Chapter 9

Achieving Operational Excellence and Customer Intimacy: Enterprise Applications

Section 9.1: Bullet Text Study Guide Chapter Contents

Enterprise Systems

Enterprise systems, or enterprise resource planning (ERP) systems, integrate the key internal business processes of
a firm into a single software system so that information flows seamlessly throughout the organization, improving
coordination, efficiency, and decision making.

Enterprise software is based on a suite of integrated software modules and a common central database. The
database collects data from and feeds the data into numerous applications that supports nearly all of an
organization's internal business activities. When new information is entered by one process, the information is
made available immediately to other business processes.

Figure 9-1

FIGURE 9-1 HOW ENTERPRISE SYSTEMS WORK

Enterprise systems feature a set of integrated software modules and a central database that enables data to be
shared by many different business processes and functional areas throughout the enterprise.
Enterprise software is built around thousands of predefined business processes that reflect best practices. Best
practices are the most successful solutions or problem-solving methods in an industry for consistently and
effectively achieving a business objective.

Organizations implementing commercial enterprise software first select the business processes they wish to use
from the software and map their own processes to these, using the software's configuration tables. Although
businesses may choose to rewrite portions of the software to match their existing processes, this can degrade
system performance and fail to reap the benefits of this software.

Enterprise systems produce value by increasing organizational efficiency and by providing firmwide information to
help managers make better decisions. Enterprise systems create a foundation for a more customer-driven
organization by integrating firm data to enable quicker responses to customer requests and information.

Enterprise systems:

Use analytical tools to evaluate a firm's overall performance

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

Section 9.2: Bullet Text Study Guide Chapter Contents

Supply Chain Management Systems

Supply chain management refers to the coordination of activities and involved in making and moving a product.
The supply chain is the network of businesses and business processes involved the creation and selling of a
product, from suppliers that procure raw materials through retail outlets and customers. The upstream portion of
the supply chain includes the organization's suppliers and the processes for managing relationships with them. The
downstream portion consists of the organizations and processes for distributing and delivering products to the
final customers. The manufacturer also has internal supply chain processes for transforming the materials and
services furnished by suppliers into finished goods and for managing materials and inventory.

Figure 9-2
 FIGURE 9-2 NIKE’S SUPPLY CHAIN
This figure illustrates the major entities in Nike’s supply chain and the flow of information upstream and
downstream to coordinate the activities involved in buying, making, and moving a product. Shown here is a
simplified supply chain, with the upstream portion focusing only on the suppliers for sneakers and sneaker
soles.

Inefficiencies in the supply chain, such as parts shortages, underutilized plant capacity, excessive inventory, or
runaway transportation costs, are caused by inaccurate or untimely information and can waste as much as 25% of
operating costs. Uncertainties also arise because many events cannot be foreseen—product demand, late
shipments from suppliers, defective parts or raw material, or production process breakdowns. More accurate
information from supply chain management systems reduces uncertainty and the impact of the bullwhip effect, in
which information about the demand for a product gets distorted as it passes from one entity to the next across
the supply chain. With perfect information about demand and production, a firm can implement an effective just-
in-time strategy, delivering goods in the right amount and as they are needed.

Figure 9-3
 FIGURE 9-3 THE BULLWHIP EFFECT
Inaccurate information can cause minor fluctuations in demand for a product to be amplified as one moves
further back in the supply chain. Minor fluctuations in retail sales for a product can create excess inventory for
distributors, manufacturers, and suppliers.

Supply chain software can be classified as either:

Supply chain planning systems: Systems which enable the firm to generate demand forecasts for a
product, develop sourcing and manufacturing plans for that product, make adjustments to production
and distribution plans, and share that information with relevant supply chain members. One of the most
important supply chain planning functions is demand planning, which determines how much product a
business needs to make to satisfy all of its customers' demands.

Supply chain execution systems: Systems that manage the physical flow of products through distribution
centers and warehouses to ensure that products are delivered to the right locations in the most efficient
manner.

