Notes and Guidelines on Case Study Use

APEX BISCUIT COMPANY

Background

The Apex Biscuit Company is an old and established firm which makes a wide variety of packaged baked goods. The firm employs approximately 5000 people nationwide. The firm is headquartered in the same large metropolitan area where it was originally founded in 1892. Its products are manufactured in six baking plants strategically located throughout the continental United States. The six bakeries supply a total of 150 firm-owned warehouses, each of which is located near the center of the sales territory it serves and which facilitates its distribution networks. In addition, each bakery leases space in public warehouses which act as auxiliary storage areas.

The Bakery and Warehouses

The company has divided the country into six regions, each serviced by a bakery. Each region is further divided into sales and distribution territories, each serviced by a centrally located warehouse. This structure allows the firm to service the 48 contiguous states plus parts of Canada and Mexico.

Although the firm is national in scope, its sales, and thus the locations of its bakeries and warehouses, reflect its growth and expansion history, with four of its six bakeries located east of the Mississippi. These four bakeries also service 95 of its 150 warehouses. Combined, these bakeries and their associated sales regions account for more than 80 percent of the company's gross sales.

Each bakery produces its own subset of the complete line of products, which are locally baked, packaged, and shipped to its warehouses using a combination of public freight companies, leased trucks, and a fleet of firm-owned trucks. The specific subset of products and packagings is determined by the local marketing and sales organization; quantities are determined by orders processed by that bakery.

Each warehouse has a fleet of delivery trucks whose drivers also act as order takers from established outlets on their delivery routes. The warehouses also act as the base of operations for the firm's sales force whose job it is to secure new customers and who are paid a commission for the initial sales and an ongoing sliding-scale commission based on all orders from customers they have signed up.

All sales within the area serviced by the warehouse and its sales force are the responsibility of the warehouse managers. Once a day, each warehouse manager consolidates all orders from his or her sales force and places a bulk order for products with the supplier bakery. These orders determine what products are produced by the bakery, in what quantities, in what packagings, and in what mix.

In some instances, a bakery may also act as a warehouse and ship directly to the retail outlets using trucks based at the bakery. In these cases, the sales are attributed to the bakery itself.

The Products

Apex Biscuit produces approximately 175 different product items, ranging from saltine crackers through tins of specially produced cookies which are sold only during the Christmas and Easter seasons. Each product item may be packaged in a variety of ways. For instance, saltines, one of the firm's staple items, may be packed four to a glassine package and sold to restaurants, diners, and other institutions, and may also be packed in 50-pound bags and sold (predominantly in the south) for sale from old fashioned cracker barrels. Between the 4-pack and the 50-pound bags there several dozen sizes of packages, boxes, bags, cases, etc.

Since the shelf life of its products is limited and its profit margins are low, the firm's overall profitability is determined by how closely its production matches its sales and by the amount of over-age product which must be removed from the retail shelves and written off. Those products which are removed from the shelves are either sold at company owned thrift stores at deep discount or given to various charitable organizations which feed the needy and homeless.

Although the firm is managed from its national headquarters, in effect each bakery and the warehouse network it is responsible for acts as a semiautonomous unit determining what it will produce and sell. Production figures--by product item, sales, returns and removals, and production and sales expenses--are reported on a monthly basis to the home office for roll up to the corporate level.

Sales Issues

The firm's profits, while acceptable, have been relatively stable for the past few years and have shown little sign of growth. The firm has decided to embark upon a program which is aimed at increasing both its sales and its profits. As its first step, it has hired a national sales director whose first task will be to determine where the problems lie, if any, and where the firm should direct its efforts toward achieving its new profit goals.

There are a number of areas which appear to be fruitful areas for examination, each of which offers a number of alternatives.

At the warehouse level, the firm can

1. reduce the number of warehouses and consolidate them
2. relocate some or all of the existing warehouses
3. open new warehouses

At the product level, the firm can

1. reduce the number of products being produced
2. reduce the number of different packagings
3. reexamine the product pricing structure

At the sales force level, the firm can

1. make the salespeople responsible for ongoing order taking as well as initial sales
2. eliminate the sales force and allow the delivery truck driver to make initial sales
3. reduce the number of salespeople
4. restructure the sale commission schedules
5. install a sales quota system to promote sales.

At the bakery level, the firm can

1. assign specific products to specific bakeries
2. remove responsibility for the warehouses from the bakeries and establish separate sales regions
3. eliminate some bakeries altogether
4. relocate some bakeries and consolidate regions into the remaining bakeries

The new sales director, after some initial examination, realizes that important information about the company's sales performance is missing. After doing some initial data gathering, the staff determined that no consistent information exists on all the bakeries. An initial analysis uncovered the following additional facts.

1. Although each bakery knows what products it produces and how those products are packaged, there is no firmwide consolidated list of all possible products and packagings
2. There seems to be no consistency in the reporting of the size or volume of warehouse sales or the size of the territory served by each individual warehouse. In addition, since, for economy, payroll and commission checks are prepared at the individual bakeries, there is no consolidated list at headquarters of salespeople or their individual performances. This lack of consolidated data makes bakery-to-bakery, warehouse-to-warehouse, and salesperson-to-salesperson comparisons almost impossible
3. Bakeries report production on an aggregate basis. That is, all sales are reported as net dollars. There are no individual figures for units produced, returns, etc. Because of the high product turnover and short shelf life, no ongoing inventory is kept at either the local warehouse or bakery level
4. Sales commissions are paid on the basis of ordered quantities, and no adjustment is made for returns

Because populations in the sales territories vary, there is no consistent way to measure relative sales performance. The variations in product designation and ordering methods make order analysis impossible. This difficulty is compounded by the very heavy volume of orders and the large number of verbal orders which are accepted and filled from the delivery trucks. The trucks themselves are loaded with a variety of products based upon historical demand, and the trucks are audited on a net basis.

