In economics, a production function relates quantities of physical output of a production process to quantities of physical inputs or factors of production. The production function is one of the key concepts of mainstreamneoclassical theories, used to define marginal product and to distinguish allocative efficiency, a key focus of economics. The primary purpose of the production function is to address allocative efficiency in the use of factor inputs in production and the resulting distribution of income to those factors, while abstracting away from the technological problems of achieving technical efficiency, as an engineer or professional manager might understand it.
In macroeconomics, aggregate production functions are estimated to create a framework in which to distinguish how much of economic growth to attribute to changes in factor allocation (e.g. the accumulation of physical capital) and how much to attribute to advancing technology. Some non-mainstream economists, however, reject the very concept of an aggregate production function.
The theory of production functions
In general, economic output is not a (mathematical) function of input, because any given set of inputs can be used to produce a range of outputs. To satisfy the mathematical definition of a function, a production function is customarily assumed to specify the maximum output obtainable from a given set of inputs. The production function, therefore, describes a boundary or frontier representing the limit of output obtainable from each feasible combination of input. (Alternatively, a production function can be defined as the specification of the minimum input requirements needed to produce designated quantities of output.) Assuming that maximum output is obtained from given inputs allows economists to abstract away from technological and managerial problems associated with realizing such a technical maximum, and to focus exclusively on the problem of allocative efficiency, associated with the economic choice of how much of a factor input to use, or the degree to which one factor may be substituted for another. In the production function itself, the relationship of output to inputs is non-monetary; that is, a production function relates physical inputs to physical outputs, and prices and costs are not reflected in the function.
In the decision frame of a firm making economic choices regarding production—how much of each factor input to use to produce how much output—and facing market prices for output and inputs, the production function represents the possibilities afforded by an exogenous technology. Under certain assumptions, the production function can be used to derive a marginal product for each factor. The profit-maximizing firm in perfect competition (taking output and input prices as given) will choose to add input right up to the point where the marginal cost of additional input matches the marginal product in additional output. This implies an ideal division of the income generated from output into an income due to each input factor of production, equal to the marginal product of each input.
The inputs to the production function are commonly termed factors of production and may represent primary factors, which are stocks. Classically, the primary factors of production were Land, Labor and Capital. Primary factors do not become part of the output product, nor are the primary factors, themselves, transformed in the production process. The production function, as a theoretical construct, may be abstracting away from the secondary factors and intermediate products consumed in a production process. The production function is not a full model of the production process: it deliberately abstracts from inherent aspects of physical production processes that some would argue are essential, including error, entropy or waste, and the consumption of energy or the co-production of pollution. Moreover, production functions do not ordinarily model the business processes, either, ignoring the role of strategic and operational business management. (For a primer on the fundamental elements of microeconomic production theory, see production theory basics).
The production function is central to the marginalist focus of neoclassical economics, its definition of efficiency as allocative efficiency, its analysis of how market prices can govern the achievement of allocative efficiency in a decentralized economy, and an analysis of the distribution of income, which attributes factor income to the marginal product of factor input.
Specifying the production function
A production function can be expressed in a functional form as the right side of
where is the quantity of output and are the quantities of factor inputs (such as capital, labour, land or raw materials).
If is a scalar, then this form does not encompass joint production, which is a production process that has multiple co-products. On the other hand, if maps from to then it is a joint production function expressing the determination of different types of output based on the joint usage of the specified quantities of the inputs.
One formulation, unlikely to be relevant in practice, is as a linear function:
where are parameters that are determined empirically. Another is as a Cobb-Douglas production function:
The Leontief production function applies to situations in which inputs must be used in fixed proportions; starting from those proportions, if usage of one input is increased without another being increased, output will not change. This production function is given by
Other forms include the constant elasticity of substitution production function (CES), which is a generalized form of the Cobb-Douglas function, and the quadratic production function. The best form of the equation to use and the values of the parameters () vary from company to company and industry to industry. In a short run production function at least one of the 's (inputs) is fixed. In the long run all factor inputs are variable at the discretion of management.
Moysan and Senouci (2016) provide an analytical formula for all 2-input, neoclassical production functions.
