The Foundation of the Business Process Model - Economic Exchanges

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The Foundation of the Business Process Model -
Economic Exchanges

• Economic Exchange Two related economic events
  where we acquire one resource in exchange for
  another
• Economic exchanges are important because they
  involve the most fundamental events where value
  is added in the business. Therefore, the first
  part of this course will focus on these events
  only.
• Examples give cash, get inventory give
  inventory, get cash get cash from investor, give
  dividend to investor borrow money from bank,
  give money to bank give cash, get building give
  cash, get services

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Components of an Economic Exchange

• Two related events
• Each event is associated with a resource one
  event increases resources (get), the other
  decreases or uses resources (give) get and give
  may, and usually do, involve different resources
• Each event usually involves one internal agent
  and one external agent in an exchange, generally
  the same external agent is associated with both
  events
• Goal is to understand what the events, resources
  and agents are, and the nature of the
  relationships between them

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An REA Model of an Economic Exchange
William E. McCarthy Michigan State
University (These slides may be copied as long
as original source is cited) http//www.msu.edu/u
ser/mccarth4/
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Cookie-Monster (the customer) and Elmo (the
entrepreneur) meet in the (real or virtual)
marketplace, thus setting the stage for an
Economic Exchange
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Economic Exchange Pattern
R
E
A
Source W. E. McCarthy The REA Accounting
Model A Generalized Framework for Accounting
Systems in a Shared Data Environment, The
Accounting Review, July 1982, pp 554-78. W.E.
McCarthy The REA Modeling Approach to Teaching
Accounting Information Systems, Issues in
Accounting Education, November 2003, pp. 427-41.
(source of following slides)
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Cookie-Monster (the customer) and Elmo (the
entrepreneur) engage in a SHIPMENT (transfer of
Cookie Inventory)
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COOKIES
ELMO
SALE
cookie monster
Give
Take
Economic Event
inside participation
REA model of cookie sale from entrepreneurs
(ELMO) perspective
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COOKIES
ELMO
SALE
cookie monster
Give
Take
cookie monster
Economic Event
CASH RECEIPT
inside participation
ELMO
CASH
REA model of cookie sale from entrepreneurs
(ELMO) perspective
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more general exchange model from the
entrepreneurs (ELMOs) internal perspective
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COOKIES
COOKIES-stockflow-SALE
Product Description Price QOH
P-1 Chocolate Chip 1.05 200
P-2 Chocolate .95 205
P-3 Peanut Butter 1.00 97
P-4 Pecan 1.10 257
Product Invoice Quantity
P-2 I-1 5
P-3 I-1 10
P-3 I-2 20
P-4 I-3 9
P-1 I-4 4
P-3 I-4 5
SALE-duality-CASH_RECEIPT
SALE
Invoice Receipt Timestamp Amount Applied
I-1 2JUL0830 14.75
I-2 3JUL0800 2.00
I-2 5JUL0800 18.00
I-3 8JUL1145 9.90
I-4 8JUL1145 9.20
Invoice Dollar Amount Date Salesperson Employee Customer
I-1 14.75 1JUL E-1234 C-987
I-2 20.00 2JUL E-1235 C-888
I-3 9.90 3JUL E-1236 C-999
I-4 9.20 5JUL E-1237 C-999
Partial Database for Elmos Cookie Business
Why is this invoice amount 14.75 ??
How is customer paying for this ???
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A business process is a set of activities that
takes one or more kinds of input and creates an
output that is of greater value to the customer
(Hammer and Champy)
A value chain is a purposeful network of
business processes aimed at assembling the
individual components of a final product (i.e.,
its portfolio of attributes) of value to the
customer (Porter and Geerts/McCarthy)
Part of ELMOs Value Chain for Providing Cookies
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Enterprise Information Systems
Basic Accounting Systems
Counting artifacts
e-collaboration systems
Enterprise Systems classification structure is
from David, McCarthy Sommer, Communications of
the ACM, May 2003, pp. 65-9.
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Different perspectives on REA modeling needed for
enterprise modeling (value chains) and
collaboration space (supply chains)

• Enterprise modeling (as evidenced in normal ERP
  systems) is done from the perspective of one
  company or entrepreneur. Business processes are
  viewed as components of a single value chain. A
  single exchange (like the sale of a product for
  money) would be modeled twice, once in the
  enterprise system of each trading partner.
• Collaboration space modeling (as evidenced in
  ebXML or ISO Open-edi) is done from a perspective
  independent of each trading partner. A single
  exchange is modeled once in independent terms
  that can be then mapped into internal enterprise
  system components. Supply chains are networks of
  business processes that alternate internal
  transformations and external exchanges
  (definition due to Bob Haugen).
• REA modeling works in both cases and the
  independent to trading partner mapping is
  absolutely straightforward and completely
  defined.

