11
McKraklin AEROSPACE (A)
"First you figure out what's inevitable. Then
you find a way to take advantage of it."
Russell Ackoff
INTRODUCTION
Dave Costner, Director of Information Systems (IS), shook his head slowly as he reread the memorandum he had just received from Mark Segford, the manager of the Commercial Products Division of McKracklin Aerospace Company. The memorandum read in part:
"Since I assumed this position six months ago, I have been concerned with the apparent low morale of our employees. I have elicited complaints about our current practices and suggestions of how we can improve. One of the most frequent sources of complaints has been our payroll system: late payments, incorrect payments, direct deposit misrouting, etc. I want your department to begin a high priority project to drastically improve our current payroll processing."
"This is ridiculous," Dave Costner said to himself. "We spent two months developing a Strategic IS Development Plan which was completed only a year ago. Then I "cave in" to the marketing department's threats and I make the raw materials inventory system our number one priority.* Now, my new manager wants me to make the payroll system a high development priority. That system didn't even make the top-5 list of priorities when we developed the plan. The top three projects on that list would have to be shelved while we work on these other, lower priority systems."
McKraklin AEROSPACE COMPANY
McKraklin is a large aerospace firm located in Southern California. It manufactures military electronics systems, satellite systems, and commercial by-products of these systems. The firm, which has more than 65,000 employees in sixteen locations throughout the region, is organized into twelve major divisions. One of these is the Commercial Products Division.
The Commercial Products Division located in Sepulveda, California, manufactures electronic and radar products for commercial rather than military use. The division has about 2500 employees. Last year’s revenues were $781 million. About one-third of this revenue was from exports outside the country. The division is organized rather traditionally into six departments.
* This situation is described in McKraklin (A).
STRATEGIC IS DEVELOPMENT PLAN
Dave Costner remembered the process that division executives had undergone to develop the Strategic IS Development Plan. He also remembered how satisfied everyone had been with the results. The division manager had convened a committee comprising herself and every department director. The committee's goal was to mesh IS department system development and modification priorities with the Commercial Products Division's strategic goals.
The division's strategic goals had been developed the year before this committee's formation. These strategic goals were consistent with McKraklin Aerospace's corporate goals. Each of the division's strategic goals had been expressed quantitatively - as a measurable objective. For example, three of these measurable division strategic goals were:
- increase domestic sales by 12%
- increase export services by 10%
- reduce variable costs by 8%.
The committee then had carefully reviewed Dave Costner's descriptions of IS systems that needed replacement or major modifications. Dave had included on his list descriptions of IS systems not currently in the division's inventory, but which could be imported from outside. The committee then estimated if and how each potential IS development project could measurably contribute to the division's strategic goals. For example, the committee might determine that ". . . potential development project D could reduce variable costs moderately."
Members of the committee had agreed that these goal contributing estimates were probably no more than "guess-estimates," but there had been almost unanimous consensus on the IS development priorities the committee created (Figure 3.1). The committee then had included in the IS strategic plan a few generic principles that would apply to all IS development projects. These principles included:
- 10% of the IS development budget would be directed towards experimentation with emerging technologies (e.g., biometrics)
- all IS projects with development costs exceeding $500,000 would be capitalized rather than expensed.
"Oh, well," thought Dave Costner, "I guess our planning process wasn't worth much. It's only a year later, and we've already violated the priority sequence twice. I'd better start pulling my department into a payroll frame of mind."
CURRENT PAYROLL SYSTEM
The current payroll system had been operating for seven years without major modification. A centralized mainframe environment using separate application files belonging to separate departments characterized it. Dave Costner inspected the payroll system's documentation manual, which did not appear to have been updated for some time. Dave wondered how many undocumented system changes had been made since the last manual update.
He studied the primary payroll files (Figures 3.2 through 3.6). He then flipped through the manual's pages until he found a system flowchart describing the payroll system process flow. Dave noticed that there was no accompanying narrative description of the flow. This presented a problem. Dave wanted to verify the correctness of this documented flow with the payroll supervisor. System flowcharts, however, were difficult for non-technical persons to understand. He decided to develop a narrative description of the process flow that he could later convert to data flow diagrams (DFDs).