Production function as a graph
Any of these equations can be plotted on a graph. A typical (quadratic) production function is shown in the following diagram under the assumption of a single variable input (or fixed ratios of inputs so they can be treated as a single variable). All points above the production function are unobtainable with current technology, all points below are technically feasible, and all points on the function show the maximum quantity of output obtainable at the specified level of usage of the input. From point A to point C, the firm is experiencing positive but decreasing marginal returns to the variable input. As additional units of the input are employed, output increases but at a decreasing rate. Point B is the point beyond which there are diminishing average returns, as shown by the declining slope of the average physical product curve (APP) beyond point Y. Point B is just tangent to the steepest ray from the origin hence the average physical product is at a maximum. Beyond point B, mathematical necessity requires that the marginal curve must be below the average curve (See production theory basics for further explanation.).
Stages of production
To simplify the interpretation of a production function, it is common to divide its range into 3 stages. In Stage 1 (from the origin to point B) the variable input is being used with increasing output per unit, the latter reaching a maximum at point B (since the average physical product is at its maximum at that point). Because the output per unit of the variable input is improving throughout stage 1, a price-taking firm will always operate beyond this stage.
In Stage 2, output increases at a decreasing rate, and the average and marginal physical product both decline. However, the average product of fixed inputs (not shown) is still rising, because output is rising while fixed input usage is constant. In this stage, the employment of additional variable inputs increases the output per unit of fixed input but decreases the output per unit of the variable input. The optimum input/output combination for the price-taking firm will be in stage 2, although a firm facing a downward-sloped demand curve might find it most profitable to operate in Stage 1. In Stage 3, too much variable input is being used relative to the available fixed inputs: variable inputs are over-utilized in the sense that their presence on the margin obstructs the production process rather than enhancing it. The output per unit of both the fixed and the variable input declines throughout this stage. At the boundary between stage 2 and stage 3, the highest possible output is being obtained from the fixed input.
Shifting a production function
By definition, in the long run the firm can change its scale of operations by adjusting the level of inputs that are fixed in the short run, thereby shifting the production function upward as plotted against the variable input. If fixed inputs are lumpy, adjustments to the scale of operations may be more significant than what is required to merely balance production capacity with demand. For example, you may only need to increase production by million units per year to keep up with demand, but the production equipment upgrades that are available may involve increasing productive capacity by 2 million units per year.
If a firm is operating at a profit-maximizing level in stage one, it might, in the long run, choose to reduce its scale of operations (by selling capital equipment). By reducing the amount of fixed capital inputs, the production function will shift down. The beginning of stage 2 shifts from B1 to B2. The (unchanged) profit-maximizing output level will now be in stage 2.
Homogeneous and homothetic production functions
There are two special classes of production functions that are often analyzed. The production function is said to be homogeneous of degree , if given any positive constant , . If , the function exhibits increasingreturns to scale, and it exhibits decreasing returns to scale if . If it is homogeneous of degree , it exhibits constant returns to scale. The presence of increasing returns means that a one percent increase in the usage levels of all inputs would result in a greater than one percent increase in output; the presence of decreasing returns means that it would result in a less than one percent increase in output. Constant returns to scale is the in-between case. In the Cobb-Douglas production function referred to above, returns to scale are increasing if , decreasing if , and constant if .
If a production function is homogeneous of degree one, it is sometimes called "linearly homogeneous". A linearly homogeneous production function with inputs capital and labour has the properties that the marginal and average physical products of both capital and labour can be expressed as functions of the capital-labour ratio alone. Moreover, in this case if each input is paid at a rate equal to its marginal product, the firm's revenues will be exactly exhausted and there will be no excess economic profit.:pp.412–414
Homothetic functions are functions whose marginal technical rate of substitution (the slope of the isoquant, a curve drawn through the set of points in say labour-capital space at which the same quantity of output is produced for varying combinations of the inputs) is homogeneous of degree zero. Due to this, along rays coming from the origin, the slopes of the isoquants will be the same. Homothetic functions are of the form where is a monotonically increasing function (the derivative of is positive ()), and the function is a homogeneous function of any degree.
Aggregate production functions
See also: Cambridge capital controversy
In macroeconomics, aggregate production functions for whole nations are sometimes constructed. In theory they are the summation of all the production functions of individual producers; however there are methodological problems associated with aggregate production functions, and economists have debated extensively whether the concept is valid.
