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Chapter 2 – Enterprise Systems

Accounting Information Systems 7eUlric J. Gelinas and Richard Dull

Copyright © 2008 Thomson Southwestern, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

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Nestle

• 200 operating companies in 80 countries• 9 different general ledgers• 29 different prices for vanilla (all from the

same vendor)• SAP implementation:

– Started in 1997, restarted in 2001– 2003 latest rollout– Spent $280 million with SAP

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Nestle

• Not a software IT project but a change management project– 77% turnover in forecasting department

• Eventually saved $325 million, primarily in forecasting and inventory costs

Learning Objectives

• Describe enterprise resources planning (ERP) systems

• Explain the organization value chain• Describe the relationship of the organization

value chain and an enterprise system• Illustrate the value of systems integration• Describe how an enterprise system

supports major business event processes• Enumerate the pros and cons of

implementing enterprise systems

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Enterprise System

• Integrates business processes and information from entire enterprise

• Helps coordinate the operation of business functions

• ERP systems are software packages that can be used for the core systems necessary to support enterprise systems

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Integrate Business Functionality

When purchasing equipment the ERP will:• Provide an electronic order form• Apply business rules• Route the order for approvals• Send the order to a buyer• Connect to the supplier• Use data to receive goods, project funding

requirements, compare to budget, and analyze vendor performance

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ERP Systems Vendors

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SAP Modules

Source: Reprinted with permission from SAP

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SAP NetWeaver

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Third-Party Modules

Customer Relationship Management (CRM)—builds and maintains customer related data

• Customer Self-Service (CSS)—allows customers to complete tasks without assistance

• Sales Force Automation (SFA)—automates sales tasks such as order processing and tracking

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Third-Party Modules, Cont’d.

• Supply Chain Management (SCM)—plans and executes demand planning, inventory acquisition, manufacturing, distributing and selling

• Product Lifecycle Management (PLM)—manages product data from design through disposal of product

• Supplier Relationship Management (SRM) —manages the interactions with the organizations that supply the goods and services to an enterprise. Includes procurement and contract management.

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Best-of Breed versus Tight Integration

• Main problem in best-of-breed is integration of systems– Middle-ware– Application Programming Interface (API)– Enterprise Application Integration (normally

batched)– Event Driven Architecture (publish and subscribe

(e.g. Sap NetWeaver)– Business Process Management – system “on top”

of all other systems

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Enterprise Systems and the Value Chain

• Enterprise systems facilitate value chain management

• The value chain is the system of activities that transform inputs into outputs valued by the customer

• The goal of an organization is to add the greatest value with the lowest costs thereby increasing competitive advantage

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Value Chain and

Value System

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The Value of Systems Integration

• One of the values provided by an enterprise system is the coordination of value activities in the value chain.

• The system performs this coordination by sharing data across business processes.

• In the following slides we describe what life would be like without integrated systems and then how enterprise systems solve some of those problems.

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Inefficient Customer Service1. Check if the customer exists in the system and has good credit.

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Inefficient Customer Service2. Find out if good can be promised from warehouse stock or if it has to be scheduled for manufacturing. Tell the customer when they would receivethe item. The date is known as “available to promise” or ATP.

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Inefficient Customer Service3. If item is not on the shelf, when will it be releasedfrom manufacturing? Sally could review production schedules and add the time required to pick, pack, and ship the item. This would not, however, tell her if the itemhad already been allocated to another customer.

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Inefficient Customer Service4. In the event that the item must be manufactured, when could it be scheduled, and how long will the manufacturing process take?

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Inefficient Customer Service5. How long will it take vendors to supply raw materials so that manufacturing can take place?

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Inefficient Customer Service6. What price will be charged to this customer for this order?

The price to charge must be obtained from marketing.

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Inefficient Customer Service7. Needs to check AR balance to determine if customer has sufficient credit.Without direct access to the open AR data, Sally willhave to call accounting to approve this order.

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Inefficient Customer Service8. If credit is insufficient, must check with credit department for change in credit line.

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Inefficient Customer Service

• Do you think that Sally wants to keep the customer on the phone throughout this process?

