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Abstract Number: 011-0026
Use of information technologies in retail supply chain: opportunities and
challenges
Ying Xie
Business School, University of Greenwich, Maritime Campus,
London, SE10 9LS UK,
Email: [email protected], Tel: +44 (0)20 83317956
POMS 20th Annual Conference
Orlando, Florida U.S.A.
May 1 to May 4, 2009
Abstract:
The innovation in Information Technologies (IT) and their uses in the retail supply
chain increase the efficiency of the whole system itself. Radio Frequency
Identification (RFID), Electronic Data Interchange (EDI), Point of Sales (POS), and
various Data Mining (DM) technologies enable retailers to radically change the way
they do business within the retail supply chain, and achieve increased supply chain
efficiency in terms of labour cost reduction, inventory accuracy improvement, lead
time reduction, and order fill rate increment.
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The paper aims to offer an outline of the characteristics of these technologies and
identify the opportunities of adopting these technologies in helping retail sectors to
improve supply chain efficiency and customer relationship as a result of refined
operation system. While it is clear that the path to adoption will have its challenges.
Literature survey is adopted in the paper, where literature is reviewed to develop
outline of characteristics and identify opportunities and challenges.
Keywords: EDI, POS, RFID, Data Mining, retail supply chain
1. Introduction
Nowadays, retailers are facing increased competition and more demanding
customers, and they are in the race of improving their performance to be competitive
in the global market. However, retailers’ performance is affected by all the
participants in the retail Supply Chain (SC), including their suppliers and Distribution
Centres (DC) (Ellram et al., 1999). All the participants in the SC are required to work
collaboratively to compete in the global market by multiple competitive objectives
such as price, quality, responsiveness, flexibility and dependability. Information
Technologies (IT) plays a vital role in improving information sharing and
coordination in SC (Love, 1996). The rapid development of IT enables the
participants in SC to receive and disseminate the electronic information rapids, helps
to improve the information accuracy and reliability, and in turn provides a
competitive positioning of the SC participants like shorter lead time, lower stockout,
quicker response and lower costs. IT has been increasingly implemented in SC
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management for strategic planning, virtual enterprise, E-commerce and knowledge
management (Gunasekaran and Ngai, 2004). In retail SC, E-commerce take a variety
of forms such as EDI, Internet, Intranet, Extranet, Web based POS. Lancioni et al.
(2000) discussed how the Internet helps to manage SC activities by offering
information about what kind of product is demanded, what is available in the
warehouse, what is in the manufacturing process and what is entering and exiting the
physical facilities and customer sites. Weber and Kantamneni (2002) examined the
underlying factors why retailers adopt POS and EDI, indicating these technologies
achieve operational, tactical and strategic effects effects (Dearing, 1990, Chartfield
and Yetton, 200).
In addition to POS and EDI, RFID and DM are increasingly used in retail SC for
various purposes. RFID has the potential to offer tighter management and control of
the retail SC, reductions in shrinkage, labour cost and improvement in customer
service (Jones, et al., 2005(b)). DM is a power tool for retail SC management in
reducing risk level of business, controlling inventory, predicting customer’s behaviour
and improving customer relationship management (CRM) (Kusiak, 2006).
Retailers have enjoyed the benefits of these IT in terms of improved supply chain
efficiency and customer relationship as a result of refined operation system. While it
is clear that the path to adoption will have its challenges. In order to provide a clear
picture for the retailers when adopting the IT technologies, the paper aims to outline
the functionalities and features of the various IT approaches, and demonstrate how the
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retailers can benefit from the adoptions of these IT technologies. Furthermore, the
opportunities and challenges in adopting the IT technologies are identified.
By reviewing the existing literature, the functionalities and features of EDI, POS,
RFID and DM are summarised in Section 2. A framework of the opportunities and
challenges of adopting these IT technologies is provided in Section 3. Finally,
conclusions are presented in Section 4.
2. Functionalities and features of IT technologies
The applications of the IT technologies in retail SC are increasing. POS is widely
adopted by the retail store to sell products to customers (as shown in Figure-1); EDI
are used between the SC participants for data exchange; RFID is mainly used
warehouses for data capture; and DM is adopted in the back office for knowledge
discovery. Figure-1 provides a picture for the adoptions of these IT technologies in
the retail SC, and their functionalities and features will be reviewed in the following
sections.
