Operational strategies with information technology
Case Study - Amazon.Com• Launched in 1995 as an online bookstore by Jeff Bezos.• Diversified into a broad range of items including DVDs, CDs, computer software, video games, electronics, apparel, furniture and groceries.• Separate websites to serve Canada, UK, Germany, Austria, France, China and Japan. Gross sales have reached almost $ 50B at the end of 2011 with a net income after tax of $ 556M.
Amazon.Com’s Competitive AdvantageCapital Efficiency – It does not have retail stores and limits its capitalinvestment to its headquarters and warehouses. It receives payments from itscustomers on an average of 17 days before it has to pay its suppliers.Inventory Velocity – Averages 16.5 times per year.Technology - Uses information technology to execute supply chain on a largescale to realize economies of scale making its gains in capital efficiency andinventory velocity possible.• Run its warehouses as efficiently as possible. It is so high tech that its ERP has complex algorithms that can analyze relationships among the items customers purchase to find groupings that can be located in the same warehouse, thus reducing shipping costs. Warehouse operating costs has dropped from 20% of revenue to less than 10%.• Optimizes delivery performance and enhances service reputation that minimizes distribution mistakes.• Offers its retailing and supply chain management services to more than 1.1M other retailers both large and small.
Amazon.Com’s Competitive Advantage• The heart of Amazon.Com’s business model is information technology. It has been investing an average of 7% of its sales.• Some argue that Amazon has built “a stack of software on which thousands or millions of others can build businesses that in turn will bolster the platform in a self-reinforcing cycle.”• Amazon strives to be “earth’s most customer-centric company” focusing on selection, availability and price.
Achieving Competitive AdvantageSome IT investments only allow a company to achieve parity with itscompetitors. In either case, to develop an information technology strategy, acompany must answer the following questions:1. Can the company derive a competitive advantage from its investments in information technology?2. How much should the company invest? Should it be sustained over time or can it be reduced as the company grows and becomes more established?3. Where should the proposed investment in information technology be focused? How should the investment be distributed across projects?4. Should the company invest in purchasing standard information technology applications or developing custom applications? In what balance should it use standard and custom information technology?5. How should information technology development, implementation and maintenance be organized? How will projects be implemented? How should performance of the IT management function be measured?
Davenport, T. H. 1998. Putting the Enterprise into the Enterprise System. Harvard Business Review (July-August): 121-131.
Primary Reasons Why Companies Undertake ERPImplementation• To integrate their financial information and develop a common picture of what is going on throughout the company.• To integrate customer order information and smooth the flow from order through delivery.• To standardize and speed up manufacturing processes across dispersed business units.• To reduce inventory across the supply chain.• To standardize human resources information.
Some Nasty Real Life Issues• Hershey Foods experienced massive distribution problems following a flawed implementation of SAP’s R/3 ERP system in 1999.• Whirlpool blamed shipping delays on difficulties associated with its SAP R/3 implementation.• Pharmaceutical distributor FoxMeyer Drug actually collapsed and filed a $ 500M lawsuit against SAP and another $ 500M suit against Anderson Consulting.• GSIS filed a controversial Php 100M lawsuit in 2009 against IBM Philippines and Questronix over an alleged failure of its Integrated Loans, Membership, Acquired Assets and Accounts Management System.
Develop Strategies to Avoid Implementation Pitfalls• Training – Successful implementation depends on the skills and experience of the workforce in using the enterprise systems correctly. Until people understand the big picture and their roles in it, they find it hard to appreciate the value of entering their own data properly and the adverse effects if they don’t. The performance of enterprise systems is only as good as the weakest link in the system. Overcoming the natural resistance in some organizations to sharing information across organizational boundaries is an important part of training.• Data Integrity – GIGO• Reengineering Associated Business Processes – The company must understand and take on the required process changes. Reengineering blurs organizational boundaries and changes lines of responsibility, so attention to organizational design issues is important in implementation as well.• Complexity versus Simplicity – Well managed companies simplify their operating systems so that the necessary software tools can be used effectively, but at the same time understand the limitations of the system. ERP systems focus on solving the problems that are most common across companies and rarely deal with the full complexity or with the specific nuances of the business.
The Internet Connected Supply Chain The Innovators Will Control the Supply Chain, Lapide L., 2000
Opportunities for IT Based Competitive Advantage inOperations• IT investments, particularly when implemented as a standard ERP package, are rarely the source of competitive advantage as a whole.• Strategic advantage is derived from the business process redesign that accompanies implementation, or more likely from the customization of select pieces of the ERP system.• IT can drive operations strategy, but usually only in conjunction with other operational concepts such as lean manufacturing or just-in-time inventory.• Sometimes competitive advantage is derived by applying IT to specific locations within the value chain and other times it entails orchestrating activities that span the value chain.
Opportunities for IT Based Competitive Advantage inOperationsNew Product Development: Use of Workgroup TechnologiesIt enables individuals to work together under different circumstances such asgeographical location. Examples are groupware, workflow management and documentmanagement.
