Supply chain transformation by ERP for enhancing performance: an empirical investigation.

EXECUTIVE SUMMARY

This paper addresses the implication of transforming supply chain by implementing ERP to enhance corporate performance. The research methodology uses a case study approach employing a fact-based principle that combines quantitative and qualitative methods. A model of supply chain transformation by implementing ERP has been developed based on the findings of the case study. The model exemplifies supply chain transformation for enhancing corporate performance. The paper concludes with findings, implications and recommendations for the future research.

INTRODUCTION

This paper addresses the efficacy of Enterprise Resource Planning (ERP) systems for transforming supply chain. Investigation and research work in the enterprise system area has begun to receive increased attention. Existing conceptual frameworks need to be tested, substantiated and refined. Particularly a further understanding of the relationship between the enterprise system and corporate performance would have enormous potential to benefit the firm's long-term Information Technology (IT) strategic performance (e.g., Zheng et al., 2000; Sommer, 2003; Huang et al., 2003; Zeng and Pathak, 2003; Davenport and Brooks, 2004; Nab, 2004; Siau and Tian, 2004).

Corporate investment in Information Technology continues unabated. As the single largest capital expense for American companies, IT investment accounts for up to half of all capital investment by firms (Bakos, 1992; Devenport, 1993; Teach, 1997). Moreover, IT infrastructure accounts for an average of about fifty-eight percent (58%) of the organizational IT budgets and continues to increase each year (Broadbent and Weill, 1997). It is a consensus among business and academic communities that the enterprise system is a top issue in IT management (Niederman et al., 1991; Branchean et al., 1996; Boar, 1997; Information Week, 1999). This top issue is fundamental enough to warrant much more empirical studies.

The purpose of this paper is to examine the relationship between enterprise system implementation and supply chain transformation, and corporate performance. Through use of a case study methodology, the paper seeks to create a descriptive model which depicts the performance benefits experienced by the organization as a result of ERP implementation.

LITERATURE REVIEW

In the early 1980's the information systems literature began to address how IT could provide competitive advantages (e.g. Parsons, 1983; Rockart & Scott Morton, 1984; Benjamin et al., 1984; Cash and Kousynski, 1985; Porter and Millar, 1985; Johnston and Vitale, 1988). For example, a number of studies have attempted to document the impact of IT on corporate productivity. However, the findings of this research are inconclusive with some studies reporting IT investment being associated with gains in organizational productivity (Osterman, 1986; Brynjolfsson and Hitt, 1993) and other researchers reporting insignificant relationships (Roach, 1985, 1991; Franke, 1987; Loveman, 1988; Parson et al., 1990; Strassman, 1990; Barua et al., 1991; Weill, 1992).

Skepticism about the potential of IT applications for achieving competitive advantage encouraged research to ascertain whether IT can be a source of sustainable competitive advantage. There is increasing support in the literature that IT per se cannot generate an enduring competitive advantage (Hopper 1990; Kettinger et al., 1994; Mata et al., 1995). Mata et al. (1995) find that managerial IT skills are the only IT resource to be a potential to provide firms sustainable competitive advantage. Other IT resources attributes such as proprietary technology, capital requirements and technical IT skills have not been documented to provide competitive advantage (Mata et al., 1995).

Today, an enterprise information system such as ERP (Enterprise Resource Planning) is becoming a dominant enterprise system (Caruso, 2003). Integrating an enterprise wide system with business processes along supply chains is a real challenge and requires firms to build their ERP competence. Recently, discussions about the competence of managing ERP have been emerging in the literature. This is exemplified by research which has proposed (1) a stage-maturity model for ERP planning systems use (Holland and Light, 2001); (2) a two stage multi-item scale ERP competence constructs (Stratman and Roth, 2002); and (3) a best of breed critical factors for successful implementation for enterprise systems (Light et al., 2001; Nab et al., 2001).

