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Understanding the Plant Level Costs and Benefits of ERP: Will ...

  1. 1. Proceedings of the 33rd Hawaii International Conference on System Sciences - 2000 Understanding the Plant Level Costs and Benefits of ERP: Will the Ugly Duckling Always Turn Into a Swan? Thomas F. Gattiker* Dale L. Goodhue Terry College of Business, University of Georgia, Athens, GA 30602; *tgattike@uga.edu Abstract recognize the potential for subtle but important problems This paper explores the impact of Enterprise Resource to persist after implementation. Planning (ERP) systems using the individual Because ERP systems involve significant process manufacturing facility as the level of analysis. A model of standardization and data integration, the paper begins with ERP costs and benefits based on Organizational a theoretical model of positive and negative impacts of Information Processing Theory is proposed. The model data standardization from Goodhue, Wybo and Kirsch resolves some of the apparently contradictory ERP [5]. The paper then presents two case studies of "live" impacts that have been reported in the trade literature. ERP systems. We demonstrate that the model explains The paper then describes ERP implementations in two many of the ERP benefits and problems observed, and we plants. Organizational Information Processing Theory suggest a modified model that is more adapted to the ERP explains many of the costs and benefits that were domain. observed in the cases. The cases also revealed several Though we eventually plan to conduct a full scale unexpected insights. Based on the case study findings, the validation of the new model, in this paper we describe an paper proposes a revised model of ERP impacts. interim step: developing anecdotal case study evidence Keywords: ERP, standardization, integration, by studying several manufacturing facilities in depth. The interdependence, differentiation, manufacturing planning two cases described here likely do not represent ERP and control systems. experiences in general. However, the cases may well represent a class of ERP implementations because they 1. Introduction and overview share similar organizational characteristics and comparable ERP impacts. It is important to understand ERP systems promise unprecedented levels of business this class. integration and related benefits. Expenditures on ERP are huge and growing. While some observers have declared 2. What is ERP? that the end of the ERP boom is at hand, plenty of countervailing evidence exists. For example, as of May An Enterprise Resource Planning system (ERP) is a 1999, SAP 1999 sales are forecast to be twenty to twenty large, integrated system handling business processes and five percent over 1998 [1]. data storage for a significant number of business units and However, ERP's problems are significant, as well. business functions. ERP systems are packaged systems, Almost half of the IT managers questioned in a 1998 which means that they are designed with a class of InformationWeek Research survey named ERP systems organizations in mind, and then implemented in a number as the most difficult systems to implement [2]. Moreover, of different organizations. They permit some tailoring of numerous articles [3, 4] cite examples of outright the business processes to be used in any given implementation failures. organization, but only within fixed bounds, since all the The authors share the industrial and academic business processes are designed to work together using a communities' optimism about ERP. Because ERP single set of shared databases. Important elements of promises such potential benefits, understanding the costs ERP include data standards, process standards, process and how to avoid them should be a research priority. restrictions, and integration as discussed below. In their attempts to develop guidelines for avoiding the ERP systems employ a single database for the entire problems described above, many researchers and enterprise [3, 6, 7]. This feature requires data standards practitioners have focused on elements of the (“the use of common field definitions and codes across implementation process, such as user involvement, different parts of the organization”, [5] p. 23) across the management champions, etc.. However, we propose that enterprise. many apparent implementation difficulties are due to In addition to requiring data standards, ERP also other more fundamental causes. Furthermore, we entails the standardization of business processes across operating entities [8]. Since different business processes 0-7695-0493-0/00 $10.00 (c) 2000 IEEE 1
  2. 2. Proceedings of the 33rd Hawaii International Conference on System Sciences - 2000 often result in different data about those processes, the and local2 conditions in sub units). Therefore, their model requirement of data standards to a large extent requires suggests that data standardization will not always yield process standards as well. net benefits. Because integration and standardization are Furthermore, as packaged software, ERP systems key features of ERP, the Goodhue, Wybo, Kirsch model themselves are limited in the processes that they can should explain costs and benefits of ERP. model. We refer to this type of standardization as process restrictions. Designers of an ERP generally select a 4. Benefits and costs from ERP collection of what they determine are the “best practice” options for key business processes. When configuring an The literature suggests numerous ERP benefits, which ERP system, implementers typically choose from among we have grouped into four categories3. Many firms install the best practice options that the particular ERP package ERP systems to improve the flow of information across provides. While the range of configurations available in sub-units [3]. Goodhue, Wybo and Kirsch [5] point out any major ERP package is wide, ERP systems are that standardization and integration facilitate nevertheless unable to model some of the typical firm’s communications and better coordination. After all, data existing procedures [9] and firms must fit their processes standards eliminate the burden of reconciling or to the system [3]. Exhortations not to stray from the translating