New Product Development: Use of Workgroup TechnologiesVendor Gartner: Horizontal Portals 2010 Gartner: Social Software 2010 Gartner: Enterprise Content Management 2010 Gartner: Unified Communications 2010 Forrester Wave: Collaboration Platforms 2009Alcatel-Lucent No No No Challenger NoAlfresco No No Visionarist No NoAtlassian No Challenger No No Strong performerAutonomy Corporation No No Visionarist No NoAvaya No No No Yes, leader NoCisco No No No Yes, leader ContenderCovisint Visionarist No No No NoDay Software No No Visionarist No NoDrupal No Visionarist No No NoHuddle No Visionarist No No NoHyland Software No No Challenger No NoIBM Yes, leader Yes, leader Yes, leader Challenger Yes, leaderInteractive Intelligence No No No Visionarist NoJive Software No Yes, leader No No Strong performerLiferay Yes, leader Niche No No NoMicrosoft Yes, leader Yes, leader Yes, leader Yes, leader Yes, leaderMindTouch No No No No Strong performerMitel No No No Visionarist NoNEC No No No Challenger NoNewsGator No Visionarist No No NoNovell No Niche No No Strong performerOpenText Challenger Challenger Yes, leader No Strong performerOracle Corporation Yes, leader No Yes, leader No NoRedHat JBoss Challenger No No No NoSAP AG Yes, leader No Niche Niche NoSiemens No No No Visionarist NoSocialtext No Visionarist No No Strong performerSpringCM No No Visionarist No NoSuccessFactors No Visionarist No No NoTelligent No Visionarist No No NoTibco Software Visionarist No No No NoTraction Software No Niche No No Strong performerVendor Gartner: Horizontal Portals 2010 Gartner: Social Software 2010 Gartner: Enterprise Content Management 2010 Gartner: Unified Communications 2010 Forrester Wave: Collaboration Platforms 2009
Opportunities for IT Based Competitive Advantage inOperationsForecasting• Forecasting will always be subject to significant errors, but use of more sophisticated approaches can reduce the variability of forecasts compared to demand.• Internet supply chains require collaborative forecasting, planning and replenishment.• It also requires market intelligence to develop consensus-based forecasts.• This software integrates time series information on past demand and other external factors such as industry data, demand for related products, the company’s and competitor’s promotions, external data such as weather information and macroeconomic data.
Opportunities for IT Based Competitive Advantage inOperationsPricing• Pricing decisions can be optimized for specific market and operational conditions.• Revenue management, a concept pioneered by the airline industry, optimizes revenue given assessments of demand and capacity.• A company can dynamically change prices to reflect product availability and inventory, relative demand in recent periods, measured price elasticity and competitor pricing.
Opportunities for IT Based Competitive Advantage inOperationsDistribution• IT enables a number of improvements in routing algorithms, load consolidation, cross-docking methods at transit hubs, flow optimization, package tracking and supply chain event management.• Some are enabled with handheld devices for recording distribution actions. Amazon.com uses dispatching software that introduces loads at different postal locations to optimize total distribution.• Distribution software significantly enhances the company’s rapid response to orders and product customization.
Opportunities for IT Based Competitive Advantage inOperationsLarge-Scale Inventory Systems and Product Availability• Inventory management improves efficiency and inventory turnover that reduces cash- to-cash cycle times.• Sophisticated systems use complex algorithms using quantitative analysis to set inventory stock levels to reduce overages and shortages.• There are systems that can handle complicated supply chains that consist of multiple productions and inventory management stages.• Large companies can pool national demand to achieve a significant advantage in economies of scale.
Three Step Process for Generating an IT StrategyUnderstand How the Company Wishes to Gain CompetitiveAdvantage1. The business strategy dictates where the company wants to be positioned in terms of cost, quality, availability, features / innovativeness and environmental performance.2. It also suggests capabilities that the firm should leverage or needs to develop.3. The output of this step should be a general direction for the business strategy, a list of processes that must be optimized to achieve this strategy, the set of assumptions that constrain the process and how much it wishes to invest in IT.4. It also includes benchmarks against competitors and knowledge of whether or not the company wishes to distinguish itself through IT.
Three Step Process for Generating an IT StrategyIdentify the Ways in Which Information Technology Can be Usedto Support Those Goals1. It depends upon understanding which processes are core and which are context, which processes are stable and which are evolving and which processes are supported by standard packages and which require custom development.2. More investment in custom development to support core processes and less investment in standard packages to support context, stable processes is required if IT is a competitive differentiator for the organization.
Three Step Process for Generating an IT StrategyOrganize the IT Function to Accomplish the Goals1. IT functions should be decentralized if there are a large number of diverse business units with different business needs.2. A more centralized IT function allows the company to leverage IT investments in a homogenous environment.3. IT skill sets must be matched to the task at hand. The greater the customization required, the more skilled the IT organization must be.4. Metrics to assess the IT organization’s performance should link clearly to the company’s business strategy and ensure that individual projects yield the expected benefits on time and on budget.