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					Publish date 8/24/2000
BBB3 Article
            Integrating IT Infrastructure from the Top to the Bottom Line

Companies are looking to serve their customers better using compelling solutions such as
CRM, ERP and SCM, but a piecemeal approach won’t produce the results they want. The
   answer is an integrated customer-focused IT strategy that fits these puzzle pieces
                                       together.

                 By Mike Pelphrey, International Supply Chain Solutions

Most companies can summarize their varied business goals in a simple statement: “We
must serve our customers better while maintaining a healthy balance sheet.” Today,
sophisticated information technology (IT) tools are essential to this task. Companies
looking to grow the top line of the income statement—sales are using sophisticated
Customer Relationship Management (CRM) programs to streamline sales operations. To
improve the bottom line—profits—they are looking to Enterprise Resource Planning
(ERP) inside their organizations and Supply Chain Management (SCM) tools outside
their walls to drive costs out of the manufacturing and procurement processes.


Yet by focusing on SCM, ERP and CRM as separate implementations, companies are
missing a golden opportunity to truly optimize their information strategy and create real
value for their clients. Today’s enterprises must not only target the top line and the
bottom line proficiency—they need an information strategy that integrates their business,
communications and collaboration to optimize their capital resources.
Such a strategy must:
   Tie together front end and back end solutions;
   Help companies focus on their best clients;
   Use demand forecasting and business intelligence to reduce supply chain costs while
    serving customers with better products and services at economical value.
Counting on CRM
In recent years, customer relationship management has become a burning issue within
many organizations. Using contemporary CRM software, companies are hoping to
develop ever-closer “one-on-one” relationships with their customers and, in the process,
identify and meet every conceivable customer need.


Of course effectively managing customer relationships is hardly a novel concept.
Successful companies have been doing it as long as there have been companies. What’s
different about CRM today is that highly sophisticated IT tools have pushed information
volumes and processing speeds into the stratosphere. It is now theoretically possible to
store every interaction with a customer in a database and then categorize and analyze that
information in every way, shape and form. In addition, there is business intelligence
capability to store the massive information, filter it, dissect it and assist in predicting
trends.


However, the question remains: what exactly should you do with all this information?
CRM software is potent and powerful, but it depends on talented people to manage
information in ways that build lasting customer relationships. For CRM to be successful,
it must help a company provide higher quality products, effortless ordering, on time
delivery and responsive service. If it doesn’t, CRM will be just another costly IT failure.


Come Together—Right Now
The key to a successful CRM implementation is how closely it can be integrated with a
company’s existing front- and back-end business processes. Today, companies must have
complete command of the entire production process—including financial and operational
data—from a single system.


The problem is that organizations are so focused on implementing and using CRM to
improve the front end of their operations, they’re forgetting about how they can extend it
to the back end—their SCM and ERP procurement processes. For example, an effective
way of improving customer service is to take time out of the production and distribution
process and improve throughput. This requires understanding, and forecasting from the
demand signal, client interaction and supply chain management.


Companies that respond faster to the marketplace by integrating an enterprise-wide IT
strategy will generate more revenue while reducing costs through lower inventories,
improved scheduling and less paperwork. For example, our firm worked with a major
manufacturer of “make to order” industrial pumps. Once an order was placed, it took the
company two weeks to procure parts for the pump and assemble it. However, by
addressing supply chain issues, we helped them reduce the picking process from two
week to two hours. They were then able to provide same day delivery, which no one else
in the industry was offering. They were also able to charge an extra 15 percent because of
the value added reduction in cycle time. Furthermore, it actually costs them less to fulfill
an order in two hours than in two weeks, so the company won by lowering procurement
time as well as raising customer satisfaction. Sales increased, costs went down and on-
time delivery performance went from 88 percent to 99 percent.


A Great Leap Forward
These kinds of “quantum leap” improvements cannot be realized by focusing solely on
CRM or the supply chain. A team involved in supply chain initiatives usually focuses
inward, on cost cutting, while the CRM team looks only at revenue generation. Both of
these teams must focus on the entire user community. If a company purchases CRM and
SCM solutions without integrating them, they are sub-optimizing their IT investment. In
addition, a critical component in maximizing the integration strategy becomes the
collaboration of the vendor partners as well as the customers and as a result the use of
extranet and self-service is becoming “required” as compared to “nice to have”.


This may seem obvious, but when we ask companies “what is your strategic information
technology plan,” very few have an IT Strategy, or if they do, it’s dated and of little
value. Instead, they are busy reacting to the latest technology trend or business challenge
by installing a new “program of the month.” This is essentially a defensive strategy, one
that does not take into account enterprise-wide objectives. CRM may be a top IT priority,
but any CRM system must integrate seamlessly with its SCM and ERP systems for
optimum return on investment.


An intense focus on customer requirements, supply chain and procurement issues can
yield breakthrough strategies that better serve the customer. For example, the 15 percent
up charge by the above referenced pump manufacturer may seem high, but imagine this
scenario: A construction project contractor needs a pump today to complete a critical
phase of his project. Is he going to wait two weeks for a pump or, by paying 15 percent
more, can he keep from delaying his project, which may ultimately cost him money or
the customer?


