Strategic ERP - Extension and Use PDF

S T R AT E G I C E R P E X T E N S I O N A N D U S E
S T R AT E G I C E R P
EXTENSION AND USE
Elliot Bendoly and F. Robert Jacobs
STANFORD BUSINESS BOOKS

An imprint of Stanford University Press
Stanford, California 2005
Stanford University Press

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

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

PART I.
ERP Rebirth and Advanced Viewpoints
Strategy as a Critical Factor in Applied ERP Success
11
13
S. Abdinnour-Helm and C. Lengnick-Hall

3
The New Users: SMEs and the Mittelstand

Experience
36
T. Schoenherr, M. A. Venkataramanan, A. Soni,

V. A. Mabert, and D. Hilpert
4
Enterprise Applications: Building Best-of-Breed

Systems
52
V. A. Mabert and C. A. Watts

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

PART II.
Value Extensions Beyond the Enterprise
Agility Through Standardization: A CRM /ERP

Application
85
87
T. F. Gattiker, D. Chen, and D. L. Goodhue

7
ERP-Driven Replenishment Strategies in

Make-to-Order Settings
97
E. P. Robinson Jr. and F. Sahin

8
ERP as a Platform for Vendor Managed Inventory

M. V. Tatikonda, C. V. Brown, and I. Vessey
108
vi
Contents
IT-Supported Productivity: Paradoxes and

Resolution in R&D
130
D. A. Joseph and J. Ettlie

10
ERP as a Resource for Inter-Organizational

Value Creation
140
T. E. Vollmann
PART III.
11
Future Visibility and Accountability
Enabling ERP Through Auto-ID Technology
153
155
E. W. Schuster, D. L. Brock, S. J. Allen, P. Kar,

and M. Dinning
12
13
Auditing the System in Use: Value Beyond the

Baseline
J. Sarkis and R. P. Sundarraj
The Path of the Enlightened Manager:
Prescriptions for ERP Evolution
L. L. David and E. Bendoly
172
191
Contributors
Chief Editors
Dr. Elliot Bendoly is a faculty member in Decision and Information Analysis at Emory Universitys Goizueta Business School. Prior to academia, he
worked as a research engineer for the Intel Corporation. He holds a Ph.D.
in the elds of operations management and decision sciences from Indiana University. Along with these specializations, his academic background includes an information systems orientation including database,
ERP, and knowledge management focuses. During this time, he served as
an instructor and developer of SAP implementation and ABAP/4 programming curriculum. More recently, he has been involved with coursework on IT supported service operations and supply chain management.
He has published in a number of academic journals, including the Journal of Applied Psychology, Journal of Operations Management, Journal
of Service Research, European Journal of Operational Research, International Journal of Operations and Production Management, Decision Support Systems, Information and Management, and Business Horizons. His
current research focuses on operational issues in IT utilization and organizational behavioral dynamics.
Dr. F. Robert Jacobs is the E-II Faculty Fellow and Professor of Operations
Management at the Kelley School of Business, Indiana University. He has
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Contributors
degrees in industrial engineering and computer and information science,

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

Management in the Barton School of Business at Wichita State University.
Her research interests and expertise are in operations analysis and improvement, enterprise resource planning, facility layout, and supply chain
management. Dr. Abdinnour-Helm has won several awards of excellence
in both teaching and research. She has published her work in academic
and practitioner journals, including European Journal of Operational Research, International Journal of Production Research, International Journal of Physical Distribution and Logistics Management, Production and
Inventory Management Journal, and Journal of Engineering and Technology Management. Dr. Abdinnour-Helm has consulted with different companies on topics of technology and operations management. She is a member of several professional organizations, including APICS, INFORMS,
Contributors
POMS, AIS, and DSI. She regularly makes presentations at national and
international conferences and to various other professional groups.
Dr. Stuart J. Allen is professor emeritus at Penn StateErie, the Behrend
College. He works on design of decision aids for application in manufacturing environments. His educational background includes a bachelor of
science degree in mechanical engineering from the University of Wisconsin, a masters 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 eld of non-Newtonian uid
mechanics and has published over 50 journal articles in engineering and
management science. He has also owned and operated three businesses in
Wisconsin and New York State.
Dr. David L. Brock is Principal Research Scientist at the MIT Auto-ID Labs
and the founding director of Brock Rogers Surgical, a manufacturer of
microrobotic devices. He has worked with a number of organizations, including MITs articial intelligence lab, Massachusetts Eye and Ear Inrmary, DARPA, Celadon, Loral, BBN, and Draper Labs. Dr. Brocks interests include distributed systems control, Internet control, large system
simulation, robotics, and AI. He has several publications and four patents. He has received several awards, including the Wunsch Foundation
Award for outstanding mechanical design, Tau Beta Pi, and Pi Tau Sigma.
Dr. Brock holds bachelors degrees in theoretical mathematics and mechanical engineering, as well as masters and Ph.D. degrees from MIT.
Dr. Carol V. Brown is Associate Professor of Information Systems, Kelley
School of Business, IUPUI Indianapolis. Her general areas of specialization are management and design of information systems in large organizations and the management of end-user computing strategies and tactics.
Her recent work has surrounded enterprise system implementation issues,
ITs role in mergers and acquisitions, and design and governance of the
IT organization. Publications of her research can be found in highly respected outlets such as Information Systems Management, MIS Quarterly, Information Systems Research, Journal of Management Information Systems, and Organization Science.
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Contributors
Susan Cantrell is a research fellow at the Accenture Institute for High Performance Business. Her work is focused on business innovation, human
performance, and the intersection of organizational behavior and information systems. Ms. Cantrell has a masters degree in management information systems and has prior experience in the investment and education
elds. Her work has been published in publications such as Industry Standard, Across the Board, Strategy and Leadership, and Outlook.
Dr. Daniel Chen is an Assistant Professor of Information Systems at Texas
Christian University. He received his Ph.D. in MIS from the University of
Georgia in December 2004. He also holds an MBA from Washington University in St. Louis. Dr. Chens 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 Presidents Chair in Information Technology and Management at Babson College. He is a widely published author and acclaimed speaker on the topics of information and knowledge
management, reengineering, enterprise systems, and electronic business
and markets. He has a Ph.D. from Harvard University in organizational
behavior and has taught at the Harvard Business School, the University
of Chicago, Dartmouths 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. Davenports latest book
coauthored with Larry Prusakis Whats the Big Idea? (Harvard Business School Press), which describes how organizations modify and implement new management ideas to improve their performance. Prior to
this, Dr. Davenport wrote, coauthored, or edited nine other books, including the rst 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 management with a BS in mathematics and is certied in data processing
(CDP). Ms. David is currently a business consultant with SSA Global, responsible for proposing and demonstrating solution sales to installed base
clients for BPCS and various partner products. She has been a member of
APICS (American Production and Inventory Control Society) for over
20 years and has held many board positions, including president of the
APICS Atlanta Chapter from 2002 to 2004 (with almost 1,000 members)
and president of APICS Shreveport, Louisiana.
Mark Dinning is the RFID Project Leader in the Supply Chain Engineering Group at Dell Inc. He coauthored Fighting Friction, an article about
the applied use of RFID technology, which appeared as the February
2003 cover story in APICS Magazine. Mr. Dinning has a masters of engineering in supply chain management from MIT and an undergraduate
degree in business economics from UCLA. Mr. Dinning wrote his thesis
in conjunction with the MIT Auto-ID Center, the group responsible for
the development and standardization of RFID technology. Prior to Dell
Inc. and MIT, he was one of the original employees at Tickets.com.
Mr. Dinning began his career at Deloitte & Touche and is a Certied Public Accountant.
Dr. John E. Ettlie is the Malelon L. and Richard N. Rosett Professor of Business Administration and Director of the Technology Management Center
at the Rochester Institute of Technology. He earned his Ph.D. at Northwestern University in 1975 and has held appointments since then at the
University of Illinois Chicago, De Paul University, the Industrial Technology Institute, the University of Michigan Business School, the U.S.
Business School in Prague, and Catolica University in Lisbon, Portugal.
Professor Ettlie has been the consultant to numerous corporations and
government projects, including the Saturn Corporation, Allied-Signal
Corporation, Caterpillar Tractor, Inc., PACAR Reynolds Metals, Kodak,
Delphi Corporation, and many others. He is the associate editor of sev-
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eral professional journals, including the Journal of Operations Management and Production and Operations Management. He has authored six
books, including the second edition of his textbook titled Managing Innovation to be published by Elsevier (expected summer 2005).
Dr. Thomas F. Gattiker, CFPIM, is Assistant Professor of Operations Management at Miami University in Oxford, Ohio, and is an afliate of the interdisciplinary Engineering Management Program. He has published in
Information and Management, Production and Inventory Management
Journal, International Journal of Production Research, Quality Management Journal, and The Decision Sciences Journal of Innovative Education. His current research is the application of information technology to
the operations and supply chain areas. He was the 1999 APICS George
and Marion Plossl Fellow. Before obtaining his Ph.D. from the University
of Georgia, he worked in operations and inventory management, most recently at Rockwell Automation and Reliance Electric.
Dr. Dale L. Goodhue is the C. Herman and Mary Virginia Terry Chair of
Business Administration and Head of the Department of MIS at the University of Georgias Terry College of Business. He has published in Management Science, MIS Quarterly, Decision Sciences, Sloan Management
Review, and other journals. His research interests include measuring the
impact of information systems, the impact of task-technology t on individual performance, and the management of data and other IS infrastructures and resources. In particular, he is currently focusing on identifying the impacts and implementation success factors of enterprise
resource planning (ERP) systems and data warehousing.
Jeanne G. Harris is associate partner, Senior Research Fellow, and Director of Research (Chicago) at the Accenture Institute for High Performance
Business. She has a masters degree in information science from the University of Illinois and is currently conducting research on the next generation of enterprise solutions and the economics of IT innovation. Her past
research topics include improving managerial performance, knowledge
management, business intelligence, building analytic capabilities, customer relationship management, customer-centric strategies, mobile personalization, and realizing value from enterprise solutions; she also speaks
Contributors
frequently on these topics to executive audiences. Jeannes work has been

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

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

decision sciences. Professor Mabert is vice president of the Harvey Foundation and a fellow of the Decision Sciences Institute.
Dr. E. Powell Robinson Jr. is an associate professor of supply chain management at the Mays Business School, Texas A&M University. He received
his Ph.D. from the University of Texas at Austin and was previously a faculty member at Indiana University. His primary research interests are in
the design of production and distribution networks, multilocation inventory control, supply chain strategy, and information technology applications in supply chain management. His publications are in Decision Sciences, Management Science, Journal of Operations Management, Naval
Research Logistics, and Interfaces, among others.
Dr. Funda Sahin is an assistant professor of logistics and transportation
in the College of Business at the University of Tennessee. She received her
Ph.D. from Texas A&M University. Her research and teaching interests
are in logistics and transportation, operations and supply chain management, inventory planning and control, and information technology applications in supply chain management. Her publications are in Decision
Sciences and Production and Inventory Management Journal. She is a
member of CLM, DSI, and INFORMS.
Dr. Joseph Sarkis is currently Professor of Operations and Environmental
Management in the Graduate School of Management at Clark University.
He earned his Ph.D. from the State University of New York at Buffalo. His
research interests include supply chain management and management of
technology with a specic emphasis on environmentally conscious operations and logistics, performance management, justication issues, and
enterprise modeling. He has published over 160 articles in a number of
peer reviewed academic journals, conferences, and edited books.
Tobias Schoenherr is a doctoral candidate in the Kelley School of Business
at Indiana University, majoring in operations management and decision
sciences. He earned his B.S. (with High Distinction) and his M.B. from
Indiana University and holds a Diplom-Betriebswirt (FH) from the European School of Business, Germany. Mr. Schoenherrs current research in-
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terests include supply chain management, electronic procurement and reverse auctions, e-commerce, industrial marketing, and ERP systems.
Ed Schuster has held the appointment of Director of the Afliates Program
in Logistics at the MIT Center for Transportation and Logistics and is
currently helping to organize a new research effort involving the largescale analysis of data. His interests are in the application of models to logistical and planning problems experienced in industry. He has a bachelors of science in food technology from Ohio State University and a
masters in public administration with an emphasis in management science from Gannon University. Mr. Schuster also attended the executive
development program for physical distribution managers at the University of Tennessee and holds several professional certications.
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
Sonis teaching and research interests are in the areas of enterprise applications, technology, e-business, and decision support systems. His research interests are in enterprise technologies and decision support systems. His research has appeared in Management Science, Naval Logistics
Research, Omega, IIE Transactions, and European Journal of Operational Research.
Dr. R. P. Sundarraj is currently an Associate Professor of Information Systems at the University of Waterloo. He obtained his bachelors in electrical engineering from the University of Madras, India, and his M.S. and
Ph.D. in management and computer sciences from the University of Tennessee, Knoxville. Professor Sundarrajs teaching and research encompass
the development of methodologies for the efcient design and management
of emerging information systems, as well as the use of massive parallel
computing for solving large-scale problems. He has published in various
national and international journals such as Mathematical Programming,
IEEE Transactions on Power Systems, ACM Transactions on Mathematical Software, and European Journal of Operational Research. In addi-
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tion, he has provided e-commerce solutions for marketing and inventorymanagement problems arising in Fortune-100 companies.
Dr. Mohan V. Tatikonda is an Associate Professor of Operations Management at Indiana Universitys 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 certied fellow (CFPIM) and a
PDMA certied professional in new product development (NPDP). He
has received several awards for teaching excellence, including the Otteson
award and the MBA teaching excellence award. His research has received
the best doctoral dissertation award from the Production and Operations Management Society. Professor Tatikondas research on new product development and the supply chain has been published in journals such
as Management Science and Journal of Operations Management. He contributed three chapters to the recent book New Directions in Supply Chain
Management. He has taught elective courses on the practice and theory
of product innovation to MBA, Executive MBA, and Ph.D. students and
has consulted for SAP, the World Bank, and other major organizations.
Dr. M.A. Venkataramanan is a professor of Operations and Decision Technologies at the Indiana University, Bloomington. He received his Ph.D. in
business analysis and research from Texas A&M University. His research
interests include network modeling, optimization techniques, combinatorial models, articial intelligence, high-speed computing, and supply chain
models. His teaching interests are in the area of decision support systems,
computer programming, enterprise resource planning (ERP), optimization
techniques, and project management. He is one of the principle investigators in the ERP research and teaching initiative at Indiana University.
He has more than 20 research articles published in a variety of journals,
including Operations Research, Decision Sciences, Annals of Operations
Research, Naval Research Logistics, Computers and OR, EJOR, and
Mathematical Modeling.
Dr. Iris Vessey is a Professor of Information Systems at Indiana Universitys
Kelley School of Business, Bloomington. Dr. Vessey received her M.S.,
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MBA, and Ph.D. in management information systems from the University

of Queensland, Australia. She served on the faculties of the University of
Queensland, the University of Pittsburgh, and Pennsylvania State University before joining the faculty at Indiana University. She is recognized for
her research into evaluating emerging information technologies, from
both cognitive and analytical perspectives. Much of her research has used
qualitative research methods to assess the efcacy of new technologies.
Dr. Vessey was recently ranked as one of the top 10 IS researchers during
the period from 1991 to1996. Her publications have appeared in journals
such as Information Systems Research, Communications of the ACM,
Journal of Management Information Systems, MIS Quarterly, Information and Management, Decision Sciences, IEEE Transactions on Software Engineering, IEEE Transactions on Systems, Man and Cybernetics,
IEEE Software, Information Technology and Management Journal, Journal of Systems and Software, Behavior and Information Technology, and
International Journal of Man-Machine Studies (now the International
Journal of Human-Computer Studies).
Dr. Thomas E. Vollmann is Professor (Emeritus) of Manufacturing Management at the International Institute for Management Development
(IMD) in Lausanne, Switzerland. Professor Vollmann received his B.S.,
MBA, and Ph.D. from the University of California, Los Angeles. Prior
faculty positions include Dartmouth College, University of Rhode Island,
Indiana University, INSEAD, and Boston University. Professor Vollmann
has served as a consultant to many rms on manufacturing and information systems, has lectured in executive programs throughout the world,
has served as a member of the Certication and Curriculum Council of the
American Production and Inventory Control Society (APICS), and is certied at the Fellow Level (CFPIM) by APICS. Professor Vollmanns research
and consulting have primarily focused on operations management, manufacturing auditing and improvement, manufacturing planning and control systems, manufacturing performance measurement systems, benchmarking, and, most recently, supply-demand chain management and
enterprise transformation. Professor Vollmann is the author or coauthor
of 12 books, about 50 case studies (8 award winning), and approximately
100 journal articles.
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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 published research that appeared in Journal of Operations Management, International Journal of Purchasing and Materials Management, Management Science, Production and Inventory Management, International
Journal of Operations and Production Management, International Journal of Production Research, and Operations Management Review. He
conducts research and consults in the areas of supplier development, purchasing and materials management, supply chain management, warehouse location and rationalization, scheduling in service and manufacturing organizations, and the Theory of Constraint thinking process. He
was president of the APICS Toledo Chapter and is currently on the national steering committee for the Small Manufacturing Specic Industry
Group.
xix

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 lm with the associated title. More recently, similar
questions have been asked with regard to enterprise technologies,
albeit often in distinctively more colorful terms.
Debates over the value provided by ERP architectures have existed

since the inception of the enterprise-system concept. Though questions regarding the value of ERP systems remain, the nature of the argument has
evolved over the years. No longer limited to the considerations of Fortune
500 rms and those faced by impending failures of aging systems, enterprise resource planning developers have survived the Internet bubble and
are being viewed in a very different light these days. More than ever before, ERP systems are being viewed as the central binding mechanisms behind future cross-functional planning activities, both within individual
enterprises and among their value-chain partners.
However, research still seems preoccupied with discussions of
implementation and adoption. Only a handful of studies have focused on
the actual use of ERP systems or on their ability to enable the use of
complementary systems that appear to be positioned as standard features
of future commerce (e.g., CRM applications, infrastructural support for
VMI, etc.) (Jacobs and Bendoly, 2003; Davenport, 2000). An understanding of current use and of apparent gaps between expectations and
capabilities is a necessary precursor to future extensions of resource planning technologies into the inter-organizational realm. Whereas operations
managers seem convinced of the benets 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.
Transactional applicationsS
(B2B/B2C e-commerce)
Data mining
Data warehousing
SRM andS
collaborative R&D
CRM andS
collaborative R&D
ERP=
Strategic enterprise mgmt
Advanced planning & scheduling
SCM andS
collaborative logistics
FIGURE
1.1
The Enabling Position of ERP Architectures
Source: Adapted from Bendoly et al. (2004)
Fundamentally, ERP systems and their implementations represent

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

in the ERP domain, several frameworks for guiding operations management research on the topic have been established. For example, the
enabling capability of ERP can be described both in terms of the functionality of ERP systems and in terms of the implementation processes
that allow their capabilities to be realized. The organizational and operational changes associated with ERP implementations often should be
given as much, or more, credit for the potential benets as the systems
themselves. Recent research, drawing on established theoretical frameworks in operations management such as the theory of swift-even ow
(Schmenner and Swink, 1998) and its ties to the law of bottlenecks
(Goldratt, 1984), refers to both product (system) and process (implementation) benets at the intra-organizational level as the foundation of
benet 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 benets represent
distinct facets that may or may not be dominant features in individual
rms. As a whole, they represent elements that can contribute to a rms
general pursuit of internal visibility, exibility, excellence in quality, and
the capacity for inter-organizational extension. The dominant effectiveness of any subset of these benets, for whatever reason, represents a
further means of distinguishing the capabilities of rms, building on idiosyncratic strengths and reafrming the uniqueness of individual rms
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 benet,
associating these benets with tangible operational metrics and, furthermore, planning or prescribing future changes aimed at supporting strategic objectives. In the end, it is these same enabled strategic gains that have
been the most elusive to managers and generally absent from consideration in total benet 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.
Ta b l e 1 . 1
ERP product versus process benets
Variability
reduction
Bottleneck
reduction
Waste
reduction
Example product effects
Example process effects
Common DB. Elimination

of redundancy and potential
for multisystem data
conicts
Rationalization of number
of business procedures.
Less uncertainty as to how a
transaction will be executed
Standardized interfaces.
Reduction in variance in
human-computer and
computer-computer
processing time
Training/education of users.
Reduced variation in
interpretations of corporate
goals, operational priorities,
and transactional procedures
Common DB. Tracking of

processing times and
simplied identication of
potential enterprise-wide
bottlenecks
Rationalization of number of
business procedures. Fewer
processes make the
identication of bottleneck
sources easier, and allow
for smoother reactive
capacity adjustments
Signicant reduction of time
required for transactions, in
some cases eliminating
bottlenecks
More workers have the
ability to recognize
bottlenecks
Common DB. Monitoring of

specic forms of waste, and
prioritization of waste by
enterprise-wide cost implications
Rationalization of number
of business procedures.
Elimination of unnecessary,
redundant or waste-generating
business subprocesses
Allowing easier comparability
of interdepartmental sources of
waste and hastening treatment
More workers have the
ability to recognize waste
and future waste-generating
processes
s o u r c e : Adapted from Bendoly and Kaefer (2004).
The role of this book is to provide both practitioners and researchers

with a window into the cutting-edge strategic use of modern ERP systems.
In contrast to the majority of books that have focused on ERP system
implementation, our approach is to focus on current and future developments in ERP system applications. The viewpoint throughout this text
is predominantly that of the operating manager, rather than the marketer
or the information technician. Through essays provided by a myriad of
operations management researchers and professionals, we hope to clarify
issues regarding the existing functional capabilities of ERP systems and the
underutilization of these existing capabilities by rms. We also hope to illuminate the potential for extensions of the capabilities of these systems to
support both intra-organizational and inter-organizational resource management decisions and strategies. If accomplished, these objectives begin
to ll 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
lled by the existing literature).
Its How You Use It, Stupid!
. . . Not whether you have an ERP system (system labels often

dont mean much these days).
. . . Not how much you spent (which says nothing of the
complexity or appropriateness of the spending).
. . . Not even whether youve 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 rst section of this text (ERP Rebirth and Advanced Viewpoints), contributing authors discuss the new frontiers of use in the ERP
realm that accompany the growing sentiment that resource planning systems can, indeed, enable strategic gains. The rst chapter in this section
(Abdinnour-Helm and Lengnick-Hall) describes a major study of user
perceptions concerning the strategic value of ERP system implementations. The study suggests that the role of ERP architecture as a signicant
enabler of new capabilities can be expected to support strategic gains
only if used specically to enhance the operational priorities and fundamental strategic orientation of the rm. If such vision and clarity describes
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 rms. Specic ndings from an associated study suggest
an initial strategic emphasis on nancial information for traditionally
studied large rms compared with an alternative strategic focus on distribution for small rms 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
rm 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 benets and substantial
increases in system complexity.
The nal 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 specic rms progressed in these attempts?
(E.g., what success have they achieved over time?)
What did the rms that were most successful actually do to
realize novel gains?
By addressing these questions, we have the beginnings of a foundation for
considering approaches that might engender further advancements in the
idiosyncratic and strategic use of ERP systems in general. This in turn provides an excellent segue into the following section, which provides specic 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,
the focal extensions are critical to rms intending to position themselves

