A Conceptual Model Case Study

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Case study
Reference no 607-022-1
This case was written by Associate Professor Igor V Ananyev and

Assisstant Professor Elena G Serova, Graduate School of Management, Saint
Petersburg State University. It is intended to be used as the basis for class
discussion rather than to illustrate either effective or ineffective handling of a
management situation. The case was made possible by the co-operation of the
JSC Priborostroitel.
2007, Graduate School of Management, Saint Petersburg Sate University.

No part of this publication may be copied, stored, transmitted, reproduced
or distributed in any form or medium whatsoever without the permission
of the copyright owner.
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A Conceptual Model for

Manufacturing Enterprise
Corporate Information Systems
607-022-1
A Conceptual Model for Manufacturing Enterprise Corporate Information

Systems
By I.V. Ananyev & E.G. Serova
JSC Priborostroitel Profile
in the city. Number of its staff reached 2500 employees.
The plant produced
sophisticated high-tech products. The company is a large-scale manufacturer by its

production method.
During the difficult period from 1990 to 1999 the company suffered great losses.
The markets were lost, and the product range was considerably reduced and simplified.
Number of employees decreased to 350 people (including some 300 factory hands).
Personnel losses were not only quantitative, but also qualitative. The majority of those
who left the plant were young and active people.
In 1997 JSC Priborostroitel was established by a group of professionals. Life
compelled to save money on everything. The management of the company had to
simplify the structure of the enterprise and redistribute functions among its subdivisions.
Some functions were handed over from the plant management department to workshops.
The recession affected the computer infrastructure most of all. In particular,
central computer services were completely abolished. The replacement of outdated
computers of the SM EVM line (Soviet minicomputers) with the personal computers
incompatible with the previous ones resulted in the loss of program systems and
infobases made at the enterprise. The enterprise needed reconstruction practically in all
the spheres.
At present the Priborostroitel structure consists of management departments,
technical services and manufacturing workshops (fig.1). The enterprise is successfully
developing. The company managed to reestablish the connections with suppliers and
buyers. There is no problem with orders. In the last years the annual increase of
This case was written by Associate Professor Igor V. Ananyev and Assistant Professor Elena G. Serova,
Graduate School of Management, Saint Petersburg State University. It is intended to be used as the basis
for class discussion rather than to illustrate either effective or ineffective handling of a management
situation.
Up until 1990 Vyborg Instrument-Making Plant was one of the largest enterprises
607-022-1
production volume has varied from 30% to 40%. Major factor which restricts production
growth is the deficit of production facilities.
Priborostroitel JSC produces:
x Information security products for communication networks;
x Toroidal transformers, including customized ones;

x Precision components and modules for mechanical engineering for export;
x Spare parts for working sites in information systems;
x Rechargeable batteries;

x Fire-extinguishing systems;
In three years Priborostroitel is planning to double the production and to bring
the annual sales volume up to 400 million rubles. Around 15% of the products are
exported to Finland. The enterprise is sustainably profitable.
Old equipment is being replaced with the more productive one. The growth rates
of key assets are impressive. During the 8 years of its operation, their cost (at comparable
prices) has increased almost twice. New production facilities are being constructed. Thus,
for instance, a new plating shop has been constructed which allowed the company to
increase added value of final products and even to receive new orders on coating.
Recently the production line for sheet metal processing and production of frames, casings
and stands for various devices has been modernized. Specifically for that purpose a new
building has been constructed and new bending and punching machines made by Finnish
company Finn Power were installed.
The task of technical retooling and modernization was solved mainly by the
company itself. During several years all earned revenue was spent on investments. The
company management had to save on everything, including the salary. It could not but
affect the personnel. The mean age of employees is high. It is obvious that in the nearest
future mass retirement will definitely take place (in fact, it is taking place right now).
There is a lack of factory hands, engineering and technical personnel, managers. While
solving the personnel problem the company will not be able to avoid growing expenses
for salaries.
3
x Modules for air navigation systems;

y
y
Management
departments
Maintenance,
Supply and
Procurement
Department
Technical services
Economics
Department
Personnel
Department and
Office
Accounting
Department
Export Department
Sales Department
Manufacturing
workshops
Technical Control
Department
Engineering and
Design Department
Labor Protection
and Safety
Department
Transport
Department
Mechanical
Workshop 1
Assembling
Workshop 2
Coating Production
Workshop 3
Engineering and
Mechanical
Workshop
Supply and Sales

Department
Packaging
Department
Fig. 1. The Priborostroitel Plant Organizational Structure
The Degree of Enterprise Management Automation
There is a small computer network at the enterprise which connects accountants
working sites. 1 System: Accounting 7.7 is virtually the only business application
which can be considered a prototype for corporate information systems (CIS).

