The Foundation of the Business Process Model - Economic Exchanges

Economic ExchangeEconomic 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 Therefore, the first part of this course will focus on these events only.this course will focus on these events only.

Examples: 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

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

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/user/mccarth4/

Cookie-Monster (the customer) and Elmo (the entrepreneur) meet in the (real or virtual) marketplace, thus setting the stage for an Economic Exchange

EconomicEvent

EconomicAgent

EconomicResource

duality

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)

Cookie-Monster (the customer) and Elmo (the entrepreneur) engage in a SHIPMENT (transfer of Cookie Inventory)

Give

Take

Economic Resource

inside participatio

n

outside participatio

n

outside participatio

n

inside participatio

n

stock-flow

stock-flow

Economic Event

Economic Agent

Economic Agent

Economic Agent

Economic Agent

Economic Resource

duality

Economic Event

REA model of cookie sale from entrepreneur’s (ELMO) perspective

Give

Take

Economic Resource

inside participatio

n

outside participatio

n

outside participatio

n

inside participatio

n

stock-flow

stock-flow

Economic Event

Economic Agent

Economic Agent

Economic Agent

Economic Agent

Economic Resource

duality

Economic Event

REA model of cookie sale from entrepreneur’s (ELMO) perspective

Give

Take

Economic Resource

inside participatio

n

outside participatio

n

outside participatio

n

inside participatio

n

stock-flow

stock-flow

Economic Event

Cash Receipt

Economic Agent

Salesperson

Economic Agent

Customer

Economic Agent

Customer

Economic Agent

Cashier

Cash

Economic Resource

Cookies

duality

Economic Event

Sale

more general exchange model from the entrepreneur’s (ELMO’s) internal perspective

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

Invoice#

Receipt Timestam

p

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 Amoun

t

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

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

COOKIES

SALE

COOKIES-stockflow-SALE

SALE-duality-CASH_RECEIPT

Partial Database for Elmo’s Cookie Business

Why is this invoice amount $14.75 ??How is customer paying for

this ???

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 ELMO’s Value Chain for Providing Cookies

cookie ingredient

s

Acquisition Cycle

cash

business process

labor

cookiesConversion Cycle

business process

Revenue Cycle

cash

business process

value chain

Enterprise Systems classification structure is from David, McCarthy & Sommer, Communications of the ACM, May 2003, pp. 65-9.

EnterpriseSystems

No OrganizingRationale Outwardly

Organized

Single Entry

Transactions& Obligations

A = L + OEEnterprise

Value Chain

BookkeepingModular

Integration: ABC, MRP

ERP SupplyChain

Multi-dimensionalAccounting

Hybrid

Inwardly Oranized

Best ofBreed ERP

Integrator-Enabled

Standards-Enabled

SingleSourceERP

CustomerFocused

MS MoneyQuicken

PeachtreeQuickbooks

PlatinumSolomon

PeopleSoftSAP

OMGOAG Siebel

Goldmine

i2Ariba

Constellar HubVitria

BPCSGreat Plains Dynamics

TradingPartner Independent

ebXMLISO Open -EDI

Semantic infrastructure of system matches extended REA pattern

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.

BusinessProcess

BusinessProcess

BusinessProcess

BusinessProcess

BusinessProcess

BusinessProcess

Independent view of Inter-enterprise events

Enterprise

Enterprise

Enterprise

BusinessProcess

BusinessProcess

BusinessProcess

Illustration of Perspective: Trading Partner vs. Independent

Trading Partner view of Inter-enterprise events (upstream vendors and downstream customers)

Blue arrows represent flow of goods, services, and cash between different companies; green arrows represent flows within companies

SOURCE: Adapted from ISO 15944-4, K. Morita

Used for collaboration space modeling

initiating transfer

Economic Resource

from

to

to

from

stock-flow

stock-flow

Economic Event

Economic Agent

Economic Agent

Economic Agent

Economic Agent

Economic Resource

duality

Economic Event

REA model of cookie sale from independent (collaboration space) perspective

responding transfer

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.

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

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 M:M tables)

Entity: events, resources or agents

Describes the Relationship betweenentities

ER DIAGRAMS ARE NOT FLOWCHARTS!!!!!!

Basic REA Template for an Economic Exchange

Increasing Event

DecreasingEvent

Internal Agent

ExternalAgent

InternalAgent

Resource

Resource

by

from

by

for

get

give

to

Basic REA Template for an Economic Exchange -- Revenue

GoodsDelivery

CashReceipt

Cash RectsClerk

Customer

ShippingClerk

Inventory

Cash

by

to

by

for

give

get

from

Timing of Events

Generally, ERD’s 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)

Basic REA Template for an Economic Exchange – Expenditure

GoodsReceipt

Cash Payment

Cash Pmts.Clerk

Vendor

ReceivingClerk

Inventory

Cash

by

from

by

for

get

give

to

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.

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

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

Basic REA Template for an Economic Exchange – Revenue

GoodsDelivery

CashReceipt

Cash RectsClerk

Customer

ShippingClerk

Inventory

Cash

by

to

by

for

give

get

from

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

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

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

Basic REA Template for an Economic Exchange – Expenditure

GoodsReceipt

Cash Payment

Cash Pmts.Clerk

Vendor

ReceivingClerk

Inventory

Cash

by

from

by

for

get

give

to

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

Basic REA Template for an Economic Exchange – Payroll

Get EmployeeService

Time Ticket

Cash Payment

PayrollClerk

Employee

ProductionSupervisor

EmployeeService

Cash

by

from

by

for

get

give

to

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

Cash Payment Vendorsent to

Cardinality and Optionality Example

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

Cash Payment Vendorsent to

Cardinality and Optionality Example

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

Basic REA Template for an Economic Exchange -- Conversion

Manufacture Goods(Production Order)

ProductionSupervisor

Finished Goods

Inventoryby

for

get

Use EmployeeService

(Time Ticket)Employee

EmployeeService

fromgiveUse Machines(machine Log)

MachineOperator

MachineTime

fromgive

Issue RM (Materials

Requisition)

StoreroomClerk

ProductionSupervisor

Raw MaterialsInventory

fromgive

by

ProductionSupervisorby

ProductionSupervisorby

for for

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

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

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 employee’s 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)

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.

ISO Open-edi Ontology Collaboration Model

Bilateral Collaboration

governs

Economic Event

Economic Resource

Economic Agent

stockflow from

to

Economic Contract

Economic Commitment

reciprocal

fulfills

establish

duality

Economic Resource

Type

typifies

specifies

Economic Event Type

Business Role

specifies

specifies

typifies

qualifies

reserves

involves

Partner Third Party

Mediated Collaboration

Business Transaction

participates

requires

Agreement

Regulator

constrains

SOURCE: Adapted from ISO 15944-4, W.E. McCarthy