CHAPTER TWO OVERVIEW OF BUSINESS PROCESSES: Chapter objectives Dear students, at the end of this chapter, you are expected to; ¥ Understand the business process and events Y Identify the events in a business process ~ Understand the transaction processing cycle ¥ Identify the types of files and data used in the transaction processing cycle both in manual and computer based processing models. ~ Explain the advantages and disadvantages of Enterprise Resource Planning (ERP) system. Introduetion Dear students, the first chapter introduced the overview of the information system from the accountants” perspective. This chapter is organized into five major sections. The first is an overview ofthe business process and events. This section describes the five major business process common to all types of organizations. The second section describes the in each business process. ‘The third section presents the transaction processing cycle. The fourth section of this chapter addresses the types of files and data used in the transaction processing cycle both in manual and computer based processing models. Finally, it describes the Enterprise Resource Planning (ERP) systems including its advantages and dis advantages. 21. Business Processes and Events ris explained in the previous chapter that organizations must reorganize their business processes into groups of related transactions. A transaction is an agreement between two entities to exchange goods or services or any other event that can be measured in economic terms by an organization. Examples include selling goods to customers, buying inventory from suppliers, and paying employees. Many business activities are pairs of events involved in a give-get exchange. These exchanges can be grouped into five major business processes or transaction eycles: > The revenue cycle, where goods and services are sold for cash or a future promise to receive cash, > The expenditure eyele, where companies purchase inventory for resale or raw materials to use in producing products in exchange for cash or a fixture promise to pay cash. > The production ox conversion cycle, where raw materials are transformed into finished goods. > The human resources/payroll cycle, where employees are hired, trained, compensated, evaluated, promoted, and terminated. > The financing cycle, where companies sell shares in the company to investors and borrow money and where investors are paid dividends and interest is paid on loans.These cycles process « few related transactions repeatedly. For example, most revenue cycle transactions are cither selling goods or services to customers or collecting cash for those sales. 2.2, Identifying events in business process A financial transaction is an economic event that affects the assets and equities of the firm, is reflected in its accounts, and is measured in monetary terms. The most common financial transactions are economic exchanges with extemal parties. These include the sale of goods or services, the purchase of inventory, the discharge of financial obligations, and the receipt of cash ‘on account from customers. Financial transactions also include certain internal events such as the depreciation of fixed assets; the application of labor, raw materials, and overhead to the production process; and the transfer of inventory from one department to another, These three cycles exist in all types of businesses both profit-sceking and not-for-profit. For instance, every business (1) incurs expenditures in exchange for resources (expenditure cycle), (2) provides value added through its products or services (conversion cycle), and (3) receives revenue (grant) from ou! sources (revenue cycle). 2.21. The Expenditure Cycle Business activities begin with the acquisition of materials, property, and labor in exchange for cash in the expenditure cycle. Figure 2.1. shows the flaw of cash from the organization to the various providers of these resources. Most expenditure transactions are based on a credit relationship between the trading parties. The actual disbursement of cash takes place at some point after the receipt of the goods or services. Thus, from a systems perspective, this transaction has two parts: a physical component (the acquisition of the goods) and a financial component (the cash disbursement to the supplier), A separate subsystem of the cycle processes cach component, The major subsystems of the expenditure cycle are outlined below. > Purchases/accounts payable system: This system recognizes the need to acquire physical inventory (such as raw materials) and places an order with the vendor. When the goods received, the purchases system records the event by increasing inventory and establishing an account payable to be paid ata later date. > Cash disbursements system: When the obligation created in the purchases system is due, the cash disbursements system authorizes the payment, disburses the funds to the vendor, and records the transaction by reducing the cash and accounts payable accounts, > Payroll system: The payroll system collects labor usage data for cach employee, computes the payroll, and disburses paychecks to the employees, > Fixed asset system: A firm's fixed asset system processes transactions pertaining to the . maintenance, and disposal of its fixed assets.i ‘apendie Cxe Cawerston yee even Ge bays Stbsytene arn Purchedg/Accouts Payabie | |= Predation Planning and Control 7 cash Disertemerts > coe Accounting Coen Payot Gtneepe Figure 2. 