Chapter 7. How to use enterprise information systems?

Chapter 7. How to use enterprise information systems?

Enterprise information systems can be used to enhance core business processes. These systems support the integration of several business activities.

What are the core business processes?

Generally, we see five different functional areas in a company:

• Marketing
• Manufacturing and operations
• Accounting and finance
• Supply chain management
• Human resources

Customers do not care about the how but only care that things are done such that they are satisfied. A firm has to monitor its revenues and expense etc. When generating revenue there are several core business processes involved:

• Order-to-cash
  The process that is associated with selling a service or product.
• Procedure-to-pay
  All the processes associated with procuring goods from external sellers.
• Make-to-stock and make-to-order
  The first is the process where goods are produced based on forecasts and stocked in warehouses. The second is the process where raw materials, accessories and subcomponents are procured based on forecasts but where the actual manufacturing only starts when the order is received.

Companies want to optimize their core business processes to gain or sustain competitive advantage. The value chain is defined as the activities that add value to the end product. The activities of the value chain can support business processes.

Core activities are the activities occur in the functional areas of the organization that process inputs and outputs. Core activities include:

• Marketing and sales activities
• Manufacturing and operations activities
• Customer service activities
• Inbound logistics activities
• Outbound logistics activities

Inbound logistics consists of the activities associated with receiving and stocking raw materials, products and parts. Outbound logistics consists of distributing the end products.

Core activities can take place because of support activities. Support activities include:

• Administrative activities
• Infrastructure activities
• Human resource activities
• Technology development activities
• Procurement activities

Procurement is the purchasing of goods and services that are needed as inputs to allow the primary activities to take place.

The value chain framework can be used to analyze both the value adding activities of manufacturing based industries as service-based industries. The difference is that service-based industries deal with products based on information instead of physical products.

Companies can connect their internal value chains which leads to a value system. In this system information can flow from the value chain of one company to the value chain of another company. A value system can consist of multiple company’s value chains.

Information flows from a certain source to another destination. An upstream information flow refers to information that you receive from another organization. A downstream information flow consists of information that is produced by a company and then send to another company.

What is an enterprise system?

If a company want to conduct its core business activities effectively then the functional areas of the company need to be able to share data with each other. Individual departments often have specific needs and their systems are not designed to communicate with other departments. Such systems are called standalone applications.

If departments need to share information then it is not very useful to have such systems. Personnel then needs access to two different systems which is very inefficient. If the data in one system is updated but not in another then the data is inconsistent.

Because of these challenges many organizations now use an enterprise-wide information system, also called enterprise system. This system has business applications for every business process and allows companies to integrate data across operations. The system uses an integrated database with a central storage which all users can access.

These systems can be used by organizations to support business processes and internal and external operations. Information systems can be used to support activities of the value chain and by doing so gaining or sustaining competitive advantage.

Both externally and internally focused business processes can be supported by information systems.

Internally focused systems support functional areas, decision making and business processes within an organization.

Externally focused systems support the communication and coordination of business processes with suppliers, customers and others outside the boundaries of the organization. An interorganizational system (IOS) enables a company to communicate across organizational boundaries. Integrating both internally and externally focused applications can be valuable for organizations in global markets.

Software programs can have two forms; packaged and custom. Packaged, also called off-the-shelf software is written by a third part and is used by many different organizations. Such software supports tasks that are standardized and repetitive. Custom software is developed exclusively for specific organizations. This software enables a company to accommodate its specific needs.

Since each company has different needs it is impossible to create a software application that fits the needs of all companies. Therefore, the enterprise systems of companies often are built around modules. Modules are defined as components that you can select an implement when you need them.

Each standalone legacy system is replaced by a module in an enterprise system. The vanilla version of an enterprise system includes the chosen features and modules. If the business processes of a company cannot be supported by this version then it may ask for a customized version. This customized version may contain additional software or direct changes of the vanilla version.

Best practices are industry-standard business processes; the techniques and processes that have shown superior results. Generally, enterprise systems operate according to these practices. Based on these best practices, vendors offer industry-specific versions.  

Business process management (BPM) is a process in which people critically rethink and redesign business processes with the goal to improve performance measures. It is an improvement approach that is structured and systematic and gained popularity in the 1990s. BMP uses information systems to streamline business processes.

The steps of BPM are:

1. Develop a vision
2. Identify key processes
3. Understand and measure existing processes
4. Identify how the processes can be improved
5. Design and implement the new processes

BPM is still a popular approach to improve the business processes of organizations. There are several factors that lead to successful process improvement like, appropriate funding, realistic expectations, support by senior management and participants that are willing to make changes.  

An enterprise system has benefits but the acquisition of one also has some costs. Some benefits of enterprise systems are improved information availability, reduced IS costs, reduced operating expenses and improving customer interaction.

Some costs include project governance costs, training and travel costs for the personnel, business process studies and continuously customization and integration costs.

What is enterprise resource planning?

A form of enterprise system that is often used is the enterprise resource planning (ERP) system. ERP systems use modules based on a common database that support the entire enterprise instead of just parts of it. With ERP it is easier to access information because it uses a central storage. Because of the central storage the information is available to everyone of the organization.