The sales force commissions are computed each month, and although all salespeople are paid on a commission, the commission rates vary from bakery to bakery and from territory to territory. This is mainly a result of the size and profitability differences between territories.

Production Issues

Because their products have a short shelf life and thus need to be baked fresh each day, each bakery must order its raw materials from local sources. The wide variety of products and the use of locally available materials has led to wide variations in product ingredients. Although these variations are most apparent between plants, they can also be seen within each plant as sources change, and are in some cases based upon seasonal variations in the types and availability of the raw materials. There are also location-to-location variations in package printing and in the product's taste, which is due to differences in the flours, flavorings, and oils and shortenings used.

The differences in age of the various plants has led to wide variations in the levels of plant automation and in the age and types of machinery used in the manufacturing process. There are also distinct differences in information availability in each plant. Some of the newer plants have relatively modern data processing facilities, and correspondingly modern information systems. Others operate with outdated or even obsolete equipment.

The traffic control systems in each plant are also very different. In some plants and warehouses the trucks are routed so that each truck can visit as many as 30 points a day, while others can only visit as few as 5 or 10. Inventory management of raw materials in some plants allows for minimal inventory levels and efficient operations, while others have large overstocks of some materials, while shortages in others delay bakery production of some items.

Because of the heavy volume of deliveries and returns, and the corresponding heavy volume of orders, both written and verbal, each warehouse and bakery maintains its accounts for its distribution points on an open account basis. All goods are delivered to and sold by the retail outlet on a consignment basis. Order transactions are added to the open account, and returns are subtracted on a daily basis. The retailer is given a weekly statement of deliveries and returns on a product-by-product basis, as well as a bill for net moneys due from sales. All discrepancies between retailer records and company delivery and return records are settled on a net basis without regard to individual products sold.

Since the company advertises heavily on both local and national media and since it makes heavy use of discount and cents-off coupons as a sales promotion mechanism, the retailer may pay part of its bill for products sold in the form of redeemed coupons. Since coupons are on a product- and sometimes on a package-specific basis, the retailer must accompany any such coupon payments with specific delivery receipts for the coupon products and must verify that it has sold coupon products in the amount being redeemed. For each coupon redeemed, the retailer is paid 5 cents over the coupon face value amount. The retailer is responsible for ensuring that it does not accept coupons which have expired.

The retailer may sometimes run specials of its own, in which case, it will either bear the entire cost of the difference between retail price and the price it sells the products for, or in some cases it will share the cost with the company. This sharing may reflect just the cents-off cost, or may reflect the cost of advertising as well.

Because of the heavier demand for product which these sales engender, the retailer usually coordinates these sales with the company to ensure that production and delivery runs are adjusted to ensure proper stocking levels. In these cases, the company does not accept returns of product, and any expired stock is absorbed by the retailer.

NATIONAL ASSOCIATION FOR THE ADVANCEMENT OF DATA PROCESSING

Background

The National Association for the Advancement of Data Processing (NAADP) is the oldest and most prestigious organization of data processing professionals in the world. It was founded in the United States almost 40 years ago; today it has members and branch organizations in 50 countries around the world and is affiliated with similar national organizations in 40 more. The organization is a not-for-profit organization, chartered to advance general understanding of data processing, to promote the interests of the data processing community, and to provide a forum for the discussion of topics of interest to the data processing profession.

As with most professional organizations of its kind, it is managed by officers and committee heads elected or appointed from its general voting membership. There is a national headquarters which is staffed by a small group of paid professionals, whose job is to maintain records for the association, process membership renewals, collect and bank all dues and fees, publish its various periodicals, arrange for its semiannual trade shows, and answer questions from members and prospective members.

Internal Association Organization

Although it is a national organization, the basic functions of the association are performed by a complex of semiautonomous local chapters, which are located in most major cities around the United States. In addition to the local chapters there are student chapters attached to most major colleges and universities.

Each local organization is headed by elected and appointed officers (mirroring the national organization structure) who are elected by and from local membership and who work on a volunteer basis. These local organizations take general direction from the national governing body and receive the bulk of their funding from a redirection of a portion of the national dues. In addition, the local organizations may supplement this funding with local dues collection and fees and with revenues from local activities.

In addition to the formal chapter organization, the association promotes and supports some 60 national-level special interest groups (SIG), each of which is devoted to a specific aspect of data processing theory, technology, or management. The local chapters may also optionally sponsor local SIGs which may be similar to their national counterparts or which may reflect purely local interests. Funding for national SIGs is obtained from a separate dues structure, which is collected at membership renewal time by the national organization. Local SIGs are responsible for raising their own funds, or they may be funded in whole or in part by the local chapter.

The NAADP maintains reciprocal agreements with other dataprocessing--related national organizations. Under these agreements, publications, functions, and services of the national organization, and membership in the local chapters and the national SIGs are open to members of these other organizations at NAADP member rates.

The publications, functions, and services of the national organization, and membership in the local chapters and the national SIGs are also available to non-NAADP members at higher rates than those offered to either NAADP members or to members of affiliated organizations.

