Chapter 9

Achieving Operational Excellence and Customer Intimacy: Enterprise Applications

Section 9.1: Bullet Text Study Guide Chapter Contents

Enterprise Systems

Enterprise systems, or enterprise resource planning (ERP) systems, integrate the key internal business processes of

a firm into a single software system so that information flows seamlessly throughout the organization, improving

coordination, efficiency, and decision making.

Enterprise software is based on a suite of integrated software modules and a common central database. The

database collects data from and feeds the data into numerous applications that supports nearly all of an

organization's internal business activities. When new information is entered by one process, the information is

made available immediately to other business processes.

Figure 9-1

FIGURE 9-1 HOW ENTERPRISE SYSTEMS WORK

Enterprise systems feature a set of integrated software modules and a central database that enables data to be

shared by many different business processes and functional areas throughout the enterprise.

Enterprise software is built around thousands of predefined business processes that reflect best practices. Best

practices are the most successful solutions or problem-solving methods in an industry for consistently and

effectively achieving a business objective.

Organizations implementing commercial enterprise software first select the business processes they wish to use

from the software and map their own processes to these, using the software's configuration tables. Although

businesses may choose to rewrite portions of the software to match their existing processes, this can degrade

system performance and fail to reap the benefits of this software.

Enterprise systems produce value by increasing organizational efficiency and by providing firmwide information to

help managers make better decisions. Enterprise systems create a foundation for a more customer-driven

organization by integrating firm data to enable quicker responses to customer requests and information.

Enterprise systems:

Use analytical tools to evaluate a firm's overall performance

Use standard definitions, formats, and performance figures across the organization

Section 9.2: Bullet Text Study Guide Chapter Contents

Supply Chain Management Systems

Supply chain management refers to the coordination of activities and involved in making and moving a product.

The supply chain is the network of businesses and business processes involved the creation and selling of a

product, from suppliers that procure raw materials through retail outlets and customers. The upstream portion of

the supply chain includes the organization's 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. The manufacturer also has internal supply chain processes for transforming the materials and

services furnished by suppliers into finished goods and for managing materials and inventory.

Figure 9-2

FIGURE 9-2 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.

Inefficiencies in the supply chain, such as parts shortages, underutilized plant capacity, excessive inventory, or

runaway transportation costs, are caused by inaccurate or untimely information and can waste as much as 25% of

operating costs. Uncertainties also arise because many events cannot be foreseen—product demand, late

shipments from suppliers, defective parts or raw material, or production process breakdowns. More accurate

information from supply chain management systems reduces uncertainty and the impact of 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. With perfect information about demand and production, a firm can implement an effective just-

in-time strategy, delivering goods in the right amount and as they are needed.

Figure 9-3

FIGURE 9-3 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.

Supply chain software can be classified as either:

Supply chain planning systems: Systems which enable the firm to generate demand forecasts for a

product, develop sourcing and manufacturing plans for that product, make adjustments to production

and distribution plans, and share that information with relevant supply chain members. One of the most

important supply chain planning functions is demand planning, which determines how much product a

business needs to make to satisfy all of its customers' demands.

Supply chain execution systems: Systems that manage the physical flow of products through distribution

centers and warehouses to ensure that products are delivered to the right locations in the most efficient

manner.

Before the Internet, supply chain coordination was hampered by the difficulties of making information flow

smoothly among disparate internal supply chain systems. Today, using intranets and extranets, all members of the

supply chain can instantly communicate with each other, using up-to-date information to adjust purchasing,

logistics, manufacturing, packaging, and schedules. The Internet provides a standard set of tools that are used by

companies all over the world to coordinate global supply chains that include participants from many countries

Figure 9-4

FIGURE 9-4 INTRANETS AND EXTRANETS FOR SUPPLY CHAIN MANAGEMENT

Intranets integrate information from isolated business processes within the firm to help manage its internal

supply chain. Access to these private intranets can also be extended to authorized suppliers, distributors,

logistics services, and, sometimes, to retail customers to improve coordination of external supply chain

processes.