Another example is speeding up the “cash conversion cycle.” Dell, a leading PC
manufacturer, takes an order, builds a customized computer to match that order, and then
bills the customer’s credit card. The faster they can do that, the faster they can convert an
order to cash. In this case, faster means more profits, less inventory and happier
customers.


The Royal Treatment
Companies looking to effectively use CRM must also use this tool to carefully identify
their most profitable clients. To paraphrase George Orwell, all clients may be “kings,”
but some kings are more equal than others. A concept called “Pareto Distribution” states
that 20 percent of a company’s clients usually represent 80 percent of the revenue stream,
or 80 percent of the company’s profit margins. If a company is truly serious about
improving relationships with key clients, they must focus their efforts on that 20 percent.


That means going well beyond the typical “boundaries” between client and supplier. For
example, successful companies often team with their best customers to find ways to
reduce transaction costs. It’s not enough for one company to simply say “we must reduce
costs by 20%.” Organizations, suppliers and clients must work together to deploy tools
such as vendor managed inventory and improving materials throughput through shared
knowledge IT solutions across the value chain.


In other words, companies must find a way for their ERP, SCM and CRM systems to
come together and build a powerful, robust and efficient distribution channel—one that
meets customer needs and tightly integrates the balance sheet from top to bottom.


Dig Deeper
The moral of this story is that to truly serve the client, you must dig deeper into the
manufacturing system using you IT implementations. For example, say “Acme
Manufacturing” is making giant rubber bands. The same product manufactured six weeks
earlier included an unfavorable material. The data on that unfavorable material is
somewhere in the data warehouse. Using his integrated IT tools, the manufacturing
manager can mine the database to determine where the error occurred and what materials
should be avoided or replaced. In turn, this helps Acme determine and clarify the
significant product variances the next production run.


In another example, an Acme customer—“Coyote Productions”—cancels an order. Acme
can now project a future variance impact based on that altered schedule. The
manufacturing manager must understand the impact of that variance, how it will affect
the production schedule, and the true cost of making the change—particularly if that part
is for one client and is built to his specifications. Armed with timely information, Acme
may accurately assess a cancellation fee. Most companies don’t have this information.
While they may have a cancellation fee, they have no idea if it covers their costs.


Likewise, IT systems may be used to better manage vendor relationships. Say a company
expects 1,000 units to be shipped, but only 975 units arrive. An electronic alert will go
the appropriate party who can then take action. The same approach applies to electronic
approvals. If a manager places an order for a part at $1.25 per unit and the standard cost
is $1.00, the 25-cent unfavorable variance can be directed to a decision maker—wherever
he or she is—who can approve or deny the variance.
Right Here, Right Now
To truly understand costs, managers must get that information at the same time the event
is occurring. Older IT system could calculate the cost of a variance, but they could only
do that six weeks after the event occurs. That information is practically worthless.


Today, manufacturing managers facing variances and schedule changes must know at the
time of the decision if it will produce unfavorable results. They need real time “triggers”
that will, for example, show how a particular purchasing strategy will have a negative
impact on a profit and loss statement and by how much.


These systems can also produce more accurate budgeting. By using electronic approvals
and grants of authority, the system will immediately reduce a budget when a purchase is
made. That way, if a manager is over budget, his purchasing power is curtailed.


While most modern IT systems have these capabilities, companies are generally not using
them. These capabilities are powerful, and companies should be implementing a
company-wide strategy throughout their organization to formulate better production
strategies, improve client relationships and ultimately, to increase profitability.

IT: Not the Holy Grail
Architects of information strategies must remember that IT alone is not a solution—it is a
tool that lets people develop a solution. A company implementing CRM, ERP and SCM
solutions may think they are implementing a strategy and therefore fail. IT solutions
should be supporting an overall business strategy, not leading the strategy.

Lack of integration is usually the root cause of spectacular IT failures. However,
companies that achieve top line to bottom line integration will find that manufacturing
can truly deliver what the sales department promises. For some companies, that
represents revolutionary change.
Michael Pelphrey, CPIM
Managing Director
International Supply Chain Solutions

   Michael Pelphrey was formerly a Partner with BDO Seidman, LLP and has over twenty five years of
    manufacturing operations management and consulting experience. His industry and consulting
    experience includes manufacturing of pharmaceuticals, food products, process industries, computers
    and peripherals, furniture, aerospace & defense, telecommunications equipment and industrial
    pumps.

   In addition, he was a CEO and President of a $30million just in time manufacturing facility with 9
    divisions nationally. Materials manager and production control scheduler in various manufacturing
    companies. Experienced in all phases of manufacturing processes, planning and control systems.

   Conducted various APICS workshops including Supply Chain, Just in Time, Master Planning,
    Inventory Management and Production Activity Control.

   MS, Finance - West Coast University
   BA - California State University Fullerton, Beta Gamma Sigma
   Certified Member of APICS (CPIM)

Email: mwp0558@aol.com




                         The Supply Chain Value Innovation Company




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