Description
Enterprise resource planning (ERP) and supply-chai n management (SCM) have been growing in popularity across various industries. New initiatives in resources planning, electronic commerce and extended supply chain drive the trend among corporations towards integrating strategic business applications.
Exploring the rationales for ERP and SCM integration
J. Michael Tarn
Department of Business Information Systems, Haworth College of Business,
Western Michigan University, Kalamazoo, Michigan, USA
David C. Yen and
Department of Decision Sciences and Management Information Systems, Miami
University, Oxford, Ohio, USA
Marcus Beaumont
Department of Decision Sciences and Management Information Systems, Miami
University, Oxford, Ohio, USA
Introduction
Enterprise resources planning (ERP) systems
assist enterprises in automating and
integrating corporate cross-functions such as
inventory control, procurement,
distribution, finance, and project
management. In recent years as many
companies began to search for ways to
replace their existing applications running
on mainframes that no longer meet the
growing corporate needs, ERP systems have
become fixtures to provide a basis for
business process management integration
across business functions (Mabert et al., 2000)
Supply-chain management (SCM) enables
supply-chain partners to work in close
coordination through information sharing to
facilitate supplier-customer interactions and
minimize transaction cost (Lawrence, 1999;
Premkumar, 2000; Lee and Whang, 2000). This
is how demand for improved supply-chain
efficiencies will increase as business
enterprises adopt SCM applications. As the
global commercial market involves greater
complexity into the management of both
internal and external corporate supply
chains, the market competition and the
benefits from the advance in technology will
increasingly encourage the use of SCM
system applications.
In the past few years, companies have
integrated strategic applications at an
unprecedented rate. New initiatives in
resources planning, electronic commerce and
extended supply chain push the trend among
corporations towards integrating strategic
business applications. ERP and SCM have
been growing in popularity across various
segments of the electronic industry,
particularly the manufacturing and
distribution sectors. This research examines
these two important concepts in business
applications in terms of their evolution,
function and current development. The
authors further explore the rationales for
their integration by probing the problems
that ERP systems have encountered in recent
years and the solutions of how SCM systems
can alleviate some of these problems and how
SCM systems can complement ERP systems
and allow for smoother operations. This
study is concluded with the imminent
development of SCM and EPR systems and
the industrial trend toward their integration.
Enterprise resources planning
Concept and evolution of ERP
Kumar and Van Hillegersberg (2000) define
ERP systems as configurable information
systems packages that integrate information
and information-based processes within and
across functional areas in an organization. In
this sense, ERP systems are designed to
integrate business functions and allow data
to be shared across many boundaries and
divisions within the company. For example,
a customer service department of a company
would have access to information being used
by its finance and accounting divisions. This
ability to share information gives businesses
increased flexibility and allows them to
operate more efficiently than before.
ERP systems consist of series of integrated
modules from accounting, distribution,
marketing and sales, manufacturing, to
human resources. Instead of concentrating
on specific functional areas, these modules
focus on business processes. Typically, ERP
systems include a single repository of data,
and all business processes occur seamlessly
within a single information system.
Today’s ERP systems are an outgrowth of
materials requirement planning (MRP)
systems. MRP systems were developed
largely for manufacturing concerns and were
initially designed for inventory controls from
1970s to 1980s. The inventory levels could be
reduced by an integrated control of supply
T he cur re nt issu e an d f ull t ext archi ve of t his j our nal is avai labl e at
http://www.emeraldinsight.com/0263-5577.htm
[ 26]
Industrial Management &
Data Systems
102/1 [2002] 26±34
# MCB UP Limited
[ISSN 0263-5577]
[DOI 10.1108/02635570210 414631]
Keywords
Supply-chai n management,
Supply chain, Systems integration
Abstract
Enterprise resource planning
(ERP) and supply-chai n
management (SCM) have been
growing in popularity across
various industries. New initiatives
in resources planning, electronic
commerce and extended supply
chain drive the trend among
corporations towards integrating
strategic business applications .
ERP systems assist enterprises in
automating and integrating
corporate cross-function s such as
inventory control, procurement,
distribution, finance and project
management. Through information
sharing, SCM enables supply-
chain partners to work in close
coordinatio n to facilitat e supplier -
customer interactions and
minimize transaction cost. This
research examines these two
important concepts in terms of
their evolution, functions and
current development and further
explores the rationales for their
integration by analyzing the
problems of ERP and presenting
the solutions of SCM. This study is
concluded with the imminent
development of SCM and EPR
systems and the industrial trend
toward their integration.
and demand, measured against on-hand
inventory and replenishment lead times. As
these systems evolved (e.g. MRPII in the
early 1990s), they began to incorporate
financial control and measure, master
production scheduling and capacity
planning. EPR has extended the reach of the
planning system to include the entire
enterprise, from marketing to product
development, and to achieve total
organizational excellence through
integration (Mabert et al., 2000).
Functions of ERP
The major goal of ERP is to unite the various
departments across an enterprise through
one system application package. The
information managed by an ERP system can
be utilized in many different ways. For
example, executives and employees in
production, customer service, accounting
and finance are able to rely on the
information within the system to make more
effective decisions. This system with its
ability to share information in today’s
business world becomes an invaluable tool,
which provides various departments with
the capacity to work in concert and
communicate across a common interface.
From another aspect, ERP enables the
integrated flow of information to be the core
system that provides the data needed for all
corporate components. In this way, how to
take advantage of that information for the
use of gaining competitive edge is the key to
success. Since the above mentioned concept
is clear but not yet perfect, the core system
requires all components working together to
attain excellent performance. In their case
studies on the mainstream ERP systems,
Palaniswamy and Frank (2000) also recognize
that better cross-functional integration is a
critical success factor.
Information managed by ERP systems can
be used in business in many ways. Take a
simple ERP function as an example. After a
salesperson enters an order from the
customer on a computer, the transaction
data go through the entire company. The
system then updates the inventory of parts
and supplies automatically and worldwide if
needed. Production schedules and balance
sheets change as well. Most efficient of all,
the employees of different departments have
the information needed just in time to
complete their jobs. The feedback would be
fast. As for the salesperson, he or she then
can inform the delivery dates, and the
managers can receive the effects of
financial, inventory, or SCM decisions
immediately.
Current development of ERP
The ERP system providers include some
major vendors such as SAP, JD Edward,
Baan, Oracle and PeopleSoft. They provide a
set of standardized business processes for
enterprise management, and promote their
packaged ERP applications to improve
business performance (Mabert et al., 2000).
However, the ERP industry has not been
performing as it originally expected.
According to an ERP survey, when
quantifiable cost savings and revenue gains
were balanced against the amount shelled out
for software, hardware, consulting help and
ongoing support, there is an average negative
value of 1.5 million (Stedman, 1999).