information that is inconsistently defined options provided by one’s ERP package can be found across two or more sub units [15], and they do away with throughout the trade literature [2, 10] and elsewhere [7]. the potential for translation errors and ambiguity about a Integration is the linking together of the information field’s true meaning [16]. ERP also reduces the and processes of distinct subsets of the organization. administrative costs of sharing information, since it Integration can occur between operating entities (such as eliminates manual activities involved with keying plants) or between functions. In an integrated ERP information from one system to another. Finally, ERP system, a transaction in one subsystem instantaneously may improve the timeliness of information. and automatically updates other subsystems. ERP Second, the process standardization and integration systems link all (or many) business functions and across organizational units enables the centralization of operating locations together so all have access to all administrative activities, such as accounts payable and relevant information as transactions occur [3]. Integration payroll. This may allow administrative savings [3]. requires data standardization and process standardization. Third, ERP may reduce IS maintenance costs and increase the ability to deploy new IS functionality [8]. 3. Understanding ERP through Standardization of the information systems across sub- Organizational Information Processing units creates economies of scale in development and maintenance whether these are done in-house or whether Theory. the firm de facto outsources them by using packaged Organizational information processing theory states software, such as ERP. Fourth, ERP may be instrumental that organizations must process information to resolve in moving a firm away from inefficient business processes uncertainty and thus make advantageous decisions. In and toward accepted best practice business processes [14]. order to process information, organizations must choose appropriate coordination and control mechanisms (SOP's, 4.1. Interdependence: The key to ERP benefits committees, computerized information systems, etc.) The Goodhue, Wybo and Kirsch model predicts based on the level and types of uncertainty they face [11]. benefits related to better communication and coordination Uncertainty comes from a number of sources, including (the first category above) will accrue when the complexity of the tasks of individual sub-units, the interdependence is present. This includes sequential interdependence of and differentiation among sub-units, interdependence (events in one function requiring and the external environment in which the sub-units1 exist responses in another) and pooled interdependence [17]. [12, 13]. Because ERP facilitates communication and coordination, Goodhue, Wybo and Kirsch [5] apply the theory to the it can improve the management of interdependence. costs and benefits of data standardization. Their model Since interdependence among sub-units varies, the degree predicts that the benefits of data standardization increase with the interdependence among sub-units (the degree to 2 which the sub-units must exchange information or The term local is used throughout to denote a level of material in order to complete their tasks). On the other analysis that includes plants, branches, sales offices, etc., and excludes hand, the costs of data standardization increase with sub- centralized functions, such as divisional or corporate management. 3 We note that a major reason for implementing ERP systems unit differentiation (the uniqueness of tasks, technologies, is to replace legacy systems because they are not Y2K compliant or because they lack needed functionality, or both. However, since these 1 The term sub-unit is used to refer to the parts, such as plants benefits could be obtained with local (non-ERP) systems, we do not or functional departments, that make-up the organization. consider this a benefit of ERP per se. 0-7695-0493-0/00 $10.00 (c) 2000 IEEE 2
  3. 3. Proceedings of the 33rd Hawaii International Conference on System Sciences - 2000 to which firms realize ERP’s potential should vary, as sales annually, generated from 20 manufacturing well. facilities, all in North America. Finished goods are stocked at the plants and shipped directly to customers 4.2. ERP costs and distributors. We focus on FPC’s Augusta plant. In 1993 management decided to implement a number The Goodhue, Wybo and Kirsch model also suggests of SAP modules (version 2.1) across all plants because of that when there is substantial differentiation among sub- increasing IT costs and a desire for closer integration units, ERP systems will produce compromise costs, among plants. Along with outside consultants, a project higher design costs, or bureaucratic delays. As team from corporate IT began implementing SAP starting differentiation among sub-units increases, so does the with Augusta. Because of the differences among plants, likelihood that a global, standardized IS will be a poor fit they implemented a different configuration of SAP at with local conditions at any given sub-unit. For example, each plant and they made customizations to SAP code. personnel might not get information in the format that is Unfortunately, the team spent the entire implementation required by their job characteristics. Furthermore, local budget on just 4 plants, and the project was put on hold. sub-units might not be able to react to locally changing Thereafter the firm hired a new IS director who pointed conditions because IS impacts must be evaluated in terms out the need for one company-wide ERP "vision." of an IS that is shared by the entire organization. FPC then formed a "blueprint team" to develop a Alternatively, the Goodhue, Wybo Kirsh suggest that company-wide business and ERP plan. After the some information systems may accommodate the diverse blueprint was created, SAP 3.1 was to be implemented in needs of numerous differentiated sub-units. However, the all 20 plants in 2 years (prior to the year 2000), with the Goodhue, Wybo and Kirsh model states that doing so help of a consultant. The first implementation occurred at requires sophisticated IS