14 Strategic Erp Extension and Use

S T R A T E G I C E R P

E X T E N S I O N A N D U S E

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Contents

1 Introduction: Realizing the Epic Dream of ERP 1E. Bendoly and F. R. Jacobs

PART I. ERP Rebirth and Advanced Viewpoints 11

2 Strategy as a Critical Factor in Applied ERP Success 13S. Abdinnour-Helm and C. Lengnick-Hall

3 The “New” Users: SMEs and the Mittelstand Experience 36T. Schoenherr, M. A. Venkataramanan, A. Soni,

V. A. Mabert, and D. Hilpert

4 Enterprise Applications: Building Best-of-Breed Systems 52V. A. Mabert and C. A. Watts

5 Getting More Results from Enterprise Systems 71T. H. Davenport, J. G. Harris, and S. Cantrell

PART II. Value Extensions Beyond the Enterprise 85

6 Agility Through Standardization: A CRM/ERP Application 87T. F. Gattiker, D. Chen, and D. L. Goodhue

7 ERP-Driven Replenishment Strategies in Make-to-Order Settings 97E. P. Robinson Jr. and F. Sahin

8 ERP as a Platform for Vendor Managed Inventory 108M. V. Tatikonda, C. V. Brown, and I. Vessey

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9 IT-Supported Productivity: Paradoxes and Resolution in R&D 130D. A. Joseph and J. Ettlie

10 ERP as a Resource for Inter-Organizational Value Creation 140T. E. Vollmann

PART III. Future Visibility and Accountability 153

11 Enabling ERP Through Auto-ID Technology 155E. W. Schuster, D. L. Brock, S. J. Allen, P. Kar,

and M. Dinning

12 Auditing the System in Use: Value Beyond the Baseline 172

J. Sarkis and R. P. Sundarraj

13 The Path of the Enlightened Manager: Prescriptions for ERP Evolution 191

L. L. David and E. Bendoly

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Contributors

Chief Editors

Dr. Elliot Bendoly is a faculty member in Decision and Information Analy-

sis 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 Indi-

ana University. Along with these specializations, his academic back-

ground 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 pro-

gramming curriculum. More recently, he has been involved with course-

work on IT supported service operations and supply chain management.

He has published in a number of academic journals, including the Jour-

nal of Applied Psychology, Journal of Operations Management, Journal

of Service Research, European Journal of Operational Research, Interna-

tional Journal of Operations and Production Management, Decision Sup-

port Systems, Information and Management, and Business Horizons. His

current research focuses on operational issues in IT utilization and orga-

nizational 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 sys-

tems, 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 aca-

demic and professional versions of this book are available). He is co-

author of a book titled Why ERP? A Primer on SAP Implementation

(widely used in college courses to introduce ERP concepts and the imple-

mentation 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 man-

agement and E-OPS. Over his 20 years of professional experience, he has

been a consultant to many companies. He is currently involved in a tech-

nology transfer project with Honeywell Aircraft Landing Systems that

deals with the development of a new aircraft brake disk using carbon-

composite technology. Professor Jacobs is a fellow of the Decision Sci-

ences 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 im-

provement, 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 Re-

search, International Journal of Production Research, International Jour-

nal of Physical Distribution and Logistics Management, Production and

Inventory Management Journal, and Journal of Engineering and Technol-

ogy Management. Dr. Abdinnour-Helm has consulted with different com-

panies on topics of technology and operations management. She is a mem-

ber of several professional organizations, including APICS, INFORMS,

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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 manufac-

turing environments. His educational background includes a bachelor of

science degree in mechanical engineering from the University of Wiscon-

sin, 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, in-

cluding MIT’s artificial intelligence lab, Massachusetts Eye and Ear Infir-

mary, DARPA, Celadon, Loral, BBN, and Draper Labs. Dr. Brock’s in-

terests include distributed systems control, Internet control, large system

simulation, robotics, and AI. He has several publications and four pat-

ents. 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 me-

chanical 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 specializa-

tion are management and design of information systems in large organi-

zations 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 re-

spected outlets such as Information Systems Management, MIS Quar-

terly, Information Systems Research, Journal of Management Informa-

tion Systems, and Organization Science.

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Susan Cantrell is a research fellow at the Accenture Institute for High Per-

formance Business. Her work is focused on business innovation, human

performance, and the intersection of organizational behavior and infor-

mation systems. Ms. Cantrell has a master’s degree in management infor-

mation systems and has prior experience in the investment and education

fields. Her work has been published in publications such as Industry Stan-

dard, 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 Uni-

versity 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 Tech-

nology and Management at Babson College. He is a widely published au-

thor 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 Busi-

ness School Press), which describes how organizations modify and im-

plement new management ideas to improve their performance. Prior to

this, Dr. Davenport wrote, coauthored, or edited nine other books, in-

cluding 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

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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 man-

agement with a BS in mathematics and is certified in data processing

(CDP). Ms. David is currently a business consultant with SSA Global, re-

sponsible 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 Engineer-

ing 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 en-

gineering 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 Pub-

lic Accountant.

Dr. John E. Ettlie is the Malelon L. and Richard N. Rosett Professor of Busi-

ness Administration and Director of the Technology Management Center

at the Rochester Institute of Technology. He earned his Ph.D. at North-

western University in 1975 and has held appointments since then at the

University of Illinois Chicago, De Paul University, the Industrial Tech-

nology 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 Manage-

ment and Production and Operations Management. He has authored six

books, including the second edition of his textbook titled Managing In-

novation to be published by Elsevier (expected summer 2005).

Dr. Thomas F. Gattiker, CFPIM, is Assistant Professor of Operations Man-

agement at Miami University in Oxford, Ohio, and is an affiliate of the in-

terdisciplinary Engineering Management Program. He has published in

Information and Management, Production and Inventory Management

Journal, International Journal of Production Research, Quality Manage-

ment Journal, and The Decision Sciences Journal of Innovative Educa-

tion. 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 re-

cently 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 Uni-

versity of Georgia’s Terry College of Business. He has published in Man-

agement 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 indi-

vidual performance, and the management of data and other IS infra-

structures and resources. In particular, he is currently focusing on iden-

tifying 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 Direc-

tor of Research (Chicago) at the Accenture Institute for High Performance

Business. She has a master’s degree in information science from the Uni-

versity of Illinois and is currently conducting research on the next gener-

ation of enterprise solutions and the economics of IT innovation. Her past

research topics include improving managerial performance, knowledge

management, business intelligence, building analytic capabilities, cus-

tomer relationship management, customer-centric strategies, mobile per-

sonalization, and realizing value from enterprise solutions; she also speaks

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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 interna-

tional 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 biotech-

nology and economics and holds a Ph.D. in pharmacology and toxicol-

ogy. 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 cur-

rent research interest is in the comparison of strategic approaches of SME

on an international background. Professor Hilpert also serves the Euro-

pean Commission, DG XII, as an advisor and is the head of the ESB Ex-

ecutive 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 in-

formation systems with minors in computer science and organizational

behavior (change management), an MBA from SUNY at Buffalo, a mas-

ter’s degree in economics from SUNY at Albany, and a bachelor’s degree

in commerce from Niagara University. Besides teaching at RIT, Dr. Jo-

seph 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 de-

velopment process improvement, workflow analysis and design, and inte-

grated business systems, particularly those implemented using SAP prod-

ucts. He is the author of 18 articles and commercial software products.

Professor Joseph holds certification in use of the ASAP SAP Implementa-

tion Methodology.

Pinaki Kar is currently an independent consultant working in the pharma-

ceutical 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 deci-

sion 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, Kan-

pur, 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 con-

sulting, executive education, and management experience in both private

industry and higher education administration. Articles by Dr. Lengnick-

Hall have been published in numerous journals, such as the Academy of

Management Review, Academy of Management Journal, Strategic Man-

agement Journal, Journal of Management, European Journal of Opera-

tions 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 re-

cent being Human Resource Management in the Knowledge Economy:

New Challenges, New Roles, New Capabilities published by Berrett-

Koehler in 2003. Dr. Lengnick-Hall has also contributed chapters to sev-

eral other books. Her current research interests include strategic human

resource management, orchestrating internal knowledge markets, achiev-

ing competitive superiority in high-velocity environments, and using in-

tangible resources to achieve competitive advantage.

Dr. Vincent A. Mabert is the John and Esther Reese Professor and Profes-

sor of Operations Management in the Department of Operations and De-

cision 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 de-

velopment, 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. mil-

itary. He has been active and held officer positions in a number of profes-

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sional societies, including industrial engineering, INFORMS, APICS, and

decision sciences. Professor Mabert is vice president of the Harvey Foun-

dation and a fellow of the Decision Sciences Institute.

Dr. E. Powell Robinson Jr. is an associate professor of supply chain manage-

ment 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 fac-

ulty member at Indiana University. His primary research interests are in

the design of production and distribution networks, multilocation inven-

tory control, supply chain strategy, and information technology applica-

tions in supply chain management. His publications are in Decision Sci-

ences, 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 manage-

ment, inventory planning and control, and information technology appli-

cations 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 oper-

ations 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 Euro-

pean School of Business, Germany. Mr. Schoenherr’s current research in-

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terests include supply chain management, electronic procurement and re-

verse 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 large-

scale analysis of data. His interests are in the application of models to lo-

gistical and planning problems experienced in industry. He has a bache-

lor’s of science in food technology from Ohio State University and a

master’s in public administration with an emphasis in management sci-

ence from Gannon University. Mr. Schuster also attended the executive

development program for physical distribution managers at the Univer-

sity 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 appli-

cations, technology, e-business, and decision support systems. His re-

search interests are in enterprise technologies and decision support sys-

tems. His research has appeared in Management Science, Naval Logistics

Research, Omega, IIE Transactions, and European Journal of Opera-

tional Research.

Dr. R. P. Sundarraj is currently an Associate Professor of Information Sys-

tems at the University of Waterloo. He obtained his bachelor’s in electri-

cal engineering from the University of Madras, India, and his M.S. and

Ph.D. in management and computer sciences from the University of Ten-

nessee, 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 Mathemat-

ical Software, and European Journal of Operational Research. In addi-

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tion, he has provided e-commerce solutions for marketing and inventory-

management problems arising in Fortune-100 companies.

Dr. Mohan V. Tatikonda is an Associate Professor of Operations Manage-

ment 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 Opera-

tions Management Society. Professor Tatikonda’s research on new prod-

uct development and the supply chain has been published in journals such

as Management Science and Journal of Operations Management. He con-

tributed 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 Tech-

nologies 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, combinato-

rial 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 investi-

gators 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 Univer-

sity 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, Informa-

tion and Management, Decision Sciences, IEEE Transactions on Soft-

ware Engineering, IEEE Transactions on Systems, Man and Cybernetics,

IEEE Software, Information Technology and Management Journal, Jour-

nal 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 Man-

agement 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 informa-

tion 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 certi-

fied at the Fellow Level (CFPIM) by APICS. Professor Vollmann’s research

and consulting have primarily focused on operations management, man-

ufacturing auditing and improvement, manufacturing planning and con-

trol systems, manufacturing performance measurement systems, bench-

marking, 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.

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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 pub-

lished research that appeared in Journal of Operations Management, In-

ternational Journal of Purchasing and Materials Management, Manage-

ment Science, Production and Inventory Management, International

Journal of Operations and Production Management, International Jour-

nal of Production Research, and Operations Management Review. He

conducts research and consults in the areas of supplier development, pur-

chasing and materials management, supply chain management, ware-

house location and rationalization, scheduling in service and manufac-

turing organizations, and the Theory of Constraint thinking process. He

was president of the APICS Toledo Chapter and is currently on the na-

tional steering committee for the Small Manufacturing Specific Industry

Group.

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Debates over the value provided by ERP architectures have existed

since the inception of the enterprise-system concept. Though questions re-

garding 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, enter-

prise resource planning developers have survived the Internet bubble and

are being viewed in a very different light these days. More than ever be-

fore, ERP systems are being viewed as the central binding mechanisms be-

hind 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 under-

standing of current use and of apparent gaps between expectations and

capabilities is a necessary precursor to future extensions of resource plan-

ning 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.

1 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.

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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 man-

agement 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 aug-

ment 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. How-

ever, since such use necessarily involves human actors at some level, in-

corporating the question of use into studies of operational performance

requires a willingness by operations management researchers and practi-

tioners to consider relatively microlevel mechanisms and subsequently ex-

tend inferences based on these mechanisms to higher-level phenomena.

Since mechanisms involving individual ERP users impact phenomena mea-

surable at the business unit level, this also requires a willingness to con-

sider 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!


Data warehousing Data mining

Strategic enterprise mgmt Advanced planning & scheduling

SRM andScollaborative R&D

Transactional applicationsS(B2B/B2C e-commerce)

SCM andScollaborative logistics

ERP=CRM andS

collaborative R&D

FIGURE 1.1 The Enabling Position of ERP ArchitecturesSource: Adapted from Bendoly et al. (2004)

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Under the Microscope

To assist in groundbreaking efforts to contribute new knowledge

in the ERP domain, several frameworks for guiding operations manage-

ment research on the topic have been established. For example, the

enabling capability of ERP can be described both in terms of the func-

tionality of ERP systems and in terms of the implementation processes

that allow their capabilities to be realized. The organizational and opera-

tional 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 frame-

works 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” (imple-

mentation) 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 effective-

ness of any subset of these benefits, for whatever reason, represents a

further means of distinguishing the capabilities of firms, building on idio-

syncratic 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, further-

more, planning or prescribing future changes aimed at supporting strate-

gic objectives. In the end, it is these same enabled strategic gains that have

been the most elusive to managers and generally absent from considera-

tion 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.

Introduction: Realizing the Epic Dream of ERP 3

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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 develop-

ments 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


Ta b l e 1 . 1

ERP product versus process benefits

Example “product” effects Example “process” effects

Variability Common DB. Elimination Rationalization of numberreduction of redundancy and potential of business procedures.

for multisystem data Less uncertainty as to how aconflicts transaction will be executed

Standardized interfaces. Training/education of users.Reduction in variance in Reduced variation inhuman-computer and interpretations of corporatecomputer-computer goals, operational priorities,processing time and transactional procedures

Bottleneck Common DB. Tracking of Rationalization of number ofreduction processing times and business procedures. Fewer

simplified identification of processes make thepotential enterprise-wide identification of bottleneckbottlenecks sources easier, and allow

for smoother reactivecapacity adjustments

Standardized interfaces. Training/education of users.Significant reduction of time More workers have therequired for transactions, in ability to recognize some cases eliminating bottlenecksbottlenecks

Waste Common DB. Monitoring of Rationalization of numberreduction specific forms of waste, and of business procedures.

prioritization of waste by Elimination of unnecessary,enterprise-wide cost implications redundant or waste-generating

business subprocesses

Standardized interfaces. Training/education of users.Allowing easier comparability More workers have theof interdepartmental sources of ability to recognize wastewaste and hastening treatment and future waste-generating

processes

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

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issues regarding the existing functional capabilities of ERP systems and the

underutilization of these existing capabilities by firms. We also hope to il-

luminate the potential for extensions of the capabilities of these systems to

support both intra-organizational and inter-organizational resource man-

agement 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 View-

points), contributing authors discuss the new frontiers of use in the ERP

realm that accompany the growing sentiment that resource planning sys-

tems 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 implementa-

tions. 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 funda-

mental strategic orientation of the firm. If such vision and clarity describes


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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 distri-

bution 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 pro-

vides an excellent segue into the following section, which provides spe-

cific 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,


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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 par-

ticularly 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 ar-

chitecture. The authors recommend further emphasis (as already sug-

gested 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 coordi-

nated 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 architec-

ture. 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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design and planning activities that support competitive gains in innova-

tiveness across supply chains. The first of these chapters (Joseph and

Ettlie) discusses the value potential of both R&D collaborative technolo-

gies 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 real-

ization 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 pre-

sent the thoughts of researchers regarding the safeguards required to en-

sure the maintenance of strategic capabilities and subsequently the com-

petitive 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


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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 technol-

ogy not only from a business case perspective but also from the perspec-

tive 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 gar-

nering strategic value from ERP in the future.


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01-S3385 6/10/05 8:20 AM Page 10

I ERP Rebirth and Advanced Viewpoints

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02-S3385 6/10/05 8:20 AM Page 12

2 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 suppli-

ers (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

02-S3385 6/10/05 8:20 AM Page 13

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, ven-

dors, 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 bal-

ances 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 compe-

tition in the industry. While these generic strategy types were certainly

standard ways to define strategy in the mid-1980s, the strategic manage-

ment field has moved far beyond these categorizations.

14 ERP Rebirth and Advanced Viewpoints

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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 para-

digm asserts that firm performance is determined by the structure of the

industry in which it competes. In other words, incumbent firms in indus-

tries 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 similari-

ties 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 strat-

egy 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) typol-

ogy of defenders, prospectors, and analyzers and Porter’s (1985) cost lead-

ers, 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 perfor-

mance can be attributed to the Porter strategies after accounting for other

important factors that are known to affect performance outcomes. Con-

tingency 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.

Strategy as a Critical Factor in Applied ERP Success 15

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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 be-

tween these more recent strategy perspectives and the structure-conduct-

performance paradigm is the expectation that strategy and competitive

advantage are derived by looking inside the firm to capitalize on its valu-

able, 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 aggre-

gated 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 com-

petes primarily on technological innovation. Since ERP is an enterprise-

wide 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 busi-

ness 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 capa-

bilities. 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.


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Valuable resources are those that enable an organization to exploit

opportunities or neutralize threats. For example, information technolo-

gies that allow a firm to effectively manage a build-to-order manufactur-

ing 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 compet-

itive parity over time. Resources that are path dependent (developed

through a series of cumulative, small decisions over time, such as devel-

oping a firm’s unique capacity for innovation), socially complex (depend-

ing 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 innova-

tion and efficiency) are particularly difficult to imitate. Exploitable

resources are those that a firm is able to use effectively because they com-

plement the structure, values, practices, and operations of the organiza-

tion. 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 hierarchi-

cal 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 orga-

nizational 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 heteroge-

neous 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 com-

petitive 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). How-

ever, 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 valu-

able because they enable firms to accurately assess and tightly coordinate

production capabilities and to develop responsive relationships with cus-

tomers based on reliable and precise information (Dillon, 1999). More-

over, 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


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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 organiza-

tions, encompassing radical shifts in organization design and interper-

sonal 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, there-

fore, 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 neces-

sary 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 individ-

ual 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.


02-S3385 6/10/05 8:20 AM Page 19

How can ERP be used to promote the development of strategically

important intangible assets? First, the connections encoded in ERP soft-

ware 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 relation-

ships 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 meet-

ings, cross-functional task forces, and similar relationship-building activi-

ties 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 dysfunc-

tional 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 perfor-

mance. 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


02-S3385 6/10/05 8:20 AM Page 20

can be translated into opportunities for learning and continuous improve-

ment 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 recog-

nize 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-go-

live survey. The majority of the respondents came from manufacturing

operations and support functions and had been at the company for more

than 16 years.


02-S3385 6/10/05 8:20 AM Page 21

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




02-S3385 6/10/05 8:20 AM Page 22

• 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.


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.


Fre

quen

cy

1

More trouble than worth Essential

More trouble than worth Essential

2 3 4 5 6 7

Pre–Go Live

Fre

quen

cy

1 2 3 4 5 6 7

Post–Go Live

200

150

100

50

0

200

150

100

50

0

FIGURE 2.1 Switch from Legacy to ERP

02-S3385 6/10/05 8:20 AM Page 23




than it was worth.




than it was worth.


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 manu-

facturing operations and support functions, 44% felt that the

switch was essential, whereas 32% felt that the switch was


• Of the respondents who indicated that they worked in final

assembly operations and support functions, 30% felt that the



• 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









02-S3385 6/10/05 8:20 AM Page 24


felt that the switch was essential, whereas 80% felt that the

switch was more trouble than it was worth.


survey, 38% felt that the switch was essential, whereas 50%



following:


for 5 years or less, 39% felt that the switch was essential,


worth.




than it was worth.




than it was worth.


for 16 or more years, 19% felt that the switch was essential,


worth.


following:










02-S3385 6/10/05 8:20 AM Page 25


areas, 41% felt that the switch was essential, whereas 44%


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



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.






felt that there was a high likelihood that the benefits would

exceed the costs, whereas 38% felt that there was a low likeli-

hood that the benefits would exceed the costs.


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.


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



02-S3385 6/10/05 8:20 AM Page 26


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.










Fre

quen

cy

1

Low High

2 3 4 5 6 7

Pre–Go Live

Fre

quen

cy

1

Low High

2 3 4 5 6 7

Post–Go Live

250

200

150

100

50

0

250

200

150

100

50

0

FIGURE 2.2 Benefits Versus Cost of ERP

02-S3385 6/10/05 8:20 AM Page 27



• 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



following:


facturing operations and support functions, 33% felt that





assembly operations and support functions, 22% felt that





areas, 40% felt that there was a high likelihood that the

benefits would exceed the costs, whereas 34% felt that there


Post-Go-Live-Results



the benefits exceeded the costs, whereas 55% felt that the ben-

efits had not exceeded the costs.


the benefits exceeded the costs, whereas 65% felt that the ben-

efits had not exceeded the costs.


felt that the benefits exceeded the costs, whereas 64% felt that

the benefits had not exceeded the costs.


02-S3385 6/10/05 8:20 AM Page 28

• Of the professionals and engineers who responded to the sur-

vey, 27% felt that the benefits exceeded the costs, whereas

53% felt that the benefits had not exceeded the costs.


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.


for a period of 6 to 10 years, 23% felt that the benefits ex-

ceeded the costs, whereas 61% felt that the benefits had not

exceeded the costs.


for a period of 11 to 15 years 17% felt that the benefits ex-

ceeded the costs, whereas 66% felt that the benefits had not

exceeded the costs.


for 16 or more years, 17% felt that the benefits exceeded the

costs, whereas 70% felt that the benefits had not exceeded the

costs.


following:



benefits exceeded the costs, whereas 62% felt that the benefits

had not exceeded the costs.



benefits exceeded the costs, whereas 59% felt that the benefits

had not exceeded the costs.


areas, 25% felt that the benefits exceeded the costs, whereas

51% felt that the benefits had not exceeded the costs.


02-S3385 6/10/05 8:20 AM Page 29

Metric 3: Usage of ERP

Employees were asked to indicate the extent to which they be-

lieved 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 man-

agement 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 manage-

ment 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.


02-S3385 6/10/05 8:20 AM Page 30

HR administrationSS

Manufacturing/S

industrial engineeringSS

ProcurementS

S

Warehouse managementSS

Tool planning manufacture/SmaintenanceS

SProduction managementS

for assemblySS

Production managementSfor making partsS

S

Quality assuranceSS

Workaround adjustmentsS

S

Shop floor controlS

S

Capacity managementS

S

Operations schedulingS

S

MRP management and controlS

S

Sales and operations planningS

S

MeasuringS

(organization) performanceSS

Financial and cost control

0 10 20 30 40 50

Percent

60 70 80 90 100

Low Medium High Don’t know

12 10 39 38

10 11 46 33

7 9 56 28

8 9 57 26

10 11 57 22

9 10 58 24

9 10 58 23

13 12 46 29

16 14 35 35

9 11 57 22

8 11 51 30

6 9 63 22

5 8 60 27

7 9 56 28

7 14 51 28

5 8 55 32

FIGURE 2.3 Expected Usage of ERP, Pre–Go Live

02-S3385 6/10/05 8:20 AM Page 31

HR administrationSS

Manufacturing/S

industrial engineeringSS

ProcurementS

S

Warehouse managementSS

Tool planning manufacture/SmaintenanceS

SProduction managementS

for assemblySS

Production managementS for making partsS

S

Quality assuranceSS

Workaround adjustmentsS

S

Shop floor controlS

S

Capacity managementS

S

Operations schedulingS

S

MRP management and controlS

S

Sales and operations planningS

S

MeasuringS

(organization) performanceSS

Financial and cost control

0 10 20 30 40 50

Percent

60 70 80 90 100

Low Medium High Don’t know

11 9 16 64

17 13 23 46

16 10 39 35

21 10 39 31

18 13 33 36

22 14 36 29

23 14 36 26

20 15 33 32

24 15 20 41

24 13 36 28

19 10 29 42

19 11 41 29

16 12 43 30

13 10 29 48

19 15 31 36

13 13 30 44

FIGURE 2.4 Perceived Actual Usage of ERP, Post–Go Live

02-S3385 6/10/05 8:20 AM Page 32

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, intel-

lectual 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 distri-

bution 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 useful-

ness 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 appli-

cation) indicated that they did not know how ERP was to be used. The


02-S3385 6/10/05 8:20 AM Page 33

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 associ-

ated 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 possi-

bility 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 characteris-

tics and that support long-term strategic goals can certainly foster greater


02-S3385 6/10/05 8:20 AM Page 34

support and thus engender strategic benefit indirectly. Second, the long-

term competitive value from ERP comes from its ability to generate

knowledge that a firm can act on to change its business practices, intro-

duce 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. VENKATARAMANAN, 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 in-

vestments 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 counter-

ing 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 manu-

facturing, efficient supply chain operations, and outsourcing of noncore

03-S3385 6/10/05 8:20 AM Page 36

components to counter the competition. Developing modular product

designs, employing cellular production techniques, and utilizing pull-

manufacturing logic have allowed firms to keep costs competitive and op-

erations 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 mate-

rial 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 manage-

ment (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 imple-

mentation experiences are well documented in trade and academic jour-

nals. Publications have chronicled both high-profile failures and extensive

difficulties at companies such as FoxMeyer and Hershey Food Corpora-

tion (Deutsch, 1998; Nelson and Ramstad, 1999) and model implemen-

tations (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

The “New” Users: SMEs and the Mittelstand Experience 37

03-S3385 6/10/05 8:20 AM Page 37

BPICS) also started to transform their packages to ERP systems by pro-

viding more integrated functionalities such as accounting, order entry,

and warehouse management. These new offerings, aimed at the SME mar-

ket, 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 re-

port 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


03-S3385 6/10/05 8:20 AM Page 38

which are in manufacturing, tend to focus on highly customized and

specialized products and services that are used in commercial applica-

tions, such as machine controls and precision laboratory scales. Concen-

trating on customized products and services also implies that they cannot

take advantage of the economies of scale associated with mass produc-

tion. 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 vo-

cational training places in Germany. This leads to a very loyal and stable

workforce. Labor turnover rates are often very low in Mittelstand com-

panies, 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 manu-

facturing, powered by Mittelstand companies, has been very competitive,

countering threats by using various strategies in manufacturing and in-

formation 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 in-

formation 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 tech-

nology have been very significant in recent years.


03-S3385 6/10/05 8:20 AM Page 39

These characteristics of the German Mittelstand companies illus-

trate their uniqueness. Clearly, they have been able to compete very effec-

tively, 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 manufactur-

ing, 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 cho-

sen 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 Mittel-

stand, 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 ma-

chines, 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 exclu-

sively 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.


03-S3385 6/10/05 8:20 AM Page 40

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 under-

standable 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 inter-

view 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


Ta b l e 3 . 1

Characteristics of the case study companies

Size RevenueCompany Industry type (# employees) (million €)

Company A Scales, food processing equipment 1,000 378Company B Industrial mixers and grinders 600 120Company C Textiles 900 64Company D Food technology, home appliances 770 90Company E Material handling (forklifts) 593 100Company F Furniture 1,200 140Company G Machines for woodworking, 1,100 320

tooling, grindingCompany H Elevators, medical technology, gear 700� 80–85

technologyCompany I Heat and cooling technology 2,000 100Company J Waste management 220 Not availableCompany K Springs 208 25Company L Parts for automobile industry 100 24Company M Industrial precision scales 235 60Company N Industrial knitting machines 600 200Company O Gaskets for the automobile industry 3,000 380Company P Medical surgery equipment 480 70Company Q Parts for the automobile industry 500 275Company R Communications test and 350 100

management solutions

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tape-recorded and transcribed in English. While the format was semi-

structured 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


Ta b l e 3 . 2

Shop and product characteristics

Flow of materials Number

Job shop 10/18Flow shop 5/18Mixture shop 3/18

Products Number

Standard products 8/18Custom products 4/18Standard and custom 6/18

Order makeup Number

Made-to-order 10/18Made-to-stock 2/18Mixed 6/18

03-S3385 6/10/05 8:20 AM Page 42

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 pro-

vided 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 im-

plement 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 compa-

nies, the top three reasons for adopting ERP systems were gain-

ing a strategic advantage, simplifying and standardizing pro-

cesses, 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 sys-

tems, 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


03-S3385 6/10/05 8:20 AM Page 43

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 opera-

tions. The study found that there are very clear differences in

the implementation strategies by size of company. Over two-

thirds (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 imple-

mentation 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 custom-

ization, however, varied significantly across the size of com-

pany. 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


03-S3385 6/10/05 8:20 AM Page 44

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 implement-

ing 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 lead-

ing 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 consid-

ered 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.


Ta b l e 3 . 3

Motivational factors

Motivational factor Number

Gain competitive advantage 18/18Improve interactions with suppliers and customers 17/18Vendor support and ease of upgrades 16/18Link to global activities 7/18Product /process complexity 2/18Solve the Y2K problem 2/18

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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, decreas-

ing 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 competi-

tive 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 informa-

tion 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


Ta b l e 3 . 4

Enterprise systems characteristics by company

Single or Major ERP Standard systemmultiple package or versus customized Implementation

Company systems niche provider system approach

Company A Multiple Big (SAP) Standard Phased inCompany B Multiple Niche (Oxion) Standard Big bangCompany C Multiple Internal Customized Phased inCompany D Multiple Big (SAP) Customized Phased inCompany E Single Big (SAP) Customized Phased inCompany F Single Big (SAP) Standard Big bangCompany G Multiple Big (SAP) Standard Phased inCompany H Multiple Big (Baan) Standard Big bangCompany I Single Big (SAP) Standard Phased inCompany J Multiple Niche (Rohna) Customized Big bangCompany K Multiple Niche (Moves Standard Phased in

Intentia)Company L Multiple Niche (Brain) Standard Big bangCompany M Multiple Niche (Ratioplan) Customized Phased inCompany N Single Big (SAP) Standard Phased nCompany O Single Big (SAP) Standard Phased inCompany P Single Big (PeopleSoft) Standard Big bangCompany Q Multiple Big (SAP) Standard Phased inCompany R Legacy Legacy Legacy Still TBD

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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 imple-

mented 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


Ta b l e 3 . 5

Configuration and implementation of systems

Configuration of ERP systems Number

Major package ERP system 11/18Niche ERP system 5/18Internally developed ERP system 1/18No ERP system 1/18

Configuration of ERP systems Number

Single ERP system 6/18ERP system and other systems 10/18No ERP system (legacy system) 1/18

Customization of ERP systems Number

Standard ERP system 12/18Customized ERP system 5/18No ERP system (legacy system) 1/18

Implementation approach Number

Big-bang approach 6/18Phased-in approach 11/18

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SMEs, Van Everdigen et al. found that 30% of the ERP systems imple-

mented 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


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driving this difference is the complexity of the organization. Large com-

panies 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 on-

line business-to-business transactions. Not every ERP system can sup-

port these specialized add-ons. Thus, their use becomes a key decision fac-

tor 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 com-

ponent 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


03-S3385 6/10/05 8:20 AM Page 49

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 back-

bone. 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 implementa-

tion 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 implemen-

tation. Although companies were not able to provide objective

data to gauge implementation success, benefits that were


03-S3385 6/10/05 8:20 AM Page 50

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 enter-

prise systems have motivated the change. The data from the Mittelstand

companies resemble that of large companies that have been more aggres-

sive 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 sys-

tems 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 en-

terprise 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

04-S3385 6/10/05 8:20 AM Page 52

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 plan-

ning 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 num-

ber of firms to meet desired requirements. If one is looking for the opti-

mal 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 inte-

grated 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

Enterprise Applications: Building Best-of-Breed Systems 53

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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 tradi-

tional, functional, and locational silos. In addition, an organiza-

tion’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 best-

practice business processes. Those best practices can be used to

improve the way that firms do business. Choice and implemen-

tation 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 pro-

cesses 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 under-

lying 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, ide-

ally providing improved decision-making information. Third, in-

formation 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


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available, there is no need for non-value-adding workers whose

primary activity is to prepare information for upward or down-

ward dissemination.

