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Business horizonsweston


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Business horizonsweston

  1. 1. ERP II: The extendedenterprise systemF.C. “Ted” Weston, Jr.Professor of Computer Information Systems,Colorado State University, Fort Collins, Colorado( M edium and large companies are quickly learning that integrating electronic systems within and between physical locations is, more and more, a required element of doing business. At the same time, real-time communications and integration with both customers and vendors is a growing business requirement. In all cases, information technology (IT) drives the fundamental collaboration and integration changes taking place in industry. To date, much of the business transformation driven by IT is led by companies in the United States; however, this trend of information integration across extended enterprise systems will soon be embraced by firms regardless of where they are located and independent of the geographic addresses of business partners, plants, sales offices, customers, and/or vendors. Physical borders will have less future business relevance except for issues of governance, taxes, and security. IT isWith IT as the infrastructure, rapidly propelling enterprise systems beyond simply en- abling change to become the drivers of business is coming to rely on The cost of developing an IT infrastructure is also wellreal-time information integration documented. Weill, Subramani, and Broadbent (2002)both within and between firms and report that the average firm spends more than 4.2 percent of annual revenue on IT, accounting for more than 50without regard to geography, borders, percent of its total capital expenditure budget. Clearly,or language. The foundation for this businesses expect a return from these ongoing invest- ments. Davenport et al. (2001) conclude that these bil-system rests on a combination of technical lions of dollars invested in technology that are used toand general business issues. The former will generate huge volumes of transaction data can be mis-always be easier to address and manage than the spent if the investments fail to convert data into knowl-latter. However, people, structure, realignment, edge, followed by business results. One clear trend from these investments in IT, including enterprise systems, isand change management will prove more the expectation of an acceptable business return.important to accomplishing such a vision than In many firms and industries, early MRP I (materialraw IT. Firms must take both a technological and requirements planning) and MRP II systems are beingphilosophical view of how to trade information replaced by enterprise resource planning (ERP) the future and how to adapt to a changing ERP I, using the MRP I metaphor, consists of softwarebusiness environment that is increasingly global that integrates front- and back-office information systems (ISs) within the firm. ERP II consists of both CRM (cus-in nature and value-added driven. tomer relationship management) system functionality that links to customers, and SCM (supply chain manage- 49
  2. 2. ment) system functionality that links tovendors. Figure 1, depicting multiple elec- Figure 1tronically linked organizations, is the ERP II integrated extended enterprise supply chainessence of future integrated extended enter-prise systems. The Internet, combined with Customers Supplier 1 Supplier 3both intranets and extranets, is the enablerof business change that results in a virtualelectronic global communication environ-ment. This figure depicts the idea of variousbusiness functions ranging from placingorders to making purchases and receivingpayments—all being carried out electroni- Company Supplier 2cally and with a minimum of human input.Several assumptions lie at the foundation ofthe systemic changes taking place. Some are derived from The role of IT in ERP IIthe demise of numerous dotcoms during 2000–2002; oth- W ithin some firms, there are still fundamentalers reflect a realization of changes that have resulted from misunderstandings as to what is meant bythe rapid growth of hardware, software, and connectivity quarterly sales, the composition of the mostcapabilities. Still others relate to the impact of ongoing recent forecast, and even inventory and order status. Infundamental business change, including a focus on value- these firms, customer orders still get lost or are entereddriven information systems and a growing global market- incorrectly, inventory is inaccurate, bills of material andplace. These assumptions include: routings cannot be depended upon, wrong parts or mate-q Survival must include a business model in which in- rials are purchased, and informal systems abound. Clearly, vestment in IT and IS is driven by “value added” con- in firms where change that would address fundamental siderations. process efficiency and effectiveness issues is not openly embraced, IT is also not seen as fundamental to futureq Change is the only known business constant in which success. Various legacy system IS issues may also still exist, its rate-of-change is increasing. leading to multiple data entry, lost or misplaced orders,q Customers, vendors, business