222, The Conversion Cycle The conversion cycle is composed of two major subsystems: the production system and the cost accounting system. ¥ The production system: involves the planning, scheduling, and control of the physical product through the manufacturing process. This includes determining raw material requirements, authorizing the work to be performed and the release of maw materials into production, and directing the movement of the work-in process through its various stages of ‘manufacturing. ~ The cost accounting system: monitors the flow of cost information related to production. The information this system produces is used for inventory valuation, budgeting, cost control, performance reporting, and management decisions, such as make-or-buy decisions. ‘Manu facturing firms convert raw materials into finished products through formal conversion cycle operations. However, the conversion cycle is not usually formal and observable in service and retail enterprises Relationship between Transaction Cycles 2.2.3. The Revenue Cycle Firms sell their finished goods to customers through the revenue cycle, which involves processing cash sales, credit sales, and the receipt of cash following a credit sale. Revenue cycle transactions also have a physical and a financial component, which are processed separately. The primary subsystems of the revenue cycle are: > Sales order processing: The majority of business sales are made on crédit and involve tasks such as preparing sales orders, granting credit, shipping products (or rendering of a service) to the customer, billing customers, and recording the transaction in the accounts (accounts receivable, inventory, expenses, and sales). v (Cash receipts: For credit sales, some period of time (days or weeks) passes between the point of sale and the receipt of cash. Cash receipts processing includes collecting cash, depositing cash in the bank, and recording these events in the accounts (accounts receivable and cash).[1. What are the three major business process 2. List the major subsystems of the expenditure cycle? 2.3, Organizing data in AIS: The data (transaction) processing cycle ‘Accountants and other system users play a significant role in the data processing cycle. For example, they interact with systems analysts to help answer questions such as these: * What data should be entered and stored by the organization, and who should have access to them? * How should data be organized, updated, stored, accessed, and retrieved? * How can scheduled and unanticipated information needs be met? To answer these and related questions, the data processing concepts explained in this chapter must be understood. One important AIS function is to process company transactions efficiently and effectively. In manual (non-computer-based) systems, data are entered into journals and ledgers maintained on paper. In computer-based systems, data are entered into computers and stored in files and data bbases. The operations performed on data to generate meaningful and relevant information are referred to collectively as the data processing cycle. In other words, the process that begins with capturing transaction data and ends with informational output, such as the financial statements, is called transaction processing. As shown in Figure 2.2. this process consists of four steps: data input, data storage, data processing, and information output. Figure 2.2. The data processing cycle2.3.1. Data input The first step in processing input is to capture transaction data and enter them into the system. The data capture process is usually triggered by a business activity. Data must be collected about three facets of each business activity: 1) Each activity of interest 2) The resource(s) affected by each activity 3) The people who participate in each activity For example, the most frequent revenue cycle transaction is a sale, cither for cash or on credit. ‘Companies may find it useful to colllect the following data about a sales transaction: ~ Date and time the sale occured Y Employee who made the sale and the checkout clerk who processed the sale ~ Checkout register where the sale was processed ~ Item(s) sold ~ Quantity of each item sold ~ List price and actual price of each item sold Y Total amount of the sale Y Delivery instructions 7 Forcredit sales: customer name, customer bill-to and ship-to addresses Historically, most businesses used paper source documents to collect data about their business ties. They later transferred that data into the computer. When the data is entered using computer screens, they often retain the same name and basic format as the paper source document it replaced. Table 2.1. lists some common transaction cycle activities and the source ‘document or form used to capture data about that event. Turn around documents are company output sent to an extemal party, who often adds data to the document, and then are retumed to the company as an input document. They are in machine~ readable form to facilitate their subsequent processing as input records. An example is a utility bill that is sent to the customer, returned with the customer's payment, and read by a special scanning device when it is returned. Source data automation devices capture transaction data in machine- readable form at the time and place of their origin. Examples include ATMs used by banks, point - of-sale (POS) scanners used in retail stores, and bar code scanners used in warehouses. The second step in processing input is to make sure captured data are accurate and complete. ‘One way to do this is to use source data automation or well-designed tumaround documents and data entry screens. Well-designed documents and screens improve accuracy and complcieness by providing instructions or prompts about what data to collect, grouping logically related picces of information close together, using check off boxes or pull-down menus to present the available options, und using appropriate shading and borders to clearly separate data items. Data input screens usually list all the data the user needs to enter. Sometimes these screens resemble