5.4 Other Specialized Information Systems

5.4.1 An overview of Artificial Intelligence

Artificial Intelligence (AI) is a field of science and technology based on disciplines such
as computer science, biology, psychology, linguistic, mathematics and engineering. The
goal of AI is to develop computers that can think, see, hear, walk, talk and feel.

A major power of AI is the development of computer functions normally associated with
human intelligence such as reasoning, learning and problem solving.

Artificial Intelligence systems include the people, procedures, hardware, software data
and knowledge needed to develop computer systems and machines that demonstrate
the characteristics of intelligence. Characteristics of intelligence include the following;
Learn from experience and apply the knowledge acquired from experience.

Handle complex situations
Solve problems when important information is missing.
Determine what is truly important
React quickly and correctly to a new situation
Understand visual images
Process and manipulate symbols
Be creative and imaginative
Use heuristics (learn by discovering) or guesses

One of the problems in AI is arriving at a working definition of real intelligence against
which to compare the performance of an artificial intelligence system (table x).



5.4.1.1 Major Application Areas of Artificial Intelligence

AI applications can be grouped under three major areas. They are Cognitive science,
robotics and natural interfaces.



Cognitive science:

This area of AI is based on research on biology, neurology, psychology, mathematics
etc.

It focuses on researching how the human brain works and how humans think and learn.
The results of such research in human information processing are the basis for the
development of a variety of computer-based applications in AI. Applications in the
cognitive science area of AI include the following;

• Development of expert systems and other knowledge based systems that add a
knowledge base and some reasoning capability to information systems.
• Adaptive learning systems that can modify their behaviors based on information
they acquire as they operate. Example: Chess playing systems
• Fuzzy logic systems can process data that are incomplete or ambiguous, that is
fuzzy data (example: data termed as low, very high, reasonable). They work as
humans by developing approximate inferences and answers to solve
unstructured problems with incomplete knowledge.
• Genetic algorithms software uses mathematics functions to stimulate evolutionary
processes that can generate increasingly better solutions to problems.
• Intelligent agents use expert systems and other AI technologies to serve as
software surrogates for a variety of end user applications.

Robotics
Basic disciplines of robotics include AI, Engineering and physiology. This technology
produces robot machines with computer intelligence and computer controlled, human
like physical capabilities.

This area includes applications designed to give robots the powers of

Visual perception: sight
Tactility: ability use the sense of touch
Dexterity: ability in using hands skillfully
Locomotion: physical ability to move over any surface
Navigation: the intelligence to properly find ways to a destination.

Many applications of robotics exist and research into these unique devices continue.

Robots are used to assemble and paint products in manufacturing. In military
applications robots are moving beyond movie plots to become real weapons.

Natural interfaces

Development of natural interfaces is essential to the natural use of computers by
humans. This area of applications are designed for,
Natural languages and Speech recognition: ability to communicate with computers and
robots in conversational human languages and have them understand us as
easily as we understand each other. This involves research and development in
linguistics, psychology, computer science and other disciplines.

Multisensory Interfaces: development of multisensory devices that use variety body
movements to operate computers.

Virtual reality: using multisensory human computer interfaces that enable human users
to experience computer simulated objects, spaces, activities and worlds as they actually
exist.

Neural networks

These are computing systems modeled based on brain’s mesh-like network of neurons.
Although neural networks are simpler than the human brain in architecture, similar to
brain, the interconnected processors in a neural network operate in parallel and interact
dynamically with each other. This enables neural networks to process many pieces of
data at once to learn to recognize patterns.

Some of the specific features of neural networks include the following:
• The ability to retrieve information even if some of the neural nodes fail
• Fast modification of stored data as a result of new information
• The ability to discover relationships and trends in large databases
• The ability to solve complex problems for which all the information is not present
An Example of the use of neural networks:
A neural network can be trained to learn which characteristics result in good or
bad loans.

5.4.2 Expert Systems

5.4.2.1 An Overview of a Expert System

An expert system is a knowledge-based information system that uses its knowledge
about a specific, complex application area to act as an expert consultant to end users.
Expert systems provide answers to questions in a very specific problem area by making
humanlike inferences about knowledge contained in a specialized knowledge base. They
must also be able to explain their reasoning process and conclusions to a user.

Expert systems can provide decision support to end users in the form of advice from an
expert consultant in a specific problem area.

Knowledge-based information system (KBIS)

A KBIS adds a knowledge base to the major components found in other types of
computer based information systems.An Expert system consists of a collection of integrated and related components including a knowledge base, an inference engine, an explanation facility, a knowledge base acquisition facility and a user interface.



The user interacts with the user interface which interacts with the inference engine. The
inference engine interacts with the other expert system components. These components
must work together to provide expertise.

Knowledge base

The knowledge base stores all relevant information data, rules, cases and relationships
used by the expert system.

A knowledge base is a natural extension of a database and an information and decision
support system. With a knowledge base, we try to understand patterns and relationships
in data as a human expert does in making intelligent decisions.

A knowledge base must be developed for each unique application. It can include generic
knowledge from generic theories that have been established over time and specific
knowledge that comes from more recent experiences and rules of thumb. Knowledge
bases however go far beyond simple facts, also storing relationships, rules or frames
and cases.

Rules suggest certain conclusions, based on a set of given facts. Normally rules are
stored as if-then statements.

Inference engine

The inference engine processes the rules, data, and relationships stored in the
knowledge base to provide answers, predictions, and suggestions the way a human
expert would. Two common methods for processing include backward and forward
chaining. Backward chaining starts with a conclusion, then searches for facts to support
it; forward chaining starts with a fact, then searches for a conclusion to support it. Mixed
chaining is a combination of backward and forward chaining.

Explanation facility

Component of an expert system that allows a user or decision maker, to understand how
the expert system arrive at a certain conclusion or a result.
The expert system using the explanation facility can indicate all the facts and rules that
were used in reaching the conclusions.

Knowledge base acquisition facility

This acts an interface between experts and the knowledge base. The overall purpose of
the knowledge acquisition facility is to provide a convenient and efficient means for
capturing and storing all components of the knowledge base. Knowledge acquisition
software can present users and decision makers with easy to use menus. After filling the
appropriate attributes, the knowledge acquisition facility correctly stores information and
relationships in the knowledge base.

Regardless of how the knowledge is acquired, it is important to validate and update the
knowledge base frequently to make sure that it is still accurate.

The knowledge acquisition facility acts an as interface between experts and the
knowledgebase.

User interface

Specialized user interface software is employed for designing, creating, updating and
using expert systems. The main purpose of the user interface is to make the
development and use of an expert system easier for users and decision makers.

Expert systems place more emphasis on directing user activities than other types of
systems. Text oriented user interfaces (using menus, forms and scripts) are more
common in expert systems than the graphical interfaces often used with DSSs.

5.4.2.2 Applications of an Expert System

Using an expert system involves an interactive computer based session in which the
solution to a problem is explored, with the expert system acting as a consultant to an end
user. The expert systems asks questions from the user, searches its knowledge base for
facts and rules or other knowledge, explains its reasoning process when asked and
gives expert advice to the user in the subject area being explored.

Expert systems are used in many different fields, including medicine, engineering,
physical sciences and business.

Now expert systems help to diagnose illnesses, search for minerals, analyze
compounds, recommend repairs, and for financial planning.

• Credit granting and loan analysis: In banks, Expert systems are used to review an
individual’s credit application and credit history data to make a decision on
whether to grant a loan or approve a transaction.
• Stock picking: Some expert systems are used to help investment professional
pick stocks and other investments
• Catching cheats and terrorists: Some gambling casinos use expert system
software to catch gambling cheats.
• Budgeting: Automotive companies use expert systems to help budget, plan and
coordinate prototype testing programs
• Games: Some expert systems are used for entertainment- crossword puzzles
• Information management and retrieval: Expert system agents help managers find
the right data and information while filtering out irrelevant facts that might delay
timely decision making.
• Manufacturing: Expert systems can be used to spot defective welds during the
manufacturing process. The expert system analyzes radiographic images and
suggests which welds could be damaged.

5.4.2.3 Benefits and Limitations of an Expert System

Benefits

An expert system captures the expertise of an expert or group of experts in a computerbased
information system. Thus it can outperform a single human expert in many
problem situations. That’s because an expert system is faster and more consistent, can
have the knowledge of several experts, and does not get tired or distracted by overwork
or stress.