Publications

The NAADP publishes a monthly membership magazine which is sent to each member as a membership benefit. In addition 10 monthly, bimonthly, and quarterly journals are also published and are available, at additional cost, on an annual subscription basis. Both the monthly membership magazine and the journals are available to nonmembers at a cost which is slightly higher than that charged to members. Back issues of all publications are stored at headquarters and may be purchased for a premium over the normal single issue cost. Reprints of selected papers and articles may also be purchased, either individually, in bulk, or bound by topic.

The headquarters also arranges for the publication and distribution of the magazines of the national SIGs. Publication of local chapter and local SIG publications are handled by the local organizations.

Mailings

The headquarters assists the chapters and SIGs by supplying them with various membership listings and by printing mailing labels for their publication and advertising needs. As the keeper of the national mailing lists, the association also raises funds by selling copies of the list, in label form, to organizations connected with data processing and approved by the elected board of directors. These lists may be segregated geographically, by interest type, or by any other available selection criteria. The more selective and specialized the list, the higher the charge.

The Membership

The association currently has 100,000 members nationwide, of which 25,000 are student members. For historical as well as practical reasons, the association's regular membership renews on a calendar year-end basis, while the student members renew in September. The regular membership nonrenewal rate is 23 percent, while the rate of new member pickup is around 22 percent. The student member renewal rate reflects the normal 4-year student status. Thus each year, there is a surge of new student members (about 25 percent of the total), while a corresponding 25 percent leave student status. Of those leaving student status, approximately 50 percent convert to regular membership while the remainder drop membership entirely.

Current Processing Environment

Despite its data processing orientation, the availability of membership expertise, and its size, the association, like the shoemaker's children, lacks all but the most rudimentary processing capability. A large portion of its membership records are kept in manually maintained, paper files. A number of years previously, in an act of desperation, the organization's mailing list was given to a service bureau owned by one of its members, which developed a minimal system for mailings. This system was developed gratis and is run for the NAADP at cost.

The bureau-developed system transferred the master file to tape where it is processed in a batch environment. Each record contains the member's name, address (two lines), codes which reflect membership renewal date, and codes reflecting the number of copies of each publication ordered.

Each record is identified by a unique membership number. Renewals and new memberships are punched onto cards which are then used to update the master file.

The update system produces a combined proof list containing all new members, all deletions, and all renewals. Every quarter a master list of all members with their renewal dates is compiled for headquarters staff.

The NAADP governing council, recognizing that the effective limits have been reached for both the existing manual and automated systems and being desirous of expanding both the membership and the number and level of benefits and services available to its members, has commissioned the newly hired headquarters data processing manager to perform the initial analysis and develop a design for a more up-to-date automated system which would bring the association's processing back in-house and which would provide flexibility and expansion capability for the association through the rest of the century.

Issues

Because of the nature of its membership and because of its largely decentralized operations, many of the local groups have developed their own systems for record keeping purposes. These systems are maintained on the machines available to the members, which range from mainframes to personal computers and cover the range of hardware vendors in all categories.

Although the national office maintains its records on an up-to-date basis, the local systems vary in how current they are. Many systems use nationally produced lists to update their own systems' files.

Because local groups can accept members who are not members of the national organization and because they also maintain people on their lists who are not members but who are of interest to the local group, there is a great discrepancy between the national and local versions of these various lists.

The batch nature of the national system and its lack of completeness and flexibility greatly hinders the national organization's ability to provide current information in response to member queries. Failure of a member to renew causes the record to be dropped after two months. Since many members renew late or skip a year entirely between renewals, each late renewal for whatever reason requires the entire membership record to be reentered. This process of dropping and reentering causes much valuable historical information to be lost between cycles.

The batch nature of the system and the delays inherent in the processing cycles, along with the long lead times in publication preparation, cause many of the publications to have production overruns while others have shortages.

The association is required to provide an annual report to its membership on its financial condition and the financial condition of each of its related groups. These financial reports are chronically late, and in some cases, the national organization and its local units have come close to losing their not-for-profit tax-exempt status. In addition, since advertising and postal rates, the tax-exempt status of its publications, and the rates which it charges for its mailing list are all based upon independent audits of its circulation, and these reports are in turn based upon its mailing lists, the organization is continually lacking adequate backup when justifying its rates in each of these areas.

SYSTEM FOR CENTRALIZED LIBRARY ORDER PROCESSING SERVICES (SYCLOPS)

Background

In 1980, SYCLOPS was chartered by the state department of education to develop an integrated data processing system to automate the back office processes of its public library systems. SYCLOPS was to be governed by a committee consisting of the directors of each of the state's 35 public library systems. Library back office processing covered all activities from reviewing initial book order lists from the publishers to the final payment to the publishers. All of the intermediate processing was to be automated to the extent possible, and the state's intent was that SYCLOPS take over as much of this work as possible from the systems and the individual libraries, thus freeing the staff for more productive work.

An additional goal was to simplify the processing and achieve any economies of stale possible in terms of bulk ordering of books and materials, and in terms of processing labor costs. An additional goal was to provide for greater levels of standardization between the libraries and systems and for new and improved services which result from the availability of improved and centralized information.

Library back office processing includes all the work necessary to place an item on the library shelf for circulation. The process begins with advance publication lists being received from the publishers, by receipt of issues of forthcoming books, or by a request from a library patron for an item which is not currently in the library's inventory but which is still available from some source.

