The REA Enterprise Ontology: Value System and Value Chain Modeling

1. The REA Enterprise Ontology: Value System and Value Chain Modeling Chapter 3

2. 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

3. 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

4. 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

5. 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

6. 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

7. Value System and Value Chain

8. Value System Modeling • Identify resource inflows and outflows • Begin with cash flows • Also need to consider non-cash resource flows • Identify external business partners

9. Step 1: Create a circle in the middle of the model to represent the enterprise (RSWS) RSWS RSWS Example from Textbook

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. Financing Process Revenue (Sales/Collection) Process Payroll Process Conversion (Manufacturing) Process Acquisition/Payment Process Step 2: Connect scenes with resource flows

18. Step 2: Connect scenes with resource flows Financing Process cash cash Revenue (Sales/Collection) Process Conversion (Manufacturing) Process Payroll Process Acquisition/Payment Process

19. Step 2: Connect scenes with resource flows Financing Process cash cash Revenue (Sales/Collection) Process labor Payroll Process Conversion (Manufacturing) Process Acquisition/Payment Process

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. RSWS Completed Detailed Value Chain

31. 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