Expert systems also help preserve and reproduce the knowledge of experts. They allow
a company to preserve the expertise of an expert before he/she leaves the organization.
This expertise can then be shared by reproducing the software and knowledge base of
the expert system.

Expert systems can explain how and why a decision or solution was reached. Ability to
explain its reasoning process can be the most valuable feature of a computerized
system.

ESs can display intelligent behavior: that is proposing new ideas or approaches to
problem solving by considering a collection of data.

ESs can evaluate complex relationships to reach conclusions and solve problems.
ESs can deal with uncertainty: that is the ability to deal with incomplete or not completely
accurate knowledge.

Limitations

Expert systems excel only in solving specific types of problems in a limited domain of
knowledge. They are poor in solving problems requiring a broad knowledge base and
subjective problem solving. For an ES the primary source of knowledge is a human
expert. If this knowledge is incomplete or incorrect it will lead to errors in the system.
Other development errors involve poor programming practices.

Major limitations of expert systems arise from their limited focus, inability to learn,
maintenance problems and development cost. Example for limited focus: An ES
designed to provide advice on how to repair a machine is unable to decide when or
whether to repair it.

They do well in operational or analytical tasks, but can make mistakes at subjective
managerial decision making.

Expert systems cannot refine its own knowledge. A programmer must provide
instructions to the system that determine how the system is to learn from experience.
Expert systems are difficult and costly to develop and maintain properly. The cost of
knowledge engineers, lost expert time, and hardware and software resources may be too
high.

ESs are not used in a large number of organizations. That means they have not been
widely tested in corporate settings. Some ESs are difficult to control and use. Therefore,
users require the support of trained computer personnel to use the system.

Expert systems cannot easily handle knowledge that has a mixed representation.
Knowledge can be represented through defined rules, in comparison with similar cases,
and in various other ways. An ES in one application might not be able to deal with
knowledge that combines both rules and cases.

ESs are difficult to maintain. Some are not responsive or adaptive to changing
conditions. Adding new knowledge and changing complex relationships may require
sophisticated programming skills. Expert systems can be expensive to develop when
using traditional programming languages and approaches. Development cost can be
greatly reduced through the use of software for expert system development.

Expert systems raise legal and ethical concerns too. People who make decisions and
take action are legally and ethically responsible for their behavior. When expert systems
are used to make decisions or help in the decision-making process, who is legally and
ethically responsible? These legal and ethical issues have not been completely resolved.

5.3 Decision Support Systems (DSS)

5.3.1 Introduction to DSS

Decision support systems (DSS) are a type of a computer based information system that
provide interactive information support to the human decision maker during the process
of arriving at a decision. They are interactive systems that assist a decision maker when
faced with unstructured or semi structured business problems.

DSSs use analytical models, specialized databases, a decision makers own insights and
judgments and an interactive computer-based modeling process.

DSSs are designed to be ad hoc quick response systems that are initiated and controlled
by business decision makers.

In general DSS can perform the following functions.

• Handle large amounts of data from different sources – internal and external
databases
• Provide report and presentation flexibility
• Offer both textual and graphical orientation
• Support drill-down analysis
• Perform complex, sophisticated analysis and comparisons using advanced
software packages

5.3.2 Capabilities of a DSS

DSS can assist with problem solving phases, decision frequencies, and different degrees
of problem structure. DSS approaches can also help at all levels of decision making
process.

Support for problem solving phases:

Objective: assist decision makers with the phases of problem solving. The phases
include intelligence, design, choice, implementation and monitoring.
By supporting all types of decision-making approaches, a DSS gives the decision maker
a great deal of flexibility in getting computer support for decision making activities.

Support for different decision frequencies:

Decisions can range from one of a kind to repetitive decisions. One of a kind decisions
are typically handled by an ad hoc DSS. An ad hoc DSS is concerned with situations or
decisions that come up only a few times during the life of the organization; in small
businesses, they may happen only once.

Example: decision to invest on development of a new product.
Repetitive decisions are addressed by an institutional DSS. An institutional DSS handles
situations or decisions that occur more than once, usually several times a year or more.
An institutional DSS is used repeatedly and refined over the years.

Example: Production scheduling

Support for different problem structures:

Decisions can range from highly structured and programmed to unstructured and nonprogrammed.

Highly structured problems are straightforward, requiring known facts and relationships.
Semistructured or unstructured problems are more complex. The relationships among
the pieces of data are not always clear; the data may be in a variety of formats and the
data is often difficult to manipulate or obtain.

Support for various decision making levels:

DSSs can provide help for managers at different levels within the organization.
Operational managers can get assistance for daily and routine decision making. Tactical
decision makers can be supported with analysis tools to ensure proper planning and
control. At the strategic level, DSSs can help managers by providing analysis for long
term decisions requiring both internal and external information.

5.3.3 Basic Components of a DSS

Main components of a DSS include a database and a model base. In addition a typical
DSS contains a dialogue manager, which allows decision makers to easily access and
manipulate the DSS and to use common business terms and phrases.

Apart from the dialogue manager additional components include access to the internet,
networks and other computer-based systems. This allows the DSS to tie into other
powerful systems, including the TPS or function-specific subsystems.



The database

The database management system allows managers and decision makers to perform
qualitative analysis on the company’s vast stores of data in databases, data warehouses,
and data marts.

A data-driven DSS primarily performs qualitative analysis based on the company’s
databases. Data-driven DSSs tap into vast stores of information contained in the
corporate database, retrieving information on inventory, sales, personnel, production,
finance, accounting and other areas.

Data mining and business intelligence are often used in a data-driven DSS.

A database management system can also be connected to external databases to give
managers and decision makers even more information and decision support.

External databases can include the Internet, libraries, government databases, and more.
The combination of internal and external database access can give key decision makers
a better understanding of the company and its environment.

The Model base
DSSs rely on model bases as well as databases as vital system resources. A modeldriven
DSS primarily performs mathematical or quantitative analysis. The model base
allows managers and decision makers to perform quantitative analysis on both internal
and external data.

It is a software component that consists of models used in computational and analytical
routines that mathematically express relationships among variables. For example, a
spread sheet program might contain models to express relationships such as
sales value = product price x quantity

A DSS model base could include models and analytical techniques used to express
much more complex relationships. Examples are multiple linear programming models
and capacity budgeting models. The model base gives decision makers access to a
variety of models so that they can explore different scenarios and see their effects in
order to assist them in decision making.

Model management software (MMS) is often used to coordinate the use of models in a
DSS, including financial, statistical analysis, graphical, and project-management models.
DSS software typically contains built in analytical modeling routines and also enables
you to build your own models.

The dialogue manager

The dialogue manger allows users to interact with the DSS to obtain information. It
assists with all aspects of communications between the user and the hardware and
software that constitute the DSS

5.3.4 Comparison of MIS and DSS

A DSS differs from an MIS in numerous ways, including the type of problems solved, the
support given to users, the decision emphasis and approach, and the type, speed, output
and development of the system used. Following tables provide a outline of these
differences.





5.3.5 Group Support Systems (GSS)

Although DSS approach has resulted in better decision making for all levels of individual
users, it is considered as not suitable for group decision making.

A group support system (GSS), also called a group decision import system and a
computerized collaborative work system consists of most of the elements in the DSS,
plus software to provide effective support in group decision making settings.



Group support systems are used in most industries.

Architects: to collaborate with other architects and builders to develop the best plans and
to compete for contracts.

Manufacturing companies: to link raw material suppliers to their own company systems.

Engineers: use GSS called Mathcard Enterprise to create, share and reuse calculations.

Characteristics of a GSS

GSS developers utilize the advantages of individual support systems and add new
approaches unique to group decision making. Following are some of the characteristics
that improve and enhance decision making.

Special design: There are special procedures, devices and approaches needed in group
decision making settings. These procedures must promote creative thinking,
effective communications, and good group decision-making techniques.

Ease of use: GSS must be easy to learn and use

Flexibility: Support the different decision making styles of managers and find a way to
combine their different views into a common view of the task at hand.
Decision making support for different decision making approaches:
Delphi approach provides for geographically separated group decision makers
as follows.

Brainstorming- often consists of members offering ideas “off the top of their heads”.
Group consensus approach- force the members in a group to reach a unanimous
decision.