Lists of new items are previewed, review copies are obtained, and read by the librarians; a determination is then made of how many of each item is to be ordered. Orders are placed with the publication source or with publication wholesalers or distributors. When the items are received, they normally arrive with special library bindings; if not, they are sent to binderies for suitable rebinding. Once received, or rereceived, at the library, the books are reviewed by the cataloging staff, and the information necessary to produce the set of catalog cards is obtained. The card sets are manually typed, along with card pockets and spine labels, which are affixed to the item, and a protective cover is then applied.

In addition to the physical processing of the item, the back office also processes vendor accounts payables and inventory. This back office processing may be performed either in the individual branch, if it is large enough to warrant the staff, or at the system level. A library system usually includes all branches in a county, although depending upon the population, a system may encompass several counties, or a county may have more than one system. The more normal case is for the processing to be handled on a system basis since advantage can be taken of economies of scale. If performed at the system level, it may be in the main branch or in some independently located office devoted to this processing.

SYCLOPS was intended to extend this concept one step further, using its system to perform this processing on a statewide basis, gaining further economic leverage with the suppliers and further economies in the processing itself.

The Products

Public libraries stock a wide variety of items, the predominant item being books, both fiction and nonfiction, and reference volumes. In addition, the libraries stock periodicals; records, tapes, and compact disks; video tapes, movies, and educational films; presentation materials; artwork, etc. Regardless of type, all items are cataloged, which involves reading or otherwise reviewing the item and generating a brief synopsis, usually consisting of one or two lines, of the contents or an equally brief description. A set of catalog cards is generated with item descriptive information. Each set contains a card to be filed under the title, the author's last name, and each of the selected subject categories. Fiction items are usually shelved by author's last name, while nonfiction is shelved by subject. Nonbook items are shelved by title, topic, or category.

There are a number of systems for identifying library items. The primary, and most universal, one is known as International Standard Book Number (ISBN) and involves a multipart format, 10 digits in length, which identifies language, publisher, book identifier within publisher, and a check digit. The ISBN is unique for a particular title, edition, and binding. The ISBN is assigned by the publisher.

A second numbering scheme is known as the Library of Congress number, which is assigned by the Library of Congress cataloging staff in Washington, D.C.; each Library of Congress number is unique with respect to title and edition, but not necessarily to binding.

A third numbering scheme is known as the Dewey Decimal System; this number is assigned by the library cataloging staff after determination of the volume's primary subject matter. The Dewey number is the number by which nonfiction is shelved. The Dewey number ranges in value from 001 to 999 and may be followed by any number of decimal digits which further identify the book's subject matter. Most American volumes carry all three numbers.

Because many library items are not books, many libraries have developed item identification schemes to identify, catalog, and control these items. There is little if any standardization of these other schemes among libraries or systems.

Library Accounting

Public libraries are funded by federal, state, and local taxes. To make most effective use of these funds and to avoid duplication of effort, the libraries of the state are aggregated into systems. Each system is composed of and controls the branches located within its library district. Each system is autonomous and is responsible to local legislatures. Each library receives funding for operations and new acquisitions from the local and state legislatures. Funding is also generated from overdue item fines, from donations, and from membership dues charged to patrons from outside the branch district who wish to make use of the library's facilities.

Each library must prepare and present to the system a yearly budget of operations. This budget must include all fixed and recurring expenses, such as salary, rent, lease, or mortgage payments, utility costs, building maintenance, and new item acquisition plans.

The income side of the budget usually includes known donation funds, an estimate of membership dues, and estimates of state and local funding. The state and local funding is based upon a formula which factors in library district population and circulation numbers. These individual library budgets are rolled up to the system level, and the final numbers are presented to the state and local legislatures for approval. Once approved the numbers are included in the governmental budgets as a separate assessment for libraries.

Once the funds are approved, the library may draw on them for its operational and acquisition expenses. As items are purchased for its collections, the invoices are vouchered and passed along to the system for payment. The systems in turn maintain ongoing acquisitions accounts for the libraries and make up monthly and quarterly account status summaries.

Each library, or system, will make up its own purchase orders for items for its collections and include its budgetary line numbers as reference. As the vendor invoices are submitted, the library will ensure that those budgetary line numbers are included when they are vouchered.

Interlibrary Loan Functions

Items are freely exchanged between branches of a system, and a patron can withdraw or request any item within any branch of his or her home system. In addition most of the systems subscribe to and maintain an intersystem loan capability which in effect makes available to any patron all items in every branch in the state.

Currently all back office, inventory, and intra- and intersystem loan processing is handled at the system or branch level. Some systems and some of the larger branches have achieved some level of automation; however, there is no consistency among these automated systems. The commissioner of libraries for the state, an employee of the state education department, has persuaded the state legislature to take advantage of federal funds available for the purpose and to provide supplementary funding to establish and support the SYCLOPS organization, whose primary mission would be to perform in-depth analysis of the library systems' processing and to develop requirements for the design of an implementable automated system.

STUDENTEXT PUBLISHING COMPANY

Background

The Studentext Publishing Company is almost 100 years old. Its main product lines focus on textbooks and other educational materials, although it has a rather substantial popular fiction list.

The firm has grown over the years by acquiring other smaller publishing firms with similar or complementary lines, and today publishes under almost two dozen mastheads. Its offices are located in New York City; however, its warehouses and processing plants are located in Pennsylvania, Maryland, Massachusetts, Connecticut, California, Texas, Kentucky, Ohio, Tennessee, and southern New York State. Its data processing center is in the Tennessee plant with leased lines to the New York Development Center. Its customer service lines are connected to each plant and warehouse.