607-022-1
The forthcoming increase of the production cost must be compensated for by the
increase in production volume. This, in turn, leads to ever more planning and accounting
procedures.
Senior Management:
general director;
deputy director on
production;
head power
engineering specialist
607-022-1
Apart from economic departments, computers are used in the Engineering and
Design Department. However, this application is not relevant for management tasks,
therefore we are not going to dwell on it.
There are no well-developed information systems at the enterprise which could be
called CIS or ACS (Automatic Control System). Records management is carried out by
technologies. Production and financial planning is also done without integrated
information systems.
There is a strong need in such a system. Several months ago the company
management took a decision to create corporate information systems which would
specifically serve administrative and management accounting. CIS must cover the whole
production cycle, thus allowing the management to gain current detailed information
about all the assets and liabilities, including cash assets1. The fundamental element of this
system is production planning and accounting tasks, as well as major functions of
technical preparation of the production.
Taking into consideration quite a non-typical situation, the management took a
decision to consider initially the option of ordering customized CIS. This decision can be
explained by several factors: the lack of the IT specialists in the company who are able to
develop the systems by their own, difficult interaction with remote consulting companies
which could install correct accounting systems, high cost of replicated CIS which can
manage the production. The company decided to place order of CIS development with a
small software company Expert-Balans which JSC Priborostroitel has long-term
relationships with.
Incidentally, the enterprise used to have rather good experience of utilizing
automated ERP. There is quite a number of employees in the company, especially topmanagers, who know the management automation first hand. They know CIS tasks for
discrete manufacturing, as well as feel clearly what degree of transparency and
completeness of the information circulating in CIS must have. They also have a clear
The function of the financial accounting can be split up into management accounts (inner financial
accounting) and classic (fiscal) accounting. The system to be made will comprise both tasks, however in
this case study we are not interested in accounting, therefore this part of CIS functions is not discussed
further.
all available means, mainly without the use of advanced computer information
607-022-1
idea about the problems that they may face upon the CIS installation and introduction
and are ready to overcome the difficulties connected with it.
There was signed an agreement on the plant examination, following which the
performer proceeded to business. Selected materials on examination are shown in the
Exhibit 2.
conceptual scheme (infological model) of the future information base in ERD notation
(Entity-Relationships diagram).
JSC Priborostroitel Basic Business-Processes
Management of orders and requests
Approximately one third of the production is taken up by the so-called repeated

(permanent) orders - agreements with constant customers. As to these agreements the
production volumes are changing in a smooth and predictable way (there is a tendency to
growth), while the list of ordered products remains the same. It goes without saying that
there are alterations made in the structure of the product all the time, but the basis
remains invariable. There are about 30 repeated orders each order usually made for one
particular product.
As a matter of fact, permanent agreements have frame structure, that is they
stipulate the list of items, their number, as well as general terms of payment. The actual
orders are additional agreements to the frame agreements also known as letters or
requests. Requests stipulate production deadlines, lists of particular items
(specifications) to be produced, amount and price of each item. One repeated agreement
(order) is supplemented with several extra agreements a year.
The so-called one-time orders take up the other two thirds of the production.
These orders are usually not repeated. As one-time agreements are not accompanied by
additional agreements, they themselves contain the list of ordered products. As a rule,
these orders are smaller and manufactured goods are simpler than those of repeated
orders. On the other hand, their number is quite big. The enterprise executes around 60
one-time orders a year.
According to the agreement, one of the examination results must be the
607-022-1
Respectively small (but still important) part of the goods is produced for stock.
These are goods which are in steady demand. There is always a certain stock level in the
finished-products storage area which is sufficient for immediate satisfaction of needs of
most customers. Only when the company receives an order which exceeds the usual
amount of stock, the production lot is manufactured specially for the customer.
production cost are calculated for each order separately.

