Tuesday, March 2, 2010

Best Practice: Technology and Change Management

By Dr. Arunachalam Narayanan, Texas A&M University

and Dr. F. Barry Lawrence, Texas A&M University

Technology implemented and utilized properly is a tremendous asset to any wholesale distribution company. Distributors demonstrate the vast differences in technology adoption indicating many opportunities to implement best practices.

Technology is used for both data capture and systems integration. A company without a good data capture (barcode or RFID) can still utilize technology at the systems integration level (like ERP). The Council of Supply Chain Professionals (CSCMP) conducts an annual survey of supply chain professionals on critical issues pertaining to supply chain. Information technology (IT) and supply chain integration always stand out among the top three challenges for the community. Over the last 3 to 4 years, there has been a shift in the challenge, from just technology and integration to “information leverage.”

This is an important change in perception. In today’s environment, almost all companies have either recently implemented an information system or are in the process of selecting and implementing one. The next step is in understanding how to utilize the system for competitive advantage. Success or failure of the system depends on the ability of the company to utilize technology.

The technology failures of the 1990s are now largely behind us. At that time, firms often reported many disasters and took 3 to 4 years to get their systems functional and 7 to 10 additional years before feeling happy with the change. Recent implementations look a lot better. Distributors adopting new systems now report 2 years of pain and a general satisfaction thereafter. Bolt-ons for significant processes like pricing are now common. In general, the cost of IT adoption or changes has plummeted in recent years. Distributors are giant information machines, so the need to effectively adopt, integrate, and manage systems is not optional, it is the only way to do business.

The popular-selling NAW Institute for Distribution Excellence book, Optimizing Distributor Profitability: Best Practices to a Stronger Bottom Line (available at http://www.naw.org/optimizdistprof), details best practices, their implementation, and return-on-investment (ROI). These practices are valid in any economy, but the significance of one best practice versus another may change under different market conditions. Each month in this blog, we have introduced a best practice and how it can improve earnings and/or ROI under current economic conditions. We encourage you as you participate in this blog to ask questions, debate results, and offer your own experiences with such practices, so that we may further the knowledge of the community and the understanding of the science of distribution.

The book breaks business processes into seven groups (SOURCE, STOCK, STORE, SELL, SHIP, SUPPLY CHAIN PLANNING, and SUPPORT SERVICES) based on various distributor asset categories as shown in exhibit 1. The support services group includes human resource management, finance, and technology. This month, we focus on technology, especially systems integration, which is a process under support services. In future posts, we will explore best practices in data capture.

Best Practice: Information Management

Effective information management requires system integration. System integration is one of the many challenges in the IT domain for regional and national distributors. For firms with an aggressive acquisition growth plan, it is essential to integrate systems across the company to realize potential efficiency targets. System integration enables branches and regions to share key distribution resources, such as inventory. It also enhances operating efficiency and enables the firm to become competitive by reducing the cost to serve. The branches/regions will have better visibility, leading to higher productivity and the ability to share internal best practices through improved communication.

System integration directly affects the critical attribute—data integrity—that affects many financial elements. For instance, data integrity is one of the key reasons for an inventory write-off. At times, data integrity causes the wrong tactical or operational decisions that lead to financial losses in terms of write-off or constrained cash flow.

The practice levels for system integration are as follows:

COMMON practice: Individual legacy systems across regions (with little or minimal integration)
GOOD practice: Partial integration across key distribution functions
BEST practice: Bringing all the systems to one platform after taking care of local challenges

A fencing distributor was an early ERP adopter. By the mid 1990s, its system was running effectively and the company was exploring ways to leverage it further. An opportunity came when the company needed to remove inventory from a branch to improve its ROI. The sales force estimated a 40% decrease in sales, which was very reasonable given that 25% of sales were over the counter (retail), and the company believed another 15% would be lost when those customers stopped using fleet deliveries as well. After removing the inventory, however, the branch had a 25% increase in sales! The reason was that product was now coming from a regional distribution center (RDC) that carried a $7 million inventory compared to the branch’s original $600,000. The most important component, however, was the ability of the branch to see the RDC’s inventory in the fully integrated system.

