March 16, 2016

Transaction processing and ERP Systems - Summary of Stair and Reynolds Book Chapter

Chapter 9 - Transaction Processing and Enterprise Resource Planning Systems

An overview of Transaction Processing Systesm (TPS)

A TPS is used to record completed business transactions.

Information concepts are applied to routine, repetitive, and ordinary business transactions.
TPS functions are built into an ERP system.

E.g. Order entry, inventory control, payroll, accounts payable, accounts receivable, ledger…

Input includes: Customer & purchase orders, receipts, time cards, invoices, payroll cheques…

Processing includes: Data collection, edit, manipulation, storage, & document production.

The TPS is an integrated component of an organisation’s total IS because output from a TPS
is used as input for other systems.

Traditional transaction processing methods and objectives

Batch processing: Transactions are accumulated and processed as a single unit.
OLTP (On-Line Transaction Processing): Each transaction is processed immediately.
On-line entry with delayed processing = a compromise between batch & OLTP.
Transactions are entered when they occur, but they are not processed immediately.

Objectives of TPS:

Process data generated by and about transactions
Primary objective of a TPS: Capture, process & store transactions and produce documents.
Maintain a high degree of accuracy and integrity
One objective of any TPS is error-free data input and processing.
Fraudulent transactions must be avoided. (Use digital certificates).
Produce timely documents and reports
Transactions can be processed in seconds, improving the company’s cash flow.

Increase labour efficiency

A computer linked to a company’s cash registers replaces a room full of clerks & typewriters.

Help provide increased service

EDI systems allow customers to place orders electronically, instead of waiting in queues.

Help build and maintain customer loyalty

TPSs are often the means for customers to communicate, so keep them satisfied & returning.

Achieve competitive advantage

Ways that TPSs help companies gain competitive advantage:
* Increase customer loyalty
* Provide superior service to customers
* Have a better relationship with suppliers
* Superior information gathering
* Reduce costs dramatically

Transaction processing activities

The transaction processing cycle:

Data collection

The process of capturing and gathering all data necessary to complete transactions.
It begins with a transaction and results in the origination of data that is input to the TPS.
Source data automation = when data is captured at its source, with minimal manual effort,
and in a form that can be directly entered into the computer. (E.g. using scanners).

Data editing

Checking data for validity and completeness (E.g. Cost data must be numeric)
Often, the codes associated with a transaction are edited against a database with valid codes.
If any code entered is not present in the database, the transaction is rejected.

Data correction

 Re-entering miskeyed data that was discovered during the data editing routine.
The system should provide error messages that alert the person entering info.

Data manipulation

Performing calculations on business transactions, classifying data, sorting, summarising…

Data storage

Updating databases with new transactions.

Document production and reports

Generating output records and reports


Control and management issues

Business resumption planning

The process of anticipating and providing for disasters.
Focus on 2 issues:
* Maintaining the integrity of corporate information
* Keeping the IS running until normal operations can be resumed
Identify potential threats, such as natural disasters, misuse of computers…
Occasionally hold an unannounced ‘test disaster’ to ensure that the disaster plan is effective.

Disaster recovery

The implementation of the business resumption plan.

Primary tools: backups for hardware, software, databases, telecommunications & personnel.
A common backup for hardware is a similar / compatible system owned by another company.
Some companies back up their hardware with duplicate systems and equipment of their own.
Two firms in different industries with compatible systems can help back each other up.
Hot site = a duplicate system that is operational and ready to use.
Cold site / shell = a computer environment that includes rooms, electrical service, storage
devices, telecommunications links…
If there is a problem with the primary mainframe, the primary hardware is brought into the cold
site and the complete system is made operational.
Backup for software & hardware: you can make duplicate copies of all programs & data.
Keep one backup copy in the IS department and another one off-site in a safe place.
Utility packages inexpensively provide backup features for desktop computers.
Backup for telecommunications: recovery plans for the whole network or just the critical nodes
Backup for personnel: cross-train so that employees can perform an alternate job if required.

Transaction processing system audit

* 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?
Other areas investigated during an audit include:
Distribution of output documents & reports, training & education associated with existing &
new systems, the time necessary to perform various tasks, general areas of improvement…
There is no investigation pertaining to the accuracy of performance forecasts!
Internal audit: conducted by employees of the organisation.
External audit: performed by accounting firms / people not associated with the organisation.
The auditor inspects all programs, documentation, control techniques, the disaster plan,
insurance protection, fire protection…
This is accomplished by interviewing IS personnel and performing tests on the system.
Audit trail allows auditors to trace output from the computer system to the source documents.

Traditional transaction processing applications

Order processing systems

Order entry

The order entry system captures the basic data needed to process a customer order.
With an on-line order processing system, the inventory status of each item is checked.
If an order item can’t be filled, a back order is created.
Order takers can review customer payment history data to see if credit can be extended.
With EDI, a customer can place orders directly from its purchasing TPS into the order
processing TPS of another organisation.
With EDI, orders can be placed any time of day / night, and there is immediate notification.