source documents, and users fill out the screen the same way they would a paper source document. Users can improve control either by purchasing pre-numbered source documents or by having the system automatically assign a sequential number to cach new transaction, Pre-numberingsimplifies verifying that all transactions have been recorded and that none of the documents has been misplaced. (Imagine trying to balance a checkbook if the checks were not pre-numbered.) ‘The third step in processing input is to make sure company policies are followed, such as approving or verifying a transaction. For example, Companies would not want to sell goods to 8 customer who was not paying his bills or to sell an item for immediate delivery that was out of stock. These problems are prevented by programming the system to check a customer's credit limit and payment history, as well as inventory status, before confirming customer sale. TABLE 2-1 Common Business Activities and Source Documents ee Business Activity Source Document Revenue Cycle ‘Take customer order Sales order Deliver or ship order Delivery ticket or bill of lading ‘Receive cash. ‘Remittance advice or remittance fist Deposit cash receipts Deposit slip ‘Adjust customer account Credit memo Expenditure Cycle Request items Purchase requisition (Order items Purchase order Receive items Receiving report Pay for items ‘Check or electronic funds transfer Human Resources Cycle Collect employee withholding data W4 form Record time worked by employees Time cards ‘Record time spent on specific jobe Job time tickets or time sheet —— 23.2, Data storage Acompany's data are one ofits most important resources. However, the mere existence of relevant data does not guarantee that they are usefull. To function properly, an organization must have ready and easy access to its data. Therefore, accountants need to understand how data are organized and stored in an AIS and how they can be accessed. In essence, they need to know how to manage data for maximum corporate use. Imagine how difficult it would be to read a textbook if it were not organized into chapters, sections, paragraphs, and sentences. Now imagine how hard it would be for a company to find an invoice if all documents were randomly dumped into file cabinets. Fortunately, information in an AIS is organized for easy and efficient access. ‘Transaction data are often recorded in a joumal before they are entered into a ledger. Cumulative accounting information is stored in general and subsidiary ledgers.Coding techniques Data in ledgers is organized logically using coding techniques, Coding is the systematic assignment of numbers or letters to items to classify and organize them. i. With sequence codes, items are numbered consecutively to account for all items. Any missing items cause a-gap in the numerical sequence, Examples include pre-numbered checks, invoices, and purchase orders. ii, With a block code, blocks of numbers are reserved for specific categories of data. For example, business reserved the following numbers for major product categories: Product Code Product Type 1000000-1999999 *—Blectric range 2000000-2999999 Refrigerator 3000000-3999999 ‘Washer 4000004999999 Dryer Users can identify an item's type and model using the code numbers. Other examples include edger account numbers (blocked by account type), employee numbers (blocked by department), and customer numbers (blocked by region). iii, Group codes, which are two ormore subgroups of digits used to code items, are often used in conjunction with block codes. If organizations uses a seven-digit product code number, the group coding technique might be applied as follows, Digit Position Meaning 12 Product line, size, style 3 Color 4s ‘Year of mamufactore 6-1 Optional features There are four sub codes in the product code, each with a different meaning. Users can sort, summarize, and retrieve information using’ one or more sub codes. This technique is often applied to general ledger account numbers iv. With mnemonic codes, letters and numbers are interspersed to identify an item. The ‘mnemonic code is derived from the description of the item and is usually easy to memorize, For example, Dry300W0S could represent a low end (300), white (W) dryer (Dry) made by Whirlpool (05). The following guidelines result in a beter coding system. The code should: ¥ Be consistent with its intended use, which requires that the code designer determine desired system outputs prior to selecting the code.~ Allow for growth. For example, don't use a three-digit employee code for a fast-growing company with 950 employees. ~ Be as simple as possible to minimize costs, facilitate memorization and interpretation, and ensure employee acceptance. ~ Be consistent with the company's organizational structure and across the company's divisions. Chart of accounts A great example of coding is the chart of accounts, which is a list of the numbers assigned to each ‘general ledger account. These account numbers allow transaction data to be coded, classified, and entered into the proper accounts, They also facilitate the preparation of financial statements and reports, because data stored in individual accounts can easily be summed for presentation. However, data stored in summary accounts cannot be easily analyzed and reported in more detail. Consequently, it is important that the chart of accounts contain sufficient detail to meet an organization's information needs. To illustrate, consider the consequences if a company were to use only one general ledger account for all sales transactions. It would be easy to produce reports showing the total amount of sales for a given time period, but it would be very difficult to prepare reports separating cash and credit sales. Indeed, the only way to produce these latter