2

ob c e j

Information Systems in the Enterprise

After completing this chapter, you will be able to:

s e tiv

1. Analyze the role played by the six major types of information systems in 2. 3.
organizations and their relationship to each other. Describe the types of information systems supporting the major functional areas of the business. Assess the relationship between organizations, information systems and business processes, including the processes for customer relationship management and supply chain management. Explain how enterprise systems and industrial networks create new efficiencies for businesses. Evaluate the benefits and limitations of enterprise systems and industrial networks.

4. 5.

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 Alpinas market creates enormous supply chain management tasks. Dairy products require constant refrigeration and have an average shelf life of only 21 days. The company must deliver products 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

and the systems operated in isolation from each other. The firm had no way of communicating or consolidating company-wide information. To increase productivity and competitiveness, Alpina decided to install enterprise resource planning software, embarking in 1995 on an ambitious project to create integrated systems for industrial processes, logistics management, administrative and financial functions, and commercial functions. Alpina started its enterprise project with pieces of software from a number of different vendors but eventually used Oracle Consumer Packaged Goods (CPG) software to integrate these functions. By December 1998 Alpina had installed the Oracle CPG software in its production plants and sales agencies.

Alpina Mooves Faster with Enterprise Systems

Management Challenges
2.1 Key System Applications in the Organization
Different Kinds of Systems Six Major Types of Systems Relationship of Systems to One Another

2.2 Systems from a Functional Perspective

Sales and Marketing Systems

Window on Management: How Southstream Seafoods Lands the Big Customers

Monitor market changes Monitor service and costs Short shelf life of products Rapid growth New global and local competitors

Manufacturing and Production Systems Finance and Accounting Systems Human Resources Systems

Oracle Consumer Packaged Goods software

2.3 Integrating Functions and Business Processes: Enterprise Systems and Industrial Networks
Business Processes and Information Systems Customer Relationship Management and Supply Chain Management

Sales agencies Plants Distributors

Integrate production logistics, sales, and financial data Improve inventory planning Consolidate delivery loads Calculate consumer demand

Increase service Reduce costs

Window on Organizations: Supply Chain Management Keeps Inventory Fresh at HP

Enterprise Systems

Management Decision Problem

Analyzing Enterprise Process Integration Benefits and Challenges of Enterprise Systems Extended Enterprises and Industrial Networks

The new system has enabled Alpina to reduce its inventory through better planning and stocking of raw materials and finished products. Alpina has reduced turnaround in raw materials from 35 days to 25 days and has reduced turnaround in finished products from 8 days to 5 days. Through better supply chain management, Alpina is saving $2.7 million each year. Alpina has also reduced costs by using the information from its system to consolidate delivery loads and create more efficient delivery routes. The systems transportation planning capabilities have helped the company reduce the number of trucks at each of its major distribution centers by 15 percent, saving $200,000 annually in transport costs. With information about past order history, Alpinas system helps customers plan and stock their shelf space, providing them with information about which products, flavors, and sizes are most in demand in their stores. Alpina is using this information as well to help calculate customer demand as it introduces new products 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.

Application Software Exercise: Database Exercise

Management Wrap-Up Summary Key Terms Review Questions Group Project Tools for Interactive Learning Case Study

Part I

ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE

Management Challenges

Businesses need different types of information systems to support decision making and work activities for various organizational levels and functions.To respond to new competitive pressures, many are implementing enterprise-wide systems that integrate information and business processes from different functional areas. Alpina, for instance, needed information systems that would allow it to move its products more efficiently through its supply chain. It found a solution in building systems that could link important business processes for sales, production, and logistics.The opening vignette presents the potential rewards to firms with well-conceived systems linking the entire enterprise. Such systems typically require a significant amount of organizational and management change and raise the following management challenges: 1. Integration. Although it is necessary to design different systems serving different levels, functions, and business processes in the firm, more and more firms are finding advantages in integrating systems. However, integrating systems for different organizational levels, functions, and business processes to freely exchange information can be technologically difficult and costly. Managers need to determine what level of system integration is required and how much it is worth in dollars. 2. Enlarging the scope of management thinking. Most managers are trained to manage a product line, a division, or an office.They are rarely trained to optimize the performance of the organization as a whole, and often are not given the means to do so. But enterprise systems and industrial networks require managers to take a much larger view of their own behavior to include other products, divisions, departments, 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 a shared vision of the objectives.

n this chapter we examine the role of the various types of information systems in organizations. 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 they serve. We then show how systems can support business processes, including processes spanning more than one function, such as customer relationship management and supply chain management. Finally, we examine enterprise systems and industrial networks, which enable organizations to integrate information and business processes across entire firms and even entire industries.

2.1

Key System Applications in the Organization

Because there are different interests, specialties, and levels in an organization, there are different kinds of systems. No single system can provide all the information an organization needs. 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, and operational levels and then is further divided into functional areas such as sales and marketing, manufacturing, finance, accounting, and human resources. Systems are built to serve these different organizational interests (Anthony, 1965).

Different Kinds of Systems

operational-level systems Information systems that monitor the elementary activities and transactions of the organization.

Four main types of information systems serve different organizational levels: operationallevel systems, knowledge-level systems, management-level systems, and strategic-level systems. Operational-level systems support operational managers by keeping track of the elementary 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 systems at this level is to answer routine questions and to track the flow of transactions through the organization. How many parts are in inventory? What happened to Mr. Williamss pay-

Chapter 2
KIND OF INFORMATION SYSTEM Strategic Level GROUPS SERVED Senior Managers

INFORMATION SYSTEMS IN THE ENTERPRISE

Figure 2-1 Types of information systems. Organizations can be divided into strategic, management, knowledge, and operational levels and into five major functional areas: sales and marketing, manufacturing, finance, accounting, and human resources. Information systems serve each of these levels and functions.

Management Level

Middle Managers

Knowledge Level

Knowledge and Data Workers

Operational Level FUNCTIONAL Sales and AREAS Marketing Manufacturing Finance Accounting

Operational Managers Human Resources

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 bank deposits from automatic teller machines or one that tracks the number of hours worked each day by employees on a factory floor. Knowledge-level systems support the organizations knowledge and data workers. The purpose of knowledge-level systems is to help the business firm integrate new knowledge into the business and to help the organization control the flow of paperwork. Knowledge-level systems, especially in the form of workstations and office systems, are the fastest-growing applications in business today. Management-level systems serve the monitoring, controlling, decision-making, and administrative activities of middle managers. The principal question addressed by such systems is: Are things working well? Management-level systems typically provide periodic reports rather than instant information on operations. An example is a relocation control system that reports on the total moving, house-hunting, and home financing costs for employees in all company divisions, noting wherever actual costs exceed budgets. Some management-level systems support nonroutine decision making (Keen and Morton, 1978). They tend to focus on less-structured decisions for which information requirements are not always clear. These systems often answer what if questions: What would be the impact on production schedules if we were to double sales in the month of December? What would happen to our return on investment if a factory schedule were delayed for six months? Answers to these questions frequently require new data from outside the 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 and long-term trends, both in the firm and in the external environment. Their principal concern is 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 marketing, manufacturing, finance, accounting, and human resources. A typical organization has operational-, 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 record daily sales figures and to process orders. A knowledge-level system designs promotional displays for the firms products. A management-level system tracks monthly sales figures by sales territory and reports on territories where sales exceed or fall below anticipated levels. A system to forecast sales trends over a five-year period serves the strategic level.

knowledge-level systems Information systems that support knowledge and data workers in an organization. management-level systems Information systems that support the monitoring, controlling, decision-making, and administrative activities of middle managers.

strategic-level systems Information systems that support the long-range planning activities of senior management.

Part I

ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE

TYPES OF SYSTEMS Executive Support Systems (ESS) Strategic-Level Systems 5-year 5-year 5-year Profit Personnel sales trend operating budget planning planning forecasting plan forecasting Management-Level Systems Management Information Systems (MIS) Decision-Support Systems (DSS) Sales Inventory management control Sales region analysis Annual Capital budgeting investment analysis Production Cost Pricing/profitability scheduling analysis analysis Knowledge-Level Systems Knowledge Work Systems (KWS) Office Systems Engineering workstations Word processing Graphics workstations Document imaging Operational-Level Systems Machine control Transaction Processing Systems (TPS) Order tracking Plant scheduling Managerial workstations Electronic calendars Relocation analysis Contract cost analysis

Figure 2-2 The six major types of information systems: TPS, office systems, KWS, DSS, MIS, and ESS, showing the level of the organization and business function that each supports.

Securities trading

Payroll Accounts payable Accounts receivable Accounting

Compensation Training & development Employee record keeping Human Resources

Order processing Material Cash movement control management Sales and Marketing Manufacturing Finance

We first describe the specific categories of systems serving each organizational level and their value to the organization. Then we show how organizations use these systems for each major business function.

