How do enterprise systems help businesses achieve operational excellence

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IIIP A R TKey System Applicationsfor the Digital Age 8 Achieving Operational Excellence

and Customer Intimacy: Enterprise Applications

9 E-Commerce: Digital Markets, Digital Goods

10 Improving Decision Making and Managing Knowledge

Part III examines the core information system applications busi- nesses are using today to improve operational excellence and deci-

sion making. These applications include enterprise systems; systems

for supply chain management, customer relationship management,

and knowledge management; e-commerce applications; decision-

support systems; and executive support systems. This part answers

questions such as these: How can enterprise applications improve

business performance? How do firms use e-commerce to extend the

reach of their businesses? How can systems improve decision mak-

ing and help companies make better use of their knowledge assets?

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S T U D E N T L E A R N I N G O B J E C T I V E S

After completing this chapter, you will be able to answer the following questions:

1. How do enterprise systems help businesses achieve operational excellence?

2. How do supply chain management systems coordinate planning, production, and logistics with suppliers?

3. How do customer relationship management systems help firms achieve customer intimacy?

4. What are the challenges posed by enterprise applications?

5. How are enterprise applications used in platforms for new cross-functional services?

Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 8C H A P T E R

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CHAPTER OUTLINE Chapter-Opening Case: Enterprise Applications Help

Severstal Create a Global Production Platform

8.1 Enterprise Systems

8.2 Supply Chain Management Systems

8.3 Customer Relationship Management Systems

8.4 Enterprise Applications: New Opportunities and Challenges

8.5 Hands-On MIS Projects

Business Problem-Solving Case: Border States Industries Fuels Rapid Growth with ERP

ENTERPRISE APPLICATIONS HELP SEVERSTAL CREATE A GLOBAL PRODUCTION PLATFORM

Severstal (“Northern Steel”) is one of Russia’s largest steelmakers. It operates primarily in Russia but maintains facilities in the Ukraine, Kazakhstan, the United Kingdom, France, Italy, the United States, and Africa. With more than 100,000 employ- ees worldwide and more than US $22.4 billion in revenue in 2008, it’s on its way to redefining global steel making.

Some U.S. firms have left the steel production market because it’s very capital- intensive. Severstal’s not worried about that. This company’s managers are convinced that they are at the helm of a global profitability leader in the steel and mining industry.

Severstal’s corporate strategy calls for providing high-margin value-added products in attractive niche markets worldwide while keeping costs low. The company is developing a global platform for best-practice sharing and competencies development. Severstal wants to leverage best practices and technologies across its global operations and improve efficiencies by locating mills closer to key automotive customers. In 2004, for example, Severstal North America purchased Rouge Industries in Dearborn

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272 Part III: Key System Applications for the Digital Age

Michigan, originally part of Henry Ford’s massive River Rouge manufacturing complex, to gain access to the U.S. market for automotive steel. Severstal North America (SNA) is now the fourth-largest integrated steel maker in the United States.

Most of Severstal’s customers have operations throughout the world and the want to be supplied with the same quality steel in North America, Europe, and Russia. Severstal’s strat- egy “is to create a global production platform that can supply high-quality steel to customers, wherever they are located,” says Sergei Kuznetsov, Severstal North America’s chief financial officer.

All these plans call for a flexible IT infrastructure that is agile enough to meet changing global business requirements and support efficient growth. SNA’s IT infrastructure was a hodgepodge of different systems, including Oracle PeopleSoft Enterprise for financials, Indus Enterprise PAC for purchasing and maintenance, and a variety of custom systems. Information was unable to flow freely across different functional areas.

Instead of upgrading its existing applications, SNA standardized on Oracle E-Business Suite 12, an enterprise applications suite that includes integrated modules for financials, purchasing, enterprise asset management, manufacturing, and order management. The applications in Oracle E-Business Suite are integrated, making it easier to access data from different functional areas for decision making while creating more efficient workflows and enhancing productivity. Instead of optimizing individual business processes, the company is able to optimize end-to-end processes. For example, SNA’s procure-to-pay processes are integrated with its purchasing system.