Figure-1 The IT technologies adopted in a retail SC
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Electronic data interchange (EDI)
Electronic data interchange (EDI) defined as computer-to-computer transmission of
standardised business transitions (Walton and Marucheck, 1997), and it is becoming a
growing technology of information transfer system from retailer’s computers to
supplier’s computer throughout the retail supply chain. EDI was introduced to use by
the trucking industry in the early 1970s and since then has been widely adopted by
many other business sectors (Pawar and Driva, 2000).
EDI is highly accurate and very efficient to collect information over the internet
and facilitates a company to speed up their transaction and order process. By sharing
customer sales figure and forecast EDI can enhanced its planning and control to a
lower inventories with timely information (Bamfield, 1994). EDI is mainly used to
place electronic purchase orders; generating bills of lading/freight bills and invoices;
transmitting sales/inventory data, and giving advanced shipping notice.
Two features set EDI apart from other ways of exchanging information: 1) EDI
only works for business-to-business transactions, and individual consumers do not
directly use EDI to purchase goods or services; 2) EDI involves transactions between
computers or databases, not between individuals. Therefore, individuals sending
e-mail messages or sharing files over a network does not constitute EDI.
Along the booming development of Internet, it is expected that there will be a
rapid move to deliver EDI via the Internet. This would happen rapidly and could
allow more widely distributed participation.
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Point of sales (POS)
Point of sale (POS) came into use from the early 1980s onwards (Jones, 1985),
and it facilitates product sale to the customer by entering and accessing of product in
store. POS enables dynamic update of item sales and inventory data as sales occur. It
is widely used for store level transactions; credit/check cashing authorization; credits,
refunds and exchange issues; promotional inventory tracking; item and prices look
ups, sales tax calculation and reporting; and dynamic accounts receivable updating.
An integrated POS system allows quick, precise information capture so that the
logistics system can act more efficiently and effectively in getting the right product to
preferred location when it is needed (Ellram et al. 1999). It’s a total process to track
down a product’s direct cost (Cassidy, 1994). The growth in availability of POS
data is critical for integrating participants in the retail SC and especially for improving
forecasting accuracy and reducing lead time. By making the POS data more widely
available by retailers for use by other SC participants (e.g., suppliers), the higher
degree of collaboration can be achieved in the SC (Power, 2003).
An updated Web-based POS is becoming prevalent due to its powerful features.
Eliminating the hassles of software and hardware, Web-based POS is built to run
entirely on the World Wide Web through the web browser, and easy to use. The retail
stores are networked together via the Web-based POS, allowing the company to track
customer purchases, employee’s commissions, create employee schedules, create
purchase orders, process credit cards, view sales reports and save time/money to
expand businesses.
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Radio Frequency Identification (RFID)
Radio frequency identification (RFID) was traced back to 1940s for the military
application, and in 1980s emerges to be a significant generator of new or enriched
business information that has led to a range of organisation benefits. It is the generic
name for technologies that use radio waves to automatically identify and track objects.
RFID identifies the items using a tag, which is made up of a microchip with a coiled
antenna, and a reader with an antenna. A wide range of product information is
transmitted when the tag is read by the reader, including the identification of the
product, location details, price, and date of manufacturing/transportation/purchase.
According to (Singh, 2003), RFID technology has the capacity to capture some 40
times more information than barcode technology.
RFID is working as an information facilitator that can directly develop the
decision making capabilities of personnel within an organisation (Sellitto et al. 2007).
The main difference between RFID and the barcode technology are the data exchange
and scanning process. RFID can track the quantity of the items without scan on site
and send the information to the receiver located in the retailer’s warehouse, which
makes the system more versatile and productive. The features of RFID technology are
real time data capture, automating data capture, enhancing information quality, and
supporting business transactions. These features facilitate the information collection
and allow more informed and accurate decisions to be made throughout a company.
The use of RFID technology in all aspects of the supply chain is important for these
reasons.
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Data Mining (DM)
Data Mining (DM) was born in 1989 IJCAI (International Joint Conference on
Artificial Intelligence) workshop on knowledge discovery in database, and is the
process of extracting or mining knowledge from large amount data in such a way to
build predictive models for management decision making (Han and Kamber, 2000).