– ERP provides online and real-time information. In legacy sys-

tems, much information is captured on paper and then passed

to another part of the organization, where it is either repack-

aged (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 data-

base, 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 collab-

oration. Enterprise resource planning also facilitates intra-

organizational (between different functions and locations)

communication and collaboration. The existence of interlock-

ing processes brings functions and locations into communica-

tion 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 back-

bone for communication and collaboration with other organi-

zations. 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 instanta-

neous 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.


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The R /3 system was limited in capability; Eastman later deployed SAP’s

Advanced Planner and Optimizer (APO) for functions that enabled intra-

and 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 effective-

ness. 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


DW DM

SEM APS

Transactional applicationsS(B2B/B2C e-commerce)

SCM andScollaborative logistics

ERP CRM andScollaborative R&D

SRM andScollaborative R&D

CustomersSuppliers

Third parties

VALUE CHAIN DOMAIN

ENTERPRISE.DOMAIN

FIGURE 4.1 Interrelationship of ERP with Other Value Chain ElementsSource: Adapted from Bendoly et al. (2004)

04-S3385 6/10/05 8:20 AM Page 57

slow; in fact, salespeople in the field found themselves unable to down-

load 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 enter-

prise. 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 implemen-

tation process itself, focusing on project management issues such as on-

budget 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


04-S3385 6/10/05 8:20 AM Page 58

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 ful-

fillment 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 per-

formance 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 addi-

tion 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’


04-S3385 6/10/05 8:20 AM Page 59

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 acquisi-

tion to final disbursement. It attempts to have the right inven-

tory at the right location at the right time, using various statisti-

cal procedures.

– Supply network planner system. This bolt-on is used to design the

supply network by determining the best facility and product loca-

tions 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 fea-

tures, and specify staffing schedules.

– Customer relationship management (CRM). This bolt-on

includes the methodologies, strategies, software, and Web-

based 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 procure-

ment (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


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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 indica-

tors, 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 de-

signed to manage the planning and execution of projects from

initiation to the final deliverables. In addition to typical fea-

tures 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 respon-

dents 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” cat-

egory 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 sys-

tems. These firms have average revenues that are about six times higher


Ta b l e 4 . 1

Respondent information

Current position Percentage Employment Percentage

Other 25.9 1,000 � X 45.7Manager 53.5 500 � X � 1,000 6.3Executive/owner 20.6 100 � X � 500 43.1

X � 100 4.7

Revenues ($) Percentage Industry Percentage

5 billion � X 6.8 Chemical /pharmaceutical 16.11 billion � X � 5 billion 18.7 Automotive 7.0500 million � X � 1 billion 9.6 Aerospace 5.3100 million � X � 500 million 23.8 Electronics 9.150 million � X � 100 million 16.4 General manufacturing 62.625 million � X � 50 million 11.9X � 25 million 12.5

04-S3385 6/10/05 8:20 AM Page 62

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 experi-

ence 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


Ta b l e 4 . 2

ERP users versus nonusers

With ERP system Without ERP system

Percentage enterprises 76.4% 22.6%Average enterprise revenues $3.0 billion $.45 billionPercentage employees above 1,000 82.1% 17.9%

04-S3385 6/10/05 8:20 AM Page 63

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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 bet-

ter 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


Ta b l e 4 . 4

Current bolt-on system usage ranked by percent of users

Percent of Product SalesCurrent bolt-on software users improvement increase

Inventory management system 73.0 3.75 3.33Demand forecasting and planning system 66.7 3.79 3.40Factory planning and scheduling system (MES) 65.1 3.70 3.40Quality management system 46.0 3.60 3.29Data warehouse system 44.4 3.82 3.02Warehouse management system 41.3 4.06 3.33Product data management (PDM) system 40.5 3.90 3.20Project management system 29.4 3.83 3.22Call center management system 21.4 4.00 3.81Customer relationship management 21.4 3.37 3.59

(CRM) systemE-procurement system 19.8 3.68 2.96Supply network planner system 19.0 3.63 3.81Traffic management system 19.0 3.87 3.08E-auction system 11.1 3.71 3.29

04-S3385 6/10/05 8:20 AM Page 65

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 bolt-

ons 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


04-S3385 6/10/05 8:20 AM Page 66

and should have a positive impact on sales. Therefore, these results indi-

cate 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 produc-

tivity. These types of systems also mean the difference between a satis-

fied 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 pro-

ductivity by reducing wasted effort and the inventory required to main-

tain 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 dis-

tribution. 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 tran-

sition 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 excep-

tions 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


04-S3385 6/10/05 8:20 AM Page 67

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 ap-

plying 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 rela-

tionship management systems are clearly focused on the customer, and

quality systems that are designed correctly use information from custom-


Ta b l e 4 . 6

Best of breed based on sales

Percent of best salesCurrent bolt-on software increase

Demand forecasting and planning system 90.9Inventory management system 81.8Factory planning and scheduling system (MES) 81.8Quality management system 72.7Call center management system 54.5Warehouse management system 45.5Customer relationship management (CRM) system 45.5

Ta b l e 4 . 5

Best of breed based on productivity

Percent of mostCurrent bolt-on software productive

Inventory management system 77.4Factory planning and scheduling system (MES) 71.0Demand forecasting and planning system 67.7Warehouse management system 64.5Data warehouse system 51.6Product data management (PDM) system 51.6

04-S3385 6/10/05 8:20 AM Page 68

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 im-

prove 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 infor-

mation 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 enter-

prise 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 Percent of users

Factory planning and scheduling system (MES) 21.4Customer relationship management (CRM) system 19.8E-procurement system 19.0Quality management system 15.9Demand forecasting and planning system 15.1Warehouse management system 15.1Supply network planner system 15.1Inventory management system 14.3Product data management (PDM) system 8.7Data warehouse system 5.6Call center management system 5.6Traffic management system 4.8Project management system 4.0E-auction system 3.2

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making sure that individual orders are completed as promised. The con-

founding 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 down-

stream 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 up-

stream and downstream supply chains. Based on the supply chain com-

pass, this is the next evolutionary step in moving from an integrated en-

terprise 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).


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In the last decade, most large corporations and many government

agencies undertook one of the most ambitious information systems proj-

ects 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 fin-

ished 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 over-

invested 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 cross-

functional support, can automate virtually an entire business, and are

global in scope.

5 Getting More Results from Enterprise Systems

THOMAS H. DAVENPORT, JEANNE G. HARRIS, AND

SUSAN CANTRELL

05-S3385 6/10/05 8:20 AM Page 71

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 bound-

aries. Substantial benefits of multiple types were envisioned by organiza-

tions, 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 ambi-

tious: better management decision making, which is difficult to measure,

and better financial management (Figure 5.2).


FIGURE 5.1 Methodological Approach in Brief

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, govern-

ment, 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.

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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 func-

tionality 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

Getting More Results from Enterprise Systems 73

Percent of organizations naming the benefitSas a first, second, or third priority to be achieved

Better managerial decision makingS

Improved financial managementS

Improved customerS service and retentionS

Ease of expansion /Sgrowth and increased flexibilityS

Faster, more accurate transactionsS

Headcount reductionS

Cycle time reductionS

Improved inventoryS and asset managementS

Fewer physical resourcesS and improved logisticsS

Increased revenue

0 10 20 30 40 50 60

50

42

32

32

29

26

25

22

21

12

FIGURE 5.2 Benefits Sought from Enterprise Systems

05-S3385 6/10/05 8:20 AM Page 73

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


Percent


Faster, more accurate transactionsS


Improved inventory andSasset managementS


Fewer physical resourcesSand improved logisticsS


Improved customerS

service and retentionS

Headcount reductionS

Increased revenue

0 20 8040 60

70

69

63

60

55

54

53

47

40

36

FIGURE 5.3 Benefits Achieved from Enterprise Systems

05-S3385 6/10/05 8:20 AM Page 74

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 appar-

ently 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 appli-

cations. 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.”


05-S3385 6/10/05 8:20 AM Page 75

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 com-

panies, 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 enter-

prise 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 organiza-

tions to achieve value in the many forms we’ve listed. In addition, organi-

zations 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 en-

terprise 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.


05-S3385 6/10/05 8:20 AM Page 76

For most organizations, integration is an ongoing process that

continues long after implementation of the core enterprise solutions func-

tionality. 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-to-

order system, an i2 supply chain application, with eight different in-

stances 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 consoli-

dating 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 appli-

cations and applications from SAP and Manugistics. Organizations such


05-S3385 6/10/05 8:20 AM Page 77

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 relation-

ship 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 conver-

sion, 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 enter-

prise 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.


05-S3385 6/10/05 8:20 AM Page 78

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 dedi-

cated “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 func-

tionality 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 trans-

forming enterprise solutions data into context-rich information and knowl-

edge 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 infor-

mation in context, thereby empowering employees to better understand

the implications of information and to act on it. Portals, for example, can


05-S3385 6/10/05 8:20 AM Page 79

help knowledge workers access and interpret enterprise solutions infor-

mation 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 manage-

ment 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 over-

whelming in quantity and yet insufficient for making many business deci-

sions. 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 enter-

prise solutions functionality, such as performance measurement applica-

tions, 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 infor-

mation in new ways to generate insights into their operations.

Managing for Value

Enterprise systems have delivered tremendous value to organiza-

tions. Most organizations, however, can still wring a significant amount

of additional value from their systems. We have suggested that organiza-

tions integrate, optimize, and informate in order to achieve more value,

but successful organizations also:

• Invest the effort required to get a critical mass of implementa-

tion. 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).


05-S3385 6/10/05 8:20 AM Page 80

• Prioritize benefits and create an action plan to achieve them.

It is clear that the benefits of ES don’t come by happenstance;

they have to be planned for and managed. We found that

organizations with formal approaches to benefit measurement

and management achieved benefits significantly faster than

those without. The 31% of organizations that actively track

metrics for the majority or all of the expected benefits reported

that they achieved benefits significantly earlier than those

that did not actively measure or capture benefits systems

(Figure 5.5). Likewise, the 65% of organizations that held a


Time to achieve benefit (years)

Within 1 1–2 More than 42– 4

Per

centa

ge

of

org

aniz

ati

ons

thatS

have

ach

ieved

the

ben

efit

Faster information transactionsS



Improved inventory and Sasset managementS


Fewer physical resources and Simproved logistics


Improved customer serviceSand retentionS

Head count reductionS

Increased revenue

100

90

80

70

60

50

40

30

20

10

0

FIGURE 5.4 Benefits Achieved over Time

05-S3385 6/10/05 8:20 AM Page 81

dedicated individual responsible for realizing enterprise

systems benefits also achieved benefits earlier than those who

held no one responsible for benefit realization (Figure 5.6).

At the U.S. Defense Logistics Agency, which has now

implemented an ES in part of its business, the CIO commented

on her plans for post-implementation benefits assessment: “We

will have a methodology to ensure that as certain deliverables

come into development, we have a mechanism to decide if

that’s still what the agency wants to do. There will be a second

mechanism to see if key performance parameters are being met

as they are delivered. We’ll be measuring them through post-

deployment, to see that the transformational capabilities are

delivered. We will have a value realization manager post-

deployment, looking at whether the program is returning the

value we envisioned and championing any necessary additional

steps to ensure success.”


Time to benefit since implementation (years)

Within 1 1–2 More than 42– 4

Per

cent

Actively track metrics for the majority or all of expected benefits, and Sprocesses and incentives have changed to supportS

Actively track metrics for a few key benefits post-implementationS

Do not actively seek to measure and capture benefits

80

70

60

50

40

30

20

10

0

FIGURE 5.5 Firms That Track Benefits Achieve Them Faster

05-S3385 6/10/05 8:20 AM Page 82

• Manage enterprise systems as an ongoing program. We now

have evidence that getting value from enterprise systems is not a

project, but a way of life. We found not a single organization in

our qualitative survey of early adopters that was “finished”

with its ES. If the ES program dies when the software “goes

live,” it is unlikely that substantial value will be achieved. Dedi-

cating ongoing resources to ES can help firms continue to focus

on, measure, and manage the benefits from them. Organiza-

tions such as Canada Post Corporation have set up “SAP Cen-

ters of Excellence” to help them achieve value from their enter-

prise systems. Other firms, such as Intel Corporation, plan to

set up a permanent organizational unit. Organizational units

may be positioned centrally within a company so that its staff

can serve as internal consultants or leaders for specific enter-

prise systems–related initiatives and projects.

Enterprise systems, as our study details, can be a source of considerable

value to organizations, but many firms have not fully achieved that value.


Time to benefit since implementation (years)

Within 1 1–2 More than 4 orSnever achieved

2– 4

Per

cent

Someone has primary accountability for realizing ES benefitsS

Someone does not have primary accountability for realizing ES benefits

70

60

50

40

30

20

10

0

FIGURE 5.6 Firms That Put Someone in Charge of Benefits Achieve Them Faster

05-S3385 6/10/05 8:20 AM Page 83

To do so requires not only the technical implementation of the system, but

also the adoption of several approaches designed to change the business

in conjunction with the system. The more organizations adopt those

changes, the more likely they are to achieve value. The faster they adopt

those changes, the faster they achieve value.


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II Value Extensions Beyond the Enterprise

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06-S3385 6/10/05 8:20 AM Page 86

Recently, several scholars (e.g., Sambamurthy, Bharadwaj, and

Grover, 2003; Chatterjee, Pacini, and Sambamurthy, 2002) have pro-

posed reconceptualizing information technology (IT) as a platform for

generating competitive agility (Goldman, Nagel, and Presis, 1995). En-

terprise computing systems (also known as enterprise resources planning,

or ERP, systems) are one of the most significant investments in today’s IT

landscape. While there is much existing research on the implementation

of these systems, there is less understanding of the post-implementation

use of them (Jacobs and Bendoly, 2003). Because business conditions are

sure to change after a system is implemented, part of developing a post-

implementation picture of ERP success is understanding the relationship

between enterprise computing and agility. Agility requires understanding

and responding to customers and markets (Goldman et al., 1995;

Gunneson, 1997; Amos, 1998). Contemporary management thus requires

a deep understanding of the customer relationship management (CRM)

dimension of enterprise computing.

According to CIO Magazine, close to half of the companies in a

2002 survey reduced their IT budgets in 2002 from their 2001 levels. In

spite of this, many companies are still buying ERP systems, and these sys-

tems top organizations’ IT budgets. Many companies apparently expect

their investment in enterprise systems to pay off, even in tight economic

times, but they also realize that benefits may not be immediate. Looking

6 Agility Through Standardization: A CRM/ERP Application

THOMAS F. GAT TIKER, DANIEL CHEN, AND DALE L. GOODHUE

06-S3385 6/10/05 8:20 AM Page 87

at it from the perspective of long-run agility however, ERP investments

can provide extremely interesting food for thought. On one hand, the

process and data integration provided by such systems should contribute

to stronger “digital options” (Sambamurthy et al., 2003). On the other

hand, ERP systems are extremely complex, difficult to understand, and

dangerous to reconfigure or modify. This has led one IT professional to

comment that “installing ERP systems is like pouring concrete on a firm’s

business processes.”

The above observations suggest two questions:

• Does investment in enterprise computing have positive (or

negative) impacts on a firm’s competitive agility?

• If enterprise computing does impact agility, what are the

mechanisms by which it has this effect?

Various authors have suggested slightly different definitions of

agility (e.g., Gunneson, 1997; Amos, 1998; Sambamurthy et al., 2003;

Bendoly and Kaefer, 2004), but most imply a focus on addressing chang-

ing markets, products, or customers in such a way as to remain prosper-

ous. In addition to customer agility, Sambamurthy et al. also include the

possibility of both business partnering agility and operational agility. For

our work, we will define agility as an organizational ability to quickly

detect opportunities and to assemble requisite resources to make a rapid

and effective response. This could include a focus on customers, suppli-

ers, or internal operations.

As researcher and practitioner communities seek to understand

agility, they naturally attempt to categorize it in useful fashions (e.g.,

those above). We find it useful to make another distinction: sensing ver-

sus responding. Sensing agility emphasizes a firm’s capacity to rapidly

discover and interpret changing opportunities. It implies an ability to

distinguish information from noise and to transform apparent noise into

meaning faster (Haeckel, 1999). Responding agility is the ability to

quickly transform knowledge into action in response (Haeckel, 1999;

Zaheer and Zaheer, 1997), such as marshaling and reallocating resources

to capture the opportunities. Effective firms must be able to both sense

opportunities and respond to them in order to be agile.

Enterprise computing may have a number of impacts on sensing

and responding agility. The enterprise system’s global connectivity of data

88 Value Extensions Beyond the Enterprise

06-S3385 6/10/05 8:20 AM Page 88

and processes should make it far easier to integrate knowledge across the

firm, which should allow organizations to better sense opportunities and

problems. Examples include discovering changes in customer demand

patterns, ascertaining worldwide purchase volumes, and so on.

On the other hand, it is less clear that enterprise computing

systems will facilitate response agility. The following quote from a case

study participant typifies the view of a significant number of managers:

“In a way, we are slaves to the system, and we have accepted the techno-

logical imperative that that implies. We cannot improvise on process

because such innovations will ripple through the company and cause

problems for someone else” (Ross and Vitale, 2000). Existing ERP

research suggests some means by which enterprise computing has this

type of effect. Response agility may entail changing the ERP configuration

(i.e., a change to a configuration table). Although built-in configuration

capabilities allow some changes to an organization’s processes, the vari-

ety of process configurations supported by any single enterprise package

is limited. Thus, firms sometimes find desired functionality lacking (Soh,

Kien, and Tay-Yap, 2000; Sommers and Nelson, 2003).

Second, because ERP processes and modules are tightly interlinked

with one another, any reconfiguration may be prohibitively resource

intensive (Akkermans et al., 2003), in part because each configuration

change runs the risk of unintended consequences that must be evaluated

in advance to the extent possible (Bingi, Sharma, and Godla, 1999;

Brown, 1998). Of course, any change that requires customization is still

riskier and probably costlier. More generally, the increasing complexity

of large-scale technologies, such as enterprise computing, creates knowl-

edge barriers to organizations trying to leverage potential technology-

driven benefits (Boudreau and Robey, 2001; Robey, Ross, and Boudreau,

2002). Finally, because ERP typically increases the standardization and

centralization of processes and data, it may diminish the options available

to local personnel for responding to local challenges and opportunities

(Gattiker and Goodhue, 2004; Jacobs and Whybark, 2000).

Based on these notions, we suggest the following ingoing propo-

sition:

– Enterprise systems should be excellent in support of sensing

agility but more problematic in support of responding agility.

Agility Through Standardization: A CRM/ERP Application 89

06-S3385 6/10/05 8:20 AM Page 89

A Case Study in Agility

In order to explore the relationship between enterprise computing

and agility, we conducted interviews with managers at seven companies

(one or two interviews per company). Our findings were enlightening,

and they resulted in some adjustments in how we thought about ERP and

agility. In addition, the cases demonstrated several strategic and innova-

tive uses of enterprise computing. In this chapter, we focus on the experi-

ence of one company in one particular area of enterprise computing:

customer relationship management (CRM). We bring in key data from

other companies where needed.

Company Background Information

The organization in question manufactures and sells computer

services, hardware, and software. The company has more than 4,000

(excluding configurations) hardware products, including PCs, servers,

communications hardware, peripherals, and OEM semiconductor tech-

nologies. It has more than 400 software products and offers numerous

types of services, including outsourcing, consulting, systems integration,

and business recovery services. The company also provides financing

services in support of its computer business. The organization offers its

products through its global sales and distribution organizations. The

company operates in more than 100 countries worldwide and derives

more than half of its revenues from sales outside the United States.

The organization competes in a very dynamic business environ-

ment. Such dynamism is driven not just by rapidly changing technologies

(i.e., Moore’s law), but also by accelerating globalization, rapid entry of

new competitors, shifting strategic alliances, and rapid commoditization

of products and services.

Enterprise Computing

The organization’s management divides IT investments into two

types: technical IT and application IT. For technical IT, investment decisions

are based on internal business cases. For application IT investments, no

formal business case is made. Rather the only criterion for management

consideration is whether a certain application hastens business process


06-S3385 6/10/05 8:20 AM Page 90

transformation. Enterprise class systems fall into the latter investment

category because they are believed to enable the acceleration of business

transformation. However, management also believes that “ERP packages

per se deliver zero value.” In other words, the power of enterprise com-

puting lies in its ability to improve business processes and thus contributes

only indirectly to value.

Enterprise computing in the organization consists of two major

systems: SAP and Siebel Systems. The company started to implement

SAP’s ERP package in 1995. A variety of SAP modules have been imple-

mented, including customer fulfillment, production planning, procure-

ment and accounts payable, fixed assets, global financing, and general

ledger. In addition to SAP, the organization runs Siebel’s customer rela-

tionship management (CRM) system and IBM’s WebSphere technology

for customer information. The Siebel CRM project started in 2000. Key

areas of the system are opportunity management and lead passing, as well

as sales process management and creating a single global customer data-

base. The organization estimates that its use of CRM is more advanced

than at least 90% of its competitors.

CRM (or CRM in conjunction with certain modules of SAP) has

made the company more agile in responding to customer demand. Two

business processes that have enabled this are its processes for lead man-

agement and its seven-step sales process.

Seven-Step Sales Process

Prior to ERP/CRM implementation, the firm, like most companies,

did not have a well-defined sales process. There was a general sales process

flow, and there were certain well-delineated steps (such as credit checking);

however, without an enterprise-wide system, it was impossible for the or-

ganization to incorporate a standard sales process globally. Therefore,

salespeople had a great deal of discretion regarding the overall process and

the timing of steps in the process before ERP, and as a result there was a

great deal of variation from sale to sale, even within a particular product

line. However, when the company implemented CRM, it rolled out its

seven-step opportunity management process at the same time.

There are a number of potentially good reasons for standardizing a

business process. One such reason is to ensure that the proper procedures

are followed by all employees. However this was not the main motivation,


06-S3385 6/10/05 8:20 AM Page 91

nor the main benefit, of the seven-step process in this organization.

Instead, having a standard sales process allows the company to collect a

tremendous amount of meaningful data that can be used to improve

prediction and execution in both sales and operations. In particular, each

salesperson uses CRM to log the completion of each step in the sales

process for each opportunity (i.e., each lead). Tracking the status of each

potential sale also helps salespeople and their managers monitor the

progress of each opportunity.

However, the company has also developed other, more innovative

ways to exploit the seven-step process and the resulting data. For ex-

ample, management has calculated the relationship between the time that

an opportunity spends at each step and the likelihood that the prospec-

tive sale will move to the next step. In other words, the likelihood that an

opportunity will expire at any of the seven steps (i.e., the customer will go

with a competitor or change purchasing plans) increases with the time

that elapses before the lead moves to the next step. As a result, manage-

ment has developed standards for the maximum amount of time that

should elapse before a salesperson takes action to move a potential order

to the next step (of course, these standards vary with product line, sales

channel, and so on). The company refers to this as the “sales cadence.”

Maintaining the cadence can help sales personnel prioritize their efforts.

For example, the system can tell a sales person that a particular opportu-

nity will probably expire if not acted on within the next five days.

Another result of the seven-step process is that it has enabled

management to develop mathematical functions that estimate (for each

product line) the likelihood of converting a lead to a sale. For each

opportunity in the system, the probability of closing the deal is calculated

from the step to which the lead has progressed and from other informa-

tion such as the time of year. This probability data becomes an input to

the manufacturing planning process.

Lead Management

Management believes that a key to success is the ability to “sense

and respond across multiple routes to market.” The company has five

“routes to market” or channels: face-to-face sales, Web, telesales, a ser-

vices outsourcing organization, and distributors (the first four are internal

channels, whereas distributors, of course, are not legally a part of the


06-S3385 6/10/05 8:20 AM Page 92

organization). Adding to the complexity, the company does business in

many countries and sells a wide variety of products and services. Orders

vary in size and complexity, from a single laptop computer to arrange-

ments that combine large servers, local networks, software, and services.

In such an environment, it is a major challenge to manage sales

leads. This is made more complex because leads are often generated in

channels that are not the best equipped to handle them. For example, a

“blue suit” sales person may learn about an opportunity to sell 10 desk-

top PCs, but it is not economical to pursue the deal. (The company esti-

mates the cost of a face-to-face sales call to be approximately $10,000.)

Nevertheless, the company needs to exploit the opportunity and must do

so profitably. The organization accomplishes this with CRM.

Sales leads are entered into the system by players in any channel.

The CRM system selects the appropriate channel, which is defined as the

one that is the most qualified and the most cost effective based on the dol-

lar volume, the type of product or service, and a number of other factors

(which the company was reluctant to discuss). Within a channel, the

system selects the best sales office, distributor, and so on. Eighty percent

of the time, the process is completely automated (i.e., requiring no manual

intervention). Considering that, for example, there are over 100 distribu-

tors (with widely varying qualifications) for midrange servers in the

North American market alone, this is a substantial task.

There are a number of organizational factors that must be ad-

dressed to make this system work. For example, in order to give incen-

tives to higher cost channels to pass on leads rather than exploit the leads

themselves, individuals in these channels do not receive credit for sales

that fall below a certain threshold. One mechanism to accomplish this in-

volves ensuring that face-to-face sales people do not receive commission

for sales below $100,000. However, provided they pass along a lead for

this type of opportunity, they share in the commission if the sale occurs.

Key Findings: Mechanisms by Which Enterprise Computing Supports Agility

Several observations from the enterprise systems literature suggest

that enterprise systems might contribute more to sensing agility than to

responding agility. However, the details provided in the present case

demonstrate that enterprise computing systems can facilitate responding


06-S3385 6/10/05 8:20 AM Page 93

agility (along with sensing agility) quite extensively. Lead passing among

sales channels and using data from the opportunity management system

in production scheduling are two excellent examples. Beyond this partic-

ular case, the findings from six additional companies we have studied

confirm this notion. To date we have observed a total of 28 instances of

ERP facilitated agility; of these, 19 were examples of responding agility.

In the beginning of this chapter, we also suggested that if enterprise

computing does affect agility, we would want to know the mechanisms by

which it has this impact. Based on interviews with the company described

in this case and on our other case studies, we see evidence of at least five

different mechanisms through which enterprise systems provided agility.

These are summarized in Table 6.1.

The first of these mechanisms, not too surprisingly, is the flexibility

built into the ERP system. Actions such as moving or reassigning employees

or restructuring organizations seem to have been well anticipated by the

designers of ERP systems, and there are simple processes designed to accom-

plish these changes by reconfiguring the system. Such changes have been the-

oretically suggested in recent ERP research (Bendoly and Kaefer, 2004).


Ta b l e 6 . 1

Mechanisms by which ERP supports agility

Built-in flexibility The extent to which information systems are designed to allow companies to quickly and easily change their business processes without having to rewrite program code

Process integration The extent to which the interfaces of business activities across different organization groups are streamlined to form complete automated business processes

Data integration The extent to which data definitions and structures are standardized across organizational data sources

Availability of “add-on” The extent to which there are, on the market,software applications special-purpose software applications or modules

that can be easily integrated with a firm’s existinginformation systems

Availability of consultant The extent to which there are, on the market,knowledge knowledgeable external consultants who understand

the installed base of a firm’s existing informationsystems

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Second, although the level of ERP integration varies from firm

to firm (Markus, Tanis, and Fenema, 2000) enterprise computing, in

comparison to other systems, tends to drive consistent processes and data

across the organization, and highly integrated architecture provides fast

global access to that data. This facilitates faster decision making and

action. For example, the seven-step opportunity management process

described in this chapter provides globally consistent information (and

more of it) about the status of potential orders. This allows more directed

action in converting leads to sales, and it facilitates more accurate plan-

ning and deployment of production resources. Consistent with this

notion is the finding of Bendoly and Jacobs (2004) that greater ERP

integration is associated with greater performance among firms who have

implemented ERP well in line with operating requirements.

Standardization and integration create simplicity. Although ERP

systems are highly complex, a single enterprise system may well be less

complex than having many nonintegrated or loosely coupled legacy

systems. Each legacy system tends to have its own unique logic, data defini-

tions, and special quirks. Boudreau and Robey (2001) have found that IT

complexity negatively impacts companies’ abilities to innovate. The com-

panies we have studied have found it much easier to implement or change

a global process when using a single ERP system versus a collection of dis-

parate legacy systems. For example, using SAP and Siebel, the company dis-

cussed in this chapter was able to roll out changes to its terms and condi-

tions of sale overnight (literally) to 100-plus countries, whereas such a

change would have taken months in its pre-ERP computing environment.

Fourth, vendor-supplied software for special features, as well as

third-party software vendor packages, is an important source of agility.

Because the customer base for “bolt-on” systems is large, vendors (second

and third party) find it worthwhile to invest in special purpose packages

that give the customer base a much larger set of “options” from which to

choose. The organization we describe began its work on a single world-

wide customer database using SAP; however, it then moved this initiative

to Siebel and finally to WebSphere.

Fifth, there is now a sizable cadre of knowledgeable consultants

available to help in the configuration or design of customized solutions

for the enterprise systems. Because of this, a major step in designing or

revamping a process is not needed—these consultants already know the


06-S3385 6/10/05 8:20 AM Page 95

existing system, its architecture, and its processes quite well. This means

they can rapidly move to implementation, rather than spending months

coming to understand the existing nonstandard legacy systems.

Recognition of these five mechanisms has a number of implications

for managers and researchers. ERP systems are often seen as a homoge-

nizing force—diminishing a company’s ability to differentiate itself (via

its business processes) from its competitors. There are a number of well-

publicized examples of organizations’ eschewing broadly deployed pack-

ages, such as SAP, because these companies want to avoid using so-called

generic ERP-driven processes. Somewhat paradoxically, the fourth and

fifth mechanisms in Table 6.1 suggest that there are strategic benefits to

adopting the more widely deployed packages. The breadth of the con-

sultant knowledge base and variety of “bolt-on” software available both

increase with the market share of core ERP package. Thus the logic of net-

work externalities would apply: the more companies that have chosen a

particular solution, the more benefits accrue to each of them.

Summary

According to a systems view of organizations, agile firms constantly

sense and respond to competitive challenges by either adapting to or

changing their business environments. Thus agility can be broken down

into leading agility and following agility. Leading agility is the capability

of organizations to rapidly discover innovative ways of doing business and

take earlier actions than their competitors (e.g., first-mover advantage).

Following agility refers to the capacity of a firm to quickly deploy an in-

novation pioneered elsewhere (e.g., by a competitor or a software vendor).

Viewed as a collection of homogenous business process and standardized

data, enterprise-computing systems are at best a source of following agil-

ity. However, we have discovered numerous examples of ERP as a source

of leading agility—the seven-step opportunity management system in this

case being just one. Our experience suggests that gaining strategic advan-

tage though leading agility is not a matter of viewing ERP as a source of

strategic business processes; rather it is an organization’s ability to select

an ERP configuration and a set of enhancements that fit a particular set of

business conditions and opportunities. Viewed this way, important weap-

ons then include implementation factors such as managing user involve-

ment, business case analysis, and change management.


06-S3385 6/10/05 8:20 AM Page 96

Advances in information technology are enabling enterprises to

critically evaluate their operational strategies and explore new prospects

for internal and inter-organizational cooperation. A key component of

this development is linked to the evolution of ERP systems from the orig-

inal vision of integrating data across the financial, manufacturing, pro-

curement, and distribution processes of a single enterprise to including

data sharing and collaborative decision making among multiple enter-

prises. These objectives require integrating a broader range of business

processes, including supply chain management, procurement, and logis-

tics, by providing users both inside and outside the enterprise with a

single access point to data. However, it is equally important for managers

to critically analyze current business processes, which are often function-

ally oriented, and realign them to satisfy intra-organizational and inter-

organizational objectives. It is only from this broader decision-making

perspective that the capabilities of ERP systems can be fully utilized to

enhance customer value and channel performance.

Forrester’s 1958 research on industrial dynamics laid the foundation

for the application of information technology in supply chain management.