Nominal group technique-encourage feedback from individual group members and the
final decision is made by voting.

Anonymous Input:

Many GSSs support anonymous input. That is, the person giving an input is not
known to the other members. It allows to give same consideration to the input
from any level of employee.

Reduction of negative group behavior:

ability to suppress or eliminate group behavior
that is harmful to effective decision making. Procedures for effectively planning
and managing group meetings can be incorporated into the GSS approach.
Parallel communication: Speed up meeting times and result in better decisions by
providing facility to enter comments in the same time by entering into a PC.
These comments and issues are displayed on every group members PC
immediately.

Automated record keeping: Keeps detailed records of a meeting automatically.
Automatic voting and ranking features are available. After each group member
votes, the GSS records each vote and makes appropriate rankings.

GSS software

Often called groupware or workgroup software, helps with joint workgroup scheduling,
communication and management.

Example: Lotus Notes

GSS software allows ‘work teams’ to collaborate and come up with better decisionswithout
considering the geographical situation. GSS software is increasingly being
incorporated into existing software packages. Today, groupware can interact with
wireless devices.

Apart from groupware, GSSs use a number of tools including, email and instant
messaging (IM), video conferencing, group scheduling, project management and
document sharing.

5.3.6 Executive Support Systems (ESS)

ESSs are specialized DSSs developed to assist senior-level executives to make
strategic decisions. Sometimes it is also known as Executive Information Systems (EIS).
Although at first they were developed focusing on meeting the strategic information
needs of top management, now it is widely used by persons at middle levels in the
organizational structure. ESSs serve to indicate issues of importance to the organization,
indicate new directions the company may take, and help executives monitor the
company’s progress.

Some of the major decision making that can be supported through an ESS are, ability to
provide an overall vision, strategic planning and organizing, strategic control and crisis
management.

Although ESS is a special type of DSS, DSSs and ESSs are different in two important
ways. The modeling and analysis tools of a DSS allow users to answer questions. On
the other hand ESSs present structured information about aspects of the organisations
that is considered as important by the executives.

Characteristics of ESSs

Tailored to individual executives: An ESS is an interactive hands-on too, that allows an executive to focus, filter and organize data and information.

Easy to use: An ESS must be easy to learn and use and not very complex, in order to
save the time of top-level executives.

Have drill-down abilities: An ESS allows executives to drill down into the company to
determine how certain data was produced. Drilling down allows an executive to
get more detailed information if needed.

Support the need for external data: Information from competitors, the federal
government, trade associations and journals and consultants are required to
make effective top level decisions. An effective ESS is able to extract data useful
to the decision maker from variety of sources including the Internet and other
electronic publishing sources.

Help with uncertain situations: There may be a high degree of uncertainty with most
executive decisions. Handling these unknown situations using modeling and
other ESS procedures help top-level managers to measure the amount of risk in
a decision.

Have a future orientation: Executive decisions are future oriented; meaning those
decisions will have a broad impact for years or decades. The information sources
to support future- oriented decision making are usually informal.
Linked with value-added business processes: Like other information systems ESSs are
linked with executive decision making about value added business processes.

Capabilities of ESSs

An effective ESSs should have the capability to support executive decisions with
components such as strategic planning and organizing, crisis management etc. These
decisions are related to an organization’s overall profitability and direction.

Support for defining an overall vision: The vision includes the organization’s major
product lines and services, the types of businesses it supports today and in the
future, and its overriding goals. Providing a broad vision for the entire
organization is a key role of senior executives.

Support for strategic planning: Strategic planning involves determining long term
objectives by analyzing the strengths and weaknesses of the organization,
predicting future trends and projecting the developments of new product lines. It
also involves planning the acquisition of new equipment, analyzing major
possibilities, and making difficult decisions.

Support for strategic organizing and staffing: ESSs help top-levels executives to analyze the impact of; staffing decisions, changes in employee benefits, potential pay
raises, and new work rules.

Support for strategic control: Strategic control involves monitoring and managing the
overall operations of the organization. Effective ESS helps top-level managers
make the most of their existing resources and control all aspects of the
organization.

Support for crisis management: Strategic emergency plans can be put into place with the help of an ESS. These emergency plans help organizations recover quickly in the
event of an emergency or a disaster.

5.2 Management Information Systems (MIS)

5.2.1 Overview of MIS

The main objective of MIS is to provide lower and middle management with printed or
electronic reports with inquiry capabilities so that they can control, organize and plan
more effectively and efficiently. Organizations can achieve competitive advantage by
effectively using the information generated by MIS.

The concept of MIS emerged partly as a response to the shortcomings of the first
computerized TPSs, which often improved transaction processing but provided little
information for management. Computerized MISs typically extract and summarize data
from TPSs to allow managers to monitor and direct the organization.
MISs can also provide employees accurate feedback about easily measured aspects of
their work.

For example, a listing of every sale during day or week would be extremely difficult to
use in monitoring a hardware store’s performance. However, the same data could be
summarized in measure of performance, such as total sales for each type of item, for
each salesperson and for each hour of the day.

Input to MIS:

Internal data sources – from organization’s TPS and ERP systems and related
databases.

External data sources – customers, suppliers, competitors and stock holders (not
already captured by TPS), Internet and extranets

Process: MIS uses the input data and processes it into information for the use of
managers primarily in the form of pre-determined reports.

Outputs of MIS: Collection of reports that are distributed to managers. Management
reports can come from various company databases through data mining.



Data mining allows a company to shift through a vast amount of data stored in
databases, data warehouses and data marts to produce a variety of reports
including scheduled reports, key-indicator reports and demand reports,
exception reports and drill-down reports.

There are several types of reports produced by MIS. As mentioned before, these reports
provide summarized information rather than detail.

Scheduled (Periodic) reports: reports produced periodically or on a schedule such as
daily, weekly or monthly, depending on the decision making need. The format
and the informational content of scheduled reports is fixed in advance.

Examples: daily or weekly sales analysis reports.

monthly financial reports:
Another scheduled report is the key-indicator reports. These reports provide a
summary of the previous day’s critical activities and typically available at the
beginning of each work day. These reports summarize inventory levels,
production activity, sales volume etc. They are used by managers and
executives to take quick, corrective action on important aspects of the
business.

Demand reports:
Reports or screen outputs developed to give relevant information at
someone’s request (adhoc). Suppliers as well as customers can use demand
reports.

Example- inventory level of certain product

Exception reports:
Reports which are automatically produced when a situation is unusual
or requires management action. Exception reports are most often used to
monitor aspects important to an organization’s success. For example,
purchasing managers may need an exception report when suppliers are late
in deliveries. Such a report may be triggered automatically by the delay of an
individual supplier or produced on a scheduled basis, but only if there are late
suppliers. Parameters or trigger points should be set carefully, if not you may
end up with too many exception reports.

When the quantity of certain raw material drops, a report will be produced to
alert the management mentioning the steps that should be taken to re-order
these items.

In general, when an exception report is produced, a manger or executive
takes action based on the information provided by the report. In the above
example, the manager will take action to order raw material.

Drill-down reports:
Reports which provide detail data about a situation. Through the use
of drill-down reports analysts are able to see data at a higher level first (sales
for entire company), then at a more detailed level (sales for one dept) and
then a very detailed level (sales per one sales representative.)

Important things to consider when developing reports

As mentioned before, it is important to set the parameters carefully in Exception reports.
Each report should be tailored to user requirements and produced in a timely fashion as
outdate reports are of no value. It is also important to periodically review reports in order
to identify reports which are of no use, improve the content of reports and introduce new
reports.










5.2.2 Characteristics of a MIS

In general MIS perform the following functions.

• Provide reports with fixed and standard formats: for example, scheduled
reports for inventory control may contain the same type of information
placed in the same locations on the reports. Different managers may use
the same report for different purposes.

• Produce hard-copy and soft-copy reports: Some MIS reports are printed on
paper. They are known as hard-copy reports (tangible). Other reports can
be soft-copy reports where typically the output is displayed on a computer
screen. The soft copy reports are typically formatted in a report like fashion
and use visual displays on computer screens.

• Use internal data stored in the computer system: Primarily MIS reports use
internal sources of data that are contained in computerized databases.
These sources of data can be outputs generated by TPSs or ERP systems.
Some MISs use external sources of data about competitors, the industry,
economy and so on. The Internet is often used as a source for external
data.

