Strategic ERP Extension and Use 9780804767811

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S T R AT E G I C E R P E X T E N S I O N A N D U S E

S T R AT E G I C E R P EXTENSION AND USE

Elliot Bendoly and F. Robert Jacobs

STANFORD BUSINESS BOOKS An imprint of Stanford University Press Stanford, California 2005

Stanford University Press Stanford, California © 2005 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or in any information storage or retrieval system without the prior written permission of Stanford University Press. Printed in the United States of America on acid-free, archival-quality paper

Library of Congress Cataloging-in-Publication Data Strategic ERP extension and use / [edited by] Elliot Bendoly and F. Robert Jacobs. p. cm. Includes bibliographical references and index. ISBN 0-8047-5098-X (cloth : alk. paper) 1. Management information systems. 2. Business planning. I. Bendoly, Elliot. II. Jacobs, F. Robert. HD30.213.S77 2005 658.4038 — dc22 2005011864 Typeset by G&S Book Services in 10/13.5 Sabon Original Printing 2005 Last figure below indicates year of this printing: 14 13 12 11 10 09 08 07 06 05

Contents

1

Introduction: Realizing the Epic Dream of ERP

1

E. Bendoly and F. R. Jacobs PART I.

2

ERP Rebirth and Advanced Viewpoints

Strategy as a Critical Factor in Applied ERP Success

11 13

S. Abdinnour-Helm and C. Lengnick-Hall 3

The “New” Users: SMEs and the Mittelstand Experience

36

T. Schoenherr, M. A. Venkataramanan, A. Soni, V. A. Mabert, and D. Hilpert 4

Enterprise Applications: Building Best-of-Breed Systems

52

V. A. Mabert and C. A. Watts 5

Getting More Results from Enterprise Systems

71

T. H. Davenport, J. G. Harris, and S. Cantrell PART II.

6

Value Extensions Beyond the Enterprise

Agility Through Standardization: A CRM /ERP Application

85

87

T. F. Gattiker, D. Chen, and D. L. Goodhue 7

ERP-Driven Replenishment Strategies in Make-to-Order Settings

97

E. P. Robinson Jr. and F. Sahin 8

ERP as a Platform for Vendor Managed Inventory M. V. Tatikonda, C. V. Brown, and I. Vessey

108

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Contents

9

IT-Supported Productivity: Paradoxes and Resolution in R&D

130

D. A. Joseph and J. Ettlie 10

ERP as a Resource for Inter-Organizational Value Creation

140

T. E. Vollmann PART III.

11

Future Visibility and Accountability

Enabling ERP Through Auto-ID Technology

153 155

E. W. Schuster, D. L. Brock, S. J. Allen, P. Kar, and M. Dinning 12

13

Auditing the System in Use: Value Beyond the Baseline J. Sarkis and R. P. Sundarraj The Path of the Enlightened Manager: Prescriptions for ERP Evolution L. L. David and E. Bendoly

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Contributors

Chief Editors

Dr. Elliot Bendoly is a faculty member in Decision and Information Analysis at Emory University’s Goizueta Business School. Prior to academia, he worked as a research engineer for the Intel Corporation. He holds a Ph.D. in the fields of operations management and decision sciences from Indiana University. Along with these specializations, his academic background includes an information systems orientation including database, ERP, and knowledge management focuses. During this time, he served as an instructor and developer of SAP implementation and ABAP/4 programming curriculum. More recently, he has been involved with coursework on IT supported service operations and supply chain management. He has published in a number of academic journals, including the Journal of Applied Psychology, Journal of Operations Management, Journal of Service Research, European Journal of Operational Research, International Journal of Operations and Production Management, Decision Support Systems, Information and Management, and Business Horizons. His current research focuses on operational issues in IT utilization and organizational behavioral dynamics. Dr. F. Robert Jacobs is the E-II Faculty Fellow and Professor of Operations Management at the Kelley School of Business, Indiana University. He has

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degrees in industrial engineering and computer and information science, an MBA, and a Ph.D. in operations management. He is the author of over 50 research articles on topics that include inventory control, ERP systems, design of manufacturing facilities, cellular manufacturing, and the scheduling of manufacturing operations. He is coauthor of two widely used operations management textbooks: Operations Management for Competitive Advantage, 10th edition, and Manufacturing Planning and Control Systems for Supply Chain Management, 5th edition (both academic and professional versions of this book are available). He is coauthor of a book titled Why ERP? A Primer on SAP Implementation (widely used in college courses to introduce ERP concepts and the implementation process). These books are published by McGraw-Hill /Irwin. Professor Jacobs teaches the MBA core operations management course in the Kelley School and has recently taught courses in supply chain management and E-OPS. Over his 20 years of professional experience, he has been a consultant to many companies. He is currently involved in a technology transfer project with Honeywell Aircraft Landing Systems that deals with the development of a new aircraft brake disk using carboncomposite technology. Professor Jacobs is a fellow of the Decision Sciences Institute and past president of the institute. Contributors

Dr. Sue Abdinnour-Helm, Ph.D., is an Associate Professor of Operations Management in the Barton School of Business at Wichita State University. Her research interests and expertise are in operations analysis and improvement, enterprise resource planning, facility layout, and supply chain management. Dr. Abdinnour-Helm has won several awards of excellence in both teaching and research. She has published her work in academic and practitioner journals, including European Journal of Operational Research, International Journal of Production Research, International Journal of Physical Distribution and Logistics Management, Production and Inventory Management Journal, and Journal of Engineering and Technology Management. Dr. Abdinnour-Helm has consulted with different companies on topics of technology and operations management. She is a member of several professional organizations, including APICS, INFORMS,

Contributors

POMS, AIS, and DSI. She regularly makes presentations at national and international conferences and to various other professional groups. Dr. Stuart J. Allen is professor emeritus at Penn State–Erie, the Behrend College. He works on design of decision aids for application in manufacturing environments. His educational background includes a bachelor of science degree in mechanical engineering from the University of Wisconsin, a master’s degree in mechanical engineering from Seattle University, and a Ph.D. in engineering mechanics from the University of Minnesota. Dr. Allen began his research career in the field of non-Newtonian fluid mechanics and has published over 50 journal articles in engineering and management science. He has also owned and operated three businesses in Wisconsin and New York State. Dr. David L. Brock is Principal Research Scientist at the MIT Auto-ID Labs and the founding director of Brock Rogers Surgical, a manufacturer of microrobotic devices. He has worked with a number of organizations, including MIT’s artificial intelligence lab, Massachusetts Eye and Ear Infirmary, DARPA, Celadon, Loral, BBN, and Draper Labs. Dr. Brock’s interests include distributed systems control, Internet control, large system simulation, robotics, and AI. He has several publications and four patents. He has received several awards, including the Wunsch Foundation Award for outstanding mechanical design, Tau Beta Pi, and Pi Tau Sigma. Dr. Brock holds bachelors’ degrees in theoretical mathematics and mechanical engineering, as well as master’s and Ph.D. degrees from MIT. Dr. Carol V. Brown is Associate Professor of Information Systems, Kelley School of Business, IUPUI Indianapolis. Her general areas of specialization are management and design of information systems in large organizations and the management of end-user computing strategies and tactics. Her recent work has surrounded enterprise system implementation issues, IT’s role in mergers and acquisitions, and design and governance of the IT organization. Publications of her research can be found in highly respected outlets such as Information Systems Management, MIS Quarterly, Information Systems Research, Journal of Management Information Systems, and Organization Science.

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Susan Cantrell is a research fellow at the Accenture Institute for High Performance Business. Her work is focused on business innovation, human performance, and the intersection of organizational behavior and information systems. Ms. Cantrell has a master’s degree in management information systems and has prior experience in the investment and education fields. Her work has been published in publications such as Industry Standard, Across the Board, Strategy and Leadership, and Outlook. Dr. Daniel Chen is an Assistant Professor of Information Systems at Texas Christian University. He received his Ph.D. in MIS from the University of Georgia in December 2004. He also holds an MBA from Washington University in St. Louis. Dr. Chen’s research interests lie at the interface between information technology and strategic management. His primary areas of research are the organizational impact of IT application infrastructure, the role and value of IS leadership, and electronic commerce. His work has been accepted for publication in Business Intelligence Journal and the proceedings of several leading national and international conferences. Dr. Thomas H. Davenport is a fellow with the Accenture Institute for High Performance Business and holds the President’s Chair in Information Technology and Management at Babson College. He is a widely published author and acclaimed speaker on the topics of information and knowledge management, reengineering, enterprise systems, and electronic business and markets. He has a Ph.D. from Harvard University in organizational behavior and has taught at the Harvard Business School, the University of Chicago, Dartmouth’s Tuck School of Business, and the University of Texas at Austin. He has also directed research centers at Ernst & Young, McKinsey & Company, and CSC Index. Dr. Davenport’s latest book— coauthored with Larry Prusak—is What’s the Big Idea? (Harvard Business School Press), which describes how organizations modify and implement new management ideas to improve their performance. Prior to this, Dr. Davenport wrote, coauthored, or edited nine other books, including the first books on business process reengineering, knowledge management, attention in business, and enterprise systems management. He has written more than 100 articles for publications such as Harvard Business Review, Sloan Management Review, California Management

Contributors

Review, Financial Times, and many others. Dr. Davenport has also been a columnist for CIO, InformationWeek, and Darwin magazines. Loretta David, MBA, CPIM, CIRM, CDP, holds an MBA in business management with a BS in mathematics and is certified in data processing (CDP). Ms. David is currently a business consultant with SSA Global, responsible for proposing and demonstrating solution sales to installed base clients for BPCS and various partner products. She has been a member of APICS (American Production and Inventory Control Society) for over 20 years and has held many board positions, including president of the APICS Atlanta Chapter from 2002 to 2004 (with almost 1,000 members) and president of APICS Shreveport, Louisiana. Mark Dinning is the RFID Project Leader in the Supply Chain Engineering Group at Dell Inc. He coauthored Fighting Friction, an article about the applied use of RFID technology, which appeared as the February 2003 cover story in APICS Magazine. Mr. Dinning has a master’s of engineering in supply chain management from MIT and an undergraduate degree in business economics from UCLA. Mr. Dinning wrote his thesis in conjunction with the MIT Auto-ID Center, the group responsible for the development and standardization of RFID technology. Prior to Dell Inc. and MIT, he was one of the original employees at Tickets.com. Mr. Dinning began his career at Deloitte & Touche and is a Certified Public Accountant. Dr. John E. Ettlie is the Malelon L. and Richard N. Rosett Professor of Business Administration and Director of the Technology Management Center at the Rochester Institute of Technology. He earned his Ph.D. at Northwestern University in 1975 and has held appointments since then at the University of Illinois Chicago, De Paul University, the Industrial Technology Institute, the University of Michigan Business School, the U.S. Business School in Prague, and Catolica University in Lisbon, Portugal. Professor Ettlie has been the consultant to numerous corporations and government projects, including the Saturn Corporation, Allied-Signal Corporation, Caterpillar Tractor, Inc., PACAR Reynolds Metals, Kodak, Delphi Corporation, and many others. He is the associate editor of sev-

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eral professional journals, including the Journal of Operations Management and Production and Operations Management. He has authored six books, including the second edition of his textbook titled Managing Innovation to be published by Elsevier (expected summer 2005). Dr. Thomas F. Gattiker, CFPIM, is Assistant Professor of Operations Management at Miami University in Oxford, Ohio, and is an affiliate of the interdisciplinary Engineering Management Program. He has published in Information and Management, Production and Inventory Management Journal, International Journal of Production Research, Quality Management Journal, and The Decision Sciences Journal of Innovative Education. His current research is the application of information technology to the operations and supply chain areas. He was the 1999 APICS George and Marion Plossl Fellow. Before obtaining his Ph.D. from the University of Georgia, he worked in operations and inventory management, most recently at Rockwell Automation and Reliance Electric. Dr. Dale L. Goodhue is the C. Herman and Mary Virginia Terry Chair of Business Administration and Head of the Department of MIS at the University of Georgia’s Terry College of Business. He has published in Management Science, MIS Quarterly, Decision Sciences, Sloan Management Review, and other journals. His research interests include measuring the impact of information systems, the impact of task-technology fit on individual performance, and the management of data and other IS infrastructures and resources. In particular, he is currently focusing on identifying the impacts and implementation success factors of enterprise resource planning (ERP) systems and data warehousing. Jeanne G. Harris is associate partner, Senior Research Fellow, and Director of Research (Chicago) at the Accenture Institute for High Performance Business. She has a master’s degree in information science from the University of Illinois and is currently conducting research on the next generation of enterprise solutions and the economics of IT innovation. Her past research topics include improving managerial performance, knowledge management, business intelligence, building analytic capabilities, customer relationship management, customer-centric strategies, mobile personalization, and realizing value from enterprise solutions; she also speaks

Contributors

frequently on these topics to executive audiences. Jeanne’s work has been published in numerous business publications such as CIO, Strategy and Leadership, Sloan Management Review, California Management Review, and InformationWeek as well as numerous Accenture publications such as Outlook. Her research has been quoted extensively by the international business press, including the Wall Street Journal, Financial Times, Cinco Dias, and Nihon Keizai Shimbun. Dr. Ditmar Hilpert is Professor at the European School of Business (ESB), Reutlingen, Germany. He has earned a master’s degree both in biotechnology and economics and holds a Ph.D. in pharmacology and toxicology. After more than 10 years in the pharmaceutical industry, he has held the chair in Strategic Management at ESB for the last 11 years. His current research interest is in the comparison of strategic approaches of SME on an international background. Professor Hilpert also serves the European Commission, DG XII, as an advisor and is the head of the ESB Executive Institute Dr. Daniel A. Joseph is Associate Professor of Management Information Systems in RIT’s College of Business. He holds a Ph.D. in management information systems with minors in computer science and organizational behavior (change management), an MBA from SUNY at Buffalo, a master’s degree in economics from SUNY at Albany, and a bachelor’s degree in commerce from Niagara University. Besides teaching at RIT, Dr. Joseph is an active MIS consultant. His clients have included the Computer Task Group (CTG), Eastman Kodak Company, Samsung, the Stickley Furniture Company, the Japan Productivity Center, Maritz Research, Waste Management Corporation, the Knowledge Company, Raymond Corporation, and others. His current interests are focused on software development process improvement, workflow analysis and design, and integrated business systems, particularly those implemented using SAP products. He is the author of 18 articles and commercial software products. Professor Joseph holds certification in use of the ASAP SAP Implementation Methodology. Pinaki Kar is currently an independent consultant working in the pharmaceutical industry on analysis and modeling to support strategic planning,

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business development, and marketing. He is interested in the application of operations research and statistical techniques for planning and decision support across a wide range of business issues. His experience spans multiple industries that include pharmaceutical, chemical, high tech, and insurance. Mr. Kar’s educational background includes a bachelor’s degree in mechanical engineering from the Indian Institute of Technology, Kanpur, and a master’s degree in logistics from MIT. Dr. Cynthia A. Lengnick-Hall, Ph.D., is a Professor of Management in the College of Business at the University of Texas at San Antonio. She has consulting, executive education, and management experience in both private industry and higher education administration. Articles by Dr. LengnickHall have been published in numerous journals, such as the Academy of Management Review, Academy of Management Journal, Strategic Management Journal, Journal of Management, European Journal of Operations Research, Journal of Engineering and Technology Management, Strategy and Leadership, Human Resource Management, Organization Studies, and many others. She has coauthored three books, the most recent being Human Resource Management in the Knowledge Economy: New Challenges, New Roles, New Capabilities published by BerrettKoehler in 2003. Dr. Lengnick-Hall has also contributed chapters to several other books. Her current research interests include strategic human resource management, orchestrating internal knowledge markets, achieving competitive superiority in high-velocity environments, and using intangible resources to achieve competitive advantage. Dr. Vincent A. Mabert is the John and Esther Reese Professor and Professor of Operations Management in the Department of Operations and Decision Technologies at the Kelley School of Business, Indiana University. He conducts research and consults in the areas of workforce planning, order scheduling, enterprise resource planning systems, new product development, and manufacturing system design. His publications include articles in Management Science, Decision Sciences, IIE Transactions, Journal of Operations Management, The Accounting Review, and the Academy of Management Journal. He routinely consults with the Rand Corporation concerning supply chain management issues for the U.S. military. He has been active and held officer positions in a number of profes-

Contributors

sional societies, including industrial engineering, INFORMS, APICS, and decision sciences. Professor Mabert is vice president of the Harvey Foundation and a fellow of the Decision Sciences Institute. Dr. E. Powell Robinson Jr. is an associate professor of supply chain management at the Mays Business School, Texas A&M University. He received his Ph.D. from the University of Texas at Austin and was previously a faculty member at Indiana University. His primary research interests are in the design of production and distribution networks, multilocation inventory control, supply chain strategy, and information technology applications in supply chain management. His publications are in Decision Sciences, Management Science, Journal of Operations Management, Naval Research Logistics, and Interfaces, among others. Dr. Funda Sahin is an assistant professor of logistics and transportation in the College of Business at the University of Tennessee. She received her Ph.D. from Texas A&M University. Her research and teaching interests are in logistics and transportation, operations and supply chain management, inventory planning and control, and information technology applications in supply chain management. Her publications are in Decision Sciences and Production and Inventory Management Journal. She is a member of CLM, DSI, and INFORMS. Dr. Joseph Sarkis is currently Professor of Operations and Environmental Management in the Graduate School of Management at Clark University. He earned his Ph.D. from the State University of New York at Buffalo. His research interests include supply chain management and management of technology with a specific emphasis on environmentally conscious operations and logistics, performance management, justification issues, and enterprise modeling. He has published over 160 articles in a number of peer reviewed academic journals, conferences, and edited books. Tobias Schoenherr is a doctoral candidate in the Kelley School of Business at Indiana University, majoring in operations management and decision sciences. He earned his B.S. (with High Distinction) and his M.B. from Indiana University and holds a Diplom-Betriebswirt (FH) from the European School of Business, Germany. Mr. Schoenherr’s current research in-