as hallmarks of customer intimacy (e.g., assisted by customer relationship
management tactics), while in other cases, the extensions are critical particularly to those seeking to stand out through excellence in cost control
or through inter-organizational linkages that may facilitate sustained
competitive gains in innovation across their supply chains.
Accordingly, the rst 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 rms strategic capabilities as an agile
market player and its use of extended applications such as CRM tools
represent some of the greatest value opportunities supported by ERP architecture. The authors recommend further emphasis (as already suggested by contemporary authors such as Bendoly and Kaefer [2004]) on
a view of ERP as a foundation for strategic technology enhancement,
rather than a strict focus on embedded best practices.
This discussion is followed by a pair of chapters, each dealing with
the operational activities that ultimately help to support customer service
while simultaneously representing sources of excellence in cost control.
The rst of these chapters (Robinson and Sahin) focuses on contemporary
issues in ERP-driven replenishment activities. Specically, the chapter
discusses ERP systems as enablers of information sharing and coordinated decision-making for direct materials acquisition in make-to-order
(MTO) supply chains. Based on experience with Fortune 500 users of
ERP systems and simulation analysis, the authors research reveals
notable gains in operational effectiveness made possible through the
novel replenishment schemas enabled and automated via ERP architecture. These gains in turn open the door for resource shifts that can shore
up further corporate agility. The second of these chapters (Tatikonda,
Brown, and Vessey) focuses specically 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 interrm linkages from an overarching perspective that
incorporates not only materials management but also the levels of shared
design and planning activities that support competitive gains in innovativeness across supply chains. The rst of these chapters (Joseph and
Ettlie) discusses the value potential of both R&D collaborative technologies and the architectural standards (e.g., ERP) that support their use.
Although optimistic of the ability to ultimately link market results to this
use, the authors warn against myopic views of IT that still limit the realization of potential. In a subsequent chapter by Vollmann, this potential
is given greater emphasis and detail in execution. Case studies are drawn
on to illustrate how ERP architecture facilitates the evolution of dyadic
relationships within supply chains as well as the creation of idiosyncratic
inimitable gains that these relationships may embody.
In our nal section (Future Visibility and Accountability), we present the thoughts of researchers regarding the safeguards required to ensure the maintenance of strategic capabilities and subsequently the competitive strengths drawn from an evolving techno-organizational operating
architecture such as ERP. We begin this section with a chapter that touches
on what may ultimately be one of the most pivotal business technologies
of the early part of this century and one that is currently considered to
be a terra-former of future competitive landscapesAuto-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 ow 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 ndings 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
with common pitfalls that have ensnared misguided rms and misaligned
implementations), we stress that an image of the strategic relevance of
ERP as an enabler of novelty and agility is critical in valuing this technology not only from a business case perspective but also from the perspective of business landscape development. With emphasis on the fact that
the strategic opportunities posed by ERP implementations are far from
past and in fact continue to be revealed as technology and management
practice evolve, we describe options and considerations essential to garnering strategic value from ERP in the future.
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 owing 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 ow of information with suppliers (through supply chain management systems) and customers (through
customer relationship management systems). To date, several academic
and practitioner journals have discussed the topic of ERP and related
issues (for example, see Jacobs and Bendoly [2003] for a review). Many
of these papers have attempted to describe factors that drive success in
ERP applications.
Although more recent interest in ERP surrounds extension and
use, the literature on critical success factors has primarily focused on
implementation (Al-Mashari, Al-Mudimigh, and Zairi, 2003; Umble,
Haft, and Umble, 2003; Hong and Kim, 2002). One key factor often
alluded to within this growing body of literature has been that of t 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 rms source of competitive
14
advantage if it is to yield positive strategic outcomes. However, the

majority of studies that explore the t between ERP and strategy have
adopted a very narrow denition of a rms strategy and have failed to
incorporate much of the recent literature and current perspectives in the
strategic management eld.
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 benet. Markus and Tanis (2000) describe an
organizations experience with an enterprise system as moving through
four phases: chartering phase (ideas to dollars); project phase (dollars to
assets); shakedown phase (assets to impacts); and the onward and upward
phase (impacts to performance). In our view, the chartering phase can also
be called the adoption phase, in which a key decision must be made by
executives of the company in consultation with others (IT specialists, vendors, etc.) about whether to adopt an ERP system or not and if one should
be adopted, then which one. A common problem in both the adoption
phase and in the later onward and upward phases is the failure to link the
plan to implement an application system with the business strategic plan.
This often leads to the adoption of an application or architecture that
does not strategically t the organization or to the abandonment of the
ERP project after it starts and incurs major costs. A solid consideration
of strategic goals and requirements, as well as a system of checks and balances regarding the internal perspectives of those making direct use of the
application, can mitigate these losses.
Conventional Views of Strategy
The vast majority of empirical studies examining the ERP-strategy

connection have measured strategy in terms of a rms 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 diversication,
organizational-level strategic activities, expected nancial concerns, core
competence development, dynamic capabilities, and the nature of competition in the industry. While these generic strategy types were certainly
standard ways to dene strategy in the mid-1980s, the strategic management eld has moved far beyond these categorizations.
This limited cost leadership, differentiation, or innovation view

of strategy raises several conceptual and empirical problems. First, these
strategies reect a common set of causal premises and assumptions
(Lengnick-Hall and Wolff, 1998, 1999). The underlying theory perspective
is the structure-conduct-performance paradigm derived from industrial
organizational economics (Mason, 1939; Bain, 1956, 1968). This paradigm asserts that rm performance is determined by the structure of the
industry in which it competes. In other words, incumbent rms in industries that have high barriers to entry, relatively few rms with equal size
or market power, inelastic demand, and strong sources of differentiation
will typically earn higher returns than rms operating in industries that
are not characterized by these conditions.
Empirical research has demonstrated that the conceptual similarities across these strategies outweigh the conceptual differences (Segev,
1989). If measures of strategy reect the same foundation assumptions
and causal expectations, one would not expect them to lead to different
ERP-related prescriptions. This means that the expected variation in strategy to which ERP adoption and implementation practices are expected to
t or not t may not be there to measure. Segev (1989) found that the
same 31 strategic factors comprised both Miles and Snows (1984) typology of defenders, prospectors, and analyzers and Porters (1985) cost leaders, differentiators, and focus organizations. He further found that the
fundamental difference between the prospector/differentiation strategy
and the cost-leadership/focus/defender strategy was the degree to which
strategy enactment was proactive in terms of deliberate risk-taking. This
seems to be a slim basis for expected differences in ERP-strategy links,
making the previously proposed models of ERP-strategy t less useful.
Chadwick and Cappelli (1997) found that few differences in rm performance can be attributed to the Porter strategies after accounting for other
important factors that are known to affect performance outcomes. Contingency approaches rely on the assumption that important differences in
strategy should be reected in important differences in ERP adoption
if effective organizational performance is to result. However, it appears
that signicant 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.
15
16
Concepts such as the resource-based view of the rm (Barney, 1991,

1995), knowledge-based views of the rm (Kogut and Zander, 1993), and
hyper competition (DAveni, 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 sufcient to sustain
a strong competitive position (Yip, 1995). The fundamental difference between these more recent strategy perspectives and the structure-conductperformance paradigm is the expectation that strategy and competitive
advantage are derived by looking inside the rm to capitalize on its valuable, unique, and difculty-to-copy assets and capabilities rather than
basing strategic choice on a reection of the structure of the external
industry.
Third, the strategy typologies typically employed in ERP research
are meant to describe strategies at the strategic business unit (SBU) level,
yet these generic strategy typologies are often applied to the more aggregated organizational level (Somers and Nelson, 2003). Large diversied
rms operating in a number of different industries are pursuing many, and
sometimes conicting, business unit strategies. For example, one product
division might compete on price, while another product division competes primarily on technological innovation. Since ERP is an enterprisewide system, it is essential to be able to capture corporate-level strategy
when assessing ERP-strategy issues. Summarizing multiple, different
strategies and components of strategy with a single measure at the business unit level provides both a contaminated and decient measure of
the strategy construct.
Contemporary Perspectives in Strategy
An important contribution to strategy theory is the resource-based

view of the rm (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 rm is best seen as a bundle of unique assets and capabilities. Resources and capabilities that are valuable, rare, inimitable,
nonsubstitutable, and exploitable are potential sources of competitive
advantage and will determine a rms long-term strategic performance.
Valuable resources are those that enable an organization to exploit

opportunities or neutralize threats. For example, information technologies that allow a rm to effectively manage a build-to-order manufacturing system or to reduce its cycle time for product development would be
considered valuable.
Rare resources are those that are unique to a particular rm. If a
resource is valuable but common, such as an intranet, it often becomes a
basic business requirement and leads to competitive parity rather than
competitive advantage. If a resource can be easily imitated (such as best
practice software offered by numerous vendors) or if viable substitutes
are readily available (such as the rival HRIS systems offered by SAP and
PeopleSoft), then the resource does not remain rare and leads to competitive parity over time. Resources that are path dependent (developed
through a series of cumulative, small decisions over time, such as developing a rms unique capacity for innovation), socially complex (depending on unique relationships among individuals, such as organization
culture), and causally ambiguous (depending on tacit knowledge and
organizational routines, such as the ability to effectively balance innovation and efciency) are particularly difcult to imitate. Exploitable
resources are those that a rm is able to use effectively because they complement the structure, values, practices, and operations of the organization. For example, rms with relatively at structures and process-based
designs and that rely on self-managed teams are often better able to
exploit innovative manufacturing techniques than rms with hierarchical structures that have clear functional divisions and specialized work
assignments.
Because of their value in meeting uid customer needs, exibility
in responding to shifting market conditions, and difculty in replication,
intangible resources such as social capital, intellectual capital, and organizational routines and capabilities have particular competitive and
strategic importance. According to the resource-based view, a strategists
job is to identify, nurture, and deploy the rms 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
17
18
rm 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
rm (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 rm performance lies in the heterogeneous knowledge bases and diverse capabilities for putting knowledge
into action that vary from rm to rm. Thus, knowledge and the social,
human, and intellectual capital needed to transform knowledge into competitive action are the most signicant resources and capabilities driving
a rms 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 benets of seamless
functional integration, coupled with the ability to enable rms to more
effectively leverage their other key resources (Davenport, 1998). However, from a resource-based perspective, the competitive utility of ERP
systems contains an inherent paradox (Lengnick-Hall, Lengnick-Hall,
and Abdinnour-Helm, 2004). On the positive side, ERP systems are valuable because they enable rms to accurately assess and tightly coordinate
production capabilities and to develop responsive relationships with customers based on reliable and precise information (Dillon, 1999). Moreover, through links between ERP systems, rms can coordinate with
suppliers to manage the entire supply chain more efciently 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 signicant aspects of
common industry activities and relationships. Both by denition and
design, these systems are replicated and transferred from one rm to

another.
Still, exploitation of the latent benets of ERP systems requires a
life-altering, culture-changing experience for individuals and organizations, encompassing radical shifts in organization design and interpersonal relationships (Brenner and Cheese, 1999). We argue that it is these
rm-specic exploitation differences that create the greatest potential for
strategic benets from ERP; however, these rm-specic 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 benets are likely to accrue only to those rms that treat ERP
implementation as a business process rather than an IT project and, therefore, orchestrate a culture change to capitalize on the potential benets
that integration provides (Davenport, 1998, 2000; Markus and Tanis,
2000; Somers and Nelson, 2003; Bendoly and Kaefer, 2004). ERP
systems can enable a rm to effectively leverage resources in new and
more complicated ways. However, this potential is realized only if the
rm is able to overcome the enormous pressures of inertia that an ERP
system simultaneously creates (Lengnick-Hall et al., 2004).
When ERP systems are examined through the lens of contemporary
strategic management theories, it becomes clear that even if ERP is necessary to coordinate complicated, multifaceted operations, it is far from
sufcient 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
benets because these changes are neither rare nor inimitable. A sustained
competitive advantage requires ERP to change the way people think about
their work and their organization, to alter the type of relationships they
develop within and across organizational boundaries, and to redesign the
ways they use the information that integrated information systems provide
(Lengnick-Hall et al., 2004). Fortunately, an ERP implementation has the
potential to promote deep changes in relationships, culture, and individual behaviors. Social capital and intellectual capital can be crucial sources
of advantage in a knowledge economy (Nahapiet and Ghoshal, 1998;
Adler and Kwon, 2002). An ERP can be a multidimensional platform for
developing both social capital and intellectual capital if complementary
capabilities and assets accompany ERP adoption.
19
20
How can ERP be used to promote the development of strategically

important intangible assets? First, the connections encoded in ERP software can provide a roadmap for enhancing the structural elements of a
rms social capital. ERP data ows and network connections present a
valuable opportunity to enhance a rms conguration 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 rm can be
developed. Second, ERP systems increase the opportunity for new relationships to be developed by exchanging information about formerly tacit
processes. However, developing personal relationships in the presence of
electronically mediated exchanges also introduces new challenges. An ERP
implementation can suggest who needs to connect to whom, but other
mechanisms such as knowledge fairs, videoconferencing, face-to-face meetings, cross-functional task forces, and similar relationship-building activities are necessary to provide the foundation for social capital development.
Third, the dramatic change experience prompted by ERP implementation
is both personal and widely shared across a rm (Laughlin, 1999; Xenakis,
1996). Massive organizational change is a difcult and emotional personal
experience. If deliberately and strategically managed, the shared difculties
associated with a culture shift can be a basis for building collaboration,
trust, and new norms and values. However, if not managed carefully or
well, the trauma of massive organizational change can promote dysfunctional conict and rigidity and encourage turnover among the very people
the rm 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 rms stock and
ows of actionable information). Information provided by ERP allows
workers to more clearly see the direct and indirect results of their performance. ERP offers a means for individuals to see how the processes they
use and the outcomes of their work affect both internal and external
customers. ERP can provide almost continuous feedback, which in turn
can be translated into opportunities for learning and continuous improvement in performance among individuals, groups, and the organization as
a whole. Each of these elements offers a signicant route to enhancing
intellectual capital and organizational learning. The managerial challenge
is to translate this potential into organizational reality. If employees do
not trust the information an ERP system provides, if they do not recognize the value of using the data to guide their behavior, or if they do not
input information into the system in an accurate and timely way, ERP can
undermine rather than enhance the rms 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 inuence 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 companys
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 congure
and rollout) and the post-go-live survey was taken in phase III (shakedown)
of the Enterprise System Experience Cycle. There were a total of 931
respondents to the pre-go-live survey and 733 respondents to the post-golive survey. The majority of the respondents came from manufacturing
operations and support functions and had been at the company for more
than 16 years.
21
22
The demographic data that was collected included position, tenure,

and afliation 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. Benets 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 sufcient 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 afliation 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
PreGo Live
Frequency
200
150
100
50
0
1
2
3
4
More trouble than worth
7
Essential
7
Essential
PostGo Live
Frequency
200
150
100
50
0
FIGURE
2.1
1
2
3
4
More trouble than worth
Switch from Legacy to ERP
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.
23
24

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 afliation revealed the
following:
Of the respondents who indicated that they worked in manufacturing operations and support functions, 44% felt that the
switch was essential, whereas 32% felt that the switch was
Of the respondents who indicated that they worked in nal
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


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:
25
26

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 benets 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 benets would exceed the
costs, whereas 33% felt that there was a low likelihood that
the benets would exceed the costs.
felt that there was a high likelihood that the benets would
exceed the costs, whereas 38% felt that there was a low likelihood that the benets would exceed the costs.
survey, 40% felt that there was a high likelihood that the
benets would exceed the costs, whereas 33% felt that there
was a low likelihood that the benets 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 benets would exceed the costs, whereas 15% felt that there
PreGo Live
250
Frequency
200
150
100
50
0
7
High
7
High
Low
PostGo Live
250
Frequency
200
150
100
50
0
1
Low
FIGURE
2.2
Benets Versus Cost of ERP

for a period of 1 to 5 years, 43% felt that there was a high
likelihood that the benets would exceed the costs, whereas
29% felt that there was a low likelihood that the benets
would exceed the costs.
27
28
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 benets would exceed the costs, whereas 46% felt that there
following:
Of the respondents who indicated that they worked in manufacturing 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
benets would exceed the costs, whereas 34% felt that there
Post-Go-Live-Results

the benets exceeded the costs, whereas 55% felt that the benets had not exceeded the costs.
the benets exceeded the costs, whereas 65% felt that the benets had not exceeded the costs.
felt that the benets exceeded the costs, whereas 64% felt that
the benets had not exceeded the costs.
Of the professionals and engineers who responded to the survey, 27% felt that the benets exceeded the costs, whereas
53% felt that the benets 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 benets exceeded the
costs, whereas 46% felt that the benets had not exceeded
the costs.
for a period of 6 to 10 years, 23% felt that the benets exceeded the costs, whereas 61% felt that the benets had not
exceeded the costs.
for a period of 11 to 15 years 17% felt that the benets exceeded the costs, whereas 66% felt that the benets had not
exceeded the costs.
for 16 or more years, 17% felt that the benets exceeded the
costs, whereas 70% felt that the benets had not exceeded the
costs.
following:
benets exceeded the costs, whereas 62% felt that the benets
had not exceeded the costs.
benets exceeded the costs, whereas 59% felt that the benets
had not exceeded the costs.
areas, 25% felt that the benets exceeded the costs, whereas
51% felt that the benets had not exceeded the costs.
29
30
Metric 3: Usage of ERP
Employees were asked to indicate the extent to which they believed the ERP system would be used for a variety of specic activities and
operations (Figures 2.3 and 2.4).
Pre-Go-Live Results
The expected usage of ERP was as follows:

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

Highest perceived usage: MRP management and control;
operations scheduling; procurement; warehouse management;
production management for assembly; production management for making parts; tool planning manufacture and
maintenance; quality assurance.
Lowest perceived usage: HR administration; workaround
adjustments; manufacturing and industrial engineering.
Did not know: Across all of the items, one-quarter to nearly
one-half of the respondents indicated that they did not know
the extent to which ERP was used for various activities and
operations.
HR administrationS 12
10
S
Manufacturing/S
10 11
industrial engineeringS
S
ProcurementS 7 9
S
39
46
16
28
57
26
11
Capacity managementS
S
11
Operations schedulingS
S
MRP management and controlS
S
Sales and operations planningS
S
MeasuringS
(organization) performanceS
S
Financial and cost control
58
24
58
23
29
35
35
57
22
51
30
63
22
60
14
27
56
28
51
5 8
28
55
10
20
Low
2.3
22
46
5 8
FIGURE
57
14
Shop oor controlS

S
33
56
Warehouse managementS 8 9
S
Tool planning manufacture/S
10 11
maintenanceS
S
Production managementS
9
10
for assemblyS
S
9
10
for making partsS
S
Quality assuranceS 13
12
S
Workaround adjustmentsS
S
38
30
40
32
50 60
Percent
Medium
Expected Usage of ERP, PreGo Live
High
70
80
90 100
Dont know
HR administrationS
S
Manufacturing/S
industrial engineeringS
S
ProcurementS
S
11
16
17
13
16
10
18
31
33
36
22
14
36
29
23
14
36
26
15
Workaround adjustmentsS
S
24
15
Shop oor controlS

S
24
13
19
10
Operations schedulingS
S
MRP management and controlS
S
Sales and operations planningS
S
MeasuringS
(organization) performanceS
S
Financial and cost control
19
11
16
13
10
20
41
36
28
42
41
29
43
30
29
48
15
31
13
20
32
29
10
19
13
33
12
Low
2.4
35
39
13
20
46
39
Capacity managementS
S
FIGURE
23
10
21
Warehouse managementS
S
Tool planning manufacture/S
maintenanceS
S
for assemblyS
S
for making partsS
S
Quality assuranceS
S
64
36
30
30
40
44
50 60
Percent
Medium
Perceived Actual Usage of ERP, PostGo Live
High
70
80
90
Dont know
100
Discussion and Recommendations
The resource-based view of strategy and the knowledge-based

view of the rm argue that intangible factors such as social capital, intellectual capital, culture, and employee attitudes lie at the heart of sustained
competitive advantage. The results from this case study and additional
private interviews suggest that in both pre- and post-implementation
phases, employees were not convinced of the value of ERP, did not have
condence 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
rm even more dependent on formal long-term planning rather than new
insights generated by new knowledge. It is, therefore, not surprising
that the rm ultimately perceived few widespread benets from its ERP
initiative.
Acceptance (metrics 1 and 2) of an ERP system ultimately leads to
success. The case study illustrates that before going live, nearly one-quarter
of the employees were undecided regarding the need to switch from
legacy systems to an ERP system, with approximately equal percentages
on either side of the undecided score. What seemed like a normal distribution before going live gave way to a skewed distribution afterwards,
indicating that experience with the implementation and use of the system
actually encouraged pessimism among the workers regarding the usefulness of the system. Similarly, the distribution representing the costs versus
benets 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 benets. The results based on these
two metrics suggest that the employees had not accepted the cost
justication 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 specic application) indicated that they did not know how ERP was to be used. The
33
34
specic uses with the highest expectations prior to implementation (57%

or higher) emphasized control (shop oor 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 reecting value creation
(measuring organizational performance; quality assurance) were associated with lower expectations. Of even greater concern is that across the
board many employees reported that they did not know how ERP was
being used after the system went live, in fact signicantly 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 rm adopting the ERP system (rather than being based
on system developer insights). These potential benet areas were included
in much of their training materials and in their corporate vision of ERP
benets. Strategically, the greatest concern might, therefore, be the possibility that certain activities may have been omitted from consideration in
this case, even though the system may have been purposely designed to
augment such practices. If other critical activities did show signicantly
consistent benets, the difculty in assigning benet 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 rm 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 rms
experience. First, ERP systems cannot by themselves provide a sustained
competitive advantage because they are neither rare nor inimitable
although the complexity of idiosyncratic implementations may mitigate
this issue. Systems that are well tuned to existing operational characteristics and that support long-term strategic goals can certainly foster greater
support and thus engender strategic benet indirectly. Second, the longterm competitive value from ERP comes from its ability to generate
knowledge that a rm can act on to change its business practices, introduce innovation, and build social and intellectual capital. Unless these
uses of ERP are highlighted and integrated into the selection of a system
and its implementation process at the adoption stage, they will most likely
be lost during subsequent stages of implementation. Third, without an
accompanying investment in behavioral and culture change, ERP tends to
augment the more rigid aspects of organizational activity (planning and
control) and inhibit the more exible aspects of organizational activity
(learning and innovation). These trends are likely to create barriers to
competitive advantage in the uid knowledge economy.
35
The New Users: SMEs and

the Mittelstand Experience
TOBIAS SCHOENHERR, M. A. VENKATAR AMANAN, ASHOK SONI,
VINCENT A. MABERT, AND DITMAR HILPERT
In the United States and much of Western Europe, especially

