E C O N O M I C R E P O R T O F T H E P R E S I D E N T

total investment in information technology. Effective implementation ofthis technology also requires investing in the staff who will operate it, indeveloping specialized applications, and in user support. Cost surveys offirms in the services sector suggest that, at small, centralized sites, the costs ofthe staff required for operations and specialized software development mayaccount for 74 percent of total costs, far exceeding the more visible expendituresthe firm may make on hardware and prepackaged software. To developthe applications they need, many service firms are now conducting more oftheir own R&D, and this activity is beginning to show up in the aggregateR&D statistics. Whereas in 1987 nonmanufacturing industries accountedfor only about 8 percent of non-Federal R&D funds, by 1995 that figure was25 percent. These investments have been concentrated in computerprogramming and data processing services, in wholesale and retail trade, incommunications services, and in research, development, and testing services.One area in which information technology can enhance productivity is themanagement of inventories. For example, electronic scanners have been afamiliar sight in grocery checkout lines for some time, but some retailers havebegun to adopt new and more efficient distribution methods that rely onthese scanners and the wealth of transactions data they can provide. Onelarge retailer with a chain of grocery superstores has used information technologyto track what is selling in its stores and to use that information tobuild a more efficient distribution system. This firm uses its buying power togenerate large orders to manufacturers, which then deliver the demandedgoods to the firm’s warehouse distribution centers. Those centers, in turn, areresponsible for resupplying the individual retail stores. To keep revenue highand costs low, the firm also analyzes its scanner data on sales to maximize theuse of its shelf space. Detailed information captured by scanners at each storetrack how fast products are selling, so that stores can be resupplied at frequentintervals from the distribution centers. This avoids the need to keeplarge and expensive inventories at the stores themselves. In total, this companyhas reduced its operating costs to a mere 17.5 percent of sales, comparedwith 22 percent for a traditional supermarket.The increased investment in information technology by companies hascoincided with a reduction in the economy-wide ratio of inventories to salesduring the current economic expansion (Chart 3-6). Although, to be sure,information technology is used in many areas besides inventory management,some of those investments may have helped businesses to better manageinventory growth and improve productivity during the current expansion.Information technology is also being used to better manage informationflows between firms, such as between a final-goods manufacturer and thedifferent levels of its supplier chain. In the automobile industry, for example,one recent report notes that companies have largely replaced paper drawings114 | Economic Report of the President