Six Major Types of Systems

Figure 2-2 shows the specific types of information systems that correspond to each organizational level. The organization has executive support systems (ESS) at the strategic level; management information systems (MIS) and decision-support systems (DSS) at the management level; knowledge work systems (KWS) and office automation systems (OAS) at the knowledge level; and transaction processing systems (TPS) at the operational level. Systems at each level in turn are specialized to serve each of the major functional areas. Thus, the typical systems found in organizations are designed to assist workers or managers at each level and in the functions of sales and marketing, manufacturing, finance, accounting, and human resources. Table 2-1 summarizes the features of the six types of information systems. It should be noted that each of the different kinds of systems may have components that are used by organizational levels and groups other than their main constituencies. A secretary may find information on an MIS, or a middle manager may need to extract data from a TPS.

Transaction Processing Systems

transaction processing systems (TPS) Computerized systems that perform and record the daily routine transactions necessary to conduct the business; they serve the organizations operational level.

Transaction processing systems (TPS) are the basic business systems that serve the operational level of the organization. A transaction processing system is a computerized system that 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

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INFORMATION SYSTEMS IN THE ENTERPRISE

TABLE 2-1
Type of System ESS DSS

Characteristics of Information Processing Systems

Processing Graphics; simulations; interactive Interactive; simulations; analysis Information Outputs Projections; responses to queries Special reports; decision analyses; responses to queries Summary and exception reports Models; graphics Documents; schedules; mail Detailed reports; lists; summaries Users Senior managers Professionals; staff managers

Information Inputs Aggregate data; external, internal Low-volume data or massive databases optimized for data analysis; analytic models and data analysis tools Summary transaction data; highvolume data; simple models Design specifications; knowledge base Documents; schedules

MIS

Routine reports; simple models; low-level analysis Modeling; simulations Document management; scheduling; communication Sorting; listing; merging; updating

Middle managers

KWS Office systems

Professionals; technical staff Clerical workers

TPS

Transactions; events

Operations personnel; supervisors

according to predefined criteria. All that must be determined is whether the customer meets the criteria. Figure 2-3 depicts a payroll TPS, which is a typical accounting transaction processing system 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, or employee number) called data elements. Data are keyed into the system, updating the data elements. The elements on the master file are combined in different ways to create reports of interest to management and government agencies and to send paychecks to employees. These TPS can generate other report combinations of existing data elements. Other typical TPS applications are identified in Figure 2-4. The figure shows that there are five functional categories of TPS: sales/marketing, manufacturing/production, finance/
Employee data (various departments) To general ledger: wages and salaries

Payroll master file

Payroll system

Management reports Government documents

Data elements in payroll master file Employee Number Name Address Department Occupation Pay rate Vacation time Gross pay Earnings (year to date) WithholdingsFederal income tax State tax FICA Other

Employee checks

On-line queries: earnings

Payroll Employee Employee Gross Federal State FICA Earnings number name pay tax tax (year to date) 46848 Stoker, K. 2000.00 400.00 50.00 140.00 6000.00

Figure 2-3 A symbolic representation for a payroll TPS.

Part I

ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE

TYPE OF TPS SYSTEM

Sales/ marketing systems Major functions of system Sales management Market research Promotion Pricing New products Major application systems Sales order information system Market research system Sales commission system

Manufacturing/ production systems Scheduling Purchasing Shipping/receiving Engineering Operations Machine control systems Purchase order systems Quality control systems

Finance/ accounting systems Budgeting General ledger Billing Cost accounting

Human resources systems Personnel records Benefits Compensation Labor relations Training

Other types (e.g., university)

Admissions Grade records Course records Alumni

General ledger Accounts receivable/payable Funds management systems

Payroll Employee records Benefit systems Career path systems

Registration system Student transcript system Curriculum class control systems Alumni benefactor system

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 to a particular industry.Within each of these major functions are subfunctions. For each of these subfunctions (e.g., sales management) there is a major application system.

accounting, human resources, and other types of TPS that are unique to a particular industry. The UPS package tracking system described in Chapter 1 is an example of a manufacturing TPS. UPS sells package delivery services; the system keeps track of all of its package shipment transactions. Transaction processing systems are often so central to a business that TPS failure for a few hours can spell a firms demise and perhaps other firms linked to it. Imagine what would happen to UPS if its package tracking system were not working! What would the airlines do without their computerized reservation systems? Managers need TPS to monitor the status of internal operations and the firms relations with the external environment. TPS are also major producers of information for the other types of systems. (For example, the payroll system illustrated in Figure 2-4, along with other accounting TPS, supplies data to the companys general ledger system, which is responsible for maintaining records of the firms income and expenses and for producing reports such as income statements and balance sheets.)

Knowledge Work and Office Systems

knowledge work systems (KWS) Information systems that aid knowledge workers in the creation and integration of new knowledge in the organization. office systems Computer systems, such as word processing, electronic mail systems, and scheduling systems, that are designed to increase the productivity of data workers in the office.

Knowledge work systems (KWS) and office systems serve the information needs at the knowledge level of the organization. Knowledge work systems aid knowledge workers, whereas office automation systems primarily aid data workers (although they are also used extensively by knowledge workers). In general, knowledge workers are people who hold formal university degrees and who are often members of a recognized profession, such as engineers, doctors, lawyers, and scientists. Their jobs consist primarily of creating new information and knowledge. Knowledge work systems (KWS), such as scientific or engineering design workstations, promote the creation of new knowledge and ensure that new knowledge and technical expertise are properly integrated into the business. Data workers typically have less formal, advanced educational degrees and tend to process rather than create information. They consist primarily of secretaries, accountants, filing clerks, or managers whose jobs are principally to use, manipulate, or disseminate information. Office systems are information technology applications designed to increase data workers productivity by supporting the coordinating and commu-

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nicating activities of the typical office. Office systems coordinate diverse information workers, geographic units, and functional areas: The systems communicate with customers, suppliers, and other organizations outside the firm and serve as a clearinghouse for information and knowledge flows. Typical office systems handle and manage documents (through word processing, desktop publishing, document imaging, and digital filing), scheduling (through electronic calendars), and communication (through electronic mail, voice mail, or videoconferencing). Word processing refers to the software and hardware that creates, edits, formats, stores, and prints documents (see Chapter 6). Word processing systems represent the single most common application of information technology to office work, in part because producing documents is what offices are all about. Desktop publishing produces professional, publishing-quality documents by combining output from 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 access and 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 can be stored and accessed by the computer.

Graphics designers use desktop publishing software to design a page for La Opinion. Desktop publishing software enables users to control all aspects of the design and layout process for professionallooking publications.

Management Information Systems

In Chapter 1, we defined management information systems as the study of information systems in business and management. The term management information systems (MIS) also designates 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 organizations current performance and historical records. Typically, they are oriented almost exclusively to internal, not environmental or external, events. MIS primarily serve the functions of planning, controlling, and decision making at the management level. Generally, they depend on underlying transaction processing systems for their data. MIS summarize and report on the companys basic operations. The basic transaction data from TPS are compressed and are usually presented in long reports that are produced on a regular schedule. Figure 2-5 shows how a typical MIS transforms transaction-level data from inventory, production, and accounting into MIS files that are used to provide managers with reports. Figure 2-6 shows a sample report from this system. MIS usually serve managers interested in weekly, monthly, and yearly resultsnot dayto-day activities. MIS generally provide answers to routine questions that have been specified in advance and have a predefined procedure for answering them. For instance, MIS reports might list the total pounds of lettuce used this quarter by a fast-food chain or, as illustrated in 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 use simple routines such as summaries and comparisons, as opposed to sophisticated mathematical models or statistical techniques.

word processing Office automation technology that facilitates the creation of documents through computerized text editing, formatting, storing, and printing. desktop publishing Technology that produces professional-quality documents combining output from word processors with design, graphics, and special layout features. document imaging systems Systems that convert documents and images into digital form so that they can be stored and accessed by the computer. management information systems (MIS) Information systems at the management level of an organization that serve the functions of planning, controlling, and decision making by providing routine summary and exception reports. decision-support systems (DSS) Information systems at the organizations management level that combine data and sophisticated analytical models or data analysis tools to support semistructured and unstructured decision making.

Decision-Support Systems
Decision-support systems (DSS) also serve the management level of the organization. DSS help managers make decisions that are unique, rapidly changing, and not easily specified in advance. They address problems where the procedure for arriving at a solution may not be fully 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 product prices of competitors.

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Management Information Systems MIS FILES Sales data

Transaction Processing Systems Order file Order processing system

Production master file

Materials resource planning system

Unit product cost data MIS Product change data Reports Managers

Accounting files

General ledger system

Expense data

Figure 2-5 How management information systems obtain their data from the organizations TPS. In
the system illustrated by this diagram, three TPS supply summarized transaction data at the end of the time period to the MIS reporting system. Managers gain access to the organizational data through the MIS, which provides them with the appropriate reports.

