Chapter 14

IT and Business
Processes

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 14.1 Introduction
 Information technology (IT) an important enabler
of effective supply chain management
 Typically spans the entire enterprise and
beyond, encompassing suppliers on one end
and customers on the other.
 Includes systems that are:
 internal to an individual company
 external which facilitate information transfer between
various companies and individuals

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 Questions
 What is the impact of business process change on IT
implementation?
 What are the goals of IT from the perspective of supply
chain management?
 What IT components are needed to achieve the goals of
supply chain management?
 What are the supply chain component systems and how
should they be approached?
 What are decision support systems and how do they
support supply chain management?
 What criteria should be used to select decision support
systems?
 What drives the selection of best of breed systems?

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14.2 The Importance of Business
Processes
 Recent study by MIT, PRTM and SAP
 Companies that invest mostly in business
processes do better than those who invest
in IT only and lack the appropriate
business processes.
 Investments only in technology without the
appropriate business processes lead to
negative returns.

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 Challenges
 Identify measures to characterize supply
chain effectiveness
 KPIs and SCOR Model are objective ways
 Develop measures to characterize the
level of maturity of the business process
and the information technology employed
by the company
 Much more difficult because of variations
across companies

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 Characteristics of the Level of
Business Maturity
 Based on the SCOR model
 Consists of four stages

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Level I: Disconnected Processes
 Many independent processes.
 Organized functionally with no or low degree of
integration.
 Supply chain planning typically done for each
site independently of other sites.
 Characteristics:
 Functional (silo) strategies.
 Lack of clear, consistent supply chain management
processes.
 No measurements, or measurements not aligned with
company objectives.

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 Level II: Internal Integration
 Organized functionally, with a high degree of
integration.
 Decisions made through the integration of key
functional areas.
 Common forecasts applied throughout the
organization.
 Characteristics:
 Integration of some functional information.
 Documented processes followed across the entire
organization.
 Key measurements that are used departmentally.

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 Level III: Intra-Company
Integration and Limited External
Integration
 Cross-functionally organized.
 Involves key suppliers and customers in decision
making processes.
 Characteristics:
 Decisions optimized across the internal supply chain.
 Sophisticated processes that involve all affected
internal organizations.
 Key suppliers and customers are included in supply
chain planning.

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 Level IV: Multi-Enterprise
Integration
 Multi-enterprise processes
 Common business objectives/extensive
knowledge of the suppliers and customers
business environments.
 Collaboration links trading partners and enables
them to operate as one virtual corporation.
 Characteristics:
 Collaboration across the entire supply chain.
 Internal and external collaborative supply chain
management focus on key service and financial
goals.
 Measures directly link supply chain results to
company goals.
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 Four Categories of IT Systems
 Level I
 Batch processes, independent systems and
redundant data across the organization.
 Focus on spreadsheet and manual manipulation of
data for decision making.
 Level II
 Shared data across the supply chain.
 Decisions made using planning tools
 Level III:
 Complete visibility of internal data
 Key suppliers and customers have access to some of
this data
 Processes are also shared across the supply chain
 Level IV
 Data and processes are shared internally and
externally.
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 Areas of PRTM Data Collection
 Strategic Planning: Network design, Inventory positioning
and Manufacturing strategy
 Demand Planning: Demand forecasts and Promotional
planning
 Supply Planning: Coordination of manufacturing,
inventory and transportation activities across the supply
chain
 Supply-Demand Balancing: Trade off between suppliers
capability and customer demand are considered; Pricing
and promotional activities are applied systematically to
better match supply and demand
 Procurement Planning: Materials and commodities
sourcing strategy
 Manufacturing Planning: Single site vs. Enterprise wide
strategy;
 Delivery Planning: Commitments to customers are based
on forecast, available capacity, or real-time inventory and
manufacturing information.
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 Main Results
 Companies with mature business processes
have lower inventory levels
 Improvements in certain areas demand IT
investments
 BICS companies with mature processes
achieve superior financial performance
 Investing only in IT infrastructure leads to
significant inefficiencies
 Priority in IT investments depends on your
objectives

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 Companies with Mature Business
Processes Have Lower Inventory Levels

FIGURE 14-1: Mature-process companies have improved on inventory

performance; BICS companies that are process mature perform even better. 1-14
 Improvements in Certain Areas
Demand IT Investments

FIGURE 14-2: On-time delivery, fill rate level, and order-fulfillment lead time
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BICS Companies with Mature Processes
Achieve Superior Financial Performance

FIGURE 14-3: Process and systems maturity and financial performance

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Investing Only in IT Infrastructure
Leads to Significant Inefficiencies

