IT work

Enterprise systems are key in businesses’ core IT components.

Resource: Ch. 8 of Essentials of Management Information Systems

Answer each of the following questions in 200 to 300 words:

What are enterprise systems? Provide examples of organizational functions supported by enterprise systems.

· How does effectively implementing and using enterprise systems contribute to achieving operational excellence?

What challenges are posed by enterprise application?

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

and Customer Intimacy: Enterprise
Applications

9 E-Commerce: Digital Markets,
Digital Goods

10 Improving Decision Making and
Managing Knowledge

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

sion making. These applications include enterprise systems; systems

for supply chain management, customer relationship management,

and knowledge management; e-commerce applications; decision-

support systems; and executive support systems. This part answers

questions such as these: How can enterprise applications improve

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

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

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

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

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

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

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

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

4. What are the challenges posed by enterprise applications?

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

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

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271

CHAPTER OUTLINE
Chapter-Opening Case: Enterprise Applications Help

Severstal Create a Global Production Platform

8.1 Enterprise Systems

8.2 Supply Chain Management Systems

8.3 Customer Relationship Management Systems

8.4 Enterprise Applications: New Opportunities and
Challenges

8.5 Hands-On MIS Projects

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

ENTERPRISE APPLICATIONS HELP SEVERSTAL CREATE A GLOBAL PRODUCTION
PLATFORM

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

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

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

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272 Part III: Key System Applications for the Digital Age

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

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

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

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

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

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

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

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

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8.1 Enterprise Systems

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

WHAT ARE ENTERPRISE SYSTEMS?

Imagine that you had to run a business based on information from tens or even hundreds of
different databases and systems, none of which could speak to one another? Imagine your
company had 10 different major product lines, each produced in separate factories, and each
with separate and incompatible sets of systems controlling production, warehousing, and
distribution.

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

In this situation, without integrated systems, your decision making would often be based
on manual hard copy reports, often out of date, and it would be difficult to really understand
what is happening in the business as whole. Sales personnel might not be able to tell at the
time they place an order whether the ordered items are in inventory, and manufacturing
could not easily use sales data to plan for new production. You now have a good idea of why
firms need a special enterprise system to integrate information.

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

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274 Part III: Key System Applications for the Digital Age

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

If a sales representative places an order for tire rims, for example, the system verifies the
customer’s credit limit, schedules the shipment, identifies the best shipping route, and
reserves the necessary items from inventory. If inventory stock were insufficient to fill the
order, the system schedules the manufacture of more rims, ordering the needed materials
and components from suppliers. Sales and production forecasts are immediately updated.
General ledger and corporate cash levels are automatically updated with the revenue and
cost information from the order. Users could tap into the system and find out where that
particular order was at any minute. Management could obtain information at any point in
time about how the business was operating. The system could also generate enterprise-wide
data for management analyses of product cost and profitability.

ENTERPRISE SOFTWARE

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

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

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

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

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Chapter 8: Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 275

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

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

BUSINESS VALUE OF ENTERPRISE SYSTEMS

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

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

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

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

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

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

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

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

TABLE 8.1

Business Processes
Supported by
Enterprise Systems

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Enterprise systems provide valuable information for improving management decision
making. Corporate headquarters has access to up-to-the-minute data on sales, inventory, and
production, and uses this information to create more accurate sales and production forecasts.
Enterprise software includes analytical tools for using data captured by the system to evalu-
ate overall organizational performance. Enterprise system data have common standardized
definitions and formats that are accepted by the entire organization. Performance figures
mean the same thing across the company. Enterprise systems allow senior management to
easily find out at any moment how a particular organizational unit is performing, determine
which products are most or least profitable, and calculate costs for the company as a whole.

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

8.2 Supply Chain Management Systems

If you manage a small firm that makes a few products or sells a few services, chances are
you will have a small number of suppliers. You could coordinate your supplier orders and
deliveries using a telephone and fax machine. But if you manage a firm that produces more
complex products and services, then you will have hundreds of suppliers, and your suppliers
will each have their own set of suppliers. Suddenly, you are in a situation where you will
need to coordinate the activities of hundreds or even thousands of other firms in order to pro-
duce your products and services. Supply chain management systems, which we introduced
in Chapter 2, are an answer to these problems of supply chain complexity and scale.

THE SUPPLY CHAIN

A firm’s supply chain is a network of organizations and business processes for procuring
raw materials, transforming these materials into intermediate and finished products, and
distributing the finished products to customers. It links suppliers, manufacturing plants,
distribution centers, retail outlets, and customers to supply goods and services from source
through consumption. Materials, information, and payments flow through the supply chain
in both directions.

Goods start out as raw materials and, as they move through the supply chain, are trans-
formed into intermediate products (also referred to as components or parts), and finally, into
finished products. The finished products are shipped to distribution centers and from there to
retailers and customers. Returned items flow in the reverse direction from the buyer back to the
seller.

Let’s look at the supply chain for Nike sneakers as an example. Nike designs, markets,
and sells sneakers, socks, athletic clothing, and accessories throughout the world. Its
primary suppliers are contract manufacturers with factories in China, Thailand, Indonesia,
Brazil, and other countries. These companies fashion Nike’s finished products.

Nike’s contract suppliers do not manufacture sneakers from scratch. They obtain compo-
nents for the sneakers—the laces, eyelets, uppers, and soles—from other suppliers and then
assemble them into finished sneakers. These suppliers in turn have their own suppliers. For
example, the suppliers of soles have suppliers for synthetic rubber, suppliers for chemicals
used to melt the rubber for molding, and suppliers for the molds into which to pour the rubber.
Suppliers of laces have suppliers for their thread, for dyes, and for the plastic lace tips.

Figure 8-2 provides a simplified illustration of Nike’s supply chain for sneakers; it
shows the flow of information and materials among suppliers, Nike, Nike’s distributors,
retailers, and customers. Nike’s contract manufacturers are its primary suppliers. The
suppliers of soles, eyelets, uppers, and laces are the secondary (Tier 2) suppliers. Suppliers
to these suppliers are the tertiary (Tier 3) suppliers.

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Chapter 8: Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 277

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

The supply chain illustrated in Figure 8-2 has been simplified. It only shows two
contract manufacturers for sneakers and only the upstream supply chain for sneaker soles.
Nike has hundreds of contract manufacturers turning out finished sneakers, socks, and
athletic clothing, each with its own set of suppliers. The upstream portion of Nike’s supply
chain would actually comprise thousands of entities. Nike also has numerous distributors
and many thousands of retail stores where its shoes are sold, so the downstream portion of
its supply chain is also large and complex.

INFORMATION SYSTEMS AND SUPPLY CHAIN MANAGEMENT

Inefficiencies in the supply chain, such as parts shortages, underutilized plant capacity,
excessive finished goods inventory, or high transportation costs, are caused by inaccurate or
untimely information. For example, manufacturers may keep too many parts in inventory
because they do not know exactly when they will receive their next shipments from their
suppliers. Suppliers may order too few raw materials because they do not have precise
information on demand. These supply chain inefficiencies waste as much as 25 percent of a
company’s operating costs.

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

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If a manufacturer had perfect information about exactly how many units of product
customers wanted, when they wanted them, and when they could be produced, it would be
possible to implement a highly efficient just-in-time strategy. Components would arrive
exactly at the moment they were needed and finished goods would be shipped as they left
the assembly line.

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

One recurring problem in supply chain management is the bullwhip effect, in which
information about the demand for a product gets distorted as it passes from one entity to the
next across the supply chain. A slight rise in demand for an item might cause different mem-
bers in the supply chain—distributors, manufacturers, suppliers, secondary suppliers
(suppliers’ suppliers), and tertiary suppliers (suppliers’ suppliers’ suppliers)—to stockpile
inventory so each has enough “just in case.” These changes ripple throughout the supply
chain, magnifying what started out as a small change from planned orders, creating excess
inventory, production, warehousing, and shipping costs (see Figure 8-3).