Earlier supply chain management systems were driven by a push-based model (also known as build-to-stock) in

which production master schedules are based on forecasts or best guesses of demand for products, and products

are "pushed" to customers. With Web-based tools, supply chain management follows a pull-based model (or

demand-driven model or build-to-order), in which actual customer orders or purchases trigger events in the supply

chain.

Figure 9-5

FIGURE 9-5 PUSH-VERSUS PULL-BASED SUPPLY CHAIN MODELS

The difference between push- and pull-based models is summarized by the slogan “Make what we sell, not sell

what we make.”

Internet technology also makes it possible to move from sequential supply chains, where information and

materials flow sequentially from company to company, to concurrent supply chains, where information flows in

many directions simultaneously among members of a supply chain network. Ultimately, the Internet could create a

"digital logistics nervous system" throughout the supply chain to permit simultaneous, multidirectional

communication of information about participants' inventories, orders, and capacities.

Figure 9-6

FIGURE 9-6 THE FUTURE INTERNET-DRIVEN SUPPLY CHAIN

The future Internet-driven supply chain operates like a digital logistics nervous system. It provides

multidirectional communication among firms, networks of firms, and e-marketplaces so that entire networks of

supply chain partners can immediately adjust inventories, orders, and capacities.

The business value of supply chain management systems includes:

Streamlined supply chain and accurate information

Reduced supply chain costs

Increased sales through accurate product availability

Section 9.3: Bullet Text Chapter Contents

Customer Relationship Management Systems

Customers can be seen as an enterprise's most valuable asset, and customer relationship management systems

enable large firms to understand and work with their customers.

CRM systems capture and integrate customer data from all over the organization, consolidating the data, analyzing

the data, and then distributing the results to various systems and customer touch 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, Web site, or retail store.

Well-designed CRM systems provide a single enterprise view of the customer and provide customers with a single

view of the company regardless of the touch point the customer uses.

Figure 9-7

FIGURE 9-7 CUSTOMER RELATIONSHIP MANAGEMENT (CRM)

CRM systems examine customers from a multifaceted perspective. These systems use a set of integrated

applications to address all aspects of the customer relationship, including customer service, sales, and

marketing.

Good CRM systems provide data and analytical tools for determining the financial lifetime value of a customer and

customer loyalty and for identifying profitable customers and their needs.

Commercial customer relationship management (CRM) software packages range from niche tools that perform

limited functions, such as personalizing Web sites for specific customers, to large-scale enterprise applications. The

more comprehensive CRM packages contain modules for:

Partner relationship management (PRM): PRM software uses many of the same data, tools, and systems

as customer relationship management to enhance collaboration between a company and its selling

partners. It provides a company and its selling partners with the ability to trade information and distribute

leads and data about customers, integrating lead generation, pricing, promotions, order configurations,

and availability.

Employee relationship management (ERM). ERM software deals with employee issues that are closely

related to CRM, such as setting objectives, employee performance management, performance-based

compensation, and employee training.

CRM systems typically provide software or tools for:

Sales force automation (SFA): SFA modules help sales staff increase their productivity by focusing sales

efforts on the most profitable customers. They provide sales prospect and contact information, product

information, product configuration capabilities, and sales quote generation capabilities.

Customer service: Customer service modules provide information and tools to make call centers, help

desks, and customer support staff more efficient. They have capabilities for assigning and managing

customer service requests and may include Web-based self-service capabilities.

Marketing: Marketing modules support direct-marketing campaigns with capabilities for capturing

prospect and customer data, qualifying leads, and scheduling and tracking campaign mailings. They

include tools for analyzing marketing and customer data-identifying profitable and unprofitable

customers, designing products and services to satisfy specific customer needs and interests, and

identifying opportunities for cross-selling, up-selling, and bundling. Cross-selling is the marketing of

complementary products to customers. Up-selling is the marketing of higher-value products or services to

new or existing customers. Bundling is cross-selling in which a combination of products is sold as a bundle

at a price lower than the total cost of the individual products.

