FIGURE 2-7 Voyage-estimating decision-support system
Mango has a core of designers and production
facilities that can churn out new fashion styles at lightning speed. But
Mango would not be able stock its stores so quickly with hot fashion trends
without its powerful information systems. These information systems support
finely tuned business processes that organize merchandise based on style
and customer tastes to drive inventory replenishment.
MAJOR TYPES OF SYSTEMS IN ORGANIZATIONS
Because there are different interests, specialties, and levels in an organization, there are different kinds of systems. No single system can provide all the information an organization needs. Figure 2-1 illustrates one way to depict the kinds of systems found in an organization. In the illustration, the organization is divided into strategic, management, and operational levels and then is further divided into functional areas, such as sales and marketing, manufacturing and production, finance and accounting, and human resources. Systems are built to serve these different organizational interests (Anthony, 1965).
Three main categories of information systems
serve different organizational levels: operational-level systems, management-level
systems, and strategic-level systems. Operational-level systems support
operational managers by keeping track of the elementary activities and
transactions of the organization, such as sales, receipts, cash deposits,
payroll, credit decisions, and the flow of materials in a factory. The
principal purpose of systems at this level is to answer routine questions
and to track the flow of transactions through the organization. How many
parts are in inventory? What happened to Mr. Williams’s payment?
To answer these kinds of questions, information generally must be easily
available, current, and accurate. Examples of operational-level systems
include a system to record bank deposits from automatic teller machines
or one that tracks the number of hours worked each day by employees on
a factory floor.
Strategic-level systems help senior management tackle and address strategic issues and long-term trends, both in the firm and in the external environment. Their principal concern is matching changes in the external environment with existing organizational capability. What will employment levels be in five years? What are the long-term industry cost trends, and where does our firm fit in? What products should we be making in five years?
Information systems also serve the major business functions, such as sales and marketing, manufacturing and production, finance and accounting, and human resources. A typical organization has operational-, management-, and strategic-level systems for each functional area. For example, the sales function generally has a sales system on the operational level to record daily sales figures and to process orders. A management-level system tracks monthly sales figures by sales territory and reports on territories where sales exceed or fall below anticipated levels. A system to forecast sales trends over a five-year period serves the strategic level. We first describe the specific categories of systems serving each organizational level and their value to the organization. Then we show how organizations use these systems for each major business function.
Figure 2-2 shows the specific types of information
systems that correspond to each organizational level. The organization
has executive support systems (ESS) at the strategic level; management
information systems (MIS) and decision-support systems (DSS) at the management
level; and transaction processing systems (TPS) at the operational level.
Systems at each level in turn are specialized to serve each of the major
functional areas. Thus, the typical systems found in organizations are
designed to assist workers or managers at each level and in the functions
of sales and marketing, manufacturing and production, finance and accounting,
and human resources.
Table 2-1 summarizes the features of the four types of information systems. It should be noted that each of the different systems may have components that are used by organizational levels and groups other than its main constituencies. A secretary may find information on an MIS, or a middle manager may need to extract data from a TPS.
TRANSACTION PROCESSING SYSTEMS
Transaction processing systems (TPS) are the basic business systems that serve the operational level of the organization. A transaction processing system is a computerized system that performs and records the daily routine transactions necessary to conduct business. Examples are sales order entry, hotel reservation systems, payroll, employee record keeping, and shipping.
At the operational level, tasks, resources, and goals are predefined and highly structured. The decision to grant credit to a customer, for instance, is made by a lower-level supervisor according to predefined criteria. All that must be determined is whether the customer meets the criteria.
2-3 depicts a payroll TPS, which is a typical accounting transaction processing
system found in most firms. A payroll system keeps track of the money
paid to employees. The master file is composed of discrete pieces of information
(such as a name, address, or employee number) called data elements. Data
are keyed into the system, updating the data elements. The elements on
the master file are combined in different ways to make up reports of interest
to management and government agencies and to send paychecks to employees.
These TPS can generate other report combinations of existing data elements.
typical TPS applications are identified in Figure 2-4. The figure shows
that there are five functional categories of TPS: sales/marketing, manufacturing/production,
finance/accounting, human resources, and other types of TPS that are unique
to a particular industry. The United Parcel Service (UPS) package tracking
system described in Chapter 1 is an example of a manufacturing TPS. UPS
sells package delivery services; the TPS system keeps track of all of
its package shipment transactions.
Transaction processing systems are often so central to a business that TPS failure for a few hours can lead to a firm’s demise and perhaps that of other firms linked to it. Imagine what would happen to UPS if its package tracking system were not working! What would the airlines do without their computerized reservation systems?
Managers need TPS to monitor the status of internal operations and the firm’s relations with the external environment. TPS are also major producers of information for the other types of systems. (For example, the payroll system illustrated here, along with other accounting TPS, supplies data to the company’s general ledger system, which is responsible for maintaining records of the firm’s income and expenses and for producing reports such as income statements and balance sheets.)