• Would you consider this to be good customer service?

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Solution to Inefficient Customer Service

• Enterprise system establishes available to promise (ATP) by checking warehouses and scheduled manufacturing

• Price and creditworthiness automatically determined from database

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Information Systems

• Facilitate processing of business events

• Retain data about business events

• Store data useful for decision making

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Enterprise Systems Store Data in Tables

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Processing Orders Requires Multiple Tables

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Stored Data Used for Decisions

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Major ERP ModulesSales and Distribution• Records customer orders• Shipping • Billing• Connections to

• Materials management module• Financial accounting module• Controlling module

• Based on SAP (best selling ERP)

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Major ERP Modules, Cont’d.Materials Management• Acquisition and management of

goods from vendors• Purchase order preparation• Receiving• Recording invoice

• Interacts with • Sales and distribution module• Financial accounting module• Controlling module

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Major ERP Modules, Cont’d.Financial Accounting• Plays a central role in an ERP system and

incorporates data from other modules into general ledger accounts and financial statements

• Business events from other modules, such as SD and MM, are incorporated by the FA module into the general ledger accounts and included in the external account statements, the balance sheet, profit and loss statement, and statement of cash flows.

• The FA module also includes accounts receivable and accounts payable functions to record and manage that data directly and to complete events begun in the SD and MM modules.

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Major ERP Modules, Cont’d.

Controlling and Profitability Analysis

• Handles internal accounting including:• Cost center accounting• Profitability analysis for sales• Activity-based accounting• Budgeting

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Major ERP Modules, Cont’d.

Human Resources

• Recruiting, management and administration of personnel

• Payroll processing

• Training and travel

• Benefits

• Reports

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Two Major Business Processes

• Order-to-Cash – take a customer order and convert it to “cash in”

• Purchase-to-Pay – determine what needs to be ordered, order it, and pay for it

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Order-to-Cash1. Respond to customer inquiries and requests for quotes (RFQs).

Some companies add on separate CRM modules

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Order-to-Cash2. Record customer order including: check customer credit; check inventory pricing; and check where and when inventory will be available to send to the customer.

Triggers picking of goods or purchase of goods from another vendor.

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Order-to-Cash3. Pick goods from warehouse and pack for shipment.

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Order-to-Cash4. Ship goods to the customer.ERP system would choose the appropriate routing and carrier, record the cost of goods soldand inventory reduction in the general ledger. Some ERP systems trigger the billing process when a shipment takes place.

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Order-to-Cash5. Billing the customer and recording the sale in AR.ERP system ensures correct quantities, prices, terms, addresses, etc. ERP systemcan be used to analyze sales profitability by comparing product costs to sellingprice.

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Order-to-Cash6. Receive and record payment.Includes: recording cash receipts and updating cashand accounts receivable. ERP data can then be used to manage customer credit and invest available cash.

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Purchase-to-Pay1. Determine requirements, complete purchase requisition.

ERP system may automaticallygenerate the purchase requisition based on quantity on-hand, quantity-on-order, and expected demand.

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Purchase-to-Pay2. Prepare and record purchase order.An ERP system assists the buyer in identifying sources of supply for therequested item, preparing RFQs to vendors, analyzing vendor quotes,comparing vendor prices, terms, and past performance

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Purchase-to-Pay3. Receive and record goods.Compare quantity ordered to quantity received. The ERP routes goods to the function that requested them or directs them the warehouse for immediate sale. It also records vendor performance data.

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Purchase-to-Pay4. Receive vendor invoice, match with PO and receiving report; record payable.If the three-way match fails, the enterprise system notifies the proper personnel to ensure timely reconciliation of differences.

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Purchase-to-Pay5. Prepare and record cash disbursement and update accounts.An ERPsystem uses vendor and AP data toschedule payments in accordance with vendor terms and to receive discounts.

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Enterprise Systems

• Universally purchased and not built

• Organizations supplement what is purchased– Third-party software– Develop and integrate pieces missing– Use query and reporting tools for output– Extract and download data for analysis