Electronic marketplaces versus enterprise resource planning ...
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
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
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.
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) .
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  and that
ERP implementations have been difficult and come with uncertain benefits ? Or
should the firm subscribe to EMPs with the danger of the EMP faltering  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 , 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
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 . This
comparison, however, is not detailed enough for the purpose of investigating supply
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 . 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 . In the
1980s, manufacturing resource planning (MRP II) systems integrated MRP
functionality with a firm's financial and marketing systems , 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
. In the late mid-1990s other software firms quickly recognised the trend and
started designing similar packages. PeopleSoft issued a human resources package in
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 ; 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
SAP AG PeopleSoft JD Edwards Oracle
1970s 1996 1996 1992
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
(my.SAP.com) 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)
266 M. Biehl and H. Kim
Table 1 Overview of ERP supply chain capabilities of the four largest ERP vendors
SAP AG PeopleSoft JD Edwards Oracle
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
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
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).
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
Markets Discrete Food & Beverage
Complex Mixed Mode
Remanufacturing Large Companies
Process Mid-sized Companies
Pharmaceutical Small Companies
Source: adapted from BHR Software Inc. 
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 (www.mySAP.com and
www.TradeMatrix.com, respectively) in which their clients can trade with a set of
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 .
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.
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. ). 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 . 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  and Coviscint ) versus a supply chain enabler (a firm supplying
software for EMPs, e.g. CommerceOne  and Ariba ). 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
Software firm providing EMP functionality
CommerceOne Ariba Covisint ChemConnect
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;
Electronic marketplaces versus enterprise resource planning 269
Table 3 Capabilities provided by EMPs and EMP-enabling software (continued)
Software firm providing EMP functionality
CommerceOne Ariba Covisint ChemConnect
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
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
Creation, review, Automation of
negotiation, award contract creation
and mgmt of contracts
Sharing of shipping plans Monitoring of rail
with logistics providers; customers;
generation/transmission of execution of
advance shipping notices logistics services;
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
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
Sources: Trade publications, company websites
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 , Elemica [25,26],
GHX , and Converge ) 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 .
Electronic marketplaces versus enterprise resource planning 271
Table 4 Comparison of ERP and EMP supply chain functionality
Functionality ERP systems Electronic marketplaces
Sourcing/purchasing + +
Sourcing, billing, payment automation + +
Quotations + o
Contract creation and management + +
Supplier management + o
Catalogue management + +
Logistics management +
Distribution management + x
Operational performance + o
Supplier performance + +
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)
. 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.
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
3 Strategy, costs, and benefits: further decision factors in choosing a supply
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  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 . Even if firms used EMPs more extensively,
technological uncertainty would prevent them from internalising capabilities ,
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 . 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
A discussion of internal versus external capabilities (i.e. ERP systems versus
EMPs) needs to also consider a firm's competitive advantages  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 ). Clearly, if a supply chain
process provides a competitive advantage to the firm, it should be kept in-house .
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
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 . 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 , 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 , 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 . 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' . This finding is in stark
contrast to the cost reductions promised by the EMPs (e.g. ). 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' .
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
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
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
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.
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 .
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 . 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  and , 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.
wx z PRi Xi PMj Yj À HRMij Xi Yj À HMMjl Yj Yl À Uk Zk 1
i j iYj jYlTj k
sXtX CRik Xi CMjk Yj À CRMijk Xi Yj À CMMjlk Yj Yl
i j iYj jYlTj 2
Zk ! Lk V k P f1Y 2Y F F F Y Kg
Electronic marketplaces versus enterprise resource planning 277
Xi 1 V i P f1Y 2Y F F F Ig 3
Yj n V i P f1Y 2Y F F F Y Jg 4
Zk ! 0 V k 5
Xi Y Yj P f0Y 1gV iY j 6
Lk P 0Y 1V 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 1
PRi = Expected discounted payoff (benefits±costs over the decision horizon) of
implementing and using the ERP System i
PMj = Expected discounted payoff of linking and using the EMP j
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 T 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 1,
where 1 represents the highest possible capability level across all ERP systems
CMj k = Capability level of EMP j for carrying out functionality k; CMjk P 0Y 1
CRMi jk = Interaction term for combined capability levels of ERP system i and EMP j for
carrying out functionality k; CRMijk P 0Y 1
CMMj lk = Interaction term for combined capability levels of EMPs j and l, with j T I, for
carrying out functionality k; CMMjlk P 0Y 1
Lk = Capability level L desired by the firm for functionality k; Lk P 0Y 1
n = Number of EMPs to be subscribed to
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 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
Electronic marketplaces versus enterprise resource planning 279
The quantitative decision model is simple in nature and basically helps in the task
of making comparisons, where k represents the number of ERP systems and
EMPs (or parts thereof) to be chosen and n the total number of ERP systems and
EMPs considered. Note that this number decreases if n is partitioned into ERP
systems and EMPs and a certain number of each has to be chosen. In this case, the
number of combinations decreases to:
xumer of is onsidered xumer of iws onsidered
xumer of is to e seleted xumer of iws to e seleted
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
1Y 2Y F F F Y I). Moreover, the constraint on the number of ERP systems (Inequality 3)
is relaxed and the payoff and cost terms in the objective function (PRi , PMj , PRMij ,
Uk , HRMij , and HMMil ) may be 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 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:
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
Figure 2 Example selection of an ERP system/EMP combination
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
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 , 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
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 .
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