configurations. The costs of the Augusta plant and was completed August 1998. A implementing, designing and maintaining such systems shop-floor data collection system and SAP front end, are high [5]. called FACE, was also implemented company wide. 6.1.1. The Augusta plant. The plant produces 5. Research methodology engineered beams and other similar materials. It has four departments: green, dryer, press and finishing. In the One intent of the study was improving our green department trees are received, prepared, and understanding of how differentiation can lead to “unrolled” into sheets of veneer. In the dryer department difficulties in an ERP implementation. The focus was on veneer is dried and then stored in bundles. In the press manufacturing facilities because of the belief that plants department, bundles of veneer are cut into strips and within a firm would best exhibit differentiation in task mixed with glue before being fed into a press. The press and environmental characteristics. Two case study sites runs one continuous length of material. As material exits were chosen opportunistically through contacts in local the press it is cut into fifteen to fifty foot billets. In APICS chapters. No effort was made to select finishing, these are cut into finished lengths, which are particularly unsuccessful or successful firms. During bundled and sent into the storage yard. Spring of 1999, we interviewed at least seven individuals There are a number of stock items (standard depth, in each site, including multiple interviews with both plant width and length) but many products are sawed to order. managers, and a cross-section of individuals in roles such Sawed-to-order material is referred to as configurable as Controller, Purchasing Manager, Customer Service material or N-STOK. After being cut and bundled in Representative, IT Manager and Department finishing, stock and non-standard (N-STOK) products go Superintendent. Most interviews lasted approximately 1 into finished inventory. Offcuts (leftover sections of hour and followed a semi-structured format. Most billets from finishing) and rejects containing some usable interviews were taped and transcribed. We toured both material go into recovery-reclaim inventory for use later. facilities and reviewed documents, such as organization Each plant’s customer service department takes orders. charts and statements of objectives. Table 1 summarizes Stock orders that cannot be filled from finished goods key characteristics of the cases. inventory are promised against future production. Non- standard orders are sawed to order (from recovery/reclaim 6. Case study summaries inventory material, or new production). The wide variety of finished goods configurations it ships sets the Augusta plant apart from other facilities in 6.1. Forest Products Corporation the company. In its product line, it is the only plant that handles non-stock lengths. For example, Augusta Forest Products Corporation (FPC) manufactures manufactures all European (metric) orders which is a construction materials such as joists, beams, plywood and significant business segment. engineered lumber. FPC has approximately $1.2 billion in 0-7695-0493-0/00 $10.00 (c) 2000 IEEE 3
  4. 4. Proceedings of the 33rd Hawaii International Conference on System Sciences - 2000 6.1.2, Benefits from ERP. According to the finishing department, these production areas are very interviewees, the system has produced several important straightforward in terms of manufacturing planning and benefits at the plant level. SAP maintains perpetual control, and typical of most operations in FPC. The inventories of finished goods and of some intermediate reaction of the manager of the dryer department is materials. These increase the plant’s ability to make and representative of these departments. He stated that the keep customer commitments. Additionally, several simplicity of their processes has a lot to do with their interviewees stated that SAP improves accountability and satisfaction: self-discipline within the plant. SAP provides visibility of When you take a log and you peel it, and you make production orders that are open in the plant and it a stack of 4 x 8 veneer, all SAP is doing is tracking: provides accurate inventories of intermediate materials, that’s worth 90 cubes, 90 cubic feet. Then when the such as veneer. At the company level, SAP improves dryer uses it, through the FACE system, we coordination among plants for filling customer orders. withdraw that from inventory and it minuses out All plants’ inventories are viewable from a single system; and it gets added to the next stuff along the line. and some plants can enter finished goods orders against Furthermore, SAP has eliminated or automated many one another’s inventories. reporting and data entry chores. The first three of Augusta’s four departments (green, dryer, and press) are satisfied with SAP. Unlike the Table 1. Cross case summary of key characteristics Forest Products Auto Products - Heavy Equip. Div. ERP Characteristics: System installed SAP Oracle Implementation begin (in plant) Ver. 2.1 1993; Ver. 3.1 1998 1997 Business functions in implementation MM, FI, SD Manufacturing; Finance and Payroll. Number of plants in implementation 20 7 initially; then 1 In house IT manager No Yes Consulting firm assisted Yes Yes Plant representation in vision setting Yes (Plant Manager) Minimal Business Characteristics: Products Manufactured Engineered Lumber Mechanical components Plant employment 350 200 Manufacturing configuration Continuous/Repetitive but "finish to order" Repetitive Major processes Processing, cutting, packaging Machining, assembly Key differences from peers Higher variety and customization Repetitive-- most peers are batch Key manufacturing and marketing Like items in multiple plants' finished goods None- No common materials or interplant interdependencies within company inventories; Transshipment of one shipments. (involving the plant studied) intermediate material ERP Benefits --Plant Level Better discipline, enhanced inter- Improved BOM and inventory accuracy departmental coordination and easier reporting in many departments. ERP Problems--Plant Level Poor quality and relevance of information at Poor information quality at departmental and plant and department levels. Drastic plant level. Cumbersome and poor production increases in resources required for and inventory control. Increase in resources reporting and inventory control in Finishing required for production reporting. Poor department. Poor conceptual conceptual understanding of system in most understanding of system in some areas. areas. ERP Benefits-- Organization level Multi-plant finished inventory visibility; order None observed. Substantial benefits possible, promising. Other substantial benefits likely, but not the focus of this study. but not the focus of this study. Plant manager's evaluation of system Not a good fit for the business or mfr. "Still wish we had something else" today environment. "Overkill." 