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Electronic marketplaces versus enterprise resource planning ...

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Electronic marketplaces versus enterprise resource planning ...

  1. 1. 262 Int. J. Technology, Policy and Management, Vol. 3, Nos. 3/4, 2003 Electronic marketplaces versus enterprise resource planning: a comparison and decision methodology for supply chain management Markus Biehl* and Henry Kim Schulich School of Business, York University, 4700 Keele St., Toronto, ON M3J 1P3, Canada E-mail: E-mail: *Corresponding author Abstract: This paper addresses a firm's decision of whether to rely on the supply chain capabilities of enterprise resource planning (ERP) systems or to make use of electronic marketplaces (EMPs). The functionalities provided by the technologies, their costs and benefits, and strategic considerations are discussed as variables relevant to this decision. The tradeoff also depends on the firm's current level of capabilities and the processes that ensure its competitive advantage. Upon the analysis of these decision factors, the paper develops a decision methodology for the selection of these information technologies. The qualitative and quantitative decision models that are developed can together be used to make the decision between ERP systems and EMPs and the mix of internal and external supply chain capabilities. The qualitative model aids in the choice between an ERP system and an EMP and is based on a lifecycle approach. The quantitative model, a nonlinear mixed integer programme, can be used to mix and match different ERP systems or parts thereof with or without EMPs. Keywords: business-to-business; electronic business; electronic marketplaces; enterprise resource planning; internal and external capabilities; supply chain management. Reference to this paper should be made as follows: Biehl, M. and Kim, H. (2003) `Electronic marketplaces versus enterprise resource planning: a comparison and decision methodology for supply chain management', Int. J. Technology, Policy and Management, Vol. 3, Nos. 3/4, pp.262±284. Biographical notes: Markus Biehl is an Assistant Professor of Operations and Information Management at York University's Schulich School of Business. He holds an MS in management and manufacturing engineering from the University of Kaiserslautern, Germany, and an MS and PhD from the Georgia Institute of Technology. Prior to joining Schulich, Dr Biehl chaired the Operations Management department at the International University in Germany's Business School. His research interests include environmentally conscious manufacturing strategies, (green) supply chain management, and business-to-business e-commerce. Copyright # 2003 Inderscience Enterprises Ltd.
  2. 2. Electronic marketplaces versus enterprise resource planning 263 Henry Kim is an Assistant Professor of Information Systems, also at the Schulich School of Business. He is interested in information systems that facilitate data and knowledge for enterprise modelling, knowledge management, and e-commerce. His articles have appeared in journals such as the Communications of the ACM, Internet Research, BT Technology Journal, Business Process Management Journal, and Operational Research: an International Journal. He has consulted to industries and researched in laboratories in Canada, the US, the UK, and Australia. He received a PhD in Industrial Engineering from the University of Toronto. 1 Introduction and problem statement Rapid changes in information technology have had a major impact on how firms are managed. The greatest change has occurred in data intensive business functions, including finance, accounting, and supply chain management. In supply chain management, the use of information technology has allowed firms to connect to their suppliers and customers to exchange inventory and demand data and to improve planning, execution and control of supply chain functions, including logistics and manufacturing. The results have been tremendous in terms of cost savings and customer service [1,2]. The information technologies that facilitated these changes originally comprised electronic data transfer, then materials or enterprise resource planning systems and, more recently, electronic marketplaces (EMPs) [3]. Over the past few years, firms have been pushing towards implementing ERP systems and using EMPs to integrate their internal and external supply chains. These technologies offer overlapping supply chain capabilities. When a firm places an order, either system is capable of administering the order, transmitting it to the supplier, and generating the appropriate logistics forms such as the bill of lading. If an order is received, either system can generate invoices, transmit them to the purchaser, and generate logistics information. So which system should a firm choose? Should it implement a potentially costly ERP system when anecdotal evidence suggests that many firms achieve a negative return on such an investment [4] and that ERP implementations have been difficult and come with uncertain benefits [5]? Or should the firm subscribe to EMPs with the danger of the EMP faltering [6] in the foreseeable future? When research indicates that 70% of all US high tech firms have subscribed to at least one exchange but only 20% of them have actually performed transactions online [6], are EMPs really worth the cost of programming the required interfaces to the firm's information systems? Given the choice between using ERP systems and EMPs, what should a firm implement to facilitate its supply chain activities? This paper attempts to shed light onto these questions by investigating the relevant decision factors, such as the costs and benefits of the respective technology and the firm's strategy, and providing a decision methodology for the selection of these two information technologies. Important differences exist between the capabilities of ERP systems and EMPs, but only one paper is known to have compared the functionality of different ERP packages to each other [7]. This comparison, however, is not detailed enough for the purpose of investigating supply