Clearly, by design, DSS have more analytical power than other systems. They are built explicitly with a variety of models to analyze data, or they condense large amounts of data into a form where they can be analyzed by decision makers. DSS are designed so that users can work with them directly; these systems explicitly include user-friendly software. DSS are interactive; 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 subsidiary of 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 others, and bids for shipping contracts in the open market to carry general cargo. A voyageestimating system calculates financial and technical voyage details. Financial calculations include ship/time costs (fuel, labor, capital), freight rates for various types of cargo, and port expenses. Technical details include a myriad of factors such as ship cargo capacity, speed, port distances, fuel and water consumption, and loading patterns (location of cargo for different ports). The system can answer questions such as the following: Given a customer delivery schedule and an offered freight rate, which vessel should be assigned at what rate to maximize
Figure 2-6 A sample report that might be produced by the MIS in Figure 2-5.
Consolidated Consumer Products Corporation Sales by Product and Sales Region: 2001 PRODUCT PRODUCT CODE DESCRIPTION 4469 Carpet Cleaner SALES REGION Northeast South Midwest West ACTUAL SALES 4,066,700 3,778,112 4,867,001 4,003,440 16,715,253 Northeast South Midwest West 3,676,700 5,608,112 4,711,001 4,563,440 18,559,253 PLANNED ACTUAL VS. PLANNED 0.85 1.01 1.06 0.91 0.95 0.94 1.19 1.12 0.93 1.05

4,800,000 3,750,000 4,600,000 4,400,000 17,550,000 3,900,000 4,700,000 4,200,000 4,900,000 17,700,000

TOTAL 5674 Room Freshener

TOTAL

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INFORMATION SYSTEMS IN THE ENTERPRISE

Ship file (e.g., speed capacity) Port distance restrictions file

11

PC Analytical models database

Fuel consumption cost file Ship charter hire history cost file Port expense file

Figure 2-7 Voyage estimating decision-support system. This DSS operates on a powerful PC. It is used daily by managers who must develop bids on shipping contracts.

Graphics Reports

profits? What is the optimum speed at which a particular vessel can optimize its profit and still meet its delivery schedule? What is the optimal loading pattern for a ship bound for the U.S. West Coast from Malaysia? Figure 2-7 illustrates the DSS built for this company. The system operates on a powerful desktop personal computer, providing a system of menus that makes it easy for users to enter data or obtain information. We describe other types of DSS in Chapter 13.

Executive Support Systems

Senior managers use executive support systems (ESS) to make decisions. ESS serve the strategic 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 providing any fixed application or specific capability. ESS are designed to incorporate data about external events such as new tax laws or competitors, but they also draw summarized information from internal MIS and DSS. They filter, compress, and track critical data, emphasizing the reduction of time and effort required to obtain information useful to executives. ESS employ the most advanced graphics software and can deliver graphs and data from many sources immediately to a senior executives office or to a boardroom. Unlike the other types of information systems, ESS are not designed primarily to solve specific problems. Instead, ESS provide a generalized computing and telecommunications capacity that can be applied to a changing array of problems. Whereas many DSS are designed 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 business 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 competitive data from internal corporate systems and external databases such as Dow Jones News/Retrieval or the Gallup Poll. Because ESS are designed to be used by senior managers who often have little, if any, direct contact or experience with computer-based information systems, they incorporate easy-to-use graphic interfaces. More details on leading-edge applications of DSS and ESS can be found in Chapter 13.
executive support systems (ESS) Information systems at the organizations strategic level designed to address unstructured decision making through advanced graphics and communications.

Relationship of Systems to One Another

Figure 2-9 illustrates how the systems serving different levels in the organization are related to one another. TPS are typically a major source of data for other systems, whereas ESS are primarily a recipient of data from lower-level systems. The other types of systems may exchange data with each other as well. Data may also be exchanged among systems serving different functional areas. For example, an order captured by a sales system may be transmitted to a manufacturing 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 so that information can flow easily between different parts of the organization. But integration

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ESS workstation

Figure 2-8 Model of a typical executive support system. This system pools data from diverse internal and external sources and makes them available to executives in an easy-to-use form.

Menus Graphics Communications Local processing ESS workstation ESS workstation

Internal data TPS/MIS data Financial data Office systems Modeling/ analysis

External data Dow Jones Internet News Feeds Standard & Poors

Menus Graphics Communications Local processing

Menus Graphics Communications Local processing

costs money, and integrating many different systems is extremely time consuming and complex. Each organization must weigh its needs for integrating systems against the difficulties of mounting a large-scale systems integration effort. The discussion of enterprise systems in Section 2.3 treats this issue in greater detail.

2.2

Systems from a Functional Perspective

Information systems can be classified by the specific organizational function they serve as well as by organizational level. We now describe typical information systems that support each of the major business functions and provide examples of functional applications for each organizational level.

Sales and Marketing Systems

The sales and marketing function is responsible for selling the organizations product or service. Marketing is concerned with identifying the customers for the firms products or services, determining what they need or want, planning and developing products and services to

Figure 2-9 Interrelationships

among systems. The various types of systems in the organization have interdependencies. TPS are a major producer of information that is required by the other systems which, in turn, produce information for other systems. These different types of systems are only loosely coupled in most organizations.
Executive support systems (ESS)

Management systems (MIS)

Management systems (DSS)

Knowledge systems (KWS and Office Systems)

Transaction processing systems (TPS)

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13

TABLE 2-2
System Order processing Market analysis

Examples of Sales and Marketing Information Systems

Description Enter, process, and track orders Identify customers and markets using data on demographics, markets, consumer behavior, and trends Determine prices for products and services Prepare 5-year sales forecasts Organizational Level Operational Knowledge

Pricing analysis Sales trend forecasting

Management Strategic

meet their needs, and advertising and promoting these products and services. Sales is concerned with contacting customers, selling the products and services, taking orders, and following 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 number of ways. At the strategic level, sales and marketing systems monitor trends affecting new products and sales opportunities, support planning for new products and services, and monitor the performance of competitors. At the management level, sales and marketing systems support market research, advertising and promotional campaigns, and pricing decisions. They analyze sales performance and the performance of the sales staff. Knowledge-level sales and marketing systems support marketing analysis workstations. At the operational level, sales and marketing systems assist in locating and contacting prospective customers, tracking sales, processing orders, and providing customer service support. Review Figure 2-6. It shows the output of a typical sales information system at the management level. The system consolidates data about each item sold (such as the product code, product description, and price) for further management analysis. Company managers examine these sales data to monitor sales activity and buying trends. The Window on Management describes some typical sales and marketing systems that might be found in a small business.

sales and marketing information systems Systems that help the firm identify customers for the firms products or services, develop products and services to meet customers needs, promote products and services, sell the products and services, and provide ongoing customer support.

Manufacturing and Production Systems

The manufacturing and production function is responsible for actually producing the firms goods and services. Manufacturing and production systems deal with the planning, development, and maintenance of production facilities; the establishment of production goals; the acquisition, storage, and availability of production materials; and the scheduling of equipment, facilities, materials, and labor required to fashion finished products. Manufacturing and production information systems support these activities. Table 2-3 shows some typical manufacturing and production information systems arranged by organizational level. Strategic-level manufacturing systems deal with the firms
manufacturing and production information systems Systems that deal with the planning, development, and production of products and services and with controlling the flow of production.

TABLE 2-3
System Machine control

Examples of Manufacturing and Production Information Systems

Description Control the actions of machines and equipment Design new products using the computer Decide when and how many products should be produced Decide where to locate new production facilities Organizational Level Operational Knowledge Management Strategic

Computer-aided design (CAD) Production planning Facilities location

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ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE

How Southstream Seafoods Lands the Big Customers

According to Mark Soderstrom, president of Southstream Seafoods, anyone can sell fish. He believes that his company does it better than anyone else, thanks to powerful customer contact and sales information systems. Southstream Seafoods is based in Warwick, Rhode Island, and is an importer and wholesaler of frozen seafood that sells primarily to food-service distributors and restaurant chains. The company has been in business for more than 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 keeps track of Southstreams customers, phone calls, and sales transactions and helps management measure the efficiency and productivity of the sales force. Selling fish is challenging for both wholesalers and retailers because fish prices constantly go up and down, with factors such as weather or availability affecting the business within a few days. Soderstrom turned this problem into an opportunity to serve his customers better than competitors by broadcasting information about changing market prices to customers so they can make better business decisions. Southstream configured the contact management portion of the system so that with a click of a button, sales staff could send out information only to specified customers. The customer records in the system include check boxes indicating which types of fish they purchase. The check boxes enable Southstream to locate only those customers, for instance, who purchase Alaskan cod. Southstream can then send a fax about changes in Alaskan cod prices only to those customers who actually use the product. Southstream uses the system to fax market information to about half of its 1,000 customers each week. The average Southstream sales representative handles between 75 and 125 active accounts.When making each call, the salesperson enters sales information, including quantity, price, and shipping information into the system. The salesperson can also use the system to set callback dates and reminder alarms. The system records the duration of each call and makes all of the information available to a manager or Southstreams shipping department. If the shipping department gets a call indicating that a customers fish hasnt arrived on time, the shipping department can enter the customers name and immediately see what that customer has just purchased and when delivery is expected. Soderstrom can generate reports from the system to analyze the efficiency of his sales staff and find ways of better servicing customer accounts. The system can show him exactly what each salesperson has done, showing all of his or her phone calls, sales, and the results of phone calls. Using this information, Soderstrom might find that one sales representative is spending too much time on a customer with a historically low volume of purchases and recommend that the salesperson allocate more time to a customer with more purchasing potential. Using only 10 sales representatives and 2 people in the shipping department, Southstream sells and ships about one million pounds of fish each week.Without the system, the company would need a staff twice as big to do the job. To Think About: What kinds of systems for sales and marketing are described here? How do these systems support the sales function? What organizational levels are supported by these systems?
Sources: Angela R. Garber, Hook, Line, and Sinker, Small Business Computing, February 2000; and www.southstream.com.

management
New caption to come

Chapter 2
Shipment and order data

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15

Inventory Control System Inventory master file Data elements in inventory master file: Item code Description Units on hand Units on order Reorder point Item Code On-line queries 6361 4466 9313 8808

Management reports

Figure 2-10 Overview of an inventory system. This system provides information about the number of items available in inventory to support manufacturing and production activities.

