Computer Information in The EnterpriseCh02 PDF

2 Information
Systems in the
Enterprise
e s
tiv
After completing this chapter, you will be able to:
j e c 1. Analyze the role played by the six major types of information systems in
organizations and their relationship to each other.
ob 2.
3.
Describe the types of information systems supporting the major func-
tional 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.
4. Explain how enterprise systems and industrial networks create new effi-
ciencies for businesses.
5. Evaluate the benefits and limitations of enterprise systems and indus-
trial networks.
Alpina Mooves Faster

with Enterprise Systems
Alpina Productos Alimenticios is a privately owned dairy products company headquartered in
Bogota, Colombia. It produces more than 400,000 liters of milk daily and sells more than 200
products in Colombia, Central America, and North America, including a wide array of cheeses,
yogurts, milk-based beverages, fruit juices, and chilled desserts. Alpina has 21 sales agencies,
plants in Venezuela and Ecuador, and 3,400 employees, which process 72 million orders and
400,000 invoices per year. The diversity of its products, the delivery volume, and the size of
Alpina’s market creates enormous supply chain management tasks. Dairy products require con-
stant refrigeration and have an average shelf life of only 21 days. The company must deliver prod-
ucts directly to stores or distributors within 24 hours after an order has been placed.
The company wants to expand into new regional and export markets by maintaining an
exceptionally high level of product quality, service, and production efficiency. It must cope with
a regional economic downturn, consumer demand for lower prices, and new global and local
competitors. Although Alpina was doubling sales every two years, its information systems could
not support its pace of growth. Alpina had built a series of systems itself that were not integrated
2
and the systems operated in isolation from each other. The firm had no way of Alpina Mooves Faster with
communicating or consolidating company-wide information. Enterprise Systems
To increase productivity and competitiveness, Alpina decided to install enter- Management
prise resource planning software, embarking in 1995 on an ambitious project to
Challenges
2.1 Key System Applications in
create integrated systems for industrial processes, logistics management, adminis- the Organization
trative and financial functions, and commercial functions. Alpina started its enter- Different Kinds of Systems
prise project with pieces of software from a number of different vendors but even- Six Major Types of Systems
tually used Oracle Consumer Packaged Goods (CPG) software to integrate these Relationship of Systems to One
functions. By December 1998 Alpina had installed the Oracle CPG software in its Another
production plants and sales agencies. 2.2 Systems from a Functional
Perspective
Sales and Marketing Systems
Window on Management:
How Southstream Seafoods
Lands the Big Customers
Manufacturing and Production
Monitor market Short shelf life of products
changes
Systems
Rapid growth Finance and Accounting
Monitor service New global and local
and costs competitors
Systems
Human Resources Systems
2.3 Integrating Functions and
Business Processes:
Enterprise Systems and
Oracle Consumer
Packaged Goods Industrial Networks
software Business Processes and
Information Systems
Customer Relationship
Integrate production Increase service Management and Supply
logistics, sales, and Reduce costs Chain Management
financial data Window on Organizations:
Sales agencies Improve inventory Supply Chain Management
Plants planning
Distributors Consolidate delivery
Keeps Inventory Fresh at HP
loads Enterprise Systems
Calculate consumer Management Decision Problem
demand Analyzing Enterprise Process
Integration
Benefits and Challenges of
Enterprise Systems
The new system has enabled Alpina to reduce its inventory through better Extended Enterprises and
planning and stocking of raw materials and finished products. Alpina has reduced Industrial Networks
turnaround in raw materials from 35 days to 25 days and has reduced turnaround Application Software Exercise:
in finished products from 8 days to 5 days. Through better supply chain manage- Database Exercise
ment, Alpina is saving $2.7 million each year. Alpina has also reduced costs by Management Wrap-Up •
Summary • Key Terms • Review
using the information from its system to consolidate delivery loads and create more Questions • Group Project • Tools
efficient delivery routes. The system’s transportation planning capabilities have for Interactive Learning • Case
helped the company reduce the number of trucks at each of its major distribution Study
centers by 15 percent, saving $200,000 annually in transport costs.
With information about past order history, Alpina’s 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 prod-
ucts in the sub-Andes region, Central America, and the United States.
Sources: Michael Miley, “Fast Mooving,” Profit Magazine, February 2000 and www.alpina.com.co.
3
4 Part I ❙ ORGANIZATIONS, MANAGEMENT, AND THE NETWORKED ENTERPRISE
Businesses need different types of information systems to support decision making and
work activities for various organizational levels and functions.To respond to new competi-
tive pressures, many are implementing enterprise-wide systems that integrate information
and business processes from different functional areas. Alpina, for instance, needed infor-
mation systems that would allow it to move its products more efficiently through its sup-
ply chain. It found a solution in building systems that could link important 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
Management typically require a significant amount of organizational and management change and raise
Challenges 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 organi-
zational levels, functions, and business processes to freely exchange information can
be technologically difficult and costly. Managers need to determine what level of sys-
tem integration is required and how much it is worth in dollars.
2. Enlarging the scope of management thinking. Most managers are trained 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, depart-
ments, and even outside business firms. Investments in enterprise systems are huge,
they must be developed over long periods of time, and they must be guided by a
shared vision of the objectives.
I n this chapter we examine the role of the various types of information systems in organiza-
tions. First we look at ways of classifying information systems based on the organizational
level they support. Next we look at systems in terms of the organizational function they
serve. We then show how systems can support business processes, including processes span-
ning 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 dif-
ferent 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 market-
ing, manufacturing, finance, accounting, and human resources. Systems are built to serve
these different organizational interests (Anthony, 1965).
Different Kinds of Systems

Four main types of information systems serve different organizational levels: operational-
level systems, knowledge-level systems, management-level systems, and strategic-level sys-
operational-level systems tems. Operational-level systems support operational managers by keeping track of the ele-
Information systems that moni- mentary activities and transactions of the organization, such as sales, receipts, cash deposits,
tor the elementary activities and payroll, credit decisions, and the flow of materials in a factory. The principal purpose of sys-
transactions of the organization. tems 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. Williams’s pay-
Chapter 2 ❙ INFORMATION SYSTEMS IN THE ENTERPRISE 5
KIND OF GROUPS Figure 2-1 Types of informa-
INFORMATION SYSTEM SERVED tion systems. Organizations can
be divided into strategic, man-
Strategic Senior agement, knowledge, and opera-
Level Managers
tional levels and into five major
functional areas: sales and mar-
keting, manufacturing, finance,
Management Middle accounting, and human
Level Managers resources. Information systems
serve each of these levels and
functions.
Knowledge Knowledge and
Level Data Workers
Operational Operational
Level Managers
FUNCTIONAL Sales and Manufacturing Finance Accounting Human

AREAS Marketing 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 organization’s knowledge and data workers. The knowledge-level systems
purpose of knowledge-level systems is to help the business firm integrate new knowledge into Information systems that sup-
the business and to help the organization control the flow of paperwork. Knowledge-level port knowledge and data work-
systems, especially in the form of workstations and office systems, are the fastest-growing ers in an organization.
applications in business today.
Management-level systems serve the monitoring, controlling, decision-making, and management-level systems
administrative activities of middle managers. The principal question addressed by such sys- Information systems that sup-
tems is: Are things working well? Management-level systems typically provide periodic port the monitoring, controlling,
reports rather than instant information on operations. An example is a relocation control sys- decision-making, and administra-
tem that reports on the total moving, house-hunting, and home financing costs for employ- tive activities of middle man-
ees in all company divisions, noting wherever actual costs exceed budgets. agers.
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 strategic-level systems
long-term trends, both in the firm and in the external environment. Their principal concern Information systems that sup-
is matching changes in the external environment with existing organizational capability. port the long-range planning
What will employment levels be in five years? What are the long-term industry cost trends, activities of senior management.
and where does our firm fit in? What products should we be making in five years?
Information systems also serve the major business functions, such as sales and market-
ing, manufacturing, finance, accounting, and human resources. A typical organization 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 dis-
plays for the firm’s 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 sys-
tem to forecast sales trends over a five-year period serves the strategic level.
Figure 2-2 The six major TYPES OF SYSTEMS Strategic-Level Systems

types of information systems:
TPS, office systems, KWS, DSS, Executive Support 5-year 5-year 5-year Profit Personnel
Systems (ESS) sales trend operating budget planning planning
MIS, and ESS, showing the level of
forecasting plan forecasting
the organization and business
function that each supports.
Management-Level Systems
Management
Information Sales Inventory Annual Capital Relocation
Systems (MIS) management control budgeting investment analysis
analysis
Decision-Support Sales region Production Cost Pricing/profitability Contract cost
Systems (DSS) analysis scheduling analysis analysis analysis
Knowledge-Level Systems
Knowledge Work Engineering Graphics Managerial