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

designs, employing cellular production techniques, and utilizing pullmanufacturing logic have allowed rms to keep costs competitive and operations responsive.
IT has played a key role in manufacturing rms in a number of
areas. In the 1970s and 1980s, many implemented systems such as material requirements planning (MRP) and manufacturing resource planning
(MRP II). By the early 1990s, the number of these systems deployed
worldwide totaled over 60,000 (AMR, 1995). Many manufacturing rms
have also used specialized applications such as computer-aided-design
(CAD) and computer-aided-manufacturing (CAM), linking them into
the rms information infrastructure. Thus, it is not surprising to see
that manufacturing SMEs are using enterprise resource planning (ERP)
systems to stay at the leading edge. Some of these companies have also
started to implement applications that use ERP systems as a backbone
connection to more applications. These applications include advanced
planning and scheduling (APS) systems, customer relationship management (CRM), and e-business and Web services. Collectively, ERP systems
and these associated applications are generally referred to as enterprise
systems (ES).
Enterprise systems were initially developed to address the IT needs
of large Fortune 1000 type companies. During the mid- to late 1990s,
many such companies implemented these large-scale systems. These implementation experiences are well documented in trade and academic journals. Publications have chronicled both high-prole failures and extensive
difculties at companies such as FoxMeyer and Hershey Food Corporation (Deutsch, 1998; Nelson and Ramstad, 1999) and model implementations (Kirkpatrick, 1998). In addition, several authors (Piturro, 1999;
Zuckerman, 1999) have hypothesized that enterprise systems are a key
ingredient for gaining competitive advantage, streamlining operations,
and achieving lean manufacturing.
The initial target of the large-scale ERP vendors, such as SAP,
Oracle, and PeopleSoft, were large enterprises. As this market saturated,
these vendors started to focus on small and medium enterprises. They did
this by repositioning their systems and applications for the SME market
by offering pared-down versions of their large-scale systems. During the
1990s, some of the MRP and MRP II vendors (for example, QAD and
37
38
BPICS) also started to transform their packages to ERP systems by providing more integrated functionalities such as accounting, order entry,
and warehouse management. These new offerings, aimed at the SME market, motivated many SMEs to become willing players in the ERP arena.
A recent study suggests that the experiences of large companies
implementing enterprise systems (Mabert, Soni, and Venkataramanan,
2003) may be very different from those of small and medium enterprises.
That study, for example, shows that companies, depending on size, tend
to do different things with their ERP implementations across a variety of
issues. These differences range from the motivation for implementing
such systems to the types of systems adopted to the implementation
process itself. In addition, there are key differences by company size in
the outcomes and benets attained. For example, larger companies report improvements in nancial 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 classied 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 classication 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
Europes crossroads of commerce, many of these companies started as
small, family-oriented enterprises with a few employees and have grown
signicantly over the past few decades, primarily due to their innovative,
competitive, and global orientation. The Mittelstand companies, many of
which are in manufacturing, tend to focus on highly customized and

specialized products and services that are used in commercial applications, such as machine controls and precision laboratory scales. Concentrating on customized products and services also implies that they cannot
take advantage of the economies of scale associated with mass production. The orientation toward customization requires a highly skilled and
exible workforce. That SMEs rely on this formation of human capital is
evidenced by the fact that the Mittelstand provides more than 80% of vocational training places in Germany. This leads to a very loyal and stable
workforce. Labor turnover rates are often very low in Mittelstand companies, usually of the order of 3%.
German SMEs in manufacturing, like SMEs in the United States,
are under heavy competitive pressures. Their competition consists of
similar-sized companies in Asia, other Mittelstand companies in Germany,
and larger companies in Europe and the United States. While the U.S.
manufacturing sector has seen a decline in recent years, German manufacturing, powered by Mittelstand companies, has been very competitive,
countering threats by using various strategies in manufacturing and information technology.
Similar to their counterparts in other countries, German SMEs have
used lean manufacturing, efcient supply chain operations, and outsourcing
of noncore components to stay competitive. In addition, German SMEs
use exible manufacturing, cross-training of workers, a high degree of
automation, and short design and manufacturing cycle times to stay agile
and competitive. For Mittelstand companies, information technology has
been a key and critical differentiator. Because of their global presence
and highly competitive environments, they must have very responsive information systems. Also, because of their highly customized and specialized
products and services, they tend to leverage information technology as a
competitive tool. This is consistent with comparable manufacturing SMEs
in the United States who also use IT to stay competitive (Taylor, 1999). Like
their counterparts in the United States, the Mittlestand manufacturing
SMEs typically operate with MRP and MRP II systems, usually coupled
with manufacturing planning and execution systems. However, the German
SMEs are moving increasingly to ERP systems that are more integrated
between important business functions. Investments in information technology have been very signicant in recent years.
39
40
These characteristics of the German Mittelstand companies illustrate their uniqueness. Clearly, they have been able to compete very effectively, both nationally and globally, over a long period of time using a
variety of strategies. Many of them cite information technology as a key
component of their competitive strategy. For example, Voigt (2001)
found that 22% of the German SMEs, a majority of them in manufacturing, see IT as a way to secure and improve their competitive position and
ability to remain more responsive. This makes an investigation into the
enterprise system experiences of Mittelstand SMEs not only interesting
but also necessary. The next section outlines the methodology used in
this study.
Out in the Field
To obtain a better understanding of the nature, scope, and impact

of enterprise systems in Mittelstand SMEs, a eld study was conducted in
which 18 different companies were investigated by interviewing key
business managers and IT professionals. The specic companies were chosen so that a broad spectrum of the German manufacturing Mittelstand
were represented. Almost all these companies, despite their size, have a
global presence, conducting business in multiple markets. The annual
revenues range from approximately $29 million to $460 million. While
the sample of companies may be small relative to the size of the Mittelstand, it represents a diverse group of companies. Their products include
parts for the automobile industry, sophisticated medical equipment,
textiles, elevators, heat exchange systems, scales, industrial knitting machines, network systems and products, furniture, complete workstations,
home appliances, heavy-duty processing machinery, machine controls,
and specialty metal pipes. The demographics of the companies in the case
study are presented in Table 3.1. The companies employ a mix of job and
ow shop manufacturing processes (Table 3.2). About half have exclusively make-to-order (MTO) products, with only two companies entirely
operating on a make-to-stock (MTS) basis. One-third provided a mix of
MTO and MTS products.
Of the 18 companies in the sample, 17 either already have an
enterprise system or are in the process of implementing such a system.
Ta b l e 3 . 1
Characteristics of the case study companies
Company
Industry type
Company A
Company B
Company C
Company D
Company E
Company F
Company G
Scales, food processing equipment

Industrial mixers and grinders
Textiles
Food technology, home appliances
Material handling (forklifts)
Furniture
Machines for woodworking,
tooling, grinding
Elevators, medical technology, gear
technology
Heat and cooling technology
Waste management
Springs
Parts for automobile industry
Industrial precision scales
Industrial knitting machines
Gaskets for the automobile industry
Medical surgery equipment
Parts for the automobile industry
Communications test and
management solutions
Company H
Company I
Company J
Company K
Company L
Company M
Company N
Company O
Company P
Company Q
Company R
Size
(# employees)
Revenue
(million )
1,000
600
900
770
593
1,200
1,100
378
120
64
90
100
140
320
700
2,000
220
208
100
235
600
3,000
480
500
350
80 85
100
Not available
25
24
60
200
380
70
275
100
One is operating with a legacy system but plans to implement an ERP

package within the next 12 months. These companies are at various
stages of enterprise system implementations, ranging from the advanced
planning stage to completed implementations. This provides a range of
experiences at different points in the implementation cycle. The systems
being implemented are from eight different vendors. SAP is the primary
system in over half of the case study companies, a fact that is understandable from a number of perspectives. First, SAP is the biggest
worldwide vendor. Second, SAP has deep German roots, having been
established and headquartered in Germany. And third, SAP has targeted
SMEs as the growth market for the last half-dozen years.
Interviews were exploratory in nature and were conducted with
key business managers and IT professionals in March 2004. Each interview lasted from one to four hours and was conducted by four members
of the research team. The interviews were conducted both in English
and German, depending on the preference of the interviewees, and were
41
42
Ta b l e 3 . 2
Shop and product characteristics
Flow of materials
Job shop
Flow shop
Mixture shop
Products
Number
10/18
5/18
3/18
Number
Standard products
Custom products
Standard and custom
8/18
4/18
6/18
Order makeup
Number
Made-to-order
Made-to-stock
Mixed
10/18
2/18
6/18
tape-recorded and transcribed in English. While the format was semistructured with open-ended, predetermined questions, all discussions
covered the following areas at a minimum:
What is the state of enterprise systems?
Why did the company decide on an enterprise system solution?
How was the system implemented, and what was the
implementation experience?
What were the resources utilized and the benets 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
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 signicantly from large companies on a number
of dimensions. The Mabert et al. survey was undertaken in 2000 and provided the following observations:
1. Adoption of ERP systems by large companies is motivated
more by strategic needs, whereas tactical considerations carry
greater importance for smaller companies. Companies implement ERP systems for many different reasons. These reasons
include gaining a strategic advantage, acquiring a simplied
information systems infrastructure, standardizing processes,
improving customer and supplier interactions, linking global
operations, and solving the Y2K problem. For larger companies, the top three reasons for adopting ERP systems were gaining a strategic advantage, simplifying and standardizing processes, and replacing legacy systems. Over 90% of the large
rms cited these three reasons for choosing ERP systems. For
smaller rms, the top three reasons were replacing legacy systems, simplifying and standardizing processes, and improving
interactions with suppliers and customers. There were clear
and distinct differences between the priorities of the large and
small rms.
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
43
44
of the most important factors in assessing the impact of an

ERP system on an organization. Strategies can range from a
single go-live date for all modules (big bang) or for a subset
of modules (mini big bang) to phasing in by module or site.
The decision of which strategy to deploy depends on a range
of issues, such as complexities of size, processes, and operations. The study found that there are very clear differences in
the implementation strategies by size of company. Over twothirds (69%) of implementations in large companies were
phased in either by module or by site, whereas 72% of small
companies used a big-bang or a mini big-bang approach.
3. Larger companies implement large-scale systems and employ
more ERP functionality than small companies. The issue of
which ERP package to implement is an important decision
for any company, not only for functionality and ease of implementation but also for future upgrades and for using other
specialized packages with the ERP system. There are clear
differences across the different-sized companies on the packages
they adopt. Large companies favored SAP more than small
companies (42% versus 10%). Sixty-six percent of the large
companies used just three different packages (SAP, Oracle, and
Baan), compared to 35% of the small companies.
4. Large companies more frequently customize ERP software,
while small companies more often adopt business processes
within ERP systems. Customization refers to modifying the
package through code rewrites, changes, or additions. Because
of the integrative architecture of ERP systems, customizations
can be prohibitively expensive. Almost all companies went
through some form of customization. The degree of customization, however, varied signicantly across the size of company. Results show that over 50% of the larger companies did
either signicant or major modications, whereas most small
companies (73%) made no or only minor modications.
The Mabert et al. study was conducted in 2000, and signicant
changes have taken place since then, primarily due to the increasing
competitive pressures that SMEs face. Many SMEs have responded to
Ta b l e 3 . 3
Motivational factors
Motivational factor
Gain competitive advantage
Improve interactions with suppliers and customers
Vendor support and ease of upgrades
Link to global activities
Product /process complexity
Solve the Y2K problem
Number
18/18
17/18
16/18
7/18
2/18
2/18
these pressures by using IT as a key component of their competitive

strategy. As a result, many rms have implemented a range of package
enterprise systems and applications over the last few years. This study of
the Mittelstand SMEs provides a unique perspective into the current
status of implementing and using enterprise systems in small and medium
manufacturing enterprises.
The management in all 18 companies saw enterprise systems as a
key component of their competitive strategy. Seventeen of the companies
had already either implemented one or were in the process of implementing such a system. The one company that had not as yet implemented an
enterprise system planned to do so within the next 12 months. The leading reasons for implementing these systems were very consistent across all
companies and are outlined in Table 3.3.
All of these factors (with the exception of Vendor Support and
Ease of Upgrades) can be considered part of their competitive strategy,
the primary motivation for implementing these systems. The Vendor
Support and Ease of Upgrades factor is very similar to the replacement
of legacy systems, often mentioned in the ERP literature. The difference in
the nuances is important to understand with regard to SMEs. While the
replacement of a multitude of legacy systems is important to many
companies, the Mittelstand SMEs are looking for vendors with long-term
sustainability. Vendors such as SAP, Oracle, and PeopleSoft are considered long-term players. Many of the vendors providing extensions of
MRP II products are either consolidating with these large-scale ERP
vendors or being driven out from the market altogether. Several SMEs
in the sample had switched to new ERP systems from different vendors
specically for this reason.
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46
Ta b l e 3 . 4
Enterprise systems characteristics by company
Company
Single or
multiple
systems
Major ERP
package or
niche provider
Standard system
versus customized
system
Implementation
approach
Company A
Company B
Company C
Company D
Company E
Company F
Company G
Company H
Company I
Company J
Company K
Multiple
Multiple
Multiple
Multiple
Single
Single
Multiple
Multiple
Single
Multiple
Multiple
Standard
Standard
Customized
Customized
Customized
Standard
Standard
Standard
Standard
Customized
Standard
Phased in
Big bang
Phased in
Phased in
Phased in
Big bang
Phased in
Big bang
Phased in
Big bang
Phased in
Company L
Company M
Company N
Company O
Company P
Company Q
Company R
Multiple
Multiple
Single
Single
Single
Multiple
Legacy
Big (SAP)
Niche (Oxion)
Internal
Big (SAP)
Big (SAP)
Big (SAP)
Big (SAP)
Big (Baan)
Big (SAP)
Niche (Rohna)
Niche (Moves
Intentia)
Niche (Brain)
Niche (Ratioplan)
Big (SAP)
Big (SAP)
Big (PeopleSoft)
Big (SAP)
Legacy
Standard
Customized
Standard
Standard
Standard
Standard
Legacy
Big bang
Phased in
Phased n
Phased in
Big bang
Phased in
Still TBD
The other key motivating factor is interacting with both suppliers

and customers. These SMEs are increasingly looking at their entire supply
chain for efciencies, and they see their enterprise systems as a key
component of this strategy. Many of the Mittelstand SMEs are becoming
global players and face erce competition from worldwide competitors,
especially those in Asia. For example, several of the SMEs in the sample
have international sales ofces. Integrated enterprise systems make the
order management and fulllment process much more efcient, decreasing the time between order placement and manufacturing execution.
These higher-priced manufacturers believe that the accurate information
ow in their supply chain enhances their agility and provides a competitive edge. Several of the case study companies were also suppliers to larger
rms who mandate ISO certication as well as a state-of-the-art information system as a part of vendor certication. 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 . 5
Conguration and implementation of systems
Conguration of ERP systems
Major package ERP system
Niche ERP system
Internally developed ERP system
No ERP system
Conguration of ERP systems
Number
11/18
5/18
1/18
1/18
Number
Single ERP system

ERP system and other systems
No ERP system (legacy system)
6/18
10/18
1/18
Customization of ERP systems
Number
Standard ERP system

Customized ERP system
No ERP system (legacy system)
12/18
5/18
1/18
Implementation approach
Big-bang approach
Phased-in approach
Number
6/18
11/18
systems have been implemented, the degree of customization, and the

approach used to implement the system (big bang versus phased in).
These items are summarized in Table 3.5.
The case study data show that the penetration of ERP packages in
German SMEs is very different from that reported for manufacturing
SMEs in the United States by Mabert et al. (2003) and in Europe by Van
Everdigen et al. (2000). Half of the SMEs in these case studies have
implemented SAP systems as opposed to only 10% in the United States in
2000, the year of that survey, and under 10% in Europe in 1999, the year
of that survey. Just over 61% of the companies in this study have implemented a large-scale ERP package versus about 35% in the United States
in 2000 and approximately 20% in Europe in 1999. Van Everdigen et al.
(2000) concluded that best t with current business practices and
package exibility were the key criteria in package adoption decisions.
Thus, in 1999 and 2000, companies looking for a good t with their
current business practices were more likely to adopt ERP systems that had
evolved from their MRP and MRP II systems. In their survey of European
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SMEs, Van Everdigen et al. found that 30% of the ERP systems implemented came from smaller or niche vendors, and over half of the
companies preferred their in-house developed, tailor-made information
systems to the package ERP systems. The case studies conducted for this
project seem to show that companies looking for a good t 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 signicantly depending on the size
of the company. Larger companies customize more, with over 50% of
them making either signicant or major modications. On the other
hand, most small companies in the United States made only minor
modications, but the case studies show that 28% of the Mittelstand
companies made major modications to their system.
Another key difference among companies is the conguration 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
driving this difference is the complexity of the organization. Large companies are more likely to have more global operations, more sites, and
generally more complex operations that frequently reect mergers and
acquisitions of diverse operations. Even the ERP systems may not be able
to provide the functionality required to manage these complex enterprises
and disjointed operations. To remedy such shortcomings, companies are
increasingly using either self-contained add-on ERP modules or extension
systems, called bolt-ons, for functions such as demand planning, order
tracking, warehouse management, supply chain management, customer
relationship management, online collaboration, e-procurement, and online business-to-business transactions. Not every ERP system can support these specialized add-ons. Thus, their use becomes a key decision factor not only for which system is adopted but also for how the package
is implemented, as well as future enhancements and upgrades. This is
demonstrated with the Mittelstand companies, in which 56% of the
SMEs use multiple systems, a reverse of what the U.S. companies reported
in 2000.
Summary and Conclusions
Mittelstand SMEs have been at the forefront of manufacturing in

Germany for several decades. Over this period of time, they have been
able to adjust to their competitive and environmental pressures by being
nimble and innovative. Here, at the beginning of the 21st century, they are
once again responding to competitive pressures, this time by leveraging
their enterprise systems to stay ahead of the competition. They are doing
some very unique things, including the following:
These SME managers see enterprise systems as a key component of their competitive strategy. A majority of rms
either have implemented or are implementing a packaged ERP
system. Increasingly, they are implementing large-scale
package solutions.
While a few companies performed some type of ROI analysis
to justify adopting these systems, almost all SMEs approached
the decision simply as a strategic initiative or as a cost of doing
business. For almost all of these companies, the issue was not
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50
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 congured 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 reects
a maturing of the systems and a better understanding by
application programmers of how to integrate different
functional modules.
Many of the rms either had implemented or were planning to
implement specialized applications, such as order picking or
transportation management, using their ERP system as a backbone. Functionality was a major issue with these applications.
Planning is a key component of the implementation process to
reduce the risk of failure. The German SMEs spent much more
time up front planning the implementation. The planning was
often meticulous and very detailed. All major parts of the
enterprise were involved in the planning process, including the
type of system to implement.
Most chose to use a phased-in strategy either phasing in
modules one or a few at a time or phasing in the implementation by divisions, plants, business units, or locations. Fewer
companies used the big-bang approach, a clear difference from
the implementation practices of just a few years ago.
The companies are generally satised with their enterprise
systems, even if complications occurred during their implementation. Although companies were not able to provide objective
data to gauge implementation success, benets that were
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 signicant shift from 2000 to the present in the implementation of
enterprise systems across a range of issues. Competitive pressures and
maturing sophistication in the implementation and application of enterprise systems have motivated the change. The data from the Mittelstand
companies resemble that of large companies that have been more aggressive in customizing and pushing the envelope to maintain or gain an edge.
Over the last ve years, these SMEs have evolved to the point where their
enterprise system practices are very similar to those of large companies.
Clearly, they are using their enterprise systems as one of the cornerstones
of their competitive strategy. This suggests that large-scale enterprise systems and related applications in the SME sector are here for the long haul.
51
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 beneted
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 rms around the world have
invested heavily in information technology (IT), with a major focus on enterprise resource planning (ERP) systems. These new systems are designed
to integrate the numerous business processes, such as order entry and
production planning, across the entire enterprise. For example, by the late
1990s, companies responded to various business pressures by spending
over $23 billion a year (Kirkpatrick, 1998) on enterprise applications, of
which a major portion was ERP software. While ERP investments have
been signicant, rms have also made other signicant IT commitments
to systems such as demand management and warehouse management
that interface with the ERP backbone. These other systems, provided by
Enterprise Applications: Building Best-of-Breed Systems
vendors like I2 and HK Systems, are designed to employ best practices

and enhance functionality for the enterprise.
Selecting enterprise computer systems is a bit like purchasing a
new car. Should you go to the dealer for the prepackaged model that is
sitting on the lot with standard options from the factory, or should you
order a more customized version that has additional features you want?
For example, some rms have implemented the SAP R /3 system and have
enhanced its functionality by adding components such as demand planning from SAPs Advanced Planner Optimizer (APO) product line. In
other cases, one may even look to a third-party vendor such as I2 or
Manugistics. This best-of-breed approach is being followed by a number of rms to meet desired requirements. If one is looking for the optimal solution in each area, the best-of-breed option usually provides richer
functionality, satisfying more users. However, it comes with potentially
extra costs and organizational integration.
Contemporary management requires an exploration of the impact
that these investments have on performance and a prescription of where
rms 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 rms have done to expand their systems
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
OLeary (2000, p. 7) suggests that enterprise resource planning

systems provide rms with transaction processing models that are integrated with other activities of the rm, such as production planning and
human resources. By implementing standard enterprise processes and a
single database that spans the range of enterprise activities and locations,
ERP systems provide integration across multiple locations and functional
areas. ERP systems have led to improved decision-making capabilities
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54
that manifest themselves in a wide range of metrics, such as decreased

inventory (raw materials, in-process and nished goods), personnel
reductions, speeding up the nancial close process, and others. Thus, ERP
can be used to help rms create value. In particular, ERP facilitates value
creation by changing the basic nature of organizations in a number of
different ways. OLeary continues by indicating that the value creation
is attained by the following capabilities:
ERP integrates rm activities. Enterprise resource planning
processes are cross-functional, forcing the rm out of traditional, functional, and locational silos. In addition, an organizations different business processes are often integrated with each
other. Further, data that were formerly resident on different
heterogeneous systems are now integrated into a single system.
ERPs employ use of best practices. Enterprise resource
planning systems have integrated within them a thousand bestpractice business processes. Those best practices can be used to
improve the way that rms do business. Choice and implementation of an ERP require implementation of such best practices.
ERP enables organizational standardization. Enterprise resource
planning systems permit organizational standardization across
different locations. As a result, locations with substandard processes can be brought in line with other, more efcient processes.
Moreover, the rm can show a single image to the outside world.
Rather than receiving different documents when a rm deals
with different branches or plants, a single common view can be
presented to the world, one that puts forth the best image.
ERP eliminates information asymmetrics. Enterprise resource
planning systems put all the information into the same underlying database, eliminating many information asymmetries. This
has a number of implications. First, it allows increased control.
Second, it opens access to information to those who need it, ideally providing improved decision-making information. Third, information is lost as a bargaining chip because information is
now available both up and down the organization. And fourth,
it can atten an organization; because information is widely
available, there is no need for non-value-adding workers whose

primary activity is to prepare information for upward or downward dissemination.
ERP provides online and real-time information. In legacy systems, much information is captured on paper and then passed
to another part of the organization, where it is either repackaged (typically aggregated) or put into an electronic format.
With ERP systems, information is gathered at the source and
placed directly into the system. As a result, information is
available online to others and in real time.
ERP allows simultaneous access to the same data for planning
and control. Enterprise resource planning uses a single database, where most information is entered once and only once.
Since the data is available online and in real time, virtually
all organizational users have access to the same information
for planning and control purposes. This can facilitate more
consistent planning and control, in contrast to legacy systems.
ERP facilitates intra-organization communication and collaboration. Enterprise resource planning also facilitates intraorganizational (between different functions and locations)
communication and collaboration. The existence of interlocking processes brings functions and locations into communication and forces collaboration. The standardization of processes
also facilitates collaboration because there are fewer conicts
between the processes. Furthermore, the single database
facilitates communication by providing each location and
function with the information they need.
ERP facilitates inter-organization communication and
collaboration. The ERP system provides the information backbone for communication and collaboration with other organizations. Increasingly, rms 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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56
OLeary is not the only one to sing the praises of ERP. When one
talks to ERP software providers, reads various promotional brochures, or
visits either vendor or other commercial ERP Websites, one gains the
impression that ERP systems are the Holy Grail of information systems
for enterprises. Some of the claims include the abilities to link the entire
organization together seamlessly, improve productivity, provide instantaneous information, etc. However, there is another side to this story.
Improving Functionality
While ERP systems provide very fast and reliable transaction

processing, they lack critical decision support capabilities that would
enable better decision making or optimization of certain processes. Thus,
most companies do not view an ERP system as one that will provide their
entire end-to-end solution. In fact, many companies install a set of other
systems to ll 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
rms today. The major APS vendors, in spite of a down market, have
made signicant architectural and functional improvements in the last
two years, adding additional capabilities such as improved collaboration
work ows, 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 fullling customer orders.
VALUE CHAIN DOMAIN

