4. Management Information Systems and Decision Support Systems

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1 4. Management Information Systems and Decision Support Systems As we have seen, a transaction processing system serves as the foundation for the other systems. Transaction processing systems are operational level information systems that perform routine operations such as sales ordering and billing, often performing the same operations daily or weekly. The amount of support for decision making that a TPS directly provides managers and workers is low. MANAGEMENT INFORMATION SYSTEMS There is no universally accepted definition of an MIS and those that exist reflect the emphasis of the particular writer. Let us define an MIS as: A system to convert data from internal and external sources into information; and to communicate that information, in an appropriate form, to managers at all levels in all functions, to enable them to make timely and effective decisions for planning, organizing, directing and controlling the activities for which they are responsible. An MIS provides managers with information and support for effective decision making and provides feedback on daily operations. The MIS is most effective at the operational and tactical levels of management, for dealing with mainly structured types of problems. These types of problems have a low level of complexity, and are reasonably straightforward to solve. This is accomplished through various reports produced by the MIS. These reports are obtained by filtering the highly detailed data contained in transaction processing databases and summarizing the results for managers in a meaningful way. Inputs to a Management Information System Data that enters an MIS originates from both internal and external sources. Internal data originates from within the organization, while external data originates from outside the organization. The most significant internal source of data for an MIS is the organization s various TPSs. One of the major activities of the TPS is to capture and store the data resulting from ongoing business transactions. With every business transaction, various TPS applications make changes to and update the organization s databases. For example, the billing application helps keep the accounts receivable database up to date so the managers know who owes the company money. These updated databases are a primary internal source of data for the management information system. Other internal data comes from functional areas (Sales, Human resources, Accounting, R&D etc.) throughout the firm. Examples of external data are the current state of the economy, sales of the competitor s products, average production costs in the industry, and possible returns on alternative investments. 1

2 The MIS uses the data obtained from these sources and processes it into information more usable to managers, primarily in the form of reports. For example, rather than simply obtaining a chronological list of sales activity over the past week, a national sales manager might obtain her organization s weekly sales data in a format that allows her to see sales activity by region, by local sales representative, by product, and even in comparison with last year s sales. Outputs of a Management Information System The output of most MISs is a collection of reports that are distributed to managers. These reports include scheduled reports, demand reports, exception reports, and drill down reports. Scheduled reports. Scheduled reports are produced periodically, or on a schedule, such as daily, weekly, or monthly. These are typically printed rather than displayed, and include such things as weekly sales in product categories, payroll expenses by department, and profit-and-loss statements. A manufacturing report produced once a day to monitor the production of a new product is another example of a scheduled report. Other scheduled reports can help managers monitor the performance of sales representatives or inventory levels. Neither the distribution nor the format of a scheduled report varies from period to period the same people get the same information at the end of each period. Demand reports. Demand reports are developed to give certain information at a manager s request. In other words, these reports are produced on demand. This type of information is usually solicited by entering the request on a terminal keyboard, and the response is typically displayed rather than printed. For example, an executive may want to know the inventory level for a particular item a demand report can be generated to give the requested information. Other examples of demand reports include reports requested by managers to show the hours worked by a particular employee, daily sales by salesperson, total sales for a product for the year, and so on. 2

3 Exception reports. Exception reports are reports that are automatically produced when a situation is unusual or requires management action. Exception reports show only the data that is out of a specified range, not the data that is within normal ranges. We might have a report showing departmental expenditures that are 10% over or under budget. The expenditures with 10% of budget will not show up. A report for a school class may print out those with 5 or more absences per term. Exception reports were developed because most people scan detail reports only for the unusual, something that requires their action. The computer, by itself, would have a hard time deciding what constitutes unusual. However, as long as we give it our criteria for unusual, the computer is much more efficient than we are at picking these things out. All levels of management can benefit from exception reports. They are as important at the lower levels as the higher levels. Drill down reports. Drill down reports provide increasingly detailed data about a situation. They allow a decision maker to start from the summary level and dig down to get the details that make up the summary. Functional Aspects of the MIS Most organizations are structured along functional lines or areas. Some of the traditional functional areas are finance, marketing, personnel, research and development (R&D), manufacturing etc. In addition, each of these functional areas within the organization contain the various levels of management (strategic, tactical and operational). Each functional area interfaces with both the TPS and the MIS. Each of these areas requires different information and support for decision making; they may also share some common information needs. Thus, a portion of the overall MIS is organized to support the financial functional area. Reports that are shared by all levels of financial managers, as well as different reports for each level of financial management, would be generated. This same strategy applies to top, mid and lower level managers in marketing, and so on for each functional area. Each functional area is provided with reports supplying information focused on the particular needs of that group. When a functional approach is taken, the various MISs must be linked (thus the large rectangle labeled MIS that surrounds the functional areas in the figure). Otherwise, the organization might end up with a collection of disjointed and ineffective systems. One way to unify and integrate the various systems is through a shared database as shown on the next page. 3