Studentext's first major automation was completed almost 10 years ago. At that time it was considered a model of its kind and was used as a showcase installation by the hardware vendor. Although it is still functioning adequately, it does not satisfy all of the firm's current needs and is not amenable to modification.

After much deliberation the firm has decided to reexamine its requirements and develop a new automated system, to move it from an essentially third generation environment to a more technologically up-to-date online database environment.

At the same time the firm wishes to add some of the functionality which it feels is missing from the present system and to provide it with more flexibility in the sales and marketing areas.

The Business

Although identified as a publishing firm, Studentext does not actually manufacture its own products. That is, it does not maintain any printing or binding facilities. Management categorizes the firm as a marketing and distribution organization. It "farms out" the traditional production activities and functions to contractors. Its own activities are centered on the front- and back-end work.

Front-end work consists of manuscript selection and editing, artwork processing, editorial services, and layout and typesetting. Once the final texts and galleys are approved, the work is sent out for production. Production consists of all printing, cutting, and binding activities normally associated with book publication.

Studentext acts as intermediary and contractor during the production process by arranging for completed flats to be picked up at the printer and transshipped to the company's bindery services. Once the finished product leaves the bindery, covers are affixed and the books are shipped to one of its warehouses where they are stored awaiting orders, or shipment to its outlet bookstores and other distributors. Other services performed internally consist of advertising, order processing, royalty accounting, billing, inventory, and other marketing services.

Product sales occur in a number of ways.

1. A commissioned sales force travels around to distributors soliciting orders for forthcoming titles and reorders for already released titles. These distributors sell on a consignment basis.
2. Other sales specialists travel to schools and universities to show school administrators and department heads texts and other educational materials in the hope that they will be adopted by the school or school system as standard text.
3. Some products are sold on a continuing subscription basis. They are serviced from the local plants, and product is shipped as it becomes available.
4. A new and growing market for Studentext is direct mail-order sales, which are initiated by advertising campaigns and by order cards inserted in various popular or specialty publications or by direct solicitation of the end customer.

The Products

Studentext has a large list of products for sale. In addition to the standard items such as fiction and nonfiction books, it has, as previously noted, textbooks and reference works. The following is a brief description of some of its different types of products.

1. Textbooks may be sold individually or in sets, as with encyclopedias. Other books may be sold in series; this is particularly true of texts where a school system may buy a reading series which consists of texts for K to 6, 7 to 8, or 9 to 12. Other series are sold to colleges, universities, and graduate and specialty schools.
2. In addition to the texts themselves, the series may also include workbooks, that are used and thrown away, textbook updates, and teachers' guides and texts. This class of product also includes worksheets and other visual aids such as maps and charts. In addition audiovisual aids may be sold as supplementary material.
3. Books may be sold to distributors, either individually or to chains of stores. The orders for these books may be placed (a) directly with the firm by either the branch or the chain main office, (b) through one of the firm's sales representatives, or (c) through some wholesale buyer who then resells to the retailer. Here the titles may be ordered individually, in bulk, or in what is termed a "dump," which consists of a collection of related titles, or similar fiction or nonfiction titles, sold as a unit along with the display rack and other promotional media.
4. The firm acts as producer and publisher for a wide variety of periodicals, professional journals, and other magazines. Most of them are sold either from newsstands or by subscription. In some cases, however, the firm produces the periodical for another organization, usually a trade or other specialty group, which provides it to their membership as a benefit or for a fee. Studentext maintains the subscription list for its own publications and provides subscription fulfillment services to its clients, on request and for a fee.

   Certain lines of products are made available to the consumer through book clubs. The most popular of these work like the Book the Month Club, where the consumer is enrolled and given a premium of a certain number of volumes at no or greatly reduced cost, and thereafter is offered a monthly catalog of discounted books from which the customer must select a predetermined number of items.

5. For each multiple of books purchased the consumer is offered credits toward more "free" books. Thus the consumer may get one book "free" for every five purchased at the "regular club price." The consumer must order a certain number of titles to cover the initial premiums. The book clubs along with textbook sales account for a large percentage of the firm's repeat sales.
6. The final category of product consists of direct-mail sales. In this case the products are advertised in such a manner as to solicit sales directly from the consumer. The advertisements and their response cards are placed in various popular periodicals. The titles in this category are usually either specialty items, such as reference works, medical or other scientific works, or fiction titles. The products advertised in this manner are geared to the carrier medium, e.g., medical texts are carried in medical journals, etc.
7. Although this method of sales is more labor intensive and the initial sale is more expensive, it has the possibility of a large volume of repeat business at little, if any, additional cost. In addition, the firm can, through this method, build up an extensive mailing list of customer names and addresses along with certain demographic information, such as title and subject preference, which would cost a great deal of money if acquired from outside sources.

The Issues

The firm completed its initial automation project approximately 10 years ago. At that time the system was considered to be state of the art. It was an online system using traditional file access methods for data storage.

Much of the processing was performed in batch mode, and the applications which were developed at that time consisted of

1. Order entry
2. Accounts receivable
3. Back-order processing
4. Product master file maintenance
5. Inventory management

Author royalty accounting, because of its complexity, was and still is handled on a manual basis. The firm's list of titles and authors has grown substantially in recent years. Each book is contracted for with the author on an individual basis, and although certain similarities exist between contracts, no two contracts are the same. As a result of the individual nature and complexity of each author contract, and the subsequent difficulty in determining royalties due, the firm would like to automate this process and tie it into its sales analysis system, which is the primary source of information for royalty computation.