FIGURE 14-4: Impact of investment in IT infrastructure 1-17

Priority in IT Investments Depends
on Your Objectives

FIGURE 14-5: Linking processes and systems with operations and

financial performance 1-18
Linking Processes and Systems
 Box A
 Immature business processes and IT systems.
 Below average business performance.
 Box B
 mature business processes and immature systems.
 Perform significantly better than those who did not invest in
either processes or systems, but they leave a lot on the table.
 Box C
 mature systems and processes.
 Enjoy significant improvements in operational performance.
 Box D
 mature IT systems but not processes.
 Performance even worse than those with immature systems and
processes.
 IT infrastructure typically requires significant investment
accompanied by expensive support staff.
 IT provides only information

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 14.3 Goals of Supply Chain IT
 Desired goals of IT as they relate to the
supply chain management and its unique
requirements.
 Some companies and industries are
currently far from achieving these goals
 Others are well on their way to
accomplishing many of them.

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 SCM System Goals
 Collect information on each product from
production to delivery or purchase point
 provide complete visibility for all parties involved.
 Access any data in the system from a single point
of contact.
 Analyze, plan activities, and make trade-offs
based on information from the entire supply chain.
 Collaborate with supply chain partners.
 Allows companies to manage uncertainty

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 Primary Goal
 Link the point of production seamlessly with the
point of delivery or purchase.
 Have an information trail that follows the
product’s physical trail.
 Allows planning, tracking, and estimating lead
times based on real data.
 Any party that has an interest in the
whereabouts of the product should be able to
have access to this information.

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Flow of Information and Goods in
the Supply Chain

FIGURE 14-6: Flow of information and goods in the supply chain

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 Collect Information
 Information Requirements:
 Status of retailer’s orders
 Suppliers’ need to be able to anticipate an incoming
order from the manufacturer.
 Data access requirements:
 From other companies’ information systems
 Across functions and geographic locations inside a
company
 Data in their own terms
 Alert diverse systems to the implications of this
movement
 Requires standardization of product identification
(e.g., bar coding) across companies and
industries
 Radio Frequency Identification (RFID) technology an
attempt to address this issue 1-24
 Access Data
 Single-point-of-contact
 All available information accessed in one stop
and consistent regardless of:
 the mode of inquiry used (e.g., phone, fax, Internet,
kiosk)
 who is making the inquiry.
 Information may reside in various locations within
one company and across several companies.
 Problem of synchronizing data across multiple
systems and making sure data is available real-
time

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Current Information Systems

FIGURE 14-7: Current information systems

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New Generation of Information
Systems

FIGURE 14-8: New generation of information systems

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Analysis Based on Supply Chain
Data
 Data analysis should take into account the global
supply chain picture.
 Information system must be utilized to find the
most efficient ways to produce, assemble,
warehouse, and distribute products
 Different levels of analysis required
(Strategic/Tactical/Operational)
 Systems need to be flexible enough to
accommodate changes in supply chain
strategies.
 Systems need to be highly configurable and new
standards need to be developed.

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 Collaborate with Supply Chain
Partners
 Ability to collaborate key for most companies
 Sophisticated alignment of IT systems
 Integration of business processes.
 Collaboration among supply chain partners
 Ability to link and work effectively with suppliers
through supplier relationship management (SRM)
systems.
 Collaboration platforms, whether private or public.
 Customer relationship management (CRM) systems
to provide better contact and understanding of
customer needs.

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 Other Issues
 Four goals of supply chain management
 Do not all have to be achieved at the same time
 Not necessarily dependent on each other.
 Can be targeted in parallel
 Enterprise Resource Planning (ERP) systems
 Installed in most companies today
 Cover the first two requirements to a large extent.
 Common infrastructure throughout the company with
role based access to data.
 Web based portals provide the entry point into the
systems

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7-Eleven and the Four SCM Goals
 Collected data item by item, store by store, day by day,
for the last decade while other retailers are only
collecting point of sale data at best.
 Mobile Operations Terminal, a lightweight wireless tablet
with a colorful screen allows access to the item
information in the store and allows recording of inventory
changes.
 Retail Information System installed in the stores
supports the provides timely sales data that enables
each store to tailor its product assortment to its
customers.
 Supplier collaboration enabled through sharing of 7-
Eleven;’s data analysis through a program called 7-
Exchange.

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14.4 SCM System Components
 ERP systems
 attempt to resolve, bring all business
functions together to make an enterprise more
efficient.
 do not help answer the fundamental questions
of what should be made, where, when, and for
whom.
 Such decisions made by human planners
using various analytical tools such as
decision-support systems (DSS).