Dave Costner first developed the following narrative description of payroll system processing:
1. The IS department prints pre-numbered, weekly time sheets from the Payroll Master File (active employees only).
2. These time sheets are sent to the Payroll Supervisor.
3. The payroll supervisor reviews the time sheets for completeness, and then sends them to the various departments.
4. Employees fill in their respective time sheets at the end of their daily shifts.
5. Department supervisors enter applicable vacation or sick leave hours on each employee's time sheet.
6. Department supervisors then review and sign each time sheet at the end of each week and send the completed time sheets to the payroll section.
7. A payroll clerk sorts the time sheets by time sheet number. If there are missing numbers in the time sheet number sequence, the payroll clerk notifies the payroll supervisor who reconciles the discrepancy with the applicable supervisor.
8. The payroll clerk updates the payroll master file for any vacation days recorded on each time sheet. If the number of days shown on the time sheet exceeds the number of vacation days accumulated, the clerk writes that fact on the time sheet and sets the sheet aside for the payroll supervisor.
9. The payroll clerk then enters the remainder of time sheet data to the payroll transaction file and to the cumulative payroll file separately.
10. The time sheet is then sent to another payroll clerk who verifies the accuracy of the first clerk's entries. If any errors are detected, the time sheet is sent to the payroll supervisor for reconciliation.
11. At the initiation of the payroll supervisor, the IS department runs the payroll program to produce:
a. Paychecks with pay-stubs
b. Notices of direct deposit
c. Deposits slips for direct deposits
12. These output are sent to the payroll supervisor who:
a. Uses a check-signing machine to affix signatures to each paycheck.
b. Envelops paychecks, pay-stubs, and notices of direct deposit and sends the envelopes to the appropriate departments for distribution.
c. Envelopes the direct deposit slips and sends them to the appropriate banks.
PAYROLL SYSTEM PROBLEMS
Dave Costner then read the employee complaints about the payroll system that Mark Segford had attached to his memorandum. In addition, Dave inspected the documentation manual closely to find payroll system features that seemed inefficient or that needed updating. He compiled the following list of potential payroll system problems:
1. There is duplicate data entry - data fields entered more than once to different files or forms. For example, time sheet data is entered separately to both the payroll transaction file and the cumulative payroll file.
2. Internal documents have to be transferred between multiple locations. For example, the time sheets start at the IS department, are sent to the payroll section, then are sent to the various departments, which then send the time sheets back to the payroll section. This constant movement of paper forms adds time to the overall process. In addition, multiple document "hand-offs" increase the threats of error, lost data, and fraud.
3. Payroll system files are independent instead of being consolidated into an integrated database. This creates the threat of the same fields being updated with different values in different files. There also is considerable data redundancy - the same field duplicated in different files.
4. The payroll system is geared towards permanent, full-time employees. The chief executive officer (CEO) of McKracklin had recently sent a memorandum to the divisions explaining that the company's long-term plans called for changing the ratio of permanent to contract employees from 8:2 to 6:4. The payroll system has to be modified to better reflect this strategic change.
5. The current payroll system used traditional calculations where overtime is defined as any hours worked per week in excess of 40. Recent legislation has defined overtime in the following manner:
a. Any hours worked in excess of eight per day would be subject to overtime, even if the employee did not exceed 40 hours worked that week.
b. Any hours worked in excess of 12 per day or 55 per week would qualify for double the normal pay rate.
6. The Commercial Products Division does quite a lot of project work. Personnel from different departments are assigned to a project manager for the duration of a project. These projects often are billed to clients on a cost-plus basis. Thus, there is a need for detailed tracing of all costs, including personnel hours. The current payroll system was implemented before this project orientation was initiated.
DAVE COSTNER'S OPTIONS
Dave Costner thought about his options regarding the payroll system. He identified several "strategic" options including the following:
1. Inform his division manager Paul Cronkey that his memorandum conflicted with the top-down designed IS Strategic Development Plan. He might seek support from other department managers to support this position.