Inventory Status Report Report Date: 1/14/ 2001 Description Units on Units on Hand Order Fan belt Power cord Condenser Paint sprayer 10,211 55,710 663 11,242 0 88,660 10,200 0

long-term manufacturing goals, such as where to locate new plants or whether to invest in new manufacturing technology. At the management level, manufacturing and production systems analyze and monitor manufacturing and production costs and resources. Knowledge manufacturing and production systems create and distribute design knowledge or expertise to drive the production process, and operational manufacturing and production systems deal with the status of production tasks. Most manufacturing and production systems use some sort of inventory system, illustrated in Figure 2-10. Data about each item in inventory, such as the number of units depleted because of a shipment or purchase or the number of units replenished by reordering or returns, are either scanned or keyed into the system. The inventory master file contains basic data about each item, including the unique identification code for each item, the description of the item, the number of units on hand, the number of units on order, and the reorder point (the number of units in inventory that triggers a decision to reorder to prevent a stockout). Companies can estimate the number of items to reorder or they can use a formula 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, the number of units of each item to reorder, or items in inventory that must be replenished.

Finance and Accounting Systems

The finance function is responsible for managing the firms financial assets, such as cash, stocks, bonds, and other investments, in order to maximize the return on these financial assets. The finance function is also in charge of managing the capitalization of the firm (finding new financial assets in stocks, bonds, or other forms of debt). In order to determine whether the firm is getting the best return on its investments, the finance function must obtain a considerable amount of information from sources external to the firm. The accounting function is responsible for maintaining and managing the firms financial recordsreceipts, disbursements, depreciation, payrollto account for the flow of funds in a firm. Finance and accounting share related problemshow to keep track of a firms financial assets and fund flows. They provide answers to questions such as these: What is the current inventory of financial assets? What records exist for disbursements, receipts, payroll, and other fund flows? Table 2-4 shows some of the typical finance and accounting information systems found in large organizations. Strategic-level systems for the finance and accounting function establish long-term investment goals for the firm and provide long-range forecasts of the firms financial performance. At the management level, information systems help managers oversee and control the firms financial resources. Knowledge systems support finance and accounting by providing analytical tools and workstations for designing the right mix of investments to maximize returns for the firm. Operational systems in finance and accounting track the flow of funds in the firm through transactions such as paychecks, payments to vendors, securities reports, and receipts. Review Figure 2-3, which illustrates a payroll system, a typical accounting TPS found in all businesses with employees.

finance and accounting information systems Systems keep track of the firms financial assets and fund flows.

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TABLE 2-4
System Accounts receivable Portfolio analysis Budgeting Profit planning

Examples of Finance and Accounting Information Systems

Description Track money owed the firm Design the firms portfolio of investments Prepare short-term budgets Plan long-term profits Organizational Level Operational Knowledge Management Strategic

Human Resources Systems

human resources information systems Systems that maintain employee records; track employee skills, job performance, and training; and support planning for employee compensation and career development.

The human resources function is responsible for attracting, developing, and maintaining the firms workforce. Human resources information systems support activities such as identifying potential employees, maintaining complete records on existing employees, and creating programs to develop employees talents and skills. Strategic-level human resources systems identify the support requirements (skills, educational level, types of positions, number of positions, and cost) for meeting the firms longterm business plans. At the management level, human resources systems help managers monitor and analyze the recruitment, allocation, and compensation of employees. Knowledge systems for human resources support analysis activities related to job design, training, and the modeling of employee career paths and reporting relationships. Human resources operational systems track the recruitment and placement of the firms employees (see Table 2-5). Figure 2-11 illustrates a typical human resources TPS for employee record keeping. It maintains basic employee data, such as the employees name, age, sex, marital status, address, educational background, salary, job title, date of hire, and date of termination. The system can produce a variety of reports, such as lists of newly hired employees, employees who are terminated or on leaves of absence, employees classified by job type or educational level, or employee job performance evaluations. Such systems are typically designed to provide data that can satisfy federal and state record keeping requirements for Equal Employment Opportunity (EEO) and other purposes.

2.3

Integrating Functions and Business Processes: Enterprise Systems and Industrial Networks

Organizations are using information systems to coordinate activities and decisions across entire firms and even entire industries.

Business Processes and Information Systems

The systems we have described support flows of work and activities called business processes which we introduced in Chapter 1. Business processes refer to the manner in which work is organized, coordinated, and focused to produce a valuable product or service. On the one

TABLE 2-5
System Training and development Career pathing Compensation analysis Human resources planning

Examples of Human Resources Information Systems

Description Track employee training, skills, and performance appraisals Design career paths for employees Monitor the range and distribution of employee wages, salaries, and benefits Plan the long-term labor force needs of the organization Organizational Level Operational Knowledge Management Strategic

Chapter 2
Employee data (various departments)

INFORMATION SYSTEMS IN THE ENTERPRISE

To payroll

17

Employee master file

Human Resources System

Management reports

Data elements in employee master file: Employee: Number Name Address On-line Department queries Age Marital status Sex Salary Educational background Job title Date of hire Date of termination Termination reason

Termination Report Date 11/ 12/2000 12/1/2000 1/ 12/2001 Name John Hansen Patricia Carlyle Ellen Quimby Number 29433 14327 21224 Reason Position eliminated Retired Left company

Figure 2-11 An employee record keeping system.This system maintains data on the firms employees to support the human resources function.

hand, business processes are concrete workflows of material, information, and knowledgesets of activities. On the other hand, business processes represent unique ways in which organizations coordinate work, information, and knowledge, and the ways in which management chooses to coordinate work. Table 2-6 describes typical business processes for each 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 between sales, marketing, manufacturing, and research and development. These cross-functional processes cut across the traditional organizational structure, grouping employees from different functional specialties to complete a piece of work. For example, the order fulfillment process at many companies requires cooperation among the sales function (receiving the order, entering the order), the accounting function (credit checking and billing for the order), and the manufacturing function (assembling and shipping the order). Figure 2-12

TABLE 2-6
Functional Area

Examples of Business Processes

Business Process Assembling the product Checking for quality Producing bills of materials

Manufacturing and production

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

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Figure 2-12 The order fulfillment process. Generating and fulfilling an order is a multistep process involving activities performed by the sales, manufacturing and production, and accounting functions.

Sales

Generate order

Submit order

Accounting

Check credit

Approve credit

Generate invoice

Manufacturing and production

Assemble product

Ship product

illustrates how this cross-functional process might work. Information systems support these cross-functional processes as well as processes for the separate business functions. Information systems can help organizations achieve great efficiencies by automating parts of these processes or by helping organizations rethink and streamline these processes. However, redesigning business processes requires careful analysis and planning. When systems are used to strengthen the wrong business model or business processes, the business can become more efficient at doing what it should not do. As a result, the firm becomes vulnerable to competitors who may have discovered the right business model. Therefore, one of the most important strategic decisions that a firm can make is not deciding how to use computers to improve business processes, but instead to first understand what business processes need improvement (Keen, 1997). Chapter 10 treats this subject in greater detail, because it is fundamental to systems analysis and design.

Customer Relationship Management and Supply Chain Management

Electronic commerce, global competition, and the rise of digital firms have made companies think strategically about their business processes for managing their relationships with customers and suppliers. Consumers can now use the Web to comparison shop and switch companies on a moments notice. To survive, businesses need to find ways of providing more value and service to customers at lower cost. Many believe the solution lies in improving their business processes for interacting with customers and for producing and delivering products or services.
Keying data from tax returns into the Internal Revenue Service computer system is an important activity in the tax collection process. Business processes coordinate work, information, and knowledge.