Systems (KWS) workstations workstations workstations
Office Word Document Electronic

Systems processing imaging calendars
Operational-Level Systems
Machine control Securities Payroll Compensation

trading
Transaction Order tracking Plant scheduling Accounts Training &
Processing payable development
Systems
Order processing Material Cash Accounts Employee
(TPS)
movement control management receivable record keeping
Sales and Manufacturing Finance Accounting Human

Marketing Resources
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 organiza-
tional level. The organization has executive support systems (ESS) at the strategic level; man-
agement information systems (MIS) and decision-support systems (DSS) at the management
level; knowledge work systems (KWS) and office automation systems (OAS) at the knowl-
edge level; and transaction processing systems (TPS) at the operational level. Systems at each
level in turn are specialized to serve each of the major functional areas. Thus, the typical sys-
tems found in organizations are designed to assist workers or managers at each level and 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 orga-
nizational levels and groups other than their main constituencies. A secretary may find infor-
mation on an MIS, or a middle manager may need to extract data from a TPS.
Transaction Processing Systems

transaction processing Transaction processing systems (TPS) are the basic business systems that serve the opera-
systems (TPS) tional level of the organization. A transaction processing system is a computerized system
Computerized systems that per- that performs and records the daily routine transactions necessary to conduct the business.
form and record the daily routine Examples are sales order entry, hotel reservation systems, payroll, employee record keeping,
transactions necessary to con- and shipping.
duct the business; they serve the At the operational level, tasks, resources, and goals are predefined and highly structured.
organization’s operational level. The decision to grant credit to a customer, for instance, is made by a lower-level supervisor
Characteristics of Information Processing

TABLE 2-1 Systems
Type of System Information Inputs Processing Information Outputs Users
ESS Aggregate data; external, internal Graphics; simulations; Projections; responses Senior managers
interactive to queries
DSS Low-volume data or massive Interactive; simulations; Special reports; decision Professionals; staff managers
databases optimized for data analysis analyses; responses
analysis; analytic models and to queries
data analysis tools
MIS Summary transaction data; high- Routine reports; simple Summary and exception Middle managers
volume data; simple models models; low-level reports
analysis
KWS Design specifications; knowl- Modeling; simulations Models; graphics Professionals; technical staff
edge base
Office systems Documents; schedules Document management; Documents; schedules; Clerical workers
scheduling; mail
communication
TPS Transactions; events Sorting; listing; merging; Detailed reports; lists; Operations personnel;
updating summaries 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 Management
Payroll
master reports
system
file
Government documents
Data elements in Employee checks
payroll master file
Employee Number
Name
Address
Department On-line Payroll
Occupation queries:
Employee Employee Gross Federal State FICA Earnings
Pay rate earnings
number name pay tax tax (year to date)
Vacation time
Gross pay 46848 Stoker, K. 2000.00 400.00 50.00 140.00 6000.00
Earnings
(year to date)
WithholdingsFederal income tax
State tax
FICA
Other
Figure 2-3 A symbolic representation for a payroll TPS.

TYPE OF TPS SYSTEM

Sales/ Manufacturing/ Finance/ Human Other types
marketing production accounting resources (e.g., university)
systems systems systems systems
Major functions Sales management Scheduling Budgeting Personnel records Admissions

of system
Market research Purchasing General ledger Benefits Grade records
Promotion Shipping/receiving Billing Compensation Course records
Pricing Engineering Cost accounting Labor relations Alumni
New products Operations Training
Major Sales order Machine control General ledger Payroll Registration system
application information system systems
systems Market research Purchase order Accounts Employee records Student transcript
system systems receivable/payable system
Sales commission Quality control Funds management Benefit systems Curriculum class
system systems systems control systems
Career path Alumni benefactor
systems 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 subfunc-
tions (e.g., sales management) there is a major application system.
accounting, human resources, and other types of TPS that are unique to a particular indus-
try. The UPS package tracking system described in Chapter 1 is an example of a manufac-
turing TPS. UPS sells package delivery services; the system keeps track of all of its package
shipment transactions.
Transaction processing systems are often so central to a business that TPS failure for a
few hours can spell a firm’s 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 firm’s 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 company’s general ledger system, which is responsible
for maintaining records of the firm’s income and expenses and for producing reports such as
income statements and balance sheets.)
Knowledge Work and Office Systems

knowledge work systems Knowledge work systems (KWS) and office systems serve the information needs at the
(KWS) knowledge level of the organization. Knowledge work systems aid knowledge workers,
Information systems that aid whereas office automation systems primarily aid data workers (although they are also used
knowledge workers in the cre- extensively by knowledge workers).
ation and integration of new In general, knowledge workers are people who hold formal university degrees and who are
knowledge in the organization. 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
office systems systems (KWS), such as scientific or engineering design workstations, promote the creation
Computer systems, such as of new knowledge and ensure that new knowledge and technical expertise are properly inte-
word processing, electronic mail grated into the business. Data workers typically have less formal, advanced educational
systems, and scheduling systems, degrees and tend to process rather than create information. They consist primarily of secre-
that are designed to increase the taries, accountants, filing clerks, or managers whose jobs are principally to use, manipulate,
productivity of data workers in or disseminate information. Office systems are information technology applications
the office. designed to increase data workers’ productivity by supporting the coordinating and commu-
nicating activities of the typical office. Office systems Graphics designers use desktop
coordinate diverse information workers, geographic publishing software to design a
page for “La Opinion.” Desktop pub-
units, and functional areas: The systems communi- lishing software enables users to
cate with customers, suppliers, and other organiza- control all aspects of the design and
tions outside the firm and serve as a clearinghouse for layout process for professional-
information and knowledge flows. looking publications.
Typical office systems handle and manage docu-
ments (through word processing, desktop publishing,
document imaging, and digital filing), scheduling
(through electronic calendars), and communication
(through electronic mail, voice mail, or videoconfer-
encing). Word processing refers to the software and
hardware that creates, edits, formats, stores, and
prints documents (see Chapter 6). Word processing
systems represent the single most common applica-
tion 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 word processing
and distribution. We describe Web publishing in more detail in Chapter 12. Office automation technology
Document imaging systems are another widely used knowledge application. that facilitates the creation of
Document imaging systems convert documents and images into digital form so that they can documents through computer-
be stored and accessed by the computer. ized text editing, formatting,
storing, and printing.
Management Information Systems
In Chapter 1, we defined management information systems as the study of information sys- desktop publishing
tems in business and management. The term management information systems (MIS) also des- Technology that produces
ignates a specific category of information systems serving management-level functions. professional-quality documents
Management information systems (MIS) serve the management level of the organization, combining output from word
providing managers with reports and, in some cases, with on-line access to the organization’s processors with design, graphics,
current performance and historical records. Typically, they are oriented almost exclusively to and special layout features.
internal, not environmental or external, events. MIS primarily serve the functions of plan-
ning, controlling, and decision making at the management level. Generally, they depend on document imaging systems
underlying transaction processing systems for their data. Systems that convert documents
MIS summarize and report on the company’s basic operations. The basic transaction and images into digital form so
data from TPS are compressed and are usually presented in long reports that are produced on that they can be stored and
a regular schedule. Figure 2-5 shows how a typical MIS transforms transaction-level data accessed by the computer.
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. management information
MIS usually serve managers interested in weekly, monthly, and yearly results–not day- systems (MIS)
to-day activities. MIS generally provide answers to routine questions that have been specified Information systems at the man-
in advance and have a predefined procedure for answering them. For instance, MIS reports agement level of an organization
might list the total pounds of lettuce used this quarter by a fast-food chain or, as illustrated that serve the functions of plan-
in Figure 2-6, compare total annual sales figures for specific products to planned targets. ning, controlling, and decision
These systems are generally not flexible and have little analytical capability. Most MIS use making by providing routine
simple routines such as summaries and comparisons, as opposed to sophisticated mathemat- summary and exception reports.
ical models or statistical techniques.
decision-support systems
Decision-Support Systems (DSS)
Decision-support systems (DSS) also serve the management level of the organization. DSS Information systems at the orga-
help managers make decisions that are unique, rapidly changing, and not easily specified in nization’s management level that
advance. They address problems where the procedure for arriving at a solution may not be combine data and sophisticated
fully predefined in advance. Although DSS use internal information from TPS and MIS, analytical models or data analysis
they often bring in information from external sources, such as current stock prices or prod- tools to support semistructured
uct prices of competitors. and unstructured decision making.
Transaction Processing Systems Management Information Systems
Order
Order MIS FILES
processing
file
system
Sales
data
Materials
Production
resource Unit
master
planning product
file
system cost data
MIS Reports Managers
Product
change
data
General
Accounting
ledger
files Expense
system
data
Figure 2-5 How management information systems obtain their data from the organization’s 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 oth-
ers, and bids for shipping contracts in the open market to carry general cargo. A voyage-
estimating system calculates financial and technical voyage details. Financial 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 Consolidated Consumer Products Corporation

