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Chapter 6

Transaction Processing, Functional Applications, and Integration

Goals of the Chapter

This chapter describes the facts and issues related to transaction processing systems, innovative systems, and
functional systems in an organization. It discusses how IT supports customer relationship management, as well as
how the various support systems are integrated in an organization. Functional areas and business processes are
related to the value chain and the close linkage between functional areas and IT are explored. The benefits and issues
of integrating functional information systems are covered.

An Overview

Section 6.1 - Functional Information Systems – This section defines functional information systems that are designed
to handle traditional functional areas, as well as the major characteristics of the systems.

Section 6.2 - Transaction Processing Information Systems – This section covers the definition, objectives, activities,
and methods of transaction processing systems (TPS). Client/server and Web-based TPS are discussed, including
OLAP, object oriented transaction processing, and Web-based transaction processing. Some typical tasks are
explained, and transaction processing software is introduced.

Section 6.3 – Managing Production/Operations and Logistics – Systems to handle production and operations
management (POM), logistics, inventory management, MRP, and project management activities are explored,
including the decisions that must be made by each functional area.

Section 6.4 – Managing Marketing and Sales Systems – This section explores channel systems, allowing for
marketing and distribution improvements, and the tracking and analysis of sales trends and profitability.

Section 6.5 – Managing the Accounting and Finance Systems – These systems handle the money that flows into,
through, and out from the organization. This section also looks at financial and economic forecasting, budgeting, and
e-commerce in terms of management and software applications. Control and auditing are explored.

Section 6.6 – Managing Human Resources Systems - Systems developed to handle recruiting, training, performance
evaluation, payroll, and benefits are examined. Personnel planning and labor-management relations are visited.

Section 6.7 - Integrating Functional Information Systems – Reasons for integration of functional information systems
are proposed, and front- and back-office integration are discussed. Managerial and ethical issues are presented.

Questions for Review

1. What is a functional information system?
A functional information system is a system that supports a functional area in an organization. Functional areas like
accounting, finance, general management, human resources, etc. are associated with support activities that include
the firm's infrastructure, human resource management, technology development, and procurement. Other functional
areas like material management, operations, marketing, and services are associated with primary activities such as:
inbound logistics, operations, outbound logistics, marketing and sales, and service. The hierarchical organizational
structure is built on such functional areas.
2. List the major characteristics of a functional information system.
The four major characteristics of functional information systems are: (Why change to letters instead of bullets or

1. A functional information system is comprised of several smaller information systems (or modules) that support
specific activities performed by each functional area. For example, computerized shipping and inventory controls
support the logical system at DHMC.

2. The specific IS applications in any functional area can be integrated to form a coherent, department-based
functional system, or they can be completely independent. Many of the applications can and should be integrated
across departmental lines to match a business process. Several applications in the information system of DHMC were
integrated with the inventory and the purchasing systems in the opening case.

3. Functional information systems interface with each other to form an organizational or enterprise-wide information
system. The greater the degree of integration across functional lines, the greater the potential information systems
have for supporting the company cost-effectively and for helping to identify significant strategic initiatives. Some of
these systems interface with the environment, like governmental agencies, suppliers, customers, and even

4. Functional information systems can be viewed as supporting three traditional ways of looking at an organization's
activities: the operational, managerial, and strategic levels of an organization.
3. What are the objectives of a TPS?
The primary objective of TPS is to provide all the information required by law and/or the organizational policies to
keep a business running properly and efficiently.

Some specific objectives include the following: supporting the efficient use of resources and the attainment of
organizational goals, providing timely documents and reports, increasing the competitive advantage of the
organization, providing data necessary for tactical and strategic systems such as DSS applications, assuring accuracy
and integrity of data and information, and safeguarding assets and security of information. This (this what?) makes
TPSs the most likely candidates for reengineering, which will usually yield the most tangible benefits of IT
4. List the major characteristics of a TPS.
The major characteristics of a TPS include: (Use either bullets or numbers, not letters.)

