Identify the three technologies that are reinventing the supply chain

8 CHAPTER

Enterprise Applications: Business Communications

CHAPTER OUTLINE

SECTION 8.1 Supply Chain Management

SECTION 8.2 Customer Relationship Management and Enterprise Resource Planning

Building a Connected Corporation Through Integrations

Supply Chain Management

Technologies Reinventing the Supply Chain

Customer Relationship Management

The Benefits of CRM

Enterprise Resource Planning

Organizational Integration with ERP

What’s in IT for me?

This chapter introduces high-profile strategic initiatives an organization can undertake to help it gain competitive advantages and business efficiencies—supply chain management, customer relationship management, and enterprise resource planning. At the simplest level, organizations implement enterprise systems to gain efficiency in business processes, effectiveness in supply chains, and an overall understanding of customer needs and behaviors. Successful organizations recognize the competitive advantage of maintaining healthy relationships with employees, customers, suppliers, and partners. Doing so has a direct and positive effect on revenue and greatly adds to a company’s profitability.

You, as a business student, must understand the critical relationship your business will have with its employees, customers, suppliers, and partners. You must also understand how to analyze your organizational data to ensure that you are not just meeting but exceeding expectations. Enterprises are technologically empowered as never before to reach their goals of integrating, analyzing, and making intelligent business decisions.

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opening case study

Dream It, Design It, 3D Print It

Have you ever lost a beloved pet? No worries, just draw a picture of your pet and print a plastic replica from your 3D desktop printer so your cat or dog can sit on your desk forever. Can you imagine printing your drawing in 3D? Well, there is no need to imagine this because you can do it today for as little as $300. Just think of all the problems you can solve by having your own 3D printer. Did you recently lose the key to your car’s roof rack? No worries, just download the specifications and print one. Did you forgot your girlfriend’s birthday? No worries, just download and customize a silver bracelet with her initials and in less than 30 minutes, you’ll have the beautiful custom piece of jewelry on her wrist—without ever leaving your apartment.

Welcome to the wonderful world of 3D printing. For almost 30 years, 3D printing has been used by large manufacturing companies to create everything from custom parts to working prototypes. The medical industry uses 3D printing to create custom hearing aids, artificial limbs, and braces, and art designers and architects use 3D printers to create models and prototypes of statues and buildings. Traditionally, 3D printing was only available to large corporations and engineers who could code the intricate devices. Today, the first generation of consumer 3D printers are hitting the market at affordable prices with software easy enough for children to use.

The disruption occurring in the 3D printing world can of course be attributed to Moore’s law as the technology has increased in capacity and processing power while decreasing in size and costs. Now you can purchase your own 3D printer for as little as $300 to $5,000; simply connect it to your Wi-Fi network and begin downloading files to create your own 3D objects. Current 3D printers offer a wide range of colors and materials, including plastics, metal, glass, and even chocolate. That’s right—you can custom print your own valentine chocolates! The only barrier to 3D printing is that the software used to control the printer is still rather difficult for the average person to use, but you can expect that to change because software makers, such as Autodesk, are quickly releasing new, user-friendly applications. Autodesk just released 123D, a suite of free applications that enables ordinary people to design and customize objects on their PCs or even their iPads and then send them to a 3D printer.

3D printers work by first creating a digital computer aided design (CAD) file, produced with a 3D modeling program or scanned into a 3D modeling program with a 3D scanner. To get from this digital file to instructions that the 3D printer understands, software then slices the design into hundreds or thousands of horizontal layers. Typically, the 3D printer uses either a fused deposition modeling printer, which applies the tiny layers of material, or a laser sintering process by which a laser fuses the material together. Names like 3DSystems, Afinia, and MakerBot produce 3D printers for just a few thousand dollars for consumers and small businesses alike. Figure 8.1 represents a few of the best 3D printed objects according to PC Magazine and Wired. 1

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FIGURE 8.1

3D Printed Objects

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section 8.1

Supply Chain Management

LEARNING OUTCOMES

8.1Explain integrations and the role they play in connecting a corporation.

8.2Describe supply chain management along with its impact on business.

8.3Identify the three technologies that are reinventing the supply chain.

BUILDING A CONNECTED CORPORATION THROUGH INTEGRATIONS

LO 8.1: Explain integrations and the role they play in connecting a corporation.

Until the 1990s, each department in the United Kingdom’s Ministry of Defense and Army headquarters had its own information system, and each system had its own database. Sharing information was difficult, requiring employees to input the same information manually into different systems multiple times. Often, management could not even compile the information it needed to answer questions, solve problems, and make decisions.

To combat this challenge, the ministry integrated its systems, or built connections among its many databases. These connections, or integrations , allow separate systems to communicate directly with each other, eliminating the need for manual entry into multiple systems. Building integrations allows information sharing across databases along with dramatic increases in quality. The army can now generate reports detailing its state of readiness and other essential intelligence, tasks that were nearly impossible before the integrations. Eintegration is the use of the Internet to provide customers with the ability to gain personalized information by querying corporate databases and their information sources. Application integration is the integration of a company’s existing management information systems. Data integration is the integration of data from multiple sources, which provides a unified view of all data.

