productionsystems analyze and monitor manufacturing and production costs and resources. Knowledgemanufacturing and production systems create and distribute design knowledge or expertiseto drive the production process, and operational manufacturing and production systems dealwith the status of production tasks.
Most manufacturing and production systems use some sort of inventory system, illus-trated in Figure 2-10. Data about each item in inventory, such as the number of unitsdepleted because of a shipment or purchase or the number of units replenished by reorderingor returns, are either scanned or keyed into the system. The inventory master file containsbasic data about each item, including the unique identification code for each item, thedescription of the item, the number of units on hand, the number of units on order, and thereorder point (the number of units in inventory that triggers a decision to reorder to preventa stockout). Companies can estimate the number of items to reorder or they can use a for-mula for calculating the least expensive quantity to reorder called the economic order quantity.The system produces reports such as the number of each item available in inventory, thenumber of units of each item to reorder, or items in inventory that must be replenished.
Finance and Accounting SystemsThe finance function is responsible for managing the firm’s financial assets, such as cash,stocks, bonds, and other investments, in order to maximize the return on these financialassets. The finance function is also in charge of managing the capitalization of the firm (find-ing new financial assets in stocks, bonds, or other forms of debt). In order to determinewhether the firm is getting the best return on its investments, the finance function mustobtain a considerable amount of information from sources external to the firm.
The accounting function is responsible for maintaining and managing the firm’s finan-cial records–receipts, disbursements, depreciation, payroll–to account for the flow of fundsin a firm. Finance and accounting share related problems–how to keep track of a firm’s finan-cial assets and fund flows. They provide answers to questions such as these: What is the cur-rent inventory of financial assets? What records exist for disbursements, receipts, payroll, andother fund flows?
Table 2-4 shows some of the typical finance and accounting information systemsfound in large organizations. Strategic-level systems for the finance and accounting functionestablish long-term investment goals for the firm and provide long-range forecasts of thefirm’s financial performance. At the management level, information systems help managersoversee and control the firm’s financial resources. Knowledge systems support finance andaccounting by providing analytical tools and workstations for designing the right mix ofinvestments to maximize returns for the firm. Operational systems in finance and accountingtrack the flow of funds in the firm through transactions such as paychecks, payments to ven-dors, securities reports, and receipts. Review Figure 2-3, which illustrates a payroll system, atypical accounting TPS found in all businesses with employees.
Figure 2-10 Overview of aninventory system. This systemprovides information about thenumber of items available ininventory to support manufac-turing and production activities.
Data elements ininventory master file:Item codeDescriptionUnits on handUnits on orderReorder point
Inventorymaster
file
Managementreports
Inventory Status ReportReport Date: 1/14/2001
ItemCode
6361446693138808
Description
Fan beltPower cordCondenserPaint sprayer
Units onHand
10,21155,710
66311,242
Units onOrder
088,66010,200
0
On-linequeries
Shipment and order data
InventoryControlSystem
16 Part I ❙ ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE
TABLE 2-5Examples of Human ResourcesInformation Systems
System Description Organizational Level
Training and development Track employee training, skills, Operationaland performance appraisals
Career pathing Design career paths for employees Knowledge
Compensation analysis Monitor the range and distribution Managementof employee wages, salaries, and benefits
Human resources planning Plan the long-term labor force needs Strategicof the organization
Human Resources SystemsThe human resources function is responsible for attracting, developing, and maintaining thefirm’s workforce. Human resources information systems support activities such as identify-ing potential employees, maintaining complete records on existing employees, and creatingprograms to develop employees’ talents and skills.
Strategic-level human resources systems identify the support requirements (skills, educa-tional level, types of positions, number of positions, and cost) for meeting the firm’s long-term business plans. At the management level, human resources systems help managers mon-itor and analyze the recruitment, allocation, and compensation of employees. Knowledgesystems for human resources support analysis activities related to job design, training, andthe modeling of employee career paths and reporting relationships. Human resources opera-tional systems track the recruitment and placement of the firm’s employees (see Table 2-5).
Figure 2-11 illustrates a typical human resources TPS for employee record keeping. Itmaintains basic employee data, such as the employee’s name, age, sex, marital status, address,educational background, salary, job title, date of hire, and date of termination. The systemcan produce a variety of reports, such as lists of newly hired employees, employees who areterminated or on leaves of absence, employees classified by job type or educational level, oremployee job performance evaluations. Such systems are typically designed to provide datathat can satisfy federal and state record keeping requirements for Equal EmploymentOpportunity (EEO) and other purposes.
2.3 Integrating Functions andBusiness Processes: EnterpriseSystems and Industrial Networks
Organizations are using information systems to coordinate activities and decisions acrossentire firms and even entire industries.
Business Processes and Information SystemsThe systems we have described support flows of work and activities called business processeswhich we introduced in Chapter 1. Business processes refer to the manner in which work isorganized, coordinated, and focused to produce a valuable product or service. On the one
TABLE 2-4Examples of Finance andAccounting Information Systems
System Description Organizational Level
Accounts receivable Track money owed the firm Operational
Portfolio analysis Design the firm’s portfolio of investments Knowledge
Budgeting Prepare short-term budgets Management
Profit planning Plan long-term profits Strategic
human resources information systemsSystems that maintain employeerecords; track employee skills,job performance, and training;and support planning foremployee compensation andcareer development.
Chapter 2 ❙ INFORMATION SYSTEMS IN THE ENTERPRISE 17
Figure 2-11 An employee record keeping system.This system maintains data on the firm’s employ-ees to support the human resources function.
Data elements inemployee master file:Employee: Number
NameAddressDepartmentAgeMarital statusSexSalaryEducational backgroundJob titleDate of hireDate of terminationTermination reason
Employeemaster
file
Managementreports
Termination Report
Date
11/12/2000
12/1/20001/12/2001
Name
John Hansen
Patricia CarlyleEllen Quimby
Number
29433
1432721224
Reason
PositioneliminatedRetiredLeftcompany
On-linequeries
Employee data(various departments) To payroll
HumanResources
System
hand, business processes are concrete workflows of material, information, andknowledge–sets of activities. On the other hand, business processes represent unique ways inwhich organizations coordinate work, information, and knowledge, and the ways in whichmanagement chooses to coordinate work. Table 2-6 describes typical business processes foreach of the functional areas.