• Allow end users to develop their own custom reports: Typically, analysts and
programmers involve in developing and implementing complex MIS reports.
At the same time end users are also increasingly developing their own
simple programs to query a database and produce basic reports.
However, this approach can lead to several end users developing the same
or similar reports, which can increase the total time expended and require
more storage, compared to an analyst developing a report for all users.

• Require user requests for reports developed by systems personnel: As
mentioned previously, typically, IS personnel develop and implement MIS. If
any user needs to access these systems, they typically require to submit a
formal request to the IS department. For example if the sales manager
wants a sales report to be used by several people in his/her department,
often a request has to be made. This is different to end user developed
systems where it is less formal.

5.2.3 MIS in Functional Areas of Business
Most organizations are structured along functional lines or areas. Some of the traditional functional areas include finance, manufacturing, marketing and human resources. The MIS can be divided along those functional lines, in order to produce reports tailored to individual functions.



5.2.3.1 Financial MIS

A financial MIS provides financial information not only to accountants, but to a broader
set of people who need to make better decisions on a daily basis.
Most financial MISs perform the following functions:

• Integrate financial and operational information from multiple sources, including
the Internet, into a single system
• Provide easy access to data for both financial and non financial users, often
through use of a corporate intranet to access corporate web pages of financial
data and information
• Make financial data immediately available to shorten analysis turnaround time
• Enable analysis of financial data among multiple dimensions-time, geography,
product, plant, customer
• Analyze historical and current financial activity. Monitor and control the use of
funds over time

The following figure describes a basic financial MIS. The typical inputs to a MIS include
internal TPS databases, additional corporate databases of internal data and external
data.

Typical outputs (reports and updated databases) provide support for profit/loss and cost
systems, auditing as well as use and management of funds.



Profit/Loss and Cost systems

The two specialized financial functional systems include profit/loss system and the cost
system.

These systems organize revenue and cost data for the company. The revenue and
expenses data of each department is captured by the TPS. The updated databases of
these TPSs are the primary internal source of financial information for the MIS, ie the
internal input to the MIS.

Profit center: Department within an organization that tracks total expenses and net
profits.(investment division of a large insurance or credit card company)
Revenue center: Division within a company that tracks sales or revenues.(marketing or
sales department)

Cost center: Division within a company that does not directly generate
revenue.(manufacturing, research and development).

Auditing

Auditing involves analyzing the financial condition of an organization and determining
whether financial statements and reports produced by financial MIS are accurate.
Correct and proper auditing procedures are important as financial statements such as
income statements and balance sheets are used by so many people and organizations
(investors, bankers, insurance companies, federal and state government agencies,
competitors and customers). Auditing can reveal potential fraud, false and misleading
information. Types of auditing are;

Internal auditing: Auditing performed by individuals within the organization.
Conducted to see how well the organization is meeting the established company goals
and objectives.

External auditing: Auditing performed by an outside group. Purpose is to provide an
unbiased picture of the financial condition of an organization and uncover problems.

Funds Usage and Management:
Another important function of a financial MIS is to assist with funds usage and
management. Companies that do not manage and use funds effectively often have lower
profits or face economic failure which leads to closing down of the organization.
Internal uses of funds: purchasing additional inventory and machinery, hiring new
employees, buying new office equipment, increasing marketing and
advertising, investing in new products, and increasing research and
development.

External uses of funds: they are typically investment related. Companies often invest
excess funds in external revenue generating methods. These include
investing in banks, stocks, bonds, bills, notes, futures, foreign currency.

5.2.3.2 Marketing MIS

A marketing MIS supports managerial activities related to product development,
distribution, pricing decisions, promotions, and sales forecasting.

Customer Relationship Management (CRM) programs, available from some ERP
vendors help a company manage all aspects of customer encounters. CRM integrates
and automates many of the customer serving processes in sales, marketing and
customers services that interact with a company’s customers.

CRM systems include a family of software modules that provides the tools that help a
business and its employees and provide fast, convenient, dependable and consistent
service to its customers.



Sub systems for the marketing MIS include marketing research, product development,
promotion and advertising and product pricing. These subsystems and their outputs help
marketing managers and executives increase sales, reduce marketing expenses and
develop plans for future products and services to meet the challenging needs of the
customers.

Market research:
Market research is a formal study of the market and customer preferences. Tools used
for marketi research include surveys, questionnaires, pilot studies and interviews. Market
research enables to identify potential future customers and the features that current
customers really want in a good or service.
The ability to forecast demand is made possible by marketing research and sophisticated
software.

Product development:
This involves the conversion of raw materials into finished goods and services. Product
devepopment focuses primarily on the physical attributes of the product. Important
factors in product development decisions include plant capacity, labor skills, engineering
factors and materials.

In many cases a computer program analyzes these various factors and selects the
appropriate mix of labor, materials, plant and equipment and engineering designs.
Computer programs can be used for make-or buy decisions.

Promotion and advertising:

One of the most important functions of any marketing effort is promotion and advertising.
Product success is a direct function of the types of advertising and sales promotions
carried out by the organisation. .

Richness and reach are important measures of effective advertising. Richness refers to
the amount and level of detail that an organization can give its potential and existing
customers.

Reach refers to number of people that an organization is able to contract through
advertising.

With information systems and the Internet, however, companies are able to achieve high
levels of richness and reach in their advertising programs.

Product pricing:

Product or service pricing is another important and complex marketing function. With
relation to a product, retail price, whole-sale price, and price discounts must be set. A
major factor in determining pricing policy is an analysis of the demand curve, which
attempts to determine the relationship between price and sales. Computer programs can
determine pricing policies.

For example a marketing executive can enter a hypothetical price to a computer system
and see how the total revenue will be changed. This will give him an idea as to the price
that should be charged to get a profit.



Sales analysis is also important to identify products, sales personnel and customers that
contribute to profits and those that do not. Several reports can be used by marketing
managers/sales managers to make effective decisions.

For example: reports such as sales by product item, sales made a sales person etc
Based on these reports the sales manager can identify which items have more or less
demand.

5.2.3.4 Human Resource MIS

A human resource MIS, also called the personnel MIS, is concerned with activities
related to employees and potential employees of the organization. Because the
personnel function relates to all other functional areas in the business, the human
resource MIS plays a valuable role in ensuring organizational success.

Activities performed: Workforce analysis and planning, hiring, training, job and task
management, other personnel related issues.

An effective human resource MIS allows a company to keep personal costs at a
minimum while serving the required business processes needed to achieve corporate
goals.



Outputs: Some organizations have computer systems to assist with human resource
planning, hiring, training, skills inventorying, wage and salary administration.
Reports developed by these systems include human resource planning reports, job
application review profiles, skills inventory reports, salary surveys
Human resource planning

Overall purpose: Put the right number and kinds of employees in the right jobs when they
are needed.

One of the first aspects of any human resource MIS is determining personal and human
needs.

Effective human resource planning requires defining the future number of employees
needed and anticipating the future supply of people for these jobs. For companies
involved with large projects, human resource plans can be generated directly from data
on current and future jobs.

The output of a human resource MIS would be a human resource needs and planning
report.

Example: for a large construction project to be started next year project management
and forecasting software can be used to determine types of employees needed and
when. The output would be a human resource needs and planning report.

Personnel selection and Recruiting

If the human resource plan reveals that additional personnel are required, the next step
is to recruit and select personnel.

Management information systems can also be used to help rank and select potential
employees.

For every applicant, the system can analyze and print the results of interviews, tests and
company visits. This report is called a “job applicant review profile”, and it assists
corporate recruiting teams in final selection.

Training and skills inventory

For some jobs very specific training should be given to new employees. Other jobs may
require general training about the organizational culture, orientation, dress standards and
the expectations of the organization.

After the training is completed, employees usually take computer-scored tests to
evaluate their new mastery.

The results of these tests create a “training or skills inventory report’.
Skills inventory reports help managers to evaluate current employees to determine their
potential for a particular new position, and to determine raises or bonuses.

Scheduling and job placement

Scheduling people and jobs is relatively straightforward or complex. In most cases,
various schedules and job placement reports are generated.

Employee schedules: developed for each employee, showing his/her job assignment
over the next week or month.

Job placements: often determined based on skills inventory reports, which show which
employee might be best suited to a particular job.