The new system also reduced the time required to close the company’s books from 10 days to 5 days or less, providing more timely and higher-quality information to the Severstal parent company in Russia. Oracle iSupplier Portal, Oracle iProcurement, and Oracle Sourcing include capabilities for electronic quoting and self-service applications, facilitat- ing communication and collaboration with SNA’s suppliers and business partners. As Severstal grows organically or through acquisitions, the Oracle software will help it integrate the new units on the same platform.

Sources: David A. Kelly, “Managing in a Global Economy: SeverStal,” Profit Magazine, February 2008; Anna V. Schevchenko, “Severstal Global Master Data Project,” October 15-16, 2008; and www.severstalna.com, accessed July 5, 2009.

Severstal’s efforts to create a global IT infrastructure identifies some of the issues that orga- nizations need to consider if they want to use global and enterprise-wide systems. In order to operate as a global business, the company had to have the right set of business processes and information systems in place. It needed to access company-wide information from all of its different global operating locations and business functions so that management could man- age the company as a single global entity.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. Severstal is trying to generate profits in a competitive and capital-intensive industry by providing products that can command higher prices in niche markets, but it still needs to keep its operating costs low. It adopted a global production model to meet this chal- lenge. Severstal could have upgraded its existing systems with newer technology, but these legacy information systems did not support global business processes and information flows. Instead, the company replaced them with a set of enterprise applications from Oracle. The new systems integrate disparate business functions and business processes and enable the company to create new cross-functional company-wide processes. The company is now able to respond flexibly to opportunities all over the world.

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8.1 Enterprise Systems

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 instanta- neously 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 different databases and systems, none of which could speak to one another? Imagine your company had 10 different major product lines, each produced in separate factories, and each with separate and incompatible sets of systems controlling production, warehousing, and distribution.

For example, Alcoa, the world’s leading producer of aluminum and aluminum products with operations spanning 41 countries and 500 locations, had initially been organized around lines of business, each of which had its own set of information systems. Many of these systems were redundant and inefficient. Alcoa’s costs for executing requisition-to-pay and financial processes were much higher and its cycle times were longer than those of other companies in its industry. (Cycle time refers to the total elapsed time from the beginning to the end of a process.) The company could not operate as a single worldwide entity.

In this situation, without integrated systems, your decision making would often be based on manual hard copy reports, often out of date, and it would be difficult to really understand what is happening in the business as 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.

Chapter 2 introduced enterprise systems, also known as enterprise resource planning (ERP) systems, which are based on a suite of integrated software modules and a common central database. The database collects data from many different divisions and departments in a firm, and from a large number of key business processes in manufacturing and produc- tion, finance and accounting, sales and marketing, and human resources, making the data available for applications that support nearly all of an organization’s internal businessIS

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274 Part III: Key System Applications for the Digital Age

activities. When new information is entered by one process, the information is made imme- diately available to other business processes (see Figure 8-1).

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 were 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 could tap into the system and find out where that particular order was at any minute. Management could obtain information at any point in time about how the business was operating. The system could also generate enterprise-wide data for management analyses of product cost and profitability.

ENTERPRISE SOFTWARE

Enterprise software is built around thousands of predefined business processes that reflect best practices. Table 8.1 describes some of the major business processes supported by enterprise software.

Companies implementing this software would have to first select the functions of the system they wished to use and then map their business processes to the predefined business processes in the software. (One of our Learning Tracks shows how SAP enterprise software handles the procurement process for a new piece of equipment.) To implement a new enter- prise system, Tasty Baking Company identified its existing business processes and then translated them into the business processes built into the SAP ERP software it had selected. A firm would use configuration tables provided by the software to tailor a particular aspect of the system to the way it does business. For example, the firm could use these tables to select whether it wants to track revenue by product line, geographical unit, or distribution channel.

