FREEZE FRAME

Sep 01, 2001 9:30 PM  By

“Nothing much” may be a perfectly fine answer to give to an old friend who calls to ask whassup. But if that’s how you describe what’s going on in your technology division, you’re deep in the proverbial doo-doo. Unfortunately, that’s pretty much the state of affairs in the IT divisions of most companies these days, as chief technology officers, chief information officers, and just plain techies sweat through what is perhaps the worst climate in many years for buying or upgrading high-tech gear.

The argument for belt-tightening is overwhelming: Morgan Stanley’s study of 225 technology professionals, conducted in May, reports that 50% of CIOs (up from 33% in March and 40% in April) face requests by senior management to cut or slow IT spending. Another survey, conducted by the Meta Group, found that total information technology spending dropped heavily between August 2000 and April 2001. A Merrill Lynch study reports that 72% of U.S. and European chief technology officers plan to keep their IT spending down in the second half of this year. Predictably, expenses most likely to be cut include so-called frills such as consulting services, new custom development, and wireless initiatives, according to the report. Least likely to go, even in a downturn, are essentials like security software, network equipment, customer service and database applications, and, in a bow to the value of retaining customers in a sluggish economy, call center projects.

The findings of Operations & Fulfillment’s survey of 131 companies reveal that logistics and fulfillment systems, like those in the majority of other businesses, remain in a holding pattern. According to 13.7% of the respondents, less than a twentieth of their company’s operating expenses goes toward information technology; for 10.7% of firms, the handout is a modest 5% to 9%. Around fifteen percent of respondents get between 10% and 19% of the operating budget for IT. Beyond that, however, the numbers rise — close to ten percent report IT allocations of 20% to 24%, and nearly eleven percent of respondents receive 30% or more. The higher numbers come mostly from small firms, probably because these businesses have no option but to upgrade their systems to stay competitive (or, in this environment, survive).

There’s no question, though, where technology officers’ priorities lie. On average, 40% of the 2001 IT operating budget is earmarked for maintaining existing applications and 25.5% for enhancing them. Developing new programs gets 20.1% of the pie, but implementation receives only 13.6%. A scant 0.7% is allocated to various activities that fall in the realm of “Other,” such as hardware/software and subcontracting engineers. The IT capital budget for infrastructure shows a similar pattern: 33.8% is spent on maintaining current technology infrastructure, 30.4% on enhancing it, and a little over seventeen percent on creating and implementing a new custom IT framework.

Easy as one, two, three

A quick glance at our respondent profile shows that multichannel operations are firmly entrenched. Companies use a plethora of methods to reach their customers, with a majority using some combination of Web sites (75.6%), printed catalogs (64.1%), direct mail (70.2%), and brick-and-mortar stores (39.7%). About a third also use direct-response print advertising (33.6%) and telemarketing (29.8%).

No matter what channel they employ, however, improving and integrating systems is respondents’ main concern, and their answers are remarkably consistent across all revenue categories. The top three IT activities that companies report accomplishing in the last 12 months are upgrading systems (61.1%), integrating diverse hardware and software platforms (38.9%), and installing interactive technologies to enhance customer transactions (37.4%). Innovation is on hold for now — fewer than a fifth of the respondents cite connecting to vendors, and only 16.8% report changing IT platforms. Even cost cutting isn’t a priority, with a minority of respondents pursuing it as a key objective. As for retraining IT personnel: fogeddabout it! A meager 13.7% mention this as something they managed to achieve in the past year.

On the upside, distribution center systems are, if not cutting-edge, at least reasonably sophisticated. Probably because of their rapidly decreasing cost, warehouse management systems are no longer a rarity, with over half of the respondents using them. Given the traditional catalog background of many direct merchants, it is not surprising that more than a third of the total sample has catalog management systems installed; in the case of the medium-sized firms, the number is close to half. A high percentage of the respondents, 34.4%, report using customer relationship management systems — a somewhat unusual finding in light of the exorbitant cost of CRM program development and implementation (see our cover story, “Lip Service,” in the June 2001 issue). The installation of transportation management systems by about twenty percent of the respondents highlights the increasing prominence of operations in corporate logistics programs. Enterprise resource planning (ERP) systems have received a bad rap lately, but 26.5% of large companies have invested in them; the number of small companies that have done so, 11.4%, is remarkably robust compared to the scant 7.9% of medium-sized firms that have ERP systems.

