Chapter 7 – Enterprise Applications

ENTERPRISE RESOURCE PLANNING SYSTEMS

7- 1 How do enterprise systems help businesses achieve operational excellence?

Around the globe, companies are increasingly becoming more connected, both internally and
with other companies. If you run a business, you’ll want to be able to react instantaneously when
a customer places a large order or when a shipment from a supplier is delayed. You may also
want to know the impact of these events on every part of the business and how the business is
performing at any point in time, especially if you’re running a large company. Enterprise systems
provide the integration to make this possible. Let’s look at how they work and what they can do
for the firm.

What are Enterprise Systems?

Imagine that you had to run a business based on information from tens or even hundreds of
databases and systems, none of which could speak to one another. Imagine your company had 10
major product lines, each produced in separate factories and each with separate and incompatible
sets of systems controlling production, warehousing, and distribution. At the very least, your
decision making would often be based on manual hard-copy reports, often out of date, and it
would be difficult to understand what is happening in the business as a whole. Sales personnel
might not be able to tell at the time they place an order whether the ordered items are in
inventory, and manufacturing could not easily use sales data to plan for new production. You
now have a good idea of why firms need a special enterprise system to integrate information.

Enterprise systems, also known as enterprise resource planning (ERP) systems, are based on a
suite of integrated software modules and a common central database. The database collects data
from many divisions and departments in a firm and from a large number of key business
processes in manufacturing and production, finance and accounting, sales and marketing, and
human resources, making the data available for applications that support nearly all of an
organization’s internal business activities. When new information is entered by one process, the
information is made immediately available to other business processes. If a sales representative
places an order for tire rims, for example, the system verifies the customer’s credit limit,
schedules the shipment, identifies the best shipping route, and reserves the necessary items from
inventory. If inventory stock is insufficient to fill the order, the system schedules the
manufacture of more rims, ordering the needed materials and components from suppliers.
Sales and production forecasts are immediately updated. General ledger and corporate cash
levels are automatically updated with the revenue and cost information from the order. Users can
tap into the system and find out where that particular order is at any minute. Management can
obtain information at any point in time about how the business was operating. The system can
also generate enterprise-wide data for management analyses of product cost and profitability.

Leading enterprise software vendors include SAP, Oracle, IBM, Infor Global Solutions, and
Microsoft. Versions of enterprise software packages are designed for small and medium-sized
businesses and on-demand software services running in the cloud.

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Business Value of Enterprise Systems
Enterprise systems provide value by both increasing operational efficiency and providing
firmwide information to help managers make better decisions.

Enterprise systems help firms respond rapidly to customer requests for information or products.
Because the system integrates order, manufacturing, and delivery data, manufacturing is better
informed about producing what customers have ordered, and procuring the right number of
components or raw materials to fill actual orders.

Enterprise systems provide much valuable information for improving management decision
making. Corporate headquarters has access to up-to the- minute data on sales, inventory, and
production and uses this information to create more accurate sales and production forecasts.
Enterprise software includes analytical tools to use data the system captures to evaluate overall
organizational performance. Enterprise systems allow senior management to find out easily at
any moment how a particular organizational unit is performing, determine which products are
most or least profitable, and calculate costs for the company as a whole.

SUPPLY CHAIN MANAGEMENT SYSTEMS

7- 2 How do supply chain management systems coordinate planning, production, and

logistics with suppliers?
If you manage a small firm that makes a few products or sells a few services, chances are you
will have a small number of suppliers. You could coordinate your supplier orders and deliveries
by using just a telephone and fax machine. But if you manage a firm that produces more complex
products and services, you will have hundreds of suppliers, and each of your suppliers will have
its own set of suppliers. Suddenly, you will need to coordinate the activities of hundreds or even
thousands of other firms to produce your products and services. Supply chain management
(SCM) systems are an answer to the problems of supply chain complexity and scale.