that might be produced by the Sales by Product and Sales Region: 2001
MIS in Figure 2-5.
PRODUCT PRODUCT SALES ACTUAL PLANNED ACTUAL VS.
CODE DESCRIPTION REGION SALES PLANNED
4469 Carpet Cleaner Northeast 4,066,700 4,800,000 0.85

South 3,778,112 3,750,000 1.01
Midwest 4,867,001 4,600,000 1.06
West 4,003,440 4,400,000 0.91
TOTAL 16,715,253 17,550,000 0.95
5674 Room Freshener Northeast 3,676,700 3,900,000 0.94

South 5,608,112 4,700,000 1.19
Midwest 4,711,001 4,200,000 1.12
West 4,563,440 4,900,000 0.93
TOTAL 18,559,253 17,700,000 1.05

Ship file (e.g.,

Figure 2-7 Voyage estimating
speed capacity) decision-support system. This
DSS operates on a powerful PC.
Port distance It is used daily by managers who
PC restrictions file must develop bids on shipping
contracts.
Fuel consumption
Analytical
cost file
models
Graphics database
Ship charter hire
history cost file
Reports
Port
expense file
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 executive support systems
strategic level of the organization. They address nonroutine decisions requiring judgment, (ESS)
evaluation, and insight because there is no agreed-on procedure for arriving at a solution. Information systems at the orga-
ESS create a generalized computing and communications environment rather than provid- nization’s strategic level designed
ing any fixed application or specific capability. ESS are designed to incorporate data about to address unstructured decision
external events such as new tax laws or competitors, but they also draw summarized infor- making through advanced graph-
mation from internal MIS and DSS. They filter, compress, and track critical data, emphasiz- ics and communications.
ing 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 executive’s 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 busi-
ness swings? Which units should we sell to raise cash for acquisitions (Rockart and Treacy,
1982)? Figure 2-8 illustrates a model of an ESS. It consists of workstations with menus,
interactive graphics, and communications capabilities that can access historical and compet-
itive data from internal corporate systems and external databases such as Dow 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 appli-
cations of DSS and ESS can be found in Chapter 13.
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 pri-
marily 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 func-
tional areas. For example, an order captured by a sales system may be transmitted to a manu-
facturing system as a transaction for producing or delivering the product specified in the order.
It is definitely advantageous to have some measure of integration among these systems so
that information can flow easily between different parts of the organization. But integration
Figure 2-8 Model of a typical ESS

executive support system. This workstation
system pools data from diverse
internal and external sources and
makes them available to execu- • Menus
tives in an easy-to-use form. • Graphics
• Communications
• Local processing
ESS ESS
workstation Internal data External data
workstation
• TPS/MIS data • Dow Jones

• Financial data • Internet News
• Menus • Menus
• Office systems Feeds
• Graphics • Graphics
• Modeling/ • Standard &
• Communications • Communications
analysis Poor’s
• Local processing • Local processing
costs money, and integrating many different systems is extremely time consuming and com-
plex. Each organization must weigh its needs for integrating systems against the 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 organization’s product or ser-
vice. Marketing is concerned with identifying the customers for the firm’s products or ser-
vices, determining what they need or want, planning and developing products and services to
Figure 2-9 Interrelationships

among systems. The various
Executive
types of systems in the organiza- support
tion have interdependencies. TPS systems
are a major producer of informa- (ESS)
tion that is required by the other
systems which, in turn, produce
information for other systems. Management Management
These different types of systems systems systems
are only loosely coupled in most (MIS) (DSS)
organizations.
Knowledge
systems Transaction
(KWS and processing
Office systems
Systems) (TPS)
Examples of Sales and

TABLE 2-2 Marketing Information Systems
System Description Organizational Level
Order processing Enter, process, and track orders Operational
Market analysis Identify customers and markets using Knowledge
data on demographics, markets,
consumer behavior, and trends
Pricing analysis Determine prices for products Management
and services
Sales trend forecasting Prepare 5-year sales forecasts Strategic
meet their needs, and advertising and promoting these products and services. Sales is con-
cerned with contacting customers, selling the products and services, taking orders, and fol-
lowing up on sales. Sales and marketing information systems support these activities. sales and marketing
Table 2-2 shows that information systems are used in sales and marketing in a number information systems
of ways. At the strategic level, sales and marketing systems monitor trends affecting new Systems that help the firm iden-
products and sales opportunities, support planning for new products and services, and mon- tify customers for the firm’s
itor the performance of competitors. At the management level, sales and marketing systems products or services, develop
support market research, advertising and promotional campaigns, and pricing decisions. products and services to meet
They analyze sales performance and the performance of the sales staff. Knowledge-level sales customer’s needs, promote
and marketing systems support marketing analysis workstations. At the operational level, products and services, sell the
sales and marketing systems assist in locating and contacting prospective customers, tracking products and services, and pro-
sales, processing orders, and providing customer service support. vide ongoing customer support.
Review Figure 2-6. It shows the output of a typical sales information system at the man-
agement level. The system consolidates data about each item sold (such as the product code,
product description, and price) for further management analysis. Company managers exam-
ine these sales data to monitor sales activity and buying trends. The Window on
Management describes some typical sales and marketing systems that might be found in a
small business.
Manufacturing and Production Systems

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

TABLE 2-3 Production Information Systems
Machine control Control the actions of machines Operational
and equipment
Computer-aided design (CAD) Design new products using Knowledge
the computer
Production planning Decide when and how many Management
products should be produced
Facilities location Decide where to locate new Strategic
production facilities
How Southstream Seafoods