We write off all the materials delivered to the plant and main employees wages
to the orders, says the chief accountant. We can distinguish approximately 20 orders.
These are repeated orders, as well as one-time orders taken together which we consider
as one order. We regard export as a separate order. We can give rather precise production
cost of each order.

The Expert-Balans company analyst asks How do you consider the fact that
there are spare parts which are used in many products? They are produced for the stock
and it is not clear which product they will finally make up.
Chief accountant: We think that multi-purpose parts and modules hold a small
share in the cost of products, that is why the distribution of these material expenses by
eye is acceptable.
Analyst: By writing off materials to order when you launch them into
production, you lose the opportunity to follow the real production cost of a particular
sold product taking into consideration the fact that some intermediate assembly units
produced earlier will be taken from the storage area.
Chief accountant: We have never had such an objective. An order is not a
particular product but the line of activity which profitability we are interested in.
Then amortization, workshop expenses including hourly and overhead expenses
are written off to the orders.
Sales management
When the plant receives a regular request or one-time order, the coordination
process within the business process Execution of an Order (Fig. 2) starts. It consists of
the following stages:
Accounting department considers orders significant for accounting. Sales and
607-022-1
x The technical preparation of production is carried out (engineering and design);
x The planned production cost is calculated;
x The sales cost is calculated and agreed upon with a customer;
request
registration in
the Sales
Department
1
registered request
Engineering and
Design
development
Production
task
Set of engineering
and design
documents
1
Engineering and
Design specification
production cost
and price
calculations
production cost
and price
price
coordination
with a
customer

production
end product
5
Shipment of
products,
proceeds from
sale
Fig. 2 Business Process Scheme Execution of an Order

Quite often by mutual agreement of the customer and the plant the request is not
executed in full accordance with specifications. Deviations, concerning both the quality
and list of produced goods are considered admissible if they are initiated by the customer.
The plant strictly controls only the correspondence of the total cost of shipped products
ordered by request with the sum of received payment for these products.
If a big production lot is ordered, goods may be shipped as soon as they have
been manufactured. The payment may also be received in parts. There is no standard
sequence of production and payment for all orders: in some cases the plant receives
upfront payment (full or partial) and in other cases the customer may be given a delay of
payment.
For those products which are manufactured for stock, frame agreements are not
signed, but terms of payment for products shipped from the storage area may also be
arbitrary (upfront payment or delay of payment).
request
607-022-1
The payment may be received only on account (cashless). However, the company
has two settlement (ruble) accounts in two different banks and one foreign currency
account.
Technical preparation of the production
carried out at the Engineering and Design Department (by the group of designers).
Then in the same department (but this time by a group of technologists) the
technological engineering is done: identification of materials which are to be used in the
manufacturing process, setting technological routes and contents of technological
operations, development of plate and paint-and-varnish coatings.

Designers distinguish:
x products final stock-list of products which go to the finished-products storage
area;
x assembly units which consist of spare parts and assembly units (an assembly unit
may be a product);
x parts made by the enterprise itself (usually a part is made of one material);
x materials;
x purchased components (in particular, fixing products and electronic and radio
components);
Designers also use a universal term Item.
Each item in a stock-list falls into one of the two categories: purchased or made at
the enterprise. Purchased products are atomic by definition that is they do not consist of
other components. Typical examples of purchased products are fixing system, electronic
components, materials.
The stock-list of products made at the enterprise comprises other stock line items.
The term own make is used in this meaning, not in any other meaning. Thus, parts are
items of own make because they "consist of" materials. The relationship between a spare
part and material (half-finished material) is considered to be the same as the relationship
between an assembly unit and assembled components.
Design of a product (for example, identification of the product configuration) is
607-022-1
Item configuration is set forth by the designers specification which has the list of
next level item in the assembly tree. The specification line sets forth a constituent and
amount, usually in units or kilograms for one manufactured product. For the description
of the whole assembling tree they will need as many specifications as many assembly
units it has.
moment of time only one specification (the so-called current specification) is relevant.
The coating can be applied on both purchased item and item made by the
enterprise itself. Generally the product has several coatings.
In much the same way as the product configuration is stipulated by the

engineering specifications, the list of coatings is stipulated by the coating specifications.