Although each of the major business functions has its own set of business processes,many other business processes are cross-functional, transcending the boundaries betweensales, marketing, manufacturing, and research and development. These cross-functionalprocesses cut across the traditional organizational structure, grouping employees from differ-ent functional specialties to complete a piece of work. For example, the order fulfillmentprocess at many companies requires cooperation among the sales function (receiving theorder, entering the order), the accounting function (credit checking and billing for theorder), and the manufacturing function (assembling and shipping the order). Figure 2-12
TABLE 2-6 Examples of Business Processes
Functional Area Business Process
Manufacturing and production Assembling the product
Checking for quality
Producing bills of materials
Sales and marketing Identifying customers
Making customers aware of the product
Selling the product
Finance and accounting Paying creditors
Creating financial statements
Managing cash accounts
Human resources Hiring employees
Evaluating employees’ job performance
Enrolling employees in benefits plans
18 Part I ❙ ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE
Figure 2-12 The order fulfill-ment process. Generating andfulfilling an order is a multistepprocess involving activities per-formed by the sales, manufactur-ing and production, and account-ing functions.
Sales
Accounting
Manufacturingand
production
Generateorder
Submitorder
Checkcredit
Approvecredit
Assembleproduct
Shipproduct
Generateinvoice
Keying data from tax returns intothe Internal Revenue Service com-puter system is an important activ-ity in the tax collection process.Business processes coordinate work,information, and knowledge.
illustrates how this cross-functional process might work. Information systems support thesecross-functional processes as well as processes for the separate business functions.
Information systems can help organizations achieve great efficiencies by automatingparts of these processes or by helping organizations rethink and streamline these processes.However, redesigning business processes requires careful analysis and planning. When sys-tems are used to strengthen the wrong business model or business processes, the business canbecome more efficient at doing what it should not do. As a result, the firm becomes vulner-able to competitors who may have discovered the right business model. Therefore, one of themost important strategic decisions that a firm can make is not deciding how to use comput-ers to improve business processes, but instead to first understand what business processesneed improvement (Keen, 1997). Chapter 10 treats this subject in greater detail, because it isfundamental to systems analysis and design.
Customer Relationship Management and SupplyChain Management
Electronic commerce, global competition, and the rise of digital firms have made companiesthink strategically about their business processes for managing their relationships with cus-tomers and suppliers. Consumers can now use the Web to comparison shop and switch com-panies on a moment’s notice. To survive, businesses need to find ways of providing morevalue and service to customers at lower cost. Many believe the solution lies in improvingtheir business processes for interacting with customers and for producing and deliveringproducts or services.
Chapter 2 ❙ INFORMATION SYSTEMS IN THE ENTERPRISE 19
customer relationship managementBusiness and technology disci-pline to coordinate all of thebusiness processes for dealingwith customers.
supply chain managementIntegration of supplier, distribu-tor, and customer logisticsrequirements into one cohesiveprocess.
Customer Relationship Management (CRM)Instead of treating customers as exploitable sources of income, businesses are now viewingthem as long-term asserts to be nurtured through customer relationship management(CRM). Customer relationship management (CRM) focuses on managing all of the waysthat a firm deals with its existing and potential new customers. CRM is both a business andtechnology discipline that uses information systems to coordinate all of the businessprocesses surrounding the firm’s interactions with its customers in sales, marketing, and ser-vice. The ideal CRM system provides end-to-end customer care from receipt of an orderacquisition through product delivery.
In the past, a firm’s processes for sales, service, and marketing were highly compartmen-talized and did not share much essential customer information. Some information on a spe-cific customer might be stored and organized in terms of that person’s account with the com-pany. Other pieces of information about the same customer might be organized by productsthat were purchased. There was no way to consolidate all of this information to provide aunified view of a customer across the company. CRM tools try to solve this problem by inte-grating the firm’s customer-related processes and consolidating customer information frommultiple communication channels–the telephone, e-mail, wireless devices, or the Web sothat the firm can put one coherent face to the customer.
Good CRM systems consolidate customer data from multiple sources and provide ana-lytical tools for answering questions such as: What is the value of a particular customer to thefirm over his or her lifetime? Who are our most loyal customers? (It costs six times more tosell to a new customer than to an existing customer.) (Kalakota and Robinson, 2001). Whoare our most profitable customers? (Typically 80–90% of a firm’s profits are generated by10–20% of its customers.) What do these profitable customers want to buy? Firms can thenuse the answers to acquire new customers, provide better service and support, customizetheir offerings more precisely to customer preferences, and provide ongoing value to retainprofitable customers. Chapters 3, 4, 9, and 13 provide additional detail on customer rela-tionship management applications and technologies.
Supply Chain ManagementTo deliver the product more rapidly to the customer at lower cost, firms are also trying tostreamline their business processes for supply chain management. Supply chain manage-ment is the close linkage of activities involved in buying, making, and moving a product. Itintegrates supplier, distributor, and customer logistics requirements into one cohesive processto reduce time, redundant effort, and inventory costs (see Figure 2-14). The supply chain isa network of facilities for procuring materials, transforming raw materials into intermediate
supply chainNetwork of facilities for procur-ing materials, transforming rawmaterials into finished products,and distributing finished prod-ucts to customers.
Figure 2-13 Customer rela-tionship management combinesbusiness processes using tech-nology to look at customersfrom a multifaceted perspective.CRM uses a set of integratedapplications to address allaspects of the customer relation-ship, including customer service,sales, and marketing.
Sales Telephone sales Web sales Field sales Retail sales
Marketing Campaign data Content Data analysis
Customer Service Call center data Web self service data Field service data Wireless data
• Unified view of customers• Consistent message to customers• End-to-end customer care• Long-term customer relationships• Identification of best customers
20 Part I ❙ ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE
TABLE 2-7How Information Systems CanFacilitate Supply ChainManagement
Information systems can help participants in the supply chain
Decide when and what to produce, store, and move
Rapidly communicate orders
Track the status of orders
Check inventory availability and monitor inventory levels
Track shipments
Plan production based on actual customer demand
Rapidly communicate changes in product design
Provide product specifications
Share information about defect rates and returns
and finished products, and distributing the finished products to customers. It links manu-facturing plants, distribution centers, conveyances, retail outlets, people, and informationthrough processes such as procurement or logistics to supply goods and services from sourcethrough consumption. Goods or services start out as raw materials and move through thecompany’s logistics and production systems until they reach customers. To manage the sup-ply chain, a company tries to eliminate redundant steps, delays, and the amount of resourcestied up along the way.
Companies that skillfully manage their supply chains get the right amount of their prod-ucts from their source to their point of consumption with the least amount of time and thelowest cost. Information systems make supply chain management more efficient by helpingcompanies coordinate, schedule, and control procurement, production, inventory manage-ment, and delivery of products and services to customers. Information systems can integratedemand planning, production forecasting, materials requisition, order processing, inventoryallocation, order fulfillment, transportation services, receiving, invoicing, and payment.Table 2-7 describes how companies can benefit from using information systems for supplychain management.