  3. 3. 264 M. Biehl and H. Kim chain functionality. Moreover, since its publishing date, ERP vendors have added significant improvements to their software packages. To our knowledge, ours is the first paper that directly compares the functionalities of ERP systems with those of EMPs based on an extensive review of the trade literature. The functionality of the chosen systems is a major factor in the decision of which technology to use. Implementing an ERP system increases a firm's internal supply chain capabilities whereas using EMPs means that the firm accesses external benefits. The choice of internal versus external capabilities is determined by a firm's strategy and its core competencies [8]. However, the tradeoff between internal and external capabilities is examined within the literature mainly within the context of technology management (e.g. [9±12]) rather than supply chain management. In this paper, we investigate the relevance of both streams of literature with regards to supply chain management and the choice between ERP systems and EMPs to improve a firm's supply chain capabilities. In the next section, we investigate the functionalities provided by ERP systems and EMPs and critically compare them in terms of supply chain functionality. In the third section of the paper, we extend the discussion of decision factors by adding strategic considerations as well as the costs and benefits of implementing either technology. In the fourth section, we introduce a qualitative and quantitative decision model to help in making a selection using the decision criteria identified in the previous sections. Lastly, we conclude the paper by summarising the most important findings and suggesting further research. 2 Supply chain capabilities of ERP software and electronic marketplaces In this section we discuss ERP and EMP capabilities in preparation for a critical comparison with a focus on supply-chain functionality. We take a historical perspective since the roots of the technologies partially determine which functionality the systems provide. 2.1 ERP software The origin of ERP systems can be traced to material requirements planning (MRP) applications. In the 1970s, MRP systems became popular with large manufacturing firms dealing with many or complex products because of their ability to break down customer demand (`independent demand') into demand for components and materials (`dependent demand') and thus link a firm's demand side with its supply side while helping the firm to control inventories and the shop floor [13]. In the 1980s, manufacturing resource planning (MRP II) systems integrated MRP functionality with a firm's financial and marketing systems [14], thus reducing the need for multiple data entry and improving data accuracy. ERP systems are an extension of MRP II systems. ERP packages attempt to integrate data flows across all business functions and include optimisation and reporting routines. SAP AG was the first software firm to release an ERP package [15]. In the late mid-1990s other software firms quickly recognised the trend and started designing similar packages. PeopleSoft issued a human resources package in
  4. 4. Electronic marketplaces versus enterprise resource planning 265 1989 and added other functions subsequently; JD Edwards, founded in 1977, issued its first full ERP system in 1996 [16]; i2 Technologies, a leader in scheduling software, started offering enterprise-wide solutions in 1997; Oracle started with a financial package in 1989, added human resources and manufacturing in the following years, and issued a first integrated package in 1994. Table 1 shows the supply chain functionality provided by the software of the four largest ERP vendors. While the functionality of other ERP packages has also been investigated, only four are shown to conserve space. Table 1 Overview of ERP supply chain capabilities of the four largest ERP vendors Systems SAP AG PeopleSoft JD Edwards Oracle Manufacturing 1970s 1996 1996 1992 Supply chain 1995 Procurement 1994 Purchasing, 1996 sales & order 1994 Costing and billing; automation incl. comparison mgmt, procurement, Link w/legacy systems; (e.g. orders) shopping, MRP EDI and agent technology; 1996 Internet bulk pricing 1998 Planning/ Workflow; Mobile capabilities 1995 Billing and scheduling, order application 1998 End-user adjustments, mgmt & tracking 1995 Data warehousing; ordering, receiving, invoicing 1999 Sales online analytical invoicing; Business 1996 Order mgmt Configurator applications; web access to performance invoices, payments 1997 Web enabled 2000 Online 1999 Product Data module marketplace; 1996 Web customer & Mgmt (integration supplier applications; web 1998 Order promising, ERP fully web- supplier scheduling, w/logistics); web- demand planning; enabled; Real-time hosted applications repetitive ordering web-based self-service; promise-to-deliver and portals Data warehouse, 2001 Web-enabled 1997 Industry-specific ( online analytical product applications; order mgmt; 2000 e-tendering, applications configuration; SC planning, order mgmt collaborative Order promising automation, supplier 1999 Internet scheduling (receipts, procurement storefront, integration 2002 Collaborative authorisations), product 2002 Full view of with SC mgmt forecasting; configuration transactions, supplier module; Enterprise web-based customer qualification and Performance Mgmt and supplier self- 1998 Strategic procurement selection, purchasing, service (spending patterns, track 2000 Scheduling, & overages, supplier performance) contract negotiation billing; invoicing; and mgmt, real-time ordering; 1999 Hosted e-commerce relationship web client and ERP applications; sales monitoring; analysis; internet modules: Sourcing 2001 Acceptance & CRM, SC & procurement; translation of partners' internet SC (virtual SC, data files into usable collaboration, auctions); data format; Order mgmt (self-service, Promotions mgmt; guided selling); Procurement; Financial performance Exchange (B2B commerce)
  5. 5. 266 M. Biehl and H. Kim Table 1 Overview of ERP supply chain capabilities of the four largest ERP vendors (continued) Systems SAP AG PeopleSoft JD Edwards Oracle Supply chain 2002 Supplier rating 2000 Marketing campaigns & analysis; & intelligence Requisitioning & 2001 eBusiness purchase order mgt; (eCollaboration); SC Collaborative selling; exchange, Product trading partner mgmt; development exchange, strategic sourcing; Exchange marketplace Mobile services; (design, planning, eSettlements catalogue, auctions) 2002 Most eBusiness applications mobile-enabled Logistics 1995 Logistics 2002 Integrated 1991 Distribution 1995 Shipments 1996 Transportation shipping w/3rd party planning and 1997 Inventory visibility, planning & logistics providers execution fulfilment scheduling, internet 1994 Warehouse 2001 Transportation SC, capacity planning) mgmt exchange (logistics services, 1997 SC mgmt 1996 Inventory shipping documents) 2000 Transportation mgmt planning, vehicle 1998 Warehouse & scheduling, transportation mgmt collaborative transport 2001 Real time planning inventory mgmt; 2002 Full SC visibility, web-distribution supplier qualification, planning contract negotiation and mgmt) Legend: mgmt = management; SC = supply chain Sources: Trade literature, press releases, and company websites In comparing the supply chain functionality of the ERP packages, two important insights emerge. First, ERP software firms initially released their systems with very different functionality (e.g. PeopleSoft focused on human resources, Manugistics on MRP) and implemented complete ERP packages with supply chain capabilities at different stages. Most packages now offer full supply chain capabilities that include the planning and execution of marketing activities (the demand side), shop floor and inventory management, ordering, billing, and invoicing, including the possibility of delegating ordering and receiving to the end-user (`desk top receiving'). Most packages also facilitate scheduling and optimising distribution through management of logistics suppliers or transportation planning. Clearly, this functionality denotes a significant increase in capabilities over MRP II systems and original ERP systems (see Table 2).