With an ERP system it is also easier for organizations to implement audit controls and to comply with regulations imposed by the government. Many organizations that struggle with regulation and legal mandates are deploying an ERP. 

An organization can choose several ERP systems and it has to choose which one it will use. When making this decision it must take several factors into consideration and determine which system will meet the requirements of the organization. The management must especially look at ERP control and ERP business requirements.

ERP control refers to the locus of control over computing systems and their data. It also refers to the locus of the authority to make decisions. Most companies have a centralized control or the business units have their own control. With some ERP systems you can customize the locus of control.

Organizations must determine which modules they want in their ERP. The two main categories of ERP components are core components and extended components.

ERP core components support the internal activities. Examples of such internal activities are operations management, financial management and human resource management. ERP extended components support the external activities for dealing with customers and suppliers.

There are industry-specific ERP systems in which all the modules work together to enhance business processes that are needed to run a business effectively. Different vendors offer specific ERP systems that might differ from each other. For the management of an organization it is essential to understand the naming conventions and software modules of the vendor.

The configuration of ERP systems is a difficult activity. Configuration is an activity that has to be performed during the implementation of the ERP system. A key factor for the success of ERP implementation is setting up the database. To do this, the organization has to make many decisions but to make good decisions one must have knowledge. Therefore, companies often hire expert analysist to help them with these configuration tasks.

How to achieve success?

As said before, the success of an enterprise system depends on the implementation of the system. Companies that have successfully installed an enterprise system often follow the following recommendations:

• Secure executive sponsorship
  Most enterprise systems fail because there is no support from top level management.
• Hire experts
  ERP systems are complex so it is wisely to hire experts
• Train the users
  It is hard to learn how to use an enterprise system and therefore you should train the users of the system. This is often underestimated by companies.
• Evolve the implementation
  Once an ERP system is implemented, organizations must be able to adapt when the business requirements change.
• Use a multidisciplinary approach for implementation
  The implementation of an enterprise system has an effect on the entire organization. Therefore, personnel from different levels must be included in the implementation project.

Bulletpoint

• Generally, we see five different functional areas in a company:
  • Marketing
  • Manufacturing and operations
  • Accounting and finance
  • Supply chain management
  • Human resources
• A firm has to monitor its revenues and expense etc. When generating revenue there are several core business processes involved:
  • Order-to-cash
    The process that is associated with selling a service or product.
  • Procedure-to-pay
    All the processes associated with procuring goods from external sellers.
  • Make-to-stock and make-to-order
    The first is the process where goods are produced based on forecasts and stocked in warehouses. The second is the process where raw materials, accessories and subcomponents are procured based on forecasts but where the actual manufacturing only starts when the order is received.
• Companies want to optimize their core business processes to gain or sustain competitive advantage. The value chain is defined as the activities that add value to the end product. The activities of the value chain can support business processes.
• Core activities are the activities occur in the functional areas of the organization that process inputs and outputs. Core activities include:
  • Marketing and sales activities
  • Manufacturing and operations activities
  • Customer service activities
  • Inbound logistics activities
  • Outbound logistics activities
• Core activities can take place because of support activities. Support activities include:
  • Administrative activities
  • Infrastructure activities
  • Human resource activities
  • Technology development activities
  • Procurement activities
• If a company want to conduct its core business activities effectively then the functional areas of the company need to be able to share data with each other. Because of these challenges many organizations now use an enterprise-wide information system, also called enterprise system. This system has business applications for every business process and allows companies to integrate data across operations. The system uses an integrated database with a central storage which all users can access.
• Business process management (BPM) is a process in which people critically rethink and redesign business processes with the goal to improve performance measures. BMP uses information systems to streamline business processes. The steps of BPM are:
  1. Develop a vision
  2. Identify key processes
  3. Understand and measure existing processes
  4. Identify how the processes can be improved
  5. Design and implement the new processes
• A form of enterprise system that is often used is the enterprise resource planning (ERP) system. ERP systems use modules based on a common database that support the entire enterprise instead of just parts of it. With ERP it is easier to access information because it uses a central storage. Because of the central storage the information is available to everyone of the organization.
• With an ERP system it is also easier for organizations to implement audit controls and to comply with regulations imposed by the government. Many organizations that struggle with regulation and legal mandates are deploying an ERP. 
• The configuration of ERP systems is a difficult activity. Configuration is an activity that has to be performed during the implementation of the ERP system. A key factor for the success of ERP implementation is setting up the database.
• Companies that have successfully installed an enterprise system often follow the following recommendations:
  • Secure executive sponsorship
    Most enterprise systems fail because there is no support from top level management.
  • Hire experts
    ERP systems are complex so it is wisely to hire experts
  • Train the users
    It is hard to learn how to use an enterprise system and therefore you should train the users of the system.
  • Evolve the implementation
    Once an ERP system is implemented, organizations must be able to adapt when the business requirements change.
  • Use a multidisciplinary approach for implementation
    The implementation of an enterprise system has an effect on the entire organization. Therefore, personnel from different levels must be included in the implementation project.

Tentamentickets

• Know the difference between core and supporting activities.
• Know what business process management is and what its steps are.