Electronic Marketplaces versus Enterprise Resource Planning:

32
Electronic Marketplaces versus Enterprise Resource Planning: A Comparison and Decision Methodology for Supply Chain Management Markus Biehl Assistant Professor of Operations and Information Management Henry Kim Assistant Professor of Information Systems Schulich School of Business, York University, 4700 Keele St., Toronto, ON M3J 1P3, Canada Emails: [email protected] , [email protected] Abstract. This paper addresses a firm’s decision of whether to rely on the supply chain capabilities of enterprise resource planning (ERP) systems or to make use of electronic marketplaces (EMPs). The functionalities provided by the technologies, their costs and benefits, and strategic considerations are discussed as decision variables relevant to this decision. This tradeoff depends on the firm’s current level of capabilities and the processes that ensure its competitive advantage. Upon the analysis of these decision factors, the paper provides a decision methodology in the selection of these information technologies. Specifically, a qualitative and a quantitative decision model are developed which together can be used in conjunction with each other in making the decision between ERP systems and EMPs and the mix of internal and external supply chain capabilities. The qualitative model aids in the choice between an ERP system and an EMP and is based on a lifecycle approach. The quantitative model, a nonlinear mixed integer program, can be used to mix and match different ERP systems or parts thereof with or without EMPs. Key Words: supply chain management, enterprise resource planning, electronic business, business-to- business, electronic marketplaces, internal and external capabilities Author Biographies. Markus Biehl is an Assistant Professor of Operations and Information Management at York University’s Schulich School of Business. He holds an M.S. in management and manufacturing engineering from the University of Kaiserslautern, Germany, and an M.S. and Ph.D. from the Georgia Institute of Technology. Prior to joining Schulich, Dr. Biehl chaired the Operations Management department at the International University in Germany’s Business School. His research interests include environmentally conscious manufacturing strategies, (green) supply chain management, and business-to- business e-Commerce. Henry Kim is an Assistant Professor of Information Systems, also at the Schulich School of Business. He is interested in information systems that facilitate data and knowledge for enterprise modeling, knowledge management, and e-commerce. His articles have appeared in journals such as the Communications of the ACM, Internet Research, BT Technology Journal, Business Process Management Journal, and Operational Research: an International Journal. He has consulted to industries and researched in laboratories in Canada, US, UK, and Australia. He received a PhD in Industrial Engineering from the University of Toronto. Submitted to the International Journal of Technology, Policy and Management (IJTPM) – Special Issue on Developments in Decision Technologies – November 2002, Revised February 24, 2003 and March 28, 2003

Transcript of Electronic Marketplaces versus Enterprise Resource Planning:

Page 1: Electronic Marketplaces versus Enterprise Resource Planning:

Electronic Marketplaces versus Enterprise Resource Planning: A Comparison and Decision Methodology for Supply Chain Management

Markus Biehl Assistant Professor of Operations and Information Management

Henry Kim Assistant Professor of Information Systems

Schulich School of Business, York University, 4700 Keele St., Toronto, ON M3J 1P3, Canada Emails: [email protected], [email protected]

Abstract. This paper addresses a firm’s decision of whether to rely on the supply chain capabilities of enterprise resource planning (ERP) systems or to make use of electronic marketplaces (EMPs). The functionalities provided by the technologies, their costs and benefits, and strategic considerations are discussed as decision variables relevant to this decision. This tradeoff depends on the firm’s current level of capabilities and the processes that ensure its competitive advantage. Upon the analysis of these decision factors, the paper provides a decision methodology in the selection of these information technologies. Specifically, a qualitative and a quantitative decision model are developed which together can be used in conjunction with each other in making the decision between ERP systems and EMPs and the mix of internal and external supply chain capabilities. The qualitative model aids in the choice between an ERP system and an EMP and is based on a lifecycle approach. The quantitative model, a nonlinear mixed integer program, can be used to mix and match different ERP systems or parts thereof with or without EMPs.

Key Words: supply chain management, enterprise resource planning, electronic business, business-to-business, electronic marketplaces, internal and external capabilities

Author Biographies. Markus Biehl is an Assistant Professor of Operations and Information Management at York University’s Schulich School of Business. He holds an M.S. in management and manufacturing engineering from the University of Kaiserslautern, Germany, and an M.S. and Ph.D. from the Georgia Institute of Technology. Prior to joining Schulich, Dr. Biehl chaired the Operations Management department at the International University in Germany’s Business School. His research interests include environmentally conscious manufacturing strategies, (green) supply chain management, and business-to-business e-Commerce.

Henry Kim is an Assistant Professor of Information Systems, also at the Schulich School of Business. He is interested in information systems that facilitate data and knowledge for enterprise modeling, knowledge management, and e-commerce. His articles have appeared in journals such as the Communications of the ACM, Internet Research, BT Technology Journal, Business Process Management Journal, and Operational Research: an International Journal. He has consulted to industries and researched in laboratories in Canada, US, UK, and Australia. He received a PhD in Industrial Engineering from the University of Toronto.

Submitted to the International Journal of Technology, Policy and Management (IJTPM) – Special Issue on Developments in Decision Technologies –

November 2002, Revised February 24, 2003 and March 28, 2003

Page 2: Electronic Marketplaces versus Enterprise Resource Planning:

1

1 Introduction and Problem Statement

Rapid changes in information technology have had a major impact on how firms are

managed. The greatest change in how work is performed has occurred in data intensive business

functions, including finance, accounting, and supply chain management. In supply chain

management, the use of information technology has allowed firms to connect to their suppliers

and customers to exchange inventory and demand data and to improve planning, execution and

control of supply chain functions, including logistics and manufacturing. The results have been

tremendous in terms of cost savings and customer service [1,2]. The information technologies

that facilitated these changes originally comprised electronic data transfer, then materials or

enterprise resource planning systems and, more recently, electronic marketplaces (EMPs) [3].

Over the past few years, firms have been pushing forward implementing ERP systems and

use EMPs to integrate their internal and external supply chains. Both technologies, however,

offer overlapping supply chain capabilities. When a firm places an order, either system is capable

of administering the order, transmitting it to the supplier, and generating the appropriate logistics

forms such as the bill of lading. If an order is received, either system can generate invoices,

transmit them to the purchaser, and generate logistics information. So which system should a firm

choose? Should it implement a potentially costly ERP system when anecdotal evidence suggests

that many firms achieve a negative return on such an investment [4] and that ERP

implementations have been difficult and come with uncertain benefits [5]? Or should the firm

subscribe to EMPs with the danger of the EMP faltering [6] in the foreseeable future? When

research indicates that 70% of all U.S. high tech firms have subscribed to at least one exchange

but only 20% of them have actually performed transactions online [6], are EMPs really worth the

cost of programming the required interfaces to the firm’s information systems? Given the choice

Page 3: Electronic Marketplaces versus Enterprise Resource Planning:

2

between using ERP systems and EMPs, what should a firm implement to facilitate its supply

chain activities?

This paper attempts to shed light onto these questions by investigating the decision factors

relevant to this problem, including the costs and benefits of the respective technology and the

firm’s strategy, and providing a decision methodology for the selection of these two information

technologies. Important differences exist between the capabilities of ERP systems and EMPs, but

only one paper is known to have compared the functionality of different ERP packages to each

other [7]. However, this comparison is not detailed enough for investigating supply chain

functionality. Moreover, since its publishing date, ERP vendors have added significant

improvements to their software packages. To our knowledge, this is the first paper that directly

compares the functionalities of ERP systems with those of EMPs based on an extensive review of

the trade literature.

In terms of benefits, the functionality of the systems represents a major factor in the

decision of which technology to use. However, even those benefits must be closely scrutinized.