Before the Internet, supply chain coordination was hampered by the difficulties of making information flow
smoothly among disparate internal supply chain systems. Today, using intranets and extranets, all members of the
supply chain can instantly communicate with each other, using up-to-date information to adjust purchasing,
logistics, manufacturing, packaging, and schedules. The Internet provides a standard set of tools that are used by
companies all over the world to coordinate global supply chains that include participants from many countries
Figure 9-4

FIGURE 9-4 INTRANETS AND EXTRANETS FOR SUPPLY CHAIN MANAGEMENT

Intranets integrate information from isolated business processes within the firm to help manage its internal
supply chain. Access to these private intranets can also be extended to authorized suppliers, distributors,
logistics services, and, sometimes, to retail customers to improve coordination of external supply chain
processes.

Earlier supply chain management systems were driven by a push-based model (also known as build-to-stock) in
which production master schedules are based on forecasts or best guesses of demand for products, and products
are "pushed" to customers. With Web-based tools, supply chain management follows a pull-based model (or
demand-driven model or build-to-order), in which actual customer orders or purchases trigger events in the supply
chain.

Figure 9-5
 FIGURE 9-5 PUSH-VERSUS PULL-BASED SUPPLY CHAIN MODELS
The difference between push- and pull-based models is summarized by the slogan “Make what we sell, not sell
what we make.”

Internet technology also makes it possible to move from sequential supply chains, where information and
materials flow sequentially from company to company, to concurrent supply chains, where information flows in
many directions simultaneously among members of a supply chain network. Ultimately, the Internet could create a
"digital logistics nervous system" throughout the supply chain to permit simultaneous, multidirectional
communication of information about participants' inventories, orders, and capacities.

Figure 9-6
 FIGURE 9-6 THE FUTURE INTERNET-DRIVEN SUPPLY CHAIN
The future Internet-driven supply chain operates like a digital logistics nervous system. It provides
multidirectional communication among firms, networks of firms, and e-marketplaces so that entire networks of
supply chain partners can immediately adjust inventories, orders, and capacities.

The business value of supply chain management systems includes:

Streamlined supply chain and accurate information

Reduced supply chain costs

Increased sales through accurate product availability

Section 9.3: Bullet Text Chapter Contents

Customer Relationship Management Systems

Customers can be seen as an enterprise's most valuable asset, and customer relationship management systems
enable large firms to understand and work with their customers.

CRM systems capture and integrate customer data from all over the organization, consolidating the data, analyzing
the data, and then distributing the results to various systems and customer touch points across the enterprise. A
touch point (also known as a contact point) is a method of interaction with the customer, such as telephone, e-
mail, customer service desk, conventional mail, Web site, or retail store.
Well-designed CRM systems provide a single enterprise view of the customer and provide customers with a single
view of the company regardless of the touch point the customer uses.

Figure 9-7

FIGURE 9-7 CUSTOMER RELATIONSHIP MANAGEMENT (CRM)

CRM systems examine customers from a multifaceted perspective. These systems use a set of integrated
applications to address all aspects of the customer relationship, including customer service, sales, and
marketing.

Good CRM systems provide data and analytical tools for determining the financial lifetime value of a customer and
customer loyalty and for identifying profitable customers and their needs.

Commercial customer relationship management (CRM) software packages range from niche tools that perform
limited functions, such as personalizing Web sites for specific customers, to large-scale enterprise applications. The
more comprehensive CRM packages contain modules for:

Partner relationship management (PRM): PRM software uses many of the same data, tools, and systems
as customer relationship management to enhance collaboration between a company and its selling
partners. It provides a company and its selling partners with the ability to trade information and distribute
leads and data about customers, integrating lead generation, pricing, promotions, order configurations,
and availability.

Employee relationship management (ERM). ERM software deals with employee issues that are closely
related to CRM, such as setting objectives, employee performance management, performance-based
compensation, and employee training.
CRM systems typically provide software or tools for:

Sales force automation (SFA): SFA modules help sales staff increase their productivity by focusing sales
efforts on the most profitable customers. They provide sales prospect and contact information, product
information, product configuration capabilities, and sales quote generation capabilities.

Customer service: Customer service modules provide information and tools to make call centers, help
desks, and customer support staff more efficient. They have capabilities for assigning and managing
customer service requests and may include Web-based self-service capabilities.