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5 DECISION SUPPORT SYSTEMS During the 1970s, systems began to evolve whose purpose it was to help decision makers devise solutions to unstructured and partially structured (semi-structured) problems. These systems, called decision support systems, provide sophisticated tools to managers, especially at the tactical level, to assist them in solving unstructured and semi-structured problems. A DSS is an organized collection of people, procedures, software, databases, and devices used to support problem-specific decision making. DSSs support the human decision-making process rather than providing a means to replace it. They obtain much of their basic data from routine transaction processing. Decision making as a component of Problem Solving In general, problem solving is the most critical activity a business organization undertakes. Problem solving begins with decision making. A well-known model developed by Herbert Simon divides the decision-making phase of the problemsolving process into 3 stages: intelligence, design and choice. This model was later incorporated by George Huber into an expanded model of the entire problem solving process. The first stage in the decision-making phase of the problem-solving process is the intelligence stage. During this stage, potential problems and/or opportunities are identified and defined. The decision maker may be reacting to problems or else may recognize opportunities. Information is gathered that relates to the cause and scope of the problem. Constraints on the possible solution and the problem environment are investigated. For eg., exploring the possibilities associated with the Decision Making Intelligence Design Choice Implementation Monitoring Problem Solving opportunity of shipping tropical fruit from a farm in Essequibo to stores in Kansas (a state in southwest U.S.) is done during the intelligence stage. The perishability of the fruit and the maximum price consumers in Kansas are willing to pay for the fruit are problem constraints. Aspects of the problem environment that must be considered in this case include federal and state regulations regarding the shipment of food products. In the design stage, alternative solutions to the problem are developed. In addition, the feasibility and implications of these alternatives are evaluated. In our tropical fruit example, the alternative methods of shipment, including the transportation times and costs associated with each, would be considered. During this stage it might be determined that shipment by freighter to New York and then by truck to Kansas is not a feasible method because, in the time this method would take, the fruit would spoil. The last stage of the decision-making phase, the choice stage, requires selecting a course of action. In our tropical fruit example, the Guyanese farm might select the method of speed boat and truck to Georgetown; by air to New York and then by truck to Kansas as its solution. The choice stage would conclude with the selection of the actual air carrier and trucking company to do the transport. 5

6 Problem solving includes and goes beyond decision making. It also includes the implementation stage, when action is taken to put the solution into effect. In our tropical fruit example, implementation would be the actual shipping of the fruit to Kansas. The final stage of the problem-solving process is the monitoring stage. In this stage, the decision makers evaluate the implementation of the solution to determine whether the anticipated results were achieved and to modify the process in light of new information learned during the implementation stage. For example, after the first shipment of fruit, the farmer might learn that the trucking company retained to pick up the fruit from the New York airport and truck it to Kansas does not pick up the fruit till almost 6 hours after the flight has reached, since the flight reaches New York around 12 midnight. If this unforeseen exposure to temperature and humidity adversely affects the fruit, the farmer might have to readjust his solution to include a new air freight firm that reaches during the day, or perhaps he would consider a change in fruit packaging. Decision Support Systems can be an important part of all phases of decision making and problem solving, but especially to analyze alternatives. A user might define a problem that involves simulating cash flows under a variety of business conditions. Financial modeling software might be chosen to model the problem into a DSS. The DSS model is then run, providing results. EXAMPLE During lunch hour, customers arrive at a fast food restaurant at a rate of three per minute. They require 1.5 minutes to place an order and pay the bill before going to pick up the food. How many cash register stations are needed to ensure that the number of customers waiting in line does not exceed six and that this waiting time does not occur more than 30 percent of the time during the lunch hour rush? As an example of this type of system, consider the customer service department of the Biggs Department Store. The customer service department of the store has a waiting room in which chairs are placed along the wall, in effect forming a single waiting line. Customers come to this area with questions or complaints or to clarify matters regarding credit card bills. The customers are served by three store representatives, each located in a partitioned stall. Customers are served on a first-come, first-served basis. The store management wants to analyze this queuing system because excessive waiting times can make customers angry enough to shop at other stores. Typically, customers who come to this area have some problem and thus are impatient anyway. Waiting a long time serves only to increase their impatience. Let us assume that a survey of the customer service department for a 12-month period shows that the arrival rate and service rate are as follows: 10 customers per hr. arrive at the service department 4 customers per hr. can be served by each store representative 3 customer reps in department Using a software such as MS Excel, we can simulate this problem using a queuing model containing mathematical formulas. A Poisson probability distribution can be used to model the 6

7 customer arrivals. Statistics describing the queue are produced automatically by the simulation software. For example, the Table below shows that five servers are needed to ensure that the queue will be no longer than six persons for 70 percent of the time. 3 reps 4 reps Average time in the store per customer (mins.) = Number of customers on average waiting to be served at any particular point in time = Average time waiting in line per customer (mins.) = Percentage of time that a customer must wait for service (%) = 70% 32% The information in the Table would serve as a tool for establishing optimal staffing levels for a the department so as not to have customers waiting a long time. Components of a DSS At the core of a DSS are a database and software that allows for modeling, statistical analysis, what-if analysis, goal-seeking, drill-down, and graphical presentations. The database holds information on inventory, sales, personnel, production, finance, accounting, and other areas. Mathematical modeling techniques can enable managers to re-create the functional aspects of a system within the confines of a computer. Models can be used by managers to discern patterns or trends in data; to schedule resources in an optimal fashion; to find the shortest or quickest route for transportation. A comparison of DSS and MIS Factor Problem Type Users Output Comparison A DSS is good at handling unstructured and semistructured problems that cannot be easily programmed. An MIS is normally used only with more structured problems. A DSS supports individuals, small groups, and the entire organization; an MIS supports primarily the organization. A DSS is an interactive, user-friendly system that can be used by the decision maker with little or no assistance from an IT professional. It is especially useful for decision makers at the tactical and strategic levels. DSS reports are usually screen oriented, with the ability to generate reports on a printer. An MIS, however, typically is oriented toward printed reports and documents Integration of TPS, MIS and DSS In many organizations these information systems are integrated through the use of a common database. For eg., a billing TPS that sends monthly bills to customers, a billing MIS that produces weekly reports to managers on overdue bills, and a billing DSS that performs what-if analysis to determine the impact of the late bill paying on cash flows, revenues, and overall profit levels may all draw data from the same database. Using the same database for these different systems may require more powerful hardware and software; otherwise, extensive use of a DSS could slow down the operation of the TPS. 7