Figure 9-8, Figure 9-9

FIGURE 9-8 HOW CRM SYSTEMS SUPPORT MARKETING

Customer relationship management software provides a single point for users to manage and evaluate

marketing campaigns across multiple channels, including e-mail, direct mail, telephone, the Web, and wireless

messages.

FIGURE 9-9 CRM SOFTWARE CAPABILITIES

The major CRM software products support business processes in sales, service, and marketing, integrating

customer information from many different sources. Included are support for both the operational and

analytical aspects of CRM.

CRM software can also be used to increase customer loyalty through customer service by identifying valued

customers and providing them with special services or offers.

Figure 9-10

FIGURE 9-10 CUSTOMER LOYALTY MANAGEMENT PROCESS MAP

This process map shows how a best practice for promoting customer loyalty through customer service would

be modeled by customer relationship management software. The CRM software helps firms identify high-value

customers for preferential treatment.

CRM applications may support either:

Operational CRM: Customer facing applications such as tools for sales force automation, call center and

customer service support, and marketing automation.

Analytical CRM: Applications that analyze customer data generated by operational CRM applications to

provide information for improving business performance management. Analytical CRM applications are

based on data warehouses that consolidate the data from operational CRM systems and customer touch

points for use with online analytical processing (OLAP), data mining, and other data analysis techniques.

An important output of analytical CRM is the customer lifetime value (CLTV). CLTV is based on the

relationship between the revenue produced by a specific customer, the expenses incurred in acquiring

and servicing that customer, and the expected life of the relationship between the customer and the

company.

Figure 9-11

FIGURE 9-11 ANALYTICAL CRM DATA WAREHOUSE

Analytical CRM uses a customer data warehouse and tools to analyze customer data collected from the firm’s

customer touch points and from other sources.

The business value of CRM systems includes

Increased customer satisfaction

Reduced direct-marketing costs

More effective marketing

Lower costs for customer acquisition and retention

Increased sales revenues through identifying profitable customers

Reduced churn rate: The churn rate measures the number of customers who stop using or purchasing

products or services from a company and is an important indicator of the growth or decline of a firm's

customer base.

Section 9.4: Bullet Text Chapter Contents

Management Opportunities, Challenges, and Solutions

Many firms obtain extraordinary business value from enterprise applications because of their power to improve

process coordination and management decision making.

However, enterprise systems, supply chain management, and customer relationship management systems are very

expensive to purchase and implement. Costs run even higher for organizations with global operations, which must

manage organizational and technology changes in many different languages, time zones, currencies, and

regulatory environments.

Enterprise applications require not only deep-seated technological changes but also fundamental changes in the

way the business operates, including changes to business processes, employee responsibilities, and functions.

Enterprise applications also introduce "switching costs." Once an enterprise application is purchased and

implemented, it becomes very costly to switch vendors.

Enterprise applications require defining and implementing standardized definitions of data throughout the

organization.

Solutions for gaining more value from enterprise applications include:

Enterprise solutions (enterprise suites or e-business suites): Flexible enterprise software that enables

close linking between CRM, SCM, and enterprise systems, as well as to customer and supplier systems.

Service platforms: A service platform integrates multiple applications from multiple business functions,

business units, or business partners to deliver a seamless experience for the customer, employee,

manager, or business partner. Enterprise-wide service platforms provide a greater degree of cross-

functional integration than the traditional enterprise applications. To accomplish this, software tools

(such as Web services and XML) use existing applications as building blocks for new cross-enterprise

processes. Portal software can integrate information from enterprise applications and disparate in-house

legacy systems, presenting it to users through a Web interface so that the information appears to be

coming from a single source.

Figure 9-12.

FIGURE 9-12 ORDER-TO-CASH SERVICE

Order-to-cash is a composite process that integrates data from individual enterprise applications and legacy

financial applications. The process must be modeled and translated into a software system using application

integration tools.

Chapter 9: Case Study

Can Information Systems Restore Profitability to Restoration Hardware?

Restoration Hardware is a retailer of furniture, hardware, and home accessories such as bathroom fixtures and

decorative furnishings. The company is based in California; it started operations in 1979 and incorporated in 1987.