Supply chain management systems can be built using intranets, extranets, or special sup-ply chain management software. The Window on Organizations shows how Hewlett-Packard benefited from a sophisticated supply chain management system that used Internettechnology.
Enterprise SystemsA large organization typically has many different kinds of information systems that supportdifferent functions, organizational levels, and business processes. Most of these systems, builtaround different functions, business units, and business processes, do not “talk” to each other,and managers might have a hard time assembling the data they would need for a comprehen-sive, overall picture of the organization’s operations. For instance, sales personnel might not beable to tell at the time they placed an order whether the items that were ordered were in inven-tory; customers could not track their orders; and manufacturing could not communicate eas-
Figure 2-14 Supply chainmanagement. The major entitiesin the supply chain and the flowof information coordinate theactivities involved in buying, mak-ing, and moving a product.
Orders, return requests, repair and service requests, payments
Chapter 2 ❙ INFORMATION SYSTEMS IN THE ENTERPRISE 21
Supply Chain Management Keeps Inventory Fresh at HP
organizations
Why is the PC business like thefresh fruit business? Jean-LucMeyer, a PC group marketing man-ager at Hewlett-Packard (HP),claims “Every day fresh fruitbecomes less valuable because it
gets a little rotten. In the PC business, every day prices godown.” New computer technology develops so quickly thatcomputers sitting on the shelf become technically outdated.Tohelp the company sell its computers at full price, HP created asophisticated supply chain management system that producesPCs to order and gets them to customers within 48 hours.
The new system automates much of the process. Orders areplaced via computer that in turn forwards the data to HP’s pro-duction and delivery computer systems. Some of these systemsare linked to the systems of HP’s suppliers. Synnex, located inFremont, California, is a contract manufacturer of PCs for anumber of companies, including HP. When orders arrive atSynnex, computers immediately check the credit of the cus-tomer placing the order. Simultaneously they validate the orderconfiguration to make sure it works (so no one wastes timebuilding a computer with incompatible, duplicate, or missingcomponents). Assuming everything checks out, the order isautomatically forwarded to a computer that controls produc-tion. That computer prints out an instruction ticket for theassembly technician while simultaneously forwarding a partsorder to Synnex’s warehouse.The software to be included withthe purchased computer is loaded onto that computer and thenthe whole parts order with the ticket are shipped to the tech-nician’s workstation. One worker assembles the computer andthen connects it to a computer that tests it.The new computeris then boxed, tagged, and shipped. Using the bar code on theticket, even the delivery is monitored by computer. Much of theinformation in this process is communicated through theInternet.
HP’s supply chain management system enables customers toreceive its new computers very rapidly while HP reduces pro-duction errors.The system also reduces inventory–parts, goodsin process, and completed products. Knowing exactly what com-puters to build helps HP reduce its pipeline of products awaiting
the arrival of orders.To keep inventory low,HP makes the supplychain data available to parts suppliers and to production con-tractors (many HP PCs are produced by outside manufacturers).
For computers manufactured by contract producers, HPthus maintains virtually no inventory. Prior to supply chain man-agement software, Synnex maintained four weeks of partsinventory. With the new automated system, their parts inven-tory has been cut to two weeks.The supply chain managementsoftware even monitors the parts inventory and automaticallyorders more parts when inventory gets low.
To Think About: How has HP’s supply chain managementsystem changed the way the company runs its business? It hasbeen said that building a world-class supply chain managementsystem is neither cheap nor easy.Why?
Sources: Rory J. O’Connor, “Keeping Inventory Fresh,” Upside, June 2000; andeCompany Staff, “Supply-Chain Software: Hewlett Packard,” eCompany,November 2000.
ily with finance to plan for new production. This fragmentation of data in hundreds of sepa-rate systems could thus have a negative impact on organizational efficiency and business per-formance. Figure 2-15 illustrates the traditional arrangement of information systems.
Systems for customer relationship management and supply chain management are a stepforward in solving this problem. Many organizations are now building enterprise systems,also known as enterprise resource planning (ERP) systems, to provide firmwide integration.Enterprise software models and automates many business processes, such as filling an orderor scheduling a shipment, with the goal of integrating information across the company andeliminating complex, expensive links between computer systems in different areas of thebusiness. Information that was previously fragmented in different systems can seamlesslyflow throughout the firm so that it can be shared by business processes in manufacturing,
HP is using supply chain management software in other parts of its busi-ness, and can now efficiently manage its supply chain for plastic parts.
enterprise systemsFirmwide information systemsthat integrate key businessprocesses so that informationcan flow freely between differentparts of the firm.
22 Part I ❙ ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE
Figure 2-16 Enterprise sys-tems. Enterprise systems canintegrate the key businessprocesses of an entire firm into asingle software system thatallows information to flow seam-lessly throughout the organiza-tion. These systems may includetransactions with customers andvendors.
Business processBusiness processBusiness process
Enterprise-wide businessprocesses
Accounting
CustomersVendors
Enterprise System
FinanceHumanResources
Manufacturing
Sales andMarketing
Org
aniz
atio
nal b
ound
arie
s
Org
aniz
atio
nal b
ound
arie
s
accounting, human resources, and other areas of the firm. Discrete business processes fromsales, production, finance, and logistics can be integrated into company-wide businessprocesses that flow across organizational levels and functions. An enterprise-wide technicalplatform serves all processes and levels. Figure 2-16 illustrates how enterprise systems work
The enterprise system collects data from various key business processes (see Table 2-8)and stores the data in a single comprehensive data repository where they can be used by otherparts of the business. Managers emerge with more precise and timely information for coor-dinating the daily operations of the business and a firmwide view of business processes andinformation flows.
For instance, when a sales representative in Brussels enters a customer order, the dataflows automatically to others in the company who need to see it. The factory in Hong Kongreceives the order and begins production. The warehouse checks its progress on-line andschedules the shipment date. The warehouse can check its stock of parts and replenish what-ever the factory has depleted. The enterprise system stores production information, where itcan be accessed by customer service representatives to track the progress of the order throughevery step of the manufacturing process. Updated sales and production data automaticallyflow to the accounting department. The system transmits information for calculating thesalesperson’s commission to the payroll department. The system also automatically recalcu-lates the company’s balance sheets, accounts receivable and payable ledgers, cost centeraccounts, and available cash. Corporate headquarters in London can view up-to-the-minutedata on sales, inventory, and production at every step of the process as well as updated salesand production forecasts and calculations of product cost and availability.