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terests include supply chain management, electronic procurement and reverse auctions, e-commerce, industrial marketing, and ERP systems. Ed Schuster has held the appointment of Director of the Affiliates Program in Logistics at the MIT Center for Transportation and Logistics and is currently helping to organize a new research effort involving the largescale analysis of data. His interests are in the application of models to logistical and planning problems experienced in industry. He has a bachelor’s of science in food technology from Ohio State University and a master’s in public administration with an emphasis in management science from Gannon University. Mr. Schuster also attended the executive development program for physical distribution managers at the University of Tennessee and holds several professional certifications. Dr. Ashok Soni is Chairperson and Professor of Operations and Decision Technologies and the SAP Faculty Fellow at the Kelley School of Business at Indiana University. He received a B.S. in aeronautical engineering from Manchester University, an M.S. in operations research from Strathclyde University, and an MBA and DBA from Indiana University. Professor Soni’s teaching and research interests are in the areas of enterprise applications, technology, e-business, and decision support systems. His research interests are in enterprise technologies and decision support systems. His research has appeared in Management Science, Naval Logistics Research, Omega, IIE Transactions, and European Journal of Operational Research. Dr. R. P. Sundarraj is currently an Associate Professor of Information Systems at the University of Waterloo. He obtained his bachelor’s in electrical engineering from the University of Madras, India, and his M.S. and Ph.D. in management and computer sciences from the University of Tennessee, Knoxville. Professor Sundarraj’s teaching and research encompass the development of methodologies for the efficient design and management of emerging information systems, as well as the use of massive parallel computing for solving large-scale problems. He has published in various national and international journals such as Mathematical Programming, IEEE Transactions on Power Systems, ACM Transactions on Mathematical Software, and European Journal of Operational Research. In addi-

Contributors

tion, he has provided e-commerce solutions for marketing and inventorymanagement problems arising in Fortune-100 companies. Dr. Mohan V. Tatikonda is an Associate Professor of Operations Management at Indiana University’s Kelley School of Business. Dr. Tatikonda holds a doctorate in operations management from Boston University and an M.S. in manufacturing systems engineering, an MBA in operations management, and a B.S. in electrical engineering, all from the University of Wisconsin at Madison. He is an APICS certified fellow (CFPIM) and a PDMA certified professional in new product development (NPDP). He has received several awards for teaching excellence, including the Otteson award and the MBA teaching excellence award. His research has received the “best doctoral dissertation” award from the Production and Operations Management Society. Professor Tatikonda’s research on new product development and the supply chain has been published in journals such as Management Science and Journal of Operations Management. He contributed three chapters to the recent book New Directions in Supply Chain Management. He has taught elective courses on the practice and theory of product innovation to MBA, Executive MBA, and Ph.D. students and has consulted for SAP, the World Bank, and other major organizations. Dr. M.A. Venkataramanan is a professor of Operations and Decision Technologies at the Indiana University, Bloomington. He received his Ph.D. in business analysis and research from Texas A&M University. His research interests include network modeling, optimization techniques, combinatorial models, artificial intelligence, high-speed computing, and supply chain models. His teaching interests are in the area of decision support systems, computer programming, enterprise resource planning (ERP), optimization techniques, and project management. He is one of the principle investigators in the ERP research and teaching initiative at Indiana University. He has more than 20 research articles published in a variety of journals, including Operations Research, Decision Sciences, Annals of Operations Research, Naval Research Logistics, Computers and OR, EJOR, and Mathematical Modeling. Dr. Iris Vessey is a Professor of Information Systems at Indiana University’s Kelley School of Business, Bloomington. Dr. Vessey received her M.S.,

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MBA, and Ph.D. in management information systems from the University of Queensland, Australia. She served on the faculties of the University of Queensland, the University of Pittsburgh, and Pennsylvania State University before joining the faculty at Indiana University. She is recognized for her research into evaluating emerging information technologies, from both cognitive and analytical perspectives. Much of her research has used qualitative research methods to assess the efficacy of new technologies. Dr. Vessey was recently ranked as one of the top 10 IS researchers during the period from 1991 to1996. Her publications have appeared in journals such as Information Systems Research, Communications of the ACM, Journal of Management Information Systems, MIS Quarterly, Information and Management, Decision Sciences, IEEE Transactions on Software Engineering, IEEE Transactions on Systems, Man and Cybernetics, IEEE Software, Information Technology and Management Journal, Journal of Systems and Software, Behavior and Information Technology, and International Journal of Man-Machine Studies (now the International Journal of Human-Computer Studies). Dr. Thomas E. Vollmann is Professor (Emeritus) of Manufacturing Management at the International Institute for Management Development (IMD) in Lausanne, Switzerland. Professor Vollmann received his B.S., MBA, and Ph.D. from the University of California, Los Angeles. Prior faculty positions include Dartmouth College, University of Rhode Island, Indiana University, INSEAD, and Boston University. Professor Vollmann has served as a consultant to many firms on manufacturing and information systems, has lectured in executive programs throughout the world, has served as a member of the Certification and Curriculum Council of the American Production and Inventory Control Society (APICS), and is certified at the Fellow Level (CFPIM) by APICS. Professor Vollmann’s research and consulting have primarily focused on operations management, manufacturing auditing and improvement, manufacturing planning and control systems, manufacturing performance measurement systems, benchmarking, and, most recently, supply-demand chain management and enterprise transformation. Professor Vollmann is the author or coauthor of 12 books, about 50 case studies (8 award winning), and approximately 100 journal articles.

Contributors

Dr. Charles A. Watts, DBA, CPIM, Jonah, is a Professor in the Department of Management, Marketing, and Logistics at John Carroll University. He received his B.S. in business administration and MBA from Bowling Green State University and his DBA from Indiana University. He has published research that appeared in Journal of Operations Management, International Journal of Purchasing and Materials Management, Management Science, Production and Inventory Management, International Journal of Operations and Production Management, International Journal of Production Research, and Operations Management Review. He conducts research and consults in the areas of supplier development, purchasing and materials management, supply chain management, warehouse location and rationalization, scheduling in service and manufacturing organizations, and the Theory of Constraint thinking process. He was president of the APICS Toledo Chapter and is currently on the national steering committee for the Small Manufacturing Specific Industry Group.

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Introduction: Realizing the Epic Dream of ERP ELLIOT BENDOLY AND F. ROBERT JACOBS

“Is this it, is this as good as it gets?” A question posed by misanthropic novelist Melvin Udall in the 1997 film with the associated title. More recently, similar questions have been asked with regard to enterprise technologies, albeit often in distinctively more colorful terms.

Debates over the value provided by ERP architectures have existed since the inception of the enterprise-system concept. Though questions regarding the value of ERP systems remain, the nature of the argument has evolved over the years. No longer limited to the considerations of Fortune 500 firms and those faced by impending failures of aging systems, enterprise resource planning developers have survived the Internet bubble and are being viewed in a very different light these days. More than ever before, ERP systems are being viewed as the central binding mechanisms behind future cross-functional planning activities, both within individual enterprises and among their value-chain partners. However, research still seems preoccupied with discussions of implementation and adoption. Only a handful of studies have focused on the actual “use” of ERP systems or on their ability to enable the use of complementary systems that appear to be positioned as standard features of future commerce (e.g., CRM applications, infrastructural support for VMI, etc.) (Jacobs and Bendoly, 2003; Davenport, 2000). An understanding of current use and of apparent gaps between expectations and capabilities is a necessary precursor to future extensions of resource planning technologies into the inter-organizational realm. Whereas operations managers seem convinced of the benefits of information sharing in contexts such as the supply chain, it is ironic that the basic intra-organizational mechanisms that support such sharing are given so little attention.

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Introduction: Realizing the Epic Dream of ERP

I I Data warehousing SRM andS

I collaborative R&D

Transactional applicationsS (B2B/B2C e-commerce)

Data mining I

~

I I

I

/ CRM andS I I collaborative R&D

ERP=

I

~

/ I Strategic enterprise mgmt

Advanced planning & scheduling I

SCM andS collaborative logistics FIGURE

1.1

The Enabling Position of ERP Architectures

Source: Adapted from Bendoly et al. (2004)

Fundamentally, ERP systems and their implementations represent essential enablers of improvement, development, and growth with and ultimately among firms (Figure 1.1). As emphasized by operations management and information systems researchers alike, the critical research question is not whether IT expenditures in general lead to returns, but rather how to make the best use of the IT opportunities available to augment operations and support competitive gains (i.e., to ensure that new sustainable returns actually come about) (e.g., Brynjolfsson and Hitt, 1998). The same directed question applies to ERP architectures. However, since such use necessarily involves human actors at some level, incorporating the question of use into studies of operational performance requires a willingness by operations management researchers and practitioners to consider relatively microlevel mechanisms and subsequently extend inferences based on these mechanisms to higher-level phenomena. Since mechanisms involving individual ERP users impact phenomena measurable at the business unit level, this also requires a willingness to consider models and relationships that span, rather than restrict themselves to, specific levels of analysis. This is not a traditional approach to operations management views of technology by any means —And it’s about time!

Introduction: Realizing the Epic Dream of ERP

Under the Microscope

To assist in groundbreaking efforts to contribute new knowledge in the ERP domain, several frameworks for guiding operations management research on the topic have been established. For example, the enabling capability of ERP can be described both in terms of the functionality of ERP systems and in terms of the implementation processes that allow their capabilities to be realized. The organizational and operational changes associated with ERP implementations often should be given as much, or more, credit for the potential benefits as the systems themselves. Recent research, drawing on established theoretical frameworks in operations management such as the theory of swift-even flow (Schmenner and Swink, 1998) and its ties to the law of bottlenecks (Goldratt, 1984), refers to both “product” (system) and “process” (implementation) benefits at the intra-organizational level as the foundation of benefit enablement at the inter-organizational level (Bendoly and Kaefer, 2004). Examples of these potentially pervasive and ubiquitous enabling capabilities are illustrated in Table 1.1. Categorical groupings of these suggested enabled benefits represent distinct facets that may or may not be dominant features in individual firms. As a whole, they represent elements that can contribute to a firm’s general pursuit of internal visibility, flexibility, excellence in quality, and the capacity for inter-organizational extension. The dominant effectiveness of any subset of these benefits, for whatever reason, represents a further means of distinguishing the capabilities of firms, building on idiosyncratic strengths and reaffirming the uniqueness of individual firms that allows them to stand apart from others. These distinctions, based in established theory, appeal to researchers and practicing managers alike because they suggest methods of more easily pinpointing sources of benefit, associating these benefits with tangible operational metrics and, furthermore, planning or prescribing future changes aimed at supporting strategic objectives. In the end, it is these same enabled strategic gains that have been the most elusive to managers and generally absent from consideration in total benefit assessments of ERP systems. Such a discussion of strategic enablement has been a long time coming, but it is slowly starting to be recognized and scrutinized.

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Introduction: Realizing the Epic Dream of ERP

Ta b l e 1 . 1 ERP product versus process benefits

Variability reduction

Bottleneck reduction

Waste reduction

Example “product” effects

Example “process” effects

Common DB. Elimination of redundancy and potential for multisystem data conflicts

Rationalization of number of business procedures. Less uncertainty as to how a transaction will be executed

Standardized interfaces. Reduction in variance in human-computer and computer-computer processing time

Training/education of users. Reduced variation in interpretations of corporate goals, operational priorities, and transactional procedures

Common DB. Tracking of processing times and simplified identification of potential enterprise-wide bottlenecks

Rationalization of number of business procedures. Fewer processes make the identification of bottleneck sources easier, and allow for smoother reactive capacity adjustments

Standardized interfaces. Significant reduction of time required for transactions, in some cases eliminating bottlenecks

Training/education of users. More workers have the ability to recognize bottlenecks

Common DB. Monitoring of specific forms of waste, and prioritization of waste by enterprise-wide cost implications

Rationalization of number of business procedures. Elimination of unnecessary, redundant or waste-generating business subprocesses

Standardized interfaces. Allowing easier comparability of interdepartmental sources of waste and hastening treatment

Training/education of users. More workers have the ability to recognize waste and future waste-generating processes

s o u r c e : Adapted from Bendoly and Kaefer (2004).

The role of this book is to provide both practitioners and researchers with a window into the cutting-edge strategic use of modern ERP systems. In contrast to the majority of books that have focused on ERP system implementation, our approach is to focus on current and future developments in ERP system applications. The viewpoint throughout this text is predominantly that of the operating manager, rather than the marketer or the information technician. Through essays provided by a myriad of operations management researchers and professionals, we hope to clarify

Introduction: Realizing the Epic Dream of ERP

issues regarding the existing functional capabilities of ERP systems and the underutilization of these existing capabilities by firms. We also hope to illuminate the potential for extensions of the capabilities of these systems to support both intra-organizational and inter-organizational resource management decisions and strategies. If accomplished, these objectives begin to fill the knowledge gap that has served as a barrier to many managers in cost-justifying both their prior technology investments and future strategically focused management decisions (a gap that is currently not filled by the existing literature). It’s How You Use It, Stupid!

– . . . Not whether you have an ERP system (system labels often don’t mean much these days). – . . . Not how much you spent (which says nothing of the complexity or appropriateness of the spending). – . . . Not even whether you’ve gone big bang vs. phased, plain vanilla vs. customized, etc. The only real way to ensure that value is gained through resource planning system implementations is to ensure that the process changes associated with the implementation are followed through and that other forms of use enabled by the technology are leveraged. The development and retention of new competitive advantages drawn from these systems require a steady watch for appropriate and advantageous use and an organizational diligence that encourages novel applications of the system in problem solving, regulation, and innovation. In the first section of this text (ERP Rebirth and Advanced Viewpoints), contributing authors discuss the new frontiers of use in the ERP realm that accompany the growing sentiment that resource planning systems can, indeed, enable strategic gains. The first chapter in this section (Abdinnour-Helm and Lengnick-Hall) describes a major study of user perceptions concerning the strategic value of ERP system implementations. The study suggests that the role of ERP architecture as a significant enabler of new capabilities can be expected to support strategic gains only if used specifically to enhance the operational priorities and fundamental strategic orientation of the firm. If such vision and clarity describes

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Introduction: Realizing the Epic Dream of ERP

the mind-set of IT staff, operational planners, and strategic managers, the “appropriate use” of ERP should develop into strategic priority in itself. In the following chapter (Schoenherr et al.), strategic use is discussed in the context of the growing small- to medium-sized enterprise market. The chapter argues that the reasons for implementing ERP might be very different for such firms. Specific findings from an associated study suggest an initial strategic emphasis on financial information for traditionally studied large firms compared with an alternative strategic focus on distribution for small firms considering the value of ERP implementations. Chapter 4 (Mabert and Watts) deals with the strategic development and application of best-of-breed ERP extensions. The issue of whether a firm uses a single-vendor, plain vanilla ERP system or one that is enhanced with more advanced modules and add-ons from other vendors continues to be a topic of heated debate among practitioners. Using survey research, this chapter explores what companies are actually doing and measures the degree of success of the various approaches. Findings reveal potential strategic tradeoffs between additional accrued benefits and substantial increases in system complexity. The final chapter of Section I (Davenport et al.) attempts to tackle critical questions relating to the still untapped strength of modern ERP systems. These questions include: – What types of value are business trying to draw from ERP architectures? – How have specific firms progressed in these attempts? (E.g., what success have they achieved over time?) – What did the firms that were most successful actually do to realize novel gains? By addressing these questions, we have the beginnings of a foundation for considering approaches that might engender further advancements in the idiosyncratic and strategic use of ERP systems in general. This in turn provides an excellent segue into the following section, which provides specific instances of ERP extension. The second section (Value Extensions Beyond the Enterprise) delves into the strategic extension of ERP systems as enablers of a variety of strategically oriented contemporary technologies. In some of these cases,

Introduction: Realizing the Epic Dream of ERP

the focal extensions are critical to firms intending to position themselves as hallmarks of customer intimacy (e.g., assisted by customer relationship management tactics), while in other cases, the extensions are critical particularly to those seeking to stand out through excellence in cost control or through inter-organizational linkages that may facilitate sustained competitive gains in innovation across their supply chains. Accordingly, the first chapter (Gattiker, Chen, and Goodhue) of Section II deals with advancements in agility driven by ERP-enabled customer relationship management (CRM) applications. The authors posit that the linkage between a firm’s strategic capabilities as an agile market player and its use of extended applications such as CRM tools represent some of the greatest value opportunities supported by ERP architecture. The authors recommend further emphasis (as already suggested by contemporary authors such as Bendoly and Kaefer [2004]) on a view of ERP as a foundation for strategic technology enhancement, rather than a strict focus on embedded best practices. This discussion is followed by a pair of chapters, each dealing with the operational activities that ultimately help to support customer service while simultaneously representing sources of excellence in cost control. The first of these chapters (Robinson and Sahin) focuses on contemporary issues in ERP-driven replenishment activities. Specifically, the chapter discusses ERP systems as enablers of information sharing and coordinated decision-making for direct materials acquisition in make-to-order (MTO) supply chains. Based on experience with Fortune 500 users of ERP systems and simulation analysis, the authors’ research reveals notable gains in operational effectiveness made possible through the novel replenishment schemas enabled and automated via ERP architecture. These gains in turn open the door for resource shifts that can shore up further corporate agility. The second of these chapters (Tatikonda, Brown, and Vessey) focuses specifically on vendor managed inventory (VMI), its enablement through ERP architecture, and its subsequent ability to provide barriers to competition. One case of such a program, supported by ERP technology, is discussed in detail with insights and prescriptions for future VMI success and strategic customer integration. The last two chapters of this section explore the evolving nature of ERP-enabled interfirm linkages from an overarching perspective that incorporates not only materials management but also the levels of shared