The company sells through multiple channels: a network of 103 retail stores across the United States and Canada,

a print mail-order catalog, and its RestorationHardware.com Web site. Restoration Hardware is a major player in

an industry that includes competitors such as Pottery Barn, Pier 1, and Williams Sonoma. Restoration employs

3,500 workers, 1,400 of those full-time.

Restoration’s business strategy puts the company in a unique sector of the marketplace. Restoration focused

from the start on merchandise that honors classic America. The company’s original furniture and fixtures were

designed to match the décor and form of older houses. Today, when you walk into a Restoration Hardware store,

the merchandise clearly evokes images of the past. Many products, such as portable record players or wooden

toys, are intent on inspiring feelings of tradition, if not nostalgia, in older generations of customers. The younger

generations may recognize these products from reruns of old television shows and movies set in the times of their

parents and grandparents. Many of these products are difficult to find elsewhere and they are very appealing. Up

front, the company knows what it wants to do and has maintained a consistent vision. According to Ed Weller, an

analyst at ThinkEquity Partners, “When you go to the stores, it’s clear that Restoration Hardware has something

customers want.” Many of Restoration’s top executives come from merchandising backgrounds.

A significant portion of Restoration’s revenue stream comes from its direct-to-customer ventures.

Circulation of the mail-order catalog surpassed 30 million in 2003, with 58 percent of the catalogs earmarked for

past customers. Mail-order catalog and Web site operations saw substantial revenue gains both in the fourth

quarter (51%) and annual (52%) numbers for 2003.

In recent years, the company has improved its e-commerce software, increasing its capacity to support

simultaneous online shoppers by 8,000 percent. This upgrade to Art Technology Group’s e-commerce software is

just one of several technology investments that Restoration has made in its Web site. In late 2003, Restoration

brought in iPhrase Technologies to implement its One Step natural language search and navigation software as a

replacement for RestorationHardware.com’s keyword-oriented product search facility. The new search technology

has made the Web site more user-friendly.

In March 2004, Scene7, Inc., a provider of dynamic imaging software, announced that Restoration Hardware

had adopted Scene7’s eCatalog solution for its online print catalog. Restoration now outsources the entire process

of publishing and hosting its print catalog on the Web. Restoration only has to provide Scene7 with the print

catalog in Portable Document Format (PDF). The published Web catalog includes dynamic links from areas on each

catalog page to corresponding product pages on the Restoration Hardware Web site. Scene7’s eCatalog solution

has also made it possible to implement advanced image-viewing features such as panning, zooming, and rollover

product descriptions. Additionally, customers can now use a “colorizer” feature to change the fabric style on any

upholstered product that they are viewing. Such technology saves Restoration from the enormous expenses that

would accompany studio photography of all the different combinations of fabric and furniture. According to

Scene7, its eCatalog solution has resulted in the doubling of Restoration Hardware’s conversion rate of browsers to

buyers.

Despite a strong product line and upward growth in sales, Restoration has not been able to make money. By

the end of 2003 the company posted a $2.9 million net loss, down from $3.9 million the previous year. The year

2003 was the fifth straight year the company did not turn a profit. Analysts point to the less-visible aspects of

Restoration’s business, specifically its supply chain management systems and technology infrastructure, as profit

drains. Russell Hoss, a Roth Capital Partners analyst, states that Restoration simply does not “know how to make

money.” Good products alone do not guarantee success. Retail businesses need to juggle an extraordinarily

complex system of variables to meet their expectations of success. The analysts contend that Restoration

Hardware is failing to control these variables to the best of its ability. Among the greatest concerns is Restoration’s

ability to keep its inventory in line with customer demand.

Over the 2003 holiday shopping season, same-store sales figures for Restoration experienced a drop of 3.5

percent from the previous year’s holiday season. One of the biggest culprits was a line of couches and chairs that

shoppers can customize by choosing from a selection of 50 fabric styles, with delivery promised within 8 to 10

weeks. High demand of the most popular styles set off a chain reaction of profit-draining events. Customers had to

wait longer than they had been told initially to receive their couches and chairs. In some cases, the customers

simply canceled their orders. Other customers chose to purchase less-popular styles instead, with the incentive of

a discounted price. Some of the orders that customers did not cancel could not be fulfilled in time to count in the

holiday season sales figures.