Criticisms of the production function theory
There are two major criticisms[which?] of the standard form of the production function.
On the concept of capital
During the 1950s, '60s, and '70s there was a lively debate about the theoretical soundness of production functions (see the Capital controversy). Although the criticism was directed primarily at aggregate production functions, microeconomic production functions were also put under scrutiny. The debate began in 1953 when Joan Robinson criticized the way the factor input capital was measured and how the notion of factor proportions had distracted economists. She wrote:
"The production function has been a powerful instrument of miseducation. The student of economic theory is taught to write Q = f (L, K ) where L is a quantity of labor, K a quantity of capital and Q a rate of output of commodities. [They] are instructed to assume all workers alike, and to measure L in man-hours of labor; [they] are told something about the index-number problem in choosing a unit of output; and then [they] are hurried on to the next question, in the hope that [they] will forget to ask in what units K is measured. Before [they] ever do ask, [they] have become a professor, and so sloppy habits of thought are handed on from one generation to the next".
According to the argument, it is impossible to conceive of capital in such a way that its quantity is independent of the rates of interest and wages. The problem is that this independence is a precondition of constructing an isoquant. Further, the slope of the isoquant helps determine relative factor prices, but the curve cannot be constructed (and its slope measured) unless the prices are known beforehand.
On the empirical relevance
As a result of the criticism on their weak theoretical grounds, it has been claimed that empirical results firmly support the use of neoclassical well behaved aggregate production functions. Nevertheless, Anwar Shaikh has demonstrated that they also have no empirical relevance, as long as alleged good fit outcomes from an accounting identity, not from any underlying laws of production/distribution.
See also: Nicholas Georgescu-Roegen § Criticising neoclassical economics (weak versus strong sustainability)
Natural resources are usually absent in production functions. When Robert Solow and Joseph Stiglitz attempted to develop a more realistic production function by including natural resources, they did it in a manner economist Nicholas Georgescu-Roegen criticized as a "conjuring trick": Solow and Stiglitz had failed to take into account the laws of thermodynamics, since their variant allowed man-made capital to be a complete substitute for natural resources. Neither Solow nor Stiglitz reacted to Georgescu-Roegen's criticism, despite an invitation to do so in the September 1997 issue of the journal Ecological Economics.:127-136
The practice of production functions
Main article: Production (economics)
The theory of production function depicts the relation between physical outputs of a production process and physical inputs, i.e. factors of production. The practical application of production function is obtained by valuing the physical outputs and inputs by their prices. The economic value of physical outputs minus the economic value of physical inputs is the income generated by the production process. By keeping the prices fixed between two periods under review we get the income change generated by the change of production function. This is the principle how the production function is made a practical concept, i.e. measureable and understandable in practical situations.
- ^ abDaly, H (1997). "Forum on Georgescu-Roegen versus Solow/Stiglitz". Ecological Economics. 22 (3): 261–306. doi:10.1016/S0921-8009(97)00080-3.
- ^ abcCohen, A. J.; Harcourt, G. C. (2003). "Retrospectives: Whatever Happened to the Cambridge Capital Theory Controversies?". Journal of Economic Perspectives. 17 (1): 199–214. doi:10.1257/089533003321165010.
- ^see Moysan and, G.; Senouci, M. (2016). "A note on 2-input neoclassical production functions". Journal of Mathematical Economics. doi:10.1016/j.jmateco.2016.09.011.
- ^Chiang, Alpha C. (1984) Fundamental Methods of Mathematical Economics, third edition, McGraw-Hill.
- ^On the history of production functions, see Mishra, S. K. (2007). "A Brief History of Production Functions". Working Paper. SSRN 1020577.
- ^Robinson, Joan (1953). "The Production Function and the Theory of Capital". Review of Economic Studies. 21: [p. 81].
- ^Shaikh, A. (1974). "Laws of Production and Laws of Algebra: The Humbug Production Function". Review of Economics and Statistics. 56 (1): 115–120. doi:10.2307/1927538. JSTOR 1927538.