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Introduction: Realizing the Epic Dream of ERP

design and planning activities that support competitive gains in innovativeness across supply chains. The first of these chapters (Joseph and Ettlie) discusses the value potential of both R&D collaborative technologies and the architectural standards (e.g., ERP) that support their use. Although optimistic of the ability to ultimately link market results to this use, the authors warn against myopic views of IT that still limit the realization of potential. In a subsequent chapter by Vollmann, this potential is given greater emphasis and detail in execution. Case studies are drawn on to illustrate how ERP architecture facilitates the evolution of dyadic relationships within supply chains as well as the creation of idiosyncratic inimitable gains that these relationships may embody. In our final section (Future Visibility and Accountability), we present the thoughts of researchers regarding the safeguards required to ensure the maintenance of strategic capabilities and subsequently the competitive strengths drawn from an evolving techno-organizational operating architecture such as ERP. We begin this section with a chapter that touches on what may ultimately be one of the most pivotal business technologies of the early part of this century and one that is currently considered to be a terra-former of future competitive landscapes—Auto-ID (Schuster et al.). The authors discuss the developing implications for ERP systems resulting from increased data obtained through Auto-ID technology. It is anticipated that nearly all components of existing ERP packages will be affected by Auto-ID, allowing many more applications in practice given the increased flow of data through the application of Auto-ID. This discussion is followed by a chapter (Sarkis and Sundarraj) outlining the critical nature of ongoing ERP architecture evaluation in-line with the support of sustained competitive advantage. The authors provide some detail on the process of evaluating these strategy-enabling systems within the context of a broad systems development or technology management framework. A number of methodological approaches and tools for evaluation are outlined. Insights related to the implementation of these approaches for ERP evaluation are also provided. Given the wide range of expert viewpoints and findings depicted in these chapters, we conclude this compilation with a set of summary thoughts and prescriptions regarding strategic ERP extension and use (Davids and Bendoly). Based on the vast array of positive case experiences describing already substantial gains and notable suggestions for advancement (along

Introduction: Realizing the Epic Dream of ERP

with common pitfalls that have ensnared misguided firms and misaligned implementations), we stress that an image of the strategic relevance of ERP as an enabler of novelty and agility is critical in valuing this technology not only from a business case perspective but also from the perspective of business landscape development. With emphasis on the fact that the strategic opportunities posed by ERP implementations are far from past and in fact continue to be revealed as technology and management practice evolve, we describe options and considerations essential to garnering strategic value from ERP in the future.

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Strategy as a Critical Factor in Applied ERP Success SUE ABDINNOUR-HELM AND CYNTHIA LENGNICK-HALL

Enterprise resource planning (ERP) systems promise to solve the problem of fragmented information in large organizations by providing seamless integration of all the information flowing through the company across the different functional and business units across the world (Davenport, 1998). They are also touted as backbone infrastructures that, through extension, can support the flow of information with suppliers (through supply chain management systems) and customers (through customer relationship management systems). To date, several academic and practitioner journals have discussed the topic of ERP and related issues (for example, see Jacobs and Bendoly [2003] for a review). Many of these papers have attempted to describe factors that drive “success” in ERP applications. Although more recent interest in ERP surrounds extension and use, the literature on critical success factors has primarily focused on implementation (Al-Mashari, Al-Mudimigh, and Zairi, 2003; Umble, Haft, and Umble, 2003; Hong and Kim, 2002). One key factor often alluded to within this growing body of literature has been that of “fit” or “alignment,” both strategic and tactical (Davenport, 1998; Brenner and Cheese, 1999; Peterson, Gelman, and Cooke, 2001; Somers and Nelson, 2003; Bendoly and Jacobs, 2004). These studies consistently argue that (1) ERP projects should be business driven rather than technology driven and (2) ERP requires an alignment with a firm’s source of competitive

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ERP Rebirth and Advanced Viewpoints

advantage if it is to yield positive strategic outcomes. However, the majority of studies that explore the fit between ERP and strategy have adopted a very narrow definition of a firm’s strategy and have failed to incorporate much of the recent literature and current perspectives in the strategic management field. Given recent strategic literature, perhaps a more appropriate tactic would be to focus on a more multidimensional view of strategy when considering sources of ERP benefit. Markus and Tanis (2000) describe an organization’s experience with an enterprise system as moving through four phases: chartering phase (ideas to dollars); project phase (dollars to assets); shakedown phase (assets to impacts); and the onward and upward phase (impacts to performance). In our view, the chartering phase can also be called the adoption phase, in which a key decision must be made by executives of the company in consultation with others (IT specialists, vendors, etc.) about whether to adopt an ERP system or not and if one should be adopted, then which one. A common problem in both the adoption phase and in the later onward and upward phases is the failure to link the plan to implement an application system with the business strategic plan. This often leads to the adoption of an application or architecture that does not strategically fit the organization or to the abandonment of the ERP project after it starts and incurs major costs. A solid consideration of strategic goals and requirements, as well as a system of checks and balances regarding the internal perspectives of those making direct use of the application, can mitigate these losses. Conventional Views of Strategy

The vast majority of empirical studies examining the ERP-strategy connection have measured strategy in terms of a firm’s stated intent to compete on the basis of cost leadership, differentiation, or innovation. This single indicator of business-level sources of competitive advantage neglects other equally important elements of strategy, such as diversification, organizational-level strategic activities, expected financial concerns, core competence development, dynamic capabilities, and the nature of competition in the industry. While these generic strategy types were certainly standard ways to define strategy in the mid-1980s, the strategic management field has moved far beyond these categorizations.

Strategy as a Critical Factor in Applied ERP Success

This limited cost leadership, differentiation, or innovation view of strategy raises several conceptual and empirical problems. First, these strategies reflect a common set of causal premises and assumptions (Lengnick-Hall and Wolff, 1998, 1999). The underlying theory perspective is the structure-conduct-performance paradigm derived from industrial organizational economics (Mason, 1939; Bain, 1956, 1968). This paradigm asserts that firm performance is determined by the structure of the industry in which it competes. In other words, incumbent firms in industries that have high barriers to entry, relatively few firms with equal size or market power, inelastic demand, and strong sources of differentiation will typically earn higher returns than firms operating in industries that are not characterized by these conditions. Empirical research has demonstrated that the conceptual similarities across these strategies outweigh the conceptual differences (Segev, 1989). If measures of strategy reflect the same foundation assumptions and causal expectations, one would not expect them to lead to different ERP-related prescriptions. This means that the expected variation in strategy to which ERP adoption and implementation practices are expected to fit or not fit may not be there to measure. Segev (1989) found that the same 31 strategic factors comprised both Miles and Snow’s (1984) typology of defenders, prospectors, and analyzers and Porter’s (1985) cost leaders, differentiators, and focus organizations. He further found that the fundamental difference between the prospector/differentiation strategy and the cost-leadership/focus/defender strategy was the degree to which strategy enactment was proactive in terms of deliberate risk-taking. This seems to be a slim basis for expected differences in ERP-strategy links, making the previously proposed models of ERP-strategy fit less useful. Chadwick and Cappelli (1997) found that few differences in firm performance can be attributed to the Porter strategies after accounting for other important factors that are known to affect performance outcomes. Contingency approaches rely on the assumption that important differences in strategy should be reflected in important differences in ERP adoption if effective organizational performance is to result. However, it appears that significant differences in strategy have not been captured in most ERP-related studies to date. Second, the strategy measures used in most ERP-related research to date do not incorporate the more recent thinking in strategic management.

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Concepts such as the resource-based view of the firm (Barney, 1991, 1995), knowledge-based views of the firm (Kogut and Zander, 1993), and hyper competition (D’Aveni, 1994) have been ignored or merely noted but not used to shape conceptual models (cf. Somers and Nelson, 2003). Nor do most studies appear to recognize the increasing evidence that no single approach to creating competitive advantage is sufficient to sustain a strong competitive position (Yip, 1995). The fundamental difference between these more recent strategy perspectives and the structure-conductperformance paradigm is the expectation that strategy and competitive advantage are derived by looking inside the firm to capitalize on its valuable, unique, and difficulty-to-copy assets and capabilities rather than basing strategic choice on a reflection of the structure of the external industry. Third, the strategy typologies typically employed in ERP research are meant to describe strategies at the strategic business unit (SBU) level, yet these generic strategy typologies are often applied to the more aggregated organizational level (Somers and Nelson, 2003). Large diversified firms operating in a number of different industries are pursuing many, and sometimes conflicting, business unit strategies. For example, one product division might compete on price, while another product division competes primarily on technological innovation. Since ERP is an enterprisewide system, it is essential to be able to capture corporate-level strategy when assessing ERP-strategy issues. Summarizing multiple, different strategies and components of strategy with a single measure at the business unit level provides both a contaminated and deficient measure of the strategy construct. Contemporary Perspectives in Strategy

An important contribution to strategy theory is the resource-based view of the firm (Barney, 1991, 1995; Collis and Montgomery, 1995; Conner, 1996; Grant, 1991; Prahalad and Hamel, 1990; Stalk, Evans, and Shulman, 1992; Wernerfelt, 1984). The root premise of this body of work is that the firm is best seen as a bundle of unique assets and capabilities. Resources and capabilities that are valuable, rare, inimitable, nonsubstitutable, and exploitable are potential sources of competitive advantage and will determine a firm’s long-term strategic performance.

Strategy as a Critical Factor in Applied ERP Success

Valuable resources are those that enable an organization to exploit opportunities or neutralize threats. For example, information technologies that allow a firm to effectively manage a build-to-order manufacturing system or to reduce its cycle time for product development would be considered valuable. Rare resources are those that are unique to a particular firm. If a resource is valuable but common, such as an intranet, it often becomes a basic business requirement and leads to competitive parity rather than competitive advantage. If a resource can be easily imitated (such as “best practice” software offered by numerous vendors) or if viable substitutes are readily available (such as the rival HRIS systems offered by SAP and PeopleSoft), then the resource does not remain rare and leads to competitive parity over time. Resources that are path dependent (developed through a series of cumulative, small decisions over time, such as developing a firm’s unique capacity for innovation), socially complex (depending on unique relationships among individuals, such as organization culture), and causally ambiguous (depending on tacit knowledge and organizational routines, such as the ability to effectively balance innovation and efficiency) are particularly difficult to imitate. Exploitable resources are those that a firm is able to use effectively because they complement the structure, values, practices, and operations of the organization. For example, firms with relatively flat structures and process-based designs and that rely on self-managed teams are often better able to exploit innovative manufacturing techniques than firms with hierarchical structures that have clear functional divisions and specialized work assignments. Because of their value in meeting fluid customer needs, flexibility in responding to shifting market conditions, and difficulty in replication, intangible resources such as social capital, intellectual capital, and organizational routines and capabilities have particular competitive and strategic importance. According to the resource-based view, a strategist’s job is to identify, nurture, and deploy the firm’s unique stock of assets and capabilities in ways that enable it to create value for its customers and to simultaneously protect these assets from imitation by rivals. In contrast to the cost-leadership/differentiation approach, which relies on the structure/conduct /performance paradigm and the characteristics of the market environment to derive strategy, the resource-based view of the

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firm argues that strategy should be derived from the internal assets and value-creating capabilities of an organization. One extension of the resource-based view that is particularly relevant to ERP adoption decisions is knowledge-based theories of the firm (Grant, 1991, 1996; Kogut and Zander, 1993; Liebeskind, 1996; Nonaka, 1994; Spender, 1996). The knowledge-based view suggests that the main source of differences in firm performance lies in the heterogeneous knowledge bases and diverse capabilities for putting knowledge into action that vary from firm to firm. Thus, knowledge and the social, human, and intellectual capital needed to transform knowledge into competitive action are the most significant resources and capabilities driving a firm’s competitive performance. Unfortunately, this realization is often neglected during the ERP adoption process. ERP advocates argue that enterprise systems are substantial, competitive assets on their own because of the benefits of seamless functional integration, coupled with the ability to enable firms to more effectively leverage their other key resources (Davenport, 1998). However, from a resource-based perspective, the competitive utility of ERP systems contains an inherent paradox (Lengnick-Hall, Lengnick-Hall, and Abdinnour-Helm, 2004). On the positive side, ERP systems are valuable because they enable firms to accurately assess and tightly coordinate production capabilities and to develop responsive relationships with customers based on reliable and precise information (Dillon, 1999). Moreover, through links between ERP systems, firms can coordinate with suppliers to manage the entire supply chain more efficiently and smoothly (Fisher, 1997; Bendoly, Soni, and Venkataramanan, 2004). In addition, ERP systems as implementations are largely nonsubstitutable. Of course, ERP systems in themselves and in concept are not rare. Industry-wide ERP adoption promotes competitive parity among major players, and it moves an industry away from opportunities for sustained competitive advantage (Grant, 1991). In addition, ERP systems are not entirely inimitable, although idiosyncratic implementations and instances of these architectures can be as inimitable as the unique operational processes they support. Third-party vendors create ERP technologies, making basic standardized components easy to copy or acquire. Vendors create modules designed to capture the most significant aspects of common industry activities and relationships. Both by definition and

Strategy as a Critical Factor in Applied ERP Success

design, these systems are replicated and transferred from one firm to another. Still, exploitation of the latent benefits of ERP systems requires a life-altering, culture-changing experience for individuals and organizations, encompassing radical shifts in organization design and interpersonal relationships (Brenner and Cheese, 1999). We argue that it is these firm-specific exploitation differences that create the greatest potential for strategic benefits from ERP; however, these firm-specific exploitation differences are more dependent on the social capital and culture of the enterprise than on the information system itself. ERP advocates agree that strategic benefits are likely to accrue only to those firms that treat ERP implementation as a business process rather than an IT project and, therefore, orchestrate a culture change to capitalize on the potential benefits that integration provides (Davenport, 1998, 2000; Markus and Tanis, 2000; Somers and Nelson, 2003; Bendoly and Kaefer, 2004). ERP systems can enable a firm to effectively leverage resources in new and more complicated ways. However, this potential is realized only if the firm is able to overcome the enormous pressures of inertia that an ERP system simultaneously creates (Lengnick-Hall et al., 2004). When ERP systems are examined through the lens of contemporary strategic management theories, it becomes clear that even if ERP is necessary to coordinate complicated, multifaceted operations, it is far from sufficient to guarantee a strong competitive position in shifting competitive markets. If an ERP only rearranges tasks and changes the procedures people use to do their work, it is unlikely to provide long-term competitive benefits because these changes are neither rare nor inimitable. A sustained competitive advantage requires ERP to change the way people think about their work and their organization, to alter the type of relationships they develop within and across organizational boundaries, and to redesign the ways they use the information that integrated information systems provide (Lengnick-Hall et al., 2004). Fortunately, an ERP implementation has the potential to promote deep changes in relationships, culture, and individual behaviors. Social capital and intellectual capital can be crucial sources of advantage in a knowledge economy (Nahapiet and Ghoshal, 1998; Adler and Kwon, 2002). An ERP can be a multidimensional platform for developing both social capital and intellectual capital if complementary capabilities and assets accompany ERP adoption.

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How can ERP be used to promote the development of strategically important intangible assets? First, the connections encoded in ERP software can provide a roadmap for enhancing the structural elements of a firm’s social capital. ERP data flows and network connections present a valuable opportunity to enhance a firm’s configuration of impersonal links between people and units. For example, people and units that rely on ERP data have inherent interdependencies. If these interdependencies are made visible and if people are rewarded for facilitating effective coordination across parts of the system, then an enterprise-wide view of the firm can be developed. Second, ERP systems increase the opportunity for new relationships to be developed by exchanging information about formerly tacit processes. However, developing personal relationships in the presence of electronically mediated exchanges also introduces new challenges. An ERP implementation can suggest who needs to connect to whom, but other mechanisms such as knowledge fairs, videoconferencing, face-to-face meetings, cross-functional task forces, and similar relationship-building activities are necessary to provide the foundation for social capital development. Third, the dramatic change experience prompted by ERP implementation is both personal and widely shared across a firm (Laughlin, 1999; Xenakis, 1996). Massive organizational change is a difficult and emotional personal experience. If deliberately and strategically managed, the shared difficulties associated with a culture shift can be a basis for building collaboration, trust, and new norms and values. However, if not managed carefully or well, the trauma of massive organizational change can promote dysfunctional conflict and rigidity and encourage turnover among the very people the firm needs most. An ERP implementation experience can provide a powerful foundation for developing the cognitive dimension of social capital, or it can undermine the foundation of organizational cohesiveness. ERP systems also provide opportunities for intellectual capital formation (the development of knowledge, skills, and capabilities among employees) and knowledge enhancement (expanding the firm’s stock and flows of actionable information). Information provided by ERP allows workers to more clearly see the direct and indirect results of their performance. ERP offers a means for individuals to see how the processes they use and the outcomes of their work affect both internal and external customers. ERP can provide almost continuous feedback, which in turn

Strategy as a Critical Factor in Applied ERP Success

can be translated into opportunities for learning and continuous improvement in performance among individuals, groups, and the organization as a whole. Each of these elements offers a significant route to enhancing intellectual capital and organizational learning. The managerial challenge is to translate this potential into organizational reality. If employees do not trust the information an ERP system provides, if they do not recognize the value of using the data to guide their behavior, or if they do not input information into the system in an accurate and timely way, ERP can undermine rather than enhance the firm’s knowledge. It is important to recognize that none of the potential social capital development, intellectual capital formation, or knowledge enhancement can be realized unless the people within an organization make it happen. Attitudes toward ERP, toward change, and toward the organization all influence the likelihood that the potentially important strategic consequences of ERP adoption will be achieved. A Case Study on Perceptions of ERP Use

One company, a major aircraft manufacturer in the Midwest employing over 5,000 employees, made the decision to switch from legacy systems to an ERP system and set the “go live” date to January 1, 2000. This date coincided with the Y2K deadline, which was one of the drivers for the adoption of the ERP system (as described in the company’s business case). The company used an accelerated schedule to complete a big-bang implementation of a major ERP system. A survey instrument was used to collect data from employees several months before the go-live date, when the majority of the potential users of the system should have had at least introductory training on the system. The survey was taken again almost a year after the go-live date. The pre-go-live survey was taken shortly before phase II (project configure and rollout) and the post-go-live survey was taken in phase III (shakedown) of the Enterprise System Experience Cycle. There were a total of 931 respondents to the pre-go-live survey and 733 respondents to the post-golive survey. The majority of the respondents came from manufacturing operations and support functions and had been at the company for more than 16 years.