In the study, he identifies the natural tendency of decentralized decision mak-

ing to amplify, delay, and distort demand information moving upstream in a

make-to-stock supply chain, thereby causing inaccurate forecasts, inefficient

asset management, and poor customer service. Lee, Padhamanabhan, and

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

E. POWELL ROBINSON JR. AND FUNDA SAHIN

07-S3385 6/10/05 8:20 AM Page 97


Whang (1997) label this phenomenon as the “bullwhip” effect and suggest

remedies such as sharing point-of-sales data with suppliers and the opera-

tional alignment of channel member activities. In the 1990s, the coemergence

of advanced information technologies and supply chain management

philosophies led to numerous industry successes based on the benefits of in-

formation sharing and collaboration among channel members. Well-known

examples include Wal-Mart’s retail link program, efficient consumer re-

sponse in the grocery industry, quick response systems in the apparel indus-

try, Dell’s direct sell and value chain models, and vendor-managed inventory

programs.

Sahin and Robinson (2002) surveyed the vast and growing litera-

ture on supply chain integration and proposed information sharing and

decision-making coordination (problem scope) as the two primary drivers

of supply chain cost performance. Their review of over 100 research stud-

ies found that operational improvements associated with enhanced infor-

mation sharing and coordination ranged from 0% to 35% of total rele-

vant costs, depending on the supply chain environment. While these

research efforts are encouraging, they only address make-to-stock supply

chains in which each channel member applies statistical inventory control

procedures to plan inventory that is held in anticipation of demand. In

spite of their importance in industry, not a single study investigates the ap-

plication of extended ERP systems to improve channel integration in

make-to-order systems, in which all supply chain activities are performed

in direct response to a customer’s order, utilizing requirements planning-

based procedures.

While the basic functionality for managing procurement and fulfill-

ment processes exists in current ERP software, our research findings indi-

cate that the prospective capabilities of ERP systems to integrate intra- and

inter-organizational replenishment activities, and thereby lower operating

costs, are underutilized in industry. We feel that this is in large part due to

an incomplete understanding of the alternative strategies for replenish-

ment integration, the potential economic benefit, and a clear implementa-

tion path. We draw conclusions about enhanced ERP replenishment sys-

tems from the authors’ research, addressing the value of information

sharing and coordination in make-to-order supply chains. The research,

based on the authors’ observations and experiences with several Fortune

500 companies in the construction equipment, building materials, and

07-S3385 6/10/05 8:20 AM Page 98

power transmission industries, illuminates the managerial strategies and

potential extensions of ERP systems necessary to better support replenish-

ment decisions and strategies. Our findings, derived from computer simu-

lation studies of vendor-manufacturer replenishment processes utilizing

industry data, reveal performance improvements ranging from 35% to

50% of total costs when moving from traditional functionally oriented

processes to an inter-organizational approach. In this setting, ERP plays a

critical role by providing all channel members with the requisite data and

a platform for coordinated decision making.

Make-to-Order Production Planning and Scheduling

Make-to-order supply chains are employed in highly uncertain,

erratic, and discontinuous demand environments, where it is not possible

to forecast demand at the end item, module, or component levels with

sufficient accuracy to enable product stocking in anticipation of customer

demand. Special purpose electrical motors, construction equipment, and

manufacturing tooling are examples of make-to-order products whose

designs are customized to the particular application.

We briefly describe the production and replenishment processes of

make-to-order supply chains as commonly implemented within ERP soft-

ware systems. Orlicky (1975) and Vollmann, Berry, Whybark, and Jacobs

(2004) provide in-depth descriptions of the processes. Our primary con-

cern, however, is on managing the vendor-manufacturer replenishment

activities through better utilization of the information provided by the

ERP system for purchased components.

Operational planning begins with an intermediate-term forecast in

generic product units, or planning bills of material, which are assigned

tentative completion dates in a final assembly schedule (FAS). As firm cus-

tomer orders are received, the generic planning units in the FAS are re-

placed with the specific end items ordered. An order time-fence, equal to

the longest cumulative stacked procurement, production, and assembly

lead-time path for any noninventoried item in the bill of materials (BOM),

is established, indicating the minimum delivery lead time for accomplish-

ing all supply chain activities. Any planning unit that is not replaced with

a customer order on reaching the order time-fence is dropped from the

forecast or rescheduled for a later date. Once a customer’s order passes

ERP-Driven Replenishment Strategies in Make-to-Order Settings 99

07-S3385 6/10/05 8:20 AM Page 99

the order time-fence, its configuration, quantity, and due date are locked

into the production schedule and subject to change only in emergencies.

This provides a stable FAS schedule for planning. A master production

schedule (MPS) coordinates module fabrication with assembly operations

and drives material requirements planning (MRP).

Figure 7.1 shows the lead-time relationships among the order

time-fence, the longest cumulative lead time in the BOM, final assembly,

module production, and procurement operations for an illustrative drilling

rig from a construction equipment supply chain. The 53-day order time-

fence corresponds to the longest cumulative procurement and final assem-

bly lead-time path of a noninventoried component. The total lead time for

drilling tower fabrication and final assembly is 33 days, providing a 20-day

planning horizon from the time when the end item crosses the order time-

fence until the manufacturer must order and receive the components for

the tower fabrication.

Table 7.1 illustrates the manufacturer’s MRP record for one of the

many metal components that are used in the tower fabrication. Due to the

schedule stability provided by the order time-fence, all gross requirements

for the component are deterministic over the 20-day planning horizon.

However, the timing and quantity of the planned orders, particularly in the

later time periods, may oscillate during successive MRP record processing

cycles as new orders are entered into the FAS and the MRP schedule is re-

optimized. Standard practice for controlling this MRP nervousness and


Slack timeS

18 days

Tower fabricationS

10 days

Final assemblyS

23 days

Vendor’s LTS

S

2 days

Main frame

Power pack

Procurement of longest lead-time componentsS

30 days

Order time-fence � 53

FIGURE 7.1 Cumulative Manufacturing and Procurement Lead Times

07-S3385 6/10/05 8:20 AM Page 100

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providing a stable planning environment is to establish a frozen time-fence

(Sridharan, Berry, and Udayabhanu, 1987; Vollman et al., 2004). The

planned order receipts within the frozen time-fence are fixed in both tim-

ing and quantity, while those in the remaining time periods are permitted

to vary in the next planning iteration (Zipkin, 2000). This is illustrated in

Table 7.1, in which the frozen time-fence is set at the end of period 12. The

length of the frozen time-fence is set to attain a balance between the need

for stable order schedules for upstream replenishment processes and MPS

schedule flexibility.

Vendor-Manufacturer Integration: Information Sharing and Coordination

The MRP record in Table 7.1 suggests alternative strategies for

scheduling the replenishment activities of the vendors. The strategies are

defined by the degree of information sharing between channel members

and the decision maker’s problem scope or the level of decision-making

coordination. Traditional replenishment processes, as illustrated in Table 7.1

and modeled by current ERP systems, portray functional coordination

(FUNC) with no information (NI) sharing between channel members.

In this approach, the purchasing manager optimizes the replenishment

schedules for each individual item by considering the economic tradeoffs

between ordering and inventory-holding costs. Orders are then released

to the vendor one at a time according to the replenishment lead times.

In the absence of any future demand visibility, the vendor responds to

each order on a lot-for-lot basis and arranges for product shipments as

required to meet the manufacturer’s delivery due dates. While multiple

orders scheduled for shipment on the same date may share joint trans-

portation costs, there is no formal attempt to explicitly coordinate

multiple-item replenishment schedules or transportation schedules in the

decision-making process.

The traditional (NI /FUNC) strategy fails to fully utilize the data

provided by the ERP system. A potential system improvement is for the

manufacturer to place advance order commitments (AOC) for all or a

subset of the planned order receipts in the planning horizon. The AOC

information-sharing strategy provides the vendor with visibility into fu-

ture orders, enabling the vendor to optimize the replenishment schedules

and potentially reduce channel costs. The manufacturer could also pursue


07-S3385 6/10/05 8:20 AM Page 102

a full information (FULL) sharing strategy by providing the vendor with

the complete MRP record, which reveals, in addition to planned orders,

all gross requirements and projected inventory balances by time period.

This is analogous to providing the vendor with a perfect demand forecast

over the item’s planning horizon. Note that the data required by these

two enhanced information-sharing strategies are readily available within

current ERP systems.

Expanding the decision maker’s problem scope may also yield system

improvements. For example, simultaneously coordinating multiple-item pro-

curement and transportation decisions provides an intra-organizational

(INTRA) decision-making strategy. Under this strategy, the manufacturer

solves a separate “coordinated lot-sizing problem” for each supplier, in

which multiple-item replenishment schedules and transportation delivery

costs are jointly optimized. Problem data requirements include transporta-

tion cost structures, the set of items ordered from each vendor, and each

item’s on-hand inventory balance, unit cost, gross requirements over the

planning horizon, fixed-ordering cost, inventory-holding costs, and delivery

lead time. While the requisite data is modeled in existing ERP software, the

decision models, data linkages, and solution algorithms for efficiently solving

coordinated lot-sizing problems are not incorporated into current ERP sys-

tem capabilities. However, decision technology capable of finding high-

quality heuristic or optimal solutions to these mathematically complex prob-

lems in less than a second of CPU time currently exists. Robinson and Gao

(1996) and Robinson and Narayanan (2004), among others, provide highly

efficient optimization and heuristic solution procedures that are well suited

for incorporation into ERP systems.

We also define an inter-organizational (INTER) coordination strategy

in which all procurement, transportation, and fulfillment costs are jointly con-

sidered. In the functional and intra-organizational strategies, the manufac-

turer independently optimizes the order schedules and then “throws them

over the wall to the vendor,” while the inter-organizational approach requires

consideration of all relevant channel information and cost tradeoffs to attain

a global system solution. Consequently, the optimal system replenishment

schedules may be considerably different from those associated with a func-

tional or intra-organizational planning approach. In addition to the data re-

quired by the intra-organizational strategy, the inter-organizational strategy

requires data describing the vendor’s order processing, equipment-setup and


07-S3385 6/10/05 8:20 AM Page 103

variable-production costs, and inventory-carrying costs. The global decision

problem, although assuming a broader scope, can be modeled as a coordi-

nated lot-size problem and efficiently solved using procedures identical to

those described for the intra-organizational replenishment strategy. The only

difference in model implementation is in calculating the model parameters.

Of the nine possible combined information-sharing and coordina-

tion strategies, NI /INTER and AOC/INTER are not feasible because

inter-organizational coordination requires the sharing of all relevant sys-

tem data. In addition, since full information sharing provides no economic

advantage over AOC sharing when there is less than full system coordina-

tion, we do not consider the FULL/FUNC and FULL/INTRA strategies.

Table 7.2 defines the five remaining replenishment strategies along with

the lot-size scheduling problem solved by each channel member.


Ta b l e 7 . 2

ERP enhanced replenishment strategies

decision maker’s planning problem

Replenishment strategy Manufacturer Transportation Vendor

No information sharing Wagner-Whitin Ship as required Replenish on aand functional single-item lot-for-lot coordination lot-size problem basis(NI /FUNC)

Advance order Wagner-Whitin Ship as required Wagner-Whitin commitments and single-item single-item functional lot-size problem lot-size coordination problem(AOC/FUNC)

No information sharing Coordinated replenishment problem Replenish on a and intra- lot-for-lot organizational basiscoordination (NI /INTRA)

Advance order Coordinated replenishment problem Wagner-Whitin commitments and single-item intra-organizational lot-size coordination problem(AOC/INTRA)

Full information sharing Coordinated replenishment problemand inter-organizational coordination (FULL/INTER)

07-S3385 6/10/05 8:20 AM Page 104

Experimental Analysis and Results

In order to illuminate the potential economic benefit associated with

the enhanced replenishment strategies, we conducted computer simulation

studies based on data collected from a vendor-manufacturer relationship in

a construction equipment supply chain. However, to ensure that the results

are reflective of this general type of make-to-order environment and not

a specific problem instance, we generated 108 different test problems

by varying the number of purchased items, the demand patterns, total

demand, the vendor’s equipment setup costs, and the transportation cost

structures. Next, we constructed a separate computer simulation model to

replicate the ERP processes and embedded lot-sizing models associated

with each replenishment strategy. The computer simulations were imple-

mented using rolling schedule procedures over a 200-time-period experi-

mental horizon. Each MRP planning iteration considered a 20-time-period

planning horizon with a 12-period frozen time-fence (see Robinson and

Sahin [2003] for complete details of the study).

The experimental results indicate an average systemwide cost re-

duction of 47.58% when moving from a traditional (NI /FUNC) strategy

to an inter-organizational (FULL/INTER) replenishment strategy. The

minimum and maximum percent savings are 36.5% and 51.3%, respec-

tively; the largest cost savings are associated with problem environments

that had larger number of items, higher vendor and transportation fixed

cost structures, and relatively constant demand.

Figure 7.2 summarizes the experimental results across the replen-

ishment strategies. While the capability of extended ERP systems to facil-

itate information sharing is widely recognized as a key contributor to

improved supply chain performance, the findings suggest that ERP’s role

in facilitating intra- and inter-organizational coordination may yield even

greater benefits. This is seen in Figure 7.2, which shows that increasing

the level of information sharing by moving from NI /FUNC to AOC/

FUNC yields an average 2.3% improvement, while expanding the prob-

lem scope from NI /FUNC to NI /INTRA yields a 30.69% improvement.

Furthermore, sharing planned replenishment schedules with the vendor

as AOCs while following an intra-organizational coordination strategy

improves performance by 39.36% over the NI /FUNC benchmark. This

8.67% marginal gain over NI /INTRA illustrates the potential synergy

that can be obtained from both enhanced information-sharing and


07-S3385 6/10/05 8:20 AM Page 105

coordination strategies. Finally, moving to an inter-organizational coordi-

nation strategy with full information sharing (FULL/INTER) yields a mar-

ginal 8.22% improvement over the best intra-organizational coordination

strategy. Overall, these results are promising and indicate that a significant

potential economic benefit is associated with enhanced ERP replenishment

systems.

Conclusions and Implications

Advances in ERP systems are rapidly evolving to include data shar-

ing and collaborative decision making among channel partners. In the past,

interoperability among trading partners proved to be a significant hurdle,

but today the availability of the Internet and the falling costs of B2B server-

to-server integration have brought the cost of connectivity into the reach of

most channel partners (Brown, 2001). However, a better understanding of

the alternative integration strategies and their potential benefits is necessary


50

45

40

35

30

25

20

15

10

5

0

Information sharing

Problem scope

None AOC Full

Per

cent

Functional Intra-organizational Inter-organizational

FIGURE 7.2 Percent Cost Improvement over the NI /FUNC Benchmark

07-S3385 6/10/05 8:20 AM Page 106

for industry to move forward with the development of improved business

processes that support intra- and inter-organizational objectives.

Here we examined alternative replenishment strategies for make-to-

order supply chains and found that enhanced ERP systems can play a criti-

cal role in improving channel performance by enabling both information

sharing and coordinated decision making. While the basic data require-

ments are already available in current ERP systems, the capability of the

ERP systems to support intra- and inter-organizational replenishment deci-

sion making is not fully harnessed. This is in large part due to the functional

decision-making perspective commonly applied in the past and all too

prevalent in today’s business environment. However, the projected 35–50%

cost improvements reported here provide economic incentive for both sup-

ply chain managers and ERP system vendors to broaden the scope of their

replenishment business models. For business managers, this calls for a re-

alignment of incentive systems, intra-organizational responsibilities, and

inter-organizational relationships to pursue system rather than functional

performance objectives. For the ERP system vendor, the broadened problem

scope is simply another step in the evolutionary development of enterprise

and inter-organizational information systems. The requisite data, channel

connectivity, and operations research models for coordinated replenishment

planning currently exist. Perhaps it is time to put these pieces together and

reap the benefits of enhanced information sharing and decision-making

coordination in make-to-order supply chains.


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8 ERP as a Platform for Vendor Managed Inventory

MOHAN V. TATIKONDA, CAROL V. BROWN, AND IRIS VESSEY

At its most basic level, vendor managed inventory (VMI) is an inventory

replenishment program in which the supplier makes the inventory replenish-

ment decisions for the customer. The supplier monitors the customer’s inventory

levels and replenishes the inventory when necessary, based on prespecified

inventory- and service-level targets. The customer benefits from higher product

availability and lower inventory costs. The supplier benefits from lower overall

costs (especially through reduction of the “bullwhip” effect), marketplace differ-

entiation, and increased customer retention and sales due to the value-added

services it provides. The supplier can be a manufacturer or distributor. The cus-

tomer is any organization one tier downstream from the supplier, such as a man-

ufacturer, distributor, retailer, or end user.

In the traditional customer-managed approach to inventory replen-

ishment (called “retailer managed inventory” in some industries), the cus-

tomer independently makes inventory reorder decisions and initiates the

purchase order. The supplier’s role is limited to communicating pricing and

product availability and the actual provision of the goods.

With VMI, the supplier relies on real-time inventory status infor-

mation or periodic snapshots of the customer’s inventory status (e.g., daily

inventory level counts). Inventory status and other relevant information is

typically made available by the customer to the supplier via electronic

communication from the customer’s ERP, point-of-sale (POS) systems, or

other electronic information systems to the supplier’s inventory planning

08-S3385 6/10/05 8:20 AM Page 108

and management systems. Manual systems, although less common, exist

as well. The supplier and customer pair in a VMI program is referred to as

a “partnership.”

There are two essential aspects that make VMI different from tra-

ditional approaches. First, there is information sharing (or information

visibility) that extends well beyond the data required for simple order

placement. Second, there is collaboration between the two parties. VMI

programs typically require up-front, joint decision making about inven-

tory level targets, reorder points, replenishment frequency, and other in-

ventory policy agreements to guide the implementation. In constructing

these agreements, the supplier considers prior customer usage histories

and forecasts. The information sharing and collaboration require a no-

table level of trust between the parties. That is particularly true for the

customer who must divulge proprietary information and relinquish tacti-

cal ordering decisions to the supplier.

The term VMI is often confusing in practice. VMI goes by many

names, including supplier managed inventory, automatic replenishment

programs, and continuous replenishment. In the consumer retail arena

(e.g., apparel), VMI is called efficient consumer response and quick re-

sponse. Also confusing is that VMI is, in a sense, a misnomer because it

implies no involvement by the customer. The customer is involved, but

with up-front planning rather than with tactical inventory management.

Accordingly, the alternative terms comanaged inventory and supplier-

assisted inventory replenishment are used by some companies.

Variations in Form

VMI programs differ considerably in practice, and those differ-

ences can be categorized into three dimensions: collaborative intensity,

technology intensity, and program complexity (see Figure 8.1).

First, the level of collaborative intensity of VMI programs varies

based on the extent of joint planning and management and on what in-

formation is shared. By definition, VMI requires information sharing.

However, the amount of information sharing can vary (e.g., length of the

time-horizon of the historical product usage data shared with the supplier,

amount of the customer’s downstream demand or forecast data shared

with the supplier, and granularity of the shared data). VMI programs vary

ERP as a Platform for Vendor Managed Inventory 109

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in whether there is real-time data availability or periodic data transfer. If

periodic, then programs vary in the amount of informational detail passed

along in each snapshot and how often the snapshots occur. However, VMI

programs require more than information sharing; they necessitate collab-

oration as well. Programs vary from slight to substantial collaboration

both in the degree of up-front strategic planning and in the shorter term

reviews of inventory performance and policy.

Second, the level of technology intensity can vary both within each

organization and across the supplier-customer boundary. VMI implemen-

tation can theoretically range from a 100% manual process to one that is a

100% closed-loop, electronic process that requires no human intervention

(except for physical movement of the inventory). In the recent past,

computer-based inter-organizational systems were used to transfer transac-

tions from company to company, utilizing agreed-on formats for transmit-

ting standard documents electronically (referred to as EDI). Since the mid-

1990s, however, extensions to ERP systems have been developed for VMI

programs. VMI programs do not require an ERP system, but since ERP sys-

tems are robust and scalable transaction-processing systems with an inte-

grated database, they have become the typical enabling system platform for


Collaborative intensity

L H

Tec

hnolo

gy inte

nsi

ty

L

H

Prog

ram

S

com

plex

ity

L

H

FIGURE 8.1 VMI Programs: Variations in Form

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VMI. In the words of Jacobs and Bendoly (2003), VMI is a management

“concept,” while ERP is a “system” by which VMI can be achieved. (For

discussions of ERP system capabilities written for the business manager, see

Jacobs and Whybark [2000] and Davenport [2000].)

Third, the complexity of a VMI program differs based on the

location of the given supplier-customer interface in the extended supply

chain. In addition to company size and global (versus domestic) factors,

program complexity can be influenced by characteristics such as the num-

ber of partners, product variety (number of SKUs), product flow volumes

and velocity, and distribution options. For example, VMI programs for

B2B situations tend to differ from VMI programs for B2C situations in

that there are fewer customers but a greater degree of industry-specific

communication standards. Some partnerships are characterized by high-

volume flows of a few unique inventory items, while others involve trans-

fer of thousands of SKUs, not all in large volumes. Some suppliers service

only a few select customers, while others service hundreds of branches

for a given customer. Partnerships vary in replenishment frequency from

long-cycle periodicity to practically continuous replenishment. In general,

replenishment frequency tends to be greater in VMI situations than in

non-VMI situations because of the cost-benefit tradeoffs. Partnerships

also vary in the diversity of transportation modes used to transmit inven-

tory from supplier to customer. For example, a single VMI partnership

may employ different modes at different times for different SKUs.

What VMI Is Not

VMI commonly uses EDI, but is not synonymous with EDI. EDI

stands for “electronic data interchange” and involves the use of standard-

ized electronic formats for B2B transactions such as order placement, order

confirmation, and invoicing. By the early 1990s, many Fortune 500 firms

had implemented custom software applications to transmit high volumes of

orders and other documents electronically using EDI standards developed

by industry groups or powerful buyers such as automobile manufacturers or

large retailers like Kmart and Wal-Mart. VMI programs, due to their high

level of transactions, also commonly use EDI standards for information

exchange. However, VMI transactions can be communicated via document

attachments to e-mail systems, Web-based forms (with or without XML),


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File Transfer Protocol (FTP), and other electronic and telecommunication

mechanisms. Small companies can also outsource their EDI requirements to

value-added network providers (VANs).

VMI should not be confused with consignment inventory. In con-

signment situations, the supplier’s inventory resides on the customer’s

premises. The customer owns the inventory and owes payment on it only

when the customer draws on that inventory. In some consignment pro-

grams, the supplier actually physically manages the inventory at the cus-

tomer’s site (called an “in-plant store”). Customers enter into consignment

agreements to obtain increased service (inventory is available without

delay) and lower costs (inventory is not owned until used). Suppliers enter

into consignment agreements primarily to provide service-based competi-

tive differentiation. The supplier off-loads inventory storage costs (e.g.,

secured physical space) to the customer but faces issues regarding timing

of ownership, which in turn influences payment cash flows.

In general, consignment requires more human intervention and

manual effort for the business transactions than VMI. However, VMI and

consignment are not mutually exclusive. In many cases, both are used

simultaneously on the same inventory items. VMI addresses decision mak-

ing and timing of inventory replenishment, while consignment addresses

timing of ownership. A concept related to consignment is that of bonded

inventory or reserved product, in which the supplier prioritizes and seg-

regates safety stock as a reserve inventory for select customers. This pro-

vides high confidence about product availability to key customers. Like

consignment, reserve inventories may or may not be used with VMI.

Many VMI programs employ a demand-pull logic, including kan-

ban order quantities, to guide the timing and quantity of inventory replen-

ishment. The pull logic is central to the just-in-time (JIT) philosophy and

has become common in the automotive industry, among others. But JIT

and VMI are not the same thing. A JIT delivery (JITD) program need not

have vendor managed inventories, and a VMI program need not be based

on a pull logic. The JIT and VMI concepts are separate, but often used to-

gether, and as such parallel the VMI and consignment inventory situation.

A typical VMI partnership is limited to two-party situations: a sup-

plier and a customer. In contrast, collaborative forecasting, planning, and

replenishment (CFPR) involves many players in an extended supply chain

who provide information such as historical product usage and forecasts to


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all the players in that supply chain. Multiparty collaboration based on this

data can lead to effective global decision making and optimization of the

extended supply chain rather than simple optimization of a given supplier-

customer partnership in the supply chain. CFPR clearly involves a more

complex set of players, but the individual supplier-customer partnership

dyads in VMI are often deeper and stronger than links between two part-

ners in a CFPR (multiparty) program.

Case Study: NIBCO’s VMI Program

The following case study illustrates the strategic motivation, im-

plementation process, and performance outcomes for a new VMI program

leveraging an ERP platform (Brown, Tatikonda, and Vessey, 2003).

The Company

NIBCO Incorporated is a worldwide provider of flow-control

products, including valves, fittings, supports, seismic bracing, and struts

used in applications for potable water, chemical and gas processing, and

drain waste. Markets include residential construction, commercial con-

struction (hotels, hospitals, and office buildings), and irrigation and envi-

ronmental systems. In 2003, NIBCO had over $400 million in sales rev-

enues, with 12 plants and four distribution centers worldwide. This

privately held company was founded in 1904, is headquartered in Indiana,

and employs over 2,900 people.

NIBCO manufactures more than 20,000 different stock-keeping

units (SKUs). Its plastic products include valves and fittings made by in-

jection molding of plastics resins. Its metal products include pipe fittings,

valves, and other pipe products made of copper, bronze, iron, and steel

that are cast, machined, and assembled. Two-thirds of NIBCO’s sales are

in commodity markets; their customers include large wholesalers such as

F. W. Webb, large (“big box”) retailers such as Home Depot, hardware

cooperatives such as Ace Hardware, and many smaller customers. All

tolled, NIBCO has approximately 9,000 customers.

By the end of the 1990s, NIBCO had become the information tech-

nology leader in its industry. By early 1998, it had successfully executed a

“big-bang” implementation of all major ERP (SAP R /3) modules across its


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plants, distribution centers, and headquarters (Brown and Vessey, 2002).

This initial implementation was viewed as an opportunity to begin

redefining the company’s supply chain processes. A new director-level po-

sition for supply chain systems was created to oversee continuous improve-

ment projects, as well as to focus on e-commerce initiatives with customers

and suppliers. By the end of 2001, the company had completed two version

upgrades, which provided enhanced supply chain capabilities.

Origins of the VMI Program

NIBCO’s VMI program builds on the enabling capabilities provided

by its ERP system, as well as the knowledge gained by its IT and business

personnel about the capabilities of this type of packaged enterprise soft-

ware. NIBCO’s VMI program was envisioned as part of a multichannel

e-commerce approach to customer interaction (including electronic cata-

logs, Web-based ordering, EDI, and other order-entry mechanisms for non-

VMI customers), all supported by its ERP infrastructure.

NIBCO viewed its ongoing investments in enterprise systems as a

means to not only remain viable but also increase its competitiveness and

ensure significant growth in its commodity business. Three strategic

thrusts help describe the motivation for VMI program implementation in

particular.

1. Greater customer service. NIBCO could differentiate itself

from competitors in its commodity industry by providing a

more substantial, value-added product /service bundle. It was

anticipated that this would offer its customers greater avail-

ability of products (in terms of fewer stockouts and higher fill

rates), faster replenishment, greater order accuracy, and easier

order placement and receipt.

2. Increased efficiency. The firm could reduce costs through over-

head reduction, greater utilization of physical assets, reduced

paperwork and administrative costs, and fewer errors, deduc-

tions, and returns. The firm could also improve cash flow through

faster cash cycles and lower working capital requirements.

3. Sales growth. The firm could expand market opportunities.

With established customers, NIBCO anticipated increased sales

of currently sourced items, addition of new lines, and customer


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conversion to sole sourcing from NIBCO. VMI partners would

be true strategic partners, with a deeper, longer-term, and more

stable partnership than typical trading relationships. Customer

retention and growth would accrue through increased cus-

tomer loyalty and nontrivial switching costs. New customers

would be attracted by the value-added product /service bundle

that NIBCO could provide and competitors could not.

NIBCO’s first VMI customer was a leading wholesaler whose pres-

ident challenged all current and potential suppliers of copper parts in the

late 1990s to provide a VMI capability. The supplier with the successful

proposal would become the sole-source provider of its copper products

(hundreds of SKUs). NIBCO, which at the time sourced products other

than copper to this customer, prepared a detailed proposal and captured

the contract. NIBCO first developed a manual process and then a fully au-

tomated replenishment process driven by its ERP system. When the cus-

tomer’s president made the challenge, his firm’s distribution centers were

near capacity. One immediate benefit of the VMI partnership was that the

customer was able to delay growing its distribution centers.

Since that first customer, NIBCO has developed a deep competency

in VMI, serving a number of strategic wholesale customers who enter into

sole-sourcing agreements with NIBCO for high-moving commodity prod-

ucts. NIBCO has developed a business model to identify potential VMI

customers based on sales levels and the attractiveness of a sole-sourcing

arrangement to both parties. A targeted customer is typically EDI-capable

and has a central distribution center, which in turn services multiple

branches.

Partner Engagement Process

The partnership development proceeds in steps, which we describe

here and illustrate in the flowchart in Figure 8.2. The initial goal is to

achieve buy-in from a potential VMI partner to move forward with a trial

VMI partnership. NIBCO’s marketing team makes an initial presentation

to the customer, explaining the VMI concept and informing them of the

types of improvements that NIBCO’s established VMI customers have

achieved. If the customer shows interest and approves, then NIBCO con-

ducts a statistical analysis to model the customer’s purchase landscape and


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PARTNER IDENTIFICATIONS(via business model)

VIABLE PARTNER?

MARKETING PRESENTATION STO POTENTIAL CUSTOMER

PARTNER SHOWS INTEREST?

DATA COLLECTION, ANALYSIS SAND DETAILED PROPOSAL

PARTNER APPROVES PROPOSAL?

PILOT PROJECT

BOTH PARTIES SATISFIED ANDSAPPROVE FORMAL AGREEMENT

FULL-SCALE VMI PROGRAM IMPLEMENTATIONS

‘‘GO-LIVE’’S(regular daily transactions for all SKUs)

PERIODIC PERFORMANCE REVIEW ANDSINVENTORY POLICY REVISION

STARTS

EXITS

EXITS

EXITS

EXITS

No

No

No

No

Yes

Yes

Yes

Yes

FIGURE 8.2 Typical VMI Partnership Process

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determine specific potential benefits for the customer. The customer’s last

24-month consumption history and sales activity data are analyzed in con-

junction with customer inventory data, growth forecasts, and seasonality

effects so that NIBCO can develop a VMI proposal. Based on the cus-

tomer’s own critical business metrics (e.g., inventory turns and gross mar-

gin return on inventory investment), improvement projections are made

and presented to the customer.

If there is customer buy-in, NIBCO and the customer then discuss

and finalize execution details, including which SKUs will be affected; in-

ventory maximums, minimums, and reorder point levels; the frequency of

the replenishment cycle (weekly, biweekly, or monthly); the number of

customer locations; and the improvement metrics to be tracked. These in-

ventory policy decisions can differ for each SKU. Although NIBCO may

sell thousands of SKUs to a given customer, its preference is to manage

only the high-volume items via VMI and to replenish low-volume items

through traditional means instead. Essentially, a Pareto analysis is con-

ducted to trade off transactional volume complexity with “bang for the

buck” in terms of which SKUs are best served by a VMI plan (often 300

to 600 SKUs).

The partners agree to a long-term, stable-rate pricing plan and a

single-source relationship for the SKUs of interest. Single sourcing is es-

sential to NIBCO to ensure data completeness and validity in terms of

product usage rates, on-hand levels, and inventory level projections. Cus-

tomers do typically identify a second source, but only as a contingency for

emergency situations.

Partner Implementation Process

NIBCO works in parallel with the customer’s resources to analyze

the customer data, perform EDI testing, agree to item selection and pricing

terms, and gain final approval to establish the VMI relationship. NIBCO’s

supply chain systems manager is responsible for the VMI program and

establishes and coordinates the partnership core team. This VMI team typ-

ically consists of an inventory analyst, an EDI /information systems special-

ist, and the appropriate sales or account representative from NIBCO. From

the customer’s side, there are three types of team participants: the purchas-

ing manager, at least one EDI person from the customer’s IT group, and a


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logistics person in the customer’s warehouse, distribution center, or branch

location where NIBCO is replenishing supply.