Since its initial automation, the firm has acquired many other publishing firms and product lines. The volume of sales and the number of products has far outstripped its own system's capacity. The firm's attempts to assimilate or adapt in some manner the systems of the acquired firms has so far met with failure. The firm has ordered a new generation of processor and has commissioned the development of a replacement system.

Management's directives state that they want a system which is (a) integrated, (b) flexible, and (c) capable of supplying the increased capacity required by the expanding business.

An additional objective, as stated by management, is to increase the firm's direct sales capability. Currently the firm must rent lists of prospective customers. These rentals are usually single-use only, and the prices for each list vary, depending upon the selectivity of the list.

The selectivity of a list is determined by the amount of demographic data known about each entry in the list. For instance, a list of all physicians in the country might rent for $.50 a name. The same list with type of practice indicated might rent for $1.00 per name. The same list with type of practice and specialty indicated might rent for $1.25 per name. If the firm were publishing a new text on cardiac surgery, it would obviously be more cost-effective to solicit orders from cardiac surgeons than, for instance, from general surgeons or pediatricians.

The firm has indicated that it would like to begin building a customer base containing the type of demographic information which would enable it to target its solicitations more cost-effectively and without the necessity of renting lists from outside vendors. The development of requirements for such a customer base and analysis as to how to best create one has been designated as a primary part of the first project.

Additionally, the firm would like to improve its customer service capability, its accounts receivable systems, and its inventory systems to reduce the number of back orders or nonfillable orders. In addition it would like to be able to have greater control over the distribution of product to its warehouse and storage locations, which will in turn reduce its distribution and delivery costs.

As part of this new system, the firm would like to automate and simplify its royalty accounting and payment systems. Currently each item must be accounted for separately, and the same author may receive payment for different items as much as 2 or 3 months apart. Those items with multiple authors, illustrators, editors, etc., receiving payment may be as much as 6 months in arrears. The firm must pay penalties for these late payments, and thus would like to eliminate the delays to the extent possible.

The company maintains a variety of customer and vendor accounting systems. Most of its sales outlets work from open accounts, with deliveries and returns being maintained on a continual basis and monthly accounting statements being generated. For chains, accounts are maintained in duplicate, with a master set being maintained for the chain home office and a duplicate set maintained for the branch location. Each branch is billed separately with consolidated statements sent to the home office.

Since accurate sales analysis is the basis for many of the firm's operational systems, including inventory management, production scheduling, royalty computation, sales commission computation, and distributor payments, an updated sales analysis system is also a high priority item.

Individual customers may open a variety of accounts ranging from cash prepayment through COD and credit accounts. Customers may also pay by credit card. For both individual and corporate accounts, the firm offers the option of master and standing orders and offers special shipment and billing options. All credit customers undergo periodic credit checks by the firm, and a customer may be offered credit facilities, or credit may be withdrawn based upon ordering and payment history. Because of the shift in emphasis to direct-mail marketing, customer accounting and billing is also a high priority item.

THE LAST NATIONAL BANK AND TRUST COMPANY

Background

The Last National Bank and Trust Company is a medium-size, regional, commercial bank with its roots in the New York metropolitan area. As with most institutions of its size it grew by acquiring other local banks and merging both their assets and customer bases into its own. Over time its assets have grown to about $5 billion, and its customer base has grown to approximately 500,000 account holders. Its branch network currently extends to some 500 locations, ranging in size from storefront offices to large modern complexes, many of which are in buildings designed, built, and owned by the bank itself.

The bank is considered rather conservative, waiting for its larger competitors to innovate new products and then modifying those products to its own needs. Its offerings fall into the traditional mold, with demand deposit accounts (checking), commercial and consumer loans, mortgages, and savings accounting for the bulk of its business.

The Last National has recently been bought by a large overseas bank, which resulted in a change in management and an influx of capital. The new management has set a strategic direction which is intended to streamline the operations areas, to provide a wider range of products and services offerings, and to improve the bank's image with its customers and with the general public.

As with most banks today, Last National has an extensive portfolio of existing automated systems. Many of them were developed as independent projects, and most are 10 to 15 years old. While the systems are still serviceable, the bank, to keep up with its competition, has embarked on a strategic change in direction with respect to systems development. The new management has funded a project to analyze the current account processing environment, with the ultimate goal of reautomating these systems in three areas.

1. From the existing multivendor hardware environment to newer, single vendor, more cost-effective machinery
2. From an account-specific processing environment to an integrated customer asset management environment
3. From a multiple file, batch processing environment to an online database-oriented environment

The bank would also like to take advantage of the efficiencies and economies afforded by personal computers, by reautomating, where possible, many of its smaller user-specific systems to these machines.

These development programs are dictated by the bank's need to provide more extensive and flexible financial services to its customers, by the expanding product offering environment, andby the concurrent need to assess the bank's exposure for a given customer across all its product offerings, and to manage its risk in a more efficient and economic manner.

The bank's competitive environment has also been changing over the years, and while it is still profitable, those profits have been relatively flat, even in the face of an expanding customer and customer account base.