Two common methods are used for integrating databases. The first is to create forward and backward integrations that link processes (and their underlying databases) in the value chain. A forward integration sends information entered into a given system automatically to all downstream systems and processes. A backward integration sends information entered into a given system automatically to all upstream systems and processes. Figure 8.2 demonstrates how this method works across the systems or processes of sales, order entry, order fulfillment, and billing. In the order entry system, for example, an employee can update the customer’s information. Via the integrations, that information is sent upstream to the sales system and downstream to the order fulfillment and billing systems. Ideally, an organization wants to build both forward and backward integrations, which provide the flexibility to create, update, and delete information in any of the systems. However, integrations are expensive and difficult to build and maintain, causing most organizations to invest in forward integrations only.

FIGURE 8.2

A Forward and Backward Customer Information Integration Example

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FIGURE 8.3

Integrating Customer Information Among Databases

The second integration method builds a central repository for a particular type of information. Figure 8.3 provides an example of customer information integrated using this method across four systems in an organization. Users can create, update, and delete customer information only in the central customer database. As users perform these tasks, integrations automatically send the new and/or updated customer information to the other systems. The other systems limit users to read-only access of the customer information stored in them. Neither integration method entirely eliminates information redundancy, but both do ensure information consistency among multiple systems.

Integration Tools

Enterprise systems provide enterprisewide support and data access for a firm’s operations and business processes. These systems can manage customer information across the enterprise, letting you view everything your customer has experienced from sales to support. Enterprise systems are often available as a generic, but highly customizable, group of programs for business functions such as accounting, manufacturing, and marketing. Generally, the development tools for customization are complex programming tools that require specialist capabilities.

Enterprise application integration (EAI) connects the plans, methods, and tools aimed at integrating separate enterprise systems. A legacy system is a current or existing system that will become the base for upgrading or integrating with a new system. EAI reviews how legacy systems fit into the new shape of the firm’s business processes and devises ways to reuse what already exists efficiently while adding new systems and data.

Integrations are achieved using middleware —several types of software that sit between and provide connectivity for two or more software applications. Middleware translates information between disparate systems. Enterprise application integration (EAI) middleware takes a new approach to middleware by packaging commonly used applications together, reducing the time needed to integrate applications from multiple vendors. The remainder of this chapter covers the three enterprise systems most organizations use to integrate their disparate departments and separate operational systems: supply chain management (SCM), customer relationship management, and enterprise resource planning (see Figure 8.4 ).

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FIGURE 8.4

The Three Primary Enterprise Systems

SUPPLY CHAIN MANAGEMENT

LO 8.2: Describe supply chain management along with its impact on business.

The average company spends nearly half of every dollar it earns on suppliers and raw materials to manufacture products. It is not uncommon to hear of critical success factors focusing on getting the right products to the right place at the right time at the right cost. For this reason, tools that can help a company source raw materials, manufacture products, and deliver finished goods to retailers and customers are in high demand. A supply chain consists of all parties involved, directly or indirectly, in obtaining raw materials or a product. Figure 8.5 highlights the five basic supply chain activities a company undertakes to manufacture and distribute products. To automate and enable sophisticated decision making in these critical areas, companies are turning to systems that provide demand forecasting, inventory control, and information flows between suppliers and customers.

Supply chain management (SCM) is the management of information flows between and among activities in a supply chain to maximize total supply chain effectiveness and corporate profitability. In the past, manufacturing efforts focused primarily on quality improvement efforts within the company; today these efforts reach across the entire supply chain, including customers, customers’ customers, suppliers, and suppliers’ suppliers. Today’s supply chain is an intricate network of business partners linked through communication channels and relationships. Supply chain management systems manage and enhance these relationships with the primary goal of creating a fast, efficient, and low-cost network of business relationships that take products from concept to market. SCM systems create the integrations or tight process and information linkages between all participants in the supply chain. Supply chain management performs three main business processes (see Figure 8.6 ):

1.Materials flow from suppliers and their upstream suppliers at all levels.

2.Materials are transformed into semifinished and finished products—the organization’s own production processes.

3.Products are distributed to customers and their downstream customers at all levels.

Consider a customer purchasing a mountain bike from a dealer. Dozens of steps are required to complete this transaction from beginning to end. The customer places an order with the dealer. The dealer purchases the bike from the manufacturer. The manufacturer purchases the raw materials required to make the bike such as aluminum, rubber tires, brakes, accessories, and packaging from different suppliers. The raw materials are stored in the manufacturer’s warehouse until a production order requires the bike to be built, at which time the finished product is sent to the dealer or, in some cases, directly to the customer. The supply chain for a bike manufacturer includes all processes and people required to fulfill the customer’s order (see Figure 8.7 ).

Walmart and Procter & Gamble (P&G) have implemented a successful SCM system that links Walmart’s distribution centers directly to P&G’s manufacturing centers (see Figure 8.8 ). The customer generates order information by purchasing a product from Walmart. Walmart supplies the order information to its warehouse or distributor. The warehouse or distributor transfers the order information to P&G, which provides pricing and availability information to the store and replenishes the product to the distributor. Payment is transferred electronically. Effective and efficient supply chain management systems can enable an organization to have these impacts on Porter’s Five Forces Model 3 :

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FIGURE 8.5

The Five Basic Supply Chain Activities

Decrease the power of its buyers.