On the other hand, in order to compete
with the fast growing SCM application
providers, major ERP vendors are attempting
to extend beyond the core functionality of
their ERP products to include the SCM
capabilities. Evidence of this change can be
seen in the numerous acquisitions and
strategic alliances formed recently. Baan, for
example, acquired supply-chain application
vendor Berclain, adding some internally
developed supply-chain capabilities to its
ERP applications (Electronic Buyers News,
1997). However, as the range of ERP
implementation becomes broader, adopting
an ERP system is much more costly than
before. This problem has seriously limited
the market potential of ERP systems. To
solve the dilemma, top ERP vendors are
developing packaged products rather than
full ERP implementation to meet the needs of
organizations with different sizes. This is
another major change in current ERP
market. These packaged products essentially
are component-based solutions and thus do
not have the breadth of full ERP
implementations. These packaged systems
normally have a modular approach, which
allows quick and customized delivery and
installation at lower cost platform. As a
result, even medium- and small-sized
companies are able to benefit from the
advantages of ERP systems, which were
limited to large companies in the past.
SCM
Concept and evolution of SCM
SCM is a concept that has gained
considerable support as managers have
increasingly recognized the importance of
logistics as the last cost-cutting frontier. SCM
systems have developed in recent years to
offer more cost-effective solutions for
logistics within companies and the chain
itself. The supply chain represents the whole
[ 27]
J. Michael Tarn, David C. Yen
and Marcus Beaumont
Exploring the rationales for
ERP and SCM integration
Industrial Management &
Data Systems
102/1 [2002] 26±34
production process of any goods, starting
from supplier processes, raw materials,
manufacturing process to post production
and product distribution.
According to Ferguson (2000), the concept
of SCM incorporates two important ideas:
1 SCM is a collaborative effort that
combines many parties or processes in the
product cycle; and
2 it shows that SCM can cover the entire
product cycle, from the introduction of
raw materials to the point at which the
consumer purchases the product.
SCM can form a loop that begins with the
customer and ends with the customer (Yang
and Papazoglou, 2000). The concept depicts
the supply chain as a network, which clearly
explains the relationship among all the
components along the supply chain. While
autonomous or semi-autonomous business
entities are responsible for the activities
along the chain, the supply chain is therefore
a set of facilities and distribution options that
perform the supply activities. Accordingly, a
streamlined SCM is the network of facilities
and distribution options to support an
association of vendors, suppliers,
manufacturers, distributors, retailers, and
other trading partners (Kwan, 1999). Software
developers have wisely recognized the
potential for making the supply chain more
efficient through automation.
Interest in SCM has steadily increased
since the 1980s when firms saw the benefits of
collaborative relationships within and
beyond their own organization (c.f. Yang and
Papazoglou, 2000; Ayers, 2000). Firms find
that they can no longer compete effectively in
isolation of their suppliers or other entities
in the supply chain (Sandeep, 1998). The term
does not replace supplier partnerships, nor is
it a description of the logistics function.
Linking a firm’s supply-chain strategy to its
overall business strategy and some practical
guidelines are offered for successful SCM.
Moreover, SCM is a business philosophy
that has evolved out of the field of logistics.
During the 1960s, the emphasis was on
physical distribution and little focus was
placed on business-to-business (B2B)
relationship (i.e. supplier-customer
relationship). In the 1980s, the shift was
towards total quality management (TQM),
which focused on ways to make the product
better. Again little emphasis was on the
importance of B2B relationships. During the
late 1980s and early 1990s, process
reengineering became the trend. American
enterprises began to learn Japanese business
practices that incorporated supplier
relationships. Keiretsu, a supplier
partnership involving partial ownership of
the suppliers themselves, was observed to be
an effective method of improving quality and
reducing cost. Chrysler as a typical example
saw the importance of partnering with
suppliers and offering them incentives to
work together on development and cost
cutting procedures (Dyer, 1996).
The evolution of SCM has gradually
formulated B2B relationship in recent years.
The enterprise system solution providers
quickly recognize the potential of SCM and
continue developing systems that could allow
better B2B relationships and improve
production and forecasting simultaneously.
Functions of SCM
SCM systems support demand and
manufacturing planning and B2B
communication. Companies must recognize
the importance of planning as a function in
the supply chain because randomness and
uncertainty ultimately can create chaos on a
company’s distribution network. SCM
systems offer the flexibility and speed
necessary against demand uncertainty. In
addition, a SCM system is capable of
coordinating the supply chain to ensure the
effective implementation of just-in-time (JIT)
practices. B2B communication is a critical
function in the practice of SCM.
SCM systems have two important system
functions, maintaining timely information
sharing across the overall supply chain and
facilitating the synchronization of the entire
supply chain. The philosophy of SCM is that
a firm has the right product in the right
place, at the right price, at the right time, and
in the right condition. Under this
assumption, an enterprise requires not only
the free flow of information within its
organizational boundary, but also the timely
sharing of the right information with the
right business partners. The reason is that
the success of a firm’s SCM would depend
upon the accuracy and velocity of the
information which every business partner
provides (Zheng et al., 2000).
SCM systems can facilitate the
synchronization of the entire supply chain
because they can assist a firm in integrating
internal business processes within the
corporate boundary so that all internal
functional areas can operate in
synchronization. Further, SCM systems
allow an individual organization to integrate
its business processes with those of its
business partners. In other words, when an
organization becomes a node of a supply
chain, its business success relies on not only
the internal efficiency and productivity of the
firm, but also that of its business partners.
[ 28]
J. Michael Tarn, David C. Yen
and Marcus Beaumont
Exploring the rationales for
ERP and SCM integration
Industrial Management &
Data Systems
102/1 [2002] 26±34
Current development of SCM
While the ERP software market has entered a
mature stage, the SCM application market is
in its fast growing phase, showing a very
strong and robust growth in recent years. A
recent survey of SCM practices also indicates
that approximately 80 per cent of
manufacturers in the USA have launched
major supply-chain initiatives as of 1999 (c.f.
Logistics Management & Distribution Report,
1999a; 1999b). While the annual sales of ERP
software and service were estimated to
exceed $84 billion by 2002 (Kirkpatrick, 1998),
the SCM market is expected to be nearly
doubled from 1998 to 2003. I2 Technologies,
Manugistics and ILOG, for example, are the
three popular SCM system providers in this
market. The current development of these
system providers focuses on either
integrating SCM software packages with
existing ERP packages or partnering with
ERP vendors to provide a common solution.
Major problems associated with
ERP solutions
Problems with implementation
The time and cost associated with ERP
implementations can be enormous (c.f.
Davenport, 1998b; Reda, 1998; Jacob, 1999;
Bingi et al., 1999; Mabert et al., 2000). As
observed by Soh et al. (2000), ERP
implementation is more complex due to cross-
module integration, data standardization,
adoption of the underlying business model,
compressed implementation schedule, and the
involvement of a large number of
stakeholders. The ERP industry as discussed
earlier has not been performing as originally
expected. The average ERP implementation
takes 23 months (Wheatley, 2000). For
example, the implementation of the R/3
system on average takes about one year to one
and a half years. Some have even exceeded
three years. During this long implementation
period, software and user specification change
and the technicians who are implementing
the package must constantly adapt and make
adjustments in order to accommodate these
changes (c.f. Davenport, 1998a; Mendel, 1999).
Another problem associated with
implementation is the speed the systems
themselves operate at. ERP systems run on
cycle updates, rather than on real time
processing. Accurate analysis necessary for
quick decision-making is lost in these cyclical
updates. Therefore, the system may become
reactive instead of proactive. To be successful
enterprises require being proactive and
responding to change quickly and effectively
with the right information to guide them. A
reactive system is more likely to pose a serious
threat to a major corporation (Allen, 1998).