278 Part III: Key System Applications for the Digital Age

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

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For example, Procter & Gamble (P&G) found it had excessively high inventories of its
Pampers disposable diapers at various points along its supply chain because of such
distorted information. Although customer purchases in stores were fairly stable, orders from
distributors would spike when P&G offered aggressive price promotions. Pampers and
Pampers’ components accumulated in warehouses along the supply chain to meet demand
that did not actually exist. To eliminate this problem, P&G revised its marketing, sales, and
supply chain processes and used more accurate demand forecasting.

The bullwhip is tamed by reducing uncertainties about demand and supply when all
members of the supply chain have accurate and up-to-date information. If all supply chain
members share dynamic information about inventory levels, schedules, forecasts, and
shipments, they have more precise knowledge about how to adjust their sourcing, manufac-
turing, and distribution plans. Supply chain management systems provide the kind of
information that helps members of the supply chain make better purchasing and scheduling
decisions. Table 8.2 describes how firms benefit from these systems.

SUPPLY CHAIN MANAGEMENT SOFTWARE

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

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

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

Chapter 8: Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 279

Information from supply chain management systems helps firms

Decide when and what to produce, store, and move

Rapidly communicate orders

Track the status of orders

Check inventory availability and monitor inventory levels

Reduce inventory, transportation, and warehousing costs

Track shipments

Plan production based on actual customer demand

Rapidly communicate changes in product design

TABLE 8.2

How Information
Systems Facilitate
Supply Chain
Management

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from i2 Technologies, that includes modules for Master Scheduling, Deployment Planning,
and Inventory Planning. Whirlpool also installed i2’s Web-based tool for Collaborative
Planning, Forecasting, and Replenishment (CPFR) for sharing and combining its sales
forecasts with those of its major sales partners. Improvements in supply chain planning
combined with new state-of-the-art distribution centers helped Whirlpool increase availabil-
ity of products in stock when customers needed them to 97 percent, while reducing the
number of excess finished goods in inventory by 20 percent and forecasting errors by 50
percent (Barrett, 2009).

Supply chain execution systems manage the flow of products through distribution
centers and warehouses to ensure that products are delivered to the right locations in the
most efficient manner. They track the physical status of goods, the management of
materials, warehouse and transportation operations, and financial information involving
all parties. Haworth Incorporated’s Warehouse Management System (WMS) is an
example. Haworth is a world-leading manufacturer and designer of office furniture, with
distribution centers in four different states. The WMS tracks and controls the flow of
finished goods from Haworth’s distribution centers to its customers. Acting on shipping
plans for customer orders, the WMS directs the movement of goods based on immediate
conditions for space, equipment, inventory, and personnel. Manugistics and i2
Technologies (both acquired by JDA Software) are major supply chain management soft-
ware vendors, and enterprise software vendors SAP and Oracle PeopleSoft offer supply
chain management modules.

The Interactive Session on Technology describes how supply chain management
software improves operational performance and decision making at Procter & Gamble. This
multinational giant manages global supply chains for more than 300 brands, each of which
has many different configurations. Its supply chains are numerous and complex. P&G has
many supply chain management applications. The one described here is for inventory
optimization.

GLOBAL SUPPLY CHAINS AND THE INTERNET

Before the Internet, supply chain coordination was hampered by the difficulties of making
information flow smoothly among disparate internal supply chain systems for purchasing,
materials management, manufacturing, and distribution. It was also difficult to share
information with external supply chain partners because the systems of suppliers, distribu-
tors, or logistics providers were based on incompatible technology platforms and standards.
Enterprise systems supply some integration of internal supply chain processes but they are
not designed to deal with external supply chain processes.

Some supply chain integration is supplied inexpensively using Internet technology.
Firms use intranets to improve coordination among their internal supply chain processes,
and they use extranets to coordinate supply chain processes shared with their business
partners (see Figure 8-4).

Using intranets and extranets, all members of the supply chain are instantly able to
communicate with each other, using up-to-date information to adjust purchasing, logistics,
manufacturing, packaging, and schedules. A manager will use a Web interface to tap into
suppliers’ systems to determine whether inventory and production capabilities match
demand for the firm’s products. Business partners will use Web-based supply chain
management tools to collaborate online on forecasts. Sales representatives will access
suppliers’ production schedules and logistics information to monitor customers’ order
status.

Global Supply Chain Issues
More and more companies are entering international markets, outsourcing manufacturing
operations, and obtaining supplies from other countries as well as selling abroad. Their
supply chains extend across multiple countries and regions. There are additional complexi-
ties and challenges to managing a global supply chain.

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INTERACTIVE SESSION: TECHNOLOGY Procter & Gamble Tries to Optimize Inventory

The shampoo and lipstick aisles at Target and
Wal-Mart hardly seem like battlegrounds, but they are
actually sites for an unending struggle among
consumer products companies for retail shelf space.
No company knows this better than Procter & Gamble
(P&G), one of the world’s largest consumer goods
companies, with annual revenue surpassing $76 billion
and 138,000 employees in 80 countries. The company
sells more than 300 brands worldwide, including
Cover Girl cosmetics, Olay skin care, Crest, Charmin,
Tide, Pringles, and Pampers.

Demand variability for P&G’s products from its
Beauty division is very high. A popular eye shadow or
lipstick color may quickly fall out of favor, while fash-
ion trends call for new products continually to come
on-stream. Major retail outlets such as Wal-Mart and
Target compete by offering brand-name products at
the lowest price possible.

In response to these pressures, P&G is constantly
searching for ways to reduce supply chain costs and
improve efficiency throughout its entire manufacturing
and distribution network. It recently implemented a
multi-echelon inventory optimization system to man-
age its supply chain more efficiently.

The supply chains of a company as large as P&G
are extremely complicated, featuring thousands of
suppliers, manufacturing facilities, and markets. Even
the slightest of changes at any part of the supply chain
has significant effects on all of the other participants.
What’s more, because P&G’s supply chains are so
extensive, the chance for any errors or inefficiencies to
occur are greater than with smaller, more compact
supply chains. Inventory optimization for a company
as large as P&G is therefore critical to cutting costs
and increasing revenues. P&G was already renowned
for its supply chain management, successfully reduc-
ing its surplus inventory with sales and operations
planning, better forecasting, just-in-time delivery
strategies, and vendor-managed inventory activity. But
multi-echelon inventory optimization has provided the
company with a new means to achieve even higher
levels of efficiency.

Multi-echelon networks are networks in which
products are located in a variety of locations along their
path to distribution, some of which are in different
“echelons”, or tiers, of the enterprise’s distribution net-
work. For example, large retailers’ distribution net-
works often consist of a regional distribution center and
a larger number of forward distribution centers. The
presence of multiple echelons in a distribution network
makes inventory management more difficult because
each echelon is isolated from other echelons, so

changes in inventory made by one echelon may have
unpredictable consequences on the others.

Multi-echelon inventory optimization seeks to
minimize the total inventory in all of the echelons of a
company’s supply chain. This is more complicated
than traditional inventory optimization because of the
additional lead times between each echelon, the
bullwhip effect, and the need to synchronize orders
and control costs between echelons. Companies with
this level of complexity in their supply chains must
replenish and divide their inventories at each distribu-
tion point along the supply chain, as opposed to just
one distribution point or even just the inventory of the
initial supplier. Each point in the supply chain is also
unaware of the inventory levels of points beyond
those that they have immediate contact with, which
creates a lack of visibility up and down the supply
chain.

The multi-echelon approach to inventory manage-
ment consists of the following factors: multiple
independent forecast updates in each echelon;
accounting for all lead times and variations in lead
times; management of the bullwhip effect; creation of
visibility up and down the demand chain; synchro-
nized order strategies; and appropriate modeling of the
effects of different echelons’ replenishment strategies
on one another.

P&G prefers to develop its own analytical tools,
but in this case turned to Optiant for its PowerChain
Suite multi-echelon inventory optimization solution.
Gillette, which P&G was preparing to acquire at the
time, had already begun using Optiant software with
strong results.

PowerChain Suite determines appropriate
inventory configurations that can adapt smoothly to
quickly changing demand. The solution uses mathe-
matical models, based on award-winning research
from MIT, which balance costs, resources, and
customer service to arrive at these configurations.
PowerChain tools pool inventory to minimize risk
across products, components, and customers and also
coordinate inventory policy across different items.
(When inventory is available at the same time, this
helps reduce early stock). PowerChain enables com-
panies to design new supply chains and to model
their end-to-end supply chain. They then can quickly
evaluate the cost and performance of alternate supply
chain structures and sourcing options to make better
decisions. Optiant has provided supply chain man-
agement for other leading manufacturers such as
Black & Decker, HP, IKEA, Imation, Intel, Kraft,
Microsoft, and Sonoco.

