Reference no: EM131195768

Does IT Investment Pay Off? Tween Brands,

Inc., sells fashion merchandise and accessories for girls aged 7-14 through its 900 Limited Too and Justice stores located in the United States, Puerto Rico, Europe, and the Middle East. (Tween Brands is scheduled to convert all Limited Too stores to Justice stores in 2009.) It also offers its fashions through each brand's Web site. Recent annual revenue was just under $1 billion.63 The company recently implemented a "put-to-light" system that improved the productivity of warehouse workers by 25 percent. Workers scan identifiers on products received at the warehouse and then follow flashing light signals at stocking locations that indicate where to put the scanned product. In many instances, the incoming product can be unloaded from one truck and loaded directly onto another outbound truck headed for a store. Such cross-docking opportunities eliminate the need to store product in inventory and greatly streamline operations. Just prior to installing the "put-to-light" system, Tween Brands upgraded its warehouse management system, which tracks inventory levels for each item.64 MIT economist Erik Brynjolfsson has reported a strong correlation between IT capital per worker and a company's productivity. He says there is a growing consensus that IT is the most important factor in increasing productivity.65 Considering the impact that technology has had on the workplace, this correlation seems obvious. Or is it? What about the cost of training Tween Brands workers to use the new inventory and warehouse management systems? What about the costs incurred when the hardware breaks down? What if there is a bug in the software? What if a new system makes the current one obsolete in two or three years? Paul Strassmann, a former CIO of both Xerox and NASA, disagrees with Brynjolfsson and argues that IT has not improved labor productivity at all. Back in the 1990s, Strassmann developed a method to measure increased productivity based on microeconomics instead of GDP and other large-scale measurements. Strassmann argues that productivity should be taken as the ratio of the cost of goods to transaction costs, which includes administrative and other costs not directly related to the production or delivery of a good or service. Strassmann and others at Alinean LLC have found that this ratio has remained constant for the past 10 years.66 In response, macroeconomists argue that Strassmann's calculations do not account for increases in customer value, such as timely delivery or the creation of innovative products and services. In addition, they say technology has allowed companies to meet regulatory standards and reporting requirements established by government agencies. Strassmann and other proponents of the microeconomic approach don't deny this oversight and don't argue against IT investment. No company can remain competitive and fail to innovate. Strassmann and his colleagues are simply hoping to do away with short "build and junk" cycles, in which new information systems are scrapped before ever breaking even, and avoid illconceived IT investments. They want to develop microeconomic parameters that CIOs can take to their boards of directors as proof that they are cutting costs.67 Thus, while economists still debate the impact of IT investment, the discussions are at least producing tools that help businesses improve their IT decision making and perhaps even increase their productivity

Discussion Questions

1. Apart from the annual rate of output per worker, what are other ways of measuring labor productivity?

2. What factors determine whether a new information system will increase or decrease labor productivity?

3. Why is it so difficult to determine whether IT has increased labor productivity?