Marketing: Marketing modules support direct-marketing campaigns with capabilities for capturing
prospect and customer data, qualifying leads, and scheduling and tracking campaign mailings. They
include tools for analyzing marketing and customer data-identifying profitable and unprofitable
customers, designing products and services to satisfy specific customer needs and interests, and
identifying opportunities for cross-selling, up-selling, and bundling. Cross-selling is the marketing of
complementary products to customers. Up-selling is the marketing of higher-value products or services to
new or existing customers. Bundling is cross-selling in which a combination of products is sold as a bundle
at a price lower than the total cost of the individual products.

Figure 9-8, Figure 9-9

FIGURE 9-8 HOW CRM SYSTEMS SUPPORT MARKETING

Customer relationship management software provides a single point for users to manage and evaluate
marketing campaigns across multiple channels, including e-mail, direct mail, telephone, the Web, and wireless
messages.
 FIGURE 9-9 CRM SOFTWARE CAPABILITIES
The major CRM software products support business processes in sales, service, and marketing, integrating
customer information from many different sources. Included are support for both the operational and
analytical aspects of CRM.

CRM software can also be used to increase customer loyalty through customer service by identifying valued
customers and providing them with special services or offers.

Figure 9-10
 FIGURE 9-10 CUSTOMER LOYALTY MANAGEMENT PROCESS MAP
This process map shows how a best practice for promoting customer loyalty through customer service would
be modeled by customer relationship management software. The CRM software helps firms identify high-value
customers for preferential treatment.

CRM applications may support either:

Operational CRM: Customer facing applications such as tools for sales force automation, call center and
customer service support, and marketing automation.

Analytical CRM: Applications that analyze customer data generated by operational CRM applications to
provide information for improving business performance management. Analytical CRM applications are
based on data warehouses that consolidate the data from operational CRM systems and customer touch
points for use with online analytical processing (OLAP), data mining, and other data analysis techniques.
An important output of analytical CRM is the customer lifetime value (CLTV). CLTV is based on the
relationship between the revenue produced by a specific customer, the expenses incurred in acquiring
and servicing that customer, and the expected life of the relationship between the customer and the
company.

Figure 9-11
 FIGURE 9-11 ANALYTICAL CRM DATA WAREHOUSE
Analytical CRM uses a customer data warehouse and tools to analyze customer data collected from the firm’s
customer touch points and from other sources.

The business value of CRM systems includes

Increased customer satisfaction

Reduced direct-marketing costs

More effective marketing

Lower costs for customer acquisition and retention

Increased sales revenues through identifying profitable customers

Reduced churn rate: The churn rate measures the number of customers who stop using or purchasing
products or services from a company and is an important indicator of the growth or decline of a firm's
customer base.

Section 9.4: Bullet Text Chapter Contents

Management Opportunities, Challenges, and Solutions

Many firms obtain extraordinary business value from enterprise applications because of their power to improve
process coordination and management decision making.
However, enterprise systems, supply chain management, and customer relationship management systems are very
expensive to purchase and implement. Costs run even higher for organizations with global operations, which must
manage organizational and technology changes in many different languages, time zones, currencies, and
regulatory environments.

Enterprise applications require not only deep-seated technological changes but also fundamental changes in the
way the business operates, including changes to business processes, employee responsibilities, and functions.

Enterprise applications also introduce "switching costs." Once an enterprise application is purchased and
implemented, it becomes very costly to switch vendors.

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

Solutions for gaining more value from enterprise applications include:

Enterprise solutions (enterprise suites or e-business suites): Flexible enterprise software that enables
close linking between CRM, SCM, and enterprise systems, as well as to customer and supplier systems.

Service platforms: A service platform integrates multiple applications from multiple business functions,
business units, or business partners to deliver a seamless experience for the customer, employee,
manager, or business partner. Enterprise-wide service platforms provide a greater degree of cross-
functional integration than the traditional enterprise applications. To accomplish this, software tools
(such as Web services and XML) use existing applications as building blocks for new cross-enterprise
processes. Portal software can integrate information from enterprise applications and disparate in-house
legacy systems, presenting it to users through a Web interface so that the information appears to be
coming from a single source.