reports would bbe to go back to original sales records to identi fy the nature of each sales transaction. If acompany used separate general ledger accounts for cash and credit sales, then reports showing both types of sales could be easily produced. Total sales could also be easily reported by summing each type of sale. For example, in the chart of accounts in which each account number is three digits long. The first digit represents the major accountcategory and indicates where it appears on a company's financial statements. Thus, all current assets are numbered in the 100s; noncurrent assets are numbered in the 200s, and so on. ‘The second digit represents the primary financial subaccounts within each category. Again, the accounts are assigned numbers to match the order of their appearance in financial statements (in order of decreasing liquidity), Thus, account 120 represents accounts receivable, and account!50 represents inventory. ‘The third digit identifies the specific account to which the transaction data will be posted. For example, account $01 represents cash sales, and account 502 represents credit sales. Similarly, accounts 101 through 103 represent the various cash accounts used by the company. A chart of accounts is tailored to the nature and purpose of an organization. For example, the chart of accounts for a corporation include equity accounts of common stock and retained camings . In contrast, a partnership would include separate capital and drawing accounts for each partner, instead of common stock and retained earnings. Likewise, if a business is a retail organization, it has only one type of general ledger inventory account. A manufacturing company, in contrast, would have separate general ledger accounts forraw materials, work in process, and finished goods inventories‘Audit tral ‘An audit trail is a traceable path ofa transaction through a data processing system from point of origin to final output, or backwards from final output to point of origin. It is used to check the accuracy and validity of ledger postings. fest 2.2. Dear learners, check your progress! 1. What are the three steps in processing data input? |2. What is audit trial? 2.3.3. Data processing Once business activity data have been entered into the system, they must be processed to keep the databases current. The four different types of data processing activities, referred to as CRUD, are as follows: 1. Creating new data records, such as adding a newly hired employec to the payroll database. 2. Reading. retricving, or viewing existing data, 3. Updating, previously stored data, Figure 2.3, depicts the steps required to update an accounts receivable record witha sales transaction, The two records are matched using the account number. The sale amount ($360) is added to the account balance ($1,500) to get a new current balance ($1,860), 4, Deleting data, such as purging the vendor master file of all vendors the company no longer does business with.Figure 2.3.. The accounts receivable file update process [09/19/13 Fle update proces . ‘doa accuracy 4 Mach primary bay foccourt number} (0123 [$2000.00 1000.00]$1500.00] || ¢ Ad romocion amour to ced Elance | Repeot for ol tronsoctions «© Print summary reports rpare> MASTER Pas RECORD | ‘Account | Credit | Previous | Currant Number | limit | Bolonce | Balance 0123 _|$2000.00 } $1500.00 | $1860.00 | Batch vs. Real-Time Processing There are two ways to process transactions: using batches and in real time. Updating done periodically, such as daily, is referred to as batch processing. In a batch processing system, transactions are accumulated over a periéd of time and processed as a single unit, or batch. Although baich processing is cheaper and more efficient, the data are curent and accurate only immediately after processing. For that reason, batch processing is used only for applications, such as payroll, that do not need frequent updating and those naturally occurs or are processed at fixed time periods. For example, a store may update its sales records every day after the store closes. Or, payroll system may process all the time cards every two weeks to determine employee eamings and produce paychecks. Whatever the time period in a batch system, there is some time delay between the actual event and the processing of the transaction to update the records of the organization. Most companies update each transaction as it occurs, referred to as real-time processing because it ensures that stored information is always current, thereby increasing its decision making usefulness. It is also more accurate because data input errors can be corrected in real time or refused. It also provides significant competitive advantages In areal-time processing system, transactions are processed immediately as they occur without any delay to accumulate transactions. Real-time processing is also refered to as online transaction processing, or OLTP. In this case, the records in the system always reflect the current status. ‘A good example of a real-time processing system would be airline ticket reservations. When you book a ticket, and select a seat, that booking is made right away, and nobody else can get that same seat even a second later. Any changes you make to your reservation are also updated in real time.Another example is the stock market. When you submit an order to buy a stock, that order is processed immediately and not at the end of the day. While real-time processing is often more efficient and in some cases, necessary, batch processing may be more effective. In the case of a payroll system, there is really no need to keep track of how much an employee has camed every minute of the day and doing every two weeks is likely sufficient. 