Chapter 2 Literature Review
2.5 The Impact of ERP on SCM
In the past decade, nearly all literature on ERP has focused on reasons for implementa-tion and on the challenges of the implementaimplementa-tion project itself. Several distinct research
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streams on ERP are observed in the recent literature. Several studies have demonstrated a re-lationship between ERP benefits and SCM: for example, Akkermans et al. (2003). Although the initial focus of ERP was “within the organization,” many organizations have addressed supply chain challenges with their ERP systems (Davenport and Brooks, 2004).
Although there is no analytical framework for measuring the impacts of ERP systems on SCM competencies, Byrd and Davidson (2003) have examined how the antecedents, IT department technical quality, IT plan utilization, and top management of IT positively affected IT impact on the supply chain. Wade and Hulland (2004) provide an overview of the literature on IT-related resources and their impact on firm strategy and performance, where IT covers all of the information systems, including ERP systems. Akkermans et al. (2003) studied the fu-ture impact of ERP systems on SCM. Their panel experts saw only a modest role for ERP in improving future supply chain effectiveness, and a clear risk of ERP actually limiting progress in SCM. Moreover, they identified key limitations of current ERP systems in providing effec-tive SCM support. The problem is that the first generation of ERP products has been designed to integrate the various operations of an individual firm, whereas in modern SCM, the unit of analysis has become a network of organizations, making these ERP products inadequate in the new economy. There is a new generation of ERP, however. ERP II extends business processes, opens application architectures, provides vertical-specific functionality, and is capable of supporting global enterprise processing requirements (Zrimsek, 2003). On the basis of the li-terature review presented above, we believe that the relationship between ERP and SCM sug-gested by the above-mentioned authors may be useful in the development of our research model and hypotheses.
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CHAPTER 3
RESEARCH MODEL AND HYPOTHESIS DEVELOPMENT
When understanding the phenomenon of an ERP system adoption and SCM, it is help-ful to have a framework within which to work and from which testable hypotheses can be drawn. A theoretical framework enables predictions to be made about the likely outcome of the relationship between ERP adoption and SCM competencies. It enables observed business behavior to be evaluated and therefore provides better explanations of the motivations form the implementation of ERP systems and its impact on firm competencies of SCM.
3.1 Research Model
The research model is shown in Figure 3.1. The definitions of various constructs in it are summarized in Table 3.1. In this study, the authors base the research model on selected literature on ERP and on SCM. As discussed earlier, although some researchers have given their attention to the contribution of ERP systems to supply chain coordination, the goal of this research is to examine in more detail ERP benefits’ impact on SCM competency. Thus, this research model encompasses and relies on two areas: ERP benefits as referred to in the classification of ERP benefits, in Shang and Seddon (2000), and SCM competencies, based on the 21st Century Logistics framework as extended by Bowersox et al. (1999). The model in-cludes five constructs for ERP benefits, namely: operational, managerial, strategic, IT infra-structure, and organizational benefits, and three constructs for SCM competencies, namely:
operational, planning and control, and behavioral processes. Based on Shang and Seddon’s (2000) classification of ERP benefits, Stratman and Roth’s (2002) competencies of ERP, and Vemuri and Shailendra’s (2006) measurement items, we conclude and hypothesize that ERP
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benefits are antecedents to improving SCM competencies after an ERP system is operational and functionally stable. Therefore, this model investigates the relationships between the bene-fits of ERP adoption and SCM competencies. A more detailed description of SCM competen-cies and ERP benefits follows.
3.1.1 The constructs of SCM competencies
To improve firm performance, a firm needs to enhance its competences in SCM. The 21st Century Logistics framework identifies three categories of firm competences as critical for logistics and supply chain management (Figure 2.1). Each competence is composed of multiple underlying capabilities, which guide philosophies and processes to complete specific logistics and supply chain activities. Based on this framework and suggestions from experts who have recently gone or are currently going through ERP systems implementations or being responsible for SCM in Taiwanese IT industry, we identify the firm competences that may be impacted by ERP benefits and may lead to high supply chain performance and group them into three constructs. These are operational process integration, planning and control process integration, and behavioral process integration.
