As an introduction, we will look at the way business process involve more than one functional area, using a very small business as an example – a fictitious lemonade stand that you own. We will examine the business processes of the lemonade stand and see why coordination of the functional areas helps achieve efficient and effective business processes. You will see the role that information plays in this coordination and how integration of the information system improves your business.
Even though one person can run a lemonade stand, the operation of the business requires a number of processes. Coordination the activities within different functional areas requires accurate and timely information.
Marketing and Sales
The functions of Marketing and Sales include developing products, determining pricing promoting products to customers, and taking customers’ orders. M/S also helps to create a sales forecast to ensure the successful operation of the lemonade stand.
For the most part, this is a cash business and does not require formal recordkeeping, but you still need to keep track of your customers so that you can send flyers or occasional thank you notes to repeat customers. Thus, your records must not only show the amount of sales, but also identify repeat customers.
Product development can be done informally in such a simple business; you gather information about who buys which kind of lemonade and note what customers say about each product. You also analyze historical sales records to spot trends that are not obvious. Deciding whether to sell a product also depends on how much it costs to produce the product. For example, some customers might be asking for a sugar-free lemonade. To determine whether the new lemonade could be profitably produced and sold, you could analyze data from SCM, including production information (such as mixing container size, time required to mix) and materials management data (cost of lemons and sweetener).
Even though you run a cash business, good repeat customers are allowed to charge purchases – up to a point. Thus, your records must show how much each customer owes and his or her available credit. It is very important that the data be available and accurate at the time of a customer’s credit request. Since Accounting and Finance records must be accessed as a part of the selling process, the accounting function has a critical role to play in the sales process.
Supply Chain Management
The functions within Supply Chain Management include making the lemonade (manufacturing/production) and buying raw materials (purchasing). Production is planned so that, as much as possible, lemonade is available when needed, without excess production of lemonade that must be liquidated. This planning requires sales forecasts from the M/S functional area. Sales forecasts are analyses that attempt to predict the future sales of a product. A forecast’s accuracy will be improved if it is based on historical sales figures (for example, factors such as hot weather and nearby yard sales will impact the forecast). Thus, forecasts from M/S play an important role in the production planning process.
Production plans are also used to develop requirements for raw materials (bottled spring water, fresh lemons, artificial sweetener, and raw sugar) and packaging (cups, straws, and napkins). You must generate raw material and packaging orders from these requirements. If the forecasts are accurate, you will not lose sales because of material shortages, nor will you have excessive inventory that might spoil.
SCM and M/S must choose a recipe for each lemonade product sold. The standard recipe is a key input for deciding how much to order of each raw material, which is a purchasing function. Access to this recipe is also necessary for keeping good manufacturing records, allowing managers within the SCM functional area (working with those in A/F) to compare how much it actually costs to make a glass of lemonade, versus how much the recipe should have cost.
Accounting and Finance
Functions within Accounting and Finance include recording raw data about transactions (including sales), raw material purchases, payroll, and receipt of cash from customers. Raw data are simply numbers collected from those operations, without any manipulation, calculation, or arrangement for presentation. Those data are then summarized in meaningful way to determine the profitability of the lemonade stand and to support decision making.
Note that data from Accounting and Finance are used by Marketing and Sales as well as by Supply Chain Management. The sales records are an important component of the sales forecast, which is used in making staffing decisions and in production planning. The records from accounts receivable, which you use to determine whether to grant credit to a particular customer, are also used to monitor the overall credit-granting policy of the lemonade stand. You want to be sure that you have enough cash on hand to purchase raw materials, as well as to finance purchasing new equipment, such as a lemon juicer.
Even a simple business needs employees to support the M/S and SCM functional areas, which means that the business must recruit, train, evaluate, and compensate employees. These are the functions of Human Resources.
At the lemonade stand, the number of employees and the timing of hiring depend on the level of lemonade sales. HR uses sales forecasts developed by the individual departments to plan personnel needs. A part-time helper might be needed at forecasted peak hours or days. How much should a part-time helper be paid? That depends on prevailing job market conditions, and it is HR’s job to monitor those conditions.
Would increased sales justify hiring a part-time worker at the prevailing wage? Or, should you think about acquiring more automated ways of making lemonade, so that a person working alone could run the stand? Resolving these questions requires input from SCM and A/F.
The lemonade stand, while a simple business, has many of the processes needed in larger organizations, and these processes involve activities in more than one functional area. In fact, it is impossible to discuss the processes in one functional area without discussing the links to other functional areas – connections that invariably require the sharing of data. Systems that are integrated using ERP software provide the data sharing that is necessary between functional areas.