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The demographic data that was collected included position, tenure, and affiliation of the system users within the organization. Respondents were also asked to evaluate their perception of the ERP system based on three metrics: 1. Switch from legacy systems to ERP 2. Benefits versus costs of ERP 3. Usage of ERP The above metrics measure the recipe for success in the chartering phase, as proposed by Markus and Tanis (2000). The authors write that in this phase, success occurs when “the organization is well prepared to accept and use the system and related infrastructure of sufficient quality to meet business needs” (Markus and Tanis, 2000, p. 29). Metrics 1 and 2 refer to acceptance of the system, in terms of employee buy-in that a switch to the ERP system was essential and worthwhile. Metric 3 refers to usage of the system, which has been a common metric of success in information system research (see Venkatesh et al. [2003] for a recent review of the literature). The subsections that follow describe each metric and the results by position, tenure, and organizational affiliation at the company (metrics 1 and 2) and by highest and lowest expected usage (metric 3). Metric 1: Switch from Legacy to ERP

Employees were asked: “Overall, I think that the switch from legacy systems to ERP is . . . ‘more trouble than it is worth {1}’ to ‘absolutely essential at this time {7}’” (Figure 2.1). Pre-Go-Live Results

An examination of the data by position revealed the following: • Of the managers who responded to the survey, 68% felt that the switch was essential, whereas 18% felt that the switch was more trouble than it was worth. • Of the supervisors who responded to the survey, 38% felt that the switch was essential, whereas 33% felt that the switch was more trouble than it was worth.

Strategy as a Critical Factor in Applied ERP Success

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• Of the production workers who responded to the survey, 32% felt that the switch was essential, whereas 35% felt that the switch was more trouble than it was worth. • Of the professionals and engineers who responded to the survey, 49% felt that the switch was essential, whereas 29% felt that the switch was more trouble than it was worth. An examination of the data by tenure at the company revealed the following: • Of the respondents who had been employed by the company for less than a year, 60% felt that the switch was essential, whereas 13% felt that the switch was more trouble than it was worth. • Of the respondents who had been employed by the company for a period of 1 to 5 years, 55% felt that the switch was essential, whereas 19% felt that the switch was more trouble than it was worth.

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• Of the respondents who had been employed by the company for a period of 6 to 10 years, 45% felt that the switch was essential, whereas 32% felt that the switch was more trouble than it was worth. • Of the respondents who had been employed by the company for a period of 11 to 15 years, 37% felt that the switch was essential, whereas 36% felt that the switch was more trouble than it was worth. • Of the respondents who had been employed by the company for 16 or more years, 34% felt that the switch was essential, whereas 39% felt that the switch was more trouble than it was worth. An examination of the data by organizational affiliation revealed the following: • Of the respondents who indicated that they worked in manufacturing operations and support functions, 44% felt that the switch was essential, whereas 32% felt that the switch was more trouble than it was worth. • Of the respondents who indicated that they worked in final assembly operations and support functions, 30% felt that the switch was essential, whereas 33% felt that the switch was more trouble than it was worth. • Of the respondents who indicated that they worked in “other” areas, 55% felt that the switch was essential, whereas 19% felt that the switch was more trouble than it was worth. Post-Go-Live Results

An examination of the data by position revealed the following: • Of the managers who responded to the survey, 39% felt that the switch was essential, whereas 47% felt that the switch was more trouble than it was worth. • Of the supervisors who responded to the survey, 19% felt that the switch was essential, whereas 66% felt that the switch was more trouble than it was worth.

Strategy as a Critical Factor in Applied ERP Success

• Of the production workers who responded to the survey, 12% felt that the switch was essential, whereas 80% felt that the switch was more trouble than it was worth. • Of the professionals and engineers who responded to the survey, 38% felt that the switch was essential, whereas 50% felt that the switch was more trouble than it was worth. An examination of the data by tenure at the company revealed the following: • Of the respondents who had been employed by the company for 5 years or less, 39% felt that the switch was essential, whereas 43% felt that the switch was more trouble than it was worth. • Of the respondents who had been employed by the company for a period of 6 to 10 years, 33% felt that the switch was essential, whereas 54% felt that the switch was more trouble than it was worth. • Of the respondents who had been employed by the company for a period of 11 to 15 years, 25% felt that the switch was essential, whereas 64% felt that the switch was more trouble than it was worth. • Of the respondents who had been employed by the company for 16 or more years, 19% felt that the switch was essential, whereas 70% felt that the switch was more trouble than it was worth. An examination of the data by organizational affiliation revealed the following: • Of the respondents who indicated that they worked in manufacturing operations and support functions, 27% felt that the switch was essential, whereas 61% felt that the switch was more trouble than it was worth. • Of the respondents who indicated that they worked in final assembly operations and support functions, 20% felt that the switch was essential, whereas 63% felt that the switch was more trouble than it was worth.

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• Of the respondents who indicated that they worked in “other” areas, 41% felt that the switch was essential, whereas 44% felt that the switch was more trouble than it was worth. Metric 2: Benefits Versus Costs of ERP

Employees were asked: “What do you believe is the likelihood that the benefits of ERP will outweigh the costs?” Responses ranged from “extremely likely {7}” to “extremely unlikely {1}” (Figure 2.2). Pre-Go-Live Results

An examination of the data by position revealed the following: • Of the managers who responded to the survey, 46% felt that there was a high likelihood that the benefits would exceed the costs, whereas 33% felt that there was a low likelihood that the benefits would exceed the costs. • Of the supervisors who responded to the survey, 32% felt that there was a high likelihood that the benefits would exceed the costs, whereas 42% felt that there was a low likelihood that the benefits would exceed the costs. • Of the production workers who responded to the survey, 23% felt that there was a high likelihood that the benefits would exceed the costs, whereas 38% felt that there was a low likelihood that the benefits would exceed the costs. • Of the professionals and engineers who responded to the survey, 40% felt that there was a high likelihood that the benefits would exceed the costs, whereas 33% felt that there was a low likelihood that the benefits would exceed the costs. An examination of the data by tenure at the company revealed the following: • Of the respondents who had been employed by the company for less than a year, 53% felt that there was a high likelihood that the benefits would exceed the costs, whereas 15% felt that there was a low likelihood that the benefits would exceed the costs.

Strategy as a Critical Factor in Applied ERP Success

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Benefits Versus Cost of ERP

• Of the respondents who had been employed by the company for a period of 1 to 5 years, 43% felt that there was a high likelihood that the benefits would exceed the costs, whereas 29% felt that there was a low likelihood that the benefits would exceed the costs. • Of the respondents who had been employed by the company for a period of 6 to 10 years, 35% felt that there was a high likelihood that the benefits would exceed the costs, whereas 36% felt that there was a low likelihood that the benefits would exceed the costs. • Of the respondents who had been employed by the company for a period of 11 to 15 years, 30% felt that there was a high likelihood that the benefits would exceed the costs, whereas

27

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ERP Rebirth and Advanced Viewpoints

44% felt that there was a low likelihood that the benefits would exceed the costs. • Of the respondents who had been employed by the company for 16 or more years, 22% felt that there was a high likelihood that the benefits would exceed the costs, whereas 46% felt that there was a low likelihood that the benefits would exceed the costs. An examination of the data by organizational affiliation revealed the following: • Of the respondents who indicated that they worked in manufacturing operations and support functions, 33% felt that there was a high likelihood that the benefits would exceed the costs, whereas 39% felt that there was a low likelihood that the benefits would exceed the costs. • Of the respondents who indicated that they worked in final assembly operations and support functions, 22% felt that there was a high likelihood that the benefits would exceed the costs, whereas 38% felt that there was a low likelihood that the benefits would exceed the costs. • Of the respondents who indicated that they worked in “other” areas, 40% felt that there was a high likelihood that the benefits would exceed the costs, whereas 34% felt that there was a low likelihood that the benefits would exceed the costs. Post-Go-Live-Results

An examination of the data by position revealed the following: • Of the managers who responded to the survey, 27% felt that the benefits exceeded the costs, whereas 55% felt that the benefits had not exceeded the costs. • Of the supervisors who responded to the survey, 24% felt that the benefits exceeded the costs, whereas 65% felt that the benefits had not exceeded the costs. • Of the production workers who responded to the survey, 17% felt that the benefits exceeded the costs, whereas 64% felt that the benefits had not exceeded the costs.

Strategy as a Critical Factor in Applied ERP Success

• Of the professionals and engineers who responded to the survey, 27% felt that the benefits exceeded the costs, whereas 53% felt that the benefits had not exceeded the costs. An examination of the data by tenure at the company revealed the following: • Of the respondents who have been employed by the company for 5 years or less, 34% felt that the benefits exceeded the costs, whereas 46% felt that the benefits had not exceeded the costs. • Of the respondents who have been employed by the company for a period of 6 to 10 years, 23% felt that the benefits exceeded the costs, whereas 61% felt that the benefits had not exceeded the costs. • Of the respondents who have been employed by the company for a period of 11 to 15 years 17% felt that the benefits exceeded the costs, whereas 66% felt that the benefits had not exceeded the costs. • Of the respondents who have been employed by the company for 16 or more years, 17% felt that the benefits exceeded the costs, whereas 70% felt that the benefits had not exceeded the costs. An examination of the data by organizational affiliation revealed the following: • Of the respondents who indicated that they worked in manufacturing operations and support functions, 24% felt that the benefits exceeded the costs, whereas 62% felt that the benefits had not exceeded the costs. • Of the respondents who indicated that they worked in final assembly operations and support functions, 19% felt that the benefits exceeded the costs, whereas 59% felt that the benefits had not exceeded the costs. • Of the respondents who indicated that they worked in “other” areas, 25% felt that the benefits exceeded the costs, whereas 51% felt that the benefits had not exceeded the costs.

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Metric 3: Usage of ERP

Employees were asked to indicate the extent to which they believed the ERP system would be used for a variety of specific activities and operations (Figures 2.3 and 2.4). Pre-Go-Live Results

The expected usage of ERP was as follows: • Highest expected usage: operations scheduling; MRP management and control; production management for assembly; production management for making parts; warehouse management; tool planning manufacture and maintenance; shop floor control; procurement; sales and operations planning; financial and cost control. • Lowest expected usage: workaround adjustments; HR administration; manufacturing and industrial engineering; quality assurance. • Did not know: Across all of the items, nearly one-third of the respondents indicated that they did not know the extent to which ERP would be used for various activities and operations. Post-Go-Live Results

The actual usage of ERP was as follows: • Highest perceived usage: MRP management and control; operations scheduling; procurement; warehouse management; production management for assembly; production management for making parts; tool planning manufacture and maintenance; quality assurance. • Lowest perceived usage: HR administration; workaround adjustments; manufacturing and industrial engineering. • Did not know: Across all of the items, one-quarter to nearly one-half of the respondents indicated that they did not know the extent to which ERP was used for various activities and operations.

I

I

I

I

HR administrationS 12 10 S Manufacturing/S 10 11 industrial engineeringS S ProcurementS 7 9 S

56

I I

57

I

I

I

I

I

I

I

I

16

14

Shop floor controlS S

9

I 11 I

Capacity managementS S

8

I 11 I

Operations schedulingS S MRP management and controlS S Sales and operations planningS S MeasuringS (organization) performanceS S Financial and cost control

6

I9 I

7

I

I

24

I

58

I

23

I

I I

I

I

I

10

20

30

40

22

I

22

I

50 60 Percent

27

I

I

28

I

I

28

I I

32 I

I

70

80

I

2.3

Expected Usage of ERP, Pre–Go Live

I

90 100

D Low D Medium D High D Don’t know FIGURE

I

I

I I

I I

30

I

55

I

I

35

51

I I

I

29

I

56

5 8 0

58

60

I

I I

63

14

26 22

51

I I

I

I

57

5 8

28

I

35

I9 I

7

I

46

I

I

33

57

I

I

38

I

46

I I

Warehouse managementS 8 9 S Tool planning manufacture/S 10 11 maintenanceS S Production managementS 9 10 for assemblyS S Production managementS 9 10 for making partsS S Quality assuranceS 13 12 S Workaround adjustmentsS S

I

39

HR administrationS S Manufacturing/S industrial engineeringS S ProcurementS S

I

11

I

9

17

I

16

I 10 I

I

35

I

I

36

I

14

I

36

I

29

23

I

14

I

36

I

26

I

I

15

24

I

15

Shop floor controlS S

24

I

13

Capacity managementS S

19

I 10 I

Operations schedulingS S MRP management and controlS S Sales and operations planningS S MeasuringS (organization) performanceS S Financial and cost control

19

I 11 I

I I

I 10 I

13 19

J

10

15

13

I

20

I

29

I

43

I

30

I

I

48

I

31

40

I

42

I

50 60 Percent

I

I

36

I

30 30

I

44 70

80

90

D Low D Medium D High D Don’t know FIGURE

2.4

I

28

41

29

I

I I

29

I I

41

36

I

I

32

I

20

I 12 I

16

I

33

I

31

I

33

Workaround adjustmentsS S

0

I 39

I

I

46

22

20

13

I

23 39

13

I

64

I 10 I I

18

I

13

21

Warehouse managementS S Tool planning manufacture/S maintenanceS S Production managementS for assemblyS S Production managementS for making partsS S Quality assuranceS S

I

16

Perceived Actual Usage of ERP, Post–Go Live

100

Strategy as a Critical Factor in Applied ERP Success

Discussion and Recommendations

The resource-based view of strategy and the knowledge-based view of the firm argue that intangible factors such as social capital, intellectual capital, culture, and employee attitudes lie at the heart of sustained competitive advantage. The results from this case study and additional private interviews suggest that in both pre- and post-implementation phases, employees were not convinced of the value of ERP, did not have confidence that it would be better than the current legacy systems, and did not see it as a vehicle for value creation but as a mechanism to increase managerial control, tighten cost containment activities, and make the firm even more dependent on formal long-term planning rather than new insights generated by new knowledge. It is, therefore, not surprising that the firm ultimately perceived few widespread benefits from its ERP initiative. Acceptance (metrics 1 and 2) of an ERP system ultimately leads to success. The case study illustrates that before going live, nearly one-quarter of the employees were undecided regarding the need to switch from legacy systems to an ERP system, with approximately equal percentages on either side of the undecided score. What seemed like a normal distribution before going live gave way to a skewed distribution afterwards, indicating that experience with the implementation and use of the system actually encouraged pessimism among the workers regarding the usefulness of the system. Similarly, the distribution representing the costs versus benefits of the ERP system seemed to follow a normal distribution before going live. The distribution became skewed after going live, indicating that the majority of employees had become more convinced that the costs of the ERP system far outweighed the benefits. The results based on these two metrics suggest that the employees had not accepted the cost justification for new ERP systems and were thus less likely to use it to its full strategic potential even a year after going live. As far as usage of the ERP system (metric 3), two factors are particularly revealing. One, the pre-implementation (expected) versus post-implementation (perceived actual) comparison regarding the use of ERP strongly indicates that expectations shape actual utilization. A large percentage of employees (22% to 38% depending on the specific application) indicated that they did not know how ERP was to be used. The

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ERP Rebirth and Advanced Viewpoints

specific uses with the highest expectations prior to implementation (57% or higher) emphasized control (shop floor control; MRP management and control), preset coordination (production management for assembly; production management for making parts; operations scheduling), or support activities (warehouse management; tool planning manufacture and maintenance). Those activities most directly reflecting value creation (measuring organizational performance; quality assurance) were associated with lower expectations. Of even greater concern is that across the board many employees reported that they did not know how ERP was being used after the system went live, in fact significantly more than had stated such expectations prior to implementation. This suggests that ERP was, at best, seen as a new IT technology rather than a core business capability with a clearly articulated corporate-wide agenda. From an alternative perspective, it should be noted that the list of expected ERP-use activities captured in Figures 2.3 and 2.4 had been developed by the firm adopting the ERP system (rather than being based on system developer insights). These potential benefit areas were included in much of their training materials and in their corporate vision of ERP benefits. Strategically, the greatest concern might, therefore, be the possibility that certain activities may have been omitted from consideration in this case, even though the system may have been purposely designed to augment such practices. If other critical activities did show significantly consistent benefits, the difficulty in assigning benefit to the ERP system may be largely due to a misperception in the alignment of system functionality with the corporate strategic focus. There is no indication that the firm intended to use ERP as a platform for change or as a vehicle for building relationships, providing a foundation for organizational learning, or achieving resource-based competitive advantage. Without this intent, there is little possibility for sustained strategic gain even if the implementation proceeds smoothly and the ERP system operates as intended. There are likely several lessons to be learned from this firm’s experience. First, ERP systems cannot by themselves provide a sustained competitive advantage because they are neither rare nor inimitable— although the complexity of idiosyncratic implementations may mitigate this issue. Systems that are well tuned to existing operational characteristics and that support long-term strategic goals can certainly foster greater

Strategy as a Critical Factor in Applied ERP Success

support and thus engender strategic benefit indirectly. Second, the longterm competitive value from ERP comes from its ability to generate knowledge that a firm can act on to change its business practices, introduce innovation, and build social and intellectual capital. Unless these uses of ERP are highlighted and integrated into the selection of a system and its implementation process at the adoption stage, they will most likely be lost during subsequent stages of implementation. Third, without an accompanying investment in behavioral and culture change, ERP tends to augment the more rigid aspects of organizational activity (planning and control) and inhibit the more flexible aspects of organizational activity (learning and innovation). These trends are likely to create barriers to competitive advantage in the fluid knowledge economy.