Client/server is by far the most common network architecture, used by 93.9% of large companies and 80.9% of the total sample. About seventy percent of respondents run Microsoft Windows NT as their operating system. And proof positive that e-mail has become the lingua franca of business, close to one hundred percent of the medium-sized and large companies in the sample use it, as do 93.2% of small firms. Local area networks (LANs), intranets, and scanner and bar-coding applications have a sizable number of users, although they are more prevalent among medium-sized and large firms, but usage falls off sharply when it comes to advanced technologies like wireless, employed by only 26.7% of the total sample; Web-based EDI, used by a modest 25.2%; and Web-based IT architecture, installed by a scant 16.8%. Small companies, possibly because of their agility, seem to be more aggressive on the technology front. For example, 20.5% of the under-$10 million firms boast wireless technology and extranets; just 13.2% of medium-sized firms use the former and 15.8% the latter. Nearly forty-six percent of the companies surveyed did not answer the question of whether they outsource their IT activities, but among those who responded, 31.3% say they outsource application development; 16% use outside contractors for telecommunications/networks; and 11.5% seek external help for business process design.

Soft sell

Software functions are all over the map. In some areas, respondents appear to have made impressive progress — 69.5% say they offer real-time inventory information, and 32.8% (nearly 35% of medium-sized and large companies) track shipments on the Internet. But a mere 19.1% of total respondents can direct product placement based on current or projected picking volume; only 9.1% of small companies and 13.2% of medium-sized firms can do so. Less than a fifth of all respondents (and a minuscule 2.3% of small merchants) report the ability to consolidate multi-lane picks and bring them through a sorter to a packing station. And considering that bar coding and radio frequency applications have been around — and their value in the warehouse recognized — for a long time, it’s puzzling that only 26% of total respondents employ these technologies to direct picking. Bar code and RF systems are fairly common in large operations, with 46.9% reporting their use, but a mere 11.4% of small businesses and a notably low 15.8% of medium-sized companies have installed these applications.

Detailed questions about usage of bar code scanning technology produced varied answers. Of the 67.9% of respondents who use it, the majority employ it for putaway, picking, and confirming that an item matches the order. About a quarter of the sample, 23.6%, uses scanning to trigger replenishment. A large group of answers, though, falls into the “Other” category, with 36% of respondents using bar code scanning to, among other things, enter orders, process returns, verify shipment of pick tickets, generate manifests, control inventory, and track orders, as well as conduct point-of-sale transactions. Again, given the obviously extensive capabilities of bar coding systems, their somewhat limited use in distribution centers is remarkable.

Missing links

Of the 90.1% of respondents who have Web sites, about half outsource their hosting; among small firms, 63.2% farm out this job. However, almost seventy percent of the respondents (including a significant 57.9% of small companies) maintain their sites in-house. The level of integration of the site with corporate systems is divided among none (29.7%), basic (39.8%), and complete (28.8%). Small merchants score surprisingly well on this measure, with a full 50% reporting basic integration between Web sites and corporate systems, compared to 35.3% of medium-sized firms and 34.8% of large companies. Complete integration may be years away for most; less than forty percent of the large (and, presumably, well-heeled) firms in the sample have accomplished it so far.

Very little about the Web has escaped hype, and its great potential for streamlining business transactions is no exception. As is all too common, however, the disconnect between cyber reality and fantasy is sharp. Among respondents with Web sites, 42.4% say they conduct less than 10 percent of transactions with suppliers online; slightly more than a fourth of all respondents use the Internet for 10% to 25% of their dealings with vendors. As for electronic data interchange, another locus of buzz, don’t throw away those paper POs just yet — only 35.1% of respondents employ EDI to communicate with suppliers, and 5.3% don’t even know if they use EDI or not.

Rama Ramaswami is editorial director of Operations & Fulfillment. Rick Lowe, research manager at Primedia Business, conducted the research for this report.