In general, companies using computers to capture details of business transactions such
as banking record, retail sales and manufacturing warranty (Lee and Siau, 2001). As
long as a transaction finished, all information goes to data warehouse where the
database implement and analyser has to explore and analyse the total business
situations.
The features of DM are mining knowledge from large databases, and work for
executives involved in strategic and tactical decision making as well as operating
managers responsible for cost reduction. DM is used to make strategic decisions like
developing competitive strategies, identifying market opportunities, launching new
product launch, and product positioning. Tactical decisions are made for sales
forecasting, direct marketing, customer acquisition, retention and extension purposes
and marketing campaign analysis. Alongside, operational managers can use similar
data for decisions on supplier selection, production schedule, inventory control,
logistics provider selection, and transportation route.
In retail store, loyalty card system is introduced where customer will get rewarded
with their shopping. Therefore, DM plays an important role in retailer, especially in
customer relationship management (CRM), allowing retailers to gain knowledge and
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understanding of consumer behaviour (Byrom, 2001), and to segment their customer
base and to tailor products and services to the needs and purchasing power of
individual groups of customers. DM is a powerful tool for retail SC management, and
can be used in the five areas: 1) reducing the level of risk to business by checking the
customer’s credit history (Kusiak, 2006); 2) refining inventory levels to reduce
stockout or overstock (Lee and Siau, 2001); 3) forecasting customer demand and
behaviour by analysing customers’ performance in the past (Kusiak, 2006, Katsaras,
et al., 2001); 4) improving CRM by providing a deep understanding of customer
behaviour and needs (Kusiak, 2006); and 5) optimising marketing strategies (Katsaras,
et al., 2001), in which marketing actions are targeted to the potential clients most
likely to buy, based on an analysis of customer preferences, customer demographics,
market baskets and customer loyalty programmes (Herman, 1997). With the
overwhelming use of Web browsers and online shopping, DM adapts the Internet
technology to facilitate suggestive selling (Lee and Siau, 2001), i.e., provide a
targeted banner campaign or promotion, then to report behavioural data about Web
visitors, finally help make better online business decisions.
In essence, DM helps businesses to optimise their processes in such a way that
their customers receive the most relevant services, the costs of serving them are
proportionate to the value of the profits earned from them, and a company’s
exposure to risk is proportionate to premiums earned, etc.
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3. Opportunities and challenges of adopting IT technologies
The great functionalities and features of implementing these IT technologies bring
the companies opportunities to improve performances, however, the adoption of them
are still complicated and costly. Much research has discussed the benefits and
obstacles of adopting these IT technologies, for example, Murphy and Daley (1999)
summarised previous logistics research intro the benefits and barriers of EDI; Jun and
Cai (2001) investigated key EDI obstacles to EDI success; and Jones, et al. (2005 (b))
briefly discussed some of the benefits and challenges of RFID for food retailers in UK.
Based on the literature survey and authors’ own research, this section identifies the
opportunities and challenges faced by the retail SC when adopting the four IT
technologies, as shown in Table 1.
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Table-1 opportunities and challenges of IT technologies applied in retail SC
IT
technologies
Opportunities Challenges
EDI
Quick access to information (Ferguson et al.,
1990);
Decreased administrative and transaction
cost (Vijayasarathy and Tyler, 1997, Murphy
and Daley, 1999);
Improved communications and information
accuracy (Ferguson et al., 1990, Murphy and
Daley, 1999);
Improved cash flows (Murphy and Daley,
1999);
Increased productivity (Ferguson et al.,
1990);
Improved tracing and expediting (Ferguson
et al., 1990);
Better customer service (Angeles et al.,
1998);
Enhanced competitiveness (Iacovou et al,
1995)
Incooperation between parters (Ellram et al.,
1999; Jun and Cai, 2003);
Managerial leadership issue: limited
awareness of EDI from top managers
(Monczka and Carter, 1988, Premkumar and
Ramamurthy, 1995, Tuunaiene, 1998);
Technical issue: Incompatibility of
hardware/software (Hendon et al, 1998,
Murphy and Daley, 1999);
Human resource issue: insufficient education
and training for users (Banerjee and Golha,
1994);
Security issue: disclosure of information
(Banerjee and Golha, 1993);
Legal issue: agreement on terms and
conditions of EDI use (Aggarwal et al., 1998)
POS
reduced check-out time and error (Cassidy,
1994);
improved inventory management (Weber and
Kantamneni, 2002);
increased traceability;
improve collaboration between partners
lack of sufficient resources;
insufficient technological capability;
lack of management commitment to
technology adoption;
lack of trust between retailer and supplier
(Czinkota and Kotabe, 1992).