Implementing an ERP system increases a firm’s internal supply chain capabilities whereas using

EMPs means that the firm accesses external benefits. Both the choice of capabilities themselves

and the choice of internal versus external benefits should be driven by a firm’s strategy and

operations. The choice of internal versus external capabilities is driven by a firm’s strategy and

its core competencies [8]. However, the literature treats the tradeoff between internal and external

capabilities mainly within the context of technology management (e.g., [9-12]) rather than supply

chain management. In this paper, we investigate the relevance of both streams of literature with

regards to supply chain management and the choice between ERP systems and EMPs to improve

a firm’s supply chain capabilities.

Page 4: Electronic Marketplaces versus Enterprise Resource Planning:

3

In the next section, we investigate the functionalities provided by ERP systems and EMPs

and critically compare them in terms of supply chain functionality. In the third section of the

paper, we extend the discussion of decision factors by adding strategic considerations as well as

the costs and benefits of implementing either technology. In the fourth section, we introduce a

qualitative and quantitative decision model to help in making a selection using the decision

criteria identified in the previous sections. Lastly, we conclude the paper by summarizing the

most important findings and suggesting further research.

2 Supply Chain Capabilities of ERP Software and Electronic Marketplaces

In this section we discuss ERP and EMP capabilities in preparation for a critical

comparison with a focus on supply-chain functionality. We take a historic perspective since the

roots of the technologies partially determine which functionality the systems provide.

2.1 ERP Software

ERP systems trace their origins to material requirements planning (MRP) applications. In

the 1970s, MRP systems became popular with large manufacturing firms dealing with many or

complex products because of their ability to break down customer demand (“independent

demand”) into demand for components and materials (“dependent demand”) and thus link a

firm’s demand side with its supply side while helping the firm to control inventories and the shop

floor [13]. In the 1980s, manufacturing resource planning (MRP II) systems integrated MRP

functionality with a firm’s financial and marketing systems [14], thus reducing multiple entry of

the same data and improving data accuracy.

Page 5: Electronic Marketplaces versus Enterprise Resource Planning:

4

ERP systems were a further extension of MRP II systems. ERP packages attempt to

integrate data flows across all business functions and include a large amount of optimization and

reporting routines. SAP AG was the first software firm to have released an ERP package [15] and

other software firms quickly recognized the trend and started designing similar packages in the

late mid-1990s. PeopleSoft issued a human resources package in 1989 and added other function

subsequently; JD Edwards, founded in 1977, issued its first full ERP system in 1996 [16]; i2

Technologies, a leader in scheduling software, started offering enterprise-wide solutions in 1997;

Oracle started with a financial package in 1989, added human resources and manufacturing in the

following years, and issued a first integrated package in 1994.

Table 1 shows the supply chain functionality provided by the software of the four largest

ERP vendors. While the functionality of other ERP packages has also been investigated, only

four are shown to conserve space.

In comparing the supply chain functionality of the ERP packages, two important insights

emerge. First, ERP software firms released their initial systems with very different functionality

(e.g., PeopleSoft focused on human resources, Manugistics on MRP) and implemented complete

ERP packages with supply chain capabilities at different stages. Most packages, however, now

offer full supply chain capabilities that include the planning and execution of marketing activities

(the demand side), shop floor and inventory management, ordering, billing, and invoicing,

including the possibility of delegating ordering and receiving to the end-user (“desk top

receiving”). Most packages also facilitate scheduling and optimizing distribution through

management of logistics suppliers or transportation planning. Clearly, this functionality denotes a

significant increase in capabilities over MRP II systems and original ERP systems (see Table 2).

Page 6: Electronic Marketplaces versus Enterprise Resource Planning:

5

Table 1 Overview of ERP Supply Chain Capabilities of the Four Largest ERP Vendors (Sources: Trade literature, press releases, and company websites)

Systems

Most important modules

SAP AG PeopleSoft JD Edwards Oracle

Manufacturing 1970s 1996 1996 1992 Supply Chain 1995 Procurement

automation (e.g., orders) 1996 Internet capabili-ties 1998 End-user ordering, receiving, invoicing; Business performance 1999 Product Data Mgmt (integration w/ logistics); Web-hosted applications and portals (my.SAP.com) 2000 e-tendering, collaborative procure-ment 2002 Full view of transactions, supplier qualification and se-lection, purchasing, contract negotiation and mgmt, relationship monitoring; Sourcing

1994 Purchasing, incl. comparison shopping, bulk pricing 1995 Billing and ad-justments, invoicing 1996 Order mgmt 1997 Web enabled module 1998 Order promising, demand planning; Web-based self-service; Data warehouse, online analytical applications 1999 Internet storefront, integration with SC mgmt module; Enterprise Performance Mgmt 2000 Scheduling, & billing; invoicing; real-time ordering; web client 2001 Acceptance & translation of partners’ data files into usable data format; Promotions mgmt; Financial performance 2002 Supplier rating & analysis; Requisitioning & purchase order mgt; Collaborative selling; trading partner mgmt; strategic sourcing; Mobile services; eSettlements

1996 sales & order mgmt, procurement, MRP 1998 Planning/ scheduling, order mgmt & tracking 1999 Sales Configurator 2000 Online marketplace; ERP fully web-enabled; Real-time prom-ise-to-deliver 2001 Web-enabled product configuration; Order promising 2002 Collaborative forecasting; Web-based customer and supplier self-service

1994 Costing and billing; Link w/ legacy systems; EDI and agent technology; Workflow; Mobile application 1995 Data warehousing; online analytical applications; Web access to invoices, payments 1996 Web customer & supplier applications; Web supplier scheduling, repetitive ordering 1997 Industry-specific applications; order mgmt; SC planning, order mgmt automation, supplier scheduling (receipts, authorizations), product configuration 1998 Strategic procurement (spending patterns, track overages, supplier performance) 1999 Hosted e-commerce and ERP applications; sales analysis; Internet modules: CRM, SC & procurement; Internet SC (virtual SC, collaboration, auctions); Order mgt (self-service, guided selling); Procurement; Exchange (B2B commerce) 2000 Marketing campaigns & intelligence 2001 eBusiness (eCollabora-tion); SC exchange, Product development exchange, Ex-change marketplace (design, planning, catalog, auctions) 2002 Most eBusiness applications mobile-enabled

Logistics 1995 Logistics 1996 Transportation planning & scheduling, Internet SC, capacity planning) 1997 SC mgmt 2000 Transportation planning, vehicle scheduling, collaborative transport planning 2002 Full SC visibility, supplier qualification, contract negotiation and mgmt)

2002 Integrated shipping w/ 3rd party logistics providers

1991 Distribution planning and execution 1994 Warehouse mgmt 1996 Inventory mgmt 1998 Warehouse & transportation mgmt 2001 Real time in-ventory mgmt; Web-distribution planning

1995 Shipments 1997 Inventory visibility, ful-fillment 2001 Transportation Exchange (logistics services, shipping documents)

Legend: mgmt = management; SC = supply chain

Page 7: Electronic Marketplaces versus Enterprise Resource Planning:

6

Table 2 Typical ERP Software Capabilities (adapted from [17])

Purchasing Contract Purchases Blanket Purchases Approved Source List

RFQ Capability Update Order Status via Internet or EDI

ERP Modules

Financial Warehouse Management Human Resources Forecasting Logistics / Distribution Quality Control

Manufg. Execution Systems/Shop Floor Customer Relationship Management Supply Chain Management / Planning

Markets Discrete Repetitive Complex Automotive Remanufacturing Process Pharmaceutical

Food & Beverage Retail Mixed Mode Repair Large Companies Mid-sized Companies Small Companies

Second, starting in 1995, ERP vendors implemented Internet capabilities that eventually

included online ordering and sales, the linking of suppliers’ and customers’ ERP systems to the

firm’s, online analytical processing to create (near-) real time processing and promising of orders

and increase inventory visibility, and access to financial clearinghouses for online financial

transactions. Software makers have also added functionality that allows linking ERP systems to

EMPs and legacy systems. Collaborative sourcing has become part of the packages as well as

contract negotiation and a variety of pricing procedures such as dynamic pricing and auctions.