Figure 9-12.
 FIGURE 9-12 ORDER-TO-CASH SERVICE
Order-to-cash is a composite process that integrates data from individual enterprise applications and legacy
financial applications. The process must be modeled and translated into a software system using application
integration tools.

Chapter 9: Case Study

Can Information Systems Restore Profitability to Restoration Hardware?

Restoration Hardware is a retailer of furniture, hardware, and home accessories such as bathroom fixtures and
decorative furnishings. The company is based in California; it started operations in 1979 and incorporated in 1987.
The company sells through multiple channels: a network of 103 retail stores across the United States and Canada,
a print mail-order catalog, and its RestorationHardware.com Web site. Restoration Hardware is a major player in
an industry that includes competitors such as Pottery Barn, Pier 1, and Williams Sonoma. Restoration employs
3,500 workers, 1,400 of those full-time.

Restoration’s business strategy puts the company in a unique sector of the marketplace. Restoration focused
from the start on merchandise that honors classic America. The company’s original furniture and fixtures were
designed to match the décor and form of older houses. Today, when you walk into a Restoration Hardware store,
the merchandise clearly evokes images of the past. Many products, such as portable record players or wooden
toys, are intent on inspiring feelings of tradition, if not nostalgia, in older generations of customers. The younger
generations may recognize these products from reruns of old television shows and movies set in the times of their
parents and grandparents. Many of these products are difficult to find elsewhere and they are very appealing. Up
front, the company knows what it wants to do and has maintained a consistent vision. According to Ed Weller, an
analyst at ThinkEquity Partners, “When you go to the stores, it’s clear that Restoration Hardware has something
customers want.” Many of Restoration’s top executives come from merchandising backgrounds.

A significant portion of Restoration’s revenue stream comes from its direct-to-customer ventures.
Circulation of the mail-order catalog surpassed 30 million in 2003, with 58 percent of the catalogs earmarked for
past customers. Mail-order catalog and Web site operations saw substantial revenue gains both in the fourth
quarter (51%) and annual (52%) numbers for 2003.

In recent years, the company has improved its e-commerce software, increasing its capacity to support
simultaneous online shoppers by 8,000 percent. This upgrade to Art Technology Group’s e-commerce software is
just one of several technology investments that Restoration has made in its Web site. In late 2003, Restoration
brought in iPhrase Technologies to implement its One Step natural language search and navigation software as a
replacement for RestorationHardware.com’s keyword-oriented product search facility. The new search technology
has made the Web site more user-friendly.

In March 2004, Scene7, Inc., a provider of dynamic imaging software, announced that Restoration Hardware
had adopted Scene7’s eCatalog solution for its online print catalog. Restoration now outsources the entire process
of publishing and hosting its print catalog on the Web. Restoration only has to provide Scene7 with the print
catalog in Portable Document Format (PDF). The published Web catalog includes dynamic links from areas on each
catalog page to corresponding product pages on the Restoration Hardware Web site. Scene7’s eCatalog solution
has also made it possible to implement advanced image-viewing features such as panning, zooming, and rollover
product descriptions. Additionally, customers can now use a “colorizer” feature to change the fabric style on any
upholstered product that they are viewing. Such technology saves Restoration from the enormous expenses that
would accompany studio photography of all the different combinations of fabric and furniture. According to
Scene7, its eCatalog solution has resulted in the doubling of Restoration Hardware’s conversion rate of browsers to
buyers.

Despite a strong product line and upward growth in sales, Restoration has not been able to make money. By
the end of 2003 the company posted a $2.9 million net loss, down from $3.9 million the previous year. The year
2003 was the fifth straight year the company did not turn a profit. Analysts point to the less-visible aspects of
Restoration’s business, specifically its supply chain management systems and technology infrastructure, as profit
drains. Russell Hoss, a Roth Capital Partners analyst, states that Restoration simply does not “know how to make
money.” Good products alone do not guarantee success. Retail businesses need to juggle an extraordinarily
complex system of variables to meet their expectations of success. The analysts contend that Restoration
Hardware is failing to control these variables to the best of its ability. Among the greatest concerns is Restoration’s
ability to keep its inventory in line with customer demand.

