Roadmap for adding interface systems to value chains

IT in the past has proven to be difficult to integrate into a business, due to the complex nature of IT. Although, once it has been integrated, it can work wonders for a business in a multitude of ways. A team of W. P. Carey researchers led by Information Systems Professor Benjamin Shao have collaborated in order to create a roadmap in order for businesses to successfully incorporate IT into their respective businesses.

Poet John Donne once wrote, “No man is an island.” These days, the same can be said for a fully rigged enterprise system. That’s because today’s organizations oftentimes need to interface with the IT systems of upstream suppliers and downstream buyers. In an effort to help CIOs steer the course of such complex IT integrations, a team of W. P. Carey School of Business researchers mapped a recommended roadmap of IT systems implementations to enable competitive advantage.

Linking firms and customers

Two models underpin the research that led to the implementation recommendations. First, the researchers looked at Harvard University Professor Michael Porter’s value chain. “It’s a well-accepted model of what firms do internally to deliver products and services to the customer,” explains Benjamin Shao, a professor of Information System at the W. P. Carey School and lead researcher on the study.

Shao explains that the value chain outlines all the activities firms perform to create value and sustain competitive advantage while they produce the goods or services they sell. The model starts with inbound logistics — the acquisition of raw materials or components — which fulfills the firm’s production needs. Next comes operations, the process that converts raw materials into goods and services, followed closely by outbound logistics, or the process of delivering what you sell to the customers. Marketing and sales are part of the value chain too, and so is service, or what happens after the item is sold and delivered to maintain the post-sales value.

With the value chain model as their foundation, the research team also based their investigation on the theory of organizational information processing. Shao explains: “It’s a theory that says your information processing needs and capabilities have to be matched. Your information requirements will dictate what information processing capabilities you need to develop to get the job done.”

Given these two proven concepts, Shao and his colleagues set out to discover what IT capabilities a retail firm should develop to successfully implement interface information systems that interact with the two external stakeholders on either end of the value chain: suppliers and customers. “IT implementations always pose a challenge,” Shao says. “Technology changes so fast today that many people are constantly playing catch-up. As a result, IT managers or CIOs simply don’t have the time and resources to map out a well-crafted IT integration architectural plan for the whole company.”

Filling that gap was what Shao set out to do when he teamed with W. P. Carey School colleagues Professors Bin Gu and Raghu Santanam, as well as Yen-Chun Chou, a former PhD student and now a professor at National Chengchi University in Taiwan. The team parsed through data from surveys of retailers across the Americas and Europe. The surveys were conducted from 2009 to 2011, and they represented feedback from CIOs and IT department leaders from hundreds of firms representing thousands of retail stores.

As an example of how extensive the data were, the 2011 surveys represented retailers with combined sales of $555 billion and more than 117,000 stores. That was equivalent to eight percent of the retail market in the Americas and Europe at the time.

In the surveys, CIOs answered questions about specific IT functions their companies were using to support value-chain activities. Among the IT functions identified were things like inventory optimization, logistics, loyalty program, operations and more. The survey also examined infrastructure in use and plans for the future.

Where to go from here?

Based on survey results, the researchers were able to come up with guiding principles for planning the implementations of various enterprise systems. “If you look at the value chain, all of the value-added activities are performed in a certain order,” Shao says. “That order, the sequence of activities, has influence on how you will develop the interface information systems that enable you to interact with suppliers and customers.”

The researchers split up interfaces into two types of systems: those that connect a firm with its upstream suppliers and those that connect the organization to its downstream customers. On the upstream side of the value chain, the research team examined two information systems that have a close tie to inbound logistics, and those systems are electronic data interchange (EDI) and vendor-managed inventory (VMI).

EDI is the more basic of those two interface systems, exchanging order information about business transactions between a firm and its suppliers. “You issue an order to the supplier, and the supplier sends an electronic invoice. All the transactional data will be exchanged electronically according to industry vocabulary standards,” Shao explains.

VMI, which extends the capability of EDI, allows firms to automate inventory management. Rather than having to manually check inventory and contact a supplier, VMI takes on these tasks for firm staff. “Through VMI, the supplier will automatically replenish and hence manage the inventory stock for you once the inventory drops to a certain level,” Shao says.

But, EDI and VMI don’t operate in a vacuum. According to Shao, mature IT functions for inbound logistics and operations lay the foundation for successful implementation of such interactive supplier-facing information systems as EDI and VMI.

On the other hand, Shao continues, “downstream, you need mature IT capabilities for the marketing and sales value-chain activities” before implementing customer-centric information systems like customer relationship management (CRM) system or e-commerce website. “You can’t just say, ‘let’s build a customer-facing information system to attract, serve and retain more customers,’” he adds. “You have to first make sure you have mature IT capability in-house to support related primary value-chain activity in marketing and sales. Without it, the CRM or e-commerce project will fail.”

The researchers also found that that there are certain synergies between IT infrastructure and value-chain activities. “We found that downstream, a customer-facing information system like e-commerce website or CRM draws and heavily relies on information generated from logistics and operations activities, but the opposite is not observed,” Shao notes.

He adds that this finding makes sense if you look at the sequence of how value-chain activities are performed. “You go from logistics and operations to marketing and sales,” he points out. Because things happen in that order, the supplier-interaction tasks of logistics and operations don’t require immediate real-time information from marketing and sales for completion. A downstream interaction system like e-commerce website does, however, benefit from strong IT functions put in place for the value-chain activities that precede marketing and sales, namely logistics and operations.

How does that work? Shao invites us to consider the consumer activity of buying shoes online. “Before you place your order, you want to make sure the shoes you want to purchase are available and on stock. Otherwise, you’ll wait a longer period of time,” he says. To check on availability, an e-commerce website would need current inventory data. The site would need to pull information from logistics and operations activities, transfer it and present it in a user-friendly way to the website visitor in real time.

“If you have online Retailer A and Retailer B, and A has the IT capability to guarantee ‘you’ll get your shoes in two days,’ while Retailer B can only say, ‘you’ll get your shoes in about 10 to 14 days,’ which retailer would you choose?” Shao asks. “This example illustrates the importance of leveraging IT capability to provide timely accurate information across the value chain in helping a retailer outperform its competitors.”

Shao says their research results show that implementing interface information systems is best done as a step-by-step process, where the IT manager thinks about the sequence of activities they’re supporting and reflect that order in the sequence of their IT systems implementations. He adds, “As you implement IT to support value-chain activities, you’ll probably get more and more return on your investments accrued on the downstream end.”

Although Shao’s research examined retailers, he says all organizations engage in value-chain activities, so this approach to systems and application implementations likely applies to other sectors as well.

“And, of course, IT infrastructure is critical no matter what,” he concludes. “That’s how you’ll make sure you have all you need to coordinate activities across the entire value chain, from beginning to end.”