Increase its supplier power.

Increase buyers’ switching costs to reduce the threat of substitute products or services.

Create entry barriers to reduce the threat of new entrants.

Increase efficiencies while seeking a competitive advantage through cost leadership (see Figure 8.9 ).

Supply chain management systems can increase profitability across an organization. For example, a manufacturing plant manager might focus on keeping the inventory of Product A as low as possible, which will directly reduce the manufacturing costs and make the plant manager look great. However, the plant manager and the business might not realize that these savings are causing increased costs in other areas, such as having to pay more to procure raw materials for immediate production needs or increasing costs due to expedited shipping services. Only an end-to-end view or an integrated supply chain would uncover these issues, allowing a firm to adjust business strategies to increase profitability across the enterprise.

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FIGURE 8.6

A Typical Supply Chain

The supply chain is only as strong as its weakest link. Companies use supply chain management metrics to measure the performance of supply chains to identify weak links quickly. A few of the common supply chain management metrics include:

Back order: An unfilled customer order for a product that is out of stock.

Inventory cycle time: The time it takes to manufacture a product and deliver it to the retailer.

Customer order cycle time: The agreed upon time between the purchase of a product and the delivery of the product.

Inventory turnover: The frequency of inventory replacement.

Visibility into the Supply Chain

Supply chain visibility is the ability to view all areas up and down the supply chain in real time. To react to demand, an organization needs to know all customer events triggered upstream and downstream and so must their suppliers and their suppliers’ suppliers. Without this information, supply chain participants are blind to the supply and demand needs occurring in the marketplace, a factor required to implement successful business strategies. To improve visibility across the supply chain, firms can use supply chain planning systems and supply chain execution systems. Supply chain planning systems use advanced mathematical algorithms to improve the flow and efficiency of the supply chain while reducing inventory. To yield accurate results, however, supply chain planning systems require information inputs that are correct and up to date regarding customers, orders, sales, manufacturing, and distribution capabilities.

FIGURE 8.7

Supply Chain for a Bike Manufacturer

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FIGURE 8.8

Supply Chain for a Product Purchased from Walmart

Ideally, the supply chain consists of multiple firms that function as efficiently and effectively as a single firm, with full information visibility. Supply chain execution systems ensure supply chain cohesion by automating the different activities of the supply chain. For example, a supply chain execution system might electronically route orders from a manufacturer to a supplier using electronic data interchange (EDI) , a standard format for the electronic exchange of information between supply chain participants. Figure 8.10 details how supply chain planning and supply chain execution systems interact with the supply chain.

A good example of inventory issues that occur when a company does not have a clear vision of its entire supply chain is the bullwhip effect. The bullwhip effect occurs when distorted product-demand information ripples from one partner to the next throughout the supply chain. The misinformation regarding a slight rise in demand for a product could cause different members in the supply chain to stockpile inventory. These changes ripple throughout the supply chain, magnifying the issue and creating excess inventory and costs for all. For example, if a car dealership is having a hard time moving a particular brand of car, it might offer significant discounts to try to move the inventory. Without this critical information, the car manufacturer might see a rise in demand for this particular brand of car and increase production orders, not realizing that the dealerships are actually challenged with selling the inventory. Today, integrated supply chains provide managers with the visibility to see their suppliers’ and customers’ supply chains, ensuring that supply always meets demand.

FIGURE 8.9

Effective and Efficient Supply Chain Management’s Effect on Porter’s Five Forces

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FIGURE 8.10

Supply Chain Planning’s and Supply Chain Execution’s Roles in the Supply Chain

TECHNOLOGIES REINVENTING THE SUPPLY CHAIN

LO 8.3: Identify the three technologies that are reinventing the supply chain.

Optimizing the supply chain is a critical business process for any successful organization. Just think of the complexity of Walmart’s supply chain and the billions of products being sent around the world guaranteeing every shelf is fully stocked. The three components of supply chain management on which companies focus to find efficiencies include procurement, logistics, and materials management (see Figure 8.11 ).

Procurement is the purchasing of goods and services to meet the needs of the supply chain. The procurement process is a key supply chain strategy because the capability to purchase input materials at the right price is directly correlated to the company’s ability to operate. Without the right inputs, the company simply can’t create cost-effective outputs. For example, if McDonald’s could not procure potatoes or had to purchase potatoes at an outrageous price, it would be unable to create and sell its famous french fries. In fact, procuring the right size potatoes that can produce the famous long french fries is challenging in some countries where locally grown potatoes are too small. Procurement can help a company answer the following questions:

What quantity of raw materials should we purchase to minimize spoilage?

How can we guarantee that our raw materials meet production needs?

At what price can we purchase materials to guarantee profitability?

Can purchasing all products from a single vendor provide additional discounts?