Over the 2003 holiday shopping season, same-store sales figures for Restoration experienced a drop of 3.5
percent from the previous year’s holiday season. One of the biggest culprits was a line of couches and chairs that
shoppers can customize by choosing from a selection of 50 fabric styles, with delivery promised within 8 to 10
weeks. High demand of the most popular styles set off a chain reaction of profit-draining events. Customers had to
wait longer than they had been told initially to receive their couches and chairs. In some cases, the customers
simply canceled their orders. Other customers chose to purchase less-popular styles instead, with the incentive of
a discounted price. Some of the orders that customers did not cancel could not be fulfilled in time to count in the
holiday season sales figures.

In the last few years, Restoration has implemented a repositioning plan, which involves reducing the
company’s debt, upgrading management, weeding out poor products from the product line, and closing stores
that aren’t performing. Additionally, the company has introduced new products and remodeled its retail locations.
The plan does not address improvements to the company’s aging information technology (IT) infrastructure.

Restoration Hardware stores use point-of-sale equipment that is nearly 10 years old. The equipment lacks
the capability to process debit card purchases without a physical signature, nor can it automate processes such as
checking fabric stocks when a customer makes a request for a custom furniture order. Customers placing custom
furniture orders must fill out a paper form that includes their fabric selection. Then a salesperson must call
Michael’s Furniture (which manufactures Restoration’s furniture) in Sacramento, California, to see what is in stock.

A system polls Restoration stores nightly to aggregate sales, inventory, and pricing data to provide
information that can help managers fine-tune the company’s merchandise assortments. However, the system is
not capable of providing demand forecasting. Restoration has systems to support “smooth warehouse operations
in a multi-warehouse environment” consisting of three warehouses in California and one in Baltimore.

Restoration Hardware’s most recent annual report on Form 10-K for the U.S. Securities and Exchange
Commission states that the company relies on a single vendor for its point of sale, merchandise management, and
warehouse management systems, along with the software support required to maintain these systems.
Restoration purchased these systems and services from STS Systems, which has since become part of NSB Group,
in the mid-1990s. NSB’s most recent version of its warehouse-management system is far more advanced than the
version that Restoration continues to use, with capabilities for XML-enabled processing of advance shipping
notices and real-time task tracking. Upgrades to the older version of the system are covered by Restoration’s
service agreement with NSB, but Restoration has not taken advantage of the new technology. The company has
also not improved its systems for restocking its products once they have been distributed from the various
warehouses.

Statistics show that in areas such as frequency of inventory turnover and gross profit margin, Restoration
trails its competitors. During the 12 months ending November 1, 2003, Restoration turned over its inventory only
1.9 times, compared to 3.2 times at Williams Sonoma. Restoration’s gross profit margin is only 30 percent, putting
it among the lowest-category performers for its industry even though same-store sales for 2003 averaged 7
percent higher than the previous year.

Restoration’s annual report paints a picture of a complex business environment that is vulnerable to a host
of trends, restrictions, and abnormalities. From a competition standpoint, Restoration’s offerings place it in the
same realm as specialty stores, traditional furniture stores, and department stores. At stake are customers, viable
store locations, suppliers, and personnel. Restoration asserts that many of its competitors have greater financial,
marketing, and operational resources for obtaining these assets, and that such hearty competition puts its financial
performance and future success at risk. To stay in the race Restoration believes that the company should focus on
fortifying its management, improving and increasing its product line, improving customer service, enhancing its
presentation of merchandise, and maintaining competitive pricing and retail locations.
 The report goes on to say, “Our success is highly dependent on improvements to our planning and supply
chain process. . . . An important part of our efforts to achieve efficiencies, cost reductions and sales growth is the
identification and implementation of improvements to our planning, logistical and distribution infrastructure and
our supply chain. . . . An inability to improve our planning and supply chain processes or to take full advantage of
supply chain opportunities could have a material adverse effect on our operating results.” The company must also
be able to better anticipate consumer trends. Restoration does not speculate on how successful it will be at
implementing these improvements or offer any specific plans for doing so.

The one thing that Restoration Hardware does seem sure of is the litany of factors that could undermine its
future success. These include seasonal fluctuations in revenue (including a dependence on peak sales and earnings
from the fourth-quarter holiday season), dependence on vendors to supply merchandise and services, disruptions
in distribution to stores from its warehouses, labor strife, dependence on external funding, trade restrictions and
currency fluctuations associated with foreign imports and purchases, general economic conditions, and the
negative impacts on business of war and threats of terrorism.