3.1.1.1 Operational process integration competencies of SCM
As Bowersox et al. (1999) and Closs and Mollenkopf (2004) defined in the 21st Century Logistics framework, operations involve the processes that facilitate order fulfillment and replenishment across the supply chain. In the operational context, integration is essential in-ternally as well as with customers and suppliers. Customer integration builds on the philoso-phies and activities that develop customer intimacy and is the competency that builds lasting competitive advantage. Internal integration focuses on the joint activities and processes within a firm that coordinates functions related to procurement, manufacturer, and customer distribu-tion. Supplier integration also focuses on activities that create close ties with material and
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vice providing supply chain partners. Competency in this area links externally performed ac-tivities into a seamless flow with internal work processes. Firms that desire to excel must blend their operating processes into those of supply partners in order to meet increasingly broad and demanding customer expectation. Nowadays, the IT industry is shifting from push methods driven by anticipated sales to pull methods that focus on delivering value to custom-ers through rapid response to demand. To do this profitably, firms must strip redundancy and duplication of materials and effort from supply chain operations. The task is all the more challenging because it is not limited to internal activities. It requires linking internal work processes with those of material and service providers. Thus, an important integration deci-sion is how many material and service suppliers to include in synchronized operations. That is, integrating operations with material and service suppliers to form a seamless flow of internal and external work overcomes the financial barriers of vertical ownership while retaining many of the benefits. A successful SCM of operational process integration, cross-functional unification, standardization, simplification, compliance, structural adaptation, operational fu-sion, and supplier management capabilities must be developed.
3.1.1.2 Planning and control process integration competencies of SCM
The planning and control process includes competences of technology and planning in-tegration refers to information systems capable of supporting the wide variety of operational configuration needed and to the development of measurement systems that facilitate segmen-tal strategies and processes to serve diverse market segments (Bowersox et al., 1999). Across the supply chain, information technology and measurement systems must facilitate planning and control of integrated operations. As Bowersox et al. (1999) explain in the 21st Century Logistics framework, success of technology and planning integration rests upon six capabili-ties: information management, internal communications, connectivity, collaborative forecast-ing and plannforecast-ing, and activity-based and total cost management. Information management
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focuses on supply chain resource allocation through seamless transactions across the total or-der-to-delivery cycle. Internal communication uses technological systems to exchange infor-mation across functional boundaries in a timely, responsive, and usable format. Connectivity extends internal communications capability to supply chain partners. Collaborative forecast-ing and plannforecast-ing involves customers and suppliers developforecast-ing a shared vision supported by a mutual commitment to jointly generated action plans. Activity-based and total cost manage-ment uses activity-based costing, budgeting, and measurement to obtain a comprehensive picture of the cost/revenue contribution of a specific customer or product. Operational excel-lence must be supplemented and supported by integrated planning and measurement compe-tences. This process involves joining technologies to monitor, control, and facilitated overall supply chain performance.
3.1.1.3 Behavioral process competencies of SCM
The behavioral process rests on the quality of the basic business relationship between partners. In a competitive environment, single enterprises acting alone cannot fully achieve all management goals. The problem is that different firms typically operate under different man-agement philosophies and pursue divergent goals. Relationship integration refers to the ability to develop and maintain a shared mental framework with customers and suppliers regarding inter-enterprise dependency and principles of collaboration (Bowersox et al., 1999). Quality relationships can improve trust among a firm’s members, and further promote their attitude to and intentions of knowledge sharing in an organization (Yang and Chen, 2007). The relation-ship integration category is a competence that enables firms to build lasting distinctiveness with customers of choice and to share a mentality with customers and suppliers regarding in-terdependency and principles of collaboration. Role specificity is the capability to clarify lea-dership processes and establish shared, as contrasted with individual, enterprise responsibility.
Information sharing involves the willingness to exchange key technical, financial, operational
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and strategic information with others in the supply chain. Any firm seeking supply chain per-formance must demonstrate strong commitment to the customization required for effective customer and relationship integration. Bowersox et al. (1999) suggested, in the Supply Chain 2000 framework and assessment process, that the best way to start the search for integration gaps is by reviewing how a firm coordinates with customers and relationships. Thus, it is clear that consistent success ultimately depends on a firm’s competence to create value for custom-ers by providing products and services at prices that cover total cost and provide a profit to meet customers’ needs.
