2: ERP: Contribution and Trends – ERP and Information Systems

2
ERP: Contribution and Trends

This chapter illustrates the role and trends for enterprise resource planning (ERP) implementation within the framework of the information systems. It also shows the main trends related to the evolution of ERPs toward a new generation (2nd G).

2.1. ERP as an indicator of integration for information systems

This indicator aims to illustrate the contribution of ERP systems to the integration of information systems. Many studies that have been conducted on the evolution of information system (IS) principally show its transformation toward integration. Scientists consider system integration as one of the most problematic areas of ERP implementation [THE 01, RAT 12]. Firms should use ERP as an integrative mechanism to create a new style of management [HAM 99]. An ERP system is an IS that manages, through integration, all aspects of a business [ESC 99].

Many companies started to replace their legacy system with ERP packages in order to solve integration problems during the 1990s [HYV 03]. The integration of applications is one of the main reasons for the ERP system adoption [SPA 04]. Any ERP system pushes a company toward full process integration and solves the fragmentation of information [PAR 05]. ERP systems can be viewed as tools for control and integration [HAN 06]. ERP systems aim to integrate business processes into a synchronized suite of procedures, applications and metrics that exceeds firms’ boundaries [WIE 07].

Firms implement ERP systems to integrate the business processes of a company [DIX 11]. Bidan et al. emphasize the lack of integration that results from the absence of ERP systems within information systems [BID 12]: “The ‘Silos Architecture’ category is strongly characterized by the lack of ERP systems, and therefore has a large number of autonomous applications which do not utilize a common logical database. The architecture looks like a set of heterogeneous applications with few interfaces. The logic of the Silos Architecture is not that of integration in the pure sense but simply of limited or controlled interoperability”. An implemented ERP system is almost always becoming the core system for information collection and processing, so it needs to integrate data from each organizational level and functional area: manufacturing, distribution, sales, etc. [RAT 12].

Consequently, we can consider an ERP system to be an indicator of IS integration. For the purpose of our research, the selection of an ERP system and then the success or the failure of its implementation by a company can be used as an indicator to measure the integration rate for its information system.

2.2. Trends for ERP implementation within the framework of the information system

The prospect of replacing “home grown” legacy systems with the integrated business solution offered by ERP systems, such as SAP/R3, PeopleSoft and Oracle, has proven to be irresistible [CAL 98]. For instance, many firms prefer to use ERP systems when they set out to replace the legacy system [HOL 99]. The outgoing legacy systems are usually associated with the title of a “dying system” [ALV 00]. However, organizations typically do not “abandon all their existing applications when adopting ERP solutions” [SCH 00]. ERP systems have not solved the integration problems as many companies do not abandon their legacy systems and they integrate their functionality from disparate applications. It has also been argued that ERP packages have in fact failed to achieve (a total) application integration and 38% of companies which adopt these ERP solutions do not replace their legacy systems [THE 01].

If you look closely at the level of ERP presence in firms, it is clear that almost all large companies are equipped with at least one, if not several, ERP systems. More than half of all small- and medium-sized enterprises (SMEs) have an ERP system. Some large groups have launched several ERP systems. A survey shows that, on average, large groups have 2.7 ERP systems each and some have many more [ELA 07]. A large group that had 22 different ERP systems has initiated a project to remove 18 of them [DES 04]. “One ERP, to cover all needs, has proved largely illusory” [DES 04]. Today, the functionality of universal and modern ERP systems includes almost all standardized business processes. Therefore, in some cases, the activity area of a company (e.g. public institutions) or specific legal considerations (e.g. the case of salary calculations) are unique. Consequently, to evaluate ERP software suitability, we have to consider its integration possibilities with software already in use [RAT 12].

Mabert et al. surveyed 479 US manufacturing firms [MAB 00] and found that more than 60% of companies have installed or plan to install a packaged ERP system. According to Gartner [BIS 09], the ERP software market is still growing; overall, the enterprise software market in Europe, the Middle East and Africa was expected to reach 70 billion euros by 2013, with a 5-year compound annual growth rate (CAGR) of 5.0%. During the same period, it was estimated that the worldwide market would reach 214 billion euros, with a CAGR of 7.1%. The need to integrate all the business processes in one computer system and align this system with the business goals in today’s highly competitive world has only become more important.

Ventana Research 2010 (White Paper) reported that one-third of companies with more than 1,000 employees use an ERP application supplied by a single vendor, while two-thirds use software from two or more vendors; of the latter, one-third have software from four or more vendors [VEN 10]. There are largely two reasons why companies have heterogeneous ERP environments. One is purely historical: automating back office functions began decades ago, and companies initially did not roll out or upgrade the systems across the entire enterprise. Moreover, some parts of the organization may have been built through acquisitions. If the acquired entity was relatively large, it often made sense to leave the existing systems in place.