Sales configuration

The sales configuration system ensures that the products and services ordered are sufficient
to accomplish the customer’s objectives and will work well together.
Sales configuration programs can suggest optional equipment, solve customer problems and
answer customer questions, eliminate mistakes, reduce costs, increase revenues.

Shipment planning

The shipment planning system determines which orders will be filled and from which location.
The output shows where each order is to be filled and gives a precise schedule.
The system also prepares a picking list that is used to select the ordered goods.

Shipment execution

The shipment execution system coordinates the outflow of products from the organisation.
The shipping department is given responsibility for packing & delivering the products.
The system receives the picking list from the shipment planning system.
After shipment execution, ‘shipped orders’ transactions go to the invoicing system.
These transactions specify what items were shipped, the quantity, and to whom.
This data is used to generate a customer invoice.
The shipment execution system also produces packing documents, which are enclosed with
the items being shipped, to tell customers what is in the shipment, on back-order…

Inventory control

For each item being picked, a transaction is passed to the inventory control system.
In this way, inventory records reflect the exact quantity on hand of each stock-keeping unit.
Once products have been picked out of inventory, other documents & reports are initiated.

E.g. Inventory status report - summarises all inventory items shipped over a specific time.
One objective is to place just the right amount of inventory on the factory floor.
Competitive advantage: real-time inventory control systems, wireless LAN communications…
Advantage: Inventory data is more accurate and current for people performing order entry etc


Customer invoices are generated based on records from the shipment execution TPS.
Most invoicing programs automatically compute discounts, taxes, and miscellaneous charges.

Customer interaction

Customer interaction system monitors & tracks each customer interaction with the company.
Goal: To build customer loyalty.
Additional data is captured at the time of each sale and is passed to people who can use it.
The customer interaction data can be used to keep customers satisfied, improve products…

Routing and scheduling

A routing system determines the best way to get products from one location to another.
A scheduling system determines the best time to deliver goods & services.
Scheduling & routing programs are connected to the organisation’s order & inventory TPS.

Purchasing systems

Inventory control

The firm must ensure that there’s enough raw / packing material, & maintenance parts.

Purchase order processing

The purchase order processing system helps complete transactions quickly and efficiently.
The buying process is facilitated by keeping data on suppliers’ goods and services.
Many companies form strategic partnerships with a major supplier for important materials.
Partners are chosen based on prices and their ability to deliver quality products on time.


The receiving system creates a record for the expected receipts.
A centralised receiving department takes incoming items, inspects them, and routes them.
Any items that fail inspection are sent back to the supplier.

Accounts payable

The accounts payable system increases control over purchasing while regulating cash flow.
Major outputs = cheques to suppliers for materials & services.
Input from the purchase order processing system provides an electronic record to the
accounts payable application that updates the database.
Accounts payable cheques include the items ordered, amount of each item, totals…
Companies can also pay their suppliers electronically using EDI, the Internet etc.
Common report produced: Purchases journal, which summarises bill-paying activities.

Accounting systems


The budget transaction processing system amasses budget data and distributes it to users.

Accounts receivable

The accounts receivable system manages the cash flow by keeping track of money owed.
When goods are shipped, the customer’s accounts payable system receives an invoicing
transaction, & the customer’s account is updated in the supplier’s accounts receivable system
Major output: monthly bills / statements sent to customers.


Primary outputs: payroll cheque & stub, and the payroll register (=summary report)
The number of hours worked is collected, and weekly / monthly paycheques are prepared.
Payroll systems can handle: overtime, commissions, tax forms, savings plans…
Payroll journal = a report that contains all employees; names, hours, pay rate…
Financial managers use the payroll journal to monitor & control pay to individual employees.

Asset management

Capital assets last several years, while their value depreciates, resulting in a tax reduction.
The asset management TPS controls investments & manages depreciation for tax benefits.
General ledger
Every monetary transaction that occurs must be recorded in a general ledger.
A computerised general ledger system allows automated financial reporting and data entry.
The ledger application produces a detailed list of all business transactions & activities.
Reports: profit & loss statements, balance sheets, general ledger statements.

Enterprise resource planning (ERP)

An overview of ERP

The key to ERP is real-time monitoring of business functions (which permits timely analysis).
ERP configures all aspects of the IS environment to support how your firm runs its business.

Advantages of ERP:

Elimination of costly, inflexible legacy systems
Separate systems are replaced with a single integrated set of applications.
Improvement of work processes
Best practices = the most efficient & effective ways to complete a business process.
ERP vendors do research to define the best business practices.
Increase in Access to data for operational decision making
An integrated database means one set of data supports all business functions.
This allows companies to provide greater customer service & support.
Upgrade of technology infrastructure
Standardisation on fewer technologies and vendors reduces ongoing maintenance costs.

Disadvantages of ERP:

Expense and time in implementation
ERP is time-consuming, difficult, and expensive to implement.
Difficulty implementing change
Sometimes companies have to make big operational changes to conform to the ERP.
Difficulty integrating with other systems
Some companies have difficulty making other systems operate with their ERP.
Risks in using one vendor
It is expensive to change vendors, so your vendor might not be responsive.
Your vendor’s product may become outdated or they might go out of business.
SAP R/3 is the most widely used ERP solution in the world.

No comments:

Post a Comment