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282 Part III: Key System Applications for the Digital Age

1. Why are larger supply chains more difficult to
manage? List several reasons.

2. Why is supply chain management so important at
a company such as P&G?

3. How did inventory optimization impact operations
and decision making at P&G?

4. Why wouldn’t a small company derive much ben-
efit from multi-echelon inventory optimization as
a large company? Explain your answer.

P&G’s beauty division served as the pilot project
for the adoption of the Optiant software. Beauty is one
of the company’s largest, most complicated, and most
profitable divisions. P&G believed that if multi-eche-
lon inventory strategies could increase profitability at
this division, it would work at any unit of the company.

The Optiant software first configured P&G’s
existing cosmetics supply chain, pulling in the previ-
ous 18 months of demand data and using the previous
three months’ demand variability. It then optimized
the inventory strategy within that supply chain, aim-
ing for target service levels above 99 percent. A third
step identified alternate supply chain designs, and the
final step created an optimal redesign of the supply
network.

1. Surf the Web for the ingredients of a Procter &
Gamble product such as Crest toothpaste or
Cover Girl lipstick or look for the list of ingre-
dients on the packaging for these products in a
retail store. Make a list of the ingredients for the
product you selected.

2. Use the Web to find the major suppliers for each
of these ingredients and their locations.

3. What did you learn from your investigation
about P&G’s supply chains for these products?
What factors would determine price and
availability of these products?

Results have been impressive. P&G’s beauty
division trimmed its total inventory by 3 to 7 percent
and maintained service levels above 99 percent. In the
first fiscal year after implementation of the new soft-
ware, the division’s earnings rose 13 percent and sales
rose 7 percent. Inventory days on hand were down by
eight days compared to the previous fiscal year. The
results were so successful that P&G began rolling out
multi-echelon inventory strategies across all of its var-
ious manufacturing branches.

Sources: “Optiant Adds New Inventory Optimization Capabilities and Centralized
Administration Portal,” Supply& Demand Chain Executive, February 27, 2009;
John Kerr, “Procter & Gamble Takes Inventory Up a Notch,” Supply Chain
Management Review, February 13, 2008; Optiant, “Optiant Announces Multi-
Echelon Inventory Optimization Enterprise Agreement with P&G,” October 17,
2007; and www. optiant.com accessed July 17, 2009.

CASE STUDY QUESTIONS MIS IN ACTION

Figure 8-4
Intranets and
Extranets for Supply
Chain Management
Intranets integrate infor-
mation 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, some-
times, to retail
customers to improve
coordination of external
supply chain processes.

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Global supply chains typically span greater geographic distances and time differences
than domestic supply chains and have participants from a number of different countries.
Although the purchase price of many goods might be lower abroad, there are often
additional costs for transportation, inventory (the need for a larger buffer of safety stock),
and local taxes or fees. Performance standards may vary from region to region or from
nation to nation. Supply chain management may need to reflect foreign government regula-
tions and cultural differences. All of these factors impact how a company takes orders, plans
distribution, sizes warehousing, and manages inbound and outbound logistics throughout
the global markets it services.

The Internet helps companies manage many aspects of their global supply chains,
including sourcing, transportation, communications, and international finance. Today’s
apparel industry, for example, relies heavily on outsourcing to contract manufacturers in
China and other low-wage countries. Apparel companies are starting to use the Web to
manage their global supply chain and production issues.

For example, Koret of California, a subsidiary of apparel maker Kellwood Co., uses
e-SPS Web-based software to gain end-to-end visibility into its entire global supply chain.
E-SPS features Web-based software for sourcing, work-in-progress tracking, production
routing, product development tracking, problem identification and collaboration, delivery-
date projections, and production-related inquiries and reports.

As goods are being sourced, produced, and shipped, communication is required among
retailers, manufacturers, contractors, agents, and logistics providers. Many, especially
smaller companies, still share product information over the phone, via e-mail, or through
faxes. These methods slow down the supply chain and also increase errors and uncertainty.
With e-SPS, all supply chain members communicate through a Web-based system. If one of
Koret’s vendors makes a change in the status of a product, everyone in the supply chain sees
the change.

In addition to contract manufacturing, globalization has encouraged outsourcing
warehouse management, transportation management, and related operations to third-party
logistics providers, such as UPS Supply Chain Solutions and Schneider Logistics Services.
These logistics services offer Web-based software to give their customers a better view of
their global supply chains. Customers are able to check a secure Web site to monitor inven-
tory and shipments, helping them run their global supply chains more efficiently.

Demand-Driven Supply Chains: From Push to Pull Manufacturing and
Efficient Customer Response
In addition to reducing costs, supply chain management systems facilitate efficient customer
response, enabling the workings of the business to be driven more by customer demand.
(We introduced efficient customer response systems in Chapter 3.)

Earlier supply chain management systems were driven by a push-based model (also
known as build-to-stock). In a push-based model, production master schedules are based
on forecasts or best guesses of demand for products, and products are “pushed” to
customers. With new flows of information made possible by Web-based tools, supply chain
management more easily follows a pull-based model. In a pull-based model, also known as
a demand-driven model or build-to-order, actual customer orders or purchases trigger events
in the supply chain. Transactions to produce and deliver only what customers have ordered
move up the supply chain from retailers to distributors to manufacturers and eventually to
suppliers. Only products to fulfill these orders move back down the supply chain to the
retailer. Manufacturers use only actual order demand information to drive their production
schedules and the procurement of components or raw materials, as illustrated in Figure 8-5.
Wal-Mart’s continuous replenishment system and Dell Computer’s assemble-to-order sys-
tem, both described in Chapter 3, are examples of the pull-based model.

The Internet and Internet technology make 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. Members of the network immediately adjust to

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changes in schedules or orders. Ultimately, the Internet could create a “digital logistics
nervous system” throughout the supply chain (see Figure 8-6).

BUSINESS VALUE OF SUPPLY CHAIN MANAGEMENT SYSTEMS

You have just read how supply chain management systems enable firms to streamline both
their internal and external supply chain processes and provide management with more
accurate information about what to produce, store, and move. By implementing a networked
and integrated supply chain management system, companies match supply to demand,
reduce inventory levels, improve delivery service, speed product time to market, and use
assets more effectively.

Total supply chain costs represent the majority of operating expenses for many
businesses and in some industries approach 75 percent of the total operating budget.
Reducing supply chain costs has a major impact on firm profitability.

In addition to reducing costs, supply chain management systems help increase sales. If a
product is not available when a customer wants it, customers often try to purchase it from

284 Part III: Key System Applications for the Digital Age

Figure 8-5
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.”

Figure 8-6
The Future Internet-
Driven Supply Chain
The future Internet-driven
supply chain operates
like a digital logistics
nervous system. It pro-
vides multidirectional
communication among
firms, networks of firms,
and e-marketplaces so
that entire networks of
supply chain partners
can immediately adjust
inventories, orders, and
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someone else. More precise control of the supply chain enhances the firm’s ability to have
the right product available for customer purchases at the right time.

8.3 Customer Relationship Management Systems

You’ve all heard phrases such as “the customer is always right” or “the customer comes
first.” Today these words ring more true than ever. Because competitive advantage based on
an innovative new product or service is often very short lived, companies are realizing that
their only enduring competitive strength may be their relationships with their customers.
Some say that the basis of competition has switched from who sells the most products and
services to who “owns” the customer, and that customer relationships represent a firm’s
most valuable asset.

WHAT IS CUSTOMER RELATIONSHIP MANAGEMENT?

What kinds of information would you need to build and nurture strong, long-lasting
relationships with customers? You’d want to know exactly who your customers are, how to
contact them, whether they are costly to service and sell to, what kinds of products and
services they are interested in, and how much money they spend on your company. If you
could, you’d want to make sure you knew each of your customers well, as if you were
running a small-town store. And you’d want to make your good customers feel special.