The line of this specification has a reference to the material which is used for coating and
the coating area (in square centimeters). This data is enough to calculate the need in the
coating material and to express it in the usual for materials unit of measure.
An item can have several alternative coating specifications and technological
routes. The product route is a list of route points with time per unit and time of
preparation in minutes indicated for each, as well as hourly wage in rubles.
At any moment of time only one current specification and only one route are
acting.
Product configuration, data on the product coating, data on item technological
routes altogether make up the TPP database (technical preparation of production). This
data together with time allowances and other labor standards developed by the economics
department are used when the planned product production cost is calculated.
Inventory and Purchase Management
There are four storage areas at the plant: storage of materials, storage of
component parts, storage of chemicals and finished-products storage area.
Purchased materials and component parts are delivered directly to the workshop
where they will be used. Metal goes to the first workshop, fixing system and electronic
and radio components to the second workshop, while chemicals and paints to the third
one. Roughly speaking each product and material corresponds by default to a particular
storage area.
10
The product can have several alternative assembling specifications. At any
607-022-1
Main inventory management discipline is made-to-order purchase scheme, in
other words the time of purchase and amount of material are determined by the order
fulfillment schedule (Fig. 3). A classic reorder point theory (statistic inventory control)
is used for fixing systems and materials of low value.
The plant director: We avoid having spare inventory. We purchase as much
arrives from St. Petersburg, and right after uploading material goes to working sites.
Head of Engineering and Design Department (EDD): When the need in
materials is calculated, the final list of deficit has only basic materials. All kinds of small
items (fixing system, paper, threads, glue and other cheap materials) are not calculated,
although they are included in the product configuration and in engineering specifications.
Workshops themselves take care of sufficiency of these items.

Head of Supply Department: Of course, we purchase somewhat more material
than we need. It is unprofitable to make small orders, this means extra transportation
expenses. We try to load the truck to the maximum. On some materials the size of order
is stipulated by the supplier. This refers both to additional and basic materials.
signed
agreements
materials and
component parts
demand
materials and
parts invoice
1
materials and component
parts with accompanying
documents
work with suppliers
filled in invoices and

accompanying
documents for the
accounting
materials and spare department
parts taken on
charge
Fig. 3. Business Process Scheme Made-To-Order Purchase of Materials

Objectives of Corporate Systems Introduction
The plant management consider that the following objectives must be achieved as a result
of the corporate systems introduction:
11
material as we need for the execution of an order. Every day a lorry with materials
607-022-1
x Enhancing operational accounts management (at present they use accounting data
which shows the quarterly picture and is almost one month late);
x Making the return more analytical (as for expenses we would like to get results
separately for each center of financial responsibility, data on profit for orders
and even for requests);
in the accounting distort greatly the first cost of orders and cost of goods in
process);
To achieve these objectives the company management set four important

calculation tasks for CIS developers, among others:

x Identification of the actual production cost of orders;
x Separate calculation of fixed and variable expenses;
x Correct calculation of goods in process;
x Calculation of expenses for centers of financial responsibility;
Identification of the actual production cost of orders
Orders executed at the plant differ greatly in their complexity, cost and structure
of costs. Share of main employees wages in the production cost varies from 5% to 50%.
Taking into consideration the current very low level of salaries at the enterprise, one must
expect the increase of the salary component in the production cost of products very soon.
On the other hand, installation of high-performance equipment considerably decreases
time spent on technological operations and, accordingly, labor costs.
Planning production cost of goods is necessary to have a true idea of whether this
or that order is profitable, whether it is worth taking, how high the price must be to
ensure good profit. It is especially important in quickly changing business environment.
Production cost of orders is not constant. Instrument-making industry is
characterized by the wide use of nonferrous metals which prices change very quickly.
For example, in 2005 copper price increased by 70%, whereas aluminum price increased
almost twice. Ferrous metals went up less but also considerably. For instance,
12
x Ensuring higher authenticity of return (methods and conventions which are used
607-022-1
transformer steel rose in price by 40%. Other indicators (defect ratio, hourly base wage
rates of piece-workers) are also variable. That is why it is extremely important to
calculate not only the cost of order, but also the cost of each request.
Separate calculation of fixed and variable costs
JSC Priborostroitel is now replacing fixed assets and even constructing new
manufacture has achieved sufficient production volume which ensures profit and allows
to estimate its break-even level. This question can be answered with the help of the
popular direct costing method. The method is based on separate calculation of fixed and
variable costs. This method is interesting because it allows us to allocate the so-called
marginal profit. The marginal profitability of sales calculated using this method unlike
profitability calculated by net profit, gives the right answer to the question of the amount
of extra profit which a product unit manufacture makes.
Director: Last quarter our net profit margin was 3%. So will the production of
one extra product give us only 3% of its sales? We dont have such products. When we
calculate price we consider that the profit should account for than 40% of the material
cost. I want to realize even before the production process starts what profit each extra
product from our backlog of orders will bring.
Correct calculation of goods in process
Along with production cost and Direct Costing Method, cost estimation of goods
in process is also important for identification of management indexes. In particular, this
allows the company to control average time of production cycle in each of the
workshops. Goods in process are essential part of circulating assets. Its correct
calculation is necessary for reflection of circulating assets in the management balance
and correct calculation of return rates from circulating assets.
To track goods in process per workshop it is necessary to record all cost transfers
of manufactured goods such as allocating materials to production, payroll accounting,
transfer of parts from workshop to workshop, delivery of goods from the workshop to the
finished-products storage area. As a matter of fact, it is necessary to follow and record all
transfers of parts to calculate goods in process.
Incidentally, it is useful to follow the
transfer process because it is a simple way for the company to control order execution.
13
production facilities. Therefore it is important for the company to see whether the new
607-022-1
Calculation of Centers of Financial Responsibility Expenses
Most expenses are calculated by the accountants without considering centers of
financial responsibility. This impedes the cost analysis and management.
First, superficial calculation of costs hinders the implementation of factor analysis
and cost behavior analysis.
achieving break-even point for a manufacturing enterprise only when we calculate the
fixed costs of each manufacturing subdivision.
Chief accountant: We provide our director with analytical information before the
annual meeting of stockholders. We necessarily choose costs which are connected with

new production lines. This is handwork; we are unable to do it every month.

CIS Conceptual Modeling
Based on the enterprise employees interviews and other materials collected in the
course of the examination the Expert-Balans company analysts built a conceptual model
of the enterprise information systems in the Entity-Relationships method notation.
Managers and introduction group members on the part of the customer consider
the conceptual model as a statistical description of the control object (enterprise)
structure. Now effectiveness of the future system and even particularities of data
processing algorithms are discussed within the model.
The value of the infological model created by means of conceptual design is that,
on the one hand, it is comprehensible for managers who are not programmers (one does
not need special knowledge and IT related experience for modeling), and, on the other
hand, it is well-structured enough to come in handy in database creation. Due to this
unique peculiarity the model serves as an agreement between managers (customers in a
way) and IT specialists and helps them to maintain equal comprehension of its
effectiveness at all stages of the project.
Exhibit 1. Abstracts from Expert-Balans company examination materials
Expected number of working sites
The first line of the system caters for 14 users, including 3 of the company
management (general director, deputy director on production, chief accountant). These
14
Second, we can speak about return on capital investments into production and

Table 1.1
User groups in departments
Engineering and Design Department

2
Economics Department
3
Planning and Dispatching Department

3
Supply Department
2
Sales Department
1
General Director and his/her deputies

3
Total
14
Computers and Software Costs
Almost all working sites need full modernization and re-equipment. Almost all
the computers available in the plant subdivisions are out-of-date. Many working sites
need to be created from scratch.
Costs for putting working sites up-to-date (computers and systems software) is
estimated as follows:
Table 1.2
Creating Working Sites
Server with software
$ 3000
Network equipment
$ 14000
The plant owns several buildings
Users working sites
$ 9800
$700 per computer
Total
$ 26800
15
607-022-1
users are relatively passive, as they do not enter data into the system. They are not
expected to know CIS profoundly.

Other users must actively work with information and enter considerable amount
of data into the system. These users are expected to have profound knowledge of the
system and good keyboard skills. This category of users will need advanced training.
Distribution of users according to the departments is shown in table 1.1.