Logistics includes the processes that control the distribution, maintenance, and replacement of materials and personnel to support the supply chain. Recall from the value chain analysis in Chapter 1 that the primary value activities for an organization include inbound and outbound logistics. Inbound logistics acquires raw materials and resources and distributes them to manufacturing as required. Outbound logistics distributes goods and services to customers. Logistics controls processes inside a company (warehouse logistics) and outside a company (transport logistics) and focuses on the physical execution part of the supply chain. Logistics includes the increasingly complex management of processes, information, and communication to take a product from cradle to grave. Cradle to grave provides logistics support throughout the entire system or life of the product. Logistics can help a company answer the following questions:

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APPLY YOUR KNOWLEDGE

BUSINESS DRIVEN GLOBALIZATION

3D Printing for Poverty

Thirty-three-year-old Kodjo Afate Grikou wanted to help his community in West Africa to print necessities that they can’t source locally, such as kitchen utensils for cooking. The structure of the 3D printer he had in mind uses very little in terms of new parts because it is mostly made up of ewaste and scrap metal. Before building this printer, he set up his project on the European social funding website, ulule. The project received more than $10,000, despite the printer costing only $1,000, mostly through purchasing new parts that he couldn’t find locally. Grikou hopes that his innovation will inspire teenagers and young people in his community to attend school and gain an education so they can make further life-changing developments that will benefit not only their lives but also others around them. In a group, brainstorm ways 3D printing can help rural communities fight poverty. 4

What is the quickest way to deliver products to our customers?

What is the optimal way to place items in the warehouse for picking and packing?

What is the optimal path to an item in the warehouse?

What path should the vehicles follow when delivering the goods?

What areas or regions are the trucks covering?

Materials management includes activities that govern the flow of tangible, physical materials through the supply chain such as shipping, transport, distribution, and warehousing. In materials management, you focus on quality and quantity of materials as well as on how you will plan, acquire, use, and dispose of such materials. It can include the handling of liquids, fuel, produce, and plants and a number of other potentially hazardous items. Materials management focuses on handling all materials safely, efficiently, and in compliance with regulatory requirements and disposal requirements. Materials management can help a company answer the following concerns:

FIGURE 8.11

The Three Business Areas of Supply Chain Management

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What are our current inventory levels?

What items are running low in the warehouse?

What items are at risk of spoiling in the warehouse?

How do we dispose of spoiled items?

What laws need to be followed for storing hazardous materials?

Which items must be refrigerated when being stored and transported?

What are the requirements to store or transport fragile items?

As with all other areas of business, disruptive technologies are continuously being deployed to help businesses find competitive advantages in each component of the supply chain, as outlined in Figure 8.12 .

3D Printing Supports Procurement

The process of 3D printing (additive manufacturing) builds—layer by layer in an additive process—a three-dimensional solid object from a digital model. The additive manufacturing process of 3D printing is profoundly different from traditional manufacturing processes. The Financial Times and other sources are stating that 3D printing has the potential to be vastly more disruptive to business than the Internet. That is a bold statement! The reason people are betting on 3D printing to disrupt business is that it brings production closer to users, thus eliminating steps in the supply chain similar to disintermediation by the Internet. Three-dimensional printing also promotes mass customization, small production batches, and reduction in inventory. Traditionally, the costs associated with 3D printing made it accessible only to large corporations. Now with inexpensive printers, scanners, and applications, the technology is accessible to small and midsized businesses and home users. With the advances in 3D printing, the need to procure materials will become far easier because businesses can simply print the parts and components required for the production process. There is no doubt about it—3D printing will affect production process and supply chains and cause business disruption. These printers are creating auto parts, cell phone covers, jewelry, toys, bicycles, and manufacturing prototypes for testing purposes. 5

FIGURE 8.12

Disruptive Business Technologies

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To print a 3D product, users create a digital model that is sliced into thin cross-sections called layers. During the printing process, the 3D printer starts at the bottom of the design and adds successive layers of material to complete the project. Computer-aided design/computer-aided manufacturing (CAD/CAM) systems are used to create the digital designs and then manufacture the products. For example, a user creates a design with a CAD application and then manufactures the product by using CAM systems. Before 3D printers existed, creating a prototype was time-consuming and expensive, requiring skilled craftsmen and specific machinery. Instead of sending modeling instructions to a production company, advances in 3D printing allow users to create prototypes and products on demand from their desks. Shipping required parts from around the world could become obsolete because the spare parts can now be 3D printed on demand. This could have a major impact on how businesses large and small operate and interact on a global scale in the future.

The maker movement is a cultural trend that places value on an individual’s ability to be a creator of things as well as a consumer of things. In this culture, individuals who create things are called ‘makers.’ The movement is growing rapidly and is expected to be economically disruptive; as ordinary people become more self-sufficient, they will be able to make their own products instead of procuring brand-name products from retail stores. Makers come from all walks of life, with diverse skill sets and interests. The thing they have in common is creativity, an interest in design, and access to tools and raw materials that make production possible. The growth of the maker movement is often attributed to the rise of community makerspaces , a community center that provides technology, manufacturing equipment, and educational opportunities to the public that would otherwise be inaccessible or unaffordable. Although the majority of makers are hobbyists, entrepreneurs and small manufacturers are also taking advantage of the classes and tools available in makerspaces. 6

RFID Supports Logistics

A television commercial shows a man in a uniform quietly moving through a family home. The man replaces the empty cereal box with a full one just before a hungry child opens the cabinet; he then opens a new sack of dog food as the hungry bulldog eyes him warily, and, finally, hands a full bottle of shampoo to the man in the shower whose bottle had just run out. The next wave in supply chain management will be home-based supply chain fulfillment. Walgreens is differentiating itself from other national chains by marketing itself as the family’s just-in-time supplier. Consumers today are becoming incredibly comfortable with the idea of going online to purchase products when they want, how they want, and at the price they want. Walgreens is developing custom websites for each household, which allow families to order electronically and then at their convenience go to the store to pick up their goods at a special self-service counter or the drive-through window. Walgreens is making a promise that goes beyond low prices and customer service and extends right into the home.