In a small business operating in a neighborhood, it is possible for business owners
and managers to really know their customers on a personal, face-to-face basis. But in a
large business operating on a metropolitan, regional, national, or even global basis, it is
impossible to “know your customer” in this intimate way. In these kinds of businesses
there are too many customers and too many different ways that customers interact with
the firm (over the Web, the phone, fax, and face-to-face). It becomes especially difficult
to integrate information from all theses sources and to deal with the large numbers of
customers.

A large business’s processes for sales, service, and marketing tend to be highly compart-
mentalized, and these departments do not share much essential customer information. Some
information on a specific customer might be stored and organized in terms of that person’s
account with the company. Other pieces of information about the same customer might be
organized by products that were purchased. There is no way to consolidate all of this
information to provide a unified view of a customer across the company.

This is where customer relationship management systems help. Customer relationship
management (CRM) systems, which we introduced in Chapter 2, capture and integrate
customer data from all over the organization, consolidate the data, analyze the data, and then
distribute the results to various systems and customer touch 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, wireless
device, or retail store.

Well-designed CRM systems provide a single enterprise view of customers that is useful
for improving both sales and customer service. Such systems likewise provide customers
with a single view of the company regardless of what touch point the customer uses
(see Figure 8-7).

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

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CRM SOFTWARE

Commercial CRM software packages range from niche tools that perform limited func-
tions, such as personalizing Web sites for specific customers, to large-scale enterprise
applications that capture myriad interactions with customers, analyze them with sophisti-
cated reporting tools, and link to other major enterprise applications, such as supply chain
management and enterprise systems. The more comprehensive CRM packages contain
modules for partner relationship management (PRM) and employee relationship man-
agement (ERM).

PRM uses many of the same data, tools, and systems as customer relationship manage-
ment to enhance collaboration between a company and its selling partners. If a company
does not sell directly to customers but rather works through distributors or retailers, PRM
helps these channels sell to customers directly. It provides a company and its selling partners
with the ability to trade information and distribute leads and data about customers, integrat-
ing lead generation, pricing, promotions, order configurations, and availability. It also
provides a firm with tools to assess its partners’ performances so it can make sure its best
partners receive the support they need to close more business.

ERM software deals with employee issues that are closely related to CRM, such as
setting objectives, employee performance management, performance-based compensa-
tion, and employee training. Major CRM application software vendors include Oracle-
owned Siebel and PeopleSoft CRM, SAP, Salesforce.com, and Microsoft Dynamics
CRM.

Customer relationship management systems typically provide software and online tools
for sales, customer service, and marketing. We briefly describe some of these capabilities.

Sales Force Automation (SFA)
Sales force automation modules in CRM systems help sales staff increase their productivity
by focusing sales efforts on the most profitable customers, those who are good candidates
for sales and services. CRM systems provide sales prospect and contact information, prod-
uct information, product configuration capabilities, and sales quote generation capabilities.
Such software can assemble information about a particular customer’s past purchases to
help the salesperson make personalized recommendations. CRM software enables sales,
marketing, and delivery departments to easily share customer and prospect information. It
increases each salesperson’s efficiency in reducing the cost per sale as well as the cost of
acquiring new customers and retaining old ones. CRM software also has capabilities for
sales forecasting, territory management, and team selling.

286 Part III: Key System Applications for the Digital Age

Figure 8-7
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 relation-
ship, including customer
service, sales, and
marketing.

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Customer Service
Customer service modules in CRM systems provide information and tools to increase the
efficiency of call centers, help desks, and customer support staff. They have capabilities for
assigning and managing customer service requests.

One such capability is an appointment or advice telephone line: When a customer
calls a standard phone number, the system routes the call to the correct service person,
who inputs information about that customer into the system only once. Once the
customer’s data are in the system, any service representative can handle the customer
relationship. Improved access to consistent and accurate customer information help call
centers handle more calls per day and decrease the duration of each call. Thus, call
centers and customer service groups achieve greater productivity, reduced transaction
time, and higher quality of service at lower cost. The customer is happier because he or
she spends less time on the phone restating his or her problem to customer service
representatives.

The Interactive Session on Organizations describes another CRM capability for improv-
ing customer service and operational efficiency. Implementation of Enkata software helped
JP Morgan Chase increase its rate of first-call resolution, which takes place when a call
center agent is able resolve a customer service issue during the first call.

CRM systems may also include Web-based self-service capabilities: The company Web
site can be set up to provide inquiring customers’ personalized support information as well
as the option to contact customer service staff by phone for additional assistance.

Marketing
CRM systems support direct-marketing campaigns by providing capabilities for capturing
prospect and customer data, for providing product and service information, for qualifying
leads for targeted marketing, and for scheduling and tracking direct-marketing mailings or
e-mail (see Figure 8-8). Marketing modules also 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.

Cross-selling is the marketing of complementary products to customers. (For example, in
financial services, a customer with a checking account might be sold a money market account
or a home improvement loan.) CRM tools also help firms manage and execute marketing
campaigns at all stages, from planning to determining the rate of success for each campaign.

Chapter 8: Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 287

Figure 8-8
How CRM Systems
Support Marketing
Customer relationship
management software
provides a single point
for users to manage and
evaluate marketing
campaigns across
multiple channels, includ-
ing e-mail, direct mail,
telephone, the Web, and
wireless messages.

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INTERACTIVE SESSION: ORGANIZATIONS
Customer Relationship Management Helps Chase Card
Services Manage Customer Calls

If you have a credit card, there’s a good chance that it
is from Chase. Chase Card Services is the division of
JP Morgan Chase that specializes in credit cards,
offering an array of credit card products such as the
Chase Rewards Platinum Visa card. As one of the
largest credit card issuers in the United States, the
company fields a correspondingly large amount of
calls from people seeking customer service for their
credit card accounts. Each of Chase’s 6,000 call center
agents worldwide at the company’s 11 call centers
fields field up to 120 calls per day. The company
handles slightly less than 200 million calls each year
from a customer base of 100 million.

Even a small reduction of 1 percent to the amount
of calls received results in savings of millions of dol-
lars and improved customer service for Chase.
Achieving such a reduction is easier said than done,
however. In 2006, Chase Card Services attempted to
accomplish this by improving first-call resolution.
First-call resolution is when a call center agent is able
to resolve a customer’s issues during the initial call to
customer service without requiring additional calls.

The problem was that the company’s record
keeping did not give an accurate account of current
rates of first-call resolution. Chase had previously tried
tracking first-call resolution rates by having agents log
the content and results of each call they received. But
this task was time-consuming and was not standard-
ized, since agents tended to record results subjectively
and not in a uniform way. Company policies for some
customer requests were also far from ideal for increas-
ing first-call resolution. For example, agents were only
able to process balance transfers for customers calling
from their homes, and the fee structure underwent mul-
tiple changes over a short span, prompting repeat calls.

To improve call center efficiency, Chase con-
tracted with Enkata Technologies to implement a
performance and talent management system.

The system monitors and tags each call with the
topic and length of the call as well as the length of time
the agent that handled the call has been working. It
doesn’t require agents to perform any action to acquire
this information; it tracks calls automatically by
keeping track of the keyboard strokes of each agent.

As soon as an agent clicks on the feature of the
account that the customer is calling about, the Enkata
system automatically identifies the reason for the call.
Proprietary algorithms match the reason and caller
identification to the amount of time predetermined for
each type of call.

The system then monitors discrepancies in call
time, depending on the reason for the call. For
example, a call from a customer requiring card activa-
tion should be a quick call, so the system will pinpoint
card activation calls that take longer than normal, or
fee dispute calls that are shorter than normal. But
sometimes customers have multiple reasons for call-
ing, which would have been very difficult to track
prior to the implementation of Enkata’s system. Now
Enkata separates each individual reason for calling
and organizes them into a sequence, so that a call with
multiple issues to resolve is analyzed using the appro-
priate time frame.

By separating and organizing reasons for calling
into distinct categories, Chase is able to determine
criteria for declaring particular calls “resolved.”

For example, a card activation call will be consid-
ered resolved after only a few days without a follow-
up call, but a disputed fee call won’t be considered
resolved until the customer received another statement
without any complaints. This method gives Chase
much more accurate data on first-call resolution, a feat
which is regarded as very difficult and impressive in
the industry.