Chapter 2

INFORMATION SYSTEMS IN THE ENTERPRISE

19

Customer Relationship Management (CRM)

Instead of treating customers as exploitable sources of income, businesses are now viewing them as long-term asserts to be nurtured through customer relationship management (CRM). Customer relationship management (CRM) focuses on managing all of the ways that a firm deals with its existing and potential new customers. CRM is both a business and technology discipline that uses information systems to coordinate all of the business processes surrounding the firms interactions with its customers in sales, marketing, and service. The ideal CRM system provides end-to-end customer care from receipt of an order acquisition through product delivery. In the past, a firms processes for sales, service, and marketing were highly compartmentalized and did not share much essential customer information. Some information on a specific customer might be stored and organized in terms of that persons account with the company. Other pieces of information about the same customer might be organized by products that were purchased. There was no way to consolidate all of this information to provide a unified view of a customer across the company. CRM tools try to solve this problem by integrating the firms customer-related processes and consolidating customer information from multiple communication channelsthe telephone, e-mail, wireless devices, or the Web so that the firm can put one coherent face to the customer. Good CRM systems consolidate customer data from multiple sources and provide analytical tools for answering questions such as: What is the value of a particular customer to the firm over his or her lifetime? Who are our most loyal customers? (It costs six times more to sell to a new customer than to an existing customer.) (Kalakota and Robinson, 2001). Who are our most profitable customers? (Typically 8090% of a firms profits are generated by 1020% of its customers.) What do these profitable customers want to buy? Firms can then use the answers to acquire new customers, provide better service and support, customize their offerings more precisely to customer preferences, and provide ongoing value to retain profitable customers. Chapters 3, 4, 9, and 13 provide additional detail on customer relationship management applications and technologies.
customer relationship management Business and technology discipline to coordinate all of the business processes for dealing with customers.

Supply Chain Management

To deliver the product more rapidly to the customer at lower cost, firms are also trying to streamline their business processes for supply chain management. Supply chain management is the close linkage of activities involved in buying, making, and moving a product. It integrates supplier, distributor, and customer logistics requirements into one cohesive process to reduce time, redundant effort, and inventory costs (see Figure 2-14). The supply chain is a network of facilities for procuring materials, transforming raw materials into intermediate

supply chain management Integration of supplier, distributor, and customer logistics requirements into one cohesive process. supply chain Network of facilities for procuring materials, transforming raw materials into finished products, and distributing finished products to customers.

Figure 2-13 Customer relaSales 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

tionship management combines business processes using technology to look at customers from a multifaceted perspective. CRM uses a set of integrated applications to address all aspects of the customer relationship, including customer service, sales, and marketing.

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C a p a c it y
, i n v e n t o r y l e v e l,

Figure 2-14 Supply chain management. The major entities in the supply chain and the flow of information coordinate the activities involved in buying, making, and moving a product.

delivery schedule, payment

terms

Supplier

Manufacturer

Distributor

Retail Outlet

Customer

O rd er

s, r e t u r n r

nts equests, repair and service requests, payme

and finished products, and distributing the finished products to customers. It links manufacturing plants, distribution centers, conveyances, retail outlets, people, and information through processes such as procurement or logistics to supply goods and services from source through consumption. Goods or services start out as raw materials and move through the companys logistics and production systems until they reach customers. To manage the supply chain, a company tries to eliminate redundant steps, delays, and the amount of resources tied up along the way. Companies that skillfully manage their supply chains get the right amount of their products from their source to their point of consumption with the least amount of time and the lowest cost. Information systems make supply chain management more efficient by helping companies coordinate, schedule, and control procurement, production, inventory management, and delivery of products and services to customers. Information systems can integrate demand planning, production forecasting, materials requisition, order processing, inventory allocation, order fulfillment, transportation services, receiving, invoicing, and payment. Table 2-7 describes how companies can benefit from using information systems for supply chain management. Supply chain management systems can be built using intranets, extranets, or special supply chain management software. The Window on Organizations shows how HewlettPackard benefited from a sophisticated supply chain management system that used Internet technology.

Enterprise Systems
A large organization typically has many different kinds of information systems that support different functions, organizational levels, and business processes. Most of these systems, built around 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 comprehensive, overall picture of the organizations operations. For instance, sales personnel might not be able to tell at the time they placed an order whether the items that were ordered were in inventory; customers could not track their orders; and manufacturing could not communicate eas-

TABLE 2-7

How Information Systems Can Facilitate Supply Chain Management

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

Chapter 2

INFORMATION SYSTEMS IN THE ENTERPRISE

21

Supply Chain Management Keeps Inventory Fresh at HP

Why is the PC business like the fresh fruit business? Jean-Luc Meyer, a PC group marketing manager at Hewlett-Packard (HP), claims Every day fresh fruit becomes less valuable because it gets a little rotten. In the PC business, every day prices go down. New computer technology develops so quickly that computers sitting on the shelf become technically outdated.To help the company sell its computers at full price, HP created a sophisticated supply chain management system that produces PCs to order and gets them to customers within 48 hours. The new system automates much of the process. Orders are placed via computer that in turn forwards the data to HPs production and delivery computer systems. Some of these systems are linked to the systems of HPs suppliers. Synnex, located in Fremont, California, is a contract manufacturer of PCs for a number of companies, including HP. When orders arrive at Synnex, computers immediately check the credit of the customer placing the order. Simultaneously they validate the order configuration to make sure it works (so no one wastes time building a computer with incompatible, duplicate, or missing components). Assuming everything checks out, the order is automatically forwarded to a computer that controls production. That computer prints out an instruction ticket for the assembly technician while simultaneously forwarding a parts order to Synnexs warehouse.The software to be included with the purchased computer is loaded onto that computer and then the whole parts order with the ticket are shipped to the technicians workstation. One worker assembles the computer and then connects it to a computer that tests it.The new computer is then boxed, tagged, and shipped. Using the bar code on the ticket, even the delivery is monitored by computer. Much of the information in this process is communicated through the Internet. HPs supply chain management system enables customers to receive its new computers very rapidly while HP reduces production errors.The system also reduces inventoryparts, goods in process, and completed products. Knowing exactly what computers to build helps HP reduce its pipeline of products awaiting the arrival of orders.To keep inventory low, HP makes the supply chain data available to parts suppliers and to production contractors (many HP PCs are produced by outside manufacturers). For computers manufactured by contract producers, HP thus maintains virtually no inventory. Prior to supply chain management software, Synnex maintained four weeks of parts inventory. With the new automated system, their parts inventory has been cut to two weeks.The supply chain management software even monitors the parts inventory and automatically orders more parts when inventory gets low.

HP is using supply chain management software in other parts of its business, and can now efficiently manage its supply chain for plastic parts.

organizations
Sources: Rory J. OConnor, Keeping Inventory Fresh, Upside, June 2000; and eCompany Staff, Supply-Chain Software: Hewlett Packard, eCompany, November 2000.

To Think About: How has HPs supply chain management system changed the way the company runs its business? It has been said that building a world-class supply chain management system is neither cheap nor easy.Why?

ily with finance to plan for new production. This fragmentation of data in hundreds of separate systems could thus have a negative impact on organizational efficiency and business performance. Figure 2-15 illustrates the traditional arrangement of information systems. Systems for customer relationship management and supply chain management are a step forward 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 order or scheduling a shipment, with the goal of integrating information across the company and eliminating complex, expensive links between computer systems in different areas of the business. Information that was previously fragmented in different systems can seamlessly flow throughout the firm so that it can be shared by business processes in manufacturing,

enterprise systems Firmwide information systems that integrate key business processes so that information can flow freely between different parts of the firm.

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Business Functions Marketing and Sales Human Resources

Vendors Vendors Vendors

Organizational Boundaries

Organizational Boundaries

Manufacturing

Accounting

Finance

Customers Customers Customers

Business processes

Business processes

Business processes

Business processes Marketing and Sales Systems

Business processes

Manufacturing Systems

Accounting Systems

Finance Systems Information Systems

Human Resources Systems

Figure 2-15 Traditional view of systems. In most organizations today, separate systems built over a long period of time support discrete business processes and discrete segments of the business value chain.The organizations systems rarely include vendors and customers.

accounting, human resources, and other areas of the firm. Discrete business processes from sales, production, finance, and logistics can be integrated into company-wide business processes that flow across organizational levels and functions. An enterprise-wide technical platform 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 other parts of the business. Managers emerge with more precise and timely information for coordinating the daily operations of the business and a firmwide view of business processes and information flows. For instance, when a sales representative in Brussels enters a customer order, the data flows automatically to others in the company who need to see it. The factory in Hong Kong receives the order and begins production. The warehouse checks its progress on-line and schedules the shipment date. The warehouse can check its stock of parts and replenish whatever the factory has depleted. The enterprise system stores production information, where it can be accessed by customer service representatives to track the progress of the order through every step of the manufacturing process. Updated sales and production data automatically flow to the accounting department. The system transmits information for calculating the salespersons commission to the payroll department. The system also automatically recalculates the companys balance sheets, accounts receivable and payable ledgers, cost center accounts, and available cash. Corporate headquarters in London can view up-to-the-minute data on sales, inventory, and production at every step of the process as well as updated sales and production forecasts and calculations of product cost and availability.