Figure 2-15 Traditional view of systems. In most organizations today, separate systems built over along period of time support discrete business processes and discrete segments of the business valuechain.The organization’s systems rarely include vendors and customers.
Vendors
Vendors
Vendors
Customers
Customers
Customers
Org
aniz
atio
nal B
ound
arie
s AccountingManufacturing Finance
Business Functions
Marketingand
Sales
HumanResources
ManufacturingSystems
AccountingSystems
FinanceSystems
Marketingand
SalesSystems
HumanResourcesSystems
Org
aniz
atio
nal B
ound
arie
s
Information Systems
Businessprocesses
Businessprocesses
Businessprocesses
Businessprocesses
Businessprocesses
Chapter 2 ❙ INFORMATION SYSTEMS IN THE ENTERPRISE 23
TABLE 2-8Business Processes Supportedby Enterprise Systems
Manufacturing processes, including inventory management, purchasing, shipping, productionplanning, material requirements planning, and plant and equipment maintenance
Financial and accounting processes, including accounts payable, accounts receivable, cash man-agement and forecasting, product-cost accounting, cost-center accounting, asset accounting,general ledger, and financial reporting
Sales and marketing processes, including order processing, pricing, shipping, billing, sales man-agement, and sales planning
Human resource processes, including personnel administration, time accounting, payroll, person-nel planning and development, benefits accounting, applicant tracking, and travel expensereporting,
Benefits and Challenges of Enterprise SystemsEnterprise systems promise to integrate the diverse business processes of a firm into a singleintegrated information architecture.
Benefits of Enterprise SystemsEnterprise systems promise to greatly change four dimensions of business: firm structure,management process, technology platform, and business capability.
Firm Structure and Organization: One Organization Companies can use enterprisesystems to support organizational structures that were not previously possible or to create amore disciplined organizational culture. For example, they might use enterprise systems tointegrate the corporation across geographic or business unit boundaries or to create a moreuniform organizational culture in which everyone uses similar processes and information. Anenterprise-enabled organization does business the same way worldwide, with functionalboundaries deemphasized in favor of cross-functional coordination and information flowingfreely across business functions.
Management: Firmwide Knowledge-based Management Processes In addition toautomating many essential business transactions, such as taking orders, paying suppliers, orchanging employee benefits status, enterprise systems can also improve management report-ing and decision making. Information supplied by an enterprise system is structured around
Management Decision Problem
ANALYZING ENTERPRISE PROCESS INTEGRATIONManagement at your agricultural chemicals corporation has been dis-satisfied with production planning. Production plans are created usingbest guesses of demand for each product which are based on howmuch of each product has been ordered in the past. If a customerplaces an unexpected order or requests a change to an existing orderafter it has been placed, there is no way to adjust the production plans.The company may have to tell customers it can’t fill their orders ormay run up extra costs maintaining additional inventory to preventstock-outs.
At the end of each month, orders are totaled and manually keyedinto the company’s production planning system. Data from the pastmonth’s production and inventory systems are manually entered intothe firm’s order management system. Analysts from the sales depart-ment and from the production department analyze the data from theirrespective systems to determine what the sales targets and what the pro-
duction targets should be for the next month. These estimates are usu-ally different. The analysts then get together at a high-level planningmeeting, to revise the production and sales targets to take into accountsenior management’s goals for market share, revenues, and profits. Theoutcome of the meeting is a finalized production master schedule.
The entire production planning process takes 17 business days tocomplete. Nine of these days are required to enter and validate thedata. The remaining days are spent developing and reconciling theproduction and sales targets and finalizing the production masterschedule.
1. Draw a diagram of the production planning process.2. Analyze the problems this process creates for the company.3. How could an enterprise system solve these problems? Diagram
what this process might look like if the company implementedenterprise software.
24 Part I ❙ ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE
cross-functional business processes and it can be obtained rapidly. For example, an enterprisesystem might help management more easily determine which products are most or least prof-itable. No longer would general managers be stuck without any hard data on firm perfor-mance, or data that applies only to their own immediate department. An enterprise systemcould supply management with better data about business processes and overall organiza-tional performance.
Technology: Unified Platform Enterprise systems promise to provide firms with a single,unified, and all-encompassing information system technology platform and environment.Enterprise systems promise to create a single, integrated repository that gathers data on allthe key business processes. The data have common, standardized definitions and formatsthat are accepted by the entire organization. You will learn more about the importance ofstandardizing organizational data in Chapter 7.
Business: More Efficient Operations and Customer-driven Business ProcessesEnterprise systems can help create the foundation for a customer-driven or demand organi-zation. By integrating discrete business processes such as sales, production, finance, andlogistics, the entire organization can efficiently respond to customer requests for products orinformation, forecast new products, and build and deliver them as demand requires.Manufacturing has better information to produce only what customers have ordered, to pro-cure exactly the right amount of components or raw materials to fill actual orders, to stageproduction, and to minimize the time that components or finished products are in inven-tory. Using enterprise systems to capture unit cost and quality data, firms can improve thequality of their products and services.
The Challenge of Enterprise SystemsAlthough enterprise systems can improve organizational coordination, efficiency, and deci-sion making, they have proven very difficult to build. They require not only large technologyinvestments but also fundamental changes in the way the business operates. Companies needto rework their business processes to make information flow smoothly between them.Employees must take on new job functions and responsibilities. Enterprise systems requirecomplex pieces of software and large investments of time, money, and expertise. Enterprisesystems raise serious challenges for firms: a daunting implementation process, surviving acost/benefit analysis, inflexibility, and realizing strategic value.
Daunting Implementation Enterprise systems bring dramatic changes to business. Theyrequire not only deep-seated technological changes but also fundamental changes in the waythe business operates. Business processes change dramatically, as do organizational structureand culture. Firms implementing enterprise systems have to come up with organization-widedefinitions of data, retrain thousands of workers, and redesign their fundamental businessprocesses, all at once, while carrying on business as usual. It might take a large company threeto five years to fully implement all of the organizational and technology changes required byan enterprise system. Organizations that do not understand that such changes will berequired or are unable to make them will have problems implementing enterprise systems, orthey may not be able to achieve a higher level of functional and business process integration.
High Up-front Costs and Future Benefits The costs of enterprise systems are large, up-front, highly visible, and often politically charged. Although the costs to build the system areobvious, the benefits often cannot be precisely quantified at the beginning of an enterpriseproject. One reason is that the benefits often accrue from employees using the system after itis completed and gaining the knowledge of business operations heretofore impossible to learn.