6.1.3 Problems from ERP. Many problems stem 6.1.4. N-STOK. One goal of the SAP 3.1 from the poor visibility of information regarding N-STOK implementation was to enable available to promise orders and recovery-reclaim inventory. The accuracy and calculations. Doing so without adding unacceptable levels understandability of performance measurement and of complexity and IS staff required drastically reducing accounting data are also issues. The problems often result FPC’s number of stock model numbers. Starting with the in the use of informal systems or "going without." SAP 3.1 implementation, FPC instituted “configurable material” or N-STOK part numbers for all non-standard 0-7695-0493-0/00 $10.00 (c) 2000 IEEE 4
  5. 5. Proceedings of the 33rd Hawaii International Conference on System Sciences - 2000 products. A given N-STOK number is used for all non- 6.1.6. Performance reporting. In addition to standard products with a given width and depth, visibility problems for critical information, there is also a regardless of length. For example, all non-standard items problem with the meaningfulness and accuracy of SAP that are 3.5 inches wide and 14 inches deep are assigned reports. This surfaces in a number of different areas and part number 897686, regardless of their length. Since N- is often addressed by maintaining alternate reporting STOK part numbers do not indicate length they cannot be systems. used as unique identifiers for a given configuration of In the finishing department, production and cost product. Therefore, although it carries a N-STOK numbers generated by SAP are not useful to the finishing number, the unique identifier for any non-stock item is the manager. The key performance indicator for the finishing sales order number and line number. department manager is recovery (net finished good Because of its heavy volume of non-standard business, productions divided by billets received into the relative to other plants, Augusta experienced problems department to be sawn into finished goods). However related to N-STOK. For example, the master scheduler because of recovery-reclaim, SAP does not provide a needs to know what orders have been placed, and what meaningful recovery metric that the department manager recovery-reclaim is available for cutting. For any planned can use to gauge performance on a daily basis. Recovery order related to N-STOK, the SAP standard reports he is understated some days and overstated on others. receives indicate the quantity, depth and width of the Because the SAP daily production report is not material needed, but not the length. To discern the length managerially meaningful, the Finishing Department he needs to open up the appropriate line item of the Manager and other managers use a manually generated specific sales orders. As a result the master scheduler Department Production Report maintained on Excel. spends approximately 30 minutes per day looking up N- Really, SAP, even though that’s eventually what the STOK requirements in sales orders. N-STOK creates plant’s performance is based on, I don’t really use a similar problems in the customer service department. lot of the numbers that we’re entering. Number 6.1.5. Recovery-Reclaim. Offcuts and partial bundles one, they’re not easy to get to. I know my way are stored in recovery-reclaim inventory until they can be around the system, but they’re not easy to get to. I used on new orders or completed. Because of its high don’t trust the numbers that it gives me. variety of configurations, Augusta has some of the Similarly, the senior plant accountant and the plant “toughest cuts” in the company. This wide variety of cuts manager have concerns about the accuracy of SAP results in a lot of leftover billet sections and thus a lot of generated reports. Some problems are inherent in FPC’s recovery-reclaim inventory to manage. SAP configuration. For example, because a N-STOK part Since FPC's ERP system is part-number driven, the number does not signify length, it is difficult to track the only way to record the exact contents of recovery reclaim cost per unit. This creates problems valuing certain would be to assign a part number to every piece that was business, such as European sales. Other deficiencies may placed into recovery reclaim. FPC management feels this be due to errors in the logic implemented. The plant is not worthwhile because of the sheer (potentially manager and accountant have noted many discrepancies infinite) variety of lengths of offcuts and rejects. between SAP-based performance reports and both Therefore, all material that is placed into recovery-reclaim historical averages and manually generated reports. is inventoried under a single part number, and SAP only Corporate has investigated some of these and the plant’s “knows” the total cubic feet in recovery-reclaim. internal figures or estimates have been found correct. This poor visibility into recovery-reclaim causes As a result, the plant manager and his team make many problems for the plant. For example, to avoid wasting decisions based on a manually generated plant production usable material, the master scheduler needs to schedule report. This report draws data from the FACE system, cuts from material in recovery-reclaim, instead of cutting and from various departmental reports, some of which are into “fresh” billets. The scheduler would like to solve the generated from tally sheets on the shop floor. problem by keeping a perpetual recovery-reclaim Even though the Senior