Enterprise resource planning (ERP) systems integrate the planning, management, and use of all of an organization’s resources. The major objectives of ERP systems are to tightly integrate the functional areas of the organization and to enable information to flow seamlessly across the functional areas. Tight integration means that changes in one functional area are immediately reflected in all other pertinent functional areas.
ERP systems provide the information necessary to control the business processes of the organization. A business process is a set of related steps or procedures designed to produce a specific outcome. Business processes can be located entirely within one functional area, such as approving a credit card application or hiring a new employee. They can also span multiple functional areas, such as fulfilling a large order from a new customer. ERP software includes a set of interdependent software modules, linked to a common database, that provide support for the internal business processes in the following functional areas: finance and accounting, sales and marketing, manufacturing and production, and human resources. The modules are built around predefined business processes, and users access them through a single interface. The business processes in ERP software are often predefined by the best practices that the ERP vendor has developed. Best practices are the most successful solutions or problem solving methods for achieving a business objective.
Business Processes Supported by ERP Modules
• Financial and accounting processes: general ledger, accounts payable, accounts receivable, fixed assets, cash management and forecasting, product-cost accounting, cost-center accounting, asset accounting, tax accounting, credit management, financial reporting • Sales and marketing processes: order processing, quotations, contracts, product configuration, pricing, billing, credit checking, incentive and commission management, sales planning • Manufacturing and production processes: procurement, inventory management, purchasing, shipping, production planning, production scheduling, material requirements planning, quality control, distribution, transportation, plant and equipment maintenance • Human resources processes: personnel administration, time accounting, payroll, personnel planning and development, benefits accounting, applicant tracking, compensation, workforce planning, performance management
Although some companies have developed their own ERP systems, most organizations use commercially available ERP software. The leading ERP software vendor is SAP (www.sap.com), with its SAP R/3 package (the one adopted by IGT). Other major vendors include Oracle (www.oracle.com) and PeopleSoft (www.peoplesoft.com). For up-to-date information on ERP software, visit http://erp.ittoolbox.com. Despite all of their benefits, ERP systems have drawbacks.
To begin with, they can be extremely complex, expensive, and time consuming to implement. For companies with well-established procedures, this requirement can be a huge problem. Finally, companies must purchase the entire software package even if they require only a few of the modules. For these reasons, ERP software is not attractive to everyone. During the late 1990s, companies began to extend ERP systems along the supply chain to suppliers and customers. These extended systems add functions to help companies manage customer interactions and relationships with suppliers and vendors.
CUSTOMER RELATIONSHIP MANAGEMENT SYSTEMS
Customer relationship management (CRM) is an enterprisewide effort to acquire and retain customers. CRM recognizes that customers are the core of a business and that a company’s success depends on effectively managing its relationships with them. CRM focuses on building long-term and sustainable customer relationships that add value for both the customer and the company. For additional information on CRM products, visit www.mycustomer.com and http://crm.ittoolbox.com.
CRM includes a one-to-one relationship between a customer and a seller. To be a genuine one-to-one marketer, a company must be willing and able to change its behavior toward a specific customer, based on what it knows about that customer. In essence, CRM is based on a simple idea: Treat different customers differently. For example, “good” customers account for about 80 percent of a company’s profits, but they comprise only 20 percent of its customers. Acquiring a new customer can cost many times more than retaining an existing customer. Therefore, CRM helps organizations to keep profitable customers and to maximize lifetime revenue from them.
Because a firm must be able to modify its products and services based on the needs of individual customers, CRM involves much more than just sales and marketing. In order to build enduring one-to-one relationships in a CRM initiative, a company must continuously interact with customers individually. One reason so many firms are beginning to focus on CRM is that this kind of marketing can create high customer loyalty, which will increase the firm’s profits. Significantly, for CRM to be effective, almost all other functional areas must become involved.
Customer Relationship Management Applications
In the past, customer data were located in many isolated systems in various functional areas, such as finance, distribution, sales, service, and marketing. In addition, e-commerce generated huge amounts of customer data that were not integrated with the data in the functional area ISs. CRM systems were designed to address these problems by providing information and tools to deliver a superior customer experience and to maximize the lifetime customer value for a firm. CRM systems integrate customer data from various organizational sources, analyse these data, and then provide the results to both employees and customer touch points.
A customer touch point is a method of interaction with a customer, such as telephone, e-mail, a customer service or help desk, conventional mail, a Web site, and a store. Properly designed CRM systems provide a single, enterprisewide view of each customer. These systems also provide customers with a single point of contact within the enterprise as well as a unified view of the enterprise. CRM systems provide applications in three major areas: sales, marketing, and customer service. Let’s take a look at each one.
1) Sales. Sales force automation (SFA) functions in CRM systems make salespeople more productive by helping them focus on the most profitable customers. SFA functions provide data such as sales prospect and contact information, product information, product configurations, and sales quotes. SFA software can integrate all the information about a particular customer so that the salesperson can put together a personalized presentation for that customer. 2) Marketing. CRM systems support marketing campaigns by providing prospect and customer data, product and service information, qualified sales leads, and tools for analysing marketing and customer data. In addition, they enhance opportunities for cross-selling, upselling, and bundling.