Figure 2-16 Enterprise systems. Enterprise systems can integrate the key business processes of an entire firm into a single software system that allows information to flow seamlessly throughout the organization. These systems may include transactions with customers and vendors.
Manufacturing Organizational boundaries Enterprise System Business process Business process Business process Enterprise-wide business processes Accounting Organizational boundaries

Vendors

Customers

Human Resources

Finance Sales and Marketing

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TABLE 2-8

Business Processes Supported by Enterprise Systems

Manufacturing processes, including inventory management, purchasing, shipping, production planning, material requirements planning, and plant and equipment maintenance Financial and accounting processes, including accounts payable, accounts receivable, cash management 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 management, and sales planning Human resource processes, including personnel administration, time accounting, payroll, personnel planning and development, benefits accounting, applicant tracking, and travel expense reporting,

Benefits and Challenges of Enterprise Systems

Enterprise systems promise to integrate the diverse business processes of a firm into a single integrated information architecture.

Benefits of Enterprise Systems

Enterprise 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 enterprise systems to support organizational structures that were not previously possible or to create a more disciplined organizational culture. For example, they might use enterprise systems to integrate the corporation across geographic or business unit boundaries or to create a more uniform organizational culture in which everyone uses similar processes and information. An enterprise-enabled organization does business the same way worldwide, with functional boundaries deemphasized in favor of cross-functional coordination and information flowing freely across business functions. Management: Firmwide Knowledge-based Management Processes In addition to automating many essential business transactions, such as taking orders, paying suppliers, or changing employee benefits status, enterprise systems can also improve management reporting and decision making. Information supplied by an enterprise system is structured around

Management Decision Problem

ANALYZING ENTERPRISE PROCESS INTEGRATION Management at your agricultural chemicals corporation has been dissatisfied with production planning. Production plans are created using best guesses of demand for each product which are based on how much of each product has been ordered in the past. If a customer places an unexpected order or requests a change to an existing order after it has been placed, there is no way to adjust the production plans. The company may have to tell customers it cant fill their orders or may run up extra costs maintaining additional inventory to prevent stock-outs. At the end of each month, orders are totaled and manually keyed into the companys production planning system. Data from the past months production and inventory systems are manually entered into the firms order management system. Analysts from the sales department and from the production department analyze the data from their respective systems to determine what the sales targets and what the production targets should be for the next month. These estimates are usually different. The analysts then get together at a high-level planning meeting, to revise the production and sales targets to take into account senior managements goals for market share, revenues, and profits. The outcome of the meeting is a finalized production master schedule. The entire production planning process takes 17 business days to complete. Nine of these days are required to enter and validate the data. The remaining days are spent developing and reconciling the production and sales targets and finalizing the production master schedule.

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 implemented enterprise software.

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cross-functional business processes and it can be obtained rapidly. For example, an enterprise system might help management more easily determine which products are most or least profitable. No longer would general managers be stuck without any hard data on firm performance, or data that applies only to their own immediate department. An enterprise system could supply management with better data about business processes and overall organizational 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 all the key business processes. The data have common, standardized definitions and formats that are accepted by the entire organization. You will learn more about the importance of standardizing organizational data in Chapter 7. Business: More Efficient Operations and Customer-driven Business Processes Enterprise systems can help create the foundation for a customer-driven or demand organization. By integrating discrete business processes such as sales, production, finance, and logistics, the entire organization can efficiently respond to customer requests for products or information, forecast new products, and build and deliver them as demand requires. Manufacturing has better information to produce only what customers have ordered, to procure exactly the right amount of components or raw materials to fill actual orders, to stage production, and to minimize the time that components or finished products are in inventory. Using enterprise systems to capture unit cost and quality data, firms can improve the quality of their products and services.

The Challenge of Enterprise Systems

Although enterprise systems can improve organizational coordination, efficiency, and decision making, they have proven very difficult to build. They require not only large technology investments but also fundamental changes in the way the business operates. Companies need to rework their business processes to make information flow smoothly between them. Employees must take on new job functions and responsibilities. Enterprise systems require complex pieces of software and large investments of time, money, and expertise. Enterprise systems raise serious challenges for firms: a daunting implementation process, surviving a cost/benefit analysis, inflexibility, and realizing strategic value. Daunting Implementation Enterprise systems bring dramatic changes to business. They require not only deep-seated technological changes but also fundamental changes in the way the business operates. Business processes change dramatically, as do organizational structure and culture. Firms implementing enterprise systems have to come up with organization-wide definitions of data, retrain thousands of workers, and redesign their fundamental business processes, all at once, while carrying on business as usual. It might take a large company three to five years to fully implement all of the organizational and technology changes required by an enterprise system. Organizations that do not understand that such changes will be required or are unable to make them will have problems implementing enterprise systems, or they 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, upfront, highly visible, and often politically charged. Although the costs to build the system are obvious, the benefits often cannot be precisely quantified at the beginning of an enterprise project. One reason is that the benefits often accrue from employees using the system after it is completed and gaining the knowledge of business operations heretofore impossible to learn. Inflexibility Enterprise system software tends to be complex, difficult to master, with a worldwide shortage in people with the expertise to install and maintain it. The software is deeply intertwined with corporate business processes. If companies need to make major changes, 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 parts as well. There is the prospect that the new enterprise systems could eventually prove as brittle and hard to change as the old systems they replaceda new kind of digital concrete that could, over time, bind firms to outdated business processes and systems.

Chapter 2
Horizontal industrial network
Firms in a single industry

INFORMATION SYSTEMS IN THE ENTERPRISE

25

Firm 1

Firm 2

Firm 3

Firm 4

Firm value chains and enterprise systems Industrial networks Industry value chain

Figure 2-17 Industrial networks. Industrial networks link the enterprise systems of firms in an entire industry into an industry-wide system. Horizontal industrial networks link firms in the same industry, including competitors, whereas vertical industrial networks link a firm with suppliers in the same industry.

Firms in complementary businesses

Firm 1

Supplier 1

Supplier 2

Supplier 3

Vertical industrial network

Realizing Strategic Value Companies may also fail to achieve strategic benefits from enterprise systems if integrating business processes using the generic models provided by standard ERP software prevents the firm from using unique business processes that had been sources of advantage over competitors. If an enterprise system is not compatible with the way the company does business, the company may lose a better way of performing a key business process that may be related to its competitive advantage. Enterprise systems promote centralized organizational coordination and decision making, which may not be the best way for some firms to operate. There are companies that clearly do not need the level of integration provided by enterprise systems (Davenport, 2000, 1998). Chapter 11 provides more detail on the organizational and technical challenges to enterprise system implementation.

Extended Enterprises and Industrial Networks

In some industries, companies are extending their enterprise systems beyond the boundaries of the firm to share information and coordinate business processes with other firms in their industry. Industrial networks, which are sometimes called extended enterprises, link together the enterprise systems of firms in an entire industry (see Figure 2-17). For instance, Procter & Gamble (P&G), the worlds largest consumer goods company, developed an integrated industry-wide system that coordinated the grocery store point-of-sale systems with grocery store warehouses, shippers, its own manufacturing facilities, and its suppliers of raw materials. This single industry spanning system effectively allows P&G to monitor the movement of all its products from raw materials to customer purchase. P&G uses data collected from point-of-sale terminals to trigger shipments to retailers of items that customers have purchased and that need restocking. Electronic links to suppliers enable P&G to order materials from its own suppliers when its inventories are low. The system helps P&G reduce its inventory by allowing the company to produce products as they are demanded by retailers. P&G is implementing an Ultimate Supply System that uses Internet technology to link retailers and suppliers to its private corporate intranet (see the Chapter 1 opening vignette). By having retailers and suppliers integrate their systems with P&Gs systems, P&G hopes to reduce product 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 the operations 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 be the OASIS network of utility industry firms, which uses the Web to help members sell surplus electrical power. A few industry networks coordinate the activities of competitors. For example, Yamaha Europe, Honda, Aprilia, and Piaggio, competing manufacturers of motor scooters, are now working together to share suppliers. They hope to ultimately reduce the number of suppliers, which will boost the production efficiency in the remaining group, and they all expect to realize savings from their cooperation (Abramson, 1999). Table 2-9 provides examples of both types of industrial networks. Most industrial networks today are vertical and do not link together competitors in the same industry.
industrial networks Networks linking systems of multiple firms in an industry. Also called extended enterprises.

vertical industrial networks Networks for integrating the operations of a firm with its suppliers. horizontal industrial networks Networks for linking firms across an entire industry.

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Part I

ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE

TABLE 2-9
Organization(s) Coca-Cola

Examples of Industrial Networks

Type of Industrial Network Vertical Description Installed an enterprise system using SAP software and extended the system to its bottling partners. Coke and its partners can pool resources, share sales information, and leverage their combined size to obtain lower raw material costs. The extended enterprise system enables them to react rapidly to market changes and deploy products efficiently to the places where they are most likely to sell. Web sites link U.S. electrical utility companies in regional power pool groups to sell their surplus power to wholesalers and locate the transmission facilities for moving the power between its source and the customer. Shared Internet purchasing system enables them to obtain parts online from suppliers, reducing costs and saving time. Has electronic links to suppliers where it can share information about forecasts, shelf space, and inventory, so they can track demand for their products, adjust production, and adjust the timing and size of deliveries. The suppliers can download Safeways information into their enterprise systems or production planning systems. Suppliers send Safeway information about product availability, production capacity, and inventory levels.