In previous years the bank's competition has been other similar commercial institutions in the area. Many of the products offered were solely the province of commercial banks. With the changing regulatory environment, the bank is facing competition from many new sources. These include

1. Savings and loan institutions that now offer product lines very similar to those of commercial banks
2. The larger money center banks that are expanding their automated teller machine (ATM) and branch networks into what was Last National's territory
3. Other financial institutions, such as brokerage firms, that are now offering products which compare rather favorably with those of the bank
4. Large retail chains which have acquired financial services units and are expanding their financial and credit services to the point where they now compete with commercial banks in many areas
5. Large insurance companies which have expanded in a manner similar to the large retail chains mentioned above
6. Foreign banks which have opened domestic branches in their own name and are establishing branch banking systems

The New Strategy

As the first phase of its planned reautomation project, the bank has decided to tackle four of its major systems requirements, two old and two new: installation of an ATM network, demand deposit, consumer savings, and a new central customer information system. These projects were chosen since they are tightly linked in terms of both processing and data requirements. Each project provides a component for implementing the bank's new strategic plan for coping with its new competition.

The ATM Network

The bank has recently installed an ATM network in its branch offices. These machines are available 24 hours a day, 7 days a week; they allow clients to make payments on loans and deposits to their various accounts; to obtain last transaction, interest, and current balance information; to transfer funds between accounts; and to withdraw funds from savings and demand deposit accounts.

These machines are activated by a credit-card--style customer identifier card with a magnetic stripe and a customer-entered personal identification number (PIN). Each of these machines has a small display screen, a telephone-style keypad, a cash dispenser slot, deposit slot, and a magnetic card reader slot.

The new machines have been installed so as to provide maximum availability to bank customers. In some locations the machines have been placed in branch lobbies and new card-activated access doors have been installed. In other branches, lobby machines have been supplemented by through-the-wall machines.

The machines themselves have been hooked to the central bank processors via redundant phone lines. In most cases each line to a branch has been routed through a different phone company switching office to provide maximum protection. Special procedures have been instituted to ensure round-the-clock servicing for the machines, including stocking counter deposit and withdrawal slots, and to ensure that the machines have sufficient cash and receipt tickets. Additionally the bank has set up a customer service department to staff the "hot" phones to each branch machine area.

Demand Deposit Accounts (DDA)

The traditional demand deposit processes were driven by a series of documents: the check itself, customer deposits, and special instructions from the customer (such as stop payment orders, etc.). Under the new environment these traditional items still exist; however, they have been augmented by new ATM transactions, such as direct cash withdrawal and payments, transfers to other accounts, and a host of new products. These products, usually associated with a traditional DDA account, include overdraft protection (a form of automatic consumer loan), money market accounts (for unused cash), debit cards, etc.

In order to become more competitive, the bank has also instituted such features as automatic bill payment, checkless checking, combined account statements, chargeless checking (in combination with minimum balances in other accounts of the same customer), and revolving credit accounts, which use the customer's home equity as collateral. These new services all utilize traditional bank services but combine them in new and innovative ways.

Consumer Savings

The traditional passbook savings accounts offered by the bank required that the customer present a passbook for each transaction. This passbook could be presented in person or mailed in with a deposit or withdrawal. Since consumer savings accounts provide a substantial portion of the bank's funds for other services, the bank has embarked on a program of creating new and innovative features for existing accounts and adding new types of accounts, all designed to lure more of the customers' funds for a longer period.

Some of these new savings products are: money market accounts, NOW accounts (negotiable order of withdrawal), and certificates of deposit with lower than normal deposit requirements.

Because of the attractiveness and popularity of individual retirement accounts (IRAs), the bank has developed a number of products which can serve as investment instruments for these long-term deposit accounts.

Consumer Loans

Much of the bank's traditional revenue comes from its consumer loan and credit operations, which include the traditional mortgage, auto, and home improvement loans. In recent years, increased competition and the development of new products have put increased pressure on these revenue mechanisms. The current mortgage environment has changed from fixed-rate fixed-term mortgages to current flexible-rate flexible-term instruments. Additionally, the new home equity loans and equity access accounts (which in effect represent second mortgages) greatly increase the risk in this area. The increased use of credit cards and consumer credit lines has also made it imperative that the bank have means for assessing its exposure in these areas.

The fluctuating and currently declining interest rate environment also puts pressure on the bank to ensure that its income sources keep pace with its expenses (primarily interest owed). Changing tax laws, which reflect tighter controls on interest expenses, also affect bank income and expense figures and mandate that the bank track its commitments in this area very closely.

Customer Service

In keeping with its new emphasis on improved customer service and its new customer orientation, the bank would like to produce consolidated customer statements. Currently a customer receives a statement for each account type. Aside from being confusing and annoying to the customer, it is costly for the bank. Each statement must detail all activity against that account during the preceding statement period. The separate statements, however, do not give customers a complete picture of their banking relationships. A consolidated statement would provide a summary balance for each account relationship, including credit card and loan accounts, and would allow customers to see their entire financial position at a glance. In addition the statement would continue to provide the detailed account transaction activity as before.

VERYLARGE FULL SERVICE BROKERAGE COMPANY

Background

The Verylarge Full Service Brokerage Company was established over 100 years ago as a partnership. Its primary orientation and the bulk of its operations, then as now, is in the area of retail brokerage. Retail brokerage deals primarily with individual investors and small businesses. The primary activities in this area are the execution of buy and sell (trades) orders for securities and other financial instruments on behalf of its customers and the management of the investment portfolios of these customers. To this end it established a network of storefront branch offices, each staffed with a sales force and a back office processing area.