Plant Accountant has years of inventory in Excel; however, doing so would require a experience in a variety of manufacturing environments, he full-time clerk which the plant cannot afford. Therefore has difficulty comprehending how costs are calculated making the best use of recovery-reclaim is difficult, and and passed on from one department to another in the the master scheduler estimates it has added five to ten current system. Furthermore, because SAP limits his hours to his work week. access to information and the format into which it is The finishing department, too, must do manual organized, SAP makes it more difficult to investigate and calculations in order to manage the material flow into and understand. He feels that eventually the problems will be out of recovery-reclaim each day. This activity consumes fixed and that reports will be customized more to meet the about 1 man-day everyday, and the department recently needs of the plant but that right now resources are a hired a clerk solely to work on it. problem. However he points out that in previous systems 0-7695-0493-0/00 $10.00 (c) 2000 IEEE 5
  6. 6. Proceedings of the 33rd Hawaii International Conference on System Sciences - 2000 he would have done much of this customization himself. manager, changing part numbers would have affected data Now, because of the integration of plants and associated accuracy and the time required to do transactions. complexity, he is dependent on the corporate SAP team. Furthermore the plant had a huge investment in printed If you tinker with something, you’re tinkering with documentation based on the existing part numbers. something that 19 other plants are using, too, and While Oracle was running after October 1997, to a you just can’t do that. You don’t know what, and large extent it was bypassed until after the fact, and not all the plants are exactly the same, so you don’t informal systems and legacy systems, were used to plan know what you’ll screw up somewhere else. and control plant operations. The plant managed to ship product in spite of, not because of, Oracle: 6.2. Auto Products Corp: Heavy Equipment We were able to get the point that we didn’t let it Division [Oracle] impact our customers, we made products and shipped products and did what we needed to do Auto Products Corporation has approximately 200 to catch up with the system. – Plant Manager manufacturing facilities with six billion dollars in annual 6.2.2. Shop floor control problems. A major source sales. The Gainesville plant is one of 7 in the Heavy of the problem was the Oracle shop floor module. Eighty Equipment Division. The plant supplies several of the percent of Gainesville’s shipments came from a few major OEM's. products, which consisted of only fifteen to twenty parts. In the mid-1990’s Division and Corporate IT personnel For the most part, production was continuous and realized that Y2K and customers' increasing IT-related personnel knew the necessary work instructions and demands (EDI, etc.) made existing systems costly. They material flows. However, the ERP shop floor viewed ERP as a solution. Manufacturing, too, was aware configuration was designed to control each step in the of the increasing IT backlog and supported ERP. Finally process via system-issued production orders. In addition management wished to centralize plant accounting and to scrap and inventory transactions, an Oracle transaction believed ERP would provide the needed infrastructure. was required when work orders were started and stopped. Both corporate accounting and the division decided to In fact, completing a finished product required 26 Oracle implement Oracle around 1995. The division’s core transactions in the shop. Aggravating this were Oracle’s implementation team, called the SLAM team, was formed transaction screens, which employees considered in December 1996 and was assisted by a consulting firm. cumbersome and slow. Early on, management responded The Gainesville implementation was the first in the by deciding that operators would record transactions in division. It began in Spring 1997 and went live in logs. These were transcribed into spreadsheets and paper October 1997 reports, which were delivered to the office, where the 6.2.1. The Gainesville plant. Gainesville’s product is Oracle transactions were entered. made by machining metal parts and then assembling them A new division vice-president came to power in together along with some electrical components. Four September 1998. Soon after, he cancelled the division models comprise over eighty percent of shipments. These Oracle project. The Gainesville implementation, which items are produced continuously. Most materials was complete, effectively became stand-alone as the other management and manufacturing activity involves only plants remained on their AS-400 systems. one hundred or so part numbers. Gainesville differs from At roughly the same time, the plant manager began a many of the other plants in the division because many of program, called “Streamline”, to simplify Gainesville’s the other plants produced a greater variety of end items logical and computerized systems. Streamline replaced less regularly. It is a repetitive manufacturer while most Oracle’s order driven shop floor control system with a of the others are batch plants. Kanban system (a simple control system using visual About three months into the Gainesville signals to coordinate production between departments). implementation, the plant manager was replaced. As part of the Streamline initiative, the plant IS team and Between 1996 and 1997, demand had increased a group of consultants replaced the Oracle shop floor drastically, and the plant experienced extreme difficulty in module with a customized module borrowed from another meeting commitments. The plant’s first priority was facility. With the exception of scrap reporting, the new shipping product to meet customer needs, not the Oracle module has eliminated transactions on the shop floor system. As a result, the Oracle implementation team because the module is based on backflushing. One made numerous configuration decisions without input transaction, which is made when a product is shipped, from Gainesville personnel. There were other replaces the original module’s myriad shop floor compromises between the needs of manufacturing and the transactions. When the ship transaction is entered, the system's imperatives. For example, Gainesville was system automatically creates the jobs and generates the expected to change its part numbers to a division standard transactions that would have been done manually under being developed for the ERP. According to the plant the old module. 0-7695-0493-0/00 $10.00 (c) 2000 IEEE 6