Problems with hidden cost
Cost is a critical part of an ERP
implementation for both large and small
businesses alike. While the range of ERP
implementation becomes broader with the
introduction of fast upgrading software
applications, enterprises adopting ERP
systems are more costly than before.
Companies that install ERP systems may
underestimate cost that is hidden. In addition
to a long implementation time as pointed out
previously, an EPR system has an average
total cost of ownership of $15 million but
rewards the business with an average
negative net present value of $1.5 million
(Wheatley, 2000). While most experts agree
that ERP failures are not systemic, the
following five types of common hidden cost
may increase implementation cost
dramatically (Slater, 1998; Soh et al., 2000):
1 Training is the most underrated hidden
cost. The cost to train an entire staff on a
new system and process is enormous. This
cost often gets taken for granted.
2 Integration and implementation are often
overlooked. Many consultants
recommend multiple dry runs with real
orders. Too often add-on modules such as
taxes and bar coding are not factored into
the test runs.
3 The cost for data conversion is hidden.
Companies often do not recognize the cost
associated with transferring data from the
old system to the new package. Included in
this cost is the need to modify the data to
fit into the new system. The need to hire
professionals can send this type of cost
higher.
4 High consulting cost becomes inevitable.
Though this cost is not entirely hidden,
many companies do not budget consulting
fees properly. Experts recommend
contracts be set up prior to
implementation, which outline goals to be
met by target dates. In addition to the
significant knowledge disparity among
implementation personnel and the
insufficient understanding of the
functionality of ERP systems and the
implications of adoption among users,
high cost is invited as critical areas of
mismatches could not be successfully
identified by the consultants who lack
understanding their customers’ business
processes.
5 A cost often overlooked is the notion that
the project will end on a certain date.
Management must recognize that these
projects require unique budgets.
[ 29]
J. Michael Tarn, David C. Yen
and Marcus Beaumont
Exploring the rationales for
ERP and SCM integration
Industrial Management &
Data Systems
102/1 [2002] 26±34
Problems with process automation and
system complexity
An imperative hidden cost often incurred by
businesses implementing ERP is the loss of
efficient process due to an inability to
automate their business processes.
Frequently, ERP venders offer their system
packages as a solution to making the
company more efficient without first looking
at the corporate business processes per se.
Automating an inefficient process would
only generate more problems and
unnecessary spending. Moreover, removing
efficient processes rather than integrating
them highlights the problem of inflexibility
that can arise with an ERP implementation
(Mendel, 1999).
As for the complexity of system process, it
does not just involve purchasing a software
package but rather an extensive and complex
business process. In some cases,
organizations must change how they do
business in order to benefit from a migration
to enterprise solutions. Because the systems
are complex, organizations typically do not
have the required expertise in-house to
implement the systems and implementation
can take a long time to complete (c.f.
Davenport, 1998a; Mendel, 1999). As discussed
earlier, they instead must rely on consultants
or employees of the software vendor, and
such experts’ help would be very expensive.
ERP and SCM integration
The rationales
Based on the previous examination, Table I
summarizes the objectives, focuses, goals and
functions of ERP and SCM systems. The
summary also supports further exploration
in the rationales for ERP and SCM
integration.
In a global business perspective,
companies are actively expanding outside of
their original area to seek new opportunities
over the world. While the dynamic and fast
changing external environment has put great
pressures on companies’ operations and
decisions, how to react quickly to external
changes and how to compete effectively in
the global environment become a crucial
issue. Inside a dispersed company, it requires
building integrated information systems,
which allow data transmission across the
border of a geographic area to another.
Furthermore, the enterprise demands more
effective communication between head office
and local units. Even within an area,
companies want to build corporate
applications through which different
departments can cooperate more efficiently
with each other. In one word, they need to
establish a streamline business process,
which can significantly enhance the
communication and cooperation among
functional departments. To achieve this goal,
functional integration is required, which is
the process of integrating all business
functions to work together, e.g. a firm’s
logistics or distribution functions must
integrate with supply-management,
manufacturing, and information technology
before the functional integration can be
extended to other companies in the supply
chain (Ferguson, 2000).
From the standpoint of technology,
information system architecture has been
moving from a two-tier to a three-tier client
server. Old legacy systems need to be
converted to new, more powerful and flexible
systems, and old data need to be migrated
into new forms. Faced with all these needs,
companies are seeking integrated business
and technology solutions. The settlement
would fall into ERP and SCM, which in
essence combines business processes with
state-of-the-art technology to provide
solutions for the whole enterprise.
According to Table I, ERP aims to improve
internal efficiency by integrating different
parts in the organization, while SCM focuses
on external relationships with trading
partners in the supply chain. Indeed, the
proliferation of ERP systems forces
companies to provide communication and
Table I
Comparison of SCM and ERP systems
SCM systems ERP systems
Objective Integrating and optimizing internal business processes of a single
organization as well as the interaction of the organization with its
business partners across the entire supply chain
Integrating and optimizing internal business processes within
the boundary of a single organization
Focus Optimizing information flow, physical distribution flow, and cash
flow over the entire supply chain
Optimizing information flow and physical distribution flow
within a single organization
Goal Constraint-based tool providing reasonable and feasible business
plans based on the availability of the required key resources
Non-constraint-based tools providing business plans without
the consideration of the availability of key resources
Function Manufacturing management, inventory management, logistics
management, and supply-chain planning
Manufacturing management, financial management, and human
resource management
[ 30]
J. Michael Tarn, David C. Yen
and Marcus Beaumont
Exploring the rationales for
ERP and SCM integration
Industrial Management &
Data Systems
102/1 [2002] 26±34
information flow between supply-chain
agents, overcoming natural boundaries.
Therefore, integration of ERP and SCM is a
natural and necessary process in strategic
and managerial consideration.
Technologically, ERP is said to be the
backbone of SCM. Because they both rely on
very similar framework, such as intranet,
extranet and electronic data interchange, it is
very possible and feasible for their
integration. Most ERP system providers have
been enhancing their products to include
sales-force automation, data warehousing,
document management, and after-sales
service and support. And the most important
trend today is the integration with SCM.
The future of ERP is to improve the supply
chain and foster greater collaborating across
multiple enterprises. The core of ERP, an
integrated set of applications that link
together such back-office operations as
manufacturing, financials and distribution,
will become a subclass of a much bigger and
broader enterprise business system. ERP will
extend into transportation, warehousing,
sales-force automation, and even beyond that
into engineering with computer-aided design
and product data management systems
(McGee, 1998). Consequently, it is feasible
and possible for the integration of these two
technologies.
In this sense, ERP system applications
originally linking back-office applications
into a single system would extend beyond
their core functionality to include not only
sales-force automation, data warehousing,
document management, and after-sales
service but also SCM to increase efficiency
and productivity for the key customers
(Stein, 1998a).
Methods of integration
Many ERP providers have quickly
recognized the integration of ERP and SCM
system applications as a necessity to remain
competitive and maintain sales. The SCM
system applications soon were added to
existing ERP solutions to act as modular
enhancements. Three methods of integrating
SCM software with ERP packages have been
recognized. First is the notion of conformity.