Inflexibility Enterprise system software tends to be complex, difficult to master, with aworldwide shortage in people with the expertise to install and maintain it. The software isdeeply intertwined with corporate business processes. If companies need to make majorchanges, the system will have to be changed. And because enterprise systems are integrated,it is difficult to make a change in only one part of the business without affecting other partsas well. There is the prospect that the new enterprise systems could eventually prove as brit-tle and hard to change as the old systems they replaced–a new kind of “digital concrete” thatcould, over time, bind firms to outdated business processes and systems.
Chapter 2 ❙ INFORMATION SYSTEMS IN THE ENTERPRISE 25
Figure 2-17 Industrial net-works. Industrial networks linkthe enterprise systems of firmsin an entire industry into anindustry-wide system. Horizontalindustrial networks link firms inthe same industry, including com-petitors, whereas vertical indus-trial networks link a firm withsuppliers in the same industry.
Firmsin a singleindustry
Firms incomplementarybusinesses
Industryvaluechain
Industrial networks
Horizontal industrial network
Vertical industrial network
Firm1
Firm2
Firm3
Firm4
Firm1
Supplier1
Supplier2
Supplier3
Firm value chains and enterprise systems
industrial networksNetworks linking systems ofmultiple firms in an industry.Also called extended enter-prises.
vertical industrial networksNetworks for integrating theoperations of a firm with its suppliers.
Realizing Strategic Value Companies may also fail to achieve strategic benefits fromenterprise systems if integrating business processes using the generic models provided bystandard ERP software prevents the firm from using unique business processes that had beensources of advantage over competitors. If an enterprise system is not compatible with the waythe company does business, the company may lose a better way of performing a key businessprocess that may be related to its competitive advantage. Enterprise systems promote central-ized organizational coordination and decision making, which may not be the best way forsome firms to operate. There are companies that clearly do not need the level of integrationprovided by enterprise systems (Davenport, 2000, 1998). Chapter 11 provides more detailon the organizational and technical challenges to enterprise system implementation.
Extended Enterprises and Industrial NetworksIn some industries, companies are extending their enterprise systems beyond the boundariesof the firm to share information and coordinate business processes with other firms in theirindustry. Industrial networks, which are sometimes called extended enterprises, link togetherthe enterprise systems of firms in an entire industry (see Figure 2-17). For instance, Procter& Gamble (P&G), the world’s largest consumer goods company, developed an integratedindustry-wide system that coordinated the grocery store point-of-sale systems with grocerystore warehouses, shippers, its own manufacturing facilities, and its suppliers of raw materi-als. This single industry spanning system effectively allows P&G to monitor the movementof all its products from raw materials to customer purchase. P&G uses data collected frompoint-of-sale terminals to trigger shipments to retailers of items that customers have pur-chased and that need restocking. Electronic links to suppliers enable P&G to order materialsfrom its own suppliers when its inventories are low. The system helps P&G reduce its inven-tory by allowing the company to produce products as they are demanded by retailers. P&Gis implementing an Ultimate Supply System that uses Internet technology to link retailersand suppliers to its private corporate intranet (see the Chapter 1 opening vignette). By hav-ing retailers and suppliers integrate their systems with P&G’s systems, P&G hopes to reduceproduct cycle time by half, inventory costs by $4.5 billion, and systems costs by $5 billion.
There are two kinds of industrial networks. Vertical industrial networks integrate theoperations of the firm with its suppliers and can be used for supply chain management.Horizontal industrial networks link firms across an entire industry. An example would bethe OASIS network of utility industry firms, which uses the Web to help members sell sur-plus electrical power. A few industry networks coordinate the activities of competitors. Forexample, Yamaha Europe, Honda, Aprilia, and Piaggio, competing manufacturers of motorscooters, are now working together to share suppliers. They hope to ultimately reduce thenumber of suppliers, which will boost the production efficiency in the remaining group, andthey all expect to realize savings from their cooperation (Abramson, 1999). Table 2-9 pro-vides examples of both types of industrial networks. Most industrial networks today are ver-tical and do not link together competitors in the same industry.
horizontal industrial networksNetworks for linking firmsacross an entire industry.
26 Part I ❙ ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE
Many of these industrial networks are currently dedicated to supply chain management.Enterprise systems have primarily focused on helping companies manage their internal man-ufacturing, financial, and human resource processes and were not originally designed to sup-port supply chain management processes involving entities outside the firm. However, enter-prise software vendors are starting to enhance their products so that firms can link theirenterprise systems with external vendors, suppliers, manufacturers, distributors, and retailers.
Enterprise systems can produce the integration among internal supply chain processes,such as sales, inventory, and production, that makes it easy for the firm to coordinate itsactivities with manufacturing partners and customers. Manufacturing can be informed ofexactly what to produce, based on sales orders, and reduce the need to keep excess stock ininventory. If participants in the supply chain use the same enterprise software systems, theirsystems can exchange data without manual intervention. Companies can also use Internettechnology to create industrial networks, because it provides a platform where systems fromdifferent companies can seamlessly exchange information.
TABLE 2-9 Examples of Industrial Networks
Type of Industrial Organization(s) Network Description
Coca-Cola Vertical Installed an enterprise system using SAP software and extended the system to itsbottling partners. Coke and its partners can pool resources, share sales informa-tion, and leverage their combined size to obtain lower raw material costs. Theextended enterprise system enables them to react rapidly to market changes anddeploy products efficiently to the places where they are most likely to sell.
OASIS Horizontal Web sites link U.S. electrical utility companies in regional power pool groups tosell their surplus power to wholesalers and locate the transmission facilities formoving the power between its source and the customer.
Ford, General Motors, Horizontal Shared Internet purchasing system enables them to obtain parts online from and DaimlerChrysler suppliers, reducing costs and saving time.
Safeway UK Vertical Has electronic links to suppliers where it can share information about forecasts,shelf space, and inventory, so they can track demand for their products, adjustproduction, and adjust the timing and size of deliveries. The suppliers can down-load Safeway’s information into their enterprise systems or production planningsystems. Suppliers send Safeway information about product availability, produc-tion capacity, and inventory levels.
Application Software Exercise
Database Exercise: Tracking Reservations at Monroe’sMidnight Inn
Monroe’s Midnight Inn is a family-owned and operated bed and breakfast. After inheritingthe Monroe mansion eight years ago, James and Peggy Monroe decided to renovate the man-sion and establish a bed and breakfast. The bed and breakfast has 14 rooms: 5 overlook a pri-vate lake, 5 overlook the woods, and the remaining 4 rooms overlook the gardens. Roomrates are based on room choice, length of stay, and number of guests per room. Guests stay-ing for 7 days or more are given a 15 percent discount on their daily room rates. A maximumof four guests are permitted in each room, with each additional guest charged $20 per day.