2.3.4. Information output “The final step in the data processing cycle is information output. When displayed on a monitor, output is referred to as soft copy. When printed on paper, it is referred to as hard copy. Information is usually presented in one of three forms: a document, a report, OF a query response. Documents are records of transaction or other company data. Some, such as checks and invoices, are transmitted to external parties. Others, such as receiving reports and purchase requisitions, are used internally. Documents can be printed out, ar they can be stored as electronic images in a computer. For example, Toys 'R’ Us uses clectronic data interchange to communicate with its ssipplicms, Every year it processes over half a million invoices electronically, thereby eliminating. paper documents and dramatically reducing costs and errors, This has resulted in higher profits tand more accurate information. Reports are used by employces to control operational activities and by managers to make decisions and to formulate business strategies. External users need reports to evaluate company profitability, judge creditworthiness, or comply with regulatory requirements. Some reports, such as financial statements and sales analyses, are produced on a regular basis. Others are produced on an exception basis to call attention to unusual conditions. For example, a company could have its system produce a report to indicate when product returns exceed a certain percentage of sales, Reports can also be produced on demand. For example, Susan could produce a report. identify the salesperson ‘who sold the most items during a specific promotional period. “The need for reports should be periodically assessed, because they are often prepared long after they are needed, wasting time, money, and resources, For example, NCR Corporation reduced the number of reports from 1,200 to just over 100. Another company eliminated 6 million pages of reports, a stack four times higher than its 41-story headquarters building. One 25- page report took five days to prepare and sat unread. ‘A database query is used to provide the information needed to deal with problems and questions that need rapid action or answers. A user enters a request for a specific piece of information; itis retrieved, displayed, or analyzed as requested. Repetitive queries are often developed by information systems specialists. One-time queries are often developed by users, Some companies, such as Wal-Mart, allow suppliers to access their databases to help them better serve Wal-Mart's needs. Suppliers can gauge how well a product is selling in every Wal-Mart store in the world and maximize sales by stocking and promoting items that are selling well. |. What are the four different types of data processing activities? | ____ is used to provide the in formmaition needed to deal with problems and questions that need rapid action or answers.24. Types of Files and Data This section presents the different types of files and data used in the data processing cycle described in the above section both in the manual and computer systems. We begin with traditional reconds used in manual systems (documents, journals, and ledgers) and then examine their magnetic counterparts in computer-based systems. 2.4.1. The Manual Process Model The manual process model is the oldest and most traditional form of accounting systems, Manual systems constitute the physical events, resources, and personnel that characterize many business processes. This includes such tasks as order-taking, warehousing materials, manufacturing goods for sale, shipping goods to customers, and placing orders with vendors. Traditionally, this model also includes the physical task of record keeping. Often, manual record keeping is used to teach the principles of accounting to- business students. The following are the files and data used in the manual process model A. Documents ‘A document provides evidence of an economic event and may be used to initiate transaction processing. Some documents are a result of transaction processing. There are three types of documents: source documents, product documents, and tumaround documents. Source Documents: Economic events result in some documents being created at the beginning, (the source) of the transaction. These are called source documents. Source documents are used to capture and formalize transaction data that the transaction cycle needs for processing. Product Documents: Product documents are the result of transaction processing rather than the triggering mechanism for the process. For example, a payroll check to an employee is a product document of the payroll system. ‘Turnaround Documents: Turnaround documents are product documents of one system that become source documents for another system. B. Journals ‘A joural is a record of a chronological entry. At some point in the transaction process, when all relevant facts about the transaction are known, the event is recorded in a journal in chronological order. Documents are the primary source of data for journals. The joumal holds a complete record of transactions and thus provides a means for posting to accounts. There are two primary types of journals: special journals and general journals. ~ Special journals arc used to record specific classes of transactions that occur in high volume. ‘Such transactions can be grouped together in a special journal and processed more efficiently than a general journal permits. Most organizations use several special joumals, including the cash receipts journal, cash disbursements journal, purchases journal, and the payroll! journal. ~ General Journals arc used to record nonrecurring, infrequent, and dissimilar transactions, For example, we usually record periodic depreciation and closing entries in the general journal.Journal vouchers are used to