The rea enterprise ontology value system and value chain modeling
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The REA Enterprise Ontology: Value System and Value Chain Modeling. Chapter 3. Chapter Learning Objectives. Identify enterprise external business partners Identify resources exchanged between an enterprise and its business partners Develop value system level REA models

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The rea enterprise ontology value system and value chain modeling

The REA Enterprise Ontology: Value System and Value Chain Modeling

Chapter 3


Chapter learning objectives

Chapter Learning Objectives

  • Identify enterprise external business partners

  • Identify resources exchanged between an enterprise and its business partners

  • Develop value system level REA models

  • Identify enterprise business processes (transaction cycles)

  • Identify the resource flows between an enterprise’s internal business processes

  • Identify the economic events that cause the resource flows between an enterprise’s internal business processes

  • Develop a value chain level REA models


Porter s value chain

Revenue

Costs

Firm Infrastructure

Human Resource Management

Support

Activities

Technology development

Procurement

Margin

Inbound

logistics

Outbound

logistics

Marketing

& Sales

Service

Operations

Primary Activities

Michael Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985).

Porter’s Value Chain


Porter s value chain1

Porter’s Value Chain

  • Primary value activities

    • Inbound logistics - receiving, storing

    • Operations – transformation of inputs into the final products

    • Outbound logistics - distributing the products or services

    • Marketing and sales - means by which customers can buy products and the means for inducing them to buy

    • Service - providing service to enhance or maintain the products or services


Porter s value chain2

Porter’s Value Chain

  • Support value activities

    • Procurement - purchasing inputs

    • Technology Development - procedures or technology embedded in processes to improve the product, services, and/or process

    • Human Resource Management - recruiting, hiring, training, developing, and compensating

    • Firm Infrastructure - activities that support the entire value chain


Importance of studying value system and value chain levels in rea

Importance of Studying Value System and Value Chain Levels in REA

  • Understanding an enterprise’s activities at the value system and value chain levels in the REA ontology

    • Helps keep perspective (gives the ability to “see the forest” without getting mired in the detail of the trees)

    • Provides the structure to guide lower levels of analysis

    • Requires consideration of the enterprise’s mission and strategy, which should ensure that business processes and activities are constructed in a manner consistent with the mission and strategy

  • A business process is a series of activities that accomplishes a business objective

    • Adding value to input resources


Value system and value chain

Value System and Value Chain


Value system modeling

Value System Modeling

  • Identify resource inflows and outflows

    • Begin with cash flows

    • Also need to consider non-cash resource flows

  • Identify external business partners


Rsws example from textbook

Step 1: Create a circle in the middle of the model to represent the enterprise (RSWS)

RSWS

RSWS Example from Textbook


Rsws example from textbook1

Step 2: Identify cash inflows and other resource inflows that are not part of a cash-related exchange to the enterprise

Cash inflows

From investors

For future cash flows

From creditors

For future cash flows

From customers

For merchandise

For repair services

For rentals of merchandise

Barter inflows

None noted

RSWS Example from Textbook


Rsws example from textbook2

Step 3: Identify cash outflows and any non-cash resource outflows that are not part of a cash-related exchange of the enterprise and note the destination of the resource outflows

Cash outflows

To investors

For past cash flows

To creditors

For past cash flows

To suppliers

For raw materials, parts, supplies, and merchandise

For property, plant & equipment

For various services and utilities

To employees

For labor

Barter outflows

None noted

RSWS Example from Textbook


Rsws example from textbook3

Step 4: Determine what categories to use as the enterprise’s external business partners and make a box to represent each

RSWS

RSWS Example from Textbook

Investors/ creditors

Customers

Employees

Suppliers


Rsws example from textbook4

Step 5: Fill in resource inflows and outflows on the model

RSWS

RSWS Example from Textbook

Investors and creditors

cash

cash

cash

Employees

goods & services

labor

cash

cash

Suppliers

Customers

goods & services


Value chain level

Value Chain Level

  • Duality relationships consist of paired increment economic events and decrement economic events

    • Increment economic events increase resources (stock in-flows)

    • Decrement economic events decrease resources (stock out-flows)

  • “Duality relationships are the glue that binds a firm’s separate economic events together into rational economic processes, while stock-flow relationships weave these processes together into an enterprise value chain.” -- Geerts & McCarthy 1997


Value chain level1

Value Chain Level

  • Each economic event in each cycle in the value chain corresponds to a resource inflow or outflow.