If the enterprise software does not support the way the organization does business, companies can rewrite some of the software to support the way their business processes work. However, enterprise software is unusually complex, and extensive customization may degrade system performance, compromising the information and process integration that are the main benefits of the system. If companies want to reap the maximum benefits from

Figure 8-1 How Enterprise Systems Work Enterprise systems fea- ture a set of integrated software modules and a central database that enables data to be shared by many different business processes and functional areas through- out the enterprise.

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enterprise software, they must change the way they work to conform to the business processes in the software. To ensure it obtained these benefits, Tasty Baking Company deliberately planned for customizing less than 5 percent of the system and made very few changes to the SAP software itself. It used as many tools and features that were already built into the SAP software as it could. SAP has more than 3,000 configuration tables for its enter- prise software. Identifying the organization’s business processes to be included in the system and then mapping them to the processes in the enterprise software is often a major effort.

Major enterprise software vendors include SAP, Oracle (with its acquisition of PeopleSoft), and Infor Global Solutions. There are versions of enterprise software packages designed for small businesses and versions obtained through software service providers over the Web. Although initially designed to automate the firm’s internal “back-office” business processes, enterprise systems have become more externally oriented and capable of commu- nicating with customers, suppliers, and other organizations.

BUSINESS VALUE OF ENTERPRISE SYSTEMS

Enterprise systems provide value both by increasing operational efficiency and by providing firmwide information to help managers make better decisions. Large companies with many operating units in different locations have used enterprise systems to enforce standard practices and data so that everyone does business the same way worldwide.

Coca-Cola, for instance, implemented a SAP enterprise system to standardize and coordinate important business processes in 200 countries. Lack of standard, company-wide business processes prevented the company from leveraging its worldwide buying power to obtain lower prices for raw materials and from reacting rapidly to market changes. Severstal, described in the chapter-opening case, implemented its enterprise system to standardize global business processes for similar reasons.

Enterprise systems help firms respond rapidly to customer requests for information or products. Because the system integrates order, manufacturing, and delivery data, manufac- turing is better informed about producing only what customers have ordered, procuring exactly the right amount of components or raw materials to fill actual orders, staging production, and minimizing the time that components or finished products are in inventory.

After implementing enterprise software from Oracle, Alcoa eliminated many redundant processes and systems. The enterprise system helped Alcoa reduce requisition-to-pay cycle time (the total elapsed time from the time a purchase requisition is generated to the time the payment for the purchase is made) by verifying receipt of goods and automatically generat- ing receipts for payment. Alcoa’s accounts payable transaction processing dropped 89 percent. Alcoa was able to centralize financial and procurement activities, which helped the company reduce nearly 20 percent of its worldwide costs.

Financial and accounting processes, including general ledger, accounts payable, accounts receivable, fixed assets, cash management and forecasting, product-cost accounting, cost-center accounting, asset accounting, tax accounting, credit management, and financial reporting

Human resources processes, including personnel administration, time accounting, payroll, personnel planning and development, benefits accounting, applicant tracking, time management, compensation, workforce planning, performance management, and travel expense reporting

Manufacturing and production processes, including procurement, inventory management, purchasing, shipping, production planning, production scheduling, material requirements planning, quality control, distribution, transportation execution, and plant and equipment maintenance

Sales and marketing processes, including order processing, quotations, contracts, product configuration, pricing, billing, credit checking, incentive and commission management, and sales planning

TABLE 8.1

Business Processes Supported by Enterprise Systems

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Enterprise systems provide 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 for using data captured by the system to evalu- ate overall organizational performance. Enterprise system data have common standardized definitions and formats that are accepted by the entire organization. Performance figures mean the same thing across the company. Enterprise systems allow senior management to easily find out 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.

For example, Alcoa’s enterprise system includes functionality for global human resources management that shows correlations between investment in employee training and quality, measures the company-wide costs of delivering services to employees, and measures the effectiveness of employee recruitment, compensation, and training.