Moreover, to enable firms to actually use these features outside publicly accessible EMPs, SAP

and i2 have set up private EMPs (www.mySAP.com and www.TradeMatrix.com, respectively) in

which their clients can trade with a set of pre-defined partners.

Some ERP systems now attempt to not only help manage the complexities of supply chains,

but offer proactive solutions that span from the design of marketing campaigns to the preparation

of manufacturing for these activities. For example, Manugistics’ Enterprise Profit Optimization

Page 8: Electronic Marketplaces versus Enterprise Resource Planning:

7

combines a cost reduction approach through supplier relationship management and supply chain

management with revenue-enhancing pricing and revenue optimization on the demand side [18].

In conclusion, it is apparent that ERP systems seem well suited to providing firms with a

high level of internal supply chain capabilities spanning from shop floor control to logistics

planning and from supply management to marketing and demand management. Given this high

level of capabilities, why should firms access external capabilities in the form of EMPs?

2.2 Electronic Marketplaces

Whereas ERP systems have a comparatively long history of managing resources, EMPs are

at the most only a few years old. They were incepted well after the advent of the Internet. In

comparison to ERP systems, their initial focus was on market-making (e.g., [19]). More recently,

as many EMPs faltered, the remaining ones found that offering firms supply chain functionality

was important to their survival.

The landscape of business-to-business EMPs is very crowded. By April 2002, more than

1,700 exchanges were active [20]. For the purpose of this research the analysis of EMP

capabilities was carried out by selecting four well-known firms as representative. The firms were

chosen based on their standing as a market-maker (a pure EMP, e.g., ChemConnect [19] and

Coviscint [21]) versus a supply chain enabler (a firm supplying software for EMPs, e.g.,

CommerceOne [22] and Ariba [23]). Analyzing the functionalities provided not only by major

EMPs but also by the EMP-enabling software provides a good overview of capabilities that can

be offered by EMPs.

Page 9: Electronic Marketplaces versus Enterprise Resource Planning:

8

Table 3 Capabilities provided by EMPs and EMP-enabling Software (Sources: Trade publications, company websites)

Electronic Marketplace . Software Firm providing EMP Functionality

Company CommerceOne Ariba Covisint ChemConnect Sourcing/

Purchasing Sourcing, sourcing intelligence; sourcing activity reporting; purchase order creation (incl. RFx templates); purchasing approval controls, approval process with workflow and business rules; purchasing cycle automation Quotation Analysis Invoice-to- payment process automation; payment terms mgmt Order visibility / tracking Supplier selection & management; self-service (availability, confirmations, advance shipping notes, invoices, payments) Supplier mgmt of catalogs, pricing and orders

Sourcing analysis; procurement compli-ance; benchmarking; order routing; order aggregation; compli-ance monitoring; full-cycle process integra-tion Plan-to-pay automa-tion; payment visibility; invoice reconciliation Supplier discovery (business, product, and category informa-tion), evaluation, and relationship mgmt; supplier communica-tions; on suppliers Automated catalog mgmt; sharing of catalogs

Sourcing: automatic the purchase order approval and workflow process; ordering from external websites via open interface; requisitions using customizable forms; real-time order tracking; inventory control; request information for purchase orders for non-cataloged items Quotations: real-time, electronic RfQ document crea-tion/management (incl. electronic announcement); revision tracking; templated responses Catalog: refine content into internet ready, transactional data; online catalog data creation and approval

Sourcing: Request for quotes (RFQ) automation; collabo-ration; electronic messages; fore-casting; inventory control; automatic order generation Request for new suppliers; perform-ance tracking; online account mgmt

Negotiation/ Collaboration

Variety of auction types and bids Structured one-on-one negotiation (single and multi-round) Collaborative platform (visibility to legacy systems, online collabo-ration, process mgmt); real-time information exchange

Collaborative workspaces; elec-tronic communication; exchange business documents

Auctions: multi-variable bidding, multi-line items, messaging; overtime; proxy bidding; public or private auctions; multiple auction types Collaboration: virtual project teams; project mgmt; document mgmt & revision control; discussion forums; workflow engine; visualization of CAD drawings; conferencing and application sharing; e- communications

Real-time auction format. Non-anonymous negotiation; private negotiations Collaboration on the sourcing and inventory mgmt, order fulfillment, procurement, and business intelligence

Contracts Creation, review, nego-tiation, award and mgmt of contracts

Automation of contract creation

Logistics Sharing of shipping plans with logistics providers; genera-tion/transmission of advance shipping notices

Monitoring of rail customers; execution of logistics services; logistics intelligence

Performance Spending analysis by commodity, supplier, project, or contract Multi-dimensional spend and supplier performance analysis

Operational effec-tiveness monitoring Supplier key per-formance indicators

Supplier ratings; online supplier reviews; milestone status control; supplier score-cards; supplier progress

Supplier performance tracking

Supply Chain Integration

Integration with ERPs, back-office systems and browser infrastructures

Integration with ERP and legacy systems

Integration of back-end systems

Integration with ERP systems

Page 10: Electronic Marketplaces versus Enterprise Resource Planning:

9

Table 3 shows a comparison of the supply chain functionality currently offered by the four

firms. From Table 3 we note that both EMPs and software firms offer sourcing functionality that

automates the creation, placement and administration of orders and requests for quotations

(RFQs), as well as order tracking and automatic payment. Suppliers can be selected and new

suppliers can be searched. Other commonalities include collaboration tools, such as collaborative

platforms or workspaces that allow the real-time exchange of data and documents, supplier

performance evaluations, and integration with ERP and legacy systems.

Differences exist between the software firms and EMPs in terms of contracting and

logistics. First, CommerceOne’s and Ariba’s softwares offer the possibility of creating contracts,

a feature not yet offered by EMPs. Second, while the EMP software allows the management of

suppliers and processes, only EMPs provide readily set up logistics solutions through using

logistics service providers that act as suppliers in their marketplaces. This allows buyers and

sellers to execute the shipping of their products and generate all necessary shipping forms and

information.

Table 3 also reveals other interesting insights. Ariba, while providing collaborative

workspaces, does not support auctions. This might stem from Ariba’s mission to be a match

maker between suppliers and buyers and from a philosophy that stresses the collaborative over

the competitive sourcing approach. ChemConnect’s lack of support for catalogs and some other

services available through the software makers and Covisint points to its purely public nature and

stems from its history as a match maker rather than a strong provider of transactional capabilities.

The analysis of other EMPs (E2open [24], Elemica [25,26], GHX [27], and Converge [28])

shows that EMPs usually do not implement all available supply chain functionality, leaving

subscribers with the task of selecting the EMP(s) with the appropriate capabilities.

Page 11: Electronic Marketplaces versus Enterprise Resource Planning:

10

2.3 Critical Comparison of ERP Systems and EMPs

The previous discussion of ERP systems and EMPs reveals that both offer overlapping

supply chain functionality (see Table 4). In particular, ERP systems only lack the interactive

capabilities of EMPs when they are not connected to a supplier network (value added network) or

an EMP. In contrast, not all EMPs support the creation and management of quotations, supplier

management, auctions, or the measurement of operational performance (as opposed to the

performance of suppliers). Moreover, EMPs usually do not support distribution management, i.e.,

the scheduling and management of a logistics fleet and network.

One of the major differences between ERP systems and EMPs is that ERP systems evolved

from a focus on internal management of complexity and an integration of data flows within firms.

EMPs, in comparison, were conceived for the purpose of facilitating collaboration and

connecting the demand side to the supply side to facilitate market mechanisms previously used

only off-line. ERP system markers have tried to integrate connectivity into their packages by

equipping their systems with the capability to emulate multiple EDI standards and collaborating

with EMP software firms to implement market-making functionality such as auctioning.

However, these capabilities can be used only if ERP systems are hooked up to EMPs or value

added networks. Wal-Mart, for example, has linked many of its 25,000 suppliers to a VAN and,

as a result, improved demand forecasting and order-processing [20].