1. Large amounts of data are collected, stored, processed, and used in other types of information systems.
2. The sources of data are mostly internal, and the output is intended mainly for an internal audience.
3. It processes information on a regular and repetitive basis.
4. A large amount of storage capacity is required.
5. High processing speed is required due to the high volume.
6. Historical orientation of information is prevalent.
7. Input and output data conform to structured formats.
8. High levels of detail are featured, especially in input data but often in output as well.
9. Low computation complexity is usually evident.
10. High levels of accuracy, data integrity, and security are required.
11. A high level of reliability is required; the flow of TPS data is mission critical.
12. Inquiry processing is a must.
5. Distinguish between batch and online TPS.
In batch processing, a firm collects transactions as they occur, placing them in groups or latches. The system then
prepares and processes the batches periodically. (For example, cookies are individually prepared from the dough and
baked in a batch. In online processing, data is processed as soon as a transaction occurs. For example, in any store,
once merchandise is sold, the inventory system is notified immediately.
6. Explain how the Web enables mass customization.
Mass customization refers to a situation in which a company produces a large volume of products (as in mass
production), but they also customize the products according to the specifications made by individual customers. The
Web enables mass customization by allowing customers to pick and choose the products they want customized and
also to correspond with the company's sales force.
7. Describe MRP.
Material requirements planning (MRP) systems facilitate planning for acquiring or producing parts, subassemblies,
and materials in a manufacturing environment. MRP deals only with production scheduling and inventories. MRP is
computerized because of the complex interrelationship among products and their components and because of the
need to alter plans each time a delivery date or an order quantity is changed. For example, if a company makes three
types of chairs that all use the same screws, MRP maintains the demand for screws along with the shipment schedule
of the chairs.

8. Describe MRP II.

Manufacturing resource planning (MRP II) systems are integrated applications that connect regular MRP with other
functional areas. In addition to the outputs of MRP, MRP II includes the costs of parts and the cash flow needed to
pay for them. It also estimates the cost of labor, tools, equipment repair, and energy, producing a computerized,
detailed budget.
9. Describe VMI.
Vendor managed inventory systems are used to allow the suppliers to monitor supply levels and to place reorders as
necessary. These systems are employed frequently in grocery markets and at large discounters like Wal-Mart. These
systems free the retailer from the time consuming work of inventory maintenance, and places the responsibility for
the proper maintenance of supply levels on the suppliers.
10. Define CIM and list its major benefits.
Computer integrated manufacturing (CIM) is a concept or philosophy on the implementation of various integrated
computer systems in factory automation.

Three basic goals (and benefits) of CIM are:

· simplification of all manufacturing technologies and techniques
· automation of as many of the manufacturing processes as possible by integrating many information technologies,
including flexible-manufacturing systems (FMS), JIT, MRP, CAD, CAE, and Group Technology (GT)
· Integration and coordination via computer hardware and software of all aspects of design, manufacturing, and
related functions
11. Describe PLM and list its benefits.
Product lifecycle management is a strategy that enables manufacturers to control and share product-related
information as part of product design and development.
12. Define channel systems.
Channel systems are all the systems that are involved in the process of getting a product or service to customers and
meeting all their needs. They can link and transform marketing, sales, supply, and other activities and systems.
Added market power comes from the integration of channel systems with the corporate functional areas.
13. Define JIT and list some of its benefits.
The just-in-time (JIT) concept attempts to minimize waste of all kinds, continually improve processes and systems,
and maintain respect for all workers as a result of using several technologies and management techniques. Benefits of
JIT include a reduction of production cycle time and costs, and an increase in quality. All elements of JIT can be
executed manually, but the use of JIT to support even some of the elements may result in significant process
14. Define sales force automation.
Providing salespersons with mobile devices and online access to real time databases empowers them to close more
deals, thus increasing productivity. A number of tools that track customers and their preferences, sales leads, and
current product levels and pricing are available to enhance these systems.
15. What is product/customer profitability?
This is an analysis of the profit contribution of different products or customers to the organization’s total
profitability. This helps management determine which products and customers lead to the most profit over time and
thereby aids in analyzing promotional and sales efforts.
16. Describe some tactical and strategic accounting/finance applications.
Accounting and finance both deal with money as their primary resource, although they often process and analyze
transactions involving other resources. Accounting is primarily concerned with the recording, classifying, and
analyzing of transactions; finance is primarily concerned with the availability of the money resource and its