partners, products, and data accuracy issues in general. processes, and channels of distribution are all subject The role of IT in the new Net-driven, integrated extended to continuous change. enterprise firm is rapidly evolving toward becoming theq Business change driven by technology advances has catalyst for change. Indeed, and for many firms, business only begun. strategy is IT strategy. One need only look to firms such as Wal-Mart, FedEx, Cisco, or Dell to see how IT has becomeq The speed of making changes to business processes and the essence of their business strategy. It has also become procedures will be both internally and externally driven. the dominant theme advancing ERP and ERP II. Whileq ISs must increasingly contribute to both top- and bot- several definitions of ERP exist, the definition we will use tom-line revenue, profitability, customer satisfaction, as central to the future of extended enterprise systems and and cost reduction. themes presented here, and the essence of an IT-driven ERP II strategy, is adapted from Weston (2002):q Human and organizational resistance to change, even in weak markets and periods of downsizing and out- the automation and integration of information, sourcing, will continue to exist but will have minimal processes, and functions in a manufacturing (or economic impact. other) environment with the result being a closed- loop, functionally integrated, real-time planning,For some firms, failure to get past the negatives of these execution, and control system that is location- andassumptions will mean either failure or eventual merger/ language-independent and that increasingly in-acquisition. Old models and paradigms for doing busi- cludes customers, vendors, and partners.ness will not survive in the new Internet age of integratedextended enterprise systems. For example, Ghoshal and This definition of ERP II includes virtually everythingGratton (2002) stress the importance of a focus on hori- related to front- and back-office systems (ERP I) integra-zontal rather than vertical processes as part of a manage- tion plus all system functionality that is included withinrial philosophy that stresses integration between auton- either CRM or SCM. The all-encompassing “umbrella” itomous units. And they credit the Web with being the includes is depicted in Figure 2, illustrating that a truemost important change affecting horizontal integration. ERP II environment must include technology and IT plan-50 Business Horizons / November-December 2003
  3. 3. ning and execution issues that support and complement update inventory, change priorities on the shop floor—allemerging business processes, change management, and in a near-immediate fashion. Speed must include the abil-interorganizational execution of business plans. The um- ity to revamp business processes that cross fragmentedbrella concept of ERP II, or Integrated Extended Enterprise functional silos with a minimum of human intervention.Planning and Execution Systems (IEEP/ES), includes per- ISs and the technological infrastructure associated withsonnel and organizational issues that coexist with hard- extended systems must support speed requirements 24/7.ware, software, and connectivity issues. Collectively, the Cross-functional data sharing and information require-technical and non-technical topics depicted in this ERP II ments include virtually all areas of a firm’s business oper-umbrella must radically improve customer and bottom- ations—manufacturing, material planning, inventory con-line results of investments in both IT and IS. trol, distribution, engineering, sales and marketing, ac- counting and finance, HRM, and procurement. Increas- ingly, this cross-silo, process-oriented functionality in- cludes B2B, B2C, e-commerce, trading exchanges, dataThe need for enterprise mining tools, and newer optimization techniques such assystems advanced planning and scheduling (APS). The need for integrated extended enterprise systems isO ne of the most important reasons that extended enterprise or ERP II systems are needed in the also supported by issues of adaptability, flexibility, and new economy is the absolute necessity to move responsiveness. Adaptability refers to the ability to changedata anywhere, at any time, within the company, within or reconfigure business processes on the fly. This impliesthe value chain (customers, vendors), with the knowledge that empowered business users rather than IT personnelthat data are up-to-date and accurate, and independent of must be able to reconfigure specific business processes aslanguage, location, and currency. This requirement signals needs develop, and specifically to respond to an individ-the importance of a standard data format. Because legacy ual customer’s requirements. Flexibility refers to the abil-systems need not be integrated into any current standard ity to integrate newly acquired firms, their accountingdata format, communications within and between plants structures and business processes, and new branches,will not be real-time and the effectiveness of business plants, and distribution centers—at virtually the momentprocesses will necessarily suffer due to data errors and these entities are acquired. Responsiveness is