It requires all of the members of the supply
chain to embrace the same system. In a large
supply chain this form of integration should
be viewed as impractical. Issues of trust and
security further complicate any chance of
success with this method. The second
integration method is middleware. This
method, though very practical, is very
expensive. Programmers are required to
establish links between various systems. The
benefits are strong, but the cost must be
weighed. The third method, and the latest, is
to use specialized integration technologies or
software (SIS) to extend ERP functionality.
The mapping of different packages is already
done in these technologies. The software is
preprogrammed to integrate SCM software
with ERP system packages. By doing this, the
ERP system will become a business-services
framework, a central information repository,
and a data-distribution facility (Radding,
1999).
In other words, this integration solution
depends upon how data are kept consistent
between ERP and SCM systems. I2 uses SAP’s
application link enabler to exchange data
between R/3 and Rhythm (I2’s SCM product
suite). Oracle and the other ERP vendors also
have APIs with which I2 and other vendors
can use common denominator middleware to
interface. However, this means that system
providers have to change their middleware
interface software quite often, which is often
a trial and error process and does not usually
perform well (Allen, 1998). SIS is designed
specifically to allow ERP and other systems
to share processes and data. It removes the
chore of developing an interface to every
other vendor’s software. For example, a
major company in this area is CrossWorlds
Software. This software, which runs on
Windows NT, claims to work by simply
pointing and clicking on a sending
application (such as SAP) and a receiving
application (such as Manugistics) and then
selecting the processes to link together. Table
II summaries the integration methods.
SCM solutions
Providing proactive solutions
Perhaps the principal problem ERP system
solutions face is their inability to process
data real time (Kochan, 2000). The packages
are often overburdened with information and
are forced to process information in cycles,
rather than in real time. This forces ERP
systems to be reactive instead of proactive. It
is this reactive processing that makes it
difficult for demand and factory planning.
These functions rely heavily on the constant
evaluation of information regarding
processing, materials, and constraints within
the process. Without real-time processing,
the data for these functions become obsolete
and relatively useless for planning.
SCM offers a more proactive solution to the
ERP system (c.f. Allen, 1998). These software
packages do not conduct nearly the number
of transactions at one time as ERP systems
do, thus giving them the ability to process in
real time. SCM systems can consider all
[ 31]
J. Michael Tarn, David C. Yen
and Marcus Beaumont
Exploring the rationales for
ERP and SCM integration
Industrial Management &
Data Systems
102/1 [2002] 26±34
relevant constraints in the process
simultaneously and order the necessary raw
materials at the same time. This is an
essential function for the supply chain of any
large corporation.
Extending B2B relationship
Today’s business environment is changing
rapidly in terms of business relationships
that are forming. Companies must have the
ability to establish strong partnerships and
clear communication to form an effective
supply chain. ERP systems in the past were
unable to provide successful links with
companies outside of the company operating
on that system. The system applications were
often set up with the purpose of improving
transaction processing within the company
and not outside of it. The shift toward B2B
e-commerce puts an emphasis on accessing
data that reside in the systems of suppliers,
customers, and channel partners (Fulcher,
2000). SCM systems are more geared for the
B2B relationship because these systems
provide the means for closer relations with
companies outside of the company. This is a
critical advantage for companies as they
move into new methods of doing business
that require effective methods of sharing
information.
Reviving ERP market
ERP market growth has been reduced
considerably, with analysts estimating
annual rates of 15 per cent to 17 per cent
(Sherman, 2000). Initially the drop was
attributed to the Y2K issue, but by now the
venders has recognized that the drop may be
related to lack of confidence in the systems
(c.f. Wah, 2000). Although ERP packages
strive to integrate all the major processes of a
firm, customers have discovered the lack of
some essential functionality in ERP (Scott
and Kaindl, 2000). By examining the problem
from two perspectives, the product
development and marketing challenge for the
vendor and the implementation and
integration problem for the consumer, Sprott
(2000) reports that the ERP system providers
face a more complex problem than
organizations managing in-house developed
applications.
By integrating SCM modules into existing
ERP systems, a new market is emergent. The
benefits of SCM software systems would be
added to the value of the existing packages
and could help boost many ERP venders’
sales. With new business practices such as
JIT and SCM taking shape, it becomes even
easier for venders to show customers
potential uses of the new packaged systems.
The major EPR providers such as SAP and
PeopleSoft have put their large stakes in the
SCM software industry. SAP as an example
has the unique philosophy of allowing its
customers to have considerable control over
what functions their ERP systems perform.
The SCM system solutions at SAP are no
different. Initially, SAP attempted to partner
with I2 on designing and integrating a
software package into existing SAP systems.
However, SAP instead has designed a system
of their own that is more efficient and less
expensive than those of the major SCM
providers such as I2 or Manugistics.
A benefit is that by linking supply-chain
applications with other business systems,
users can trim down cycle times, reduce
inventory, and better connect with suppliers,
distributors, and end customers (Stein, 1998b).
As for cross-enterprise application
integration, companies are able to link their
ERP systems directly to the disparate
applications of their suppliers and customers.
Conclusions
The movement towards B2B e-commerce and
SCM have ultimately forced ERP system
providers to reevaluate their models. ERP
venders would have to shift toward more
flexible systems to compensate for the need to
adapt to changing business cultures. The
notion of ``plug and play’’ modules to perform
specialized tasks is a very realistic
alternative in the near future, as customers
increasingly demand more specialized tasks
from ERP venders. Point and click systems
are also a near-term direction to support
more user-friendly operation and thus reduce
training cost. Perhaps ERP venders’
strongest assets are the large customer bases
they possess. In the 1980s TQM was the
business fad, then came business process
Table II
System integration methods
Method Solution
Conformity Requiring all of the members of the supply chain to embrace the same system
Middleware Establishing links between various systems via programming
Special integration software Extending ERP functionality and allowing ERP and other systems to share
processes and data
[ 32]
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and Marcus Beaumont
Exploring the rationales for
ERP and SCM integration
Industrial Management &
Data Systems
102/1 [2002] 26±34
reengineering in 1990s, now companies are
looking at EPR and SCM as the solution. The
trend indicates that ERP will adapt through
the incorporation of modular upgrades to
current systems and the exploitation of the
small- to medium-sized markets.
Accordingly, the industrial trend between
ERP and SCM is that the integration of
supply-chain capabilities with ERP systems
will continue to be enhanced in the near
future. One of the main reasons is that cross-
enterprise integration will continue to be one
of the major organizational goals, especially
for those whose business success is directly
dependent upon the success of their supply
chain. Driven by the market forces such as
shifting channel power and demand for fast
cycle-time-to-market, SCM has created a
critical and influential business success.
Consequently, organizations begin to rely on
SCM systems as a new source of competitive
advantage.
In conclusion, the core of ERP, an
integrated set of applications that link
together back-office operations, will become
a subclass of a much larger and broader
enterprise business system. The integration
of ERP and SCM will create a new spectrum
in the information industry, i.e. the
integration of all core business processes
through one comprehensive information
system and the cooperation among multiple
parties and trading partners in the value
chain to create a collaborative business and
operational environment.