Through managing the integration process* companies may be able to create a competitive edge. The integration process must take into account the unique historical* business and technological situations confronting an organization (Wemerfelt, 1984; Barney, 1991; Duncan, 1995). These situational contexts serve to both (a) complicate the implementation/integration of Enterprise Information Systems; and Co) inhibit the imitation of these systems by competitors (Duncan, 1995). The emergence of this situational outcome may serve to enhance the competitive advantage of firms successfully implementing ERP systems (Duncan 1995; Light et al. 2001).

METHODOLOGY

This research uses a case study approach to reveal the underlying relationship and interaction between implementing ERP and performance at corporate level. As Pearson (1911) stated, the function of science is the classification of facts and the recognition of their sequence and relative significance. The study employs this fact-based principle to explore IT strategic value by combining the quantitative and qualitative approaches.

A firm's competitive position is defined by a bundle of unique resources, relationships and interactions. The task of management is to adjust and renew these resources and relationships as time, competition, and change erode their value (Rumelt, 1984). An enterprise information system can be this special set of resources that is individually developed from firm to firm, with causal ambiguity and historic complexity behind its sharability and reusability (Venkatraman, 1991; Duncan, 1995). Therefore we put forward our first principal hypothesis.

Hypothesis 1: The organization, business processes and technology are closely intertwined with the ERP.

ERP systems tend to be developed by external vendors, not an organization's IT personnel who may be much more familiar with their own company's business processes. The ERP covers and integrates many different business processes reengineering, and involves people, business strategy and processes, organizational structure and procedure, technology etc. Indeed, any enterprise software is not just software. It requires changing the way of running business. As a typical process-oriented system, based on the best practices the ERP embeds the business processes of the best practice in the software. It means that the ERP intrinsically requires that the firm's existing business processes converges the ERP' embedded business processes (Nab et al., 2001; Dai and Duserick, 2005). This leads us to articulate second principal hypothesis.

Hypothesis 2: If guided by a well defined business strategy and if fully integrated with business processes, the ERP has influentially positive impacts on the firm's sustainable competitive advantage and vice versa.

Generally, there have been three main categories of studies in measurement of IT value: "key ratios", "competitive interaction" and "microeconomic" approaches (Mahmood, 1993). Sethi and King, (1994) view different perspectives on the measurement as signifying two fundamental approaches to measuring IT-related competitive advantage: outcome approach and trait approach.

The outcome approach suggests using outcomes as the dominant criterion, such as revenue growth rate, return on investment, return on assets, profits, net worth etc. This approach has been seen in the broader area of organizational effectiveness research (Cameron, 1986). Typical criticism and problem with this approach are that the variables are very aggregate and thus insensitive to the effects of a single IT application (Crowston and Treacy, 1986). Nevertheless, the aggregate feature of variables is the measurement necessity in this study because we are concerned with the impact of the ERP on the corporate level rather than that of a single IT application on a business function level.

The Wait approach identifies important traits or attributes that characterize competitive advantage, such as the traits of competitive forces, value activities, strategic thrusts and customer resource life cycle. This approach defines the attainment of a normative state and recommends the measurement of "means" (Hamilton and Chervany, 1981). The advantage of this approach is that it would render deep understanding of how and why IT affects competitive advantage, and the interrelationships among components and subcomponents of competitive advantage. However, it is difficult to select right attributes that possess germane content and adequate operational measures.

A small number of IT value studies demonstrate that it can be done within the same study to combine quantitative and qualitative measures at multiple levels, though it is difficult (Belcher and Watson, 1993; Barua et al., 1991; Desmaris et al., 1997; Vandenbosch and Huff, 1997). Then we put forward third principal hypothesis.

Hypothesis 3: The ERP impact on the firm's performance can be appropriately explained and evaluated by a combination of the outcome and trait measures at the corporate level.

As Bridgman (1980, p. 535) observed, "The scientific method, as far as it is a method, is nothing more than doing one's damnedest with one's mind, no holds barred." In this study, Tobin's q is used as an outcome measure. Tobin's q is the ratio of the market value of the firm (share price times number of shares) to the replacement cost of its assets. A q value greater than one means that the market believes the assets can generate cash flows that exceed the liquidation value of those assets.

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