RFID
Improve information quality, accuracy,
relevancy, completeness (Jones et al,
2005(a));
Improve business responsiveness and
customer service (Jones et al, 2005(a));
Reduce operation cost (Jones et al., 2005(b));
Optimize the assets (Jones et al., 2005(b));
Reduce shrinkage (Jones, et al., 2004);
Enhance warehouse space use (Jones, et al.,
2004);
Increase traceability (Jones et al., 2005(a))
Customer privacy (Park, 2003);
Managing data generated by RFID (Jones, et
al., 2004);
Defective tags (Sellitto et al. 2007);
Training on users (Jones, et al., 2004).
DM
Intelligent marketing strategies (Forcht and Cochran, 1999) Supply chain management (Forcht and Cochran, 1999); End-to-end optimization or redesign of
business processes (Folorunso and Ogunde,
2005);
Scalability: Very high data volumes and data
flow rates;
Efficient algorithms to handle multiple
complex data types (Kohavi et al., 2004)
Data extraction, cleaning, and consolidation
from many sources (Lee and Siau, 2001);
Mining at different abstraction levels (Lee
and Siau, 2001);
Interactive, web mining (Shaw et al., 2001);
Privacy and data security (Lee and Siau,
2001)
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EDI
EDI gives a choice to the organisation to replace traditional modes of exchanging
documents such as purchase orders, invoices, order confirmation and payment, so that
business transactions to occur in less time and with fewer errors than do traditional,
paper-based means. In this way, inventory level companies must invest in can be
reduced and just-in-time delivery can be adopted. By getting rid of paper forms, EDI
also reduces postage costs and the expenses and space considerations involved in
paper-based record storage (Ferguson et al., 1990, Murphy and Daley, 1999). By
adopting EDI, many companies have seen dramatic improvements in their business
processes, such as the shortened lead time, reduced stock out, accelerated response, as
well as improved demand forecasting. Elimination of labour intensive task, paper
documentation and improved stock control stimulate the adoption of EDI
(Vijayasarathy and Tyler, 1997).
In addition, EDI is important in the retail SC since it facilitates frequency and
automatic transfer of information required for integration and coordination ( Hill and
Scudder, 2002), and improves information accuracy by eliminating data re-entering,
which result in improved communication between suppliers and buyers (Murphy and
Daley, 1999). Improved communication and better stock control reduces order lead
time and provides customers timely information about transaction status, thus
improves customer service (Angeles, et al., 1998). With the EDI, funds can be paid or
received more quickly to improved cash flow and allow companies to make
investments more efficiently (Murphy and Daley, 1999), and a win-win partnership
can be fostered between suppliers and retailers to increase competitiveness (Iacovou
et al., 1995). However, “suppliers and retailers must work together to implement
compatible systems in order to realise the benefits of EDI’ (Ellram et al., 1999).
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One of the challenges in implementing EDI is to get participants in retail SC to
use EDI and to reach an agreement on terms associated with EDI use (Jun and Cai,
2003). For this purpose, the people in top management need to have understanding of
functionalities, features, and key benefits of EDI. The support from top management
plays a vital role in successful EDI implementation (Monczka and Carter, 1988,
Premkumar and Ramamurthy, 1995, Tuunaiene, 1998). In the process of
implementation, it is a difficulty task to fully integrate EDI into a company’s existing
computer system (Hendon et al, 1998, Murphy and Daley, 1999); and the other
challenge is lack of sufficient education and training for the managers and users to use
EDI (Banerjee and Golha, 1994). Implementing EDI will incur security and legal
issues. Without improvement and integration both parties in EDI transactions are not
fully efficient and cannot control cost. Some company emphasise their object to
reduce inventory cost but on the other hand they incurred more administrative cost.