- ^Daly, Herman E. (1999). "How long can neoclassical economists ignore the contributions of Georgescu-Roegen?". In Daly, Herman E. (2007). Ecological Economics and Sustainable Development. Selected Essays of Herman Daly(PDF contains full book). Cheltenham: Edward Elgar. ISBN 9781847201010.
- ^Ayres, Robert U.; Warr, Benjamin (2009). The Economic Growth Engine: How Useful Work Creates Material Prosperity. ISBN 978-1-84844-182-8.
- Brems, Hans (1968). "The Production Function". Quantitative Economic Theory. New York: Wiley. pp. 62–74.
- Craig, C.; Harris, R. (1973). "Total Productivity Measurement at the Firm Level". Sloan Management Review (Spring 1973): 13–28.
- Guerrien B. and O. Gun (2015) "Putting an end to the aggregate function of production... forever?", Real World Economic Review N°73
- Hulten, C. R. (January 2000). "Total Factor Productivity: A Short Biography"(PDF). NBER Working Paper No. 7471.
- Heathfield, D. F. (1971). Production Functions. Macmillan Studies in Economics. New York: Macmillan Press.
- Intriligator, Michael D. (1971). Mathematical Optimalization and Economic Theory. Englewood Cliffs: Prentice-Hall. pp. 178–189. ISBN 0-13-561753-7.
- Laidler, David (1981). Introduction to Microeconomics (Second ed.). Oxford: Philip Allan. pp. 124–137. ISBN 0-86003-131-4.
- Maurice, S. Charles; Phillips, Owen R.; Ferguson, C. E. (1982). Economic Analysis: Theory and Application (Fourth ed.). Homewood: Irwin. pp. 169–222. ISBN 0-256-02614-9.
- Moroney, J. R. (1967). "Cobb-Douglass production functions and returns to scale in US manufacturing industry". Western Economic Journal. 6 (1): 39–51. doi:10.1111/j.1465-7295.1967.tb01174.x.
- Pearl, D.; Enos, J. (1975). "Engineering Production Functions and Technological Progress". Journal of Industrial Economics. 24: 55–72. doi:10.2307/2098099. JSTOR 2098099.
- Shephard, R. (1970). Theory of Cost and Production Functions. Princeton, NJ: Princeton University Press.
- Thompson, A. (1981). Economics of the Firm: Theory and Practice (3rd ed.). Englewood Cliffs: Prentice Hall. ISBN 0-13-231423-1.
Quadratic production function
Shifting a production function
Information Systems for Business Functions
12.1 Supporting Business Functions in an Enterprise with Information
The principal business functions in a business firm are:
1. Marketing and sales
3. Accounting and finance
4. Human resources
Figure 12.1: Outlines a general view of information systems supporting a company's operations and management. Emphasize that management support systems (MRS), decision support systems (DSS), and executive information systems (EIS), rest on the foundation of transaction processing systems (TPS) that support business operations. TPSs are the major source of data used by the higher-level systems to derive information. Professional support systems (PSS) and office information systems (OIS), which support individual and group knowledge work, are also a part of this foundation.
12.2 Marketing Information Systems [Figure 12.2 & Figure 12.3]
Marketing activities are directed toward planning, promoting, and selling goods and services to satisfy the needs of customers and the objectives of the organization.
Marketing information systems support decision making regarding the marketing mix. These include:
Figure 12.3 illustrates the structure of the entire marketing information system. In order to support decision making on the marketing mix, a marketing information system draws on several sources of data and information.
Sources of Data and Information for Marketing: Boundary-Spanning and Transaction Processing Subsystems
A marketing information system relies on external information to a far greater degree than other organizational information systems. It includes two subsystems designed for boundary spanning - bringing into the firm data and information about the marketplace.
The objective of marketing research is to collect data on the actual customers and the potential customers, known as prospects. The identification of the needs of the customer is a fundamental starting point for total quality management (TQM). Electronic commerce on the WEB makes it easy to compile statistics on actual buyer behaviour.
Marketing research software supports statistical analysis of data. It enables the firm to correlate buyer behaviour with very detailed geographic variables, demographic variables, and psychographic variables.
Marketing (competitive) intelligenceis responsible for the gathering and interpretation of data regarding the firm's competitors, and for the dissemination of the competitive information to the appropriate users. Most of the competitor information comes from corporate annual reports, media-tracking services, and from reports purchased from external providers, including on-line database services. The Internet has become a major source of competitive intelligence.