3.1.2 The constructs of ERP benefits
Markus and Tanis (2000) and Markus et al. (2000) identify various reasons that moti-vate organizations to implement ERP systems. They also suggest that there should be a con-nection between the reasons for adoption of ERP systems and the benefits. Shang and Seddon (2000) compiled an ERP benefits list from ERP vendor success stories published on the World Wide Web. Follow-up interviews and analysis led Shang and Seddon (2000) to classify the different types of ERP benefits into five categories. Stratman and Roth (2002) identified eight theoretically important ERP competences and Vemuri and Shailendra (2006) developed a set of initial measurement items for each competences of ERP. Based on Shang and Seddon’s classification of ERP benefits, Stratman and Roth’s competences of ERP, we must also heed the suggestions of experts who have recently been or are currently going through ERP or SCM systems implementations in Taiwanese IT industry. We conclude that ERP benefits may improve firm competences in SCM.
3.1.2.1 The operational benefits of ERP
Shang and Seddon (2000) determined that the operational benefits of an ERP system arise from automating cross functional process. They encompass both efficiency-based and
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effectiveness-based performance improvements in order to capture the enterprise-wide busi-ness benefits. Those benefits are expected to improve day-to-day operations (short-term im-pact), which include improved inventory control, improved cash management, and reduction in operating costs (Stratman and Roth, 2002). They will also lead to improvements in produc-tion, information and customer service quality. Today’s ERP solutions offer even more bene-fits. Many vendors have begun to enhance their offerings with extended supply chain applica-tions in an effort to create a seamless, integrated information flow, from suppliers through manufacturing and distribution. ERP is a suite of application modules that can link back-office operations to front-office operations, as well as internal and external supply chains (Verville and Halingten, 2003). Latamore (1999) has argued that a core ERP system for operational function must include applications for forecasting, production scheduling, materi-al planning, inventory control, warehouse management, etc.
3.1.2.2 The managerial and organizational benefits of ERP
The managerial benefits arise from the use of databases to plan better and for better management of production, manpower, inventory and physical resources. Also, firms are get-ting benefits from monitoring and controlling of financial performance in the contexts of products, customers, business lines and geographic area (Shang and Seddon, 2000). Since ERP systems can automate business processes and enable process changes, one would expect them to offer all of the above types of benefits. Also, since process knowledge is dynamic, organizations may derive benefits from procedures and practices that continuously allow fun-damental business processes to be improved in a systematic fashion (Roth et al., 1994). That is, managerial benefits are expected to improve the day-to-day business process (long-term impact) which reflects long-term benefits. Those benefits include improving customer res-ponsiveness, customer satisfaction, on-time delivery, and decision making. They are provided by centralizing the database and built-in data analysis capabilities. Furthermore, ERP systems
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provide information benefits to process and resources management (Stratman and Roth, 2002;
King and Teo, 1996; Guha et al., 1997). Furthermore, firms are likely to increase control over their suppliers by gaining power from information (Cox et al., 2000; Nah et al., 2001), and ERP applications, or similar integration solutions, are a leading tool for this purpose (Sawy et al.,1999; Themistocleous et al., 2002). When an ERP system is implemented, the advantage of business process skills is demonstrated by understanding of how the business operates, and the ability to predict the impact of a particular decision or action on the rest of the enterprise.
At the same time, those benefits, such as production orders, capability planning, resource al-location, production tracking and reporting, inventory management, waste/reject tracking, etc., also meet the competences needs of supply chains (Latamore , 1999).
3.1.2.3 The strategic and IT infrastructure benefits of ERP
The strategic benefits of ERP are a consequence of the system’s ability to support busi-ness growth, reduce the cost of maintaining legacy systems, and capture the benefits derived from facilitation business learning, empowerment of staff and higher levels of employee mo-rale and satisfaction (Shang and Seddon, 2000). IT infrastructure benefit of ERP is an indica-tion of an organizaindica-tion’s competence in matching IT capabilities with the changing, cross-functional business requirements of the enterprise. Several studies suggest that it is crit-ical that a firm’s information technology systems support the strategic goals of the firm (Sampler, 1998). Strategic and IT infrastructure benefit help to ensure that IT development goals are aligned with the needs of the organization (Segars et al., 1998). Dynamically changing business needs may require operations strategy planners to continually evaluate cross-functional business goals and define the information systems capabilities that are re-quired to support these goals. Thus, a formal strategic benefit and IT infrastructure benefit is posited to contribute to the quality of this ongoing activity, especially activity that can leve-rage supply chain processes to enhance performance need in each particular operating arena.