The Supply Chain

A firm’s supply chain is a network of
organizations and business processes for
procuring raw materials, transforming these
materials into intermediate and finished products,
and distributing the finished products to
customers. It links suppliers, manufacturing
plants, distribution centers, retail outlets, and
customers to supply goods and services from
source through consumption. Materials,
information, and payments flow through the
supply chain in both directions. Goods start out
as raw materials and, as they move through the supply chain, are transformed into intermediate
products (also referred to as components or parts) and, finally, into finished products. The
finished products are shipped to distribution centers and from there to retailers and customers.
Returned items flow in the reverse direction from the buyer back to the seller.

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Flows in the Supply Chain

There are typically three flows in the supply chain:

• material,
• information, and
• financial.
Primary product/material flows are the physical products, raw materials, supplies, and so forth
that flow along the chain. Material flows also include reverse flows. For example, damaged or
unwanted products can be returned.

Information flows consist of data related to demand, shipments, orders, returns, and schedules, as
well as changes in any of these data.

Finally, financial flows involve money transfers, payments, credit card information and
authorization, payment schedules, e-payments, and credit-related data.

Significantly, different supply chains have different numbers and types of flows. For instance, in
service industries there may be no physical flow of materials, but frequently there is a flow of
information, often in the form of documents (physical or electronic copies). For example, the
digitization of software, music, and other content can create a supply chain without any physical
flow. Notice, however, that in such a case, there are two types of information flows: one that
replaces materials flow (digitized software), and another that provides the supporting information
(orders, billing, and so on). To manage the supply chain, an organization must coordinate all of
the above flows among all of the parties involved in the chain.

The supply chain has three main parts:

1. Materials flow from suppliers and their “upstream” suppliers at all levels
2. Transformation of materials into finished products through the organization’s own
production process
3. Distribution of products to customers and their “downstream” customers at all levels

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Let’s look at the supply chain for Nike sneakers as an example. Nike designs, markets, and sells
sneakers, socks, athletic clothing, and accessories throughout the world. Its primary suppliers are
contract manufacturers with factories in China, Thailand, Indonesia, Brazil, and other countries.
These companies fashion Nike’s finished products. Nike’s contract suppliers do not manufacture
sneakers from scratch. They obtain components for the sneakers—the laces, eyelets, uppers, and
soles— from other suppliers and then assemble them into finished sneakers. These suppliers in
turn have their own suppliers. For example, the suppliers of soles have suppliers for synthetic
rubber, suppliers for chemicals used to melt the rubber for molding, and suppliers for the molds
into which to pour the rubber. Suppliers of laces have suppliers for their thread, for dyes, and for
the plastic lace tips.

The figure shows the flow of information and materials among suppliers, Nike, Nike’s
distributors, retailers, and customers. Nike’s contract manufacturers are its primary suppliers.
The suppliers of soles, eyelets, uppers, and laces are the secondary (Tier 2) suppliers. Suppliers
to these suppliers are the tertiary (Tier 3) suppliers.

The upstream portion of the supply chain includes the company’s suppliers, the suppliers’
suppliers, and the processes for managing relationships with them. The downstream portion
consists of the organizations and processes for distributing and delivering products to the final
customers.

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The supply chain illustrated in the figure has been simplified. It only shows two contract
manufacturers for sneakers. Nike has hundreds of contract manufacturers turning out finished
sneakers, socks, and athletic clothing, each with its own set of suppliers. The upstream portion of
Nike’s supply chain actually comprises thousands of entities. Nike also has numerous
distributors and many thousands of retail stores where its shoes are sold, so the downstream
portion of its supply chain is also large and complex.

Supply chains are a vital component of the overall strategies of many modern organizations. To
manage supply chains efficiently, a business must be tightly integrated with its suppliers,
business partners, distributors, and customers. A critical component of this integration is the use
of information systems to facilitate the exchange of information among the participants in the
supply chain.

Problems along the Supply chain

Inefficiencies in the supply chain, such as parts shortages, underused plant capacity, excessive
finished goods inventory, or high transportation costs, are caused by inaccurate or untimely
information. For example, manufacturers may keep too many parts in inventory because they do
not know exactly when they will receive their next shipments from their suppliers. Suppliers may
order too few raw materials because they do not have precise information on demand. These
supply chain inefficiencies waste as much as 25 percent of a company’s operating costs. If a
manufacturer had perfect information about exactly how many units of product customers
wanted, when they wanted them, and when they could be produced, it would be possible to
implement a highly efficient just-in-time strategy. Components would arrive exactly at the
moment they were needed, and finished goods would be shipped as they left the assembly line.