Radio-frequency identification (RFID) uses electronic tags and labels to identify objects wirelessly over short distances. It holds the promise of replacing existing identification technologies such as the bar code. RFID tags are evolving, too, and the advances will provide more granular information to enterprise software. Today’s tags can store an electronic product code. In time, tags could hold more information, making them portable mini-databases. RFID’s Electronic Product Code (RFID EPC) promotes serialization or the ability to track individual items by using the unique serial number associated with each RFID tag. Although a bar code might identify a product such as a bottle of salad dressing, an RFID EPC tag can identify each specific bottle and allow item-level tracking to determine whether the product has passed its expiration date. Businesses can tell automatically where all its items are in the supply chain just by gathering the data from the RFID chips. The possibilities of RFID are endless, and one area it is affecting is logistics. RFID tags for applications such as highway toll collection and container tracking remain in continuous use for several years. Like regular electronic components, the tags are adhered to rigid substrates and packaged in plastic enclosures. In contrast, tags on shipping cartons are used for a much shorter time and are then destroyed. Disposable tags are adhered to printed, flexible labels pasted onto the carton, and these smart labels contain an RFID chip and antenna on the back. A thermal printer/encoder prints alphanumeric and bar code data on the labels while encoding the chip at the same time. Figures 8.13 and 8.14 display how an RFID system works in the supply chain.

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Drones Support Logistics

A drone is an unmanned aircraft that can fly autonomously, or without a human. Amazon.com is piloting drone aircraft for package deliveries. Amazon is now working on small drones that could someday deliver customers’ packages in half an hour or less. UPS and FedEx have also been experimenting with their own versions of flying parcel carriers. Drones are already here and use GPS to help coordinate the logistics of package delivery. The problems with drones include FAA approval and the advanced ability to detect and avoid objects. GPS coordinates can easily enable the drone to find the appropriate package delivery location, but objects not included in the GPS, such as cars, dogs, and children, will need to be detected and avoided.

FedEx founder Fred Smith stated that his drones are up and running in the lab; all he requires to move his fleet of drones from the lab to production is approval from regulators. “We have all this stuff working in the lab right now, we don’t need to reinvent the wheel,” remarks Smith. “We need a set of rules from the FAA. It’s just a matter of getting the laws in place so companies can begin building to those specifications and doing some real field testing.” 7

Robotics Supports Materials Management

Robotics focuses on creating artificial intelligence devices that can move and react to sensory input. The term robot was coined by Czech playwright Karl Capek in his play R.U.R. (Rossum’s Universal Robots), which opened in Prague in 1921. Robota is the Czech word for “forced labor.” The term robotics was introduced by writer Isaac Asimov; in his science fiction book I, Robot, published in 1950, he presented three laws of robotics:

FIGURE 8.13

RFID Components

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FIGURE 8.14

RFID in the Supply Chain

1.A robot may not injure a human being, or, through inaction, allow a human being to come to harm.

2.A robot must obey the orders given it by human beings except where such orders would conflict with the First Law.

3.A robot must protect its own existence as long as such protection does not conflict with the First or Second Law. 8

You can find robots in factories performing high-precision tasks, in homes vacuuming the floor and the pool, and in dangerous situations such as cleaning toxic wastes or defusing bombs. Amazon alone has more than 10,000 robots in its warehouses, picking, packing, and managing materials to fulfill customer orders. The robots are made by Kiva Systems, a company Amazon bought for $775 million in 2012. Kiva pitches its robots—which can cost between a few million dollars and as much as roughly $20 million—as simplifying and reducing costs via materials management. The robots are tied into a complex grid that optimizes item placement in the warehouse and allows the robots to pick the inventory items and bring them to the workers for packing. Watching an order fulfillment center equipped with Kiva robots is amazing; the operators stand still while the products come to them. Inventory pods store the products that are carried and transferred by a small army of little orange robots, eliminating the need for traditional systems such as conveyors and sorters. Though assessing the costs and benefits of robots versus human labor can be difficult, Kiva boasts that a packer working with its robots can fulfill three to four times as many orders per hour. Zappos, Staples, and Amazon are just a few of the companies taking advantage of the latest innovation in warehouse management by replacing traditional order fulfillment technologies such as conveyor belts with Kiva’s little orange robots. 9

The Extended Supply Chain

As the supply chain management market matures, it is becoming even more sophisticated and incorporating additional functionality such as marketing, customer service, and even product development to its extended supply chain. Advanced communications tools, easy-to-use decision support systems, and building trust among participants when sharing information are all making the home-based supply chain possible. A few of the fastest-growing extensions for supply chain management are included in Figure 8.15 .