In the last few years, Restoration has implemented a repositioning plan, which involves reducing the

company’s debt, upgrading management, weeding out poor products from the product line, and closing stores

that aren’t performing. Additionally, the company has introduced new products and remodeled its retail locations.

The plan does not address improvements to the company’s aging information technology (IT) infrastructure.

Restoration Hardware stores use point-of-sale equipment that is nearly 10 years old. The equipment lacks

the capability to process debit card purchases without a physical signature, nor can it automate processes such as

checking fabric stocks when a customer makes a request for a custom furniture order. Customers placing custom

furniture orders must fill out a paper form that includes their fabric selection. Then a salesperson must call

Michael’s Furniture (which manufactures Restoration’s furniture) in Sacramento, California, to see what is in stock.

A system polls Restoration stores nightly to aggregate sales, inventory, and pricing data to provide

information that can help managers fine-tune the company’s merchandise assortments. However, the system is

not capable of providing demand forecasting. Restoration has systems to support “smooth warehouse operations

in a multi-warehouse environment” consisting of three warehouses in California and one in Baltimore.

Restoration Hardware’s most recent annual report on Form 10-K for the U.S. Securities and Exchange

Commission states that the company relies on a single vendor for its point of sale, merchandise management, and

warehouse management systems, along with the software support required to maintain these systems.

Restoration purchased these systems and services from STS Systems, which has since become part of NSB Group,

in the mid-1990s. NSB’s most recent version of its warehouse-management system is far more advanced than the

version that Restoration continues to use, with capabilities for XML-enabled processing of advance shipping

notices and real-time task tracking. Upgrades to the older version of the system are covered by Restoration’s

service agreement with NSB, but Restoration has not taken advantage of the new technology. The company has

also not improved its systems for restocking its products once they have been distributed from the various

warehouses.

Statistics show that in areas such as frequency of inventory turnover and gross profit margin, Restoration

trails its competitors. During the 12 months ending November 1, 2003, Restoration turned over its inventory only

1.9 times, compared to 3.2 times at Williams Sonoma. Restoration’s gross profit margin is only 30 percent, putting

it among the lowest-category performers for its industry even though same-store sales for 2003 averaged 7

percent higher than the previous year.

Restoration’s annual report paints a picture of a complex business environment that is vulnerable to a host

of trends, restrictions, and abnormalities. From a competition standpoint, Restoration’s offerings place it in the

same realm as specialty stores, traditional furniture stores, and department stores. At stake are customers, viable

store locations, suppliers, and personnel. Restoration asserts that many of its competitors have greater financial,

marketing, and operational resources for obtaining these assets, and that such hearty competition puts its financial

performance and future success at risk. To stay in the race Restoration believes that the company should focus on

fortifying its management, improving and increasing its product line, improving customer service, enhancing its

presentation of merchandise, and maintaining competitive pricing and retail locations.

The report goes on to say, “Our success is highly dependent on improvements to our planning and supply

chain process. . . . An important part of our efforts to achieve efficiencies, cost reductions and sales growth is the

identification and implementation of improvements to our planning, logistical and distribution infrastructure and

our supply chain. . . . An inability to improve our planning and supply chain processes or to take full advantage of

supply chain opportunities could have a material adverse effect on our operating results.” The company must also

be able to better anticipate consumer trends. Restoration does not speculate on how successful it will be at

implementing these improvements or offer any specific plans for doing so.

The one thing that Restoration Hardware does seem sure of is the litany of factors that could undermine its

future success. These include seasonal fluctuations in revenue (including a dependence on peak sales and earnings

from the fourth-quarter holiday season), dependence on vendors to supply merchandise and services, disruptions

in distribution to stores from its warehouses, labor strife, dependence on external funding, trade restrictions and

currency fluctuations associated with foreign imports and purchases, general economic conditions, and the

negative impacts on business of war and threats of terrorism.