Page 12: Electronic Marketplaces versus Enterprise Resource Planning:

11

Table 4 Comparison of ERP and EMP Supply Chain Functionality

Functionality ERP Systems Electronic Marketplaces

Sellin

g/Pu

rcha

sing

Sourcing/purchasing Sourcing, billing, payment automation Quotations Contract creation and management Supplier management Catalog management

� � � � � �

� � � � � �

Inte

ract

ion Collaboration

Negotiation Auctions

���� ���� ����

� � �

Logi

s-tic

s Logistics management Distribution management

���� �

� �

Perfo

rm-

ance

Operational performance Supplier performance

� �

� �

Inte

-gr

atio

n

Supply chain integration � �

Legend � Usually supported

���� Supported when connected to supplier network or EMP � Supported by some EMPs � Usually not supported

In contrast, using an EMP’s connectivity gives immediate access to a base of potential

suppliers and customers in proportion to the EMP’s size. At worst, a firm can use a Web-

interface to submit requests for quotations or bids and interact with its supply chain partners.

Moreover, using an EMP’s functionality, the firm can take advantage of automatic order

processing, invoicing, and billing once all appropriate information has been keyed in. However,

while such a sourcing or sales system might be viable for a firm with few transactions, it will not

suffice for most other firms. Given that order information is intrinsically linked to the demand

side, typing in order information by hand is not a feasible solution for firms with a complex

Page 13: Electronic Marketplaces versus Enterprise Resource Planning:

12

manufacturing structure or demand for a number of different products (i.e., a wide scope of

orders) [29]. Moreover, EMPs by themselves do not provide an integrated approach that includes

order promising (except from inventory) or profit maximization mechanism such as offered by

Manugistic’s ERP solution. It is unlikely that EMPs will ever offer this solution, unless they are

integrated with an ERP or similar system.

Having discussed commonalities and differences between ERP systems and EMPs, we now

proceed to investigate the decision of which technology to implement.

3 Strategy, Costs, and Benefits:

Further Decision Factors in Choosing a Supply Chain Solution

Recall that, apart from functionality, a fundamental difference between ERP systems and

EMPs also lies in the generation of supply chain capabilities. The implementation of an ERP

system usually represents a significant increase in a firm’s internal supply chain capabilities.

Drawing on the existing literature, White [10] finds that firms are more likely to engage in

external capabilities when there is a low level of technical uncertainty. This certainty is not

necessarily a given for EMPs, as is reflected in the speed at which new features are added and

fact that numerous EMPs close down only a few years after their inception [6]. Even if firms used

EMPs more extensively, technological uncertainty would prevent them from internalizing

capabilities [11], further indicating that a firm with a low level of internal supply chain

capabilities will barely benefit from EMPs in terms of learning or experience. In fact, from recent

research we can deduce that, in order to use EMPs effectively, firms need to have successfully

reengineered their business processes, possess extensive knowledge about their EMPs and their

Page 14: Electronic Marketplaces versus Enterprise Resource Planning:

13

procedures, and understood the cause-and-effect relationships for their EMP activities [9]. These

findings make clear that it is not entirely possible to substitute internal with external supply chain

capabilities. Instead, regardless of the firm’s choice, a certain level of internal capabilities is

needed to effectively use EMP functionality.

A discussion of internal versus external capabilities (i.e., ERP systems versus EMPs) needs

to also consider a firm’s competitive advantages [30] which are vital to a firm’s long-term

survival. Competitive advantages have usually been developed over a long period of time and are

typically more difficult and expensive to change than comparative (short-term) capabilities (also

see [8]). Clearly, if a supply chain process provides a competitive advantage to the firm, it should

be kept in-house [31]. In other words, processes critical to a firm’s business should not be

outsourced to EMPs, where they can easily be replicated by a competitor. Instead, the firm should

continually improve those internal capabilities to main the competitive advantage. It may use

business process reengineering tools to simplify these processes [32,33] or implement an ERP

system to further improve their performance.

So far, we have considered exclusively qualitative decision variables for selecting an

internal or external supply chain solution, including supply chain functionalities provided by ERP

systems and EMPs as well as strategic factors. The last category of decision variables, the costs

and benefits of the two technologies, is mostly quantitative in nature.

The cost of a supply chain solution consists of two parts: the fixed implementation cost and

the variable usage cost. ERP systems are usually implemented internal to the firm and, therefore,

present a large fixed setup cost with a relatively small variable license and maintenance cost. For

example, a recent survey of U.S. manufacturers found that, on average, firms spend almost 6% of

their annual revenues (firms with less than $50 million annual revenues spend and average of

Page 15: Electronic Marketplaces versus Enterprise Resource Planning:

14

14%) on an ERP system implementation, with more than 40% spending less than $ 5 million [2].

Recall, however, that some supply chain functionalities cannot be used unless the system is

connected to an EMP or VAN. Hence, the fixed cost of providing connectivity for the ERP and

the variable cost of the VAN or EMP must be added if desired.

An EMP, on the other hand, requires only a small fixed cost to link it to the firm’s

information systems. This fixed cost can range from a few thousand to a few million dollars,

depending on the complexity of the interface required. However, the EMP’s variable costs may

be higher than those of an ERP system. For example, ChemConnect charges between 0.2% and

2% of the transaction volume [34], which may significantly impact a firm’s profit margin if it

operates in a competitive industry. In contrast, value added networks are more costly to set up

than EMPs, but offer a lower variable cost.

In terms of benefits, almost 70% of ERP users receive a return on their investment of 16%

or more [2], a number that satisfies most internal rates of return and largely refutes anecdotal

evidence of disastrous implementation results [4,5]. The most important qualitative benefits of

ERP systems include a shorter information response time, an increased interaction across the

enterprise, a shorter order cycle, and an improved interaction with customers and suppliers [2]. In

comparison, about 33% of the firms that used EMPs claim that “investments in selling online to

consumers are paying off. But less than 20% say extranets, electronic supply chains […], and

electronic marketplaces have produced returns” [1]. This finding is in stark contrast with the cost

reductions promised by the EMPs (e.g., [19]). The reason for this might be that EMPs tend to be

more profitable for buyers than for sellers. Qualitative benefits from EMP participation include

“improved customer service, greater knowledge of their customers' preferences, a greater

Page 16: Electronic Marketplaces versus Enterprise Resource Planning:

15

presence in their markets, improved brand recognition and increased efficiency of supply

chains/reduced processing costs” [1].

The costs and benefits are related to the order volume a firm transacts over the ERP system

(connected to customers or suppliers) or the EMP. For the purpose of this analysis, the order

volume is classified along two dimensions: the order scale and the order scope. An increase in

the order scale means that the order volume increases, but not the variety of items procured. An

increase in the order scope represents an increase in the number of different items ordered but not

necessarily an increase in the order scale.

The impact of the order scale and the order scope on the choice of an ERP system versus

EMP can be easily illustrated. In the simplest case, which holds for many small and some

medium-sized firms, supply chain activities are performed manually and orders are submitted by

mail, email, or fax. An increase in the order scale will not have an impact on the efficiency of the

ordering system, only on the transaction cost which is usually proportional to the transaction

volume for EMPs and constant for VANs. Given that the firm has been typing in orders to start

off with, an EMP’s supply chain capabilities provide a significant simplification of the supply

chain process. In addition to reducing the transaction costs, reducing errors due to the partial

automation of processes, and extending market reach, using an EMP’s negotiation or auction

functionality as well as order aggregation mechanisms (if offered) usually also result in lower

sourcing prices [1,19,21].

If a firm’s order scope grows, however, it must start using more efficient ordering methods.

Clearly, an ERP system is well suited for managing the complexity that comes with a growing

scope of items and, hence, would be the preferred technology choice. For example, orders can

then be generated and printed automatically or directly faxed to suppliers through the ERP

Page 17: Electronic Marketplaces versus Enterprise Resource Planning:

16

system. As a result, the firm can expect a higher quality of information, better inventory

management, and decreased IT costs [2].