Marketing Mix Subsystems
The marketing mix subsystems support decision making regarding product introduction, pricing, promotion (advertising and personal selling), and distribution. These decisions are integrated into the sales forecast and marketing plans against which the ongoing sales results are compared.
Marketing mix subsystems include:
1. Product subsystem
2. Place subsystem
3. Promotion subsystem
4. Price subsystem
5. Sales forecasting
The product subsystem helps to plan the introduction of new products. Continually bringing new products to market is vital in today's competitive environment of rapid change. The product subsystem should support balancing the degree of risk in the overall new-product portfolio, with more aggressive competitors assuming higher degrees of risk for a potentially higher payoff.
Although decisions regarding the introduction of new products are unstructured, information systems support this process in several ways:
1. Professional support systems assist designers in their knowledge work
2. DSSs are used to evaluate proposed new products
3. With a DSS, a marketing manager can score the desirability of a new product.
4. Electronic meeting systems help bring the expertise of people dispersed in space and time to bear on the problem
5. Information derived from marketing intelligence and research is vital in evaluating new product ideas.
The place subsystem assists the decision makers in making the product available to the customer at the right place at the right time. The place subsystem helps plan the distribution channels for the product and track their performance.
The use of information technology has dramatically increased the availability of information on product movement in the distribution channel. Examples include:
1. Bar-coded Universal Product Code (UPC)
2. Point-of-sale (POS) scanning
3. Electronic data interchange (EDI)
4. Supports just-in-time product delivery and customized delivery
The promotion subsystem is often the most elaborate in the marketing information system, since it supports both personal selling and advertising. Media selection packages assist in selecting a mix of avenues to persuade the potential purchaser, including direct mail, television, print media, and the electronic media such as the Internet and the WEB in particular. The effectiveness of the selected media mix is monitored and its composition is continually adjusted.
Database marketingrelies on the accumulation and use of extensive databases to segment potential customers and reach tem with personalized promotional information.
The role of telemarketing, marketing over the telephone, has increased. Telemarketing calls are well supported by information technology.
Sales management is thoroughly supported with information technology. Customer profitability analysis help identify high-profit and high-growth customers and target marketing efforts in order to retain and develop these accounts.
Sales force automation, involves equipping salespeople with portable computers tied into the corporate information systems. This gives the salespeople instantaneous access to information and frees them from the reporting paperwork. This increases selling time and the level of performance. Access to corporate databases is sometimes accompanied by access to corporate expertise, either by being able to contact the experts or by using expert systems that help specify the product meeting customer requirements.
Pricing decisions find a degree of support from DSSs and access to databases that contain industry prices. These highly unstructured decisions are made in pursuit of the companys pricing objectives. General strategies range from profit maximization to forgoing a part of the profit in order to increase a market share.
Information systems provide an opportunity to finely segment customer groups, and charge different prices depending on the combination of products and services provided, as well as the circumstances of the sale transaction.
Based on the planned marketing mix and outstanding orders, sales are forecast and a full marketing plan is developed. Sale forecasting is an area where any quantitative methods employed must be tempered with human insight and experience. The actual sales will depend to a large degree on the dynamics of the environment.
Qualitative techniques are generally used for environmental forecasting - an attempt to predict the social, economic, legal, and technological environment in which the company will try to realize its plans. Sales forecasting uses numerous techniques, which include:
1. Group decision making techniques are used to elicit broad expert opinion
2. Scenario analysis in which each scenario in this process is a plausible future environment
3. Extrapolation of trends and cycles through a time-series analysis.
12.3 Manufacturing Information Systems
Global competitive pressures of the information society have been highly pronounced in manufacturing and have radically changed it. The new marketplace calls for manufacturing that are:
1. Lean - highly efficient, using fewer input resources in production through better engineering and through production processes that rely on low inventories and result in less waste.
2. Agile - fit for time-based competition. Both the new product design and order fulfilment are drastically shortened.
3. Flexible - able to adjust the product to a customer's preferences rapidly and cost effectively.
4. Managed for quality - by measuring quality throughout the production process and following world standards, manufacturers treat quality as a necessity and not a high-price option.