Lands the Big Customers
According to Mark Soderstrom, The average Southstream sales representative handles
president of Southstream Seafoods, between 75 and 125 active accounts.When making each call, the
anyone can sell fish. He believes salesperson enters sales information, including quantity, price,
that his company does it better and shipping information into the system. The salesperson can
than anyone else, thanks to power- also use the system to set callback dates and reminder alarms.
ful customer contact and sales The system records the duration of each call and makes all of
information systems. Southstream Seafoods is based in Warwick, the information available to a manager or Southstream’s ship-
Rhode Island, and is an importer and wholesaler of frozen ping department. If the shipping department gets a call indicat-
seafood that sells primarily to food-service distributors and ing that a customer’s fish hasn’t arrived on time, the shipping
restaurant chains. The company has been in business for more department can enter the customer’s name and immediately
than 10 years and has 20 employees. see what that customer has just purchased and when delivery is
To stay ahead of competitors in a tough business, expected.
Southstream installed a customer relationship management Soderstrom can generate reports from the system to ana-
(CRM) system with software from Sage Inc. The system keeps lyze the efficiency of his sales staff and find ways of better ser-
track of Southstream’s customers, phone calls, and sales trans- vicing customer accounts. The system can show him exactly
actions and helps management measure the efficiency and pro- what each salesperson has done, showing all of his or her phone
ductivity of the sales force. calls, sales, and the results of phone calls. Using this information,
Selling fish is challenging for both wholesalers and retailers Soderstrom might find that one sales representative is spending
because fish prices constantly go up and down, with factors too much time on a customer with a historically low volume of
such as weather or availability affecting the business within a purchases and recommend that the salesperson allocate more
few days. Soderstrom turned this problem into an opportunity time to a customer with more purchasing potential. Using only
to serve his customers better than competitors by broadcasting 10 sales representatives and 2 people in the shipping depart-
information about changing market prices to customers so they ment, Southstream sells and ships about one million pounds of
can make better business decisions. Southstream configured the fish each week.Without the system, the company would need a
contact management portion of the system so that with a click staff twice as big to do the job.
of a button, sales staff could send out information only to spec-
ified customers. The customer records in the system include To Think About: What kinds of systems for sales and mar-
check boxes indicating which types of fish they purchase. The keting are described here? How do these systems support the
check boxes enable Southstream to locate only those cus- sales function? What organizational levels are supported by
tomers, for instance, who purchase Alaskan cod. Southstream these systems?
management
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.
Sources: Angela R. Garber, “Hook, Line, and Sinker,” Small Business Computing,
February 2000; and www.southstream.com.
New caption to come

Shipment and order data Figure 2-10 Overview of an
inventory system. This system
provides information about the
Inventory
Management number of items available in
Control
reports inventory to support manufac-
System
turing and production activities.
Inventory
master Inventory Status Report
file Report Date: 1/14/ 2001
Data elements in Item Description Units on Units on
inventory master file: Code Hand Order
Item code
6361 Fan belt 10,211 0
Description
On-line 4466 Power cord 55,710 88,660
Units on hand
queries 9313 Condenser 663 10,200
Units on order
8808 Paint sprayer 11,242 0
Reorder point
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, illus-
trated 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 for-
mula for calculating the least expensive quantity to reorder called the economic order quantity.
The system produces reports such as the number of each item available in inventory, 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 firm’s 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 (find-
ing 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 firm’s finan-
cial records–receipts, disbursements, depreciation, payroll–to account for the flow of funds
in a firm. Finance and accounting share related problems–how to keep track of a firm’s finan-
cial assets and fund flows. They provide answers to questions such as these: What is the cur-
rent inventory of financial assets? What records exist for disbursements, receipts, payroll, and
other fund flows?
Table 2-4 shows some of the typical finance and accounting information systems finance and accounting
found in large organizations. Strategic-level systems for the finance and accounting function information systems
establish long-term investment goals for the firm and provide long-range forecasts of the Systems keep track of the firm’s
firm’s financial performance. At the management level, information systems help managers financial assets and fund flows.
oversee and control the firm’s 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 ven-
dors, securities reports, and receipts. Review Figure 2-3, which illustrates a payroll system, a
typical accounting TPS found in all businesses with employees.
Examples of Finance and

TABLE 2-4 Accounting Information Systems
Accounts receivable Track money owed the firm Operational
Portfolio analysis Design the firm’s portfolio of investments Knowledge
Budgeting Prepare short-term budgets Management
Profit planning Plan long-term profits Strategic
Human Resources Systems

The human resources function is responsible for attracting, developing, and maintaining the
human resources firm’s workforce. Human resources information systems support activities such as identify-
information systems ing potential employees, maintaining complete records on existing employees, and creating
Systems that maintain employee programs to develop employees’ talents and skills.
records; track employee skills, Strategic-level human resources systems identify the support requirements (skills, educa-
job performance, and training; tional level, types of positions, number of positions, and cost) for meeting the firm’s long-
and support planning for term business plans. At the management level, human resources systems help managers mon-
employee compensation and itor and analyze the recruitment, allocation, and compensation of employees. Knowledge
career development. systems for human resources support analysis activities related to job design, training, and
the modeling of employee career paths and reporting relationships. Human resources opera-
tional systems track the recruitment and placement of the firm’s employees (see Table 2-5).
Figure 2-11 illustrates a typical human resources TPS for employee record keeping. It
maintains basic employee data, such as the employee’s name, age, sex, marital status, address,
educational background, salary, job title, date of hire, and date of termination. The 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
Examples of Human Resources

TABLE 2-5 Information Systems
Training and development Track employee training, skills, Operational
and performance appraisals
Career pathing Design career paths for employees Knowledge
Compensation analysis Monitor the range and distribution Management
of employee wages, salaries, and benefits
Human resources planning Plan the long-term labor force needs Strategic
of the organization
Employee data
(various departments) To payroll
Employee Human
Management
master Resources
reports
file System
Data elements in
employee master file:
Termination Report
Employee: Number
Name
Address On-line Date Name Number Reason
Department queries
Age 11/ 12/2000 John Hansen 29433 Position
Marital status eliminated
Sex 12/1/2000 Patricia Carlyle 14327 Retired
Salary 1/ 12/2001 Ellen Quimby 21224 Left
Educational background company
Job title
Date of hire
Date of termination
Termination reason
Figure 2-11 An employee record keeping system.This system maintains data on the firm’s employ-
ees to support the human resources function.
hand, business processes are concrete workflows of material, information, and

knowledge–sets 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 differ-
ent 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 Examples of Business Processes

Functional Area Business Process
Manufacturing and production Assembling the product
Checking for quality
Producing bills of materials
Sales and marketing Identifying customers
Making customers aware of the product
Selling the product
Finance and accounting Paying creditors
Creating financial statements
Managing cash accounts
Human resources Hiring employees
Evaluating employees’ job performance
Enrolling employees in benefits plans
Figure 2-12 The order fulfill-

ment process. Generating and
fulfilling an order is a multistep Generate Submit
Sales
order order
process involving activities per-
formed by the sales, manufactur-
ing and production, and account-
ing functions.
Accounting Check Approve Generate
credit credit invoice
Manufacturing Assemble Ship

and product product
production
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 sys-
tems 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 vulner-
able 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 comput-
ers 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 cus-
tomers and suppliers. Consumers can now use the Web to comparison shop and switch com-
panies on a moment’s notice. To survive, businesses need to find ways of providing 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 com-
puter system is an important activ-
ity in the tax collection process.
Business processes coordinate work,
information, and knowledge.
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 customer relationship
that a firm deals with its existing and potential new customers. CRM is both a business and management
technology discipline that uses information systems to coordinate all of the business Business and technology disci-
processes surrounding the firm’s interactions with its customers in sales, marketing, and ser- pline to coordinate all of the
vice. The ideal CRM system provides end-to-end customer care from receipt of an order business processes for dealing
acquisition through product delivery. with customers.
In the past, a firm’s processes for sales, service, and marketing were highly compartmen-
talized and did not share much essential customer information. Some information on a spe-
cific customer might be stored and organized in terms of that person’s account with the com-
pany. Other pieces of information about the same customer might be organized by 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 inte-
grating the firm’s customer-related processes and consolidating customer information from
multiple communication channels–the 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 ana-
lytical 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 80–90% of a firm’s profits are generated by
10–20% 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 supply chain management
their offerings more precisely to customer preferences, and provide ongoing value to retain Integration of supplier, distribu-
profitable customers. Chapters 3, 4, 9, and 13 provide additional detail on customer rela- tor, and customer logistics
tionship management applications and technologies. requirements into one cohesive
process.
Supply Chain Management
To deliver the product more rapidly to the customer at lower cost, firms are also trying to supply chain
streamline their business processes for supply chain management. Supply chain manage- Network of facilities for procur-
ment is the close linkage of activities involved in buying, making, and moving a product. It ing materials, transforming raw
integrates supplier, distributor, and customer logistics requirements into one cohesive process materials into finished products,
to reduce time, redundant effort, and inventory costs (see Figure 2-14). The supply chain is and distributing finished prod-
a network of facilities for procuring materials, transforming raw materials into intermediate ucts to customers.
Figure 2-13 Customer rela-