Wage and salary administration

This MIS subsystem involves determining wages, salaries and benefits (medical
payments, saving plans, retirement accounts)

Wage data (such as industry averages for positions) can be taken from the corporate
databases and manipulated by the human resource MIS to provide wage information and
reports to higher levels of management.

These reports are called salary surveys and used to compare salaries with budget plans,
the cost of salaries versus sales and the wage required for any department or office.

Outplacement

Employees leave companies for various reasons.
Many companies offer outplacement services to help employees make the transition.
Outplacement can include job counseling and training, job and executive search,
retirement and financial planning and a variety of severance packages and options.

5.2.3.5 Manufacturing MIS

Compared to any other functional area, manufacturing has been improved by advances
in technology. With emphasis on greater quality and productivity, having an efficient and
effective manufacturing process is becoming critical to the success of manufacturing
organizations. Computerized systems support manufacturing activity at all levels, from
the factory floor to the management level. The use of the Internet has also enabled to
streamline all aspects of manufacturing. The following figure 5.2.8 gives an overview of
manufacturing MIS inputs, subsystems and outputs.

The manufacturing MIS subsystems and outputs monitor and control the flow of
materials, products and services through the organization. As raw materials are
converted to finished goods, the manufacturing MIS monitors the process at almost
every stage.

Using specialized computer chips and tiny radio transmitters, companies are able to
monitor materials and products throughout the entire manufacturing process.



Design and engineering

At the start of the manufacturing process, many aspects of the design are finalized with
the help of design and engineering departments. These activities include deciding, the
size and shape of parts, the way electrical components are attached to equipment, the
placement of controls on a product, and the order in which parts are assembled into the
finished product.

Apart from internal staff, increasingly, companies are involving customers in the design
and engineering process. In some cases, computer assisted design (CAD) facilitates this
process. Using applications such as CAD enables engineers to identify faults in a newly
designed product.

Data from design and engineering can also be used to identify problems with existing
products and help develop new products.

Master production schedule and inventory control

The overall objective of master production schedule sub system is to provide detailed
plans for both short-term and long-term scheduling of manufacturing facilities.
Master production- scheduling software packages include forecasting techniques that
determine current and future demand for products and services. After current demand
has been calculated and future demand has been estimated, the mater productionscheduling
package determines the best way to use the manufacturing facility and all its
related equipment.

The result of the process is a detailed plan that reveals a schedule for every item that will
be manufactured.

Another important key to the manufacturing process is inventory control. Many
techniques are used to minimize inventory costs.

EOQ (economic order quantity): determines the quantity to order. This quantity is
calculated to minimize the total inventory costs.

ROP (reorder point): a critical inventory quantity level. When the inventory levels for a
particular item falls to the reorder point, or critical level, the system generates a
report so that an order is immediately placed for the EOQ of the product.

MRP (material requirements planning): This technique is used when the demand for one item is dependent on the demand for another. The basic goal is to determine
when finished products (such as cars) are needed and then to work backwards to
determine deadlines and resources (tires) needed, to complete the final product
on schedule.

MRPII (manufacturing resource planning): refers to an integrated, company wide system based on network scheduling that enables people to run their business with high
level of customer service and productivity, while lowering costs and inventories.
MRPII places a heavy emphasis on planning, which helps companies ensure that
the right product is in the right place at the right time.

JIT (just-in-time) inventory and manufacturing is an approach that maintains inventory at
lowest levels without clarifying the availability of finished products. Here inventory
and materials are delivered just before they are used in a product.

Process control

Managers use number of technologies to control and streamline the manufacturing
process.

Some of the technologies used as follows;

CAM (computer assisted manufacturing): computers can directly control manufacturing
equipment, using CAM systems. Examples: drilling machines, assembly lines

CIM (computer integrated manufacturing): link the components of the production process (order processing, product design, manufacturing, inspection, quality control, and
shipping) into an effective system.

FMS (flexible manufacturing system): allows manufacturing facilities to rapidly and
efficiently change from making one product to another. Using FMS in the middle
of a production run, the production process can be changed to make a different
product or switch manufacturing materials so companies can react quickly to
market needs and competition.

Quality control and testing

This is a process that ensures that the finished products meet the needs of the customer.
For a continuous manufacturing process, control charts are used to measure weight,
volume, temperature, or similar attributes. Then upper and lower control limits are
established.

If these limits are exceeded, the manufacturing equipment is checked for defaults.
The development of control chart limits and acceptance sampling plans can be fairly
complex. So quality-control software programs have been used to generate them.
Information generated from quality control programs can help workers locate problems in
manufacturing equipment.

Quality control reports can also be used to design better products.

5.2.3.6 Other Management Information Systems

In addition to finance, manufacturing, marketing and human resource MIS some
companies have other functional MISs.

Accounting MISs

An information system provides aggregate information on accounts payable, accounts
receivable, payroll and many other applications.

Some smaller companies hire outside accounting firms to assist them with their
accounting functions. These outside companies produce reports for the firm using raw
accounting data. In addition, many excellent integrated accounting programs are
available for personal computers in small companies. Depending on the needs of the
small organization and its personnel’s computer experience, using these accounting
systems can be a very cost-effective approach for managing information.

Geographical Information Systems

A computer system is capable of assembling, storing, manipulating and displaying
geographically referenced information, that is data identified according to its location. A
GIS enables users to pair maps or map outlines with tabular data to describe aspects of
a particular geographical region.

LESSON 5

Business Information Systems

5.1 Transaction Processing System (TPS)

5.1.1 Overview of TPS

Transaction Processing Systems (TPS) are cross functional systems that process data
resulting from the daily routine transactions necessary for business functions.
Transactions are events that occur as part of doing business, such as sales, purchases,
deposits, payments etc. Automated TPSs consist of all the components of a computer
based information system (CBIS), including databases, telecommunications, people,
procedures, software and hardware devices used to process transactions.
TPSs are considered as operational level systems as they keep track of the elementary
activities and transactions of the organization. The principal purpose of systems at this
level is to answer routine questions and track the flow of transactions through the
organization. These systems are used mainly by operational level employees of an
organization.

Input to a TPS: Basic business transactions such as customer orders, purchase
orders, receipts and invoices are inputs to a TPS.

Processing: In order to produce the required output processing is carried out on
input data. The processing activities include data collection, data editing,
data correction, data manipulation and data storage and document
production.

Output of a TPS: Updated records after the last transaction.
For example withdrawing money from a savings account will cause a
change in the balance of the savings account. The relevant record of the
customer in the database will be updated to reflect this change.
An output of a TPS can also take the form of reports and documents. For
example, the customer’s savings book will be updated with the latest
transaction.





As TPSs often perform activities related to customer contacts - such as order
processing and invoicing- these information systems play a critical role in
providing value to the customer. Apart from external customers, internal
stakeholders also heavily rely on TPSs to carry out routine operations of the
organization (as shown on table 5.1). Therefore, if TPSs fail to operate correctly,
the impact on the organization can be high.

5.1.2 Types of Transaction methods

5.1.2.1 Batch Processing

When computerized transaction processing system first developed, only one method, i.e.
batch processing was available. With batch processing systems, business transactions
are collected over a period of time and prepared for processing as a single unit or batch.
Batch jobs can be stored up during working hours and then executed during the evening
or whenever the computer is idle. The time period during which transaction are
accumulated is whatever length of time is needed to meet the needs of the users of that
system.

For example, it may be important to process invoices and customer payments for the
accounts receivable system daily, whereas, the payroll system may receive time cards
and process them biweekly or monthly to create checks and update employee earning
records. Another example of batch processing is the way that credit card companies
process billing. The customer does not receive a bill for each separate credit card
purchase but one monthly bill for all of that month’s purchases. The bill is created
through batch processing, where all of the data are collected and held until the bill is
processed as a batch at the end of the billing cycle. This is depicted in figure 5.1.2.



The essential characteristics of a batch processing system is that there is some delay
between the occurrence of the event and the final processing of the related transaction
to update the organization’s records.

5.1.2.2 Online Processing

Today’s computer technology allows another processing method called online
transaction processing (OLTP). In OLTP, each transaction is processed immediately,
without the delay of collecting transactions into a batch. As soon as the input is available,
a computer program performs the necessary processing and updates the records
affected by that single transaction. Consequently, at any time the data in an online
system always reflects the current status.

