Chapter 10 The REA Approach to Business Process Modeling

1. Chapter 10The REA Approach to Business Process Modeling

2. Objectives for Chapter 10 Recognize the economic foundations of the resources, events, and agents (REA) model. Understand the key differences between traditional entity relationship modeling and REA modeling. Understand the structure of an REA diagram. Be able to create an REA diagram by applying the view modeling steps to a business case. Be able to create an entity-wide REA diagram by applying the view integration steps to a business case.

3. Traditional Approaches:User-View Orientation • When data-modeling and IS design is too oriented toward the user’s views, problems arise: • multiple information systems • duplication of data • restricted user-view leads to poor decision-making • inability to support change

4. Resources, Events, and Agents Model • REA is an approach to database design meant to overcome problems with traditional approaches: • formalized data modeling and design of IS • use of centralized database • use of relational database structure • collects detailed financial and non-financial data • supports accounting and non-accounting analysis • supports multiple user views • supports enterprise-wide planning

5. Resources, Events, and Agents Model • REA models consists of three entity types and the associations linking them. • Resources • Events • Agents

6. Resources in the REA Model • Resources – the ‘assets’ of the company • things of economic value • objects of economic exchanges able to generate revenue • objects that are scarce and under the control of the organization • can be tangible or intangible • Does not include some traditional accounting assets: • artifacts that can be generated from other primary data • for example, accounts receivables

7. Events in the REA Model • Events are phenomena that effect changes in resources. • a source of detailed data in the REA approach to databases • Events fall into two groups: • Economic – increases or decreases resources • Support – control, planning, and other management activities; but do not directly affect resources

8. Agents in the REA Model • Agents can be individuals or departments. • Participate in events • Affect resources • Have discretionary power to use or dispose of resources • Can be inside or outside the organization • Clerks • Production workers • Customers • Suppliers, vendors • Departments, teams

9. Participates External Economic Agent Stock Flow Economic EconomicEvent Resource Internal Economic Duality Participates Agent Basic REA Model Figure 10-1

10. Resources, Events, and Agents Model • Another key feature of the REA model is economic duality. • Events occur in pairs • Represent the give event and receive event of an economic exchange

11. External Agent Participates Out Flow Give Economic Resource A Event Internal Agent Duality Internal Agent Inflow Receive Economic Resource B Event External Agent REA Model showing Duality of a Give and Receive Exchange Participates Give Activity Receive Activity Participates Participates Figure 10-2

12. ER Diagrams (ERD’s) versus REA Diagrams (READ’s) • Classes of entities • ERD’s – one class • READ’s – three classes (resources, events, and agents) • Arrangement of entities • ERD’s – determined by cardinality and readability • READ’s – organized into constellations by class • Sequencing of events • ERD’s – static • READ’s – chronological sequence of business processes • Naming conventions • ERD’s – all nouns • READ’s – nouns (R’s and A’s) and verbs (E’s)

13. View Modeling: Creating an Individual REA Diagram • View modeling is a multistep process for creating an individual REA model. • The result is a single view of the entire database. • The four steps involved are: • Identify the event entities to be modeled. • Identify the resource entities changed by events. • Identify the agent entities participating in events. • Determine associations and cardinalities between entities.

14. Step 1: Identify the Event Entities • Identify the events that are to be included in the model. • Include at least two economic events (duality) • May include support events • Arrange events in chronological sequence • Focus on value chain events. • Do not include invalid events such as: • bookkeeping tasks • accounting artifacts, e.g., accounts receivable

15. Verify Availability Take Order ShipProduct Receive Cash Arrangement of Events Entities in Order of Occurrence Events Order of Events Figure 10-5

16. Step 2. Identify the Resource Entities • Identify the resources impacted by events identified in step 1. • Each event must be linked to at least one resource. • Economic events directly affect resources. • Support events indirectly affect them.

17. Step 3. Identify the Agent Entities • Each economic event entity in an REA diagram is associated with at least two agent entities. • One internal agent • One external agent • It is possible to have only an internal agent when no exchange occurs, as with certain ‘internal’ manufacturing processes.

