IFSM 300 Stage 1-Assignment 1

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HowInformationSupportsDecisionMaking.pdf

How Information Supports Decision Making

Now that you have been introduced to the basics of data, how it can be

stored, and the importance of data quality, let’s look at how data

transformed into information supports organizational decision making. In

their simplest form, information systems are all about getting the right

information in the most usable format to the right people, at the right

time and place. Advances in integrated software applications, the

internet, and better data management practices provide businesses with

better tools to support that goal.

A key competitive advantage of an organization is the ability to react to

changes quickly. Being able to make the right decision to address a

potential threat or seize an opportunity could make the difference in

whether or not the company stays in business or continues to increase

profits. The key to making good decisions is having the relevant

information readily available in the form that is needed. There are three

basic levels of decision making in an organization: operational,

managerial, and strategic as illustrated below.

Learning Resource

How Information Supports Decision Making

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Let's look at the process of creating an invoice. An invoice contains

several pieces of data, such as customer name, number, address, shipping

method, items ordered, and quantities. This data is required at an

operational level to update inventories, handle logistics, add to accounts

receivable, and so forth. At the mid‐level of our pyramid, the management

level, the data from each individual invoice are not as important as the

cumulative information that many invoices can provide. For example,

sales have increased 25% on product A, orders for product B are shipping

consistently behind schedule, and shipping costs with shipper X are

increasing more than with other shippers. With this information on trends

or patterns, management can investigate further and make decisions on

production schedules, supplier relationships, or preferred shipping

vendors.

At the senior or executive level of an organization, the company

leadership is less concerned than middle management about the trends or

patterns—their concerns are strategic. Senior management looks at

information, both from within the organization and external. For example,

suppose a key component needed in the manufacturing process is

petroleum‐based. Rising oil prices, coupled with industry forecasts that

prices will continue to rise, call for addressing this situation at a strategic

level. Senior management might consider whether a price increase can be

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justified, how much of an increase the market can bear, or whether there

are alternatives that would not degrade the product.

A primary advantage of an information system is its ability to support and

improve decision making throughout the organization by turning data into

useful information. However, the system is just a tool and does not

replace the human factor; people are still required to make the choices

involved in the decisions. Individuals at all levels of the organization can

use the information provided by the system as they make their decisions.

In the invoice example above, the creation and use of the invoice data

could all be done by hand, using paper invoices. However, the use of a

system to capture, store, and share that information throughout the

organization significantly increases the efficiency and effectiveness of the

process and makes the information immediately and readily available to

those who need it to make their decisions.

We can see that information moves through the organization and is

viewed for different purposes by different levels within the organization.

However, the data are captured at the operational level (transaction‐

processing systems) and made available in appropriate forms (summary of

product, customer, geographic distribution differences, and so on) at the

various managerial levels.

It is important to note that information can flow both up and down the

levels within an organization. Information that is useful for monitoring

("How are we doing?") typically flows from the operational level upward.

Control information ("Is business going as planned?") typically flows from

the top level downward. For example, a senior manager notes that sales

figures are declining. She queries down through the organization to find

more information to control the declining sales. From mid‐level

management, she may learn that only the Midwest region is experiencing

a decline. From the operational level, she may learn that the sales force in

that region has had significant turnover and that 40 percent of its sales

representatives have fewer than six months of experience.

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More specifically, let’s look at some examples of possible types of

information and decisions different levels of the organization based on

information from an invoice processing system based on the graphic

above.

Level

Types of Informatio n

Area of Focus or Concern

Decision Example

Supportin g Informatio n from the IT System

Strategic Overall sales

figures

Amount of

increase in

market

share.

Monitor

sales volume

vs. projected

sales.

Decide to

discontinue

under‐

performing

products.

The system

could

produce a

report of

products

where the

sales volume

is not

meeting the

projected

volume.

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Level

Types of Informatio n

Area of Focus or Concern

Decision Example

Supportin g Informatio n from the IT System

Strategic Overall Sales

Figures

Determine

manufacturi

ng capacity

requirement

s and

resource

utilization.

Identify

increasing

costs of raw

materials

due to

increased oil

prices.

Decide

whether to

reduce

production

of products

that use

significant

petroleum‐

based

ingredients.

The system

could

provide a

report on

products

that include

more than

10%

petroleum‐

based

ingredients.

Managerial Monthly

Invoices

Plan

monthly

production

schedule.

Schedule

employees.

Plan

maintenance

schedules.

Manage

inventory.

Decide to

increase

production

schedule to

meet

increased

demands on

certain

products.

The system

would

provide

product

sales volume

information

to indicate

high‐

demand

products.

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Level

Types of Informatio n

Area of Focus or Concern

Decision Example

Supportin g Informatio n from the IT System

Managerial Monthly

Invoices

Impact on

monthly

payroll;

overtime

hours

worked.

Decide to

increase

number of

employees

in certain

departments

to reduce

excessive

overtime.

The system

could

provide a

report

indicating

where sales

exceeded

projected

demand by

15%.

Operational Invoice Data Update

inventory,

schedule

production.

Coordinate

shipping.

Decide to

negotiate

shipping

rates with

most‐used

shippers.

The system

could

produce a

report of the

volume of

shipping

done with

each

shipping

vendor and

their

shipping

rates.

To provide a more personal example, think about the information you can

gain from your online bank account system. The system can show your

current balance, total of deposits, total of withdrawals, pending payments

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(if you use online bill paying), etc. Then based on information the system

provides, you can make more informed decisions about your budgeting

and spending. If the system showed information that last month your

total withdrawals at ATM machines had increased significantly, on

average you were hitting the ATM machine 3 or 4 times each week, and

the withdrawals averaged $50 per withdrawal, you could decide to limit

yourself to once‐a‐week ATM withdrawals of no more than $100. Further

analysis of your spending habits could show a significant amount of

money being spent daily on eating lunch out. You could then decide to

pack your lunch two days a week. This shows how you could make fact‐

based decisions supported by information from the banking information

system.

Keep in mind that information technology is simply a tool. Knowing how

to use the tool correctly is instrumental to overall effectiveness. The key

to using IT successfully is knowing what data an information system

contains and how the data can be converted into useful information to

support decision making at each level in the organization. This helps

organizations achieve their business strategy and maintain or increase its

competitive advantage.

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