NIBCO’s VMI approach is an automated, computer-to-computer

process that utilizes its ERP system as the underlying platform and relies

heavily on EDI transactions. The pilot project with each customer therefore

includes testing of system-to-system EDI transactions between customer and

supplier for selected SKUs. Trial runs of the inventory replenishment cycle

are conducted. In the full implementation, the customer’s inventory system

must submit EDI transactions to NIBCO each day for each SKU. As such,

there is a significant external transaction volume that must be handled by

the ERP system, and a streamlined, reliable EDI communication process is

essential. Part and product references (e.g., names, part numbers, or prod-

uct codes) that differ between NIBCO and the customer are translated as

part of the EDI interface or via cross-references embedded in the SAP mod-

ules (such as those for Universal Product Codes [UPCs]). Other product

catalog information is also electronically referenced as necessary to accom-

modate a specific customer’s product name and labeling needs.

Four EDI transactions are employed (see Figure 8.3). Each day, the

customer system sends the product activity (EDI transaction number 852)

for each SKU, which indicates, among other things, on-hand levels.

NIBCO’s system then determines whether replenishment is necessary. If so,

an internal (or reverse) purchase order is generated and a purchase order

acknowledgment (EDI 855) is sent to the customer to indicate that an or-

der has been placed. Later, when the order is ready to be shipped, NIBCO

sends an advance ship notice (EDI 856), which indicates the order’s con-

tents and arrival time. An electronic invoice (EDI 810) is also sent. The cus-

tomer then makes payment via electronic funds transfer (EFT)—hence the

financial aspects are fully electronic as well. For most customers, the phys-

ical inventory replenishment consists of a weekly truckload from NIBCO

containing many SKUs.

Regular weekly conference calls are held with the customer during

the initial implementation. After implementation, the NIBCO core team

typically stays on the project for three to four weeks to monitor issues on

a weekly basis. Then, on a quarterly basis, NIBCO communicates to cus-

tomers the benefits that have been delivered, considers any relevant new

forecast information, and makes inventory policy adjustments as needed.


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NIBCO and its customers rigorously collect and assess VMI part-

nership performance data. For NIBCO and its customers, the actual bene-

fits in terms of the overall VMI program and individual partnerships have

been quite compelling. The proposed improvement levels for all VMI cus-

tomers have been realized or exceeded. Relative to pre-VMI benchmarks,

the customers have approximately doubled their inventory turns and re-

duced their inventory dollar value by one-third to one-half. These results

are in line with customer benefits reported for VMI programs by other

companies (IOMA Group, 2003). All in all, NIBCO’s VMI customers have

seen notable benefits.

NIBCO’s VMI team has honed its organizational processes and

information systems so that a new VMI partnership can be established

within a period as soon as two to three weeks after customer buy-in is

achieved. This relatively short time frame for fully implementing a VMI

partnership is due to NIBCO’s competency in VMI program management

and partnership execution.

NIBCO’s Next Steps

NIBCO was the first company in its industry to leverage its ERP in-

frastructure to offer VMI. Four years later, some of NIBCO’s competitors

tried to implement a comprehensive VMI program but did not succeed. Al-

though VMI customers represent a small percentage of NIBCO’s total cus-

tomer base, they provide a large percentage of its sales. Overall, NIBCO is

a stronger company with closer relationships to key customers as a result

of its VMI program.


(1) Product activity

(2) Purchase order acknowledgement

(3) Advance ship notice

(4) Invoice

(5) Funds transfer

EDI � EFTSupplier Customer

FIGURE 8.3 VMI Partnership Electronic Communication

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By 2003, NIBCO was moving forward with VMI-related activities

on several fronts. First, it continues to seek additional customers for its VMI

program. Second, it has applied the VMI concept “in reverse” by engaging

in supplier-facing partnerships in which a supplier monitors and manages

NIBCO’s raw materials inventories for high-moving items. This supplier-

NIBCO interface exhibits significantly lower program complexity (see

Figure 8.1) because far fewer SKUs are involved than for a typical NIBCO-

customer interface. NIBCO, this time as the customer, has achieved the ex-

pected VMI benefits and seeks to expand VMI to more key suppliers. This

e-procurement effort further leverages the ERP system capabilities already

in place. Third, NIBCO is working with industry trade organizations to help

create a common, industry-wide database of parts and to help set and en-

hance a variety of industry-wide electronic communication standards.

The benefits of VMI have also begun to spread among NIBCO’s

partners. The first customer who engaged in a VMI partnership with

NIBCO has since developed numerous VMI relationships with its own

customers and promotes its VMI-based value-added services as a differ-

entiator in its marketplace. NIBCO’s first VMI supplier has expanded its

customer-facing VMI relationships with other customers after using the

NIBCO partnership as a pilot project.

Measuring VMI Performance

Partnership-Level Measures

As in all complex business processes, the benefits of VMI programs

and partnerships are multidimensional (Tatikonda and Montoya-Weiss,

2001). Some benefits accrue to both the supplier and customer, while others

are supplier or customer specific. Here we focus on the benefits that are, for

the most part, measurable and applicable across many VMI contexts. The

supplier benefits from:

1. Improved customer service and increased customer satisfaction.

This is measured by greater product availability, higher fill rates

(order, line, and piece) and on-time delivery, shorter delivery lead

times, greater order accuracy, and order process error reduction.

2. Greater efficiency and cost and time savings. These effects are

measured by a reduction in demand volatility (particularly


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through significant reductions in the “bullwhip” effect), which

in turn leads to more stable production and distribution capac-

ity requirements; reduced inventory levels (in pieces and total

dollar value), increased inventory turns, and reduced inventory

space requirements; reduced overhead, administrative, and

transactional costs (through the replacement of manual pro-

cesses with automated ones and through prenegotiated agree-

ments) and associated error avoidance; working capital reduc-

tions due to lower inventory levels (without reduced sales); and

shorter cash-to-cash cycles (due to faster inventory flows, elec-

tronic funds transfer, and even shortened payment terms in

some cases).

3. Strengthened business relationships. This is observed through

initiation of strategic partnerships with established customers

and attraction of new customers who seek the differentiated

product /service bundle.

The customer benefits as well from effects similar to the first two

benefits listed in (1) and (2) above. From the customer’s perspective, it is

not volatility of demand that is reduced, but rather a reduction in supply

uncertainty. Inventory savings and inventory turns increases are likely to

be more pronounced for customers than for suppliers. The customer

gains administrative efficiencies by reducing procurement personnel,

overhead, and errors. In addition, the customer, through its own greater

product availability, provides increased service levels (higher fill rates)

and other differentiating aspects to its own customers, in turn leading to

some of the beneficial effects listed in the last bullet above.

Early benefits are, in part, dependent on the customer’s initial in-

ventory condition. The timing of benefits for some customers is slower as

excess inventories (typically hedging or “just-in-case” inventories) ac-

quired pre-VMI are worked off. There is a large, but one-time, inventory

level reduction. During this time, the supplier typically faces reduced sales

(similarly a one-time event).

A recent study found that VMI suppliers enjoyed an average in-

ventory reduction of 35% and an average inventory turns increase of

53%. Companies also reported faster replenishment lead times, increased

fill rates, and increased sales (Asgekar and Suleski, 2003).


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Other Relevant Measures

There are also benefits at the program level (that is, the supplier

firm’s overall portfolio of VMI partnerships). For example, the supplier

gains deeper insight into its customers’ actual needs, particularly through

visibility into actual customer consumption levels. This makes it possible

for the supplier to consider and prioritize the needs of all VMI partners.

The supplier can make priority allocation decisions rather than treating

all customer orders as equally important. This approach optimizes the

supplier’s asset utilization and increases customer service.

Admittedly, it is difficult to parse out benefits that accrue solely due

to the VMI aspects of the partnership (that is, vendor decision making re-

garding the timing and quantity of replenishment) because there are com-

mingled factors in many VMI programs. These factors would themselves

alone logically lead to some benefits. Such factors include electronic com-

munication methods (e.g., increased speed and decreased transaction costs

due to EDI and EFT), the “demand-pull” philosophy of inventory replen-

ishment (versus the traditional “forecast push” approach, which tends to

lead to higher inventory levels), and strategic partnership aspects (includ-

ing long-term, stable-price contracts and sole-sourcing relationships).

Other measures could be listed as well because different industry

contexts call for different objectives. For example, noncommodity and re-

tail VMI situations have some benefits that are distinct from those in com-

modity situations. In the case of noncommodity products, part innova-

tion by the supplier and joint product innovation between supplier and

customer are benefits that could arise from VMI partnerships. Both part-

ners benefit from less costly and simpler transitions (“changeovers”) when

established parts are replaced with new ones (due to upgrades, engineer-

ing changes, etc.). Other measures appropriate for some situations in-

clude part quality, return on (information) technology investment, and

the customer’s performance measures (that is, the second-tier customer’s

fill rates, inventory turns, and overall satisfaction).

Strategic Implications for Organizational Capabilitiesand Competitive Competencies

The first strategic implication is that an effective VMI program can

significantly differentiate the supplier firm from its competitors and, as


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such, can be an essential competitive competency. The differentiated,

value-added product /service bundle provided by VMI can achieve greater

customer loyalty and retention, increased sales to established and new cus-

tomers, longer trading relationships, and increased switching costs for cus-

tomers. These aspects, combined with the internal efficiency gains of VMI,

allow supplier firms to offer lower prices, provide better service, and invest

for the future.

A critical question then is how lasting this marketplace differenti-

ation might be. Competitors may join the VMI bandwagon, customers

may become more sophisticated in partner selection or their willingness

to share information may wane as time progresses, and emerging tech-

nologies may result in greater interface richness at ever lower costs. As

shown in the NIBCO case, there is a potential for a first-mover effect. A

key aspect of NIBCO’s VMI program was a sole-sourcing agreement in

which new and established customers, once they were entered into a VMI

program, became long-term strategic partners. Furthermore, installing

and maintaining an effective VMI program is no simple matter. Although

software to facilitate VMI programs and consulting services abound,

there truly is no black-box solution. Large-scale VMI program operation

requires not only a robust information technology infrastructure in terms

of hardware, integrated software modules, network communications, and

training, but also highly knowledgeable VMI management personnel

with the ability to quite effectively engage partners and maintain individ-

ual VMI partnership relationships. Therefore, in addition to the techno-

logical capabilities, key management process skills must be obtained.

Despite the benefits afforded by standard ERP platforms, there is a

significant setup cost and learning curve to all this, so there is a differen-

tiation capability that appears difficult to imitate in the short term.

A second, related strategic implication is that the ability to sup-

port, plan, and execute both an overall VMI program and individual VMI

partnerships is a fundamental, valuable organizational capability that is,

in turn, a competitive competence. The ability to rapidly implement a

partnership and smoothly execute, with low coordination costs, both the

VMI partnerships and the VMI program as a whole is valuable. Having

the technology and analytical skills in place to measure VMI perfor-

mance, both proven and projected, for established and potential cus-

tomers is valuable as well.


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The essential aspects of VMI competence can be grouped into two

areas, partnership development and program infrastructure. Partnership

development consists of skills in the following areas:

• identifying promising customer partners

• persuading potential customers to buy-in to the VMI concept

and the supplier’s specific program

• helping the customer overcome technological and political hur-

dles, gain internal consensus, and develop trust with the supplier

Program infrastructure is the installation of the VMI program that then

supports continuous execution of individual partnership activity. Pro-

gram infrastructure consists of the following components:

• installation and ongoing operation of the essential underlying op-

erational systems (including technology, management processes,

and personnel)

• installation and ongoing operation of the VMI-specific systems

functionality (including technology, management processes, and

personnel)

• development and operation of the VMI performance measure-

ment system (including data analysis and periodic audits or feed-

back) for partnership and program evaluation and improvement

As noted earlier, all this is not a simple matter, and there are

significant installation costs. Still, those who enter into VMI activity ear-

lier than others can go down the learning curve to be ahead of competi-

tors in obtaining the skills for VMI partnership engagement, setup, pilot,

and execution.

The third strategic implication is that an ability to effectively con-

duct a VMI program is, in a sense, a baby step down the path toward more

sophisticated interactions with supply chain partners both upstream and

downstream and at multiple tiers in the chain. A successful VMI experience

confirms the supplier’s ability to effectively interface with one customer in

a given partnership. That is, there is confidence in the technological infra-

structure, the management processes, and the ability to foster trust with a

partner. Recall that VMI is more than information sharing: it requires col-

laboration. This essential ability to interface with another firm is a collab-

orative competence that can be leveraged in other arenas. For example, if


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the supplier firm is the focal firm of interest, then the VMI experience can

serve to establish interfaces with the supplier’s suppliers. VMI involves non-

trivial interaction, but that interaction is only on the outer edges of the

boundaries of the two firms. VMI experience can serve as a basis for richer

and deeper interactions in established partnerships, ranging from two-

company integrated inventory-planning systems to collaborative develop-

ment of new products. And it may help the firm contribute to, and operate

in, a multi-tier CFPR-like environment more successfully.

Outlooks for VMI Growth

Overcoming the Barriers

In general, the factors in Table 8.1 appear to be those most com-

monly associated with implementation of VMI partnerships and with VMI

partnership effectiveness. The inverse of these factors can be seen as barriers

to VMI implementation and success. Finding ways to reduce or overcome

these barriers would allow growth in the number and depth of VMI part-

nerships. As one example, consider the high “bang for the buck” SKU items.

Currently, VMI programs are applied primarily to higher volume SKUs.

These are the A parts in the “ABC” inventory analysis logic. Should VMI be

extended to B and C parts? And if so, then what is required for VMI to be

made viable for those items? As a start, the traditional inventory control pri-

oritization of A, B, and C items could be extended into the VMI context. As

such, B and C items would be monitored less often by the supplier, perhaps

once a month rather than once a day as might be done with A items.

Systems Integration

There are intra-firm and inter-firm technology barriers to seamless

electronic VMI operation. Each linkage depicted in Figure 8.4 is a potential

technology barrier. Some companies conduct VMI with some manual inter-

vention, and others utilize vendors to perform intermediary roles. Although

Internet-based EDI systems provide for standardized communications

across different computer platforms, smaller companies that do not have in-

tegrated, cross-functional transaction systems (such as those afforded by

ERP platforms), as well as firms of any size that do not have VMI function-

ality well integrated into their enterprise system, face internal integration


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barriers. Conversely, partners with the same ERP platform or VMI system

will have the potential advantage of deeper inter-firm integration of planning

and execution systems (the supplier’s and customer’s MRP systems, for

example). Today, extranets commonly provide visibility into a partner’s

data, but truly integrated, multiparty systems have the potential to provide

simultaneous visibility to multiple tiers in the supply chain.


Ta b l e 8 . 1

Factors associated with VMI partnership implementation and effectiveness

Characteristics• Customer has established electronic capabilities (EDI in place)• Customer employs centralized inventory planning (even if customer has many

branches)• VMI partner represents a significant percentage of supplier’s sales

Product characteristics• High-volume, fast-moving items• High “bang for the buck” items (these SKUs represent a large percentage of the

supplier’s sales)• High product unit accountability (discrete, unitized, countable pieces)• Highly defined part reference and communication standards for the industry

Partnership characteristics• Customer willing to collect and share proprietary information with supplier• Customer has sufficient personnel and management resources for implementation• Customer and supplier trust each other• Potential employee resistance is managed (especially among customer’s purchasing/

procurement personnel and supplier’s sales representatives/agents)

EDI /EFT

Inter-firm communication

EnterpriseSfunctionality

VMISfunctionality

VMISfunctionality

EnterpriseSfunctionality

Supplier’s information systems Customer’s information systems

FIGURE 8.4 Potential Information Systems Integration Barriers

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Finally, even with VMI, there is dependence on an intermediate

party between the supplier and customer—the logistics entity involved in

the actual physical distribution of the goods. The logistics entity may be

internal or external to the supplier. Subsequent to VMI implementation,

it is common for replenishment deliveries to increase in frequency while

replenishment quantities decrease for a given SKU. The increased ship-

ping costs are defrayed through better freight consolidation capabilities

that arise through increased visibility into customer requirements. Still,

system integration with the shipper can be further developed, and better

models and techniques for incorporating the shipper into the VMI

process are necessary.

Performance Measurement Systems

There is a pressing need for better VMI performance measurement

capabilities. Industry needs comprehensive, practical models of the strate-

gic and tactical costs and benefits of VMI opportunities, implementation,

and execution. Metrics for costs, inventory, and service currently exist, but

quantifiable measures of the benefits of strategic partnerships and market

growth opportunities brought about by VMI would be especially helpful.

Also needed are performance measures that span three or more players in

a supply chain (3� echelons). Current VMI effectiveness measures focus

on a single organization (e.g., the customer’s inventory levels) or the

customer-supplier dyad (e.g., fill rates). To our knowledge, measures to as-

sess the benefits of linking the supplier to the customer to the customer’s

customer are not usually captured.

Technological Progress

To some firms, it is simply too costly to purchase, install, and

operate VMI software functionality that can be integrated with their ex-

isting enterprise systems. However, the availability of dedicated VMI soft-

ware packages from ERP vendors and other software firms is increasing,

and installation is easier and less costly than in the past. XML and other

Internet standards for communicating electronic transactions are develop-

ing and offer alternative solutions that may be cheaper than EDI in some

cases. Together these factors increase the population of firms, especially

smaller firms, that can afford to engage in VMI (at least as customers).


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A constant challenge is the conversion and synchronization of one

firm’s part numbers to another’s. The development and usage of common

industry standards and part databases are accelerating, and industry-wide

systems that act as universal translators are coming into play. With this in-

crease in industry-wide standards and systems developed for supply-chain

partners, VMI partnership setups should become faster and simpler. For

the supplier, this makes it economical to enter into more partnerships.

However, the customer gains an advantage as well because switching costs

will also go down.

Some firms have the types of parts that lend themselves to automated

inventory level monitoring (e.g., through point-of-sale systems). These are

typically unitized, discrete-part types of items. Automated monitoring is

more challenging for bulk-type items, and currently, sophisticated weigh-

ing, volumetric, optical sensor, and other techniques are employed. As tech-

nologies progress and their costs fall and with the increasing functionality

of bar codes and RFID (radio-frequency identification), the ability to mon-

itor inventories becomes physically easier and less costly. The impact of

these technology-based physical unit measurement and tracking systems

will be significant going forward and will make VMI feasible for more firms

and products.

Conclusions

VMI is clearly a win-win relationship for both customer and supplier.

VMI represents an essential, initial step toward the electronically integrated

extended supply chain. The firm that moves early to implement customer-

facing VMI may be able to lock-in customers. Successful early adopters may

also be able to leverage a learning curve advantage. On the other hand, part-

ner implementation costs may be lower for late adopters due to enhanced

technological capabilities, facilitated translation of part references, and

greater understanding and acceptability of VMI by customers.

Suppliers, particularly those seeking to smooth out their product de-

mand (i.e., mitigate the “bullwhip” effect), have an additional motivation to

convince customers to adopt VMI. However, in some industries in which cus-

tomers have high buyer power (e.g., electronics manufacturing and automo-

bile manufacturing), it is the customers that demand VMI from their suppli-

ers. As less powerful customers become more technologically sophisticated,


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they may also demand VMI partnerships. In operations strategy terminology

(Hill, 1999), the supplier’s ability to offer VMI may be an “order winner”

characteristic today, but will become an “order qualifier” characteristic in

time. What is a competitive advantage today may become a competitive ne-

cessity tomorrow. Firms need to assess trends in their industries to anticipate

customer demands for VMI as a basic supplier capability.

Furthermore, firms with a robust enterprise system architecture that

includes integrated back-office systems and e-commerce capabilities have

the technological advantage today for quickly ramping up a large-scale

VMI program. The vendors of the first-wave ERP packages of the 1990s

now offer supply chain and customer relationship management (CRM)

modules to support multichannel interactions with customers and efficient

e-procurement programs. We believe the competitive advantage of the ERP

adopter rests in how well the company’s enterprise system investments are

leveraged to take advantage of its own internal management competencies

for multichannel approaches with customers and suppliers.


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

DANIEL A. JOSEPH AND JOHN ET TLIE

Nicholas G. Carr, as editor-at-large for the Harvard Business

Review, authored the provocative editorial piece “IT Doesn’t Matter”

(Carr, 2003). He compared the development of information technology

with the development of railroad and electrical technologies in that article

and concluded that IT had reached its commodity stage. His advice to his

readers was to spend less on IT; to follow and not lead; and to focus on

vulnerabilities instead of opportunities. As one might expect, a flurry of

letters to the editor protesting this point of view followed from some very

prominent academics in the IT and MIS fields. Responses to the article

pointed out that IT would be a commodity if one chose to view it as such

and that management makes the difference between productive and non-

productive use of IT (Various, 2003). Succinctly put, when IT productiv-

ity is an issue, management matters!

Brynjolfsson and Hitt (1998) had earlier observed that if computer-

based information technology were not combined with a realignment of

workflow in an organization, then information technology could actually

result in reduced productivity. Feld and Stoddard (2004, p. 74) lent further

support to this contention when they cited an undisclosed study from the

Gartner consulting group that specified, “The average business fritters

away 20% of its corporate IT budget on purchases that fail to achieve their

objectives.” They made the observation that “making IT work has little to

do with technology itself. Just because a builder can acquire a handsome

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set of hammers, nails, and planks doesn’t mean that he can erect a quality

house at reasonable cost” (Feld and Stoddard, 2004, p. 74). In other words,

it does not matter how powerful the hardware or how elegant the software

if strategy and structures for execution are inappropriate.

Feld and Stoddard suggest that management teams who wish to cap-

italize on IT investments should observe three principles in their approach

to IT management: (1) develop a long-term IT renewal plan aligned to cor-

porate strategy; (2) replace vertically oriented data silos with clean, hori-

zontally oriented architectures designed to serve the company as a whole;

and (3) strive to develop a highly functional, performance-oriented IT or-

ganization. Unfortunately, the authors place the blame in much too general

terms (poor IT management) to be really useful. This is the equivalent to say-

ing that all the world’s problems would be solved by better communication.

The Paradox Revisited

Our concern about the current resolution of the productivity

paradox is illustrated by an example in the automobile manufacturing

industry. Consider the case of Toyota’s work with the Lexus luxury car

division. Toyota, and Japanese car companies generally, have been slow

to adopt advanced information technology, and yet the Lexus brand is the

perennial winner of the J. D. Powers award for reliable quality. Five of the

top 10 brands in reliable quality are Japanese, and yet these same com-

panies are not known as leaders in use of information technology, espe-

cially in engineering and for car design. How can this be?

Intuitively, most people have a difficult time accepting that the in-

troduction of computing technologies into the financial, insurance, man-

ufacturing, and health-care industries has been counterproductive. Infor-

mation and communications technology–based supply chain linkages in

place today certainly appear to have enhanced just-in-time production

planning. E-commerce and computer controls in motor vehicle manufac-

turing facilities as well as in their products have revolutionized the auto-

mobile industry and brought about new ways of designing, building, and

marketing motor vehicles. Lynds (2003, p. 2) rhetorically poses an inter-

esting question in this regard:

Is it possible, I wonder, that wide-scale implementation of information

technology has in fact greatly increased productivity—but the productivity

IT-Supported Productivity: Paradoxes and Resolution in R&D 131

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not of the US, but of the vast, underdeveloped Asian region. [sic] Informa-

tion technology is making it possible to move jobs from the US to China

and India; to where those jobs are beyond the reach of the productivity

statistics.

Perhaps the best place to look for the answer to this question is to

look at how the Japanese view the relationship between quality and tech-

nology and apply this lesson generally. For example, Ettlie (1997) studied

600 durable goods firms in 20 countries and found that technology

significantly moderated the association of R&D intensity and total quality

management (TQM) with market share, controlling for industry category.

In high-technology firms, R&D intensity was significantly associated with

market share; in low-technology firms, TQM was significantly associated

with market share. R&D intensity and TQM were significantly and in-

versely related, while R&D intensity and computer-aided manufacturing

(CAM) were significantly and directly related. Given such spurious results,

it is, therefore, not surprising that many scholars have raised the questions

of “how much” and, more important, “what type and application of” IT

is enough to support real strategic gains for a company. Clearly, the

uniqueness of innovations developed through the support of IT should rep-

resent a necessary objective qualifying the purchase of such systems by in-

novative firms, yet standards-based architectures required as a medium for

such creative development cannot be discounted.

Collaborating Engineering: Standardization Versus Innovation

One of the vexing challenges of any technology manager of sup-

port systems, such as the CIO, plant engineering, or the manager of cus-

tomer service, is finding that delicate balance between standardization of

practices and dealing with the inevitable exception that always seems to

arrive at the wrong time. The technical unit responsible for core technol-

ogy of any organization is still the last holdout in ES deployments. Eco-

nomic theory can help explain why this happens and why it is likely to

continue for quite some time. The appropriation of rents from invest-

ments in new technology is best under strong conditions: when the fruits

of these investments in new technology can be protected with solid intel-

lectual property protection. Therefore, why struggle to protect purchased

technology such as hardware and software systems, which are owned by


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outsiders? Rather, as suggested in prior chapters in this compilation, the

focus should be on idiosyncratic use.

Consider for example the use of collaborative engineering applica-

tions, which are now being increasingly supported by modern ERP infra-

structures. The information processing view of the innovation process

developed over the last several decades by multiple disciplines argues that

uncertainty reduction and resolution of the ambiguity of information is

amenable to organizational design interventions (Daft and Lengel, 1986).

However, more recent findings suggest that this view is inadequate to ex-

plain outcomes in the new product development process (Tatikonda and

Rosenthal, 2000). Alternative views (e.g., incremental reduction of infor-

mation asymmetry [Hauschildt, 1992]) have met with only limited success

in adding to this original stream of research. Accordingly, we argue that a

new dimension needs to be incorporated into the information processing

view of the innovation process. Specifically, we suggest further considera-

tion of the relationship between the IT (information technology functional)

core and the R&D (functional core technology of the business) trajectory

needed to support the products and services offered by the organization.

We test this augmented view of information processing and innovation us-

ing the context of new engineering collaborative software systems, which

are ERP supported and often Web enabled and which hold out the prom-

ise of reducing or eliminating problems of interoperability.

To obtain an appropriate representation of system users, we surveyed

respondent companies in two waves: a survey of automotive engineering

managers directly involved in the new product development process (n � 72)

and a broad survey of manufacturing in durable and nondurable goods and

assembled and nonassembled products (n � 237). We also did follow-up in-

terviews with a select group of automotive companies: first-tier suppliers

and assemblers (Ettlie and Perotti, 2004). Our findings show that a very ro-

bust, causal pattern is evident in both samples for predicting the adoption of

new virtual team support systems, which is ultimately and significantly re-

lated to improved new product profitability in almost 300 companies across

numerous manufacturing industry categories and construction. Companies

adopting these new systems were significantly more likely to (1) report hav-

ing an integrated IT strategy (e.g., ERP); (2) coevolve organizational inno-

vations (such as new job titles) to implement new collaborative engineering

technologies; (3) report a formalized new product development strategy;


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and (4) have recently introduced a major new product characterized as new

to the world, new to the industry, or new to the company.

Overall, these preliminary results suggest that in order to fully un-

derstand the adoption of collaborative engineering hardware and software

systems, one can take cues from the innovation and new product develop-

ment processes in these firms. Based on such data, not only were our mod-

els able to replicate the new product success rate (60% after launch) in both

samples, we also found that the impact of the adoption of collaborative en-

gineering systems on performance outcomes (i.e., new product profitabil-

ity) was significantly moderated by the adoption of tailored hardware and

software systems. Given the collaborative bolt-on options available to firms

with integrative IS architectures such as ERP, the focus should, therefore,

remain not on distinguishing the specific designs of ERP architectures per se

but rather on the tailored selection and use of such bolt-ons.

Research & Development Organizations

When one considers the best commercial R&D organizations in the

world, a few may come to mind: Xerox’s Palo Alto Research Center (PARC),

Lockheed Martin’s Lockheed Advanced Development Projects Unit (better

known as the Skunk Works), and Scaled Composites (formerly Rutan Air-

craft Factory), developer of the Rutan Model 61 Long-EZ (an aircraft that

will not stall) and Spaceship One (the first privately funded spacecraft). Of

course, universities and think tanks such as the Brookings Institution also

support research and, in some cases, development effort.

The salient feature of these organizations is the “loose” hierarchies

that govern them. Decision-making authority is delegated to very low or-

ganizational levels in loose hierarchies, and yet there is a universal need for

people to stay in close communication with one another (Malone, 2004).

Goals and changes to design are normally determined or approved by a

central figure in these organizations, but most members of these organiza-

tions do not feel that they work for someone so much as they feel that they

work with someone. There is an important point here: Effective R&D em-

ployees perceive their managers more as facilitators and coordinators and

less as managers and directors of their work. Indeed, there is evidence sug-

gesting that people who work in R&D environments perform best when

they are permitted the flexibility to determine their own project controls


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and allowed to pursue their own processes and procedures in carrying out

their work. In addition, it suggests that members of project teams prefer to

be involved in the development of the operational controls for the projects

on which they work and that they perceive management intervention in

project activities as onerous (Bonner, Ruekert, and Walker, 2002).

Creativity is not a 9–5 job. Nor is it something that can be turned

on and off. It comes and goes somewhat serendipitously, and it requires a

strong discipline and, most often, intense synergistic interaction with oth-

ers. More to the point, it requires the kind of seamless access to informa-

tion across business units, functions, and corporate boundaries that only

integrated systems such as ERP can provide. At one time, it may have been

possible for one individual to design a motor vehicle, but not today.

Today there are so many aspects to designing a motor vehicle that such a

proposition is unreasonable as an effective and timely mechanism for in-

novation. Some require embedded programs on electronics boards, some

require the design of aerodynamic exteriors, and other R&D activities

may require anything from packaging science to color science.

New developments in software that take ERP beyond the mono-

lithic suites it was in the 1990s and into an entirely new realm where pro-

cess architectures dominate will allow for the necessary control to be

maintained while providing flexibility in processes. Presently this is ac-

complished through bolt-ons and middleware: software designed to sup-

port a set of process architecture standard interfaces so that any vendor’s

application can interact with the middleware, provided that it abides by

the interface standard. Process architectures are normally depicted as ac-

tivity maps in which each activity connects with other steps in a process.

Someday soon, a “plug-and-play” process architecture could be devel-

oped for the automobile manufacturing industry. Such a product would

be shared throughout the industry and would permit an entirely new level

of flexibility. New processes could be developed and then redesigned

quickly as needs change by using plug-and-play product components.

As an example, a process architecture map for designing a car

would define all basic activities that could be involved in the car design

process, along with common variations on the activities and key inter-

faces between the activities. It would also include many levels of detail so

that different audiences involved in the process (e.g., top managers,

middle managers, operations managers, operations staff, and operators)


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could view their activity and see how it fits into the entire process. This

will make it possible for the person in one step to see who gets the output

from his or her activity so that, in the event that this person’s step

changes, he or she will be able to discuss the change with the recipient of

the output before the change is made. This will provide greater freedom

to the people doing work activity over how they accomplish their work,

and it will allow them to tailor their activities to the situation at hand. As

an added benefit, when appropriate, these maps include tools for finding

appropriate people or services to perform each of the various activities or

to whom the activities might be outsourced (Malone, 2004).

Views from the Frontline: Heads in the Sand?

We administered a brief survey to select members of a local chapter

of the Americas SAP Users Group (ASUG) in an attempt to determine the

proportion of spending that their firms dedicated to IT as well as the types

of ERP-related applications they had implemented. The results appear in

Table 9.1.

The group consisted of individuals who attended a meeting fo-

cused on upgrading to newer releases of SAP R /3. Companies from the

following industries were represented among respondents in the survey:

juice preparation and distribution, packaging, medical devices, computer

boards and chips, frozen foods, writing instruments and accessories, and

gas and electric utilities. To these firms, we asked the following question:

What do you see as the major issues for enterprise systems over the next

five years? (This includes challenges, matters arising in your business

environment that interact with ES, or any other big issues confronting

your area and its use of IT.)