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3

The “New” Users: SMEs and the Mittelstand Experience TOBIAS SCHOENHERR, M. A. VENKATAR AMANAN, ASHOK SONI, VINCENT A. MABERT, AND DITMAR HILPERT

In the United States and much of Western Europe, especially Germany, small and medium enterprises (SMEs) form the backbone of the economy and lead in job creation. The manufacturing sector in both the United States and Western Europe is dominated by SMEs. In the United States, 97% of the exporters are SMEs, accounting for 30% of the value of the exports. In Germany, the SMEs number over a million companies and employ over 20 million people. Collectively known as the Mittelstand, German SMEs are responsible for almost 40% of total German gross investments and account for 30% of the exports (Hauser, 2000). While many of the SMEs are very successful, these companies are under considerable pressure from global competitors. The competitive pressures are expected to increase even more in the near future, primarily due to higher labor costs, increasing employee benefits, the bargaining power of large customers, open markets, global competition, and the free flow of information. To stay competitive in this fast-moving and dynamic environment, the SMEs have to be nimble, reactive, and capable of providing quick responses to the market place. Many SMEs are countering these threats by using strategies in manufacturing and information technology (IT) to provide the agility to compete and flourish in the 21st-century marketplace. In manufacturing, SMEs are using strategies such as lean manufacturing, efficient supply chain operations, and outsourcing of noncore

The “New” Users: SMEs and the Mittelstand Experience

components to counter the competition. Developing modular product designs, employing cellular production techniques, and utilizing pullmanufacturing logic have allowed firms to keep costs competitive and operations responsive. IT has played a key role in manufacturing firms in a number of areas. In the 1970s and 1980s, many implemented systems such as material requirements planning (MRP) and manufacturing resource planning (MRP II). By the early 1990s, the number of these systems deployed worldwide totaled over 60,000 (AMR, 1995). Many manufacturing firms have also used specialized applications such as computer-aided-design (CAD) and computer-aided-manufacturing (CAM), linking them into the firm’s information infrastructure. Thus, it is not surprising to see that manufacturing SMEs are using enterprise resource planning (ERP) systems to stay at the leading edge. Some of these companies have also started to implement applications that use ERP systems as a backbone connection to more applications. These applications include advanced planning and scheduling (APS) systems, customer relationship management (CRM), and e-business and Web services. Collectively, ERP systems and these associated applications are generally referred to as enterprise systems (ES). Enterprise systems were initially developed to address the IT needs of large Fortune 1000 –type companies. During the mid- to late 1990s, many such companies implemented these large-scale systems. These implementation experiences are well documented in trade and academic journals. Publications have chronicled both high-profile failures and extensive difficulties at companies such as FoxMeyer and Hershey Food Corporation (Deutsch, 1998; Nelson and Ramstad, 1999) and model implementations (Kirkpatrick, 1998). In addition, several authors (Piturro, 1999; Zuckerman, 1999) have hypothesized that enterprise systems are a key ingredient for gaining competitive advantage, streamlining operations, and achieving “lean” manufacturing. The initial target of the large-scale ERP vendors, such as SAP, Oracle, and PeopleSoft, were large enterprises. As this market saturated, these vendors started to focus on small and medium enterprises. They did this by repositioning their systems and applications for the SME market by offering pared-down versions of their large-scale systems. During the 1990s, some of the MRP and MRP II vendors (for example, QAD and

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ERP Rebirth and Advanced Viewpoints

BPICS) also started to transform their packages to ERP systems by providing more integrated functionalities such as accounting, order entry, and warehouse management. These new offerings, aimed at the SME market, motivated many SMEs to become willing players in the ERP arena. A recent study suggests that the experiences of large companies implementing enterprise systems (Mabert, Soni, and Venkataramanan, 2003) may be very different from those of small and medium enterprises. That study, for example, shows that companies, depending on size, tend to do different things with their ERP implementations across a variety of issues. These differences range from the motivation for implementing such systems to the types of systems adopted to the implementation process itself. In addition, there are key differences by company size in the outcomes and benefits attained. For example, larger companies report improvements in financial measures, whereas smaller companies report better performance in manufacturing and logistics metrics. This preliminary evidence suggests that the activities and experiences of large companies may not be applicable to SMEs. Thus, it is important and useful to study more fully the deployment of ERP systems and related applications as they apply to small and medium enterprises (Bendoly and Kaefer, 2004). German SMEs— The Mittelstand

Companies are usually classified as SMEs based on either the total number of employees or total revenues or a combination of these two measures (Mabert et al., 2003). A commonly used cut-off point for SMEs in the United States is around $600 million in revenues. The Mittlestand companies studied, by contrast, ranged from 24 million Euros to 380 million Euros in revenues (approximately $29 million to $460 million). However, this classification by itself falls short of fully describing the uniqueness of German SMEs and their impact. SMEs in Germany are the backbone of the German economy, with over a million companies employing over 20 million people. Located at Europe’s crossroads of commerce, many of these companies started as small, family-oriented enterprises with a few employees and have grown significantly over the past few decades, primarily due to their innovative, competitive, and global orientation. The Mittelstand companies, many of

The “New” Users: SMEs and the Mittelstand Experience

which are in manufacturing, tend to focus on highly customized and specialized products and services that are used in commercial applications, such as machine controls and precision laboratory scales. Concentrating on customized products and services also implies that they cannot take advantage of the economies of scale associated with mass production. The orientation toward customization requires a highly skilled and flexible workforce. That SMEs rely on this formation of human capital is evidenced by the fact that the Mittelstand provides more than 80% of vocational training places in Germany. This leads to a very loyal and stable workforce. Labor turnover rates are often very low in Mittelstand companies, usually of the order of 3%. German SMEs in manufacturing, like SMEs in the United States, are under heavy competitive pressures. Their competition consists of similar-sized companies in Asia, other Mittelstand companies in Germany, and larger companies in Europe and the United States. While the U.S. manufacturing sector has seen a decline in recent years, German manufacturing, powered by Mittelstand companies, has been very competitive, countering threats by using various strategies in manufacturing and information technology. Similar to their counterparts in other countries, German SMEs have used lean manufacturing, efficient supply chain operations, and outsourcing of noncore components to stay competitive. In addition, German SMEs use flexible manufacturing, cross-training of workers, a high degree of automation, and short design and manufacturing cycle times to stay agile and competitive. For Mittelstand companies, information technology has been a key and critical differentiator. Because of their global presence and highly competitive environments, they must have very responsive information systems. Also, because of their highly customized and specialized products and services, they tend to leverage information technology as a competitive tool. This is consistent with comparable manufacturing SMEs in the United States who also use IT to stay competitive (Taylor, 1999). Like their counterparts in the United States, the Mittlestand manufacturing SMEs typically operate with MRP and MRP II systems, usually coupled with manufacturing planning and execution systems. However, the German SMEs are moving increasingly to ERP systems that are more integrated between important business functions. Investments in information technology have been very significant in recent years.

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ERP Rebirth and Advanced Viewpoints

These characteristics of the German Mittelstand companies illustrate their uniqueness. Clearly, they have been able to compete very effectively, both nationally and globally, over a long period of time using a variety of strategies. Many of them cite information technology as a key component of their competitive strategy. For example, Voigt (2001) found that 22% of the German SMEs, a majority of them in manufacturing, see IT as a way to secure and improve their competitive position and ability to remain more responsive. This makes an investigation into the enterprise system experiences of Mittelstand SMEs not only interesting but also necessary. The next section outlines the methodology used in this study. Out in the Field

To obtain a better understanding of the nature, scope, and impact of enterprise systems in Mittelstand SMEs, a field study was conducted in which 18 different companies were investigated by interviewing key business managers and IT professionals. The specific companies were chosen so that a broad spectrum of the German manufacturing Mittelstand were represented. Almost all these companies, despite their size, have a global presence, conducting business in multiple markets. The annual revenues range from approximately $29 million to $460 million. While the sample of companies may be small relative to the size of the Mittelstand, it represents a diverse group of companies. Their products include parts for the automobile industry, sophisticated medical equipment, textiles, elevators, heat exchange systems, scales, industrial knitting machines, network systems and products, furniture, complete workstations, home appliances, heavy-duty processing machinery, machine controls, and specialty metal pipes. The demographics of the companies in the case study are presented in Table 3.1. The companies employ a mix of job and flow shop manufacturing processes (Table 3.2). About half have exclusively make-to-order (MTO) products, with only two companies entirely operating on a make-to-stock (MTS) basis. One-third provided a mix of MTO and MTS products. Of the 18 companies in the sample, 17 either already have an enterprise system or are in the process of implementing such a system.

The “New” Users: SMEs and the Mittelstand Experience

Ta b l e 3 . 1 Characteristics of the case study companies Company

Industry type

Company A Company B Company C Company D Company E Company F Company G

Scales, food processing equipment Industrial mixers and grinders Textiles Food technology, home appliances Material handling (forklifts) Furniture Machines for woodworking, tooling, grinding Elevators, medical technology, gear technology Heat and cooling technology Waste management Springs Parts for automobile industry Industrial precision scales Industrial knitting machines Gaskets for the automobile industry Medical surgery equipment Parts for the automobile industry Communications test and management solutions

Company H Company I Company J Company K Company L Company M Company N Company O Company P Company Q Company R

Size (# employees)

Revenue (million €)

1,000 600 900 770 593 1,200 1,100

378 120 64 90 100 140 320

700 2,000 220 208 100 235 600 3,000 480 500 350

80 – 85 100 Not available 25 24 60 200 380 70 275 100

One is operating with a legacy system but plans to implement an ERP package within the next 12 months. These companies are at various stages of enterprise system implementations, ranging from the advanced planning stage to completed implementations. This provides a range of experiences at different points in the implementation cycle. The systems being implemented are from eight different vendors. SAP is the primary system in over half of the case study companies, a fact that is understandable from a number of perspectives. First, SAP is the biggest worldwide vendor. Second, SAP has deep German roots, having been established and headquartered in Germany. And third, SAP has targeted SMEs as the growth market for the last half-dozen years. Interviews were exploratory in nature and were conducted with key business managers and IT professionals in March 2004. Each interview lasted from one to four hours and was conducted by four members of the research team. The interviews were conducted both in English and German, depending on the preference of the interviewees, and were

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ERP Rebirth and Advanced Viewpoints

Ta b l e 3 . 2 Shop and product characteristics Flow of materials Job shop Flow shop Mixture shop Products

Number 10/18 5/18 3/18 Number

Standard products Custom products Standard and custom

8/18 4/18 6/18

Order makeup

Number

Made-to-order Made-to-stock Mixed

10/18 2/18 6/18

tape-recorded and transcribed in English. While the format was semistructured with open-ended, predetermined questions, all discussions covered the following areas at a minimum: • What is the state of enterprise systems? • Why did the company decide on an enterprise system solution? • How was the system implemented, and what was the implementation experience? • What were the resources utilized and the benefits accumulated? • What areas of the organization experienced improvements after the implementation? Disappointments? • What lessons were learned? • What do these companies plan to do in the future? The primary objective of the case studies was to obtain reliable and detailed information on the current status of ERP practice and implementations in the manufacturing SMEs. Comparing SME Experiences

Since the mid-1990s, there have been numerous studies conducted on ERP systems. However, very few have concentrated on small and

The “New” Users: SMEs and the Mittelstand Experience

medium enterprises. The two exceptions and the ones most relevant to the current study are by Van Everdigen, Van Hillegersberg, and Warts (2000) and Mabert, Soni, and Venkataramanan (2003). Van Everdigen et al. surveyed 2,647 European companies to determine the adoption and penetration of ERP by functionality. This study provides a reference point on the status of enterprise systems in European SMEs in 1999, the year of their survey. Mabert et al. looked at the ERP implementation practices of manufacturing companies across a range of different-sized companies. Thus, their results not only provide key insights into the implementation and use of ERP systems in the manufacturing sector but also analyze the impact of company size on ERP implementations. They found that smaller companies differ significantly from large companies on a number of dimensions. The Mabert et al. survey was undertaken in 2000 and provided the following observations: 1. Adoption of ERP systems by large companies is motivated more by strategic needs, whereas tactical considerations carry greater importance for smaller companies. Companies implement ERP systems for many different reasons. These reasons include gaining a strategic advantage, acquiring a simplified information systems infrastructure, standardizing processes, improving customer and supplier interactions, linking global operations, and solving the Y2K problem. For larger companies, the top three reasons for adopting ERP systems were gaining a strategic advantage, simplifying and standardizing processes, and replacing legacy systems. Over 90% of the large firms cited these three reasons for choosing ERP systems. For smaller firms, the top three reasons were replacing legacy systems, simplifying and standardizing processes, and improving interactions with suppliers and customers. There were clear and distinct differences between the priorities of the large and small firms. 2. Large companies use an incremental implementation approach by phasing in the systems, while smaller companies adopt more radical implementation approaches, such as implementing the entire system or several major modules at the same time. The strategies used for implementation are one

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ERP Rebirth and Advanced Viewpoints

of the most important factors in assessing the impact of an ERP system on an organization. Strategies can range from a single go-live date for all modules (big bang) or for a subset of modules (mini big bang) to phasing in by module or site. The decision of which strategy to deploy depends on a range of issues, such as complexities of size, processes, and operations. The study found that there are very clear differences in the implementation strategies by size of company. Over twothirds (69%) of implementations in large companies were phased in either by module or by site, whereas 72% of small companies used a big-bang or a mini big-bang approach. 3. Larger companies implement large-scale systems and employ more ERP functionality than small companies. The issue of which ERP package to implement is an important decision for any company, not only for functionality and ease of implementation but also for future upgrades and for using other specialized packages with the ERP system. There are clear differences across the different-sized companies on the packages they adopt. Large companies favored SAP more than small companies (42% versus 10%). Sixty-six percent of the large companies used just three different packages (SAP, Oracle, and Baan), compared to 35% of the small companies. 4. Large companies more frequently customize ERP software, while small companies more often adopt business processes within ERP systems. Customization refers to modifying the package through code rewrites, changes, or additions. Because of the integrative architecture of ERP systems, customizations can be prohibitively expensive. Almost all companies went through some form of customization. The degree of customization, however, varied significantly across the size of company. Results show that over 50% of the larger companies did either significant or major modifications, whereas most small companies (73%) made no or only minor modifications. The Mabert et al. study was conducted in 2000, and significant changes have taken place since then, primarily due to the increasing competitive pressures that SMEs face. Many SMEs have responded to

The “New” Users: SMEs and the Mittelstand Experience

Ta b l e 3 . 3 Motivational factors Motivational factor Gain competitive advantage Improve interactions with suppliers and customers Vendor support and ease of upgrades Link to global activities Product /process complexity Solve the Y2K problem

Number 18/18 17/18 16/18 7/18 2/18 2/18

these pressures by using IT as a key component of their competitive strategy. As a result, many firms have implemented a range of package enterprise systems and applications over the last few years. This study of the Mittelstand SMEs provides a unique perspective into the current status of implementing and using enterprise systems in small and medium manufacturing enterprises. The management in all 18 companies saw enterprise systems as a key component of their competitive strategy. Seventeen of the companies had already either implemented one or were in the process of implementing such a system. The one company that had not as yet implemented an enterprise system planned to do so within the next 12 months. The leading reasons for implementing these systems were very consistent across all companies and are outlined in Table 3.3. All of these factors (with the exception of “Vendor Support and Ease of Upgrades”) can be considered part of their competitive strategy, the primary motivation for implementing these systems. The “Vendor Support and Ease of Upgrades” factor is very similar to the replacement of legacy systems, often mentioned in the ERP literature. The difference in the nuances is important to understand with regard to SMEs. While the replacement of a multitude of legacy systems is important to many companies, the Mittelstand SMEs are looking for vendors with long-term sustainability. Vendors such as SAP, Oracle, and PeopleSoft are considered long-term players. Many of the vendors providing extensions of MRP II products are either consolidating with these large-scale ERP vendors or being driven out from the market altogether. Several SMEs in the sample had switched to new ERP systems from different vendors specifically for this reason.