18. REA Model Showing Events and Related Resources and Agents Figure 10-6

19. Step 4. Determine Associations and Cardinalities between Entities • Association – reflects the nature of the relationship between two entities • Represented by the labeled line connecting the entities • Cardinality – the degree of association between the entities • Describes the number of possible occurrences in one entity that are associated with a single occurrence in a related entity • Cardinality reflects the business rules that are in play for a particular organization. • Sometimes the rules are obvious and are the same for all organizations. • Sometimes the rules differ, e.g., whether inventory items are tracked individually or as quantity on hand.

20. Associations and Cardinality in REA Diagram Figure 10-8

21. Many-to-Many Associations • Many-to-many (M:M) associations cannot be directly implemented into relational databases. • They require the creation of a new linking table. • This process splits the M:M association into two 1:M associations. • The linking table requires a ‘composite primary key’.

22. Link Tables in an REA Diagram Figure 10-9

23. View Integration: Creating an Enterprise-Wide REA Model • View integration – combining several individual REA diagrams into a single enterprise-wide model • The three steps involved in view integration are: • Consolidate the individual models. • Define primary keys, foreign keys, and attributes. • Construct physical database and produce user views.

24. Step 1. Consolidate the Individual Models • Merging multiple REA models requires first a thorough understanding of the business processes and entities involved in the models. • Individual models are consolidated or linked together based on shared entities. • For example, procurement (expenditures) and sales (revenue) both use inventory and cash resource entities.

25. Integrated REA Diagram Figure 10-12

26. Step 2. Define Primary Keys, Foreign Keys, and Attributes • Implementation into a working relational database requires primary keys, foreign keys and attributes in tables. • Primary key – uniquely identifies an instance of an entity (i.e., each row in the table) • Foreign key – the primary key embedded in the related table so that the two tables can be linked • Attribute – a characteristic of the entity to be recorded in the table

27. Rules for Foreign Keys • Primary key  Foreign key: Relations are formed by an attribute that is common to both tables in the relation. • Assignment of foreign keys: • if 1 to 1 (1:1) association, either of the table’s primary key may be the foreign key • if 1 to many (1:m) association, the primary key on one of the sides is embedded as the foreign key on the other side • if many to many (m:m) association, create a separate linking table with a composite primary key

28. Attributes Using the customer as an example, these data include: Financial Customer name Customer address Customer telephone number Amount owed by customer Value of total sales to date Terms of trade offered Nonfinancial Customer credit rating Damaged goods record On-time payment record Customer volume record EDI access Internet access

29. Step 3. Construct Physical Database and Produce User Views • The database designer is now ready to create the physical relational tables using software. • Once the tables have been constructed, some of them must be populated with data. • Resource and Agent tables • Event tables must wait for business transactions to occur before data can be entered. • The resulting database should support the information needs of all users. • SQL is used to generate reports, computer screens, and documents for users.

30. User-Views User-View #1 User-View #2 REA Database Sales Report Past Due Accounts Name Amount James $500.00 Henry $100.00 … …

31. Value Chain Analysis • Competitive advantages from the REA approach can be see via value chain analysis. • Value chain analysis distinguishes between primary activities (create value) and support activities (assist performing primary activities). • REA provides a model for identifying and differentiating between these activities. • Prioritizing Strategy: Focus on primary activities; eliminate or outsource support activities.

32. Competitive Advantages of theREA Model • Using REA can lead to more efficient operations. • Helps managers identify non-value added activities that can be eliminated • Increasing productivityvia elimination of non-value added activities generates excess capacity • Storing both financial and nonfinancial data in the same central database reduces multiple data collection, data storage, and maintenance.

33. Competitive Advantages of the REA Model • Using REA can lead to more efficient operations. • Detailed financial and nonfinancial business data supports a wider range of management decisions • supporting multiple user views (e.g., different perspectives on a problem) • Provides managers with more relevant, timely, and accurate information. • leading to better customer service, higher-quality products, and flexible production processes