OASIS

Horizontal

Ford, General Motors, and DaimlerChrysler Safeway UK

Horizontal Vertical

Many of these industrial networks are currently dedicated to supply chain management. Enterprise systems have primarily focused on helping companies manage their internal manufacturing, financial, and human resource processes and were not originally designed to support supply chain management processes involving entities outside the firm. However, enterprise software vendors are starting to enhance their products so that firms can link their enterprise 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 its activities with manufacturing partners and customers. Manufacturing can be informed of exactly what to produce, based on sales orders, and reduce the need to keep excess stock in inventory. If participants in the supply chain use the same enterprise software systems, their systems can exchange data without manual intervention. Companies can also use Internet technology to create industrial networks, because it provides a platform where systems from different companies can seamlessly exchange information.

Application Software Exercise

Database Exercise: Tracking Reservations at Monroes Midnight Inn
Monroes Midnight Inn is a family-owned and operated bed and breakfast. After inheriting the Monroe mansion eight years ago, James and Peggy Monroe decided to renovate the mansion and establish a bed and breakfast. The bed and breakfast has 14 rooms: 5 overlook a private lake, 5 overlook the woods, and the remaining 4 rooms overlook the gardens. Room rates are based on room choice, length of stay, and number of guests per room. Guests staying for 7 days or more are given a 15 percent discount on their daily room rates. A maximum of 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 establishment was frequented primarily by couples; however, the bed and breakfast now caters to a variety of clientele, including families, executives, and locals. The bed and breakfasts growing popularity is because, in part, of its location, the activities available to its visitors, and its affordability.

Chapter 2

INFORMATION SYSTEMS IN THE ENTERPRISE

27

Currently, all records are manually kept. This manual record keeping system has caused many problems for James and Peggy. For instance, only last week Peggy had two families booked in the Washington room. Luckily, she was able to reassign one of the families to the Lincoln room and avoid upsetting a valuable customer. Similarly, James does not have immediate access to management information about the bed and breakfasts operations. He would like to have information about current room occupancy, average length of stay, and weekly income by room. Using the information provided in the scenario and in the accompanying tables on the Laudon Web site, prepare a simple database to track reservations and generate management reports. In addition to the 10 transactions provided in the table, add at least 10 more transactions 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 and stored in the database? As mentioned previously, James requires managerial information about the bed and breakfasts operations. What reports would provide the necessary information? Identify at least two other reports that would be beneficial for James. Prepare these reports.

Management Wrap-Up
Enterprise systems and industrial networks require management to take a firmwide view of business processes and information flows. Managers need to determine which business processes should be integrated, the short- and long-term benefits of this integration, and the appropriate level of financial and organizational resources to support this integration. There are many types of information systems in an organization that support different organizational levels, functions, and business processes. Some of these systems, such as those for customer relationship management and supply chain management, span more than one function or business process. Enterprise systems integrating information from different organizational functions and business processes often require extensive organizational change. Information systems that create firm- or industry-wide information flows and business processes require major technology investments and planning. Firms must have an information technology (IT) infrastructure that can support organization-wide or industry-wide computing.

For Discussion 1. 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 decision. Do you agree? Why or why not? Who should make this decision?

Summary
1. 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 contemporary organizations that are designed for different purposes and different audiences. Operational-level systems are transaction processing systems (TPS), such as payroll or order processing, that track the flow of the daily routine transactions that are necessary to conduct business. Knowledge-level systems support clerical, managerial, and professional workers. They consist of office systems for increasing data workers productivity and knowledge work systems for enhancing knowledge workers productivity. Management-level systems (MIS and DSS) provide the management control level with reports and access to the organizations current performance and historical records. Most MIS reports condense information from TPS and are not highly analytical. Decision-support systems (DSS) support management decisions when these decisions are

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Part II

INFORMATION TECHNOLOGY INFRASTRUCTURE automating parts of these processes or by helping organizations rethink and streamline these processes, especially those for customer relationship management and supply chain management. Customer relationship management uses information systems to coordinate all of the business processes surrounding a firms interactions with its customers. Supply chain management is the close linkage of activities involved in buying, making, and moving a product. Information systems make supply chain management more efficient by helping companies coordinate, schedule, and control procurement, production, inventory management, and delivery of products and services to customers. Explain how enterprise systems and industrial networks create new efficiencies for businesses. Enterprise systems integrate the key business processes of a firm into a single software system so that information can flow throughout the organization, improving coordination, efficiency, and decision making. Industrial networks link other organizations in the same industry in a single industry-wide system. Vertical industrial networks consist of an organization and its suppliers, whereas horizontal industrial networks consist of competitors in the same industry. Evaluate the benefits and limitations of enterprise systems and industrial networks. Enterprise systems and industrial networks promise efficiencies from better coordination of both internal and external business processes. Enterprise systems can help create a uniform organization in which everyone uses similar processes and information, and measures their work in terms of organization-wide performance standards. An enterprise system could supply management with better data about business processes and overall organizational performance. Enterprise systems feature a single information technology platform where data definitions are standardized across the organization. The coordination of sales, production, finance, and logistics processes provided by enterprise systems helps organizations respond rapidly to customer demands. The reality is that firm- and industry-wide systems are very difficult to implement successfully. They require extensive organizational change, use complicated technologies, and require large up-front costs for long-term benefits that are difficult to quantify. Once implemented, enterprise systems are very difficult to change. Management vision and foresight is required to take a firm- and industry-wide view of problems and to find solutions that realize strategic value from the investment.

2.

3.

unique, rapidly changing, and not specified easily in advance. They have more advanced analytical models and data analysis capabilities than MIS and often draw on information from external as well as internal sources. Executive support systems (ESS) support the strategic level by providing a generalized computing and communications environment to assist senior managements decision making. They have limited analytical capabilities but can draw on sophisticated graphics software and many sources of internal and external information. The various types of systems in the organization exchange data with one another. TPS are a major source of data for other systems, especially MIS and DSS. ESS primarily receive data from lower-level systems. The different systems in an organization have traditionally been loosely integrated. Describe the types of information systems supporting the major functional areas of the business. At each level of the organization there are information systems supporting the major functional areas of the business. Sales and marketing systems help the firm identify customers for the firms products or services, develop products and services to meet customers needs, promote products and services, sell the products and services, and provide ongoing customer support. Manufacturing and production systems deal with the planning, development, and production of products and services, and control the flow of production. Finance and accounting systems keep track of the firms financial assets and fund flows. Human resources systems maintain employee records, track employee skills, job performance, and training; and support planning for employee compensation and career development. Assess the relationship between organizations, information systems and business processes, including the processes for customer relationship management and supply chain management. Business processes refer to the manner in which work is organized, coordinated, and focused to produce a valuable product or service. Business processes are concrete workflows of material, information, and knowledge, and they also represent unique ways in which organizations coordinate work, information, and knowledge, and the ways in which management chooses to coordinate work. Although each of the major business functions has its own set of business processes, many other business processes are crossfunctional, such as fulfilling an order. Information systems can help organizations achieve great efficiencies by

4.

5.

Key Terms
Customer 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 accounting information systems, 00 Horizontal industrial networks, 00 Human resources information systems, 00 Industrial networks, 00 Knowledge-level systems, 00 Knowledge work systems (KWS), 00 Management information systems (MIS), 00 Management-level systems, 00

Chapter 8
Manufacturing and production information systems, 00 Office systems, 00 Operational-level systems, 00 Sales and marketing information systems, 00 Strategic-level systems, 00 Supply chain, 00

TELECOMMUNICATIONS AND NETWORKS

29

Supply chain management, 00 Transaction processing systems (TPS), 00

Vertical industrial networks, 00 Word processing, 00

Review Questions
1. Identify and describe the four levels of the organiza2. 3. 4. 5. 6. 7. 8.
tional hierarchy. What types of information systems serve each level? List and briefly describe the major types of systems in organizations. What are the five types of TPS in business organizations? What functions do they perform? Give examples of each. Describe the functions performed by knowledge work and office systems and some typical applications of each. What are the characteristics of MIS? How do MIS differ from TPS? From DSS? What are the characteristics of DSS? How do they differ from those of ESS? Describe the relationship between TPS, office systems, KWS, MIS, DSS, and ESS. List and describe the information systems serving each of the major functional areas of a business.

9. What is a business process? Give two examples of 10. 11. 12. 13. 14. 15. 16.
processes for functional areas of the business and one example of a cross-functional process. What is customer relationship management? Why is it so important to businesses? How do information systems facilitate customer relationship management? What is supply chain management? What activities does it comprise? Why is it so important to businesses? How do information systems facilitate supply chain management? What are enterprise systems? How do they change the way an organization works? What are the benefits and challenges of implementing enterprise systems? What are industrial networks? Define and describe the two types of industrial networks. How can organizations benefit from participating in industrial networks?

Group Project
With a group of three or four other students, select a business using an industrial network for supply chain management. Use the Web, newspapers, journals, and computer or business magazines 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 to the class.