  6. 6. Electronic marketplaces versus enterprise resource planning 267 Table 2 Typical ERP software capabilities Purchasing Contract Purchases RFQ Capability Blanket Purchases Update Order Status via Internet or EDI Approved Source List ERP Financial Manufacturing Execution Systems/Shop Floor Modules Warehouse Management Customer Relationship Management Human Resources Supply Chain Management/Planning Forecasting Logistics/Distribution Quality Control Markets Discrete Food & Beverage Repetitive Retail Complex Mixed Mode Automotive Repair Remanufacturing Large Companies Process Mid-sized Companies Pharmaceutical Small Companies Source: adapted from BHR Software Inc. [17] Second, ERP vendors started implementing internet capabilities in 1995. They eventually included online ordering and sales, the linking of suppliers' and customers' ERP systems to the firms', online analytical processing to create (near-) real time processing and promising of orders and increase inventory visibility, and access to financial clearinghouses for online financial transactions. Software makers have also added functionality that allows linking ERP systems to EMPs and legacy systems. Collaborative sourcing has been incorporated into the packages as well as contract negotiation and a variety of pricing procedures such as dynamic pricing and auctions. Moreover, to enable firms to actually use these features outside publicly accessible EMPs, SAP and i2 have set up private EMPs ( and, respectively) in which their clients can trade with a set of pre-defined partners. Some ERP systems now attempt not only to help manage the complexities of supply chains, but offer proactive solutions that span from the design of marketing campaigns to the preparation of manufacturing for these activities. For example, Manugistics' Enterprise Profit Optimization combines a cost reduction approach through supplier relationship management and supply chain management with revenue-enhancing pricing and revenue optimisation on the demand side [18]. In conclusion, it is apparent that ERP systems seem well suited to providing firms with a high level of internal supply chain capabilities spanning from shop floor control to logistics planning and from supply management to marketing and demand management. Given this high level of capabilities on the part of ERP systems one might ask why a firm would choose to access external capabilities in the form of EMPs.
  7. 7. 268 M. Biehl and H. Kim 2.2 Electronic marketplaces Whereas ERP systems have a comparatively long history of managing resources, EMPs are at the most only a few years old. They were incepted well after the advent of the internet. In comparison to ERP systems, their initial focus was on market-making (e.g. [19]). More recently, as many EMPs faltered, the remaining ones found that offering firms supply chain functionality was important to their survival. The landscape of business-to-business EMPs is very crowded. By April 2002, more than 1,700 exchanges were active [20]. For the purpose of this research the analysis of EMP capabilities was carried out by selecting four well-known firms as representative. The firms were chosen based on their standing as a market-maker (a pure EMP, e.g. ChemConnect [19] and Coviscint [21]) versus a supply chain enabler (a firm supplying software for EMPs, e.g. CommerceOne [22] and Ariba [23]). Analysing the functionalities provided not only by major EMPs but also by the EMP-enabling software provides a good overview of capabilities that can be offered by EMPs. Table 3 shows a comparison of the supply chain functionality currently offered by the four firms. From Table 3 we note that both EMPs and software firms offer sourcing functionality that automates the creation, placement and administration of orders and requests for quotations (RFQs), as well as order tracking and automatic payment. Suppliers can be selected and new suppliers can be searched. Other commonalities include collaboration tools, such as collaborative platforms or workspaces that allow the real-time exchange of data and documents, supplier performance evaluations, and integration with ERP and legacy systems. Table 3 Capabilities provided by EMPs and EMP-enabling software Electronic marketplace Software firm providing EMP functionality CommerceOne Ariba Covisint ChemConnect Sourcing/Purchasing Sourcing, sourcing Sourcing analysis; Sourcing: automatic the Sourcing: Request intelligence; sourcing procurement purchase order approval and for quotes (RFQ) activity reporting; compliance; workflow process; ordering automation; purchase order benchmarking; order from external websites via open collaboration; creation (incl. RFx routing; order interface; requisitions using electronic templates); purchasing aggregation; compliance customisable forms; real-time messages; approval controls, monitoring; full-cycle order tracking; inventory forecasting; approval process process integration control; request information for inventory control; with workflow and Plan-to-pay purchase orders for non- automatic order business rules; automation; payment catalogued items generation purchasing cycle visibility; invoice Request for new automation reconciliation suppliers; Quotation Analysis Supplier discovery performance Invoice-to-payment (business, product, and tracking; online process automation; category information), account mgmt payment terms mgmt evaluation, and Order visibility/ relationship mgmt; tracking supplier communications; on suppliers
  8. 8. Electronic marketplaces versus enterprise resource planning 269 Table 3 Capabilities provided by EMPs and EMP-enabling software (continued) Electronic marketplace Software firm providing EMP functionality CommerceOne Ariba Covisint ChemConnect Sourcing/Purchasing Supplier selection & Automated catalogue Quotations: real-time, electronic management; self- mgmt; sharing of RfQ document creation/ service (availability, catalogues management (incl. electronic confirmations, announcement); revision advance shipping tracking; templated responses notes, invoices, Catalogue: refine content into payments) internet ready, transactional Supplier mgmt of data; online catalogue data catalogues, pricing creation and approval and orders Negotiation/Collaboration Variety of auction Collaborative Auctions: multi-variable Real-time auction types and bids workspaces; bidding, multi-line items, format Structured one-on- electronic messaging; overtime; proxy Non-anonymous one negotiation communication; bidding; public or private negotiation; private (single and multi- exchange business auctions; multiple auction types negotiations round) documents Collaboration: virtual project Collaboration on Collaborative platform teams; project mgmt; document the sourcing and (visibility to legacy mgmt & revision control; inventory mgmt, systems, online discussion forums; workflow order fulfilment, collaboration, process engine; visualisation of CAD procurement, and mgmt); real-time drawings; conferencing and business information exchange application sharing; e- intelligence communications Contracts Creation, review, Automation of negotiation, award contract creation and mgmt of contracts Logistics Sharing of shipping plans Monitoring of rail with logistics providers; customers; generation/transmission of execution of advance shipping notices logistics services; logistics intelligence Performance Spending analysis by Operational Supplier ratings; online Supplier commodity, supplier, effectiveness supplier reviews; milestone performance project, or contract monitoring status control; supplier tracking Multi-dimensional Supplier key scorecards; supplier progress spend and supplier performance indicators performance analysis Supply Chain Integration Integration with ERPs, Integration with ERP Integration of back-end Integration with back-office systems and and legacy systems systems ERP systems browser infrastructures Sources: Trade publications, company websites
  9. 9. 270 M. Biehl and H. Kim Differences exist between the software firms and EMPs in terms of contracting and logistics. First, CommerceOne's and Ariba's softwares offer the possibility of creating contracts, a feature not yet offered by EMPs. Second, while the EMP software allows the management of suppliers and processes, only EMPs provide readily set up logistics solutions through using logistics service providers that act as suppliers in their marketplaces. This allows buyers and sellers to execute the shipping of their products and to generate all necessary shipping forms and information. Table 3 also reveals other interesting insights. Ariba, while providing collaborative workspaces, does not support auctions. This might stem from Ariba's mission to be a match maker between suppliers and buyers and from a philosophy that stresses the collaborative over the competitive sourcing approach. ChemConnect's lack of support for catalogues and some other services available through the software makers and Covisint points to its purely public nature and stems from its history as a match maker rather than a strong provider of transactional capabilities. The analysis of other EMPs (E2open [24], Elemica [25,26], GHX [27], and Converge [28]) shows that EMPs usually do not implement all available supply chain functionality, leaving subscribers with the task of selecting the EMP(s) with the appropriate capabilities. 2.3 Critical comparison of ERP systems and EMPs The previous discussion of ERP systems and EMPs reveals that both offer overlapping supply chain functionality (see Table 4). In particular, ERP systems only lack the interactive capabilities of EMPs when they are not connected to a supplier network (value added network) or an EMP. In contrast, not all EMPs support the creation and management of quotations, supplier management, auctions, or the measurement of operational performance (as opposed to the performance of suppliers). Moreover, EMPs do not usually support distribution management, i.e. the scheduling and management of a logistics fleet and network. One of the major differences between ERP systems and EMPs is their focus. ERP systems evolved from a focus on internal management of complexity and an integration of data flows within firms. EMPs, in comparison, were conceived for the purpose of facilitating collaboration and connecting the demand side to the supply side to facilitate market mechanisms previously used only offline. ERP system markers have tried to integrate connectivity into their packages by equipping their systems with the capability to emulate multiple EDI standards and collaborating with EMP software firms to implement market-making functionality such as auctioning. However, these capabilities can be used only if ERP systems are hooked up to EMPs or value added networks. Wal-Mart, for example, has linked many of its 25,000 suppliers to a VAN and, as a result, improved demand forecasting and order-processing [20].