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and Marcus Beaumont
Exploring the rationales for
ERP and SCM integration
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Data Systems
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doc_647177039.pdf
Enterprise resource planning (ERP) and supply-chai n management (SCM) have been growing in popularity across various industries. New initiatives in resources planning, electronic commerce and extended supply chain drive the trend among corporations towards integrating strategic business applications.
Exploring the rationales for ERP and SCM integration
J. Michael Tarn
Department of Business Information Systems, Haworth College of Business,
Western Michigan University, Kalamazoo, Michigan, USA
David C. Yen and
Department of Decision Sciences and Management Information Systems, Miami
University, Oxford, Ohio, USA
Marcus Beaumont
Department of Decision Sciences and Management Information Systems, Miami
University, Oxford, Ohio, USA
Introduction
Enterprise resources planning (ERP) systems
assist enterprises in automating and
integrating corporate cross-functions such as
inventory control, procurement,
distribution, finance, and project
management. In recent years as many
companies began to search for ways to
replace their existing applications running
on mainframes that no longer meet the
growing corporate needs, ERP systems have
become fixtures to provide a basis for
business process management integration
across business functions (Mabert et al., 2000)
Supply-chain management (SCM) enables
supply-chain partners to work in close
coordination through information sharing to
facilitate supplier-customer interactions and
minimize transaction cost (Lawrence, 1999;
Premkumar, 2000; Lee and Whang, 2000). This
is how demand for improved supply-chain
efficiencies will increase as business
enterprises adopt SCM applications. As the
global commercial market involves greater
complexity into the management of both
internal and external corporate supply
chains, the market competition and the
benefits from the advance in technology will
increasingly encourage the use of SCM
system applications.
In the past few years, companies have
integrated strategic applications at an
unprecedented rate. New initiatives in
resources planning, electronic commerce and
extended supply chain push the trend among
corporations towards integrating strategic
business applications. ERP and SCM have
been growing in popularity across various
segments of the electronic industry,
particularly the manufacturing and
distribution sectors. This research examines
these two important concepts in business
applications in terms of their evolution,
function and current development. The
authors further explore the rationales for
their integration by probing the problems
that ERP systems have encountered in recent
years and the solutions of how SCM systems
can alleviate some of these problems and how
SCM systems can complement ERP systems
and allow for smoother operations. This
study is concluded with the imminent
development of SCM and EPR systems and
the industrial trend toward their integration.
Enterprise resources planning
Concept and evolution of ERP
Kumar and Van Hillegersberg (2000) define
ERP systems as configurable information
systems packages that integrate information
and information-based processes within and
across functional areas in an organization. In
this sense, ERP systems are designed to
integrate business functions and allow data
to be shared across many boundaries and
divisions within the company. For example,
a customer service department of a company
would have access to information being used
by its finance and accounting divisions. This
ability to share information gives businesses
increased flexibility and allows them to
operate more efficiently than before.
ERP systems consist of series of integrated
modules from accounting, distribution,
marketing and sales, manufacturing, to
human resources. Instead of concentrating
on specific functional areas, these modules
focus on business processes. Typically, ERP
systems include a single repository of data,
and all business processes occur seamlessly
within a single information system.
Today’s ERP systems are an outgrowth of
materials requirement planning (MRP)
systems. MRP systems were developed
largely for manufacturing concerns and were
initially designed for inventory controls from
1970s to 1980s. The inventory levels could be
reduced by an integrated control of supply
T he cur re nt issu e an d f ull t ext archi ve of t his j our nal is avai labl e at
http://www.emeraldinsight.com/0263-5577.htm
[ 26]
Industrial Management &
Data Systems
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# MCB UP Limited
[ISSN 0263-5577]
[DOI 10.1108/02635570210 414631]
Keywords
Supply-chai n management,
Supply chain, Systems integration
Abstract
Enterprise resource planning
(ERP) and supply-chai n
management (SCM) have been
growing in popularity across
various industries. New initiatives
in resources planning, electronic
commerce and extended supply
chain drive the trend among
corporations towards integrating
strategic business applications .
ERP systems assist enterprises in
automating and integrating
corporate cross-function s such as
inventory control, procurement,
distribution, finance and project
management. Through information
sharing, SCM enables supply-
chain partners to work in close
coordinatio n to facilitat e supplier -
customer interactions and
minimize transaction cost. This
research examines these two
important concepts in terms of
their evolution, functions and
current development and further
explores the rationales for their
integration by analyzing the
problems of ERP and presenting
the solutions of SCM. This study is
concluded with the imminent
development of SCM and EPR
systems and the industrial trend
toward their integration.
and demand, measured against on-hand
inventory and replenishment lead times. As
these systems evolved (e.g. MRPII in the
early 1990s), they began to incorporate
financial control and measure, master
production scheduling and capacity
planning. EPR has extended the reach of the
planning system to include the entire
enterprise, from marketing to product
development, and to achieve total
organizational excellence through
integration (Mabert et al., 2000).
Functions of ERP
The major goal of ERP is to unite the various
departments across an enterprise through
one system application package. The
information managed by an ERP system can
be utilized in many different ways. For
example, executives and employees in
production, customer service, accounting
and finance are able to rely on the
information within the system to make more
effective decisions. This system with its
ability to share information in today’s
business world becomes an invaluable tool,
which provides various departments with
the capacity to work in concert and
communicate across a common interface.
From another aspect, ERP enables the
integrated flow of information to be the core
system that provides the data needed for all
corporate components. In this way, how to
take advantage of that information for the
use of gaining competitive edge is the key to
success. Since the above mentioned concept
is clear but not yet perfect, the core system
requires all components working together to
attain excellent performance. In their case
studies on the mainstream ERP systems,
Palaniswamy and Frank (2000) also recognize
that better cross-functional integration is a
critical success factor.
Information managed by ERP systems can
be used in business in many ways. Take a
simple ERP function as an example. After a
salesperson enters an order from the
customer on a computer, the transaction
data go through the entire company. The
system then updates the inventory of parts
and supplies automatically and worldwide if
needed. Production schedules and balance
sheets change as well. Most efficient of all,
the employees of different departments have
the information needed just in time to
complete their jobs. The feedback would be
fast. As for the salesperson, he or she then
can inform the delivery dates, and the
managers can receive the effects of
financial, inventory, or SCM decisions
immediately.
Current development of ERP
The ERP system providers include some
major vendors such as SAP, JD Edward,
Baan, Oracle and PeopleSoft. They provide a
set of standardized business processes for
enterprise management, and promote their
packaged ERP applications to improve
business performance (Mabert et al., 2000).
However, the ERP industry has not been
performing as it originally expected.
According to an ERP survey, when
quantifiable cost savings and revenue gains
were balanced against the amount shelled out
for software, hardware, consulting help and
ongoing support, there is an average negative
value of 1.5 million (Stedman, 1999).