The key benefits of system integration are

  • improved communication
  • visibility
  • productivity
  • asset efficiency
  • data integrity.
Many companies use “bolt-on” applications. When acquiring new companies, especially at a rapid pace, it’s easier to keep the systems in place, and not too expensive to have an internal programmer create an interface for the bolt-on system to talk to the main system. While one system obviously can’t do it all, this is not an effective long-term solution. When you have too many different software systems, you are not using the full potential of each one, and you may have to run too many interfaces. You may also run into the problem of updates and resource issues. Consider upgrading your laptop running Windows XP to Windows 7. You have to make sure all the other applications are either reinstalled or updated. The same applies for a company. The only difference between the company’s IT infrastructure and a laptop is that instead of an operating system, it’s your enterprise system and instead of applications, it’s your bolt-on.

In the search for a new information system, due diligence requires forming an internal team and hiring outside experts and consultants. The members of the internal team are crucial in deciding the needs of the new system. The team should consist of employees from all related departments, regardless of whether the department actually uses the system or not. A list of possible software systems for any application in an industry is now easily available thanks to the Internet and industry associations. The Distribution Software Guide is one example and can be found at http://www.software4distributors.com/downloads/2010_Distribution_Software_Guide_Email_Blast.pdf.

Post Installation

The other biggest issue in information management is managing expectations. An IT system is not a “magic pill” to solve the problem. Instead, it’s a tool to help achieve certain goals. An interesting survey in CIO magazine (2003, http://www.cio.com/article/29894/The_Value_of_Enterprise_Systems) demonstrates that the major benefits come to those who wait (exhibit 2).

Exhibit 2.

Our interactions with distributors also reiterate the facts of this survey. Patience is key in an IT system implementation. Projects such as these usually have the tendency to exceed budget and timeline. The most obvious place for cutting corners is training and testing, which is a dangerous game, since training is by far the most important and time-consuming part of any system change.

The training challenge has been played out so many times at so many firms. A roofing distributor illustrates this problem. An early adopter of ERP, this distributor did not allocate enough funding for training. Instead, it went with “train the trainer.” The company sent its most capable specialists in functional areas, who had shown an interest in the system, to training at the IT firm. These individuals would then be expected to come back and train others. The problem was that these people still had a job, would be expected to troubleshoot problems for the company, and also conduct training. It was an impossible workload. Then, of course, these specialists were hired away by consultants because of their new skills.

Change Management

A systems integration project leads to a complex change within a company. Ambrose’s 1987 recipe for successful change (Managing Complex Change Pittsburgh: The Enterprise Grp Ltd.) still holds true today. His recipe for change identifies five critical elements: vision, skills, incentives, resources, and action plan. Lack of even one of these elements may lead to confusion, anxiety, frustration, false starts, or slow change as shown in exhibit 3.

So even after more than 20 years of IT implementation, we can say that the greatest potential is still ahead of us. Whether it’s inventory or customer relationship management, warehousing or sales force effectiveness, transportation or customer service efficiencies, all roads lead to the distributor’s information systems. The IT system will define the relationships and operations of the next generation distributor. The next generation will be automated; connected to customers and suppliers; and every asset, human resource, and customer will be wired in (wirelessly).

About this Blog

“Managing in an Uncertain Economy” is a blog created by the Council for Research on Distributor Best Practices (CRDBP). The mission of the CRDBP, created by the NAW Institute for Distribution Excellence and the Supply Chain Systems Laboratory at Texas A&M University, is to create competitive advantage for wholesaler-distributors through development of research, tools, and education. CRDBP encourages readers of this blog to send in comments and e-mail this blog to other interested parties.

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