  10. 10. Electronic marketplaces versus enterprise resource planning 271 Table 4 Comparison of ERP and EMP supply chain functionality Functionality ERP systems Electronic marketplaces Selling/purchasing Sourcing/purchasing + + Sourcing, billing, payment automation + + Quotations + o Contract creation and management + + Supplier management + o Catalogue management + + Interaction Collaboration + Negotiation + Auctions o Logistics Logistics management + Distribution management + x Performance Operational performance + o Supplier performance + + Integration Supply chain integration + + Legend: + Usually supported Supported when connected to supplier network or EMP o Supported by some EMPs x Usually not supported In contrast, using an EMP's connectivity gives immediate access to a base of potential suppliers and customers in proportion to the EMP's size. At worst, a firm can use a web-interface to submit requests for quotations or bids and interact with its supply chain partners. Moreover, using an EMP's functionality, the firm can take advantage of automatic order processing, invoicing, and billing once all appropriate information has been keyed in. However, while such a sourcing or sales system might be viable for a firm with few transactions, it will not suffice for most other firms. Given that order information is intrinsically linked to the demand side, typing in order information by hand is not a feasible solution for firms with a complex manufacturing structure or demand for a number of different products (i.e. a wide scope of orders) [29]. Moreover, EMPs by themselves do not provide an integrated approach that includes order promising (except from inventory) or profit maximisation mechanism such as offered by Manugistic's ERP solution. It is unlikely that EMPs will ever offer this solution, unless they are integrated with an ERP or similar system.
  11. 11. 272 M. Biehl and H. Kim Having discussed commonalities and differences between ERP systems and EMPs, we now proceed to investigate the firm's decision of which technology to implement. 3 Strategy, costs, and benefits: further decision factors in choosing a supply chain solution Recall that, apart from functionality, a fundamental difference between ERP systems and EMPs also lies in the generation of supply chain capabilities. The implementation of an ERP system usually represents a significant increase in a firm's internal supply chain capabilities. Drawing on the existing literature, White [10] finds that firms are more likely to engage in external capabilities when there is a low level of technical uncertainty. This certainty is not necessarily a given for EMPs, as is reflected in the speed at which new features are added and the fact that numerous EMPs close down only a few years after their inception [6]. Even if firms used EMPs more extensively, technological uncertainty would prevent them from internalising capabilities [11], further indicating that a firm with a low level of internal supply chain capabilities will barely benefit from EMPs in terms of learning or experience. In fact, from recent research we can deduce that, in order to use EMPs effectively, firms need to have successfully reengineered their business processes, possess extensive knowledge about their EMPs and their procedures, and understood the cause-and-effect relationships for their EMP activities [9]. These findings make clear that it is not entirely possible to substitute internal with external supply chain capabilities. Instead, regardless of the firm's choice, a certain level of internal capabilities is needed to effectively use EMP functionality. A discussion of internal versus external capabilities (i.e. ERP systems versus EMPs) needs to also consider a firm's competitive advantages [30] which are vital to a firm's long-term survival. Competitive advantages have usually been developed over a long period of time and are typically more difficult and expensive to change than comparative (short-term) capabilities (also see [8]). Clearly, if a supply chain process provides a competitive advantage to the firm, it should be kept in-house [31]. In other words, processes critical to a firm's business should not be outsourced to EMPs, where they can easily be replicated by a competitor. Instead, the firm should continually improve those internal capabilities to main the competitive advantage. It may use business process reengineering tools to simplify these processes [32,33] or implement an ERP system to further improve their performance. So far, we have considered exclusively qualitative decision variables for selecting an internal or external supply chain solution, including supply chain functionalities provided by ERP systems and EMPs as well as strategic factors. The last category of decision variables, the costs and benefits of the two technologies, is mostly quantitative in nature. The cost of a supply chain solution consists of two parts: the fixed implementation cost and the variable usage cost. ERP systems are usually implemented internal to the firm and, therefore, present a large fixed setup cost with a relatively small variable license and maintenance cost. For example, a recent survey of US manufacturers found that, on average, firms spend almost 6% of their
  12. 12. Electronic marketplaces versus enterprise resource planning 273 annual revenues (those with less than $50 million annual revenues spend an average of 14%) on ERP system implementation, with more than 40% spending less than $5 million [2]. Recall, however, that some supply chain functionalities cannot be used unless the system is connected to an EMP or VAN. Hence, the fixed cost of providing connectivity for the ERP and the variable cost of the VAN or EMP must be added if it is desired. An EMP, on the other hand, requires only a small fixed cost to link it to the firm's information systems. This fixed cost can range from a few thousand to a few million dollars, depending on the complexity of the interface required. However, the EMP's variable costs may be higher than those of an ERP system. For example, ChemConnect charges between 0.2% and 2% of the transaction volume [34], which may significantly impact a firm's profit margin if it operates in a competitive industry. In contrast, value added networks are more costly to set up than EMPs, but offer a lower variable cost. In terms of benefits, almost 70% of ERP users receive a return on their investment of 16% or more [2], a number that satisfies most internal rates of return and largely refutes anecdotal evidence of disastrous implementation results [4,5]. The most important qualitative benefits of ERP systems include a shorter information response time, an increased interaction across the enterprise, a shorter order cycle, and an improved interaction with customers