tionship management combines
business processes using tech-
Sales
Telephone sales nology to look at customers
Web sales from a multifaceted perspective.
Field sales CRM uses a set of integrated
Retail sales applications to address all
aspects of the customer relation-
Marketing • Unified view of customers
ship, including customer service,
Campaign data • Consistent message to customers
• End-to-end customer care sales, and marketing.
Content
Data analysis • Long-term customer relationships
• Identification of best customers
Customer Service
Call center data
Web self service data
Field service data
Wireless data
Figure 2-14 Supply chain , i n v e n t o r y l e v e l,

delivery schedule, payment
terms
management. The major entities C a p a c it y
in the supply chain and the flow
of information coordinate the Retail
Supplier Manufacturer Distributor Customer
activities involved in buying, mak- Outlet
ing, and moving a product.
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 manu-
facturing 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
company’s logistics and production systems until they reach customers. To manage the sup-
ply chain, a company tries to eliminate redundant steps, delays, and the amount of resources
tied up along the way.
Companies that skillfully manage their supply chains get the right amount of their prod-
ucts from their source to their point of consumption with the least amount of time and the
lowest cost. Information systems make supply chain management more efficient by helping
companies coordinate, schedule, and control procurement, production, inventory manage-
ment, 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 sup-
ply chain management software. The Window on Organizations shows how Hewlett-
Packard 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 comprehen-
sive, overall picture of the organization’s 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 inven-
tory; customers could not track their orders; and manufacturing could not communicate eas-
How Information Systems Can

TABLE 2-7 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
Supply Chain Management Keeps

Inventory Fresh at HP
Why is the PC business like the the arrival of orders.To keep inventory low, HP makes the supply
fresh fruit business? Jean-Luc chain data available to parts suppliers and to production con-
Meyer, a PC group marketing man- tractors (many HP PCs are produced by outside manufacturers).
ager at Hewlett-Packard (HP), For computers manufactured by contract producers, HP
claims “Every day fresh fruit thus maintains virtually no inventory. Prior to supply chain man-
becomes less valuable because it agement software, Synnex maintained four weeks of parts
gets a little rotten. In the PC business, every day prices go inventory. With the new automated system, their parts inven-
down.” New computer technology develops so quickly that tory has been cut to two weeks.The supply chain management
computers sitting on the shelf become technically outdated.To software even monitors the parts inventory and automatically
help the company sell its computers at full price, HP created a orders more parts when inventory gets low.
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 HP’s pro-
duction and delivery computer systems. Some of these systems
are linked to the systems of HP’s 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 cus-
tomer 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 produc-
tion. That computer prints out an instruction ticket for the
assembly technician while simultaneously forwarding a parts
order to Synnex’s 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 tech-
nician’s workstation. One worker assembles the computer and HP is using supply chain management software in other parts of its busi-
ness, and can now efficiently manage its supply chain for plastic parts.
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 To Think About: How has HP’s supply chain management
information in this process is communicated through the system changed the way the company runs its business? It has
Internet. been said that building a world-class supply chain management
HP’s supply chain management system enables customers to system is neither cheap nor easy.Why?
organizations
receive its new computers very rapidly while HP reduces pro-
duction errors.The system also reduces inventory–parts, goods
in process, and completed products. Knowing exactly what com-
puters to build helps HP reduce its pipeline of products awaiting
Sources: Rory J. O’Connor, “Keeping Inventory Fresh,” Upside, June 2000; and
eCompany Staff, “Supply-Chain Software: Hewlett Packard,” eCompany,
November 2000.
ily with finance to plan for new production. This fragmentation of data in hundreds of sepa-
rate systems could thus have a negative impact on organizational efficiency and business per-
formance. Figure 2-15 illustrates the traditional arrangement of information systems.
Systems for customer relationship management and supply chain management are a step
forward in solving this problem. Many organizations are now building enterprise systems, enterprise systems
also known as enterprise resource planning (ERP) systems, to provide firmwide integration. Firmwide information systems
Enterprise software models and automates many business processes, such as filling an order that integrate key business
or scheduling a shipment, with the goal of integrating information across the company and processes so that information
eliminating complex, expensive links between computer systems in different areas of the can flow freely between different
business. Information that was previously fragmented in different systems can seamlessly parts of the firm.
flow throughout the firm so that it can be shared by business processes in manufacturing,
Business Functions
Marketing
Human
Organizational Boundaries
Manufacturing Accounting Finance and
Organizational Boundaries
Resources
Sales
Vendors Customers
Business Business Business Business Business
Vendors Customers
processes processes processes processes processes
Vendors Customers
Marketing
Human
Manufacturing Accounting Finance and
Resources
Systems Systems Systems Sales
Systems
Systems
Information 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 organization’s 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 coor-
dinating 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 what-
ever 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
salesperson’s commission to the payroll department. The system also automatically recalcu-
lates the company’s 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 sys-

tems. Enterprise systems can Manufacturing Accounting
integrate the key business Enterprise System
Organizational boundaries
Organizational boundaries
processes of an entire firm into a

single software system that Business process
allows information to flow seam- Business process
Vendors Business process Customers
lessly throughout the organiza-
Enterprise-wide business
tion. These systems may include processes
transactions with customers and
vendors.
Human
Finance
Resources
Sales and
Marketing
Business Processes Supported

TABLE 2-8 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 man-
agement and forecasting, product-cost accounting, cost-center accounting, asset accounting,
general ledger, and financial reporting
Sales and marketing processes, including order processing, pricing, shipping, billing, sales man-
agement, and sales planning
Human resource processes, including personnel administration, time accounting, payroll, person-
nel planning and development, benefits accounting, applicant tracking, and travel 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 report-
ing and decision making. Information supplied by an enterprise system is structured around
Management Decision Problem