When you make an airline reservation, for instance, the transaction is processed, and all
databases, such as seat occupancy and accounts receivable, are updated immediately.
This type of processing is absolutely essential for businesses that require quick access
to up-to-date information such as airlines, travel agencies, and stock investment firms.
Many firms are using the Internet, extranets and other networks that tie them
electronically to their customers or suppliers for online transaction processing. Such realtime
systems, which capture and process transactions immediately, can help firms
provide a superior service to customers and other trading partners. This capability adds
value to their products and services, and thus gives them an important way to
differentiate themselves from their competitors.

Example of OLTP - When travel agent A confirms a reservation, the central database
needs to be updated quickly before travel agent B makes a reservation. If the database
is not updated online, a situation may arise where a travel agent may confirm a seat for a
passenger without knowing the aircraft is fully booked.



Online entry with delayed processing

A third type of transaction processing, called online entry with delayed processing is a
compromise between batch processing and online processing. With this type of system,
transactions are entered into the computer system when they occur, but they are not
processed immediately.

Example: Ordering over the telephone

Although the technology exists to carry out OLTP, it is not used for all transactions. For
many applications, batch processing is considered to be more appropriate and costeffective.
Batch processing is particularly useful for operations that require the computer
or a peripheral device for an extended period of time. Once a batch job begins, it
continues until it is done or until an error occurs.

Typical batch processing applications include payroll transactions and billing.
Furthermore, specific organizational goals also define the method of transaction
processing best suited for the various applications of the company.

5.1.3 Organizational Objectives of a TPS

Because of the importance of transaction processing, organizations expect their TPSs to
achieve a number of specific objectives, including the following.

Capture, Process, Store Transactions and Produce Outputs

The primary objective of any TPS is to capture large volumes of data, process data,
store transactions and to produce a variety of documents related to routine business
activities. These business activities can be directly or indirectly related to selling products
and services to customers.

Processing orders, purchasing materials, controlling inventory, billing customers, and
paying suppliers and employees are all business activities that result from customer
orders.

These activities result in transactions that are processed by the TPS.
Many businesses including telecommunications companies, financial-services
organizations are under enormous pressure to process ever-larger volumes of
transactions in near-real time.

Ensure Accuracy and Integrity of Data and Information
Another objective of any TPS is error-free data input and processing.
Example An editing program should have the ability to determine that an entry that
should read “60 hours” is not entered as “600 hours” or “6000 hours” due to a
data entry error.

An important component of data integrity is to avoid fraudulent transactions.
Example E-commerce companies face this problem when accepting credit or debit card
information over the Internet. It is important to make sure that the customer is
using a valid credit or debit card. One approach is to use a digital certificate. A
digital certificate is a small computer file that serves as both an ID card and a
signature. Some believe that digital certificates, which use complex
mathematical codes, are almost fraud proof.

As the volume of data being processed and stored increases, it becomes more difficult
for individuals and machines to review all input data.

A company must ensure both data integrity and data accuracy because data and
information generated by the TPS are often used by other information systems in an
organization.

Produce Timely Reports and Documents

The ability to conduct business transactions quickly can be very important for an
organization’s bottom line.

Although manual transaction processing systems can take days to produce routine
documents, the use of computerized TPSs significantly reduces this response time.
Improvements in information technology, especially hardware and telecommunications
links, allow transactions to be processed in a matter of seconds.
Example: If bills are sent out to customers a few days earlier than usual, payment may be received earlier.

A number of transactions processing systems can monitor how timely a company is
when processing transactions and producing reports and documents. Some monitoring
software packages can compare actual performance with corporate goals and
objectives.

Timing is also crucial for related applications such as order processing, invoicing,
accounts receivable, inventory control, and accounts payable. Because of electronic
recording and transmission of sales information, transactions can be processed in
seconds rather than overnight. This leads to improving the cash flow of the companies.

Increase Labor Efficiency

Manual business processes requires significant number of employees and equipments to
process the necessary business transactions. By automating these manual processes,
organizations are able to substantially reduce the number of employees and equipment
required to carry out a specific transaction. For example, a small minicomputer linked to
a company’s cash registers has replaced a room full of clerks, typewriters, and filling
cabinets.

Organizations are interested in gaining even greater labour efficiency by further
streamlining business processes.

Provide Increased and Enhanced Customer Service

One objective of TPSs is to assist an organization to provide a fast, efficient service.
Electronic Data Interchange (EDI) systems of some companies allow customers to place
orders electronically, thus bypassing slower and more error-prone methods of written or
oral communication. Another example would be utilizing technologies such as the
Internet to improve customer service. Through the Internet customers are able to browse
a catalogue of products and order an item, purchase the air tickets etc. by accessing the
relevant databases of the organization. Among other benefits, this reduces the need for
the customer to physically be present at the supplier’s premises, thus improving
customer service.

Increase Customer Loyalty

Transaction processing systems of a firm are often the means of communicating with the
customer. Therefore, it is important that the customer interaction with these systems
keep customers satisfied and returning.

For example the use of store cards. Store cards can be used to collect points whenever
a transaction takes place. A TPS will capture information about the purchasing details of
a customer. These points are usually equivalent to money (100 points equals Rs. 10
etc.). The collected points may be redeemed against gift vouchers or money.

Achieve Competitive Advantage

Another objective of a TPS can be achieving competitive advantage. The following table
5.2 provides a list factors that may contribute to achieving competitive advantage by
using a TPS.



Depending on the specific nature and goals of the organization, any of the objectives
discussed may be more important than others.

By meeting these objectives, TPSs can support corporate goals such as cost reduction,
increased production, improved quality and customer satisfaction and more efficient and
effective operations.

5.1.4 Activities in a TPS

All TPS s perform a common set of basic data processing activities. TPSs capture and
process data that describes fundamental business transactions. This data is used to
update databases and to produce a variety of reports which are used by people both
within and outside the enterprise. These can be considered as the activities of a typical
TPS. Apart from these activities some TPSs can include inquiry processing capabilities.


The business data goes through a transaction processing cycle that includes data
collection, data editing, data correction, data manipulation, data storage and document
production.

Data Collection

Data collection is the process of capturing and gathering all data necessary to complete
a transaction. In some cases it can be done manually by collecting hand written sales
orders or changes to inventory.

It can also be automated via special input devices such as scanners, point-of-sale
devices.

Data collection begins with a transaction (e.g., taking a customer order) and results in
the origination of data that is input to the transaction processing system. Data should be
captured at its source, and recorded accurately, in a timely fashion, with minimal manual
effort, and in a form that can be directly entered into the computer rather than keying the
data from a document.

This approach is called source data automation. Improved efficiency can be achieved
by automating data collection.

An example of source data automation is collection of transaction data by point-of-sale
terminals using optical scanning of bar codes and credit card readers at a retail store or
any other business.

Once the item is scanned at a retail store, the product ID for each item is determined
automatically, and its price is found in the item database. It is more quicker and more
accurate than having a clerk enter codes manually at the cash register. This eventually
leads to better customer satisfaction due to reduced queing times.

Data Editing

An important step in processing transaction data is to perform data editing for validity
and completeness to detect any problems.

For example, quantity and cost data must be numeric and name should be characters.
Often the codes associated with an individual transaction are edited against a database
containing valid codes. If any code entered (or scanned) is not present in the database,
the transaction is rejected.

Data Correction

It is not enough simply to reject invalid data. The system should also provide error
messages that alert those responsible for the data editing function. Error messages must
specify the problem and corrective action required.
Data correction involves reentering miskeyed or misscanned data that was found during
data editing.

Data Manipulation

Data manipulation is the process of performing calculations and other data
transformations related to business transactions.

Data manipulation can include classifying data, sorting data, moving data in the
organization’s database for further processing.

Example: In a Sales TPS, data manipulation includes adding total monthly sales for a
particular year, to calculate total sales for that year.

Database Maintenance

An organisation’s database must be maintained by its TPSs so that they are always
correct and up-to-date. Therefore, transaction processing systems update the corporate
databases of an organization to reflect changes resulting from daily business
transactions. For example, when a customer withdraws money from a savings account,
customer account will be updated with the new account balance.

Although transaction databases can be considered a by-product of transaction
processing, they have a pronounced effect on nearly all other information systems and
decision-making processes in an organization.