Each of these factors has its own set of variables that adds to the unpredictability of running a retail

business. For example, Restoration acquires its merchandise from a pool of over 500 vendors. However, two

vendors were the sources of nearly one-quarter of all merchandise purchases in 2003. Restoration does not have

purchase contracts with these two vendors, or with any of their smaller vendors. Therefore, the company has no

guarantee that it can continue to acquire the merchandise that it intends to market in the proper quantities, at the

appropriate cost, or at all. Additionally, many vendors must have purchase orders submitted well in advance of

when Restoration wants to move its inventory to the shelves of its stores. This long lead time leaves the company

without the ability to respond to sales trends, which is especially risky during the holiday season, when Restoration

also spends more money on marketing and personnel. The company expects to hit certain sales highs during the

holidays. Failure to do so as a result of insufficient inventory or a miscalculation of what products will appeal to

shoppers can have significant negative impact on the health of the business.

Restoration purchased nearly half of its merchandise from foreign vendors in 2003 and the company expects

the percentage of foreign goods to rise in the future. Importing goods adds another layer of risk factors for the

business. Tariffs, quotas, trade relations and restrictions, political unrest, shipping costs, exchange rates, and other

variables all mitigate Restoration’s ability to maximize the efficiency of its supply chain. The company must weigh

the risks involved with importing merchandise against the benefits, such as cheaper goods and the availability of

products that cannot be purchased anywhere else.

Restoration’s report even points out that its thriving direct-to-customer operations may not sustain its

current level of profitability. Decreased performance by those departments could be detrimental to the

profitability of the business as a whole. Even though Restoration has placed great emphasis on upgrading the

direct-to-customer operations, they remain as vulnerable to risk factors as the rest of the business.

Although a business such as Restoration Hardware faces numerous obstacles in operating to a profit, many

of those outlined by the company are speculation or worst-case scenarios. Nevertheless, loss of revenue during

the key selling period of the year is clear evidence of a problem that needs attention.

Sources: Larry Dignan, “Restoration Project,” Baseline Magazine, February 2004; Restoration Hardware 10-K

Report for the Fiscal Year Ending January 31, 2004, www.restorationhardware.com; “Restoration Hardware,”

Corporate Design Foundation, www.cdf.org, accessed April 20, 2004; “Restoration Hardware Increases Conversion

Rates Using Scene7’s eCatalog e-Merchandising Solutions,” www.scene7.com/news, accessed March 23, 2004;

“Restoration Hardware Reports Mixed Annual Results,” Home Channel News, March 19, 2004; “Financial Reports:

Direct Business Soars at Restoration Hardware,” Catalog Age, March 24, 2004; “Hardware Chain Makes Progress

on Restoration,” San Francisco Business Times, March 18, 2004; and “Restoration Hardware Utilizes iPhrase to

Drive Sales and Provide Industry-Leading Self-Service Shopping Experience,” Internet Retailer, December 1, 2003.

CASE STUDY QUESTIONS

1. Evaluate Restoration Hardware using the value chain and competitive forces models. How is the company

responding to the forces that influence it?

2. What is Restoration Hardware’s business strategy? How well do the company’s information systems

support that strategy?

3. What management, organization, and technology factors are responsible for the problems Restoration

Hardware is encountering?

4. What role does supply chain management play at Restoration Hardware?

5. How can Restoration Hardware improve its information systems to solve its problems?

Chapter 9: Electronic Business Project:

Evaluating Supply Chain Management Services

Trucking companies no longer merely carry goods from one place to another. They can also provide

supply chain management services to their customers and help them manage their information.

Investigate the Web sites of two companies, J. B. Hunt (www.jbhunt.com) and Schneider Logistics

(www.schneiderlogistics.com) to see how these companies’ services can be used for supply chain

management. Then respond to the following questions:

1. What supply chain processes can each of these companies support for their clients?

2. How can customers use the Web site of each company to help with supply chain

management?

3. Compare the supply chain management services provided by these companies. Which

company would you select to help your firm manage its supply chain? Why?