These heterogeneous ERP environments could also be related to a “Best of Breed (BoB)” information technology (IT) strategy. The various advantages of BoB implementation include less disruption to an organization, less required process reengineering and the allowance for greater flexibility [MAC 08]. Like ERP systems, “Enterprise Application Integration (EAI)” also encourages the use of BoB applications from multiple vendors [BID 12]. This means that an IS can comprise many ERP systems, which could be themselves a kind of BoB.

Bidan et al. identified two categories of positioning for ERP systems within the framework of the IS [BID 12]:

  1. 1) the “Partially Standardized Architecture”;
  2. 2) the “Mixed Architecture”.

The “Partially Standardized Architecture” category is characterized by the limited coverage of the ERP (in terms of the number of modules installed). One hundred percent of the firms of this class have a unique ERP, 90% for at least one module for its support activities and 77% for its core activities. However, 77% of the firms in this category have from one to three modules deployed and one to three silos architecture. Eighty-three percent of reporting firms with partially standardized architecture do not have an EAI platform and have no common database. The integration in this category can be described as having some limited ERP implementation (single vendor only), also having software bridges in addition to the ERP system and achieving integration via the ERP and any additional software bridges.

The “Mixed Architecture” category is the most advanced with regard to IS architectural and systems integration because this organization type mixes EAI and ERP systems [SHA 05]. This category is characterized by having common database models, widespread use of an ERP system with integration standards arising from the greater adoption of the ERP modules and combining ERP and EAI technologies in various ways [KHO 06]. Within this category, Bidan et al. found that 29% of the firms do have common databases. Most (83%) have one ERP system, and a few (17%) have more than one. Firms in this category have at least a core activity module (92%), and a support activity module (88%). Many of these firms have from four to eight ERP modules in place (62%), with more than one-third (35%) having eight or more ERP modules. In transitioning to ERP, most firms appear to have abandoned autonomous applications in favor of the ERP system’s core operations (81%) and support activities (79%). They often have an EAI platform (65%) as well. Nearly one-third of these firms are among the largest firms of our total sample. This category represents the closest match to Markus’ broad category of the hybrid firm [MAR 00a].

These trends for ERP implementation within the framework of the information system illustrate that one ERP could rarely occupy the whole IS alone. Often, the architecture consists of many ERP systems and/or other subsystems. For this reason, in this book, we principally study two types of integrated information systems: total integration of IS (TIIS) and hybrid integration of IS (HIIS).

2.3. Trends for ERP evolution toward a new generation (2nd G)

Bowersox called for more effort to be exerted toward the integration of supply chain systems using ERP systems [BOW 98]. ERP is the information backbone of supply chain management [ALM 00]. The emphasis on supply chain management and the advancement of information technology created a need for enterprise-wide integration [HIS 04]. Firms seek to use ERP systems to establish integration with other supply chain stakeholders [MAC 08].

The top management of the organization can choose to change the IS either by the addition or deletion of new processes to take advantage of and exploit dynamic environmental conditions that can be improved by interconnecting clients and suppliers [RAS 10]. In order to facilitate supply chain management (SCM) operations for business planning and decision making, an ERP system must be extensible in terms of support for a range of external constituents in the supply chain [CHU 11].

In this regard, the Ford Motor Company was able to connect customers’ warranty information with suppliers to help improve future products. The ERP market leaders constantly upgrade their production quality characteristics with new versions. According to a consultancy study by AMR Research [SWA 04], 55% of upgrades have been voluntary business improvements triggered by the need for a new functionality, expansion or consolidation of systems. The systems, applications and products for data processing (SAP) grows with the enterprise, as further modules and resources can be installed and configured as needed [UFL 07].

Some articles attempt to understand the direction of the industry regarding ERP extensions. A few articles explain the enabling of technologies through further ERP extensions and integrations. Some reports research on how to expand the existing functionalities of the ERP system. Vendors are continuously increasing the capabilities of their ERP system by adding additional functionality such as business intelligence, supply chain and customer relationship management (CRM), etc. [STE 01]. “After having insisted that their software package treats all the essential business functions, ERP vendors offer for sale new essential modules” [DES 04]. As most ERP vendors have now developed a broader definition of enterprise integration, these articles may well provide a good picture of the trends which essentially deal with the issues of extending ERP systems toward e-business, supply chain management, customer relationship management, supplier relationship management, business intelligence, manufacturing execution systems, etc. [MOO 07].

As a result, we can assume that ERP 1st G systems have become incomplete by today’s standards (lack of some modules relative to users’ current needs) and therefore are not able to satisfy all needs. We can notice the appearance, since the year 2000, of new users’ needs which should be taken into account as new modules (CRM, SCM, product lifecycle management (PLM), E-business, information system for decision making, (ISDM), etc.) within the framework of the ERP evolve from 1st toward 2nd G.