Production of Document / Reports

Document production involves generating output records and reports. These documents
may be hard-copy paper reports or displays on computer screens (sometimes referred to
as soft copy).

Examples:
Hard-copy documents – monthly bank statement, invoices, paycheck, sales receipts
Soft-copy report - outstanding balance report for invoices displayed by an accounts receivable TPS.

Often, results from one TPS are passed downstream as input to other systems. For
example when an item is sold in a supermarket, this would result in reduction of a stock
item. Therefore, the sales TPS will pass data (quantity of the item sold) and update the
inventory TPS with the current available stock of that particular item.
TPSs provide other useful management information and decision support, such as
printed or on-screen reports that help managers and employees perform various
activities.

Example: A report showing current inventory levels allows management to decide whether new stock is required.

Inquiry processing

Many transaction processing systems allow the use of the Internet, intranets, extranets
and Web browsers or database`e management query languages to make inquiries and
receive responses concerning the results of transaction processing activity. Example:
Most Banks provide a facility to check transactions of a bank account through the
Internet.

5.1.5 Control and Management of a TPS

Transaction processing systems are the backbone of any organization’s information
systems. They capture facts about the fundamental business operations of the
organization. Without these facts in a typical organization, customers cannot be invoiced,
and employees and suppliers cannot be paid.

In addition to this, the data captured by one TPS is interconnected to other systems in
the organization. For example, as mentioned in section 5.1.4, the Sales TPS will be
connected to the Inventory TPS.

Like any structure, an organization’s information systems are only as good as the
foundation on which they are built.

In fact, most organizations would grind to a searching halt if their TPSs failed.

Business Continuity Planning

Any business organization must be aware of disasters and be prepared to deal with such
situations. Disasters can be natural emergencies such as a flood, a fire, or an
earthquake, hacker attack or erasure of an important file.

Business continuity planning identifies the processes that must be restored first in the
event of a disaster to operations of the business restarted with minimum disruption.
It also specifies the actions that must be taken and by whom to restore operations.
Some of the key actions include safe evacuation of all employees, assessment of the
impact of the disaster, relocation to alternate work places, backup and recovery of
important electronic and manual business records, and use of alternate equipment.
One of the first steps of business continuity planning is to identify potential threats or
problems, such as natural disasters, employee misuse of personal computers, and poor
internal control procedures.

Business continuity planning also involves disaster preparedness. Business managers
should occasionally hold an unannounced “test disaster”-similar to a fire drill-to ensure
that the disaster plan is effective.

Disaster Recovery

Disaster recovery focuses on the actions that must be taken to restore computer
operations and services in the event of a disaster.

It includes providing for alternate computing and network facilities; the transfer of key
personnel, data, and software to a backup site; and the rapid resumption of data
processing and communications.

Transaction Processing System Audit

Chief Information Officers (CIOs) must act to prevent the accounting irregularities or loss
of data privacy that can get their companies into trouble and erase investor confidence.
In some cases organizations have filed for bankruptcy and put the blame on faulty
transaction processing systems.

In order to avoid such issues organizations should conduct a transaction processing
system audit. Such an audit would typically attempt to answer four basic questions:
• Does the system meet the business need for which it was implemented? • What procedures and controls have been established? • Are these procedures and controls being used properly? • Do the information systems and procedures produce accurate and honest reports?
In addition to these four basic auditing questions, other areas that are typically
investigated during an audit include the distribution of output documents and reports, the
training and education associated with existing and new systems, and the time
necessary to perform various tasks and to resolve problems and blocks in the system.
General areas of improvement are also investigated and reported during the audit.

Types of Audits: Internal and External

An internal audit is conducted by employees of the organization.
An external audit is performed by accounting firms or companies and individuals not
associated with the organization.

In both internal and external audits, the auditor inspect all programs, documentation,
control techniques, the disaster plan, insurance protection, fire protection, and other
systems management concerns such as efficiency and effectiveness of the disk or tape
library.

This check is accomplished by interviewing IS personnel and performing a number of
tests on the computer system.

In addition to managers and employees inside the company, external audits are
important for stakeholders and others outside the company.

Example (usefulness of a external audit) : A number of internet startup companies overstate their income, which has resulted in high stock evaluations in some cases. An external audit by a reputable audit company can help uncover these reporting problems. Audit Trail: An audit trial allows the auditor to trace any output from the computer system back to the source documents, enabling the integrity of the computer programs and software, However, with the use of real-time systems, it is difficult to find inputs to a system and therefore, the auditor has to investigate the processing activity as well as inputs and outputs to various programs. Audit trail can be especially useful where privacy of information should be maintained, as in patient records in a healthcare TPS.

5.1.6 TPS Applications

In this section we provide an overview of several common transaction processing
systems, that support the order processing, purchasing and accounting business
processes. Although each organization may have unique business processes, only a
generalized view is presented.



Order Processing Systems

Order processing system includes order entry, sales configuration, shipment
planning, shipment execution, inventory control and invoicing. Based on the
requirements of the organization, the systems and the information flow of an Order
Processing System may change from one organization to another.
Here we discuss input, process and output activities related to the order processing
system.

The business processes supported by these systems are so critical to the operation
of an enterprise that the order processing systems are sometimes referred to as the
lifeblood of the organization.

[Following figure is a system-level flowchart that shows the various systems and the
information that flows between them. a rectangle represent a system, a line
represents the flow of information from one system to another, and a circle
represents any entity outside the system-in this case, the customer



Order Entry and Sales Configuration

The order entry system captures the basic data needed to process a customer order.
Orders may come through the mail, telephone ordering system and be gathered by a
staff of sales representatives. Alternatively it may arrive via EDI transactions directly from
a customer’s computer over a wide area network, or be entered directly over the Internet
by the customer using a data entry form on the firm’s web site.

Inputs to such a system will include customer details, product, and the quantity required.
This will lead to an entry in the daily sales journal.

The sales configuration system ensures that the products and services ordered are
sufficient to accomplish the customer’s objectives and will work well together.

For example, using a sales configuration program, a sales representative knows that a
computer printer needs a certain cable and a LAN so that it can be connected to the
LAN.

Without a sales configuration program, a sales representative might sell a customer the
wrong cable or forget the LAN card.

Sales configuration programs also suggest optional equipments. If a customer orders a
handheld computer, the sales configuration program will suggest an AC adapter, backup
software and communications cards to enable the user to connect wirelessly to printers,
LAN, and the Internet.

Sales configuration software can also solve customer problems and answer their
questions.

Example: A sales configuration program can determine whether a factory robot made by one manufacturer can be controlled by a customer system developed by another manufacturer. Sales configuration programs can eliminate mistakes, reduce costs, and increase revenues.

Shipment Planning

New orders received and any other orders not yet shipped (open orders) are passed
from the order entry system to the shipment planning system.
The shipment planning system determines which open orders will be filled and from
which location they will be shipped.

While this may be a simple task for a small organization with local customers, it can be
an extremely complicated task for a global operation.

However, a key objective of this process should be to minimize shipping and
warehousing costs while still meeting customer delivery dates.

The output of the shipping planning system is a plan that shows where each order is to
be filled and precise schedule for shipping with a specific carrier on a specific date and
time.

Another output generated by this system is a picking list that warehouse operators use to
select the ordered goods from the warehouse. These outputs may be in paper form, or
they may be computer records that are transmitted electronically.

Shipment Execution

The shipment execution system provides coordination for the outflow of all products from
an organization. The objective of this system is to deliver quality products on time to
customers.

The shipping department is usually responsible for physically packaging and delivering
quality products to customers and suppliers.

The system receives the picking list from the shipment planning system.
As items are picked and loaded for shipment, warehouse operators must enter data
about the exact items and quantity of each that are loaded for each order (input). When
the shipment execution is completed, “shipped orders” transaction is sent downstream
to the invoicing system.

This transaction specify exact name of company, name of person involved, item names
and quantities. This data is used to generate a customer invoice.
Another output of this system would be packing documents. This is usually enclosed with
the item and sent to the customer and gives information about items that are being
shipped, what is back ordered etc.

Soft-copy data-such as that provided by advanced shipment notices and shipment
tracking systems-is also made available to other business functions.

Inventory Control

For each item picked during the shipment execution process, a transaction providing the
stock number and quantity picked is passed to the inventory-control system. In this way,
the computerized inventory records are updated to reflect the exact quantity on hand of
each stock-keeping unit.