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 DSS
 Range from spreadsheets to expert
systems
 Appropriate DSS depends on:
 nature of the problem, the planning horizon,
and the type of decisions that need to be
made.
 DSS helps in analysis:
 At various planning levels
 Exact nature depends on manufacturing
characteristics, demand fluctuation,
transportation costs, and inventory costs.
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Data Analysis Techniques in
DSS
 Queries
 Vast quantities of data make manual analysis
difficult.
 Decisions often facilitated by simply asking
specific questions about the data
 Statistical analysis
 Used to determine trends and patterns in the
data

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Data Analysis Techniques in DSS
 Data mining
 With larger corporate databases
 New tools to look for “hidden” patterns, trends, and
relationships in the data.
 On-line analytical processing (OLAP) tools
 An intuitive way to view corporate data, typically
stored in data warehouses.
 Aggregates data along common business dimensions
 Let users navigate through the hierarchies and
dimensions by drilling down, up, or across levels.
 Also provide sophisticated statistical tools to analyze
these data and tools to present them.

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 DSS Interfaces
 Display and report based on the specific
problem being solved.
 Uses analytical tools that have some
specific embedded knowledge of the
problem being solved.

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 DSS Interfaces Example

FIGURE 14-9: A typical GIS interface for supply chain management

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 Analytics Used in DSS
 Calculators
 Simple decision-support tools that facilitate
specialized calculations such as accounting
costs.
 Simulation
 Incorporates random components.
 Create a model of the process on a computer.
 Specify each of the random elements of the
model with a probability distribution.
 Run the model to study effects

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 Analytics Used in DSS
Artificial Intelligence (AI)
 Systems that exhibit intelligence by incorporating
some form of learning.
 Concept of agents
 A software process
 Communicate and interact with other agents,
 Expert systems are a type of AI system
 Capture an expert’s knowledge in a database and use
it to solve problems.
 Relies on an extensive database of knowledge,
usually expressed as a set of rules.
 Not extensively used in logistics practice

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 Analytics Used in DSS
Mathematical Algorithms
 Can be applied to the data to determine potential
solutions to problems
 Exact algorithms
 Finds a solution that is mathematically the “best possible
solution” or optimal solution.
 May take a long time to run, especially if a problem is complex.
 Input data to these algorithms are often approximated or
aggregated
 Exact solutions to approximate problems may be worth no
more than approximate solutions to approximate problems
 Heuristics
 Provide good, but not necessarily optimal, solutions to problems.
 Typically run much faster
 Most DSSs employ heuristics when using mathematical
algorithms.
 Quality of a good heuristic defined by how rapidly it can give a
solution that is very close to the optimal solution
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 Appropriateness of Different
Tools
 Typically a hybrid of different tools used
 Factors to consider:
 The type of problem being considered.
 The required accuracy of the solution
 Problem complexity
 The number and type of quantifiable output
measures.
 The required speed of the DSS
 The number of objectives or goals of the decision
maker

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 Applications and Analytical
Tools
Problem Tools used

Marketing Query, statistics, data mining

Routing Heuristics, exact algorithms

Production scheduling Simulation, heuristics, dispatch rules

Logistics network configuration Simulation, heuristics, exact algorithms

Mode selection Heuristics, exact algorithms

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 Capabilities for Supply Chain
Excellence

FIGURE 14-10: Capabilities required to achieve supply chain excellence

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 IT Capabilities
Strategic Network Design
 Pick the optimal number, location, and size of
warehouses and/or plants
 Determine optimal sourcing strategy
 Determine the best distribution channels
 Objective: minimize total costs, including
sourcing, production, transportation,
warehousing, and inventory, by identifying the
optimal trade-offs between the number of
facilities and service levels.
 Planning horizon typically a few months to a few
years
 Uses aggregated data and long-term forecasts.

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 IT Capabilities
Tactical Planning
 Determines resource allocation over shorter
planning periods such as weeks or months
 Supply chain master planning
 Coordinates production, distribution strategies, and
storage requirements
 Efficiently allocates supply chain resources to
maximize profit or minimize system-wide cost.
 Inventory planning
 Determines the optimal amount of safety stock
 How to best position inventory in the supply chain.

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 IT Capabilities
Operational Planning
 Enables efficiencies in procurement,
production, distribution, inventory, and
transportation for short-term planning.
 Planning horizon typically daily to weekly
 Systems focused on generating feasible
strategies, not optimized solutions

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 Four Components of Operational
Planning
 Demand planning
 Generates demand forecasts based on various historical and
other pertinent information.
 Statistical analysis and forecasting methods
 Production scheduling
 Generates detailed production schedules based on the supply
chain master plan or demand forecasts.
 Constraint-based feasibility analysis that satisfies all production
constraints.
 Inventory management
 Generates inventory plans for the various facilities in the supply
chain
 Statistical and computational methods.
 Transportation planning
 Produces transportation routes and schedules
 Fleet planning, transportation mode selection, routing,
distribution planning.
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 IT Capabilities
Operational Execution
 Provide the data, transaction processing,
user access, and infrastructure for running
a company.
 Tend to be real-time in the sense that the
data are current and are constantly being
updated by users and events.