and suppliers [2]. In comparison, about 33% of the firms which used EMPs claim that `investments in selling online to consumers are paying off. But less than 20% say extranets, electronic supply chains [. . .], and electronic marketplaces have produced returns' [1]. This finding is in stark contrast to the cost reductions promised by the EMPs (e.g. [19]). The reason for this might be that EMPs tend to be more profitable for buyers than for sellers. Qualitative benefits from EMP participation include `improved customer service, greater knowledge of their customers' preferences, a greater presence in their markets, improved brand recognition and increased efficiency of supply chains/ reduced processing costs' [1]. The costs and benefits are related to the order volume a firm transacts over the ERP system (connected to customers or suppliers) or the EMP. For the purpose of this analysis, the order volume is classified along two dimensions: the order scale and the order scope. An increase in the order scale means that the order volume increases, but not the variety of items procured. An increase in the order scope represents an increase in the number of different items ordered but not necessarily an increase in the order scale. The impact of the order scale and the order scope on the choice of an ERP system versus EMP can be easily illustrated. In the simplest case, which holds for many small and some medium-sized firms, supply chain activities are performed manually and orders are submitted by mail, e-mail, or fax. An increase in the order scale will not have an impact on the efficiency of the ordering system, only on the transaction cost which is usually proportional to the transaction volume for EMPs and constant for VANs. Given that the firm has been typing in orders to start off with, an EMP's supply chain capabilities provide a significant simplification of the supply chain process. In addition to reducing the transaction costs, reducing errors due to the partial automation of processes, and extending market reach, using an EMP's negotiation or auction functionality as well as order aggregation
  13. 13. 274 M. Biehl and H. Kim mechanisms (if offered) usually also results in lower sourcing prices [1,19,21]. If a firm's order scope grows, however, it must start using more efficient ordering methods. Clearly, an ERP system is well suited to managing the complexity that comes with a growing scope of items and, hence, would be the preferred technology choice. For example, orders can then be generated and printed automatically or directly faxed to suppliers through the ERP system. As a result, the firm can expect a higher quality of information, better inventory management, and decreased IT costs [2]. Having discussed all relevant decision variables in this section, the next section introduces two models that support the decision between an ERP system and the use of EMPs. 4 Decision models for selecting supply chain capabilities In this section, two models are introduced that provide a methodology for deciding between an ERP system and an EMP solution. First, a qualitative model is introduced which can be used for strategic level planning. Once this model has been applied, the quantitative decision model may be used for the selection of an operational solution. The operational solution involves the actual choice of an ERP system or components of multiple ERP systems either as a stand-alone solution or in conjunction with one or more EMPs. 4.1 ERP/EMP integration model The following qualitative decision model is based on the above discussion of the decision factors and considers the firm's strategy in terms of competitive processes as well as the order scale and order scope as proxies for costs and benefits. Recall that processes that provide the firm with a competitive advantage tend to result in an internal solution. EMPs may be used for less critical processes. Moreover, as its order scale grows, a firm can take advantage of EMPs to gain cost reductions in the sourcing process. As the order scope increases, however, an ERP system is needed to help the firm manage the growth in complexity. Examining these findings within the context of a choice between ERP systems and EMPs and borrowing from the lifecycle approach (e.g. as used in the BCG product matrix) leads to the ERP/EMP Integration Model shown in Figure 1.
  14. 14. Electronic marketplaces versus enterprise resource planning 275 Figure 1 ERP/EMP integration model Figure 1 classifies a firm's current state according to its use of ERP systems and EMPs (see Figure 1) and shows the possible progressions through the technology landscape. In the simplest case, a firm is performing all supply chain processes either manually or with the help of non- or partially integrated legacy systems (Island). This state is appropriate for firms with a small order scope and order scale. Sensitive processes are performed internally. If the firm then experiences an increase in the scale of orders, it may take advantage of using an EMP. This state is termed External Integration. Internal supply chain processes are still performed as in the Island state, external supply chain capabilities such as purchasing and billing automation help the firm decrease the transaction cost while the access to a wider range of suppliers as well as negotiation and auctioning mechanisms may reduce the cost of products. Note that the firm must be careful to keep sensitive processes in-house. However, as the firm grows and its order scope increases, it must consider transitioning to a fully integrated state. The state of Full Integration marries internal with external supply chain capabilities and gives the firm the possibility of taking advantage of the full range of supply chain functionality offered in the market. The path from Island through External Integration to Full Integration is taken by many growing small and medium sized firms. Again, while taking the last step, the firm must be careful not to outsource processes that provide a competitive advantage. If, on the other hand, the firm's order scope grows, it is advisable to first implement an ERP system to reach the Internal Integration state. This is the path most manufacturing firms have taken as they deal with complex product structures and benefit from the management of the resulting order scope. The firm increases its internal supply chain capabilities and keeps all competitively relevant processes in-house. As the order scale starts increasing, however, the firm must consider integrating its ERP system with an EMP or VAN to take advantage of collaborative and logistics functionality that can be achieved only with integrated systems. Hence, the firm reaches a state of Full Integration. More than 30% of US manufacturers progress along this path [2].