Once product has been picked out of inventory, other documents and reports are
initiated by the inventory-control application (output). One important report is the
inventory status report which lists inventory items shipped over a specific time period.
The information on this report may include stock numbers, description, number of units
on hand, number of units ordered and costs etc.

Inventory control is essential for industries in the service sector, too. Such organizations
as hotels, air lines, rental car agencies, and universities which primarily provide services
can use inventory applications to help them monitor use of rooms, airline seats, car
rentals and classroom capacity.

Similarly organizations in the manufacturing sector also need to manage the inventory
levels efficiently, in order to produce goods on time to meet the delivery dates and to
avoid cash tied up on raw materials. This will be discussed under purchasing systems.

Invoicing

Customer invoices are generated based on records receiving from the shipment
execution TPS. This application encourages follow-up on existing sales activities,
increases profitability, and improves customer service.

Most invoicing programs automatically compute discounts, applicable taxes, and other
miscellaneous charges.

Most computerized operations contain elaborate databases on customers and inventory,
and many invoicing applications require only information on the items ordered and the
client identification number; the invoicing application does the rest.

Purchasing transaction processing systems

These are the systems that include inventory control, purchase order processing,
receiving, and accounts payable.



Inventory Control

Types of inventory owned by an organization depend on the type of organization.
Typically a manufacturing firm would have an inventory of raw material, finished goods,
packing materials etc. On the other hand, the inventory of an airline which is a service
industry firm includes number of seats in a specific aircraft.

Effective Inventory controlling allows an organization to deliver finished goods to
customers on time (applies to manufacturing firms) and to reduce cash tied up with idle
inventory. A mistake in tracking current raw material inventory can cost millions of
dollars, causing the manufacturer to miss prof targets.

In order to make effective purchasing decisions the inventory control system must
identify the correct stock levels and inform the management when stocks are low.
An output of this system would be a report which provides the status of the raw material
and other related inventories to the purchase order processing system. For this purpose
the quantity available (stock items) should be updated whenever a stock item is used in
manufacturing.

Purchase Order Processing

An organization’s purchasing department is responsible for all its purchasing activities.
The purchase order processing system helps purchasing departments complete their
transactions quickly and efficiently. The purchasing function begins when the purchasing
department receives a purchase order request or when the inventory control status
report suggests the need to order.

Every organization has its own policies, practices, and procedures for purchasing
supplies and equipment.

The purchasing department facilitates the purchasing process by keeping data on
suppliers goods and services. The increased use of telecommunications has given many
purchasing departments easier access to this information.

The technological developments allow organizations to compare prices of different
suppliers and order on-line. Once a supplier is selected the computer systems of the
supplier can be linked with the customer’s computer systems using technologies such as
Electronic Data Interchange (EDI), which enables to reduce purchasing costs and time
and provide the ability to maintain adequate inventory levels.

Based on the requirements of the order, a purchase order is developed and sent to the
supplier.

Receiving

Many organizations have a department responsible for inspecting incoming items and
routing them to the relevant department which made the initial purchase order request.
In addition, the receiving department notifies the purchasing department when items
have been received. This notification may be done using a paper form called a receiving
report or electronically through a business transaction created by entering data into the
receiving TPS (output).

An important function of many receiving departments is quality control by inspection.
Inspection procedures and practices are set up to monitor the quality of incoming items.
Any items that fail inspection are sent back to the supplier, or adjustments are made to
compensate for faulty or defective products.

Accounts Payable

The accounts payable system attempts to increase an organization’s control over
purchasing, improve cash flow, increase profitability, and provide more effective
management of current liabilities.

The major output of this system is payments to suppliers for materials and services.
Most accounts payable applications attempt to manage cash flow and minimize manual
data entry.

Input from the purchase order processing system provides an electronic record to the
accounts payable application that updates the accounts payable database to create a
liability record showing the firm has made a commitment to purchase a specific good or
service. Once the accounts payable department receives an invoice from a supplier, the
invoice is verified and checked for accuracy.

Upon receiving notice that the goods and services have been delivered in a satisfactory
manner from the receiving department, the data is entered in to the accounts payable
application. Accounts payable application records purchases from, amounts owed to,
and payments to suppliers. It produces cash management reports.

Accounting Systems

Accounting information systems are the oldest and most widely used IS in business.
They record and report business transactions and other economic events. A typical
accounting system may include the budget, accounts receivable, payroll, asset
management, and general ledger applications.



Budget

In an organization, a budget is a financial plan that identifies items and dollar amounts
that the organization estimates it will spend. In some organizations, budgeting can be an
expensive and time-consuming process of manually distributing and consolidating
information. The budget transaction processing system automates many of the tasks
required to amass budget data, distribute it to users, and consolidate the prepared
budgets.

Automating the budget process allows financial analysts more time to manage it to meet
organizational goals by setting enterprise-wide budgeting targets, ensuring a consistent
budget model and assumptions across the organization, and monitoring the status of
each department’s spending.

Budget transaction processing system

System that automates many of the tasks required to collect budget data, distribute it to
users, and consolidate the prepared budgets.

Accounts receivable

The accounts receivable system keeps track of the money owed the company on
charges for goods sold and services performed.

When goods are shipped to a customer, the customer’s accounts payable system
receives a business transaction from the invoicing system, and the customer’s account is
updated in the accounts receivable system of the supplier.

A statement reflecting the balance due is sent to active customers. Upon receipt of
payment, the amount due from that customer is reduced by the amount of payment
A major output of accounts receivable application is the monthly bills and statements
sent to customers..

The accounts receivable system is vital to managing the cash flow of a firm. One major
way to increase the cash flow is by identifying overdue accounts. Reports are generated
to identify customers whose accounts are overdue by more than a particular number of
days (depending on the policies of the company this may change).

Another important function of the accounts receivable application is to identify bad credit
risks.

Many companies routinely check a customer’s payment history before accepting a new
order. With the advances in telecommunications companies can search huge national
databases for the names of firms and individuals with records of bad credit.

However, when using external data like this in a TPS application, companies must be
extremely cautious regarding the accuracy of the data.

Payroll

The two primary outputs of the payroll system are the payroll checks and stub, which are
distributed to the employees, and the payroll register, which is a summary report of all
payroll transactions.

The number of hours worked by each employee is collected using a variety of data entry
devices, including time clocks, time cards, and industrial data-collection devices in a
subsystem called time and attendance.

Once collected, payroll data is used to prepare weekly, biweekly, or monthly employee
paychecks.

Like many other transaction processing applications, the payroll application interfaces
with other applications. For example, all payroll entries are entered into the general
ledger systems.

Packaged software applications are commonly used to automate the payroll process.
Many of these applications could be customized to suite the needs of the organization.

Asset Management

Capital assets represent major investments for the organization. These values appear
on the balance sheet under fixed assets. Examples of capital assets include buildings,
vehicles, machinery etc. These assets have a useful life of several years or more, over
which their value is depreciated, resulting in a tax reduction. The asset management
transaction processing system controls investments in capital equipment and manages
depreciation for maximum tax benefits. Key features of this application include efficient
handling of a wide range of depreciation methods, country-specific tax reporting and
depreciation structures for the various countries in which the firm does business, and
workflow-managed processes to easily add, transfer, and retire assets.

General ledger

Every monetary transaction that occurs within an organization must be properly
recorded. Examples of monetary transactions are payment of a supplier’s invoice, receipt
of payment from a customer, and payment to an employee. A computerized general
ledger system is designed to allow automated financial reporting and data entry.
The general ledger application produces a detailed list of all business transactions and
activities. The outputs include reports such as profit and loss (P&L) statements, balance
sheets, and general ledger statements.

Furthermore, historical data can be kept and used to generate trend analyses and
reports for various accounts and groups of accounts used in the general ledger package.
Various income and expense accounts can also be generated for the current period,
year to date, and month to date as required. These reports are useful to accounting and
financial managers to monitor the profitability of the organization and to control cash
flows.

In recent years, online service providers such as Net Ledger has entered the SME
market by offering a general ledger software application as a networked service on a
monthly subscription basis. This reduces the capital costs (software license, labour,
equipment etc.) associated with implementing such a system internally.

As the Web-based system is fully hosted and offered via a monthly subscription fee, no
infrastructure, maintenance, or upgrade work needs to be carried out.