Transactional applicationsS
(B2B/B2C e-commerce)
DW
Suppliers
SRM andS
collaborative R&D
ENTERPRISE.
DOMAIN
DM
CRM andS
collaborative R&D
ERP
Customers
APS
SEM
SCM andS
collaborative logistics
Third parties
FIGURE
4.1
Interrelationship of ERP with Other Value Chain Elements
Source: Adapted from Bendoly et al. (2004)
The R /3 system was limited in capability; Eastman later deployed SAPs

Advanced Planner and Optimizer (APO) for functions that enabled intraand inter-company planning of the supply chain and for scheduling and
monitoring various processes. For Eastmans 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 rms
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 efciency and effectiveness. But in practice it can be perilous! For example, Monster.com rolled
out a CRM program in 1998. The new system proved to be frighteningly
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58
slow; in fact, salespeople in the eld found themselves unable to download customer information from the companys 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, Reicheld, and Schefter, 2002).
While billions of dollars have been expended on IT systems such
as ERP and bolt-ons, the question remains as to their value to the enterprise. From limited reports in editorials and the popular press (Cliffe,
1999; Deutsch, 1998), the success of ERP systems in achieving the stated
objectives is mixed at best. For example, FoxMeyer (Diederich, 1998)
claimed that an ERP implementation was the reason for its ultimate
failure, while it was reported that Hershey Foods Corporation (Nelson
and Ramstad, 1999) had a major distribution problem when it went live
with a new ERP system. Others (Piturro, 1999; Kirkpatrick, 1998)
emphasize that ERP is a key ingredient for gaining competitive advantage,
streamlining the supply chain, contributing to lean manufacturing, and
managing customer relationships. Thus, there are differing opinions on
whether basic ERP systems are an asset that can deliver on the stated
promises or a liability with signicant cost consequences.
The limited research that has occurred addresses the implementation process itself, focusing on project management issues such as onbudget and on-time performance for system implementation (Mabert,
Soni, and Venkataramanan, 2003). The next section presents an objective
view of ERP systems and bolt-ons as management tools for coordinating
and guiding the activities of an organization based on a survey conducted
in January 2004.
Recent Experience
In an earlier study (Mabert, Soni, and Venkataramanan, 2000,

p. 58) of ERP systems, the authors concluded that the . . . data indicate
that some of the anticipated benets 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
to a rm. The questionnaire focused on the following areas for data

collection and evaluation:
What are the rms characteristics?
Is the rm 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 nancial 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 ow of products
through the manufacturing process, coordinating what is done
to what part at what time.
Order fulllment. This module monitors the entire order fulllment cycle, keeping track of the progress the company
has made in satisfying demand.
Human resources. This module handles all sorts of human
resources tasks, such as scheduling workers.
Supplier management. This module monitors supplier performance and tracks the delivery of suppliers products.
Since the ERP system utilizes a common platform, standardization
of transaction processing and coordination across the enterprise is the key
contribution. All vendors promote this point, and no attempt was made
to differentiate between vendors or systems features. However, the addition of which bolt-ons to employ can vary widely between enterprises. In
this study, the following bolt-on systems are of interest:
Demand forecasting and planning system. This bolt-on uses
various demand sources, such as sales history and customers
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60
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 oor 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 ow of stock and materials from acquisition to nal disbursement. It attempts to have the right inventory at the right location at the right time, using various statistical procedures.
Supply network planner system. This bolt-on is used to design the
supply network by determining the best facility and product locations to meet customer service requirements at minimum cost.
Call center management system. This bolt-on provides a system
to manage customer and other telephone calls that are handled
by an organization. They usually employ computer automation
to evenly distribute phone trafc, provide database query features, and specify stafng schedules.
Customer relationship management (CRM). This bolt-on
includes the methodologies, strategies, software, and Webbased capabilities that help an enterprise organize and manage
customer relationships. Companies utilize this approach to gain
a better understanding of their customers wants and needs.
E-procurement system. This bolt-on allows electronic procurement (e.g., electronic purchasing cards) and provides linkages
from a rms purchasing system to its suppliers order systems.
It may also include cataloging capabilities so that suppliers
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 enterprises decision support system. It organizes and
collects information into databases that can then be searched
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 rm to manage attribute and documentary product data, as
well as the relationships between them. These systems facilitate
quicker design of new products design by providing a database
of information on current products.
Quality management system. This bolt-on provides a set of
tools for managing quality that can include statistical process
control, failure mode effect analysis, key performance indicators, etc. for goods and services. This system helps improve
quality of a rms products and processes.
Warehouse management system. This bolt-on manages
receiving, disbursement, and inventory in a rms warehouses
and distribution centers. It typically contains order entry,
tracking, and order-picking features.
Trafc/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 specically designed to manage the planning and execution of projects from
initiation to the nal deliverables. In addition to typical features such as timelines and work breakdown structures, they
utilize various heuristics to perform resource load leveling.
The survey questionnaire reported here was developed and mailed
to a key informant at randomly selected manufacturing rms in the
United States. The mailing list was developed from APICSs active
membership list. The questionnaire was pretested with a pilot study of
managers from a representative set of rms.
In early January 2004, the authors mailed 2000 questionnaires
and personalized cover letters to individuals employed at randomly
selected manufacturing rms in the United States. Six questionnaires were
returned due to incomplete addresses. By mid-February, 191 surveys were
returned, but four had insufcient information to be useful. Therefore,
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62
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 condentiality.
Basic Company Information
Table 4.1 presents some basic information concerning the respondents and their rms. As can be seen, there is a wide variety of rms and
respondents. The table indicates that 74% of the respondents are at the
manager level or above in their respective organizations. The other category includes staff planners and project leaders. The sample rms span
a wide range in size as measured by revenue and employment. Close to a
quarter of the rms have annual revenues exceeding $1 billion per year,
while about 40% are under $100 million. In terms of workforce level,
about 50% employed fewer than 500 people. The demographic data
indicate that the respondents represent a wide cross-section of rms and
industries, suggesting a representative group for assessing current and
future effort to build and utilize best-of-breed systems.
For the purposes of this chapter, we focus on the data from rms
in the survey that had already implemented ERP systems. In Table 4.2,
you can see that 76% of our sample had already implemented ERP systems. These rms have average revenues that are about six times higher
Ta b l e 4 . 1
Respondent information
Current position
Percentage
Other
Manager
Executive/owner
25.9
53.5
20.6
Revenues ($)
5 billion X
1 billion X 5 billion
500 million X 1 billion
100 million X 500 million
X 25 million
Percentage
6.8
18.7
9.6
23.8
16.4
11.9
12.5
Employment
1,000 X
500 X 1,000
100 X 500
X 100
Industry
Chemical /pharmaceutical
Automotive
Aerospace
Electronics
General manufacturing
Percentage
45.7
6.3
43.1
4.7
Percentage
16.1
7.0
5.3
9.1
62.6
Ta b l e 4 . 2
ERP users versus nonusers
Percentage enterprises
Average enterprise revenues
Percentage employees above 1,000
With ERP system
Without ERP system
76.4%
$3.0 billion
82.1%
22.6%
$.45 billion
17.9%
than those who had not implemented ERP. Also, 82% of the rms that
already used ERP have more than 1,000 employees. These rms are on
leading edge in building and employing best-of-breed systems because
they have the nancial and technical resources necessary to attempt this
complex task.
Current Best-of-Breed Systems
Leading-edge rms 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 rms 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 rms 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 rms were selected for closer study of their experience and future expectations.
The evaluation started by looking at what type of bolt-on
systems ERP adopters were currently employing and then examined their
future plans. Table 4.4 shows the current percentage of bolt-on software
systems for ERP rms. Three types of bolt-ons are being used by over half
of the ERP adopters in our survey: inventory management, demand
63
Cost of quality
Quality and cost
Independent
departments
Standard operating
procedures
Predictable cost
and rates
Automated
Spreadsheets
MRP and other

homegrown
applications
Business pain
Driving goal
Organizational
focus
Process change
Metric
IT focus
Key planning
tools
Key execution
tools
The fundamentals
Stage I
MRP II
Point tools
Packaged
On-time, complete
delivery
Cross-functional
communications
Consolidated operations
Customer service
Unreliable order
fulllment
Stage II
Cross-functional
teams
ERP
Enterprise supply
chain planning
Integrated
Total delivered cost
Cross-functional
processes
Integrated supply
chains (internal)
Protable customer
responsiveness
Cost of customer
service
Integrated enterprise
Stage III
Ta b l e 4 . 3
The supply chain compass
Customer management
systems
Point-of-sale supply
chain planning
Inter-operable
Share of customer
Customer-specic
processes
Integrated supply
chains (external)
Protable growth
Slow growth margin

erosion
Stage IV
Extended supply
chain
Network-centric
commerce
Synchronized supply
chain planning
Networked
New worth
Reinvented processes
Rapidly
recongurable
Market leadership
Nonpreferred supplier
Stage V
Supply chain
communities
Ta b l e 4 . 4
Current bolt-on system usage ranked by percent of users
Current bolt-on software
Inventory management system
Demand forecasting and planning system
Factory planning and scheduling system (MES)
Quality management system
Data warehouse system
Warehouse management system
Product data management (PDM) system
Project management system
Call center management system
Customer relationship management
(CRM) system
E-procurement system
Supply network planner system
Trafc management system
E-auction system
Percent of
users
Product
improvement
Sales
increase
73.0
66.7
65.1
46.0
44.4
41.3
40.5
29.4
21.4
21.4
3.75
3.79
3.70
3.60
3.82
4.06
3.90
3.83
4.00
3.37
3.33
3.40
3.40
3.29
3.02
3.33
3.20
3.22
3.81
3.59
19.8
19.0
19.0
11.1
3.68
3.63
3.87
3.71
2.96
3.81
3.08
3.29
forecasting and planning, and factory planning and scheduling systems.

These results are most likely inuenced by the fact that the survey was
sent to APICS members, who are primarily employed by manufacturing
rms. However, it is interesting to note that all of these systems are
internally focused on the enterprise. It would appear that most of these
rms 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 rm.
Enhanced inventory management capabilities allow a rm 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 rm do a better job of making sure that they are making the right products and do not
waste resources on products that are not demanded or required. Factory
planning and scheduling helps reduce lead times, increases utilization, and
improves customer service by making sure that the schedules support the
inventory and demand plans that are derived from the other two systems.
Returning to Table 4.4, the next ve 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 rms are currently
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66
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 rms 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 ve-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 inuenced by the fact
that these rms may be using other bolt-ons as well. If one ranks the boltons based on the average productivity improvement, only two have an
average of 4 or above: warehouse management systems and call center
management systems. These bolt-ons gave an average improvement of
6% or greater. The top three adopted bolt-ons in Table 4.4 are, at best,
ranked seventh in terms of productivity improvement. This indicates that
these bolt-ons are probably the most mature and have much wider use in
manufacturing rms. Given that there is a high percentage of adopters of
these applications, there are likely to be some rms in the group that are
not leading-edge users. These rms may have adopted the most popular
applications, but they have not gained the same amount of benet as
leading competitors.
When looking at the change in revenue over that last two years,
again a ve-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
and should have a positive impact on sales. Therefore, these results indicate that many of the bolt-ons with external focus are in fact providing
the impact they are intended to provide.
Looking at bolt-ons in the top half on each performance measure,
there are only three that appear in both lists: Call center management
systems, warehouse management systems, and demand forecasting and
planning systems. All of these bolt-ons involve some component of a
customer interface. Call centers take customer calls, answer questions, or
place orders. Promptly and accurately handling these issues ensures that
resource use is driven by customer desires, which helps improve productivity. These types of systems also mean the difference between a satised 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 products location in the distribution system improves productivity by reducing wasted effort and the inventory required to maintain the same level of customer service. The last bolt-on that is in the top
half of both lists is demand forecasting and planning. These systems make
sure that the right items are in the demand plan for production and distribution. Accurate demand planning improves both customer service and
productivity. These systems also have an external component because
they frequently use direct input from the customer in terms of demand
information. Firms who are using these types of bolt-ons may already be
transitioning from an integrated enterprise in Stage III of the supply chain
compass to a Stage IV rm that has an extended supply chain. This transition raises the question of where rms will focus their future efforts in
building their best-of-breed systems.
When looking at these performance measures, one can surmise
that rms with the highest productivity or the highest sales growth be
rms that have created a best-of-breed system. Table 4.5 shows bolt-ons
that are being used by 50% or more of the rms with productivity
increases of 10% or above. The six bolt-ons that would comprise these
best-of-breed systems are all internally focused with the possible exceptions of two, demand forecasting and planning systems (discussed earlier)
and warehouse management systems that are tied to customers through the
distribution system. These rms appear to be clearly focused on Stage III of
67
68
Ta b l e 4 . 5
Best of breed based on productivity
Percent of most
productive
77.4
71.0
67.7
64.5
51.6
51.6
Ta b l e 4 . 6
Best of breed based on sales
Customer relationship management (CRM) system
Percent of best sales

increase
90.9
81.8
81.8
72.7
54.5
45.5
45.5
the supply chain compass, using all of these bolt-ons to create a tightly
integrated and successful enterprise. Thirty-one rms fell into the highest
category for productivity improvement, and all of these rms were using at
least one bolt-on, with 23 of those 31 rms using ve or more bolt-ons to
their ERP system. We can conclude that those rms are selecting and applying multiple bolt-ons to build their best-of-breed system.
The set of bolt-ons being used by about 50% of the rms that
were in the top sales growth category are given in Table 4.6. The top
three are the same as those in the list based on productivity with one
important difference: demand forecasting and planning was the highest
on the list. This particular bolt-on is the most externally oriented of
the top three, heavily oriented to using customer input in determining
the demand plan. A fourth bolt-on that appears on both lists was the
warehouse management system. The other three in the top seven are
customer oriented: call center management systems and customer relationship management systems are clearly focused on the customer, and
quality systems that are designed correctly use information from custom-
ers as part of the improvement process. It appears that rms may want
to use a different set of bolt-ons depending on whether they want to improve productivity or improve sales. Firms with the highest sales increases
all use at least one bolt-on, and 8 out of the 11 use ve or more bolt-ons.
This result shows that whether you are interested in increased sales or
increased productivity, selecting several bolt-ons to enhance your information system is one path to success. The only bolt-on not used by one of
the rms with the highest sales increases was the e-procurement system.
Obviously, using the four bolt-ons that appear on both lists would be a
good starting point for building a best-of-breed system to enhance enterprise performance.
Future Best-of-Breed Systems
Where are enterprises heading? Table 4.7 shows the bolt-ons that
respondents say they are going to install in the future. When looking at
future best-of-breed system plans, one sees a general change from an
internal to an external focus. The top future bolt-on (factory planning
and scheduling systems) is one of the top three currently being used. It is
a critical foundation bolt-on that is still internally focused and that is
helping to ne-tune the production process by improving execution on
the shop oor. 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
Customer relationship management (CRM) system
E-procurement system
Supply network planner system
Trafc management system
Project management system
E-auction system
Percent of users
21.4
19.8
19.0
15.9
15.1
15.1
15.1
14.3
8.7
5.6
5.6
4.8
4.0
3.2
69
70
making sure that individual orders are completed as promised. The confounding factor about whether this system has an external focus depends
on where the decoupling point for customer orders is located for rms
using these systems. If the decoupling point is at the nished goods stage,
then the rm is in a make-to-stock situation and the linkage to specic
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 rms future plans: customer relationship management
(CRM) and e-procurement systems. The purpose of these two bolt-ons is
to provide better linkages to the extended supply chain. CRM improves
the linkages to customers and enhances communication on the downstream side of a rms supply chain. E-procurement systems provide
linkages to suppliers and strengthen communication on the upstream side
of the supply chain. It appears that these rms are attempting to create an
extended supply chain by obtaining better information on both the upstream and downstream supply chains. Based on the supply chain compass, this is the next evolutionary step in moving from an integrated enterprise to an extended supply chain.
This chapter illustrates that rms that have already adopted ERP
systems are trying to get more functionality by adding bolt-ons to create
a best-of-breed system. The rms that are the top performers are the ones
that have selected the appropriate ve or more bolt-ons to enhance their
productivity and sales. The data suggest that rms in the future will
implement best-of-breed systems that are more externally oriented. These
enterprise application systems will allow rms to have an extended supply
chain and eventually lead to value chain resource planning, as discussed
by Bendoly et al. (2004).

THOMAS H. DAVENPORT, JEANNE G. HARRIS, AND
SUSAN C ANTRELL
In the last decade, most large corporations and many government

agencies undertook one of the most ambitious information systems projects in their histories: the implementation of packaged enterprise systems.
Arguably the second most important technology of the last decade,
enterprise systems may have been even more expensive for many rms
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 organizationto our knowledgeis completely nished 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 x Y2K problems and overinvested in ES. Why spend so much and take so long, critics argue, to
implement commodity back-ofce 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
CIOs prayer, given that they work well, provide a high level of crossfunctional support, can automate virtually an entire business, and are
global in scope.
72
Research Approach
Accentures 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, nancial services, government, products, and resources industries. Geographies represented were Australia,
Europe, and the United States. In 2003, 180 additional interviews were conducted
in the Asia-Pacic 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-Pacic study specically identied.
FIGURE
5.1
Methodological Approach in Brief
Recent academic studies (Hitt, Wu, and Zhou, 2002; Anderson,

Banker, and Ravindran, 2003) support the positive side of ES, suggesting
that companies achieved substantial returns on their investments in ES
in terms of both productivity and shareholder value. The specic 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 benets? 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 benets. Millions
of dollarsnot to mention years of organizational attentionwere spent
striving for a seamless ow of information and transaction processes
across diverse business functions, business units, and geographic boundaries. Substantial benets of multiple types were envisioned by organizations, including headcount reductions, more accurate business planning,
and the ability to serve customers better, cheaper, and faster. In our study,
however, the most likely benets to actually be sought were less ambitious: better management decision making, which is difcult to measure,
and better nancial management (Figure 5.2).
At an overall level, only 4% of the companies in our study said

they had achieved all the benets 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 Pacic study, 93% of
respondents said they had achieved business benets. When asked about
specic benets, many rms noted that they received benets in areas they
had not targetedin other words, they were pleasantly surprised.
In terms of specics, the most likely benet to have been achieved
was better nancial management, perhaps in part because nancial functionality was the rst capability to be installed in our sample (Figure 5.3).
Faster transactions and better decision making came next in the list of
achieved benets. These were also the top three benets achieved in Asia
Pacic organizations, although faster information transactions ranked
Better managerial decision makingS
50
Improved nancial managementS
42
Improved customerS
service and retentionS
32
Ease of expansion /S
growth and increased exibilityS
32
Faster, more accurate transactionsS
29
Headcount reductionS
26
Cycle time reductionS
25
Improved inventoryS
and asset managementS
22
Fewer physical resourcesS

and improved logisticsS
21
Increased revenue
12
FIGURE
5.2
10
20
30
40
50
60
Percent of organizations naming the benetS
as a rst, second, or third priority to be achieved
Benets Sought from Enterprise Systems
73
74
70
Faster, more accurate transactionsS
69
63
Improved inventory andS

asset managementS
60
55
Fewer physical resourcesS

and improved logisticsS
54
53
Improved customerS
service and retentionS
47
Headcount reductionS
40
Increased revenue
36
FIGURE
5.3
20
40
Percent
60
80
Benets Achieved from Enterprise Systems
rst there. These are certainly useful benets, but they are also undeniably
difcult to translate into nancial returns. The most difcult (and nancially
rewarding) change objectivessuch as headcount reduction and increased
revenueswere at the bottom of the list. Firms might have achieved more
value if they had worked harder on more measurable and nancially
quantiable targets. Again, however, a comparison of Figures 5.2 and 5.3
indicates that rms often received benet in areas where they did not
target it.
All of these benets took time to be achieved (Figure 5.3). As we
have noted, faster transactions and nancial management benets were
among the rst to be delivered, with a majority of companies reporting
benet in only one year. Only about 20% of the companies we surveyed,
however, were able to achieve increased revenues or lower headcounts
within a year. Over 60% of surveyed rms had achieved some benet 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 rms should attempt to change their
businesses and extract value as during implementation, but this apparently proved too difcult. 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 benet realization was getting critical
mass, which leads to tight integration of business processes and
real-time access to information globally.
Infrastructure projects come rst, and add less value. The
earliest aspects of an ES implementation are back-ofce and
transaction-oriented components, but they are necessary to
provide a foundation for later front-ofce functions such as
CRM and supply chain optimization. A chemical company
CIO (in the eighth year of ES implementation) noted, The
emphasis this year will be on leveraging value from our applications. Benets are greater in the follow-up projects than in
getting the core infrastructure in place. Were just now starting
to gure out what they are.
Getting to know the data. A big part of value derives from using
ES data, and it apparently takes time to learn how to use it. As
another consumer products executive described, One challenge
has been going from a lot of transactional data to good business
information. Slowly but surely, people are doing their jobs in
different ways. About six months after implementation, people
start to understand what they can do with the data.
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76
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 beneted from the experience of earlier implementations. Most
notably, we found that Asian companies got more value faster. U.S. and
European companies, many in a rush to implement before Y2K, generally
focused more on the technical implementation of the system. Asian companies, in contrast, paid more attention to transforming their business
processes and other complementary business changes designed to help
them target and achieve desired benets.
Driving Enterprise Solutions Value
What steps should companies take to maximize the value of their

ES investments? Our research identied three actions that organizations
should consider: to integrate, optimize, and informate their businesses in
relation to enterprise systems. Organizations that completed their enterprise infrastructure installations and continued to focus on these three
value drivers realized the majority or all of the benets they had targeted.
These three actions, especially when taken together, can enable organizations to achieve value in the many forms weve listed. In addition, organizations that adopted these approaches earlier, as in our Asia Pacic study,
achieved value earlier.
Integrate
Integration is the single factor that is most closely correlated to

achieving greater value from enterprise solutions. Just implementing enterprise solutions does not mean that an organization has successfully
managed to integrate its information and processes to their full potential.
We dene integration as connecting information systems and bringing
about common information and processes throughout an organization.
For most organizations, integration is an ongoing process that

continues long after implementation of the core enterprise solutions functionality. Organizations must continue to integrate enterprise solutions
from disparate best-of-breed vendors, as well as within existing legacy
systems. Herman Miller, for example, has integrated its custom make-toorder system, an i2 supply chain application, with eight different instances of Baan ES, another ES from a different vendor, and legacy order
management and distribution systems. Integrating with a companys
customers, suppliers, and business partners can also lead to dramatic
improvements in operational efciencies that can have a clear relationship
to protability. Eastman Chemical, for example, has achieved signicant
benet 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 signicantly 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 Dows
infrastructure, avoiding the kind of ad hoc approach that would normally
prompt information inefciencies. Additionally, the company has been
able to eliminate redundant processes that required handoffs and data
replication. From 1996 to 2000, for example, Dow cut costs by consolidating IT work previously done in hundreds of sites into four technology
centers. Some organizations, such as the Texas Education Agency and a
group of North Sea oil companies, even share a single ES and IT support
in a shared service center model, thereby achieving economies of scale
across rms and further driving down costs.
Another approach is to integrate enterprise solutions package
modules with other legacy systems. For this approach, organizations may
employ enterprise application integration (EAI) tools to connect disparate
applications together. The Defense Logistics Agency, for example, is using
EAI tools to link their disparate applications, which include legacy applications and applications from SAP and Manugistics. Organizations such
77
78
as Dow Chemical and Eastman Chemical are also experimenting with the
use of emerging integration technologies like Web services.
Optimize
We dene optimization as the continuous renement of business