ANALYZING ENTERPRISE PROCESS INTEGRATION duction targets should be for the next month. These estimates are usu-
Management at your agricultural chemicals corporation has been dis- ally different. The analysts then get together at a high-level planning
satisfied with production planning. Production plans are created using meeting, to revise the production and sales targets to take into account
best guesses of demand for each product which are based on how senior management’s goals for market share, revenues, and profits. The
much of each product has been ordered in the past. If a customer outcome of the meeting is a finalized production master schedule.
places an unexpected order or requests a change to an existing order The entire production planning process takes 17 business days to
after it has been placed, there is no way to adjust the production plans. complete. Nine of these days are required to enter and validate the
The company may have to tell customers it can’t fill their orders or data. The remaining days are spent developing and reconciling the
may run up extra costs maintaining additional inventory to prevent production and sales targets and finalizing the production master
stock-outs. schedule.
At the end of each month, orders are totaled and manually keyed
1. Draw a diagram of the production planning process.
into the company’s production planning system. Data from the past
2. Analyze the problems this process creates for the company.
month’s production and inventory systems are manually entered into
3. How could an enterprise system solve these problems? Diagram
the firm’s order management system. Analysts from the sales depart-
what this process might look like if the company implemented
ment and from the production department analyze the data from their
enterprise software.
respective systems to determine what the sales targets and what the pro-
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 prof-
itable. No longer would general managers be stuck without any hard data on firm perfor-
mance, or data that applies only to their own immediate department. An enterprise system
could supply management with better data about business processes and overall organiza-
tional performance.
Technology: Unified Platform Enterprise systems promise to provide firms with a single,
unified, and all-encompassing information system technology platform and environment.
Enterprise systems promise to create a single, integrated repository that gathers data on 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 organi-
zation. 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 pro-
cure 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 inven-
tory. 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 deci-
sion 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, up-
front, 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 brit-
tle and hard to change as the old systems they replaced–a new kind of “digital concrete” that
could, over time, bind firms to outdated business processes and systems.
Horizontal industrial network Figure 2-17 Industrial net-
works. Industrial networks link
Firms the enterprise systems of firms
in a single Firm Firm Firm Firm in an entire industry into an
industry 1 2 3 4
industry-wide system. Horizontal
Firm value chains and enterprise systems
industrial networks link firms in
the same industry, including com-
Industry
value petitors, whereas vertical indus-
Industrial networks
chain trial networks link a firm with
suppliers in the same industry.
Firms in
complementary Firm Supplier Supplier Supplier
businesses 1 1 2 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 central-
ized 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 industrial networks
the enterprise systems of firms in an entire industry (see Figure 2-17). For instance, Procter Networks linking systems of
& Gamble (P&G), the world’s largest consumer goods company, developed an integrated multiple firms in an industry.
industry-wide system that coordinated the grocery store point-of-sale systems with grocery Also called extended enter-
store warehouses, shippers, its own manufacturing facilities, and its suppliers of raw materi- prises.
als. 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 pur-
chased 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 inven-
tory 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 hav-
ing retailers and suppliers integrate their systems with P&G’s 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 vertical industrial networks
operations of the firm with its suppliers and can be used for supply chain management. Networks for integrating the
Horizontal industrial networks link firms across an entire industry. An example would be operations of a firm with its
the OASIS network of utility industry firms, which uses the Web to help members sell sur- suppliers.
plus electrical power. A few industry networks coordinate the activities of competitors. For
example, Yamaha Europe, Honda, Aprilia, and Piaggio, competing manufacturers of motor horizontal industrial
scooters, are now working together to share suppliers. They hope to ultimately reduce the networks
number of suppliers, which will boost the production efficiency in the remaining group, and Networks for linking firms
they all expect to realize savings from their cooperation (Abramson, 1999). Table 2-9 pro- across an entire industry.
vides examples of both types of industrial networks. Most industrial networks today are ver-
tical and do not link together competitors in the same industry.
TABLE 2-9 Examples of Industrial Networks

Type of Industrial
Organization(s) Network Description
Coca-Cola Vertical Installed an enterprise system using SAP software and extended the system to its
bottling partners. Coke and its partners can pool resources, share sales informa-
tion, 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.
OASIS Horizontal 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.
Ford, General Motors, Horizontal Shared Internet purchasing system enables them to obtain parts online from
and DaimlerChrysler suppliers, reducing costs and saving time.
Safeway UK Vertical Has electronic links to suppliers where it can share information about forecasts,
shelf space, and inventory, so they can track demand for their products, adjust
production, and adjust the timing and size of deliveries. The suppliers can down-
load Safeway’s information into their enterprise systems or production planning
systems. Suppliers send Safeway information about product availability, produc-
tion capacity, and inventory levels.
Many of these industrial networks are currently dedicated to supply chain management.
Enterprise systems have primarily focused on helping companies manage their internal man-
ufacturing, financial, and human resource processes and were not originally designed to sup-
port supply chain management processes involving entities outside the firm. However, enter-
prise software vendors are starting to enhance their products so that firms can link 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 Monroe’s
Midnight Inn
Monroe’s 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 man-
sion and establish a bed and breakfast. The bed and breakfast has 14 rooms: 5 overlook a pri-
vate lake, 5 overlook the woods, and the remaining 4 rooms overlook the gardens. Room
rates are based on room choice, length of stay, and number of guests per room. Guests stay-
ing for 7 days or more are given a 15 percent discount on their daily room rates. A 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 establish-
ment 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 breakfast’s grow-
ing popularity is because, in part, of its location, the activities available to its visitors, and its
affordability.
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 imme-
diate access to management information about the bed and breakfast’s 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 trans-
actions to the database. You may make any assumptions you believe are necessary; however,
please document these assumptions in writing and provide them to your professor.
In addition to the data already provided, what additional data should be captured and
stored in the database? As mentioned previously, James requires managerial information
about the bed and breakfast’s operations. What reports would provide the necessary infor-
mation? Identify at least two other reports that would be beneficial for James. Prepare 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 orga-
nizational 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 orga-
nizational 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 informa-
tion 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 deci-
sion. 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 professional workers. They consist of office systems for