Each of these factors has its own set of variables that adds to the unpredictability of running a retail
business. For example, Restoration acquires its merchandise from a pool of over 500 vendors. However, two
vendors were the sources of nearly one-quarter of all merchandise purchases in 2003. Restoration does not have
purchase contracts with these two vendors, or with any of their smaller vendors. Therefore, the company has no
guarantee that it can continue to acquire the merchandise that it intends to market in the proper quantities, at the
appropriate cost, or at all. Additionally, many vendors must have purchase orders submitted well in advance of
when Restoration wants to move its inventory to the shelves of its stores. This long lead time leaves the company
without the ability to respond to sales trends, which is especially risky during the holiday season, when Restoration
also spends more money on marketing and personnel. The company expects to hit certain sales highs during the
holidays. Failure to do so as a result of insufficient inventory or a miscalculation of what products will appeal to
shoppers can have significant negative impact on the health of the business.

Restoration purchased nearly half of its merchandise from foreign vendors in 2003 and the company expects
the percentage of foreign goods to rise in the future. Importing goods adds another layer of risk factors for the
business. Tariffs, quotas, trade relations and restrictions, political unrest, shipping costs, exchange rates, and other
variables all mitigate Restoration’s ability to maximize the efficiency of its supply chain. The company must weigh
the risks involved with importing merchandise against the benefits, such as cheaper goods and the availability of
products that cannot be purchased anywhere else.

Restoration’s report even points out that its thriving direct-to-customer operations may not sustain its
current level of profitability. Decreased performance by those departments could be detrimental to the
profitability of the business as a whole. Even though Restoration has placed great emphasis on upgrading the
direct-to-customer operations, they remain as vulnerable to risk factors as the rest of the business.

Although a business such as Restoration Hardware faces numerous obstacles in operating to a profit, many
of those outlined by the company are speculation or worst-case scenarios. Nevertheless, loss of revenue during
the key selling period of the year is clear evidence of a problem that needs attention.

Sources: Larry Dignan, “Restoration Project,” Baseline Magazine, February 2004; Restoration Hardware 10-K
Report for the Fiscal Year Ending January 31, 2004, www.restorationhardware.com; “Restoration Hardware,”
Corporate Design Foundation, www.cdf.org, accessed April 20, 2004; “Restoration Hardware Increases Conversion
Rates Using Scene7’s eCatalog e-Merchandising Solutions,” www.scene7.com/news, accessed March 23, 2004;
“Restoration Hardware Reports Mixed Annual Results,” Home Channel News, March 19, 2004; “Financial Reports:
Direct Business Soars at Restoration Hardware,” Catalog Age, March 24, 2004; “Hardware Chain Makes Progress
on Restoration,” San Francisco Business Times, March 18, 2004; and “Restoration Hardware Utilizes iPhrase to
Drive Sales and Provide Industry-Leading Self-Service Shopping Experience,” Internet Retailer, December 1, 2003.

CASE STUDY QUESTIONS

1. Evaluate Restoration Hardware using the value chain and competitive forces models. How is the company
responding to the forces that influence it?
2. What is Restoration Hardware’s business strategy? How well do the company’s information systems
support that strategy?
3. What management, organization, and technology factors are responsible for the problems Restoration
Hardware is encountering?
4. What role does supply chain management play at Restoration Hardware?
5. How can Restoration Hardware improve its information systems to solve its problems?

Chapter 9: Electronic Business Project:

Evaluating Supply Chain Management Services

Trucking companies no longer merely carry goods from one place to another. They can also provide
supply chain management services to their customers and help them manage their information.
Investigate the Web sites of two companies, J. B. Hunt (www.jbhunt.com) and Schneider Logistics
(www.schneiderlogistics.com) to see how these companies’ services can be used for supply chain
management. Then respond to the following questions:

1. What supply chain processes can each of these companies support for their clients?
2. How can customers use the Web site of each company to help with supply chain
management?
3. Compare the supply chain management services provided by these companies. Which
company would you select to help your firm manage its supply chain? Why?