Interestingly, our respondents focused on short-term issues. Compli-

ance with the Sarbanes-Oxley Act is perhaps the best example of this; im-

plementation of measures to ensure conformance to the law are undoubtedly

a top priority, especially in view of the fact that the CEO and CFO face a real

prospect of jail terms and substantial fines if their corporations are found out

of compliance with the law. However, Sarbanes-Oxley compliance is not a

strategic issue, nor is the coordination of outsource agreements or anything

else that our respondents mentioned. These are operational issues and, as

such, represent the focus of our survey respondents. However, the responses


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to this question suggest that the people who use ERP systems today may not

be aware of future directions in the business environments of their firms; if

this is true, it does not bode well for American business. There was no men-

tion of process architecture maps, Web services architectures, systems or ap-

plication architectures, the integration of R&D with ERP systems, improved

information requirements gathering models, and, perhaps most important,

the evaluation of new technologies for competitive advantage.

Six of the seven firms represented in the survey were at some stage in

the installation of the business intelligence component of the SAP software


Ta b l e 9 . 1

Potential information systems integration barriers

Respondent’s perception of major Integrating RFID into ERPissues for ERP over next five years Outsourcing coordination

Net-based business, SCMUpgrades and enhancementsSarbanes-Oxley complianceAdapting to advances in technologyKeeping up with a changing business modelMaintenance costs and issues

How did your firm measure success “User satisfaction, meaningful for the business intelligence project? information delivered in a

timely, easy-to-use format.”“BW was brought up with the R /3

Go-Live, limited number of cubes.”“Mostly it’s ‘are the executives happy?’”

Major challenges in implementing 3—Users did not know what they wantedbusiness intelligence module 1—Technology issue � interfacing with

IBM I-Series Computer1—Training and expertise1—Developing standards for deployment

Which functional areas were involved 6—Financein your business intelligence project? 4—Production (including SCM)

4—Marketing/sales

Major challenge your firm had to Information Requirements Analysisovercome to implement the business Clear definition of Project Scopeintelligence module Understanding information delivered by

the system

Percentage of total business intelligence 1%; 1%; 3%; 5%; <10%; 10%project budget that went for training

Your assessment of relationship between Little or no relationship with R&DIT and R&D or tech function of your Where there are relationships, most core business are poor

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suite. This module is focused on the evaluation of a firm’s data for strategic

and tactical use. Its importance is evident in the number of implementa-

tion projects under way in our sample. In every case, the finance depart-

ment was involved in the business intelligence project. Marketing and

production were the only other areas where interest was found. For us,

the interesting finding in this area was that despite the fact that six of the

seven firms were pursuing installation of the business intelligence appli-

cation, respondents from half of the firms surveyed indicated that their

users were unable to adequately define their information requirements.

Moreover, there appeared to be no knowledge among the respondents re-

garding what, if any, metrics were being used to measure the project’s suc-

cess. All of these issues, including the comments regarding the problem

with scoping and with understanding the information in the SAP data-

base, we think might suggest that the users of ERP systems do not neces-

sarily understand the systems well enough to use them to full advantage.

If this is so, this situation can be resolved quickly with additional train-

ing. Unfortunately, training is often ignored in these sorts of projects. The

Gartner group estimates that 17% of a typical ERP project budget should

be spent on training (Kelly and O’Donnell, 2001), but the data clearly

indicates that this level of expenditure was missing from these projects.

In areas such as R&D, it is more likely that much autonomy will

be permitted in the design of work processes. Our work on collaborative

engineering suggests that economic models which include intermediate

appropriation conditions are very much a part of the future of most firms.

However, in other areas, such as production, it would probably be better

to allow less autonomy and more standardization.

Legacies Versus Emerging Futures

What does all of this mean? Our world is more complex than even

a decade ago. First, it is not a matter of make or buy but make and buy with

partnership assistance. Second, the new economy requires a constant tend-

ing of the new dual-core model of the firm: the rearranging, upgrading, and

continuous and simultaneous improvement of both information technol-

ogy and core technology in any enterprise. Third and finally, the future

workplace will resemble in part what we see today but in great measure will

be more mobile, more challenging, more global, and, of course, more virtual.


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Firms will need to face these challenges head-on, not by myopically opting

for fads directed solely by the whims of potentially agenda-biased IT man-

agers but by shoring up extensions to existing architectures that align with

operational and strategic goals. For firms that distinguish themselves

through innovation, this means developing idiosyncratic patterns of use for

collaborative technologies that draw on existing ERP architectures and

augmenting such strategic idiosyncrasies by ensuring that such use is bol-

stered on both sides of the corporate boundary (i.e., among its collaborators).

In turn, this may necessitate greater levels of commitment among partners,

yet it opens the door for repeated shifts in project and partner focus (i.e.,

technology-facilitated flexibility) as such bolt-ons gain greater diffusion in the

marketplace.


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10 ERP as a Resource for Inter-OrganizationalValue Creation

THOMAS E. VOLLMANN

Today we stand at the end of a 40-year evolution in manufacturing

systems and thinking. We started with a focus on “lean manufacturing,”

which has the factory as the primary unit of analysis: material require-

ments planning (MRP), total quality management (TQM), manufactur-

ing resource planning (MRPII), and other programs to increase speed,

reduce inventories, and improve quality. All of these have been applied

with good results in many (not all) cases. The 1990s witnessed an evolu-

tionary shift from the factory as the unit of analysis to the business unit.

ERP systems now focus on “lean enterprise,” in which the objective is

integration across the various functions of the business, coordinating

manufacturing with sales, order management, downstream logistics,

purchasing, cost accounting, finance, and human resource management.

The objective is to manage the business unit in a coordinated way, using

standard software packages that are implemented function by function.

Recently, we are witnessing a further evolution to what can be

deemed “lean organization.” Now companies need to achieve benefits

that go beyond individual business units, such as joint purchasing of

materials and responding to global customers such as Wal-Mart who do

not wish to buy from the individual business units of Unilever or Procter &

Gamble. Lean organization is not easy to achieve, and the large, fast-moving

consumer goods companies are struggling to make this a reality. Lean

organization typically involves significant efforts to standardize ERP

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systems and, even, more important, to standardize or reduce product

and component specifications. Extending these efforts goes beyond lean

organization to “lean supply chain”: how to achieve the major benefits

that accrue from coordination of activities across companies. The major

benefits of lean supply chain come when the same diligence and hard

work of lean organization are applied to processes and systems that cross

company boundaries.

Several key questions now need to be addressed: What are the

major challenges facing firms as they attempt to achieve “lock-on” with

their customers? How does ERP enable—and constrain—the approaches

needed to create inter-organizational value? What are the best practices,

lessons learned, and future directions in supply chain management?

Understanding the Needs of Key Customers

The lean supply chain embraces one major shift in thinking from

that seen in the progression from MRP to ERP and related systems.

Rather than a monolithic approach to systems design—one that focuses

on integration of all activities—the approach becomes one of imple-

menting the processes and systems that uniquely address the needs of par-

ticular customers. It is critical that we not see this as a technical problem

or one in which more integrated information systems will lead the way.

The lean supply chain requires critical strategic decision making directed

by pairs of key supplier-customer decision makers and followed up by a

very different implementation approach. The approach, as well as the

processes and IT support, are fundamentally different.

The Nestlé Globe Project

In 2000, Nestlé launched their Globe (“Global Business Excel-

lence”) project to transform the company from a set of individual oper-

ating units into an integrated global company. The project is expected to

cost SFr 3 billion ($2.4 billion) and return major benefits only after five

years, when the majority of the operations have been converted to a

common, integrated approach. The three major objectives of the program

are to create a set of best-practice processes that will be used throughout

the company, create a standard set of Nestlé data, and implement a

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standard information systems infrastructure. The payoffs are to come

from standardizing materials to achieve consolidated purchasing, better

coordination of the supply chain, reduced support function costs, and

improved demand generation.

Although the Globe project is the largest SAP (ERP system) roll-

out in the world to date, Globe is definitively not viewed as an IT project

inside Nestlé. The objective is essentially to achieve lean organization—

an integrated, coordinated organization that responds to individual

markets as well as global customers—with optimum internal efficiency.

The Nestlé Globe project is fundamentally internal, seeking to achieve the

benefits of standardization, rationalization and coordination of their

operations, elimination of redundant activities, coordination of marketing

regions, and implementation of best practices, but some of the Globe

project activities are indeed focused on improvements with customers and

suppliers. The major benefits of lean supply chain come when the same

diligence and hard work of lean organization are applied to processes and

systems that cross company boundaries. These include elimination of

duplicate inventories, much faster responses to end customer needs,

doubling or tripling the rate at which new products can be introduced,

joint new product or service development, elimination of transactions

and cumbersome record keeping, and wholly new ways of jointly work-

ing with customers and suppliers. A critical lesson to be drawn from the

Nestlé Globe Project is that there is definitive evolution from individual

business unit thinking (unique ERP systems) to joint business unit think-

ing (coordinated ERP systems)—and then to leveraging the coordinated

information to achieve major improvements in cost and value with both

key suppliers and key customers.

A Key Customer Initiative at Heineken

A few years ago, Albert Heijn, a large Dutch retailer, asked

Heineken to adopt their “today for tomorrow” replenishment approach.

That is, Albert Heijn would tell Heineken at the end of each day how

much beer had been shipped from their central warehouse to the stores—

and Heineken would replace those quantities the following day. At the

time, it took Heineken four days to make replenishments: On day 1, an

order was created and entered into an overnight batch-processing system.


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It was then scheduled in manufacturing on day 2, shipping on day 3, and

delivery on day 4. The fix was not to run the same systems more often—

it was necessary to redesign the work, the processes, and the IT. More-

over, the interactions between sales at Heineken and purchasing at Albert

Heijn also changed structurally. Heineken was asked not to send sales

people at each month’s end to try to increase sales—this only caused

inventory problems: “Do not send any sales people—we will tell you each

day what to ship the following day. Fire the sales people and give us the cost

savings!” Implementing the necessary changes required major changes in

the organizational structure in both companies.

Instead of working in classical functional silos with traditional

systems, new ways of operating were required. Structural changes were

necessary in the ways the work was done in both companies, in the

processes utilized, and in the information systems that supported the pro-

cesses. Moreover, the work, processes, and information systems could not

be constrained by existing functional thinking. Achieving the necessary

structural changes requires transformation of the supply chain (that is, in

both the supplier and the customer). It is not sufficient to only do the same

things better!

Redefining Customer Needs at Zara

Zara has not only responded to changing customer needs: They

have redefined what customers can expect! Doing so requires a com-

pletely new approach to supply chain management. Fortunately for Zara,

they did not start with the traditional functional baggage that Heineken

had to overcome. Instead, Zara was able to think differently from the out-

set. Their approach has been to deliver unheard of levels of quality, cost,

and speed. In doing so, they have clearly exceeded existing levels of cus-

tomer satisfaction. To make this a reality, Zara implemented processes

and systems to achieve the following results:

• The time from new product concept to the goods being in

their stores is two weeks, versus the standard industry average

of many months.

• More than 20,000 new designs are created and sold

every year.


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• The stores place no orders—they are just sent new

merchandise as it is created.

• There is daily feedback from the retail stores to Zara’s design

group as to how well new products are selling.

• Manufacturing of high-fashion goods is done in Europe, close

to the market, in short production lots.

• Zara utilizes state-of-the-art distribution, logistics, and

dispatching trucks all over Europe and uses air cargo for the

rest of the world.

• Design adapts to respond quickly to latest developments and

new trends.

• There are no reorders of fashion goods—and the customers

know this.

• The customers must buy now—it will not be there long and

will not return.

• The average customer comes to the store 17 times per year.

• Suppliers work without formal contracts, based on frequent

telephone contacts.

• Stores are designed and built by Zara to match their sales

approach.

• There is no advertising; all funds thus saved are invested in

stores, which are in the absolute best locations in every city.

Dyad Management and Modifications to Classic ERP Systems

In order for supply chain management to function effectively, it is

necessary for individual pairs of supplier-customer partners to create

detailed operational systems that coordinate the flows of materials and

information between the companies. The typical approach here is to first

implement e-based systems that replicate other inter-company linkages

such as electronic data interchange (EDI) systems. Figure 10.1 is just such

a result that is being implemented currently in a major fast-moving con-

sumer goods company (customer), working with some of its key suppli-

ers. Study of Figure 10.1 clearly shows why this is not at all sufficient: in-

ternal, functional-based systems (classic ERP) create overly complex and

costly systems and processes.


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Constraints of Functional Management

As is often the case, the customer in Figure 10.1 wants the supplier

to provide materials on consignment (vendor managed inventory, or

VMI). Starting with the upper-hand portion of Figure 10.1, we see the

customer planning manufacturing (with ERP-based systems), which leads

to an expected outflow of stock from their inventory. This information is

passed to the sales organization of the supplier, who evaluates the fore-

casted outflow and proposes a replenishment shipment to the purchasing

function of the customer. That group evaluates the replenishment and

confirms or modifies the result. The authorized replenishment quantity is

then passed back to the supplier’s sales function and subsequently to its

manufacturing unit, which plans manufacturing based on the supplier’s

finished goods inventory (and other criteria and constraints). When the

order is ready, the sales organization creates the consignment order,

which is then picked and shipped.

When the order arrives at the customer, it is put into inventory.

Then, when the customer needs these materials for its planned manufac-

turing, they are issued to the manufacturing function. At that time, the

purchasing group creates a purchase order for the amount issued to man-

ufacturing and sends this to the sales function of the supplier. This is the

point where title for the goods passes from the supplier to the customer.

The supplier now creates a sales order for the amount used by the cus-

tomer and passes the sales order to its finance group to create an invoice.

The invoice is sent to the customer for payment. Finally, as shown in

the figure, there is a periodic reconciliation of inventory between the

firms. All of these activities take place in typical supply relationships.

Figure 10.1 improves them by replacing classic transactions with e-based

systems and processes.

Breaking Out of ERP-Based Systems

If the approach in Figure 10.1 seems very complicated, it is only

because that is indeed the case. But why? The reason is because both

firms operate with classical ERP systems that are functionally based,

with a command and control philosophy. In fact, the boxes with an X in

Figure 10.1 are not necessary and could be eliminated. Almost all of these


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boxes require human intervention, which implies unnecessary work and

longer response times. From the customer side, there is no real need to pre-

pare and check the stock outflow forecast. With the proper degree of trust,

the supplier can and should be privy to the manufacturing plans: it is their

job to support them as they wish (perhaps within some constraints). With

this philosophy, there is no need for the sales function to review the fore-

cast, nor to propose a replenishment shipment quantity. Similarly, there is

no need for the customer’s purchasing organization to authorize the ship-

ment or create a purchase order. Finally, there is no need for the supplier to

prepare a sales order or create an invoice. In both firms, these are probably

required only because existing systems are not able to operate without them

or because existing control systems (and management mentalities) do not

believe they can properly operate without these cross-checks.

Achieving these improvements in operational systems requires a

focus beyond internal systems and ERP thinking. It is necessary to imple-

ment joint business-process reengineering and the development of trust

and good working relations. This implies a fundamental change or trans-

formation: It is not enough to do the same things better—one needs to

do better things. The payoffs are there: reductions in work, transaction

costs, response times, inventories, logistics, and coordination. Making

these a reality typically involves exchanges of personnel between a par-

ticular customer-supplier pair for perhaps 6 –12 months to redesign the

processes, systems, and working relations. It also requires a commitment

at a senior level in both companies to create the win-win supply chain.

Moving Beyond the Lean Enterprise

Figure 10.1 clearly shows us that the new operating systems

required for lean supply chain are quite different from those used to

achieve lean enterprise. Moreover, the implementation is also different in

one fundamental way: Whereas the payoffs in lean enterprise require

standardization and rationalization across the operating units, lean supply

chain payoffs can be achieved in individual supplier-customer pairs. Thus,

for the Nestlé Globe project, there is a long implementation period with

delays before the benefits can be fully realized. In a lean supply chain effort,

it is quite possible for an individual supplier to work with an individual

customer and achieve major payoffs in 6 –12 months. The similarity to


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lean enterprise is that one still has to design and implement new business

processes, and best practices can also be fostered or copied.

What is perhaps more important is that lean supply chain does not

need to wait until lean enterprise is completed. This is not an either/or

decision. One can work on achieving the benefits of lean enterprise

through rationalization, standardization, and best practices, while simul-

taneously working with selected supplier and customer partners to achieve

the payoffs from excellence in supply chain management.

Best Practices and Future Directions

As mentioned earlier, we are today at the beginning of a new

paradigm for supply chain management. There will be many changes

implemented: in operational systems, in organizational structures, and in

strategic choices. It would be nice to provide senior managers with a

clear-cut blueprint for how all of this will take place. Unfortunately, given

the limited experience with these ideas, we can only provide a few basic

ideas and hints from early successes. Best practices have yet to be defined,

and there is significant unlearning that must take place to do so. Let us

now examine what appears to be the approach and sequence for imple-

menting the evolving supply chain paradigm.

Figure 10.2 provides a hierarchical series of three implementation

stages through which dyads seem to evolve. We say “seems” because we

truly are at the beginning. In stage 1, we are seeing firms replace existing

processes with newer, e-based systems. In fact, “replacing” also needs to

encompass “eliminating.” In this stage, there is a progression from simple

transactions to more complex interactions between firms. Unfortunately,

the problems we illustrated in Figure 10.1 are all too prevalent in this

stage. Too many firms are hamstrung by existing functional based sys-

tems and locked into zero-sum based thinking. Unlearning—i.e., break-

ing away from the integrated systems, such as those that support classic

ERP—requires new processes and the elimination of classical cross-

checks. More fundamentally, progress requires dyad-based improvement

initiatives. This implies dyad-by-dyad working, as well as joint working

and joint commitment to change. In far too many situations, we have seen

firms such as the customer in Figure 10.1 dictating conditions (poor

practice conditions!) to all its suppliers. Asking suppliers to adopt the


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systems shown in Figure 10.1 (with none of the X’s removed) is clearly

suboptimal.

Figure 10.2 appears to be the way firms are achieving early success

and subsequent improvements. What one can observe here is companies

evolving dyad by dyad in stage 1: from step (a), ordering and invoicing,

to step (b), order acknowledgement and logistics documents, to step (c),

request for quotation (RFQ). Best practice involves making the improve-

ments with the best dyad partners (suppliers and customers) and there-

after cascading the learning to other dyad partners. There is an important

lesson here; the progress is within specific dyads, rather than trying to

push all suppliers (or customers) through step (a) before step (b), etc. The

progress tends to match thinking as to market segments as far as working

with customers, and supplier evaluation with suppliers. In both cases, the

fundamental questions is: who is smart, trustworthy, and interested in

working with us?

There are clearly choices to be made as to which dyad partners to

work with at any given point in time. Practice indicates that most firms

start with key suppliers, before customers. This is probably because they


The following is a set of ‘‘stages’’ of dyad transaction complexity that can be approached through e-based B2B systems. Implementing the successive stages will require a series of transformations, supported by cross-firm education programs and new IT systems support:

Stage 1: Replacing. existing processes.S(a) OrderingS InvoicingS PaymentsS(b) OrderS acknowledgementS Delivery informationS Logistics documentsS(c) PricingS RFQS Quality certificationS Payments linked toS contractual terms

Stage 2: Joint planning . and information. sharing.S(a) Planning visibilityS (knowledge, notS guessing)S Planning/forecastingS trackingS AllocationS VMI (� uphill skier)S HubsS(b) Product specifications S Project managementS New productS introductionS Dyad performanceS measures

Stage 3: Joint Execution.S(a) Multiple sources/S destinationsS Quality monitoringS TraceabilityS Virtual hubsS Multiple orchestration S (� shifts)S ManufacturingS flexibilityS(b) Joint schedulingS Synchronous S manufacturingS Joint new productS design /developmentS Real-time visibilityS (materials andS demands)S Chain KPIs

FIGURE 10.2 Dyad Implementation Hierarchy

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believe that they have more leverage with suppliers. However, it is often

one of their customers who initiates the process, as was the case for

Heineken. It also is true that although each dyad tends to be unique, there

are always lessons to be learned; moreover, most leading-edge firms try to

develop modular approaches to the systems and processes. Those who

move first, proactively, can often define the ways of working, rather

than being put into the position of adopting multiple, incompatible

approaches.

Stage 2 requires new interactions and systems operating between

dyad partners. More important, it assumes that “partnership” does in fact

exist. Stage 2 implies a much greater degree of trust and mutual working

relationships than stage 1. Thus, planning visibility requires transfer of

knowledge from customer to supplier. “VMI � uphill skier” involves

even greater transfer of knowledge and responsibility. In this case, the ex-

act needs of the customer are passed to the supplier, who can satisfy them

as it wishes—with payments made as the customer uses the supplied

goods; this is similar to skiing, in which it is the uphill skier who is re-

sponsible for not colliding with the downhill skier. These changes in prac-

tice can be achieved only when the dyads have been working together

for extended time periods. A good current example is Hewlett-Packard

working jointly with Flextronics in the manufacture of tape drives. In

the end, the key to success was the development of shared values from

top to bottom in both organizations. With this overall level of trust, it

has been possible to develop quick response times to market dynam-

ics, visibility across the supply chain, fast time-to-market and time-to-

volume, and high-quality products. All of the features of stage 2 have been

achieved.

Stage 3 may look like nirvana, but all of the activities depicted

there are in fact possible. It is important to compare step (a) with step (b).

The specific activities depicted in step (b) are more related to extensions

of classic lean manufacturing concepts, but step (a) is where the really big

payoffs are achieved. Concentrating on the systems and transactions

associated with coordinating the flows of material is necessary—but not

sufficient! The improvements depicted in step (a) of stage 3 involve some

key strategic choices, such as when the customer should direct dyad

“orchestration” and when the supplier should do it. It is critical that these

decisions not be based exclusively on power or politics.


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Figure 10.3 extends the thinking in Figure 10.2, focusing on the

evolution in dyad implementation. Here, the three stages of Figure 10.2

are depicted in terms of two critical issues. As shown, there is a need for

major developments of new processes, systems, and software as one

evolves through the three stages, but this progression is linear. On the

other hand, the evolution in managerial behavior is shown as exponen-

tial. That is, as the firm moves from stage 1 through stage 3, the changes

in working relations with dyad partners are profound. This is not a refine-

ment of existing purchasing and sales procedures (or thinking!).

When we shift focus back to step (a) in Figure 10.2, the required

change in managerial behavior becomes enormous. We are indeed at the

beginning of a new paradigm. This is good news and bad news. Funda-

mental change is never easy, but it can also be exciting when one can make

it a reality. Make no mistake, though; the kind of performance illustrated

in the Zara case is not a fluke. This is the standard to which firms will

increasingly be held, and those who cannot stand up to it are as doomed

as the competitors of Zara. When all is said and done, supply chain


Eff

ort

ManageSbehavioralS

change

SoftwareSdevelopment

Replacing existingSprocesses

Joint planning andSinformation sharing

Time

Joint execution

FIGURE 10.3 Dyad Implementation Evolution

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management is indeed today’s best bet to improve competitiveness. Senior

managers need to understand this fundamental truth and then make the

commitments to change their companies appropriately. Even if the exact

pattern for change is not known, the directions are clear—and the errors

of wrong choices are becoming more obvious with each passing day.

Concluding Remarks

There has been continuing progress in the systems and processes

that plan and control manufacturing and that match this planning to the

ongoing needs of the customers. The progress can be seen as having four

complementary objectives: The first has been to gain major improvements

in factory operations (lean manufacturing). The second has been to

expand the focus to the effectiveness of the overall business unit (lean

enterprise). The next extension encompasses optimization of the entire

business—across all business units (lean organization). But now we are

experiencing a fourth shift—to achieve major improvements in working

jointly with key suppliers and key customers (lean supply chain). Today’s

ERP systems are the direct result of lean manufacturing being extended

into lean enterprise. These systems and thinking are now being used to

address some of the key issues in lean organization, and ERP systems are

also often the basic source of information for achieving lean supply chain.

However, it is important to understand that lean supply chain embodies key

differences in approach: The focus is on individual dyads; the functional

approach of ERP needs to be at least augmented and often replaced;

the objectives—especially in regard to time and responsiveness—are

revolutionary, not evolutionary. We are at the beginning of a long learning

(and unlearning!) process.


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III Future Visibility and Accountability

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11-S3385 6/10/05 8:21 AM Page 154

In many respects, MRP, the subsequent development of manufac-

turing resource planning (MRP II), and ERP represent increasingly so-

phisticated databases that over time have improved tactical and strategic

business planning. Essentially, ERP serves an “uncertainty absorption”

function (Miles, 1980). It is impossible to know with certainty all future

outcomes that might occur for a business. However, with enough data

and proper methods of analysis, reasonable projections of future outcomes

become feasible. Having data allows for the possibility of calculating

risk, in which several different outcomes are possible, and a probability

calculated from the data can be assigned to each outcome (for example,

see Allen and Schuster, 2004).

The crowning achievement of ERP systems in practice is that busi-

ness decision making has moved from an uncertainty basis, in which no

comprehension of risk exists, to a risk basis, in which ERP serves the im-

portant function of mitigating uncertainty. The result: Much more effec-

tive business decision making based on rational analysis of data available

rather than on pure conjecture. With the established success of ERP in

practice, it is realistic to begin thinking about what changes in informa-

tion technology will further enhance ERP, thus reducing even more

uncertainty within business planning. Since ERP is at its essence a data

management tool, it is reasonable that any advancement in the way that

11 Enabling ERP Through Auto-ID Technology

EDMUND W. SCHUSTER, DAVID L. BROCK, STUART J. ALLEN,

PINAKI KAR, AND MARK DINNING

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data is obtained, organized, and employed will have a significant impact

on the structure of ERP software.

RFID Versus Auto-ID Technology

A great deal of confusion exists concerning the meaning of two

terms, radio frequency identification (RFID) and Auto-ID. While RFID

has been in existence for more than 50 years, Auto-ID represents a new

technological development (Sarma, Brock, and Ashton, 2000). Though

both technologies share commonalities, several important differences

exist.

Historically, the term RFID has been applied to situations in which

an object identifies itself through the transmission of radio waves that are

received by an antenna and processed into positional information.

Transponders on commercial and military aircraft that use two-way com-

munication are early examples of RFID technology. In these situations, a

radio signal broadcast from a ground station or another aircraft activates

the transponder, which then returns a signal containing important prox-

imity information.

Other examples include the application of RFID tags to steamship

containers and rail cars. Most of these applications involve different types

of capital asset tracking and management. This type of two-way commu-

nication is tightly coupled with highly specific applications such as air

traffic control, proximity warning, and shipyard management systems.

Many in industry classify these applications as “closed loop” to denote

that direct feedback occurs between two objects coupled by RFID types

of communication. Because most of these applications are highly special-

ized, RFID has evolved into mostly proprietary technology characterized

by closed standards.

Though RFID has been used in some highly innovative applica-

tions, the technology has never achieved mass use for supply chains

because the cost of electronic tags powered with tiny batteries remained

relatively expensive. Manufacturing breakthroughs during the last several

years, including fluidic self-assembly and vibratory manufacturing meth-

ods, offer significant potential to place individual transistors onto an in-

tegrated circuit at a sharply lower cost (Sarma, 2001). Projections show

that the new generation of tags will reach a price that allows individual

156 Future Visibility and Accountability

11-S3385 6/10/05 8:21 AM Page 156

tagging of cases and pallets. At some time in the future, the price might

be low enough to tag individual consumer goods on a large scale.

With these new manufacturing methods, production of the silicon

chips needed for Auto-ID becomes a continuous manufacturing opera-

tion, in contrast to the current batch method for producing the integrated

circuits that make up silicone chips. This development opens the possi-

bility of tag application to a large number of objects, such as individual

units, cases, and pallets of merchandise within the consumer goods sup-

ply chain. Given that the scale of retail supply chains includes billions of

items, industry consortiums recognized very early the need for a compre-

hensive information technology infrastructure to manage the large

amount of data potentially available from linking objects to the Internet.

With such an infrastructure, the practical possibility exists of ERP sys-

tems that have continuous, two-way communication with objects located

anywhere within a supply chain. This Internet of things will create un-

precedented interconnectivity and have an important impact on the ERP

systems of the future.

The infrastructure needed to manage the Internet of things is

Auto-ID technology, an intricate yet robust system that utilizes RFID. An

important feature of Auto-ID technology includes open standards and

protocols for both tags and readers. This means that a tag produced by

one manufacturer can be read using equipment produced by a different

manufacturer. This type of interoperability between tags and readers is

essential for wide-scale application within supply chains.

Beyond the sophisticated information technology, Auto-ID lays

the groundwork for the intelligent value chain of the future (Brock,

2000). Creating “smart products” that sense and respond with the phys-

ical world requires unique identification, which is an element of Auto-ID

technology. With this capability, distributed control systems can interact

and give instructions to a specific object. For example, some time in

the future smart objects within the consumer goods supply chain might

dynamically change price based on sensing demand and communicate

this information to ERP systems without human intervention. Because it

offers much more than merely identifying objects using radio communi-

cation, Auto-ID technology holds the potential to drive rapid advances in

commerce by providing the infrastructure for true automation across

supply chains.

Enabling ERP Through Auto-ID Technology 157

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How Auto-ID Technology Works

In addition to the advances in manufacturing technology for pro-

ducing the integrated circuits, there are several other important advances

worth noting that deal with the way tags are powered. Currently, two

basic types of tags are used most often.

An active tag requires a small battery that provides electric power

to continuously generate and transmit the radio frequency signal. Active

tags can be read from a relatively long range—up to 30 meters. In gen-

eral, these tags have significant amounts of memory to store information

such as bill of lading details. In some cases, specialized readers called

interrogators can not only read data from an active tag, but can also send

signals to reprogram the tag with new information or instructions.

However, active tags have several drawbacks. Because these tags

transmit signals significant distances, there is greater chance of a “fre-

quency collision” with other radio waves such as those emitted by radios,

transformers, or cellular phones. This type of interference could cause

the reader not to pick up the tag signal. In addition, with longer read

distances, the opportunity of providing exact location information

diminishes. The tiny batteries are also somewhat expensive, thus limiting

widespread use. Common prices for active tags are $2 or more per unit,

depending on capability, memory, and order size. Beyond the expense, the

other disadvantage of active tags is that the batteries sometimes wear out,

resulting in total loss of signal. This is disastrous if the tag fulfills a criti-

cal function such as providing data for a moving rail car. Battery life

varies a great deal depending on many different factors, so it is difficult to

predict in advance when a failure might occur.

Beginning in 1999, industry and academics undertook research to

develop low-cost passive tags. With this technology, each tag does not con-

tain a battery. Rather, the energy needed to power the tag is drawn from

electromagnetic fields created by readers that also serve to gather the signals

emanating from the passive tags. The read distance of a passive tag is usu-

ally no more than 3 meters. Since no fixed power source is required, passive

tags hold a great advantage over active tags in terms of lower cost per unit.

This opens the possibility for the use of passive tags in a far greater number

of applications. Gradually, as costs decrease, passive tags will challenge bar

codes as a means of gathering information within supply chains.


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A third type, the semipassive tag, is a hybrid of both active and

passive tags. It has a smaller battery that is partially recharged each time

the tag enters the electromagnetic field of the reader. These tags are

currently under commercial development and are not widely used in

industrial applications, although there is promise that such a technology

might be an important factor in the near future. Designed to operate at

low energy levels, these tags store relatively little information. Just enough

memory exists to store a serial number that can reference an IP address

on the Internet. Information is stored on the Internet, not on the tag. This

provides a distributed means of holding information. Table 11.1 summa-

rizes the capabilities of tags.

Overall, passive tags hold the promise of ubiquitous application to

objects within a supply chain. However, a comprehensive information tech-

nology infrastructure must also exist to organize and communicate the data

gathered from passive tags. Auto-ID provides such an infrastructure.

The Components of Auto-ID Technology

In conjunction with advances by tag and equipment manufacturers,

the objective of Auto-ID technology is to create infrastructure and set

open standards that will make it possible for wide adoption of passive


Ta b l e 1 1 . 1

Comparison of different tags

Tag Active Passive Semipassive

Power source Battery Induction from Battery andelectromagnetic inductionwaves emittedby reader

Read distance Up to 30 meters 3 meters Up to 30 meters

Proximity information Poor Good Poor

Frequency collision High Medium High

Information storage 32 k or more 2 kb (read only) 32 k or more (read/write) (read/write)

Cost /tag $2–$100 25¢ Under development,some applications

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RFID technology (Dinning and Schuster, 2003; Schuster et al., 2004).