Having discussed all relevant decision variables in this section, the next section introduces

two models that support the decision between an ERP system and the use of EMPs.

4 Decision Models for Selecting Supply Chain Capabilities

In this section, two models are introduced that provide a methodology for deciding between

an ERP system and EMP solution. First, a qualitative model is introduced which can be used for

strategic level planning. Once this model has been applied, the quantitative decision model may

be used for the selection of an operational solution. The operational solution involves the actual

choice of an ERP system or components of multiple ERP systems either as a stand-alone solution

or in conjunction with one or more EMPs.

4.1 ERP/EMP Integration Model

The following qualitative decision model is based on the above discussion of the decision

factors and considers the firm’s strategy in terms of competitive processes as well as the order

scale and order scope as proxies for costs and benefits. Recall that processes that provide the firm

with a competitive advantage tend to result in an internal solution. EMPs may be used for less

critical processes. Moreover, as its order scale grows, a firm can take advantage of EMPs to gain

cost reductions in the sourcing process. As the order scope increases, however, an ERP system is

needed to help the firm manage the growth in complexity. Examining these findings within the

context of a choice between ERP systems and EMPs and borrowing from the lifecycle approach

Page 18: Electronic Marketplaces versus Enterprise Resource Planning:

17

(e.g., as used in the the BCG product matrix) leads to the ERP/EMP Integration Model shown in

Figure 1.

Figure 1 ERP/EMP Integration Model

+ Competitive Activity –

– Scale of Orders +

Yes

Internal

Integration Full

integration U

se o

f ER

P Sy

stem

No

Island External Integration

– S

cope

of O

rder

s +

No Yes Use of EMP

Figure 1 indicates that a firm’s current state can be classified according to its use of ERP

systems and EMPs (see Figure 1) and shows the possible progressions through the technology

landscape. In the simplest case, a firm is performing all supply chain processes either manually or

with the help of non- or partially integrated legacy systems (Island). This state is appropriate for

firms with a small order scope and order scale. Sensitive processes are performed internally.

If the firm then experiences an increase in the scale of orders, it may take advantage of

using an EMP. This state is termed External Integration. Internal supply chain processes are still

performed as in the Island state, external supply chain capabilities such as purchasing and billing

automation help the firm decrease the transaction cost while the access to a wider range of

suppliers as well as negotiation and auctioning mechanisms may reduce the cost of products.

Note that the firm must be careful to keep sensitive processes in-house. However, as the firm

grows and its order scope increases, it must consider transitioning to a fully integrated state. The

state of Full Integration marries internal with external supply chain capabilities and gives the

Page 19: Electronic Marketplaces versus Enterprise Resource Planning:

18

firm the possibility of taking advantage of the full range of supply chain functionality offered in

the market. The path from Island through External Integration to Full Integration is taken by

many growing small and medium sized firms. Again, while taking the last step, the firm must be

careful to not outsource processes that provide a competitive advantage.

If, on the other hand, the firm’s order scope grows, it is advisable to first implement an

ERP system to reach the Internal Integration state. This is the path most manufacturing firms

have taken as they deal with complex product structures and benefit from the management of the

resulting order scope. The firm increases its internal supply chain capabilities and keeps all

competitively relevant processes in-house. As the order scale starts increasing, however, the firm

must consider integrating its ERP system with an EMP or VAN to take advantage of

collaborative and logistics functionality that can be achieved only with integrated systems.

Hence, the firm reaches a state of Full Integration. More than 30% of U.S. manufacturers

progress along this path [2].

Lastly, starting out from the Island state, a firm may directly progress to the Fully

Integrated state. This transition is appropriate if the order volume grows in terms of both scale

and scope. Due to the mix of internal and external capabilities, the firm has the choice of keeping

important processes in-house while taking advantage of EMP connectivity. About 20% of U.S.

manufacturing firms have taken this route [2]. Again, when choosing this path, the firm must be

careful to differentiate between strategically important and less important processes. The former

should be handled by internal systems; the latter may be implemented using either an internal or

external solution.

Once the strategy for an ERP/EMP implementation has been chosen, the question still

remains which systems and EMPs to select. Clearly, making this choice is a function of what

Page 20: Electronic Marketplaces versus Enterprise Resource Planning:

19

these alternatives offer and how much they cost. In the following section, a decision model is

developed that helps in making this decision.

4.2 Mixed Integer Non-Linear Decision Model

The ERP/EMP Integration Model can be successfully used as a strategic-level planning

tool. Once the firm knows which path to take, the following model can be applied to aid the firm

in selecting a set of ERP system(s) and EMP(s).

To find an operational solution to the decision problem, it is useful to first narrow down the

alternatives to a few ERP systems and EMPs. Given the discussion of decision factors in sections

2 and 3 of the paper, the firm must determine the following information about the systems:

(i) The functionalities offered by each of the candidates by themselves;

(ii) Overlapping functionalities particularly between ERP systems and EMPs; and

(iii) The fixed and variable costs and benefits associated with the candidates.

Typical costs and returns of ERP systems and EMPs are given in the previous section and can be

found in [1] and [2], respectively. In addition, an estimate of the cost of integrating each ERP

system with each EMP must be made. The cost and benefits for each candidate may then be

aggregated and discounted over the decision horizon using an internal rate of return.

This data is used in a mixed integer non-linear decision model to derive the most beneficial

solution (see below). In the simplest case, the solution of the proposed optimization model may

consist of implementing only an ERP package, using only an EMP, or implementing a combined

solution. In other words, the quantitative model is capable of suggesting the firm’s optimal

position in the qualitative model introduced above.

Page 21: Electronic Marketplaces versus Enterprise Resource Planning:

20

{ }{ }{ }

{ }[ ] (7)k 0,1 L

(6)ji, 0,1 Y ,X)5(k 0 Z

)4(J..., 1,2,i nY

)3(I..., 1,2,i 1XK1,2,...,k

)2( L ZYYCMMYXCRMYCMXCR.t.s

)1(ZU YYHMM YXHRM YPM XPR zMax

k

ji

k

jj

ii

kkjl,j

ljjlki j,i

jiijkj

jjkiik

kkk

i jl,jljjl

j j,ijiijjjii

∀∈∀∈

∀≥

∈∀≤

∈∀≤∈∀

≥+−−+

−−−+=

∑∑ ∑∑

∑∑ ∑∑ ∑

Table 5 Variable Definitions for the Nonlinear Decision Model

Xi = Decision variable indicating whether ERP system i ∈ {1, 2, …, I} is implemented; Xi ∈ {0,1} Yj = Decision variable indicating whether EMP j ∈ {1, 2, …, J} is implemented; Yj ∈ {0,1}; note that

l ∈ {1, 2, …, J} is used interchangeably with j where interactions between EMPs are represented Zk = Decision variable indicating to which degree supply chain functionality k ∈ {1, 2, …, K} does not meet

the firm’s needs; Zk ∈ [0,1] PRi = Expected discounted payoff (benefits – costs over the decision horizon) of implementing and using

the ERP System i PMj = Expected discounted payoff of linking and using the EMP j HRMij = Discounted cost (benefit) of introducing ERP system i and EMP j at the same time and linking the

systems to each other HMMjl = Discounted cost (benefit) of introducing the set of EMPs j and l, with j≠ l, at the same time and linking

the systems to each other Uk = Unit cost of not meeting the desired level of supply chain functionality k; Uk ≥ 0 ∀ k CRik = Capability level of ERP system i for carrying out functionality k; Cik ∈ [0,1], where 1 represents the

highest possible capability level across all ERP systems and EMPs CMjk = Capability level of EMP j for carrying out functionality k; CMjk ∈ [0,1], CRMijk = Interaction term for combined capability levels of ERP system i and EMP j for carrying out

functionality k; CRMijk ∈ [0,1] CMMjlk = Interaction term for combined capability levels of EMPs j and l, with j≠ l, for carrying out functionality

k; CMMjlk ∈ [0,1] Lk = Capability level L desired by the firm for functionality k; Lk ∈ [0,1] n = Number of EMPs to be subscribed to