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BUSINESS DRIVEN ETHICS AND SECURITY

3D Printing Weapons

In 1976, the big movie studios sued Sony for releasing the first VCR because it advertised it as “a way of recording feature-length movies from TV to VHS tape for watching and taking over to friends’ houses.” Over the next eight years Universal Studios, along with other powerful media groups, fought Sony over creating the device because it could allow users to violate copyright laws. The courts went back and forth for years attempting to determine whether Sony would be held liable for creating a device that enabled users to break copyright laws. In 1984, the U.S. Supreme Court ruled in favor of Sony: “If a device is capable of sustaining a substantial noninfringing use, then it is lawful to make and sell that device. That is, if the device is merely capable of doing something legit, it is legal to make no matter how it is used in practice.” 10

Just think of cars, knives, guns, and computers as they are all used to break the law, and nobody would be allowed to produce them if they were held responsible for how people used them. Do you agree that if you make a tool and sell it to someone who goes on to break the law, you should be held responsible? Do you agree that 3D printers will be used to infringe copyright, trademark, and patent protections? If so, should 3D printers be illegal?

FIGURE 8.15

Extending the Supply Chain

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section 8.2

Customer Relationship Management and Enterprise Resource Planning

LEARNING OUTCOMES

8.4Explain operational and analytical customer relationship management.

8.5Identify the core and extended areas of enterprise resource planning.

8.6Discuss the current technologies organizations are integrating in enterprise resource planning systems.

CUSTOMER RELATIONSHIP MANAGEMENT

LO 8.4: Explain operational and analytical customer relationship management.

Today, most competitors are simply a mouse-click away, and this intense competition is forcing firms to switch from sales-focused business strategies to customer-focused business strategies. Customers are one of a firm’s most valuable assets, and building strong loyal customer relationships is a key competitive advantage. Harley-Davidson offers an excellent example of a company that knows the value of customer loyalty, and it finds itself in the coveted position of demand outweighing its supply. No other motorcycle in the world has the look, feel, and sound of a Harley-Davidson. Demand for Harley-Davidson motorcycles outweighs supply, and some models have up to a two-year waiting list. Knowing the value of its customers, Harley-Davidson started the Harley’s Owners Group (HOG), which is the largest motorcycle club in the world with more than 600,000 members. HOG offers a wide array of events, rides, and benefits to its members and is a key competitive advantage because it helps build a strong sense of community among Harley-Davidson owners. Harley-Davidson has built a customer following that is extremely loyal, a difficult task to accomplish in any industry. 11

Customer relationship management (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 allows an organization to gain insights into customers’ shopping and buying behaviors. Every time a customer communicates with a company, the firm has the chance to build a trusting relationship with that particular customer. Harley-Davidson realizes that it takes more than just building and selling motorcycles to fulfill the dreams of its loyal customers. For this reason, the company strives to deliver unforgettable experiences along with its top-quality products. When the company began selling products online, it found itself facing a dilemma—its online strategy for selling accessories directly to consumers would bypass Harley-Davidson’s dealers, who depend on the high-margin accessories for store revenues. The solution was to deploy Harley-Davidson.com , which prompts customers to select a participating Harley-Davidson dealership before placing any online orders. The selected dealership is then responsible for fulfilling the order. This strategy ensured that the dealers remained the focus point of each customer’s buying experiences. To guarantee that every customer has a highly satisfying online buying experience, the company asks the dealers to agree to a number of standards, including:

Checking online orders twice daily.

Shipping online orders within 24 hours.

Responding to customer inquiries within 24 hours. 12

Harley-Davidson still monitors online customer metrics such as time taken to process orders, number of returned orders, and number of incorrect orders, guaranteeing that the company delivers on its critical success factor of providing prompt, excellent customer service consistently to all its loyal customers.

A primary component of managing a customer relationship is knowing when and why the customer is communicating with the company. Imagine an irate customer who has just spent an hour on the phone with your call center complaining about a defective product. While the customer is on the phone, your sales representative decides to drop by the customer’s office in an attempt to sell additional products. Obviously, this is not the ideal time to try to up-sell or cross-sell products to this particular customer. A customer relationship management system would inform the sales representative that the customer was on the phone with customer service and even provide details of the call. Then your sales representative could stop by and offer assistance in resolving the product issue, which might help restore the relationship with the customer and provide opportunities for future sales.

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The Power of the Customer

A standard rule of business states that the customer is always right. Although most businesses use this as their motto, they do not actually mean it. Ebusiness firms, however, must adhere to this rule as the power of the customer grows exponentially in the information age. Various websites and videos on YouTube reveal the power of the individual consumer (see Figure 8.16 ). A decade ago if you had a complaint against a company, you could make a phone call or write a letter. Now you can contact hundreds or thousands of people around the globe and voice your complaint or anger with a company or product. You—the customer—can now take your power directly to millions of people, and companies have to listen.

Measuring CRM Success

Using CRM metrics to track and monitor performance is a best practice for many companies. Figure 8.17 displays a few common CRM metrics a manager can use to track the success of the system. Just remember that you only want to track between five and seven of the hundreds of CRM metrics available.