systems in organizations and their relationship to each other. increasing data workers’ productivity and knowledge work
There are six major types of information systems in con- systems for enhancing knowledge workers’ productivity.
temporary organizations that are designed for different pur- Management-level systems (MIS and DSS) provide the
poses and different audiences. Operational-level systems are management control level with reports and access to the
transaction processing systems (TPS), such as payroll or organization’s current performance and historical records.
order processing, that track the flow of the daily routine Most MIS reports condense information from TPS and are
transactions that are necessary to conduct business. not highly analytical. Decision-support systems (DSS) sup-
Knowledge-level systems support clerical, managerial, and port management decisions when these decisions are
28 Part II ❙ INFORMATION TECHNOLOGY INFRASTRUCTURE
unique, rapidly changing, and not specified easily in automating parts of these processes or by helping organiza-
advance. They have more advanced analytical models and tions rethink and streamline these processes, especially
data analysis capabilities than MIS and often draw on infor- those for customer relationship management and supply
mation from external as well as internal sources. chain management. Customer relationship management
Executive support systems (ESS) support the strategic level uses information systems to coordinate all of the business
by providing a generalized computing and communications processes surrounding a firm’s interactions with its cus-
environment to assist senior management’s decision mak- tomers. Supply chain management is the close linkage of
ing. They have limited analytical capabilities but can draw activities involved in buying, making, and moving a prod-
on sophisticated graphics software and many sources of uct. Information systems make supply chain management
internal and external information. more efficient by helping companies coordinate, schedule,
The various types of systems in the organization exchange and control procurement, production, inventory manage-
data with one another. TPS are a major source of data for ment, and delivery of products and services to customers.
other systems, especially MIS and DSS. ESS primarily 4. Explain how enterprise systems and industrial networks create
receive data from lower-level systems. The different systems new efficiencies for businesses. Enterprise systems integrate
in an organization have traditionally been loosely inte- the key business processes of a firm into a single software
grated. system so that information can flow throughout the organi-
2. Describe the types of information systems supporting the major zation, improving coordination, efficiency, and decision
functional areas of the business. At each level of the organiza- making. Industrial networks link other organizations in the
tion there are information systems supporting the major same industry in a single industry-wide system. Vertical
functional areas of the business. Sales and marketing sys- industrial networks consist of an organization and its sup-
tems help the firm identify customers for the firm’s prod- pliers, whereas horizontal industrial networks consist of
ucts or services, develop products and services to meet cus- competitors in the same industry.
tomer’s needs, promote products and services, sell the 5. Evaluate the benefits and limitations of enterprise systems and
products and services, and provide ongoing customer sup- industrial networks. Enterprise systems and industrial net-
port. Manufacturing and production systems deal with the works promise efficiencies from better coordination of both
planning, development, and production of products and internal and external business processes. Enterprise systems
services, and control the flow of production. Finance and can help create a uniform organization in which everyone
accounting systems keep track of the firm’s financial assets uses similar processes and information, and measures their
and fund flows. Human resources systems maintain work in terms of organization-wide performance standards.
employee records, track employee skills, job performance, An enterprise system could supply management with better
and training; and support planning for employee compen- data about business processes and overall organizational
sation and career development. performance. Enterprise systems feature a single informa-
3. Assess the relationship between organizations, information sys- tion technology platform where data definitions are stan-
tems and business processes, including the processes for customer dardized across the organization. The coordination of sales,
relationship management and supply chain management. production, finance, and logistics processes provided by
Business processes refer to the manner in which work is enterprise systems helps organizations respond rapidly to
organized, coordinated, and focused to produce a valuable customer demands.
product or service. Business processes are concrete work- The reality is that firm- and industry-wide systems are very
flows of material, information, and knowledge, and they difficult to implement successfully. They require extensive
also represent unique ways in which organizations coordi- organizational change, use complicated technologies, and
nate work, information, and knowledge, and the ways in require large up-front costs for long-term benefits that are
which management chooses to coordinate work. Although difficult to quantify. Once implemented, enterprise systems
each of the major business functions has its own set of busi- are very difficult to change. Management vision and fore-
ness processes, many other business processes are cross- sight is required to take a firm- and industry-wide view of
functional, such as fulfilling an order. Information systems problems and to find solutions that realize strategic value
can help organizations achieve great efficiencies by from the investment.
Key Terms
Customer relationship Enterprise systems, 00 Horizontal industrial Knowledge work systems
management, 00 Executive support systems networks, 00 (KWS), 00
Decision-support systems (ESS), 00 Human resources information Management information
(DSS), 00 Finance and accounting systems, 00 systems (MIS), 00
Desktop publishing, 00 information systems, 00 Industrial networks, 00 Management-level systems, 00
Document imaging systems, 00 Knowledge-level systems, 00
Chapter 8 ❙ TELECOMMUNICATIONS AND NETWORKS 29
Manufacturing and production Sales and marketing Supply chain management, 00 Vertical industrial networks, 00
information systems, 00 information systems, 00 Transaction processing systems Word processing, 00
Office systems, 00 Strategic-level systems, 00 (TPS), 00
Operational-level systems, 00 Supply chain, 00
Review Questions
1. Identify and describe the four levels of the organiza- 9. What is a business process? Give two examples of
tional hierarchy. What types of information systems processes for functional areas of the business and one
serve each level? example of a cross-functional process.
2. List and briefly describe the major types of systems in 10. What is customer relationship management? Why is it
organizations. so important to businesses? How do information sys-
3. What are the five types of TPS in business organiza- tems facilitate customer relationship management?
tions? What functions do they perform? Give exam- 11. What is supply chain management? What activities
ples of each. does it comprise? Why is it so important to businesses?
4. Describe the functions performed by knowledge work 12. How do information systems facilitate supply chain
and office systems and some typical applications of management?
each. 13. What are enterprise systems? How do they change the
5. What are the characteristics of MIS? How do MIS dif- way an organization works?
fer from TPS? From DSS? 14. What are the benefits and challenges of implementing
6. What are the characteristics of DSS? How do they dif- enterprise systems?
fer from those of ESS? 15. What are industrial networks? Define and describe the
7. Describe the relationship between TPS, office systems, two types of industrial networks.
KWS, MIS, DSS, and ESS. 16. How can organizations benefit from participating in
8. List and describe the information systems serving each industrial networks?
of the major functional areas of a business.
Group Project
With a group of three or four other students, select a business information technology to provide links to other organizations.
using an industrial network for supply chain management. Use If possible, use presentation software to present your findings to
the Web, newspapers, journals, and computer or business maga- the class.
zines to find out more about that organization and its use of
Tools for Interactive Learning