Application Software and Consulting Costs
1C usage licenses
$2800
Examination
$10560 2 months, 8 hours/day, $ 30
Users training
$6000
Implementation support
$10560 2 consultants during 1 month
Total
$29920 Without software updating costs
$200 per license
6 user groups, 20 hours, $50 per hour
Exhibit 2. Costs of Replicated Middle-Class CIS Deployment (software and
consulting)
While working out the project the plant management also considered the option
of using replicated middle-class CIS which has an enterprise management subsystem in
its structure. Costs estimation for this option is shown in the table.
CIS usage licenses
$14000
$1000 per license
Examination
$15840
2 months, 8 hours, $45
Users training
$18000
6 user groups, 40 hours, $75 per

hour
Implementation support
$15840
2 consultants during a month
Software installation
$52800
1 person, 6 months, $50 per hour
Total
$116480
Without software updating cost
16
607-022-1
Application Software and Consulting Costs

Application software costs are made up of two parts: cost of licenses for CIS
platform usage (depends on the number of users) and cost of software customization (CIS
settings customized specifically for the enterprise). 1C: Enterprise is chosen as a platform
for CIS development.
Table 1.3

A Conceptual Model Case Study

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CCCooopppyyyrrriiiggghhhttt eeennncccooodddeeeddd AAA777666HHHMMM---JJJUUUJJJ999KKK---PPPJJJMMMNNN999III

This case was written by Associate Professor Igor V Ananyev and

2007, Graduate School of Management, Saint Petersburg Sate University.

Distributed by The Case Centre

Rest of the world

A Conceptual Model for

A Conceptual Model for Manufacturing Enterprise Corporate Information

in the city. Number of its staff reached 2500 employees.

The plant produced

sophisticated high-tech products. The company is a large-scale manufacturer by its

x Toroidal transformers, including customized ones;

EEEddduuucccaaatttiiiooonnnaaalll mmmaaattteeerrriiiaaalll sssuuuppppppllliiieeeddd bbbyyy TTThhheee CCCaaassseee CCCeeennntttrrreee

x Modules for air navigation systems;

EEEddduuucccaaatttiiiooonnnaaalll mmmaaattteeerrriiiaaalll sssuuuppppppllliiieeeddd bbbyyy TTThhheee CCCaaassseee CCCeeennntttrrreee

Supply and Sales

Fig. 1. The Priborostroitel Plant Organizational Structure

The Degree of Enterprise Management Automation

There is a small computer network at the enterprise which connects accountants

which can be considered a prototype for corporate information systems (CIS).

Approximately one third of the production is taken up by the so-called repeated

According to the agreement, one of the examination results must be the

production cost are calculated for each order separately.

cost of each order.

Accounting department considers orders significant for accounting. Sales and

EEEddduuucccaaatttiiiooonnnaaalll mmmaaattteeerrriiiaaalll sssuuuppppppllliiieeeddd bbbyyy TTThhheee CCCaaassseee CCCeeennntttrrreee

Fig. 2 Business Process Scheme Execution of an Order

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Design of a product (for example, identification of the product configuration) is

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engineering specifications, the list of coatings is stipulated by the coating specifications.

The product can have several alternative assembling specifications. At any

Workshops themselves take care of sufficiency of these items.

work with suppliers

filled in invoices and

Fig. 3. Business Process Scheme Made-To-Order Purchase of Materials

To achieve these objectives the company management set four important

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calculation tasks for CIS developers, among others:

Incidentally, it is useful to follow the

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new production lines. This is handwork; we are unable to do it every month.

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User groups in departments

Engineering and Design Department

Planning and Dispatching Department

General Director and his/her deputies

Computers and Software Costs

need to be created from scratch.

Creating Working Sites

Server with software

The plant owns several buildings

Users working sites

$700 per computer

expected to know CIS profoundly.

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Application Software and Consulting Costs

6 user groups, 20 hours, $50 per hour

Exhibit 2. Costs of Replicated Middle-Class CIS Deployment (software and

of using replicated middle-class CIS which has an enterprise management subsystem in

CIS usage licenses

$1000 per license

2 months, 8 hours, $45

6 user groups, 40 hours, $75 per