  7. 7. Proceedings of the 33rd Hawaii International Conference on System Sciences - 2000 Using the Streamline principles, the plant today because it is, "I worked with one consultant over satisfies its customers. Though purchasing uses Oracle, here because they were the expert in purchasing. I Oracle is not an integral part of manufacturing and worked with the other group because they were the materials management. Kanban controls the shop floor, experts in accounting." Until somebody knows the and spreadsheets are used for production and material whole picture, how can you not be scared to make a planning. The plant manager characterized the situation as change. follows: I would strongly disagree [with the statement “you 7. Applying the model to the cases are running your plant using Oracle”]. We are running our plant based off of our manual systems, Based on the findings in our case studies, we present a and we have simplified Oracle to a point to be able model based on the Goodhue, Wybo, Kirsch model. Our to use it to accurately reflect our financial status. model is in Figure 1, which is discussed below. 6.2.3. Complexity and understanding. Gainesville’s 7.1. Interdependence and ERP benefits current management is a fairly sophisticated group. They have a solid conceptual understanding of the framework Following Goodhue, Wybo and Kirsch, Figure 1 of more general accounting systems and manufacturing suggests that when interdependence among sub-units planning and control systems (such as MRPII). By exists, ERP provides communication and coordination contrast, many feel they do not understand the model benefits, many of which manifest themselves most clearly underlying ERP. For example, the plant manager at the corporate level. Because our research focused on complained: the local level, we were not in a position to thoroughly I mean I am not a dumb person, but I have got to discern all corporate-wide benefits. Even so, there is tell you I don’t understand. And, I was the some evidence of global benefits, such as better materials manager in my previous life and I coordination among sub-units. For example, Forest understand MRPII, and I have a financial Products’ ERP allowed customer service reps to see background as well. All of this [accounting and inventory across multiple plants and to place customer materials management standard bodies of orders against other plants’ finished inventories. We knowledge] stuff makes good sense to me, but I assume that other global benefits accrue in these firms, cannot make sense…. I mean when a transaction especially where pooled interdependence exists. happens over here it is so integrated I don’t know However, there was minimal interdependence involving what is going to happen with it. the plants, (such as interplant material shipments) and Many of the people interviewed expressed concern that thus we observed few plant-level ERP benefits. the plant would not be able to continually adapt Oracle as Figure 1 emphasizes global benefits driven by conditions change and modifications to business practices interdependence and local costs driven by differentiation, are needed.: but not local ERP benefits. Our research was well positioned to discern both benefits and costs at the local You’ve got to adapt to the system, the system’s not level, and we did definitely see some laudable local going to adapt to us. Right now [new practices] benefits. As we reported above, Forest Products' ERP would have to be tailored to Oracle. It’s not like we improved coordination and discipline between could take Oracle and mold it around what we want departments within the Augusta plant, and it automated it to do. - Purchasing Manager some manual tasks. Similarly, implementing ERP forced Several interviewees partially attributed their concerns improvements in BOM accuracy at Auto Products. These about adaptability and innovation to their poor are substantial benefits, however, we must be cautious understanding of the system. Though the IS Manager about labeling them as ERP benefits per se because these stated that you can develop competitive advantages improvements could have been accomplished with single working with Oracle, she added, “You’re going to have to site systems, such as MRPII. have a core group that really, really knows that software.” Apparently, most Gainesville personnel have not 7.2. Differentiation and local problems developed this level of understanding. Several interviews suggested that the level of integration across functional Figure 1 predicts that ERP will impose costs when areas contributes to some of their reluctance to manipulate differentiation exists among entities in an enterprise, the system. For example, on manager stated: because differentiation increases the likelihood that the You're affecting so many more disciplines… One ERP will be a poor fit to the operational and informational change may mean 25 changes. There's not enough needs of some local units. Our cases support this people out there that fully understand the whole assertion. The most severe problems associated with ERP picture, because it's modular. They [can’t] tell you were related to the fact that both plants were ugly 0-7695-0493-0/00 $10.00 (c) 2000 IEEE 7