2. Request reformation of the IS Strategic Plan committee for the purpose of revising the plan.
3. Abandon work on the higher priority projects and assign one of his senior analysts to the payroll system project.
Dave decided to list his "tactical" alternatives in case he chose (or was forced to choose) the payroll project option. He decided upon the following development alternatives:
1. Search for an easily modified, packaged program that could be used for payroll processing.
2. Reengineer the current system to make it more efficient, timely, and consistent with operational requirements.
3. Completely redesign the current payroll system either in a paper-driven or Web-driven format.
4. Outsource redesign of the payroll system to a systems integrator vendor.
5. Outsource payroll services to a local payroll vendor.
6. In conjunction with other alternatives, consider a point-of-sale (POS), electronic payroll system that would eliminate or minimize keystroke entry and physical forms movement.
Dave decided that he had better convene a department meeting of his key personnel so that they might help him make the correct decision.
SYSTEM TO BE DEVELOPED / STRATEGIC GOALSWireless Sales Initiation / Increase domestic sales
E-business Order Entry / Increase domestic sales
Increase export services
Research & Development Tracking / Increase domestic sales*
Increase export services*
Increase product quality*
Computer-aided Manufacturing / Decrease variable costs
Increase product quality
Raw Materials Inventory / Decrease variable costs
* Long-term pay-off
Figure 3.1 Top-5 IS Department Development Priorities
Department ID #
Department Name
Employee ID #
Social Security Number
Status (Active, Inactive)
Last Name
First Name
Middle Initial
Job Code
E-mail Address
Work Phone
Home Phone
Street Address
City
State
Zip Code
Figure 3.2 Employee Master File Fields
Employee ID #
Social Security Number
Last Name
First Name
Middle Initial
Job Code
Birth Date
Date Hired
Payment Code (Wage, Salary, or Commission)
Payment Rate
Deduction Code (IRA, 401K, Union Dues, Insurance, Other)
Deduction Amount
Tax Status (Single, Married)
Number of Exemptions
Overtime Code (Y/N)
Direct Deposit Code (Y/N)
Direct Deposit Bank Code
Direct Deposit Account Code
Vacation Accrual Rate
Sick Leave Accrual Rate
Vacation Days Accumulated
Sick Leave Days Accumulated
Figure 3.3 Payroll Master File Fields
Check #
Check Date
Employee ID #
Employee Social Security #
Employee Name
Employee Address
Payment Type (Wage, Salary, Commission)
Payment Rate
Hours Worked
Regular Pay
Overtime Pay
Total Gross Pay
Amount Federal Tax Withheld
Amount State Tax Withheld
FICA / Social Security Tax Withheld
Deduction Type
Deduction Amount
Check Amount
Figure 3.4 Payroll Transaction File Fields
Employee ID #
Employee Social Security #
Employee Name
Employee Address
YTD Gross Pay
YTD Federal Tax Withheld
YTD State Tax Withheld
YTD FICA / Social Security Withheld
YTD Deduction Type
YTD Deduction Amount
Figure 3.5 Cumulative Payroll File Fields
Time Sheet Number
Department Name
Department ID #
Employee ID #
Employee Name
Job Code
Date
Hours Worked
Vacation Hours
Sick Leave Hours
Supervisor Signature
Figure 3.6 Time Sheet Fields
ASSIGNMENTS
Forms Design:
1. Using established principles of forms design, create the time sheet as a paper form.
Documentation:
2. Construct the following data flow diagrams (DFDs) for the description of the current payroll system:
a. Context-level
b. 1st-level explosion
c. 2nd-level explosion of one of the processes in the 1st-level DFD
3. Construct a decision table that will reflect the overtime logic required for a new payroll system.
Databases:
4. Draw an REA diagram to describe the file structures shown in Figures 3.2 through 3.6.
5. Normalize the files shown in Figures 3.2 through 3.6.
6. Convert these files into Access tables. (You will have to make assumptions about field lengths and types.)
Internal Controls:
7. Describe the existing internal controls in the current payroll system. (Categorize these controls as Preventive, Detective, or Corrective.)