Structure of Manufacturing Information Systems[Figure 12.5]
Information technology must play a vital role in the design and manufacturing processes. Manufacturing information systems are among the most difficult both to develop and to implement.
TPSs are embedded in the production process or in other company processes. The data provided by the transaction processing systems are used by management support subsystems, which are tightly integrated and interdependent.
Manufacturing information subsystems include:
1. Product design and engineering
2. Product scheduling
3. Quality control
4. Facilities planning, production costing, logistics and inventory subsystems
Product Design and Engineering
Product design and engineering are widely supported today by computer-aided design (CAD) and computer-aided engineering (CAE) systems. CAD systems assist the designer with automatic calculations and display of surfaces while storing the design information in databases. The produced designs are subject to processing with CAE systems to ensure their quality, safety, manufacturability, and cost-effectiveness. CAD/CAE systems increasingly eliminate paperwork from the design process, while speeding up the process itself. As well, the combined techniques of CAD/CAE and rapid prototyping cut time to market.
Production scheduling is the heart of the manufacturing information system. This complex subsystem has to ensure that an appropriate combination of human, machinery, and material resources will be provided at an appropriate time in order to manufacture the goods.
Production scheduling and the ancillary processes are today frequently controlled with a manufacturing resource planning system as the main informational tool. This elaborate software converts the sales forecast for the plants products into a detailed production plan and further into a master schedule of production.
Computer integrated manufacturing(CIM) is a strategy through which a manufacturer takes control of the entire manufacturing process. The process starts with CAD and CAE and continues on the factory floor where robots and numerically controlled machinery are installed - and thus computer-aided manufacturing (CAM) is implemented. A manufacturing system based on this concept can turn out very small batches of a particular product as cost-effectively as a traditional production line can turn out millions of identical products. A full-fledged CIM is extremely difficult to implement; indeed, many firms have failed in their attempts to do so.
The quality control subsystem of a manufacturing information system relies on the data collected on the shop floor by the sensors embedded in the process control systems.
Total quality management(TQM) is a management technique for continuously improving the performance of all members and units of a firm to ensure customer satisfaction. In particular, the principles of TQM state that quality comes from improving the design and manufacturing process, rather than Ainspecting out@ defective products. The foundation of quality is also understanding and reducing variation in the overall manufacturing process.
Facilities Planning, Production Costing, Logistics and Inventory Subsystems
Among the higher-level decision making supported by manufacturing information systems are facilities planning - locating the sites for manufacturing plants, deciding on their production capacities, and laying out the plant floors.
Manufacturing management requires a cost control program, relying on the information systems. Among the informational outputs of the production costing subsystem are labor and equipment productivity reports, performance of plants as cost centers, and schedules for equipment maintenance and replacement.
Managing the raw-materials, packaging, and the work in progress inventory is a responsibility of the manufacturing function. In some cases, inventory management is combined with the general logistics systems, which plan and control the arrival of purchased goods into the firm as well as shipments to the customers.
12.4 Accounting and Financial Information Systems[Figure 12.9]
The financial function of the enterprise consists in taking stock of the flows of money and other assets into and out of an organization, ensuring that its available resources are properly used and that the organization is financially fit. The components of the accounting system include:
1. Accounts receivable records
2. Accounts payable records
3. Payroll records
4. Inventory control records
5. General ledgers
Financial information systems rely on external sources, such as on-line databases and custom produced reports, particularly in the areas of financial forecasting and funds management. The essential functions that financial information systems perform include:
1. Financial forecasting and planning
2. Financial control
3. Funds management
4. Internal auditing
Financial forecasting is the process of predicting the inflows of funds into the company and the outflows of funds from it for a long term into the future. Outflows of funds must be balanced over the long term with the inflows. With the globalization of business, the function of financial forecasting has become more complex, since the activities in multiple national markets have to be consolidated, taking into consideration the vagaries of multiple national currencies. Scenario analysis is frequently employed in order to prepare the firm for various contingencies.
Financial forecasts are based on computerized models known as cash-flow models. They range from rather simple spreadsheet templates to sophisticated models developed for the given industry and customized for the firm or, in the case of large corporations to specify modeling of their financial operations. Financial forecasting serves to identify the need for funds and their sources.