CRM Communication Channels

The complicated piece of this puzzle is that customers can use many communication channels to contact a company, including call centers, websites, email, faxes, and telephones (see Figure 8.18 ). To make matters even more complex, a single customer can communicate with a firm using all of the communication channels multiple times. Keeping track of customer communications is important if the firm wants to continue to build and manage that relationship. A CRM system can track every form of customer communication, providing this information to all employees (see Figure 8.19 ). The firm can then implement strategies for the best ways to communicate effectively with each and every customer. With a CRM system, a firm can obtain an overview of the customer’s products, preferences, account information, communications, and purchasing history, allowing it to send customized product offers, expedite shipping, ensure satisfaction, and employ other marketing and sales techniques that can greatly add to sales and profits.

THE BENEFITS OF CRM

Companies that understand individual customer needs are best positioned to achieve success. Of course, building successful customer relationships is not a new business practice; however, implementing CRM systems allows a company to operate more efficiently and effectively in the area of supporting customer needs. CRM moves far beyond technology by identifying customer needs and designing specific marketing campaigns tailored to each. This enables a firm to treat customers as individuals, gaining important insights into their buying preferences and shopping behaviors. Firms that treat their customers well reap the rewards and generally see higher profits and highly loyal customers. Identifying the most valuable customers allows a firm to ensure that these customers receive the highest levels of customer service and are offered the first opportunity to purchase new products. Firms can find their most valuable customers by using the RFM formula—recency, frequency, and monetary value. In other words, an organization must track:

How recently a customer purchased items.

How frequently a customer purchases items.

The monetary value of each customer purchase.

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FIGURE 8.16

The Power of the Customer

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FIGURE 8.17

CRM Metrics

After gathering this initial CRM information, the firm can analyze it to identify patterns and create marketing campaigns and sales promotions for different customer segments. For example, if a customer buys only at the height of the season, the firm should send a special offer during the off-season. If a certain customer segment purchases shoes but never accessories, the firm can offer discounted accessories with the purchase of a new pair of shoes. If the firm determines that its top 20 percent of customers are responsible for 80 percent of the revenue, it can focus on ensuring that these customers are always satisfied and receive the highest levels of customer service.

Evolution of CRM

There are three phases in the evolution of CRM: (1) reporting, (2) analyzing, and (3) predicting. CRM reporting technologies help organizations identify their customers across other applications. CRM analysis technologies help organizations segment their customers into categories such as best and worst customers. CRM predicting technologies help organizations predict customer behavior, such as which customers are at risk of leaving. Figure 8.20 highlights a few of the important questions an organization can answer in these areas by using CRM technologies.

FIGURE 8.18

Customer Contact Points

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BUSINESS DRIVEN START-UP

Ruby Receptionists

Great businesses are driven by exceptional customer experiences and interactions. Ruby is a company operating from Portland, Oregon, that has a team of smart and cheerful virtual receptionists that you can hire to carry out all your customer interactions—remotely. Ruby aims to deliver the perfect mix of friendliness, charm, can-do attitude, and professionalism to all its clients’ customer calls. Best of all, customers believe the Ruby receptionists are working right in your office, not in Portland, Oregon. Ruby promises to bring back the lost art of human interaction by delighting each and every customer who calls. 13

Explain the importance of customer service for customer relationship management. Do you agree that a company can improve customer service by hiring Ruby Receptionists? If you owned a small business, would you be comfortable hiring Ruby Receptionists?

FIGURE 8.19

Customer Relationship Management Overview

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FIGURE 8.20

Evolution of CRM

Operational and Analytical CRM

The two primary components of a CRM strategy are operational CRM and analytical CRM. Operational CRM supports traditional transactional processing for day-to-day front-office operations or systems that deal directly with the customers. Analytical CRM supports backoffice operations and strategic analysis and includes all systems that do not deal directly with the customers. Figure 8.21 provides an overview of the two.

Figure 8.22 shows the different technologies marketing, sales, and customer service departments can use to perform operational CRM.

FIGURE 8.21

Operational CRM and Analytical CRM

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FIGURE 8.22

Operational CRM Technologies

Marketing and Operational CRM

Companies are no longer trying to sell one product to as many customers as possible; instead, they are trying to sell one customer as many products as possible. Marketing departments switch to this new way of doing business by using CRM technologies that allow them to gather and analyze customer information to tailor successful marketing campaigns. In fact, a marketing campaign’s success is directly proportional to the organization’s ability to gather and analyze the right customer information. The three primary operational CRM technologies a marketing department can implement to increase customer satisfaction are:

1.List generator.

2.Campaign management.

3.Cross-selling and up-selling.

List Generator List generators compile customer information from a variety of sources and segment it for different marketing campaigns. These sources include website visits, questionnaires, surveys, marketing mailers, and so on. After compiling the customer list, it can be filtered based on criteria such as household income, gender, education level, political facilitation, age, or other factors. List generators provide the marketing department with valuable information on the type of customer it must target to find success for a marketing campaign.

Campaign Management Campaign management systems guide users through marketing campaigns by performing such tasks as campaign definition, planning, scheduling, segmentation, and success analysis. These advanced systems can even calculate the profitability and track the results for each marketing campaign.