Equation (1) depicts the objective function that maximizes the payoff from the selection of

an ERP system and/or EMP(s). The decision variables, Xi and Yj, are binary and represent the

selection of ERP systems and EMPs, respectively. The objective function considers the expected

Page 22: Electronic Marketplaces versus Enterprise Resource Planning:

21

discounted payoffs from the ERPs (PRiXi) and EMPs (PMjYj). In addition, the objective function

contains the cost of the selected solution not providing the required supply chain functionality

(“underperformance cost,” UkZk), and the cost (benefit) of introducing two systems at the same

time (economies of scale) and linking the ERP system with the EMP (“integration cost,”

HRMijXiYj). Note that the integration cost is nonzero only if a set of systems has actually been

chosen. In addition, if multiple EMPs are chosen, the EMP interaction cost, HMMilYjYl, may be

invoked in the case overlapping benefits. The interaction cost can be used to reflect the

possibility that the sum of the discounted benefits of the EMPs is greater than the actual benefits

derived. Since EMPs are frequently chosen to complement rather than substitute another,

however, the interaction cost term will frequently be negligible.

The first set of constraints (Inequality 2) models the levels of all functionalities (k = 1

through K) provided by the ERP systems (CRik), EMPs (CMjk), and interaction terms between the

ERP systems and EMPs (CRMijk). The levels of the functionalities are scaled between 0 and 1

(see Equation 7), where 1 represents the estimated highest level of functionality possible

considering any solution currently on the market (i.e., the benchmark). The sum of the selected

functionalities must be at least as great as the required functionality, Lk. If a selected solution

does not meet this requirement, Zk becomes non-negative to invoke the underperformance cost,

UkZk, of the missing level of functionality k. If a certain functionality is important to the firm, the

associated unit underperformance cost, Uk, will reflect this fact and steer the firm clear of sub-

optimal technology.

Moreover, Inequality (2) contains an interaction term (CRMijkXiYj) that adjusts the overall

levels of functionality for the amount different systems overlap in terms of functionality. For

example, if the firm’s pre-selected options contain an ERP system and an EMP whose sourcing

Page 23: Electronic Marketplaces versus Enterprise Resource Planning:

22

functionalities overlap, this fact would be reflected in the interaction term to ensure that those

functionalities are not double counted. Note that this term does not correspond to the integration

cost term in the objective function. Similarly, the interaction term CMMjlkYjYl adjusts for

functional overlaps between multiple EMPs.

Equations (3) and (4) ensure that only one ERP system and n EMPs are selected,

respectively. The fourth constraint explicitly allows for the selection of multiple EMPs since

firms often subscribe to a portfolio of EMPs to access significantly different functionalities. The

number of EMPs allowed, n, can be adjusted to reflect the firm’s need.

The set of Inequalities (5) ensures that the decision variables associated with the

underperformance cost, Zk, remain non-negative. This has the effect that over-performance along

the supply chain functionalities, k, is not rewarded since the firm essentially implements unusable

‘overcapacity.’ Lastly, while the variables Zk are real numbers, Equation (6) ensures that the

ERP and EMP decision variable are binary.

The quantitative decision model is simple in nature and basically helps in the task of

making

kn

comparisons, where k represents the number of ERP systems and EMPs (or parts

thereof) to be chosen and n the total number of ERP systems and EMPs considered. Note that this

number decreases if n is partitioned into ERP systems and EMPs and a certain number of each

has to be chosen. In this case, the number of combinations decreases to:

selected be toEMPs ofNumber considered EMPs ofNumber

selected be toERPs ofNumber considered ERPs ofNumber

.

Clearly, since some firms pick and choose modules from different ERP systems and many more

subscribe to a few EMPs at the same time, the number of options investigated (k) is large and,

Page 24: Electronic Marketplaces versus Enterprise Resource Planning:

23

hence, a direct enumeration of possible solutions becomes tedious even for smaller problem sizes

and nearly intractable for large problems. This model helps in evaluating those options by taking

into account both the functionalities offered and the expected monetary consequences. A strategy

for applying the model will be given in the next section.

The model can be easily expanded. First, it can be modified to allow for the selection of a

portfolio of multiple parts from different ERP systems and different EMPs. In this case, the

binary restriction on Xi and Yj (Equation 6) can be dropped and an interaction term introduced

into Inequality (3) that takes into account the ERP systems’ functional overlap (-

∑≠im,i

miimk XXCRR , with i,m ∈ [1, 2, …, I]). Moreover, the constraint on the number of ERP

systems (Inequality 3) is relaxed and the payoff and cost terms in the objective function (PRi,

PMj, PRMij, Uk, HRMij, and HMMil) may be modeled as linear or non-linear functions of the

implementation levels chosen (Xi and Yj). Alternatively, to obtain more detailed results, the

decision variables can be modified to not represent whole systems anymore but different

functionality/system combinations. In that case, since modules with the same functionality

would not be chosen from different ERP systems, the interaction term discussed above would not

have to be introduced to Inequality (3).

Second, if the firm finds that a particular combination of an ERP system and EMP is

unsuitable for reasons of functionality or difficulty of integration, a constraint can be introduced

that excludes that combination from the optimal solution. For example, if ERP system i and EMP

j are not to be selected together, the constraint would be XiYj = 0 or, if the decision variables are

binary, Xi + Yj ≤ 1. Any combination of ERP systems and any combination of EMPs may be

excluded from the optimal solution in a similar manner.

Page 25: Electronic Marketplaces versus Enterprise Resource Planning:

24

Third, if the firm considers using multiple EMPs for placing orders, it may not be able to

achieve economies of scales that are as high as if the number of EMPs (or suppliers in general) is

severely limited. This effect may be modeled through including a term in the objective function

that decreases the total benefit from the solution at a non-increasing rate with the increase in the

number of suppliers.

Lastly, based on the experience of a senior ERP systems consultant, when choosing

between ERP systems, the ease of using such a system can be an issue influencing the final

decision. The model can be expanded to include such a constraint in the following way:

)b8( A YSM)a8( A XSR

22 jj

11ii

≥α+≥α+

where α. represents a term that measures the inconvenience of not using a user-friendly system in

relation to A., the desired level of user-friendliness, and SRi and SMj represent the level of user-

friendliness of ERP i and EMP j, respectively. To make this constraint work, the objective

function must be augmented by the cost that represents the inconvenience or loss of productivity

caused by the lack of user-friendliness, -α1F1-α2F2 , where F. is the unit cost of the inconvenience

(or loss in productivity) from the lack of user-friendliness. F. should be set to reflect its

importance relative to the systems’ functionalities (e.g., the costs of underperformance). Note that

Inequality (8b) is not needed if only an ERP or an integrated solution is implemented. In the latter

case, ERP functionality is usually negotiated through ERP system interfaces. Similarly, if only a

set of EMPs is to be selected, Inequality (8a) may be omitted.

Page 26: Electronic Marketplaces versus Enterprise Resource Planning:

25

The model is easily implemented in Microsoft Excel or any other software suitable for

solving non-linear programs. An example implementation is shown in Figure 2. In order to

conserve space, no interaction terms have been included in the example.

Figure 2 Example Selection of an ERP System/EMP Combination

Cho

ices

ERP

Syst

em 1

ERP

Syst

em 2

ERP

Syst

em 3

EMP

1

EMP

2

EMP

3

Sour

cing

Billin

g/Pa

ymen

t

Quo

tatio

ns

Con

tract

s

Supp

liers

Cat

alog

s

Col

labo

ratio

n

Neg

otia

tion

Auct

ions

Logi

stic

s M

gt

Dis

tribu

tion

Ope

r Per

form

Supp

lier P

erf.