The primary tools of financial control are budgets. A budget specifies the resources committed to a plan for a given project or time period. Fixed budgets are independent of the level of activity of the unit for which the budget is drawn up. Flexible budgets commit resources depending on the level of activity.
Spreadsheet programs are the main budgeting tools. Spreadsheets are the personal productivity tools in use today in budget preparation.
In the systems-theoretic view, budgets serve as the standard against which managers can compare the actual results by using information systems. Performance reports are used to monitor budgets of various managerial levels. A performance report states the actual financial results achieved by the unit and compares them with the planned results.
Along with budgets and performance reports, financial control employs a number of financial ratios indicating the performance of the business unit. A widely employed financial ratio is return on investment (ROI). ROS shows how well a business unit uses its resources. Its value is obtained by dividing the earnings of the business unit by its total assets.
Financial information systems help to manage the organization's liquid assets, such as cash or securities, for high yields with the lowest degree of loss risk. Some firms deploy computerized systems to manage their securities portfolios and automatically generate buy or sell orders.
The audit function provides an independent appraisal of an organization's accounting, financial, and operational procedures and information. All large firms have internal auditors, answerable only to the audit committee of the board of directors. The staff of the chief financial officer of the company performs financial and operational audits. During a financial audit, an appraisal is made of the reliability and integrity of the company's financial information and of the means used to process it. An operational audit is an appraisal of how well management utilizes company resources and how well corporate plans are being carried out.
12.5 Human Resource Information Systems
A human resource information system (HRIS) supports the human resources function of an organization with information. The name of this function reflects the recognition that people who work in a firm are frequently its most valuable resources. The complexity of human resource management has grown immensely over recent years, primary due to the need to conform with new laws and regulations.
A HRIS has to ensure the appropriate degree of access to a great variety of internal stakeholders, including:
1. The employees of the Human Resources department in performance of their duties
2. All the employees of the firm wishing ti inspect their own records
3. All the employees of the firm seeking information regarding open positions or available benefit plans
4. Employees availing themselves of the computer-assisted training and evaluation opportunities
5. Managers throughout the firm in the process of evaluating their subordinates and making personnel decisions
6. Corporate executives involved in tactical and strategic planning and control
Transaction Processing Subsystems and Databases of Human Resource Information Systems
At the heart of HRIS are its databases, which are in some cases integrated into a single human resource database. The record of each employee in a sophisticated employee database may contain 150 to 200 data items, including the personal data, educational history and skills, occupational background, and the history of occupied positions, salary, and performance in the firm. Richer multimedia databases are not assembled by some firms in order to facilitate fast formation of compatible teams of people with complementary skills.
Other HRIS databases include:1. Applicant databases2. Position inventory3. Skills inventory4. Benefit databases5. External databases
Information Subsystems for Human Resource Management
The information subsystems of HRIS reflect the flow of human resources through the firm, from planning and recruitment to termination. A sophisticated HRIS includes the following subsystems:1. Human resource planning2. Recruiting and workforce management3. Compensation and benefits4. Government reporting and labour relations support
Human Resource Planning
To identify the human resources necessary to accomplish the long-term objectives of a firm, we need to project the skills, knowledge, and experience of the future employees.
Recruiting and Workforce Management
Based on the long-term resource plan, a recruitment plan is developed. The plan lists the currently unfilled positions and those expected to become vacant due to turnover.
The life-cycle transitions of the firm's workforce - hiring, promotion and transfer, and termination - have to be supported with the appropriate information system components.
Compensation and Benefits
Two principal external stakeholders have an abiding interest in the human resource policies of organizations. These are:1. Various levels of government2. Labor unions
12.6 Integrating Functional Systems for Superior Organizational Performance
Functional information systems rarely stand alone. This reflects the fact that the functions they support should, as much as possible, connect with each other seamlessly in order to serve the firms customers. Customers expect timely order delivery, often on a just-in-time schedule; quality inspection to their own standards; flexible credit terms; post-delivery service; and often, participation in the product design process.
Information technology provides vital support for integrating internal business processes, cutting across functional lines, and for integrating operations with the firm's business partners, its customers and suppliers.