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

Leading organizations that have succeeded in capitalizing on their enterprise solutions continuously examine and improve how the processes ow
and t 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.
Once an organization determines the process ows it desires, the

organization often will need to modify the system to make sure the
system ts the processes and the business that the processes support.
Modication might involve some post-implementation customization to
the systemusually through careful reconguration 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 specically built to t
an organizations given industry. Canada Post, for example, has a dedicated SAP Center of Excellence team that resides on the business, not
the technical, side of the organization to evaluate proposals for changes
or additions to its enterprise solutions. The group also evaluates functionality in new releases and encourages SAP to incorporate missing
but needed industry-specic functionality such as a new postal service
application that reconciles accounts among the worlds major post ofces.
Informate
Driven by the desire for accurate, consistent, complete, real-time

information, executives are seeking efcient, transparent, and real-time
decision-making capability. To realize this goal, organizations must
informate, a term coined by Shoshana Zuboff (1988). Organizations
informate when they use information to transform work.
In terms of enterprise solutions, organizations informate by transforming enterprise solutions data into context-rich information and knowledge that supports the unique business analysis and decision-making needs
of multiple workforces. The rst step is to improve the availability and
quality of enterprise solutions data by making sure it is timely, consistent,
and accurate. As users become more familiar with the data available, their
need for data often exceeds the standard reporting functionality that
comes with enterprise solutions. Implementing data warehouses, ad hoc
reporting functionality, and portals empowers employees to access and
manipulate the data they need.
Leading organizations, however, do not just give people access to
data. They give access to the right data that are most applicable to the
person and the problem at hand. In other words, they present the information in context, thereby empowering employees to better understand
the implications of information and to act on it. Portals, for example, can
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80
help knowledge workers access and interpret enterprise solutions information relevant to specic tasks.
Once robust reporting and data access are widely available, the
next major challenge is providing the analytical capabilities that managers
need to analyze, correctly interpret, and apply their ES data to management decision making. Executives say that this is a separate issue, one that
goes beyond data access or performance management reporting. At Briggs
and Stratton, for example, executives originally assumed that their new ES
would address all their reporting needs. However, once they completed
their installation, executives found that their operational data was overwhelming in quantity and yet insufcient for making many business decisions. Management concluded that ES-based operational data was merely
a starting point to addressing their information and analytic needs.
Another way companies informate is by implementing new enterprise solutions functionality, such as performance measurement applications, to obtain managerial information not otherwise captured by their
systems. For example, executives at the Texas Education Agency attribute
much of their success to the extension of their ES to include performance
measurement. Using PeopleSofts balanced scorecard, they are able to
track performance on a monthly basis. Their ES capabilities enable them
to handle information requests quickly and analyze management information in new ways to generate insights into their operations.
Managing for Value
Enterprise systems have delivered tremendous value to organizations. Most organizations, however, can still wring a signicant amount
of additional value from their systems. We have suggested that organizations integrate, optimize, and informate in order to achieve more value,
but successful organizations also:
Invest the effort required to get a critical mass of implementation. Only organizations that have invested the time and
resources necessary to extensively implement ES throughout
their organizations will be able to capitalize on their promise
of better integration and seamless information ows between
functions, business units, and geographies (Figure 5.4).
Percentage of organizations thatS

have achieved the benet
100
90
80
70
60
50
40
30
20
10
0
Within 1
12
2 4
Time to achieve benet (years)
Faster information transactionsS

Improved inventory and S
asset managementS
Fewer physical resources and S
improved logistics
FIGURE
5.4
More than 4
Improved customer serviceS
and retentionS
Head count reductionS
Increased revenue
Benets Achieved over Time
Prioritize benets and create an action plan to achieve them.

It is clear that the benets of ES dont come by happenstance;
they have to be planned for and managed. We found that
organizations with formal approaches to benet measurement
and management achieved benets signicantly faster than
those without. The 31% of organizations that actively track
metrics for the majority or all of the expected benets reported
that they achieved benets signicantly earlier than those
that did not actively measure or capture benets systems
(Figure 5.5). Likewise, the 65% of organizations that held a
81
80
70
60
50
Percent
82
40
30
20
10
0
Within 1
12
2 4
More than 4
Time to benet since implementation (years)
Actively track metrics for the majority or all of expected benets, and S
processes and incentives have changed to supportS
Actively track metrics for a few key benets post-implementationS
Do not actively seek to measure and capture benets
FIGURE
5.5
Firms That Track Benets Achieve Them Faster
dedicated individual responsible for realizing enterprise

systems benets also achieved benets earlier than those who
held no one responsible for benet 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 benets assessment: We
will have a methodology to ensure that as certain deliverables
come into development, we have a mechanism to decide if
thats 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. Well be measuring them through postdeployment, to see that the transformational capabilities are
delivered. We will have a value realization manager postdeployment, looking at whether the program is returning the
value we envisioned and championing any necessary additional
steps to ensure success.
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 nished
with its ES. If the ES program dies when the software goes
live, it is unlikely that substantial value will be achieved. Dedicating ongoing resources to ES can help rms continue to focus
on, measure, and manage the benets from them. Organizations such as Canada Post Corporation have set up SAP Centers of Excellence to help them achieve value from their enterprise systems. Other rms, 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 specic enterprise systemsrelated initiatives and projects.
Enterprise systems, as our study details, can be a source of considerable
value to organizations, but many rms have not fully achieved that value.
70
60
Percent
50
40
30
20
10
0
Within 1
12
2 4
More than 4 orS

never achieved
Time to benet since implementation (years)
Someone has primary accountability for realizing ES benetsS

Someone does not have primary accountability for realizing ES benets
FIGURE
5.6
Firms That Put Someone in Charge of Benets Achieve Them Faster
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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.
II
Agility Through Standardization:

A CRM/ERP Application
THOMAS F. GAT TIKER, DANIEL CHEN, AND DALE L. GOODHUE
Recently, several scholars (e.g., Sambamurthy, Bharadwaj, and

Grover, 2003; Chatterjee, Pacini, and Sambamurthy, 2002) have proposed reconceptualizing information technology (IT) as a platform for
generating competitive agility (Goldman, Nagel, and Presis, 1995). Enterprise computing systems (also known as enterprise resources planning,
or ERP, systems) are one of the most signicant investments in todays 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 postimplementation 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 systems 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 benets may not be immediate. Looking
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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, difcult to understand, and
dangerous to recongure or modify. This has led one IT professional to
comment that installing ERP systems is like pouring concrete on a rms
business processes.
The above observations suggest two questions:
Does investment in enterprise computing have positive (or
negative) impacts on a rms competitive agility?
If enterprise computing does impact agility, what are the
mechanisms by which it has this effect?
Various authors have suggested slightly different denitions of
agility (e.g., Gunneson, 1997; Amos, 1998; Sambamurthy et al., 2003;
Bendoly and Kaefer, 2004), but most imply a focus on addressing changing markets, products, or customers in such a way as to remain prosperous. 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 dene 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, suppliers, 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 nd it useful to make another distinction: sensing versus responding. Sensing agility emphasizes a rms 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 rms 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 systems global connectivity of data
Agility Through Standardization: A CRM/ERP Application
and processes should make it far easier to integrate knowledge across the
rm, 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 typies the view of a signicant number of managers:
In a way, we are slaves to the system, and we have accepted the technological 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 conguration
(i.e., a change to a conguration table). Although built-in conguration
capabilities allow some changes to an organizations processes, the variety of process congurations supported by any single enterprise package
is limited. Thus, rms sometimes nd 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 reconguration may be prohibitively resource
intensive (Akkermans et al., 2003), in part because each conguration
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 knowledge barriers to organizations trying to leverage potential technologydriven benets (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 proposition:
Enterprise systems should be excellent in support of sensing
agility but more problematic in support of responding agility.
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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 ndings were enlightening,
and they resulted in some adjustments in how we thought about ERP and
agility. In addition, the cases demonstrated several strategic and innovative uses of enterprise computing. In this chapter, we focus on the experience 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 congurations) hardware products, including PCs, servers,
communications hardware, peripherals, and OEM semiconductor technologies. 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 nancing
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 environment. Such dynamism is driven not just by rapidly changing technologies
(i.e., Moores law), but also by accelerating globalization, rapid entry of
new competitors, shifting strategic alliances, and rapid commoditization
of products and services.
Enterprise Computing
The organizations 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
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 computing 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
SAPs ERP package in 1995. A variety of SAP modules have been implemented, including customer fulllment, production planning, procurement and accounts payable, xed assets, global nancing, and general
ledger. In addition to SAP, the organization runs Siebels customer relationship management (CRM) system and IBMs 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 database. 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 management and its seven-step sales process.
Seven-Step Sales Process
Prior to ERP/CRM implementation, the rm, like most companies,

did not have a well-dened sales process. There was a general sales process
ow, and there were certain well-delineated steps (such as credit checking);
however, without an enterprise-wide system, it was impossible for the organization 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,
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nor the main benet, 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 example, management has calculated the relationship between the time that
an opportunity spends at each step and the likelihood that the prospective 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, management 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 opportunity will probably expire if not acted on within the next ve 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 information 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 ve
routes to market or channels: face-to-face sales, Web, telesales, a services outsourcing organization, and distributors (the rst four are internal
channels, whereas distributors, of course, are not legally a part of the
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 arrangements 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 desktop PCs, but it is not economical to pursue the deal. (The company estimates 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 protably. 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 dened as the
one that is the most qualied and the most cost effective based on the dollar 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 ofce, 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 distributors (with widely varying qualications) for midrange servers in the
North American market alone, this is a substantial task.
There are a number of organizational factors that must be addressed to make this system work. For example, in order to give incentives 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 involves 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
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Ta b l e 6 . 1
Mechanisms by which ERP supports agility
Built-in exibility
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 denitions and structures

are standardized across organizational data sources
Availability of add-on
software applications
The extent to which there are, on the market,

special-purpose software applications or modules
that can be easily integrated with a rms existing
information systems
Availability of consultant
knowledge
The extent to which there are, on the market,

knowledgeable external consultants who understand
the installed base of a rms existing information
systems
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 particular case, the ndings from six additional companies we have studied
conrm 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 ve
different mechanisms through which enterprise systems provided agility.
These are summarized in Table 6.1.
The rst of these mechanisms, not too surprisingly, is the exibility
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 accomplish these changes by reconguring the system. Such changes have been theoretically suggested in recent ERP research (Bendoly and Kaefer, 2004).
Second, although the level of ERP integration varies from rm

to rm (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 planning and deployment of production resources. Consistent with this
notion is the nding of Bendoly and Jacobs (2004) that greater ERP
integration is associated with greater performance among rms 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 denitions, and special quirks. Boudreau and Robey (2001) have found that IT
complexity negatively impacts companies abilities to innovate. The companies 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 disparate legacy systems. For example, using SAP and Siebel, the company discussed in this chapter was able to roll out changes to its terms and conditions 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) nd 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 worldwide customer database using SAP; however, it then moved this initiative
to Siebel and nally to WebSphere.
Fifth, there is now a sizable cadre of knowledgeable consultants
available to help in the conguration or design of customized solutions
for the enterprise systems. Because of this, a major step in designing or
revamping a process is not neededthese consultants already know the
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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 ve mechanisms has a number of implications
for managers and researchers. ERP systems are often seen as a homogenizing force diminishing a companys ability to differentiate itself (via
its business processes) from its competitors. There are a number of wellpublicized examples of organizations eschewing broadly deployed packages, such as SAP, because these companies want to avoid using so-called
generic ERP-driven processes. Somewhat paradoxically, the fourth and
fth mechanisms in Table 6.1 suggest that there are strategic benets to
adopting the more widely deployed packages. The breadth of the consultant knowledge base and variety of bolt-on software available both
increase with the market share of core ERP package. Thus the logic of network externalities would apply: the more companies that have chosen a
particular solution, the more benets accrue to each of them.
Summary
According to a systems view of organizations, agile rms 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., rst-mover advantage).
Following agility refers to the capacity of a rm to quickly deploy an innovation 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 agility. However, we have discovered numerous examples of ERP as a source
of leading agilitythe seven-step opportunity management system in this
case being just one. Our experience suggests that gaining strategic advantage though leading agility is not a matter of viewing ERP as a source of
strategic business processes; rather it is an organizations ability to select
an ERP conguration and a set of enhancements that t a particular set of
business conditions and opportunities. Viewed this way, important weapons then include implementation factors such as managing user involvement, business case analysis, and change management.
ERP-Driven Replenishment Strategies in

Make-to-Order Settings
E. POWELL ROBINSON JR. AND FUNDA SAHIN
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 original vision of integrating data across the nancial, manufacturing, procurement, and distribution processes of a single enterprise to including
data sharing and collaborative decision making among multiple enterprises. These objectives require integrating a broader range of business
processes, including supply chain management, procurement, and logistics, 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 functionally oriented, and realign them to satisfy intra-organizational and interorganizational 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.
Forresters 1958 research on industrial dynamics laid the foundation
for the application of information technology in supply chain management.
In the study, he identies the natural tendency of decentralized decision making to amplify, delay, and distort demand information moving upstream in a
make-to-stock supply chain, thereby causing inaccurate forecasts, inefcient
asset management, and poor customer service. Lee, Padhamanabhan, and
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Whang (1997) label this phenomenon as the bullwhip effect and suggest
remedies such as sharing point-of-sales data with suppliers and the operational 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 benets of information sharing and collaboration among channel members. Well-known
examples include Wal-Marts retail link program, efcient consumer response in the grocery industry, quick response systems in the apparel industry, Dells direct sell and value chain models, and vendor-managed inventory
programs.
Sahin and Robinson (2002) surveyed the vast and growing literature 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 studies found that operational improvements associated with enhanced information sharing and coordination ranged from 0% to 35% of total relevant 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 application 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 customers order, utilizing requirements planningbased procedures.
While the basic functionality for managing procurement and fulllment processes exists in current ERP software, our research ndings indicate 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 replenishment integration, the potential economic benet, and a clear implementation path. We draw conclusions about enhanced ERP replenishment systems 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
ERP-Driven Replenishment Strategies in Make-to-Order Settings
power transmission industries, illuminates the managerial strategies and

potential extensions of ERP systems necessary to better support replenishment decisions and strategies. Our ndings, derived from computer simulation 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
sufcient 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 briey describe the production and replenishment processes of
make-to-order supply chains as commonly implemented within ERP software systems. Orlicky (1975) and Vollmann, Berry, Whybark, and Jacobs
(2004) provide in-depth descriptions of the processes. Our primary concern, 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 nal assembly schedule (FAS). As rm customer orders are received, the generic planning units in the FAS are replaced with the specic 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 accomplishing 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 customers order passes
99
100
Vendors LTS
Slack timeS
S
18 days
2 days
Tower fabricationS
10 days
Main frame
Power pack
Final assemblyS
23 days
Procurement of longest lead-time componentsS

30 days
Order time-fence 53
FIGURE
7.1
Cumulative Manufacturing and Procurement Lead Times
the order time-fence, its conguration, 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, nal assembly,
module production, and procurement operations for an illustrative drilling
rig from a construction equipment supply chain. The 53-day order timefence corresponds to the longest cumulative procurement and nal assembly lead-time path of a noninventoried component. The total lead time for
drilling tower fabrication and nal assembly is 33 days, providing a 20-day
planning horizon from the time when the end item crosses the order timefence until the manufacturer must order and receive the components for
the tower fabrication.
Table 7.1 illustrates the manufacturers 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 reoptimized. Standard practice for controlling this MRP nervousness and
Planned order
release
Planned order
receipt
16
30
Ending
inventory
Gross
requirements
Scheduled
receipt
Time
16
16
30
22
20
26
20
12
Frozen orders
26
10
16
24
10
11
24
16
12
22
13
14
24
22
12
10
15
Ta b l e 7 . 1
MRP tableau for a component with a 12-period frozen time-fence
24
16
17
Slushy orders
12
16
16
10
18
19
16
16
20
102
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 xed in both timing 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 exibility.
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
dened by the degree of information sharing between channel members
and the decision makers 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 manufacturers delivery due dates. While multiple
orders scheduled for shipment on the same date may share joint transportation 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 future orders, enabling the vendor to optimize the replenishment schedules
and potentially reduce channel costs. The manufacturer could also pursue
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 items planning horizon. Note that the data required by these
two enhanced information-sharing strategies are readily available within
current ERP systems.
Expanding the decision makers problem scope may also yield system
improvements. For example, simultaneously coordinating multiple-item procurement 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 transportation cost structures, the set of items ordered from each vendor, and each
items on-hand inventory balance, unit cost, gross requirements over the
planning horizon, xed-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 efciently solving
coordinated lot-sizing problems are not incorporated into current ERP system capabilities. However, decision technology capable of nding highquality heuristic or optimal solutions to these mathematically complex problems in less than a second of CPU time currently exists. Robinson and Gao
(1996) and Robinson and Narayanan (2004), among others, provide highly
efcient optimization and heuristic solution procedures that are well suited
for incorporation into ERP systems.
We also dene an inter-organizational (INTER) coordination strategy
in which all procurement, transportation, and fulllment costs are jointly considered. In the functional and intra-organizational strategies, the manufacturer 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 functional or intra-organizational planning approach. In addition to the data required by the intra-organizational strategy, the inter-organizational strategy
requires data describing the vendors order processing, equipment-setup and
103
104
Ta b l e 7 . 2
ERP enhanced replenishment strategies
decision makers planning problem
Replenishment strategy
Manufacturer
Transportation
Vendor
No information sharing
and functional
coordination
(NI /FUNC)
Wagner-Whitin
single-item
lot-size problem
Ship as required
Replenish on a
lot-for-lot
basis
Advance order
commitments and
functional
coordination
(AOC /FUNC)
Wagner-Whitin
single-item
lot-size problem
Ship as required
Wagner-Whitin
single-item
lot-size
problem
No information sharing
and intraorganizational
coordination
(NI /INTRA)
Coordinated replenishment problem
Replenish on a
lot-for-lot
basis
Advance order
commitments and
intra-organizational
coordination
(AOC /INTRA)
Wagner-Whitin
single-item
lot-size
problem
Full information sharing

and interorganizational
coordination
(FULL /INTER)
variable-production costs, and inventory-carrying costs. The global decision

problem, although assuming a broader scope, can be modeled as a coordinated lot-size problem and efciently 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 coordination strategies, NI /INTER and AOC /INTER are not feasible because
inter-organizational coordination requires the sharing of all relevant system data. In addition, since full information sharing provides no economic
advantage over AOC sharing when there is less than full system coordination, we do not consider the FULL /FUNC and FULL /INTRA strategies.
Table 7.2 denes the ve remaining replenishment strategies along with
the lot-size scheduling problem solved by each channel member.
Experimental Analysis and Results
In order to illuminate the potential economic benet 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 reective of this general type of make-to-order environment and not
a specic problem instance, we generated 108 different test problems
by varying the number of purchased items, the demand patterns, total
demand, the vendors 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 implemented using rolling schedule procedures over a 200-time-period experimental 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 reduction 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%, respectively; the largest cost savings are associated with problem environments
that had larger number of items, higher vendor and transportation xed
cost structures, and relatively constant demand.
Figure 7.2 summarizes the experimental results across the replenishment strategies. While the capability of extended ERP systems to facilitate information sharing is widely recognized as a key contributor to
improved supply chain performance, the ndings suggest that ERPs role
in facilitating intra- and inter-organizational coordination may yield even
greater benets. 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 problem 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
105
50
45
40
35
Percent
106
30
25
20
15
10
5
0
Problem scope
Functional
FIGURE
7.2
None
AOC
Information sharing
Intra-organizational
Full
Inter-organizational
Percent Cost Improvement over the NI /FUNC Benchmark
coordination strategies. Finally, moving to an inter-organizational coordination strategy with full information sharing (FULL /INTER) yields a marginal 8.22% improvement over the best intra-organizational coordination
strategy. Overall, these results are promising and indicate that a signicant
potential economic benet is associated with enhanced ERP replenishment
systems.
Conclusions and Implications
Advances in ERP systems are rapidly evolving to include data sharing and collaborative decision making among channel partners. In the past,
interoperability among trading partners proved to be a signicant hurdle,
but today the availability of the Internet and the falling costs of B2B serverto-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 benets is necessary
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-toorder supply chains and found that enhanced ERP systems can play a critical role in improving channel performance by enabling both information
sharing and coordinated decision making. While the basic data requirements are already available in current ERP systems, the capability of the
ERP systems to support intra- and inter-organizational replenishment decision 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 todays business environment. However, the projected 3550%
cost improvements reported here provide economic incentive for both supply chain managers and ERP system vendors to broaden the scope of their
replenishment business models. For business managers, this calls for a realignment 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 benets of enhanced information sharing and decision-making
coordination in make-to-order supply chains.
107
ERP as a Platform for

Vendor Managed Inventory
MOHAN V. TATIKONDA, C AROL 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 replenishment decisions for the customer. The supplier monitors the customers inventory
levels and replenishes the inventory when necessary, based on prespecied
inventory- and service-level targets. The customer benets from higher product
availability and lower inventory costs. The supplier benets from lower overall
costs (especially through reduction of the bullwhip effect), marketplace differentiation, and increased customer retention and sales due to the value-added
services it provides. The supplier can be a manufacturer or distributor. The customer is any organization one tier downstream from the supplier, such as a manufacturer, distributor, retailer, or end user.
In the traditional customer-managed approach to inventory replenishment (called retailer managed inventory in some industries), the customer independently makes inventory reorder decisions and initiates the
purchase order. The suppliers 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 information or periodic snapshots of the customers 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 customers ERP, point-of-sale (POS) systems, or
other electronic information systems to the suppliers inventory planning
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 traditional 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 inventory level targets, reorder points, replenishment frequency, and other inventory 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 notable level of trust between the parties. That is particularly true for the
customer who must divulge proprietary information and relinquish tactical 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 efcient consumer response and quick response. 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 supplierassisted inventory replenishment are used by some companies.
Variations in Form
VMI programs differ considerably in practice, and those differences 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 information is shared. By denition, 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 customers downstream demand or forecast data shared
with the supplier, and granularity of the shared data). VMI programs vary
109
co Pro
m gr
pl am
ex S
ity
Technology intensity
110
L
L
H
Collaborative intensity
FIGURE
8.1
VMI Programs: Variations in Form
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 collaboration 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 implementation 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 transactions from company to company, utilizing agreed-on formats for transmitting standard documents electronically (referred to as EDI). Since the mid1990s, however, extensions to ERP systems have been developed for VMI
programs. VMI programs do not require an ERP system, but since ERP systems are robust and scalable transaction-processing systems with an integrated database, they have become the typical enabling system platform for
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 inuenced by characteristics such as the number of partners, product variety (number of SKUs), product ow 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-specic
communication standards. Some partnerships are characterized by highvolume ows of a few unique inventory items, while others involve transfer 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-benet tradeoffs. Partnerships
also vary in the diversity of transportation modes used to transmit inventory 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 standardized electronic formats for B2B transactions such as order placement, order
conrmation, and invoicing. By the early 1990s, many Fortune 500 rms
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),
111
112
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 consignment situations, the suppliers inventory resides on the customers
premises. The customer owns the inventory and owes payment on it only
when the customer draws on that inventory. In some consignment programs, the supplier actually physically manages the inventory at the customers 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 competitive 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 inuences payment cash ows.
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 making 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 segregates safety stock as a reserve inventory for select customers. This provides high condence 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 kanban order quantities, to guide the timing and quantity of inventory replenishment. 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 together, and as such parallel the VMI and consignment inventory situation.
A typical VMI partnership is limited to two-party situations: a supplier 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
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 suppliercustomer 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 partners in a CFPR (multiparty) program.
Case Study: NIBCOs VMI Program
The following case study illustrates the strategic motivation, implementation 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 ow-control

products, including valves, ttings, supports, seismic bracing, and struts
used in applications for potable water, chemical and gas processing, and
drain waste. Markets include residential construction, commercial construction (hotels, hospitals, and ofce buildings), and irrigation and environmental systems. In 2003, NIBCO had over $400 million in sales revenues, 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 ttings made by injection molding of plastics resins. Its metal products include pipe ttings,
valves, and other pipe products made of copper, bronze, iron, and steel
that are cast, machined, and assembled. Two-thirds of NIBCOs 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 technology 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
113
114
plants, distribution centers, and headquarters (Brown and Vessey, 2002).