Enkata compiles this data and distributes it to Chase
Card Services in the form of weekly reports on call type
and length, call handling times, repeat call rates, and
other performance measures that allow both agents and
supervisors to monitor their performance. The system
also connects reports with call recordings to assist man-
agers in coaching and evaluating their agents. When the
system was still being implemented, Enkata used histor-
ical call data gathered prior to the implementation to
create initial reports. Chase Card Services executives
considered this initial upload of data to be the most
time- consuming part of the implementation. Once the
implementation was complete, the company hoped that
improvements in the interpretation and management of
this information would lead to improvements in agent
performance, customer satisfaction, and customer
retention.

The results speak for themselves. Chase Card
Services improved its first-call resolution rate to 91
percent, an increase of 3 percent, in its first year after
the implementation of the Enkata system. That repre-
sented a total savings of $8 million. Approximately
$2.5 million of that total savings was a direct result of
the average call time decreasing by two seconds.

The company hopes to reach its goal of 95 percent
within the next few years. A perfect rate of 100 percent
first-call resolution is not feasible because some addi-

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1. What functions of customer relationship manage-
ment systems are illustrated in this case?

2. Why is the call center so important for Chase
Card Services? How could Chase’s call centers
help it improve relationships with customers?

3. Describe the problem at Chase call centers. What
management, organization, or technology factors
contributed to the problem?

4. How did using Enkata improve operational per-
formance and decision making? Give examples.

5. What management, organization, or technology
factors would have to be considered in imple-
menting the Enkata solution?

tional calls after the first are acceptable under certain
circumstances, such as a customer remembering a
charge that he or she had initially disputed.

Within three months time, 30 percent of agents
that had scored below the acceptable rate for first-
call resolution improved to an acceptable rate. And
although the number of active customer accounts
grew by 5.2 percent in the six months after imple-
mentation of the system, call volume decreased 8.3
percent over that same span.

Visit the Enkata Web site and explore the features of
its products, then answer the following questions:

1. How could Enkata’s system be used for analyzing
customer service at another type of business (such
as a cell phone provider or clothing retailer with
catalog and Web ordering, for example)?

2. What kinds of questions might customers call in
to ask? What kinds of problems might call center
agents encounter in answering these questions?
How could Enkata software help?

Encouraged by these successes, Chase Card
Services is now looking to expand the capabilities of
the system to classify calls into even more categories,
and to link their collected data to marketing programs
to foster cross-selling and upselling.

Sources: Marshall Lager, “Credit Where Due,” Customer Relationship
Management, April 2008; and Michele Heller, “How Chase Got Control of
Call-Center Expenses,” American Banker, February 26, 2008.

CASE STUDY QUESTIONS MIS IN ACTION
Chapter 8: Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 289

Figure 8-9 illustrates the most important capabilities for sales, service, and marketing
processes that would be found in major CRM software products. Like enterprise software,
this software is business-process driven, incorporating hundreds of business processes
thought to represent best practices in each of these areas. To achieve maximum benefit,
companies need to revise and model their business processes to conform to the best-practice
business processes in the CRM software.

Figure 8-10 illustrates how a best practice for increasing customer loyalty through
customer service might be modeled by CRM software. Directly servicing customers
provides firms with opportunities to increase customer retention by singling out profitable
long-term customers for preferential treatment. CRM software can assign each customer a
score based on that person’s value and loyalty to the company and provide that information
to help call centers route each customer’s service request to agents who can best handle that
customer’s needs. The system would automatically provide the service agent with a detailed
profile of that customer that included his or her score for value and loyalty. The service
agent would use this information to present special offers or additional service to the
customer to encourage the customer to keep transacting business with the company. You will
find more information on other best-practice business processes in CRM systems in our
Learning Tracks.IS

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290 Part III: Key System Applications for the Digital Age

Figure 8-9
CRM Software
Capabilities
The major CRM software
products support busi-
ness 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.

Figure 8-10
Customer Loyalty Management Process Map
This process map shows how a best practice for promoting customer loyalty through customer service would be modeled by cus-
tomer relationship management software. The CRM software helps firms identify high-value customers for preferential treatment.

OPERATIONAL AND ANALYTICAL CRM

All of the applications we have just described support either the operational or analytical
aspects of customer relationship management. Operational CRM includes customer-facing
applications, such as tools for sales force automation, call center and customer service

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support, and marketing automation. Analytical CRM includes applications that analyze
customer data generated by operational CRM applications to provide information for
improving business performance.

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 process-
ing (OLAP), data mining, and other data analysis techniques (see Chapter 5). Customer data
collected by the organization might be combined with data from other sources, such as
customer lists for direct-marketing campaigns purchased from other companies or demo-
graphic data. Such data are analyzed to identify buying patterns, to segments for targeted
marketing, and to pinpoint profitable and unprofitable customers (see Figure 8-11).

Another important output of analytical CRM is the customer’s lifetime value to the firm.
Customer lifetime value (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.

BUSINESS VALUE OF CUSTOMER RELATIONSHIP MANAGEMENT
SYSTEMS

Companies with effective customer relationship management systems realize many benefits,
including increased customer satisfaction, reduced direct-marketing costs, more effective
marketing, and lower costs for customer acquisition and retention. Information from CRM
systems increases sales revenue by identifying the most profitable customers and segments
for focused marketing and cross-selling.

Customer churn is reduced as sales, service, and marketing better respond to customer
needs. The churn rate measures the number of customers who stop using or purchasing
products or services from a company. It is an important indicator of the growth or decline of
a firm’s customer base.

8.4 Enterprise Applications: New Opportunities and
Challenges

Many firms have implemented enterprise systems and systems for supply chain manage-
ment and customer relationship because they are such powerful instruments for achieving
operational excellence and enhancing decision making. But precisely because they are so

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Figure 8-11
Analytical CRM Data
Warehouse
Analytical CRM uses a
customer data ware-
house and tools to
analyze customer data
collected from the firm’s
customer touch points
and from other sources.

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powerful in changing the way the organization works, they are challenging to implement.
Let’s briefly examine some of these challenges, as well as new ways of obtaining value from
these systems.

ENTERPRISE APPLICATION CHALLENGES

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

Enterprise applications involve complex pieces of software that are very expensive to
purchase and implement. It might take a large company several years to complete a large-
scale implementation of an enterprise system or a system for SCM or CRM. The total
implementation cost of a large system, including software, database tools, consulting fees,
personnel costs, training, and perhaps hardware costs, might amount to four to five times
the initial purchase price for the software.

Enterprise applications require not only deep-seated technological changes but also
fundamental changes in the way the business operates. Companies must make sweeping
changes to their business processes to work with the software. Employees must accept new
job functions and responsibilities. They must learn how to perform a new set of work
activities and understand how the information they enter into the system can affect other
parts of the company. This requires new organizational learning.

Supply chain management systems require multiple organizations to share information
and business processes. Each participant in the system may have to change some of its
processes and the way it uses information to create a system that best serves the supply
chain as a whole.

Some firms experienced enormous operating problems and losses when they first imple-
mented enterprise applications because they did not understand how much organizational
change was required.

• Kmart had trouble getting products to store shelves when it implemented supply chain
management software from i2 Technologies in July 2000. The i2 software did not work
well with Kmart’s promotion-driven business model, which creates sharp spikes and
drops in demand for products, and it was not designed to handle the massive number of
products stocked in Kmart stores.

• A mistake-laden Oracle implementation rolled out in October 2005 caused
Overstock.com’s order tracking system to go down for a full week and contributed to a
third-quarter loss of $14.5 million. Overstock.com had tried to replace a homegrown
system with an Oracle enterprise system. A rush to implement caused early design
problems. The new system recorded customer refunds transaction-by-transaction rather
than in batches (as did the old homegrown system). Overstock’s ERP development team
did not synchronize this change properly with the company’s accounts receivable
system, so that the accounts receivable balance did not accurately reflect all of these
refunds. In October 2008, Overstock had to re-state more than 5 years of earnings, with
a revenue reduction of $12.9 million and increased losses of $10.3 million.