The four components that make up Auto-ID Technology include:

• EPC (Electronic Product Code)

• ONS (Object Naming Service)

• PML (Physical Markup Language)

• Savant (data handling)

The EPC is a numbering system that contains enough combina-

tions to identify trillions of objects. This is necessary because the ultimate

goal is to provide a structure for low cost identification at the item level,

meaning that every single product will have its own unique code. PML is

the communication format for the data and is based on XML (extensible

markup language), which is gaining popularity in e-commerce transac-

tions. PML represents a hierarchal data format to store information.

By providing a standardized means of describing physical objects and pro-

cesses, PML will facilitate inter- and intra-company commercial transactions

and data transfer.

The ONS acts as a pointer to connect the EPC to the PML file

stored on a network, either a local area network or the Internet. It

performs a function similar to that of the Domain Naming Service (DNS)

of the Internet, which connects a text-based Web address to an underly-

ing IP address. An IP address consists of a 32-bit numeric address written

as four numbers separated by periods and used to find resources over the

Internet. However, with the EPC, we start with a number and use the

ONS to find the product information linked to that number.

Savant is a lower-level software application that processes the data

and performs error checking and de-duplication procedures in the event

that more than one reader receives a signal from the same tag. It handles

the scalability problem associated with the massive amount of data

captured by Auto-ID. To summarize, the EPC identifies the product, PML

describes the product, and the ONS links them together.

To make the system work, products are tagged with passive RFID

chips containing the EPC. The tags are placed on surface areas of pallets

or cartons or are contained within item packaging. Readers are posi-

tioned at strategic points throughout the supply chain where companies

need to capture data. Readers constantly emit an electromagnetic field

that is received by the tags through a small antenna. This energy activates


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the tag, and in turn, a signal is generated and transmitted to the reader.

Through this process, readers capture the EPC and interact with Savant

to look up the information on the product using the ONS.

The position of the reader receiving the EPC signal provides

important information on location and environmental conditions such as

temperature, vibration, and humidity, which is then linked through data-

bases to the EPC. All this information is housed and written to corporate

databases using the PML format (see Figure 11.1).

Advantages of Auto-ID Technology Relative to Bar Codes

Few other inventions developed during the 20th century have had as

wide an impact on everyday life as the bar code (Haberman, 2001). First

implemented in 1974, the bar code has drastically reduced the amount of

labor needed to operate retail stores, improved pricing accuracy, and short-

ened countless checkout lines, saving great amounts of time.


PML

SavantONS

Reader

Antenna

Serial number

EPC

PML–Physical Markup LanguageSONS–Object Naming ServiceSEPC–Electronic Product Code

EPC EPC EPC

Antenna

FIGURE 11.1 Technology Overview

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Beyond retail stores, bar codes have been applied in many other

situations to provide important information, such as the coordination of

production within manufacturing plants or tracking data for overnight

packages in transit. Bar codes transmit a small amount of information

that identifies the manufacturer and links to a description of the object.

Nonprofit standards groups such as GS1 administer the numbering

system used for the bar codes, ensuring unique identification without

duplication by other firms. New research efforts have led to the develop-

ment of a two-dimensional bar code that is able to carry more data about

an object. This opens the possibility of attaching important information

such as billing details directly to the object as it passes through the

supply chain.

A basic characteristic of bar codes is that all information travels

with the object. In the case of a two-dimensional bar code, more infor-

mation travels with the object as compared to a regular bar code. This is

a common attribute shared with active RFID tags, although in most cases,

active tags contain much more information than two-dimensional bar

codes. Furthermore, although two-dimensional bar codes do provide

much more information beyond product identification, all bar codes have

limitations, including:

• The need for a direct line of sight from the scanner to the bar

code

• The ability to read only one code at time

• The need for human intervention to capture data or to orient

packages in the case of overhead bar code readers

In addition, bar codes provide only one-way communication and

seldom provide real-time information or Internet connectivity to the data.

There is always a chance that the bar code will be missed or, in other

cases, read twice. Bar codes can also be damaged or compromised in a

way that makes them impossible to read. Auto-ID technology is designed

to overcome all of these limitations and make it possible to automate the

scanning process, providing real-time data.

With all the advantages of Auto-ID, it is natural to begin thinking

about how this new identification technology will affect the overall design

and operation of ERP systems. At its core, ERP is essentially a large data-

base. As increasing amounts of data become available through Auto-ID


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technology, the nature of ERP and the infrastructure needed to support the

system will change dramatically, opening new possibilities to do things

that were previously thought to be impossible to achieve in practice.

Data and ERP Systems

Since the inception of ERP, accuracy of data has been an important

goal for long-term success. Early efforts focused on improving the accu-

racy of the bill of materials (BOM), an important part of MRP. In the

past, popular management programs such as Class A MRP II were im-

portant in helping practitioners get the most benefit from these systems.

With the perfection of the BOM approach, emphasis has shifted to raw

data accuracy as a means of further improving the overall results of plan-

ning. Though data accuracy has been an important issue for many years,

it continues to attract the interest of practitioners.

A recent online survey conducted by APICS supports this observa-

tion. When polled about the relevance and main goal of Auto-ID tech-

nology, 55% of respondents indicated that improved inventory accuracy

was the most important objective. The total results of the poll are shown

in Table 11.2.

The goal of tracking items through an entire supply chain with

100% inventory accuracy remains elusive. This type of effort represents a

huge challenge to current information technology infrastructures that are

a critical part of ERP. In the future, automated methods of planning and

control within manufacturing and service operations, and even entire

supply chains, will depend on accurate, real-time information and unique

identification of individual objects. Because manufacturing systems are in


Ta b l e 1 1 . 2

Auto-ID poll (spring 2004)

What is your main goal in implementing an Auto-ID solution?

Improve inventory accuracy 55%Satisfy trading partner requirement 13%Increase inventory turns 10%Reduce out-of-stock situation 9%Enhance supplier relationship 9%Improve fill rates 4%

Sample size 658 respondents

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constant flux, data accuracy is not just a function of having the correct

value, but of having the correct value at the correct time to reflect the

proper state of the system. Accurate data that is old is useless in a dynamic

system.

Thinking beyond the utilization of real-time data, Auto-ID offers

other opportunities to capture detailed data about objects within a supply

chain on a scale never before experienced in commerce. However, orga-

nizing EPCs represents a challenge that requires significant changes to

ERP systems.

Organizing Data from the EPC

Though it is early in the development of Auto-ID technology, it

appears that ERP will hold an important role in managing the EPC data

needed for supply chain–wide visibility. The EPC, a fundamental tenet of

Auto-ID Technology, provides the capability for unique identification of

trillions of objects. Unique identification on this scale results in useful in-

formation for track and trace (Koh et al., 2003a; Schuster and Koh, 2004)

and for the authentication of objects located anywhere in a supply chain

(Koh et al., 2003b). However, managing serial numbers for trillions of

objects presents a difficult challenge for current ERP systems. As a result,

there will be a measured transition from lot control, currently available in

some ERP systems, to serial number control, enabled by new software

concepts such as the transactional bill of materials (T-BOM).

With the T-BOM approach, serial numbers contained in the EPC

are organized to provide the history of movement for an item (pedigree

information), a schematic of the serial numbers for all components

contained in the finished item, and a mechanism to allow a query for

authentication by any party within a particular supply chain (Bostwick,

2004). This is accomplished through sophisticated database technology

that utilizes EPC information gathered from the middleware interface to

Auto-ID.

The T-BOM represents a new generation of software intended to

enhance system integration as Auto-ID technology begins to take hold in

industry. Since current ERP systems use only lot control for tracking and

tracing, it is important to add capabilities that handle EPC data so that

that it can be queried and communicated as needed. Without these types


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of new structures to enhance ERP, there will be much less effectiveness in

using data from Auto-ID technology.

Besides tracking, tracing, and authentication, serial data on com-

ponents opens new possibilities for gaining insight into complex opera-

tions. There are many situations in which lack of detailed information

leads to ineffective supply chain management. For example, difficulties

with the management of versions is a common problem in capital asset in-

dustries in which service parts for long-life-cycle items such as aircraft fre-

quently undergo modification and redesign midway through the life of the

asset (Engels et al., 2004). With most part numbering systems, different

versions of a service part cannot be identified, inventoried, traced, or

tracked. In situations involving large networks that perform maintenance

of deployed assets, such as airbases in support of combat aircraft, know-

ing the exact version of a service part in inventory is essential to provid-

ing high levels of service and readiness. In addition, the ability to track

failure rates by serial number (version) is also critical to understanding

overall reliability as service parts move from manufacture, to distribution,

and finally to installation and use (Kar, Li, and Schuster, 2003).

There is no question that Auto-ID has great potential to provide

detailed data about objects within a supply chain. The data capabilities

of the technology also allow other possibilities, such as a change in the

algorithmic structure of ERP. The next section explores just a few of

these possibilities.

Capacitated Planning and Automated Scheduling

One of the most basic processes of ERP is planning and schedul-

ing. Figure 11.2 provides a conceptual overview of the various planning

and scheduling functions common to all ERP systems.

Two aspects of Auto-ID technology have the potential to change

the way that practitioners use ERP for planning and scheduling.

First, the ability to have manufacturing plant and supply chain–

wide visibility of objects identified with the EPC allows for large amounts

of information and executable instructions to be assigned to an object. An

example that has been in application for several years involves attaching

an electronic tag to a component that is a work in process (WIP). As the

component moves through different manufacturing stages, the tagged


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item is scanned and instructions are downloaded from databases into

computer numeric control (CNC) milling machines that automatically cut

the component to exact specifications. As the component moves to the

next stage of manufacturing, another scan takes place and a new set of

instructions are loaded into processing machines. It is even feasible that a

queue of tagged parts for an individual work center could be scanned

simultaneously to identify important information for adjusting work

center priorities. In this manner, detailed day-to-day shop scheduling and

management of instructions become automated processes.

With this level of control, there are almost unlimited opportunities

to improve information handling and automation within manufacturing

plants. The opportunity also exists to increase the level of automation

across entire supply chains so that a component manufactured at one

plant can be transferred to another with the knowledge that all relevant

information and manufacturing instructions are attached to the component

and can be processed automatically. The open standards and protocols are


Forecasts of future demand

Aggregate plan

Master production scheduleS

Schedule of production quantities by product and time period

Materials requirements planning systemS

Explode master schedule to obtain requirements for components and final product

Detailed job shop scheduleS

To meet specification of production quantities from MRP system

HIERARCHY OF PRODUCTION DECISIONS

FIGURE 11.2 Sequencing of Value-Added Operational TasksSource: Adapted from Nahmias (1993)

11-S3385 6/10/05 8:21 AM Page 166

an important feature of Auto-ID technology that allow for this type of

information transfer and communication within the supply chain.

The second important aspect of Auto-ID technology that will

change the way planning and scheduling is performed within ERP

involves the continuous flow of data. A well-designed Auto-ID system is

always “on.” With this improved sensing capability, critical subsystems

of ERP will have accessibility to more data for scheduling calculations.

Given real-time data, new possibilities exist to apply advanced algorithms

such as math programming and heuristics in every practical aspect of

planning and scheduling.

One of the most important goals of manufacturing is the manage-

ment of capacity utilization. Several ERP subsystems are crucial in

achieving this short- and medium-term goal. The master production

schedule, the MRP system, and the detailed shop schedule, all visualized

in Figure 11.2, are the current tools within ERP to manage capacity. For

many years, all of these systems assumed infinite capacity when doing

planning and scheduling.

This assumption, though widely recognized as an important weak-

ness, reflected the reality that, in many cases, data did not exist to support

advanced finite planning and scheduling. Planners have spent untold

hours manually balancing production to meet available capacity. When

the problem could not be solved manually, due dates were not met and

customer service suffered.

Beginning in the mid-1980s, the advent of microcomputers re-

sulted in the introduction of master scheduling software that accom-

plished capacitated planning and scheduling for end items. These soft-

ware packages existed outside ERP systems and required significant

integration to achieve operability. During this time, computer spread-

sheets began to be used as a powerful means to build models and do finite

capacity scheduling for end items (Schuster and Finch, 1990; Allen and

Schuster, 1994; Allen, Martin, and Schuster, 1997; D’Itri, Allen, and

Schuster, 1999).

However, achieving capacitated planning and scheduling for a

single-level, finished good is far easier than achieving the same task for

dependent demand (MRP). In this case, the consideration of capacity

constraints and cost optimization must take place through multiple levels

for the BOM. Manufacturing multiple complex end items at a single


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facility adds to this complexity. MRP has been singled out by managers

and academics alike for the lack of consideration of capacity constraints

when planning lots sizes. As Billington, McClain, and Thomas (1983,

p. 1130) write, “MRP systems in their basic form assume that there are

no capacity constraints. That is, they perform ‘infinite loading’ in that any

amount of production is presumed possible. . . .”

For some types of industries, such as heavy manufacturing, this

limitation is an annoying inconvenience. With finished items requiring

high labor inputs, the primary capacity constraint is often the availability

of skilled workers to do the job. If high production levels press the

capacity of available trained labor, more workers can be hired or existing

workers can be retrained. In other situations, such as process industries,

lack of capacitated planning and scheduling is a much more serious

matter.

The process industries are asset intensive, with huge investments

in long lead-time equipment. In this case, adding additional capacity is

not a short-term managerial prerogative, so it becomes imperative to get

the greatest amount of capacity utilization possible through scheduling

methods that find the optimal solution and consider dynamic capacity

constraints. The lack of capacitated MRP is such a serious issue that some

leading companies have declined to use MRP for planning and schedul-

ing (Taylor and Bolander, 1994). While the algorithms to do aspects of

capacitated MRP (CMRP) are available, the drawback to implementation

is partially dependent on lack of real-time data needed for a meaningful

solution. To deal with dynamic demand for end items, manufacturers

must account for capacity constraints at all levels of the supply chain.

This ambitious goal remains elusive for most firms.

Auto-ID technology overcomes one barrier to the implementation

of advanced algorithms for capacitated MRP by providing a continuous

stream of data for mathematical programming models to achieve CMRP

in practice. Although there are a number of complicating factors that

limit the widespread use of advanced models, a major drawback appears

to be schedule stability (Unahabhokha et al., 2003). Because of a lack of

continuous data, replanning often occurs less frequently than needed. In

addition, small changes in inventory and production values caused by

inaccurate counts or poor execution to plan (for production and the sales

forecast) also contribute to the schedule stability problem. The combination


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of these two factors can create large changes in out-front schedules and a

great amount of instability within CMRP. Having a continuous stream of

data allows quick adjustment to variances and frequent updates. If the

proper buffers exist, a stable schedule results, with only minor changes

occurring over the time horizon with each new planning run.

There are several documented examples of the application of

CMRP in industry (Schuster and Allen, 1998; Schuster, Allen, and D’Itri,

2000). Most notable is the work of Leachman et al. (1996). This article

provides a comprehensive report on the successful application of CMRP

for a semiconductor company. The approach uses large-scale linear pro-

gramming (LP) to accomplish CMRP with the goal of improving on-time

delivery. The authors note that before implementing the LP approach,

sector-wide planning took place only once per month because of the poor

quality and availability of data on demand, work in process, and inven-

tory. Essentially, planners always had incomplete information. A large

part of the project included the design of databases to feed the LP plan-

ning model and the development of standard ways to represent data. In

the end, the authors state that data accuracy, availability, and timeliness

were significant factors in the overall success of their efforts to implement

CMRP as a management tool.

These are just a few examples of how Auto-ID technology will

change the nature of ERP systems in practice. However, the concepts of

Auto-ID do not apply just to supply chains. The final section of this chap-

ter explores the application of Auto-ID concepts beyond the Internet of

things. In many ways, this is Auto-ID part II. This effort will have a long-

term impact on ERP system design.

Semantic Modeling

The underlying aspects of Auto-ID technology will form the bed-

rock of international commerce in the years to come. Unique identifica-

tion, interoperability, standards, and the use of automated Internet-based

systems to track, trace, and control physical objects all are important el-

ements of Auto-ID technology that are moving out of the laboratory and

into practical application. There will be new applications that can only be

dreamed about today, and other applications that are beyond what cur-

rently can be conceptualized.


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Though there is a long road to full implementation of Auto-ID

technology in business, the merging of data with physical objects opens

so many new opportunities that it is important for all firms that use or

create ERP systems to plan for future operations by learning as much as

possible about the technology. One of the most common questions that

managers have about the future of Auto-ID involves improved ways of

analyzing the data generated by the technology. As a result, there is a

renewed research effort to examine ways to make sense of data gathered

using Auto-ID technology.

The new initiative, termed semantic modeling, examines how var-

ious types of mathematical models can be applied quickly to the volumes

of data produced by Auto-ID (Brock, 2003a, 2003b; Brock et al., 2004).

Using the principles of computer languages, protocols, standards, inter-

operability, and unique identification refined during the development of

Auto-ID technology, the research initiative focuses on new ways to con-

nect mathematical models with data. This will substantially increase the

clockspeed (Fine, 1998) of modeling and the computational efficiency of

applying models to perform the “sense,” “understand,” and “do” func-

tions that comprise the underpinning of creating smart objects within

supply chains.

In many ways, this effort is a step beyond linking the physical

world, the underlying concept that has made Auto-ID technology suc-

cessful. Networks of physical objects or of abstractions such as models

share the premise that leaps in productivity arise from the free flow of

information. Creating an intelligent modeling network will accelerate the

flow of information to the greater advantage of many practitioners who

apply Auto-ID technology.

Semantic modeling also has important implications for ERP sys-

tems. Auto-ID technology offers the prospect of significant improvements

over bar codes in the identification of physical objects. Specifically, the EPC

will provide unique identification on an unprecedented level. This develop-

ment will lead to large amounts of data streaming into ERP systems.

Beyond changing the basic architecture of ERP, Auto-ID also lays the

groundwork for other technologies such as semantic modeling. In time,

Auto-ID will create an “Internet of things” that will have a significant

impact on business. This is consistent with the long-term trend toward

interconnectivity. ERP systems cannot escape being affected by this trend.


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Semantic modeling may offer a powerful alternative to the

traditional packaged software employed by ERP vendors. In essence, the

approach provides a means of establishing a repository of model elements

located on the Internet that can be searched, recombined, and employed

as needed. The primary search criteria are precise semantic definitions

that describe data inputs for a particular model. In this way, a model can

be matched exactly to a stream of data within a firm. In addition, the

outputs of one model can become the inputs of another model.

For example, there are hundreds of models that deal with all types

of master production scheduling problems. Many of these models are

long forgotten or have never been applied to more than one scheduling

problem in practice. Using semantic modeling, it is possible to build an

Internet-based repository of master scheduling models that are inter-

operable and easily applied to the available data within firms. This would

facilitate the rapid interchange of models and allow for a better chance of

finding an exact match to business processes.


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12 Auditing the System in Use: Value Beyond the Baseline

JOSEPH SARKIS AND R. P. SUNDARRAJ

Enterprise resource planning (ERP) systems require significant

investment in terms of labor, time, effort, and, most of all, dollars. A stan-

dard quote of managers in industry has been “I know exactly how much

an extra million dollars spent on marketing can generate in new revenue

but what about another million on computing? I don’t even know

whether our spending on IS has been necessary, or what it’s added to the

value of our business” (Semich, 1994, p. 46). This quote is still as appli-

cable today as it was in the early periods of IT investment. It may even be

argued that it is more pertinent now, as systems have become more strate-

gic and pervasive. Even after a slight dip in ERP investments in 2001–

2002, it is expected that investment in these systems will continue to

grow, especially among small- and medium-sized organizations.

An important aspect concerning the use of ERP systems is to eval-

uate the manner in which they are being used. That is, once ERP systems

are evaluated, justified, and implemented, the issue arises as to whether

they are doing the job that they were initially designed to do and whether

they have actually met the goals and performance metrics used in the ini-

tial evaluations for their justification. Thus, the post-implementation au-

diting (PIA) and evaluation of operating systems to help determine what

was effective (i.e., what worked) and what did not meet expectations

become indispensable. This process needs to be included for the purposes

of continuous improvement of the system and for future investments, to

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name a couple of reasons. Yet, PIA and evaluation is one of the least

attractive areas for practice and investigation.

As part of determining the value of an ERP system and strategy to

an organization, it is necessary to consider a more holistic picture than

dollars and cents. There are many factors that come into play. What these

factors may be and how they may be evaluated (before and after imple-

mentation) are two core issues that are addressed in a more complete

value evaluation of implemented ERP systems. Such a discussion, with

particular attention to PIA concerns, can prove extremely valuable within

the scope of a larger management of technology framework.

Review of Development Phases

ERP systems and their implementations can be viewed as strategic

efforts. They are meant to pervade the whole enterprise, integrating func-

tions, processes, and product families. In many cases, they also cross

boundaries to integrate the external supply chain. They have broad and

long-term implications for an organization’s competitive advantage. To

help manage this type of technology, the literature has introduced a num-

ber of strategic evaluation and implementation models and frameworks;

see Jacobs and Bendoly (2003). In this section, using this literature, we

summarize a strategic framework for managing strategic technologies in

general and ERP, specifically. The major stages of this management pro-

cess are shown in Figure 12.1. After initial discussion of the early stages,

we focus especially on the PIA.

Strategy Formulation and Integration

The decision for the development and implementation of strategic

technologies and programs begins at the upper levels of management. The

technology that should be selected needs to fit within the vision, goals,

and strategic objectives of the organization. Otherwise, the maintenance

of a “competitive gridlock” may be encountered by these organizations

(Skinner, 1996). The development of information technology and other

functional strategies should be closely linked to the corporate and busi-

ness strategy. Associated management practices should allow for contin-

uous improvement, and feedback should be present throughout the

Auditing the System in Use: Value Beyond the Baseline 173

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Uncertainty andSexternal competitiveS

environment

CorporateSstrategic planning

FunctionalSstrategic planningSand integration

Process andSsystemsS

engineering

Configuration designSand functionalityS

requirements

Systems evaluationSand justification

SystemsSimplementation

Post-SimplementationS

audits

ReconcileSfactors,S

performance,Sexpectations,Sand strategy

Strategy=formulation and=

integration

FIGURE 12.1 A Strategic Management Framework for ERP

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technology management framework. The SWOT-MOSP process is usually

completed at this stage. Within SWOT-MOSP, organizations assess their

S trengths and Weaknesses in light of environmental Opportunities and

Threats (SWOT); then, relying on and refining a shared sense of basic

identity and M ission to inform the choice of a few overarching Objec-

tives, they can then formulate a S trategy for activities that can achieve the

objective and then operationalize these principles in a set of Policies

(MOSP) (Adler, 1989).

Process Planning and Systems Engineering

The next level of planning is the initiation of the specific planning

and development of the ERP system that will later need to be justified and

implemented. The three primary concerns of this level are: what type of

system is presently in operation and what level of actual operation it

presently provides (the as-is study); at what level this system has the po-

tential to function (the should-be study); and finally what we want any

new system to provide in terms of operations and outputs (the to-be

study). For each of these studies, there needs to be a development and de-

termination of the inputs, outputs, and parameters necessary for effective

evaluation of all these systems; these same evaluation elements are needed

at the later stages and should be linked to organizational and functional

strategies. This phase could be also be defined as a “reengineering” stage

of the project development process (Davenport, 2000; Hammer and

Champy, 1993; Scheer, 1994). A rule of thumb in implementation is that

more thorough initial phases of planning and development typically lead

to fewer problems in later stages of a project’s life.

System Design and Functionality Requirements

The next step in the process is to determine what alternate ERP

configurations are required for the system. The technical development of

various information technology functionalities (e.g., what functional

areas and modules will be integrated into ERP systems) need to be ad-

dressed at this stage of the process development. Having the appropriate

conceptual models of the systems to be implemented allows the project

group to conduct a preliminary analysis of the operational, technical, and


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economic feasibility of the alternative systems. Once the configuration

and data relating to alternative systems have been developed, this infor-

mation should be integrated at the justification phase of the development

cycle.

System Evaluation and Justification

At this stage, the primary financial analysis determines the eco-

nomic feasibility and justification of the system or subsystem. Factors for

evaluation need to be determined and utilized by the organization. These

factors and measures should evolve from the previous phases. They will

also be required for auditing and maintenance of the system’s perfor-

mance. A listing of potential factors is presented later in this chapter. Typ-

ically, there are many factors with many characteristics to consider in an

evaluation: tangible, intangible, financial, quantitative, qualitative, etc.

For effective analysis of this type of data, utilizing multiple objective de-

cision techniques is clearly warranted. Some of these multiple objective

techniques are also provided with an overview and concern, especially

from an auditing perspective. At this stage, the final outcome should be a

“business case” for ERP in general and the selected system in particular.

This business case must be well documented so that PIAs can be com-

pleted efficiently (Tompkins and Hall, 2001).

System Implementation

Implementation issues can be separated into these four major steps:

1. Acquisition and procurement

2. Operational planning

3. Implementation and installation

4. Integration

There are four major strategies for implementation (especially suitable

for replacement cases) that a manufacturing firm would be interested in;

these are:

• Parallel conversion. The existing system and the new system

operate simultaneously until there is confidence that the new

system is working properly.


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• Direct conversion. The old system is removed totally, and

the new system takes over (also called the “cold turkey”

approach).

• Phased conversion. Modules of the new system are gradually

introduced one at a time using either direct or parallel

conversion.

• Pilot conversion. The new system is fully implemented on

a pilot basis in one segment of the organization.

System integration of ERP is one of the final goals in the imple-

mentation process and one of the most difficult to achieve. The difficulties

arise primarily from the use of multiple types of subsystems, platforms,

and interfaces, as well as dispersion in terms of control and physical lo-

cation of these subsystems. Legacy system integration is a critical matter

for most systems implementers. Making sure that future systems can link

modularly to current and past systems is a concern for systems managers.

Post-Implementation Auditing

The post-implementation audit (PIA) stage is one of the most neg-

lected steps of many ERP management projects (Levinson, 2003). It helps

close the loop for future development of the system and is also the primary

step required for the inclusion of the concept of continuous improvement.

There are a number of reasons posited by the literature on why

PIAs are not completed, including:

• They take too much time and drain away valuable personnel

resources.

• They require reams of documentation so that processes and

results can be validated.

• Project sponsors and implementers fear that the results of an

audit, if unfavorable, will be used against them.

To overcome these difficulties, auditing should:

• Encourage personnel to prepare investment proposals in a

more realistic and objective manner because the results of

their forecasts will be monitored.

• Help improve the evaluation of future projects.


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• Help improve the performance of projects that are already in

operation but do not perform and operate as originally planned.

• Call attention to projects that should be discontinued.

Some of the requirements for this stage include:

• Monitoring the factors and performance measures that were

identified in the justification stage

• Developing a productivity improvement tracking report that

identifies information necessary to monitor the key

justification factors, original source data, and new source data

• Reviewing and reporting elements that were not previously

reported that would have significant impact on the overall

evaluation

• Documenting all sources of information previously identified

Among these stages, there should always be some form of feedback. That

is why consistent and common factors and their measures are necessary.

This consistency is needed for effective design, evaluation, implementation,

auditing, and overall management of technology. These iterative feedback

mechanisms among and between the stages are illustrated in Figure 12.1.

Besides ensuring structured feedback mechanisms, another issue that

arises for managers is the specific timing of PIAs. When to start typically de-

pends on the type of system or application that is deployed, the amount of

time it will take before the application begins generating some results or

data, and the amount of time it takes staffers to get acclimated to the new

system and new processes. It has been recommended that audits take place

6–18 months after implementation of the system or module. As additional

modules or bolt-ons are implemented, subsequent PIAs must be administered

with sufficient time for valid data collection on sustainable use to take place.

Factors for Performance Evaluation

As we have mentioned, to fully conclude a business case and to fur-

ther complete a PIA, performance measures must be determined. These

measures, especially for strategic evaluation, need to go beyond standard

operational or cost factors. The literature provides a number of possible

performance measures that can be used, and we have categorized them

into cost measures and IT requirements.


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Cost Factors

There are many components to the tangible factor of cost. From a

project cost perspective, there are many decisions, policies, and activities

that should be included. A set of potential costs associated with imple-

mentation of ERP systems is provided in Table 12.1. There are a number

of direct and indirect costs that should be considered and evaluated, be-

yond just the purchase costs of the software. The determination of some

of these costs cannot occur until after implementation, especially items

such as unexpected hardware and software costs and losses in organiza-

tional productivity. Typically, these costs can be monetized, but some are

more difficult to determine, such as organizational strain.

IT Requirements and Factors

From an information system operational perspective, there needs

to be some consideration on the actual ability of the ERP system to meet

some of the following basic requirements:

– Platform Neutrality and Interoperability. The architecture of the

system must be such that it can operate on different platforms

and interact with other systems built for a different platform.

Interoperability is a key characteristic of software systems because


Ta b l e 1 2 . 1

Project cost categories

Direct project costs Indirect human costsEnvironmental operating costs Management /staff resourcesInitial hardware costs Management timeInitial software costs Cost of ownership; system supportInstallation and configuration costs Management effort and dedicationSystem development costs Employee timeProject management costs Employee trainingTraining costs Employee motivationMaintenance costs Changes in salariesUnexpected hardware costs Staff turnoverUnexpected software costsSecurity costs Indirect organizational costsConsumables Losses in organizational productivity

Strains on organizational resourcesBusiness process reengineeringOrganizational restructuring

s o u r c e : Adapted from Irani et al. (1997).

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the lack of integration can be expensive. For example, the

Department of Defense maintains 1,700 nonstandardized sys-

tems, making it time consuming to exchange information from

one to another and thereby consuming a major portion of its

$9 billion IT budget (Aiken, Muntz, and Richards, 1994). For

this reason, the IT field is concerned with developing technologies

for integrating systems rather than having isolated information

systems (Weingard, Verharen, and Dignum, 1997). Technologies,

as well as management and developmental processes that provide

interoperability and integration, are given in, for example, Sage

and Lynch (1998), Li and Su (2001), Sousa and Garlan (2001),

Gimenes and Barroca (2002), Plachy and Hauser (1999), and

Henn (1998).

– Scalability. The performance of a system must scale well with

business size. Scalability is a quality that allows a system to oper-

ate without wear and on any volume of data. In the context of

software systems, scalability implies the alteration of the scope

of the methods and processes according to the problem size

(Laitinen, Fayad, and Ward, 2000). For example, Arens,

Knoblock, and Shen (1996) describe a system that automatically

reformulates a database query based on changes to the data

sources, and Henn (1998) describes the use of different methods

to accomplish scalability. Scalability is important to businesses

and the lack of scalability has been the reason for the failure of

FoxMeyer Drug’s enterprise system (Bartholomew, Jesitus, and

Kreitzburg, 1997). It should be noted that scalability entails both

scaling up as well as scaling down. Scaling down requires that

processes which consume too much overhead in order to provide

their relative benefits not be used for small problem instances.

– Adaptability. Adaptability refers to how the ERP system

accommodates changes in either the process or other compo-

nents with which the system is interacting. Irani et al. (2003)

argue that information systems need to evolve over time, ac-

cording to the needs of the business, especially with the

emergence of e-commerce and inter-organizational systems.

Technologies for developing adaptable software are discussed

by Stavridou (1999).


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– Security. Security of the databases and of the ERP processes

must be inviolable because breaches therein are hard to detect

and even harder to correct. Parkin (1996) argues that security

must be viewed as a business issue and not just as an IT issue.

Security violations are often costly. For this reason, Liao and

Cheung (2001) and Devaraj, Fan, and Kohli (2002) view secu-

rity as a component of the transaction costs of IT adoption,

although the context of these two research works is from the

consumer perspective.

– Reliability. Reliability consists of the time for which the sys-

tem is running as well as the accuracy of the system’s outputs.

According to Kettinger and Lee (1994), reliability is a key com-

ponent of the perceived quality of a software system. More

recently, Devaraj et al. (2002) have studied the importance of

reliability to e-shopping end users.