Business has grown steadily during the past eight years. In the early years, the establish-ment was frequented primarily by couples; however, the bed and breakfast now caters to avariety of clientele, including families, executives, and locals. The bed and breakfast’s grow-ing popularity is because, in part, of its location, the activities available to its visitors, and itsaffordability.
Chapter 2 ❙ INFORMATION SYSTEMS IN THE ENTERPRISE 27
Currently, all records are manually kept. This manual record keeping system has causedmany problems for James and Peggy. For instance, only last week Peggy had two familiesbooked in the Washington room. Luckily, she was able to reassign one of the families to theLincoln room and avoid upsetting a valuable customer. Similarly, James does not have imme-diate access to management information about the bed and breakfast’s operations. He wouldlike to have information about current room occupancy, average length of stay, and weeklyincome by room.
Using the information provided in the scenario and in the accompanying tables on theLaudon Web site, prepare a simple database to track reservations and generate managementreports. In addition to the 10 transactions provided in the table, add at least 10 more trans-actions to the database. You may make any assumptions you believe are necessary; however,please document these assumptions in writing and provide them to your professor.
In addition to the data already provided, what additional data should be captured andstored in the database? As mentioned previously, James requires managerial informationabout the bed and breakfast’s operations. What reports would provide the necessary infor-mation? Identify at least two other reports that would be beneficial for James. Prepare thesereports.
Enterprise systems and industrial networks require management to take a firmwide view ofbusiness processes and information flows. Managers need to determine which businessprocesses should be integrated, the short- and long-term benefits of this integration, and theappropriate level of financial and organizational resources to support this integration.
There are many types of information systems in an organization that support different orga-nizational levels, functions, and business processes. Some of these systems, such as those forcustomer relationship management and supply chain management, span more than onefunction or business process. Enterprise systems integrating information from different orga-nizational functions and business processes often require extensive organizational change.
Information systems that create firm- or industry-wide information flows and businessprocesses require major technology investments and planning. Firms must have an informa-tion technology (IT) infrastructure that can support organization-wide or industry-widecomputing.
For Discussion1. Review the payroll TPS illustrated in Figure 2-3. How could it provide information for
other types of systems in the firm?
2. Adopting an enterprise system is a key business decision as well as a technology deci-sion. Do you agree? Why or why not? Who should make this decision?
ManagementWrap-Up
Summary1. Analyze the role played by the six major types of information
systems in organizations and their relationship to each other.There are six major types of information systems in con-temporary organizations that are designed for different pur-poses and different audiences. Operational-level systems aretransaction processing systems (TPS), such as payroll ororder processing, that track the flow of the daily routinetransactions that are necessary to conduct business.Knowledge-level systems support clerical, managerial, and
professional workers. They consist of office systems forincreasing data workers’ productivity and knowledge worksystems for enhancing knowledge workers’ productivity.Management-level systems (MIS and DSS) provide themanagement control level with reports and access to theorganization’s current performance and historical records.Most MIS reports condense information from TPS and arenot highly analytical. Decision-support systems (DSS) sup-port management decisions when these decisions are
unique, rapidly changing, and not specified easily inadvance. They have more advanced analytical models anddata analysis capabilities than MIS and often draw on infor-mation from external as well as internal sources.Executive support systems (ESS) support the strategic levelby providing a generalized computing and communicationsenvironment to assist senior management’s decision mak-ing. They have limited analytical capabilities but can drawon sophisticated graphics software and many sources ofinternal and external information.The various types of systems in the organization exchangedata with one another. TPS are a major source of data forother systems, especially MIS and DSS. ESS primarilyreceive data from lower-level systems. The different systemsin an organization have traditionally been loosely inte-grated.
2. Describe the types of information systems supporting the majorfunctional areas of the business. At each level of the organiza-tion there are information systems supporting the majorfunctional areas of the business. Sales and marketing sys-tems help the firm identify customers for the firm’s prod-ucts or services, develop products and services to meet cus-tomer’s needs, promote products and services, sell theproducts and services, and provide ongoing customer sup-port. Manufacturing and production systems deal with theplanning, development, and production of products andservices, and control the flow of production. Finance andaccounting systems keep track of the firm’s financial assetsand fund flows. Human resources systems maintainemployee records, track employee skills, job performance,and training; and support planning for employee compen-sation and career development.
3. Assess the relationship between organizations, information sys-tems and business processes, including the processes for customerrelationship management and supply chain management.Business processes refer to the manner in which work isorganized, coordinated, and focused to produce a valuableproduct or service. Business processes are concrete work-flows of material, information, and knowledge, and theyalso represent unique ways in which organizations coordi-nate work, information, and knowledge, and the ways inwhich management chooses to coordinate work. Althougheach of the major business functions has its own set of busi-ness processes, many other business processes are cross-functional, such as fulfilling an order. Information systemscan help organizations achieve great efficiencies by
automating parts of these processes or by helping organiza-tions rethink and streamline these processes, especiallythose for customer relationship management and supplychain management. Customer relationship managementuses information systems to coordinate all of the businessprocesses surrounding a firm’s interactions with its cus-tomers. Supply chain management is the close linkage ofactivities involved in buying, making, and moving a prod-uct. Information systems make supply chain managementmore efficient by helping companies coordinate, schedule,and control procurement, production, inventory manage-ment, and delivery of products and services to customers.
4. Explain how enterprise systems and industrial networks createnew efficiencies for businesses. Enterprise systems integratethe key business processes of a firm into a single softwaresystem so that information can flow throughout the organi-zation, improving coordination, efficiency, and decisionmaking. Industrial networks link other organizations in thesame industry in a single industry-wide system. Verticalindustrial networks consist of an organization and its sup-pliers, whereas horizontal industrial networks consist ofcompetitors in the same industry.
5. Evaluate the benefits and limitations of enterprise systems andindustrial networks. Enterprise systems and industrial net-works promise efficiencies from better coordination of bothinternal and external business processes. Enterprise systemscan help create a uniform organization in which everyoneuses similar processes and information, and measures theirwork in terms of organization-wide performance standards.An enterprise system could supply management with betterdata about business processes and overall organizationalperformance. Enterprise systems feature a single informa-tion technology platform where data definitions are stan-dardized across the organization. The coordination of sales,production, finance, and logistics processes provided byenterprise systems helps organizations respond rapidly tocustomer demands.The reality is that firm- and industry-wide systems are verydifficult to implement successfully. They require extensiveorganizational change, use complicated technologies, andrequire large up-front costs for long-term benefits that aredifficult to quantify. Once implemented, enterprise systemsare very difficult to change. Management vision and fore-sight is required to take a firm- and industry-wide view ofproblems and to find solutions that realize strategic valuefrom the investment.