■ Internet ■ CD-ROM
The Internet Connection for this chapter will take you to a series If you purchase and use the Multimedia Edition CD-
of Web sites used in business-to-business electronic commerce ROM with this chapter, you can complete an interactive exercise
where you can complete an exercise to evaluate the use of the Web to analyze an enterprise system implementation. You can also
in supply chain management. You can also use the Interactive find an audio overview of the major themes of this chapter and
Study Guide to test your knowledge of the topics in this chapter bullet text summarizing the key points of the chapter.
and get instant feedback when you need more practice.
■ Electronic Commerce Project
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.
30 Part II ❙ INFORMATION TECHNOLOGY INFRASTRUCTURE
Case Study Owens-Corning’s Enterprise System Struggle

In the early 1990s Owens-Corning was a U.S. leader in the pro- to be of little use,” explained Mark Orton, of the New England
duction and sale of such building materials as insulation, siding, Supplier Institute in Boston.
and roofing, but management wanted the company to grow. Owens-Corning’s project began with its insulation group,
The company had only two possible paths to growth: offering a and those on the project team understood this. They undertook
fuller range of building materials, or becoming a global force. To a redesign process before implementing SAP’s R/3. They set up
increase its range of products Owens-Corning decided to cross-functional teams to identify the handoffs and touch points
acquire other companies. To become a global force, manage- between the various functions. For example, the process that
ment realized the company would need to become a global runs from the time the firm needs to buy something through the
enterprise that could coordinate the activities of all of its units in payment issuance to the supplier touches logistics and account-
many different countries. ing. The teams also kept in close contact with suppliers who
Headquartered in Toledo, Ohio, Owens-Corning had been needed to know what Owens-Corning would require of them.
divided along product lines, such as fiberglass insulation, exte- As a result of the redesign, purchasing decisions were moved
rior siding, and roofing materials. Each unit operated as a dis- from the plants up to a regional level, enabling commodity spe-
tinct entity with its own set of information systems. (The com- cialists to use their expertise and the leverage of buying for a
pany had more than 200 archaic, inflexible, and isolated larger base to improve Owens-Corning’s purchasing position.
systems.) Each plant had its own product lines, pricing sched- How did the first ERP project go? During a weekend in
ules, and trucking carriers. Owens-Corning customers had to March 1997 a team of about 60 people transferred legacy data
place separate telephone calls for each product ordered–one each into the SAP system, and on Monday morning the company
for siding, roofing, and insulation. The company operated like a went live. When Owens-Corning first went live with SAP, over-
collection of autonomous fiefdoms. all productivity and customer service dropped sharply during
Owens-Corning management believed that these problems the first six months. “When you put in something like SAP, it’s
could be solved by implementing an enterprise system. The not a mere systems change,” said David Johns, Owens-Corning’s
company selected enterprise software from SAP AG to serve as director of global development. “You’re changing the way people
the foundation for a broad company overhaul. “The primary have done their jobs for the past 20 years.”
intent with SAP was to totally integrate our business systems on The first problems that surfaced were technical. According to
a global basis so everyone was operating on the same platform Johns, application response time had increased from seconds
with the same information,” said Dennis Sheets, sourcing man- before ERP to minutes under the new system. Other technical
ager for the insulation and roofing business. Sheets wanted to problems also emerged. For example, Johns said the system was-
centralize purchasing. “Prior to SAP,” he said, “we were buying n’t working the way it was supposed to. Johns believes the source
widgets all over the world without any consolidated knowledge of these problems was inadequate testing. The team further
of how much we were buying and from whom. Now [using tuned the software, and during the next weeks response time
SAP’s R/3 software] we can find out how many widgets we’re reduced to an acceptable level, and slowly the software began
using, where they’re being purchased, and how much we paid operating smoothly.
for them, [allowing] us to consolidate the overall acquisition However, after Owens-Corning fixed some of the technical
process.” Now, he added, “we can . . . make better business deci- problems, it saw that this was much bigger than a technology
sions and better buys.” Sheets expected the company’s material problem. There were problems in the business, problems with
and supply inventories to drop by 25 percent as a result. the way people’s new roles had been defined, communication
However, the project to install SAP’s enterprise system would and change management issues, and business process issues. For
ultimately cost Owens-Corning about $100 million and take example, the SAP system demanded that the entire corporation
several years, too expensive and time consuming to be justified adopt a single product list and a single price list. Staff members
only by the reasons given by Sheets. The company hoped that initially resisted. Owens-Corning employees had not been prop-
the new system would also enable it to digest acquisitions more erly trained and they were overwhelmed, resulting in a lot of
easily. Owens-Corning wanted to acquire other companies to errors. Johns explained that at Owens-Corning “we underesti-
expand its product line so it could increase sales from $2.9 bil- mated the impact that swapping out all our old systems would
lion in 1992 to $5 billion within a few years. That meant that have on our people.” Users had indeed been properly trained on
Owens-Corning would have to digest the archaic, inflexible sys- their own functions, but ERP systems are integrated, and the
tems from the companies it purchased. If Owens-Corning were users did not understand the impact their work was having on
to become a global enterprise, it would need a flexible system other departments.
that would enable the company to access all of its data in an ERP systems are complex and errors ripple throughout the
open and consolidated way. system. When using the old systems, employees had time to cor-
ERP experts point out that simply converting to ERP sys- rect data entry mistakes, and if they were not caught, they only
tems does not solve companies’ problems. “Unless a company affected the local function. However, now that they were using
does a lot of thinking about what its supply chain strategy is and R/3, the databases are immediately updated. Thus, for example,
articulating what its business processes are, these tools are going the data flows instantly from sales to purchasing, production,
Chapter 8 ❙ TELECOMMUNICATIONS AND NETWORKS 31
and logistics systems. Johns offered another example. “If you’re The ERP system’s rollout was completed in 2000. During
at a warehouse, and you don’t tell the system when a truck is those years, Owens-Corning acquired and integrated 17 compa-
leaving the dock, the truck can still leave, but the customer will nies, successfully expanding their product offerings. Company
never get an invoice for the goods. Accounting won’t find out sales have reached $5 billion annually. Because of the new sys-
later because the transaction will never get to them.” Such errors tem, Owens-Corning has been able to reduce its inventory sig-
can be costly. To motivate users to work with more care, they nificantly, while centralizing coordination of various functions
needed to know how their errors would affect other workers and and divisions. Lot size and machine allocations have become
even company profitability. more efficient. The company can perform production planning
To address this problem the company quickly instituted a and control globally because it has one uniform system with
new training approach. Training now would include informa- which to work. The integrated system lets the company leverage
tion on the larger system and its complexities, so users would common carriers and take advantage of overlapping transporta-
understand the impact of their work. Under the new training tion routes. Managers can use the system to identify its biggest
regimen, all employees were denied access to the system until suppliers across the entire company and use that information to
they had passed a test and so became certified. Those who failed negotiate bulk discounts. A customer needs to call only one
the test had to return to training until they could pass it. About location to place an order. Factory production managers no
20 percent of Owens-Corning employees never passed the test longer have to concern themselves with taking customer orders,
and had to change jobs. This job shifting was massive and time tracking logistics or after-sales service. Because centralization
consuming, causing organizational disruption. Whereas the applied not only to U.S. operations but also to foreign activities,
original project training was budgeted for 7 percent of overall the corporation has been transformed into a truly globalized
costs, training eventually consumed 13 percent of the budget. enterprise.
Customers also suffered. Owens-Corning had been known
for its excellent customer service, but the quality of that service Sources: Rajagopal Palaniswamy and Tyler Frank, “Enhancing
declined sharply after the SAP system went live. Many cus- Manufacturing Performance with ERP Systems,” Information Systems
tomers were shocked, and some began turning to other suppli- Management, Summer 2000; SAP, “Owens Corning Builds Its Internet
ers. Owens-Corning began losing important customers. The Future with mySAP.com,” September 14, 2000, www.sap.com;
company was forced to devote a great deal of personnel time Christopher Koch, “From Team Techie to Enterprise Leader,” CIO
rebuilding relations with its customers while simultaneously Magazine, October 15, 1999; Tom Stein, “Making ERP Add Up,”
repairing both its organization and the software installation. Information Week, May 24, 1999, and “Key Work: Integration,”
ERP implementation problems of this type are common. Information Week, September 22, 1997; Tim Minahan, “Enterprise
According to Barry Wilderman of the Meta Group, ERP pro- Resource Planning: Strategies Not Included,” Purchasing, July 16,
jects often result in a negative return on investment (ROI) for 1998; Janice Fioravante, “ERP Orchestrates Change,” Beyond
five or more years. Why? Because ERP systems are so complex. Computing, October 1998; Bruce Caldwell and Tom Stein, “Beyond
The company may not understand all that needs to be done in ERP,” Information Week, October 12, 1998; John E. Ettlie, “The ERP
preparation. Moreover, these systems are expensive, and testing Challenge,” Automotive Manufacturing & Production, June 1998; and
and training often get cut for budgetary reasons. Not only do Joseph B. White, Don Clark, and Silvio Ascarelli, “Program of Pain,”
employees need to become accustomed to new ways of doing Wall Street Journal, March 14, 1997.
business, but customers and suppliers may need to change their
business processes as well. CASE STUDY QUESTIONS
How successful was the whole project? Management believes 1. Describe the problems Owens-Corning had with its informa-
it has been a success. Johns said, “We made each mistake only tion systems prior to installing its enterprise system. What
once. Each deployment [in the rollout] got better.” For instance, management, organization, and technology factors were
“We do a lot more testing now before we go live,” he said, “to responsible for those problems?
make sure that all the different pieces of the system work 2. What management, organization, and technology problems
together.” Customers now have a single point of contact for all did Owens-Corning face in putting their enterprise system
orders. With Owens-Corning’s old system, it didn’t know what into effect?
inventory was in stock. Employees would have to check around
3. How did implementing an enterprise system change the way
and get back to the customer. The firm can see what inventory is
Owens-Corning ran its business?
available, when it will be produced, and who is the lowest cost
carrier. It can commit to the customer before hanging up the 4. Was installing an enterprise system the right solution for
phone. The changes have been massive, with about 10,000 peo- Owens-Corning? Explain.
ple involved with the reengineering effort.

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2 Information

Alpina Mooves Faster

2.1 Key System Applications in the

Different Kinds of Systems

FUNCTIONAL Sales and Manufacturing Finance Accounting Human

Figure 2-2 The six major TYPES OF SYSTEMS Strategic-Level Systems

Knowledge Work Engineering Graphics Managerial

Office Word Document Electronic

Machine control Securities Payroll Compensation

Sales and Manufacturing Finance Accounting Human

Six Major Types of Systems

Transaction Processing Systems

Characteristics of Information Processing

Employee data (various departments) To general ledger: wages and salaries

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

TYPE OF TPS SYSTEM

Major functions Sales management Scheduling Budgeting Personnel records Admissions

Knowledge Work and Office Systems

Transaction Processing Systems Management Information Systems

Figure 2-6 A sample report Consolidated Consumer Products Corporation

4469 Carpet Cleaner Northeast 4,066,700 4,800,000 0.85

TOTAL 16,715,253 17,550,000 0.95

5674 Room Freshener Northeast 3,676,700 3,900,000 0.94

TOTAL 18,559,253 17,700,000 1.05

Ship file (e.g.,

Executive Support Systems

Relationship of Systems to One Another

Figure 2-8 Model of a typical ESS

• TPS/MIS data • Dow Jones

2.2 Systems from a Functional

Sales and Marketing Systems

Figure 2-9 Interrelationships

Examples of Sales and

Manufacturing and Production Systems

Examples of Manufacturing and

How Southstream Seafoods

New caption to come

Finance and Accounting Systems

Examples of Finance and

Human Resources Systems

2.3 Integrating Functions and

Business Processes and Information Systems

Examples of Human Resources

hand, business processes are concrete workflows of material, information, and

TABLE 2-6 Examples of Business Processes

Figure 2-12 The order fulfill-

Manufacturing Assemble Ship

Customer Relationship Management and Supply

Keying data from tax returns into

Figure 2-13 Customer rela-

Figure 2-14 Supply chain , i n v e n t o r y l e v e l,

How Information Systems Can

Supply Chain Management Keeps

Figure 2-16 Enterprise sys-

processes of an entire firm into a

Business Processes Supported

Benefits and Challenges of Enterprise Systems