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Ta b l e 3 . 4 Enterprise systems characteristics by company

Company

Single or multiple systems

Major ERP package or niche provider

Standard system versus customized system

Implementation approach

Company A Company B Company C Company D Company E Company F Company G Company H Company I Company J Company K

Multiple Multiple Multiple Multiple Single Single Multiple Multiple Single Multiple Multiple

Standard Standard Customized Customized Customized Standard Standard Standard Standard Customized Standard

Phased in Big bang Phased in Phased in Phased in Big bang Phased in Big bang Phased in Big bang Phased in

Company L Company M Company N Company O Company P Company Q Company R

Multiple Multiple Single Single Single Multiple Legacy

Big (SAP) Niche (Oxion) Internal Big (SAP) Big (SAP) Big (SAP) Big (SAP) Big (Baan) Big (SAP) Niche (Rohna) Niche (Moves Intentia) Niche (Brain) Niche (Ratioplan) Big (SAP) Big (SAP) Big (PeopleSoft) Big (SAP) Legacy

Standard Customized Standard Standard Standard Standard Legacy

Big bang Phased in Phased n Phased in Big bang Phased in Still TBD

The other key motivating factor is interacting with both suppliers and customers. These SMEs are increasingly looking at their entire supply chain for efficiencies, and they see their enterprise systems as a key component of this strategy. Many of the Mittelstand SMEs are becoming global players and face fierce competition from worldwide competitors, especially those in Asia. For example, several of the SMEs in the sample have international sales offices. Integrated enterprise systems make the order management and fulfillment process much more efficient, decreasing the time between order placement and manufacturing execution. These higher-priced manufacturers believe that the accurate information flow in their supply chain enhances their agility and provides a competitive edge. Several of the case study companies were also suppliers to larger firms who mandate ISO certification as well as a state-of-the-art information system as a part of vendor certification. For example, many of their customers have lean-manufacturing initiatives that require close coordination in the supply chain for just-in-time deliveries. Table 3.4 summarizes the details of the adoption by package breakdowns across all 18 companies. This table also includes other implementation information such as whether a single system or multiple

The “New” Users: SMEs and the Mittelstand Experience

Ta b l e 3 . 5 Configuration and implementation of systems Configuration of ERP systems Major package ERP system Niche ERP system Internally developed ERP system No ERP system Configuration of ERP systems

Number 11/18 5/18 1/18 1/18 Number

Single ERP system ERP system and other systems No ERP system (legacy system)

6/18 10/18 1/18

Customization of ERP systems

Number

Standard ERP system Customized ERP system No ERP system (legacy system)

12/18 5/18 1/18

Implementation approach Big-bang approach Phased-in approach

Number 6/18 11/18

systems have been implemented, the degree of customization, and the approach used to implement the system (big bang versus phased in). These items are summarized in Table 3.5. The case study data show that the penetration of ERP packages in German SMEs is very different from that reported for manufacturing SMEs in the United States by Mabert et al. (2003) and in Europe by Van Everdigen et al. (2000). Half of the SMEs in these case studies have implemented SAP systems as opposed to only 10% in the United States in 2000, the year of that survey, and under 10% in Europe in 1999, the year of that survey. Just over 61% of the companies in this study have implemented a large-scale ERP package versus about 35% in the United States in 2000 and approximately 20% in Europe in 1999. Van Everdigen et al. (2000) concluded that “best fit” with “current business practices” and package flexibility were the key criteria in package adoption decisions. Thus, in 1999 and 2000, companies looking for a good fit with their current business practices were more likely to adopt ERP systems that had evolved from their MRP and MRP II systems. In their survey of European

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SMEs, Van Everdigen et al. found that 30% of the ERP systems implemented came from “smaller” or “niche” vendors, and over half of the companies preferred their in-house developed, tailor-made information systems to the package ERP systems. The case studies conducted for this project seem to show that companies looking for a good fit with their business practices in 2004 are more likely to adopt a large-scale ERP system. Another area that appears to have changed over the last few years involves the strategies used for the implementation of enterprise systems. These strategies are one of the most important factors in assessing the impact of an ERP system on an organization. Strategies can range from a single go-live date for all modules (big bang) or for a subset of modules (mini big bang) to phasing in by module or site. While the big-bang approach usually results in the shortest implementation time, it is also the riskiest approach because it can threaten the entire stability of a company in case of any problems. The decision of which strategy to deploy depends on a range of issues, including complexities of geographical reach and the complexity of processes and operations. Our work shows that 61% of the Mittelstand SMEs implemented their ERP system using one of the phased-in approaches, while 28% used a big-bang approach. This is almost the reverse of the SMEs in the United States in 2000, whereas Mabert et al. reported that over 72% of the SMEs used one of the two big-bang approaches. Here again, the implementation strategies appear to have changed over the period from 2000 to 2004. SMEs also seem to have changed when it comes to customization of the systems. Because of the integrative architecture of ERP systems, customization can be prohibitively expensive. Mabert et al. determined that the degree of customization varies significantly depending on the size of the company. Larger companies customize more, with over 50% of them making either significant or major modifications. On the other hand, most small companies in the United States made only minor modifications, but the case studies show that 28% of the Mittelstand companies made major modifications to their system. Another key difference among companies is the configuration of the ERP systems implemented. In 2000, approximately 56% of small companies in the United States used a single ERP package, while only 28% of the large companies used this approach. One clear distinction

The “New” Users: SMEs and the Mittelstand Experience

driving this difference is the complexity of the organization. Large companies are more likely to have more global operations, more sites, and generally more complex operations that frequently reflect mergers and acquisitions of diverse operations. Even the ERP systems may not be able to provide the functionality required to manage these complex enterprises and disjointed operations. To remedy such shortcomings, companies are increasingly using either self-contained add-on ERP modules or extension systems, called “bolt-ons,” for functions such as demand planning, order tracking, warehouse management, supply chain management, customer relationship management, online collaboration, e-procurement, and online business-to-business transactions. Not every ERP system can support these specialized add-ons. Thus, their use becomes a key decision factor not only for which system is adopted but also for how the package is implemented, as well as future enhancements and upgrades. This is demonstrated with the Mittelstand companies, in which 56% of the SMEs use multiple systems, a reverse of what the U.S. companies reported in 2000. Summary and Conclusions

Mittelstand SMEs have been at the forefront of manufacturing in Germany for several decades. Over this period of time, they have been able to adjust to their competitive and environmental pressures by being nimble and innovative. Here, at the beginning of the 21st century, they are once again responding to competitive pressures, this time by leveraging their enterprise systems to stay ahead of the competition. They are doing some very unique things, including the following: • These SME managers see enterprise systems as a key component of their competitive strategy. A majority of firms either have implemented or are implementing a packaged ERP system. Increasingly, they are implementing large-scale package solutions. • While a few companies performed some type of ROI analysis to justify adopting these systems, almost all SMEs approached the decision simply as a strategic initiative or as a cost of doing business. For almost all of these companies, the issue was not

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whether to invest in an enterprise system, but at what point in time. • While companies had a number of criteria for selecting enterprise systems, a key selection criterion of the base ERP system was the long-term sustainability of vendors. Many SMEs selected large-scale system vendors such as SAP. Many have replaced their smaller “niche” packages with systems from companies such as SAP and Oracle. • The companies configured their systems very closely to the functionalities needed for their businesses. This was a key criterion, even if it meant more customization. The amount of enterprise system customization among these companies was greater than previously reported in the literature. This reflects a maturing of the systems and a better understanding by application programmers of how to integrate different functional modules. • Many of the firms either had implemented or were planning to implement specialized applications, such as order picking or transportation management, using their ERP system as a backbone. Functionality was a major issue with these applications. • Planning is a key component of the implementation process to reduce the risk of failure. The German SMEs spent much more time up front planning the implementation. The planning was often meticulous and very detailed. All major parts of the enterprise were involved in the planning process, including the type of system to implement. • Most chose to use a phased-in strategy— either phasing in modules one or a few at a time or phasing in the implementation by divisions, plants, business units, or locations. Fewer companies used the big-bang approach, a clear difference from the implementation practices of just a few years ago. • The companies are generally satisfied with their enterprise systems, even if complications occurred during their implementation. Although companies were not able to provide objective data to gauge implementation success, benefits that were

The “New” Users: SMEs and the Mittelstand Experience

frequently mentioned include improved communications with external partners, as well as data availability, quality, and transparency, which enabled faster and more informed decisions. This analysis of the Mittelstand companies suggests that there has been a significant shift from 2000 to the present in the implementation of enterprise systems across a range of issues. Competitive pressures and maturing sophistication in the implementation and application of enterprise systems have motivated the change. The data from the Mittelstand companies resemble that of large companies that have been more aggressive in customizing and pushing the envelope to maintain or gain an edge. Over the last five years, these SMEs have evolved to the point where their enterprise system practices are very similar to those of large companies. Clearly, they are using their enterprise systems as one of the cornerstones of their competitive strategy. This suggests that large-scale enterprise systems and related applications in the SME sector are here for the long haul.

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4

Enterprise Applications: Building Best-of-Breed Systems VINCENT A. MABERT AND CHARLES A. WAT TS

The 21st century represents a time of numerous and ever-increasing challenges faced by global businesses to be competitive and responsive. Expanded global competition is the norm rather than the exception, with an unprecedented number and variety of products available to satisfy consumer needs and desires. Additionally, enterprises are more global in scope, with operations in all corners of the world, and need to adapt to local customs and norms. The dynamics of faster product development, more customized manufacturing, and quicker distribution have benefited the consumer. At the same time these changes have led to new and very high consumer expectations and standards for companies to meet in the marketplace. To meet these new challenges, many firms around the world have invested heavily in information technology (IT), with a major focus on enterprise resource planning (ERP) systems. These new systems are designed to integrate the numerous business processes, such as order entry and production planning, across the entire enterprise. For example, by the late 1990s, companies responded to various business pressures by spending over $23 billion a year (Kirkpatrick, 1998) on enterprise applications, of which a major portion was ERP software. While ERP investments have been significant, firms have also made other significant IT commitments to systems such as demand management and warehouse management that interface with the ERP backbone. These other systems, provided by

Enterprise Applications: Building Best-of-Breed Systems

vendors like I2 and HK Systems, are designed to employ “best practices” and enhance functionality for the enterprise. Selecting enterprise computer systems is a bit like purchasing a new car. Should you go to the dealer for the “prepackaged model” that is sitting on the lot with standard options from the factory, or should you order a more customized version that has additional features you want? For example, some firms have implemented the SAP R /3 system and have enhanced its functionality by adding components such as demand planning from SAP’s Advanced Planner Optimizer (APO) product line. In other cases, one may even look to a third-party vendor such as I2 or Manugistics. This “best-of-breed” approach is being followed by a number of firms to meet desired requirements. If one is looking for the optimal solution in each area, the best-of-breed option usually provides richer functionality, satisfying more users. However, it comes with potentially extra costs and organizational integration. Contemporary management requires an exploration of the impact that these investments have on performance and a prescription of where firms should head in their efforts to build a best-of-breed system. This chapter presents an objective view of ERP systems and best-of-breed bolt-ons as management tools for coordinating and guiding the activities of an organization. Our observations are based on a survey conducted in January 2004. In the remaining sections, the authors provide an overview of the ERP promise and what many firms have done to expand their system’s capability. We then describe a recently completed study focusing on IT investments and their impact on enterprise performance. Based on this work, observations for enterprise IT investments are provided. ERP Promise

O’Leary (2000, p. 7) suggests that “enterprise resource planning systems provide firms with transaction processing models that are integrated with other activities of the firm, such as production planning and human resources. By implementing standard enterprise processes and a single database that spans the range of enterprise activities and locations, ERP systems provide integration across multiple locations and functional areas. ERP systems have led to improved decision-making capabilities

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that manifest themselves in a wide range of metrics, such as decreased inventory (raw materials, in-process and finished goods), personnel reductions, speeding up the financial close process, and others. Thus, ERP can be used to help firms create value. In particular, ERP facilitates value creation by changing the basic nature of organizations in a number of different ways.” O’Leary continues by indicating that the value creation is attained by the following capabilities: – ERP integrates firm activities. Enterprise resource planning processes are cross-functional, forcing the firm out of traditional, functional, and locational silos. In addition, an organization’s different business processes are often integrated with each other. Further, data that were formerly resident on different heterogeneous systems are now integrated into a single system. – ERPs employ use of “best practices.” Enterprise resource planning systems have integrated within them a thousand bestpractice business processes. Those best practices can be used to improve the way that firms do business. Choice and implementation of an ERP require implementation of such best practices. – ERP enables organizational standardization. Enterprise resource planning systems permit organizational standardization across different locations. As a result, locations with substandard processes can be brought in line with other, more efficient processes. Moreover, the firm can show a single image to the outside world. Rather than receiving different documents when a firm deals with different branches or plants, a single common view can be presented to the world, one that puts forth the best image. – ERP eliminates information asymmetrics. Enterprise resource planning systems put all the information into the same underlying database, eliminating many information asymmetries. This has a number of implications. First, it allows increased control. Second, it opens access to information to those who need it, ideally providing improved decision-making information. Third, information is lost as a bargaining chip because information is now available both up and down the organization. And fourth, it can “flatten” an organization; because information is widely

Enterprise Applications: Building Best-of-Breed Systems

available, there is no need for non-value-adding workers whose primary activity is to prepare information for upward or downward dissemination. – ERP provides online and real-time information. In legacy systems, much information is captured on paper and then passed to another part of the organization, where it is either repackaged (typically aggregated) or put into an electronic format. With ERP systems, information is gathered at the source and placed directly into the system. As a result, information is available online to others and in real time. – ERP allows simultaneous access to the same data for planning and control. Enterprise resource planning uses a single database, where most information is entered once and only once. Since the data is available online and in real time, virtually all organizational users have access to the same information for planning and control purposes. This can facilitate more consistent planning and control, in contrast to legacy systems. – ERP facilitates intra-organization communication and collaboration. Enterprise resource planning also facilitates intraorganizational (between different functions and locations) communication and collaboration. The existence of interlocking processes brings functions and locations into communication and forces collaboration. The standardization of processes also facilitates collaboration because there are fewer conflicts between the processes. Furthermore, the single database facilitates communication by providing each location and function with the information they need. – ERP facilitates inter-organization communication and collaboration. The ERP system provides the information backbone for communication and collaboration with other organizations. Increasingly, firms are opening up their databases to partners to facilitate procurement and other functions. In order for such an arrangement to work, there needs to be a single repository to which partners can go; ERP can be used to facilitate such exchanges.

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O’Leary is not the only one to sing the praises of ERP. When one talks to ERP software providers, reads various promotional brochures, or visits either vendor or other commercial ERP Websites, one gains the impression that ERP systems are the “Holy Grail” of information systems for enterprises. Some of the claims include the abilities to link the entire organization together seamlessly, improve productivity, provide instantaneous information, etc. However, there is another side to this story. Improving Functionality

While ERP systems provide very fast and reliable transaction processing, they lack critical decision support capabilities that would enable better decision making or optimization of certain processes. Thus, most companies do not view an ERP system as one that will provide their entire end-to-end solution. In fact, many companies install a set of other systems to fill gaps in capability. These specialized systems are commonly called “bolt-ons,” incorporating numerous features that are considered best practices. The bolt-on provider can be an ERP vendor, a specialty vendor, or an in-house department. These systems typically perform tasks such as data analysis, scheduling, and demand planning and are intended to enhance organizational performance and create additional enterprise value. In Figure 4.1, Bendoly, Soni, and Venkataramanan (2004) provide a convenient representation of the connectivity of the ERP backbone with a number of these support systems, such as data warehouse (DW) and data mining (DM), within the supply chain structure. One of the most popular bolt-ons today is an advanced planning system (APS) to improve material management. APS is implemented at some level in most major Fortune 1000 companies and in many small firms today. The major APS vendors, in spite of a down market, have made significant architectural and functional improvements in the last two years, adding additional capabilities such as improved collaboration work flows, pricing optimization and analytics, and Web services platforms to improve inter-enterprise access and ease of integration. For example, in the early 1990s, Eastman Chemical installed an ERP system from SAP to manage information throughout the supply chain, including bringing raw materials into the plants, operating the manufacturing processes within the plants, and fulfilling customer orders.