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Used for collaboration space modeling
SOURCE Adapted from ISO 15944-4, K. Morita
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COOKIES
from
ELMO
SHIPMENT
cookie monster
to
initiating transfer
responding transfer
to
ELMO
Economic Event
PAYMENT
from
cookie monster
CASH
REA model of cookie sale from independent
(collaboration space) perspective
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Identifying Economic Exchanges

• The Merchant of Venice receives funding from
  outside investors. His goal is to purchase silk
  in China and sell it to the wealthy people in
  Italy. To accomplish this goal, he first
  purchases a boat. Next he hires a deck hand to
  captain the ship to China and back. While in
  China, the manager negotiates with silk sellers
  and purchases silk. When the return trip is
  completed, the Merchant of Venice pays the deck
  hand, and sells the silk. After retaining a
  portion of the proceeds for himself, the
  remaining proceeds from the venture are
  distributed among the investors according to the
  amount of their original investment.

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Merchant of Venice Economic Exchanges

• Get cash from investor, give cash (principal plus
  return) to investor
• Give cash to silk merchant, get silk from
  merchant
• Give silk to wealthy people, get cash from
  wealthy people
• Give cash to ship builder, get ship from ship
  builder
• Give cash to deck hands, get service from deck
  hands
• Give cash to merchant, get services from merchant

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ER Diagrams

• REA/Business Process Show the events, resources
  and agents in a business process and
  relationships between them
• Data Model Show the key entities to store data
  about (tables) and relationships between them
  which must be captured (primary/foreign key
  relationships and MM tables)

ER DIAGRAMS ARE NOT FLOWCHARTS!!!!!!
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Basic REA Template for an Economic Exchange
Increasing Event
Internal Agent
Resource
by
get
from
External Agent
for
to
Decreasing Event
Internal Agent
Resource
by
give
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Basic REA Template for an Economic Exchange --
Revenue
Goods Delivery
Shipping Clerk
Inventory
by
give
to
Customer
for
from
Cash Receipt
Cash Rects Clerk
Cash
by
get
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Timing of Events

• Generally, ERDs are drawn with the events listed
  from top to bottom in the order they take place
• For revenue, the two events making up the
  exchange may occur
• At the same time (a cash sale)
• With the delivery first (a sale on account)
• With the cash receipt first (customer prepays or
  makes a deposit)

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Basic REA Template for an Economic Exchange
Expenditure
Goods Receipt
Receiving Clerk
Inventory
by
get
from
Vendor
for
to
Cash Payment
Cash Pmts. Clerk
Cash
by
give
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REA Data Modeling

• Step 1 Identify Events -- Store information
  about events we want to plan, execute or
  evaluate list these down the center of the ER
• Step 2 Identify Resources Influenced by Events
  -- Resources are often assets of the business
  that we wish to track information about List
  these to the left of the events on the ER.
• Step 3 Identify Agents Involved in Events --
  Usually one internal agent and one external
  agent. List these to the right of the events on
  the ER.

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REA Data Modeling, continued

• Step 4 Identify Attributes of Events, Resources
  and Agents -- Selection of attributes determines
  what information we later have to make reports,
  etc.
• Step 5 Identify Relationships between Events,
  Resources and Agents -- Words in the box are
  unimportant, but you may want to use the basic
  terminology used in the templates

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Identifying Attributes

• Eventually, we will become much more exacting
  about the attributes stored when we create
  database tables. For now, attributes help to
  understand what is being modeled
• For events, think of all of the things that would
  be on the paper document used to capture
  information about the event
• For resources and agents, this is their master
  file information

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Basic REA Template for an Economic Exchange
Revenue
Goods Delivery
Shipping Clerk
Inventory
by
give
to
Customer
for
from
Cash Receipt
Cash Rects Clerk
Cash
by
get
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Attributes - Revenue

• Goods Delivery Date, Dock shipped from,
  customer, items shipped, qty.
• Cash Receipts Date, Place received, customer,
  amount received
• Inventory Item Number, description, qty on hand
• Cash Account/Drawer Number, Bank/Location,
  Description, Balance
• Customer Customer Number, Name, Address,
  Contact, Credit Limit, Balance
• Shipping Clerks, Cash Receipts Clerks Employee
  Number, Name, Address, Department

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More on Attributes Inventory

• Inventory items can be either
• generic inventory items ones that we always
  keep in stock where we keep a catalog of the
  items we sell The data table for generic
  inventory items is basically a listing of the
  items in our catalog and QOH
• unique inventory items custom made items that
  will each have a unique identifier (think job
  order costing). The data table for unique
  inventory items is a listing of all of the
  individual items (or groups of identical items
  called jobs) produced
• YOU SHOULD ALWAYS ASSUME GENERIC INVENTORY ITEMS,
  UNLESS IT IS SPECIFICALLY STATED OTHERWISE

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More On Attributes Cash

• The cash resource represents cash on hand or in
  the bank. The data table storing information
  about cash looks like one of the following
• For cash on hand A listing of all of the cash
  drawers in all of our stores and the amount of
  cash that should be in each one
• For cash in the bank A listing of all of our
  bank accounts, the bank and the balance

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Basic REA Template for an Economic Exchange
Expenditure
Goods Receipt
Receiving Clerk
Inventory
by
get
from
Vendor
for
to
Cash Payment
Cash Pmts. Clerk
Cash
by
give
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Attributes - Expenditure