Beyond the operational level, tactical applications of accounting include budgeting, cost control, etc. At the strategic
level, both accounting and finance are involved in forecasting and long-range planning. They also support strategic
planning, which requires the use of judgment and instinct to interpret and expand on the projections that accounting
and finance provide. At the tactical level, finance manages the cash and securities portions of the money resource in
order to obtain a maximum return on an investment. Arrangements for financing through lending institutions and
securities sales are made. At the strategic level, finance develops plans to assure that financing is available to support
the strategic operating plans of a company. There are many facets to the tactical and strategic activities of
17. List some budgeting-related activities.
Financial and economic forecasting, the availability and cost of financing (loans), stock and bond issues, dividend
payments, salaries, allocation of funds for annual expenses, and capital expenditures are examples of budgeting-related
18. List some EC activities in finance.
Loan approvals, credit card approvals, stock exchange transactions, currency conversion, e-bond, purchases,
electronic funds transfers, electronic bill presentment, and portfolio access and management are but a few of the
current financial examples.
19. List IT-supported recruitment activities.
Recruitment and advertisement of jobs, in addition to online interviewing, are just the beginning of the available
recruitment activities. Salary surveys, job selling through consortiums, and outsourcing information are other examples.
20. How can training go online?
Today, many organizations have developed online training simulations through ICAI and multimedia applications that are
made available via the organization’s intranet or the Internet. Through the addition of video clips, VR, and multimedia,
interactive training has become a standard.
21. Explain human resources information systems.
Human resource information systems (HRIS) support an organization's human resource management function. For
recruitment, HRIS can maintain position inventories and support employee selection decisions. HRIS are used to
enhance many day-to-day human resources activities including performance evaluations, employee training and
development, analyses of turnover, tardiness, and absenteeism, personnel planning, and for top management,
succession planning. Expert systems are often components of HRIS. In addition, GDSS are used with computerized
DSS models to support labor management negotiations.
22. Describe the need for application integration.
Applications must be able to cross functional lines in order to reach different databases. In order to be truly
successful, this integration becomes a critical success factor.
Questions for Discussion
1. Why is it logical to organize IT applications by functional areas?
It is logical to organize IT applications by functional areas because many companies are often organized in a
traditional functional hierarchy: control and efficiency. (How is “control and efficiency” related to the hierarchy? I
would make a more specific connection.) One group can possess both the authority and responsibility for a given
function and is motivated to operate as efficiently as possible. By basing IT applications in a functional area, they can
be designed and implemented to serve a particular function. However, in many practical cases, functionally oriented
applications do not serve an organization as well as business process oriented systems. In those situations, both the
business processes and systems are often reengineered or incrementally modified to provide the best results. The
applications serve all parties in the process, not just one function.
2. Describe the role of a TPS in a service organization.
While the role of TPS in service organizations is the same, in many ways, as in manufacturing or merchandising
organizations (e.g., payroll, human resource management, accounting, etc.), it does differ since there are no
inventory, manufacturing, or distribution systems in service organizations. Instead, the emphasis is on customer
service, which is the main product, and marketing.
3. Why are transaction processing systems a major target for restructuring?
Transaction processing systems are major targets for reengineering because they are critical for keeping an
organization running properly and efficiently. They are often some of the first (and oldest) applications implemented
by an organization. Therefore, they tend to become obsolete quickly. Thus, reengineering is likely to produce
dramatic and cost-justifiable results.
4. Which functional areas are related to payroll, and how does the relevant information flow?
All functional areas are related to payroll in the sense that all employees get paid through the system. However, the
payroll function of the accounting department is responsible for operating and maintaining the system. This is true
even when the mechanics of the payroll function are outsourced; internal personnel are still required to administer the
system. Payroll information is generated in all areas of an organization. This information includes hours worked, pay
raises granted, special allowances given, payroll and tax deductions made, etc. The information flows to the payroll
function, which updates and operates the payroll system. Output from the function includes paychecks or direct
deposits, related paperwork like pay stubs, reports to management and outside agencies, and accounting information.
5. Discuss the benefits of Web-based TPS.
Web-based TPSs allow you to provide timely data and reports to management and necessary personnel, for example,
salespersons. Inventory levels and pricing can be checked in real time, enhancing customer management and
improving production and delivery scheduling. This, in turn, will save the organization time and money.
6. It is said that, in order to be used successfully, MRP must be computerized. Why?
MRP is usually computerized because of the complex interrelationship between many products and their
components, and of the need to alter plans each time a delivery date or quantity ordered. It is difficult to do this
manually and produce consistently good results.
7. The Japanese implemented JIT for many years without computers. Discuss some elements of JIT, and comment
on the potential benefits of computerization.
It is surprising that the Japanese are not implementing JIT with computers since IT has proven very effective in
enhancing JIT(?) elements. These elements include:
1). low inventories, which are supported with accurate, timely inventory systems
2). small lot sizes, which have proven to be economically feasible when supported by CAM and other computer
3). fixed production rates, often associated with automation
4). extensive preventative maintenance and quick repairs, often scheduled and tracked with computer systems
5). few but reliable vendors, who are often selected and managed by purchasing management systems and EDI
6). quick changes (setups), associated with CAM
7). multi-functionally skilled workers, who can be managed with human resource systems
8). cooperative spirit and encouragement for a problem-solving environment
9). continual innovation and improvements