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

Enterprise applications are based on organization-wide definitions of data. You’ll need
to understand exactly how your business uses its data and how the data would be organized
in a customer relationship management, supply chain management, or enterprise system.
CRM systems typically require some data cleansing work.

In a nutshell, it takes a lot of work to get enterprise applications to work properly.
Everyone in the organization must be involved. For the most part, companies that have suc-

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cessfully implemented CRM, SCM, and enterprise systems, the results have justified the
effort.

NEXT-GENERATION ENTERPRISE APPLICATIONS

Today, enterprise application vendors are delivering more value by becoming more flexible,
Web-enabled, and capable of integration with other systems. Stand-alone enterprise sys-
tems, customer relationship systems, and supply chain management systems are becoming a
thing of the past.

The major enterprise software vendors have created what they call enterprise solutions,
enterprise suites, or e-business suites to make their customer relationship management,
supply chain management, and enterprise systems work closely with each other, and link to
systems of customers and suppliers. SAP Business Suite, Oracle e-Business Suite, and
Microsoft’s Dynamics suite (aimed at mid-sized companies) are examples, and they now
utilize Web services and service-oriented architecture (SOA, see Chapter 4).

SAP’s next-generation enterprise applications are based on its enterprise service-
oriented architecture. It incorporates SOA standards and uses its NetWeaver tool as an inte-
gration platform linking SAP’s own applications and also Web services developed by inde-
pendent software vendors. The goal is to make enterprise applications easier to implement
and manage.

For example, the current version of SAP enterprise software combines key applications
in finance, logistics and procurement, and human resources administration into a core ERP
component. Businesses then extend these applications by linking to function-specific Web
services such as employee recruiting or collections management provided by SAP and other
vendors. SAP provides over 500 Web services through its Web site.

Oracle also has included SOA and business process management capabilities into its
Fusion middleware products. Businesses can use Oracle tools to customize Oracle’s
applications without breaking the entire application.

Next-generation enterprise applications also include open source and on-demand
solutions. Compared to commercial enterprise application software, open source products
such as Compiere, Open for Business (OFBiz), and Openbravo are not as mature, nor do
they include as much support. However, companies such as small manufacturers are choos-
ing this option because there are no software licensing fees. (Support and customization for
open source products cost extra.)

The most explosive growth in software as a service (SaaS) offerings has been for
customer relationship management. Salesforce.com has been the leader in hosted CRM
solutions, but Oracle and SAP have also developed SaaS capabilities. SaaS versions of
enterprise systems are available from smaller vendors such as NetSuite and Plex Online.

SAP now offers an on-demand enterprise software solution called Business ByDesign
for small and medium businesses in select countries. For large businesses, SAP’s on-site
software is the only version available. However, SAP is hosting function-specific applica-
tions (such as e-sourcing and expense management) available by subscription that integrate
with customers’ on-site SAP Business Suite systems. The major enterprise application
vendors also offer portions of their products that work on mobile handhelds. You can find
out more about this topic in our Learning Track on Wireless Applications for Customer
Relationship Management, Supply Chain Management, and Healthcare.

Salesforce.com and Oracle now include some Web 2.0 capabilities that enable organiza-
tions to identify new ideas more rapidly, improve team productivity, and deepen interactions
with customers. For example, Salesforce Ideas allows employees, customers, and business
partners to suggest and then vote on new ideas. Dell Computer deployed this technology as
Dell IdeaStorm (dellideastorm.com) to enable customers to suggest and vote on new
concepts and feature changes in Dell products. Ideas contributed on the service encouraged
Dell to add higher-resolution screens to the Dell 1530 laptop (Greenfield, 2008).

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Service Platforms
Another way of extending enterprise applications is to use them to create service
platforms for new or improved business processes that integrate information from multi-
ple functional areas. These enterprise-wide service platforms provide a greater degree of
cross-functional integration than traditional enterprise applications. A service platform
integrates multiple applications from multiple business functions, business units, or busi-
ness partners to deliver a seamless experience for the customer, employee, manager, or
business partner.

For instance, the order-to-cash process involves receiving an order and seeing it all the
way through obtaining payment for the order. This process begins with lead generation,
marketing campaigns, and order entry, which are typically supported by CRM systems.
Once the order is received, manufacturing is scheduled and parts availability is verified—
processes that are usually supported by enterprise software. The order is then handled by
processes for distribution planning, warehousing, order fulfillment, and shipping, which are
usually supported by supply chain management systems. Finally, the order is billed to the
customer, which is handled by either enterprise financial applications or accounts receiv-
able. If the purchase at some point required customer service, customer relationship man-
agement systems would again be invoked.

A service such as order-to-cash requires data from enterprise applications and financial
systems to be further integrated into an enterprise-wide composite process. To accomplish
this, firms need software tools that use existing applications as building blocks for new
cross-enterprise processes (see Figure 8-12). Enterprise application vendors provide middle-
ware and tools that use XML and Web services for integrating enterprise applications with
older legacy applications and systems from other vendors.

Increasingly, these new services are delivered through portals. Portal software integrates
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 sin-
gle source. For example, Valero Energy, North America’s largest refiner, used SAP
NetWeaver Portal to create a service for wholesale clients to view their account information
all at once. SAP NetWeaver Portal provides an interface to clients’ invoice, price, electronic
funds, and credit card transaction data stored in SAP’s customer relationship management
system data warehouse as well as in non-SAP systems.

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Figure 8-12
Order-to-Cash
Service
Order-to-cash is a com-
posite process that inte-
grates data from individ-
ual enterprise systems
and legacy financial appli-
cations. The process
must be modeled and
translated into a soft-
ware system using appli-
cation integration tools.

8.5 Hands-On MIS Projects

The projects in this section give you hands-on experience analyzing business process
integration, suggesting supply chain management and customer relationship management
applications, using database software to manage customer service requests, and evaluating
supply chain management business services.

MANAGEMENT DECISION PROBLEMS

1. Toronto-based Mercedes-Benz Canada, with a network of 55 dealers, did not know
enough about its customers. Dealers provided customer data to the company on an ad
hoc basis. Mercedes did not force dealers to report this information, and its process for
tracking dealers that failed to report was cumbersome. There was no real incentive for
dealers to share information with the company. How could customer relationship
management (CRM) and partner relationship management (PRM) systems help solve
this problem?

2. Office Depot sells a wide range of office products and services in the United States and
internationally, including general office supplies, computer supplies, business machines
(and related supplies), and office furniture. The company tries to offer a wider range of
office supplies at lower cost than other retailers by using just-in-time replenishment and
tight inventory control systems. It uses information from a demand forecasting system
and point-of-sale data to replenish its inventory in its 1,600 retail stores. Explain how
these systems help Office Depot minimize costs and any other benefits they provide.
Identify and describe other supply chain management applications that would be
especially helpful to Office Depot.

IMPROVING DECISION MAKING: USING DATABASE SOFTWARE
TO MANAGE CUSTOMER SERVICE REQUESTS

Software skills: Database design; querying and reporting
Business skills: Customer service analysis

In this exercise, you’ll use database software to develop an application that tracks customer
service requests and analyzes customer data to identify customers meriting priority treat-
ment.

Prime Service is a large service company that provides maintenance and repair services
for close to 1,200 commercial businesses in New York, New Jersey, and Connecticut. Its
customers include businesses of all sizes. Customers with service needs call into its cus-
tomer service department with requests for repairing heating ducts, broken windows, leaky
roofs, broken water pipes, and other problems. The company assigns each request a number
and writes down the service request number, identification number of the customer account,
the date of the request, the type of equipment requiring repair, and a brief description of the
problem. The service requests are handled on a first-come-first-served basis. After the ser-
vice work has been completed, Prime calculates the cost of the work, enters the price on the
service request form, and bills the client.

Management is not happy with this arrangement because the most important and prof-
itable clients—those with accounts of more than $70,000—are treated no differently from
its clients with small accounts. It would like to find a way to provide its best customers with
better service. Management would also like to know which types of service problems occur
the most frequently so that it can make sure it has adequate resources to address them.