record summaries of routine transactions, no routine transactions, adjusting entries, and closing entries. C. Ledgers Alledger is abook of accounts that reflects the financial effects of the firm's transactions after they are posted from the various journals. Whereas journals show the chronological effect of business activity, ledgers show activity by account type. A ledger indicates the increases, decreases, and current balance of each account. Organizations tise this information to prepare financial statements, support daily operations, and prepare internal reports. There are two basic types of ledgers: (1) general ledgers, which contain the firm’s account information in the form of highly summarized control accounts, and (2) subsidiary ledgers, which contain the details of the individual accounts that constitute a particular control account. ~ The general ledger summarizes the activity for each of the organization's accounts. The general ledger department updates these records from journal vouchers prepared from special journals and other sources located throughout the organization. The general ledger provides a single value for each control account, such as accounts payable, accounts receivable, and inventory. This highly summarized information is sufficient for financial reporting, but it is not useful for supporting daily business operations. Y Subsidiary ledgers are kept in various accounting departments of the firm, including inventory, accounts payable, payroll, and accounts receivable. This separation provides better control and support of operations. Thus, in addition to providing financial statement information, the general ledger is a mechanism for verifying the overall accuracy of accounting, data that separate accounting departments have processed. Any event incorrectly recorded in a journal or subsidiary ledger will cause an out-of-balance condition that should be detected during the general ledger update. By periodically reconciling summary balances from subsidiary accounts, journals, and control accounts, the completeness and accuracy of transaction processing can be formally assessed, Generally, the accounting records described previously provide an audit trail for tracing transactions from source documents to the financial statements. Of the many purposes of the audit tail, most important to accountants is the year-end audit, 2.4.2. Computer-Based Systems Accounting records in computer-based systems are represented by four different types of magnetic files: master files, transaction files, reference files, and archive files. A. Master File. A master file generally contains account data, The general ledger and subsidiary ledgers are examples of master files. Data values in master files are updated from transactions. B. Transaction File A transaction file is a temporary file of transaction records used to change or update data in a master file. Sales orders, inventory receipts, and cash receipts are examples of transaction files.C. Reference File Areference file stores data that are used as standards for processing transactions. For example, the payroll program may refer to a tax table to calculate the proper amount of employment tax. Other reference files include price lists used for preparing customer invoices, lists of authorized suppliers and customer credit files for approving credit sales. D. Archive File. ‘An archive file contains records of past transactions that are retained for future reference. These transactions form an important part of the audit tail. Archive files include journals, prior-period payroll information, lists of former employees, records of accounts written off, and prior-period ledgers. est 2.4, Dear leamers, check your pro ‘What are the three types of documents used in manual processing model? 2 a is a temporary file of transaction records used to change or update data in a master file. 25. Enterprise resource planning (ERP) systems ‘Traditionally, the AIS has been referred to as a transaction processing system because its only concer was financial data and accounting transactions. For example, when a sale took place, the AIS would record a journal entry showing only the date of the sale, a debit to either cash or accounts receivable, and a credit to sales. Other potentially useful nonfinancial information about the sale, such as the time of day that it occured, would traditionally be collected and processed outside the AIS. Consequently, many organizations developed additional information systems to collect, process, store, and report information not contained in the AIS. Unfortunately, the existence of multiple systems creates numerous problems and inefficiencies. Often the same data ‘must be captured and stored by more than one system, which not only results in redundancy across systems but also can lead to discrepancies if data are changed in one system but not in others. In addition, itis difficult to integrate data from the various systems. Enterprise resource plarining (ERP) systems overcome these problems as they integrate all aspects of a company's operations with a traditional AIS. ERP is a set of integrated programs to ‘manage critical operations for an entire organization. At the center of the ERP system is a database that is shared by all users, This makes it possible for all units in the organization to have access to current data to support operations and planning. ERP has emerged as an important tool in controlling costs and product flows through a complex. enterprise. One of the defining characteristics of ERP is that it integrates real-time information from across the entire enterprise.