Cross-selling refers to the marketing of complementary products to customers. For example, a bank customer with a large balance in his or her checking account might be directed toward CDs or money market funds. Up-selling is the marketing of higher-value products or services to new or existing customers. For example, if you are in the market for a television, a salesperson will show you a plasma-screen TV next to a conventional TV, in hopes that you will pay extra for a clearer picture.
Finally, bundling is a type of cross-selling in which a vendor sells a combination of products together at a lower price than the combined costs of the individual products. For example, your cable company might offer a package that includes basic cable TV, all the movie channels, and broadband Internet access for a lower price than these services would cost individually. As another example, computer manufacturers or retailers often bundle a computer, monitor, and printer at a reduced cost.
3) Customer Service. Customer service functions in CRM systems provide information and tools to make call centers, help desks, and customer support staff more efficient. These functions often include Web-based self-service capabilities. Customer service can take many forms, as we see below.
CRM systems can personalize interactive experiences to induce a consumer to commit to a purchase or to remain loyal to a company. For example, General Electric’s Web site (www.ge.com) provides detailed technical and maintenance information. In addition, it sells replacement parts for discontinued models. These types of parts and information are quite difficult to find offline. The ability to download manuals and solutions to common problems at any time is another innovation of Web-based customer service. Finally, customized information—such as product and warranty information—can be efficiently delivered when the customer logs on to the vendor’s Web site. Not only can the customer pull (search and find) information as needed, but the vendor also can push (send) information to the customer.
Dell Computer revolutionized the purchasing of computers by letting customers configure their own systems. Many other online vendors now offer this type of mass customization. Consumers are shown prepackaged specials and are then given the option to custom-build products using product configurators. Customers can view their account balances or check the shipping status of their orders at any time from their computers or cell phones. If you order books from Amazon, for example, you can find the anticipated arrival date. Many companies follow this model and provide similar services (see www.fedex.com and www.ups.com). Many companies allow customers to create their own individual Web pages. These pages can be used to record purchases and preferences, as well as problems and requests.
For example, you can create your own personalized Google Web page by visiting www.google.com/ig. FAQs are the simplest and least expensive tool for dealing with repetitive customer questions. Customers use this tool by themselves, which makes the delivery cost minimal. However, nonstandard questions still require an individual e-mail. E-mail has become the most popular tool of customer service. Inexpensive and fast, e-mail is used primarily to answer inquiries from customers. However, firms also rely on e-mail to disseminate product and other information (for example, confirmations) and to conduct correspondence regarding any topic. One of the most important tools of customer service is the call center. Call centers are typically the “face” of the organization to its customers, and they handle incoming product support and customer inquiries.
SUPPLY CHAIN MANAGEMENT SYSTEMS
A supply chain refers to the flow of materials, information, money, and services from raw material suppliers, through factories and warehouses to the end customers. A supply chain also includes the organizations and processes that create and deliver products, information, and services to end customers. The function of supply chain management (SCM) is to plan, organize, and optimize the supply chain’s activities. Like other functional areas, SCM utilizes information systems. The goal of SCM systems is to reduce friction along the supply chain. Friction can involve increased time, costs, and inventories as well as decreased customer satisfaction.
SCM systems, then, reduce uncertainty and risks by decreasing inventory levels and cycle time and improving business processes and customer service. All of these benefits contribute to increased profitability and competitiveness. Significantly, SCM systems are a type of interorganizational information system. An interorganizational information system (IOS) involves information flows among two or more organizations. By connecting the information systems of business partners, IOSs enable the partners to perform a number of tasks: • Reduce the costs of routine business transactions.
• Improve the quality of the information flow by reducing or eliminating errors. • Compress the cycle time involved in fulfilling business transactions. • Eliminate paper processing and its associated inefficiencies and costs. • Make the transfer and processing of information easier for users.
The Structure and Components of Supply Chains
The term supply chain comes from a picture of how the partnering organizations are linked together. A typical supply chain, which links a company with its suppliers and its distributors and customers, is shown in Figure 8.3. Note that the supply chain involves three segments: 1. Upstream, where sourcing or procurement from external suppliers occurs 2. Internal, where packaging, assembly, or manufacturing takes place 3. Downstream, where distribution takes place, frequently by external distributors The flow of information and goods can be bidirectional. For example, damaged or unwanted products can be returned, a process known as reverse logistics. Using the retail clothing industry as an example, we see that reverse logistics would involve clothing that customers return, either because the item had defects or because the customer did not like the item. [pic]
Tiers of Suppliers. If you look closely at Figure 8.3, you will notice that there are several tiers of suppliers. As the diagram shows, a supplier may have one or more subsuppliers, and the subsupplier may have its own subsupplier(s), and so on. For example, with an automobile manufacturer, Tier 3 suppliers produce basic products such as glass, plastic, and rubber. Tier 2 suppliers use these inputs to make windshields, tires, and plastic moldings. Tier 1 suppliers produce integrated components such as dashboards and seat assemblies. The Flows in the Supply Chain. There are typically three flows in the supply chain: materials, information, and financial.