Variety Show

Sales Channels*

Respondents (%)

<$10 million (n=44)

$10-49.9 million (n=38)

$50 million or more (n=49)

Total (n=131)

Web site (e-commerce)

70.5%

71.1%

83.7%

75.6%

Direct mail

65.9%

84.2%

63.3%

70.2%

Printed catalog

52.3%

76.3%

65.3%

64.1%

Brick-and-mortar store(s)

25.0%

50.0%

44.9%

39.7%

Direct-response print advertising

34.1%

23.7%

40.8%

33.6%

Telemarketing

22.7%

26.3%

38.8%

29.8%

Direct-response television

2.3%

2.6%

20.4%

9.2%

Other**

9.1%

2.6%

10.2%

7.6%

No answer

2.3%

2.6%

2.0%

2.3%
Total Sample 100.0% 100.0% 100.0% 100.0%

* Multiple answers

** Includes direct e-mail, field sales, magazines, and sky mall

Pedal to Medal

Top IT Achievements in Last 12 Months*

Respondents (%)

<$10 million (n=44)

$10-49.9 million (n=38)

$50 million or more (n=49)

Total (n=131)

Upgrading systems

68.2%

68.4%

49.0%

61.1%

Integrating various hardware and software platforms

31.8%

44.7%

40.8%

38.9%

Implementing interactive technologies for consumers

29.5%

34.2%

46.9%

37.4%

Building internal electronic linkages

18.2%

23.7%

32.7%

25.2%

Cutting IT costs

22.7%

13.2%

32.7%

23.7%

Connecting to vendors

15.9%

21.1%

22.4%

19.8%

Changing IT platforms

11.4%

18.4%

20.4%

16.8%

Retraining IT personnel

13.6%

10.5%

16.3%

13.7%

Other

11.4%

5.3%

12.2%

9.9%

No answer

4.5%

5.3%

4.1%

4.6%
Total Sample 100.0% 100.0% 100.0% 100.0%

* Multiple answers; three-answer limit

Plug & Play

Systems in Use*

Respondents (%)

<$10 million (n=44)

$10-49.9 million (n=38)

$50 million or more (n=49)

Total (n=131)

Warehouse management systems (WMS)

36.4%

44.7%

67.3%

50.4%

Catalog management systems (CMS)

34.1%

47.4%

30.6%

36.6%

Customer relationship management (CRM) sys.

31.8%

34.2%

36.7%

34.4%

Transportation management systems

6.8%

23.7%

26.5%

19.1%

Enterprise resource planning (ERP) systems

11.4%

7.9%

26.5%

16.0%

Other**

15.9%

2.6%

14.3%

11.5%

No answer

15.9%

10.5%

6.1%

10.7%
Total Sample 100.0% 100.0% 100.0% 100.0%

* Multiple answers

** Includes retail, manufacturing, and logistics management systems

Tech Support

Technologies in Use*

Respondents (%)

<$10 million (n=44)

$10-49.9 million (n=38)

$50 million or more (n=49)

Total (n=131)

E-mail

93.2%

100.0%

98.0%

96.9%

Client/server

68.2%

78.9%

93.9%

80.9%

LANs

54.5%

63.2%

87.8%

69.5%

Windows NT operating system

59.1%

73.7%

75.5%

69.5%

Scanners/bar coding

45.5%

63.2%

83.7%

64.9%

Intranets

34.1%

73.7%

73.5%

60.3%

Unix

15.9%

39.5%

57.1%

38.2%

Wireless technology

20.5%

13.2%

42.9%

26.7%

Web-based EDI

13.6%

26.3%

34.7%

25.2%

Extranets

20.5%

15.8%

32.7%

23.7%

Web-based IT architecture

11.4%

15.8%

22.4%

16.8%

No answer

2.3%

0.0%

0.0%

0.8%
Total Sample 100.0% 100.0% 100.0% 100.0%

* Multiple answers

Chain Reaction

EDI Transactions*

Respondents Using EDI (%)

Total (n=46)