simply thelateness, plus language and currency conversion issues. ability to “spin on a dime” when a customer asks for order changes or a vendor signals a delivery problem.Speed of execution is a major consideration in regard tothe future of enterprise systems. This includes the ability Collectively, speed, adaptability, flexibility, and respon-to enter a new customer order, place new purchase orders, siveness are adding to the power of both internal and external customers to drive busi- ness changes when and where needed, including the expectation Figure 2 FORE that vendors and the entire supply The ERP II “umbrella” BPR B W MES B2 chain will respond to change in a eb SFC SFA M SC se near-immediate fashion. This is the RP B2C M/ rvi SO AT II SC ce essence of both collaboration and P P E s rce NPD integration within the context of me ASP com CTP ERP II in today’s competitive envi- R CR CRM ET F DRP E- CP g P O CIM in ronment. c PD IM S nt ur EDI anageme so M Change m ut Po rta ing O ls as ch RP r C Pu M EAI HRS ECO WMS VM I APS MPS PC A view to s n issue the future entatio Implem S everal main issues or themes will dominate the future of extended enterprise systems. Their essence comprises technol- ogy changes that will affect (a) business strategy and (b) funda- mental ideas as to how better to serve the customer, make andERP II: The extended enterprise system 51
  4. 4. deliver a product or service, and compete more efficiently, ices between firms over the Net, with speed and reliabilityeffectively, and profitably. of communications as major selling points. Some of what is being called “Web services” is not conceptually new.Information flows This includes e-business, where the focus is on the “busi-ERP II of the future must first be focused on providing a ness” with the “e” being the medium of electronics-basedclear flow of consistent, real-time information both within communication. CRM is also part of Web services becauseand between heterogeneous and disparate systems. This of the focus on customer business intelligence, plus toolsflow includes information both within divisions/locations and analytics including data mining—all related to boththat have different hardware and software scattered around customer satisfaction and the ability to respond to orderthe world, and between firms, customers, vendors, part- changes (quantity, timing) in near real-time. Althoughners, and regulatory authorities. In this context, what istoday viewed as ERP I systems (functionality that integratesfront- and back-office IS) will be integrated with elementsof both SCM and CRM systems. This combined view ofERP I, SCM, and CRM is the essence of ERP II and assumes Companies must quickly learn toend-to-end integration, as depicted in Figure 1. differentiate and prioritize thoseDifferentiated solutions applications and implementationsAccording to Johnston (2002), the enterprise system soft-ware market in 2001 was approximately $47 billion, of that possess the potential forwhich 40 percent, or $19 billion, was attributable to ERPapplications. The size of this market suggests the second bottom-line impact.main issue that will dominate the future of enterprise sys-tems or ERP II: recognizing the importance of “differenti-ated solutions.” Simply stated, some software applicationsand implementations are more important than others. For much of the discussion of .Net versus J2EE as the appro-example, software investments in enterprise applications priate Web services architecture is focused on choice ofwith ROI potential—implementations that would con- platform, the real issue is not the technology surroundingtribute to a gain in market share or market advantage either. J2EE or .Net is all about the value-added advantages(such as first to market), or contribute to major cost re- to be gained from synchronous or asynchronous B2B com-ductions—should have a higher priority than applications munications by using either or both technologies.that do not have revenue, cost, or customer impact. Simi- Discussion and deliberation over Web services is alsolarly, applications that offer speed-to-market, enhanced about IT accountability. If potential business users of Webproduct quality, reliability of delivery date commitments, services desire data integration and cross-firm communi-or after-sale customer response advantages must have pri- cation functionality in the future, then they must be heldority over applications that pertain to HR, personaliza- accountable for Web service results, rather than relyingtion, or internal systems that do not influence revenue, solely on IT personnel. If Web services are conceptuallycosts, or customer satisfaction. supportive of the corporate strategic plan, including theCompanies must quickly learn to differentiate and priori- timetable to achieve specific elements of the plan relatedtize those applications and implementations that possess to integrating systems between firms over the Web, thenthe potential for bottom-line impact. For example, “per- the business users must take project ownership andsonalization” portals, thought interesting because of the responsibility. This includes ensuring that the desiredfocus on employees and their ability to access HR-type