EDI technology pull electronically transmitted orders into the central computer
system by its software programmes which lead sometimes a mix up with the retail’s
products code and manufacturer code and it means inconsistent delivery of that item
(Bamfield, 1994). The disclosure of information, modification of message and
repudiation of message origin or receipt can severely damage the communication and
collaboration between trading participants in retail SC. Therefore, it is suggested that
EDI users to make an agreement on the terms and conditions related to EDI use to
avoid legal problems, such as the liability of paying network charges, duration of
contract, the obligations of users, etc (Aggarwal et al., 1998).
POS
Initially POS reduces check out time and error and also improves inventory
management through reducing stock outs, inventory levels, shrinkage, and forced
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markdowns. Retail organisations get direct benefit adopting POS by facilitating
shorter checkout times and better customer service in store (Cassidy, 1994). Retailers’
emphasis on providing higher inventory related customer levels with fewer
inventories (Weber and Kantamneni, 2002). POS has the ability to offer
improvements in retail store management and customer service by tracking the costs
directly to specific products (Cassidy, 1994) and focusing timeliness and accuracy of
information, which in turn will contribute to generating the purchase orders for the
needed items on time, accurately and within budget. Increasing use of POS data in
retailer and making them available to other SC participants makes pivotal contribution
to the overall SC coordination (Power, 2003).
However, there are challenges arising when implementing POS, and not all the
companies can take the advantages of POS system because upon integrating the
system it needs continuous improvement and some companies do not have sufficient
resources for the improvement. The resources include technical skills equipped staff,
knowledge of improvement, computing network facilities and equipment. If the
management is not technology friendly they would not be able to take the full
advantages of automated system. Because of that companies will seek suppliers using
the same platform, which could be also a limitation of that particular company having
only limited suppliers to choose from. Those problems will lead the company being
uncompetitive in cost effective way. Although the increased sharing POS data by
retailer can improve retail SC performance and coordination, a lack of trust between
retailer and supplier is the critical barrier in achieving this (Czinkota and Kotabe,
1992).
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RFID
Real time data collection via RFID provides managers the necessary information
of products. Retail industry wants to take control over inventory by keeping its
volume in low-margin because it’s an important factor in profitability. According to
Attaran (2007), ‘Organisations should consider RFID if they want to increase their
revenue growth, lower cost, reduce inventory, better utilise fixed assets and gain
favour over competitors’.
RFID improves information quality in both time-based and content-based
dimensions, therefore, retailers are able to get more accurate, relevant and complete
information about products and customers (Jones et al., 2005(a)). This in turn, will
increase on-shelf availability and improve customer service. By fast and reliable
information transmission, manual inventory costs are eliminated, and transport
efficiently and accuracy are increased, these ultimately lead to better warehouse
management (reduced inventory level, higher inventory visibility) and reduced
operation cost (Jones et al., 2005(b)). Reductions in inventory levels and information
sharing will optimise the assets employed. RFID can reduce shrinkage due to stolen or
missing goods and respond quickly to product request. In addition, RFID improves
the use of warehouse space as goods can be stored in most efficient manner based on
size and shape and automatically tracked (Jones et al., 2005(a)), rather than be
stored according to product type for manual location (Jones et al., 2004).
With the wide rang of benefits that RFID bring to the retail SC, RFID manifest in
revolutionizing retail SC and making longer term strategic based decisions, which
appears to be a beneficial element of RFID adoption.
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RFID has some limitations. Parker (2003) states that, ‘Caspian - a US shopper’s
rights group has called for worldwide boycott of Gillette for its use of RFID
technology. Because they thought it was going to interfere customers’ personal life’.
The customer’s personal transactional data being held in the RFID tag after the POS
may be misused, accessed unauthorised or disclosed, which is a potential challenge in
adopting RFID.
Price of RFID tag has fallen significantly from 0.5 pound to 0.5 pence since 2000,
but it is still much higher than the bar codes. In addition, the cost of RFID readers,
associated infrastructure, and software that needs to be installed requires big
investment. RFID system will collect massive data, however, large amount of data
storage and transmission will place severe strains on the users’ computer network.