MANAGEMENT INFORMATION SYSTEMS
In Chapter 1, we define management information systems as the study of information systems in business and management. The term management information systems (MIS) also designates a specific category of information systems serving management-level functions. Management information systems (MIS) serve the management level of the organization, providing managers with reports and often online access to the organization’s current performance and historical records. Typically, MIS are oriented almost exclusively to internal, not environmental or external, events. MIS primarily serve the functions of planning, controlling, and decision making at the management level. Generally, they depend on underlying transaction processing systems for their data.
summarize and report on the company’s basic operations. The basic
transaction data from TPS are compressed and are usually presented in
long reports that are produced on a regular schedule. Figure 2-5 shows
how a typical MIS transforms transaction level data from inventory, production,
and accounting into MIS files that are used to provide managers with reports.
Figure 2-6 shows a sample report from this system.
MIS usually serve managers primarily interested in weekly, monthly, and yearly results, although some MIS enable managers to drill down to see daily or hourly data if required. MIS generally provide answers to routine questions that have been specified in advance and have a predefined procedure for answering them. For instance, MIS reports might list the total pounds of lettuce used this quarter by a fast-food chain or, as illustrated in Figure 2-6, compare total annual sales figures for specific products to planned targets. These systems are generally not flexible and have little analytical capability. Most MIS use simple routines such as summaries and comparisons, as opposed to sophisticated mathematical models or statistical techniques.
Decision-support systems (DSS) also serve the management level of the organization. DSS help managers make decisions that are unique, rapidly changing, and not easily specified in advance. They address problems where the procedure for arriving at a solution may not be fully predefined in advance. Although DSS use internal information from TPS and MIS, they often bring in information from external sources, such as current stock prices or product prices of competitors.
Clearly, by design, DSS have more analytical power than other systems. They use a variety of models to analyze data, or they condense large amounts of data into a form in which they can be analyzed by decision makers. DSS are designed so that users can work with them directly; these systems explicitly include user-friendly software. DSS are interactive; the user can change assumptions, ask new questions, and include new data.
interesting, small, but powerful DSS is the voyage-estimating system of
a subsidiary of a large American metals company that exists primarily
to carry bulk cargoes of coal, oil, ores, and finished products for its
parent company. The firm owns some vessels, charters others, and bids
for shipping contracts in the open market to carry general cargo. A voyage-estimating
system calculates financial and technical voyage details. Financial calculations
include ship/time costs (fuel, labor, capital), freight rates for various
types of cargo, and port expenses. Technical details include a myriad
of factors, such as ship cargo capacity, speed, port distances, fuel and
water consumption, and loading patterns (location of cargo for different
voyage-estimating DSS draws heavily on analytical models. Other types
of DSS are less model-driven, focusing instead on extracting useful information
to support decision making from massive quantities of data. For example,
Intrawest—the largest ski operator in North America—collects
and stores vast amounts of customer data from its Web site, call center,
lodging reservations, ski schools, and ski equipment rental stores. It
uses special software to analyze these data to determine the value, revenue
potential, and loyalty of each customer so managers can make better decisions
on how to target their marketing programs. The system segments customers
into seven categories based on needs, attitudes, and behaviors, ranging
from “passionate experts” to “value-minded family vacationers.”
The company then e-mails video clips that would appeal to each segment
to encourage more visits to its resorts.
Senior managers use executive support systems (ESS) to help them make decisions. ESS serve the strategic level of the organization. They address nonroutine decisions requiring judgment, evaluation, and insight because there is no agreed-on procedure for arriving at a solution.
ESS are designed to incorporate data about external events, such as new tax laws or competitors, but they also draw summarized information from internal MIS and DSS. They filter, compress, and track critical data, displaying the data of greatest importance to senior managers. For example, the CEO of Leiner Health Products, the largest manufacturer of private-label vitamins and supplements in the United States, has an ESS that provides on his desktop a minute-to-minute view of the firm’s financial performance as measured by working capital, accounts receivable, accounts payable, cash flow, and inventory.
ESS employ the most advanced graphics software and can present graphs and data from many sources. Often the information is delivered to senior executives through a portal, which uses a Web interface to present integrated personalized business content from a variety of sources. You will learn more about other applications of portals in Chapters 4, 11, and 12.
the other types of information systems, ESS are not designed primarily
to solve specific problems. Instead, ESS provide a generalized computing
and communications capacity that can be applied to a changing array of
problems. Although many DSS are designed to be highly analytical, ESS
tend to make less use of analytical models.
Relationship of Systems to One Another
Figure 2-9 illustrates how the systems serving different levels in the organization are related to one another. TPS are typically a major source of data for other systems, whereas ESS are primarily a recipient of data from lower-level systems. The other types of systems may exchange data with each other as well. Data may also be exchanged among systems serving different functional areas. For example, an order captured by a sales system may be transmitted to a manufacturing system as a transaction for producing or delivering the product specified in the order or to a MIS for financial reporting.
It is definitely advantageous to integrate these systems so that information can flow easily between different parts of the organization and provide management with an enterprise-wide view of how the organization is performing as a whole. But integration costs money, and integrating many different systems is extremely time consuming and complex. This is a major challenge for large organizations, which are typically saddled with hundreds, even thousands of different applications serving different levels and business functions. Each organization must weigh its needs for integrating systems against the difficulties of mounting a large-scale systems integration effort. Section 2.3 and Chapter 11 treat this issue in greater detail.