28 Part II ❙ INFORMATION TECHNOLOGY INFRASTRUCTURE
Key TermsCustomer relationship
management, 00
Decision-support systems(DSS), 00
Desktop publishing, 00
Document imaging systems, 00
Enterprise systems, 00
Executive support systems(ESS), 00
Finance and accountinginformation systems, 00
Horizontal industrial networks, 00
Human resources informationsystems, 00
Industrial networks, 00
Knowledge-level systems, 00
Knowledge work systems(KWS), 00
Management informationsystems (MIS), 00
Management-level systems, 00
1. Identify and describe the four levels of the organiza-tional hierarchy. What types of information systemsserve each level?
2. List and briefly describe the major types of systems inorganizations.
3. What are the five types of TPS in business organiza-tions? What functions do they perform? Give exam-ples of each.
4. Describe the functions performed by knowledge workand office systems and some typical applications ofeach.
5. What are the characteristics of MIS? How do MIS dif-fer from TPS? From DSS?
6. What are the characteristics of DSS? How do they dif-fer from those of ESS?
7. Describe the relationship between TPS, office systems,KWS, MIS, DSS, and ESS.
8. List and describe the information systems serving eachof the major functional areas of a business.
9. What is a business process? Give two examples ofprocesses for functional areas of the business and oneexample of a cross-functional process.
10. What is customer relationship management? Why is itso important to businesses? How do information sys-tems facilitate customer relationship management?
11. What is supply chain management? What activitiesdoes it comprise? Why is it so important to businesses?
12. How do information systems facilitate supply chainmanagement?
13. What are enterprise systems? How do they change theway an organization works?
14. What are the benefits and challenges of implementingenterprise systems?
15. What are industrial networks? Define and describe thetwo types of industrial networks.
16. How can organizations benefit from participating inindustrial networks?
Chapter 8 ❙ TELECOMMUNICATIONS AND NETWORKS 29
Manufacturing and productioninformation systems, 00
Office systems, 00
Operational-level systems, 00
Sales and marketinginformation systems, 00
Strategic-level systems, 00
Supply chain, 00
Supply chain management, 00
Transaction processing systems(TPS), 00
Vertical industrial networks, 00
Word processing, 00
Review Questions
Group ProjectWith a group of three or four other students, select a businessusing an industrial network for supply chain management. Usethe Web, newspapers, journals, and computer or business maga-zines to find out more about that organization and its use of
information technology to provide links to other organizations.If possible, use presentation software to present your findings tothe class.
Tools for Interactive Learning� Internet
The Internet Connection for this chapter will take you to a seriesof Web sites used in business-to-business electronic commercewhere you can complete an exercise to evaluate the use of the Webin supply chain management. You can also use the InteractiveStudy Guide to test your knowledge of the topics in this chapterand get instant feedback when you need more practice.
� Electronic Commerce Project
At the Laudon Web site for Chapter 2 you will find an electroniccommerce project where you can use a series of Web sites to helpa company plan and budget for a sales conference.
� CD-ROM
If you purchase and use the Multimedia Edition CD-ROM with this chapter, you can complete an interactive exerciseto analyze an enterprise system implementation. You can alsofind an audio overview of the major themes of this chapter andbullet text summarizing the key points of the chapter.
In the early 1990s Owens-Corning was a U.S. leader in the pro-duction and sale of such building materials as insulation, siding,and roofing, but management wanted the company to grow.The company had only two possible paths to growth: offering afuller range of building materials, or becoming a global force. Toincrease its range of products Owens-Corning decided toacquire other companies. To become a global force, manage-ment realized the company would need to become a globalenterprise that could coordinate the activities of all of its units inmany different countries.
Headquartered in Toledo, Ohio, Owens-Corning had beendivided along product lines, such as fiberglass insulation, exte-rior siding, and roofing materials. Each unit operated as a dis-tinct entity with its own set of information systems. (The com-pany had more than 200 archaic, inflexible, and isolatedsystems.) Each plant had its own product lines, pricing sched-ules, and trucking carriers. Owens-Corning customers had toplace separate telephone calls for each product ordered–one eachfor siding, roofing, and insulation. The company operated like acollection of autonomous fiefdoms.
Owens-Corning management believed that these problemscould be solved by implementing an enterprise system. Thecompany selected enterprise software from SAP AG to serve asthe foundation for a broad company overhaul. “The primaryintent with SAP was to totally integrate our business systems ona global basis so everyone was operating on the same platformwith the same information,” said Dennis Sheets, sourcing man-ager for the insulation and roofing business. Sheets wanted tocentralize purchasing. “Prior to SAP,” he said, “we were buyingwidgets all over the world without any consolidated knowledgeof how much we were buying and from whom. Now [usingSAP’s R/3 software] we can find out how many widgets we’reusing, where they’re being purchased, and how much we paidfor them, [allowing] us to consolidate the overall acquisitionprocess.” Now, he added, “we can . . . make better business deci-sions and better buys.” Sheets expected the company’s materialand supply inventories to drop by 25 percent as a result.
However, the project to install SAP’s enterprise system wouldultimately cost Owens-Corning about $100 million and takeseveral years, too expensive and time consuming to be justifiedonly by the reasons given by Sheets. The company hoped thatthe new system would also enable it to digest acquisitions moreeasily. Owens-Corning wanted to acquire other companies toexpand its product line so it could increase sales from $2.9 bil-lion in 1992 to $5 billion within a few years. That meant thatOwens-Corning would have to digest the archaic, inflexible sys-tems from the companies it purchased. If Owens-Corning wereto become a global enterprise, it would need a flexible systemthat would enable the company to access all of its data in anopen and consolidated way.
ERP experts point out that simply converting to ERP sys-tems does not solve companies’ problems. “Unless a companydoes a lot of thinking about what its supply chain strategy is andarticulating what its business processes are, these tools are going
to be of little use,” explained Mark Orton, of the New EnglandSupplier Institute in Boston.
Owens-Corning’s project began with its insulation group,and those on the project team understood this. They undertooka redesign process before implementing SAP’s R/3. They set upcross-functional teams to identify the handoffs and touch pointsbetween the various functions. For example, the process thatruns from the time the firm needs to buy something through thepayment issuance to the supplier touches logistics and account-ing. The teams also kept in close contact with suppliers whoneeded to know what Owens-Corning would require of them.As a result of the redesign, purchasing decisions were movedfrom the plants up to a regional level, enabling commodity spe-cialists to use their expertise and the leverage of buying for alarger base to improve Owens-Corning’s purchasing position.