  8. 8. Proceedings of the 33rd Hawaii International Conference on System Sciences - 2000 ducklings: They differed significantly from the other the production process was controlled by a discrete work plants that were in the ERP implementation. order and required numerous ERP transactions. Forest Products’ Augusta plant differs from other Reporting the status of each work order allowed close plants due to the wide variety of non-standard finished tracking of work-in-process and intermediate component products it makes, and the resulting need to utilize N- inventories. Such a system was a good fit for many of the STOK part numbers and recovery/reclaim. When FPC plants in the division, but not for Gainesville. Gainesville configured SAP to handle N-STOK and recovery/reclaim, makes only four major products from a handful of it assumed that non-standard cuts and non-standard components. Cycle times are short and routings fixed. products were rare. The resulting “ungraceful” manner of Therefore, there is little need to control production with handling of N-STOK and recovery-reclaim was worth work orders or for detailed inventory tracking. putting up with at the other plants. But at Augusta it led With it’s twenty-some reporting points and awkward to operational problems for the master scheduler and the interfaces, the Gainesville ERP’s shop floor interfaces finishing manager, as well as reporting problems that stifled production until Auto Products was able to rolled up to the plant manager level since it under- uncouple production from the ERP by interposing the reported an important component of production. The “Streamline” system front end. Then the plant could use Augusta plant has responded by relying on several manual manual systems that fit its needs such as Kanban and systems, but these are resource intensive and still have not spreadsheets. In effect, the plant developed the solved its problems regarding the accuracy of coordination and control processes it needed and then information. retrofitted or jury-rigged Oracle so it would not be too Similarly, APC's Gainesville plant differed from other disruptive. The Oracle system has not significantly plants in its division due to its product-process structure. impacted manufacturing, materials, or purchasing because The shop floor module that was implemented was they rely on manual systems. appropriate for a plant producing a high variety of models or models with a complex product structure. Each step in In the presence of ERP (standardization and these characteristics: integration) leads to: Which yields these outcomes: Interdependence Better fit between ERP Improved coordination among plants. among sub-units and global operational Better corporate-wide mgmt. info. needs Administrative savings. IS development & maintenance savings. Differentiation among sub-units Poorer fit between Local level effects: ERP system and local Reliance on legacy and informal operational and systems. Limits on resources information needs of Diminished quality & relevance of dedicated to local some plants information. level implementation More resources needed for transformation, reporting and planning. Any level of local Diminished local level mgmt./staff skill & understanding of Reduced ability to to generate and to education information systems support local adaptation and innovation Figure 1. Revised model of ERP impacts 7.3. Modifying the degree of standardization encompass two implementations each. And within each case, the level of integration and standardization differed Although experimental control is not a strength of case between implementations, as did the ERP costs and studies, we note that events in both cases essentially benefits. FPC's version 2.1 implementation was highly 0-7695-0493-0/00 $10.00 (c) 2000 IEEE 8
  9. 9. Proceedings of the 33rd Hawaii International Conference on System Sciences - 2000 customized in Augusta while the version 3 implantation so likely saddles ugly ducklings with systems that are emphasized standardization and expedience. We note that inconsistent with their operational needs or environments. the first version of SAP handled N-STOK and recovery- reclaim better than the second implementation. 7.5. Systems complexity and innovation Furthermore, interviewees felt that reporting was better in the first system. Auto Products Corp’s Gainesville plant Finally, though we were not looking for it, our started as part of a divisional implementation, but became cases suggested that ERP systems may hinder local stand-alone when the division Vice President cancelled business processes innovation. The people who work the project. After the project became stand-alone, the closest to a business process and its information system plant switched from Oracle’s order driven shop floor interface often best understand how it works and how it module to the demand flow module, which proved to be a could be improved. Indeed, “tinkering” or experimenting much better fit. with small changes drives improvement in many firms. The level of integration in ERP makes for highly 7.4. The role of resources complex systems with difficult to understand interrelationships between subsystems. Numerous One might argue that the problems experienced at interviewees, including those who clearly understood FPC and Auto Products are transitory – that after an initial previous systems, complained that they found the ERP’s rough period the systems will be appropriately configured complexity bewildering. and local operations will run smoothly again. The plants When front line managers and staff do not understand may not be exploiting certain flexibilities built into their the business system, they are in a much weaker position ERP packages. In fact one plant manager mentioned this to generate possible process and control innovations. possibility. However, because of the complexity of the Further, they will not be able to easily test out their ERP, neither he nor anyone on his staff has the necessary innovative ideas, since they lack the authority and know- understanding of the system to even know if there is a how to make many changes. Finally, those who cross more sophisticated global configuration that meets his these first hurdles face the possibility that changes might needs while maintaining compatibility with the other negatively impact other parts of the organization. plants requirements. Resources required to evaluate this This could move the locus of innovation, perhaps and to possibly implement a more sophisticated toward the ERP vendor firm or to a specialized corporate configuration are scarce and costly. group. This possibility is significant and deserves further Moreover, because it is simpler to implement and consideration. maintain one standard configuration, in some instances