Posted by: Monideepa Tarafdar | June 18, 2010

Process Linkages and Intra-firm Integration

“Integration” is a word we often hear in the context of Information Technology (IT) applications. ERP vendors tell us that their software “integrates” processes that span different departments and supply chain application vendors promise “business-to-business integration” through electronic procurements and electronic data interchange applications. Seamless integration, it would seem is one of the silver bullets that IT can bring. But what is integration?

The concept of integration stems from that of “value linkages” (Porter 1980) between activities in the company’s value chain. A value linkage between two or more activities means that (a) the performance of one is dependent on that of the other or (b) all of the activities need to be done right together to achieve a broader activity/process. An example of the first, if vendor quality control is stringent then incoming raw materials inspection processes will yield less waste (a principle applied by Japanese auto manufacturers). An example of the second, to accomplish Just-in-Time manufacturing, one needs to coordinate demand forecasting, inbound logistics, outbound logistics and production scheduling (a principle applied by Dell’s direct model). So what does all this have to do with IT? Well, to take advantage of value linkages requires flow of information in various forms (a) between activities and processes and (b) about the performance of activities and processes. So we need integrating applications to implement these flows within the firm (i.e. intra-firm applications) or among firms (i.e. inter-firm applications).

One of the most widely used classes of intra-firm integrating applications is the ERP software. It (a) captures all transactions from different functions into a single database schema, (b) provides customized application interfaces for employees of different functions for specific data elements that are relevant them, (c) allows for automation of workflows, whereby a transaction in one particular function can fire or trigger transactions in other functions, and (d) provides aggregated MIS-type reports of transactions. In doing so, ERP softwares accomplish intra-business integration in a number of ways. First, by capturing all transactions in one database they simple make sure that required information is available. That means that if a particular activity, say tracking accounts receivables requires information from sales/marketing, accounts and dispatch, it is available in one place, such that co-ordination between these activities is possible. Also, if one wants to analyze curves or patterns related to the performance of accounts receivables, that is also possible using the single ERP application. Second, by automating workflow triggers, ERP applications take care of interdependencies between activities.  Say that you want to raise an invoice when a goods dispatch consignment is ready – the application should be able to pull the relevant information from the purchase order and the consignee details and generate an invoice automatically when the shipment is done. Plus it should be able to send an email to the consignee, or at least trigger a reminder to the person generating an invoice to send it. So one activity leads to another without error or delay. Third, physically integrating transaction information in one database it takes of data linkages, that is, makes sure that data formats are uniform and can be seamlessly used across functions. That is, if incoming goods is receiving a consignment, the information that they have about the vendor is the same as what the purchase department has, and there does not need to be any “translation”.

Another class of intra-firm applications is corporate portals and knowledge management systems. These applications take off from where the ERP stops. They do not integrate “transactions”, rather they make sure that information and knowledge that various members might need is centrally available. This information or knowledge is not stored in the form of database rows and columns, it is stored in the form of files, pictures, videos and hyperlinks, and reflects analyses, aggregations and solutions that members have gathered and that is part of the firm’s collective knowledge. So when someone wants to create a solution for a particular problem, they have access to similar solutions and can draw from them. Just as ERP systems address coordination and linkage requirements among structured transactions, portals coordinate address similar requirements among qualitative, aggregated and unstructured information.

Transaction based intra-firm integration (i.e. ERP) is more applicable to structured, manufacturing type environments, whereas portal based intra-firm integration is more suitable for unstructured environments such as those found in consulting and IT services firms.

Reference:

Porter, M., Competitive Strategy, Free Press, 1980.

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