    • If there is a resource flowing into the cycle, there must be an event in the cycle that uses that resource

    • If there is a resource flowing out of the cycle, there must be an event in the cycle that provides that resource


Rsws example from text step 1 write rsws script based on narrative and value system model

RSWS Example (from text)Step 1: Write RSWS script based on narrative and value system model

  • RSWS gets cash from investors and creditors

  • RSWS engages in value-adding activities

    • uses cash to buy instruments, raw materials, and overhead from vendors

    • uses cash to acquire labor from employees

    • uses materials, equipment, and overhead to manufacture accessories and to provide repair services

    • sells instruments, accessories, and repair services to customers for cash

  • RSWS pays cash to investors and creditors


Step 2 connect scenes with resource flows

Financing Process

Revenue (Sales/Collection) Process

Payroll Process

Conversion (Manufacturing) Process

Acquisition/Payment Process

Step 2: Connect scenes with resource flows


Step 2 connect scenes with resource flows1

Step 2: Connect scenes with resource flows

Financing Process

cash

cash

Revenue (Sales/Collection) Process

Conversion (Manufacturing) Process

Payroll Process

Acquisition/Payment Process


The rea enterprise ontology value system and value chain modeling

Step 2: Connect scenes

with resource flows

Financing Process

cash

cash

Revenue (Sales/Collection) Process

labor

Payroll Process

Conversion (Manufacturing) Process

Acquisition/Payment Process


The rea enterprise ontology value system and value chain modeling

Step 2: Connect scenes

with resource flows

Financing Process

cash

cash

Revenue (Sales/Collection) Process

labor

Payroll Process

Conversion (Manufacturing) Process

raw materials

equipment

overhead

Acquisition/Payment Process

instruments


The rea enterprise ontology value system and value chain modeling

Step 2: Connect scenes

with resource flows

Financing Process

cash

cash

Revenue (Sales/Collection) Process

labor

Payroll Process

Conversion (Manufacturing) Process

manufactured accessories, repair services

raw materials

equipment

overhead

Acquisition/Payment Process

instruments


The rea enterprise ontology value system and value chain modeling

Step 2: Connect scenes

with resource flows

Financing Process

cash

cash

cash

Revenue (Sales/Collection) Process

labor

Payroll Process

Conversion (Manufacturing) Process

manufactured accessories, repair services

raw materials

equipment

overhead

Acquisition/Payment Process

instruments


The rea enterprise ontology value system and value chain modeling

Step 2: Connect scenes

with resource flows

Financing Process

cash

cash

cash

Revenue (Sales/Collection) Process

labor

Payroll Process

Conversion (Manufacturing) Process

manufactured accessories, repair services

raw materials

equipment

overhead

Acquisition/Payment Process

instruments


Step 3 specify economic exchange events for each scene

Step 3: Specify economic exchange events for each scene

  • Each resource inflow must be matched to an economic decrement event

  • Each resource outflow must be matched to an economic increment event


Step 3 specify economic exchange events for each scene1

Cash Receipt

cash

Financing Process

duality

Cash Disbursement

cash

cash

Revenue Process

labor

Payroll Process

Conversion Process

manufactured accessories, repair services

raw materials

equipment

overhead

Acquisition/Payment Process

instruments

Step 3: Specify economic exchange events for each scene


The rea enterprise ontology value system and value chain modeling

Cash Receipt

cash

Financing Process

duality

Cash Disbursement

cash

cash

Revenue Process

labor

Cash disbursement

Payroll Process

duality

Conversion Process

manufactured accessories, repair services

Labor Acquisition

raw materials

equipment

overhead

Acquisition/Payment Process

instruments

Step 3: Specify economic

exchange events for each scene


The rea enterprise ontology value system and value chain modeling

Cash Receipt

cash

Financing Process

duality

Cash Disbursement

cash

cash

Revenue Process

labor

Labor Acquisition

Payroll Process

duality

Conversion Process

manufactured accessories, repair services

Cash disbursement

raw materials

equipment

Acquisition

overhead

instruments

Acquisition/Payment Process

duality

Cash disbursement

Step 3: Specify economic

exchange events for each scene


The rea enterprise ontology value system and value chain modeling

Cash Receipt

cash

Financing Process

duality

Cash Disbursement

cash

cash

Revenue Process

labor

Labor Acquisition

Labor Operation

Payroll Process

duality

Material Issue

WIP Job

duality

manufactured accessories, repair services

Cash disbursement

Conversion Process

Machine Operation

raw materials

equipment

Acquisition

overhead

instruments

Acquisition/Payment Process

duality

Cash disbursement

Step 3: Specify economic

exchange events for each scene


The rea enterprise ontology value system and value chain modeling

Cash Receipt

cash

Financing Process

duality

Cash Disbursement

cash

cash

Cash receipt

Revenue Process

labor

duality

Labor Acquisition

Labor Operation

Sale

Payroll Process

duality

Material Issue

WIP Job

duality

manufactured accessories, repair services

Cash disbursement

Conversion Process

Machine Operation

raw materials

equipment

Acquisition

overhead

instruments

Acquisition/Payment Process

duality

Cash disbursement

Step 3: Specify economic

exchange events for each scene


The rea enterprise ontology value system and value chain modeling

RSWS Completed Detailed Value Chain


Summary

Summary

  • Modeling enterprise systems provides an overview of the strategy and stockflows of the enterprise

  • Resource flows at the value system and value chain levels are not necessarily physical


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