• Goods Receipt Date, Dock where received,
  vendor, items received, qty.
• Cash Payments Date, Cash Account Number,
  Vendor, amount paid
• Inventory Item Number, description, qty on hand
• Cash Account/Drawer Number, Bank/Location,
  Description, Balance
• Vendor Vendor Number, Name, Address, Contact,
  Credit Limit, Balance
• Receiving Clerks, Cash Payments Clerks Employee
  Number, name, Address, Department

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Basic REA Template for an Economic Exchange
Payroll
Get Employee Service Time Ticket
Production Supervisor
Employee Service
by
get
from
Employee
for
to
Cash Payment
Payroll Clerk
Cash
by
give
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REA Data Modeling, Continued

• Step 6 Cardinality and Optionality -- For each
  entity pair there are really TWO DIFFERENT
  relationships
• Focus on a single example of one of the two
  entities
• Cardinality -- How many instances the entity on
  the other side of the relationship can be
  associated with that single entity?
• Optionality -- At ANY possible point in time,
  does a relationship have to exist between the
  entity and the one on the other side, or is it
  simply possible for a relationship to exist?
• Reevaluate, starting with a single example of the
  other entity in the relationship

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Cardinality and Optionality Example
Cash Payment
Vendor
sent to

• Single Payment
• How many vendors associated with single payment?
• Only one (no crows feet)
• Does payment always have to have a vendor?
• Yes (vertical line)

• Notice where this symbol goes

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Cardinality and Optionality Example
Cash Payment
Vendor
sent to

• Single Vendor
• How many payments associated with single Vendor?
• Can be many (crows feet)
• Does Vendor always have to have a payment?
• No goods received, no payments yet (circle)

• Notice where this symbol goes

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Basic REA Template for an Economic Exchange --
Conversion
Manufacture Goods (Production Order)
Production Supervisor
Finished Goods Inventory
by
get
for
for
for
Production Supervisor
by
Issue RM (Materials Requisition)
Storeroom Clerk
Raw Materials Inventory
from
give
Production Supervisor
Production Supervisor
by
by
Use Employee Service (Time Ticket)
Use Machines (machine Log)
Employee
Employee Service
Machine Operator
Machine Time
from
give
from
give
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Attributes - Conversion

• Manufacture Goods/Production Order Date,
  factory number, supervisor, item to produce, qty.
• Use Raw Materials/Materials Requisition -- Date,
  Storeroom Clerk, Production Employee, Items
  Issues, Production Order, Qty Issued
• Use Employee Service/Time Ticket Date Employee,
  Production Order, Hours Worked, Job Code
• Use Machine Time/Machine Log Date, Machine
  Operator, Machine, Hours used, Production Order
• Employee Service Job Code, Description,
  Capacity
• Machine Time Machine Number, Machine Use,
  Capacity
• FG/RM Inventory Item Number, description, qty
  on hand
• Production Supervisor, Storeroom Clerk,
  Employees, Machine Operators Employee Number,
  name, Address, Department, YTD earnings

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Conversion Key Points

• There is NO CASH INVOLVED, but Economic Exchange
  Still Exists Get Finished Goods, Give up
  employee service, machine time, raw materials
• The Economic Exchange is within the organization
• Because all events are internal, there may not be
  two agents for each event Most often, the ones
  deleted would be the production supervisor
  (authorizer) in the use machine time and use
  employee service events
• Often, all of these events are recorded using a
  single document (i.e. a record of a good being
  assembled called a job cost sheet) the process
  illustrated here would be used in a large
  manufacturing operation
• The Manufacture Goods event can take place over a
  course of time (several hours, days or weeks).
  We may record sub-events i.e. start production,
  complete production

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Simultaneous Production and Consumption

• Definition When a single resource is received
  or created at the same time it is used or
  delivered.
• Simultaneous production and consumption takes
  place with all services. Unlike goods where there
  is one event where we get the good (goods
  receipt) and a separate one where we give it
  (shipment), for services, give and get occur
  simultaneously because services cannot be stored
• Because of simultaneous production and
  consumption, the Give Employee Service pattern
  for conversion is the same as the Get Employee
  service template shown for payroll, except it
  says GIVE rather than GET
• These are really the same event because we
  simultaneously get (produce) and give (consume)
  the employees service.
• Despite the fact that they are the same event,
  sometimes, the event is recorded two different
  times, once to pay payroll (the get) and
  separately to track it for job costing purposes
  (the give) A better design is to record the
  event only once, on the time ticket, and use the
  data for both payroll and job costing (as we will
  assume)

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Ontological Extensions to the REA Model (Geerts
and McCarthy)

• Type images for basic objects allows
  specification of policies and controls plus
  abstract specification of negotiation components
• Commitment images for economic events allows
  specification of contracts and agreements
• State machine model allows specification and
  ordering of business events as collaboration
  space messaging and/or internal workflow
• Aggregation of binary collaborations allows
  mediated collaboration with third parties

SOURCE Geerts and McCarthy, The Ontological
Foundations of REA Enterprise Information
Systems, 2003.
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SOURCE Adapted from ISO 15944-4, W.E. McCarthy