  15. 15. 276 M. Biehl and H. Kim Lastly, starting out from the Island state, a firm may directly progress to the Fully Integrated state. This transition is appropriate if the order volume grows in terms of both scale and scope. Due to the mix of internal and external capabilities, the firm has the choice of keeping important processes in-house while taking advantage of EMP connectivity. About 20% of US manufacturing firms have taken this route [2]. Again, when choosing this path, the firm must be careful to differentiate between strategically important and less important processes. The former should be handled by internal systems; the latter may be implemented using either an internal or external solution. Once the strategy for an ERP/EMP implementation has been chosen, the question still remains which systems and EMPs to select. Clearly, making this choice is a function of what these alternatives offer and how much they cost. In the following section, a decision model is developed that helps in making this decision. 4.2 Mixed integer non-linear decision model The ERP/EMP Integration Model can be successfully used as a strategic-level planning tool. Once the firm knows which path to take, the following model can be applied to aid the firm in selecting a set of ERP system(s) and EMP(s). To find an operational solution to the decision problem, it is useful to first narrow down the alternatives to a few ERP systems and EMPs. Given the discussion of decision factors in Sections 2 and 3 of the paper, the firm must determine the following information about the systems: * the functionalities offered by each of the candidates by themselves * overlapping functionalities particularly between ERP systems and EMPs * the fixed and variable costs and benefits associated with the candidates. Typical costs and returns of ERP systems and EMPs are given in the previous section and can be found in [1] and [2], respectively. In addition, an estimate of the cost of integrating each ERP system with each EMP must be made. The cost and benefits for each candidate may then be aggregated and discounted over the decision horizon using an internal rate of return. These data are used in a mixed integer non-linear decision model to derive the most beneficial solution (see below and Table 5). In the simplest case, the solution of the proposed optimisation model may consist of implementing only an ERP package, using only an EMP, or implementing a combined solution. In other words, the quantitative model is capable of suggesting the firm's optimal position in the qualitative model introduced above. ˆ ˆ ˆ ˆ ˆ w—x z ˆ PRi Xi ‡ PMj Yj À HRMij Xi Yj À HMMjl Yj Yl À Uk Zk …1† i j iYj jYlTˆj k ˆ ˆ ˆ ˆ sXtX CRik Xi ‡ CMjk Yj À CRMijk Xi Yj À CMMjlk Yj Yl i j iYj jYlTˆj …2† ‡ Zk ! Lk V k P f1Y 2Y F F F Y Kg
  16. 16. Electronic marketplaces versus enterprise resource planning 277 ˆ Xi 1 V i P f1Y 2Y F F F Ig …3† i ˆ Yj n V i P f1Y 2Y F F F Y Jg …4† j Zk ! 0 V k …5† Xi Y Yj P f0Y 1gV iY j …6† Lk P ‰0Y 1ŠV k …7† Table 5 Variable definitions for the nonlinear decision model Xi = Decision variable indicating whether ERP system i P f1Y 2Y F F F Y Ig is implemented; Xi P f0Y 1g Yj = Decision variable indicating whether EMP j P f1Y 2Y F F F Y Jg is implemented; Yj P f0Y 1g; note that I P f1Y 2Y F F F Y Jg is used interchangeably with j where interactions between EMPs are represented Zk = Decision variable indicating to which degree supply chain functionality k P f1Y 2Y F F F Y Kg does not meet the firm's needs; Zk P ‰0Y 1Š PRi = Expected discounted payoff (benefits±costs over the decision horizon) of implementing and using the ERP System i PMj = Expected discounted payoff of linking and using the EMP j HRMi j = Discounted cost (benefit) of introducing ERP system i and EMP j at the same time and linking the systems to each other HMMj l = Discounted cost (benefit) of introducing the set of EMPs j and l, with j Tˆ I, at the same time and linking the systems to each other Uk = Unit cost of not meeting the desired level of supply chain functionality k; Uk ! 0 V k CRi k = Capability level of ERP system i for carrying out functionality k; Cik P ‰0Y 1Š, where 1 represents the highest possible capability level across all ERP systems and EMPs CMj k = Capability level of EMP j for carrying out functionality k; CMjk P ‰0Y 1Š CRMi jk = Interaction term for combined capability levels of ERP system i and EMP j for carrying out functionality k; CRMijk P ‰0Y 1Š CMMj lk = Interaction term for combined capability levels of EMPs j and l, with j Tˆ I, for carrying out functionality k; CMMjlk P ‰0Y 1Š Lk = Capability level L desired by the firm for functionality k; Lk P ‰0Y 1Š n = Number of EMPs to be subscribed to
  17. 17. 278 M. Biehl and H. Kim Equation (1) depicts the objective function that maximises the payoff from the selection of an ERP system and/or EMP(s). The decision variables, Xi and Yj , are binary and represent the selection of ERP systems and EMPs, respectively. The objective function considers the expected discounted payoffs from the ERPs (PRi Xi ) and EMPs (PMj Yj ). In addition, the objective function contains the cost of the selected solution not providing the required supply chain functionality (`underperformance cost', Uk Zk ), and the cost (benefit) of introducing two systems at the same time (economies of scale) and linking the ERP system with the EMP (`integration cost', HRMij Xi Yj ). Note that the integration cost is non zero only if a set of systems has actually been chosen. In addition, if multiple EMPs are chosen, the EMP interaction cost, HMMil Yj Yl , may be invoked in the case overlapping benefits. The interaction cost can be used to reflect the possibility that the sum of the discounted benefits of the EMPs is greater than the actual benefits derived. Since EMPs are frequently chosen to complement rather than substitute another, however, the interaction cost term will frequently be negligible. The first set of constraints (Inequality 2) models the levels of all functionalities (k ˆ 1 through K) provided by the ERP systems (CRik ), EMPs (CMjk ), and interaction terms between the ERP systems and EMPs (CRMijk ). The levels of the functionalities are scaled between 0 and 1 (see Equation 7), where 1 represents the estimated highest level of functionality possible considering any solution currently on the market (i.e. the benchmark). The sum of the selected functionalities must be at least as great as the required functionality, Lk . If a selected solution does not meet this requirement, Zk becomes non-negative to invoke the underperformance cost, Uk Zk , of the missing level of functionality k. If a certain functionality is important to the firm, the associated unit underperformance cost, Uk , will reflect this fact and steer the firm clear of sub-optimal technology. Moreover, Inequality (2) contains an interaction term (CRMijk Xi Yj ) that adjusts the overall levels of functionality for the amount different systems overlap in terms of functionality. For example, if the firm's pre-selected options contain an ERP system and an EMP whose sourcing functionalities overlap, this fact would be reflected in the interaction term to ensure that those functionalities are not double counted. Note that this term does not correspond to the integration cost term in the objective function. Similarly, the interaction term CMMjlk Yj Yl adjusts for functional overlaps between multiple EMPs. Equations (3) and (4) ensure that only one ERP system and n EMPs are selected, respectively. The fourth constraint explicitly allows for the selection of multiple EMPs since firms often subscribe to a portfolio of EMPs to access significantly different functionalities. The number of EMPs allowed, n, can be adjusted to reflect the firm's need. The set of Inequalities (5) ensures that the decision variables associated with the underperformance cost, Zk , remain non-negative. This has the effect that over-performance along the supply chain functionalities, k, is not rewarded since the firm essentially implements unusable `overcapacity'. Lastly, while the variables Zk are real numbers, Equation (6) ensures that the ERP and EMP decision variable are binary.