Also internally in RFID, tags and signals can be distorted, absorbed and deflected
by certain types of products like dairy or fresh foods . Extreme temperature or
labelling standards can also impede its usefulness (Sellitto et al. 2007). The actual
performance and capabilities of RFID technology is ever reliant on electronic tag and
reader standards, as well as the ability of business integration software to
inexpensively capture and store RFID-derived data (Rappold, 2003). But using
different types of tag in different palettes will be more challenging for tag reader at
the same time. To avoid collision between readers it has walk down the range of
possible values and several reader needs to read the same tag data to clarify this
information (Lahiri, 2006).
DM
The application of DM techniques facilitates the retail SC participants to make
intelligent marking strategies on market segmentation, market targeting, market
differentiation and positioning (Forcht and Cochran, 1999). By analysing POS data
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and other research data stored in the database, the marketing managers are able to
segment customer market, evaluate market segments and select target market
segments through knowledge discovery in DM. Marketers are now moving their focus
from producing the right product to targeting the existing products to right customers.
DM can also be used to analyse the effect of changing 4Ps (Price, Product, Promotion
and Place) and market share, and predict which customer group will be most
responsive to the promotion and campaign.
The use of DM is also beneficial for efficient retail SC management, ranging from
procurement, warehouse management and distribution. The database information on
historical orders, price and supplier performance are used by the procurement
department for evaluating and selecting suppliers. DM can analyse the movement of
warehouse stock in relation to product type, product location, shelf space and improve
warehouse management. Information collected from transportation and distribution
can be utilised to facilitate route planning, scheduling and logistics company
selection.
More strategically, DM tools allow the retail SC participants to collect massive
quantities data from multiple resources, and extract the useful and relevant knowledge
from database to redesign and optimise business processes (Folorunso and Ogunde,
2005). DM techniques predict futures and trends, allowing companies to make
proactive and knowledge-driven decisions. In addition, DM can be integrated into the
existing software and hardware platform to enhance the value of the existing
information resources.
DM has many challenges to overcome. Scalability is one of constraints on DM
adoption, as there are usually very high data volumes and data flow rates to be
analysed. For a large retail site, there are around 35000 products, 4.2 billion
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transactions, tens to hundreds of TeraBytes per year. These data are usually complex
and from multiple resources, and efficient algorithms need to be designed to handle
the multiple data types and generate output that is comprehensible for business insight.
(Kohavi et al., 2004). The users of DM may require different types of information to
be extracted from the database for different purposes, the system should allow the
data to be mined at different levels (Chen et al., 1996).
The process of DM is an interactive learning process in order to discover
knowledge, and the key components of this process include hypotheses formulation,
model evaluation and refinement. It takes rounds of trial and error to prodcue the most
relevant and useful knowledge from vast amount of data. Therefore, how to make this
process efficient and productive is also a challenge of DM.
With the increased use of Internet, Internet is becoming a new product
distribution channel. Business transactions are being completed online, and the web is
emerging as an important and convenient source to collect customer data. However,
the data transmitted and stored in the Web are even more complex and of different
formats and nature, which makes it another challenge to discover, extract, organize
and manage useful knowledge for marketing decision making (Shaw et al., 2001).
Finally, privacy and data security is argued to be a challenge of DM. Different
levels of data can be viewed at different angles from DM, and it is relatively easy to
construct a personal profile using these data (Lee and Siau, 2001).
4. Conclusion and future work
EDI, POS, RFID and DM are the prevalent IT technologies being adopted by the
retail SC to capture data, automate data transmission, increase data transmission speed,
improve data quality, extract knowledge from data and facilitate decision making. The
advent of the IT technologies offers the retail SC many opportunities, and is
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acknowledged for improving business performance and optimizing business processes.
However, the extent and speed of the adoptions of these IT technologies are impacted
by many challenges. Among them, EDI and POS are more widely implemented in the
retail SC compared with RFID and DM, and this is attributed to high setup cost of
RFID and complexity of DM. The public perceptions and acceptance of the IT
technologies also impacts the decisions of companies. The concerns on privacy and
security issues associated with the IT technologies need to be addressed by the retail
industry to avoid legislation matters.
The case studies are being conducted in the UK major grocery retail industries to
investigate their experiences of adopting these IT technologies. Based on the
findings from the primary research, how to realise the benefits of the IT technologies
in the maximum extent will be the future research.
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