functionality is defined up front, has the support of topinformation quickly, do not possess the ROI potential management and other user-stakeholders, and possesseswhen compared to applications such as extranet-based appropriate business metrics that warrant the businessportals designed for high-priority customers or critical decision to proceed with a Web services project.vendors. Exchanges and standardsWeb services A fourth main issue affecting the direction and future ofA third main issue driving ERP II involves both the first ERP II is the relative success of supporting services andpoint of having a clear flow of information within and technology such as application service providers (ASPs),between divisions and locations, and the second point of exchanges and marketplaces, standards organizations, andfocusing on applications that have revenue, cost, or cus- clearing houses. For many firms, ASPs provide an oppor-tomer impact. Specifically, this third issue is Web services. tunity to operate on a software platform of choice run byWeb services are all about linking applications and serv- a third-party vendor. Let there be no mistake: ASPs are in52 Business Horizons / November-December 2003
  5. 5. their relative infancy and many will not be long-term sur- “agile,” and “collaborative” all connote a basic theme—vivors because their business model will not support con- processes that are adaptable, flexible, responsive, and pro-tinuous module upgrades, best-of-breed integrated soft- vide ongoing business value. In the evolving business cli-ware offerings, and/or ease of migration and implementa- mate, changing processes must be viewed as having a pos-tion tools. Security and cost are the two main issues sur- itive impact on product or service flow and cannot be per-rounding ASPs—and either or both can be a reason to ceived as being disruptive to the general flow of opera-place, or not place, ERP II applications with an exogenous tions. BPR/BPM changes include sensitivity to the moraleprovider of services. of personnel who are more than aware of recent downsiz- ing and outsourcing trends. Both internal and externalExchanges and marketplaces are also part of this issue. processes must be squeezed to become devoid of non-“Collaborative commerce” is a term commonly used here. value-added activities. Because both ERP I and ERP II nec-Firms are rapidly discovering both the advantages and dis- essarily incorporate myriad processes, selection of anyadvantages of purchasing exchanges for B2B and B2C. extended enterprise software system must be made with aSpeed, price, rapid information exchange, and the poten- realization that processes can never be locked in concretetial for partnering and collaboration are clear advantages and that users must be in control of which ones to changeof exchanges and marketplaces. Disadvantages include as well as when, where, and how to make the changes.margin pressure on vendors as well as the potential for ERP II software selection decisions must reflect this neederosion of the relationships and trust that had built up to always be able to redesign or reconfigure businessover several years between customer and vendor. processes as needs dictate.Related issues As firms grow to understand the importance of the rate-Infrastructural to all main issues affecting the future of of-change of change, developing and maintaining quickextended enterprise systems is the role of IT-based stan- response processes becomes more and more importantdards organizations such as the World Wide Web Consor- for keeping customers satisfied and internal operationstium, or W3C. A major role of these organizations is to effective. Processes in ERP II systems must be designedserve the function of determining an agreed-upon set of around goals of customer satisfaction and order fulfill-standards and protocols for communicating over the Net ment that will increasingly focus on synthesizing andboth within and between firms. Clearly, a unified set of aggregating internal data in such a way that orders arestandards independent of hardware and software vendors executed faster, cheaper, and with greater reliability. Dataand individual products is in the best interest of firms relevant to both customer orders and the effectiveness ofthat are expanding global business and expediting busi- business processes will be crunched with the aid of enter-ness communications. Clearinghouses pertaining to func- prise systems in such a way that corporate decisions cantionality such as digital signatures have a similar function: be made more accurately and more cost-efficiently. BPR/facilitate and expedite business communications between BPM will increasingly take on an IT focus that continuallyfirms. Based on global communication standards, busi- examines for internal bottlenecks and means of managingness processes will quickly be brought to the edge of the resources in such a manner that throughput is maximizedNet. Differences in processes from firm to firm will be- with optimal profitability.come largely transparent, but not unimportant. What isimportant is the ability to quickly and seamlessly commu-nicate process results, details, events, and outcomes be-tween firms in a common and consistent