All are characteristics of business process reengineering supported by IT. The pull system for moving goods found in
JIT situations can be managed with IT applications. Standardized outputs, moderately utilized capacity, and
participative management are often associated with automation and reengineered processes.
8. Describe the role of computers in CIM.
Computers are central to CIM and are necessary for its integration, but represent only 20 percent of the concept. The
rest is represented by business processes and people. CIM is possible only when an integrated plan, the correct
information technology, and the right creative, motivated people are available.
9. Explain how Web applications can make the customer king/queen.
As business continues to become more competitive and as customers become more demanding and aware of
alternatives, efficient sales order processing takes on new importance as a mission critical application. Successful
organizations promote their ability to quickly and accurately serve the customer, since the days of manual order
processing are gone for most companies. Without the appropriate information systems in place to support order
processing, even a small business would be at a competitive disadvantage.
10. Why are information systems critical to sales-order processing?
Sales order processing is where:

· Detailed information is obtained from the customer.

· This detailed information feeds the operations which produce the product or deliver the service.
· The same information feeds the planning processes for the company's future.
· The same information also supports the company's service function, hopefully assuring customer satisfaction
and future business.

Information systems are necessary to assure that customer information is accurate, current, and complete, and to
make it available for all these other business processes.
11. Describe how IT can enhance mass customization.
Mass customization requires a highly flexible production technology and direct-to-the-customer distribution. Dell
and Gateway computers are good examples of companies that have successfully employed IT to these ends.
12. Marketing databases play a major role in channel systems. Why?
Channel systems are discussed under Managing Marketing and Sales Systems in Section 7.4 of the textbook. A
channel is the sum of all the pathways that connect the company and its customer.

Since the customer is the focus of the channel and since much of the company’s customer information is
contained in its marketing databases, the channel systems rely heavily upon those databases.
13. Geographical information systems are playing an important role in supporting marketing and sales. Provide
some examples not discussed in the text.
These systems are being used to provide customer and competitor information in a variety of industries. They are
often used for support of retail site location decisions. There is great potential for other uses. A few applications

* political uses such as voter "marketing" and election support

* deployment of police, fire, and other emergency services
* test marketing of new products
14. What is the role of software in PLM? Can PLM be done manually?
PLM software is used in the product development phase to automate the collaborative efforts. These routine and
time-intensive steps can be done manually, but automating them releases the organization’s employees from time-
consuming, repetitive tasks.
15. Discuss how IT facilitates the budgeting process.
The budget is the financial expression of an organization's plans. It allows management to allocate resources in
the way that best supports achieving the organization's missions and goals.

Budgeting is creating a set of accounting reports for future operations rather than past operations. For this reason,
IT facilitates budgeting in all of the ways that it facilitates accounting, except that it usually does not use
transaction data in the process. However, budgeting draws upon historical transaction data, and through analysis,
a projection of numbers for a future period is made. Therefore, IT facilitates budgeting by providing the data and
analysis necessary to make realistic projections.

Forecasting is the process of modifying projections based upon knowledge of the real world and then exercising
judgment about it. These forecasts become the basis for budgets.

IT is indispensable in converting projections into forecasts and forecasts into budgets. Very often, budgeters must
perform several “what if” exercises with forecasts before they can be confident about the numbers used in the
budget. IT is indispensable for these exercises as well.

Businesses usually work with annual budgets that are extremely detailed. Beyond the budget year, the “budget” is
referred to as a plan and is not nearly so detailed. However, many businesses are going to two-year detailed
budgets, partly because they are more useful and because the IT tools for managing such budgets are more readily
available today.
Once a budget is approved, IT can be used to track performance against it. Managers must account for differences
on a regular basis and take appropriate actions. “Actual vs. budgeted” information, particularly if tracked over
several years, can be used effectively to improve the accuracy of the budget process as well. This is nearly
impossible to do without the help of IT.
16. Why is risk management important, and how can it be enhanced by IT?
There is always risk present in all aspects of business. Organizations must be prepared to meet and appropriately
manage the most serious risks in order to succeed. In some cases, insurance is available when there are problems;
in others, management must be more sophisticated to handle a crisis.