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Five Components of Operational
Execution
 Enterprise resource planning
 Customer relationship management
 Supplier relationship management
 Supply chain management systems
 Transportation systems

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 Other Factors
 Planning horizons different for various
capabilities
 Return on investment different for various
system
 High for strategic systems
 Much smaller gain for operational planning and
execution
 Implementation complexity different
 Low for strategic network design is not high
 Tools and processes not integrates with other systems or
processes.
 Does not require real-time updates
 High for operational systems
 Integrate and require real-time data
 Extensive training. 1-50
 14.5 Sales and Operations
Planning (S&OP)
 Business process that continuously balances
supply and demand.
 Cross-functional integrating sales, marketing,
new product launch, manufacturing and
distribution into a single plan
 Typically involves analysis of aggregated volume
such as product families.
 Most companies use some demand planning
software and spreadsheet analysis of data
collected from various ERP, CRM and
manufacturing systems.

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 S&OP Implementations
 Achieving S&OP process success is quite
challenging.
 Process does not include optimization,
inventory considerations, what-if capabilities
 Data complexity and too many options to
analyze in a spreadsheet results in a need
to create a repeatable and visible process
that is integrated with ERP systems.

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 Advanced S&OP Process

FIGURE 14-11: Advanced S&OP process

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 Features in the New Process
 Aided by new technology platforms
 Allows easier integration of data
 Ability to optimize and not focus solely on
the forecast.
 Integration of different activities into the
S&OP process

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 14.6 Integrating Supply Chain
IT
 Systems are complex
 Companies may think it is not cost
effective to implement some of the
systems
 Implementing ERP systems
 Internal processes have to be converted
 Follow some industry conventions
 No single standard has emerged as yet
 Therefore, companies need to decide:
 What are the priorities in implementation?
 What should a company invest in first?

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Implementation of ERP and DSS
Implementation issue ERP DSS

Length 18-48 months 6-12 months

Value Operational Strategic, tactical, operational

operational

ROI 2-5 year payback 1-year payback

Users All end users Small group

Training Simple Complex

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 Implementation Issues
 Companies must first install ERP so that data is
available
 However companies can start installing DSS
before/in-parallel with ERP as data is already
available in legacy systems
 DSS projects take much lesser time
 DSS projects have a higher ROI
 Type of DSS implemented and benefits
achieved depends on the industry

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 Priorities when Implementing
Industry
DSS DSS

Soft drink distributor Network and transportation

Computer manufacturer Demand and manufacturing

Consumer products Demand and distribution

Apparel Demand, capacity, and distribution

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“Best of Breed” vs Single Vendor
Solution
 Single Vendor
 Purchase ERP and supply chain DSS as a total
solution from one vendor
 Best of Breed
 Purchase the best-fit solution in each category from a
different vendor,
 System better fits each function in the company.
 More complex and takes longer to implement
 Provides greater long-term flexibility
 Better overall solutions to the company’s problems.

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 Proprietary Systems
Development
 Makes sense for extremely large companies
 Already existing expert IT departments and
systems that already serve the company well.
 Latest technologies provide easier business
oriented development and integration
 May be a push back towards more internal or
software integrator development

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Issues with the Various Options
Implementation issue Best of breed Single vendor Proprietary

Length 2–4 years 12–24 months Not known

Cost Higher Lower Depends on expertise

Flexibility Higher Lower Highest

Complexity Higher Lower Highest

Quality of solution Higher Lower Not sure

Fit to enterprise Higher Lower Highest

Staff training Longer Shorter Shortest

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 SUMMARY
 Four major goals for IT
 Information availability on each product from
production to delivery point.
 Single point of contact.
 Decision making based on total supply chain
information.
 Collaboration with supply chain partners.

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What Is the Impact of Achieving These
Goals on the Logistics Manager?
 Standardization brings about cheaper and easier
methods to implement the basic infrastructure.
 Data display and access more integrated in systems that
do not require any specialized knowledge.
 Various systems interact in a way that will blur the
current boundaries
 SOA will allow easier integration
 Disparate systems will become better integrated
 Likely proliferation of applications that can plug into a company’s
enterprise system
 E-commerce is changing the way we work, interact, and
do business.
 Provides an interface to businesses and government that allows
meaningful data comparison
 Data access possible
 Extends access throughout the supply chain
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 Quote from Lou Gerstner,
Former CEO of IBM
“The payoff from information technology is going
to be in making transactions and processes
more effective and efficient, so it’s not about
creating a new economy, it’s not about creating
new models of behavior or new models of
industry. It’s about taking a tool, a powerful tool,
and saying, “How can I make my supply chain
more effective and efficient, how can I make my
purchasing process more efficient, how can I
make my internal employee communications
more effective and efficient, how can I as a
government deliver services to constituents
more efficiently and more effectively?”

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