format and Roadblocks to visionindependent of language or location. fulfillmentAny vision of the future of ERP II would not be complete T here are several land mines and pitfalls that couldwithout including the role and importance of business prevent any of this vision for the future of enter-process reengineering (BPR). For many firms, imple- prise systems from becoming reality. An Accenturementing ERP II and engaging in an analysis of business (2002) study cited several main reasons for the shortfallprocesses are synonymous. Processes may be reengineered of CRM implementations:without an ongoing ERP II implementation; however, anERP implementation without significant BPR will be a q no long-term CRM visionrare and risky event. q weak business case for investmentsBPR has evolved from the radical restructuring of business q investments not prioritizedprocesses originally called for by Hammer and Champy(1993) to an approach focused more on value-added and q return on investment not calculated properlyrelabeled business process management (BPM), as espoused Similar studies on the return from large-scale enterpriseby Smith and Fingar (2002). Today, terms like “lean,” systems have produced results focusing on the lack of topERP II: The extended enterprise system 53
  6. 6. management support, project management implementa- q bad data, including not understanding the magnitudetion issues, and people/organizational issues contrasted to of the master data problem when implementing anytechnology issues. There are many common threads from new ERP II-type systemall these studies. One involves issues of change manage- q clinging to outmoded legacy systemsment—a point Nestlé learned well, as told by Worthen(2002) in a story that includes issues of risk assessment, q the inability and/or unwillingness to focus on businessROI analysis, and impacts on change management on the (value-added) metrics (revenue, cost, customer)overall business culture. The whole issue of uncertainty Collectively, any plan for implementing the type of ERP IIthat can undermine a project was the subject of a related system outlined above must take into account a myriad ofstudy by DeMeyer, Loch, and Pich (2002). management and people issues that have the potential toThe Chaos Study conducted by the Standish Group is derail any long-term vision of top management to pro-arguably the best-known study to look at large-scale IT ceed with an integrated extended enterprise planning andprojects such as ERP II. Repeated to present a longitudinal execution system.view of IT project results, it has consistently pointedtoward problems with large-scale system implementationand project management. Problems cited in the original1994 study, which involved projects costing an average of$2.3 million, included 31 percent of the projects beingcanceled before completion; more than half of them camein at nearly double the original estimate, and only one- T he future of extended enterprise systems clearly includes an IT perspective in which companies, customers, and vendors are all linked electroni- cally. IT is the infrastructural basis for all change related to e-business, collaborative commerce, and the inclusion ofsixth of them were completed on time. SCM and CRM under an expanded ERP II umbrella. This vision highlights the importance of clean data both withinAn update of the Chaos Study presented a more positive and between organizations, the importance of “differenti-picture. Johnson et al. (2001) report that “success rates are ated solutions,” the emerging role of Web services, and theup across the board, while cost and schedule overruns are growing importance of ASPs, exchanges and marketplaces,declining.” They also report executive support, user in- standards organizations, and clearing houses. For mostvolvement, an experienced project manager, and clear busi- firms, BPR must accompany a migration to ERP II.ness objectives as the top four factors contributing to proj-ect success and risk reduction. Clearly, the ability to man- All this is not without risk. Understanding the role andage large-scale projects such as ERP II has considerable importance of resistance to change, local culture issues,impact on whether or not the projects will be successful. training, testing, and good project management are all key to successful implementation. Any vision of future enter-Several additional issues need to be examined carefully as prise systems must recognize the role to be played by thepart of any vision of the future for a large-scale extended Internet as a communication medium. However, it is theenterprise system such as ERP II: people within the firm seeking to implement an ERP IIq training to include both potential users of the system strategy that will determine its overall success or failure. and management representing all stakeholder areas of People plus bad data can disrupt any well-intended ex- the firm, plus major customers and vendors tended enterprise system integration strategy. ❍q incomplete unit, integration, system, and user accept- ance testing References and selected bibliographyq failure to take into account global stakeholders, includ- Accenture. 2002. 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