  18. 18. Electronic marketplaces versus enterprise resource planning 279 The quantitative decision model is simple in nature and basically helps in the task n of making comparisons, where k represents the number of ERP systems and k EMPs (or parts thereof) to be chosen and n the total number of ERP systems and EMPs considered. Note that this number decreases if n is partitioned into ERP systems and EMPs and a certain number of each has to be chosen. In this case, the number of combinations decreases to: xum˜er of i‚€s ™onsidered xum˜er of iw€s ™onsidered X xum˜er of i‚€s to ˜e sele™ted xum˜er of iw€s to ˜e sele™ted Clearly, since some firms pick and choose modules from different ERP systems and many more subscribe to a few EMPs at the same time, the number of options investigated (k) is large and, hence, a direct enumeration of possible solutions becomes tedious even for smaller problem sizes and nearly intractable for large problems. This model helps in evaluating those options by taking into account both the functionalities offered and the expected monetary consequences. A strategy for applying the model will be discussed in the next section. The model can be easily expanded or modified. First, it can be modified to allow for the selection of a portfolio of multiple parts from different ERP systems and different EMPs. In this case, the binary restriction on Xi and Yj (Equation 6) can be dropped and an interaction term introduced into Inequality (3) that takes into € account the ERP systems' functional overlap (À CRRimk Xi Xm , with iY m P iYmTˆi ‰1Y 2Y F F F Y IŠ). Moreover, the constraint on the number of ERP systems (Inequality 3) is relaxed and the payoff and cost terms in the objective function (PRi , PMj , PRMij , Uk , HRMij , and HMMil ) may be modelled as linear or non-linear functions of the implementation levels chosen (Xi and Yj ). Alternatively, to obtain more detailed results, the decision variables can be modified not to represent whole systems any more but different functionality/system combinations. In that case, since modules with the same functionality would not be chosen from different ERP systems, the interaction term discussed above would not have to be introduced to Inequality (3). Second, if the firm finds that a particular combination of an ERP system and EMP is unsuitable for reasons of functionality or difficulty of integration, a constraint can be introduced that excludes that combination from the optimal solution. For example, if ERP system i and EMP j are not to be selected together, the constraint would be Xi Yj ˆ 0 or, if the decision variables are binary, Xi ‡ yj 1. Any combination of ERP systems and any combination of EMPs may be excluded from the optimal solution in a similar manner. Third, if the firm considers using multiple EMPs for placing orders, it may not be able to achieve economies of scales that are as high as if the number of EMPs (or suppliers in general) is severely limited. This effect may be modelled through including a term in the objective function that decreases the total benefit from the solution at a non-increasing rate with the increase in the number of suppliers. Lastly, based on the experience of a senior ERP systems consultant, when choosing between ERP systems, the ease of using an ERP system can be an issue influencing the final decision. The model can be expanded to include such a constraint in the following way:
  19. 19. 280 M. Biehl and H. Kim SRi Xi ‡ 1 ! A1 …8—† SMj Yj ‡ 2 ! A2 …8˜† where represents a term that measures the inconvenience of not using a user-friendly system in relation to A, the desired level of user-friendliness, and SRi and SMj represent the level of user-friendliness of ERP i and EMP j, respectively. To make this constraint work, the objective function must be augmented by the cost that represents the inconvenience or loss of productivity caused by the lack of user-friendliness, À1 F1 À 2 F2 , where F is the unit cost of the inconvenience (or loss in productivity) from the lack of user-friendliness. F should be set to reflect its importance relative to the systems' functionalities (e.g. the costs of underperformance). Note that Inequality (8b) is not needed if only an ERP or an integrated solution is implemented. In the latter case, ERP functionality is usually negotiated through ERP system interfaces. Similarly, if only a set of EMPs is to be selected, Inequality (8a) may be omitted. The model is easily implemented in Microsoft Excel or any other software suitable for solving non-linear programmes. An example implementation is shown in Figure 2. In order to conserve space, interaction terms have not been included in the example. Figure 2 Example selection of an ERP system/EMP combination
  20. 20. Electronic marketplaces versus enterprise resource planning 281 4.3 Decision strategy In the previous sections we have introduced a strategic level (qualitative) model and an operational level (quantitative) model to support the selection of ERP systems or EMPs. We now discuss a strategy for applying these models. As noted earlier, the strategic model is suitable for making a general decision of which type of system or mix of systems to implement given a firm's current setup. The three alternatives are: 1 to first introduce an ERP system (Internal Integration) and, possibly later on, add EMP access 2 to first use the services of one or more EMPs (External Integration) and, e.g. implement an ERP system after business has reached a certain performance or 3 to implement both an ERP system and use (a set of) EMPs (Full Integration). Once this strategic decision has been made, it needs to be operationalised by translating it into the functions of the qualitative decision model. For example, the number of EMPs or ERP systems may be limited or interaction terms may be simplified or expanded as a result of the strategic decision. If the firm decides to internally integrate, the quantitative model is simplified because all (parts of) functions that relate to EMPs fall away. Alternatively, if the firm thinks of adding EMP access at a later time, this information can be reflected in the quantitative model by discounting the expected EMP cash flows appropriately and estimating how the functionalities of EMPs will develop over time. The information and discussion provided in the second section of this paper can be of help for such a short to medium term forecast. In contrast, if the firm decides to externally integrate, the ERP system variables fall away, including Inequality (3) which limits the number of ERP systems. In this case, the firm may wish to introduce a constraint that restricts the number or EMPs to be used. Alternatively, it may first use the model without any further restrictions to find an optimal solution and then consider an additional restriction on the number of EMPs if the number is deemed too high. Lastly, to explore the possibility of reducing the amount of data needed for the quantitative model, the firm may start out using rough estimates of the costs, benefits, and functionalities provided by the systems under consideration. After solving the model the robustness of the solution should be investigated. If the solution is fairly robust, more precise numbers may be needed for only a small subset of the systems. In contrast, if the solution is sensitive to minor changes, the firm must acquire detailed data for a larger set of the systems being investigated. 5 Conclusions and further research This paper deals with the question of whether a firm should implement an enterprise resource planning (ERP) system or use electronic marketplaces (EMPs) to improve its supply chain capabilities. To answer this question we investigated a variety of important decision factors, including the functionalities of ERP systems and EMPs, their costs and benefits, and strategic considerations. Using these decision factors, we