Inte

grat

ion

ERP/

EMP

Inte

grat

ion

Exp. Benefits 15000 13000 14000 5000 4900 4700Exp. Costs 9000 8000 8500 2000 2200 2300 20000 15000 7000 6000 3000 3000 13000 7500 15000 17000 4000 2000 5000 30000

Decision 1.0 0.0 0.0 1.0 1.0 0.0 0.0 0.0 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0MAX Exp. Payoff 6000 0 0 3000 2700 0 0 0 -1400 0 0 0 0 0 0 0 0 0 0 0 -220

S.T.Sourcing 0.70 0.65 0.80 0.40 0.25 0.30 1.00 1.4 >= 1.0Billing/Paymt 0.92 0.90 0.95 0.35 0.35 0.30 1.00 1.6 >= 1.0Quotations 0.70 0.80 0.75 0.00 0.10 0.00 1.00 1.0 >= 1.0Contracts 0.60 0.60 0.60 0.60 0.60 0.60 1.00 1.8 >= 0.7Suppliers 0.84 1.00 1.00 1.00 0.79 1.00 1.00 2.6 >= 0.8Catalogs 1.00 1.00 1.00 0.52 0.62 1.00 1.00 2.1 >= 0.3

Collaboration 0.93 0.68 0.61 0.98 0.74 1.00 1.00 2.6 >= 0.8Negotiation 0.50 1.00 1.00 0.92 0.20 1.00 1.00 1.6 >= 0.9Auctions 0.40 1.00 0.53 0.68 0.52 1.00 1.00 1.6 >= 0.2

Logistics Mgt 0.20 0.30 0.28 0.61 0.80 0.80 1.00 1.6 >= 1.0Distribution 1.00 0.77 1.00 0.00 0.00 0.00 1.00 1.0 >= 0.1

Oper Perform 1.00 1.00 0.79 1.00 0.79 0.51 1.00 2.8 >= 1.0Supplier Perf. 1.00 0.81 0.55 0.61 0.66 0.92 1.00 2.3 >= 1.0

Integration 1.00 0.97 1.00 0.93 1.00 1.00 1.00 2.9 >= 1.0

No of ERPs 1.00 1.00 1.00 1.0 <= 1.0No of EMPs 1.00 1.00 1.00 2.0 <= 2.0

ERP/EMP Integration Cost Matrices EMP/EMP Simultaneous Integration Cost Savings

EMP

1

EMP

2

EMP

3

EMP

1

EMP

2

EMP

3

EMP

1

EMP

2

EMP

1

EMP

2

Level 1.0 1.0 0.0 Level 1.0 0.0ERP Sys 1 1.0 -200 -95 -250 -200 -95 0 EMP2 1.0 75 75 0ERP Sys 2 0.0 -180 -280 -270 0 0 0 EMP3 0.0 50 90 0 0ERP Sys 3 0.0 -220 -250 -270 0 0 0

NOTES • Expected costs, benefits, payoffs are shown in thousands of dollars and ficticious. Expected costs and benefits should be computed on the basis of discounted cash flows over a pre-determined decision period given an expected trading volume and value. They can be modeled as non-linear functions of the implementation level.• There is no benefit to over-performance.• In this example, the constraints in the solver ensure that the selection variables are binary and the underperformance cost variables are non-negative.

Exp. Benefit10,080$

UNDERPERFORMANCE COST

ERP/

EMP

Inte

grat

ion

Cap

abilit

ies

ERPs EMPs

Page 27: Electronic Marketplaces versus Enterprise Resource Planning:

26

4.3 Decision Strategy

After having introduced a strategic level (qualitative) model and an operational level

(quantitative) model to support the selection of ERP systems or EMPs, we now discuss a strategy

for applying those models.

As noted earlier, the strategic model is suitable for making a general decision of which type

of system or mix of systems to implement given a firm’s current setup. The alternatives are to:

(i) First introduce an ERP system (Internal Integration) and, possibly later on, add

EMP access;

(ii) First use the services of one or more EMPs (External Integration) and, e.g.,

implement an ERP system after business has reached a certain performance; or

(iii) Implement both an ERP system and use (a set of) EMPs (Full Integration).

Once this strategic decision has been made, it needs to be operationalized by translating it

into the functions of the qualitative decision model. For example, the number of EMPs or ERP

systems may be limited or interaction terms may be simplified or expanded as a result of the

strategic decision.

In particular, if the firm decides to internally integrate, the quantitative model is simplified

because all (parts of) functions that relate to EMPs fall away. Alternatively, if the firm thinks of

adding EMP access at a later time, this information can be reflected in the quantitative model by

discounting the expected EMP cash flows appropriately and estimating how the functionalities of

EMPs will develop over time. The information and discussion provided in the second section of

this paper can be of help for such a short to medium term forecast.

In contrast, if the firm decides to externally integrate, the ERP system variables fall away,

including Inequality (3) which limits the number of ERP systems. However, in this case, the firm

Page 28: Electronic Marketplaces versus Enterprise Resource Planning:

27

may wish to introduce a constraint that restricts the number or EMPs to be used. Alternatively, it

may first use the model without any further restrictions to find an optimal solution and then

consider an additional restriction on the number of EMPs if it is deemed too high.

Lastly, to explore the possibility or reducing the amount of data needed for the quantitative

model, the firm may start out using rough estimates of the costs, benefits, and functionalities

provided by the systems under consideration. After solving the model the robustness of the

solution should be investigated. If the solution is fairly robust, more precise numbers may be

needed only for a small subset of the systems. In contrast, if the solution is sensitive to minor

changes, the firm must acquire detailed data for a larger set of the systems being investigated.

5 Conclusions and Further Research

This paper deals with the question of whether a firm should implement an enterprise

resource planning (ERP) system or use electronic marketplaces (EMPs) to improve its supply

chain capabilities. To answer this question we investigated a variety of important decision

factors, including the functionalities of ERP systems and EMPs, their costs and benefits, and

strategic considerations. Using these decision factors, we then propose two decision models to

help firms in making a reasonable tradeoff between those two technologies.

To analyze relevant decision factors, we first investigated the historical underpinnings and

functionalities of ERP systems, followed by those of EMPs. This analysis provided the basis for a

critical comparison of ERP systems and EMPs in terms of functionality. The comparison

revealed important conceptual differences between ERP systems and EMPs. First, they have

evolved in different ways. Whereas ERP systems and their predecessors were developed to

Page 29: Electronic Marketplaces versus Enterprise Resource Planning:

28

manage the complexity of information flows and decisions within a firm, the first EMPs were

created after the advent of the Internet and designed to provide real-time market-making and

collaboration mechanisms. These differences are still reflected in the functionalities offered by

the technologies.

In addition to the functionality, the tradeoff is also impacted by more strategic decision

factors. Specifically, the introduction of ERP systems, often in conjunction with business process

reengineering to simplify processes, results in a significant long-term increase in internal supply

chain capabilities. In contrast, using an EMP provides access to external capabilities. As opposed

to ERP systems, these capabilities are restricted to supply-chain functionality and almost

completely vanish when the firm discontinues its subscription to the EMP. In particular, firms

with low internal capabilities can rarely improve their supply chain efficiency by accessing

external capabilities, especially in an uncertain environment in which the technology or

conditions for using the technology change. This is clearly the case with EMPs, therefore making

them unsuitable when the firm wants to engage in organizational learning and building up of

internal capabilities. In addition, when outsourcing supply chain capabilities, the firm must

ensure that processes critical to its competitive position remain in-house to ensure the potential to

differentiate itself from its competitors.

In addition to these qualitative and strategic decision factors we identified the costs and

benefits of using either technology. Our analysis revealed substantial differences between the two

technologies in terms of both fixed and variable costs as well as the benefits reported in the

literature. As compared to EMPs, ERP systems require a large up-front investment and generate

relatively low maintenance costs. However, the implementation of an ERP system often goes

hand in hand with process reengineering [35] and, thus, substantially increases the firm’s internal

Page 30: Electronic Marketplaces versus Enterprise Resource Planning:

29

capabilities and efficiencies and is capable of managing a complex supply setup. On the other

hand, the use of EMPs gives quick and relatively inexpensive access to potential buyers and

customers, but provides little help in terms of linking a firm’s demand to the system.