In a supply chain, however, uncertainties arise because many events cannot be foreseen—
uncertain product demand, late shipments from suppliers, defective parts or raw materials, or
production process breakdowns. To satisfy customers, manufacturers often deal with such
uncertainties and unforeseen events by keeping more material or products in inventory than they
think they may actually need. The safety stock acts as a buffer for the lack of flexibility in the
supply chain. Although excess inventory is expensive, low fill rates are also costly because
business may be lost from canceled orders.

One recurring problem in supply chain management is the bullwhip effect, in which information
about the demand for a product gets distorted as it passes from one entity to the next across the
supply chain. A slight rise in demand for an item might cause different members in the supply
chain—distributors, manufacturers, suppliers, secondary suppliers (suppliers’ suppliers), and
tertiary suppliers (suppliers’ suppliers’ suppliers)—to stockpile inventory so each has enough
just in case. These changes ripple throughout the supply chain, magnifying what started out as a
small change from planned orders and creating excess inventory, production, warehousing, and
shipping costs (see Figure 9. 3). Therefore, a small fluctuation in demand from customers results
in a highly magnified demand through the supply chain. It is called the ‘bull whip effect’ because
a slight movement at the handle of a whip causes a magnified effect at the tip of the whip, thus
depicting the effect of the Bullwhip concept.

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Due to the bullwhip effect, every component in the supply chain feels that it is equipped to
handle fluctuating demands. In reality, the inventory keeps increasing at each stage of the supply
chain. This causes increased inventory costs. Similarly, if demands fall, inventory required also
falls and the fall in demand gets amplified as the information travels upstream. A major
consequence of ineffective supply chains is poor customer service. In some cases, supply chains
do not deliver products or services when and where customers—either individuals or
businesses—need them. Other problems associated with supply chain friction are high
inventory costs and revenue loss.

Source: http://www.mbaskool.com/business-articles/operations/7669-the-bullwhip-effect-in-supply-chain.html

For example, Procter & Gamble (P&G) found it had excessively high inventories of its Pampers
disposable diapers at various points along its supply chain because of such distorted information.
Although customer purchases in stores were fairly stable, orders from distributors spiked when
P&G offered aggressive price promotions. Pampers and Pampers’ components accumulated in
warehouses along the supply chain to meet demand that did not actually exist, creating
production and inventory problems for P&G. An investigation revealed that distributors’ orders
were fluctuating because of poor demand forecast and lack of coordination and trust among the
supply chain partners. If each entity along the supply chain makes ordering and inventory
decisions with an eye to its own interests (fear of product outages so each has enough “just in
case.”) above those of the chain, stockpiling of inventory may occur.

Solving Supply chain problems

Successful coordination enables materials and goods to move smoothly and on time from
suppliers to manufacturers to customers, which enables firms to keep inventories low and costs
down.

A solution to improving demand forecasts is sharing information along the supply chain. If all
supply chain members share dynamic information about inventory levels, schedules, forecasts,
and shipments, they have more precise knowledge about how to adjust their sourcing,

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manufacturing, and distribution plans and can improve their demand forecasts. The bullwhip
effect is tamed by reducing uncertainties about demand and supply when all members of the
supply chain have accurate and up-to-date information. Companies use supply chain
management software that allows this sharing of information enabling firms to achieve optimal
inventory levels.

Sharing information between the partners of the supply chain improves supply chain visibility
and improves trust and collaboration among supply chain partners. Supply chain visibility is the
ability to view all relevant data up and down the supply chain. Companies that operate superior
supply chains have deep visibility into purchases, inventory, workforces, transportation
networks, warehouses, and partner operations.

To make a supply chain work most effectively, organizations must create visibility in real time.
Organizations must know about customer events triggered downstream, but so must their
suppliers and their suppliers’ suppliers. Without this information, partners throughout the supply
chain can experience a bullwhip effect, in which disruptions intensify throughout the chain.
With deep and clear supply chain visibility, a business is positioned to respond quickly to
unplanned, potentially disruptive events such as production bottlenecks on the supply side and
order changes on the demand side. Organizations can use technology tools that help them
integrate upstream and downstream, with both customers and suppliers.