Enterprise Applications: Building Best-of-Breed Systems

VALUE CHAIN DOMAIN Transactional applicationsS (B2B/B2C e-commerce) DW Suppliers

SRM andS collaborative R&D

ENTERPRISE. DOMAIN DM CRM andS collaborative R&D

ERP

Customers

APS

SEM

SCM andS collaborative logistics Third parties

FIGURE

4.1

Interrelationship of ERP with Other Value Chain Elements

Source: Adapted from Bendoly et al. (2004)

The R /3 system was limited in capability; Eastman later deployed SAP’s Advanced Planner and Optimizer (APO) for functions that enabled intraand inter-company planning of the supply chain and for scheduling and monitoring various processes. For Eastman’s business, acquiring rapid, accurate external data for planning purposes was critical, and business performance has been enhanced with these additions in functionality (Ng, Yen, and Farhoomad, 2002). However, it is not clear all enterprises experience the same level of success with bolt-ons and support systems. Discussions with other firms and one report (Grackin and Gilmore, 2004) suggest less success from deployments. For example, Owens Corning had an excellent experience when it deployed an ERP system in the late 1990s, but the attempts to enhance performance by deploying an APS proved very frustrating. Another hot area is customer relationship management (CRM). The promise of CRM is seductive: identify your customers, differentiate them in terms of both their needs and their value to your company, and then interact with them in ways that improve cost efficiency and effectiveness. But in practice it can be perilous! For example, Monster.com rolled out a CRM program in 1998. The new system proved to be frighteningly

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slow; in fact, salespeople in the field found themselves unable to download customer information from the company’s databases onto their laptop. Every time they tried, their machine froze. Eventually, Monster.com was forced to rebuild the entire system. It lost millions of dollars along the way, not to mention the goodwill of both customers and employees (Rigby, Reichfield, and Schefter, 2002). While billions of dollars have been expended on IT systems such as ERP and bolt-ons, the question remains as to their value to the enterprise. From limited reports in editorials and the popular press (Cliffe, 1999; Deutsch, 1998), the success of ERP systems in achieving the stated objectives is mixed at best. For example, FoxMeyer (Diederich, 1998) claimed that an ERP implementation was the reason for its ultimate failure, while it was reported that Hershey Foods Corporation (Nelson and Ramstad, 1999) had a major distribution problem when it went live with a new ERP system. Others (Piturro, 1999; Kirkpatrick, 1998) emphasize that ERP is a key ingredient for gaining competitive advantage, streamlining the supply chain, contributing to lean manufacturing, and managing customer relationships. Thus, there are differing opinions on whether basic ERP systems are an asset that can deliver on the stated promises or a liability with significant cost consequences. The limited research that has occurred addresses the implementation process itself, focusing on project management issues such as onbudget and on-time performance for system implementation (Mabert, Soni, and Venkataramanan, 2003). The next section presents an objective view of ERP systems and bolt-ons as management tools for coordinating and guiding the activities of an organization based on a survey conducted in January 2004. Recent Experience

In an earlier study (Mabert, Soni, and Venkataramanan, 2000, p. 58) of ERP systems, the authors concluded that the “. . . data indicate that some of the anticipated benefits from ERP systems have not been realized.” This is an unexpected outcome, given the billions of dollars that have been expended on these types of systems. To gain better insight, a data collection effort was initiated to address this important issue and provide a more complete picture of both ERP and bolt-on systems’ value

Enterprise Applications: Building Best-of-Breed Systems

to a firm. The questionnaire focused on the following areas for data collection and evaluation: – What are the firm’s characteristics? – Is the firm currently an ERP user or non-ERP user? – What bolt-on systems are currently deployed? – What future bolt-on systems are contemplated? – What have been the productivity and revenue changes? While ERP systems can vary from one vendor to another, they tend to have the following basic features or modules: – Finance. This module tracks financial information such as revenue and cost data through various areas within the company. – Logistics. This module is often broken into several submodules that cover different logistics functions, such as transportation, inventory management, and warehouse management. – Manufacturing. This module tracks the flow of products through the manufacturing process, coordinating what is done to what part at what time. – Order fulfillment. This module monitors the entire order fulfillment cycle, keeping track of the progress the company has made in satisfying demand. – Human resources. This module handles all sorts of human resources tasks, such as scheduling workers. – Supplier management. This module monitors supplier performance and tracks the delivery of suppliers’ products. Since the ERP system utilizes a common platform, standardization of transaction processing and coordination across the enterprise is the key contribution. All vendors promote this point, and no attempt was made to differentiate between vendors or systems features. However, the addition of which bolt-ons to employ can vary widely between enterprises. In this study, the following bolt-on systems are of interest: – Demand forecasting and planning system. This bolt-on uses various demand sources, such as sales history and customers’

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plans, to estimate future demand, which will be used as an input to other planning systems. – Factory planning and scheduling system. This bolt-on provides best material schedules for the shop floor and factory planning that reduce lead times and decrease cost, generally using heuristics or simulation. Sometimes these systems are also known as manufacturing execution systems. – Inventory management system. This bolt-on monitors inventory levels and tracks the flow of stock and materials from acquisition to final disbursement. It attempts to have the right inventory at the right location at the right time, using various statistical procedures. – Supply network planner system. This bolt-on is used to design the supply network by determining the best facility and product locations to meet customer service requirements at minimum cost. – Call center management system. This bolt-on provides a system to manage customer and other telephone calls that are handled by an organization. They usually employ computer automation to evenly distribute phone traffic, provide database query features, and specify staffing schedules. – Customer relationship management (CRM). This bolt-on includes the methodologies, strategies, software, and Webbased capabilities that help an enterprise organize and manage customer relationships. Companies utilize this approach to gain a better understanding of their customers’ wants and needs. – E-procurement system. This bolt-on allows electronic procurement (e.g., electronic purchasing cards) and provides linkages from a firm’s purchasing system to its suppliers’ order systems. It may also include cataloging capabilities so that supplier’s products can be looked up when the need arises. – E-auction system. This bolt-on package assists in developing an RFQ and facilitates the use of auctions to procure materials and supplies through rapid online auctions. – Data warehouse system. This bolt-on is a critical component of an enterprise’s decision support system. It organizes and collects information into databases that can then be searched

Enterprise Applications: Building Best-of-Breed Systems

and mined for information. The collection of data often serves as the basis of crucial business decisions. – Product data management (PDM) system. This bolt-on allows a firm to manage attribute and documentary product data, as well as the relationships between them. These systems facilitate quicker design of new products design by providing a database of information on current products. – Quality management system. This bolt-on provides a set of tools for managing quality that can include statistical process control, failure mode effect analysis, key performance indicators, etc. for goods and services. This system helps improve quality of a firm’s products and processes. – Warehouse management system. This bolt-on manages receiving, disbursement, and inventory in a firm’s warehouses and distribution centers. It typically contains order entry, tracking, and order-picking features. – Traffic/transportation management system. This bolt-on manages the movement of goods from suppliers to production facilities, warehouses, distribution centers, and the customer. It frequently utilizes an interface with carrier services for vehicle dispatching. – Project management system. This bolt-on is specifically designed to manage the planning and execution of projects from initiation to the final deliverables. In addition to typical features such as timelines and work breakdown structures, they utilize various heuristics to perform resource load leveling. The survey questionnaire reported here was developed and mailed to a key informant at randomly selected manufacturing firms in the United States. The mailing list was developed from APICS’s active membership list. The questionnaire was pretested with a pilot study of managers from a representative set of firms. In early January 2004, the authors mailed 2000 questionnaires and personalized cover letters to individuals employed at randomly selected manufacturing firms in the United States. Six questionnaires were returned due to incomplete addresses. By mid-February, 191 surveys were returned, but four had insufficient information to be useful. Therefore,

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the 187 useful responses, a 9.3% return rate, are the basis for the observations discussed below. Respondents were not asked to provide company-identifying information, and postage-paid return envelopes were provided to maintain confidentiality. Basic Company Information

Table 4.1 presents some basic information concerning the respondents and their firms. As can be seen, there is a wide variety of firms and respondents. The table indicates that 74% of the respondents are at the manager level or above in their respective organizations. The “other” category includes staff planners and project leaders. The sample firms span a wide range in size as measured by revenue and employment. Close to a quarter of the firms have annual revenues exceeding $1 billion per year, while about 40% are under $100 million. In terms of workforce level, about 50% employed fewer than 500 people. The demographic data indicate that the respondents represent a wide cross-section of firms and industries, suggesting a representative group for assessing current and future effort to build and utilize best-of-breed systems. For the purposes of this chapter, we focus on the data from firms in the survey that had already implemented ERP systems. In Table 4.2, you can see that 76% of our sample had already implemented ERP systems. These firms have average revenues that are about six times higher Ta b l e 4 . 1 Respondent information Current position

Percentage

Other Manager Executive/owner

25.9 53.5 20.6

Revenues ($) 5 billion  X 1 billion  X  5 billion 500 million  X  1 billion 100 million  X  500 million 50 million  X  100 million 25 million  X  50 million X  25 million

Percentage 6.8 18.7 9.6 23.8 16.4 11.9 12.5

Employment 1,000  X 500  X  1,000 100  X  500 X  100 Industry Chemical /pharmaceutical Automotive Aerospace Electronics General manufacturing

Percentage 45.7 6.3 43.1 4.7 Percentage 16.1 7.0 5.3 9.1 62.6

Enterprise Applications: Building Best-of-Breed Systems

Ta b l e 4 . 2 ERP users versus nonusers

Percentage enterprises Average enterprise revenues Percentage employees above 1,000

With ERP system

Without ERP system

76.4% $3.0 billion 82.1%

22.6% $.45 billion 17.9%

than those who had not implemented ERP. Also, 82% of the firms that already used ERP have more than 1,000 employees. These firms are on leading edge in building and employing best-of-breed systems because they have the financial and technical resources necessary to attempt this complex task. Current Best-of-Breed Systems

Leading-edge firms build best-of-breed systems by improving the functionality of their system so that they can operate their entire value chain in real time. This allows any entity in the value chain to have the right information at the right time so that they can make the right decision. As stated earlier, in order for firms to operate at this high level of performance, they need greater functionality than off-the-shelf ERP systems provide. Fox and Holmes (1998) proposed a model for supply chain evolution called the supply chain compass (illustrated in Table 4.3) that is composed of Stage I (Fundamentals) through Stage V (Supply Chain Communities). A necessary prerequisite of firms at Stage III (Integrated Enterprise) is that they are using an ERP system as their key IT execution tool. In order to move to Stages IV and V, they must add more functionality across the value chain by adding other systems that link them more tightly with trading parties outside their enterprise. Since ERP adopters are poised to move to the next two stages on the supply chain compass, these firms were selected for closer study of their experience and future expectations. The evaluation started by looking at what type of bolt-on systems ERP adopters were currently employing and then examined their future plans. Table 4.4 shows the current percentage of bolt-on software systems for ERP firms. Three types of bolt-ons are being used by over half of the ERP adopters in our survey: inventory management, demand

63

Cost of quality

Quality and cost

Independent departments

Standard operating procedures

Predictable cost and rates

Automated

Spreadsheets

MRP and other homegrown applications

Business pain

Driving goal

Organizational focus

Process change

Metric

IT focus

Key planning tools

Key execution tools

The fundamentals

Stage I

MRP II

Point tools

Packaged

On-time, complete delivery

Cross-functional communications

Consolidated operations

Customer service

Unreliable order fulfillment

Stage II Cross-functional teams

ERP

Enterprise supply chain planning

Integrated

Total delivered cost

Cross-functional processes

Integrated supply chains (internal)

Profitable customer responsiveness

Cost of customer service

Integrated enterprise

Stage III

Ta b l e 4 . 3 The supply chain compass

Customer management systems

Point-of-sale supply chain planning

Inter-operable

Share of customer

Customer-specific processes

Integrated supply chains (external)

Profitable growth

Slow growth margin erosion

Stage IV Extended supply chain

Network-centric commerce

Synchronized supply chain planning

Networked

New worth

Reinvented processes

Rapidly reconfigurable

Market leadership

Nonpreferred supplier

Stage V Supply chain communities

Enterprise Applications: Building Best-of-Breed Systems

Ta b l e 4 . 4 Current bolt-on system usage ranked by percent of users Current bolt-on software Inventory management system Demand forecasting and planning system Factory planning and scheduling system (MES) Quality management system Data warehouse system Warehouse management system Product data management (PDM) system Project management system Call center management system Customer relationship management (CRM) system E-procurement system Supply network planner system Traffic management system E-auction system

Percent of users

Product improvement

Sales increase

73.0 66.7 65.1 46.0 44.4 41.3 40.5 29.4 21.4 21.4

3.75 3.79 3.70 3.60 3.82 4.06 3.90 3.83 4.00 3.37

3.33 3.40 3.40 3.29 3.02 3.33 3.20 3.22 3.81 3.59

19.8 19.0 19.0 11.1

3.68 3.63 3.87 3.71

2.96 3.81 3.08 3.29

forecasting and planning, and factory planning and scheduling systems. These results are most likely influenced by the fact that the survey was sent to APICS members, who are primarily employed by manufacturing firms. However, it is interesting to note that all of these systems are internally focused on the enterprise. It would appear that most of these firms are indeed at Stage III of the supply chain compass and that they are integrated enterprises. The focus of these three bolt-ons is to help improve the utilization of assets (e.g., inventories, plants, and equipment) within the firm. Enhanced inventory management capabilities allow a firm to keep investments in inventory to a minimum while satisfying customer service requirements. It improves the return on assets by reducing the assets required while increasing revenues. Demand planning helps a firm do a better job of making sure that they are making the right products and do not waste resources on products that are not demanded or required. Factory planning and scheduling helps reduce lead times, increases utilization, and improves customer service by making sure that the schedules support the inventory and demand plans that are derived from the other two systems. Returning to Table 4.4, the next five types of bolt-ons in terms of percentage of use (quality management to project management) are internally focused as well. Here again, one sees that firms are currently

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emphasizing systems that optimize the use of their current resources. The bottom six bolt-ons (in terms of the percentage of adopters) could all be characterized as systems that tend to be more external than the ones higher on the list. This suggests that firms want to have their internal systems in order before expending extensive effort on external facing systems. To estimate the impact of bolt-on systems’ on performance, data were collected on productivity improvements as a result of bolt-ons and on change in revenue over the last two years. In terms of productivity increases, the following five-point scale: 1 (decreased), 2 (no change), 3 (increased 1% to 5%), 4 (increased 6% to 10%), and 5 (increase more than 10%). Using the provided responses, the average productivity for the adopters of each bolt-on is shown in Table 4.3. This average gives an indication of the amount of productivity improvement as a result of a particular bolt-on. However, the results are also influenced by the fact that these firms may be using other bolt-ons as well. If one ranks the boltons based on the average productivity improvement, only two have an average of 4 or above: warehouse management systems and call center management systems. These bolt-ons gave an average improvement of 6% or greater. The top three adopted bolt-ons in Table 4.4 are, at best, ranked seventh in terms of productivity improvement. This indicates that these bolt-ons are probably the most mature and have much wider use in manufacturing firms. Given that there is a high percentage of adopters of these applications, there are likely to be some firms in the group that are not leading-edge users. These firms may have adopted the most popular applications, but they have not gained the same amount of benefit as leading competitors. When looking at the change in revenue over that last two years, again a five-point scale was used with the following descriptors: 1 (large decrease), 2 (moderate decrease), 3 (little change), 4 (moderate increase), and 5 (large increase). These results are shown in the fourth column of Table 4.4. The top two bolt-ons for companies with the highest average sales increases were call center management systems and supply network planner systems. Both of these systems are clearly externally focused, which explains their impact on increasing revenue. Customer relationship management systems are third, based on the average sales increases. These applications are also designed to improve customer information

Enterprise Applications: Building Best-of-Breed Systems

and should have a positive impact on sales. Therefore, these results indicate that many of the bolt-ons with external focus are in fact providing the impact they are intended to provide. Looking at bolt-ons in the top half on each performance measure, there are only three that appear in both lists: Call center management systems, warehouse management systems, and demand forecasting and planning systems. All of these bolt-ons involve some component of a customer interface. Call centers take customer calls, answer questions, or place orders. Promptly and accurately handling these issues ensures that resource use is driven by customer desires, which helps improve productivity. These types of systems also mean the difference between a satisfied customer who generates repeat sales and a disgruntled customer who takes his or her business elsewhere. The warehouse management system performs a similar function in making sure that the right products are at the right warehouse at the right time to satisfy customer requirements. Knowing a product’s location in the distribution system improves productivity by reducing wasted effort and the inventory required to maintain the same level of customer service. The last bolt-on that is in the top half of both lists is demand forecasting and planning. These systems make sure that the right items are in the demand plan for production and distribution. Accurate demand planning improves both customer service and productivity. These systems also have an external component because they frequently use direct input from the customer in terms of demand information. Firms who are using these types of bolt-ons may already be transitioning from an integrated enterprise in Stage III of the supply chain compass to a Stage IV firm that has an extended supply chain. This transition raises the question of where firms will focus their future efforts in building their best-of-breed systems. When looking at these performance measures, one can surmise that firms with the highest productivity or the highest sales growth be firms that have created a best-of-breed system. Table 4.5 shows bolt-ons that are being used by 50% or more of the firms with productivity increases of 10% or above. The six bolt-ons that would comprise these best-of-breed systems are all internally focused with the possible exceptions of two, demand forecasting and planning systems (discussed earlier) and warehouse management systems that are tied to customers through the distribution system. These firms appear to be clearly focused on Stage III of

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Ta b l e 4 . 5 Best of breed based on productivity Current bolt-on software Inventory management system Factory planning and scheduling system (MES) Demand forecasting and planning system Warehouse management system Data warehouse system Product data management (PDM) system

Percent of most productive 77.4 71.0 67.7 64.5 51.6 51.6

Ta b l e 4 . 6 Best of breed based on sales Current bolt-on software Demand forecasting and planning system Inventory management system Factory planning and scheduling system (MES) Quality management system Call center management system Warehouse management system Customer relationship management (CRM) system

Percent of best sales increase 90.9 81.8 81.8 72.7 54.5 45.5 45.5

the supply chain compass, using all of these bolt-ons to create a tightly integrated and successful enterprise. Thirty-one firms fell into the highest category for productivity improvement, and all of these firms were using at least one bolt-on, with 23 of those 31 firms using five or more bolt-ons to their ERP system. We can conclude that those firms are selecting and applying multiple bolt-ons to build their best-of-breed system. The set of bolt-ons being used by about 50% of the firms that were in the top sales growth category are given in Table 4.6. The top three are the same as those in the list based on productivity with one important difference: demand forecasting and planning was the highest on the list. This particular bolt-on is the most externally oriented of the top three, heavily oriented to using customer input in determining the demand plan. A fourth bolt-on that appears on both lists was the warehouse management system. The other three in the top seven are customer oriented: call center management systems and customer relationship management systems are clearly focused on the customer, and quality systems that are designed correctly use information from custom-