Acknowledgement of purchase orders

56.5%

Sending purchase orders to vendors

54.3%

Receiving advance shipping notification

47.8%

Sending sales information to vendors

39.1%

Other**

15.2%
Total Sample 100.0%

* Multiple answers

** Includes transmission of drop-ship orders and invoices

The Real Thing

Software Functions*

Respondents (%)

<$10 million (n=44)

$10-49.9 million (n=38)

$50 million or more (n=49)

Total (n=131)

Offer real-time inventory

59.1%

76.3%

73.5%

69.5%

Track and manage location (via address on picking bins) to confirm picking and putaway

31.8%

50.0%

67.3%

50.4%

Track merchandise location and confirm picking/putaway

22.7%

39.5%

63.3%

42.7%

Direct immediate shipment of backordered merchandise upon receipt

34.1%

31.6%

42.9%

36.6%

Direct replenishment of active or forward pick area from back stock

15.9%

23.7%

59.2%

34.4%

Track shipments via the Web

29.5%

34.2%

34.7%

32.8%

Direct picking via bar code and/or RF systems

11.4%

15.8%

46.9%

26.0%

Direct product placement based on current or forecast picking volume

9.1%

13.2%

32.7%

19.1%

Consolidate multi-lane picks and bring them through a sorter to a single pack station

2.3%

15.8%

28.6%

16.0%

No answer

20.5%

10.5%

4.1%

11.5%
Total Sample 100.0% 100.0% 100.0% 100.0%

* Multiple answers

In Sync

Integration Level

Respondents With Web Sites (%)

<$10 million (n=38)

$10-49.9 million (n=34)

$50 million or more (n=46)

Total (n=118)

Basic links between site and corporate systems

50.0%

35.3%

34.8%

39.8%

Stand-alone site; no links to corporate systems

36.8%

29.4%

23.9%

29.7%

Fully integrated into corporate systems infrastructure

13.2%

32.4%

39.1%

28.8%

No answer

0.0%

2.9%

2.2%

1.7%
Total Sample 100.0% 100.0% 100.0% 100.0%

Status Quo

IT Activities/% of 2001 Operations Budget

Respondents (%)

Total (n=74)

Maintaining existing applications

40.0%

Enhancing existing applications

25.5%

Developing new custom applications

20.1%

Implementing new custom applications

13.6%

Other*

0.7%

* Includes hardware/software and subcontracting engineers

Status Quo II

IT Infrastructure/% of 2001 Capital Budget

Respondents (%)

Total (n=66)

Maintaining existing IT infrastructure

33.8%

Enhancing existing IT infrastructure

30.4%

Developing a new IT infrastructure

17.5%

Implementing a new IT infrastructure

17.6%

Other

0.8%

Supply and Demand

Percentage of Transactions With Suppliers Conducted Online

Respondents With Web Sites (%)

<$10 million (n=38)

$10-49.9 million (n=34)

$50 million or more (n=46)

Total (n=118)

None

15.8%

11.8%

6.5%

11.0%

Less than 10%

47.4%

47.1%

34.8%

42.4%

10%-25%

28.9%

20.6%

30.4%

27.1%

26%-50%

5.3%

11.8%

10.9%

9.3%

51%-75%

0.0%

2.9%

6.5%

3.4%

75% or more

2.6%

5.9%

6.5%

5.1%

No answer

0.0%

0.0%

4.3%

1.7%
Total Sample 100.0% 100.0% 100.0% 100.0%

On the Cheap

Percentage of 2001 Operations Budget/IT Activities

Respondents (%)

<$10 million (n=44)

$10-49.9 million (n=38)

$50 million or more (n=49)

Total (n=131)

Less than 5%

11.4%

23.7%

8.2%

13.7%

5%-9%

9.1%

7.9%

14.3%

10.7%

10%-14%

13.6%

7.9%

2.0%

7.6%

15%-19%

11.4%

10.5%

2.0%

7.6%

20%-24%

13.6%

7.9%

8.2%

9.9%

25%-29%

0.0%

2.6%

6.1%

3.1%

30% or more

13.6%

10.5%

8.2%

10.7%

No answer

27.3%