Example: Information sharing between two giants.

One of the most notable examples of information sharing is between Procter and Gamble (P&G)
and Wal-Mart. Wal-Mart provides P&G access to sales information about every P&G product
that Wal-Mart sells. The information is collected electronically by P&G on a daily basis, from
every
Wal-Mart store. This enables P&G to manage the inventory replenishment for Walmart’s stores.
By monitoring inventory levels, P&G knows when inventories fall below the threshold for each
product at any Walmart store. These data trigger an immediate shipment. This way, P&G is able
to manage the inventory replenishment for Wal-Mart. All this is done electronically. The benefit
for P&G is accurate demand information. P&G has similar agreements with other major retailers.
Thus, P&G can plan production more accurately, avoiding some of the problem of the bullwhip
effect.

Information sharing between Walmart and P&G is executed automatically. It is part of a vendor-
managed inventory strategy. Vendor-managed inventory (VMI) occurs when the supplier,
rather than the retailer, manages the entire inventory process for a particular product or group of
products. Significantly, P&G has similar agreements with other major retailers. The benefit for
P&G is accurate and timely information on consumer demand for its products. Thus, P&G can
plan production more accurately, minimizing the bullwhip effect.

Supply chain management (SCM) is a formal term for managing the physical and information
flow of materials and finished goods in a supply chain. It includes many tasks such as sourcing,
purchasing, payment flow, materials handling, production planning and control, warehousing,

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inventory control, and distribution and delivery. It involves planning, organizing, and optimizing
all the supply chain’s activities.

SCM systems use information technology to create a cross functional inter-enterprise (involving
more than one organization) system called SCM information systems. These systems integrate
the business processes of suppliers, purchasing firms, distributors, and custom logistics in order
to improve the efficiency and effectiveness of manufacturing and distribution. They automate the
flow of information between a company and its supply chain partners to optimize the sourcing
and procurement, manufacturing, and delivery of products or services.

CUSTOMER RELATIONSHIP MANAGEMENT SYSTEMS

7- 3 How do customer relationship management systems help firms achieve customer

intimacy?
Because competitive advantage based on an innovative new product or service is often very short
lived, companies are realizing that their most enduring competitive strength may be their
relationships with their customers.

What is Customer Relationship Management (CRM)?

In a small business operating in a neighborhood, it is possible for business owners and managers
to know their customers well on a personal, face-to-face basis, but in a large business operating
on a metropolitan, regional, national, or even global basis, it is impossible to know your
customer in this intimate way. In these kinds of businesses, there are too many customers and too
many ways that customers interact with the firm (over the web, the phone, e-mail, blogs, and in
person). It becomes especially difficult to integrate information from all these sources and deal
with the large number of customers. Successful companies build their business around the
customer. They know who their most valuable customers are and understand their needs and
buying habits. They target and tailor their offerings and personalize their interactions with their
customers.

A large business’s processes for sales, service, and marketing tend to be highly
compartmentalized, and these departments do not share much essential customer information.
There is no provision for consolidating all the customer-related information in order to provide a
unified view of a customer to the organization and to its employees who need to interact with the
customers. In this traditional business environment, there is no convenient way to consolidate all
this information to provide a unified view of a customer across the company. This is where
customer relationship management systems help.

The CRM approach is designed to understand the needs of customers and maintain long term
customer relationships that create value for the company as well as for the customer. CRM is a
means of managing all aspects of a customer’s relationship with an organization to increase
customer loyalty and retention and an organization’s profitability.

CRM systems capture and integrate customer data from all over the organization, consolidate the
data, analyze the data, and then distribute the results to various systems and customer touch

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points across the enterprise. A touch point (also known as a contact point) is a method of
interaction with the customer, such as telephone, e-mail, customer service desk, conventional
mail, Facebook, Twitter, website, wireless device, or retail store. This consolidated info is stored
in a common customer database and provide a single enterprise view of customers that is useful
for improving both sales and customer service. The CRM approach is enabled by information
technology.