Prime Service has a small database with client account information, which can be found
in MyMISLab. A sample is shown on the next page, but the Web site may have a more recent
version of this database for this exercise. The database table includes fields for the account
ID, company (account) name, street address, city, state, zip code, account size (in dollars),
contact last name, contact first name, and contact telephone number. The contact is the name

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LEARNING TRACKS

The following Learning Tracks provide content relevant to topics covered in this
chapter:

1. SAP Business Process Map

2. Business Processes in Supply Chain Management and Supply Chain Metrics

3. Best-Practice Business Processes in CRM Software

4 Wireless Applications for Customer Relationship Mangement, Supply Chain
Management, and Healthcare

of the person in each company who is responsible for contacting Prime about maintenance
and repair work. Use your database software to design a solution that would enable Prime’s
customer service representatives to identify the most important customers so that they could
receive priority service. Your solution will require more than one table. Populate your data-
base with at least 15 service requests. Create several reports that would be of interest to
management, such as a list of the highest- and lowest-priority accounts or a report showing
the most frequently occurring service problems. Create a report showing customer service
representatives which service calls they should respond to first on a specific date.

ACHIEVING OPERATIONAL EXCELLENCE: EVALUATING SUPPLY
CHAIN MANAGEMENT SERVICES

Software skills: Web browser and presentation software
Business skills: Evaluating supply chain management services

Trucking companies no longer merely carry goods from one place to another. Some also
provide supply chain management services to their customers and help them manage their
information. In this project, you’ll use the Web to research and evaluate two of these
business services.

Investigate the Web sites of two companies, UPS Logistics and Schneider Logistics, to
see how these companies’ services can be used for supply chain management. Then respond
to the following questions:

• What supply chain processes can each of these companies support for their clients?
• How can customers use the Web sites of each company to help them with supply chain

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

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

Chapter 8: Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 297

Review Summary

1 How do enterprise systems help businesses achieve operational excellence?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 applica-
tions that can support 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.

Enterprise systems support organizational centralization by enforcing uniform data stan-
dards and business processes throughout the company and a single unified technology plat-
form. The firmwide data generated by enterprise systems helps managers evaluate organiza-
tional performance.

2 How do supply chain management systems coordinate planning, production, andlogistics with suppliers? Supply chain management systems automate the flow of
information among members of the supply chain so they can use it to make better decisions
about when and how much to purchase, produce, or ship. More accurate information from
supply chain management systems reduces uncertainty and the impact of the bullwhip
effect.

Supply chain management software includes software for supply chain planning and
for supply chain execution. Internet technology facilitates the management of global
supply chains by providing the connectivity for organizations in different countries to
share supply chain information. Improved communication among supply chain members
also facilitates efficient customer response and movement toward a demand-driven model.

3 How do customer relationship management systems help firms achieve customerintimacy? Customer relationship management (CRM) systems integrate and automate
customer-facing processes in sales, marketing, and customer service, providing an enter-
prise-wide view of customers. Companies can use this customer knowledge when they
interact with customers to provide them with better service or to sell new products and
services. These systems also identify profitable or nonprofitable customers or opportunities
to reduce the churn rate.

The major customer relationship management software packages provide capabilities
for both operational CRM and analytical CRM. They often include modules for managing
relationships with selling partners (partner relationship management) and for employee
relationship management.

4 What are the challenges posed by enterprise applications? Enterprise applicationsare difficult to implement. They require extensive organizational change, large new
software investments, and careful assessment of how these systems will enhance organiza-
tional performance. Enterprise applications cannot provide value if they are implemented
atop flawed processes or if firms do not know how to use these systems to measure perfor-
mance improvements. Employees require training to prepare for new procedures and roles.
Attention to data management is essential.

5 How are enterprise applications used in platforms for new cross-functionalservices? Service platforms integrate data and processes from the various enterprise
applications (customer relationship management, supply chain management, and enterprise
systems), as well as from disparate legacy applications to create new composite business
processes. Web services tie various systems together. The new services are delivered
through enterprise portals, which can integrate disparate applications so that information
appears to be coming from a single source. Open source, mobile, and cloud versioins of
some of these products are becoming available.

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Review Questions

1. How do enterprise systems help businesses achieve operational excellence?
• Define an enterprise system and explain how enterprise software works.
• Describe how enterprise systems provide value for a business.

2. How do supply chain management systems coordinate planning, production, and
logistics with suppliers?
• Define a supply chain and identify each of its components.
• Explain how supply chain management systems help reduce the bullwhip effect and how

they provide value for a business.
• Define and compare supply chain planning systems and supply chain execution systems.
• Describe the challenges of global supply chains and how Internet technology can help

companies manage them better.
• Distinguish between a push-based and pull-based model of supply chain management

and explain how contemporary supply chain management systems facilitate a pull-based
model.

3. How do customer relationship management systems help firms achieve customer
intimacy?
• Define customer relationship management and explain why customer relationships are

so important today.
• Describe how partner relationship management (PRM) and employee relationship

management (ERM) are related to customer relationship management (CRM).
• Describe the tools and capabilities of customer relationship management software for

sales, marketing, and customer service.
• Distinguish between operational and analytical CRM.

4. What are the challenges posed by enterprise applications?
• List and describe the challenges posed by enterprise applications
• Explain how these challenges can be addressed.

5. How are enterprise applications used in platforms for new cross-functional services?
• Define a service platform and describe the tools for integrating data from enterprise

applications.
• How are enterprise applications taking advantage of cloud computing, wireless technol-

ogy, Web 2.0, and open source technology?

Employee relationship
management (ERM), 286

Enterprise software, 274
Just-in-time strategy, 278
Operational CRM, 290
Partner relationship manage-

ment (PRM), 286
Pull-based model, 283

Push-based model, 283
Service platform, 294
Supply chain, 276
Supply chain execution

systems, 280
Supply chain planning

systems, 279
Touch point, 285

Analytical CRM, 291
Bullwhip effect, 278
Churn rate, 291
Cross-selling, 287
Customer lifetime value

(CLTV), 391
Demand planning, 279

Key Terms

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Discussion Questions

1. Supply chain management is less about
managing the physical movement of goods
and more about managing information.
Discuss the implications of this statement.

2. If a company wants to implement an
enterprise application, it had better do its
homework. Discuss the implications of this
statement.

Video Cases

Video Cases and Instructional Videos illustrating some of the concepts in this chapter are
available. Contact your instructor to access these videos.

Collaboration and Teamwork

Analyzing Enterprise Application Vendors
With a group of three or four students, use the Web to research and evaluate the products of two
vendors of enterprise application software. You could compare, for example, the SAP and
Oracle enterprise systems, the supply chain management systems from i2 and SAP, or the
customer relationship management systems of Oracle’s Siebel CRM and Salesforce.com. Use
what you have learned from these companies’ Web sites to compare the software packages you
have selected in terms of business functions supported, technology platforms, cost, and ease of
use. Which vendor would you select? Why? Would you select the same vendor for a small
business as well as a large one? If possible, use Google Sites to post links to Web pages, team
communication announcements, and work assignments; to brainstorm; and to work collabora-
tively on project documents. Try to use Google Docs to develop a presentation of your findings
for the class.

BUSINESS PROBLEM-SOLVING CASE

Border States Industries Fuels Rapid Growth with ERP

unit). BSE has distribution agreements with more than
9,000 product vendors.

BSE had relied on its own legacy ERP system called
Rigel since 1988 to support its core business processes.
However, Rigel had been designed exclusively for elec-
trical wholesalers, and by the mid-1990s, the system
could not support BSE’s new lines of business and
extensive growth.

At that point, BSE’s management decided to imple-
ment a new ERP system and selected the enterprise
software from SAP AG. The ERP solution included
SAP’s modules for sales and distribution, materials
management, financials and controlling, and human
resources.

BSE initially budgeted $6 million for the new system,
with a start date of November 1, 1998. Senior manage-
ment worked with IBM and SAP consulting to

Border States Industries Inc. (BSE) is a wholesale
distributor for the construction, industrial, utility, and
data communications markets. The company is
headquartered in Fargo, North Dakota, and has 57 sales
offices in states along the U.S. borders with Canada and
Mexico as well as in South Dakota, Wisconsin, Iowa,
and Missouri. BSE has 1,400 employees and is wholly
employee-owned through its employee stock ownership
plan. For the fiscal year ending March 31, 2008, BSE
earned revenues of over US $880 million.