– Customer Support. As with system reliability, customer sup-

port is another issue that contributes to the perception of sys-

tem quality. However, it is a post-implementation issue (unlike

system reliability, which is a function of pre-implementation

developmental processes, such as the capability maturity model

given by Paulk, Curtis, and Chrissis [1991]). Customer support

is important to managing users’ expectations of a system dur-

ing maintenance and upgrade activities (Hinley, 1996), which

have been found to occupy a huge proportion of the IT budget

(Banker, Davis, and Slaughter 1998).

– Ease of Use (EOU). EOU has been widely employed as a per-

formance measure of IT systems. It is defined as the degree to

which a prospective user expects the system to be free of effort

(Davis, Bagozzi, and Warshaw, 1989). Davis et al. (1989)

found that EOU affects the acceptance of an information sys-

tem, as measured by the usage of the system. This has been val-

idated for different types of IT, such as e-mail and voice mail

(Adams, Nelson, and Todd, 1992), and for electronic com-

merce systems (Geffen and Straub, 2000).

– Perceived Value. Perceived value is another widely used perfor-

mance metric that can influence system usage and adoption.


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Davis et al. (1989) and Adams et al. (1992) have considered the

importance of perceived value from the individual’s perspective,

while Brynjolfsson and Hitt (1996) and Kohli and Devaraj

(2003) have studied firm-level value of an IT.

Business Performance Factors and Measures

Strategic (and related operational) measures and categories also

need to be considered if a truthful PIA is to be conducted. A number of

sources of these measures already exist, and there is significant literature

on these issues. For example, one method of evaluating an ERP system’s

influence on the organization is to consider how an ERP implementation

influences the supply chain’s performance. This issue requires considera-

tion of supply chain performance measurement, which is an evolving

area of research and practice (Beamon, 1999; Guenasekaran, Patel, and

Tirtiroglu, 2001). Examples of performance measures beyond mere cost

and related to strategic performance measures such as time, speed, flexi-

bility, and quality are shown in Table 12.2 (see Gunasekaran, Patel, and

McGaughey [2004] for a description and development of these measures).

Examples of strategic, tactical, and operational level performance mea-

sures are presented. Gunasekaran et al. (2001) also describe how these and

similar performance metrics can be applied across supply chain functions.

They consider functions within a single organization’s supply chain and

provide metrics appropriate to manage the four “basic links” of the sup-

ply chain, including plan, source, make/assemble, and delivery functions.

Thus, not only do vertical management decision hierarchical rela-

tionships and related performance measures need to be considered in PIA,

but so do the influences of these relationships on various functions along

the value or supply chain. This is true regardless of whether they are internal

or external measures.

Relationships Among Factors

The right half of Figure 12.2 summarizes the possible relationships

and linkage among these factors and management levels. There are two

points worth noting in the figure. First, the factors map approximately to

the strategic, tactical, and operational levels of an organization’s managerial

and decision hierarchy. That is, strategic factors are typically evaluated by


12-S3385 6/10/05 8:21 AM Page 182

upper-level management, tactical supply chain factors by middle or line

managers, and the IT-related factors by line managers or IT system users.

Even though these mappings are suggestive, organizational characteristics

may have the same person evaluating different levels of these factors. For

example, in a small company, all factors may be evaluated by the owner

of the company, while in a large company, the decision-making divisions

are clearer (see dotted lines in the figure).

The second point to note concerns the relationship among the fac-

tors. Clearly, decisions on the strategic factors have an effect on those at

the levels below them, signifying a hierarchical relationship among the

factors, but it is also possible for lower-level factors to influence those at

the higher level (e.g., a technology’s platform neutrality can be quite


Ta b l e 1 2 . 2

Strategic, tactical, and operational performance metrics within an

organizational supply chain or value chain

Level Performance metrics

Strategic Order lead timeCustomer query timeCustomer perceived value of productVariations against budgetSupply lead timeSupplier’s level of defect-free deliveriesLevel of buyer-supplier partnershipDelivery lead timeLevel of flexibility to meet particular customer needs

Tactical Supplier’s ability to respond to quality problemsDelivery reliabilityAccuracy of forecasting techniquesLevel of supplier’s assistance in solving technical problemsProduct development cycle timePlanned process cycle timeEffectiveness of enterprise distribution planning scheduleSupplier cost saving initiativesPurchase order cycle time

Operational Level of finished goods inventoryInformation carrying costInventory level of incoming stockCost per operation hourHuman resource productivity indexQuality of delivered goodsSupplier rejection rateCapacity utilizationActual versus theoretical throughput time

s o u r c e : Adapted from Gunasekaran et al. (2004).

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important to a general strategic objective of flexibility). Furthermore,

factors within a level can be interdependent (e.g., for certain organiza-

tions that design custom products, the marketing and design functions

must be closely interlinked). These aforementioned relationships are

modeled by the two-way and block arrows, respectively. The reader is

referred to Sarkis and Sundarraj (2000) for more details.

Research has also shown that the factors which need to be con-

sidered, as well as relationships among the factors, are affected by the

type of the system under consideration (Sarkis and Sundarraj, 2003); see

the left side of Figure 12.2. Local (or departmental) systems, which are

managed, maintained, and operated internal to its user group and which

seldom have an impact on the strategy direction of an organization, need

not be evaluated directly on strategic performance metrics (as signified by

the dotted line in Figure 12.2). Instead, such systems must be evaluated

on the basis of cost as well as on a number of IT factors (see the bold line

in Figure 12.2). On the other hand, monolithic ERP systems encompass

the entire organization and take an inordinate amount of time for imple-

mentation. A business process embedded in a monolithic system holds for

an entire organization (Fan, Stallaert, and Whinston, 2000). As such,

these systems must be evaluated from an organizational viewpoint, by

considering their utility to the organization from the short- and long-term

perspectives, from the strategic perspective, and from various functional

and IT perspectives (see the bold lines in Figure 12.2).

The newer types of ERPs (namely componentized systems) share

a number of common characteristics with both local and monolithic


MonolithicSERPS

ComponentSERP

LocalSsystem

StrategicSperformanceS

metrics/factorsS

Supply chainSfactors

IT factors

SeniorSmanagementS

MiddleSmanagement

OperationalSmanagers

FIGURE 12.2 Relationships Among Factors, Alternatives, and Managerial Hierarchy

12-S3385 6/10/05 8:21 AM Page 184

ERP systems. Each component of the entire ERP system is used by a

restricted group of employees in the organization; each component is

essentially implemented internal to its group; and because it does not cost

as much in terms of money and time, a component can be changed

periodically to suit the needs of an organization. Hence, each component

should be evaluated by the set of IT factors that are used for local systems.

Strategic factors do not have a significant influence on these systems.

Finally, a key issue with componentized systems is the methodology that

is used to integrate the components in question. Thus, intercomponent

compatibility becomes a key consideration (see the block arrow next to

the componentized systems in Figure 12.2).

Methodologies for Post-Implementation Audit and Evaluation

In finalizing the post-implementation documentation of a business

case, a number of methodologies exist. Yet these methodologies will need

some restructuring because initial justification models are used typically

for selection purposes. The explicit consideration for PIA has not been a

focus in these models’ development. Thus, there is potential for

significant research in this area to further model and methodology devel-

opment for PIA. We will provide a brief overview of these evaluation

models and some considerations in their implementation, with a focus on

bias associated with their implementation.

Evaluation Methodologies

A number of methods have been proposed in the literature for the

evaluation of the factors and relationships discussed thus far. These meth-

ods typically fall within the scope of multiple criteria decision making. In-

cluded among these techniques are the analytical hierarchy process

(AHP); analytical network process (ANP); data envelopment analysis

(DEA); expert systems; goal programming; multiattribute utility theory

(MAUT); and outranking, simulation, and scoring models. These are ex-

amples of the techniques that can address a mix of tangible and intangi-

ble factors, and they are well described in the literature. Thus, we restrict

ourselves to listing the techniques and providing certain important char-

acteristics of these techniques in Table 12.3.


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Ta

bl

e 1

2.3

Sum

mary

of

mult

iple

-cri

teri

a e

valu

ati

on t

echniq

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and m

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s fo

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alu

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f

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and f

act

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(H

�hig

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under

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xit

yflex

ibilit

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AH

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ML

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LH

A, B

, C

DE

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ML

ML

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D, E

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stem

sH

HL

HM

HH

F, G

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gra

mM

MM

HL

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C, H

, I

MA

UT

HH

MM

MM

HJ,

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utr

ankin

gM

ML

ML

MM

LSim

ula

tion

HH

HH

HH

MM

, N

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ring m

odel

sL

LL

LH

LH

O, P

*A

�A

lbayra

koglu

(1996),

B �

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indorf

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nd P

art

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990),

C �

Sure

sh a

nd K

apart

hi (1

992),

D �

Khouja

(1995),

E �

Sark

is (

1997),

F �

Bore

nst

ein

(1998),

G �

Padm

anabhan (

1989),

H �

Sta

m a

nd K

uula

(1991),

I �

Sure

sh (

1991),

J �

Chandle

r (1

982),

K �

Pandey

and K

engpol (1

995),

L �

Pars

aei

, W

ilhel

m, and K

olli (1

993),

M �

Sure

sh a

nd M

ered

ith (

1985),

N �

Pri

mro

se (

1991),

O �

Nel

son (

1986),

P �

Sem

ich (

1994).

12-S3385 6/10/05 8:21 AM Page 186

Managerial Issues Concerning Biases in Post-Implementation Auditing and Evaluation

Our discussion thus far has focused on (a) the importance of

considering intangible issues in ERP evaluation and (b) methodologies

for evaluating those issues. This evaluation, initially, involves significant

judgment elicitations using field interviews and surveys. A protocol

suggested for conducting this elicitation is given in Keeney and von

Winterfeldt (1991):

• Identification of issues

• Identification of expert

• Refinement of issues

• Training for elicitation

• Elicitation

• Analysis, aggregation, and resolution of disagreements

• Documentation

A number of the above steps are affected by judgments biases stemming

from both the decision maker and researcher, whether before or after im-

plementation of the ERP system. Biases can affect the selection of the factors

for consideration, as well as the methodology used to evaluate those factors.

Even though the following bias discussion is particularly relevant for sub-

jective measurement through management perceptual input, more tangible

information and its acquisition may also fall prey to many of these biases.

– Availability Bias. Availability bias arises when issues that are

not mentioned explicitly are not considered; that is, “out of

sight is out of mind” (Fischchoff, Slovic, and Lichtenstein, 1978,

p. 333). To handle this bias, auditors and managers must follow

in their interviews a “debiasing strategy” that entails asking dis-

confirming questions aimed at refocusing the subject’s attention

on what was left out. An example by Fischchoff et al. (1978) is

as follows: “In particular, we’d like you to consider its com-

pleteness. That is, what proportion of the possible reasons . . .

are left out, to be included in the category all other problems.”

– Overconfidence Bias. This bias relates to situations in which

individuals tend to be overconfident in their fallible judgment


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(Bazerman, 1986). A number of researchers have found that

overconfidence is most extreme with tasks of great difficulty

and is reduced when tasks get easier (Lichtenstein, Fischchoff,

and Phillips, 1982; Pitz, 1974). As such, Fischhoff’s (1982,

p. 427) review of methodological manipulations to debias over-

confidence has found that “overconfidence is relatively resistant

to many forms of tinkering (other than changes in difficulty

level),” and he suggests decompositional approaches as one of

the restructuring debiasing strategies. Kleinmuntz (1990) con-

tends that decompositional approaches reduce information-

processing demands as well as errors, and Russo and

Shoemaker (1989) state that people have difficulty simultane-

ously handling (or “making assessments across” in the case of

PIA) several factors. Finally, Armstrong, Denniston, and

Gordan (1975) have experimentally found that decomposition

can reduce cognitive biases. In other words, the research litera-

ture suggests that judgments must be elicited by breaking down

a complex question into a series of simpler questions. Of the

methodologies surveyed in the previous section, the AHP ap-

proach does decomposition naturally, which may support the

use of one technique versus another. If the auditing team feels

that overconfidence bias is prevalent, then the incorporation of

a technique such as AHP may be more appropriate.

– Management Bias. Management bias can occur when a sub-

ject’s responses are influenced by some kind of reward struc-

ture, such as: “Well, if that’s the variable the boss wants mini-

mized, we’ll minimize it!” (Merkhofer, 1987, p. 746; Shephard

and Kirkwood, 1994). It would, therefore, be important to

select people for PIAs who would not be subject to pressure

from management.

– Anchoring Bias. Anchoring occurs when an individual starts

with an initial estimate and makes insufficient adjustment from

that anchor (Bazerman, 1986). Merkhofer (1987) states that

organizational frames create strong anchors, and only those

individuals who understand the context of such frames are able

to free themselves of that anchoring effect. Anchoring could

also happen when the expert is influenced by the framework of


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the analyst (Russo and Shoemaker, 1989). One way to mitigate

the effects of this bias is to ask the expert to substantiate each

factor that is being considered.

– Other Interviewer or Auditor Bias. Sometimes interviewers

and auditors unwittingly communicate information to the re-

spondent (for example, through a comment). This can produce

expectations about how the respondent must answer the inter-

viewer’s or auditor’s question and thus bias the response

(Hyman, 1970; Krosnick, 1999). An example drawn from

Hyman (1970, p. 58) is the following statement by the inter-

viewer: “The average woman thinks only of her job.”

Managerial and Research Implications of PIA Factors and Methodologies

A number of issues arise when seeking to complete PIAs with

respect to factors and methodologies. Many of these issues occur in prac-

tice and have not been fully researched to determine how they should be

addressed. Addressing them may help to further the development and

adoption of PIAs in organizations, further enhancing their competitive

position by improving the use of ERP systems and thus the strategic com-

petitive positioning of the organization. We now enumerate what may be

considered some major issues and characteristics.

1. In ERP environments, the fuzziness or uncertainty of the

measures used in PIA may be because much can be based on

data archived by these systems, rather than simply on subjec-

tive experiential estimates. This reduces reliance on manage-

rial perceptions and may cause a shift in the biases associated

with the acquisition of data and application of methodologies.

2. Methodological evaluation approaches will need to consider

variances in valuations and factors, not just absolute values.

Thus, methodologies may need adjustments for gap analysis

or focusing more on variance qualities of the factors.

3. Methodological approaches that are more intangible and per-

ceptually or preferentially focused (i.e., expert systems) may be

less useful for post-audit implementation than methodologies


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that are more structured and quantitatively oriented (e.g.,

mathematical programming). The veracity of this point needs

to be investigated.

4. Selection of factors must be carefully and rigorously con-

ducted so that before and after data are comparable and

measurable to similar extents. For example, return on invest-

ment, a financial metric, may be used in before and after mea-

sures and integrated into a broad variety of methodologies.

5. The methodological approaches selected should be consistent

(even with differing factor and data availability). This issue

gets into the flexibility of methodologies for pre- and post-

implementation audit. An investigation into this flexibility,

considering some of the decision environments we have

discussed, needs to be completed.

6. The availability of various levels of management for informa-

tion and data acquisition must be taken into consideration

when determining which factors and methodologies are suit-

able. Those that require significant interaction with managers

(e.g., expert systems and AHP) may be at a disadvantage. It is

expected that this interaction is lessened in PIA.

Bottom Line

One of the major concerns in ensuring continued success in ERP

implementations and extensions is that of the post-implementation audit

(PIA) and evaluation of these systems “in-use.” Yet regardless of their

importance in improving management decisions and operations relating to

these systems, formal and valid PIAs are still not common. To further the

integration of PIAs into organizations, understanding the roles of factors

and evaluation methodologies, especially for strategic systems such as ERP,

becomes critical. Managerial and research insights into the application of

various factors (cost, IT operational, and general business) into the PIA

must be developed. Similarly, methodologies and considerations facing

their application and the issue of biases must be more rigorously addressed

by researchers and practitioners alike. With continued advancements in

ERP system capabilities and extensions, this task will only get more com-

plex in the future. Becoming familiar with PIA processes in the near term

should establish a corporate knowledge base for emerging developments.


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The ability of future enterprise applications to support corporate

business objectives and the requirements demanded of a new century

remain subject to debate. Many of these “IT solutions” have been

extremely painful (if not disastrous), though some have paved the way for

companies to explore new markets and technologies. Nevertheless, many

operations and IT managers feel like battle survivors and still wonder

what they have won. Now faced with industry pressures to widen the

scope of ERP applications and find solutions to manage entire supply

chains, they are looking back to their ERP implementations for cues to

the possible future.

In a 2003 presentation to the SSA Global Client Forum, Mike

Greenough (President and EO of SSA Global) stated the case plainly:

“Implementing an ERP system is like brain surgery: you only want to do

it once.” Others, such as Graeme Cooksley (Executive VP, Global Sales

and Marketing, SSA Global), suggested that “given the economic realities

of today, companies are looking for more efficient ways to conduct busi-

ness and remain competitive . . . ” while purposely avoiding major IT in-

vestments. In other words, having gone through the effort to get an ERP

architecture up and running . . . find ways to better use what you have,

before looking for new things to get (or change). In looking ahead, man-

agers first need to look back and recognize the accomplishments they may

13 The Path of the Enlightened Manager:Prescriptions for ERP Evolution

LORET TA L. DAVID AND ELLIOT BENDOLY

13-S3385 6/10/05 8:21 AM Page 191

have achieved through ERP implementation. Depending on the nature of

the business and type of success achieved, this may include:

• The majority of key business processes now linked and

supported by a common ERP architecture

• Unique, proprietary system customizations to resolve critical

procedural gaps that previously existed

• A strengthened foundation for understanding, tracking, and

managing cross-linked operations

However, the question of “the relevance to new practices” (e.g., new

SCM initiatives) still needs to be addressed. The task is complicated by

the fact that not all ERP benefits have been equally realized by a large

number of firms that possess “completed” implementations. With pres-

sure to secure competitive supply chain positions among other firms with

potentially disparate ERP capabilities, managers are weighing a range of

often seemingly dramatic options.

– Upgrade or change architecture. Only a select few companies

have embraced the very disciplined (if not questionable) ap-

proach of banning customizations (or at least limiting them to

business critical areas). These few are perhaps best positioned

to take advantage of upgrades designed to stay current with

emerging application benefits. Each new version has the

potential of contributing new functionality and easing con-

temporary compatibility concerns across the architecture. In

fact, the “traditional” model for ERP software had always

been keep current and always plan to move to the most cur-

rent software release. Benefits touting such modifications

have been:

– • Access to new functionality that matches a firm’s strategic or

tactical needs

– • Replacement of previous “heavy-seam” customizations,

making processing smoother and laying the groundwork for

easier future changes

– • The leveraging of existing system strengths, which were

previously underutilized


13-S3385 6/10/05 8:21 AM Page 192

– • Potentially minimal disruptions to end users and processes, if

much of the front-end protocols and interfaces go unchanged

– At the same time, these modification projects do require the

drafting and approval of new project plans and often drive

firms to call for additional assistance from experts (either

in-house or outsourced) to provide net change education and

perhaps “re-implementation” if several critical modules or

releases have previously been skipped. Furthermore, aside from

migration assessments from vendors to determine the scope

and cost of such upgrades, post-implementation assessments

involving net operating changes and surveys of end users are

required to ensure that the greatest benefits from such changes

are ultimately realized. Overall, and not surprisingly, it often

takes so much time, money, and effort to modify these systems,

few “veteran” managers are willing to consider such overhauls

seriously.

– Expand with bolt-on solutions. A potentially less disruptive,

and increasingly popular, option is to keep existing ERP

architectures intact and seek out solutions designed to enhance

the firm’s ability to support its strategic vision and mission. As

discussed in several of the previous chapters, this often comes

in the form of what have become known as “bolt-on” applica-

tions. Such extensions can support both strategic and tactical

solutions to emerging competitive requirements. As Mabert

and Watts (Chapter 4) suggest, the benefits of bolt-on–based

evolution provides opportunities for best-of-breed extensions

while retaining the underlying efficiencies made possible by

existing enterprise capabilities. Of course, the loss of seamless-

ness from the use of bolt-ons from vendors other than the ERP

architecture provider may raise some red flags—but with

modern awareness of ERP architectural design, such seams

need not be extensive. The near seamlessness of “light-seam”

options suitable for specific firms, architectures, and applica-

tions is becoming more commonplace. Major concerns for this

approach still exist in industries in which novel extensions are

not common practice, even from an operational standpoint.

The Path of the Enlightened Manager: Prescriptions for ERP Evolution 193

13-S3385 6/10/05 8:21 AM Page 193

When “heavy-seam” options are the only options available,

bolt-on solutions require considerable scrutiny to justify from a

medium-term risk perspective.

– Sweat and exploit. Many firms, having made a significant

investment in their ERP systems, may still have significant ROI

to achieve directly from existing untapped capabilities. It is

important to keep in mind that data is not the only thing that

can be mined from ERP architecture. Underutilized functional-

ity can also be “discovered” with sufficient time, experience,

and effort. Just as data mining is not driven entirely by auto-

mated algorithms (Bendoly, 2003), the search for functionality

involves a wide range of contributors, including managers,

high-level super users, and end users faced with seemingly rote

and repetitive tasks. Three critical components should be kept

in mind during exploitation efforts—access to information, in-

creased productivity, and collaboration. The focus should not

be on a better mousetrap, but on the efficiency of the traps in

place. ERP systems offer a wealth of data, but it is information

that drives business. Access to answers relating to the business

operations within hours rather than days is an advantage. Pro-

ducing consistent real-time measurements of the key perfor-

mance indicators within hours of the results is competitive.

Providing workers with tools to give visibility to customer or-

ders and service levels is strategic. Shared information between

customers and suppliers extends solutions to the entire supply

chain.

Recommendations

Bottom line: If it’s broken, fix it; if it’s failing, shore it; if it’s work-

ing, advance it! If the system is not supporting current operations, or on

the road to that state, then either modify the system or modify opera-

tional procedures for conformity. Firms that simply ignore misalignment

set themselves up for a myriad of unorganized local decisions. A sustained

policy of usage accountability must be engaged as an extension of the im-

plementation process to ensure that ERP systems continue to complement

operational processes and are advantageously leveraged through time


13-S3385 6/10/05 8:21 AM Page 194

(e.g., Sarkis, Chapter 12). We outline some of the tasks required in such

an ongoing accountability below:

• Broadly review current processes and procedures. Current op-

erational procedures may have changed to meet changing mar-

ket requirements since initial implementation. Evaluate the

changes against existing processes and ERP functionality. Ad-

ditional core ERP products may have been bundled with the

original purchase or could be added for a minimum invest-

ment. The real advantage here is that all of the new processes

will build on the existing database and the new functionality

may be fully integrated throughout the system. This is a good

way to leverage the knowledge of your business, customers,

and markets to gain competitive advantage.

• Perform a formal gap analysis. Analyze how the solution or

system is being used. Assess how the firm is currently using the

ERP architecture. Get consulting help if needed to maximize

the use of the software to support operations. Consider using

consulting like you would laser surgery—very focused for a

short duration. Make sure internal managers have an under-

standing of the global picture to guide this focus.

• Consider the physical resources that drive ERP effectiveness.

Determine whether a hardware upgrade would improve system

operation. The technology race has reaped fast, more efficient,

economical hardware, but do not limit resource considerations

to the technology. If slow response time or problem-resolution

accuracy is a problem, look for efficiency improvements in

the workforce. Training and greater exposure of users to

enterprise-wide functional linkages can create a culture of

extended use—and can yield much greater results than many

technical options.

• Consider rolling out the solution to a wider user base. Expand

to field personnel via intranet and Internet access, share infor-

mation, and link customers and vendors. There are several

software solutions that can Web enable the software, even if

the current vendor does not offer it at the current ERP release

that is running.


13-S3385 6/10/05 8:21 AM Page 195

• Maintain an active partnership with the ERP vendor. Many

vendors have answered the wake-up call to listen to customers

and have had to re-invent solutions to become more agile and

responsive. An active partnership requires commitment

through renewing or continuing ongoing maintenance support,

which invests in the vendors and entitles customers to shape

the direction of the solutions offered in the future. This will

also open the opportunity to report all open issues and follow

up until resolved.

• Don’t feel locked into extensive prior customizations. Time

and money spent on such customizations often dissuade the

consideration of upgrade benefits. However, new versions may

include the solution that warranted initial customization in the

first place, as well as added functionality that could bypass

future customization projects. Keep long-term goals in mind,

and remember that sunk costs are, after all, sunk.

• Consider further consolidation. Again, with market changes in

mind, if the company has many sites using different software

solutions, determine whether a conversion to one standard

system is now or will soon be warranted. Of course, this

depends on the extent of homogeneity across business units

and divisions. Also, understand that “consolidation” does not

need to be strictly an IT issue. Procedural consolidation may

end up being much more operational and organizational in

scope. To that extent, consider whether local technical ex-

pertise at each site may serve the firm’s purposes more effec-

tively than centralized IT support. Furthermore, evaluate the

potential tradeoffs between centralized and decentralized

operational planning that may only now be possible given the

IT infrastructure.

• Look to bolt-on solutions when exploitation fails to yield.

Work with the existing ERP vendor to enhance the solutions.

Many vendors have established partnerships with best-of-breed

solutions with collaborative efforts in developing the software

integration between the core ERP and the partner solutions. At

the same time, don’t discount third-party options. They’re


13-S3385 6/10/05 8:21 AM Page 196

often ahead of the curve relative to base vendors on innovative

extensions. To determine the partner solutions that may help:

• • Go to market leader literature to compare feature function-

ality.

• • Attend web presentations, exhibits, and workshops.

• • Speak with references and read client testimonials.

It’s “Usage That Supports Strategy,” Stupid!

Regardless of the numerous strategic implications of ERP, there

remain critics. Those that (a) view ERP simply as an imitable technology

that imposes common and inflexible standards and (b) choose to ignore

the process dynamics derived from its implementation and associated

with its usage are likely to be closed minded to a number of opportunities

available to their firms. Such managers seldom represent positive stabiliz-

ers and are much more likely to serve as dead weight, limiting the flex-

ibility of the firm much more so than any set of imposed standards. More-

over, such managers have most likely bought the line that imitable and

inflexible assets can’t possibly advance the competitive objectives of firms

(a mindset analogous to the common misinterpretation of resource-based

thinking on the behalf of some academics). They fail to see that even

highly imitable and inflexible resources can give rise to high levels of flex-

ibility and inimitability in other resources (e.g., human resources, process

designs, etc.). This point is significant in that although it is not in conflict

with either the original statement of the resource-based view or dynamic

capabilities discussions, it has not been one of the main points of focus by

academics. For example, Barney (often praised as the originator of the

resource-based view) only mentions such an alternative notion in passing

in his 1991 treatise (p. 113):

It may be that the [imitable] formal planning system in a firm enables

a firm to recognize and exploit other resources, and some of these

resources might be sources of sustained competitive advantage.

This “new” recognition and exploitation necessarily assumes

changes in other resources (e.g., new processes designed to exploit these

newly recognized or rediscovered resources). Furthermore, this recognition


13-S3385 6/10/05 8:21 AM Page 197

and exploitation doesn’t have to be catalyzed by the resources within the

firm alone. Given the relational nature of modern supply chains, it is very

likely that the use of imitable resources (e.g., off-the-shelf ERP packages)

by partnering firms can create the same result, even if a firm does not

possess that same imitable resource.

The concept of knowledge generation through imitable resource

usage among a network of firms gives rise to an inspiring notion of the

mechanisms behind supply chain technical advancement and strategic

evolution. Necessarily such a process is iterative and cyclical even for

individual firms (as depicted in Figure 13.1).

What makes ERP so profound from a strategic perspective is its

role as a foundation and launching pad for such inter-organizational

development. The wide variety of extended applications as described in

the preceding chapters attests to its flexibility in this regard—in sharp


ImitableStechnologySresources

FuzzySknowledgeSresources

Higher-levelSknowledgeSresources

� TechnologySadoption

� Inter-org.Stech ambiguity� Inter-org.S

external cues

� Inter-org.Sexternalities

StrategicSvalue-S

clarifyingSknowledge

StrategicSprocess andSrelationalSresources

� Composite techSassessments

FIGURE 13.1 Supply Chain Enablement Through ERP Development and UseSource: Adapted from generic model by Bendoly (2005)

13-S3385 6/10/05 8:21 AM Page 198

contrast to any inflexibility imposed by embedded standards. This diver-

sity of opportunities in turn opens the door to levels of competitive

distinction that many firms may not have even considered in the past—

provided that these resources are in fact used to their full potential at all

levels of the firm. This includes use of the system in identifying capabili-

ties and driving new strategic directions by top-level managers, as well as

application in the weeding out of process constraints by front-line work-

ers familiar with the direct links between the transactional data collected

and the flow of operational activities. Much of this is not the kind of use

mandated by system design, but rather promoted by a concerted organi-

zational culture of development.

This isn’t a missed ship. It still waits in the harbor for intrepid

firms interested in preventing extinction through inertia. When asked, “Is

this as good as it gets?” regarding resource planning technologies, com-

petent and responsible managers need to feel confident in replying, “You

ain’t seen nothing yet.” They need to be aware of their options and of

deficiencies of their current capabilities. Resources that have as great a

potential as ERP systems to motivate the evolution of competitive strengths

and strategic prowess can make the sky the limit, but only for managers

and organizations willing to embrace inward scrutiny, confront long-lived

challenges, and drive continual development through the future. There

will always be a few that are willing to test the waters. For these we have

the highest regard and look forward to seeing the new worlds, innovations,

and fortunes that await them.


13-S3385 6/10/05 8:21 AM Page 199

13-S3385 6/10/05 8:21 AM Page 200

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Index

Italic page numbers indicate material in tables or figures. Page numbers followed

by “n” indicate notes.