This initial implementation was viewed as an opportunity to begin
redening the companys supply chain processes. A new director-level position for supply chain systems was created to oversee continuous improvement 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
NIBCOs 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 software. NIBCOs VMI program was envisioned as part of a multichannel
e-commerce approach to customer interaction (including electronic catalogs, Web-based ordering, EDI, and other order-entry mechanisms for nonVMI 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 signicant 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 availability of products (in terms of fewer stockouts and higher ll
rates), faster replenishment, greater order accuracy, and easier
order placement and receipt.
2. Increased efciency. The rm could reduce costs through overhead reduction, greater utilization of physical assets, reduced
paperwork and administrative costs, and fewer errors, deductions, and returns. The rm could also improve cash ow through
faster cash cycles and lower working capital requirements.
3. Sales growth. The rm could expand market opportunities.
With established customers, NIBCO anticipated increased sales
of currently sourced items, addition of new lines, and customer
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 customer 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.
NIBCOs rst VMI customer was a leading wholesaler whose president 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 rst developed a manual process and then a fully automated replenishment process driven by its ERP system. When the customers president made the challenge, his rms distribution centers were
near capacity. One immediate benet of the VMI partnership was that the
customer was able to delay growing its distribution centers.
Since that rst 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 products. 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 owchart 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. NIBCOs marketing team makes an initial presentation
to the customer, explaining the VMI concept and informing them of the
types of improvements that NIBCOs established VMI customers have
achieved. If the customer shows interest and approves, then NIBCO conducts a statistical analysis to model the customers purchase landscape and
115
STARTS
PARTNER IDENTIFICATIONS
(via business model)
No
VIABLE PARTNER?
EXITS
Yes
MARKETING PRESENTATION S
TO POTENTIAL CUSTOMER
PARTNER SHOWS INTEREST?
No
EXITS
Yes
DATA COLLECTION, ANALYSIS S
AND DETAILED PROPOSAL
No
PARTNER APPROVES PROPOSAL?
EXITS
Yes
PILOT PROJECT
BOTH PARTIES SATISFIED ANDS

APPROVE FORMAL AGREEMENT
Yes
FULL-SCALE VMI PROGRAM IMPLEMENTATIONS
GO-LIVES
(regular daily transactions for all SKUs)
PERIODIC PERFORMANCE REVIEW ANDS
INVENTORY POLICY REVISION
FIGURE
8.2
Typical VMI Partnership Process
No
EXITS
determine specic potential benets for the customer. The customers last
24-month consumption history and sales activity data are analyzed in conjunction with customer inventory data, growth forecasts, and seasonality
effects so that NIBCO can develop a VMI proposal. Based on the customers own critical business metrics (e.g., inventory turns and gross margin 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 nalize execution details, including which SKUs will be affected; inventory 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 inventory 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 conducted 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 essential to NIBCO to ensure data completeness and validity in terms of
product usage rates, on-hand levels, and inventory level projections. Customers do typically identify a second source, but only as a contingency for
emergency situations.
Partner Implementation Process
NIBCO works in parallel with the customers resources to analyze

the customer data, perform EDI testing, agree to item selection and pricing
terms, and gain nal approval to establish the VMI relationship. NIBCOs
supply chain systems manager is responsible for the VMI program and
establishes and coordinates the partnership core team. This VMI team typically consists of an inventory analyst, an EDI /information systems specialist, and the appropriate sales or account representative from NIBCO. From
the customers side, there are three types of team participants: the purchasing manager, at least one EDI person from the customers IT group, and a
117
118
logistics person in the customers warehouse, distribution center, or branch

location where NIBCO is replenishing supply.
NIBCOs 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 customers inventory system
must submit EDI transactions to NIBCO each day for each SKU. As such,
there is a signicant 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 product codes) that differ between NIBCO and the customer are translated as
part of the EDI interface or via cross-references embedded in the SAP modules (such as those for Universal Product Codes [UPCs]). Other product
catalog information is also electronically referenced as necessary to accommodate a specic customers 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.
NIBCOs 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 order has been placed. Later, when the order is ready to be shipped, NIBCO
sends an advance ship notice (EDI 856), which indicates the orders contents and arrival time. An electronic invoice (EDI 810) is also sent. The customer then makes payment via electronic funds transfer (EFT)hence the
nancial aspects are fully electronic as well. For most customers, the physical 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 customers the benets that have been delivered, considers any relevant new
forecast information, and makes inventory policy adjustments as needed.
(1) Product activity

(2) Purchase order acknowledgement
(3) Advance ship notice
(4) Invoice
(5) Funds transfer
Supplier
FIGURE
8.3
EDI EFT
Customer
VMI Partnership Electronic Communication
NIBCO and its customers rigorously collect and assess VMI partnership performance data. For NIBCO and its customers, the actual benets in terms of the overall VMI program and individual partnerships have
been quite compelling. The proposed improvement levels for all VMI customers have been realized or exceeded. Relative to pre-VMI benchmarks,
the customers have approximately doubled their inventory turns and reduced their inventory dollar value by one-third to one-half. These results
are in line with customer benets reported for VMI programs by other
companies (IOMA Group, 2003). All in all, NIBCOs VMI customers have
seen notable benets.
NIBCOs 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 NIBCOs competency in VMI program management
and partnership execution.
NIBCOs Next Steps
NIBCO was the rst company in its industry to leverage its ERP infrastructure to offer VMI. Four years later, some of NIBCOs competitors
tried to implement a comprehensive VMI program but did not succeed. Although VMI customers represent a small percentage of NIBCOs total customer 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.
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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
NIBCOs raw materials inventories for high-moving items. This supplierNIBCO interface exhibits signicantly lower program complexity (see
Figure 8.1) because far fewer SKUs are involved than for a typical NIBCOcustomer interface. NIBCO, this time as the customer, has achieved the expected VMI benets 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 enhance a variety of industry-wide electronic communication standards.
The benets of VMI have also begun to spread among NIBCOs
partners. The rst 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 differentiator in its marketplace. NIBCOs rst 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 benets of VMI programs

and partnerships are multidimensional (Tatikonda and Montoya-Weiss,
2001). Some benets accrue to both the supplier and customer, while others
are supplier or customer specic. Here we focus on the benets that are, for
the most part, measurable and applicable across many VMI contexts. The
supplier benets from:
1. Improved customer service and increased customer satisfaction.
This is measured by greater product availability, higher ll rates
(order, line, and piece) and on-time delivery, shorter delivery lead
times, greater order accuracy, and order process error reduction.
2. Greater efciency and cost and time savings. These effects are
measured by a reduction in demand volatility (particularly
through signicant reductions in the bullwhip effect), which

in turn leads to more stable production and distribution capacity 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 processes with automated ones and through prenegotiated agreements) and associated error avoidance; working capital reductions due to lower inventory levels (without reduced sales); and
shorter cash-to-cash cycles (due to faster inventory ows, electronic 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 benets as well from effects similar to the rst two
benets listed in (1) and (2) above. From the customers 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 efciencies by reducing procurement personnel,
overhead, and errors. In addition, the customer, through its own greater
product availability, provides increased service levels (higher ll rates)
and other differentiating aspects to its own customers, in turn leading to
some of the benecial effects listed in the last bullet above.
Early benets are, in part, dependent on the customers initial inventory condition. The timing of benets for some customers is slower as
excess inventories (typically hedging or just-in-case inventories) acquired 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 inventory reduction of 35% and an average inventory turns increase of
53%. Companies also reported faster replenishment lead times, increased
ll rates, and increased sales (Asgekar and Suleski, 2003).
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Other Relevant Measures
There are also benets at the program level (that is, the supplier
rms 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
suppliers asset utilization and increases customer service.
Admittedly, it is difcult to parse out benets that accrue solely due
to the VMI aspects of the partnership (that is, vendor decision making regarding the timing and quantity of replenishment) because there are commingled factors in many VMI programs. These factors would themselves
alone logically lead to some benets. Such factors include electronic communication methods (e.g., increased speed and decreased transaction costs
due to EDI and EFT), the demand-pull philosophy of inventory replenishment (versus the traditional forecast push approach, which tends to
lead to higher inventory levels), and strategic partnership aspects (including 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 retail VMI situations have some benets that are distinct from those in commodity situations. In the case of noncommodity products, part innovation by the supplier and joint product innovation between supplier and
customer are benets that could arise from VMI partnerships. Both partners benet from less costly and simpler transitions (changeovers) when
established parts are replaced with new ones (due to upgrades, engineering changes, etc.). Other measures appropriate for some situations include part quality, return on (information) technology investment, and
the customers performance measures (that is, the second-tier customers
ll rates, inventory turns, and overall satisfaction).
Strategic Implications for Organizational Capabilities
and Competitive Competencies
The rst strategic implication is that an effective VMI program can

signicantly differentiate the supplier rm from its competitors and, as
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 customers, longer trading relationships, and increased switching costs for customers. These aspects, combined with the internal efciency gains of VMI,
allow supplier rms to offer lower prices, provide better service, and invest
for the future.
A critical question then is how lasting this marketplace differentiation 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 technologies may result in greater interface richness at ever lower costs. As
shown in the NIBCO case, there is a potential for a rst-mover effect. A
key aspect of NIBCOs 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 individual VMI partnership relationships. Therefore, in addition to the technological capabilities, key management process skills must be obtained.
Despite the benets afforded by standard ERP platforms, there is a
signicant setup cost and learning curve to all this, so there is a differentiation capability that appears difcult to imitate in the short term.
A second, related strategic implication is that the ability to support, 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 performance, both proven and projected, for established and potential customers 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 suppliers specic program
helping the customer overcome technological and political hurdles, 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. Program infrastructure consists of the following components:
installation and ongoing operation of the essential underlying operational systems (including technology, management processes,
and personnel)
installation and ongoing operation of the VMI-specic systems
functionality (including technology, management processes, and
personnel)
development and operation of the VMI performance measurement system (including data analysis and periodic audits or feedback) for partnership and program evaluation and improvement
As noted earlier, all this is not a simple matter, and there are
signicant installation costs. Still, those who enter into VMI activity earlier than others can go down the learning curve to be ahead of competitors in obtaining the skills for VMI partnership engagement, setup, pilot,
and execution.
The third strategic implication is that an ability to effectively conduct 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
conrms the suppliers ability to effectively interface with one customer in
a given partnership. That is, there is condence in the technological infrastructure, the management processes, and the ability to foster trust with a
partner. Recall that VMI is more than information sharing: it requires collaboration. This essential ability to interface with another rm is a collaborative competence that can be leveraged in other arenas. For example, if
the supplier rm is the focal rm of interest, then the VMI experience can
serve to establish interfaces with the suppliers suppliers. VMI involves nontrivial interaction, but that interaction is only on the outer edges of the
boundaries of the two rms. VMI experience can serve as a basis for richer
and deeper interactions in established partnerships, ranging from twocompany integrated inventory-planning systems to collaborative development of new products. And it may help the rm 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 commonly 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 partnerships. 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 prioritization 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-rm and inter-rm 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 intervention, 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 integrated, cross-functional transaction systems (such as those afforded by
ERP platforms), as well as rms of any size that do not have VMI functionality well integrated into their enterprise system, face internal integration
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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 signicant percentage of suppliers sales
Product characteristics
High-volume, fast-moving items
High bang for the buck items (these SKUs represent a large percentage of the
suppliers sales)
High product unit accountability (discrete, unitized, countable pieces)
Highly dened part reference and communication standards for the industry
Partnership characteristics
Customer willing to collect and share proprietary information with supplier
Customer has sufcient personnel and management resources for implementation
Customer and supplier trust each other
Potential employee resistance is managed (especially among customers purchasing/
procurement personnel and suppliers sales representatives/agents)
Suppliers information systems
EnterpriseS
functionality
VMIS
functionality
Customers information systems
EDI /EFT
VMIS
functionality
EnterpriseS
functionality
Inter-rm communication
FIGURE
8.4
Potential Information Systems Integration Barriers
barriers. Conversely, partners with the same ERP platform or VMI system
will have the potential advantage of deeper inter-rm integration of planning
and execution systems (the suppliers and customers MRP systems, for
example). Today, extranets commonly provide visibility into a partners
data, but truly integrated, multiparty systems have the potential to provide
simultaneous visibility to multiple tiers in the supply chain.
Finally, even with VMI, there is dependence on an intermediate

party between the supplier and customerthe 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 shipping 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 strategic and tactical costs and benets of VMI opportunities, implementation,
and execution. Metrics for costs, inventory, and service currently exist, but
quantiable measures of the benets 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 customers inventory levels) or the
customer-supplier dyad (e.g., ll rates). To our knowledge, measures to assess the benets of linking the supplier to the customer to the customers
customer are not usually captured.
Technological Progress
To some rms, it is simply too costly to purchase, install, and

operate VMI software functionality that can be integrated with their existing enterprise systems. However, the availability of dedicated VMI software packages from ERP vendors and other software rms is increasing,
and installation is easier and less costly than in the past. XML and other
Internet standards for communicating electronic transactions are developing and offer alternative solutions that may be cheaper than EDI in some
cases. Together these factors increase the population of rms, especially
smaller rms, 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

rms part numbers to anothers. 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 increase 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 rms 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 weighing, volumetric, optical sensor, and other techniques are employed. As technologies progress and their costs fall and with the increasing functionality
of bar codes and RFID (radio-frequency identication), the ability to monitor inventories becomes physically easier and less costly. The impact of
these technology-based physical unit measurement and tracking systems
will be signicant going forward and will make VMI feasible for more rms
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 rm that moves early to implement customerfacing 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, partner 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 demand (i.e., mitigate the bullwhip effect), have an additional motivation to
convince customers to adopt VMI. However, in some industries in which customers have high buyer power (e.g., electronics manufacturing and automobile manufacturing), it is the customers that demand VMI from their suppliers. As less powerful customers become more technologically sophisticated,
they may also demand VMI partnerships. In operations strategy terminology

(Hill, 1999), the suppliers ability to offer VMI may be an order winner
characteristic today, but will become an order qualier characteristic in
time. What is a competitive advantage today may become a competitive necessity tomorrow. Firms need to assess trends in their industries to anticipate
customer demands for VMI as a basic supplier capability.
Furthermore, rms with a robust enterprise system architecture that
includes integrated back-ofce systems and e-commerce capabilities have
the technological advantage today for quickly ramping up a large-scale
VMI program. The vendors of the rst-wave ERP packages of the 1990s
now offer supply chain and customer relationship management (CRM)
modules to support multichannel interactions with customers and efcient
e-procurement programs. We believe the competitive advantage of the ERP
adopter rests in how well the companys 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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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 Doesnt 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 urry of
letters to the editor protesting this point of view followed from some very
prominent academics in the IT and MIS elds. 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 nonproductive use of IT (Various, 2003). Succinctly put, when IT productivity is an issue, management matters!
Brynjolfsson and Hitt (1998) had earlier observed that if computerbased information technology were not combined with a realignment of
workow 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 specied, 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
IT-Supported Productivity: Paradoxes and Resolution in R&D
set of hammers, nails, and planks doesnt 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 capitalize on IT investments should observe three principles in their approach
to IT management: (1) develop a long-term IT renewal plan aligned to corporate strategy; (2) replace vertically oriented data silos with clean, horizontally oriented architectures designed to serve the company as a whole;
and (3) strive to develop a highly functional, performance-oriented IT organization. Unfortunately, the authors place the blame in much too general
terms (poor IT management) to be really useful. This is the equivalent to saying that all the worlds 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 Toyotas 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 companies are not known as leaders in use of information technology, especially in engineering and for car design. How can this be?
Intuitively, most people have a difcult time accepting that the introduction of computing technologies into the nancial, insurance, manufacturing, and health-care industries has been counterproductive. Information and communications technologybased supply chain linkages in
place today certainly appear to have enhanced just-in-time production
planning. E-commerce and computer controls in motor vehicle manufacturing facilities as well as in their products have revolutionized the automobile industry and brought about new ways of designing, building, and
marketing motor vehicles. Lynds (2003, p. 2) rhetorically poses an interesting question in this regard:
Is it possible, I wonder, that wide-scale implementation of information
technology has in fact greatly increased productivitybut the productivity
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not of the US, but of the vast, underdeveloped Asian region. [sic] Information 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 technology and apply this lesson generally. For example, Ettlie (1997) studied
600 durable goods rms in 20 countries and found that technology
signicantly moderated the association of R&D intensity and total quality
management (TQM) with market share, controlling for industry category.
In high-technology rms, R&D intensity was signicantly associated with
market share; in low-technology rms, TQM was signicantly associated
with market share. R&D intensity and TQM were signicantly and inversely related, while R&D intensity and computer-aided manufacturing
(CAM) were signicantly 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 represent a necessary objective qualifying the purchase of such systems by innovative rms, 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 support systems, such as the CIO, plant engineering, or the manager of customer service, is nding 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 technology of any organization is still the last holdout in ES deployments. Economic theory can help explain why this happens and why it is likely to
continue for quite some time. The appropriation of rents from investments in new technology is best under strong conditions: when the fruits
of these investments in new technology can be protected with solid intellectual property protection. Therefore, why struggle to protect purchased
technology such as hardware and software systems, which are owned by
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 applications, which are now being increasingly supported by modern ERP infrastructures. 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 ndings suggest that this view is inadequate to explain outcomes in the new product development process (Tatikonda and
Rosenthal, 2000). Alternative views (e.g., incremental reduction of information 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. Specically, we suggest further consideration 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 using the context of new engineering collaborative software systems, which
are ERP supported and often Web enabled and which hold out the promise 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 interviews with a select group of automotive companies: rst-tier suppliers
and assemblers (Ettlie and Perotti, 2004). Our ndings show that a very robust, causal pattern is evident in both samples for predicting the adoption of
new virtual team support systems, which is ultimately and signicantly related to improved new product protability in almost 300 companies across
numerous manufacturing industry categories and construction. Companies
adopting these new systems were signicantly more likely to (1) report having an integrated IT strategy (e.g., ERP); (2) coevolve organizational innovations (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 understand the adoption of collaborative engineering hardware and software
systems, one can take cues from the innovation and new product development processes in these rms. Based on such data, not only were our models 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 engineering systems on performance outcomes (i.e., new product protability) was signicantly moderated by the adoption of tailored hardware and
software systems. Given the collaborative bolt-on options available to rms
with integrative IS architectures such as ERP, the focus should, therefore,
remain not on distinguishing the specic 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: Xeroxs Palo Alto Research Center (PARC),
Lockheed Martins Lockheed Advanced Development Projects Unit (better
known as the Skunk Works), and Scaled Composites (formerly Rutan Aircraft Factory), developer of the Rutan Model 61 Long-EZ (an aircraft that
will not stall) and Spaceship One (the rst 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 organizational 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 gure in these organizations, but most members of these organizations 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 employees perceive their managers more as facilitators and coordinators and
less as managers and directors of their work. Indeed, there is evidence suggesting that people who work in R&D environments perform best when
they are permitted the exibility to determine their own project controls
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 others. More to the point, it requires the kind of seamless access to information 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 innovation. 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 monolithic suites it was in the 1990s and into an entirely new realm where process architectures dominate will allow for the necessary control to be
maintained while providing exibility in processes. Presently this is accomplished through bolt-ons and middleware: software designed to support a set of process architecture standard interfaces so that any vendors
application can interact with the middleware, provided that it abides by
the interface standard. Process architectures are normally depicted as activity maps in which each activity connects with other steps in a process.
Someday soon, a plug-and-play process architecture could be developed for the automobile manufacturing industry. Such a product would
be shared throughout the industry and would permit an entirely new level
of exibility. 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 dene all basic activities that could be involved in the car design
process, along with common variations on the activities and key interfaces 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 ts 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 persons 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 benet, when appropriate, these maps include tools for nding
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 rms 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 focused 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 rms, we asked the following question:
What do you see as the major issues for enterprise systems over the next
ve 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. Compliance with the Sarbanes-Oxley Act is perhaps the best example of this; implementation 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 nes 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
Ta b l e 9 . 1
Potential information systems integration barriers
Respondents perception of major
issues for ERP over next five years
Integrating RFID into ERP

Outsourcing coordination
Net-based business, SCM
Upgrades and enhancements
Sarbanes-Oxley compliance
Adapting to advances in technology
Keeping up with a changing business model
Maintenance costs and issues
How did your firm measure success

for the business intelligence project?
User satisfaction, meaningful

information delivered in a
timely, easy-to-use format.
BW was brought up with the R /3
Go-Live, limited number of cubes.
Mostly its are the executives happy?
Major challenges in implementing

business intelligence module
3 Users did not know what they wanted

1 Technology issue interfacing with
IBM I-Series Computer
1 Training and expertise
1Developing standards for deployment
Which functional areas were involved

in your business intelligence project?
6 Finance
4 Production (including SCM)
4 Marketing/sales
Major challenge your firm had to

overcome to implement the business
intelligence module
Information Requirements Analysis

Clear definition of Project Scope
Understanding information delivered by
the system
Percentage of total business intelligence

project budget that went for training
1%; 1%; 3%; 5%; <10%; 10%
Your assessment of relationship between

IT and R&D or tech function of your
core business
Little or no relationship with R&D

Where there are relationships, most
are poor
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 rms; if
this is true, it does not bode well for American business. There was no mention of process architecture maps, Web services architectures, systems or application 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 rms represented in the survey were at some stage in
the installation of the business intelligence component of the SAP software
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suite. This module is focused on the evaluation of a rms data for strategic
and tactical use. Its importance is evident in the number of implementation projects under way in our sample. In every case, the nance department was involved in the business intelligence project. Marketing and
production were the only other areas where interest was found. For us,
the interesting nding in this area was that despite the fact that six of the
seven rms were pursuing installation of the business intelligence application, respondents from half of the rms surveyed indicated that their
users were unable to adequately dene their information requirements.
Moreover, there appeared to be no knowledge among the respondents regarding what, if any, metrics were being used to measure the projects success. All of these issues, including the comments regarding the problem
with scoping and with understanding the information in the SAP database, we think might suggest that the users of ERP systems do not necessarily understand the systems well enough to use them to full advantage.
If this is so, this situation can be resolved quickly with additional training. 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 ODonnell, 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 rms.
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 tending of the new dual-core model of the rm: the rearranging, upgrading, and
continuous and simultaneous improvement of both information technology and core technology in any enterprise. Third and nally, 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.
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 managers but by shoring up extensions to existing architectures that align with
operational and strategic goals. For rms 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 bolstered 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 exibility) as such bolt-ons gain greater diffusion in the
marketplace.
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10
ERP as a Resource for Inter-Organizational