We then developed two decision models to help firms in making a decision between the

two information technologies. First, we developed the ERP/EMP Integration Model which

explains the transition from a state termed Island (no ERP system, no EMP access) to the Full

Integration state (ERP system and EMP access). Possible progressions were shown and discussed

in the context of the firm’s competitive advantage and the scope versus scale of orders. The

ERP/EMP Integration Model allows a firm to arrive at a strategic decision of which (mix of)

technologies to implement.

Given this strategic decision, a mixed-integer non-linear decision model was introduced

that allows operationalizing that decision by selecting a suitable technology solution. The

decision model explicitly reflects quantitative decision factors, including the expected costs and

benefits associated with introducing a selection of ERP systems or EMPs as well as the levels of

supply chain functionality needed. The optimal solution gives concrete advice on which ERP

system and EMPs to use. The model can be easily extended to also facilitate the selection of

various modules from different ERP systems or various EMPs. In addition, a constraint may be

added that takes into account the user-friendliness of the systems under consideration.

Future research should consider three agendas. First, as the capabilities of ERP systems and

EMPs continually evolve, periodic updates of this research will be needed. Second, a formal

validation of the quantitative decision model and its extensions, including a test of the model

through firms currently going through this type of decision, is necessary and would lend

additional credibility to the model. Third, given the changes in ERP systems and EMPs over

Page 31: Electronic Marketplaces versus Enterprise Resource Planning:

30

time, it would be beneficial to extend the decision model introduced in this paper to a dynamic,

non-linear decision model capable of incorporating changes in costs and benefits over a planning

horizon [19].

6 References and Notes

1 Violino, B. (2001) 'The Search For E-Business Returns -- As the economy sputters, companies must assess how Internet technology will improve the bottom line,' InternetWeek, Oct 15, 2001, p. PG 9-13.

2 Mabert, V. A., A. Soni, and M. A. Venkataramanan (2000) 'Enterprise Resource Planning Survey of U.S. Manufacturing Firms,' Production and Inventory Management Journal, Vol. 41, No. 2, pp. 52-58.

3 An EMP can be defined as a network that brings together different companies for the purpose of matching and buying sellers, facilitating transactions, or providing an institutional infrastructure (see Bakos, Y. (1998) 'The Emerging Role of Electronic Marketplaces on the Internet,' Communications of the ACM, Vol. 41, No. 8, pp. 35-42).

4 Meta_Group (1999) 'ERP Implementation Study Reveals Costs, Benefits,' APICS - The Performance Advantage, Oct 1999, p. 7.

5 Davenport, T. (1998) 'Putting the Enterprise into the Enterprise System,' Harvard Business Review, Vol. 76, No. 4, pp. 121-131.

6 ATKearney (2000) 'B2B Exchanges in the High Tech Industry: Creating Liquidity through Services.'

7 Please see the June, 2001, issue of 'APICS - The Performance Advantage' and http://www.bhrsoftware.com/erp/comparison.html

8 Prahalad, C. K. and G. Hamel (1990) 'The Core Competence of the Corporation,' Harvard Business Review, Vol. 68, No. 3, pp. 79-91.

9 Grewal, R. (2001) 'An investigation into the antecedents of organizational participation in business-to-business electronic markets,' Journal of Marketing, Vol. 65, No. 3, pp. 17 ff.

10 White, S. (2000) 'Competition, capabilities, and the make, buy, or ally decisions of Chinese state-owned firms,' Academy of Management Journal, Vol. 43, No. 3, pp. 324 ff.

11 Steensma, K. H. and J. F. Fairbank (1999) 'Internalizing External Technology: A Model of Governance Mode Choice and an Empirical Assessment,' Journal of High Technology Management Research, Vol. 10, No. 1, pp. 1-35.

12 Lee, C., K. Lee, and J. M. Pennings (2001) 'Internal capabilities, external networks, and performance: A study on technology-based ventures,' Strategic Management Journal, Vol. 22, No. 6/7, pp. 615 ff.

13 Miller, J. G. and L. G. Sprague (1975) 'Behind the Growth in Material Requirements Planning,' Harvard Business Review, No. Sept/Oct 1975, pp. 83-89.

14 Simpson, J. L. and D. A. Garvin (1987) 'A Note on Manufacturing Resource Planning (MRP II),' Harvard Business School, Boston, Note No. 9-687-097.

Page 32: Electronic Marketplaces versus Enterprise Resource Planning:

31

15 Escalle, C. X., M. J. Cotteleer, and R. D. Austin (1999) 'Enterprise Resource Planning (ERP),' Harvard Business School, Boston, Note No. 9-699-020.

16 JDEdwards (2002) 'What We Do -- Company History,' Oct 13, 2002 <http://www.jdedwards.com/public/0,1413,0%257E101%257E,00.html >.

17 BHR_Software_Inc. (2002) 'ERP Comparison,' October 14, 2002 <http://www.bhrsoftware.com/erp/comparison.html >.

18 Manugistics (2002) 'The next wave in value creation,' October 15, 2002 <http://www.manugistics.com/solutions/epo.asp >.

19 Envera (2002) 'ChemConnect Website,' Oct 24, 2002 <http://www.chemconnect.com >.

20 Young, E. (2002) 'Web Marketplaces that Really Work,' Fortune, Vol. 144, No. 10, pp. 78-83.

21 Covisint (2002) 'Covisint Solutions,' Sept 23, 2002 <http://www.covisint.com/solutions/ >.

22 CommerceOne (2002) 'Commerce One 5.0,' Oct 24, 2002 <http://www.commerceone.com/download/collateral/cmrc_corp_50_brochure.pdf >.

23 Ariba (2002) 2002 <http://www.ariba.com/company/press_archive.cfm >.

24 E2open (2002) 'Press Releases,' Oct 24, 2002 <http://www.e2open.com/news/pr/ >.

25 Elemica (2002) 'Press Releases,' Oct 24, 2002 <http://www.elemica.com/servlet/page?_pageid=57,91,97&_dad=elemica&_schema=ELEMICA >.

26 'Elemica Goes Live in Phase One and Conducts First Transaction,' (2001) Chemical Market Reporter, Jan 8, 2001.

27 GHX (2002) 'United States Press Releases,' Oct 24, 2002 <http://home.ghx.com/USA/news/press_release_list.asp >.

28 Converge (2002) 'Converge News,' Oct 24, 2002 <http://www.comverge.com/news.html >.

29 Hoffman, W., J. Keedy, and K. Roberts (2002) 'The unexpected return of B2B,' The McKinsey Quarterly, No. 3.

30 Porter, M. E. (1979) 'How Competitive Forces Shape Strategy,' Harvard Business Review, Vol. 57, No. 2, pp. 137-145.

31 Venkatesan, R. (1992) 'Strategic Sourcing: To Make or Not To Make,' Harvard Business Review, Vol. 70, No. 6, pp. 98-107.

32 Kumar, V., B. Maheshwari, and U. Kumar (2002) 'Enterprise resource planning systems adoption process: a survey of Canadian organizations,' International Journal of Production Research, Vol. 40, No. 3, pp. 509-523.

33 Francalanci, C. (2001) 'Predicting the implementation effort of ERP projects: empirical evidence on SAP R/3,' Journal of Information Technology, Vol. 16, No. 1, pp. 33-48.

34 'Internet Startups Have Chemicals in their Sites; E-Traders Fight for Share,' (1999) Chemical Week, Sept 29, 1999, p. 33.

35 Nah, F. F.-H., J. L.-S. Lau, and J. Kuang (2001) 'Critical factors for successful implementation of enterprise systems,' Business Process Management Journal, Vol. 7, No. 3, pp. 285.