In addition to the execution of securities trades, the sales force is empowered to sell to its clients any number of financial products, which include shares in mutual funds, specialized investment partnerships, commodities (mainly farm products and precious metals), retirement and annuity products, insurance products, investment newsletters, etc.

The firm, through its sales force, acts as an intermediary rather than as a principal in these securities transactions for the customer. That is, it is not an active party to the trade or sale, but rather arranges the buy or sell and takes a commission based upon a formula which takes into account the price of the securities or other products, and the number of units traded.

These trades may be effected in one of the national, regional, or international markets (such as the New York or American Stock Exchanges, the Boston, Pacific, or Montreal Stock Exchanges, or the London or Tokyo Stock Exchanges).

For nonsecurities transactions, those where the firm is selling its own product (its own mutual fund, newsletters, or insurance policies written against its own insurance subsidiary), or where the firm is buying for or selling from its own securities inventory, the firm is also an active party to the trade.

The Sales Force

Company "sales" are handled by a combination of commissioned salespeople and salaried customer service representatives. All securities salespeople must be licensed by the Securities and Exchange Commission and in some cases by other regulatory or governmental units. In order to receive this license they must take a rigorous course in securities operations, rules, laws, and regulations. Upon completion of this course they are licensed and are then "registered" to execute trades on behalf of their customers and provide investment advice.

Each salesperson is responsible for signing up and servicing his or her own customers. Before customers can trade, however, they must establish an account with the firm. Because of regulatory requirements and in order to facilitate accounting, each type of trading activity is usually handled through a different type of account. Salespeople are compensated based upon the number of accounts they open and control and upon the level of activity in each account. Although most salespeople are, technically speaking, employees of the firm, many consider themselves to be, and thus operate as, independent agents who "work at" rather than "for" the firms they represent.

The customer service representatives may or may not be licensed to trade, and in many cases may be salespeople "in-training." Each customer service representative is normally assigned to one or more salespeople and is responsible for ensuring that the paperwork for account maintenance is properly handled and that trade-related forms are properly routed. Customer service representatives also handle routine customer inquiries. They may not give securities or other trading advice (even though they may be licensed to do so) and may not execute any actual trades. In contrast to the salespeople, customer service representatives are full-time, salaried employees of the firm. Many sales representatives also receive bonuses based upon how well "their" salespeople or "their" office does.

Types of Accounts

Each type of customer account is tailored to a particular type of trading or investment activity. There are two basic types of accounts: cash and margin.

The most usual account is the cash account, which permits the customer to trade on a cash basis' as opposed to credit. That is, all buy transactions must be settled in full, in cash.

Margin accounts by contrast are accounts where the firm allows the customer to put up only a part of the value of the securities purchased, in cash, with the company providing the remainder of the value in the form of a loan to the customer. Thus the customer could buy $10,000 dollars worth of securities for as little as $5000 or $6000 in actual cash, with the company financing the remainder of the cost. The firm charges the customer interest on the money loaned. For margin accounts, the firm must, by law, maintain a fixed ratio between the actual market value of the equity and the customer's actual investment. If that ratio falls below the regulatory amount, the firm must obtain further funds from the customer within a fixed number of business days.

The firm will normally open up a separate account for each type of security, or investment in which the customer can trade: equity (stock), debt (bonds), commodities, currency, money market funds, and both equity and debt mutual funds. In addition the customer may also have separate accounts for any special products which the firm may offer, such as investment partnerships, tax shelters, retirement funds, annuity funds, etc. A customer may also open and control separate accounts of the same type in the name of family members, for special business purposes, etc.

Customer Accounting

The firm treats customer accounts in much the same manner as commercial and savings bank accounts are treated. That is, they are summary accounts, and all transaction details are recorded on a separate basis, with final totals being kept in the account itself. The firm will send customers an "advice" which notifies them of the completion of each trade, each interest or dividend payment, or other transaction; on a monthly basis the firm sends customers a statement which details all activity, starting and ending balances, and their position in all securities or instruments which have been traded in the name of the account since the last statement.

Because of the high volatility of trades in many accounts, for security reasons, and to reduce the amount of paperwork, most firms offer to hold customer securities on their own premises or in independent "depositories." In these cases, although customers retain full ownership rights to the securities, they do not normally take physical possession. The brokerage firm in these cases will receive and distribute to the clients all dividend or interest payments earned by the securities, and these payments will be reflected on the monthly statements.

Because they physically hold the documents for the customer, the firm must have systems which allow it to track these securities inventories. Normally the firm must track inventory positions in two ways: (a) they must know at all times which customers hold what securities (for portfolio valuation purposes) and (b) which securities are held by each customer (for margin calculation, and interest and dividend payment purposes).

Trade Processing

Each trade is in effect an order from a customer to buy or sell some security or other instrument. The order may be "at market" which means at whatever the price is at that time, or it may be an order with limits or restrictions. These limits or restrictions may be with respect to either price, time, or a combination of both. That trade is forwarded to a trader specialist who contacts an opposite number and "executes" the trade.

The customer then normally has five business days to, "settle" the trade. Settlement consists of either delivering payment for that which was bought or delivering the document which represents that which was sold. The actual ownership of the security must be changed, and the company whose shares it represents must be notified of that change. The firm must then execute the physical (or book record) transfer of ownership and possession. Because of the monetary value of these securities, there are strict accounting and regulatory controls placed upon the movement of these documents.

At each stage in the process numerous reports and records are maintained to ensure that all regulations and procedures are complied with and that the financial and inventory accounts reflect the current status of the affected accounts.