Value 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 requirements planning (MRP), total quality management (TQM), manufacturing 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 evolutionary 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, nance, 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 benets
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 signicant efforts to standardize ERP
ERP as a Resource for Inter-Organizational Value Creation
systems and, even, more important, to standardize or reduce product

and component specications. Extending these efforts goes beyond lean
organization to lean supply chain: how to achieve the major benets
that accrue from coordination of activities across companies. The major
benets 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 rms as they attempt to achieve lock-on with
their customers? How does ERP enableand constrainthe 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 activitiesthe approach becomes one of implementing the processes and systems that uniquely address the needs of particular 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 Nestl Globe Project
In 2000, Nestl launched their Globe (Global Business Excellence) project to transform the company from a set of individual operating units into an integrated global company. The project is expected to
cost SFr 3 billion ($2.4 billion) and return major benets only after ve
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 Nestl 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) rollout in the world to date, Globe is denitively not viewed as an IT project
inside Nestl. The objective is essentially to achieve lean organization
an integrated, coordinated organization that responds to individual
markets as well as global customerswith optimum internal efciency.
The Nestl Globe project is fundamentally internal, seeking to achieve the
benets 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 benets 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 working with customers and suppliers. A critical lesson to be drawn from the
Nestl Globe Project is that there is denitive evolution from individual
business unit thinking (unique ERP systems) to joint business unit thinking (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.
It was then scheduled in manufacturing on day 2, shipping on day 3, and

delivery on day 4. The x was not to run the same systems more often
it was necessary to redesign the work, the processes, and the IT. Moreover, the interactions between sales at Heineken and purchasing at Albert
Heijn also changed structurally. Heineken was asked not to send sales
people at each months end to try to increase salesthis only caused
inventory problems: Do not send any sales peoplewe 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 processes. 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 sufcient to only do the same
things better!
Redefining Customer Needs at Zara
Zara has not only responded to changing customer needs: They

have redened what customers can expect! Doing so requires a completely 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 outset. Their approach has been to deliver unheard of levels of quality, cost,
and speed. In doing so, they have clearly exceeded existing levels of customer 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 ordersthey are just sent new

merchandise as it is created.
There is daily feedback from the retail stores to Zaras 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 goodsand the customers
know this.
The customers must buy nowit 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 ows of materials and
information between the companies. The typical approach here is to rst
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 consumer goods company (customer), working with some of its key suppliers. Study of Figure 10.1 clearly shows why this is not at all sufcient: internal, functional-based systems (classic ERP) create overly complex and
costly systems and processes.
FIGURE
10.1
ReconcileS
inventory
Issue toS
manufacturing
ReceiveS
goods
Stock outowS
forecastS
(X)
Customer
Raw materials
Pay invoice
Finance
Create (X)S
purchase order
EvaluateS
(conrm)S
replenishmentS
(X)
Purchasing
Operational Systems: Eliminating Complexity
PlanS
manufacturing
PlanS
manufacturing
Manufacturing
Create (X)S
sales orderS
update VMI
CreateS
consignmentS
stock orderS
(VMI)
ProposeS
replenishmentS
(X)
EvaluateS
forecastS
(X)
Sales
PlanS
manufacturing
Manufacturing
ReconcileS
inventory
Pick ship
ProjectedS
balance
Supplier
Finished goods
CreateS
invoice (X)
Finance
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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 outow of stock from their inventory. This information is
passed to the sales organization of the supplier, who evaluates the forecasted outow and proposes a replenishment shipment to the purchasing
function of the customer. That group evaluates the replenishment and
conrms or modies the result. The authorized replenishment quantity is
then passed back to the suppliers sales function and subsequently to its
manufacturing unit, which plans manufacturing based on the suppliers
nished 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 manufacturing, they are issued to the manufacturing function. At that time, the
purchasing group creates a purchase order for the amount issued to manufacturing 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 customer and passes the sales order to its nance group to create an invoice.
The invoice is sent to the customer for payment. Finally, as shown in
the gure, there is a periodic reconciliation of inventory between the
rms. 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
rms 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
boxes require human intervention, which implies unnecessary work and

longer response times. From the customer side, there is no real need to prepare and check the stock outow 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 forecast, nor to propose a replenishment shipment quantity. Similarly, there is
no need for the customers purchasing organization to authorize the shipment or create a purchase order. Finally, there is no need for the supplier to
prepare a sales order or create an invoice. In both rms, 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 implement joint business-process reengineering and the development of trust
and good working relations. This implies a fundamental change or transformation: 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 particular 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 Nestl Globe project, there is a long implementation period with
delays before the benets 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 benets of lean enterprise
through rationalization, standardization, and best practices, while simultaneously 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 dened,
and there is signicant unlearning that must take place to do so. Let us
now examine what appears to be the approach and sequence for implementing 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 rms 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 rms. Unfortunately,
the problems we illustrated in Figure 10.1 are all too prevalent in this
stage. Too many rms are hamstrung by existing functional based systems and locked into zero-sum based thinking. Unlearningi.e., breaking away from the integrated systems, such as those that support classic
ERPrequires new processes and the elimination of classical crosschecks. 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
rms such as the customer in Figure 10.1 dictating conditions (poor
practice conditions!) to all its suppliers. Asking suppliers to adopt the
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-rm 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 certicationS
Payments linked toS
contractual terms
FIGURE
10.2
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 specications 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
exibilityS
(b) Joint schedulingS
Synchronous S
manufacturingS
Joint new productS
design /developmentS
Real-time visibilityS
(materials andS
demands)S
Chain KPIs
Dyad Implementation Hierarchy
systems shown in Figure 10.1 (with none of the Xs removed) is clearly

suboptimal.
Figure 10.2 appears to be the way rms 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 improvements with the best dyad partners (suppliers and customers) and thereafter cascading the learning to other dyad partners. There is an important
lesson here; the progress is within specic 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 rms
start with key suppliers, before customers. This is probably because they
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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 rms try to
develop modular approaches to the systems and processes. Those who
move rst, proactively, can often dene 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 exact needs of the customer are passed to the supplier, who can satisfy them
as it wisheswith payments made as the customer uses the supplied
goods; this is similar to skiing, in which it is the uphill skier who is responsible for not colliding with the downhill skier. These changes in practice 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 dynamics, visibility across the supply chain, fast time-to-market and time-tovolume, 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 specic 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 ows of material is necessarybut not
sufcient! 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.
ManageS
behavioralS
change
Effort
SoftwareS
development
Replacing existingS
processes
Joint planning andS

information sharing
Joint execution
Time
FIGURE
10.3
Dyad Implementation Evolution
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 exponential. That is, as the rm moves from stage 1 through stage 3, the changes
in working relations with dyad partners are profound. This is not a renement 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. Fundamental 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 uke. This is the standard to which rms 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
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management is indeed todays 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 clearand 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 rst 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
businessacross all business units (lean organization). But now we are
experiencing a fourth shiftto achieve major improvements in working
jointly with key suppliers and key customers (lean supply chain). Todays
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 responsivenessare
revolutionary, not evolutionary. We are at the beginning of a long learning
(and unlearning!) process.
III
11

EDMUND W. SCHUSTER, DAVID L. BROCK, STUART J. ALLEN,
PINAKI KAR, AND MARK DINNING
In many respects, MRP, the subsequent development of manufacturing resource planning (MRP II), and ERP represent increasingly sophisticated 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 business decision making has moved from an uncertainty basis, in which no
comprehension of risk exists, to a risk basis, in which ERP serves the important function of mitigating uncertainty. The result: Much more effective 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 information 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
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data is obtained, organized, and employed will have a signicant 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 identication (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 identies 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 communication 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 proximity 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 communication is tightly coupled with highly specic applications such as air
trafc 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 specialized, RFID has evolved into mostly proprietary technology characterized
by closed standards.
Though RFID has been used in some highly innovative applications, 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 uidic self-assembly and vibratory manufacturing methods, offer signicant potential to place individual transistors onto an integrated circuit at a sharply lower cost (Sarma, 2001). Projections show
that the new generation of tags will reach a price that allows individual
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 operation, in contrast to the current batch method for producing the integrated
circuits that make up silicone chips. This development opens the possibility of tag application to a large number of objects, such as individual
units, cases, and pallets of merchandise within the consumer goods supply chain. Given that the scale of retail supply chains includes billions of
items, industry consortiums recognized very early the need for a comprehensive 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 systems that have continuous, two-way communication with objects located
anywhere within a supply chain. This Internet of things will create unprecedented 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 physical world requires unique identication, which is an element of Auto-ID
technology. With this capability, distributed control systems can interact
and give instructions to a specic 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 communication, Auto-ID technology holds the potential to drive rapid advances in
commerce by providing the infrastructure for true automation across
supply chains.
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How Auto-ID Technology Works
In addition to the advances in manufacturing technology for producing 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 rangeup to 30 meters. In general, these tags have signicant 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 signicant distances, there is greater chance of a frequency 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 fullls a critical function such as providing data for a moving rail car. Battery life
varies a great deal depending on many different factors, so it is difcult 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 contain a battery. Rather, the energy needed to power the tag is drawn from
electromagnetic elds created by readers that also serve to gather the signals
emanating from the passive tags. The read distance of a passive tag is usually no more than 3 meters. Since no xed 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.
Ta b l e 1 1 . 1
Comparison of different tags
Tag
Active
Passive
Semipassive
Power source
Battery
Induction from
electromagnetic
waves emitted
by reader
Battery and
induction
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
(read/write)
2 kb (read only)
32 k or more
(read/write)
Cost /tag
$2 $100
25
Under development,
some applications
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 eld 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 summarizes the capabilities of tags.
Overall, passive tags hold the promise of ubiquitous application to
objects within a supply chain. However, a comprehensive information technology 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
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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 combinations to identify trillions of objects. This is necessary because the ultimate
goal is to provide a structure for low cost identication 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 transactions. PML represents a hierarchal data format to store information.
By providing a standardized means of describing physical objects and processes, 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 le
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 underlying IP address. An IP address consists of a 32-bit numeric address written
as four numbers separated by periods and used to nd resources over the
Internet. However, with the EPC, we start with a number and use the
ONS to nd 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 identies 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 positioned at strategic points throughout the supply chain where companies
need to capture data. Readers constantly emit an electromagnetic eld
that is received by the tags through a small antenna. This energy activates
PML
ONS
Savant
Reader
Antenna
Antenna
Serial number
EPC
EPC
EPC
EPC
PMLPhysical Markup LanguageS

ONSObject Naming ServiceS
EPCElectronic Product Code
FIGURE
11.1
Technology Overview
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 databases 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 shortened countless checkout lines, saving great amounts of time.
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162
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 identies the manufacturer and links to a description of the object.
Nonprot standards groups such as GS1 administer the numbering
system used for the bar codes, ensuring unique identication without
duplication by other rms. New research efforts have led to the development 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 information 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 identication, 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 identication technology will affect the overall design
and operation of ERP systems. At its core, ERP is essentially a large database. As increasing amounts of data become available through Auto-ID
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 accuracy of the bill of materials (BOM), an important part of MRP. In the
past, popular management programs such as Class A MRP II were important in helping practitioners get the most benet 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 planning. 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 observation. When polled about the relevance and main goal of Auto-ID technology, 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
identication 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
Satisfy trading partner requirement
Increase inventory turns
Reduce out-of-stock situation
Enhance supplier relationship
Improve ll rates
Sample size
55%
13%
10%
9%
9%
4%
658 respondents
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164
constant ux, data accuracy is not just a function of having the correct
value, but of having the correct value at the correct time to reect 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, organizing EPCs represents a challenge that requires signicant 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 chainwide visibility. The EPC, a fundamental tenet of
Auto-ID Technology, provides the capability for unique identication of
trillions of objects. Unique identication on this scale results in useful information 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 difcult 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 nished 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
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 components opens new possibilities for gaining insight into complex operations. There are many situations in which lack of detailed information
leads to ineffective supply chain management. For example, difculties
with the management of versions is a common problem in capital asset industries in which service parts for long-life-cycle items such as aircraft frequently undergo modication 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 identied, inventoried, traced, or
tracked. In situations involving large networks that perform maintenance
of deployed assets, such as airbases in support of combat aircraft, knowing the exact version of a service part in inventory is essential to providing 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 nally 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 scheduling. 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 identied 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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HIERARCHY OF PRODUCTION DECISIONS

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 nal product
Detailed job shop scheduleS

To meet specication of production quantities from MRP system
FIGURE
11.2
Sequencing of Value-Added Operational Tasks
Source: Adapted from Nahmias (1993)
item is scanned and instructions are downloaded from databases into

computer numeric control (CNC) milling machines that automatically cut
the component to exact specications. 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
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 ow 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 management 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 innite capacity when doing
planning and scheduling.
This assumption, though widely recognized as an important weakness, reected the reality that, in many cases, data did not exist to support
advanced nite 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 resulted in the introduction of master scheduling software that accomplished capacitated planning and scheduling for end items. These software packages existed outside ERP systems and required signicant
integration to achieve operability. During this time, computer spreadsheets began to be used as a powerful means to build models and do nite
capacity scheduling for end items (Schuster and Finch, 1990; Allen and
Schuster, 1994; Allen, Martin, and Schuster, 1997; DItri, Allen, and
Schuster, 1999).
However, achieving capacitated planning and scheduling for a
single-level, nished 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 innite 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 nished 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 nd 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 scheduling (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 rms.
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
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 DItri,
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 programming (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 inventory. Essentially, planners always had incomplete information. A large
part of the project included the design of databases to feed the LP planning model and the development of standard ways to represent data. In
the end, the authors state that data accuracy, availability, and timeliness
were signicant 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 nal section of this chapter 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 longterm impact on ERP system design.
Semantic Modeling
The underlying aspects of Auto-ID technology will form the bedrock of international commerce in the years to come. Unique identication, interoperability, standards, and the use of automated Internet-based
systems to track, trace, and control physical objects all are important elements 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 currently 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 rms 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 various 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, interoperability, and unique identication rened during the development of
Auto-ID technology, the research initiative focuses on new ways to connect mathematical models with data. This will substantially increase the
clockspeed (Fine, 1998) of modeling and the computational efciency of
applying models to perform the sense, understand, and do functions 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 successful. Networks of physical objects or of abstractions such as models
share the premise that leaps in productivity arise from the free ow of
information. Creating an intelligent modeling network will accelerate the
ow of information to the greater advantage of many practitioners who
apply Auto-ID technology.
Semantic modeling also has important implications for ERP systems. Auto-ID technology offers the prospect of signicant improvements
over bar codes in the identication of physical objects. Specically, the EPC
will provide unique identication on an unprecedented level. This development 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 signicant
impact on business. This is consistent with the long-term trend toward
interconnectivity. ERP systems cannot escape being affected by this trend.
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 denitions
that describe data inputs for a particular model. In this way, a model can
be matched exactly to a stream of data within a rm. 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 interoperable and easily applied to the available data within rms. This would
facilitate the rapid interchange of models and allow for a better chance of
nding 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. SUNDARR AJ
Enterprise resource planning (ERP) systems require signicant

investment in terms of labor, time, effort, and, most of all, dollars. A standard 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 dont even know
whether our spending on IS has been necessary, or what its added to the
value of our business (Semich, 1994, p. 46). This quote is still as applicable 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 strategic 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 evaluate the manner in which they are being used. That is, once ERP systems
are evaluated, justied, 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 initial evaluations for their justication. Thus, the post-implementation auditing (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
Auditing the System in Use: Value Beyond the Baseline
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 implementation) 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 functions, 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 organizations competitive advantage. To
help manage this type of technology, the literature has introduced a number 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, specically. The major stages of this management process 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 t 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 business strategy. Associated management practices should allow for continuous improvement, and feedback should be present throughout the
173
Uncertainty andS
external competitiveS
environment
Strategy=
formulation and=
integration
CorporateS
strategic planning
FunctionalS
strategic planningS
and integration
Process andS
systemsS
engineering
Conguration designS
and functionalityS
requirements
Systems evaluationS
and justication
SystemsS
implementation
Post-S
implementationS
audits
FIGURE
12.1
A Strategic Management Framework for ERP
ReconcileS
factors,S
performance,S
expectations,S
and strategy
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 rening a shared sense of basic
identity and Mission to inform the choice of a few overarching Objectives, 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 specic planning

and development of the ERP system that will later need to be justied 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 potential to function (the should-be study); and nally 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 determination 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 dened 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 projects life.
System Design and Functionality Requirements
The next step in the process is to determine what alternate ERP

congurations 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 addressed 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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176
economic feasibility of the alternative systems. Once the conguration

and data relating to alternative systems have been developed, this information should be integrated at the justication phase of the development
cycle.
System Evaluation and Justification
At this stage, the primary nancial analysis determines the economic feasibility and justication 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 systems performance. A listing of potential factors is presented later in this chapter. Typically, there are many factors with many characteristics to consider in an
evaluation: tangible, intangible, nancial, quantitative, qualitative, etc.
For effective analysis of this type of data, utilizing multiple objective decision 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 nal 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 completed efciently (Tompkins and Hall, 2001).
System Implementation
Implementation issues can be separated into these four major steps:

1.
2.
3.
4.
Acquisition and procurement

Operational planning
Implementation and installation
Integration
There are four major strategies for implementation (especially suitable

for replacement cases) that a manufacturing rm would be interested in;
these are:
Parallel conversion. The existing system and the new system
operate simultaneously until there is condence that the new
system is working properly.
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 nal goals in the implementation process and one of the most difcult to achieve. The difculties
arise primarily from the use of multiple types of subsystems, platforms,
and interfaces, as well as dispersion in terms of control and physical location 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 neglected 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 difculties, 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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178
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
identied in the justication stage
Developing a productivity improvement tracking report that
identies information necessary to monitor the key
justication factors, original source data, and new source data
Reviewing and reporting elements that were not previously
reported that would have signicant impact on the overall
evaluation
Documenting all sources of information previously identied
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 specic timing of PIAs. When to start typically depends 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 sufcient 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 further 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.
Ta b l e 1 2 . 1
Project cost categories
Direct project costs
Environmental operating costs
Initial hardware costs
Initial software costs
Installation and conguration costs
System development costs
Project management costs
Training costs
Maintenance costs
Unexpected hardware costs
Unexpected software costs
Security costs
Consumables
Indirect human costs

Management /staff resources
Management time
Cost of ownership; system support
Management effort and dedication
Employee time
Employee training
Employee motivation
Changes in salaries
Staff turnover
Indirect organizational costs
Losses in organizational productivity
Strains on organizational resources
Business process reengineering
Organizational restructuring
s o u r c e : Adapted from Irani et al. (1997).
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 implementation of ERP systems is provided in Table 12.1. There are a number
of direct and indirect costs that should be considered and evaluated, beyond 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 organizational productivity. Typically, these costs can be monetized, but some are
more difcult 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
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the lack of integration can be expensive. For example, the

Department of Defense maintains 1,700 nonstandardized systems, 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 eld 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 operate 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 Drugs 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 benets not be used for small problem instances.
Adaptability. Adaptability refers to how the ERP system
accommodates changes in either the process or other components with which the system is interacting. Irani et al. (2003)
argue that information systems need to evolve over time, according 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).
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 security 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 system is running as well as the accuracy of the systems outputs.
According to Kettinger and Lee (1994), reliability is a key component 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 support is another issue that contributes to the perception of system 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 during 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 performance measure of IT systems. It is dened 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 system, as measured by the usage of the system. This has been validated for different types of IT, such as e-mail and voice mail
(Adams, Nelson, and Todd, 1992), and for electronic commerce systems (Geffen and Straub, 2000).
Perceived Value. Perceived value is another widely used performance metric that can inuence system usage and adoption.
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182
Davis et al. (1989) and Adams et al. (1992) have considered the
importance of perceived value from the individuals perspective,
while Brynjolfsson and Hitt (1996) and Kohli and Devaraj
(2003) have studied rm-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 signicant literature
on these issues. For example, one method of evaluating an ERP systems
inuence on the organization is to consider how an ERP implementation
inuences the supply chains performance. This issue requires consideration 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, exibility, 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 measures 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 organizations supply chain and
provide metrics appropriate to manage the four basic links of the supply chain, including plan, source, make/assemble, and delivery functions.
Thus, not only do vertical management decision hierarchical relationships and related performance measures need to be considered in PIA,
but so do the inuences 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 gure. First, the factors map approximately to
the strategic, tactical, and operational levels of an organizations managerial
and decision hierarchy. That is, strategic factors are typically evaluated by
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 time

Customer query time
Customer perceived value of product
Variations against budget
Supply lead time
Suppliers level of defect-free deliveries
Level of buyer-supplier partnership
Delivery lead time
Level of exibility to meet particular customer needs
Tactical
Suppliers ability to respond to quality problems

Delivery reliability
Accuracy of forecasting techniques
Level of suppliers assistance in solving technical problems
Product development cycle time
Planned process cycle time
Effectiveness of enterprise distribution planning schedule
Supplier cost saving initiatives
Purchase order cycle time
Operational
Level of nished goods inventory