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Figure 3.1 The proposed conceptual model and research hypotheses
Ha1 Ha2
Ha3 Hb1
Hb2 Hb3 Hc1 Hc2 Hc3
Operational Process
Behavioral Process Planning and Control Process SCM Competences
Operational ERP Benefits
IT Infrastructure
Organizational Managerial
Strategic
Hd3
He1 He2 He3 Hd2 Hd1
32 Table 3.1. Definitions and constructs in the model
Construct Definitions Key References
Operational benefits
The benefits of ERP systems that result from auto-mating cross functional processes, the use of data to better plan and manage production, manpower, in-ventory and physical resources, and from the moni-toring and control of financial performance of prod-ucts, customers, business lines and geographic areas.
Shang and Seddon
Managerial benefits are expected to improve the day-to-day business process (long-term impact), re-flecting long-term benefits such as improved cus-tomer responsiveness, improved cuscus-tomer satisfac-tion, on-time delivery, and improved decision mak-ing.
Focuses on the benefits that arise from the system’s ability to support business growth, reduce the cost of maintaining legacy systems, and capture the benefits derived from facilitating business learning, empo-werment of staff and higher employee morale and satisfaction.
Involving building business flexibility, IT cost reduc-tion, and increased IT infrastructure capability.
Shang and Seddon (2000)
Organiza-tional benefits
Relating to support organizational changes, facilitate business learning, empowering, and build common visions.
Shang and Seddon (2000)
Operational process
inte-gration
Firm has the competences to support customer re-quirements, and supplier integration links externally performed work into a seamless congruency with internal work processes.
Planning and control process integration refers to information systems to support the wide variety of operational configurations needed to serve diverse market segments, and the capabilities to develop the measurement systems that facilitate segmental strate-gies and process.
Firm has the competences to build lasting distinc-tiveness with customers of choice; also refers to the ability to develop and maintain a shared mental framework with customers and suppliers regarding inter-enterprise dependency and principles of colla-boration.
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3.2 Research Hypothesis
3.2.1 ERP benefits and the operational process of SCM
As Closs and Mollenkopf (2004) defined it in the 21st Century Logistics framework, the operational process involves the processes that facilitate order fulfillment and replenish-ment across the supply chain. Effective order fulfillreplenish-ment requires coordination both within a firm and among supply chain partners. Within the operational process, firm competencies in-clude customer integration, internal integration, and supplier integration (Figure 2.1). Cus-tomer integration is a competency that enables firms to build lasting distinctiveness with cus-tomers of choice. Internal integration involves cross-functional planning, sourcing, manufac-turing and delivery to achieve excellence throughout the enterprise. Integrating operations with material and service suppliers to form a seamless flow of internal and external work can retain many of the benefits. Supplier integration links externally performed work into a seam-less congruency with internal work processes (Closs and Mollenkopf, 2004; Bowersox et al., 1999).
Today’s ERP solutions offer even more benefits. Many vendors have begun to enhance their offerings with extended supply chain applications in an effort to create a seamless, inte-grated information flow, from suppliers through manufacturing and distribution. Hsu et al.
(2007) provide empirical support for the impact of operations capabilities on SCM practices.
That result is consistent with resource-based and competency-based views of the firm. ERP is a suite of application modules that can link back-office to front-office operations, as well as internal and external supply chains. Akyuz and Rehan (2008) intend to discuss the require-ments for forming an e-supply chain from different perspectives, including integration with the legacy systems, ERP systems, internal and external business processes and business deci-sion support. Since ERP systems can automate business processes and enable process changes,
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one would expect them to improve the SCM competencies in operational process and improve customer responsiveness and satisfaction (Venkatesh, 2006). Bowersox et al. (1999) and Ve-muri and Shailendra (2006) have developed a set of scales to directly measure the SCM com-petencies and ERP benefits, and these form the basis of our measurement items and our hy-pothesis. Hence, in our model, the SCM competencies in operational process are driven by ERP benefits. In order to examine what categories of ERP benefits can predict SCM compe-tency, the following research model and hypotheses are given:
Ha1: The operational benefits of ERP positively affect SCM competencies in the operational
Ha1: The operational benefits of ERP positively affect SCM competencies in the operational