On the other hand, in order to compete
with the fast growing SCM application
providers, major ERP vendors are attempting
to extend beyond the core functionality of
their ERP products to include the SCM
capabilities. Evidence of this change can be
seen in the numerous acquisitions and
strategic alliances formed recently. Baan, for
example, acquired supply-chain application
vendor Berclain, adding some internally
developed supply-chain capabilities to its
ERP applications (Electronic Buyers News,
1997). However, as the range of ERP
implementation becomes broader, adopting
an ERP system is much more costly than
before. This problem has seriously limited
the market potential of ERP systems. To
solve the dilemma, top ERP vendors are
developing packaged products rather than
full ERP implementation to meet the needs of
organizations with different sizes. This is
another major change in current ERP
market. These packaged products essentially
are component-based solutions and thus do
not have the breadth of full ERP
implementations. These packaged systems
normally have a modular approach, which
allows quick and customized delivery and
installation at lower cost platform. As a
result, even medium- and small-sized
companies are able to benefit from the
advantages of ERP systems, which were
limited to large companies in the past.
SCM
Concept and evolution of SCM
SCM is a concept that has gained
considerable support as managers have
increasingly recognized the importance of
logistics as the last cost-cutting frontier. SCM
systems have developed in recent years to
offer more cost-effective solutions for
logistics within companies and the chain
itself. The supply chain represents the whole
[ 27]
J. Michael Tarn, David C. Yen
and Marcus Beaumont
Exploring the rationales for
ERP and SCM integration
Industrial Management &
Data Systems
102/1 [2002] 26±34
production process of any goods, starting
from supplier processes, raw materials,
manufacturing process to post production
and product distribution.
According to Ferguson (2000), the concept
of SCM incorporates two important ideas:
1 SCM is a collaborative effort that
combines many parties or processes in the
product cycle; and
2 it shows that SCM can cover the entire
product cycle, from the introduction of
raw materials to the point at which the
consumer purchases the product.
SCM can form a loop that begins with the
customer and ends with the customer (Yang
and Papazoglou, 2000). The concept depicts
the supply chain as a network, which clearly
explains the relationship among all the
components along the supply chain. While
autonomous or semi-autonomous business
entities are responsible for the activities
along the chain, the supply chain is therefore
a set of facilities and distribution options that
perform the supply activities. Accordingly, a
streamlined SCM is the network of facilities
and distribution options to support an
association of vendors, suppliers,
manufacturers, distributors, retailers, and
other trading partners (Kwan, 1999). Software
developers have wisely recognized the
potential for making the supply chain more
efficient through automation.
Interest in SCM has steadily increased
since the 1980s when firms saw the benefits of
collaborative relationships within and
beyond their own organization (c.f. Yang and
Papazoglou, 2000; Ayers, 2000). Firms find
that they can no longer compete effectively in
isolation of their suppliers or other entities
in the supply chain (Sandeep, 1998). The term
does not replace supplier partnerships, nor is
it a description of the logistics function.
Linking a firm’s supply-chain strategy to its
overall business strategy and some practical
guidelines are offered for successful SCM.
Moreover, SCM is a business philosophy
that has evolved out of the field of logistics.
During the 1960s, the emphasis was on
physical distribution and little focus was
placed on business-to-business (B2B)
relationship (i.e. supplier-customer
relationship). In the 1980s, the shift was
towards total quality management (TQM),
which focused on ways to make the product
better. Again little emphasis was on the
importance of B2B relationships. During the
late 1980s and early 1990s, process
reengineering became the trend. American
enterprises began to learn Japanese business
practices that incorporated supplier
relationships. Keiretsu, a supplier
partnership involving partial ownership of
the suppliers themselves, was observed to be
an effective method of improving quality and
reducing cost. Chrysler as a typical example
saw the importance of partnering with
suppliers and offering them incentives to
work together on development and cost
cutting procedures (Dyer, 1996).
The evolution of SCM has gradually
formulated B2B relationship in recent years.
The enterprise system solution providers
quickly recognize the potential of SCM and
continue developing systems that could allow
better B2B relationships and improve
production and forecasting simultaneously.
Functions of SCM
SCM systems support demand and
manufacturing planning and B2B
communication. Companies must recognize
the importance of planning as a function in
the supply chain because randomness and
uncertainty ultimately can create chaos on a
company’s distribution network. SCM
systems offer the flexibility and speed
necessary against demand uncertainty. In
addition, a SCM system is capable of
coordinating the supply chain to ensure the
effective implementation of just-in-time (JIT)
practices. B2B communication is a critical
function in the practice of SCM.
SCM systems have two important system
functions, maintaining timely information
sharing across the overall supply chain and
facilitating the synchronization of the entire
supply chain. The philosophy of SCM is that
a firm has the right product in the right
place, at the right price, at the right time, and
in the right condition. Under this
assumption, an enterprise requires not only
the free flow of information within its
organizational boundary, but also the timely
sharing of the right information with the
right business partners. The reason is that
the success of a firm’s SCM would depend
upon the accuracy and velocity of the
information which every business partner
provides (Zheng et al., 2000).
SCM systems can facilitate the
synchronization of the entire supply chain
because they can assist a firm in integrating
internal business processes within the
corporate boundary so that all internal
functional areas can operate in
synchronization. Further, SCM systems
allow an individual organization to integrate
its business processes with those of its
business partners. In other words, when an
organization becomes a node of a supply
chain, its business success relies on not only
the internal efficiency and productivity of the
firm, but also that of its business partners.
[ 28]
J. Michael Tarn, David C. Yen
and Marcus Beaumont
Exploring the rationales for
ERP and SCM integration
Industrial Management &
Data Systems
102/1 [2002] 26±34
Current development of SCM
While the ERP software market has entered a
mature stage, the SCM application market is
in its fast growing phase, showing a very
strong and robust growth in recent years. A
recent survey of SCM practices also indicates
that approximately 80 per cent of
manufacturers in the USA have launched
major supply-chain initiatives as of 1999 (c.f.
Logistics Management & Distribution Report,
1999a; 1999b). While the annual sales of ERP
software and service were estimated to
exceed $84 billion by 2002 (Kirkpatrick, 1998),
the SCM market is expected to be nearly
doubled from 1998 to 2003. I2 Technologies,
Manugistics and ILOG, for example, are the
three popular SCM system providers in this
market. The current development of these
system providers focuses on either
integrating SCM software packages with
existing ERP packages or partnering with
ERP vendors to provide a common solution.
Major problems associated with
ERP solutions
Problems with implementation
The time and cost associated with ERP
implementations can be enormous (c.f.
Davenport, 1998b; Reda, 1998; Jacob, 1999;
Bingi et al., 1999; Mabert et al., 2000). As
observed by Soh et al. (2000), ERP
implementation is more complex due to cross-
module integration, data standardization,
adoption of the underlying business model,
compressed implementation schedule, and the
involvement of a large number of
stakeholders. The ERP industry as discussed
earlier has not been performing as originally
expected. The average ERP implementation
takes 23 months (Wheatley, 2000). For
example, the implementation of the R/3
system on average takes about one year to one
and a half years. Some have even exceeded
three years. During this long implementation
period, software and user specification change
and the technicians who are implementing
the package must constantly adapt and make
adjustments in order to accommodate these
changes (c.f. Davenport, 1998a; Mendel, 1999).