How did the first ERP project go? During a weekend inMarch 1997 a team of about 60 people transferred legacy datainto the SAP system, and on Monday morning the companywent live. When Owens-Corning first went live with SAP, over-all productivity and customer service dropped sharply duringthe first six months. “When you put in something like SAP, it’snot a mere systems change,” said David Johns, Owens-Corning’sdirector of global development. “You’re changing the way peoplehave done their jobs for the past 20 years.”
The first problems that surfaced were technical. According toJohns, application response time had increased from secondsbefore ERP to minutes under the new system. Other technicalproblems also emerged. For example, Johns said the system was-n’t working the way it was supposed to. Johns believes the sourceof these problems was inadequate testing. The team furthertuned the software, and during the next weeks response timereduced to an acceptable level, and slowly the software beganoperating smoothly.
However, after Owens-Corning fixed some of the technicalproblems, it saw that this was much bigger than a technologyproblem. There were problems in the business, problems withthe way people’s new roles had been defined, communicationand change management issues, and business process issues. Forexample, the SAP system demanded that the entire corporationadopt a single product list and a single price list. Staff membersinitially resisted. Owens-Corning employees had not been prop-erly trained and they were overwhelmed, resulting in a lot oferrors. Johns explained that at Owens-Corning “we underesti-mated the impact that swapping out all our old systems wouldhave on our people.” Users had indeed been properly trained ontheir own functions, but ERP systems are integrated, and theusers did not understand the impact their work was having onother departments.
ERP systems are complex and errors ripple throughout thesystem. When using the old systems, employees had time to cor-rect data entry mistakes, and if they were not caught, they onlyaffected the local function. However, now that they were usingR/3, the databases are immediately updated. Thus, for example,the data flows instantly from sales to purchasing, production,
30 Part II ❙ INFORMATION TECHNOLOGY INFRASTRUCTURE
Case Study Owens-Corning’s Enterprise System Struggle
and logistics systems. Johns offered another example. “If you’reat a warehouse, and you don’t tell the system when a truck isleaving the dock, the truck can still leave, but the customer willnever get an invoice for the goods. Accounting won’t find outlater because the transaction will never get to them.” Such errorscan be costly. To motivate users to work with more care, theyneeded to know how their errors would affect other workers andeven company profitability.
To address this problem the company quickly instituted anew training approach. Training now would include informa-tion on the larger system and its complexities, so users wouldunderstand the impact of their work. Under the new trainingregimen, all employees were denied access to the system untilthey had passed a test and so became certified. Those who failedthe test had to return to training until they could pass it. About20 percent of Owens-Corning employees never passed the testand had to change jobs. This job shifting was massive and timeconsuming, causing organizational disruption. Whereas theoriginal project training was budgeted for 7 percent of overallcosts, training eventually consumed 13 percent of the budget.
Customers also suffered. Owens-Corning had been knownfor its excellent customer service, but the quality of that servicedeclined sharply after the SAP system went live. Many cus-tomers were shocked, and some began turning to other suppli-ers. Owens-Corning began losing important customers. Thecompany was forced to devote a great deal of personnel timerebuilding relations with its customers while simultaneouslyrepairing both its organization and the software installation.
ERP implementation problems of this type are common.According to Barry Wilderman of the Meta Group, ERP pro-jects often result in a negative return on investment (ROI) forfive or more years. Why? Because ERP systems are so complex.The company may not understand all that needs to be done inpreparation. Moreover, these systems are expensive, and testingand training often get cut for budgetary reasons. Not only doemployees need to become accustomed to new ways of doingbusiness, but customers and suppliers may need to change theirbusiness processes as well.
How successful was the whole project? Management believesit has been a success. Johns said, “We made each mistake onlyonce. Each deployment [in the rollout] got better.” For instance,“We do a lot more testing now before we go live,” he said, “tomake sure that all the different pieces of the system worktogether.” Customers now have a single point of contact for allorders. With Owens-Corning’s old system, it didn’t know whatinventory was in stock. Employees would have to check aroundand get back to the customer. The firm can see what inventory isavailable, when it will be produced, and who is the lowest costcarrier. It can commit to the customer before hanging up thephone. The changes have been massive, with about 10,000 peo-ple involved with the reengineering effort.
The ERP system’s rollout was completed in 2000. Duringthose years, Owens-Corning acquired and integrated 17 compa-nies, successfully expanding their product offerings. Companysales have reached $5 billion annually. Because of the new sys-tem, Owens-Corning has been able to reduce its inventory sig-nificantly, while centralizing coordination of various functionsand divisions. Lot size and machine allocations have becomemore efficient. The company can perform production planningand control globally because it has one uniform system withwhich to work. The integrated system lets the company leveragecommon carriers and take advantage of overlapping transporta-tion routes. Managers can use the system to identify its biggestsuppliers across the entire company and use that information tonegotiate bulk discounts. A customer needs to call only onelocation to place an order. Factory production managers nolonger have to concern themselves with taking customer orders,tracking logistics or after-sales service. Because centralizationapplied not only to U.S. operations but also to foreign activities,the corporation has been transformed into a truly globalizedenterprise.
Sources: Rajagopal Palaniswamy and Tyler Frank, “EnhancingManufacturing Performance with ERP Systems,” Information SystemsManagement, Summer 2000; SAP, “Owens Corning Builds Its InternetFuture with mySAP.com,” September 14, 2000, www.sap.com;Christopher Koch, “From Team Techie to Enterprise Leader,” CIOMagazine, October 15, 1999; Tom Stein, “Making ERP Add Up,”Information Week, May 24, 1999, and “Key Work: Integration,”Information Week, September 22, 1997; Tim Minahan, “EnterpriseResource Planning: Strategies Not Included,” Purchasing, July 16,1998; Janice Fioravante, “ERP Orchestrates Change,” BeyondComputing, October 1998; Bruce Caldwell and Tom Stein, “BeyondERP,” Information Week, October 12, 1998; John E. Ettlie, “The ERPChallenge,” Automotive Manufacturing & Production, June 1998; andJoseph B. White, Don Clark, and Silvio Ascarelli, “Program of Pain,”Wall Street Journal, March 14, 1997.
CASE STUDY QUESTIONS
1. Describe the problems Owens-Corning had with its informa-tion systems prior to installing its enterprise system. Whatmanagement, organization, and technology factors wereresponsible for those problems?
2. What management, organization, and technology problemsdid Owens-Corning face in putting their enterprise systeminto effect?
3. How did implementing an enterprise system change the wayOwens-Corning ran its business?
4. Was installing an enterprise system the right solution forOwens-Corning? Explain.