When risks are recurring, such as late deliveries, they can be managed with the help of IT. For example,
transaction data that would reveal late deliveries must be collected, and this data must be analyzed against many
variables: frequency, vendor, time of year, geographic location, etc. The analysis will show where the most
serious risks occur, and management can act to prevent these risks in the future.

Risk analysis is a complex topic covering every aspect of business. The purpose of risk analysis is to develop a set
of protection and prevention programs that are cost effective. A serious risk with a low frequency of occurrence
requires a different risk management strategy from a small risk that occurs with greater frequency. IT can provide
the information required to develop a comprehensive, cost-effective risk management program.
17. Compare bill presentment to check re-presentment. How are they facilitated by IT?
Bill presentment, in terms of our course, is the preparation and presentation of a bill to be paid for merchandise or
services rendered by either the seller or a third party. Check re-presentment is the presentation of a check to a
bank for payment a second time (usually the last time).
Automated bill presentment is a quick means of billing a client, often increasing the speed of payment receipt.
Third parties, who loan money to the seller against the expected bill payment, are sometimes employed,,
increasing the immediately available capital of an organization. Check re-presentment is usually done through an
ETF system, quickly and easily allowing for collection of a NSF (non-sufficient funds) check.
18. How can the Internet support investment decisions?
Investment decisions are based upon information and instinct. The Internet carries much of the information an
investor needs to know about a company (or any other potential investment), often as up to date as the last hour.
There is also broader information on the industry, competitors, customers, suppliers, and the socio-
politico-economic environment. In fact, there is more information relevant to an investment decision than any
competent investor could hope to review in a reasonable length of time. The Internet provides a market
opportunity, and there are other Internet sites whose business it is to review and analysis this information. Further,
the information on the Internet is available quickly with minimal effort. Much of it is free; although some of it
may cost money. Regardless, a prudent investor can find most of the information he/she needs via the Internet at a
fraction of the cost and time required by any other method.
19. Describe the benefits of integrated accounting software such as MAS 90. Compare it to MAS 200.
MAS 90 gives the organization a fully integrated package that includes accounting, payroll, CRM, and business
intelligence tools, as well as bill production, job costing, and inventory management for small to mid-sized
businesses. MAS 200 extends these benefits to a client/server architecture that employs Microsoft SQL server.
(Or put a comma before “employing”, depending on the intended meaning.)
20. Discuss the role IT plays in support of auditing.
Auditing is the sampling and analysis of transactions to verify that they really occurred, that they are valid, that
their integrity has been protected and preserved, that appropriate controls are in place for each type of transaction,
that all related transactions also meet these criteria, and that the methods used for recording and analyzing them
have been carried out in accordance with generally accepted accounting principles, procedures, and standards.
Auditing verifies that there is a paper trail for all transactions and that when the paper trail disappears into a
computer, the computer software follows the same principles, procedures, and standards until the trail emerges
from the computer.

IT has developed sophisticated software to carry out the complex auditing operations that effectively determine
anomalies. Auditing would not be possible without today's IT tools for the millions of transactions carried out
each day in large multinational corporations. Even for small businesses, the audit is more effective and less costly
in terms of time and money when IT tools are used.
21. Investigate the role of the Web in human resources management.
It is possible that recent interest in teams and empowered employees is responsible for the implementation of new
HRIS. Before individual non-management employees became the resource they represent today, HRIS was a
fairly low priority item for development within an organization’s system. The applicability of employees' skills to
processes and projects that crossed functional areas was not considered; each functional area was responsible for
its own employees, and information maintained in an organization's centralized HRIS was elementary. Today's
companies must implement and maintain sophisticated HRIS to support complex organizational forms and
22. Geographical information systems are playing an important role in supporting marketing and sales. Provide
some examples not discussed in the text. (See Chapter 10.)
These answers will vary based on the interests of the students and can prove excellent fodder for discussions.
23. Discuss the need for application integration and the difficulty of doing it.
The various applications used throughout a company need to be fully integrated in order to achieve the greatest
success in ERP. However, the challenge of making disparate system applications correctly interact with each
other is legion, especially if you are dealing with legacy system applications. The organization will be forced to
produce integration software or purchase (and perhaps adapt) middleware.
24. Discuss the approaches and the reasons for integrating front office with back office.
Integrating front-end and back-end operations are a must for ERP. By full integration, an organization can
maintain a Web-based CRM application and allow for interactive sales and marketing by providing salespersons
with real-time reports of product inventory and pricing. It can allow for e-commerce through a website connected
to back-office operations and use the entire system to sustain a competitive advantage through intelligence