BSE’s goal is to provide customers with what they
need whenever they need it, including providing custom
services beyond delivery of products. Thus, the company
is not only a wholesale distributor but also a provider of
supply chain solutions, with extensive service operations
such as logistics, job-site trailers, and kitting (packaging
individually separate but related items together as oneIS

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implement the system. Although close involvement of
management was one key ingredient in the systems’
success, day-to-day operations suffered while managers
were working on the project.

BSE also decided to customize the system extensively.
It wrote its own software to enable the ERP system to
interface automatically with systems from other vendors,
including Taxware Systems, Inc., Innovis Inc., and TOP-
CALL International GmbH. The Taxware system
enables BSE to comply with the sales tax requirements
of all the states and municipalities where it conducts
business. The Innovis system supports electronic data
interchange (EDI) so that BSE could electronically
exchange purchase and payment transactions with its
suppliers. The TOPCALL system enables BSE to fax
customers and vendors directly from the SAP system.

At the time of this implementation, BSE had no
experience with SAP software, and few consultants
familiar with the version of the SAP software that BSE
was using. Instead of adopting the best-practice business
processes embedded in the SAP software, BSE hired
consultants to further customize the SAP software to
make its new SAP system look like its old Rigel system
in certain areas. For example, it tried to make customer
invoices resemble the invoices produced by the old Rigel
system.

Implementing these changes required so much cus-
tomization of the SAP software that BSE had to delay
the launch date for the new ERP system until February
1, 1999. By that time, continued customization and
tuning raised total implementation costs to $9 million
(an increase of 50 percent).

Converting and cleansing data from BSE’s legacy
system took far longer than management had antici-
pated. The first group of “expert users” were trained
too early in the project and had to be retrained when
the new system finally went live. BSE never fully
tested the system as it would be used in a working
production environment before the system actually
went live.

For the next five years, BSE continued to use its
SAP ERP system successfully as it acquired several
small companies and expanded its branch office infra-
structure to 24 states. As the business grew further,
profits and inventory turns increased. However, the
Internet brought about the need for additional changes,
as customers sought to transact business with BSE
through an e-commerce storefront. BSE automated
online credit card processing and special pricing
agreements (SPAs) with designated customers.
Unfortunately, the existing SAP software did not
support these changes, so the company had to process
thousands of SPAs manually.

To process a credit card transaction in a branch
office, BSE employees had to leave their desks, walk

over to a dedicated credit card processing system in
the back office, manually enter the credit card num-
bers, wait for transaction approval, and then return to
their workstations to continue processing sales trans-
actions.

In 2004, BSE began upgrading its ERP system to a
more recent version of the SAP software. The software
included new support for bills of material and kitting,
which were not available in the old system. This
functionality enabled BSE to provide better support to
utility customers because it could prepare kits that could
be delivered directly to a site.

This time the company kept customization to a
minimum and used the SAP best practices for wholesale
distribution embedded in the software. It also replaced
TOPCALL with software from Esker for faxing and
e-mailing outbound invoices, order acknowledgments,
and purchase orders and added capabilities from Vistex
Inc. to automate SPA rebate claims processing. BSE
processes over 360,000 SPA claims each year, and the
Vistex software enabled BSE to reduce rebate fulfillment
time to 72 hours and transaction processing time by 63
percent. In the past, it took 15 to 30 days for BSE to
receive rebates from vendors.

BSE budgeted $1.6 million and 4.5 months for imple-
mentation, which management believed was sufficient
for a project of this magnitude. This time there were no
problems. The new system went live on its target date
and cost only $1.4 million to implement—14 percent
below budget.

In late 2006, BSE acquired a large company that was
anticipated to increase sales volume by 20 percent each
year. This acquisition added 19 new branches to BSE.
These new branches were able to run BSE’s SAP
software within a day after the acquisition had been
completed. BSE now tracks 1.5 million unique items
with the software.

Since BSE first deployed SAP software in 1998,
sales have increased 300 percent, profits have climbed
more than 500 percent, 60 percent of accounts payable
transactions take place electronically using EDI, and
SPA processing has been reduced by 63 percent. The
company turns over its inventory more than four times
per year. Instead of waiting 15 to 20 days for monthly
financial statements, monthly and year-to-date financial
results are available within a day after closing the
books. Manual work for handling incoming mail,
preparing bank deposits, and taking checks physically
to the bank has been significantly reduced. Over 60
percent of vendor invoices arrive electronically, which
has reduced staff size in accounts payable and the num-
ber of transaction errors. Transaction costs are lower.

The number of full-time BSE employees did increase
in the information systems area to support the SAP
software. BSE had initially expected to have 3 IT staff

Chapter 8: Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 301

supporting the system, but needed 8 people when the first
ERP implementation went live in 1999 and 11 by 2006 to
support additional SAP software and the new acquisition.
BSE’s information technology (IT) costs rose by approxi-
mately $3 million per year after the first SAP implemen-
tation. However, sales expanded during the same period,
so the increased overhead for the system produced a cost
increase of only .5 percent of total sales.

BSE management has pointed out that much of the
work that was automated by the ERP systems has been
in the accounting department and involved activities that
were purely transactional. This has freed up resources
for adding more employees who work directly with
customers trying to reduce costs and increase sales.

In the past, BSE had maintained much of its data
outside its major corporate systems using PC-based
Microsoft Access database and Excel spreadsheet
software. Management lacked a single company-wide
version of corporate data because the data were
fragmented into so many different systems. Now the
company is standardized on one common platform and
the information is always current and available to
management. Management can obtain a picture of how
the entire business is performing at any moment in time.
Since the SAP system makes all of BSE’s planning and
budgeting data available online, management is able to
make better and quicker decisions.

In 2006, Gartner Group Consultants performed an
independent evaluation of BSE’s ERP implementation.
Gartner interviewed top executives and analyzed BSE
data on the impact of the ERP system on BSE’s business
process costs, using costs as a percentage of sales as its
final metric for assessing the financial impact of SAP
software. Cost categories analyzed included costs of
goods sold, overhead and administration, warehousing
costs, IT support, and delivery.

Gartner’s analysis validated that the SAP software
implementation cost from 1998 to 2001 did indeed total
$9 million and that this investment was paid back by
savings from the new ERP system within 2.5 years.
Between 1998 and 2006, the SAP software imple-
mented by BSE produced total savings of $30 million,

approximately one-third of BSE’s cumulative earnings
during the same period. As a percentage of sales, ware-
house costs went down 1 percent, delivery costs
decreased by .5 percent, and total overhead costs
declined by 1.5 percent. Gartner calculated the total
return on investment (ROI) for the project between 1998
and 2006 was $3.3 million per year, or 37% of the origi-
nal investment.

BSE is now focusing on providing more support for
Internet sales, including online ordering, inventory, order
status, and invoice review, all within a SAP software
environment. The company implemented SAP NetWeaver
Master Data Management to provide tools to manage and
maintain catalog data and prepare the data for publication
online and in traditional print media. The company is using
SAP’s Web Dynpro development environment to enable
wireless warehouse and inventory management activities
to interact with the SAP software. And it is using SAP
NetWeaver Business Intelligence software to learn more
about customers, their buying habits, and opportunities to
cross-sell and upsell products.
Sources: Jim Shepherd and Aurelie Cordier, “Wholesale Distributor Uses
ERP Solution to Fuel Rapid Growth,” AMR Research, 2009; SAP AG, “Border
States Industries: SAP Software Empowers Wholesale Distributor,” 2008;
www.borderstateselectric.com, accessed July 7, 2009; and “Border States (BSE),”
2008 ASUG Impact Award.

Case Study Questions

1. What problems was Border States Industries encoun-
tering as it expanded? What people, organization,
and technology factors were responsible for these
problems?

2. How easy was it to develop a solution using SAP
ERP software? Explain your answer.

3. List and describe the benefits from the SAP software.
4. How much did the new system solution transform the

business? Explain your answer.
5. How successful was this solution for BSE? Identify

and describe the metrics used to measure the success
of the solution.

6. If you had been in charge of SAP’s ERP implementa-
tions, what would you have done differently?

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