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Cross-Selling and Up-Selling Two key sales strategies a marketing campaign can deploy are cross-selling and up-selling. Cross-selling is selling additional products or services to an existing customer. For example, if you were to purchase Tim Burton’s movie Alice in Wonderlandon Amazon, you would also be asked whether you want to purchase the movie’s soundtrack or the original book. Amazon is taking advantage of cross-selling by offering customers goods across its book, movie, and music product lines. Up-selling is increasing the value of the sale. McDonald’s performs up-selling by asking customers whether they would like to super-size their meals for an extra cost. CRM systems offer marketing departments all kinds of information about customers and products, which can help identify up-selling and cross-selling opportunities to increase revenues.

Sales and Operational CRM

Sales departments were the first to begin developing CRM systems. They had two primary motivations to track customer sales information electronically. First, sales representatives were struggling with the overwhelming amount of customer account information they were required to maintain and track. Second, managers found themselves hindered because much of their vital customer and sales information remained in the heads of their sales representatives, even if the sales representative left the company. Finding a way to track customer information became a critical success factor for many sales departments. Customer service and support (CSS) is a part of operational CRM that automates service requests, complaints, product returns, and information requests.

Figure 8.23 depicts the typical sales process, which begins with an opportunity and ends with billing the customer for the sale. Leads and potential customers are the lifeblood of all sales organizations, whether they sell computers, clothing, consulting, or cars. How leads are handled can make the difference between revenue growth and decline.

Sales force automation (SFA) automatically tracks all the steps in the sales process. SFA products focus on increasing customer satisfaction, building customer relationships, and improving product sales. The three primary operational CRM technologies a sales department can adopt are:

1.Sales management CRM systems.

2.Contact management CRM systems.

3.Opportunity management CRM systems.

FIGURE 8.23

A Typical Sales Process

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Sales Management CRM Systems Sales management CRM systems automate each phase of the sales process, helping individual sales representatives coordinate and organize all their accounts. Features include calendars, reminders for important tasks, multimedia presentations, and document generation. These systems can even provide an analysis of the sales cycle and calculate how each sales representative is performing during the sales process.

Contact Management CRM Systems A contact management CRM system maintains customer contact information and identifies prospective customers for future sales, using tools such as organizational charts, detailed customer notes, and supplemental sales information. For example, a contact management system can take an incoming telephone number and automatically display the person’s name along with a comprehensive history, including all communications with the company. This allows the sales representative to personalize the phone conversation and ask such things as, “How is your new laptop working, Sue?” or “How was your family vacation to Colorado?” The customer feels valued since the sales associate knows her name and even remembers details of their last conversation.

Opportunity Management CRM Systems Opportunity management CRM systems target sales opportunities by finding new customers or companies for future sales. They determine potential customers and competitors and define selling efforts, including budgets and schedules. Advanced systems can even calculate the probability of a sale, which can save sales representatives significant time and money when qualifying new customers. The primary difference between contact management and opportunity management is that contact management deals with existing customers and opportunity management with new or potential customers.

Customer Service and Operational CRM

Most companies recognize the importance of building strong customer relationships during the marketing and sales efforts, but they must continue this effort by building strong postsale relationships also. A primary reason firms lose customers is due to negative customer service experiences. Providing outstanding customer service is challenging, and many CRM technologies can assist organizations with this important activity. The three primary ones are:

1.Contact center.

2.Web-based self-service.

3.Call scripting.

Contact Center A contact center or call center is where customer service representatives answer customer inquiries and solve problems, usually by email, chat, or phone. It is one of the best assets a customer-driven organization can have because maintaining a high level of customer support is critical to obtaining and retaining customers. Figure 8.24 highlights a few of the services contact center systems offer.

Contact centers also track customer communication histories along with problem resolutions—information critical for providing a comprehensive customer view to the service representative. Representatives who can quickly comprehend the customer’s concerns provide tremendous value to the customer and to the company. Nothing makes frustrated customers happier than not having to explain their problems all over again to yet another customer service representative.

FIGURE 8.24

Contact Center Services

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BUSINESS DRIVEN INNOVATION

Nice Emotions

New emotion-detection software called Perform, created by Nice Systems, helps firms improve customer service by identifying callers who are displeased or upset. Perform determines a baseline of emotion and can detect emotional issues during the first few seconds of a call; any variation from the baseline activates an alert. When an elderly person who was highly distressed over medical costs hung up during a phone call to the insurance company, Perform identified the customer’s frustration and automatically emailed a supervisor. The supervisor was able to review a recording of the conversation and immediately called the customer back suggesting ways to lower the costs. 14

How do you think emotion-detection software will affect customer relationships? What other departments or business processes could benefit from its use? Create a new product that uses emotion-detection software. What business problem would your product solve and who would be your primary customers?

Web-Based Self-Service Web-based self-service systems allow customers to use the web to find answers to their questions or solutions to their problems. FedEx uses web-based self-service systems to let customers electronically track packages without having to talk to a customer service representative. Another feature of web-based self-service is click-to-talk functions, which allow customers to click a button and talk with a representative via the Internet. Powerful customer-driven features such as these add value to any organization by providing customers with real-time information that helps resolve their concerns.

Call Scripting Companies that market and sell highly technical products have a difficult time finding competent customer service representatives. Call scripting systems gather product details and issue resolution information that can be automatically generated into a script for the representative to read to the customer. These systems even provide questions the representative can ask the customer to troubleshoot the problem and find a resolution. This feature not only helps reps answer difficult questions quickly but also presents a uniform response so customers don’t receive different answers.