  21. 21. 282 M. Biehl and H. Kim then proposed two decision models to help firms in making a reasonable tradeoff between those two technologies. To analyse relevant decision factors, we first investigated the historical underpinnings and functionalities of ERP systems, followed by those of EMPs. This analysis provided the basis for a comparison of ERP systems and EMPs in terms of functionality. The comparison revealed important conceptual differences between ERP systems and EMPs. First, they have evolved in different ways. Whereas ERP systems and their predecessors were developed to manage the complexity of information flows and decisions within a firm, the first EMPs were created after the advent of the internet and designed to provide real-time market-making and collaboration mechanisms. These differences are still reflected in the functionalities offered by the technologies. In addition to the functionality, the tradeoff is also impacted by more strategic decision factors. Specifically, the introduction of ERP systems, often in conjunction with business process reengineering to simplify processes, results in a significant long-term increase in internal supply chain capabilities. In contrast, using an EMP provides access to external capabilities. As opposed to ERP systems, these capabilities are restricted to supply-chain functionality and almost completely vanish when the firm discontinues its subscription to the EMP. In particular, firms with low internal capabilities can rarely improve their supply chain efficiency by accessing external capabilities, especially in an uncertain environment in which the technology or conditions for using the technology change. This is clearly the case with EMPs, therefore making them unsuitable when the firm wants to engage in organisational learning and building up of internal capabilities. In addition, when outsourcing supply chain capabilities, the firm must ensure that processes critical to its competitive position remain in-house to ensure the potential to differentiate itself from its competitors. In addition to these qualitative and strategic decision factors we identified the costs and benefits of using either technology. Our analysis revealed substantial differences between the two technologies in terms of both fixed and variable costs as well as the benefits reported in the literature. As compared to EMPs, ERP systems require a large up-front investment and generate relatively low maintenance costs. However, since the implementation of an ERP system often goes hand in hand with process reengineering [35], it substantially increases the firm's internal capabilities and efficiencies. ERP systems are also capable of managing a complex supply setup. On the other hand, the use of EMPs gives quick and relatively inexpensive access to potential buyers and customers, but provides little help in terms of linking a firm's demand to the system. We then developed two decision models to help firms in making a decision between the two information technologies. First, we developed the ERP/EMP Integration Model which explains the transition from a state termed Island (no ERP system, no EMP access) to the Full Integration state (ERP system and EMP access). Possible progressions were shown and discussed in the context of the firm's competitive advantage and the scope versus scale of orders. The ERP/EMP Integration Model allows a firm to arrive at a strategic decision of which (mix of) technologies to implement. Given this strategic decision, a mixed-integer non-linear decision model was
  22. 22. Electronic marketplaces versus enterprise resource planning 283 introduced that allows the operationalisation of that decision by selecting a suitable technology solution. The decision model explicitly reflects quantitative decision factors, including the expected costs and benefits associated with introducing a selection of ERP systems or EMPs as well as the levels of supply chain functionality needed. The optimal solution gives concrete advice on which ERP system and EMPs to use. The model can be easily extended to also facilitate the selection of various modules from different ERP systems or various EMPs. In addition, a constraint may be added that takes into account the user-friendliness of the systems under consideration. Future research should consider three agendas. First, as the capabilities of ERP systems and EMPs continually evolve, periodic updates of this research will be needed. Second, a formal validation of the quantitative decision model and its extensions, including a test of the model through firms currently going through this type of decision, is necessary and would lend additional credibility to the model. Third, given the changes in ERP systems and EMPs over time, it would be beneficial to extend the decision model introduced in this paper to a dynamic, non-linear decision model capable of incorporating changes in costs and benefits over a planning horizon [19]. References and Notes 1 Violino, B. (2001) `The search for e-business returns ± as the economy sputters, companies must assess how internet technology will improve the bottom line', Internet Week, Oct 15, 2001, pp.9±13. 2 Mabert, V.A., Soni, A. and Venkataramanan, M.A. (2000) `Enterprise resource planning survey of US manufacturing firms', Production and Inventory Management Journal, Vol. 41, No. 2, pp.52±58. 3 An EMP can be defined as a network that brings together different companies for the purpose of matching and buying sellers, facilitating transactions, or providing an institutional infrastructure (see Bakos, Y. (1998) `The emerging role of electronic marketplaces on the internet', Communications of the ACM, Vol. 41, No. 8, pp.35±42). 4 Meta_Group (1999) `ERP Implementation study reveals costs, benefits', APICS ± The Performance Advantage, Oct 1999, p.7. 5 Davenport, T. (1998) `Putting the enterprise into the enterprise system', Harvard Business Review, Vol. 76, No. 4, pp.121±131. 6 Kearne, A.T. (2000) `B2B exchanges in the high tech industry: creating liquidity through services'. 7 Please see the June, 2001, issue of `APICS ± the performance advantage' and http:// 8 Prahalad, C.K. and Hamel, G. (1990) `The core competence of the corporation', Harvard Business Review, Vol. 68, No. 3, pp.79±91. 9 Grewal, R. (2001) `An investigation into the antecedents of organizational participation in business-to-business electronic markets', Journal of Marketing, Vol. 65, No. 3, pp.17 ff. 10 White, S. (2000) `Competition, capabilities, and the make, buy, or ally decisions of Chinese state-owned firms', Academy of Management Journal, Vol. 43, No. 3, pp.324 ff. 11 Steensma, K.H. and Fairbank, J.F. (1999) `Internalizing external technology: a model of governance mode choice and an empirical assessment', Journal of High Technology Management Research, Vol. 10, No. 1, pp.1±35. 12 Lee, C., Lee, K. and Pennings, J.M. (2001) `Internal capabilities, external networks, and performance: a study on technology-based ventures', Strategic Management Journal, Vol. 22, Nos. 6/7, pp.615 ff.
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