Information carrying cost
Inventory level of incoming stock
Cost per operation hour
Human resource productivity index
Quality of delivered goods
Supplier rejection rate
Capacity utilization
Actual versus theoretical throughput time
s o u r c e : Adapted from Gunasekaran et al. (2004).
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 gure).
The second point to note concerns the relationship among the factors. 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 inuence those at
the higher level (e.g., a technologys platform neutrality can be quite
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184
StrategicS
performanceS
metrics/factorsS
MonolithicS
ERPS
ComponentS
ERP
LocalS
system
FIGURE
12.2
Supply chainS
factors
IT factors
SeniorS
managementS
MiddleS
management
OperationalS
managers
Relationships Among Factors, Alternatives, and Managerial Hierarchy
important to a general strategic objective of exibility). Furthermore,

factors within a level can be interdependent (e.g., for certain organizations 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 considered, 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 signied 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 implementation. 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
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 signicant inuence 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 nalizing the post-implementation documentation of a business

case, a number of methodologies exist. Yet these methodologies will need
some restructuring because initial justication 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
signicant research in this area to further model and methodology development 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 methods typically fall within the scope of multiple criteria decision making. Included 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 examples of the techniques that can address a mix of tangible and intangible factors, and they are well described in the literature. Thus, we restrict
ourselves to listing the techniques and providing certain important characteristics of these techniques in Table 12.3.
185
M
M
H
M
H
M
H
L
Cost of
implementation
M
M
H
M
H
M
H
L
Data
requirements
L
L
L
M
M
L
H
L
Ease of
sensitivity
L
M
H
H
M
M
H
L
Economic
rigor
M
L
M
L
M
L
H
H
Management
understanding
L
H
H
H
M
M
H
L
Mathematical
complexity
H
M
H
L
H
M
M
H
Parameter
mixing/
exibility
A, B, C
D, E
F, G
C, H, I
J, K
L
M, N
O, P
References*
*A Albayrakoglu (1996), B Kleindorfer and Partovi (1990), C Suresh and Kaparthi (1992), D Khouja (1995), E Sarkis (1997), F Borenstein
(1998), G Padmanabhan (1989), H Stam and Kuula (1991), I Suresh (1991), J Chandler (1982), K Pandey and Kengpol (1995), L Parsaei,
Wilhelm, and Kolli (1993), M Suresh and Meredith (1985), N Primrose (1991), O Nelson (1986), P Semich (1994).
AHP
DEA
Expert systems
Goal program
MAUT
Outranking
Simulation
Scoring models
Evaluation
technique
Ta b l e 1 2 . 3
Summary of multiple-criteria evaluation techniques and methodologies for evaluation of
ERP systems and factors (H high, M medium, L low)
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 signicant
judgment elicitations using eld interviews and surveys. A protocol
suggested for conducting this elicitation is given in Keeney and von
Winterfeldt (1991):
Identication of issues
Identication of expert
Renement 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 implementation 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 subjective 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 disconrming questions aimed at refocusing the subjects attention
on what was left out. An example by Fischchoff et al. (1978) is
as follows: In particular, wed like you to consider its completeness. That is, what proportion of the possible reasons . . .
are left out, to be included in the category all other problems.
Overcondence Bias. This bias relates to situations in which
individuals tend to be overcondent in their fallible judgment
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188
(Bazerman, 1986). A number of researchers have found that

overcondence is most extreme with tasks of great difculty
and is reduced when tasks get easier (Lichtenstein, Fischchoff,
and Phillips, 1982; Pitz, 1974). As such, Fischhoffs (1982,
p. 427) review of methodological manipulations to debias overcondence has found that overcondence is relatively resistant
to many forms of tinkering (other than changes in difculty
level), and he suggests decompositional approaches as one of
the restructuring debiasing strategies. Kleinmuntz (1990) contends that decompositional approaches reduce informationprocessing demands as well as errors, and Russo and
Shoemaker (1989) state that people have difculty simultaneously 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 literature 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 approach does decomposition naturally, which may support the
use of one technique versus another. If the auditing team feels
that overcondence bias is prevalent, then the incorporation of
a technique such as AHP may be more appropriate.
Management Bias. Management bias can occur when a subjects responses are inuenced by some kind of reward structure, such as: Well, if thats the variable the boss wants minimized, well 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 insufcient 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 inuenced by the framework of
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 respondent (for example, through a comment). This can produce
expectations about how the respondent must answer the interviewers or auditors question and thus bias the response
(Hyman, 1970; Krosnick, 1999). An example drawn from
Hyman (1970, p. 58) is the following statement by the interviewer: 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 practice 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 competitive 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 subjective experiential estimates. This reduces reliance on managerial 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 perceptually or preferentially focused (i.e., expert systems) may be
less useful for post-audit implementation than methodologies
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190
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 conducted so that before and after data are comparable and
measurable to similar extents. For example, return on investment, a nancial metric, may be used in before and after measures 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 exibility of methodologies for pre- and postimplementation audit. An investigation into this exibility,
considering some of the decision environments we have
discussed, needs to be completed.
6. The availability of various levels of management for information and data acquisition must be taken into consideration
when determining which factors and methodologies are suitable. Those that require signicant 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 complex in the future. Becoming familiar with PIA processes in the near term
should establish a corporate knowledge base for emerging developments.
13
The Path of the Enlightened Manager:

Prescriptions for ERP Evolution
LORET TA L. DAVID AND ELLIOT BENDOLY
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 nd 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 efcient ways to conduct business and remain competitive . . . while purposely avoiding major IT investments. In other words, having gone through the effort to get an ERP
architecture up and running . . . nd ways to better use what you have,
before looking for new things to get (or change). In looking ahead, managers rst need to look back and recognize the accomplishments they may
192
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 benets have been equally realized by a large
number of rms that possess completed implementations. With pressure to secure competitive supply chain positions among other rms 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) approach 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 benets. Each new version has the
potential of contributing new functionality and easing contemporary 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 current software release. Benets touting such modications
have been:
Access to new functionality that matches a rms 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
The Path of the Enlightened Manager: Prescriptions for ERP Evolution
Potentially minimal disruptions to end users and processes, if

much of the front-end protocols and interfaces go unchanged
At the same time, these modication projects do require the
drafting and approval of new project plans and often drive
rms 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 benets 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 rms 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 applications. Such extensions can support both strategic and tactical
solutions to emerging competitive requirements. As Mabert
and Watts (Chapter 4) suggest, the benets of bolt-onbased
evolution provides opportunities for best-of-breed extensions
while retaining the underlying efciencies made possible by
existing enterprise capabilities. Of course, the loss of seamlessness from the use of bolt-ons from vendors other than the ERP
architecture provider may raise some red agsbut with
modern awareness of ERP architectural design, such seams
need not be extensive. The near seamlessness of light-seam
options suitable for specic rms, architectures, and applications 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.
193
194
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 rms, having made a signicant
investment in their ERP systems, may still have signicant 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 functionality can also be discovered with sufcient time, experience,
and effort. Just as data mining is not driven entirely by automated 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 effortsaccess to information, increased productivity, and collaboration. The focus should not
be on a better mousetrap, but on the efciency 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. Producing consistent real-time measurements of the key performance indicators within hours of the results is competitive.
Providing workers with tools to give visibility to customer orders and service levels is strategic. Shared information between
customers and suppliers extends solutions to the entire supply
chain.
Recommendations
Bottom line: If its broken, x it; if its failing, shore it; if its working, advance it! If the system is not supporting current operations, or on
the road to that state, then either modify the system or modify operational 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 implementation process to ensure that ERP systems continue to complement
operational processes and are advantageously leveraged through time
(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 operational procedures may have changed to meet changing market requirements since initial implementation. Evaluate the
changes against existing processes and ERP functionality. Additional core ERP products may have been bundled with the
original purchase or could be added for a minimum investment. 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 rm 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 surgeryvery focused for a
short duration. Make sure internal managers have an understanding 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 efcient,
economical hardware, but do not limit resource considerations
to the technology. If slow response time or problem-resolution
accuracy is a problem, look for efciency improvements in
the workforce. Training and greater exposure of users to
enterprise-wide functional linkages can create a culture of
extended useand can yield much greater results than many
technical options.
Consider rolling out the solution to a wider user base. Expand
to eld personnel via intranet and Internet access, share information, 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.
195
196
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.
Dont feel locked into extensive prior customizations. Time
and money spent on such customizations often dissuade the
consideration of upgrade benets. However, new versions may
include the solution that warranted initial customization in the
rst 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 expertise at each site may serve the rms purposes more effectively 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, dont discount third-party options. Theyre
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 functionality.
Attend web presentations, exhibits, and workshops.
Speak with references and read client testimonials.
Its 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 inexible 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 rms. Such managers seldom represent positive stabilizers and are much more likely to serve as dead weight, limiting the exibility of the rm much more so than any set of imposed standards. Moreover, such managers have most likely bought the line that imitable and
inexible assets cant possibly advance the competitive objectives of rms
(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 inexible resources can give rise to high levels of exibility and inimitability in other resources (e.g., human resources, process
designs, etc.). This point is signicant in that although it is not in conict
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 rm enables
a rm 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
197
198
TechnologyS
adoption
ImitableS
technologyS
resources
Inter-org.S
externalities
Inter-org.S
tech ambiguity
Inter-org.S
external cues
StrategicS
process andS
relationalS
resources
FuzzyS
knowledgeS
resources
Composite techS
assessments
FIGURE
13.1
StrategicS
value-S
clarifyingS
knowledge
Higher-levelS
knowledgeS
resources
Supply Chain Enablement Through ERP Development and Use
Source: Adapted from generic model by Bendoly (2005)
and exploitation doesnt have to be catalyzed by the resources within the

rm 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 rms can create the same result, even if a rm does not
possess that same imitable resource.
The concept of knowledge generation through imitable resource
usage among a network of rms 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 rms (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 exibility in this regardin sharp
contrast to any inexibility imposed by embedded standards. This diversity of opportunities in turn opens the door to levels of competitive
distinction that many rms 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 rm. This includes use of the system in identifying capabilities and driving new strategic directions by top-level managers, as well as
application in the weeding out of process constraints by front-line workers familiar with the direct links between the transactional data collected
and the ow of operational activities. Much of this is not the kind of use
mandated by system design, but rather promoted by a concerted organizational culture of development.
This isnt a missed ship. It still waits in the harbor for intrepid
rms interested in preventing extinction through inertia. When asked, Is
this as good as it gets? regarding resource planning technologies, competent and responsible managers need to feel condent in replying, You
aint seen nothing yet. They need to be aware of their options and of
deciencies 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.
199
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Index
Italic page numbers indicate material in tables or gures. Page numbers followed
by n indicate notes.
ABC inventory analysis logic, 125
Accenture, Institute for Strategic
Change, 72n
accountability of usage of ERP systems, 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, 8796; case study, 90 93;

dened, 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
216
Index
APICS (American Production and Inventory Control Society), 61, 65,

163, 163
APO (Advanced Planner and Optimizer), 53, 57
apparel industry, 98
appropriation of rents from investments, 132
APS (advanced planning and scheduling) systems, 37, 56 57
Asia-Pacic region benets 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; methodologies for PIA and evaluation, 185,
186; performance evaluation, 178
85; post-implementation audit
(PIA), 17778; research implications, 189 90
auditor bias, 189
Australia, 72n
authentication of objects, 164 65
Auto-ID technology, 155 71; vs. bar
codes, 161 63; capacitated planning 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
benets of ERP systems: vs. costs, in
perceptions survey, 26 29, 27, 33;
exploitation of, 19; identied in
Accenture studies, 72 75, 73, 74;
measurement and management, 81,
81 83, 82, 83; product vs. process,
3, 4; of upgrade modications,
192 93
benets of VMI programs, 119, 120
22
best t, 47 48
best-of-breed systems, 52 70; and
bolt-on benets, 193; current systems, 63 69, 65, 68; demographic
data in survey, 62 63; ERP characteristics, 53 56; functionality improvement, 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, dened, 56
bolt-on systems: current usage by ERP
rms, 63 69, 65, 68; evolutionary
Index
option, 193 94; functionality improvement, 56 58; recommended

in exploitation failures, 196 97;
SME use of, 49; as source of agility,
94, 95; study of value to rms, 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 exibility, 94, 94
bullwhip effect, 98, 108, 121, 128
business analysis, 79
business case, 176, 178
business intelligence project, 137,
13738
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, 9192
business transactions in VMI partnerships (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-manufacturing), 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 management, 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, planning, and replenishment) program,
112 13
channel performance and integration,
9799, 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 requirements planning), 168 69
CNC (computer numeric control)
milling machines, 166
cold turkey implementation approach,
177
collaboration: intra- and interorganizational, 55; in VMI programs, 109 10, 124
collaborative engineering systems,
132 34
collaborative forecasting, planning,
and replenishment (CFPR) program, 112 13
comanaged inventory, 109
commercial transactions, 160. See
also electronic data exchange (EDI)
217
218
Index
commissions for sales, 93

commodity stage of IT, 130
communication, intra- and interorganizational, 55
communication standards, industrywide electronic, 120, 128
companies: large companies, ERP
implementation, 38, 43. See also
rms; 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
conguration 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 ow, 167, 168 69
continuous improvement, 177
continuous replenishment, 109, 111
conversion strategies for ERP implementation, 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. benets, in
perceptions survey, 33
creativity, 135 36
critical mass of implementation, 75, 80
critical success factors, 13
CRM. See customer relationship management (CRM)
cross-training of workers, 39
culture change, 19, 33, 35
customer: benets 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
rm, 9192
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
Index
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 benet, 73 74, 81; multiple criteria, 185, 186; suppliercustomer, 141; from uncertainty
basis to risk basis, 155
decision-making coordination, replenishment strategies, 9798, 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 system, 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; suppliercustomer partnership, 141, 150
dynamic capabilities, 14, 197
dynamic demand, 168
EAI (enterprise application integration), 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, 11718, 127, 144
efciency of rm, 114, 120
efcient consumer response, 109
EFT (electronic funds transfer), 118
electromagnetic eld of Auto-ID
reader, 158, 159, 160
electronic communication standards,
industry-wide, 120, 128
electronic data exchange (EDI), 110,
111, 11718, 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, 11112
employee attitudes, 33
employees. See personnel
enterprise application integration
(EAI), 77
219
220
Index
enterprise computing systems, 87

enterprise resource planning (ERP)
systems: and Auto-ID technology,
163 64; characteristics, 53 56;
componentized systems, 184 85;
dened, 13; development phases,
173 77; enabling position, 2; evolution prescriptions, 19199; modication to classic systems, 144 48;
modules or extension systems, 49,
59; planning and scheduling, 165
69; pros and cons, 88; required investments, 172; successes and failures, 56 58; as VMI platform,
110 11
enterprise systems (ES): dened, 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 replenishment 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, 19798
extended supply chain, 112 13, 128
extensible markup language (XML),
127, 160
external systems of rms, 66 68,

69 70
extranets, 126
face-to-face sales, 92 93
factory, as unit of analysis, 140
factory planning and scheduling system, 60, 65, 69
failure mode effect analysis, 61
failure rates tracked by version, 165
FAS (nal assembly schedule), 99
feedback, 20 21, 178
File Transfer Protocol (FTP), 112
nal assembly schedule (FAS), 99
nance module, 59
nancial management, 73, 74
rms: demographic data in bolt-on
survey, 62 63; efciency of, 114,
120; integration of enterprise solutions, 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
rst-mover advantage, 96, 123, 150
attening an organization, 54 55
exibility as source of agility, 94, 94
exible manufacturing, 39
Flextronics, 150
ow-control products, 113
uidic self-assembly, 156
focus as strategy factor, 15
following agility, 96
forecast push inventory replenishment, 122
Forrester, J. W., 97
FoxMeyer, 37, 58, 180
frequency collision, 158
frozen time-fence, 101, 102
FTP (File Transfer Protocol), 112
Index
full information (FULL) sharing strategy, 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 (Nestl),
141 42
global competition, 36, 52
goal programming, 185, 186
go-live date, 21, 48. See also post-golive 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
identication 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 European companies, 76; conversion
strategies, 176 77; infrastructure
projects rst, 75
implementation stages of dyads, 148
52, 149, 151
India, 72n
industrial dynamics research, 97
industry-wide electronic communication standards, 120, 128
informate, 79 80
information asymmetry, 54, 133
information sharing: ERP-driven replenishment 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
221
222
Index
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 conditions, 138
internal purchase order, 118
internal systems of rms, 66, 69
international competition, 36, 52
Internet: and Auto-ID automated systems, 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) coordination strategy, 103, 104, 105, 106
inter-organizational value creation,
140 52; best practices, 148 52;
dyad management, 144 48; understanding customer needs, 141 44
inter-organization communication, 55
interrogators (tag readers), 158
interviewer bias, 189
intra-organizational (INTRA) decision-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 certication, 46
IT. See information technology (IT)
i2 systems, 53, 77
Japanese quality and view of technology, 131, 132
J. D. Powers award, 131
justication, 176
just-in-case inventories, 121
just-in-time delivery (JITD) program,
112
just-in-time (JIT) production planning, 112, 131
kanban order quantities, 112
key performance indicators, 61
Kmart, 111
knowledge-based view of rm, 16, 18,
33
knowledge enhancement, 20 21
Kodak, 78
Korea, 72n
labor turnover rates, 39
large companies, ERP implementation, 38, 43
leading agility, 96
lead management, 92 93
lead times in manufacturing and procurement, 100, 100
Index
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 survey, 22 26, 23, 33
linear programming, 169
local systems, 184
Lockheed Martin, Advanced Development Projects Unit, 134
logistics entity in inventory distribution, 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: German Mittelstand companies, 40;
production planning and scheduling, 99 102; replenishment strategies, 9799
make-to-stock (MTS) systems: customer linkage, 70; German Mittelstand 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 prescriptions, 19199; and performance

metrics, 183; in R&D organizations, 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 modeling, 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 strategy, 48
Mittelstand: dened, 36; eld studies,
40 42; German SMEs, 38 40;
summary, 49 51
223
224
Index
model elements on Internet, 171

modication projects, 193. See also
customization
modular product designs, 37
monolithic ERP systems, 184
Monster.com, 5758
Moores law, 90
motivational factors, 45, 45
motor vehicle design, 135
MPS (master production schedule),
100
MRP (material requirements planning), 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 schedules, 102 3
multiple-objective decision techniques,
176
Nestl 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,
11719
no information (NI) sharing, 102,
104, 105, 106
nonsubstitutable systems, 18
North Sea oil companies, 77
object naming service (ONS), 160
61, 161
OLeary, 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 fulllment module, 59
order-picking feature in bolt-on system, 61
order time-fence, 99 100
order winner/qualier characteristics,
129
organizational afliation of employees
in survey, 24, 25 26, 28, 29
organizational capability of VMI partnerships, 123 24
organizational change, 20
organizational standardization, 54
outranking, 185, 186
outsourcing of noncore components,
36, 39
overcondence bias, 187 88
Owens Corning, 57
Index
Palo Alto Research Center (PARC),

134
parallel conversion, 176
Pareto analysis, 117
part databases, 128
partnership in VMI program: compared with multiparty collaboration, 112 13; dened, 109; development process, 115 17, 116, 124;
implementation process, 11719;
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) system, 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 requirements and factors, 179 82;
metrics, 182 83, 183
performance measurement: applications, 80; for VMI programs, 120
22, 127
performance of rm: 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,
2132; in R&D organizations,
134 35, 135 36; VMI management, 123; VMI team participants,
11718. 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) systems, 37, 56 57; capacitated planning and automated scheduling,
165 69; factory planning and
scheduling system, 60, 65, 69; JIT
production, 112, 131; make-toorder 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, 17778; methodologies and
evaluation, 185, 186; performance
evaluation factors, 178 85; research 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
225
226
Index
process reengineering, 78
process vs. product, 3, 4
Procter & Gamble, 140
product activity (EDI 852), 118
product catalog information, 118
product data management (PDM) system, 61
product identication, 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. innovation, 132 34; survey on use of
IT, 136 38
product variety, 111
product vs. process, 3, 4
program infrastructure, VMI program, 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 identication (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,
97107; experimental analysis,
105 6; make-to-order production,
99 102; traditional, 9798, 102,
105; underutilization of, 9799,
106 7; vendor-manufacturer integration, 102 4, 104
research & development (R&D): intensity, 132; organizations, 134 36
research: on ERP, 13 14, 15; implications of PIA factors, 189 90; on
industrial dynamics, 97. See also
studies
reserved product /inventories, 112
resource-based view of rm, 16 18,
33, 197
resources as sources of competitive advantage, 16 17
resource usage, 19799
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 identication),
128, 156 57
risk basis, 155
Index
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, 9192, 95
SAP: Advanced Planner and Optimizer (APO), 53, 57; Centers of Excellence, 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), 9192, 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; eld
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, 9192; of practices vs. innovation, 132 34; as source of agility,
94, 95
standards groups, 162
statistical process control, 61
stock-keeping units (SKUs): inventory
policy decisions, 117; inventory replenishment 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; benets vs. costs,
26 29; contemporary perspectives
in, 16 21; conventional views of,
14 16; perceptions of ERP use,
2122; recommendations, 33 35;
227
228
Index
switch from legacy to ERP, 22 26;

usage of ERP, 30 32
strategy formulation, 173 75
structure-conduct-performance paradigm, 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 interviews, 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, 2132.
See also surveys
sunk costs, 196
supplier-assisted inventory replenishment, 109
supplier: benets of VMI programs,
120 21; in consignment agreements, 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, 9799,
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 rms, 136 38; perceptions of ERP use, 2132. 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 materials), 164
team participants in VMI partnership,
11718
technology in VMI programs, 110,
12728
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
Index
TQM (total quality management),

132
tracking and tracing, 164 65
traditional replenishment strategy, 97
98, 102, 105
trafc/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: benets 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 providers), 112
variability reduction, 4
variances in PIA evaluations, 189
vehicle dispatching, bolt-on interface,
61
vendor certication, 46
vendor managed inventory (VMI),
108 29; case study: NIBCO, 113
20; conclusions, 128 29; constraints 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, 11113
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 sustainability, 45, 50; in Mittlestand SME
study, 41; partnership recommendation, 196; targets of, 3738
229
230
Index
vendor software: dedicated VMI packages, 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
waste reduction, 4
Web-based VMI transactions, 111
WebSphere, 91, 95
work in process (WIP), 165
Wal-Mart, 98, 111, 140

warehouse management system, 59,
61, 67, 68
Warts, E., 43
Y2K deadline, 21, 43, 71, 76
Xerox, 134
XML (extensible markup language),
127, 160
Zara, 143 44, 151

Zuboff, Shoshana, 79

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

Elliot Bendoly and F. Robert Jacobs

STANFORD BUSINESS BOOKS

Stanford University Press

Library of Congress Cataloging-in-Publication Data

Introduction: Realizing the Epic Dream of ERP

E. Bendoly and F. R. Jacobs

ERP Rebirth and Advanced Viewpoints

Strategy as a Critical Factor in Applied ERP Success

S. Abdinnour-Helm and C. Lengnick-Hall

The New Users: SMEs and the Mittelstand

T. Schoenherr, M. A. Venkataramanan, A. Soni,

Enterprise Applications: Building Best-of-Breed

V. A. Mabert and C. A. Watts

Getting More Results from Enterprise Systems

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

Value Extensions Beyond the Enterprise

Agility Through Standardization: A CRM /ERP

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

ERP-Driven Replenishment Strategies in

E. P. Robinson Jr. and F. Sahin

ERP as a Platform for Vendor Managed Inventory

IT-Supported Productivity: Paradoxes and

D. A. Joseph and J. Ettlie

ERP as a Resource for Inter-Organizational

Future Visibility and Accountability

Enabling ERP Through Auto-ID Technology

E. W. Schuster, D. L. Brock, S. J. Allen, P. Kar,

Auditing the System in Use: Value Beyond the

degrees in industrial engineering and computer and information science,

Dr. Sue Abdinnour-Helm, Ph.D., is an Associate Professor of Operations

frequently on these topics to executive audiences. Jeannes work has been

business development, and marketing. He is interested in the application

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

MBA, and Ph.D. in management information systems from the University

Dr. Charles A. Watts, DBA, CPIM, Jonah, is a Professor in the Department

Introduction: Realizing the Epic Dream of ERP

Is this it, is this as good as it gets?

Debates over the value provided by ERP architectures have existed

Introduction: Realizing the Epic Dream of ERP

Strategic enterprise mgmt

Advanced planning & scheduling

The Enabling Position of ERP Architectures

Source: Adapted from Bendoly et al. (2004)

Fundamentally, ERP systems and their implementations represent

Introduction: Realizing the Epic Dream of ERP

Under the Microscope

To assist in groundbreaking efforts to contribute new knowledge

Introduction: Realizing the Epic Dream of ERP

Example product effects

Example process effects

Common DB. Elimination

Common DB. Tracking of

Common DB. Monitoring of

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

The role of this book is to provide both practitioners and researchers

Introduction: Realizing the Epic Dream of ERP

. . . Not whether you have an ERP system (system labels often

Introduction: Realizing the Epic Dream of ERP

the mind-set of IT staff, operational planners, and strategic managers,

Introduction: Realizing the Epic Dream of ERP

the focal extensions are critical to rms intending to position themselves

Introduction: Realizing the Epic Dream of ERP