8.2 Supply Chain Management Systems

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 using a telephone and fax machine. But if you manage a firm that produces more complex products and services, then you will have hundreds of suppliers, and your suppliers will each have their own set of suppliers. Suddenly, you are in a situation where you will need to coordinate the activities of hundreds or even thousands of other firms in order to pro- duce your products and services. Supply chain management systems, which we introduced in Chapter 2, are an answer to these 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 trans- formed 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.

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 compo- nents 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.

Figure 8-2 provides a simplified illustration of Nike’s supply chain for sneakers; it 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.

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The upstream portion of the supply chain includes the company’s suppliers, the suppli- ers’ 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. Companies doing manufacturing, such as Nike’s contract suppliers of sneakers, also manage their own internal supply chain processes for transforming materials, components, and services furnished by their suppliers into finished products or intermediate products (components or parts) for their customers and for managing materi- als and inventory.

The supply chain illustrated in Figure 8-2 has been simplified. It only shows two contract manufacturers for sneakers and only the upstream supply chain for sneaker soles. 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 would actually comprise 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.

INFORMATION SYSTEMS AND SUPPLY CHAIN MANAGEMENT

Inefficiencies in the supply chain, such as parts shortages, underutilized 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.

Figure 8-2 Nike’s Supply Chain This figure illustrates the major entities in Nike’s supply chain and the flow of information upstream and downstream to coordinate the activities involved in buying, making, and moving a product. Shown here is a simplified supply chain, with the upstream portion focusing only on the suppliers for sneakers and sneaker soles.

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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 fore- seen—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 what 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 mem- bers 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, creating excess inventory, production, warehousing, and shipping costs (see Figure 8-3).

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Figure 8-3 The Bullwhip Effect Inaccurate information can cause minor fluctuations in demand for a product to be amplified as one moves further back in the supply chain. Minor fluctuations in retail sales for a product can create excess inventory for distributors, manufacturers, and suppliers.

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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 would spike 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. To eliminate this problem, P&G revised its marketing, sales, and supply chain processes and used more accurate demand forecasting.

The bullwhip is tamed by reducing uncertainties about demand and supply when all members of the supply chain have accurate and up-to-date information. 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, manufac- turing, and distribution plans. Supply chain management systems provide the kind of information that helps members of the supply chain make better purchasing and scheduling decisions. Table 8.2 describes how firms benefit from these systems.

SUPPLY CHAIN MANAGEMENT SOFTWARE

Supply chain software is classified as either software to help businesses plan their supply chains (supply chain planning) or software to help them execute the supply chain steps (supply chain execution). Supply chain planning systems enable the firm to model its existing supply chain, generate demand forecasts for products, and develop optimal sourcing and manufacturing plans. Such systems help companies make better decisions such as determining how much of a specific product to manufacture in a given time period; establishing inventory levels for raw materials, intermediate products, and finished goods; determining where to store finished goods; and identifying the transportation mode to use for product delivery.

For example, if a large customer places a larger order than usual or changes that order on short notice, it can have a widespread impact throughout the supply chain. Additional raw materials or a different mix of raw materials may need to be ordered from suppliers. Manufacturing may have to change job scheduling. A transportation carrier may have to reschedule deliveries. Supply chain planning software makes the necessary adjustments to production and distribution plans. Information about changes is shared among the relevant supply chain members so that their work can be coordinated. One of the most important— and complex—supply chain planning functions is demand planning, which determines how much product a business needs to make to satisfy all of its customers’ demands.

Whirlpool Corporation, which produces washing; machines, dryers, refrigerators, ovens, and other home appliances, uses supply chain planning systems to make sure what it produces matches customer demand. The company uses supply chain planning software

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Information from supply chain management systems helps firms

Decide when and what to produce, store, and move

Rapidly communicate orders

Track the status of orders

Check inventory availability and monitor inventory levels

Reduce inventory, transportation, and warehousing costs

Track shipments