Department of Information Technology & Operations Management

Handout I
Business Processes and ERP – Basic Concepts

This handout is designed to help you:

 Name the main functional areas of operation used in business

Introduction
Enterprise Resource Planning (ERP) systems are crucial software programs used by

companies t o integrate and coordinate information in every area of the business. ERP programs

help organizations manage company-wide business processes, using a common database and

shared management reporting tools. A business process is a collection of activities that takes

one or more kinds of input and creates an output, such as a report or forecast that is of value to

the customer. ERP software supports the efficient operation of business processes by

integrating tasks related to sales, marketing, manufacturing, logistics, accounting, and HR -

throughout a business. In addition to this cross-functional integration, which is at the heart

of an ERP system, companies connect their ERP systems, using various methods, to

coordinate business processes with their customers and suppliers. In later handouts, you will

learn how successful businesspeople use ERP programs to improve how work is done within a

company and between companies.

This handout provides a background for learning about ERP software.

To understand ERP, you must first understand how a business works. Let’s begin by looking at a

typical business’s areas of operation. These areas, called functional areas of operation, are

broad categories of business activities.

Functional Areas of Operation

Most companies have four main functional areas of operation: Marketing and Sales (M/S),

Supply Chain Management (SCM), Accounting and Finance (A/F), and Human Resources (HR).

Each area is composed of a variety of narrower business functions, which are activities specific

to that functional area of operation. Examples of the business functions of each area are shown in

Figure 1.

Source Line: Course Technology/Cengage Learning.

Business schools have been similarly organized, so each functional area has been taught as a

separate course. In a company separating functional areas in this way, Marketing and Sales might

be completely isolated from Supply Chain Management, even though the Marketing and Sales

personnel sell what the employees in Supply Chain Management procure and produce. Thus, you

might conclude that what happens in one functional area is not closely related to what happens in

others. As you will learn in this handout, however, functional areas are interdependent, each

requiring data from the others. The better a company can integrate the activities of each

functional area, the more successful it will be in today’s highly competitive environment. The

Association to Advance Collegiate Schools of Business (AACSB)—the accreditation board of

university business schools—is now promoting integration between functional areas of business

for higher education.

Integration also contributes to improvements in communication and workflow. Each area’s

information system depends on data from other functional areas. An information system (IS)

includes the people, procedures, software, and computers that store, organize, analyze, and

deliver information. This handout illustrates the need for information sharing between functional

areas and the effects on the business if this information is not integrated. In later sections, you

will also see some examples of typical business processes and how these processes routinely

cross functional areas.

Business Processes

More managers are now thinking in terms of business processes rather than business functions.

Recall that a business process is a collection of activities that takes one or more kinds of input

and creates an output that is of value to the customer. The customer for a business process may
be a traditional external customer (the person who buys the finished product), or it may be an

internal customer (such as a colleague in another department).

For example, what is sold through Marketing and Sales is linked to what is procured and

produced by Supply Chain Management. This concept is illustrated in Figure 2.

Source Line: Course Technology/Cengage Learning.

FIGURE 1-2 Sample business processes related to the sale of a smartphone

Thinking in terms of business processes helps managers look at their organization from the

customer’s perspective. Consider the example illustrated in Figure 2 of a customer who wants to

purchase a new smartphone. The customer wants information about the company’s products so

she can select a smartphone and various high-tech accessories for the phone. She wants to place

her order quickly and easily, and perhaps even arrange for financing through the company. She

expects quick delivery of the correct model of smartphone, and she wants 24-hour customer

support for any problems. The customer is not concerned about how the smartphone was

marketed, how its components were purchased, how it was built, or how the delivery truck will
find the best route to her house. The customer wants the satisfaction of having the latest in

mobile phone technology at a reasonable price.

Businesses must always consider the customer’s viewpoint in any transaction. What is the

difference between a business function and a business process from the customer’s point of

view? Suppose the customer’s mobile phone is damaged during shipment. Because only one

functional area is involved in accepting the return of the damaged item, receipt of the return is a

business function—specifically, it is part of the customer relationship management function of

Marketing and Sales. Because several functional areas are involved in the repair and return of the

mobile phone back to the customer, the handling of the repair is a business process. Thus, in this

example, the customer is dealing with many of the company’s functional areas in the process of

buying and obtaining a smartphone.

A successful customer interaction is one in which the customer (either internal or external) is not

required to interact separately with each business function involved in the process. If companies

are not coordinating their business functions, a customer could receive conflicting information

and likely would quickly become dissatisfied. Successful business managers view their business

operations from the perspective of a satisfied customer and strive to present one consistent (and

positive) “face” to the customer.

For the mobile phone company to satisfy its customers, it must make sure its functional areas of

operation are integrated. Mobile phone technology changes rapidly, and the devices the phone

company sells change frequently. To provide customers with accurate information, people

performing the sales function must have up-to-date information about the latest mobile phones

available for sale; otherwise, a customer might order a smartphone that the company’s
manufacturing plant no longer produces. People performing the manufacturing function need to

receive the details of a customer’s smartphone order quickly and accurately from the employee

(or online ordering system) performing the sales function, so the right phone can be packaged

and shipped on time to the customer. If the customer is financing the smartphone through the

mobile phone company, the employees performing the sales order function must gather

information about the customer and process it quickly, so financing can be approved in time to

support shipping the phone.

Sharing data effectively and efficiently between and within functional areas leads to more

efficient business processes. Information systems that are designed so functional areas share data

are called integrated information systems. Working through this course, particularly when we

start our SAP ERP sessions will help you understand the benefits of integrated information

systems and the problems that can occur when information systems are not integrated. Research

has shown that integrated information systems can help managers better control their

organizations.

With enhanced information flow, communication between parts of the company improves,

productivity increases, and costs decrease. In effect, integrating the information systems can

make for a more effective overall organization—hence, more efficient business processes. Figure

3 illustrates the process view of business operations.

FIGURE 3: A process view of business operations

Businesses take inputs (resources) in the form of material, people, and equipment, and transform

these inputs into goods and services for customers. Effectively managing these inputs and

business processes requires accurate and up-to-date information. For example, the sales staff

takes a customer’s order, and production employees schedule the manufacturing of the product.

Logistics employees schedule and carry out the delivery of the product. If raw materials are

needed to make the product, production prompts purchasing staff to arrange for their purchase

and delivery. Logistics will receive the raw material, verify its receipt to accounting so the

vendor can be paid, and deliver the goods to production. Throughout, accounting keeps

appropriate transaction records.