limits on the firm’s permanent IS resources will still 8. Conclusion necessitate standardization and thus make it difficult to accommodate ugly ducklings. For example, Forest Today’s common wisdom reflects a belief in the Products’ made a deliberate decision to accept the efficacy of transplanting business practices from one firm shortcomings of the way its SAP configuration treats N- to another. This assumption is embedded in ERP. At the STOK because a more accommodating solution would global, macro level, business processes typically do have required that several people be added permanently to appear interchangeable. Often business practices are the corporate IS staff. While this is a case of a deliberate portable and a firm's ERP driven practices are superior to decision not to accommodate differentiation, several its original ones. At first, new practices may seem interviewees suggest that uniqueness also determines awkward in some plants, but eventually these ugly which unanticipated problems go untreated, as well. One ducklings will transform into swans. This is apparently interviewee stated: the belief of the CEO who informed Ross [8], “We told Nobody’s going to back you up now because you’re people that they could write down every change they felt the only plant with a problem. The problems that they need on this piece of paper and we would take it to are getting fixed are problems that are pretty the steering committee who would reject it” (p. 3). similar throughout all plants. The problems that Indeed we encountered situations in our cases where aren’t getting fixed are the ones that are individual locally unique practices could have been changed in favor problems, specific to plants. of standard ones. For example, the Gainesville plant could have changed its part numbers to the division When differentiation exists among a firm's sub- standards with some up-front costs but no long-term units, it may be wise to allocate more resources penalty. (consultants, IS staff, etc.) to the ugly ducklings so that On the other hand, some “ducks” really are different. those sub-units can fully exploit whatever flexibility The macro perspective may overlook valid local task or exists in the ERP. As suggested in Figure 1, failure to do environmental characteristics that require a particular (and sometimes particularistic) business process in a single 0-7695-0493-0/00 $10.00 (c) 2000 IEEE 9
  10. 10. Proceedings of the 33rd Hawaii International Conference on System Sciences - 2000 facility. For most of its plants, Forest Products likely [5] D. L. Goodhue, M. D. Wybo, and L. J. Kirsch, “The made a profitable trade-off by accepting limited visibility Impact of Data Integration on the Costs And Benefits of of non-stock part numbers (N-STOK) in exchange for a Information Systems,” MIS Quarterly, vol. 16, pp. 293-311, reduction in discrete part numbers and the ability to 1992. perform available-to-promise calculations. However, in [6] N. H. Bancroft, H. Seip, and A. Sprengel, Augusta, that configuration does not work and cannot Implementing SAP R/3, 2nd ed. Greenwich, CT: Manning, 1998. work if non-stock orders remain a high portion of their business. [7] T. Curran and G. Keller, SAP R/3 Business Blueprint: Finally, the possibility that the complexity of these Understanding the Business Process Reference Model. Upper Saddle River, NJ: Prentice Hall, 1998. systems may have the effect of reducing some types of innovation merits concern. It may be only that more time [8] J. W. Ross, “The ERP Revolution: Surviving Versus and training is required before local users are comfortable Thriving,” MIT, Cambridge, MA, White Paper November 1998. and proficient enough to make local innovations, or it may be that local innovations will not be part of the ERP [9] A. McAffe, “Vandelay Industries, Inc.,” . Boston: Harvard Business School, 1997. picture in many circumstances-- a disturbing possibility. Clearly ERP can deliver unprecedented benefits and [10] J. Connoly, “ERP: Corporate Cleanup,” we are not arguing otherwise. However, our cases Computerworld, vol. 33, 1999, pp. 74-78. suggest action along two fronts. For ERP vendors, they suggest continuing to improve the systems' flexibility so [11] J. R. Galbraith, “Organization Design: An Information Processing View,” Interfaces, vol. 4, pp. 28-36, they can accommodate local differences. Our study also 1974. suggests working to make the underlying logic of these systems somewhat more transparent. (Clearly these are [12] R. L. Daft and R. H. Lengel, “Organizational large challenges!). For implementers, the findings Information Requirements, Media Richness and Structural suggest more carefully analyzing potential differences Design,” Management Science, vol. 32, pp. 554-571, 1986. among local units and not dismissing out of hand [13] M. L. Tushman and D. A. Nadler, “Information managers who claim they are different. The cases also Processing as an Integrating Concept in Organizational Design,” suggest that implementers allocate sufficient resources to Academy of Management Review, vol. 3, pp. 613-624, 1978. training local users in the logic of the whole system. [14] D. P. Cooke and W. J. Peterson, “SAP Implementation References Strategies And Results,” Conference Board, Research Report 1998. [1] “SAP Reiterates: Sees '99 Sales Up 20-25 Percent,” [15] G. Huber, “Organizational Information Systems: Reuters newswire, 1999. Determinants of their Performance and Behavior,” Management Science, vol. 28, pp. 138-155, 1982. [2] C. Wilder and B. Davis, “False Starts, Strong Finishes,” Informationweek, pp. 41-53, 1998. [16] A. P. Sheth and J. A. Larson, “Federated Database Systems for Managing Distributed, Heterogeneous, and [3] T. Davenport, “Putting the Enterprise in the Enterprise Autonomous Databases,” ACM Computing Surveys, vol. 22, pp. System,” Harvard Business Review, vol. 76, pp. 121-131, 1998. 184-236, 1990. [4] M. H. Martin, “An Electronics Firm Will Save Big [17] J. D. Thompson, Organizations in Action. New York: Money by Replacing Six People With One and Lose All This McGraw-Hill, 1967. Paperwork, Using Enterprise Resource Planning Software. But Not Every Company Has Been so Lucky,” Fortune, vol. 137, 1998, pp. 149-151. 0-7695-0493-0/00 $10.00 (c) 2000 IEEE 10