Another problem associated with
implementation is the speed the systems
themselves operate at. ERP systems run on
cycle updates, rather than on real time
processing. Accurate analysis necessary for
quick decision-making is lost in these cyclical
updates. Therefore, the system may become
reactive instead of proactive. To be successful
enterprises require being proactive and
responding to change quickly and effectively
with the right information to guide them. A
reactive system is more likely to pose a serious
threat to a major corporation (Allen, 1998).
Problems with hidden cost
Cost is a critical part of an ERP
implementation for both large and small
businesses alike. While the range of ERP
implementation becomes broader with the
introduction of fast upgrading software
applications, enterprises adopting ERP
systems are more costly than before.
Companies that install ERP systems may
underestimate cost that is hidden. In addition
to a long implementation time as pointed out
previously, an EPR system has an average
total cost of ownership of $15 million but
rewards the business with an average
negative net present value of $1.5 million
(Wheatley, 2000). While most experts agree
that ERP failures are not systemic, the
following five types of common hidden cost
may increase implementation cost
dramatically (Slater, 1998; Soh et al., 2000):
1 Training is the most underrated hidden
cost. The cost to train an entire staff on a
new system and process is enormous. This
cost often gets taken for granted.
2 Integration and implementation are often
overlooked. Many consultants
recommend multiple dry runs with real
orders. Too often add-on modules such as
taxes and bar coding are not factored into
the test runs.
3 The cost for data conversion is hidden.
Companies often do not recognize the cost
associated with transferring data from the
old system to the new package. Included in
this cost is the need to modify the data to
fit into the new system. The need to hire
professionals can send this type of cost
higher.
4 High consulting cost becomes inevitable.
Though this cost is not entirely hidden,
many companies do not budget consulting
fees properly. Experts recommend
contracts be set up prior to
implementation, which outline goals to be
met by target dates. In addition to the
significant knowledge disparity among
implementation personnel and the
insufficient understanding of the
functionality of ERP systems and the
implications of adoption among users,
high cost is invited as critical areas of
mismatches could not be successfully
identified by the consultants who lack
understanding their customers’ business
processes.
5 A cost often overlooked is the notion that
the project will end on a certain date.
Management must recognize that these
projects require unique budgets.
[ 29]
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and Marcus Beaumont
Exploring the rationales for
ERP and SCM integration
Industrial Management &
Data Systems
102/1 [2002] 26±34
Problems with process automation and
system complexity
An imperative hidden cost often incurred by
businesses implementing ERP is the loss of
efficient process due to an inability to
automate their business processes.
Frequently, ERP venders offer their system
packages as a solution to making the
company more efficient without first looking
at the corporate business processes per se.
Automating an inefficient process would
only generate more problems and
unnecessary spending. Moreover, removing
efficient processes rather than integrating
them highlights the problem of inflexibility
that can arise with an ERP implementation
(Mendel, 1999).
As for the complexity of system process, it
does not just involve purchasing a software
package but rather an extensive and complex
business process. In some cases,
organizations must change how they do
business in order to benefit from a migration
to enterprise solutions. Because the systems
are complex, organizations typically do not
have the required expertise in-house to
implement the systems and implementation
can take a long time to complete (c.f.
Davenport, 1998a; Mendel, 1999). As discussed
earlier, they instead must rely on consultants
or employees of the software vendor, and
such experts’ help would be very expensive.
ERP and SCM integration
The rationales
Based on the previous examination, Table I
summarizes the objectives, focuses, goals and
functions of ERP and SCM systems. The
summary also supports further exploration
in the rationales for ERP and SCM
integration.
In a global business perspective,
companies are actively expanding outside of
their original area to seek new opportunities
over the world. While the dynamic and fast
changing external environment has put great
pressures on companies’ operations and
decisions, how to react quickly to external
changes and how to compete effectively in
the global environment become a crucial
issue. Inside a dispersed company, it requires
building integrated information systems,
which allow data transmission across the
border of a geographic area to another.
Furthermore, the enterprise demands more
effective communication between head office
and local units. Even within an area,
companies want to build corporate
applications through which different
departments can cooperate more efficiently
with each other. In one word, they need to
establish a streamline business process,
which can significantly enhance the
communication and cooperation among
functional departments. To achieve this goal,
functional integration is required, which is
the process of integrating all business
functions to work together, e.g. a firm’s
logistics or distribution functions must
integrate with supply-management,
manufacturing, and information technology
before the functional integration can be
extended to other companies in the supply
chain (Ferguson, 2000).
From the standpoint of technology,
information system architecture has been
moving from a two-tier to a three-tier client
server. Old legacy systems need to be
converted to new, more powerful and flexible
systems, and old data need to be migrated
into new forms. Faced with all these needs,
companies are seeking integrated business
and technology solutions. The settlement
would fall into ERP and SCM, which in
essence combines business processes with
state-of-the-art technology to provide
solutions for the whole enterprise.
According to Table I, ERP aims to improve
internal efficiency by integrating different
parts in the organization, while SCM focuses
on external relationships with trading
partners in the supply chain. Indeed, the
proliferation of ERP systems forces
companies to provide communication and
Table I
Comparison of SCM and ERP systems
SCM systems ERP systems
Objective Integrating and optimizing internal business processes of a single
organization as well as the interaction of the organization with its
business partners across the entire supply chain
Integrating and optimizing internal business processes within
the boundary of a single organization
Focus Optimizing information flow, physical distribution flow, and cash
flow over the entire supply chain
Optimizing information flow and physical distribution flow
within a single organization
Goal Constraint-based tool providing reasonable and feasible business
plans based on the availability of the required key resources
Non-constraint-based tools providing business plans without
the consideration of the availability of key resources
Function Manufacturing management, inventory management, logistics
management, and supply-chain planning
Manufacturing management, financial management, and human
resource management
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Exploring the rationales for
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Data Systems
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information flow between supply-chain
agents, overcoming natural boundaries.
Therefore, integration of ERP and SCM is a
natural and necessary process in strategic
and managerial consideration.
Technologically, ERP is said to be the
backbone of SCM. Because they both rely on
very similar framework, such as intranet,
extranet and electronic data interchange, it is
very possible and feasible for their
integration. Most ERP system providers have
been enhancing their products to include
sales-force automation, data warehousing,
document management, and after-sales
service and support. And the most important
trend today is the integration with SCM.
The future of ERP is to improve the supply
chain and foster greater collaborating across
multiple enterprises. The core of ERP, an
integrated set of applications that link
together such back-office operations as
manufacturing, financials and distribution,
will become a subclass of a much bigger and
broader enterprise business system. ERP will
extend into transportation, warehousing,
sales-force automation, and even beyond that
into engineering with computer-aided design
and product data management systems
(McGee, 1998). Consequently, it is feasible
and possible for the integration of these two
technologies.
In this sense, ERP system applications
originally linking back-office applications
into a single system would extend beyond
their core functionality to include not only
sales-force automation, data warehousing,
document management, and after-sales
service but also SCM to increase efficiency
and productivity for the key customers
(Stein, 1998a).
Methods of integration
Many ERP providers have quickly
recognized the integration of ERP and SCM
system applications as a necessity to remain
competitive and maintain sales. The SCM
system applications soon were added to
existing ERP solutions to act as modular
enhancements. Three methods of integrating
SCM software with ERP packages have been
recognized. First is the notion of conformity.