ABC inventory analysis logic, 125

Accenture, Institute for Strategic

Change, 72n

accountability of usage of ERP sys-

tems, 194 –97

Ace Hardware, 113

acquisitions, 77

active RFID tags, 162

active tags, Auto-ID, 158, 159

adaptability, 180

add-ons, 49

ad hoc reporting functions, 79

adoption phase, 14, 18, 21, 46. See

also chartering phase

Advanced Planner and Optimizer

(APO), 53, 57

advanced planning and scheduling

(APS) systems, 37, 56 –57

advance order commitments (AOC),

102–3, 104, 105

advance ship notice (EDI 856), 118

agility, 87–96; case study, 90–93;

defined, 87–88; mechanisms of ERP

support, 93–96, 94; summary, 96

AHP (analytical hierarchy process),

185, 186, 188, 190

aircraft manufacturer, 21

Albert Heijn, 142– 43

American Production and Inventory

Control Society (APICS), 61, 65,

163, 163

Americas SAP Users Group (ASUG),

136

analytical hierarchy process (AHP),

185, 186, 188, 190

analytical network process (ANP),

185

analyzers as strategy factor, 15

anchoring bias, 188–89

ANP (analytical network process), 185

AOC (advance order commitments),

102–3, 104, 105

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APICS (American Production and In-

ventory Control Society), 61, 65,

163, 163

APO (Advanced Planner and Opti-

mizer), 53, 57

apparel industry, 98

appropriation of rents from invest-

ments, 132

APS (advanced planning and schedul-

ing) systems, 37, 56 –57

Asia-Pacific region benefits studies,

72n, 73

as-is study, 175

ASUG (Americas SAP Users Group),

136

auctions, 60

auditing the system, 172–90; biases,

187–89; development phases of

ERP systems, 173–77; methodolo-

gies for PIA and evaluation, 185,

186; performance evaluation, 178–

85; post-implementation audit

(PIA), 177–78; research implica-

tions, 189–90

auditor bias, 189

Australia, 72n

authentication of objects, 164 –65

Auto-ID technology, 155–71; vs. bar

codes, 161–63; capacitated plan-

ning and automated scheduling,

165–69; components of, 159–61;

data and ERP systems, 163–64;

data from EPC, 164 –65; how it

works, 158–59; vs. RFID, 156 –57;

semantic modeling, 169–71

automated inventory level monitoring,

128

automatic replenishment programs,

109

automation of manufacturing, 39,

165–66

automobile manufacturers, 111, 131–

32, 133, 135

availability bias, 187

Baan, 44, 77

bar codes, 118, 128, 158, 161–62,

170

Barney, J. B., 197

batteries for Auto-ID tags, 158

before and after data, 190

Bendoly, Elliot, 56

benefits of ERP systems: vs. costs, in

perceptions survey, 26 –29, 27, 33;

exploitation of, 19; identified in

Accenture studies, 72–75, 73, 74;

measurement and management, 81,

81–83, 82, 83; product vs. process,

3, 4; of upgrade modifications,

192–93

benefits of VMI programs, 119, 120–

22

best fit, 47– 48

best-of-breed systems, 52–70; and

bolt-on benefits, 193; current sys-

tems, 63–69, 65, 68; demographic

data in survey, 62–63; ERP charac-

teristics, 53–56; functionality im-

provement, 56 –58; future systems,

69–70, 69; integrating ES solutions,

77; recent experience, 58–62

best practices, 54, 141, 148–52

biases in PIA, 187–89

big bang implementation strategy, 48,

50

bill of lading, 158

bill of materials, transactional

(T-BOM), 164

bill of materials (BOM), 99–100, 163

bolt-ons, defined, 56

bolt-on systems: current usage by ERP

firms, 63–69, 65, 68; evolutionary

216 Index

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option, 193–94; functionality im-

provement, 56 –58; recommended

in exploitation failures, 196 –97;

SME use of, 49; as source of agility,

94, 95; study of value to firms, 58–

63; types of, 59–61

BOM (bill of materials), 99–100, 163

bonded inventory, 112

bottleneck reduction, 4

BPICS, vendor, 38

Briggs and Stratton, 80

Broeking, A., 72n

Brookings Institution, 134

built-in flexibility, 94, 94

“bullwhip” effect, 98, 108, 121, 128

business analysis, 79

business case, 176, 178

business intelligence project, 137,

137–38

business partnering agility, 88

business performance factors and

measures, 182–85

business processes: integration into

ERP, 52, 54, 97; in monolithic ERP

system, 184; optimization of, 78;

standardization rationales, 91–92

business transactions in VMI partner-

ships (B2B, B2C), 111

business unit, 140

business unit strategies, 16

CAD (computer-aided-design), 37

call center management system, 60,

66, 67, 68

CAM (computer-aided-manufactur-

ing), 37, 132

Canada Post Corporation, 77, 79, 83

Cantrell, S., 72n

capability maturity model, 181

capacitated material requirements

planning (CMRP), 168–69

capacitated planning and scheduling,

167–69

capital asset tracking and manage-

ment, 156

Carr, Nicholas G., 130

carrier services for vehicle dispatching,

61

causally ambiguous resources, 17

cellular production techniques, 37

centralization of processes, 89

centralized operational planning, 196

CFPR (collaborative forecasting, plan-

ning, and replenishment) program,

112–13

channel performance and integration,

97–99, 107

channels (routes to market), 92–93

chartering phase, 14, 22. See also

adoption phase

Chiazza, John, 78

China, 72n

CIO Magazine, 87

Class A MRP II, 163

closed-loop applications, 156

CMRP (capacitated material require-

ments planning), 168–69

CNC (computer numeric control)

milling machines, 166

cold turkey implementation approach,

177

collaboration: intra- and inter-

organizational, 55; in VMI pro-

grams, 109–10, 124

collaborative engineering systems,

132–34

collaborative forecasting, planning,

and replenishment (CFPR) pro-

gram, 112–13

comanaged inventory, 109

commercial transactions, 160. See

also electronic data exchange (EDI)

Index 217

15-S3385-IX 6/10/05 8:21 AM Page 217

commissions for sales, 93

commodity stage of IT, 130

communication, intra- and inter-

organizational, 55

communication standards, industry-

wide electronic, 120, 128

companies: large companies, ERP

implementation, 38, 43. See also

firms; small and medium enterprises

(SMEs)

competitive advantage: and business

strategy, 14, 16 –19; ERP culture

change, 19; and ERP systems, 34 –

35, 58, 71; and VMI, 129

competitive competencies, 122–23

competitive gridlock, 173

competitive parity, 17, 18

complexity: of classic ERP system,

144, 145; of VMI program, 111

componentized systems, 184 –85

computer-aided-design (CAD), 37

computer-aided-manufacturing

(CAM), 37, 132

computer business, agility study, 90–

93

computer numeric control (CNC)

milling machines, 166

computer simulation studies, 105–6

configuration of ERP systems, 48– 49,

89

connections in ERP software and

among employees, 20

consignment inventory, 112, 146

consolidation of applications, 77, 196

construction equipment supply chain,

105

contextual information, 79

contingency approaches, 15

continuous data flow, 167, 168–69

continuous improvement, 177

continuous replenishment, 109, 111

conversion strategies for ERP imple-

mentation, 176 –77

Cooksley, Graeme, 191

coordinated lot-sizing problems, 103–

4

cost factors in performance measures,

179, 179

cost leadership, 15

costs of ERP systems vs. benefits, in

perceptions survey, 33

creativity, 135–36

critical mass of implementation, 75, 80

critical success factors, 13

CRM. See customer relationship man-

agement (CRM)

cross-training of workers, 39

culture change, 19, 33, 35

customer: benefits of VMI programs,

121; in consignment agreements,

112; understanding needs of, 141–

44; in VMI partnership, 108–9

customer interface, 66 –67, 69–70

customer relationship management

(CRM): as bolt-on system, 57, 60,

66, 68, 70; and competitive agility,

87, 90; implementation in computer

firm, 91–92

customer satisfaction, 120, 143– 44

customer service and support, 114,

120, 181

customization: evaluation of prior,

196; of German SMEs, 39; getting

results, 79; and response agility, 89;

of SMEs, 44, 48, 50; upgrade ERP

architecture, 192–93

data accuracy, 163–64

database, single underlying, 54, 55

database query, 180

data envelopment analysis (DEA),

185, 186

218 Index

15-S3385-IX 6/10/05 8:21 AM Page 218

data: for manufacturing planning and

scheduling, 167–69; in semantic

modeling, 170–71

data mining, 61

data transfer, 160. See also electronic

data exchange (EDI)

data warehouse, 60, 79

Davenport, Thomas H., 72n

DEA (data envelopment analysis),

185, 186

debiasing strategy, 187

decentralized operational planning,

196

decision making: authority in R&D,

134; as ES benefit, 73–74, 81; mul-

tiple criteria, 185, 186; supplier-

customer, 141; from uncertainty

basis to risk basis, 155

decision-making coordination, replen-

ishment strategies, 97–98, 102

decompositional approaches, 188

decoupling point for customer orders,

70

defenders as strategy factor, 15

Defense Logistics Agency, 77, 82

Dell, 98

demand forecasting and planning sys-

tem, 59–60, 63–65, 67, 68

demand management, 52

demand planning, 53

demand-pull inventory replenishment,

112, 122

demand volatility, 120–21

departmental systems, 184

Department of Defense, 180

dependent demand, 167

design and manufacturing cycles, 39

development phases of ERP systems,

173–77, 174

differentiation, 15

digital options, 88

direct conversion, 177

direct sell model, 98

distributed control systems, 157

distributor for computer sales, 92–93

Domain Naming Service (DNS), 160

Dow Chemical, 77, 78

dyad implementation, 148–52, 149,

151

dyad management, 144 – 48; supplier-

customer partnership, 141, 150

dynamic capabilities, 14, 197

dynamic demand, 168

EAI (enterprise application integra-

tion), 77

ease of use (EOU), 181

Eastman Chemical, 56 –57, 77, 78

E-auction system bolt-on, 60

economic theory, 132

EDI (electronic data exchange), 110,

111, 117–18, 127, 144

efficiency of firm, 114, 120

efficient consumer response, 109

EFT (electronic funds transfer), 118

electromagnetic field of Auto-ID

reader, 158, 159, 160

electronic communication standards,

industry-wide, 120, 128

electronic data exchange (EDI), 110,

111, 117–18, 127, 144

electronic funds transfer (EFT), 118

electronic invoice (EDI 810), 118

electronic product code (EPC), 160–

61, 161, 164, 170

electronic tags (RFID/Auto-ID), 156,

158–59, 159, 162, 165

electronic VMI transactions, 111–12

employee attitudes, 33

employees. See personnel

enterprise application integration

(EAI), 77

Index 219

15-S3385-IX 6/10/05 8:21 AM Page 219

enterprise computing systems, 87

enterprise resource planning (ERP)

systems: and Auto-ID technology,

163–64; characteristics, 53–56;

componentized systems, 184 –85;

defined, 13; development phases,

173–77; enabling position, 2; evo-

lution prescriptions, 191–99; modi-

fication to classic systems, 144 – 48;

modules or extension systems, 49,

59; planning and scheduling, 165–

69; pros and cons, 88; required in-

vestments, 172; successes and fail-

ures, 56 –58; as VMI platform,

110–11

enterprise systems (ES): defined, 37;

ongoing management of, 83; pros

and cons, 71

EOU (ease of use), 181

EPC (electronic product code), 160–

61, 161, 164, 170

e-procurement in VMI partnership,

120

e-procurement system bolt-on, 49, 60,

69–70

ERP. See enterprise resource planning

(ERP) systems

ERP-driven replenishment. See replen-

ishment strategies, ERP-driven

Ettlie, John E., 132

Europe, 72n

evaluation methodologies, 185, 186

evaluation of operating systems, 172–

73

expense of enterprise systems, 76

expert systems, 185, 186, 189, 190

exploitable resources, 17

exploitation, 194, 196, 197–98

extended supply chain, 112–13, 128

extensible markup language (XML),

127, 160

external systems of firms, 66 –68,

69–70

extranets, 126

face-to-face sales, 92–93

factory, as unit of analysis, 140

factory planning and scheduling sys-

tem, 60, 65, 69

failure mode effect analysis, 61

failure rates tracked by version, 165

FAS (final assembly schedule), 99

feedback, 20–21, 178

File Transfer Protocol (FTP), 112

final assembly schedule (FAS), 99

finance module, 59

financial management, 73, 74

firms: demographic data in bolt-on

survey, 62–63; efficiency of, 114,

120; integration of enterprise solu-

tions, 77; knowledge-based view,

16, 18, 33; major issues for, 136 –

38; resource-based view, 16 –18, 33,

197; in supply chain compass, 63,

64, 65, 67, 68; systems of, 66 –68,

69. See also companies

first-mover advantage, 96, 123, 150

flattening an organization, 54 –55

flexibility as source of agility, 94, 94

flexible manufacturing, 39

Flextronics, 150

flow-control products, 113

fluidic self-assembly, 156

focus as strategy factor, 15

following agility, 96

forecast push inventory replenish-

ment, 122

Forrester, J. W., 97

FoxMeyer, 37, 58, 180

frequency collision, 158

frozen time-fence, 101, 102

FTP (File Transfer Protocol), 112

220 Index

15-S3385-IX 6/10/05 8:21 AM Page 220

full information (FULL) sharing strat-

egy, 103, 104, 105, 106

functional coordination (FUNC), 102,

104, 105, 106

functionality, underutilized, 194

functionality requirements, 175–76

functional management, 146

F. W. Webb, 113

gap analysis, 189, 195

Gartner consulting group, 130, 138

Germany, Mittlestand SMEs, 36, 38–

40, 40– 42, 49–51

Global Business Excellence (Nestlé),

141– 42

global competition, 36, 52

goal programming, 185, 186

go-live date, 21, 48. See also post-go-

live survey; pre-go-live survey

Greenough, Mike, 191

grocery industry, 98

GS1 standards group, 162

hardware upgrade, 195

Harris, Jeanne G., 72n

Harvard Business Review, 130

headcount reduction, 74

heavy-seam customizations, 192,

194

hedging inventories, 121

Heineken, 142– 43, 150

Herman Miller, 77

Hershey Food Corporation, 37, 58

heuristic solution procedures, 103

Hewlett-Packard, 150

HK Systems, 53

Home Depot, 113

Hong Kong, 72n

human capital of German SMEs, 39

human resources module, 59

hyper competition, 16

IBM WebSphere, 91

identification technology. See Auto-ID

technology

imitated resources, 17

implementation approaches, 43– 44,

46 – 47, 48, 50

implementation of ERP systems: of

Asian companies vs. U.S. and Euro-

pean companies, 76; conversion

strategies, 176 –77; infrastructure

projects first, 75

implementation stages of dyads, 148–

52, 149, 151

India, 72n

industrial dynamics research, 97

industry-wide electronic communica-

tion standards, 120, 128

informate, 79–80

information asymmetry, 54, 133

information sharing: ERP-driven re-

plenishment systems, 105–6, 106;

supply chain management, 98;

vendor-manufacturing integration,

102– 4; in VMI partnership, 109–

10, 124

information technology (IT): German

SMEs use of, 39– 40; performance

measure requirements, 179–82;

productivity support, 130–32; SME

use of, 36; system adoptions, 52.

See also productivity of IT

information visibility, 109

infrastructure: Auto-ID technology,

159; implementation of, 75; for

supply chain automation, 157;

VMI program, 124

innovation: and creativity in R&D,

135–36, 139; in ERP environment,

15, 35

innovation process vs. standardization

of practices, 132–34

Index 221

15-S3385-IX 6/10/05 8:21 AM Page 221

in-plant store, 112

intangible resources, 17, 20

integrated circuits, 156, 157

integration: of business processes, 54;

maximizing value from ES, 76 –78;

as source of agility, 94, 95; and

strategy formulation, 173–75

Intel Corporation, 83

intellectual capital, 17, 19, 20–21,

33, 35

intellectual property protection, 132

intelligent modeling network, 170

intelligent value chain, 157

interconnectivity, 170

interdependencies of people and units,

20

intermediate appropriation condi-

tions, 138

internal purchase order, 118

internal systems of firms, 66, 69

international competition, 36, 52

Internet: and Auto-ID automated sys-

tems, 159, 160, 169; compared to

ES, 71; model elements repository,

171

Internet-based EDI systems, 125

Internet of things, 157, 170

interoperability, 179–80

inter-organizational development, 198

inter-organizational (INTER) coordi-

nation strategy, 103, 104, 105, 106

inter-organizational value creation,

140–52; best practices, 148–52;

dyad management, 144 – 48; under-

standing customer needs, 141– 44

inter-organization communication, 55

interrogators (tag readers), 158

interviewer bias, 189

intra-organizational (INTRA) deci-

sion-making strategy, 103, 104, 105

intra-organization communication, 55

inventory level reduction, 121

inventory management system, 59, 60,

63, 65

inventory policy decisions for VMI

partnership, 117, 118

inventory replenishment programs. See

vendor managed inventory (VMI)

inventory status, 108

inventory turns increases, 121

invoice, 146, 147

IP address, 159, 160

ISO certification, 46

IT. See information technology (IT)

i2 systems, 53, 77

Japanese quality and view of technol-

ogy, 131, 132

J. D. Powers award, 131

justification, 176

just-in-case inventories, 121

just-in-time delivery (JITD) program,

112

just-in-time (JIT) production plan-

ning, 112, 131

kanban order quantities, 112

key performance indicators, 61

Kmart, 111

knowledge-based view of firm, 16, 18,

33

knowledge enhancement, 20–21

Kodak, 78

Korea, 72n

labor turnover rates, 39

large companies, ERP implementa-

tion, 38, 43

leading agility, 96

lead management, 92–93

lead times in manufacturing and pro-

curement, 100, 100

222 Index

15-S3385-IX 6/10/05 8:21 AM Page 222

lean enterprise, 140, 147– 48, 152

lean manufacturing, 36, 39, 46, 140,

150, 152

lean organization, 140– 41, 142, 152

lean supply chain, 141, 142, 147– 48,

152

learning curve to VMI program, 123,

124, 128

learning to use the system, 75, 78

legacy systems: as agility inhibitors,

95, 96; compared to ERP systems,

55; integrating ES solutions, 77;

switch from ERP, perceptions sur-

vey, 22–26, 23, 33

linear programming, 169

local systems, 184

Lockheed Martin, Advanced Develop-

ment Projects Unit, 134

logistics entity in inventory distribu-

tion, 127

logistics module, 59

loose hierarchies, 134

lot control, 164

Lynds, J., 131

Mabert, Vincent A., 43

maintenance support, 196

make-to-order (MTO) systems: Ger-

man Mittelstand companies, 40;

production planning and schedul-

ing, 99–102; replenishment strate-

gies, 97–99

make-to-stock (MTS) systems: cus-

tomer linkage, 70; German Mittel-

stand companies, 40; and supply

chain management, 97, 98

Malaysia, 72n

management bias in PIA, 188

management of version numbers,

165

managerial hierarchy, 184

managers: ERP evolution prescrip-

tions, 191–99; and performance

metrics, 183; in R&D organiza-

tions, 134 –35, 135–36. See also

personnel

manufacturing: automated, 165–66;

capacity management, 167–69. See

also small and medium enterprises

(SMEs)

manufacturing execution systems,

60. See also factory planning and

scheduling system

manufacturing module, 59

manufacturing resource planning

(MRP II), 37, 47, 155

Manugistics, 53, 77

marketplace differentiation of VMI

partnership, 123

market share, R&D intensity and

TQM, 132

Markus, M. L., 14, 22

master production schedule (MPS),

100

master scheduling software/models,

167, 171

material requirements planning

(MRP), 37, 47, 100, 100, 167–69

mathematical models, semantic mod-

eling, 170

mathematical programming, 190

MAUT (multiattribute utility theory),

185, 186

mergers, 77

Microsoft, 77

milling machines, computer numeric

control (CNC), 166

mini big bang implementation strat-

egy, 48

Mittelstand: defined, 36; field studies,

40– 42; German SMEs, 38– 40;

summary, 49–51

Index 223

15-S3385-IX 6/10/05 8:21 AM Page 223

model elements on Internet, 171

modification projects, 193. See also

customization

modular product designs, 37

monolithic ERP systems, 184

Monster.com, 57–58

Moore’s law, 90

motivational factors, 45, 45

motor vehicle design, 135

MPS (master production schedule),

100

MRP (material requirements plan-

ning), 37, 47, 100, 100, 167–69

MRP II (manufacturing resource

planning), 37, 47, 155

MTO. See make-to-order (MTO)

systems

MTS. See make-to-stock (MTS)

systems

multiattribute utility theory (MAUT),

185, 186

multiparty collaboration, 112–13

multiple-criteria decision making,

185, 186

multiple-item replenishment sched-

ules, 102–3

multiple-objective decision techniques,

176

Nestlé Globe Project, 141– 42

network externalities, 96

new product development, 133–34,

143

NIBCO Incorporated, VMI study,

113–20; company overview, 113–

14; next steps, 119–20; origins of

VMI program, 114 –15; partner

engagement process, 115–17, 116;

partner implementation process,

117–19

no information (NI) sharing, 102,

104, 105, 106

nonsubstitutable systems, 18

North Sea oil companies, 77

object naming service (ONS), 160–

61, 161

O’Leary, 53–54, 56

online auctions, 60

online information, 55

ONS (object naming service), 160–

61, 161

onward and upward phase, 14

open standards and protocols for

Auto-ID, 157, 159, 166 –67

operating manager, viewpoint of, 4

operational agility, 88

operational performance metrics, 183,

183

operational planning, 99

operations management, 2, 3

optimization, maximizing value from

ES, 78–79

optimization solution procedures, 103

Oracle, 37, 44, 45, 50

order entry feature in bolt-on system,

61

order fulfillment module, 59

order-picking feature in bolt-on sys-

tem, 61

order time-fence, 99–100

order winner/qualifier characteristics,

129

organizational affiliation of employees

in survey, 24, 25–26, 28, 29

organizational capability of VMI part-

nerships, 123–24

organizational change, 20

organizational standardization, 54

outranking, 185, 186

outsourcing of noncore components,

36, 39

overconfidence bias, 187–88

Owens Corning, 57

224 Index

15-S3385-IX 6/10/05 8:21 AM Page 224

Palo Alto Research Center (PARC),

134

parallel conversion, 176

Pareto analysis, 117

part databases, 128

partnership in VMI program: com-

pared with multiparty collabora-

tion, 112–13; defined, 109; devel-

opment process, 115–17, 116, 124;

implementation process, 117–19;

performance measures, 120–21;

replenishment frequency variations,

111; supplier-NIBCO interface, 120

partnership: with ERP vendor, 196; in

supplier-customer dyad, 141, 150

passive RFID chips, 160

passive tags, Auto-ID, 158, 159

path-dependent resources, 17

PDM (product data management) sys-

tem, 61

pedigree information, 164

PeopleSoft, 37, 45, 80

perceived value, 181–82

performance evaluation, 178–85;

business factors and measures,

182–85; cost factors, 179; IT re-

quirements and factors, 179–82;

metrics, 182–83, 183

performance measurement: applica-

tions, 80; for VMI programs, 120–

22, 127

performance of firm: determined by

structure, 15; measures of, 65, 65–

69, 68; sources of differences, 18

periodic data transfer, 110

personal relationship development, 20

personnel: perceptions of ERP use,

21–32; in R&D organizations,

134 –35, 135–36; VMI manage-

ment, 123; VMI team participants,

117–18. See also managers

phased conversion, 177

phases of ERP projects, 14

physical markup language (PML),

160–61, 161

PIA. See post-implementation auditing

(PIA)

pilot conversion, 177

planning and scheduling: advanced

planning and scheduling (APS) sys-

tems, 37, 56 –57; capacitated plan-

ning and automated scheduling,

165–69; factory planning and

scheduling system, 60, 65, 69; JIT

production, 112, 131; make-to-

order production systems, 99–104

platform neutrality, 179

plug-and-play process architecture,

135

PML (physical markup language),

160–61, 161

PolyOne, 77

portals, 79–80

positional information on RFID tags,

156

position of employees in survey, 22–

23, 24 –25, 26, 28–29

postal service application, 79

post-go-live survey, 21, 24 –26, 28–

29, 30, 32

post-implementation auditing (PIA):

auditing the system, 172–73; biases

in evaluation, 187–89; completion

of, 177–78; methodologies and

evaluation, 185, 186; performance

evaluation factors, 178–85; re-

search implications, 189–90

post-implementation of ERP systems,

87

pre-go-live survey, 21, 22–24, 26 –28,

30, 31

process architecture map, 135–36

process architectures, 135

process planning, 175

Index 225

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process reengineering, 78

process vs. product, 3, 4

Procter & Gamble, 140

product activity (EDI 852), 118

product catalog information, 118

product data management (PDM) sys-

tem, 61

product identification, 162

production planning and scheduling.

See planning and scheduling

productivity improvements of bolt-on

systems, 65, 66 –69

productivity of IT, 130–32; future,

138–39; in R&D organizations,

134 –36; standardization vs. inno-

vation, 132–34; survey on use of

IT, 136 –38

product variety, 111

product vs. process, 3, 4

program infrastructure, VMI pro-

gram, 124

project management system, 61

project phase, 14, 21

prospectors as strategy factor, 15

pull logic, inventory management, 112

pull-manufacturing logic, 37

purchase order, 146, 147

purchase order acknowledgment (EDI

855), 118

QAD, vendor, 37

quality management system bolt-on,

61

quick response, 109

radio-frequency identification (RFID),

128, 156 –57

radio waves, 158

rail cars, 156, 158

R&D: intensity, 132; organizations,

134 –36

rare resources, 17

readers for Auto-ID tags, 157, 158,

159, 160, 161

real-time information, 55, 163–64

reengineering business processes, 78

reengineering stage, 175

reliability, 181

replenishment deliveries, 118, 127

replenishment frequency, 111

replenishment strategies, ERP-driven,

97–107; experimental analysis,

105–6; make-to-order production,

99–102; traditional, 97–98, 102,

105; underutilization of, 97–99,

106 –7; vendor-manufacturer inte-

gration, 102– 4, 104

research & development (R&D): in-

tensity, 132; organizations, 134 –36

research: on ERP, 13–14, 15; implica-

tions of PIA factors, 189–90; on

industrial dynamics, 97. See also

studies

reserved product /inventories, 112

resource-based view of firm, 16 –18,

33, 197

resources as sources of competitive ad-

vantage, 16 –17

resource usage, 197–99

responding agility (or response

agility), 88–89, 93–94

results from enterprise systems, 71–

84; value management, 80–84;

value maximizing, 76 –80

retailer managed inventory, 108

retail link program, Wal-Mart, 98

return on investment (ROI), 49, 190

revenue changes, 65, 66, 74

reverse purchase order, 118

RFID (radio-frequency identification),

128, 156 –57

risk basis, 155

226 Index

15-S3385-IX 6/10/05 8:21 AM Page 226

ROI (return on investment), 49, 190

routes to market, 92

Rutan Aircraft Factory, 134

sales cadence, 92

sales growth, 114 –15

sales lead management, 92–93

sales order, 146, 147

sales process, seven-step, 91–92, 95

SAP: Advanced Planner and Opti-

mizer (APO), 53, 57; Centers of Ex-

cellence, 79, 83; installed systems,

56, 77, 91, 95; largest rollout in

world, 142; and Mittlestand SMEs,

37, 41, 44, 45, 50; R /3 system, 53,

57, 113, 136

Sarbanes-Oxley Act, 136

savant (data handling), 160–61, 161

SBU (strategic business unit) level, 16

scalability, 180

Scaled Composites, 134

schedule stability, 168–69

scheduling. See planning and

scheduling

scoring models, 185, 186

seamless functional integration, 18

seamlessness in bolt-on solutions, 193

security, 181

semantic modeling, 169–71

semipassive tags, Auto-ID, 159, 159

sensing agility, 88–89, 93–94

serial number control, 164, 165

seven-step opportunity management

process (sales process), 91–92, 95

shakedown phase, 14, 21

shop scheduling, 166

should-be study, 175

Siebel Systems, 91, 95

silicon chips, 157

simulation, 185, 186

Singapore, 72n

single sourcing: in VMI partnerships,

117. See also sole sourcing

Skunk Works, 134

SKUs. See stock-keeping units (SKUs)

small and medium enterprises (SMEs),

36 –51; comparison of experiences,

42– 49; conclusions, 49–51; field

studies, 40– 42; German SMEs, the

Mittelstand, 38– 40

smart protocols, 157

social capital, 17, 19, 20, 21, 33, 35

socially complex resources, 17

sole sourcing: in VMI partnerships,

115, 122, 123. See also single

sourcing

Soni, Ashok, 43, 56

Spaceship One, 134

spreadsheets, 167

SSA Global, 191

standardization, organizational, 54

standardization: of business process,

89, 91–92; of practices vs. innova-

tion, 132–34; as source of agility,

94, 95

standards groups, 162

statistical process control, 61

stock-keeping units (SKUs): inventory

policy decisions, 117; inventory re-

plenishment implementation, 118;

NIBCO products, 113; product

variety in VMI program, 111

strategic business unit (SBU) level, 16

strategic partners in VMI program,

122–25

strategic performance metrics, 182–

83, 183, 184

strategy, 13–35; benefits vs. costs,

26 –29; contemporary perspectives

in, 16 –21; conventional views of,

14 –16; perceptions of ERP use,

21–22; recommendations, 33–35;

Index 227

15-S3385-IX 6/10/05 8:21 AM Page 227

switch from legacy to ERP, 22–26;

usage of ERP, 30–32

strategy formulation, 173–75

structure-conduct-performance para-

digm, 15, 16, 17

studies: as-is, should-be, to-be, 175;

on supply chain integration, 98–99;

of VMI program on ERP platform,

113–20. See also studies of ERP

systems

studies of ERP systems: agility inter-

views, 90–93; of bolt-on system

value, 58–63; of European SMEs,

42– 49; getting value and results,

72–76; of Mittlestand SMEs, 40–

42; perceptions of ERP use, 21–32.

See also surveys

sunk costs, 196

supplier-assisted inventory replenish-

ment, 109

supplier: benefits of VMI programs,

120–21; in consignment agree-

ments, 112; in VMI partnership,

108–9

supplier managed inventory, 109

supplier management module, 59

supply chain: and ERP development

and use, 198, 198; extended, 112–

13, 128; item tracking, 162, 163–

64; performance measurement, 182;

and RFID technology, 156 –57; of

SMEs, 46

supply chain compass, 63, 64, 65, 67,

68

supply chain management, 97–99,

148, 152; Auto-ID information,

165; and customer needs, 141– 44;

make-to-order systems, 99–104;

manufacturing operations, 36, 39

supply network planner system, 60,

66

surveys: on Auto-ID technology, 163;

best-of-breed bolt-ons, 53; major

issues for firms, 136 –38; percep-

tions of ERP use, 21–32. See also

research

switching costs, 115, 123, 128

SWOT-MOSP process, 175

system design, 175–76

system evaluation, 176

system implementation, 176 –77. See

also implementation of ERP systems

systems engineering, 175

systems integration barriers to VMI,

125–27, 126

tactical performance metrics, 183,

183

tactical supply chain factors, 183

tags, Auto-ID, 156 –57, 158–59

Taiwan, 72n

Tanis, C., 14, 22

T-BOM (transactional bill of materi-

als), 164

team participants in VMI partnership,

117–18

technology in VMI programs, 110,

127–28

telephone calls, 60

tenure of employees in survey, 23–24,

25, 26 –28, 29

Texas Education Agency, 77, 80

Thailand, 72n

third-party options, 196 –97

time-fence, 99–100, 101, 102

title for goods, 146

to-be study, 175

today for tomorrow replenishment,

142

total quality management (TQM),

132

Toyota, 131

228 Index

15-S3385-IX 6/10/05 8:21 AM Page 228

TQM (total quality management),

132

tracking and tracing, 164 –65

traditional replenishment strategy, 97–

98, 102, 105

traffic/transportation management

system bolt-on, 61

training on ERP systems, 138, 195

transactional bill of materials

(T-BOM), 164

transactional volume complexity, 117

transactions, faster, 73, 74

transistors on integrated circuit, 156

transponders on aircraft, 156

transportation function in logistics

module, 59

transportation modes: diversity for

VMI partnerships, 111

transportation schedules, 102–3

trust: in dyad implementation, 147,

150; in VMI partnership, 109,

124

two-dimensional bar code, 162

Udall, Melvin, 1

uncertainty absorption, 155

uncertainty basis, 155

underutilized functionality, 194

Unilever, 140

United States: benefits studies, 72n;

SMEs, 36

Universal Product Codes (UPCs), 118,

128. See also bar codes

universal translators, 128

unlearning, 148, 152

upgrading ERP architecture, 192–93,

196

usage accountability, 194 –97

usage of ERP systems, perceptions

survey, 30, 31, 32, 33–34

U.S. Defense Logistics Agency, 77, 82

U.S. Department of Defense, 180

user base, expanding, 195

valuable resources, 17

value-added network providers

(VANs), 112

value chain domain, 57

value chain model, 98

value creation, 34, 54, 140

value management, 80–84

value of ERP systems, 1, 5, 18

Van Everdigen, Y., 43

Van Hillegersberg, J., 43

VANs (value-added network provid-

ers), 112

variability reduction, 4

variances in PIA evaluations, 189

vehicle dispatching, bolt-on interface,

61

vendor certification, 46

vendor managed inventory (VMI),

108–29; case study: NIBCO, 113–

20; conclusions, 128–29; con-

straints on functional management,

146; as example of industry success,

98; Heineken example, 142– 43;

measuring performance, 120–22,

127; outlooks for growth, 125–28;

strategic implications, 122–25;

variations in form, 109–11, 110;

what it is not, 111–13

vendor-manufacturer replenishment

programs, 99

vendor-manufacturing integration,

102– 4

vendors: and best-of-breed approach,

53; choice of, 44; creation of ERP

technologies, 18; long-term sustain-

ability, 45, 50; in Mittlestand SME

study, 41; partnership recommenda-

tion, 196; targets of, 37–38

Index 229

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vendor software: dedicated VMI pack-

ages, 127; as source of agility, 95

Venkataramanan, M. A., 43, 56

version number management, 165

vibratory manufacturing, 156

VMI. See vendor managed inventory

(VMI)

volatility of demand, 120–21

Wal-Mart, 98, 111, 140

warehouse management system, 59,

61, 67, 68

Warts, E., 43

waste reduction, 4

Web-based VMI transactions, 111

WebSphere, 91, 95

work in process (WIP), 165

Xerox, 134

XML (extensible markup language),

127, 160

Y2K deadline, 21, 43, 71, 76

Zara, 143– 44, 151

Zuboff, Shoshana, 79

230 Index

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14 Strategic Erp Extension and Use

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