Enterprise Applications: Building Best-of-Breed Systems

ers as part of the improvement process. It appears that firms may want to use a different set of bolt-ons depending on whether they want to improve productivity or improve sales. Firms with the highest sales increases all use at least one bolt-on, and 8 out of the 11 use five or more bolt-ons. This result shows that whether you are interested in increased sales or increased productivity, selecting several bolt-ons to enhance your information system is one path to success. The only bolt-on not used by one of the firms with the highest sales increases was the e-procurement system. Obviously, using the four bolt-ons that appear on both lists would be a good starting point for building a best-of-breed system to enhance enterprise performance. Future Best-of-Breed Systems

Where are enterprises heading? Table 4.7 shows the bolt-ons that respondents say they are going to install in the future. When looking at future best-of-breed system plans, one sees a general change from an internal to an external focus. The top future bolt-on (factory planning and scheduling systems) is one of the top three currently being used. It is a critical foundation bolt-on that is still internally focused and that is helping to fine-tune the production process by improving execution on the shop floor. This package can be customer driven because it involves Ta b l e 4 . 7 Future plans for bolt-on systems ranked by percent Future bolt-on software Factory planning and scheduling system (MES) Customer relationship management (CRM) system E-procurement system Quality management system Demand forecasting and planning system Warehouse management system Supply network planner system Inventory management system Product data management (PDM) system Data warehouse system Call center management system Traffic management system Project management system E-auction system

Percent of users 21.4 19.8 19.0 15.9 15.1 15.1 15.1 14.3 8.7 5.6 5.6 4.8 4.0 3.2

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making sure that individual orders are completed as promised. The confounding factor about whether this system has an external focus depends on where the decoupling point for customer orders is located for firms using these systems. If the decoupling point is at the finished goods stage, then the firm is in a make-to-stock situation and the linkage to specific customer orders is not as strong. However, a company that decouples the orders further upstream in their process has a much tighter linkage with customers and is focusing on a more responsive approach to customer requirements. The more intriguing result is the ranking of the next two bolt-ons that are in these firms’ future plans: customer relationship management (CRM) and e-procurement systems. The purpose of these two bolt-ons is to provide better linkages to the extended supply chain. CRM improves the linkages to customers and enhances communication on the downstream side of a firm’s supply chain. E-procurement systems provide linkages to suppliers and strengthen communication on the upstream side of the supply chain. It appears that these firms are attempting to create an extended supply chain by obtaining better information on both the upstream and downstream supply chains. Based on the supply chain compass, this is the next evolutionary step in moving from an integrated enterprise to an extended supply chain. This chapter illustrates that firms that have already adopted ERP systems are trying to get more functionality by adding bolt-ons to create a best-of-breed system. The firms that are the top performers are the ones that have selected the appropriate five or more bolt-ons to enhance their productivity and sales. The data suggest that firms in the future will implement best-of-breed systems that are more externally oriented. These enterprise application systems will allow firms to have an extended supply chain and eventually lead to value chain resource planning, as discussed by Bendoly et al. (2004).

5

Getting More Results from Enterprise Systems THOMAS H. DAVENPORT, JEANNE G. HARRIS, AND SUSAN C ANTRELL

In the last decade, most large corporations and many government agencies undertook one of the most ambitious information systems projects in their histories: the implementation of packaged enterprise systems. Arguably the second most important technology of the last decade, enterprise systems may have been even more expensive for many firms than taking advantage of the Internet. And enterprise systems projects seem just as extensive as the Internet. Just as the idea of getting to “the end of the Internet” seems unlikely (and the subject of some humorous advertisements), no organization—to our knowledge—is completely finished with an enterprise systems (ES) implementation. Whether enterprise systems are a dream or a nightmare would make the subject of a good debate. Many observers have suggested that companies got caught up in the rush to fix Y2K problems and overinvested in ES. Why spend so much and take so long, critics argue, to implement commodity back-office software that could never confer a competitive advantage? Others (Davenport, 2000) argue that enterprise systems are a necessary foundation for all sorts of competitive initiatives, including e-commerce. These systems might be viewed as the answer to a CIO’s prayer, given that they work well, provide a high level of crossfunctional support, can automate virtually an entire business, and are global in scope.

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Research Approach Accenture’s Institute for Strategic Change conducted a quantitative analysis in 2002 of information obtained from surveys of 163 large businesses around the world with enterprise solutions already in place. In addition, researchers studied the experience of 28 organizations considered to be leading adopters of enterprise solutions in the communications and high-technology, financial services, government, products, and resources industries. Geographies represented were Australia, Europe, and the United States. In 2003, 180 additional interviews were conducted in the Asia-Pacific region, including mainland China, Hong Kong, Taiwan, India, Korea, Singapore, Malaysia, and Thailand. Complete results from those studies were published in Davenport, Harris, and Cantrell (2002) and Broeking (2004). Most of the results reported in this chapter are from the original study, with discussions relating to the Asia-Pacific study specifically identified.

FIGURE

5.1

Methodological Approach in Brief

Recent academic studies (Hitt, Wu, and Zhou, 2002; Anderson, Banker, and Ravindran, 2003) support the positive side of ES, suggesting that companies achieved substantial returns on their investments in ES in terms of both productivity and shareholder value. The specific means by which companies achieved value, however, have thus far been unknown. What types of business value did companies set out to achieve with enterprise systems, and at what types did they succeed? How long did it take? And for those organizations that achieved high levels of value, what were the key factors in their implementations that were correlated with the benefits? We set out to answer these kinds of questions in a large survey of organizations that had implemented ES (see Figure 5.1). Companies had big plans for enterprise systems benefits. Millions of dollars—not to mention years of organizational attention—were spent striving for a seamless flow of information and transaction processes across diverse business functions, business units, and geographic boundaries. Substantial benefits of multiple types were envisioned by organizations, including headcount reductions, more accurate business planning, and the ability to serve customers better, cheaper, and faster. In our study, however, the most likely benefits to actually be sought were less ambitious: better management decision making, which is difficult to measure, and better financial management (Figure 5.2).

Getting More Results from Enterprise Systems

At an overall level, only 4% of the companies in our study said they had achieved all the benefits they had targeted for their ES initiatives. Yet 78% said they had received at least half of the targeted value, and only 2% said they had gotten no value at all. In the Asia Pacific study, 93% of respondents said they had achieved business benefits. When asked about specific benefits, many firms noted that they received benefits in areas they had not targeted—in other words, they were pleasantly surprised. In terms of specifics, the most likely benefit to have been achieved was better financial management, perhaps in part because financial functionality was the first capability to be installed in our sample (Figure 5.3). Faster transactions and better decision making came next in the list of achieved benefits. These were also the top three benefits achieved in Asia Pacific organizations, although “faster information transactions” ranked

Better managerial decision makingS

I 50

Improved financial managementS

I 42

Improved customerS service and retentionS

I 32

Ease of expansion /S growth and increased flexibilityS

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Faster, more accurate transactionsS

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Headcount reductionS

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Cycle time reductionS

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Improved inventoryS and asset managementS

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Fewer physical resourcesS and improved logisticsS

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Increased revenue

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FIGURE

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10 20 30 40 50 60 Percent of organizations naming the benefitS as a first, second, or third priority to be achieved

Benefits Sought from Enterprise Systems

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Improved financial managementS

I 70

Faster, more accurate transactionsS

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Better managerial decision makingS

I 63

Improved inventory andS asset managementS

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Ease of expansion /S growth and increased flexibilityS

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Fewer physical resourcesS and improved logisticsS

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Cycle time reductionS

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Improved customerS service and retentionS

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Headcount reductionS

I 40

Increased revenue

I 36 0

FIGURE

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Benefits Achieved from Enterprise Systems

first there. These are certainly useful benefits, but they are also undeniably difficult to translate into financial returns. The most difficult (and financially rewarding) change objectives—such as headcount reduction and increased revenues—were at the bottom of the list. Firms might have achieved more value if they had worked harder on more measurable and financially quantifiable targets. Again, however, a comparison of Figures 5.2 and 5.3 indicates that firms often received benefit in areas where they did not target it. All of these benefits took time to be achieved (Figure 5.3). As we have noted, faster transactions and financial management benefits were among the first to be delivered, with a majority of companies reporting benefit in only one year. Only about 20% of the companies we surveyed, however, were able to achieve increased revenues or lower headcounts

Getting More Results from Enterprise Systems

within a year. Over 60% of surveyed firms had achieved some benefit in these categories four years after implementation. As a result of this time lag, we have concluded that time itself is a critical prerequisite for extracting value from enterprise systems. We and other prognosticators argued that firms should attempt to change their businesses and extract value as during implementation, but this apparently proved too difficult. Instead, most organizations installed ES with little change to their businesses and gradually found value as they became familiar with their systems. What exactly takes so long? Our interviews suggested that three factors were implicated: • Critical mass. Before an organization can use an ES to better integrate across processes and units, it has to have a critical mass of functionality installed. That takes a while for many companies, who put in the systems one module or business unit at a time. As one consumer goods CIO put it, “The biggest factor that contributed to benefit realization was getting critical mass, which leads to tight integration of business processes and real-time access to information globally.” • Infrastructure projects come first, and add less value. The earliest aspects of an ES implementation are back-office and transaction-oriented components, but they are necessary to provide a foundation for later front-office functions such as CRM and supply chain optimization. A chemical company CIO (in the eighth year of ES implementation) noted, “The emphasis this year will be on leveraging value from our applications. Benefits are greater in the follow-up projects than in getting the core infrastructure in place. We’re just now starting to figure out what they are.” • Getting to know the data. A big part of value derives from using ES data, and it apparently takes time to learn how to use it. As another consumer products executive described, “One challenge has been going from a lot of transactional data to good business information. Slowly but surely, people are doing their jobs in different ways. About six months after implementation, people start to understand what they can do with the data.”

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We also found that making substantial expenditures was a prerequisite for value: with enterprise systems, you have to spend money to save or make money. Nobody ever said that implementing an enterprise system was cheap. There was an interesting difference between our Asian study and the original study involving the rest of the world. We found that Asian companies implemented their ES, on average, two years later than their counterparts in the United States and Europe. The data point to the fact that they benefited from the experience of earlier implementations. Most notably, we found that Asian companies got more value faster. U.S. and European companies, many in a rush to implement before Y2K, generally focused more on the technical implementation of the system. Asian companies, in contrast, paid more attention to transforming their business processes and other complementary business changes designed to help them target and achieve desired benefits. Driving Enterprise Solutions Value

What steps should companies take to maximize the value of their ES investments? Our research identified three actions that organizations should consider: to integrate, optimize, and informate their businesses in relation to enterprise systems. Organizations that completed their enterprise infrastructure installations and continued to focus on these three value drivers realized the majority or all of the benefits they had targeted. These three actions, especially when taken together, can enable organizations to achieve value in the many forms we’ve listed. In addition, organizations that adopted these approaches earlier, as in our Asia Pacific study, achieved value earlier. Integrate

Integration is the single factor that is most closely correlated to achieving greater value from enterprise solutions. Just implementing enterprise solutions does not mean that an organization has successfully managed to integrate its information and processes to their full potential. We define integration as connecting information systems and bringing about common information and processes throughout an organization.

Getting More Results from Enterprise Systems

For most organizations, integration is an ongoing process that continues long after implementation of the core enterprise solutions functionality. Organizations must continue to integrate enterprise solutions from disparate best-of-breed vendors, as well as within existing legacy systems. Herman Miller, for example, has integrated its custom make-toorder system, an i2 supply chain application, with eight different instances of Baan ES, another ES from a different vendor, and legacy order management and distribution systems. Integrating with a company’s customers, suppliers, and business partners can also lead to dramatic improvements in operational efficiencies that can have a clear relationship to profitability. Eastman Chemical, for example, has achieved significant benefit by aggressively addressing the cultural, technical, and operational challenges of connecting supply chain systems directly to their trading partners. One approach is simply to consolidate applications. Consolidation can not only improve integration but significantly reduce the costs of enterprise solutions’ human and technical support. Some organizations, such as Microsoft, PolyOne, and Canada Post, choose to start with a single instance. Other organizations start with the assumption that multiple instances are necessary, only to realize later that consolidation makes sense. Mergers and acquisitions can also multiply the number of instances. At Dow Chemical, all acquisitions are integrated into Dow’s infrastructure, avoiding the kind of ad hoc approach that would normally prompt information inefficiencies. Additionally, the company has been able to eliminate redundant processes that required handoffs and data replication. From 1996 to 2000, for example, Dow cut costs by consolidating IT work previously done in hundreds of sites into four technology centers. Some organizations, such as the Texas Education Agency and a group of North Sea oil companies, even share a single ES and IT support in a shared service center model, thereby achieving economies of scale across firms and further driving down costs. Another approach is to integrate enterprise solutions package modules with other legacy systems. For this approach, organizations may employ enterprise application integration (EAI) tools to connect disparate applications together. The Defense Logistics Agency, for example, is using EAI tools to link their disparate applications, which include legacy applications and applications from SAP and Manugistics. Organizations such

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as Dow Chemical and Eastman Chemical are also experimenting with the use of emerging integration technologies like Web services. Optimize

We define “optimization” as the continuous refinement of business processes and their fit with an ES. The concept of reengineering business processes (Davenport, 1992; Hammer and Champy, 1993) led the IS implementation wave in the first place. While few organizations are interested in radical, clean-sheet-of-paper process designs, there is still a need to continuously refine and improve key business processes that are supported by an ES, such as financial management, supply chain management, and order management (Bendoly and Jacobs, 2004). In fact, process optimization has the second strongest relationship to value realization. Again, our research shows that few organizations were successful in “changing everything at once”; most found it difficult to institute enterprise solutions– enabled change before living with the new system for a while and learning about its capabilities. As John Chiazza, the VP of supply chain and the former CIO of Kodak, explains: In the early phases of implementing our ES, we thought a lot about process reengineering. As the complaints grew about the pace of conversion, however, and as we realized that we were ending up with too much custom code to support unique business processes, we kind of put our reengineering efforts on hold and just focused on getting the system in. And this is a good thing—the change in technology is so significant that it takes the user community a good 9 –12 months of living with the new system first before they can think about how they can improve their processes with the new system.

What can an organization do to optimize its enterprise solutions? Leading organizations that have succeeded in capitalizing on their enterprise solutions continuously examine and improve how the processes flow and fit with the system and how the system and processes support the needs of the business. One global consumer products company, for example, has implemented its enterprise solutions worldwide and now regularly examines the processes it supports. System deployment is highly centralized, but the process improvement program, while companywide, is implemented at the local level. Each operating unit or geography decides where to focus and how best to implement change.

Getting More Results from Enterprise Systems

Once an organization determines the process flows it desires, the organization often will need to modify the system to make sure the system fits the processes and the business that the processes support. Modification might involve some post-implementation customization to the system—usually through careful reconfiguration of the system through the setting of parameters or “switches.” In addition, better alignment between desired processes and the system itself can be achieved through the implementation of systems or modules that are specifically built to fit an organization’s given industry. Canada Post, for example, has a dedicated “SAP Center of Excellence” team that resides on the business, not the technical, side of the organization to evaluate proposals for changes or additions to its enterprise solutions. The group also evaluates functionality in new releases and encourages SAP to incorporate missing but needed industry-specific functionality such as a new postal service application that reconciles accounts among the world’s major post offices. Informate

Driven by the desire for accurate, consistent, complete, real-time information, executives are seeking efficient, transparent, and real-time decision-making capability. To realize this goal, organizations must “informate,” a term coined by Shoshana Zuboff (1988). Organizations “informate” when they use information to transform work. In terms of enterprise solutions, organizations informate by transforming enterprise solutions data into context-rich information and knowledge that supports the unique business analysis and decision-making needs of multiple workforces. The first step is to improve the availability and quality of enterprise solutions data by making sure it is timely, consistent, and accurate. As users become more familiar with the data available, their need for data often exceeds the standard reporting functionality that comes with enterprise solutions. Implementing data warehouses, ad hoc reporting functionality, and portals empowers employees to access and manipulate the data they need. Leading organizations, however, do not just give people access to data. They give access to the right data that are most applicable to the person and the problem at hand. In other words, they present the information in context, thereby empowering employees to better understand the implications of information and to act on it. Portals, for example, can

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help knowledge workers access and interpret enterprise solutions information relevant to specific tasks. Once robust reporting and data access are widely available, the next major challenge is providing the analytical capabilities that managers need to analyze, correctly interpret, and apply their ES data to management decision making. Executives say that this is a separate issue, one that goes beyond data access or performance management reporting. At Briggs and Stratton, for example, executives originally assumed that their new ES would address all their reporting needs. However, once they completed their installation, executives found that their operational data was overwhelming in quantity and yet insufficient for making many business decisions. Management concluded that ES-based operational data was merely a starting point to addressing their information and analytic needs. Another way companies informate is by implementing new enterprise solutions functionality, such as performance measurement applications, to obtain managerial information not otherwise captured by their systems. For example, executives at the Texas Education Agency attribute much of their success to the extension of their ES to include performance measurement. Using PeopleSoft’s balanced scorecard, they are able to track performance on a monthly basis. Their ES capabilities enable them to handle information requests quickly and analyze management information in new ways to generate insights into their operations. Managing for Value

Enterprise systems have delivered tremendous value to organizations. Most organizations, however, can still wring a significant amount of additional value from their systems. We have suggested that organizations integrate, optimize, and informate in order to achieve more value, but successful organizations also: • Invest the effort required to get a critical mass of implementation. Only organizations that have invested the time and resources necessary to extensively implement ES throughout their organizations will be able to capitalize on their promise of better integration and seamless information flows between functions, business units, and geographies (Figure 5.4).

Getting More Results from Enterprise Systems

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