Material flows are the physical products, raw materials, supplies, and so forth that flow along the chain. Material flows also include reverse flows— returned products, recycled products, and disposal of materials or products. A supply chain thus involves a product life-cycle approach, from “dirt to dust.” Information flows consist of data that are related to demand, shipments, orders, returns, and schedules, as well as changes in any of these data. Finally, financial flows involve money transfers, payments, credit card information and authorization, payment schedules, e-payments, and credit-related data. All supply chains do not have the same number and types of flows.
For example, in service industries there may be no physical flow of materials, but frequently there is a flow of information, often in the form of documents (physical or electronic copies). The digitization of software, music, and other content may create a supply chain without any physical flow. Notice, however, that in such a case, there are two types of information flows: one that replaces materials flow (for example, digitized software) and one that provides the supporting information (orders, billing, and so on). To manage the supply chain, an organization must coordinate all the above flows among all of the parties involved in the chain.
Problems along the Supply Chain
As we discussed earlier, problems, or friction, can develop within a supply chain. One major symptom of ineffective supply chains is poor customer service. In some cases, supply chains don’t deliver products or services when and where customers—either individuals or businesses—need them. In other cases the supply chain provides poor-quality products. Other problems are high inventory costs and loss of revenues. The problems along the supply chain stem primarily from two sources: (1) uncertainties, and (2) the need to coordinate several activities, internal units, and business partners. A major source of supply chain uncertainties is the demand forecast. Demand for a product can be influenced by numerous factors such as competition, prices, weather conditions, technological developments, and customers’ general confidence.
Another uncertainty is delivery times, which depend on factors ranging from production machine failures to road construction and traffic jams. In addition, quality problems in materials and parts can create production delays, which also lead to supply chain problems. One of the major difficulties in properly setting inventory levels in various parts of the supply chain is known as the bullwhip effect.
The bullwhip effect refers to erratic shifts in orders up and down the supply chain. Basically, customer demand variables can become magnified when they are viewed through the eyes of managers at each link in the supply chain. If each distinct entity that makes ordering and inventory decisions places its own interests above those of the chain, then stockpiling can occur at as many as seven or eight locations along the supply chain. Research has shown that in some cases such hoarding has led to as many as 100 days of inventory that is waiting “just in case” (versus 10–20 days in the normal case).
Solutions to Supply Chain Problems
Supply chain problems can be very costly for companies. Therefore, organizations are motivated to find innovative solutions. During the oil crises of the 1970s, for example, Ryder Systems, a large trucking company, purchased a refinery to control the upstream part of the supply chain and ensure timely availability of gasoline for its trucks. Such a strategy is known as vertical integration. A general definition of vertical integration is a business strategy in which a company buys its suppliers. (Ryder sold the refinery later, because (1) it could not manage a business it did not know and (2) oil became more plentiful.) In the remaining portion of this section, we will look at some of the possible solutions to supply chain problems, many of which are supported by IT.
Using Inventories to Solve Supply Chain Problems. Undoubtedly, the most common solution is building inventories as insurance against supply chain uncertainties. The main problem with this approach is that it is very difficult to correctly determine inventory levels for each product and part. If inventory levels are set too high, the costs of keeping the inventory will greatly increase. (Also, as we have seen, excessive inventories at multiple points in the supply chain can result in the bullwhip effect.) If the inventory is too low, there is no insurance against high demand or slow delivery times. In such cases, customers don’t receive what they want, when they want or need it. The result is lost customers and revenues. In either event, the total cost—including the costs of maintaining inventories, the costs of lost sales opportunities, and the costs of developing a bad reputation—can be very high. Thus, companies make major attempts to optimize and control inventories.
Information Sharing. Another common way to solve supply chain problems, and especially to improve demand forecasts, is sharing information along the supply chain. Such sharing can be facilitated by electronic data interchange and extranets, topics we discuss in the next section. One of the most notable examples of information sharing occurs between large manufacturers and retailers. For example, Wal-Mart provides Procter & Gamble with access to daily sales information from every store for every item P&G makes for Wal-Mart. This access enables P&G to manage the inventory replenishment for Wal-Mart’s stores. By monitoring inventory levels, P&G knows when inventories fall below the threshold for each product at any Wal-Mart store. These data trigger an immediate shipment.
Such information sharing between Wal-Mart and P&G is done automatically. It is part of a vendor-managed inventory strategy. Vendor-managed inventory (VMI) occurs when a retailer does not manage the inventory for a particular product or group of products. Instead, the supplier manages the entire inventory process. P&G has similar agreements with other major retailers. The benefit for P&G is accurate and timely information on consumer demand for its products. Thus, P&G can plan production more accurately, minimizing the bullwhip effect.