‘Most large and many medium-sized organizations use ERP systems to coordinate and manage their data, business processes, and resources. The ERP system collects, processes, and stores data and provides the information managers and external parties need fo assess the company. As shown in Figure 2.4., a properly configured ERP system uses a centralized database to share information across business processes and coonlinate activities. This is important because an activity that is part of one business process often tri ggers a complex series of activities throughout many different parts of the organization. For example, a customer order may necessitate scheduling additional production to meet the increased demand, This may trigger an order to purchase more raw materials. Itmay also be necessary to schedule overtime or hire temporary help. Well-designed ERP systems provide management with easy access to up-to-date information about all of these activities in order to plan, control, and evaluate the organization's business processes more effectively. ERP systems are modular, with each module using best business practices to automate a standard business process. This modular design allows businesses to add or delete modules as needed. Typical ERP modules include: > Financial (general ledger and reporting system)-general ledger, accounts receivable, accounts payable, fixed assets, budgeting, cash management, and preparation of managerial reports anc financial statements > Human resources and payroll-human resources, payroll, employee benefits, training, time and attendance, benefits, and government reporting + > Order to cash (revenue cycle)-sales order entry, shipping, inventory, cash receipts, commission calculation > Purchase to pay (disbursement cycle)-purchasing, receiptand inspection of inventory, inventory and warehouse management, and cash disbursements. > Manufacturing (production cycle)- engineering, production scheduling, bill of materials, work- in-process, workflow management, quality control, cost management, and manufacturing processes and projects > Project management-costing, billing, time and expense, performance units, activity management > Customer relationship management-sales and marketing, commissions, service, customer contact, and call center support > System tools-tools for establishing master file data, specifying flow of information, access controls, and soonFigure 2.4. Integrated ERP system Ravers le Expat Cyd (Chapter 12) (Chapeer 13) 7 ‘Goods Make sige |_[ron, [rset |i, Irtegrotod ERP ° Ht/teyoll ye (Chapter 12) a Per Fredcton Cd mn my {(Chopter 14) Ue Time ‘Gonaral Ledger and ej rare | Meg Sen Matriols Product (Chopler 16) Us Nahin An ERP system, with its centralized database, provides significant advantages: > An ERP provides an integrated, enterprise-wide, single view of the organization's data and financial situation. Storing all corporate information in a single database breaks down barriers between departments and streamlines the flow of information, > Data input is captured o keyed once, rather than multiple times, as it is entered into different systems. Downloading data from one system to another is no longer needed.> Management gains greater visibility into every area of the enterprise and greater monitoring capabilities. Employees are more productive and efficient because they can quickly gather data from both inside and outside their own department. > The organization gains better access control. An ERP can consolidate multiple permissions and security models into a single data access structure. > Procedures and reports are standardized across business units. This standardization can be especially valuable with mergers and acquisitions because an ERP system can replace the different systems with a single, unified system. > Customer service improves because employees can quickly access orders, available inventory, shipping information, and past customer transaction details. > Manufacturing plants receive new orders in real time, and the automation of manufacturing processes leads to increased productivity. ERP systems also have significant disadvantages: > Cost. ERP hardware, software, and consulting costs range from $50 to $500 million for a Fortune 500 company and upgrades can cost $50 million to $100 million. Midsized companies spend between $10 and $20 million. > Amount of time required. It can take years to select and fully implement an ERP system, depending on business size, number of modules to be implemented, degree of customization, the scope of the change, and how well the customer takes ownership of the project. As a result, ERP implementations have a very high risk of project failure, ‘Changes to business processes. Unless a company wants to spend time and money customizing modules, they must adapt to standardized business processes as opposed to adapting the ERP package to existing company processes, The failure to map current business processes to existing ERP software is a main cause of ERP project failures. > Complexity. This comes from integrating many different business activities and systems, each having different processes, business nules, data semantics, authorization hierarchies, and decision centers. > Resistance. Organizations that have multiple departments with separate resources, missions, profit and Joss, and chains of command may believe that a single system has few benefits. It also takes considerable training and experience to use an ERP system effectively, and employee resistance is a major reason why many ERP implementations do not succeed. It is not easy to convince employees to change how they do their jobs, train them in new procedures, master the new system, and persuade them to share sensitive information. Resistance, and the blurring of company boundaries, can cause problems with employee morale, accountability, and lines of responsibility. 1, What is ERP system? j2. What are the disadvantages of ERP system?