Tools for Interactive Learning

I Internet I CD-ROM

The Internet Connection for this chapter will take you to a series of Web sites used in business-to-business electronic commerce where you can complete an exercise to evaluate the use of the Web in supply chain management. You can also use the Interactive Study Guide to test your knowledge of the topics in this chapter and get instant feedback when you need more practice.
I Electronic Commerce Project

If you purchase and use the Multimedia Edition CDROM with this chapter, you can complete an interactive exercise to analyze an enterprise system implementation. You can also find an audio overview of the major themes of this chapter and bullet text summarizing the key points of the chapter.

At the Laudon Web site for Chapter 2 you will find an electronic commerce project where you can use a series of Web sites to help a company plan and budget for a sales conference.

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Part II

INFORMATION TECHNOLOGY INFRASTRUCTURE

Case Study

Owens-Cornings Enterprise System Struggle

to be of little use, explained Mark Orton, of the New England Supplier Institute in Boston. Owens-Cornings project began with its insulation group, and those on the project team understood this. They undertook a redesign process before implementing SAPs R/3. They set up cross-functional teams to identify the handoffs and touch points between the various functions. For example, the process that runs from the time the firm needs to buy something through the payment issuance to the supplier touches logistics and accounting. The teams also kept in close contact with suppliers who needed to know what Owens-Corning would require of them. As a result of the redesign, purchasing decisions were moved from the plants up to a regional level, enabling commodity specialists to use their expertise and the leverage of buying for a larger base to improve Owens-Cornings purchasing position. How did the first ERP project go? During a weekend in March 1997 a team of about 60 people transferred legacy data into the SAP system, and on Monday morning the company went live. When Owens-Corning first went live with SAP, overall productivity and customer service dropped sharply during the first six months. When you put in something like SAP, its not a mere systems change, said David Johns, Owens-Cornings director of global development. Youre changing the way people have done their jobs for the past 20 years. The first problems that surfaced were technical. According to Johns, application response time had increased from seconds before ERP to minutes under the new system. Other technical problems also emerged. For example, Johns said the system wasnt working the way it was supposed to. Johns believes the source of these problems was inadequate testing. The team further tuned the software, and during the next weeks response time reduced to an acceptable level, and slowly the software began operating smoothly. However, after Owens-Corning fixed some of the technical problems, it saw that this was much bigger than a technology problem. There were problems in the business, problems with the way peoples new roles had been defined, communication and change management issues, and business process issues. For example, the SAP system demanded that the entire corporation adopt a single product list and a single price list. Staff members initially resisted. Owens-Corning employees had not been properly trained and they were overwhelmed, resulting in a lot of errors. Johns explained that at Owens-Corning we underestimated the impact that swapping out all our old systems would have on our people. Users had indeed been properly trained on their own functions, but ERP systems are integrated, and the users did not understand the impact their work was having on other departments. ERP systems are complex and errors ripple throughout the system. When using the old systems, employees had time to correct data entry mistakes, and if they were not caught, they only affected the local function. However, now that they were using R/3, the databases are immediately updated. Thus, for example, the data flows instantly from sales to purchasing, production,

In the early 1990s Owens-Corning was a U.S. leader in the production 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 a fuller range of building materials, or becoming a global force. To increase its range of products Owens-Corning decided to acquire other companies. To become a global force, management realized the company would need to become a global enterprise that could coordinate the activities of all of its units in many different countries. Headquartered in Toledo, Ohio, Owens-Corning had been divided along product lines, such as fiberglass insulation, exterior siding, and roofing materials. Each unit operated as a distinct entity with its own set of information systems. (The company had more than 200 archaic, inflexible, and isolated systems.) Each plant had its own product lines, pricing schedules, and trucking carriers. Owens-Corning customers had to place separate telephone calls for each product orderedone each for siding, roofing, and insulation. The company operated like a collection of autonomous fiefdoms. Owens-Corning management believed that these problems could be solved by implementing an enterprise system. The company selected enterprise software from SAP AG to serve as the foundation for a broad company overhaul. The primary intent with SAP was to totally integrate our business systems on a global basis so everyone was operating on the same platform with the same information, said Dennis Sheets, sourcing manager for the insulation and roofing business. Sheets wanted to centralize purchasing. Prior to SAP, he said, we were buying widgets all over the world without any consolidated knowledge of how much we were buying and from whom. Now [using SAPs R/3 software] we can find out how many widgets were using, where theyre being purchased, and how much we paid for them, [allowing] us to consolidate the overall acquisition process. Now, he added, we can . . . make better business decisions and better buys. Sheets expected the companys material and supply inventories to drop by 25 percent as a result. However, the project to install SAPs enterprise system would ultimately cost Owens-Corning about $100 million and take several years, too expensive and time consuming to be justified only by the reasons given by Sheets. The company hoped that the new system would also enable it to digest acquisitions more easily. Owens-Corning wanted to acquire other companies to expand its product line so it could increase sales from $2.9 billion in 1992 to $5 billion within a few years. That meant that Owens-Corning would have to digest the archaic, inflexible systems from the companies it purchased. If Owens-Corning were to become a global enterprise, it would need a flexible system that would enable the company to access all of its data in an open and consolidated way. ERP experts point out that simply converting to ERP systems does not solve companies problems. Unless a company does a lot of thinking about what its supply chain strategy is and articulating what its business processes are, these tools are going

Chapter 8 and logistics systems. Johns offered another example. If youre at a warehouse, and you dont tell the system when a truck is leaving the dock, the truck can still leave, but the customer will never get an invoice for the goods. Accounting wont find out later because the transaction will never get to them. Such errors can be costly. To motivate users to work with more care, they needed to know how their errors would affect other workers and even company profitability. To address this problem the company quickly instituted a new training approach. Training now would include information on the larger system and its complexities, so users would understand the impact of their work. Under the new training regimen, all employees were denied access to the system until they had passed a test and so became certified. Those who failed the test had to return to training until they could pass it. About 20 percent of Owens-Corning employees never passed the test and had to change jobs. This job shifting was massive and time consuming, causing organizational disruption. Whereas the original project training was budgeted for 7 percent of overall costs, training eventually consumed 13 percent of the budget. Customers also suffered. Owens-Corning had been known for its excellent customer service, but the quality of that service declined sharply after the SAP system went live. Many customers were shocked, and some began turning to other suppliers. Owens-Corning began losing important customers. The company was forced to devote a great deal of personnel time rebuilding relations with its customers while simultaneously repairing both its organization and the software installation. ERP implementation problems of this type are common. According to Barry Wilderman of the Meta Group, ERP projects often result in a negative return on investment (ROI) for five or more years. Why? Because ERP systems are so complex. The company may not understand all that needs to be done in preparation. Moreover, these systems are expensive, and testing and training often get cut for budgetary reasons. Not only do employees need to become accustomed to new ways of doing business, but customers and suppliers may need to change their business processes as well. How successful was the whole project? Management believes it has been a success. Johns said, We made each mistake only once. Each deployment [in the rollout] got better. For instance, We do a lot more testing now before we go live, he said, to make sure that all the different pieces of the system work together. Customers now have a single point of contact for all orders. With Owens-Cornings old system, it didnt know what inventory was in stock. Employees would have to check around and get back to the customer. The firm can see what inventory is available, when it will be produced, and who is the lowest cost carrier. It can commit to the customer before hanging up the phone. The changes have been massive, with about 10,000 people involved with the reengineering effort.

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The ERP systems rollout was completed in 2000. During those years, Owens-Corning acquired and integrated 17 companies, successfully expanding their product offerings. Company sales have reached $5 billion annually. Because of the new system, Owens-Corning has been able to reduce its inventory significantly, while centralizing coordination of various functions and divisions. Lot size and machine allocations have become more efficient. The company can perform production planning and control globally because it has one uniform system with which to work. The integrated system lets the company leverage common carriers and take advantage of overlapping transportation routes. Managers can use the system to identify its biggest suppliers across the entire company and use that information to negotiate bulk discounts. A customer needs to call only one location to place an order. Factory production managers no longer have to concern themselves with taking customer orders, tracking logistics or after-sales service. Because centralization applied not only to U.S. operations but also to foreign activities, the corporation has been transformed into a truly globalized enterprise.
Sources: Rajagopal Palaniswamy and Tyler Frank, Enhancing Manufacturing Performance with ERP Systems, Information Systems Management, Summer 2000; SAP, Owens Corning Builds Its Internet Future with mySAP.com, September 14, 2000, www.sap.com; Christopher Koch, From Team Techie to Enterprise Leader, CIO Magazine, 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, Enterprise Resource Planning: Strategies Not Included, Purchasing, July 16, 1998; Janice Fioravante, ERP Orchestrates Change, Beyond Computing, October 1998; Bruce Caldwell and Tom Stein, Beyond ERP, Information Week, October 12, 1998; John E. Ettlie, The ERP Challenge, Automotive Manufacturing & Production, June 1998; and Joseph 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 information systems prior to installing its enterprise system. What management, organization, and technology factors were responsible for those problems? 2. What management, organization, and technology problems did Owens-Corning face in putting their enterprise system into effect? 3. How did implementing an enterprise system change the way Owens-Corning ran its business? 4. Was installing an enterprise system the right solution for Owens-Corning? Explain.