Good CRM systems provide data and analytical tools for answering questions such as these:
“What is the value of a particular customer to the firm over his or her lifetime?” “Who are our
most loyal customers?” (It can cost six times more to sell to a new customer than to an existing
customer.) “Who are our most profitable customers?” and “What do these profitable customers
want to buy?” Firms use the answers to these questions to acquire new customers, provide better
service and support to existing customers, customize their offerings more precisely to customer
preferences, and provide ongoing value to retain profitable customers.

Operational and Analytical CRMs

An organization’s CRM system contains applications that support either the operational or
analytical aspects of customer relationship management.

Operational CRM systems contain applications that support front-office business processes.
Front-office processes are those that directly interact with customers; that is, sales, marketing,
and customer service. They are also known as customer facing processes. The term electronic
CRM (or e-CRM) appeared in the mid-1990s, when organizations began using the Internet, the
Web, and other electronic touch points to manage customer relationships. E-CRM applications
include search and comparison capabilities, technical and other information and services,
customized products and services, personalized Web pages, FAQs, e-mail and automated
response. Customers interact directly with these technologies and applications rather than
interacting with a company representative as is the case with customer-facing applications.
Using these e-CRM applications, also known as customer touching applications, customers
typically are able to help themselves.

Operational CRMs capture and integrate customer data from across the organization. They
provide a 360-degree view (complete data) of each customer allowing sales and service
employees to access a complete history of customer interaction with the organization, regardless
of the touch point. They can thus support efficient and personalized marketing, sales and service.

Analytical CRM analyze customer data generated by operational CRM applications in order to
provide information for improving business performance. Analytical CRM applications are
based on data from operational CRM systems and other sources that have been organized in data
warehouses for use with online analytical processing (OLAP), data mining, and other business
intelligence techniques. Such data are analyzed to identify buying patterns, to create segments
for targeted marketing, and to pinpoint profitable and unprofitable customers.

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7- 4 What are the challenges that enterprise applications pose, and how are enterprise
applications taking advantage of new technologies?
Many firms have implemented enterprise systems and systems for supply chain and customer
relationship management because they are such powerful instruments for achieving operational
excellence and enhancing decision making. But precisely because they are so powerful in
changing the way the organization works, they are challenging to implement. Let’s briefly
examine some of these challenges as well as new ways of obtaining value from these systems.

Enterprise Application Challenges

Promises of dramatic reductions in inventory costs, order-to-delivery time, more efficient
customer response, and higher product and customer profitability make enterprise systems and
systems for SCM and CRM very alluring. But to obtain this value, you must clearly understand
how your business has to change to use these systems effectively.

Enterprise applications involve complex pieces of software that are very expensive to purchase
and implement. It might take a large Fortune 500 company several years to complete a large-
scale implementation of an enterprise system or a system for SCM or CRM. According to a 2015
survey of 562 companies conducted by Panorama Consulting Solutions, the average cost of an
ERP project was $6.1 million. Projects took an average of 15.7 months to complete, and 53% of
the projects delivered 50% or less of the expected benefits. Approximately 58% of these projects
exceeded their planned budgets, and 65% experienced schedule overruns. Changes in project
scope and additional customization work add to implementation delays and costs.

Enterprise applications require not only deep-seated technological changes but also fundamental
changes in the way the business operates. Companies must make sweeping changes to their
business processes to work with the software. Employees must accept new job functions and
responsibilities. They must learn how to perform a new set of work activities and understand
how the information they enter into the system can affect other parts of the company. This
requires new organizational learning and should also be factored into ERP implementation costs.
SCM systems require multiple organizations to share information and business processes. Each
participant in the system may have to change some of its processes and the way it uses
information to create a system that best serves the supply chain as a whole. Some firms
experienced enormous operating problems and losses when they first implemented enterprise
applications because they didn’t understand how much organizational change was required.

Enterprise applications also introduce switching costs. When you adopt an enterprise application
from a single vendor, such as SAP, Oracle, or others, it is very costly to switch vendors, and your
firm becomes dependent on the vendor to upgrade its product and maintain your installation.

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