It requires all of the members of the supply
chain to embrace the same system. In a large
supply chain this form of integration should
be viewed as impractical. Issues of trust and
security further complicate any chance of
success with this method. The second
integration method is middleware. This
method, though very practical, is very
expensive. Programmers are required to
establish links between various systems. The
benefits are strong, but the cost must be
weighed. The third method, and the latest, is
to use specialized integration technologies or
software (SIS) to extend ERP functionality.
The mapping of different packages is already
done in these technologies. The software is
preprogrammed to integrate SCM software
with ERP system packages. By doing this, the
ERP system will become a business-services
framework, a central information repository,
and a data-distribution facility (Radding,
1999).
In other words, this integration solution
depends upon how data are kept consistent
between ERP and SCM systems. I2 uses SAP’s
application link enabler to exchange data
between R/3 and Rhythm (I2’s SCM product
suite). Oracle and the other ERP vendors also
have APIs with which I2 and other vendors
can use common denominator middleware to
interface. However, this means that system
providers have to change their middleware
interface software quite often, which is often
a trial and error process and does not usually
perform well (Allen, 1998). SIS is designed
specifically to allow ERP and other systems
to share processes and data. It removes the
chore of developing an interface to every
other vendor’s software. For example, a
major company in this area is CrossWorlds
Software. This software, which runs on
Windows NT, claims to work by simply
pointing and clicking on a sending
application (such as SAP) and a receiving
application (such as Manugistics) and then
selecting the processes to link together. Table
II summaries the integration methods.
SCM solutions
Providing proactive solutions
Perhaps the principal problem ERP system
solutions face is their inability to process
data real time (Kochan, 2000). The packages
are often overburdened with information and
are forced to process information in cycles,
rather than in real time. This forces ERP
systems to be reactive instead of proactive. It
is this reactive processing that makes it
difficult for demand and factory planning.
These functions rely heavily on the constant
evaluation of information regarding
processing, materials, and constraints within
the process. Without real-time processing,
the data for these functions become obsolete
and relatively useless for planning.
SCM offers a more proactive solution to the
ERP system (c.f. Allen, 1998). These software
packages do not conduct nearly the number
of transactions at one time as ERP systems
do, thus giving them the ability to process in
real time. SCM systems can consider all
[ 31]
J. Michael Tarn, David C. Yen
and Marcus Beaumont
Exploring the rationales for
ERP and SCM integration
Industrial Management &
Data Systems
102/1 [2002] 26±34
relevant constraints in the process
simultaneously and order the necessary raw
materials at the same time. This is an
essential function for the supply chain of any
large corporation.
Extending B2B relationship
Today’s business environment is changing
rapidly in terms of business relationships
that are forming. Companies must have the
ability to establish strong partnerships and
clear communication to form an effective
supply chain. ERP systems in the past were
unable to provide successful links with
companies outside of the company operating
on that system. The system applications were
often set up with the purpose of improving
transaction processing within the company
and not outside of it. The shift toward B2B
e-commerce puts an emphasis on accessing
data that reside in the systems of suppliers,
customers, and channel partners (Fulcher,
2000). SCM systems are more geared for the
B2B relationship because these systems
provide the means for closer relations with
companies outside of the company. This is a
critical advantage for companies as they
move into new methods of doing business
that require effective methods of sharing
information.
Reviving ERP market
ERP market growth has been reduced
considerably, with analysts estimating
annual rates of 15 per cent to 17 per cent
(Sherman, 2000). Initially the drop was
attributed to the Y2K issue, but by now the
venders has recognized that the drop may be
related to lack of confidence in the systems
(c.f. Wah, 2000). Although ERP packages
strive to integrate all the major processes of a
firm, customers have discovered the lack of
some essential functionality in ERP (Scott
and Kaindl, 2000). By examining the problem
from two perspectives, the product
development and marketing challenge for the
vendor and the implementation and
integration problem for the consumer, Sprott
(2000) reports that the ERP system providers
face a more complex problem than
organizations managing in-house developed
applications.
By integrating SCM modules into existing
ERP systems, a new market is emergent. The
benefits of SCM software systems would be
added to the value of the existing packages
and could help boost many ERP venders’
sales. With new business practices such as
JIT and SCM taking shape, it becomes even
easier for venders to show customers
potential uses of the new packaged systems.
The major EPR providers such as SAP and
PeopleSoft have put their large stakes in the
SCM software industry. SAP as an example
has the unique philosophy of allowing its
customers to have considerable control over
what functions their ERP systems perform.
The SCM system solutions at SAP are no
different. Initially, SAP attempted to partner
with I2 on designing and integrating a
software package into existing SAP systems.
However, SAP instead has designed a system
of their own that is more efficient and less
expensive than those of the major SCM
providers such as I2 or Manugistics.
A benefit is that by linking supply-chain
applications with other business systems,
users can trim down cycle times, reduce
inventory, and better connect with suppliers,
distributors, and end customers (Stein, 1998b).
As for cross-enterprise application
integration, companies are able to link their
ERP systems directly to the disparate
applications of their suppliers and customers.
Conclusions
The movement towards B2B e-commerce and
SCM have ultimately forced ERP system
providers to reevaluate their models. ERP
venders would have to shift toward more
flexible systems to compensate for the need to
adapt to changing business cultures. The
notion of ``plug and play’’ modules to perform
specialized tasks is a very realistic
alternative in the near future, as customers
increasingly demand more specialized tasks
from ERP venders. Point and click systems
are also a near-term direction to support
more user-friendly operation and thus reduce
training cost. Perhaps ERP venders’
strongest assets are the large customer bases
they possess. In the 1980s TQM was the
business fad, then came business process
Table II
System integration methods
Method Solution
Conformity Requiring all of the members of the supply chain to embrace the same system
Middleware Establishing links between various systems via programming
Special integration software Extending ERP functionality and allowing ERP and other systems to share
processes and data
[ 32]
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and Marcus Beaumont
Exploring the rationales for
ERP and SCM integration
Industrial Management &
Data Systems
102/1 [2002] 26±34
reengineering in 1990s, now companies are
looking at EPR and SCM as the solution. The
trend indicates that ERP will adapt through
the incorporation of modular upgrades to
current systems and the exploitation of the
small- to medium-sized markets.
Accordingly, the industrial trend between
ERP and SCM is that the integration of
supply-chain capabilities with ERP systems
will continue to be enhanced in the near
future. One of the main reasons is that cross-
enterprise integration will continue to be one
of the major organizational goals, especially
for those whose business success is directly
dependent upon the success of their supply
chain. Driven by the market forces such as
shifting channel power and demand for fast
cycle-time-to-market, SCM has created a
critical and influential business success.
Consequently, organizations begin to rely on
SCM systems as a new source of competitive
advantage.
In conclusion, the core of ERP, an
integrated set of applications that link
together back-office operations, will become
a subclass of a much larger and broader
enterprise business system. The integration
of ERP and SCM will create a new spectrum
in the information industry, i.e. the
integration of all core business processes
through one comprehensive information
system and the cooperation among multiple
parties and trading partners in the value
chain to create a collaborative business and
operational environment.
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Data Systems
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